NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 - Unaudited interim condensed consolidated financial statements
The accompanying unaudited condensed consolidated
financial statements of RF Industries, Ltd. and its divisions and three wholly-owned subsidiaries (collectively, hereinafter the
“Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments, which are normal and recurring, have been included in order to make the information
not misleading. Information included in the consolidated balance sheet as of October 31, 2016 has been derived from, and certain
terms used herein are defined in, the audited consolidated financial statements of the Company as of October 31, 2016 included
in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2016 that was previously
filed with the Securities and Exchange Commission (“SEC”). Operating results for the three- and nine-month periods
ended July 31, 2017 are not necessarily indicative of the results that may be expected for the year ending October 31, 2017. The
unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements
and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2016.
Principles of consolidation
The accompanying unaudited condensed consolidated
financial statements include the accounts of RF Industries, Ltd., Cables Unlimited, Inc. (“Cables Unlimited”), Comnet
Telecom Supply, Inc. (“Comnet”), and Rel-Tech Electronics, Inc. (“Rel-Tech”), wholly-owned subsidiaries
of RF Industries, Ltd. All intercompany balances and transactions have been eliminated in consolidation.
Revenue recognition
Four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectability is reasonably assured. The Company recognizes revenue from product sales after
purchase orders are received which contain a fixed price and for shipments with terms of FOB Shipping Point, revenue is recognized
upon shipment, for shipments with terms of FOB Destination, revenue is recognized upon delivery and revenue from services is recognized
when services are performed, and the recovery of the consideration is considered probable.
Recent accounting standards
In August 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Classification of Certain Cash Receipts
and Cash Payments. The new standard will change the classification of certain cash payments and receipts within the cash flow statement.
Specifically, payments for debt prepayment or debt extinguishment costs, including third-party costs, premiums paid, and other
fees paid to lenders that are directly related to the debt prepayment or debt extinguishment, excluding accrued interest, will
now be classified as financing activities. Previously, these payments were classified as operating expenses. The guidance is effective
for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019,
with early adoption permitted, and will be applied retrospectively. The Company does not expect that the adoption of this new standard
will have a material impact on its Consolidated Financial Statements.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02, Leases. This ASU requires lessees to recognize most leases on their balance sheets related to the
rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related
to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating
the impact the adoption of this new standard will have on its Consolidated Financial Statements.
In March 2016, the FASB issued Accounting Standards
Update No. 2016-09, Compensation – Stock Compensation. The new standard will modify several aspects of the accounting and
reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of
operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for
award forfeitures over the vesting period. The new standard is effective for fiscal years beginning after December 15, 2016 and
interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption
of this new standard will have on its Consolidated Financial Statements.
In November 2015, the FASB issued Accounting
Standards Update No. 2015-17, Income Taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets
into current and noncurrent amounts in a classified balance sheet. The new standard simplifies the presentation of deferred tax
assets and liabilities and requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance
sheet. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015. This ASU affected
the Company’s disclosures relating to deferred tax assets and liabilities. The Company has applied this guidance prospectively
and it did not have a material impact on its consolidated balance sheets.
In May 2014, the FASB issued Accounting Standards
Update No. 2014-09, Revenue from Contracts with Customers. This guidance will supersede Topic 605, Revenue Recognition, in addition
to other industry-specific guidance, once effective. The new standard requires a company to recognize revenue in a manner that
depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14, Revenue
from Contracts with Customers: Deferral of the Effective Date, as a revision to ASU 2014-09, which revised the effective date to
fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but not prior
to periods beginning after December 15, 2016 (i.e., the original adoption date per ASU 2014-09).
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies certain aspects of the principal-versus-agent
guidance, including how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should
apply the control principle to certain types of arrangements, such as service transactions. The amendments also reframe the indicators
to focus on evidence that an entity is acting as a principal rather than as an agent.
In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies how an entity should
evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue
over time or at a point in time. The amendments also clarify when a promised good or service is separately identifiable (i.e.,
distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract.
The Company does not expect that the adoption of this new standard will have a material impact on its consolidated financial statements.
In January 2017, the Financial Accounting
Standards Board issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. The FASB eliminated Step 2 from the goodwill impairment test, which required a hypothetical purchase price
allocation. Under the amendments in this update, an entity should perform the goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount and recognize an impairment charge for the carrying amount which exceeds
the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting
unit to determine if the quantitative impairment test is necessary. The standard is effective for annual and interim
impairment tests performed in periods beginning after December 15, 2019. The Company is currently evaluating the impact the
adoption of this new standard will have on its consolidated financial statements.
Note 2 - Discontinued operations
For the three and nine months ended July 31,
2017, the Company recognized approximately $34,000 and $162,000 of royalty income for RadioMobile, respectively, which amounts,
net after tax, have been included within discontinued operations. For the three and nine months ended July 31, 2016, the Company
recognized approximately $19,000 and $20,000 of royalty income for RF Neulink and RadioMobile, respectively, which amounts, net
after tax, have been included within discontinued operations.
During March 2016, the Company announced the
shutdown of its Bioconnect division, which comprised the entire operations of the Medical Cabling and Interconnect segment. The
closure was part of the Company’s ongoing plan to close or dispose of underperforming divisions that are not part of the
Company’s core operations. For the three and nine months ended July 31, 2017, the Company recognized approximately $0 and
$10,000 of income from sale of equipment for the Bioconnect division, respectively, which has been included within discontinued
operations. For the three and nine months ended July 31, 2016, the Company recognized approximately $129,000 of income, net of
tax and $94,000 of loss, net of tax, for the Bioconnect division, respectively, which amounts have been included within discontinued
operations.
Note 3 - Sale of Aviel Electronics division
On December 22, 2015, the Company sold the assets
of its Aviel Electronics division at a gain of approximately $35,000. The terms of the sale included $150,000 cash paid at the
closing and the delivery of a $250,000 secured promissory note ($83,000 of which is recorded in other current assets and $42,000
in other assets as of July 31, 2017) with principal and interest (at 5%) payable over a three-year period. Aviel Electronics’
sales and loss from continuing operations before benefit for income taxes of $86,000 and $40,000, respectively, were included
in the Company’s RF Connector and Cable Assembly segment for the nine months ended July 31, 2016.
The sale of the Aviel Electronics division does
not represent a strategic shift that has a major effect on the Company’s operations and financial results. Accordingly, historical
results and the sale of Aviel Electronics are reported in income (loss) from continuing operations.
Note 4 - Inventories and major vendors
Inventories, consisting of materials, labor
and manufacturing overhead, are stated at the lower of cost or market. Cost has been determined using the weighted average cost
method. Inventory carrying value is net of inventory reserves of $792,000 and $500,000 at July 31, 2017 and October 31, 2016, respectively.
Inventories consist of the following (in thousands):
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
2,725
|
|
|
$
|
2,642
|
|
Work in process
|
|
|
417
|
|
|
|
279
|
|
Finished goods
|
|
|
3,340
|
|
|
|
3,101
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,482
|
|
|
$
|
6,022
|
|
Purchases of inventory from one major vendor
for the three months ended July 31, 2017 represented 11% of inventory purchases. No vendor accounted for greater than 10% of inventory
purchases for the nine months ended July 31, 2017. No vendor accounted for greater than 10% of inventory purchases for the three
months ended July 31, 2016. Purchases of inventory from one major vendor during the nine months ended July 31, 2016 represented
10% of total inventory purchases. The Company has arrangements with its vendors to purchase product based on purchase orders periodically
issued by the Company.
Note 5 - Other current assets
Other current assets consist of the following
(in thousands):
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
$
|
218
|
|
|
$
|
871
|
|
Prepaid expense
|
|
|
351
|
|
|
|
347
|
|
Notes receivable, current portion
|
|
|
83
|
|
|
|
83
|
|
Other
|
|
|
78
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
730
|
|
|
$
|
1,436
|
|
Long-term portion of notes receivable of $42,000
is recorded in other assets.
Note 6 - Earnings per share
Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding increased
by the effects of assuming that other potentially dilutive securities (such as stock options) outstanding during the period had
been exercised and the treasury stock method had been applied. Potentially dilutive securities totaling 812,244 and 1,022,970 for
the three months ended July 31, 2017 and 2016, respectively, and 1,104,837 and 1,084,419 for the nine months ended July 31, 2017
and 2016, respectively, were excluded from the calculation of diluted per share amounts because of their anti-dilutive effect.
The following table summarizes the computation
of basic and diluted weighted average shares outstanding:
|
|
Three Months Ended July 31,
|
|
|
Nine Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
8,838,027
|
|
|
|
8,834,747
|
|
|
|
8,835,852
|
|
|
|
8,770,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add effects of potentially dilutive securities-assumed exercise of stock options
|
|
|
77,767
|
|
|
|
-
|
|
|
|
50,543
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings per share
|
|
|
8,915,794
|
|
|
|
8,834,747
|
|
|
|
8,886,395
|
|
|
|
8,770,375
|
|
Note 7 - Stock-based compensation and equity transactions
The
Company’s current stock incentive plan provides for the granting of qualified and nonqualified options to the Company’s
officers, directors and employees. On July 17, 2017, the Company granted 100,000 incentive stock options to its newly hired President
and Chief Executive Officer. These options, which expire in ten years from the date of grant, vested as to 10,000 shares on the
date of grant and thereafter as to 10,000 shares per annum over the remaining nine years of the grant. These were the only options
granted to employees during the three and nine months ended July 31, 2017. During the three and nine months ended July 31, 2016,
the Company granted 20,000 incentive stock options to an employee. These options are exercisable equally over three years and expire
in five years from date of grant.
The weighted average fair
value of employee and non-employee directors’ stock options granted by the Company during the nine months ended July 31,
2017 and 2016 was estimated to be $1.60 and $3.36, respectively, per share, using the Black-Scholes option pricing model with the
following assumptions:
|
|
2017
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
1.20
|
%
|
|
|
0.70
|
%
|
Dividend yield
|
|
|
5.00
|
%
|
|
|
2.38
|
%
|
Expected life of the option
|
|
|
4.31 years
|
|
|
|
3.0 years
|
|
Volatility factor
|
|
|
43.3
|
%
|
|
|
28.7
|
%
|
Expected volatilities are
based on historical volatility of the Company’s stock price and other factors. The Company used the historical method to
calculate the expected life of the 2017 and 2016 option grants. The expected life represents the period of time that options granted
are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the
options’ expected life. The dividend yield is based upon the historical dividend yield.
The Company satisfies the
exercise of options by issuing previously unissued common shares.
Company stock option plans
Descriptions of the Company’s stock option
plans are included in Note 10 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2016. A summary
of the status of the options granted under the Company’s stock option plans as of July 31, 2017 and the changes in options
outstanding during the nine months then ended is presented in the table that follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at November 1, 2016
|
|
|
1,007,851
|
|
|
$
|
4.07
|
|
Options granted
|
|
|
434,068
|
|
|
$
|
1.60
|
|
Options exercised
|
|
|
(16,763
|
)
|
|
$
|
1.50
|
|
Options canceled or expired
|
|
|
(170,653
|
)
|
|
$
|
3.84
|
|
Options outstanding at July 31, 2017
|
|
|
1,254,503
|
|
|
$
|
3.28
|
|
Options exercisable at July 31, 2017
|
|
|
900,419
|
|
|
$
|
3.33
|
|
Options vested and expected to vest at July 31, 2017
|
|
|
1,253,107
|
|
|
$
|
3.28
|
|
Weighted average remaining contractual life of options outstanding
as of July 31, 2017: 4.32 years
Weighted average remaining contractual life of options exercisable
as of July 31, 2017: 3.31 years
Weighted average remaining contractual life of options vested and
expected to vest as of July 31, 2017: 4.32 years
Aggregate intrinsic value of options outstanding at July 31, 2017:
$224,000
Aggregate intrinsic value of options exercisable at July 31, 2017:
$194,000
Aggregate intrinsic value of options vested and expected to vest
at July 31, 2017: $224,000
As of July 31, 2017, $319,000 of expense with
respect to nonvested share-based arrangements has yet to be recognized and is expected to be recognized over a weighted average
period of 5.11 years.
Effective for the fiscal
year ending October 31, 2017, non-employee directors receive $50,000 annually, which is paid one-half in cash and one-half through
the grant of non-qualified stock options to purchase shares of the Company’s common stock. Previously, for the fiscal year
ended October 31, 2016, non-employee directors received $30,000 annually. During the quarter ended January 31, 2017, the Company
granted each of its four non-employee directors 77,339 options. The number of stock options granted to each director was determined
by dividing $25,000 by the fair value of a stock option grant using the Black-Scholes model ($0.32 per share). These options vest
ratably over fiscal year 2017. On June 9, 2017, the Company’s Board of Directors appointed Gerald Garland to serve as a director.
Mr. Garland received a prorated portion of the compensation paid by the Company. The number of stock options granted to Mr. Garland
was determined by dividing $9,863 (the portion of his director fee for the year ending October 31, 2017) by the fair value of a
stock option grant using the Black-Scholes model ($0.40 per share). These options vest ratably over the remaining portion of fiscal
year 2017.
Stock option expense
During the nine months
ended July 31, 2017 and 2016, stock-based compensation expense totaled $161,000 and $156,000, respectively. During the three months
ended July 31, 2017 and 2016, stock-based compensation expense totaled $62,000 and $54,000, respectively. For the nine months ended
July 31, 2017 and 2016, stock-based compensation classified in cost of sales amounted to $9,000 and $26,000, respectively, and
stock-based compensation classified in selling and general expense amounted to $152,000 and $130,000, respectively.
Note 8 - Concentrations of credit risk
Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents with high-credit quality financial institutions. At July 31, 2017, the Company had cash
and cash equivalent balances in excess of federally insured limits in the amount of approximately $4.6 million.
Two customers accounted for approximately 18%
and 13% of the Company’s net sales for the nine-month period ended July 31, 2017. Of the two customers, one accounted for
approximately 15% of the Company’s net sales for the nine-month period ended July 31, 2016. The same customers accounted
for approximately 22% and 11% of the Company’s net sales for the three months ended July 31, 2017 and one customer accounted
for approximately 16% of the Company’s net sales for the three months ended July 31, 2016. At July 31, 2017, these customers’
accounts receivable balance accounted for approximately 26% and 10% of the total net accounts receivable balance. Although these
customers have been ongoing major customers of the Company, the written agreements with these customers do not have any minimum
purchase obligations and the customers could stop buying the Company’s products at any time and for any reason. A reduction,
delay or cancellation of orders from these customers or the loss of these customers could significantly reduce the Company’s
future revenues and profits.
Note 9 - Segment information
The Company aggregates operating divisions into
operating segments that have similar economic characteristics primarily in the following areas: (1) the nature of the product and
services; (2) the nature of the production process; (3) the type or class of customer for their products and services; (4) the
methods used to distribute their products or services; (5) if applicable, the nature of the regulatory environment. As of July
31, 2017, the Company has two segments based upon this evaluation: 1) RF Connector and Cable Assembly and 2) Custom Cabling Manufacturing
and Assembly based.
The RF Connector and Cable Assembly segment
consisted of one division and the Custom Cabling Manufacturing and Assembly segment was composed of three divisions. The four
divisions that met the quantitative thresholds for segment reporting are Connector and Cable Assembly, Cables Unlimited, Comnet
and Rel-Tech. The specific customers are different for each division; however, there is some overlapping of product sales to them.
The methods used to distribute products are similar within each division aggregated.
Management identifies the Company’s segments
based on strategic business units that are, in turn, based along market lines. These strategic business units offer products and
services to different markets in accordance with their customer base and product usage. For segment reporting purposes, the Connector
and Cable Assembly division constitutes the RF Connector and Cable Assembly segment, and the Cables Unlimited, Comnet and Rel-Tech
divisions constitute the Custom Cabling Manufacturing and Assembly segment.
As reviewed by the Company’s chief operating
decision maker, the Company evaluates the performance of each segment based on income or loss before income taxes. The Company
charges depreciation and amortization directly to each division within the segment. Accounts receivable, inventory, property and
equipment, goodwill and intangible assets are the only assets identified by segment. Except as discussed above, the accounting
policies for segment reporting are the same for the Company as a whole.
Substantially all of the
Company’s operations are conducted in the United States; however, the Company derives a portion of its revenue from export
sales. The Company attributes sales to geographic areas based on the location of the customers. The following table presents the
sales of the Company by geographic area for the three and nine months ended July 31, 2017 and 2016 (in thousands):
|
|
Three Months Ended July 31,
|
|
|
Nine Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,603
|
|
|
$
|
7,441
|
|
|
$
|
21,557
|
|
|
$
|
21,536
|
|
Foreign countries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
180
|
|
|
|
90
|
|
|
|
356
|
|
|
|
236
|
|
Israel
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
63
|
|
Mexico
|
|
|
-
|
|
|
|
85
|
|
|
|
77
|
|
|
|
234
|
|
All other
|
|
|
25
|
|
|
|
23
|
|
|
|
75
|
|
|
|
90
|
|
|
|
|
205
|
|
|
|
199
|
|
|
|
508
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
7,808
|
|
|
$
|
7,640
|
|
|
$
|
22,065
|
|
|
$
|
22,159
|
|
Net sales, income (loss)
from continuing operations before provision (benefit) for income taxes and other related segment information for the three months
ended July 31, 2017 and 2016 are as follows (in thousands):
|
|
RF Connector
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing and
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,964
|
|
|
$
|
4,844
|
|
|
$
|
-
|
|
|
$
|
7,808
|
|
Income from continuing operations before benefit for income taxes
|
|
|
153
|
|
|
|
31
|
|
|
|
5
|
|
|
|
189
|
|
Depreciation and amortization
|
|
|
43
|
|
|
|
172
|
|
|
|
-
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
|
Assembly
|
|
|
|
Corporate
|
|
|
|
Total
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,576
|
|
|
$
|
5,064
|
|
|
$
|
-
|
|
|
$
|
7,640
|
|
Loss from continuing operations before benefit for income taxes
|
|
|
(541
|
)
|
|
|
(126
|
)
|
|
|
(32
|
)
|
|
|
(699
|
)
|
Depreciation and amortization
|
|
|
49
|
|
|
|
192
|
|
|
|
-
|
|
|
|
241
|
|
Net sales, income (loss)
from continuing operations before provision (benefit) for income taxes and other related segment information for the nine months
ended July 31, 2017 and 2016 are as follows (in thousands):
|
|
RF Connector
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing and
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,106
|
|
|
$
|
13,959
|
|
|
$
|
-
|
|
|
$
|
22,065
|
|
Income (loss) from continuing operations before provision (benefit) for income taxes
|
|
|
236
|
|
|
|
(345
|
)
|
|
|
23
|
|
|
|
(86
|
)
|
Depreciation and amortization
|
|
|
131
|
|
|
|
518
|
|
|
|
-
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
|
Assembly
|
|
|
|
Corporate
|
|
|
|
Total
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,611
|
|
|
$
|
15,548
|
|
|
$
|
-
|
|
|
$
|
22,159
|
|
Income (loss) from continuing operations before provision (benefit) for income taxes
|
|
|
(1,243
|
)
|
|
|
(111
|
)
|
|
|
34
|
|
|
|
(1,320
|
)
|
Depreciation and amortization
|
|
|
146
|
|
|
|
623
|
|
|
|
-
|
|
|
|
769
|
|
Note 10 - Income tax provision
The Company uses an estimated annual effective
tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various
jurisdictions in which the Company operates, to determine its quarterly provision (benefit) for income taxes. Certain significant
or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective
tax rates from quarter to quarter.
The provision (benefit) for income taxes was
10% and (6)% of income (loss) before income taxes for the three months ended July 31, 2017 and 2016, respectively, and 63% and
25% of income (loss) before income taxes for the nine months ended July 31, 2017 and 2016, respectively. The change in the effective
income tax rate from period to period was primarily driven by a decrease to the Company’s full year financial forecast.
The Company recorded income from discontinued
operations, net of tax, as disclosed in Note 2.
The total amount of unrecognized tax benefits
was $0 as of July 31, 2017 and October 31, 2016.
The total balance of accrued interest and penalties
related to uncertain tax positions was $0 as of July 31, 2017 and October 31, 2016. The Company recognizes interest and penalties
related to uncertain tax positions, if any, as a component of income tax expense and the accrued interest and penalties, if any,
are included in deferred and other long-term liabilities in the Company's condensed consolidated balance sheets. There were no
material interest or penalties included in income tax expense for the nine months ended July 31, 2017.
Note 11 - Intangible assets
Intangible assets consist of the following (in
thousands):
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Non-compete agreements (estimated lives 3 - 5 years)
|
|
$
|
310
|
|
|
$
|
310
|
|
Accumulated amortization
|
|
|
(301
|
)
|
|
|
(273
|
)
|
|
|
|
9
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (estimated lives 7 - 15 years)
|
|
|
5,099
|
|
|
|
5,099
|
|
Accumulated amortization
|
|
|
(2,051
|
)
|
|
|
(1,644
|
)
|
|
|
|
3,048
|
|
|
|
3,455
|
|
|
|
|
|
|
|
|
|
|
Patents (estimated life 14 years)
|
|
|
142
|
|
|
|
142
|
|
Accumulated amortization
|
|
|
(22
|
)
|
|
|
(15
|
)
|
|
|
|
120
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,177
|
|
|
$
|
3,619
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
1,237
|
|
|
$
|
1,237
|
|
Note 12 - Accrued expenses
Accrued expenses consist
of the following (in thousands):
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
Wages payable
|
|
$
|
743
|
|
|
$
|
941
|
|
Accrued receipts
|
|
|
532
|
|
|
|
578
|
|
Earn-out liability
|
|
|
432
|
|
|
|
707
|
|
Other current
liabilities
|
|
|
426
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,133
|
|
|
$
|
2,770
|
|
Accrued receipts represent purchased inventory
for which invoices have not been received.
Note 13 - Former line of credit
From May 2015 until September 2016, the Company
had a $5 million line of credit available to it from its bank. The Company did not use the line of credit and, effective September
8, 2016, the Company terminated the line of credit.
Note 14 - Commitments
On June 5, 2017, the Company entered into a
fifth amendment to its lease for its facility in San Diego, California. Prior to the amendment, the Company had intended to surrender
approximately 2,321 square feet of warehouse space (known as “Suite 5200”) that the Company was renting as part of
its lease in San Diego. Under the amendment, the Company will retain Suite 5200, which will be used as warehouse space by Comnet
Telecom. In January 2017, the Company entered into a fourth amendment to the lease in order to increase its leased space by approximately
1,940 square feet of additional space in San Diego with the intention of surrendering Suite 5200. As a result of entering into
the fifth amendment to the lease, including the additional space the Company leased in January 2017, the Company now leases a total
of approximately 21,908 square feet of office, warehouse and manufacturing space at its San Diego location. The term of the fourth
amendment to the lease was extended until July 31, 2022, and the rental payments increased $2,596 per month from $20,125 to $22,721
per month. Rent for this lease was abated for the months of May through August 2017. The term of the fifth amendment also expires
July 31, 2022 and the rental payments are $2,693 per month. Rent for this lease was abated for the month of June 2017. The minimum
annual rentals are being charged to expense on a straight-line basis over the lease term. The San Diego lease also requires the
payment of the Company’s pro rata share of real estate taxes and insurance, maintenance and other operating expenses related
to the facilities.
On June 9, 2017, the Cables Unlimited division
entered into an amendment to its lease with K & K Unlimited, as landlord, under which Cables Unlimited leases its 12,000 square
foot manufacturing facility in Yaphank, New York. Under the amendment, the parties agreed that the term of the lease shall be extended
one year to June 30, 2018. Cables Unlimited’s monthly rent expense under the amended lease remained at $13,000 per month,
plus payments of all utilities, janitorial expenses, routine maintenance costs and costs of insurance for Cables Unlimited’s
business operations and equipment. The landlord is a company controlled by Darren Clark, the former owner and current President
of Cables Unlimited.
On June 25, 2017, the Comnet Telecom division
entered into an amendment to its lease for approximately 15,000 square feet in two suites located in East Brunswick, New Jersey.
Comnet’s current monthly rent expense under the leases is approximately $6,563 per month and, effective October 31, 2017,
will increase to $8,542 per month for these facilities. The amended lease expires in September 2022.
On July 25, 2017, the Rel-Tech Electronic division
entered into a lease for approximately 13,750 square feet located in Milford, Connecticut. Rel-Tech’s current net monthly
rent expense under the lease is approximately $8,307 per month and, effective September 1, 2017, will increase to $8,707 per month
for these facilities. The new lease expires in August 2019.
Note 15 - Cash dividend and declared dividends
The Company paid dividends
of $0.02 per share during the three months ended July 31, 2017 and 2016 for a total of $177,000 and $177,000. The Company paid
aggregate dividends of $0.06 per share during the nine months ended July 31, 2017 for a total of $530,000. The Company paid aggregate
dividends of $0.11 per share during the nine months ended July 31, 2016 for a total of $964,000.
Note 16 - Subsequent events
At its September 8, 2017
meeting, the Board of Directors of the Company declared a quarterly cash dividend of $0.02 per share to be paid on October 15,
2017 to stockholders of record on September 30, 2017.