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, 2018 has been derived from, and certain
terms used herein are defined in, the audited consolidated financial statements of the Company as of October 31, 2018 included
in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2018 that was previously
filed with the Securities and Exchange Commission (“SEC”). Operating results for the nine months ended July 31, 2019
are not necessarily indicative of the results that may be expected for the year ending October 31, 2019. 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, 2018.
Principles of consolidation
The accompanying unaudited condensed consolidated
financial statements for the periods ended on or before January 31, 2019 include the accounts of RF Industries, Ltd. and its two
wholly-owned subsidiaries, Cables Unlimited, Inc. (“Cables Unlimited”) and Rel-Tech Electronics, Inc. (“Rel-Tech”).
The unaudited condensed consolidated financial statements for the three and nine months ended July 31, 2019 include the accounts
of RF Industries, Ltd., Cables Unlimited, Rel-Tech, and C Enterprises, Inc. (“C Enterprises”), a wholly-owned subsidiary
that RF Industries, Ltd. formed for the sole purpose of acquiring the business and assets of C Enterprises, L.P. The acquisition
of the business and assets of C Enterprises, L.P. was completed on March 15, 2019. For all periods on or before January 31, 2019,
references herein to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, and Rel-Tech, and for all
periods after January 31, 2019, references to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech,
and C Enterprises, collectively. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the prior period condensed
consolidated financial statements and notes have been reclassified to conform to the current period presentation of continuing
operations and discontinued operations (see Note 3). These reclassifications had no effect on reported consolidated net income.
Fair value measurements
The Company measures
at fair value certain financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset
or transfer a liability in an orderly transaction between market participants at the measurement date. 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.
As of July 31, 2019
and October 31, 2018, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash
equivalents, accounts receivable, accounts payable, and accrued liabilities approximated their carrying value due to their short-term
nature.
Revenue recognition
On November 1, 2018, the Company
adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606)
(“ASC 606”) applying the modified retrospective method. The core principle of ASC 606 is that revenue should be
recorded in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services
promised to customers. Under ASC 606, the Company follows a five-step model to: (1) identify the contract with our customer;
(2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate
the transaction price to our performance obligations; and (5) recognize revenue when (or as) each performance obligation is
satisfied. In accordance with this accounting principle, the Company recognizes revenue using the output method at a point in
time when finished goods have been transferred to the customer and there are no other obligations to customers after the
title of the goods have transferred. Title of goods are transferred based on shipping terms for each customer – for
shipments with terms of FOB Shipping Point, title is transferred upon shipment; for shipments with terms of FOB Destination,
title is transferred upon delivery.
Recent accounting standards
Recently issued
accounting pronouncements not yet adopted:
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued 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 January 2017, the FASB issued ASU 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 May 2014, the FASB issued ASC 606.
This guidance superseded Topic 605, Revenue Recognition, in addition to other industry-specific guidance. 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. On November 1, 2018, the
Company adopted ASC 606 applying the modified retrospective method. The Company has performed a review of ASC 606 as compared
to its previous accounting policies for our product revenue and did not identify any material impact to revenue recognized. Therefore,
there was no adjustment to retained earnings for a cumulative effect. The necessary changes to business processes and
controls to effectively review and account for any new contracts under this standard have been implemented.
Note 2 - Business Acquisition
On March 15, 2019, through C Enterprises,
Inc., its newly formed subsidiary, the Company purchased the business and assets of C Enterprises L.P., a California based designer
and manufacturer of quality connectivity solutions to telecommunications and data communications distributors. In consideration
for the C Enterprises business and assets, the Company paid $600,000 in cash and assumed certain liabilities. The acquisition was
determined not to be material and was accounted for in accordance with the acquisition method of accounting, and the acquired assets
and assumed liabilities were recorded by the Company at their estimated fair values in accordance with ASC 805, Business Combinations.
There were no intangible assets identified as part of the acquisition.
The results of C Enterprises, Inc.’s
operations subsequent to March 15, 2019 have been included in the results of the Custom Cabling Manufacturing and Assembly segment
(“Custom Cabling segment”) as well as in the Company’s consolidated statements of operations. Costs related to
the acquisition of C Enterprises were approximately $100,000 and have been expensed as incurred and categorized in selling and
general expenses. For the three and nine months ended July 31, 2019, C Enterprises, Inc. contributed $2.9 million and $4.5 million
of revenue, respectively.
Note 3 - Discontinued operations
On October 31, 2018, the Company sold all
of the assets and liabilities of its subsidiary, Comnet Telecom Supply, Inc. (“Comnet”), to RAP Acquisition Inc., a
New Jersey corporation. Comnet was a New Jersey-based manufacturer and supplier of telecommunications and data products, including
fiber optic cables, cabling technologies, custom patch cord assemblies, data center consoles, and other data center equipment.
This division was one of the three subsidiaries in the Company’s Custom Cabling Manufacturing Assembly segment. For the three
months ended July 31, 2018, the Company recognized pretax income of $127,000 from the discontinued operations of Comnet, and income
tax expense of $38,000. The major line items constituting the income from discontinued operations of Comnet for the three months
ended July 31, 2018 are as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
July 31, 2018
|
|
Major line items constituting pretax income from discontinued operations:
|
|
|
|
|
Net sales
|
|
$
|
2,030
|
|
Cost of sales
|
|
|
(1,509
|
)
|
Gross profit
|
|
|
521
|
|
Selling, general and administrative expenses
|
|
|
(394
|
)
|
Pretax income from discontinued operations
|
|
|
127
|
|
Provision for income taxes
|
|
|
38
|
|
Income from discontinued operations
|
|
$
|
89
|
|
For the nine months ended July 31, 2018,
the Company recognized pretax income of $380,000 from the discontinued operations of Comnet, and income tax expense of $102,000.
The major line items constituting the income from discontinued operations of Comnet for the nine months ended July 31, 2018 are
as follows (in thousands):
|
|
Nine Months Ended
|
|
|
|
July 31, 2018
|
|
Major line items constituting pretax income from discontinued operations:
|
|
|
|
|
Net sales
|
|
$
|
6,270
|
|
Cost of sales
|
|
|
(4,703
|
)
|
Gross profit
|
|
|
1,567
|
|
Selling, general and administrative expenses
|
|
|
(1,187
|
)
|
Pretax income from discontinued operations
|
|
|
380
|
|
Provision for income taxes
|
|
|
102
|
|
Income from discontinued operations
|
|
$
|
278
|
|
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):
|
|
July 31, 2019
|
|
|
October 31, 2018
|
|
Raw materials and supplies
|
|
$
|
3,538
|
|
|
$
|
2,711
|
|
Work in process
|
|
|
743
|
|
|
|
603
|
|
Finished goods
|
|
|
3,805
|
|
|
|
3,799
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
8,086
|
|
|
$
|
7,113
|
|
Two vendors accounted for 23% and 14% of
inventory purchases for the three months ended July 31, 2019. For the nine months ended July 31, 2019, the same two vendors accounted
for 17% and 14% of inventory purchases, respectively. For the three months ended July 31, 2018, one vendor accounted for 50% of
inventory purchases. This same vendor accounted for 47% of inventory purchases for the nine months ended July 31, 2018. The Company
has arrangements with these vendors to purchase products 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, 2019
|
|
|
October 31, 2018
|
|
Prepaid taxes
|
|
$
|
186
|
|
|
$
|
335
|
|
Prepaid expense
|
|
|
472
|
|
|
|
228
|
|
Notes receivable, current portion
|
|
|
-
|
|
|
|
20
|
|
Other
|
|
|
99
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
757
|
|
|
$
|
828
|
|
Note 6 - Accrued expenses
Accrued expenses consist
of the following (in thousands):
|
|
July 31, 2019
|
|
|
October 31, 2018
|
|
Wages payable
|
|
$
|
1,514
|
|
|
$
|
1,705
|
|
Accrued receipts
|
|
|
943
|
|
|
|
1,271
|
|
Other current liabilities
|
|
|
499
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,956
|
|
|
$
|
3,377
|
|
Accrued receipts represent
purchased inventory for which invoices have not been received.
Note 7 - Earnings per share
Basic earnings per share is computed
by dividing consolidated net income by the weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing consolidated 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 issuable
securities totaling 124,097 and 0 shares for the three months ended July 31, 2019 and 2018, respectively, and 124,097 and
245,328 shares for the nine months ended July 31, 2019 and 2018, 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
9,363,528
|
|
|
|
9,202,095
|
|
|
|
9,343,067
|
|
|
|
9,045,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add effects of potentially dilutive securities-assumed exercise of stock options
|
|
|
509,371
|
|
|
|
527,513
|
|
|
|
506,822
|
|
|
|
397,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings per share
|
|
|
9,872,899
|
|
|
|
9,729,608
|
|
|
|
9,849,889
|
|
|
|
9,442,612
|
|
Note 8 - Stock-based compensation and equity transactions
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 the
date of grant. On December 3, 2018, the Company granted each of two employees 25,000 incentive stock options. These options vested
5,000 each on the date of grant, and the balance vests as to 5,000 shares each per year thereafter on each of the next four anniversaries
of December 3, 2018, and expire ten years from the date of grant. On December 3, 2018, the Company also granted one employee 10,000
incentive stock options. These options vested 2,000 shares on the date of grant, and the balance vests as to 2,000 shares per year
thereafter on each of the next four anniversaries of December 3, 2018, and expire ten years from the date of grant. On March 8,
2019, the Company granted one employee 25,000 incentive stock options. These options vested 5,000 on the date of grant, and the
balance vests as to 5,000 shares per year thereafter on each of the next four anniversaries of March 8, 2019, and expire ten years
from the date of grant. No other incentive stock options were granted to Company employees during the three and nine months ended
July 31, 2019 and 2018.
The weighted average fair value of employee
and non-employee directors’ stock options granted by the Company during the nine months ended July 31, 2019 and 2018 was
estimated to be $8.16 and $2.44, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:
|
|
Nine Months Ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
|
2.86%
|
|
|
|
1.87%
|
|
Dividend yield
|
|
|
0.98%
|
|
|
|
3.28%
|
|
Expected life of the option
|
|
|
5.90 years
|
|
|
|
4.54 years
|
|
Volatility factor
|
|
|
55.42%
|
|
|
|
46.83%
|
|
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 2019 and 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.
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, 2018. A summary
of the status of the options granted under the Company’s stock option plans as of July 31, 2019 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, 2018
|
|
|
942,366
|
|
|
$
|
3.09
|
|
Options granted
|
|
|
124,097
|
|
|
$
|
8.16
|
|
Options exercised
|
|
|
(99,150
|
)
|
|
$
|
4.17
|
|
Options canceled or expired
|
|
|
(5,250
|
)
|
|
$
|
6.82
|
|
Options outstanding at July 31, 2019
|
|
|
962,063
|
|
|
$
|
3.61
|
|
Options exercisable at July 31, 2019
|
|
|
671,897
|
|
|
$
|
3.27
|
|
Options vested and expected to vest at July 31, 2019
|
|
|
961,004
|
|
|
$
|
3.61
|
|
Weighted average remaining contractual life
of options outstanding as of July 31, 2019: 4.13 years
Weighted average remaining contractual life
of options exercisable as of July 31, 2019: 2.73 years
Weighted average remaining contractual life
of options vested and expected to vest as of July 31, 2019: 4.11 years
Aggregate intrinsic value of options outstanding
at July 31, 2019: $3,721,000
Aggregate intrinsic value of options exercisable
at July 31, 2019: $2,792,000
Aggregate intrinsic value of options vested
and expected to vest at July 31, 2019: $3,706,000
As of July 31, 2019, $492,000 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 5.35 years.
Non-employee directors receive a compensation
package of $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, 2019, the Company granted each of its five non-employee
directors 7,203 non-qualified stock options. The options have an exercise price of $8.07 per share. 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
($3.471 per share). These options vest ratably over fiscal year 2019 and expire five years from the date of grant. Effective November
1, 2018, in addition to the compensation received for serving on the Board of Directors, the Chairman of each committee of the
Board will receive $15,000 per year in cash for services rendered as Chairman. On June 7, 2019, a new director joined the Board.
The Company granted the new director 3,082 non-qualified stock options with an exercise price of $7.50 per share. The number of
stock options granted to this director was determined by dividing $10,000 of compensation (prorated for the period as an active
director) by the fair value of a stock option grant using the Black-Scholes model ($3.245 per share). These options vest ratably
over fiscal year 2019 and expire five years from the date of grant. No other non-qualified stock options were granted during the
three and nine months ended July 31, 2019.
Stock option expense
During the nine months ended July 31, 2019
and 2018, stock-based compensation expense totaled $260,000 and $189,000, respectively, and was classified in selling and general
expenses. During the three months ended July 31, 2019 and 2018, stock-based compensation expense totaled $68,000 and $57,000, respectively,
and was classified in selling and general expenses.
Note 9 - 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, 2019, the Company had cash
and cash equivalent balances in excess of federally insured limits in the amount of approximately $11.8 million.
Two customers, a distributor (“Distributor
A”) and an equipment manufacturer, accounted for approximately 23% and 19%, respectively, of the Company’s net sales
for the nine-month period ended July 31, 2019. The equipment manufacturer’s accounts receivable balance accounted for 47%
of the total net accounts receivable balance at July 31, 2019, while a different distributor (“Distributor B”) had
an accounts receivable balance that accounted for 11% of the total net accounts receivable balance at July 31, 2019. For the three-month
period ended July 31, 2019, Distributor B and the equipment manufacturer accounted for approximately 11% and 35%, respectively,
of the Company’s net sales.
For the nine-month period ended July 31,
2018, one customer who is a distributor, accounted for approximately 65% of the Company’s net sales. This same customer accounted
for approximately 59% 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 61% of the total net accounts receivable balance.
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 10 - 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, 2019, the Company had two segments – RF
Connector and Cable Assembly (“RF Connector segment”) and Custom Cabling Manufacturing and Assembly (“Custom
Cabling segment”).
As of July 31, 2019, the RF Connector segment
consisted of one division and the Custom Cabling segment was composed of three divisions. The four divisions that met the quantitative
thresholds for segment reporting are the RF Connector and Cable Assembly division (“RF Connector division”), Cables
Unlimited, Rel-Tech, and C Enterprises. 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 of product and services for the RF Connector segment
were primarily through the distribution channel while the Custom Cabling segment sales were 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 division constitutes the RF Connector segment, and the Cables Unlimited, Rel-Tech, and C Enterprises 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 three and nine months ended July 31, 2019 and 2018 (in thousands):
|
|
Three
Months Ended July 31,
|
|
|
Nine
Months Ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
15,154
|
|
|
$
|
11,652
|
|
|
$
|
39,075
|
|
|
$
|
39,790
|
|
Foreign
Countries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
156
|
|
|
|
142
|
|
|
|
433
|
|
|
|
421
|
|
Mexico
|
|
|
109
|
|
|
|
-
|
|
|
|
109
|
|
|
|
39
|
|
All
Other
|
|
|
92
|
|
|
|
26
|
|
|
|
167
|
|
|
|
52
|
|
|
|
|
357
|
|
|
|
168
|
|
|
|
709
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
15,511
|
|
|
$
|
11,820
|
|
|
$
|
39,784
|
|
|
$
|
40,302
|
|
Net sales, income from continuing operations
before provision for income taxes and other related segment information for the three months ended July 31, 2019 and 2018 are as
follows (in thousands):
|
|
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
RF Connector
and
|
|
|
Manufacturing
and
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,462
|
|
|
$
|
12,049
|
|
|
$
|
-
|
|
|
$
|
15,511
|
|
Income from continuing operations before provision for income taxes
|
|
|
151
|
|
|
|
1,125
|
|
|
|
39
|
|
|
|
1,315
|
|
Depreciation and amortization
|
|
|
40
|
|
|
|
100
|
|
|
|
-
|
|
|
|
140
|
|
Total assets
|
|
|
6,969
|
|
|
|
15,007
|
|
|
|
14,137
|
|
|
|
36,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,139
|
|
|
$
|
8,681
|
|
|
$
|
-
|
|
|
$
|
11,820
|
|
Income from continuing operations before provision for income taxes
|
|
|
219
|
|
|
|
1,796
|
|
|
|
13
|
|
|
|
2,028
|
|
Depreciation and amortization
|
|
|
42
|
|
|
|
87
|
|
|
|
-
|
|
|
|
129
|
|
Total assets
|
|
|
6,336
|
|
|
|
9,006
|
|
|
|
17,571
|
|
|
|
32,913
|
|
Net sales, income (loss) from continuing
operations before provision for income taxes and other related segment information for the nine months ended July 31, 2019 and
2018 are as follows (in thousands):
|
|
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
RF Connector
and
|
|
|
Manufacturing
and
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
10,061
|
|
|
$
|
29,723
|
|
|
$
|
-
|
|
|
$
|
39,784
|
|
Income from continuing operations before provision for income taxes
|
|
|
697
|
|
|
|
2,727
|
|
|
|
75
|
|
|
|
3,499
|
|
Depreciation and amortization
|
|
|
130
|
|
|
|
288
|
|
|
|
-
|
|
|
|
418
|
|
Total assets
|
|
|
6,969
|
|
|
|
15,007
|
|
|
|
14,137
|
|
|
|
36,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,503
|
|
|
$
|
31,799
|
|
|
$
|
-
|
|
|
$
|
40,302
|
|
Income (loss) from continuing operations before provision for income taxes
|
|
|
(420
|
)
|
|
|
6,753
|
|
|
|
19
|
|
|
|
6,352
|
|
Depreciation and amortization
|
|
|
129
|
|
|
|
254
|
|
|
|
-
|
|
|
|
383
|
|
Total assets
|
|
|
6,336
|
|
|
|
9,006
|
|
|
|
17,571
|
|
|
|
32,913
|
|
Note 11 - 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. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income
Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed us to record provisional amounts during a measurement
period not to extend beyond one year of the enactment date. As a result, we previously recorded a provisional estimate of the effect
of the Tax Act in our financial statements. In the first quarter of 2019, we completed our analysis to determine the effect of
the Tax Act and recorded no additional adjustments as of December 22, 2018.
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 for income taxes was 22% and 19% of income before
income taxes for the three months ended July 31, 2019 (the “fiscal 2019 quarter”) and 2018 (the “fiscal 2018
quarter”), respectively, and 22% and 20% of income before income taxes for the nine months ended July 31, 2019 and 2018.
The increase in the effective tax rate from period to period was primarily driven by the elimination of the benefit from the domestic
production activities deduction and the one-time benefit recorded in the prior year related to the reduction in the Company’s
deferred tax liability due to the change in the federal tax rate, both as a result of the Tax Act. The Company recorded income
from discontinued operations, net of tax, as disclosed in Note 3.
The Company had $90,000 and $58,000 of unrecognized
tax benefits, inclusive of interest and penalties, as of July 31, 2019 and October 31, 2018, respectively. The unrecognized tax
benefits, if recognized, would result in a net tax benefit of $21,000 as of July 31, 2019.
Note 12 - Intangible assets
Intangible assets consist of the following
(in thousands):
|
|
July 31, 2019
|
|
|
October 31, 2018
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships (estimated lives 7 - 15 years)
|
|
$
|
2,879
|
|
|
$
|
2,879
|
|
Accumulated amortization
|
|
|
(1,818
|
)
|
|
|
(1,619
|
)
|
|
|
|
1,061
|
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
Patents (estimated life 14 years)
|
|
|
142
|
|
|
|
142
|
|
Accumulated amortization
|
|
|
(42
|
)
|
|
|
(35
|
)
|
|
|
|
100
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,161
|
|
|
$
|
1,367
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
657
|
|
|
$
|
657
|
|
Amortization expense
for the nine months ended July 31, 2019 and the year ended October 31, 2018 was $206,000 and $275,000, respectively. As of July
31, 2019, the weighted-average amortization period for the amortizable intangible assets is 10.98 years.
Note 13 - 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 $26,176
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 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. On June 6, 2018, Cables Unlimited extended its lease with K&K Unlimited for an additional three years to June 30, 2021, under the same terms and conditions. The landlord is a company controlled by Darren Clark, the former owner and current President of Cables Unlimited.
|
|
|
|
(ii)
|
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 net monthly rent expense under the lease is $8,707 per month for these facilities. That lease expired in August 2019. On September 1, 2019, Rel-Tech extended its lease term for an additional two years to August 31, 2021, with escalating rent payments over the two years. Beginning September 1, 2019, the net monthly rent payments are $8,969 per month. All other terms and conditions remain the same.
|
|
|
|
|
(iii)
|
On November 1, 2018, the Cables Unlimited division entered into a lease agreement with 100 Bellport Avenue, LLC, as landlord, for approximately 7,500 square feet located in Yaphank, New York, with a monthly rent expense of $5,625. On February 1, 2019, Cables Unlimited entered into an amendment to this lease to expand the leased space by an additional 5,000 square feet and increase the monthly rent expense by $3,750, resulting in a total rent expense of $9,375 per month. The lease expires on October 31, 2019.
|
|
|
|
|
(iv)
|
The newly acquired C Enterprises division leases approximately 24,014 square feet of office, warehouse, and manufacturing space located in Vista, California. The term of the lease expires on June 30, 2023, and the rental payments under the lease currently are $18,491 per month, plus payments of real estate taxes, management fee, property insurance and other operating expenses related to the facilities.
|
|
|
|
As of July 31, 2019, the aggregate monthly
rental for all of the Company’s facilities is approximately $76,000 per month, plus utilities, maintenance and insurance.
Note 14 - Cash dividend and declared
dividends
The Company paid dividends
of $0.02 per share during the three months ended July 31, 2019 and 2018 for a total of $187,000 and $185,000, respectively. The
Company paid dividends of $0.02 per share during the nine months ended July 31, 2019 and 2018 for a total of $560,000 and $544,000,
respectively.
Note 15 - Subsequent event
On September 9, 2019, the Board of Directors
of the Company declared a quarterly cash dividend of $0.02 per share to be paid on October 15, 2019 to stockholders of record
on September 30, 2019.