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, 2017 has been derived from, and certain
terms used herein are defined in, the audited consolidated financial statements of the Company as of October 31, 2017 included
in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2017 that was previously
filed with the Securities and Exchange Commission (“SEC”). Operating results for the three- and nine-months ended July
31, 2018 are not necessarily indicative of the results that may be expected for the year ending October 31, 2018. 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, 2017.
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 that 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
Recently issued
accounting pronouncements not yet adopted:
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 assessed the impact this new standard has on its financial reporting. The Company 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.
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 nine month period ended July 31, 2018 was
the recognition of an income tax benefit of $163,000 within income tax expense, resulting in a 2.4% 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
For the three and nine months ended July
31, 2018, the Company did not recognize any royalty income. For the three and nine months ended July 31, 2017, the Company recognized
approximately $34,000 and $162,000 of royalty income, respectively, for RadioMobile, which amounts of which 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 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 amounts have been included within
discontinued operations.
Note 3 - 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. Inventories consist of the following (in thousands):
|
|
July 31, 2018
|
|
|
October 31, 2017
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
2,867
|
|
|
$
|
2,520
|
|
Work in process
|
|
|
389
|
|
|
|
194
|
|
Finished goods
|
|
|
3,598
|
|
|
|
3,395
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,854
|
|
|
$
|
6,109
|
|
One vendor accounted for 46% of inventory
purchases for the three months ended July 31, 2018. This same vendor accounted for 41% of inventory purchases for the nine months
ended July 31, 2018. One vendor accounted for 11% of inventory purchases for the three months ended July 31, 2017. No vendor accounted
for greater than 10% of inventory purchases for the nine months ended July 31, 2017. The Company has arrangements with these vendors
to purchase products based on purchase orders periodically issued by the Company.
Note 4 - Other current assets
Other current assets consist of the following
(in thousands):
|
|
July 31, 2018
|
|
|
October 31, 2017
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
$
|
246
|
|
|
$
|
20
|
|
Prepaid expense
|
|
|
357
|
|
|
|
526
|
|
Notes receivable, current portion
|
|
|
41
|
|
|
|
83
|
|
Other
|
|
|
210
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
854
|
|
|
$
|
744
|
|
Long-term portion of notes receivable of
$0 and $21,000 is recorded in other assets at July 31, 2018 and October 31, 2017, respectively.
Note 5 - Accrued expenses and other long-term liabilities
Accrued expenses consist
of the following (in thousands):
|
|
July 31, 2018
|
|
|
October 31, 2017
|
|
|
|
|
|
|
|
|
Wages payable
|
|
$
|
2,052
|
|
|
$
|
855
|
|
Accrued receipts
|
|
|
800
|
|
|
|
695
|
|
Earn-out liability
|
|
|
210
|
|
|
|
236
|
|
Other current liabilities
|
|
|
428
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,490
|
|
|
$
|
2,242
|
|
Accrued receipts represent purchased inventory
for which invoices have not been received.
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 represents future earn-out liability that we may be required to pay in conjunction with the acquisition
of Rel-Tech and Comnet. 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 and EBITDA related to Comnet 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 July 31, 2018 (in thousands):
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Earn-out liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
210
|
|
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 three months ended July 31, 2018, April 30, 2018, January 31, 2018 and for the year ended October 31, 2017
(in thousands):
|
|
Level 3
|
|
|
|
July 31, 2018
|
|
|
April 30, 2018
|
|
|
January 31, 2018
|
|
|
October 31, 2017
|
|
Beginning balance
|
|
$
|
220
|
|
|
$
|
206
|
|
|
$
|
236
|
|
|
$
|
835
|
|
Payments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(578
|
)
|
Change in value
|
|
|
(10
|
)
|
|
|
14
|
|
|
|
(30
|
)
|
|
|
(21
|
)
|
Ending Balance
|
|
$
|
210
|
|
|
$
|
220
|
|
|
$
|
206
|
|
|
$
|
236
|
|
In August 2018, the earn-out liability to
Rel-Tech of $210,000 was paid.
Note 6 - Earnings per share
Basic earnings per share is computed by
dividing net income 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 0 and 812,244 for the three months ended July 31, 2018
and 2017, respectively, and 245,328 and 1,104,837 for the nine months ended July 31, 2018 and 2017, 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
9,202,095
|
|
|
|
8,838,027
|
|
|
|
9,045,340
|
|
|
|
8,835,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add effects of potentially dilutive securities-assumed exercise of stock options
|
|
|
527,513
|
|
|
|
77,767
|
|
|
|
397,272
|
|
|
|
50,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings per share
|
|
|
9,729,608
|
|
|
|
8,915,794
|
|
|
|
9,442,612
|
|
|
|
8,886,395
|
|
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.
The Company satisfies the exercise of options by issuing previously unissued common shares. 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 the three and nine months ended July 31, 2018 and 2017.
The weighted average fair value of employee
and non-employee directors’ stock options granted by the Company during the nine months ended July 31, 2018 and 2017 was
estimated to be $2.44 and $1.60, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:
|
|
Nine Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
1.87
|
%
|
|
|
1.20
|
%
|
Dividend yield
|
|
|
3.28
|
%
|
|
|
5.00
|
%
|
Expected life of the option
|
|
|
4.54 years
|
|
|
|
4.31 years
|
|
Volatility factor
|
|
|
46.83
|
%
|
|
|
43.30
|
%
|
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 and 2017 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.
Company stock option plans
Descriptions of the Company’s stock
option plans are included in Note 9 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2017. A summary
of the status of the options granted under the Company’s stock option plans as of July 31, 2018 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, 2017
|
|
|
1,159,771
|
|
|
$
|
3.20
|
|
Options granted
|
|
|
269,635
|
|
|
$
|
2.44
|
|
Options exercised
|
|
|
(396,087
|
)
|
|
$
|
2.57
|
|
Options canceled or expired
|
|
|
(63,718
|
)
|
|
$
|
4.88
|
|
Options outstanding at July 31, 2018
|
|
|
969,601
|
|
|
$
|
3.11
|
|
Options exercisable at July 31, 2018
|
|
|
654,863
|
|
|
$
|
3.09
|
|
Options vested and expected to vest at July 31, 2018
|
|
|
967,379
|
|
|
$
|
3.11
|
|
Weighted average remaining contractual life
of options outstanding as of July 31, 2018: 4.67 years
Weighted average remaining contractual life
of options exercisable as of July 31, 2018: 3.33 years
Weighted average remaining contractual life
of options vested and expected to vest as of July 31, 2018: 4.65 years
Aggregate intrinsic value of options outstanding
at July 31, 2018: $6,612,000
Aggregate intrinsic value of options exercisable
at July 31, 2018: $4,461,000
Aggregate intrinsic value of options vested
and expected to vest at July 31, 2018: $6,583,000
As of July 31, 2018, $305,000 of expense
with respect to nonvested share-based arrangements has yet to be recognized but is expected to be recognized over a weighted average
period of 6.02 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 expires five
year from the date of grant. During the quarter ended July 31, 2018, the Company did not grant any options.
Stock option expense
During the nine months ended July 31, 2018
and 2017, stock-based compensation expense totaled $189,000 and $161,000, respectively. During the three months ended July 31,
2018 and 2017, stock-based compensation expense totaled $57,000 and $62,000, respectively. For the nine months ended July 31, 2018
and 2017, stock-based compensation classified in cost of sales amounted to $0 and $9,000, respectively, and stock-based compensation
classified in selling and general expense amounted to $189,000 and $152,000, respectively.
Note 8 - Concentrations of credit risk
Financial instruments that 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, 2018, the Company had cash
and cash equivalent balances in excess of federally insured limits in the amount of approximately $10.5 million.
One customer who is a distributor, accounted
for approximately 56% of the Company’s net sales for the nine-month period ended July 31, 2018. This same customer accounted
for approximately 51% of the Company’s net sales for the three-month period ended July 31, 2018. At July 31, 2018, this customer’s
accounts receivable balance accounted for approximately 53% of the total net accounts receivable balance. For the nine-month period
ended July 31, 2017, two customers, a distributor and data center solutions provider accounted for approximately 18% and 13%
of the Company’s net sales, respectively. These same two customers accounted for approximately 22% and 11% of the Company’s
net sales, respectively, for the three months ended July 31, 2017. At July 31, 2017, these customers’ accounts receivable
balances accounted for approximately 26% and 10% of the Company’s total net accounts receivable balance, respectively. Although
these customers have been on-going major customers of the Company, the written agreements with these customers do 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 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. Based upon
this evaluation, as of July 31, 2018, the Company had two segments: 1) RF Connector and Cable Assembly and 2) Custom Cabling Manufacturing
and Assembly.
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, 2018 and 2017 (in thousands):
|
|
Three Months Ended July 31,
|
|
|
Nine Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
13,682
|
|
|
$
|
7,603
|
|
|
$
|
46,069
|
|
|
$
|
21,557
|
|
Foreign Countries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
142
|
|
|
|
180
|
|
|
|
419
|
|
|
|
356
|
|
Mexico
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
77
|
|
All Other
|
|
|
26
|
|
|
|
25
|
|
|
|
43
|
|
|
|
75
|
|
|
|
|
168
|
|
|
|
205
|
|
|
|
502
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
13,850
|
|
|
$
|
7,808
|
|
|
$
|
46,571
|
|
|
$
|
22,065
|
|
Net sales, income from
continuing operations before provision for income taxes and other related segment information for the three months ended July 31,
2018 and 2017 are as follows (in thousands):
|
|
RF
Connector
|
|
|
Custom
Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing
and
|
|
|
|
|
|
|
|
|
|
Cable
Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,139
|
|
|
$
|
10,711
|
|
|
$
|
-
|
|
|
$
|
13,850
|
|
Income from continuing
operations before provision for income taxes
|
|
|
310
|
|
|
|
1,833
|
|
|
|
13
|
|
|
|
2,156
|
|
Depreciation and amortization
|
|
|
42
|
|
|
|
170
|
|
|
|
-
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,964
|
|
|
$
|
4,844
|
|
|
$
|
-
|
|
|
$
|
7,808
|
|
Income from continuing
operations before provision for income taxes
|
|
|
153
|
|
|
|
31
|
|
|
|
5
|
|
|
|
189
|
|
Depreciation and amortization
|
|
|
43
|
|
|
|
172
|
|
|
|
-
|
|
|
|
215
|
|
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,
2018 and 2017 are as follows (in thousands):
|
|
RF
Connector
|
|
|
Custom
Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing
and
|
|
|
|
|
|
|
|
|
|
Cable
Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,503
|
|
|
$
|
38,068
|
|
|
$
|
-
|
|
|
$
|
46,571
|
|
Income (loss) from continuing operations
before provision (benefit) for income taxes
|
|
|
(34
|
)
|
|
|
6,747
|
|
|
|
20
|
|
|
|
6,733
|
|
Depreciation and amortization
|
|
|
129
|
|
|
|
505
|
|
|
|
-
|
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Note 10 - Income taxes
On December 22, 2017, the U.S. 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. Consequently, we adjusted our net deferred tax liability as of October 31,
2017 by $41,000 to reflect the estimated impact of the Tax Act. While we have substantially completed our provisional analysis
of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects, the net one-time charge related to
the Tax Act may differ, possibly materially, due to, among other things, further refinement of our calculations, changes in interpretations
and assumptions that we have made, additional guidance that may be issued by the U.S. Government, and actions and related accounting
policy decisions we may take as a result of the Tax Act. We will complete our analysis over a one-year measurement period ending
December 22, 2018, and any adjustments during this measurement period will be included in net earnings from continuing operations
as an adjustment to income tax expense in the reporting period when such adjustments are determined.
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 20% and 10% of income before income taxes for the three months ended July 31, 2018 (the “fiscal 2018 quarter”)
and 2017 (the “fiscal 2017 quarter”), respectively, and 20% and 63% of income (loss) before income taxes for the nine
months ended July 31, 2018 (the “fiscal 2018 nine month period”) and 2017 (the “fiscal 2017 nine month period”),
respectively. The increase in the effective tax rate from the fiscal 2017 quarter and fiscal 2018 quarter was primarily driven
by better sales in the fiscal 2018 quarter resulting in higher income. The decrease in the effective income tax rate from the fiscal
2017 nine month period to the fiscal 2018 nine month period was primarily driven by the reduction of the federal corporate income
tax rate due to the Tax Act resulting in the recognition of a benefit of $41,000, recognition of a stock option windfall benefit
of $163,000 related to the exercise of NQSOs and the benefit of R&D credits. The Company recorded income from discontinued
operations, net of tax, as disclosed in Note 2.
The Company had no unrecognized tax benefits
as of July 31, 2018 and October 31, 2017. The total balance of accrued interest and penalties related to uncertain tax positions
was $0 as of July 31, 2018 and October 31, 2017. 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, 2018 or 2017.
Note 11 - Intangible assets
Intangible assets consist of the following
(in thousands):
|
|
July 31, 2018
|
|
|
October 31, 2017
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships (estimated lives 7 - 15 years)
|
|
$
|
5,099
|
|
|
$
|
5,099
|
|
Accumulated amortization
|
|
|
(2,594
|
)
|
|
|
(2,186
|
)
|
|
|
|
2,505
|
|
|
|
2,913
|
|
|
|
|
|
|
|
|
|
|
Patents (estimated life 14 years)
|
|
|
142
|
|
|
|
142
|
|
Accumulated amortization
|
|
|
(32
|
)
|
|
|
(25
|
)
|
|
|
|
110
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,615
|
|
|
$
|
3,030
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
1,237
|
|
|
$
|
1,237
|
|
Amortization expense
for the nine-months ended July 31, 2018 and the year ended October 31, 2017 was $415,000 and $589,000, respectively. The weighted-average
amortization period for the amortizable intangible assets is 9.48 years.
Note 12 - Commitments
The Company currently leases its corporate
headquarters and RF connector and cable assembly manufacturing facilities in San Diego, California. On June 5, 2017, the Company
entered into a fifth amendment to its lease for its facility in San Diego, California. As a result, 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 lease
expires on July 31, 2022, and the rental payments under the lease currently are $22,721 per month. 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.
|
(i)
|
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, to extend the term of the lease to June 30, 2018. Cables Unlimited’s monthly rent expense under the amended lease remains 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 6, 2018, Cables Unlimited extended its lease with K&K Unlimited for an additional three years to June 30, 2021, with the same terms and conditions.
|
|
|
|
|
(ii)
|
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 $8,542 per month for these facilities. The amended lease expires in September
2022.
|
|
(iii)
|
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 $8,707 per month for these facilities. The new lease expires in August 2019.
|
The aggregate monthly rental for all of
the Company’s facilities currently is approximately $53,000 per month, plus utilities, maintenance and insurance.
Note 13 - Cash dividend and declared
dividends
The Company paid dividends
of $0.02 per share during the three months ended July 31, 2018 and 2017 for a total of $185,000 and $177,000, respectively. The
Company paid dividends of $0.06 per share during the nine months ended July 31, 2018 and 2017 for a total of $544,000 and $530,000,
respectively.
Note 14 - Subsequent events
On September 5, 2018, the Board of Directors
of the Company declared a quarterly cash dividend of $0.02 per share to be paid on October 15, 2018 to stockholders of record
on September 30, 2018.