What changed in this filing

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Item 1. Financial Statements

2021-06-14 compared with 2021-03-11 · 409 added, 200 removed, 316 unchanged (66% of the section changed)

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(In thousands)

Three Months Ended January 31,

Six Months Ended April 30,

OPERATING ACTIVITIES:

Consolidated net (loss) income

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

Consolidated net income (loss)

$ 4,442  

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

Bad debt expense

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Tax payments related to shares cancelled for vested restricted stock awards

( 11 )  

Deferred income taxes

PPP Loan and interest forgiveness

( 2,807 )  

Changes in operating assets and liabilities:

Trade accounts receivable

( 694 )  

( 987 )  

Other current assets

( 2,824 )  

Right of use assets

( 14 )  

Other long-term assets

Accounts payable

( 238 )  

Accrued expenses

Income tax payable

Income taxes payable

( 43 )  

Other current liabilities

Other long-term liabilities

( 370 )  

Net cash (used in) provided by operating activities

( 1,352 )  

INVESTING ACTIVITIES:

Capital expenditures

( 168 )  

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

Net cash used in investing activities

( 168 )  

FINANCING ACTIVITIES:

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Net (decrease) increase in cash and cash equivalents

( 1,035 )  

Cash and cash equivalents, beginning of period

15,797  

12,540  

Cash and cash equivalents, end of period

Supplemental cash flow information – income taxes paid

$ 14,762  

$ 14,076  

Supplemental cash flow information –

income taxes paid

See Notes to Unaudited Condensed Consolidated Financial Statements.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Unaudited interim 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.

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Information included in the consolidated balance sheet as of October 31, 2020 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, 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 three months ended January 31, 2021 are not necessarily indicative of the results that may be expected for the year ending October 31, 2021.

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 six months ended April 30, 2021 are not necessarily indicative of the results that may be expected for the year ended 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.

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Cables Unlimited, Inc.

(“Cables Unlimited”), Rel-Tech Electronics, Inc.

(“Rel-Tech”), C Enterprises, Inc.

(“C Enterprises”), and Schroff Technologies International, Inc.

(“Schrofftech”).

Schrofftech is a wholly-owned subsidiary that RF Industries, Ltd.

acquired effective November 1, 2019.

All references to the “Company” collectively refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech.

(“Cables Unlimited”), Rel-Tech Electronics, Inc.

(“Rel-Tech”), C Enterprises, Inc.

(“C Enterprises”), and Schroff Technologies International, Inc.

(“Schrofftech”).

All references to the “Company”

collectively refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech.

All intercompany balances and transactions have been eliminated in consolidation.

Risks and uncertainties

In March 2020, the World Health Organization (the “WHO”) declared coronavirus (“COVID-19”) a pandemic emergency.

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, 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 months ended January 31, 2021.

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

The outbreak impacted our performance for the six months ended April 30, 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 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 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.

In March 2021, the Internal Revenue Service (“IRS”) released Notice 2021 - 20, which retroactively eliminated the restriction that prevented employers who received a PPP loan from qualifying for the Employee Retention Credit (“ERC”), which is a refundable tax credit against certain employment taxes.

Upon determination that the employer has complied with all of the conditions required to receive the credit, a receivable is recognized and the credit reduces salaries and wages. 

For the six months ended April 30, 2021, we qualified and filed to claim the ERC and have recorded this as an other receivable. 

We considered the impact of the COVID- 19 related economic slowdown on our evaluation of goodwill and non-amortizable intangibles impairment indicators as of April 30, 2021.

Although no 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.

Fair value measurement

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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.

GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.

The accounting principles generally accepted in the United States of America (“GAAP”) specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.

These two types of inputs have created the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets;

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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.

Quoted prices for identical instruments in active markets;

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

Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

As of April 30, 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.

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Recently issued accounting pronouncements not yet adopted:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

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.

In November 2019, the FASB issued ASU 2019 - 10, Financial Instruments—Credit Losses (Topic 326 ), which pushes back the effective date for public business entities that are smaller reporting companies, as defined by the SEC, to fiscal years beginning after December 15, 2022.

Early adoption is permitted.

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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 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.

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. 

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.

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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.

The adoption of the standard resulted in a material recognition of additional ROU 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 loss.

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.

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.

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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.

(“Schrofftech”), a Rhode Island-based manufacturer and marketer of intelligent thermal control systems used by telecommunications companies across the U.S.

The adoption of the standard did not result in an impairment charge as of April 30, 2021.

Note 2 –

Business acquisition

On November 4, 2019, we purchased the business of 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.

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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, 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.

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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  

58,000  

Intangible assets

3,299,000  

1,127,000  

Non-interest bearing liabilities

Note 3 – Inventories and major vendors

$ 5,249,000  

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):

January 31, 2021

Inventories consist of the following (in thousands): 

April 30, 2021

October 31, 2020

Raw materials and supplies

$ 5,035  

$ 4,410  

Work in process

Finished goods

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

$ 9,574  

$ 8,586  

For the three months ended April 30, 2021, one vendor accounted for 15 % of inventory purchases, while no vendors accounted for more than 10% of inventory purchases for the three months ended April 30, 2020.

No vendors accounted for more than 10% of inventory purchases for the six months ended April 30, 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):

January 31, 2021

Note 4 –

Other current assets

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

April 30, 2021

October 31, 2020

Employee retention credit

$ 2,353  

Prepaid taxes

Prepaid expense

Note 5 – Accrued expenses and other current liabilities

$ 3,637  

Pursuant to the CARES Act, eligible employers are able to claim an ERC, which is a refundable tax credit against certain employment taxes.

If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS. 

The period assessed for eligibility of the ERC is on a calendar year basis. 

For the first and second quarter of calendar year 2021, we were eligible to claim the ERC. 

As of April 30, 2021, the remaining portion of the ERC that we have not yet received is included as other receivables in other current assets.

Note 5 –

Accrued expenses

Accrued expenses consist of the following (in thousands):

January 31, 2021

April 30, 2021

October 31, 2020

Wages payable

$ 1,432  

$ 1,506  

Accrued receipts

Other accrued expenses

$ 3,240  

$ 2,573  

Accrued receipts represent purchased inventory for which invoices have not been received.

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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.

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.

In determining the fair value of the earn-out liability as of April 30, 2021, we used the most recent projections while giving consideration to actual results versus such projections subsequent to April 30, 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 January 31, 2021 (in thousands):

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of April 30, 2021 ( in thousands):

Earn-out liability

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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):

The following table summarizes the changes to the Level 3 liabilities measured at fair value for the three months ended April 30, 2021, January 31, 2021 and for the year ended October 31, 2020 ( in thousands):

April 30, 2021

January 31, 2021

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Beginning balance

$ 1,249  

Change in value

( 296 )  

( 74 )  

Ending balance

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 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.

Note 6 –

Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed by dividing net income (loss) 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 and six months ended April 30, 2020, 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 321,338 and 392,838 shares for the three months ended April 30, 2021 and 2020, respectively, and 331,338 and 392,838 shares for the six months ended April 30, 2021 and 2020, respectively.

These shares were excluded from the calculation of diluted per share amounts because of their anti-dilutive effect.

The following table summarizes the computation of basic and diluted weighted average shares outstanding:

Three Months Ended January 31,

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

Three Months Ended April 30,

Six Months Ended April 30,

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

9,963,291  

9,704,880  

9,927,776  

9,633,935  

Add effects of potentially dilutive securities-assumed exercise of stock options

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

Note 7 – Stock-based compensation and equity transactions

166,181  

169,140  

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

10,129,472  

9,704,880  

10,096,916  

9,633,935  

Note 7 –

Stock-based compensation and equity transactions

On December 6, 2019, one employee was granted 50,000 incentive stock options.

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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,

No other shares or options were granted to company employees during the three and six months ended April 30, 2021 and 2020.

The weighted average fair value of employee stock options that were granted during the six months ended April 30, 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:

Six Months Ended April 30,

Risk-free interest rate

0.39 %  

Dividend yield

0.00 %  

Expected life of the option (in years)

Volatility factor

51.94 %  

Expected volatilities are based on historical volatility of our stock price and other factors.

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The risk-free rate is based on the U.S.

Treasury rate with a maturity date corresponding to the options’ expected life.

Treasury rate with a maturity date corresponding to the options’

expected life.

The dividend yield is based upon the historical dividend yield.

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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 January 31, 2021 and the changes in options outstanding during the three 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 April 30, 2021 and the changes in options outstanding during the six months then ended is presented in the table that follows:

Exercise Price

Outstanding at November 1, 2020

789,179  

$ 4.66  

Options granted

67,000  

$ 4.98  

Options exercised

( 156,701 )  

$ 3.10  

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.

( 91,793 )  

$ 5.88  

Options outstanding at April 30, 2021

607,685  

$ 4.91  

Options exercisable at April 30, 2021

270,082  

$ 5.24  

Options vested and expected to vest at April 30, 2021

607,349  

$ 4.92  

Weighted average remaining contractual life of options outstanding as of April 30, 2021:

Weighted average remaining contractual life of options exercisable as of April 30, 2021:

Weighted average remaining contractual life of options vested and expected to vest as of April 30, 2021:

Aggregate intrinsic value of options outstanding at April 30, 2021:

Aggregate intrinsic value of options exercisable at April 30, 2021:

Aggregate intrinsic value of options vested and expected to vest at April 30, 2021:

As of April 30, 2021, $ 648,000 and $ 385,000 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 3.71 and 1.31 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.

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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 closing stock price ($6.36).

The number of restricted shares granted to each director was determined by prorating $ 25,000 for the ten 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.

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

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).

The number of restricted stock was determined by prorating $ 25,000 for the 8.5 months of service upon joining the Board of Directors 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.

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Stock option expense

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

During the three months ended April 30, 2021 and 2020, stock-based compensation expense totaled $ 137,000 and $ 96,000 , respectively, and was classified in selling and general expenses.

During the six months ended April 30, 2021 and 2020, stock-based compensation expense totaled $ 260,000 and $ 283,000 , respectively, and was classified in selling and general expenses.

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 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.

At April 30, 2021, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $ 13.4 million.

Two customers, both distributors, accounted for approximately 12 % and 11 % of net sales for the three months ended April 30, 2 021, and 14 % and 11 %, respectively, of net sales for the six months ended April 30, 2 021. 

These distributors had accounts receivable balances that accounted for 14 % and 13 %, respectively, of the total net accounts receivable balance at April 30, 2021.

The two distributors also accounted for 17 % and 11 % of net sales for the three months ended April 30, 2 020, and 14 % and 11 %, respectively, of net sales for the six months ended April 3 0, 2020. 

In the same six -month period, another customer, a wireless carrier, accounted for 11 % of net sales.

The two distributors had accounts receivable balances that accounted for 19 % and 14 %, respectively, of the total net accounts receivable balance at April 30, 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 information

Note 9 –

Segment information

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

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and ( 5 ) if applicable, the nature of the regulatory environment.

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.

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.

Based upon this evaluation, as of April 30, 2021, we had two segments –

RF Connector and Cable Assembly (“RF Connector segment”) and 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.

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.

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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.

Accounts receivable, inventory, property and equipment, ROU 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.

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We attribute sales to geographic areas based on the location of the customers.

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

Three Months Ended January 31,

The following table presents the sales by geographic area for the three and six months ended April 30, 2021 and 2020 (in thousands):

Three Months Ended April 30,

Six Months Ended April 30,

United States

$ 10,338  

$ 9,982  

$ 19,717  

$ 22,155  

Foreign Countries:

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):

$ 11,057  

$ 10,390  

$ 21,059  

$ 22,804  

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the three months ended April 30, 2021 and 2020 are as follows (in thousands): 

Custom Cabling

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Cable Assembly

Income (loss) before benefit for income taxes

$ 3,552  

$ 7,505  

$ 11,057  

Income before provision for income taxes

Depreciation and amortization

16,835  

18,469  

42,767  

$ 3,768  

$ 6,622  

$ 10,390  

Income (loss) before provision for income taxes

( 885 )  

Depreciation and amortization

Note 10 – Income taxes

16,021  

15,265  

39,412  

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the six months ended April 30, 2021 and 2020 are as follows (in thousands): 

Custom Cabling

Manufacturing and

Cable Assembly

$ 7,127  

$ 13,932  

$ 21,059  

Income before provision for income taxes

Depreciation and amortization

16,835  

18,469  

42,767  

$ 6,957  

$ 15,847  

$ 22,804  

Income (loss) before benefit from income taxes

( 1,166 )  

Depreciation and amortization

16,021  

15,265  

39,412  

Note 10 –

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.

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):

January 31, 2021

We recorded income tax provisions of $ 648,000 and $ 3,000 for the three months ended April 

30, 2021 and 2020, respectively.

The effective tax rate was 

24.2 % for the three months ended April 

30, 2021, compared to ( 1.4 %) for the three months ended April 

For the six months ended April 

30, 2021 and 2020, we recorded income tax provisions (benefits) of $ 454,000 and ($ 11,000 ), respectively.

The effective tax rate was 

21.8 % for the six months ended April 

30, 2021, compared to 

6.7 % for the six months ended April 

The effective tax rates for the three and six months ended April 30, 2021 are excluding the PPP Loan forgiveness classified in Other Income.

The change in effective tax rate for the six months ended April 

30, 2021 compared to the six months ended April 30, 2020 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 $ 127,000 and $ 107,000 of unrecognized tax benefits, inclusive of interest and penalties, as of April 30, 2021 and October 31, 2020, respectively.

The unrecognized tax benefits, if recognized, would result in a net tax benefit of $ 33,000 as of April 30, 2021.

Note 11 –

Intangible assets

Intangible assets consist of the following (in thousands): 

April 30, 2021

October 31, 2020

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Accumulated amortization

( 267 )  

Customer relationships (estimated lives 7 - 15 years)

Accumulated amortization

( 2,559 )  

Backlog (estimated life 1 - 2 years)

Accumulated amortization

( 287 )  

Patents (estimated life 10 - 14 years)

Accumulated amortization

( 94 )  

$ 2,929  

$ 3,181  

Non-amortizable intangible assets:

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

$ 1,174  

Amortization expense for the six months ended April 30, 2021 and the year ended October 31, 2020 was $ 252,000 and $ 692,000 , respectively.

As of April 30, 2021, the weighted-average amortization period for the amortizable intangible assets is 5.66 years.

Note 12 –

We have operating leases for corporate offices, manufacturing facilities, and certain storage units.

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We also have other operating leases for certain equipment.

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

The components of our facilities and equipment operating lease expenses for the period ended April 30, 2021 were as follows (in thousands):

Three Months Ended

January 31, 2021

Six Months Ended

April 30, 2021

Operating lease cost

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

January 31, 2021

April 30, 2021

October 31, 2020

Supplemental Cash Flows Information

Right of use assets obtained in exchange for lease obligations:

ROU assets obtained in exchange for lease obligations:

Operating leases

$ 1,421  

Weighted Average Remaining Lease Term

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Operating leases

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

Year ended October 31,

3.54 %  

Future minimum lease payments under non-cancellable leases as of April 30, 2021 were as follows:

Year ending October 31,

Operating Leases

2021 (excluding three months ended January 31, 2021)

2021 (excluding six months ended April 30, 2021)

Total future minimum lease payments

Less imputed interest

Reported as of January 31, 2021

$ 1,049  

Reported as of April 30, 2021

Operating Leases

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Finance lease liabilities

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.

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.

$ 1,049  

As of April 30, 2021, operating lease ROU asset was $ 976,000 and operating lease liability totaled $ 1.0 million, of which $ 691,000 is classified as current.

There were no finance leases as of April 30, 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.

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.

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All outstanding principal and interest is due and payable on December 1, 2021.

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”).

On December 30, 2020, we closed the LOC with no amounts outstanding.

In May 2020 we applied for and received loans under the 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 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.

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,

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 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

As of April 30, 2021, the full amount of the PPP Loans has been forgiven and considered paid in full (including applicable interest).

Note 14 –

Cash dividend and declared dividends

We did not pay any dividends during the three or six months ended April 30, 2021.

During the three and six months ended April 30, 2020, we paid dividends of $ 0.02 per share for a total of $ 195,000 and $ 388,000 , respectively. 

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 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 ”

continue, ”

the negative of such terms or other comparable terminology.

These statements are only predictions.

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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.

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.

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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

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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

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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.

(together with subsidiaries, the “Company,”

“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.

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.

For the six months ended April 30, 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 68% 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 32% of total sales for the six months ended April 30, 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 project 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.

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.

The global impact of the outbreak has been rapidly evolving and certain jurisdictions, including in regions where we or third parties on which we rely have manufacturing facilities, 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 continued our operations during the quarantines, the impact of the COVID-19 pandemic has affected both our operations and those of our vendors and customers.

Our operations in both the 2020 and 2021 periods were 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 a fluctuating workforce as at times, some 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.

As a result, there has been some volatility in the overall demand for our products, and certain costs have increased.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by domestic and international jurisdictions to prevent disease spread, all of which are uncertain and cannot be predicted.

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

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”).

The outbreak impacted our performance in fiscal year 2020 and for the six months ended April 30, 2021.

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”).

In March 2021, the Internal Revenue Service (“IRS”) released Notice 2021-20, which retroactively eliminated the restriction that prevented employers who received a PPP loan from qualifying for the Employee Retention Credit (“ERC”). 

The ERC is a refundable tax credit against certain employment wages.

Upon determination that the employer has complied with all of the conditions required to receive the credit, a receivable is recognized and the credit reduces salaries and wages. 

For the six months ended April 30, 2021, we qualified and filed to claim the ERC and have recorded this as an other receivable. 

The amount of ERC that we are eligible to receive is $2.4 million, which amount will reduce our labor costs during the six-month period.

Liquidity and Capital Resources

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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.

As of April 30, 2021, we had a total of $14.8 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 April 30, 2021, we had working capital of $29.2 million and a current ratio of approximately 6.7:1 with current assets of $34.3 million and current liabilities of $5.2 million.

As of April 30, 2021, we had $15.6 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 six months ended April 30, 2021, we used $1.4 million of cash in our operating activities despite our net income of $4.5 million.

The net outflow of cash was due in part to increased inventory purchases (which increased our inventory balance by $1.0 million), and cash used for other current assets ($2.8 million).

The cash used for other current assets represents i) tax payments we made that we are expected to get refunded back 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, and (ii) employee tax payments for which we will receive future tax credits of $2.4 million.

The foregoing cash usage was partially offset by an increase in cash from noncash credits of $0.8 million as a result of the passage of the CAA, $0.4 million from depreciation and amortization, $0.3 million from stock-based compensation expense, and $0.7 million from the collection in accounts receivable.

During the six months ended April 30, 2021, we also spent $0.2 million on capital expenditures.

The cash used in operating activities and the amounts spent on capital expenditures were partially offset by $0.5 million of proceeds that we received from the exercise of stock options.

As a result of the cash received from the exercise of stock options that partially offset our net cash used in operating and investing activities, our cash and cash equivalent balance decreased by $1.0 million during the April 30, 2021 six-month period.

We do not anticipate making 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.

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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.

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.

Since our goal is to continue to expand our operations and accelerate our growth through future acquisitions, we may use some of our current capital resources to fund any acquisitions we may undertake in the future.

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.

Three Months Ended April 30, 2021 vs.

Three Months Ended April 30, 2020

Net sales for the three months ended April 30, 2021 (the “fiscal 2021 quarter”) increased by 6%, or $0.7 million, to $11.1 million as compared to the three months ended April 30, 2020 (the “fiscal 2020 quarter”) due to an increase in net sales at the Custom Cabling segment.

Net sales in the Custom Cabling segment increased by $0.9 million, or 13%, to $7.5 million, compared to $6.6 million in the fiscal 2020 quarter primarily because of increased sales of products to wireless carriers, including fiber optic cables used in the build out of 4G and 5G networks.

Net sales for the fiscal 2021 quarter at the RF Connector segment decreased by $0.2 million, or 6%, to $3.6 million as compared to $3.8 million in the fiscal 2020 quarter due primarily to slower project-related deployments in locations like stadiums, large office buildings, and other public use venues.

Gross profit for the fiscal 2021 quarter increased by $2.2 million to $4.8 million and gross margins increased to 43.1% of sales compared to 24.9% of net sales in the fiscal 2020 quarter due primarily to the ERC that the Company was eligible to claim for the production employees. 

The ERC refundable employee tax credit reduced our labor costs and thereby increased our gross profits. 

Excluding the benefit of the ERC, our gross profits for the fiscal 2021 quarter would have been $3.0 million, which is an increase of $0.4 million compared to the fiscal 2020 quarter, and gross margins would have been 27.1%.

The increase in gross margins is primarily due to the increase in sales at the Custom Cabling segment in the fiscal 2021 quarter.

Engineering expenses decreased by $0.3 million to $0.2 million in the fiscal 2021 quarter compared to $0.5 million in the fiscal 2020 quarter due to the ERC the Company was eligible to claim for engineering employees.

Excluding the benefit of the ERC, engineering expenses would have been $0.4 million, which is a decrease of $0.1 million compared to the fiscal 2020 quarter.

This decrease is due to a 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.

Selling and general expenses decreased by $0.3 million to $1.9 million (17% of sales) compared to $2.2 million (22% of sales) in the second quarter last year due to the ERC the Company was eligible to claim for the general and administrative employees.

Excluding the benefit of the ERC, selling and general expenses would have been $2.5 million (23% of sales), which is an increase of $0.3 million compared to the fiscal 2020 quarter.

This increase is primarily due to hiring of additional sales people in the last half of the 2020 fiscal year and in the first quarter of fiscal 2021.

In February 2021, the full $2.8 million of PPP Loans were forgiven and considered paid in full (including applicable interest), which is reflected as “Other Income”.

For the fiscal 2021 quarter, the Custom Cabling segment and the RF Connector segment had pretax income of $1.2 million and $1.5 million, respectively, as compared to $0.9 million loss and $0.7 million of income, respectively, for the comparable second quarter last year.

The pretax income at both the Custom Cabling and RF Connector segments in the fiscal 2021 quarter was primarily due to the ERC the Company was eligible to claim and the PPP Loan forgiveness.

For the fiscal 2021 and 2020 quarters, we recorded income tax provisions of $648,000 and $3,000, respectively.

The effective tax rate was 24.2% for the fiscal 2021 quarter, compared to (1.4%) for the fiscal 2020 quarter.

The fiscal 2021 quarter’s effective tax rate for the three months ended April 30, 2021 is excluding the PPP Loan forgiveness classified in Other Income.

The change in effective tax rate for the fiscal 2021 and 2020 quarters 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.

For the fiscal 2021 quarter, net income was $4.8 million and fully diluted earnings per share was $0.48 per share, compared to a net loss of $0.2 million and fully diluted loss per share of $0.02 per share for the fiscal 2020 quarter.

For the fiscal 2021 quarter, the diluted weighted average shares outstanding was 10,129,471 as compared to 9,704,880 for the fiscal 2020 quarter.

Six Months Ended April 30, 2021 vs.

Six Months Ended April 30, 2020

Net sales for the six months ended April 30, 2021 (the “fiscal 2021 six-month period”) of $21.1 million decreased by 7%, or $1.7 million, compared to the six months ended April 30, 2020 (the “fiscal 2020 six-month period”) due to a weaker fiscal 2021 first quarter.

The decrease in net sales is attributable to a decrease in net sales at the Custom Cabling segment, which decreased by $1.9 million, or 12%, to $13.9 million compared to $15.8 million in the fiscal 2020 six-month period.

The decrease was primarily in our project-based business which resulted from the slowdown in carrier spending in the first quarter of fiscal 2021.

Net sales by the Custom Cabling segment increased in the second quarter of fiscal 2021 and such net sales are expected to continue to increase during the remainder of the current fiscal year.

Net sales for the fiscal 2021 six-month period at the RF Connector segment increased by $0.2 million, or 2%, to $7.1 million compared to $7.0 million in the fiscal 2020 six-month period.

Gross profit for the fiscal 2021 six-month period increased by $1.5 million to $7.4 million and gross margins increased to 35.0% of sales from 25.6% of sales in the fiscal 2020 six-month period.

The increase in gross profit and gross margins was primarily due to the ERC the Company was eligible to claim for production employees.

The ERC refundable employee tax credit reduced our labor costs and thereby increased our gross profits.

Excluding the benefit of the ERC, our gross profits for the fiscal 2021 six-month period would have been $5.6 million, which is a decrease of $0.2 million compared to the fiscal 2020 six-month period, and gross margins would have been 26.6%.

Engineering expenses decreased $0.5 million to $0.6 million for the fiscal 2021 six-month period compared to $1.1 million in the fiscal 2020 six-month period primarily due to the ERC the Company was eligible to claim for engineering employees.

Excluding the benefit of the ERC, engineering expenses would have been $0.9 million, which is a decrease of $0.2 million compared to the fiscal 2020 six-month period.

This decrease is due to a 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 decreased by $0.3 million to $4.6 million (22% of sales) compared to $4.9 million (22% of sales) in the six-month period last year due to the ERC the Company was eligible to claim on general and administrative employees.

Excluding the benefit of the ERC, selling and general expenses would have been $5.3 million (25% of sales), which is an increase of $0.4 million compared to the fiscal 2020 six-month period.

This increase is primarily due to the hiring of additional sales people in the last half of the 2020 fiscal year and in the first quarter of fiscal 2021.

In February 2021, the full $2.8 million of PPP Loans were forgiven and considered paid in full (including applicable interest), which is reflected as “Other Income”.

For the fiscal 2021 six-month period, pretax income for the Custom Cabling segment and the RF Connector segment was $0.1 million and $1.9 million, respectively, as compared to $1.2 million loss and $1.0 million of income, respectively, for the comparable six-month period last year.

The pretax income at the Custom Cabling and RF Connector segments in the six-month period of fiscal 2021 was primarily due to the ERC the Company was eligible to claim and the PPP Loan forgiveness.

For the fiscal 2021 and 2020 six-month periods, we recorded income tax provisions (benefits) of $454,000 and ($11,000), respectively.

The effective tax rate was 21.8% for the fiscal 2021 six-month period, compared to 6.7% for the fiscal 2020 six-month period.

The fiscal 2021 six-month period’s effective tax rate is excluding the PPP Loan forgiveness classified in Other Income.

The change in effective tax rate for the fiscal 2021 and 2020 six-month periods 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.

For the fiscal 2021 six-month period, net income was $4.4 million and fully diluted income per share was $0.44 per share as compared to a net loss of $0.2 million and fully diluted loss per share of $0.02 per share for the fiscal 2020 six-month period.

For the fiscal 2021 six-month period, the diluted weighted average shares outstanding was 10,096,916 as compared to 9,633,935 for the fiscal 2020 six-month period.

Quantitative and Qualitative Disclosures about Market Risk

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What changed 10-Q

Item 1. Financial Statements