What changed in this filing

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Item 1. Financial Statements

2022-09-14 compared with 2022-06-14 · 158 added, 289 removed, 438 unchanged (51% of the section changed)

4 unchanged sentences

(In thousands)

Six Months Ended April 30,

Nine Months Ended July 31,

OPERATING ACTIVITIES:

Consolidated net income

$ 4,442  

Adjustments to reconcile net income to net cash used in operating activities:

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

Bad debt expense

1 unchanged sentence

Stock-based compensation expense

Amortization of debt issuance cost  

Tax payments related to shares cancelled for vested restricted stock awards

( 16 )  

Deferred income taxes

2 unchanged sentences

Trade accounts receivable

( 3,987 )  

Other current assets

( 1,026 )  

Right of use assets

( 25 )  

Other long-term assets

( 363 )  

Accounts payable

( 1,579 )  

Accrued expenses

1 unchanged sentence

Other long-term liabilities

Net cash used in operating activities  

( 1,639 )  

Net cash provided by (used in) operating activities

INVESTING ACTIVITIES:

Capital expenditures

( 268 )  

Purchase of Microlab, net of cash acquired ($ 33 )  

( 24,217 )  

Purchase of Microlab, net of cash acquired ($ 33 )

Net cash used in investing activities

( 24,485 )  

FINANCING ACTIVITIES:

Proceeds from exercise of stock options

Debt issuance cost  

( 32 )  

Term Loan payments  

( 202 )  

17,000  

Debt issuance cost

Term Loan payments

Net cash provided by financing activities

16,823  

Net decrease in cash and cash equivalents

( 9,301 )  

Cash and cash equivalents, beginning of period

13,053  

15,797  

Cash and cash equivalents, end of period

$ 3,752  

$ 14,762  

Supplemental cash flow information –

7 unchanged sentences

Our accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q.

Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, all adjustments, which are normal and recurring, have been included in order to make the information not misleading.

1 unchanged sentence

as of October 31, 2021 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2021 that was previously filed with the Securities and Exchange Commission (“SEC”).

Operating results for the six months ended April 30, 2022 are not necessarily indicative of the results that may be expected for the year ending October 31, 2022.

Operating results for the nine months ended July 31, 2022 are not necessarily indicative of the results that may be expected for the year ending October 31, 2022.

The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Form 10-K.

Principles of consolidation

The accompanying unaudited condensed consolidated financial statements for the periods ended on or before January 31, 2022 include the accounts of include the accounts of RF Industries, Ltd.

The accompanying unaudited condensed consolidated financial statements for the periods ended on or before January 31, 2022 include the accounts of RF Industries, Ltd.

and our four wholly-owned subsidiaries:

4 unchanged sentences

(“Schrofftech”). 

The unaudited condensed consolidated financial statements for the three and six months ended April 30, 2022 include the accounts of RF Industries, Ltd.

The unaudited condensed consolidated financial statements for the three and nine months ended July 31, 2022 include the accounts of RF Industries, Ltd.

and our five wholly-owned subsidiaries:

5 unchanged sentences

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

acquired effective March 01, 2022. 

acquired on March 1, 2022. 

For periods on or before January 31, 2022, references herein to the “Company”

3 unchanged sentences

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 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 six months ended April 30, 2022.

During the periods covered by this report, the operations at all locations were affected intermittently as some of our employee schedules were impacted, and as certain customers scaled back operations or otherwise delayed or deferred orders for our products.

1 unchanged sentence

748 (“CARES Act”) totaling approximately $ 2.8 million (“PPP Loans”).

See Note 12 on discussions of the PPP Loans.

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

1 unchanged sentence

For the fiscal year ended October 31, 2021, we qualified and filed to claim the ERC and have recorded this as an other receivable classified in other current assets.

As of April 30, 2022, the ERC in other receivable classified in other current assets were $ 1.7 million.

We considered the impact of the COVID- 19 related economic slowdown on our evaluation of goodwill and non-amortizable intangibles impairment indicators as of April 30, 2022.

As of July 31, 2022, the ERC in other receivable classified in other current assets were $ 1.7 million.

We considered the impact of the COVID-19 related economic slowdown on our evaluation of goodwill and non-amortizable intangibles impairment indicators as of July 31, 2022.

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.

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

Level 1 –

Quoted prices for identical instruments in active markets;

Level 2 –

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

Level 3 –

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

As of April 30, 2022 and October 31, 2021, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximated their carrying value due to their short-term nature.

As of July 31, 2022 and October 31, 2021, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximated their carrying value due to their short-term nature.

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

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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 April 30, 2022 or October 31, 2021.

The adoption of the standard did not result in an impairment charge as of July 31, 2022 or October 31, 2021.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

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The Company funded $ 17 million of the cash purchase price from the funds obtained under the Term Loan (as defined in Note 13) and paid the remaining amount of the cash purchase price with cash on hand.

The acquisition was accounted for as an acquisition of a business in accordance with the acquisition method of accounting.

During the three months ended July 31, 2022, we paid an additional $ 225,000 in purchase consideration as a result of certain post-closing adjustments relating to net working capital.

The acquisition was accounted for with the acquisition method of accounting.

The acquired assets and assumed liabilities have been recorded at their estimated fair values.

3 unchanged sentences

All manufacturing operations are performed at Microlab’s facilities in New Jersey.

Closing occurred on March 1, 2022, accordingly, subsequent to March 1, 2022, Microlab’s financial results have been included in the results of the RF Connector and Cable Assembly (“RF Connector”) segment as well as in the consolidated statements of operations.

The acquisition closed on March 1, 2022, accordingly, subsequent to March 1, 2022, Microlab’s financial results have been included in the results of the RF Connector and Cable Assembly (“RF Connector”) segment as well as in the consolidated statements of operations.

The Company expects the goodwill recorded to be deductible for income tax purposes.

Acquired amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives ranging from one to ten years.

Total costs, as of April 30, 2022, related to the acquisition of Microlab were approximately $ 1.2 million and have been expensed as incurred and categorized in selling and general expenses.

Total costs, as of July 31, 2022, related to the acquisition of Microlab were approximately $ 1.3 million 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 values at March 1, 2022:

Cash consideration paid

$ 24,250,000  

Cash consideration paid at closing

Post-closing adjustment

Total consideration transferred

$ 24,250,000  

The following table summarizes the allocation of the preliminary purchase price at fair value at March 1, 2022:

Current assets

$ 6,924,000  

Property and equipment

198,000  

Intangible assets

13,840,000  

4,990,000  

Non-interest bearing liabilities

( 1,702,000 )

Net assets acquired at fair value

$ 24,250,000  

The current purchase price allocation is preliminary.

6 unchanged sentences

Unaudited pro forma financial information assuming the acquisition of Microlab as of November 1, 2021 is presented in the following table:

Three Months Ended April 30,

Six Months Ended April 30,

$ 22,559  

$ 14,869  

$ 44,527  

$ 27,988  

Three Months Ended July 31,

Nine Months Ended July 31,

Earnings per share

$ 0.04  

$ 0.52  

$ 0.07  

$ 0.47  

$ 0.04  

$ 0.51  

$ 0.07  

$ 0.46  

Note 3 –

2 unchanged sentences

Cost has been determined using the weighted average cost method.

Inventories consist of the following (in thousands):

April 30, 2022

Inventories consist of the following (in thousands): 

July 31, 2022

October 31, 2021

Raw materials and supplies

$ 12,676  

$ 6,422  

Work in process

Finished goods

$ 19,168  

$ 11,179  

For the three months ended April 30, 2022, one vendor accounted for 35 % of inventory purchases, while one vendor accounted for 15 % of inventory purchases for the three months ended April 30, 2021.

For the six months ended April 30, 2022, one vendor accounted for 32 % of inventory purchases and no vendor accounted for more than 10 % of inventory purchases for the six months ended April 30, 2021.

For the three months ended July 31, 2022, one vendor accounted for 17 % of inventory purchases, while one vendor accounted for 27 % of inventory purchases for the three months ended July 31, 2021.

For the nine months ended July 31, 2022, one vendor accounted for 28 % of inventory purchases and one vendor accounted for 17 % of inventory purchases for the nine months ended July 31, 2021.

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

2 unchanged sentences

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

April 30, 2022

July 31, 2022

October 31, 2021

Employee retention credit ("ERC")

$ 1,685  

$ 1,774  

Prepaid taxes

Prepaid expense

Totals  

$ 3,926  

$ 2,893  

Reimbursement for tenant improvements

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

1 unchanged sentence

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

As of April 30, 2022, the remaining portion of the ERC that we have not yet received is included as other receivables in other current assets.

As of July 31, 2022, the remaining portion of the ERC that we have not yet received is included as other receivables in other current assets.

Note 5 –

1 unchanged sentence

Accrued expenses consist of the following (in thousands):

April 30, 2022

July 31, 2022

October 31, 2021

Wages payable

$ 2,323  

$ 2,607  

Accrued receipts

Other accrued expenses

$ 8,097  

$ 5,034  

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

The purchase agreement for the Schrofftech acquisition provided for earn-out payments of up to $ 2,400,000 , which were to be earned through October 31, 2021.

The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure.

The earn-out was revalued quarterly using a present value approach and any resulting increase or decrease was recorded into selling and general expenses.

Significant variances between actual and forecasted results or changes in the assumptions affected the amount of contingent consideration expense that we recorded from time to time.

In determining the fair value of the earn-out liability as of October 31, 2021, we used results through October 31, 2021.

We estimated the fair value of the earn-out liability using an option pricing based approach with a risk-neutral framework using Black Scholes related to Schrofftech calculated at net present value (Level 3 of the fair value hierarchy).

At October 31, 2021, the fair value of the Schrofftech earn-out liability was zero, and since the earn-out obligation expired on October 31, 2021, no earn-out liability was recorded for the period ended April 30, 2022.

The following table summarizes the changes to the Level 3 liabilities measured at fair value for the six months ended April 30, 2022 and 2021 (in thousands):

April 30, 2022

April 30, 2021

Beginning balance

Change in value

Ending balance

The earn-out was revalued quarterly using a present value approach and the resulting decrease was recorded into selling and general expenses.         

Note 6 –

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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.

Potentially issuable securities totaling 420,223 and 321,338 shares for the three months ended April 30, 2022 and 2021, respectively, and 459,889 and 331,338 shares for the six months ended April 30, 2022 and 2021, respectively, were excluded from the calculation of diluted per share amounts because of their anti-dilutive effect. 

Potentially issuable securities totaling 471,464  and 298,015 shares for the three months ended July 31, 2022 and 2021, respectively, and 482,889  and 371,338 shares for the nine months ended July 31, 2022 and 2021, respectively, were excluded from the calculation of diluted per share amounts because of their anti-dilutive effect. 

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

Three Months Ended April 30,

Six Months Ended April 30,

Three Months Ended July 31,

Nine Months Ended July 31,

Weighted average shares outstanding for basic earnings per share

10,107,687  

9,963,291  

10,087,309  

9,927,776  

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

135,949  

166,181  

142,395  

169,140  

Weighted average shares outstanding for diluted earnings per share

10,243,636  

10,129,472  

10,229,704  

10,096,916  

Note 7 –

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All incentive stock options expire ten years from the date of grant.

On July 16, 2021, we granted our Chief Executive Officer incentive stock options to purchase 50,000 shares.

These options immediately vested on the date of grant, and expire ten years from the date of grant.

On January 10, 2022, we granted a total of 39,666 shares of restricted stock and 106,001 incentive stock options to one manager and three officers.

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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 and six months ended April 30, 2022 and 2021.

The weighted average fair value of employee stock options that were granted during the six months ended April 30, 2022 and 2021 was estimated to be $ 3.84 and $ 2.46 , respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

Six Months Ended April 30,

On May 2, 2022, we granted a total of 39,000 incentive stock options to the following:

One employee was granted 12,000 incentive stock options.

These options vested with respesct to 3,000 shares on the date of grant, and the remaining shares vests in equal installments thereafter on each of the next three anniversaries of May 2, 2022.

The options expire ten years from the date of grant.

Three employees were each granted 5,000 incentive stock options.

These options will vest in two equal installments on the first two anniversaries of May 2, 2022, and expire ten years from the date of grant.

Two employees were each granted 6,000 incentive stock options.

These options will vest in three equal installments on the first three anniversaries of May 2, 2022, 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, 2022 and 2021.

The weighted average fair value of employee stock options that were granted during the nine months ended July 31, 2022 and 2021 was estimated to be $ 3.77 and $ 3.38 , respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

Nine Months Ended July 31,

Risk-free interest rate

1.23 %  

Dividend yield

0.00 %  

Expected life of the option (in years)

Expected life of the option (years)

Volatility factor

53.35 %  

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

4 unchanged sentences

expected life.

The dividend yield is based upon the historical dividend yield. 

Company stock option plans

Descriptions of our stock option plans are included in Note 9 of our Annual Report on Form 10-K for the year ended October 31, 2021.

A summary of the status of the options granted under our stock option plans as of April 30, 2022 and the changes in options outstanding during the six 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 July 31, 2022 and the changes in options outstanding during the nine months then ended is presented in the table that follows:

Exercise Price

Outstanding at November 1, 2021

618,858  

$ 5.33  

Options granted

106,001  

$ 7.11  

Options exercised

( 22,927 )  

$ 2.45  

Options cancelled

Options outstanding at April 30, 2022

701,932  

$ 5.70  

Options exercisable at April 30, 2022

354,141  

$ 6.18  

Options vested and expected to vest at April 30, 2022

700,081  

$ 5.70  

Weighted average remaining contractual life of options outstanding as of April 30, 2022:

Weighted average remaining contractual life of options exercisable as of April 30, 2022:

Weighted average remaining contractual life of options vested and expected to vest as of April 30, 2022:

Aggregate intrinsic value of options outstanding at April 30, 2022:

Aggregate intrinsic value of options exercisable at April 30, 2022:

Aggregate intrinsic value of options vested and expected to vest at April 30, 2022:

As of April 30, 2022, $ 779,000 and $ 523,000 of expenses with respect to nonvested stock options and restricted shares, respectively, has yet to be recognized but is expected to be recognized over a weighted average period of 2.52 and 1.36 years, respectively.

Options outstanding at July 31, 2022

Options exercisable at July 31, 2022

Options vested and expected to vest at July 31, 2022

Weighted average remaining contractual life of options outstanding as of July 31, 2022:

Weighted average remaining contractual life of options exercisable as of July 31, 2022:

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2022:

Aggregate intrinsic value of options outstanding at July 31, 2022:

Aggregate intrinsic value of options exercisable at July 31, 2022:

Aggregate intrinsic value of options vested and expected to vest at July 31, 2022:

As of July 31, 2022, $ 778,000 and $ 442,000 of expenses with respect to nonvested stock options and restricted shares, respectively, has yet to be recognized but is expected to be recognized over a weighted average period of 2.39 and 1.32 years, respectively.

Under the compensation policies adopted by the Compensation Committee, directors who also are officers and/or employees of the Company do not receive any compensation for serving on the Board.

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Stock option expense

During the three months ended April 30, 2022 and 2021, stock-based compensation expense totaled $ 168,000 and $ 137,000 , respectively, and was classified in selling and general expenses.

During the six months ended April 30, 2022 and 2021, stock-based compensation expense totaled $ 307,000 and $ 260,000 , respectively, and was classified in selling and general expenses.

During the three months ended July 31, 2022 and 2021, stock-based compensation expense totaled $ 191,000 and $ 374,000 , respectively, and was classified in selling and general expenses.

During the nine months ended July 31, 2022 and 2021, stock-based compensation expense totaled $ 498,000 and $ 634,000, respectively, and was classified in selling and general expenses.

Note 8 –

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We maintain our cash and cash equivalents with high-credit quality financial institutions.

At April 30, 2022, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $ 2.9  million.

At July 31, 2022, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $ 3.8 million.

Sales from each customer that were 10% or greater of net sales were as follows:

Three Months Ended April 30,

Six Months Ended April 30,

Three Months Ended July 31,

Nine Months Ended July 31,

Wireless provider

Distributor A

Distributor B

For the six months ended April 30, 2022, one wireless carrier customer accounted for 28 % of net sales and 21 % of total net accounts receivable balance.

Two customers, both distributors, accounted for approximately 14 % and 11 % of net sales and had accounts receivable balances that accounted for 13 % and 14 %, respectively, of the total net accounts receivable balance for the six months ended April 30, 2021.

* Less than 10%

For the nine months ended July 31, 2022, one wireless carrier customer accounted for 23 % of net sales and 19 % of total net accounts receivable balance.

Two customers, both distributors, accounted for approximately 12 % and 11 % of net sales and had accounts receivable balances that accounted for 8 % and 8 %, respectively, of the total net accounts receivable balance for the nine months ended July 31, 2021.

Although these customers have been on-going major customers of the Company, the written agreements with these customers do not have any minimum purchase obligations and they could stop buying our products at any time and for any reason.

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

Based upon this evaluation, as of April 30, 2022, we had two segments –

Based upon this evaluation, as of July 31, 2022, we had two segments –

the RF Connector segment and the Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment.

The RF Connector segment consisted of two divisions and the Custom Cabling segment was composed of four divisions. The six 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, Schrofftech, and Microlab.

The RF Connector segment consists of two divisions and the Custom Cabling segment consists of four divisions. The six 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, Schrofftech, and Microlab.

While each segment has similar products and services, there was little overlapping of these services to their customer base.

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These strategic business units offer products and services to different markets in accordance with their customer base and product usage.

For segment reporting purposes, the RF Connector and Microlab divisions constitutes the RF Connector segment, and the Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech divisions constitute the Custom Cabling segment.

For segment reporting purposes, the RF Connector and Microlab divisions constitutes the RF Connector segment, and the Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech divisions constitute the Custom Cabling segment.

As reviewed by our chief operating decision maker, we evaluate the performance of each segment based on income or loss before income taxes.

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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 and six months ended April 30, 2022 and 2021 (in thousands):

Three Months Ended April 30,

Six Months Ended April 30,

The following table presents the sales by geographic area for the three and nine months ended July 31, 2022 and 2021 (in thousands):

Three Months Ended July 31,

Nine Months Ended July 31,

United States

$ 19,950  

$ 10,338  

$ 36,366  

$ 19,717  

Foreign Countries:

$ 21,505  

$ 11,057  

$ 38,423  

$ 21,059  

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the three months ended April 30, 2022 and 2021 were as follows (in thousands): 

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the three months ended July 31, 2022 and 2021 were as follows (in thousands): 

Custom Cabling

1 unchanged sentence

Cable Assembly

$ 7,510  

$ 13,995  

$ 21,505  

Income (loss) before provision for income taxes

( 745 )  

Depreciation and amortization

34,398  

26,812  

69,647  

$ 3,552  

$ 7,505  

$ 11,057  

Income (loss) before provision for income taxes

Depreciation and amortization

16,835  

18,469  

42,767  

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the six months ended April 30, 2022 and 2021 were as follows (in thousands): 

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the nine months ended July 31, 2022 and 2021 were as follows (in thousands): 

Custom Cabling

1 unchanged sentence

Cable Assembly

$ 11,433  

$ 26,990  

$ 38,423  

Income (loss) before benefit from income taxes

( 1,472 )  

Depreciation and amortization

34,398  

26,812  

69,647  

$ 7,127  

$ 13,932  

$ 21,059  

Income (loss) before benefit from income taxes

Depreciation and amortization

16,835  

18,469  

42,767  

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.

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 our 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.

We recorded income tax provisions of $ 136,000 and $ 648,000 for the three months ended April 30, 2022 and 2021, respectively.

The effective tax rate was 21 % for the three months ended April 30, 2022, compared to 24.2 % for the three months ended April 30, 2021.

For the six months ended April 30, 2022 and 2021, we recorded income tax provisions of $ 56,000 and $ 454,000 , respectively.

The effective tax rate was 20.4 % for the six months ended April 30, 2022, compared to 21.8 % for the six months ended April 30, 2021.

The change in effective tax rate for the six months ended April 30, 2022 compared to the six months ended April 30, 2021 was primarily driven by stock compensation windfall benefits.

We had $ 194,000 and $ 141,000 of unrecognized tax benefits, inclusive of interest and penalties, as of April 30, 2022 and October 31, 2021, respectively.

The unrecognized tax benefits, if recognized, would result in a net tax benefit of $ 189,000 as of April 30, 2022.

We recorded income tax provisions of $ 140,000 and $ 272,000 for the three months ended July 31, 2022 and 2021, respectively.

The effective tax rate was 15.4 % for the three months ended July 31, 2022, compared to 15.2 % for the three months ended July 31, 2021.

For the nine months ended July 31, 2022 and 2021, we recorded income tax provisions of $ 196,000 and $ 727,000 , respectively.

The effective tax rate was 16.4 % for the nine months ended July 31, 2022, compared to 22.1 % for the nine months ended July 31, 2021.

The change in effective tax rate for the nine months ended July 31, 2022 compared to the nine months ended July 31, 2021 was primarily driven by stock compensation windfall benefits and increased benefit from research and development tax credits.

We had $ 211,000 and $ 141,000 of unrecognized tax benefits, inclusive of interest and penalties, as of July 31, 2022 and October 31, 2021, respectively.

The unrecognized tax benefits, if recognized, would result in a net tax benefit of $ 206,000 as of July 31, 2022.

Note 11 –

1 unchanged sentence

Intangible assets consist of the following (in thousands):

April 30, 2022

July 31, 2022

October 31, 2021

2 unchanged sentences

Accumulated amortization

( 311 )  

Customer relationships (estimated lives 7 - 15 years)

Accumulated amortization

( 2,877 )  

Backlog (estimated life 1 - 2 years)

Accumulated amortization

( 290 )  

Patents (estimated life 10 - 14 years)

Accumulated amortization

( 127 )  

Proprietary Techology (estimated life 10 years)

11,100  

Tradename (estimated life 15 years)

Accumulated amortization

( 215 )  

10,885  

$ 14,456  

$ 2,739  

Proprietary Technology (estimated life 10 years)

Accumulated amortization

Non-amortizable intangible assets:

$ 2,874  

$ 1,174  

Amortization expense for the six months ended April 30, 2022 and the year ended October 31, 2022 was $ 423,000 and $ 442,000 , respectively.

As of April 30, 2022, the weighted-average amortization period for the amortizable intangible assets is 9.39 years.

Amortization expense for the nine months ended July 31, 2022 and the year ended October 31, 2021 was $ 850,000 and $ 442,000 , respectively.

As of July 31, 2022, the weighted-average amortization period for the amortizable intangible assets is 9.72 years.

Note 12 –

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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 ended April 30, 2022 were as follows (in thousands):

The components of our facilities and equipment operating lease expenses for the period ended July 31, 2022 were as follows (in thousands):

Three Months Ended

Six Months Ended

April 30, 2022

Nine Months Ended

July 31, 2022

Operating lease cost

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

April 30, 2022

July 31, 2022

October 31, 2021

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Operating leases

$ 1,568  

$ 1,453  

Weighted Average Remaining Lease Term

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Operating leases

3.62 %  

Future minimum lease payments under non-cancellable leases as of April 30, 2022 were as follows:

Future minimum lease payments under non-cancellable leases as of July 31, 2022 were as follows:

Year ending October 31,

Operating Leases

2022 (excluding six months ended April 30, 2022)

2022 (excluding nine months ended July 31, 2022)

Total future minimum lease payments

Less imputed interest

$ 1,597  

Reported as of April 30, 2022

Reported as of July 31, 2022

Operating Leases

Other current liabilities

$ 1,073  

Operating lease liabilities

Finance lease liabilities

$ 1,597  

As of April 30, 2022, operating lease ROU asset was $ 1.6 million and operating lease liability totaled $ 1.6 million, of which $ 1 million is classified as current.

There were no finance leases as of April 30, 2022.

As of July 31, 2022, operating lease ROU asset was $ 14 million and operating lease liability totaled $ 16.8 million, of which $ 1.6 million is classified as current.

There were no finance leases as of July 31, 2022.

The Cables and Connectors facilities, consisting of four buildings for a total of 21,908 square feet, are leased by RF Industries, Ltd.

We renewed the lease effective as of effective August 1, 2022, for 6 month term expiring on January 31, 2023.

The monthly rental payment under the new lease currently is $ 33,957.40 per month.

The Cables and Connectors and C Enterprises facilities will relocate and consolidate into one building consisting of a total 86,952 square feet, which is leased by RF Industries, Ltd.

The lease will commence December 1, 2022, for a 120 -month term expiring November 30, 2032.

The monthly rental payments under the lease will be $ 139,123 per month for the first year and will increase annually.

During the three months ended July 31, 2022, the Company obtained possession of the building to begin construction and renovation, which resulted in a lease liability of $ 15.6  million ($ 14.9 million in long-term and $ 726,000 in current lease liability), a right of use asset of $ 12.8 million and other receivables related to tenant improvement allowance of $ 2.7 million being recorded.

The discount rate used to calculate the lease liability was 3.76 %.

Further, as a result of the early possession, the Company recognized additional rent expense of $ 135,000 for the three months ended July 31, 2022.

Note 13 –

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The Company drew down the entire amount of the Term Loan on March 1, 2022.

The primary interest rate for Term Loan is 3.76 % per annum.

The maturity date of the Term Loan is March 1, 2027.

The primary interest rate for Term Loan is 3.76 % per annum. The maturity date of the Term Loan is March 1, 2027.

Borrowings under the Credit Facility are secured by a security interest in certain assets of the Company and contains certain loan covenants.

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and (iii) consolidated minimum EBITDA of at least $ 600,000 for the discrete quarter ending January 31, 2022.

In addition, the Credit Facility contains customary affirmative and negative covenants.

As of April 30, 2022, we have borrowed $ 16,798,000 under the Term Loan while we have not borrowed any amounts under the Revolving Credit Facility.

In addition, the Credit Facility contains customary affirmative and negative covenants. 

As of July 31, 2022, we have borrowed $ 16,192,000 under the Term Loan while we have not borrowed any amounts under the Revolving Credit Facility.

In May 2020, we applied for and received loans under the PPP of the CARES Act totaling approximately $ 2.8 million.

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Cash dividend and declared dividends

We did not pay any dividends during the three or six months ended April 30, 2022.

Nor did we pay any dividends during the three or six months ended April 20, 2021.

We did not pay any dividends during the three or nine months ended July 31, 2022, nor did we pay any dividends during the three or nine months ended July 31, 2021.

Management ’

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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 provided for an earn-out payment of up to $2.4 million, which amount was earned through October 31, 2021.

Since the earn-out period has expired, no earn-out liability was required to be recorded for the fiscal quarter ended April, 2022.

The earn-out was revalued quarterly using a present value approach, and any resulting increase or decrease were recorded into selling and general expenses.

Changes in the amount of the actual results and forecasted scenarios resulted in an adjustment to the fair value.

Significant judgment was 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.

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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 six months ended April 30, 2022, 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 70% 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 30% of total sales for the six months ended April 30, 2021.

For the nine months ended July 31, 2022, 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 65% 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 70% of total sales for the nine months ended July 31, 2021.

The RF Connector segment mostly sells standardized products regularly used by customers and, therefore, has a more stable revenue stream when compared to the Custom Cabling segment.

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The extent of the impact of the COVID-19 pandemic on our future 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 in fiscal year 2021 and for the three and six months ended April 30, 2022.

The outbreak impacted our performance in fiscal year 2021 and for the three and nine months ended July 31, 2022.

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For the fiscal year ended October 31, 2021, we qualified and filed to claim the ERC and have recorded the credit as a receivable in Other Current Assets.

As of April 30, 2022, we carried a $1.7 million the ERC receivable in Other Current Assets.

As of July 31, 2022, we carried a $1.7 million the ERC receivable in Other Current Assets.

Liquidity and Capital Resources

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We believe that our remaining and existing assets and the cash we expect to generate from operations and 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 April 30, 2022, we had a total of $3.8 million of cash and cash equivalents with access to $3.0 million under the Revolving Credit Facility.

As of April 30, 2022, we had working capital of $27 million and a current ratio of approximately 3:1 with current assets of $41.6 million and current liabilities of $14.6 million.

As of April 30, 2022, we had $27.6 million of backlog, compared to $33.3 million as of October 31, 2021.

As of July 31, 2022, we had a total of $5.1 million of cash and cash equivalents with access to $3.0 million under the Revolving Credit Facility.

As of July 31, 2022, we had working capital of $30.1 million and a current ratio of approximately 3:1 with current assets of $47.1 million and current liabilities of $17.0 million.

As of July 31, 2022, we had $30.6 million of backlog, compared to $33.3 million as of October 31, 2021.

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 six months ended April 30, 2022, we used $1.7 million of cash in our operating activities despite our net income of $0.2 million.

The net outflow of cash was due in part to increased inventory purchases (which increased our inventory balance by $4.0 million), and cash used for other current assets.

The cash used for other current assets represents of ($1.1 million) which consists of ($0.3 million) in application of prepaid taxes, ($0.6 million) in prepaid expenses and ($0.3 million) in deposits for inventory purchases.

During the six months ended April 30, 2022, we also spent $0.3 million on capital expenditures, and $24.2 million on the purchase of Microlab offset by $17 million from the Term Loan as noted above.

In the nine months ended July 31, 2022, we generated $0.6 million of cash in our operating activities.

This net inflow of cash is primarily related to our net income of $0.9 million, $1.2 million from depreciation and amortization and $0.5 million from stock-based compensation expense, $1.5 million from accounts payable, and $1.3 million from accrued expenses.

The cash usage was primarily due to an increase to our inventory purchases ($4 million).

The cash used for other current assets represents ($1 million) which consists of ($0.2 million) in other receivables, ($0.5 million) in prepaid expenses and ($0.3 million) in deposits for inventory purchases.

During the nine months ended July 31, 2022, we also spent $0.4 million on capital expenditures, and $24.4 million on the purchase of Microlab offset by $17 million from the Term Loan as noted above.

The cash used in operating activities and the amounts spent on capital expenditures were partially offset by $0.1 million of proceeds that we received from the exercise of stock options.

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Results of Operations

Three Months Ended April 30, 2022 vs.

Three Months Ended April 30, 2021

Net sales for the three months ended April 30, 2022 (the “fiscal 2022 quarter”) increased by 94%, or $10.4 million, to $21.5 million as compared to the three months ended April 30, 2021 (the “fiscal 2021 quarter”) due to an increase in net sales at the Custom Cabling segment and a $3.4 million increase as a result of our consolidation of the results of Microlab, which we acquired in March 2022.

Three Months Ended July 31, 2022 vs.

Three Months Ended July 31, 2021

Net sales for the three months ended July 31, 2022 (the “fiscal 2022 quarter”) increased by 56%, or $8.6 million, to $23.8 million as compared to the three months ended July 31, 2021 (the “fiscal 2021 quarter”) due to an increase in net sales at the Custom Cabling segment and a $6.5 million increase as a result of our consolidation of the results of Microlab, which we acquired in March 2022.

Net sales in the Custom Cabling segment increased by $2 million, or 18%, to $13.3 million, compared to $11.3 million in the fiscal 2021 quarter primarily because of increased sales of products to wireless carriers, primarily related to hybrid fiber optic cables used in the build out of 4G and 5G networks.

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

Selling and general expenses increased by $2.6 million to $4.5 million (21% of sales) compared to $1.9 million (17% of sales) in the second quarter last year due to the ERC the Company was eligible to claim for the general and administrative employees.

Selling and general expenses increased by $1.9 million to $5.4 million (23% of sales) compared to $3.5 million (23% of sales) in the third 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 $3.4 million (22% of sales).

Microlab accounted for $0.6 million of the selling and general expenses and acquisition related expenses and other one-time charges (including attorney fees and broker fees) accounted for $0.6 million for the fiscal 2022 quarter.

The increase is largely due to (i) Microlab accounted for $1.4 million of the selling and general expenses and (ii) acquisition related expenses and other one-time charges (including professional fees, system implementation charges and severance) accounted for $114,000 and (iii) additional rent expense of $135,000 (non-cash) related to lease accounting for the fiscal 2022 quarter.

Selling and general expenses also increased as a result of the increase in net sales during the current fiscal 2022 quarter.

For the fiscal 2022 quarter, the Custom Cabling segment and the RF Connector segment had pretax income of $0.8 million and $0.6 million, respectively, as compared to $1.2 million and $1.5 million of income, respectively, for the comparable second quarter last year.

For the fiscal 2022 quarter, the Custom Cabling segment and the RF Connector segment had pretax income of $0.6 million and $1.0 million, respectively, as compared to $0.9 million and $0.3 million of income, respectively, for the comparable third 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.

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For the fiscal 2022 quarter, the diluted weighted average shares outstanding was 10,238,932 as compared to 10,150,396 for the fiscal 2021 quarter.

Six Months Ended April 30, 2022 vs.

Six Months Ended April 30, 2021

Net sales for the six months ended April 30, 2022 (the “fiscal 2022 six-month period”) of $38.4 million increased by 82%, or $17.4 million, compared to the six months ended April 30, 2021 (the “fiscal 2021 six-month period”) due to a stronger fiscal 2022 first quarter and the acquisition of Microlab in March 2022.

The increase in net sales is attributable to the Custom Cabling segment, which increased by $13.1 million, or 94%, to $27.0 million compared to $13.9 million in the fiscal 2021 six-month period.

The increase was primarily in our project-based business which resulted from the upturn in carrier spending in the fiscal 2022 six-month period.

Net sales for the fiscal 2022 six-month period at the RF Connector segment increased by $4.3 million, or 61%, to $11.4 million compared to $7.1 million in the fiscal 2021 six-month period of which $3.4 million was a result of the Microlab acquisition.

Gross profit for the fiscal 2022 six-month period increased by $2.8 million to $10.2 million and gross margins decreased to 26.5% of sales from 35.0% of sales in the fiscal 2021 six-month period.

The increase in gross profit primarily related to the overall increase in sales and decrease in gross margins was primarily due to the ERC the Company was eligible to claim for production employees for the fiscal 2021 six-month period.

Excluding the benefit of the ERC, our gross profits for the fiscal 2021 six-month period would have been $5.6 million and gross margins would have been 26.6%.

Engineering expenses increased $0.7 million to $1.3 million for the fiscal 2022 six-month period compared to $0.6 million in the fiscal 2021 six-month period primarily due to the ERC the Company was eligible to claim for engineering employees in fiscal 2021 quarter as well as the acquisition of Microlab in March 2022.

Excluding the benefit of the ERC, engineering expenses would have been $0.9 million, which is a increase of $0.4 million compared to the fiscal 2022 six-month period which includes $0.4 million from Microlab.

Nine Months Ended July 31, 2022 vs.

Nine Months Ended July 31, 2021

Net sales for the nine months ended July 31, 2022 (the “fiscal 2022 nine-month period”) of $62.3 million increased by 72%, or $26 million, compared to the nine months ended July 31, 2021 (the “fiscal 2021 nine-month period”) due to a stronger fiscal 2022 first quarter and the acquisition of Microlab in March 2022.

The increase in net sales is attributable to the Custom Cabling segment, which increased by $15 million, or 60%, to $40.3 million compared to $25.3 million in the fiscal 2021 nine-month period.

The increase was primarily in our project-based business which resulted from the upturn in carrier spending in the fiscal 2022 nine-month period.

Net sales for the fiscal 2022 nine-month period at the RF Connector segment increased by $10.8 million, or 98%, to $21.9 million compared to $11.1 million in the fiscal 2021 nine-month period of which $9.9 million was a result of the Microlab acquisition.

Gross profit for the fiscal 2022 nine-month period increased by $5.0 million to $17.4 million and gross margins decreased to 28.0% of sales from 34.2% of sales in the fiscal 2021 nine-month period.

Excluding the benefit of the ERC, our gross profits for the fiscal 2021 nine-month period would have been $9.8 million and gross margins would have been 27.0%.

Engineering expenses increased $1.1 million to $2.1 million for the fiscal 2022 nine-month period compared to $1.0 million in the fiscal 2021 nine-month period primarily due to the ERC the Company was eligible to claim for engineering employees in fiscal 2021 quarter as well as the acquisition of Microlab in March 2022.

Excluding the benefit of the ERC, engineering expenses would have been $1.3 million, which is an increase of $0.8 million compared to the fiscal 2022 nine-month period which includes $0.7 million from Microlab.

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

Selling and general expenses increased by $3.9 million to $8.5 million (22% of sales) compared to $4.6 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 $3.2 million compared to the fiscal 2022 six-month period.

Microlab accounted for $0.6 million of the selling and general expenses and acquisition related expenses and other one-time charges (including attorney fees, due diligence and broker fees) accounted for $1.4 million for the fiscal 2022 six-month period.

Selling and general expenses increased by $5.7 million to $13.8 million (22% of sales) compared to $8.1 million (22% of sales) in the nine-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 $8.7 million (24% of sales), which is an increase of $5.1 million compared to the fiscal 2022 nine-month period.

Microlab accounted for $2 million of the selling and general expenses and acquisition related expenses and other one-time charges (including attorney fees, due diligence and broker fees) accounted for $1.6 million for the fiscal 2022 nine-month period.

Selling and general expenses also increased as a result of the increase in net sales during the current fiscal 2022 quarter.

For the fiscal 2022 six-month period, pretax income for the Custom Cabling segment and the RF Connector segment was $1.1 million and $0.6 million, respectively, as compared to $0.1 million and $1.9 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.

For the fiscal 2022 and 2021 six-month periods, we recorded income tax provisions of $56,000 and $454,000, respectively.

The effective tax rate was 20.4% for the fiscal 2022 six-month period, compared to 21.8% for the fiscal 2021 six-month period.

The change in effective tax rate for the fiscal 2022 and 2021 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 2022 six-month period, net income was $0.2 million and fully diluted income per share was $0.02 per share as compared to a net income of $4.4 million and fully diluted earnings per share of $0.44 per share for the fiscal 2021 six-month period. 

For the fiscal 2022 six-month period, the diluted weighted average shares outstanding was 10,229,704 as compared to 10,096,916 for the fiscal 2021 six-month period.

For the fiscal 2022 nine-month period, pretax income for the Custom Cabling segment and the RF Connector segment was $1.7 million and $1.6 million, respectively, as compared to $1.1 million and $2.2 million of income, respectively, for the comparable nine-month period last year.

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

For the fiscal 2022 and 2021 nine-month periods, we recorded income tax provisions of $196,000 and $727,000, respectively.

The effective tax rate was 16.5% for the fiscal 2022 nine-month period, compared to 22.1% for the fiscal 2021 nine-month period.

The change in effective tax rate for the fiscal 2022 and 2021 nine-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 2022 nine-month period, net income was $1 million and fully diluted income per share was $0.10 per share as compared to a net income of $5.4 million and fully diluted earnings per share of $0.53 per share for the fiscal 2021 nine-month period. 

For the fiscal 2022 nine-month period, the diluted weighted average shares outstanding was 10,233,209 as compared to 10,131,172 for the fiscal 2021 nine-month period.

Quantitative and Qualitative Disclosures about Market Risk

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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