NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting
policies
Business activities
RF Industries, Ltd., together with its two wholly-owned
subsidiaries (collectively, hereinafter the “Company”), primarily engages in the design, manufacture, and marketing
of interconnect products and systems, including coaxial and specialty cables, fiber optic cables and connectors, and electrical
and electronic specialty cables. For internal operating and reporting purposes, and for marketing purposes, as of the end of the
fiscal year ended October 31, 2018 the Company classified its operations into the following three divisions/subsidiaries: (i) The
RF Connector and Cable Assembly division designs, manufactures and distributes coaxial connectors and cable assemblies that are
integrated with coaxial connectors; (ii) Cables Unlimited, Inc., the subsidiary that manufactures custom and standard cable assemblies,
complex hybrid fiber optic power solution cables, adapters, and electromechanical wiring harnesses for communication, computer,
LAN, automotive and medical equipment; and (iii) Rel-Tech Electronics, Inc., the subsidiary that designs and manufacturers of cable
assemblies and wiring harnesses for blue chip industrial, oilfield, instrumentation and military customers. The Cables Unlimited
division is a Corning Cables Systems CAH Connections SM Gold Program member that is authorized to manufacture fiber optic cable
assemblies that are backed by Corning Cables Systems’ extended warranty.
Use of estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual results may differ from those estimates.
Principles of consolidation
The accompanying consolidated financial statements
include the accounts of RF Industries, Ltd., Cables Unlimited, Inc. (“Cables Unlimited”), and Rel-Tech Electronics,
Inc. (“Rel-Tech”), wholly-owned subsidiaries of RF Industries, Ltd. All intercompany balances and transactions have
been eliminated in consolidation.
Reclassifications
Certain amounts in the prior period consolidated
financial statements have been reclassified to conform to the current period presentation of continuing operations and discontinued
operations (see Note 2). These reclassifications had no effect on reported consolidated net income.
Cash equivalents
The Company considers all highly-liquid investments
with an original maturity of three months or less when purchased to be cash equivalents.
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.
Inventories
Inventories are stated at the lower of cost
or net realizable value, with cost determined using the weighted average cost of accounting. Cost includes materials, labor, and
manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on hand,
future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction
in utility below carrying value due to damage, physical deterioration, obsolescence, changes in price levels, or other causes,
we reduce our inventory to a new cost basis through a charge to cost of sales in the period in which it occurs. The determination
of market value and the estimated volume of demand used in the lower of cost or market analysis requires significant judgment.
Property and equipment
Equipment, tooling and furniture are recorded
at cost and depreciated over their estimated useful lives (generally 3 to 5 years) using the straight-line method. Expenditures
for repairs and maintenance are charged to operations in the period incurred.
Goodwill
Goodwill is recorded when the purchase price
paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill
is not amortized, but is subject to impairment analysis at least once annually, which the Company performs in October, or more
frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater
than its fair value.
We assess whether a goodwill impairment exists
using both qualitative and quantitative assessments at the reporting level. Our qualitative assessment involves determining whether
events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, including goodwill. If based on this qualitative assessment we determine it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, we will not perform a quantitative assessment.
If the qualitative assessment indicates that
it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if we elect not to perform
a qualitative assessment, we perform a quantitative assessment, or two-step impairment test, to determine whether a goodwill impairment
exists at the reporting unit. The first step in our quantitative assessment identifies potential impairments by comparing the estimated
fair value of the reporting unit to its carrying value, including goodwill (“Step 1”). If the carrying value exceeds
estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of
impairment (“Step 2”).
No instances of goodwill
impairment were identified as of October 31, 2018 and 2017.
On June 15, 2011, the Company completed
its acquisition of Cables Unlimited. Goodwill related to this acquisition is included within the Cables Unlimited reporting
unit. As of May 19, 2015, the Company completed its acquisition of the CompPro product line. Goodwill related to this
acquisition is included within the RF Connector and Cable Assembly Division. Effective June 1, 2015, the Company completed
its acquisition of Rel-Tech. Goodwill related to this acquisition is included within the Rel-Tech reporting unit.
Long-lived assets
The Company assesses property, plant and equipment
and intangible assets, which are considered definite-lived assets for impairment. Definite-lived assets are reviewed when there
is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company
measures recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are
expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized
equals the amount by which the carrying value of the asset exceeds its fair market value. The Company has made no material adjustments
to our long-lived assets in any of the years presented.
The Company amortizes its intangible assets
with definite useful lives over their estimated useful lives and reviews these assets for impairment.
In addition, the Company tests our trademarks
and indefinite-lived asset for impairment at least annually or more frequently if events or changes in circumstances indicate that
these assets may be impaired.
No instances of impairment
were identified as of October 31, 2018 or 2017.
Earn-out liability
The purchase agreement for the Rel-Tech acquisition
provides for earn-out payments of up to $800,000 in the aggregate, the last installment of which was payable on May 31, 2018. All
payments have been made and no earn-out obligation remains as of October 31, 2018. The initial earn-out liability was valued at
its fair value using the Monte Carlo simulation and was included as a component of the total purchase price. The earn-out was revalued
quarterly using a present value approach and any resulting increase or decrease has been recorded into selling and general expenses.
Any changes in the assumed timing and amount of the probability of payment scenarios could have impacted the fair value. Significant
judgment was employed in determining the appropriateness of the assumptions used in calculating the fair value of the earn-out
as of the acquisition date.
The Company measures
at fair value certain financial assets and liabilities. U.S. GAAP specifies a hierarchy of valuation techniques based on whether
the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following
fair-value hierarchy:
Level 1— Quoted prices for identical
instruments in active markets;
Level 2— Quoted prices for similar
instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3— Valuations derived
from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The contingent consideration
liability represented future earn-out liability that we were required to pay in conjunction with the acquisition of Rel-Tech. The
Company estimates the fair value of the earn-out liability using a probability-weighted scenario of estimated qualifying earn-out
gross profit related to Rel-Tech calculated at net present value (level 3 of the fair value hierarchy).
The following table
summarizes our financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2018 (in thousands):
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Earn-out liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table
summarizes our financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2017 (in thousands):
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Earn-out liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
236
|
|
The following table summarizes the Level 3 transactions
for the years ended October 31, 2018 and 2017 (in thousands):
|
|
Level 3
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
236
|
|
|
$
|
835
|
|
Payments
|
|
|
(210
|
)
|
|
|
(578
|
)
|
Change in value
|
|
|
(26
|
)
|
|
|
(21
|
)
|
Ending Balance
|
|
$
|
-
|
|
|
$
|
236
|
|
Intangible assets
Intangible assets consist of the following as
of October 31, 2018 and 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships (estimated lives 7 - 15 years)
|
|
$
|
2,879
|
|
|
$
|
2,879
|
|
Accumulated amortization
|
|
|
(1,619
|
)
|
|
|
(1,354
|
)
|
|
|
|
1,260
|
|
|
|
1,525
|
|
|
|
|
|
|
|
|
|
|
Patents (estimated life 14 years)
|
|
|
142
|
|
|
|
142
|
|
Accumulated amortization
|
|
|
(35
|
)
|
|
|
(25
|
)
|
|
|
|
107
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,367
|
|
|
$
|
1,642
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
657
|
|
|
$
|
657
|
|
Amortization expense was
$275,000 for the years ended October 31, 2018 and 2017. The weighted-average amortization period for the amortizable intangible
assets is 9.48 years.
There was no impairment
to trademarks for the years ended October 31, 2018 and 2017.
Estimated amortization
expense related to finite lived intangible assets is as follows (in thousands):
Year ending
|
|
|
|
October 31,
|
|
Amount
|
|
2019
|
|
$
|
275
|
|
2020
|
|
|
275
|
|
2021
|
|
|
136
|
|
2022
|
|
|
89
|
|
2023
|
|
|
79
|
|
Thereafter
|
|
|
513
|
|
Total
|
|
$
|
1,367
|
|
Advertising
The Company expenses the cost of advertising
and promotions as incurred. Advertising costs charged to operations were approximately $236,000 and $125,000 in 2018 and 2017,
respectively.
Research and development
Research and development costs are expensed as
incurred. The Company’s research and development expenses relate to its engineering activities, which consist of the design
and development of new products for specific customers, as well as the design and engineering of new or redesigned products for
the industry in general. During the years ended October 31, 2018 and 2017, the Company recognized $1,480,000 and $824,000 in engineering
expenses, respectively.
Income taxes
The Company accounts for income taxes under the
asset and liability method, based on the income tax laws and rates in the jurisdictions in which operations are conducted and income
is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Developing the provision (benefit)
for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and
strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that
may be required for deferred tax assets. Valuation allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Management’s judgments and tax strategies are subject to audit by various taxing authorities.
The Company had adopted the provisions of ASC
740-10, which clarifies the accounting for uncertain tax positions. ASC 740-10 requires that the Company recognize the impact of
a tax position in the financial statements if the position is not more likely than not to be sustained upon examination based on
the technical merits of the position. The Company’s recognizes interest and penalties related to certain uncertain tax positions
as a component of income tax expense and the accrued interest and penalties are included in deferred and other long-term liabilities
in the Company’s consolidated balance sheets. See Note 8 to the Consolidated Financial Statements included in this Report
for more information on the Company’s accounting for uncertain tax positions.
Stock options
For stock option grants to employees, the Company
recognizes compensation expense based on the estimated fair value of the options at the date of grant. Stock-based employee compensation
expense is recognized on a straight-line basis over the requisite service period. The Company issues previously unissued common
shares upon the exercise of stock options.
For the fiscal years ended October 31, 2018
and 2017, charges related to stock-based compensation amounted to approximately $211,000 and $214,000, respectively. For the fiscal
years ended October 31, 2018 and 2017, stock-based compensation classified in cost of sales amounted to $0 and $13,000 and stock-based
compensation classified in selling and general and engineering expense amounted to $211,000 and $201,000, respectively.
Earnings per share
Basic earnings per share is calculated by dividing
net income applicable to common stockholders by the weighted average number of common shares outstanding during the period. The
calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased
to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally
those issuable upon the exercise of stock options, were issued and the treasury stock method had been applied during the period.
The greatest number of shares potentially issuable by the Company upon the exercise of stock options in any period for the years
ended October 31, 2018 and 2017, that were not included in the computation because they were anti-dilutive, totaled 133,220 and
737,512, respectively.
The following table summarizes the computation
of basic and diluted earnings per share:
|
|
2018
|
|
|
2017
|
|
Numerators:
|
|
|
|
|
|
|
|
|
Consolidated net income (A)
|
|
$
|
5,846,000
|
|
|
$
|
382,000
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share (B)
|
|
|
9,105,406
|
|
|
|
8,840,895
|
|
Add effects of potentially dilutive securities - assumed exercise of stock options
|
|
|
487,660
|
|
|
|
74,869
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings per share (C)
|
|
|
9,593,066
|
|
|
|
8,915,764
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (A)/(B)
|
|
$
|
0.64
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (A)/(C)
|
|
$
|
0.61
|
|
|
$
|
0.04
|
|
Recent accounting standards
Recently issued accounting
pronouncements not yet adopted:
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 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 has assessed the impact this new standard has on its financial reporting. The Company has identified
its revenue streams both by contract and product type and determined that there was no material impact in the timing or amount
of revenue recognized. The Company continues to assess the impact this new standard may have on its ongoing financial reporting.
In January 2017, the FASB issued Accounting
Standards Update No. 2017-04, Intangibles-Goodwill and Other, which simplifies the accounting for goodwill impairments by eliminating
step 2 from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an
impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that
reporting unit.” The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted.
The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements.
Recently issued
accounting pronouncements adopted:
In March 2016, the FASB issued Accounting Standards
Update No. 2016-09, Compensation – Stock Compensation. The new standard modified 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. One provision within this pronouncement requires that excess income tax benefits and tax deficiencies
related to share-based payments be recognized within income tax expense in the statement of income, rather than within additional
paid-in capital on the balance sheet. The Company adopted this provision in the first quarter of fiscal 2018. The adoption of this
provision was applied prospectively. The impact to the Company's results of operations related to this provision for the year ended
October 31, 2018 was the recognition of an income tax benefit of $189,000 within income tax expense, resulting in a 2.6% reduction
to the effective tax rate versus if the standard had not been adopted. The impact of this provision on the Company's future results
of operations will depend in part on the market prices for the Company's shares on the dates there are taxable events related to
share awards. In connection with another provision within this pronouncement, the Company has elected to account for forfeitures
as they occur rather than estimate expected forfeitures, with the change being applied prospectively. The adoption of this and
other provisions within the pronouncement did not have a material impact on the Company’s consolidated financial statements.
Note 2 - Discontinued operations
During 2013, the Company sold its RF Neulink
and RadioMobile divisions, which together had comprised the Company’s RF Wireless segment. The divisions were sold pursuant
to asset purchase agreements, whereby no purchase price was paid at the closing. Rather, the agreements stipulated royalty payments
from each of the purchasers over a three-year period. For the years ended October 31, 2018 and 2017, the Company recognized approximately
$0 and $174,000, respectively, of aggregate royalty income for RF Neulink and RadioMobile, which amounts 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 is 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 fiscal year ended October 31, 2018, no income was recognized related to the Bioconnect division. For the
year ended October 31, 2017, the Company recognized approximately $10,000 of income related to the sale of equipment for the
Bioconnect division, which amounts have been included within discontinued operations.
The following summarized financial information
related to the RF Neulink, RadioMobile and Bioconnect divisions is segregated from continuing operations and reported as discontinued
operations for the year ended October 31, 2017 (in thousands):
|
|
2017
|
|
|
|
|
|
Royalties
|
|
$
|
174
|
|
Bioconnect
|
|
|
10
|
|
Provision for income taxes
|
|
|
(68
|
)
|
Income from discontinued operations, net of tax
|
|
$
|
116
|
|
On October 31, 2018, the Company sold all of
the assets and liabilities of its subsidiary, Comnet Telecom Supply (“Comnet Telecom”). The Company and RAP Acquisition
Inc. (“RAP Acquisition”), a New Jersey corporation, entered into a stock purchase agreement under which RAP Acquisition
agreed to purchase 100% of the issued and outstanding shares of Comnet Telecom for a purchase price of $4,200,000 in cash. Comnet
Telecom is a New Jersey-based manufacturer and supplier of telecommunications and data products, including fiber optics cables,
cabling technologies, custom patch cord assemblies, data center consoles and other data center equipment. This division was one
of the three subsidiaries of the “Custom Cabling Manufacturing and Assembly” segment. Comnet Telecom was acquired by
the Company in January 2015 from Robert Portera, and has been a wholly-owned subsidiary of the Company since that time. Mr. Portera
served as the President of Comnet Telecom during the period that Comnet Telecom was owned by the Company, and is the founder and
principal of RAP Acquisition.
For the years ended October 31, 2018 and 2017,
the Company recognized pretax loss of $221,000 and pretax income of $168,000, respectively, from the discontinued operations of
the Comnet Telecom division, and an income tax benefit of $41,000 and expense of $72,000, respectively. The major line items constituting
the income (loss) of discontinued operations of Comnet are as follows (in thousands):
|
|
Years Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Major line items constituting pretax income from discontinued operations:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,343
|
|
|
$
|
7,981
|
|
Cost of sales
|
|
|
(6,199
|
)
|
|
|
(6,246
|
)
|
Gross profit
|
|
|
2,144
|
|
|
|
1,735
|
|
Selling, general and administrative expense
|
|
|
(1,569
|
)
|
|
|
(1,567
|
)
|
Pretax income from discontinued operations
|
|
|
575
|
|
|
|
168
|
|
Pretax loss on sale of Comnet
|
|
|
(796
|
)
|
|
|
-
|
|
Total pretax income (loss) from discontinued operations
|
|
|
(221
|
)
|
|
|
168
|
|
Provision (benefit) for income taxes
|
|
|
(41
|
)
|
|
|
72
|
|
Income (loss) from discontinued operations
|
|
$
|
(180
|
)
|
|
$
|
96
|
|
For the prior 2017 period presented on the consolidated
balance sheet, the major classes of assets and liabilities of assets held for sale are as follows (in thousands):
|
|
October 31,
|
|
|
|
2017
|
|
Carrying amounts of major classes of assets included as part of discontinued operations:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
831
|
|
Trade accounts receivable, net of allowance for doubtful accounts
|
|
|
998
|
|
Inventories
|
|
|
566
|
|
Other current assets
|
|
|
239
|
|
Fixed assets, net
|
|
|
146
|
|
Non-amortizable intangibles
|
|
|
580
|
|
Intangibles, net of accumulated amortization
|
|
|
1,387
|
|
Goodwill
|
|
|
1,879
|
|
Total assets included in Comnet sale
|
|
$
|
6,626
|
|
|
|
|
|
|
Carrying amounts of major classes of liabilities included as part of discontinued operations:
|
|
|
|
|
Accounts payable
|
|
$
|
320
|
|
Other liabilities
|
|
|
451
|
|
Total liabilities included in Comnet sale
|
|
$
|
771
|
|
Note 3 - 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 October 31, 2018, the Company had cash
and cash equivalent balances in excess of federally insured limits in the amount of approximately $15.4 million.
One customer, who is a distributor, accounted
for approximately 62% of the Company’s net sales for the fiscal year ended October 31, 2018. This same customer accounted
for approximately 27% of the Company’s net sales for the year ended October 31, 2017. This customer’s accounts receivable
balance accounted for approximately 48% and 36% of the total net accounts receivable balance at October 31, 2018 and 2017, respectively.
Although this customer has been an on-going major customer of the Company continuously in the past, the written agreement with
this customer does not have any minimum purchase obligations and they could stop buying the Company’s products at any time
and for any reason. A reduction, delay or cancellation of orders from this customer or the loss of this customer could significantly
reduce the Company’s future revenues and profits.
Note 4 - Inventories and major vendors
Inventories, consisting of materials, labor
and manufacturing overhead, are stated at the lower of cost or net realizable value. Cost has been determined using the weighted
average cost method. Inventories consist of the following (in thousands):
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
2,711
|
|
|
$
|
1,956
|
|
Work in process
|
|
|
603
|
|
|
|
192
|
|
Finished goods
|
|
|
3,799
|
|
|
|
3,395
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
7,113
|
|
|
$
|
5,543
|
|
One vendor accounted for
39% of inventory purchases during the fiscal year ended October 31, 2018, compared to one vendor who accounted for 11% of inventory
purchases for the fiscal year ended October 31, 2017. The Company has arrangements with their 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):
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
$
|
335
|
|
|
$
|
21
|
|
Prepaid expense
|
|
|
228
|
|
|
|
294
|
|
Notes receivable, current portion
|
|
|
20
|
|
|
|
82
|
|
Other
|
|
|
245
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
828
|
|
|
$
|
506
|
|
Note 6 - Accrued expenses and other long-term
liabilities
Accrued expenses consist
of the following (in thousands):
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Wages payable
|
|
$
|
1,705
|
|
|
$
|
778
|
|
Accrued receipts
|
|
|
1,271
|
|
|
|
487
|
|
Earn-out liability
|
|
|
-
|
|
|
|
220
|
|
Other current liabilities
|
|
|
401
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,377
|
|
|
$
|
1,791
|
|
Accrued receipts represent
purchased inventory for which invoices have not been received.
Note 7 - Segment information
The Company aggregates operating divisions
into operating segments which 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; and (5) if applicable, the nature of the regulatory
environment. Based upon this evaluation, as of October 31, 2018, the Company had two reportable segments – RF Connector
and Cable Assembly (RF Connector) and Custom Cabling Manufacturing and Assembly (Custom Cabling).
During fiscal 2018, the RF Connector segment
was comprised of one division, while the Custom Cabling segment was comprised of two divisions. The three divisions that met the
quantitative thresholds for segment reporting were the RF Connector and Cable Assembly division and the Cables Unlimited and Rel-Tech
subsidiaries. While each segment had similar products and services, with one major exception, there was little overlapping of
these services to their customer base. In addition, sales or product and services for the RF Connector segment was primarily through
the distribution channel while the Custom Cabling sales was through a combination of distribution and direct to the end customer.
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 RF
Connector and Cable Assembly division constitutes the RF Connector segment, and the Cables Unlimited and Rel-Tech divisions constitute
the Custom Cabling 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 years ended October 31, 2018 and 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
49,534
|
|
|
$
|
22,254
|
|
Foreign Countries:
|
|
|
|
|
|
|
|
|
Canada
|
|
|
547
|
|
|
|
551
|
|
Mexico
|
|
|
39
|
|
|
|
78
|
|
All Other
|
|
|
76
|
|
|
|
100
|
|
|
|
|
662
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
50,196
|
|
|
$
|
22,983
|
|
Net sales, income (loss) from continuing operations
before provision (benefit) for income taxes and other related segment information for the years ended October 31, 2018 and 2017
are as follows (in thousands):
|
|
RF Connector
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing and
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
11,846
|
|
|
$
|
38,350
|
|
|
$
|
-
|
|
|
$
|
50,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision (benefit) for income taxes
|
|
|
107
|
|
|
|
7,340
|
|
|
|
47
|
|
|
|
7,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
172
|
|
|
|
341
|
|
|
|
-
|
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
6,529
|
|
|
|
8,763
|
|
|
|
17,210
|
|
|
|
32,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
11,456
|
|
|
$
|
11,527
|
|
|
$
|
-
|
|
|
$
|
22,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision (benefit) for income taxes
|
|
|
107
|
|
|
|
96
|
|
|
|
29
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
177
|
|
|
|
329
|
|
|
|
-
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
6,297
|
|
|
|
6,353
|
|
|
|
12,410
|
|
|
|
25,060
|
|
Note 8 - Income tax provision
Reconciliation of provision (benefit) for income
taxes for the years ended October 31, 2018 and 2017 are as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Continuing operations
|
|
$
|
1,468
|
|
|
$
|
62
|
|
Discontinued operations
|
|
|
(41
|
)
|
|
|
72
|
|
Net income
|
|
$
|
1,427
|
|
|
$
|
134
|
|
The provision (benefit) for income taxes for
the fiscal years ended October 31, 2018 and 2017 consists of the following (in thousands):
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,344
|
|
|
$
|
322
|
|
State
|
|
|
236
|
|
|
|
12
|
|
|
|
|
1,580
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(112
|
)
|
|
|
(273
|
)
|
State
|
|
|
-
|
|
|
|
1
|
|
|
|
|
(112
|
)
|
|
|
(272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,468
|
|
|
$
|
62
|
|
Income tax at the federal statutory rate is
reconciled to the Company’s actual net provision (benefit) for income taxes as follows (in thousands, except percentages):
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
% of Pretax
|
|
|
|
|
|
% of Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes at federal statutory rate
|
|
$
|
1,737
|
|
|
|
23.2
|
%
|
|
$
|
79
|
|
|
|
34.1
|
%
|
State tax provision, net of federal tax benefit
|
|
|
170
|
|
|
|
2.3
|
%
|
|
|
6
|
|
|
|
2.6
|
%
|
Nondeductible differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rel-Tech earn-out
|
|
|
(6
|
)
|
|
|
-0.1
|
%
|
|
|
(9
|
)
|
|
|
-3.9
|
%
|
Qualified domestic production activities deduction
|
|
|
(141
|
)
|
|
|
-1.9
|
%
|
|
|
(59
|
)
|
|
|
-25.4
|
%
|
Stock compensation
|
|
|
(204
|
)
|
|
|
-2.7
|
%
|
|
|
52
|
|
|
|
22.4
|
%
|
Meals and entertainment
|
|
|
8
|
|
|
|
0.1
|
%
|
|
|
12
|
|
|
|
5.2
|
%
|
Temporary true-ups
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
State tax refunds, net of federal expense
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(3
|
)
|
|
|
-1.3
|
%
|
R&D credits
|
|
|
(111
|
)
|
|
|
-1.5
|
%
|
|
|
(37
|
)
|
|
|
-15.9
|
%
|
ASC 740-10 Liability
|
|
|
54
|
|
|
|
0.7
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Tax Cut and Jobs Act
|
|
|
(34
|
)
|
|
|
-0.5
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Other
|
|
|
(5
|
)
|
|
|
-0.1
|
%
|
|
|
21
|
|
|
|
9.1
|
%
|
|
|
$
|
1,468
|
|
|
|
19.5
|
%
|
|
$
|
62
|
|
|
|
26.9
|
%
|
The Company’s total deferred tax assets
and deferred tax liabilities at October 31, 2018 and 2017 are as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Reserves
|
|
$
|
276
|
|
|
$
|
375
|
|
Accrued vacation
|
|
|
116
|
|
|
|
122
|
|
Stock-based compensation awards
|
|
|
113
|
|
|
|
184
|
|
Uniform capitalization
|
|
|
78
|
|
|
|
130
|
|
Other
|
|
|
93
|
|
|
|
70
|
|
Total deferred tax assets
|
|
|
676
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Amortization / intangible assets
|
|
|
(544
|
)
|
|
|
(805
|
)
|
Depreciation / equipment and furnishings
|
|
|
(132
|
)
|
|
|
(195
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
Total deferred tax liabilities
|
|
|
(676
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
(119
|
)
|
On December 22, 2017, the President signed the
Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate
from 35% to 21% effective January 1, 2018, which results in a blended statutory income tax rate for the Company of 23.17% for fiscal
2018. For the fiscal year ending October 31, 2019 (“fiscal 2019”), the Company’s U.S. federal statutory income
tax rate will be 21.0%. The Company has completed its accounting for the tax effects of the enactment of the Tax Act, which resulted
in a tax benefit of $41,000 from remeasuring our U.S. deferred tax assets and liabilities at the lower 21% U.S. federal statutory
rate.
The Tax Act also includes items that the Company
expects could increase its tax expense in future periods such as the elimination of the domestic production deduction (Section
199). In addition, the actual effective tax rate may be materially different than the statutory Federal tax rate (including being
higher) based on the availability and impact of various other adjustments such as state taxes, Federal research and development
credits, discrete tax benefits related to stock compensation, and the inclusion or exclusion of various items in taxable income
which may differ from U.S. GAAP income.
Deferred income tax assets and liabilities are
recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable
or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected
to be realized. The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including
the amount and timing of future taxable income, and has determined it is more likely than not that the assets will be realized
in future tax years.
The provision for income taxes from continuing
operations was $1.47 million or 19.5% and $62,000 or 26.9% of income before income taxes for fiscal 2018 and 2017, respectively.
The decrease in the effective income tax rate from year to year is primarily attributable to the reduction of the federal corporate
income tax rate due to the Tax Act, the benefit of R&D credits and the recognition of a stock option windfall benefit related
to the exercise of NQSOs resulting from the Company’s adoption of ASU 2016-09.
The Company’s adjustments to its uncertain
tax positions in fiscal years ended October 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Balance, at beginning of year
|
|
$
|
-
|
|
|
$
|
-
|
|
Increase for tax positions related to the current year
|
|
|
24
|
|
|
|
-
|
|
Increase for tax positions related to prior years
|
|
|
29
|
|
|
|
-
|
|
Increase for interest and penalties
|
|
|
6
|
|
|
|
-
|
|
Balance, at end of year
|
|
$
|
59
|
|
|
$
|
-
|
|
The Company has unrecognized tax benefits of
approximately $53,000 related to its U.S. federal and California research tax credits as of October 31, 2018. The Company recognizes
interest and penalties related to uncertain tax positions in income tax expense. An increase in accrued interest and penalty charges
of approximately $6,000 was recorded as a tax expense during the current fiscal year. The Company does not anticipate that its
accrual for uncertain tax positions will change by a material amount over the next twelve-month period.
The Company is subject to taxation in the United
States and state jurisdictions. The Company’s tax years for October 31, 2014 and forward are subject to examination by the
United States and October 31, 2013 and forward with state tax authorities.
Note 9 - Stock options
Incentive and non-qualified stock option plans
On March 9, 2010, the Company’s Board
of Directors adopted the RF Industries, Ltd. 2010 Stock Incentive Plan (the “2010 Plan”). In June 2010, the Company’s
stockholders approved the 2010 Plan by vote as required by NASDAQ. An aggregate of 1,000,000 shares of common stock was set aside
and reserved for issuance under the 2010 Plan. The Company’s stockholders approved the issuance of an additional 500,000
shares of common stock at its annual meeting held on September 5, 2014, another 500,000 shares of common stock at its annual meeting
held September 4, 2015 and another 1,000,000 shares of common stock at its annual meeting held September 8, 2017. As of October
31, 2018, 1,524,588 shares of common stock were remaining for future grants of stock options under the 2010 Plan.
Additional disclosures related to stock option plans
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 the balance thereafter vests as to 10,000 shares per annum
over the remaining nine years of the grant. On December 13, 2017, the Company granted 80,000 incentive stock options to an employee.
These options vested 8,000 shares on the date of grant, and the balance vests as to 8,000 shares per year thereafter on each of
the next nine anniversaries of December 13, 2017, and expire ten years from date of grant. No other options were granted to Company
employees during fiscal 2018.
The fair value of each option granted in 2018
and 2017 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
|
|
2018
|
|
|
2017
|
|
Weighted average volatility
|
|
|
46.83
|
%
|
|
|
43.30
|
%
|
Expected dividends
|
|
|
3.28
|
%
|
|
|
5.00
|
%
|
Expected term (in years)
|
|
|
4.5
|
|
|
|
4.3
|
|
Risk-free interest rate
|
|
|
1.87
|
%
|
|
|
1.20
|
%
|
Weighted average fair value of options granted during the year
|
|
$
|
0.82
|
|
|
$
|
0.39
|
|
Weighted average fair value of options vested during the year
|
|
$
|
2.64
|
|
|
$
|
1.95
|
|
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 2018 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.
Additional information regarding all of the
Company's outstanding stock options at October 31, 2018 and 2017 and changes in outstanding stock options in 2018 and 2017 follows:
|
|
2018
|
|
|
2017
|
|
|
|
Shares or
|
|
|
Weighted
|
|
|
Shares or
|
|
|
Weighted
|
|
|
|
Price Per
|
|
|
Average
|
|
|
Price Per
|
|
|
Average
|
|
|
|
Share
|
|
|
Exercise Price
|
|
|
Share
|
|
|
Exercise Price
|
|
Outstanding at beginning of year
|
|
|
1,159,771
|
|
|
$
|
3.19
|
|
|
|
1,007,851
|
|
|
$
|
4.07
|
|
Options granted
|
|
|
269,635
|
|
|
$
|
2.44
|
|
|
|
449,068
|
|
|
$
|
1.61
|
|
Options exercised
|
|
|
(418,955
|
)
|
|
$
|
2.66
|
|
|
|
(36,763
|
)
|
|
$
|
1.50
|
|
Options canceled or expired
|
|
|
(68,085
|
)
|
|
$
|
4.98
|
|
|
|
(260,385
|
)
|
|
$
|
4.10
|
|
Options outstanding at end of year
|
|
|
942,366
|
|
|
$
|
3.09
|
|
|
|
1,159,771
|
|
|
$
|
3.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
675,033
|
|
|
$
|
3.01
|
|
|
|
926,272
|
|
|
$
|
3.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at end of year
|
|
|
940,144
|
|
|
$
|
3.09
|
|
|
|
1,159,002
|
|
|
$
|
3.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option price range at end of year
|
|
$
|
1.90 - $5.88
|
|
|
|
|
|
|
$
|
1.07 - $6.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of options exercised during year
|
|
$
|
1,207,148
|
|
|
|
|
|
|
$
|
55,000
|
|
|
|
|
|
Weighted average remaining contractual life
of options outstanding as of October 31, 2018: 4.50 years
Weighted average remaining contractual life
of options exercisable as of October 31, 2018: 3.23 years
Weighted average remaining contractual life
of options vested and expected to vest as of October 31, 2018: 4.49 years
Aggregate intrinsic value of options outstanding
at October 31, 2018: $4,411,000
Aggregate intrinsic value of options exercisable
at October 31, 2018: $3,205,000
Aggregate intrinsic value of options vested
and expected to vest at October 31, 2018: $4,391,000
As of October 31, 2018, $261,000 of expense
with respect to nonvested share-based arrangements has yet to be recognized which is expected to be recognized over a weighted
average period of 6.64 years.
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. During the quarter ended January 31, 2018, the Company granted each of its five non-employee directors 37,927 non-qualified
stock 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 ($0.659 per share). These options vest ratably over fiscal year 2018 and expire five
years from the date of grant.
Note 10 - Retirement plan
The Company has a 401(K) plan available to its
employees. For the years ended October 31, 2018 and 2017, the Company contributed and recognized as an expense $159,000 and $144,000,
respectively, which amount represented 3% of eligible employee earnings under its Safe Harbor Non-elective Employer Contribution
Plan.
Note 11 - Related party transactions
On June 15, 2011, the Company purchased Cables
Unlimited, Inc., a New York corporation, from Darren Clark, the sole shareholder of Cables Unlimited, Inc. In connection with the
purchase of Cables Unlimited, the Company entered into a lease for the New York facilities from which Cables Unlimited conducts
its operations. Cables Unlimited’s monthly rent expense under the lease is $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.
During the fiscal year ended October 31, 2018, the Company paid the landlord a total of $156,000 under the lease. The owner and
landlord of the facility is a company controlled by Darren Clark, the former owner of Cables Unlimited and the current President
of this subsidiary of the Company.
On October 31, 2018, the Company sold its Comnet
Telecom Supply, Inc.(“Comnet”) subsidiary to RAP Acquisition, Inc. for $4.2 million in cash. RAP Acquisition, Inc.
is an affiliate of Robert A. Portera, the founder of Comnet and its President.
Note 12 - Cash dividend and declared dividends
The Company paid quarterly dividends of $0.02
per share during fiscal year 2018 for a total of $730,000. The Company paid quarterly dividends of $0.02 per share during fiscal
year 2017 for a total of $707,000.
Note 13 - Commitments
For the year ended October 31, 2018, the Company
leased its facilities in San Diego, California, Yaphank, New York, Milford, Connecticut and East Brunswick, New Jersey under non-cancelable
operating leases. Deferred rent, included in accrued expenses and other long-term liabilities, was $93,000 as of October 31, 2018
and $95,000 as of October 31, 2017. The San Diego lease also requires the payment of the Company's pro rata share of the real estate
taxes and insurance, maintenance and other operating expenses related to the facilities.
Rent expense under all operating leases totaled
approximately $546,000 and $519,000 in 2018 and 2017, respectively.
Minimum lease payments under these non-cancelable
operating leases in each of the years subsequent to October 31, 2018 are as follows (in thousands):
Year ending
|
|
|
|
October 31,
|
|
Amount
|
|
|
|
|
|
2019
|
|
$
|
664
|
|
2020
|
|
|
504
|
|
2021
|
|
|
448
|
|
2022
|
|
|
262
|
|
2023
|
|
|
1
|
|
Total
|
|
$
|
1,879
|
|
Note 14 - Subsequent events
On November 1, 2018, Cables Unlimited entered
into a lease agreement with 100 Bellport Avenue, LLC for approximately 7,500 square feet located in Yaphank, New York with a monthly
rent expense of $5,625. The lease expires on October 31, 2019.
On December
17, 2018, the Board of Directors of the Company declared a quarterly dividend of $0.02 per share payable on January 15, 2019 to
stockholders of record on December 31, 2018.