What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-03-11 compared with 2020-09-10 · 258 added, 202 removed, 258 unchanged (64% of the section changed)

4 unchanged sentences

(In thousands)

Nine Months Ended July 31,

Three Months Ended January 31,

OPERATING ACTIVITIES:

Consolidated net (loss) income

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Bad debt expense

1 unchanged sentence

Stock-based compensation expense

Tax payments related to shares cancelled for vested restricted stock awards

Deferred income taxes

3 unchanged sentences

Right of use assets

Other long-term assets

Accounts payable

1 unchanged sentence

Income tax payable

Other current liabilities

Other long-term liabilities

Net cash provided by (used in) operating activities

Net cash (used in) provided by operating activities

INVESTING ACTIVITIES:

Capital expenditures

Purchase of C Enterprises, net of cash acquired ($143)

Purchase of Schrofftech, net of cash acquired ($99)

3 unchanged sentences

Dividends paid

Proceeds from PPP Loan

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents of continuing operations, beginning of period

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

2 unchanged sentences

RF INDUSTRIES, LTD.

AND SUBSIDIAR IES

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5 unchanged sentences

as of October 31, 2020 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2020 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.

Operating results for the three months ended January 31, 2021 are not necessarily indicative of the results that may be expected for the year ending October 31, 2021.

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.

7 unchanged sentences

(“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 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.

4 unchanged sentences

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.

Our operations have been negatively affected by partial shutdowns of our facilities, 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.

2 unchanged sentences

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.

The outbreak impacted our performance for the three months ended January 31, 2021.

We continue to expect the decline caused by the economic slowdown to persist through the second quarter of 2021.

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”).

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 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.

We considered the impact of the COVID-19 related economic slowdown on our evaluation of goodwill impairment indicators as of January 31, 2021.

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 unchanged sentences

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.

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.

As of January 31, 2021 and October 31, 2020, 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 Loans approximated their carrying value due to their short-term nature.

See Note 5 for discussion on the fair value of other current liabilities.

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.

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 Securities and Exchange Commission, to fiscal years beginning after December 15, 2022.

Early adoption is permitted.

7 unchanged sentences

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.

We elected the policy which allows us to combine the nonlease components with their 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.

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.

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.

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

Total purchase price

The following table summarizes the allocation of the estimated purchase price at fair value at March 15, 2019:

Current assets

Non-interest bearing liabilities

Schroff Technologies International, Inc.

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, 2021.

Note 2 – Business acquisition

On November 4, 2019, we purchased the business of Schroff Technologies International, Inc.

6 unchanged sentences

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.

1 unchanged sentence

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.

Accordingly, subsequent to November 1, 2019, Schrofftech’s financial results 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.

Total costs related to the acquisition of Schrofftech were approximately $151,000 and have been expensed as incurred and categorized in selling and general expenses during periods prior to November 1, 2020.

The following table summarizes the components of the purchase price at fair values at November 1, 2019:

6 unchanged sentences

Non-interest bearing liabilities

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,

Net (loss) income

(Loss) earnings per share

Note 3 – Inventories and major vendors

2 unchanged sentences

Inventories consist of the following (in thousands):

July 31, 2020

January 31, 2021

October 31, 2020

2 unchanged sentences

Finished goods

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.

No vendors accounted for more than 10% of inventory purchases for the three months ended January 31, 2021 or 2020.

We have arrangements with our vendors to purchase products based on purchase orders that we periodically issue.

Note 4 – Other current assets

Other current assets consist of the following (in thousands):

July 31, 2020

January 31, 2021

October 31, 2020

1 unchanged sentence

Prepaid expense

Note 5 – Accrued expenses and other long-term liabilities

Note 5 – Accrued expenses and other current liabilities

Accrued expenses consist of the following (in thousands):

July 31, 2020

January 31, 2021

October 31, 2020

1 unchanged sentence

Accrued receipts

Warranty liability

Deferred revenue

Other accrued expenses

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 purchase agreement for the Schrofftech acquisition provides for earn-out payments of up to $2.4 million, which are 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.

3 unchanged sentences

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.

In determining the fair value of the earn-out liability as of January 31, 2021, we used the most recent projections while giving consideration to actual results versus such projections subsequent to January 31, 2021.

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):

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2021 (in thousands):

Earn-out liability

There were no financial assets or liabilities measured at fair value as of October 31, 2019.

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):

July 31, 2020

April 30, 2020

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2020 (in thousands):

Earn-out liability

The following table summarizes the changes to the Level 3 liabilities measured at fair value for the three months ended January 31, 2021 and for the year ended October 31, 2020 (in thousands):

January 31, 2021

3 unchanged sentences

Ending balance

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

As of January 31, 2021, the full amount of the $296,000 earn-out was classified as other current liabilities.

Note 6 – (Loss) earnings 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.

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, 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 331,338 and 392,838 shares for the three months ended January 31, 2021 and 2020, 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 July 31,

Nine Months Ended July 31,

Three Months Ended January 31,

Weighted average shares outstanding for basic (loss) earnings per share

2 unchanged sentences

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.

6 unchanged sentences

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.

(i) one-quarter of the restricted shares and options vested on January 9, 2021;

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.

1 unchanged sentence

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.

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,

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.

No other shares or options were granted to company employees during the three months ended January 31, 2021 and 2020.

The weighted average fair value of employee stock options that were granted during the three months ended January 31, 2021 and 2020 was estimated to be $2.46 and $3.13, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

Three Months Ended January 31,

Risk-free interest rate

10 unchanged sentences

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, 2020.

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:

A summary of the status of the options granted under our stock option plans as of January 31, 2021 and the changes in options outstanding during the three months then ended is presented in the table that follows:

Exercise Price

2 unchanged sentences

Options exercised

Options outstanding at July 31, 2020

Options exercisable at July 31, 2020

Options vested and expected to vest at July 31, 2020

Weighted average remaining contractual life of options outstanding as of July 31, 2020:

Weighted average remaining contractual life of options exercisable as of July 31, 2020:

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2020:

Aggregate intrinsic value of options outstanding at July 31, 2020:

Aggregate intrinsic value of options exercisable at July 31, 2020:

Aggregate intrinsic value of options vested and expected to vest at July 31, 2020:

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.

Options cancelled

Options outstanding at January 31, 2021

Options exercisable at January 31, 2021

Options vested and expected to vest at January 31, 2021

Weighted average remaining contractual life of options outstanding as of January 31, 2021:

Weighted average remaining contractual life of options exercisable as of January 31, 2021:

Weighted average remaining contractual life of options vested and expected to vest as of January 31, 2021:

Aggregate intrinsic value of options outstanding at January 31, 2021:

Aggregate intrinsic value of options exercisable at January 31, 2021:

Aggregate intrinsic value of options vested and expected to vest at January 31, 2021:

As of January 31, 2021, $708,000 and $461,000 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 3.92 and 1.30 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.

For fiscal 2020, compensation payable to non-employee directors was 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.

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 closing stock price ($6.36).

These restricted shares vested ratably through August 31, 2020.

As compensation for services to be provided until the 2021 annual meeting of stockholders in September 2021, we granted each of our five non-employee directors 5,757 shares of restricted stock, which number was determined by dividing $25,000 by the 20-day average closing stock price ($4.34).

On December 31, 2020, a new director joined the Board.

We granted the new director 3,334 shares of restricted stock as payment for the year ending with the 2021 annual meeting.

The number of restricted stock was determined by prorating $25,000 for the 8.5 months of service upon joining the Board through the 2021 annual meeting and dividing by the 20-day average closing stock price ($5.31).

Non-employee directors who are also a chairperson of a committee of the Board receive additional compensation of $15,000 annually.

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.

Shares issued as compensation will be valued at the closing common 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.

On September 15, 2020, each of the four committee chairpersons was awarded 3,454 shares of restricted stock as payment for the $15,000 retainer payable to Chairpersons for the year ending with the 2021 annual meeting of stockholders.

The number of restricted shares granted to each chairperson was determined by dividing $15,000 by the 20-day average closing stock price ($4.34).

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.

Note 8 – Con centrations of credit r isk

During the three months ended January 31, 2021 and 2020, stock-based compensation expense totaled $123,000 and $187,000, respectively, and was classified in selling and general expense.

Note 8 – 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 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.

At January 31, 2021, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $14.3 million.

For the three months ending January 31, 2021, 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 at January 31, 2021.

These same two distributors each accounted for 11% of net sales for the three months ending January 31, 2020, while one other customer, a wireless carrier, accounted for 17% of net sales for the three months ending January 31, 2020.

The two distributors had accounts receivable balances that each accounted for 12% of total net accounts receivable balance at January 31, 2020.

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

Note 9 – Segment information

We aggregate operating divisions into two reporting segments that have similar economic characteristics primarily in the following areas:

4 unchanged sentences

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”).

Based upon this evaluation, as of January 31, 2021, 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.

13 unchanged sentences

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,

The following table presents the sales by geographic area for the three months ended January 31, 2021 and 2020 (in thousands):

Three Months Ended January 31,

United States

Foreign Countries:

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):

Custom Cabling

Manufacturing and

Cable Assembly

Income (loss) before benefit for income taxes

Depreciation and amortization

Income before provision for income taxes

Depreciation and amortization

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):

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the three months ended January 31, 2021 and 2020 are as follows (in thousands):

Custom Cabling

3 unchanged sentences

Depreciation and amortization

Income before provision for income taxes

Income (loss) before provision for income taxes

Depreciation and amortization

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.

Note 10 – 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 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.

During the first quarter of fiscal 2021, the Consolidated Appropriations Act was passed which allows for PPP loan expenses to be deducted on the Company’s tax return.

This resulted in a decrease to our deferred tax asset and income taxes payable of $0.7 million.

The provision or benefit for income taxes was 32% and (120%) of (loss) income before income taxes for the three months ended January 31, 2021 (the “fiscal 2021 quarter”) and 2020 (the “fiscal 2020 quarter”), respectively.

The change in the effective tax rate from the fiscal 2020 quarter to fiscal 2021 quarter 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 $134,000 and $107,000 of unrecognized tax benefits, inclusive of interest and penalties, as of January 31, 2021 and October 31, 2020, respectively.

The unrecognized tax benefits, if recognized, would result in a net tax benefit of $35,000 as of January 31, 2021.

Note 11 – Intangible assets

Intangible assets consist of the following (in thousands):

July 31, 2020

January 31, 2021

October 31, 2020

9 unchanged sentences

Non-amortizable intangible assets:

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.

Amortization expense for the three months ended January 31, 2021 and the year ended October 31, 2020 was $157,000 and $692,000, respectively.

As of January 31, 2021, the weighted-average amortization period for the amortizable intangible assets is 5.66 years.

Note 12 – 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.

2 unchanged sentences

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):

The components of our facilities and equipment operating lease expenses for the period ending January 31, 2021 were as follows (in thousands):

Three Months Ended

Nine Months Ended

July 31, 2020

January 31, 2021

Operating lease cost

1 unchanged sentence

Other information related to leases was as follows (in thousands):

July 31, 2020

January 31, 2021

October 31, 2020

Supplemental Cash Flows Information

5 unchanged sentences

Operating leases

Future minimum lease payments under non-cancellable leases as of July 31, 2020 were as follows:

Future minimum lease payments under non-cancellable leases as of January 31, 2021 were as follows:

Year ended October 31,

Operating Leases

2020 (excluding nine months ended July 31, 2020)

2021 (excluding three months ended January 31, 2021)

Total future minimum lease payments

Less imputed interest

Reported as of July 31, 2020

Reported as of January 31, 2021

Operating Leases

2 unchanged sentences

Finance lease liabilities

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

As of January 31, 2021, operating lease ROU asset was $1.2 million and operating lease liability totaled $1.3 million, of which $789,000 is classified as current.

There were no finance leases as of January 31, 2021.

Note 13 – Line of credit and PPP loans

In November 2019, we entered into an agreement for a revolving line of credit (“LOC”) in the amount of $5.0 million.

4 unchanged sentences

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.

On December 30, 2020, we closed the line of credit with no amounts outstanding.

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).

Without the PPP Loans, we would have made material reductions in our workforce (particularly at Cables Unlimited).

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:

As of January 31, 2021, the full amount of the PPP Loans was applied for forgiveness.

Subsequent to January 31, 2021, the full amount of the PPP Loans has been forgiven and considered paid in full (including applicable interest).

Future minimum loan payments as of January 31, 2021 were as follows:

Year ended October 31,

2020 (excluding nine months ended July 31, 2020)

2021 (excluding three months ended January 31, 2021)

Total future minimum payments

Note 14 – 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.

We did not pay any dividends during the three months ended January 31, 2021.

During the three months ended January 31, 2020, we paid dividends of $0.02 per share for a total of $193,000.

Note 15 – Subsequent events

In February 2021, the full $2.8 million of PPP Loans was forgiven and considered paid in full (including applicable interest) by the Small Business Administration.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements.

These statements relate to future events or the Company ’ s future financial performance.

In some cases, you can identify forward-looking statements by terminology such as “ may, ” “ will, ” “ should, ” “ except, ” “ plan, ” “ anticipate, ” “ believe, ” “ estimate, ” “ predict, ” “ potential ” or “ continue, ” the negative of such terms or other comparable terminology.

These statements are only predictions.

Actual events or results may differ materially.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements.

Moreover, neither the Company, nor any other person, assumes responsibility for the accuracy and completeness of the forward-looking statements.

The Company is under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in its expectations.

The following discussion should be read in conjunction with the Company ’ s unaudited condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q.

Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company ’ s business, including without limitation the disclosures made under the caption “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations, ” under the caption “ Risk Factors, ” and the audited consolidated financial statements and related notes included in the Company ’ s Annual Report filed on Form 10-K for the year ended October 31, 2020 and other reports and filings made with the Securities and Exchange Commission.

Critical Accounting Policies

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.

We evaluate our estimates, including those related to bad debts, inventory reserves, earn-out liabilities, and contingencies on an ongoing basis.

We base our estimates on historical experience and on various other assumptions that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

Inventories are stated at the lower of cost or net realizable value, with cost determined using the weighted average cost method of accounting.

Certain items in inventory may be considered obsolete or excess and, as such, we periodically review our inventories for excess and slow moving items and make provisions as necessary to properly reflect inventory value.

Because inventories have, during the past few years, represented up to one-fourth of our total assets, any reduction in the value of our inventories would require us to take write-offs that would affect our net worth and future earnings.

Allowance for Doubtful Accounts

We record an allowance for doubtful accounts based upon our assessment of various factors.

We consider historical experience, the age of the accounts receivable balance, credit quality of our customers, current economic conditions and other factors that may affect a customer’s ability to pay.

Long-Lived Assets Including Goodwill

We assess property, plant and equipment and intangible assets, which are considered definite-lived assets, for impairment.

Definite-lived assets are reviewed when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate.

If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value.

We amortize our intangible assets with definite useful lives over their estimated useful lives and review these assets for impairment.

We test our goodwill and trademarks and indefinite-lived assets for impairment at least annually or more frequently if events or changes in circumstances indicate these assets may be impaired.

These events or circumstances require significant judgment and could include a significant change in the business climate, legal factors, operating performance indicators, competition and sale or disposition of all or a portion of a division.

This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

Earn-out Liability

The purchase agreement for the acquisition of Schrofftech provides for an earn-out payment of up to $2.4 million, which amount is earned through October 31, 2021.

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.

We record a tax provision for the anticipated tax consequences of the reported results of operations.

Income taxes are accounted for under the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.

Deferred tax assets and liabilities are measured using the currently enacted tax rates as of the date of the financial statements that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.

We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The calculation of the tax provision involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws.

Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results.

Stock-based Compensation

We use the Black-Scholes model to value the stock option grants.

This valuation is affected by our stock price as well as assumptions regarding a number of inputs which involve significant judgments and estimates.

These inputs include the expected term of employee stock options, the expected volatility of the stock price, the risk-free interest rate and expected dividends.

RF Industries, Ltd.

(together with subsidiaries, the “Company,” we,” “us,” or “our”) is a national manufacturer and marketer of interconnect products and systems, including coaxial and specialty cables and connectors, fiber optic cables and connectors, and electrical and electronic specialty cables and components.

Through our manufacturing and production facilities, we provide a wide selection of interconnect products and solutions primarily to telecommunications carriers and equipment manufacturers, wireless and network infrastructure carriers and manufacturers and to various original equipment manufacturers (OEMs) in several market segments.

Since the acquisition of Schrofftech in November 2019, we also manufacture and sell energy-efficient cooling systems and integrated small cell solutions and related components.

We operate through two reporting segments:

(i) the RF Connector and Cable Assembly (“RF Connector”) segment, and (ii) the Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment.

The RF Connector segment primarily designs, manufactures, markets and distributes a broad range of connector and cable products, including coaxial connectors and cable assemblies that are integrated with coaxial connectors, used in telecommunications and information technology OEM markets and other end markets.

The Custom Cabling segment designs, manufactures, markets and distributes custom copper and fiber cable assemblies, complex hybrid fiber optic and power solution cables, electromechanical wiring harnesses, wiring harnesses for a broad range of applications in a diverse set of end markets, energy-efficient cooling systems for wireless base stations and remote equipment shelters and custom designed, pole-ready 5G small cell integrated enclosures.

For the three months ended January 31, 2021, most of our revenues were generated from the Custom Cabling segment from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which collectively accounted for 64% of the Company’s total sales.

Revenues from the RF Connector segment were generated from the sales of RF connector products and cable assemblies and accounted for 36% of total sales for the three months ended January 31, 2021.

The RF Connector segment mostly sells standardized products regularly used by customers and, therefore, has a more stable revenue stream.

On the other hand, the Custom Cabling segment mostly designs, manufactures, and sells customized cabling and wireless-related equipment under larger purchase orders.

Accordingly, the Custom Cabling segment is more dependent upon larger orders, and its revenues are therefore, more volatile than the revenues of the RF Connector segment.

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.

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 outbreak impacted our performance for the three months ended January 31, 2021.

We currently expect the decline caused by the economic slowdown to persist through at least the second quarter of 2021.

The operations of our Cables Unlimited, Inc.

subsidiary in Long Island, New York, was particularly affected as many employees stayed at home and as local customers shut down or otherwise delayed, deferred or cancelled orders for our products.

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 Cables Unlimited).

In February 2021, the full $2.8 million of PPP Loans was forgiven and considered paid in full (including applicable interest) by the Small Business Administration (“SBA”).

Liquidity and Capital Resources

Historically, we have been able to fund our liquidity and other capital requirements from funds we generated from operations.

While we still believe that our existing current assets, the amount of cash we anticipate will be generated from on-going operations, and funds we received from the PPP Loans collectively will be sufficient to fund our anticipated liquidity and capital resource needs for at least twelve months from the date of this filing, there are some uncertainties because of the unknown future impact of the COVID-19 pandemic on our business.

Nevertheless, we believe that our existing assets and the cash we expect to generate from operations, including from our current backlog of unfulfilled orders, will be sufficient to fund our liquidity needs during the next twelve months from the date of this filing based on the following:

As of January 31, 2021, we had a total of $15.5 million of cash and cash equivalents compared to a total of $15.8 million of cash and cash equivalents as of October 31, 2020.

As of January 31, 2021, we had working capital of $24.5 million and a current ratio of approximately 4.4:1 with current assets of $31.8 million and current liabilities of $7.3 million.

As of January 31, 2021, we had $7.1 million of backlog, compared to $6.3 million as of October 31, 2020.

Since purchase orders are submitted from customers based on the timing of their requirements, our ability to predict orders in future periods or trends in future periods is limited.

Furthermore, purchase orders may be subject to cancellation from customers, although we have not historically experienced material cancellations of purchase orders.

In the three months ended January 31, 2021, we used $0.6 million of cash in our operating activities.

This net outflow of cash is due to our net loss ($0.4 million), inventory purchases resulting in an increase to our inventory balance ($0.4 million), and cash used for other current assets ($1.3 million), which expenditures included an increase of our income taxes receivable of $0.7 million due to the impact of the passage of the Consolidated Appropriations Act (“CAA”) that allows for PPP loan expenses to be deducted on our tax return.

The foregoing cash usage was partially offset by an increase in cash from noncash credits of $0.7 million from the decrease of our deferred tax asset as a result of the passage of the CAA, $0.2 million from depreciation and amortization, $0.1 million from stock-based compensation expense, and $0.5 million from the collection in accounts receivable.

During the fiscal quarter ended January 31, 2021, we also spent $0.1 million on capital expenditures, and received $0.4 million of proceeds from the exercise of stock options.

As a result of the net cash used in operating and investing activities, and the cash received from the exercise of stock options, our cash and cash equivalent balance decreased by $0.3 million during the January 31, 2021 quarter.

We do not anticipate needing material additional capital equipment in the next twelve months.

In the past, we have financed some of our equipment and furnishings requirements through capital leases.

No additional capital equipment purchases have been currently identified that would require significant additional leasing or capital expenditures during the next twelve months.

In November 2019, we entered into a $5.0 million revolving line of credit that bore interest at a rate of 2.0% plus LIBOR Daily Floating Rate.

We never used the line of credit and on December 30, 2020, we closed the line of credit.

Accordingly, we currently do not have a credit facility available to us should we need to borrow amounts to fund either our working capital needs or any future unplanned capital expenditures.

From time to time, we may undertake acquisitions of other companies or product lines in order to diversify our product and solutions offerings and customer base.

Conversely, we may undertake the disposition of a division or product line due to changes in our business strategy or market conditions.

Acquisitions may require the outlay of cash, which may reduce our liquidity and capital resources while dispositions may increase our cash position, liquidity and capital resources.

On November 4, 2019, we purchased the business of Schroff Technologies International, Inc., 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 Schrofftech, 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 an additional cash earn-out payment of up to $2.4 million.

Results of Operations

Three Months Ended January 31, 2021 vs.

Three Months Ended January 31, 2020

Net sales for the three months ended January 31, 2021 (the “fiscal 2021 quarter”) decreased by 19%, or $2.4 million, to $10.0 million as compared to the three months ended January 31, 2020 (the “fiscal 2020 quarter”).

Net sales for the fiscal 2021 quarter at the Custom Cabling segment decreased by $2.8 million, or 30%, to $6.4 million, compared to $9.2 million in the fiscal 2020 quarter.

The decrease was primarily the result of lower project-based wireless carrier macro and tower site business where we continued to see a general slowdown which impacted our sales.

In addition we experienced project delays with small cell deployments due to COVID-19 as there were difficulties gaining site zoning approvals for small cell installations, challenges with building and site access, and limited availability of work crews.

Net sales for the fiscal 2021 quarter at the RF Connector segment increased by $0.4 million, or 12%, to $3.6 million as compared to $3.2 million in the fiscal 2020 quarter.

Gross profit for the fiscal 2021 quarter decreased by $0.6 million to $2.6 million due to the decrease in net sales, although gross margins remained fairly consistent at 26.1% of sales compared to 26.2% of sales in the fiscal 2020 quarter.

Engineering expenses decreased by $0.2 million to $0.4 million in the fiscal 2021 quarter compared to $0.6 million in the fiscal 2020 quarter primarily due to the reduction in engineering marketing personnel, which costs are included in the engineering costs.

Engineering expenses represent costs incurred relating to the ongoing research and development of new products.

Selling and general expenses increased by $0.1 million to $2.8 million (28% of sales) compared to $2.7 million (21% of sales) in the first quarter last year primarily due to hiring of additional sales people in the last half of the 2020 fiscal year and in the fiscal 2021 quarter.

For the fiscal 2021 quarter, the Custom Cabling segment had a pretax loss of $1.0 million while the RF Connector segment had pretax income of $0.5 million, as compared to $0.3 million loss and $0.3 million of income, respectively, for the comparable first quarter last year.

The pretax loss at the Custom Cabling segment in the fiscal 2021 quarter was primarily due to the lower sales in the project-based business resulting from the slowdown in carrier spending.

The provision or benefit for income taxes was 32% and (120%) of (loss) income before income taxes for the fiscal 2021 quarter and the fiscal 2020 quarter, respectively.

For the fiscal 2021 quarter, net loss was $0.4 million and fully diluted loss per share was $0.04 per share, compared to a net income of $26,000 and fully diluted earnings per share of $0.00 per share for the fiscal 2020 quarter.

For the fiscal 2021 quarter, the diluted weighted average shares outstanding was 9,784,760 as compared to 9,873,336 for the fiscal 2020 quarter.

Quantitative and Qualitative Disclosures about Market Risk

Nothing to report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements