R F INDUSTRIES LTD 10-Q

Item 1: Financial Statements (continued) RF INDUSTRIES, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Nine Months Ended July 31, 2020 2019 OPERATING ACTIVITIES: Consolidated net (loss) income $ (240 ) $ 2,739 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Bad debt expense 17 2 Depreciation and amortization 760 418 Stock-based compensation expense 449 260 Deferred income taxes 219 - Changes in operating assets and liabilities: Trade accounts receivable 7,395 (4,358 ) Inventories (219 ) (498 ) Other current assets (544 ) 146 Right of use assets 94 - Other long-term assets (2 ) - Accounts payable (1,293 ) 129 Accrued expenses (1,576 ) (908 ) Income tax payable (21 ) - Other long-term liabilities (778 ) 80 Net cash provided by (used in) operating activities 4,261 (1,990 ) INVESTING ACTIVITIES: Capital expenditures (117 ) (429 ) Purchase of C Enterprises, net of cash acquired ($143) - (457 ) Purchase of Schrofftech, net of cash acquired ($99) (3,901 ) - Net cash used in investing activities (4,018 ) (886 ) FINANCING ACTIVITIES: Proceeds from exercise of stock options 445 414 Dividends paid (388 ) (560 ) Proceeds from PPP Loan 2,788 - Net cash provided by (used in) financing activities 2,845 (146 ) Net increase (decrease) in cash and cash equivalents 3,088 (3,022 ) Cash and cash equivalents of continuing operations, beginning of period 12,540 16,334 Cash and cash equivalents, end of period $ 15,628 $ 13,312 Supplemental cash flow information – income taxes paid $ 415 $ 613 See Notes to Unaudited Condensed Consolidated Financial Statements. 7 RF INDUSTRIES, LTD. AND SUBSIDIAR IES 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, 2019 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, 2019 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2019 that was previously filed with the Securities and Exchange Commission (“SEC”). Operating results for the nine months ended July 31, 2020 are not necessarily indicative of the results that may be expected for the year ending October 31, 2020. 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”). C Enterprises is a wholly-owned subsidiary that RF Industries, Ltd. acquired effective March 15, 2019. For periods on or before January 31, 2019, references herein to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, and Rel-Tech, and periods between January 31, 2019 and October 31, 2019, references to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, and C Enterprises. Schrofftech is a wholly-owned subsidiary that RF Industries, Ltd. acquired effective November 1, 2019. For periods after October 31, 2019, references to the “Company” shall 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 global impact of the outbreak has been rapidly evolving and certain jurisdictions, including those where we have operations, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, social distancing protocols and restrictions on types of business that may continue to operate. While we have been deemed an “essential” business, and therefore have been permitted to continue our operations, the impact of the COVID-19 pandemic has affected both our operations and those of our customers. Our operations have been negatively affected by partial shutdowns of our facilities (particularly in the Northeast), by changes that we had to make on our operating methods and procedures, and by our reduced workforce as many of our employees stayed at home. Many of our customers and vendors have likewise had temporary closures of their facilities and have otherwise been impacted by changes in their industries. As a result, overall demand for our products has been reduced, and certain costs have increased. We have taken measures to protect the health and safety of our employees, and we continue to work with our customers and vendors to minimize potential disruptions in addressing the challenges posed by this global pandemic. 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 and nine months ended July 31, 2020. We currently expect the decline caused by the economic slowdown to persist through at least the remainder of 2020. During the periods covered by this report, the operations of our three subsidiaries in the Northeast were affected as many of our employees stayed at home and as local customers shut down or otherwise delayed, deferred or cancelled orders for our products. Because of the impact that COVID-19 had on our Northeastern operations, 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”). See Note 13 on discussions of the PPP Loans. We considered the impact of the COVID-19 related economic slowdown on our evaluation of goodwill impairment indicators as of July 31, 2020. Although no goodwill impairment indicators were identified, it is possible that impairments could emerge as the impact of the crisis becomes clearer, and those impairment losses could be material. 8 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. 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 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 July 31, 2020 and October 31, 2019, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and the current portion of the PPP Loan approximated their carrying value due to their short-term nature. See Note 5 for discussion on the fair value of other long-term liabilities. Revenue recognition In accordance with Accounting Standards Update ASU No. 2014-09, Revenue from Contacts with Customers (Topic 606) (“ASC 606”), we recognize revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. We follow 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, we recognize 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 control of the goods have transferred. Control of goods are transferred based on shipping terms for each customer – for shipments with terms of FOB Shipping Point, control is transferred upon shipment; for shipments with terms of FOB Destination, control is transferred upon delivery. Leases In accordance with ASU No. 2016-02, Leases, we determine if an arrangement is a lease at inception. Operating leases are included in our consolidated balance sheet as operating lease right of use (“ROU”) assets, other current liabilities, and operating lease liabilities. Finance leases are included in finance ROU assets, other current liabilities, and finance lease liabilities on our consolidated balance sheet. ROU assets represent our right to use an underlying asset for the duration of the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term and is recognized on the consolidated statements of operations. Recent accounting standards Recently issued accounting pronouncements not yet adopted: 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. We are currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements. In June 2016, the FASB issued 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. Early adoption is permitted. We are currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements. 9 Recently issued accounting pronouncements adopted: In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU requires lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under the current GAAP. Under ASU 2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients. We adopted the standard as of November 1, 2019, the beginning of our fiscal 2020, applying the modified retrospective method. We elected the package of practical expedients permitted under the transition guidance with the new standard, which among other things, allows us to carryforward the historical lease classification. We elected the policy which allows us to combine the nonlease components with its related lease components rather than separating, and the policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We have recognized those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The adoption of the standard resulted in a material recognition of additional right of use assets and lease liabilities of approximately $2.3 million and $2.4 million, respectively, as of November 1, 2019, but did not materially affect our consolidated net income. Note 2 – Bu s iness acquisition C Enterprises, Inc. On March 15, 2019, through C Enterprises, Inc. (“C Enterprises”), its newly formed subsidiary, we 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, we 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. The acquired assets and assumed liabilities were recorded 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’ 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 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. The following table summarizes the components of the purchase price at fair value at March 15, 2019: Cash consideration paid $ 600,000 Total purchase price $ 600,000 The following table summarizes the allocation of the estimated purchase price at fair value at March 15, 2019: Current assets $ 2,008,000 Fixed assets 30,000 Other assets 18,000 Non-interest bearing liabilities (1,456,000 ) Net assets $ 600,000 Schroff Technologies International, Inc. On November 4, 2019, we purchased the business of Schroff Technologies International, Inc. (“Schrofftech”), a Rhode Island-based manufacturer and marketer of intelligent thermal control systems used by telecommunications companies across the U.S. and Canada, and shrouds for small cell integration and installation. At the closing, in consideration for the Schrofftech business, we paid the sellers $4 million in cash, and, if certain financial targets are met by Schrofftech over a two-year period, agreed to pay additional cash earn-out payments of up to $2.4 million. The acquisition was accounted for as an acquisition of a business in accordance with the acquisition method of accounting. The acquired assets and assumed liabilities have been recorded at their estimated fair values. We determined the estimated fair values with the assistance of appraisals or valuations performed by an independent third-party specialist. Schrofftech serves the high growth wireless, telecom and cable markets. All manufacturing operations are performed at Schrofftech’s facilities in Rhode Island. The Schrofftech business allows us to diversify the types of services provided for our customers in these markets. All manufacturing operations are performed at Schrofftech’s facilities in Rhode Island. Although the closing occurred on November 4, 2019, the acquisition of Schrofftech is deemed to have become effective for financial accounting purposes as of November 1, 2019. Accordingly, Schrofftech’s financial results have been included in the results of the Custom Cabling segment for the three and nine months ended July 31, 2020 as well as in the consolidated statements of operations. Total costs related to the acquisition of Schrofftech were approximately $151,000, of which $108,000 was incurred in fiscal 2019 and $43,000 was incurred in the nine months ended July 31, 2020. All acquisition-related costs have been expensed as incurred and categorized in selling and general expenses. For the three months ended July 31, 2020, Schrofftech contributed revenue and pretax loss of $0.7 million and $254,000, respectively. For the nine months ended July 31, 2020, Schrofftech contributed revenue and pretax loss of $3.0 million and $266,000, respectively. 10 The following table summarizes the components of the purchase price at fair values at November 1, 2019: Cash consideration paid $ 4,000,000 Earn-out liability 1,249,000 Total purchase price $ 5,249,000 The following table summarizes the allocation of the purchase price at fair value at November 1, 2019: Current assets $ 1,168,000 Fixed assets 58,000 Intangible assets 3,299,000 Goodwill 1,356,000 Non-interest bearing liabilities (632,000 ) Net assets $ 5,249,000 The following unaudited pro forma financial information presents the combined operating results of the Company, C Enterprises, and Schrofftech as if both acquisitions had occurred as of the beginning of the earliest period presented. Pro forma data is subject to various assumptions and estimates and is presented for informational purposes only. This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results. Unaudited pro forma financial information assuming the acquisition of C Enterprises and Schrofftech as of November 1, 2018 is presented in the following table: Three Months Ended July 31, Nine Months Ended July 31, 2020 2019 2020 2019 Revenue $ 9,544 $ 17,640 $ 32,348 $ 50,097 Net (loss) income (82 ) 1,387 (240 ) 4,049 (Loss) earnings per share Basic $ (0.01 ) $ 0.15 $ (0.02 ) $ 0.43 Diluted $ (0.01 ) $ 0.14 $ (0.02 ) $ 0.41 Note 3 – 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, 2020 October 31, 2019 Raw materials and supplies $ 4,495 $ 3,576 Work in process 352 791 Finished goods 4,400 3,878 Totals $ 9,247 $ 8,245 For the three months ended July 31, 2020, two vendors accounted for 12% and 10% of inventory purchases. No vendors accounted for more than 10% of inventory purchases for the nine months ended July 31, 2020. For the three months ended July 31, 2019, two vendors accounted for 23% and 14% of inventory purchases. These same two vendors accounted for 17% and 14% of inventory purchases, respectively, for the nine months ended July 31, 2019. We have arrangements with these vendors to purchase products based on purchase orders that we periodically issue. 11 Note 4 – Other current assets Other current assets consist of the following (in thousands): July 31, 2020 October 31, 2019 Prepaid taxes $ 753 $ - Prepaid expense 361 346 Other 131 339 Totals $ 1,245 $ 685 Note 5 – Accrued expenses and other long-term liabilities Accrued expenses consist of the following (in thousands): July 31, 2020 October 31, 2019 Wages payable $ 1,368 $ 1,591 Accrued receipts 736 1,683 Warranty liability 217 - Deferred revenue 47 - Other accrued expenses 233 379 Totals $ 2,601 $ 3,653 Accrued receipts represent purchased inventory for which invoices have not been received. We recognize an accrued warranty liability for the estimated claims to remedy potential deficiencies of quality or performance of our products in the Schrofftech division within the Custom Cabling segment. The product warranties extend over various periods, depending upon the product subject to the warranty. We record a provision for estimated future warranty claims based upon the historical relationship of warranty claims to sales, any specifically identified warranty issues and current trends and knowledge. We base our estimates in part on historical experience and on assumptions that are believed to be reasonable under the circumstances and revise our estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is reasonably possible that they may ultimately differ materially from actual results, including in the case of a significant product failure. Warranty related expenses have not been material and were not material for the three and nine months ended July 31, 2020. Warranty liabilities were $217,000 as of July 31, 2020. The purchase agreement for the Schrofftech acquisition provides for earn-out payments of up to $2,400,000, which is 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 and will continue to be revalued quarterly using a present value approach and any resulting increase or decrease will be recorded into selling and general expenses. Any changes in the amount of the actual results and forecasted scenarios could impact the fair value. Significant judgment is employed in determining the appropriateness of the assumptions used in calculating the fair value of the earn-out as of the acquisition date. Accordingly, significant variances between actual and forecasted results or changes in the assumptions can materially impact the amount of contingent consideration expense we record in future periods. The contingent consideration liability represents the future earn-out liability that we may be required to pay in conjunction with the acquisition of Schrofftech. We estimate 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). The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of July 31, 2020 (in thousands): Description Level 3 Earn-out liability $ 558 There were no financial assets or liabilities measured at fair value as of October 31, 2019. 12 The following table summarizes the changes to the Level 3 liabilities measured at fair value for the three months ended July 31, 2020, April 30, 2020, and January 31, 2020 (in thousands): Level 3 July 31, 2020 April 30, 2020 January 31, 2020 October 31, 2019 Beginning balance $ 869 $ 1,215 $ 1,249 $ - Change in value (311 ) (346 ) (34 ) - Ending balance $ 558 $ 869 $ 1,215 $ - As of July 31, 2020, the full amount of the $0.6 million earn-out was classified as other long-term liabilities. Note 6 – (Loss) e arnings per share Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted (loss) earnings per share is computed by dividing net (loss) 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 402,838 and 124,097 shares for the three months ended July 31, 2020 and 2019, respectively, and 402,838 and 124,097 shares for the nine months ended July 31, 2020 and 2019, 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, 2020 2019 2020 2019 Weighted average shares outstanding for basic (loss) earnings per share 9,714,700 9,363,528 9,661,054 9,343,067 Add effects of potentially dilutive securities-assumed exercise of stock options - 509,371 - 506,822 Weighted average shares outstanding for diluted (loss) earnings per share 9,714,700 9,872,899 9,661,054 9,849,889 Note 7 – Stock-based compensation and equity transactions On December 3, 2018, two employees were each granted 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. Also on December 3, 2018, one employee was granted 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, one employee was granted 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. On December 6, 2019, one employee was granted 50,000 incentive stock options. These options vested 10,000 on the date of grant, and the balance vests as to 10,000 shares per year thereafter on each of the next four anniversaries of December 6, 2019, and expire ten years from the date of grant. On January 9, 2020, we granted the following equity awards to our managers and officers: ● Stock grants for a total of 12,075 common shares to three employees. We accounted for these shares as stock-based compensation totaling $77,000; ● A total of 3,241 incentive stock options to two employees, all of which vested immediately on the date of grant; and ● A total of 38,500 shares of restricted stock and 77,000 incentive stock options to five employees. 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 9, 2021; and (ii) the remaining restricted shares and options shall vest in twelve equal quarterly installments over the next three years, commencing with the first quarter following January 9, 2021. All incentive stock options expire ten years from the date of grant. On June 30, 2020, one employee was granted 10,000 incentive stock options. These options vested 2,500 on the date of grant, and the balance vests as to 2,500 shares per year thereafter on each of the next three anniversaries of June 30, 2020, and expire ten years from the date of grant. No other shares or options were granted to company employees during the three and nine months ended July 31, 2020 and 2019. 13 The weighted average fair value of employee stock options that were granted during the nine months ended July 31, 2020 and 2019 was estimated to be $3.06 and $3.98, respectively, per share, using the Black-Scholes option pricing model with the following assumptions: Nine Months Ended July 31, 2020 2019 Risk-free interest rate 1.58 % 2.86 % Dividend yield 0.63 % 0.98 % Expected life of the option (in years) 7.01 5.90 Volatility factor 52.68 % 55.42 % 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 2020 and 2019 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 10 of our Annual Report on Form 10-K for the year ended October 31, 2019. A summary of the status of the options granted under our stock option plans as of July 31, 2020 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, 2019 890,147 $ 3.62 Options granted 140,241 $ 6.40 Options exercised (241,209 ) $ 1.85 Options outstanding at July 31, 2020 789,179 $ 4.66 Options exercisable at July 31, 2020 459,513 $ 4.48 Options vested and expected to vest at July 31, 2020 788,143 $ 4.67 Weighted average remaining contractual life of options outstanding as of July 31, 2020: 4.98 years Weighted average remaining contractual life of options exercisable as of July 31, 2020: 2.84 years Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2020: 4.97 years Aggregate intrinsic value of options outstanding at July 31, 2020: $719,000 Aggregate intrinsic value of options exercisable at July 31, 2020: $433,000 Aggregate intrinsic value of options vested and expected to vest at July 31, 2020: $714,000 As of July 31, 2020, $619,000 and $255,000 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 4.31 and 1.27 years, respectively. 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 awards. For fiscal 2020, compensation payable to non-employee directors will be prorated from November 1, 2019 through August 31, 2020. On November 4, 2019, we granted each of our five non-employee directors 3,270 shares of restricted stock. The number of restricted shares granted to each director was determined by prorating $25,000 for the 10 months ending August 31, 2020 and dividing by the 20-day average RFIL stock price ($6.36). These restricted shares vest ratably through August 31, 2020. Non-employee directors who are also a chairperson of a committee of the Board receive additional compensation of $15,000 annually, which is payable in cash. On June 5, 2020, the Board of Directors revised the committee chair compensation so that all future compensation from July 1, 2020 through the next annual meeting of the stockholders will be payable in shares of common stock rather than cash. Shares issued as compensation will be valued at the closing RFIL stock price on the last day of each quarter. Accordingly, on July 31, 2020, each of the four committee chairpersons was awarded 279 shares at $4.47 per share. Beginning August 1, 2020, the full $15,000 additional compensation will be payable in shares of common stock valued at the closing RFIL stock price on the last day of the quarter. We account for these shares as stock-based compensation. Stock option expense During the three months ended July 31, 2020 and 2019, stock-based compensation expense totaled $166,000 and $68,000, respectively, and was classified in selling and general expense. During the nine months ended July 31, 2020 and 2019, stock-based compensation expense totaled $449,000 and $260,000, respectively, and was classified in selling and general expenses. 14 Note 8 – Con centrations of credit r isk 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 July 31, 2020, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $14.0 million. For the three months ending July 31, 2020, two customers, both distributors, accounted for approximately 18% and 13% of net sales. These same two distributors accounted for 15% and 12%, respectively, of net sales for the nine months ending July 31, 2020. The two distributors had accounts receivable balances that accounted for 21% and 14%, respectively, of the total net accounts receivable balance at July 31, 2020. For the three months ending July 31, 2019, two customers, a wireless carrier and one of the aforementioned distributors, accounted for approximately 35% and 11%, respectively, of net sales. This same wireless carrier and a different distributor accounted for approximately 19% and 23%, respectively, of net sales for the nine months ending July 31, 2019. At July 31, 2019, the wireless carrier and one of the distributors had accounts receivable balances that accounted for approximately 47% and 11%, respectively, 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 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 9 – Segment i nformation 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 July 31, 2020, 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 and nine months ended July 31, 2020 and 2019 (in thousands): Three Months Ended July 31, Nine Months Ended July 31, 2020 2019 2020 2019 United States $ 9,315 $ 15,154 $ 31,471 $ 39,075 Foreign Countries: Canada 124 156 530 433 Mexico - 109 12 109 All Other 105 92 335 167 229 357 877 709 Totals $ 9,544 $ 15,511 $ 32,348 $ 39,784 15 Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the three months ended July 31, 2020 and 2019 are as follows (in thousands): RF Connector Custom Cabling and Manufacturing and Cable Assembly Assembly Corporate Total 2020 Net sales $ 3,611 $ 5,933 $ - $ 9,544 Income (loss) before benefit for income taxes 500 (720 ) 1 (219 ) Depreciation and amortization 40 212 - 252 Total assets 8,413 15,539 16,942 40,894 2019 Net sales $ 3,462 $ 12,049 $ - $ 15,511 Income 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 Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the nine months ended July 31, 2020 and 2019 are as follows (in thousands): RF Connector Custom Cabling and Manufacturing and Cable Assembly Assembly Corporate Total 2020 Net sales $ 10,568 $ 21,780 $ - $ 32,348 Income (loss) before benefit for income taxes 1,479 (1,886 ) 19 (388 ) Depreciation and amortization 123 637 - 760 Total assets 8,413 15,539 16,942 40,894 2019 Net sales $ 10,061 $ 29,723 $ - $ 39,784 Income 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 Note 1 0 – Income tax es On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effects of the COVID-19 pandemic. The CARES Act includes several provisions that provide economic relief for individuals and businesses. We continue to evaluate the impact the CARES Act will have on our tax obligations, but have concluded it did not materially impact our income taxes for the three and nine months ended July 31, 2020. 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 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 or benefit for income taxes was 63% and 21% of (loss) income before income taxes for the three months ended July 31, 2020 (the “fiscal 2020 quarter”) and 2019 (the “fiscal 2019 quarter”), respectively, and 38% and 22% of (loss) income before income taxes for the nine months ended July 31, 2020 (the “fiscal 2020 period”) and 2019 (the “fiscal 2019 period”), respectively. The change in the effective tax rate from the fiscal 2019 period to fiscal 2020 period was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to our forecasted book income or loss in each period. We had $101,000 and $80,000 of unrecognized tax benefits, inclusive of interest and penalties, as of July 31, 2020 and October 31, 2019, respectively. The unrecognized tax benefits, if recognized, would result in a net tax benefit of $26,000 as of July 31, 2020. 16 Note 1 1 – Intangible assets Intangible assets consist of the following (in thousands): July 31, 2020 October 31, 2019 Amortizable intangible assets: Non-compete agreement (estimated life 5 years) $ 423 $ 200 Accumulated amortization (233 ) (200 ) 190 - Customer relationships (estimated lives 7 - 15 years) 5,058 2,879 Accumulated amortization (2,246 ) (1,884 ) 2,812 995 Backlog (estimated life 1 - 2 years) 287 134 Accumulated amortization (234 ) (134 ) 53 - Patents (estimated life 10 - 14 years) 368 142 Accumulated amortization (69 ) (45 ) 299 97 Totals $ 3,354 $ 1,092 Non-amortizable intangible assets: Trademarks $ 1,174 $ 657 Amortization expense for the nine months ended July 31, 2020 and the year ended October 31, 2019 was $519,000 and $275,000, respectively. As of July 31, 2020, the weighted-average amortization period for the amortizable intangible assets is 8.39 years. Note 1 2 – Commitments We adopted ASU 2016-02 on November 1, 2019, and elected the practical expedient modified retrospective method whereby the lease qualification and classification was carried over from the accounting for leases under ASC 840. The lease contracts for the corporate headquarters, RF Connector division manufacturing facilities, Cables Unlimited, Rel-Tech, and C Enterprises commenced prior to the effective date of November 1, 2019, and were determined to be operating leases. All other new contracts have been assessed for the existence of a lease and for the proper classification into operating leases. The rate implicit in the leases was undeterminable, and therefore, the discount rate used in all lease contracts is our incremental borrowing rate. 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 $14,000 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 July 31, 2020 were as follows (in thousands): Three Months Ended Nine Months Ended July 31, 2020 July 31, 2020 Operating lease cost $ 248 $ 752 Short-term lease cost - 1 17 Other information related to leases was as follows (in thousands): July 31, 2020 Supplemental Cash Flows Information Right of use assets obtained in exchange for lease obligations: Operating leases $ 1,659 Weighted Average Remaining Lease Term Operating leases (in months) 25.33 Weighted Average Discount Rate Operating leases 3.54 % Future minimum lease payments under non-cancellable leases as of July 31, 2020 were as follows: Year ended October 31, Operating Leases 2020 (excluding nine months ended July 31, 2020) $ 254 2021 920 2022 532 2023 166 2024 - Thereafter - Total future minimum lease payments 1,872 Less imputed interest (119 ) Total $ 1,753 Reported as of July 31, 2020 Operating Leases Other current liabilities $ 952 Operating lease liabilities 801 Finance lease liabilities - Total $ 1,753 As of July 31, 2020, operating lease ROU asset was $1.7 million and operating lease liability totaled $1.8 million, of which $952,000 is classified as current. There were no finance leases as of July 31, 2020. Note 13 – Line of credit and PPP loan In November 2019, we entered into an agreement for a revolving line of credit (“LOC”) in the amount of $5.0 million. Amounts outstanding under the LOC shall bear interest at a rate of 2.0% plus LIBOR Daily Floating Rate (“base interest rate”), with interest payable on the first day of each month. Borrowings under the LOC are secured by a security interest in certain assets of the Company. The LOC contains certain loan covenants. Failure to maintain the loan covenants may constitute an event of default, resulting in all outstanding amounts of principal and interest becoming immediately due and payable. All outstanding principal and interest is due and payable on December 1, 2021. As of July 31, 2020, we are in compliance with all loan covenants. Additionally, as of July 31, 2020, no amounts were outstanding under the line of credit. 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). We anticipate that most of the PPP Loans will be eligible for forgiveness in accordance with the provisions of the CARES Act. To the extent not forgiven, the PPP Loans have a two-year term, a fixed interest rate of 1%, and principal and interest payments are deferred for six months. Future minimum loan payments as of July 31, 2020 were as follows: Year ended October 31, PPP Loan 2020 (excluding nine months ended July 31, 2020) $ - 2021 1,699 2022 1,089 Total future minimum payments $ 2,788 Note 1 4 – Cash dividend and declared dividends We did not pay any dividends during the three months ended July 31, 2020. During the three months ended July 31, 2019, we paid dividends of $0.02 per share for a total of $187,000. During the nine months ended July 31, 2020 and 2019, we paid dividends of $0.02 per share for a total of $388,000 and $560,000, respectively. 18