See Notes to Unaudited Condensed Consolidated Financial Statements.
See Notes to Unaudited Condensed Consolidated Financial Statements.
See Notes to Unaudited Condensed Consolidated Financial Statements.
See Notes to Unaudited Condensed Consolidated Financial Statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Unaudited interim condensed consolidated financial statements
Our accompanying unaudited condensed consolidated financial statements 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, 2021 has been derived from, and certain terms used herein are defined in, the audited consolidated financial statements of RF Industries, Ltd. as of October 31, 2021 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2021 that was previously filed with the Securities and Exchange Commission (“SEC”). Operating results for the three months ended January 31, 2022 are not necessarily indicative of the results that may be expected for the year ending October 31, 2022. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Form 10-K.
Principles of consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of RF Industries, Ltd. and our four wholly-owned subsidiaries: Cables Unlimited, Inc. (“Cables Unlimited”), Rel-Tech Electronics, Inc. (“Rel-Tech”), C Enterprises, Inc. (“C Enterprises”), and Schroff Technologies International, Inc. (“Schrofftech”). All references to the “Company” collectively refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech. All intercompany balances and transactions have been eliminated in consolidation.
Risks and uncertainties
In March 2020, the World Health Organization (the “WHO”) declared coronavirus (“COVID-19”) a pandemic emergency. The COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains, and created significant volatility and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by domestic and international jurisdictions to prevent disease spread, all of which are uncertain and cannot be predicted.
The outbreak impacted our performance for the three months ended January 31, 2022. During the periods covered by this report, the operations at all locations were affected intermittently as some of our employee schedules were impacted, and as certain customers scaled back operations or otherwise delayed or deferred orders for our products. Because of the impact that COVID-19 had on our operations, in May 2020 we applied for and received loans under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 ("CARES Act") totaling approximately $2.8 million (“PPP Loans”). See Note 12 on discussions of the PPP Loans.
In March 2021, the Internal Revenue Service (“IRS”) released Notice 2021-20, which retroactively eliminated the restriction that prevented employers who received a PPP loan from qualifying for the Employee Retention Credit (“ERC”), which is a refundable tax credit against certain employment taxes. Upon determination that the employer has complied with all of the conditions required to receive the credit, a receivable is recognized and the credit reduces salaries and wages. For the fiscal year ended October 31, 2021, we qualified and filed to claim the ERC and have recorded this as an other receivable classified in other current assets. As of January 31, 2022, the ERC in other receivable classified in other current assets were $1.8 million.
We considered the impact of the COVID-19 related economic slowdown on our evaluation of goodwill and non-amortizable intangibles impairment indicators as of January 31, 2022. Although no impairment indicators were identified, it is possible that impairments could emerge as the impact of the pandemic becomes clearer, and those impairment losses could be material.
Fair value measurement
We measure 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. The accounting principles generally accepted in the United States of America ("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 our 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 January 31, 2022 and October 31, 2021, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximated their carrying value due to their short-term nature. See Note 4 for discussion on the fair value of other current liabilities.
Recent accounting standards
Recently issued accounting pronouncements not yet adopted:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The guidance is effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), which pushes back the effective date for public business entities that are smaller reporting companies, as defined by the SEC, to fiscal years beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements.
Recently issued accounting pronouncements adopted:
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments of this update, the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss should be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The guidance also still gives entities the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. We adopted the standard as of November 1, 2020, the beginning of our fiscal 2021, applying this prospectively. The adoption of the standard did not result in an impairment charge as of January 31, 2022 or October 31, 2021.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance was effective for the Company beginning on November 1, 2021 and prescribes different transition methods for the various provisions. The adoption of this standard had no material impact on the Company’s financial statements or related disclosures.
Note 2 – 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):
|
|
January 31, 2022 |
|
|
October 31, 2021 |
|
|
|
|
|
|
|
|
|
|
Raw materials and supplies |
|
$ |
8,648 |
|
|
$ |
6,422 |
|
Work in process |
|
|
355 |
|
|
|
381 |
|
Finished goods |
|
|
4,474 |
|
|
|
4,376 |
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
13,477 |
|
|
$ |
11,179 |
|
For the three months ended January 31, 2022, two vendors accounted for 30% and 10% of inventory purchases. No vendors accounted for more than 10% of inventory purchases for the three months ended January 31, 2021. We have arrangements with these vendors to purchase products based on purchase orders that we periodically issue.
Note 3 – Other current assets
Other current assets consist of the following (in thousands):
|
|
January 31, 2022 |
|
|
October 31, 2021 |
|
|
|
|
|
|
|
|
|
|
Employee retention credit ("ERC") |
|
$ |
1,774 |
|
|
$ |
1,774 |
|
Prepaid taxes |
|
|
469 |
|
|
|
314 |
|
Prepaid expense |
|
|
779 |
|
|
|
439 |
|
Other |
|
|
564 |
|
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
3,586 |
|
|
$ |
2,893 |
|
Pursuant to the CARES Act, eligible employers are able to claim an ERC, which is a refundable tax credit against certain employment taxes. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS. The period assessed for eligibility of the ERC is on a calendar year basis. As of January 31, 2022, the remaining portion of the ERC that we have not yet received is included as other receivables in other current assets.
Note 4 – Accrued expenses and other current liabilities
Accrued expenses consist of the following (in thousands):
|
|
January 31, 2022 |
|
|
October 31, 2021 |
|
|
|
|
|
|
|
|
|
|
Wages payable |
|
$ |
1,917 |
|
|
$ |
2,607 |
|
Accrued receipts |
|
|
2,458 |
|
|
|
1,711 |
|
Other accrued expenses |
|
|
1,284 |
|
|
|
716 |
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
5,659 |
|
|
$ |
5,034 |
|
Accrued receipts represent purchased inventory for which invoices have not been received.
The purchase agreement for the Schrofftech acquisition provided for earn-out payments of up to $2,400,000, which were to be earned through October 31, 2021. The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure. The earn-out was revalued quarterly using a present value approach and any resulting increase or decrease was recorded into selling and general expenses. Significant variances between actual and forecasted results or changes in the assumptions affected the amount of contingent consideration expense that we recorded from time to time. In determining the fair value of the earn-out liability as of October 31, 2021, we used results through October 31, 2021.
We estimated the fair value of the earn-out liability using an option pricing based approach with a risk-neutral framework using Black Scholes related to Schrofftech calculated at net present value (Level 3 of the fair value hierarchy). At October 31, 2021, the fair value of the Schrofftech earn-out liability was zero, and since the earn-out obligation expired on October 31, 2021, no earn-out liability was recorded for the period ended January 31, 2022.
The following table summarizes the changes to the Level 3 liabilities measured at fair value for the three months ended January 31, 2022 and 2021 (in thousands):
|
|
Level 3 |
|
|
|
January 31, 2022 |
|
|
January 31, 2021 |
|
Beginning balance |
|
$ |
- |
|
|
$ |
370 |
|
Change in value |
|
|
- |
|
|
|
(74 |
) |
Ending balance |
|
$ |
- |
|
|
$ |
296 |
|
The earn-out was revalued quarterly using a present value approach and the resulting decrease was recorded into selling and general expenses.
Note 5 – Loss per share
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding increased by the effects of assuming that other potentially dilutive securities (such as stock options) outstanding during the period had been exercised and the treasury stock method had been applied. During the three months ended January 31, 2022 and 2021, we reported a net loss and diluted loss per share is computed the same as basic loss per share as the effect of utilizing the fully diluted share count would have reduced the net loss per share which has an anti-dilutive effect. Therefore, all outstanding stock options are excluded from the computation of diluted loss per share. Potentially issuable securities that are out-of-the-money totaled 459,889 and 331,338 shares for the three months ended January 31, 2022 and 2021, respectively, and 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 January 31, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Weighted average shares outstanding for basic loss per share | | | 10,067,186 | | | | 9,864,689 | |
| | | | | | | | |
Add effects of potentially dilutive securities-assumed exercise of stock options | | | - | | | | - | |
| | | | | | | | |
Weighted average shares outstanding for diluted loss per share | | | 10,067,186 | | | | 9,864,689 | |
Note 6 – Stock-based compensation and equity transactions
On January 12, 2021, we granted a total of 33,500 shares of restricted stock and 67,000 incentive stock options to one manager and three officers. The shares of restricted stock and incentive stock options vest over four years as follows: (i) one-quarter of the restricted shares and options shall vest on January 12, 2022; and (ii) the remaining restricted shares and options shall vest in twelve equal quarterly installments over the next three years. All incentive stock options expire ten years from the date of grant.
On January 10, 2022, we granted a total of 39,666 shares of restricted stock and 106,001 incentive stock options to one manager and three officers. The shares of restricted stock and incentive stock options vest over four years as follows: (i) one-quarter of the restricted shares and options shall vest on January 10, 2023; and (ii) the remaining restricted shares and options shall vest in twelve equal quarterly installments over the next three years. All incentive stock options expire ten years from the date of grant.
No other shares or options were granted to company employees during the three months ended January 31, 2022 and 2021.
The weighted average fair value of employee stock options that were granted during the three months ended January 31, 2022 and 2021 was estimated to be $3.84 and $2.46, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:
| | Three Months Ended January 31, | |
| | 2022 | | | 2021 | |
Risk-free interest rate | | | 1.23 | % | | | 0.39 | % |
Dividend yield | | | 0.00 | % | | | 0.00 | % |
Expected life of the option (in years) | | | 7.00 | | | | 7.00 | |
Volatility factor | | | 53.35 | % | | | 51.94 | % |
Expected volatilities are based on historical volatility of our stock price and other factors. We used the historical method to calculate the expected life of the 2022 and 2021 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 our stock option plans are included in Note 9 of our Annual Report on Form 10-K for the year ended October 31, 2021. A summary of the status of the options granted under our stock option plans as of January 31, 2022 and the changes in options outstanding during the three months then ended is presented in the table that follows:
| | | | | | Weighted | |
| | | | | | Average | |
| | Shares | | | Exercise Price | |
Outstanding at November 1, 2021 | | | 618,858 | | | $ | 5.33 | |
Options granted | | | 106,001 | | | $ | 7.11 | |
Options exercised | | | - | | | $ | - | |
Options cancelled | | | - | | | $ | - | |
Options outstanding at January 31, 2022 | | | 724,859 | | | $ | 5.59 | |
Options exercisable at January 31, 2022 | | | 363,067 | | | $ | 5.94 | |
Options vested and expected to vest at January 31, 2022 | | | 723,008 | | | $ | 5.60 | |
Weighted average remaining contractual life of options outstanding as of January 31, 2022: 6.67 years
Weighted average remaining contractual life of options exercisable as of January 31, 2022: 5.67 years
Weighted average remaining contractual life of options vested and expected to vest as of January 31, 2022: 6.67 years
Aggregate intrinsic value of options outstanding at January 31, 2022: $1,372,439
Aggregate intrinsic value of options exercisable at January 31, 2022: $639,653
Aggregate intrinsic value of options vested and expected to vest at January 31, 2022: $1,363,724
As of January 31, 2022, $865,000 and $605,000 of expenses with respect to nonvested stock options and restricted shares, respectively, has yet to be recognized but is expected to be recognized over a weighted average period of 2.72 and 1.42 years, respectively.
Under the compensation policies adopted by the Compensation Committee, directors who also are officers and/or employees of the Company do not receive any compensation for serving on the Board. For their service as directors beginning in 2020 until the annual meeting of stockholders held in 2021, non-employee directors (i.e., directors who are not employed by the Company as officers or employees) were awarded $50,000 as Board fees, which amount was payable (a) one-half in cash ($25,000), with payments made on a quarterly basis, and (b) one-half through the grant of restricted shares that vest on a quarterly basis. In addition, the Chairman of the Board of Directors and the Chair of each committee of the Board of Directors received an annual retainer of $15,000, also payable in restricted shares, that vests in four equal quarterly installments commencing on September 15, 2020 and ending on the earlier of September 15, 2021 or the next annual meeting of stockholders. In each case, the equity portion of the award was calculated based on the 20-day average trailing closing price of the Company's common stock from the date of grant ($4.34); and cash and stock payments were pro-rated for board members who served less than the entire service period during fiscal 2021.
On September 8, 2021, the Board of Directors determined that the compensation payable to directors as Board fees for the next year ending with the 2022 annual meeting of stockholders was the same as they received in 2021 (i.e., $50,000). In addition, effective September 8, 2021, the Board determined that both Board fees and additional chair fees would be paid half in cash and half in restricted stock, and, in light of the additional work required by the chairs, revised the chair fees as follows, $25,000 for the Chairman of the Board, $25,000 for the Audit Committee Chair, $20,000 for the Compensation Committee Chair, $20,000 for the Strategic Planning and Capital Allocation Chair, and $10,000 for the Nominating & Governance Chair. The cash and restricted stock fees vest in four equal quarterly installments commencing on December 8, 2021, with the restricted stock portion determined by dividing the amount of the fee by the 20-day average trailing closing price of the Company’s common stock from the date of grant ($8.21). Accordingly, on September 8, 2021, Mr. Holdsworth was granted 5,785 shares of restricted stock; Ms. Cefali, 4,871 shares; Mr. Garland, 4,567 shares; and Mr. Fink, 3,044 shares.
Stock option expense
During the three months ended January 31, 2022 and 2021, stock-based compensation expense totaled $139,000 and $123,000, respectively, and was classified in selling and general expense.
Note 7 – Concentrations of credit risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We maintain our cash and cash equivalents with high-credit quality financial institutions. At January 31, 2022, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $12.3 million.
Sales from each customer that were 10% or greater of net sales were as follows:
|
|
Three Months Ended January 31, |
|
|
|
2022 |
|
|
2021 |
|
Wireless provider |
|
|
32 |
% |
|
|
* |
|
Distributor A |
|
|
* |
|
|
|
16 |
% |
Distributor B |
|
|
* |
|
|
|
12 |
% |
For the three months ended January 31, 2022, one wireless carrier customer accounted for 32% of net sales and 37% of total net accounts receivable balance. Two customers, both distributors, accounted for approximately 16% and 12% of net sales and had accounts receivable balances that accounted for 15% and 19%, respectively, of the total net accounts receivable balance for the three months ended January 31, 2021. 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 our 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 our future revenues and profits.
Note 8 – Segment information
We aggregate operating divisions into two reporting 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; and (5) if applicable, the nature of the regulatory environment. Based upon this evaluation, as of January 31, 2022, we had two segments – RF Connector and Cable Assembly (“RF Connector segment”) and Custom Cabling Manufacturing and Assembly (“Custom Cabling segment”).
The RF Connector segment consisted of one division and the Custom Cabling segment was composed of four divisions. The five divisions that met the quantitative thresholds for segment reporting are the RF Connector and Cable Assembly division (“RF Connector division”), Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech. While each segment has similar products and services, there was little overlapping of these services to their customer base. The biggest difference in segments is in the channels of sales: sales or 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 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, C Enterprises, and Schrofftech divisions constitute the Custom Cabling segment.
As reviewed by our chief operating decision maker, we evaluate the performance of each segment based on income or loss before income taxes. We charge depreciation and amortization directly to each division within the segment. Accounts receivable, inventory, property and equipment, right of use assets, 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.
All of our operations are conducted in the United States; however, we derive a portion of our revenue from export sales. We attribute sales to geographic areas based on the location of the customers. The following table presents the sales by geographic area for the three months ended January 31, 2022 and 2021 (in thousands):
|
|
Three Months Ended January 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
16,418 |
|
|
$ |
9,379 |
|
Foreign Countries: |
|
|
|
|
|
|
|
|
Canada |
|
|
297 |
|
|
|
525 |
|
Mexico |
|
|
25 |
|
|
|
- |
|
All Other |
|
|
178 |
|
|
|
98 |
|
|
|
|
500 |
|
|
|
623 |
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
16,918 |
|
|
$ |
10,002 |
|
Net sales, income (loss) before benefit for income taxes and other related segment information for the three months ended January 31, 2022 and 2021 are as follows (in thousands):
|
|
RF Connector |
|
|
Custom Cabling |
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
Manufacturing and |
|
|
|
|
|
|
|
|
|
2022 |
|
Cable Assembly |
|
|
Assembly |
|
|
Corporate |
|
|
Total |
|
Net sales |
|
$ |
3,923 |
|
|
$ |
12,995 |
|
|
$ |
- |
|
|
$ |
16,918 |
|
Income (loss) before benefit for income taxes |
|
|
56 |
|
|
|
314 |
|
|
|
(727 |
) |
|
|
(357 |
) |
Depreciation and amortization |
|
|
37 |
|
|
|
143 |
|
|
|
- |
|
|
|
180 |
|
Total assets |
|
|
7,572 |
|
|
|
24,635 |
|
|
|
17,529 |
|
|
|
49,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,575 |
|
|
$ |
6,427 |
|
|
$ |
- |
|
|
$ |
10,002 |
|
Income (loss) before provision for income taxes |
|
|
453 |
|
|
|
(1,042 |
) |
|
|
(8 |
) |
|
|
(597 |
) |
Depreciation and amortization |
|
|
35 |
|
|
|
202 |
|
|
|
- |
|
|
|
237 |
|
Total assets |
|
|
7,667 |
|
|
|
15,202 |
|
|
|
17,766 |
|
|
|
40,635 |
|
Note 9 – Income taxes
We use 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 we operate, to determine its quarterly 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.
We recorded income tax benefits of $80,000 and $194,000 for the three months ended January 31, 2022 and 2021, respectively. The effective tax rate was 22.3% for the three months ended January 31, 2022, compared to 32.4% for the three months ended January 31, 2021. The change in effective tax rate for the three months ended January 31, 2022 compared to the three months ended January 31, 2021 was primarily driven by stock compensation windfall benefits.
We had $174,000 and $141,000 of unrecognized tax benefits, inclusive of interest and penalties, as of January 31, 2022 and October 31, 2021, respectively. The unrecognized tax benefits, if recognized, would result in a net tax benefit of $168,000 as of January 31, 2022.
Note 10 – Intangible assets
Intangible assets consist of the following (in thousands):
|
|
January 31, 2022 |
|
|
October 31, 2021 |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
Non-compete agreement (estimated life 5 years) |
|
$ |
423 |
|
|
$ |
423 |
|
Accumulated amortization |
|
|
(300 |
) |
|
|
(289 |
) |
|
|
|
123 |
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
Customer relationships (estimated lives 7 - 15 years) |
|
|
5,058 |
|
|
|
5,058 |
|
Accumulated amortization |
|
|
(2,786 |
) |
|
|
(2,711 |
) |
|
|
|
2,272 |
|
|
|
2,347 |
|
|
|
|
|
|
|
|
|
|
Backlog (estimated life 1 - 2 years) |
|
|
287 |
|
|
|
287 |
|
Accumulated amortization |
|
|
(287 |
) |
|
|
(287 |
) |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Patents (estimated life 10 - 14 years) |
|
|
368 |
|
|
|
368 |
|
Accumulated amortization |
|
|
(119 |
) |
|
|
(110 |
) |
|
|
|
249 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
2,644 |
|
|
$ |
2,739 |
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets: |
|
|
|
|
|
|
|
|
Trademarks |
|
$ |
1,174 |
|
|
$ |
1,174 |
|
Amortization expense for the three months ended January 31, 2022 and the year ended October 31, 2021 was $95,000 and $442,000, respectively. As of January 31, 2022, the weighted-average amortization period for the amortizable intangible assets is 7.62 years.
Note 11 – Commitments
We have operating leases for corporate offices, manufacturing facilities, and certain storage units. Our leases have remaining lease terms of 1 year to 3 years, some of which include options to extend the leases for up to 5 years. A portion of our operating leases are leased from K&K Unlimited, a company controlled by Darren Clark, the former owner and current President of Cables Unlimited, to whom we make rent payments totaling $16,000 per month.
We also have other operating leases for certain equipment. The components of our facilities and equipment operating lease expenses for the period ending January 31, 2022 were as follows (in thousands):
| | Three Months Ended | |
| | January 31, 2022 | |
Operating lease cost | | $ | 261 | |
Short-term lease cost | | | - | |
Other information related to leases was as follows (in thousands):
| | January 31, 2022 | | | October 31, 2021 | |
Supplemental Cash Flows Information | | | | | | | | |
Right of use assets obtained in exchange for lease obligations: | | | | | | | | |
Operating leases | | $ | 1,204 | | | $ | 1,453 | |
| | | | | | | | |
Weighted Average Remaining Lease Term | | | | | | | | |
Operating leases (months) | | | 23.89 | | | | 25.26 | |
| | | | | | | | |
Weighted Average Discount Rate | | | | | | | | |
Operating leases | | | 3.54 | % | | | 3.54 | % |
Future minimum lease payments under non-cancellable leases as of January 31, 2022 were as follows:
Year ended October 31, | | Operating Leases | |
| | | | |
2022 (excluding three months ended January 31, 2022) | | $ | 613 | |
2023 | | | 478 | |
2024 | | | 234 | |
2025 | | | 13 | |
2026 | | | 7 | |
Thereafter | | | - | |
Total future minimum lease payments | | | 1,345 | |
Less imputed interest | | | (102 | ) |
Total | | $ | 1,243 | |
Reported as of January 31, 2022 | | Operating Leases | |
Other current liabilities | | $ | 698 | |
Operating lease liabilities | | | 545 | |
Finance lease liabilities | | | - | |
Total | | $ | 1,243 | |
As of January 31, 2022, operating lease ROU asset was $1.2 million and operating lease liability totaled $1.2 million, of which $698,000 is classified as current. There were no finance leases as of January 31, 2022.
The Schrofftech facilities, consisting of two buildings for a total of 10,700 square feet, are leased by RF Industries, Ltd. under two leases that were renewed effective February 1, 2022 for two years expiring January 31, 2024. The aggregate monthly rental payment under the new leases currently is $6,720 per month.
Note 12 – PPP loans
In May 2020, we applied for and received loans under the Paycheck Protection Program (“PPP”) of the CARES Act totaling approximately $2.8 million (“PPP Loans”). The funds from the PPP Loans were used to retain employees, maintain payroll and benefits, and make lease and utility payments. Without the PPP Loans, we would have made material reductions in our workforce (particularly at our New York facility). As of April 30, 2021, the full amount of the PPP Loans has been forgiven and considered paid in full (including applicable interest).
Note 13 – Cash dividend and declared dividends
We did not pay any dividends during the three months ended January 31, 2022, nor did we pay any dividends during the three months ended January 31, 2021.
Note 14 – Subsequent events
Lease Agreement
On February 1, 2022, the Company entered into an agreement with Sorrento West Properties, Inc., a Delaware corporation, to lease industrial and commercial space located at 16868 Via Del Campo Court, San Diego, California. The lease provides for an initial term of ten years, commencing on or about December 1, 2022, at an initial monthly base rent of $139,123.20, plus certain operating expenses.
Credit Facility
On February 25, 2022, the Company entered into a Loan Agreement providing for a $3 million revolving credit facility (the “Revolving Credit Facility”) and a $17 million term loan (the “Term Loan”, collectively with the “Revolving Credit Facility”, the “Credit Facility”) with Bank of America, N.A. (the “Credit Facility Lender”).
The primary interest rate for the Revolving Credit Facility is based on the Bloomberg Short-Term Bank Yield Index Rate plus a margin of 2.00%. The maturity date of the Revolving Credit Facility is March 1, 2024. The primary interest rate for Term Loan is 3.76% per annum. The maturity date of the Term Loan is March 1, 2027.
Acquisition of Microlab/FXR LLC
On March 1, 2022, the Company completed its purchase (the “Purchase Transaction”) of 100% of the issued and outstanding membership interests of Microlab/FXR LLC, a New Jersey limited liability company, from Wireless Telecom Group, Inc, a New Jersey corporation (the “Seller”) pursuant to the Membership Interest Purchase Agreement (the “Purchase Agreement”) dated December 16, 2021, with the Seller. The consideration for the Purchase Transaction was $24,250,000, subject to certain post-closing adjustments as set forth in the Purchase Agreement. The purchase price was paid in cash at the closing. The Company funded $17 million of the cash purchase price from the funds obtained under the Term Loan and paid the remaining amount of the cash purchase price with cash on hand.