NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting
policies
Business activities
RF Industries, Ltd., together with its three
wholly-owned subsidiaries (collectively, hereinafter the “Company”), primarily engages in the design, manufacture,
and marketing of interconnect products and systems, including coaxial and specialty cables, fiber optic cables and connectors,
and electrical and electronic specialty cables. For internal operating and reporting purposes, and for marketing purposes, as of
the end of the fiscal year ended October 31, 2017 the Company classified its operations into the following four divisions/subsidiaries:
(i) The RF Connector and Cable Assembly division designs, manufactures and distributes coaxial connectors and cable assemblies
that are integrated with coaxial connectors; (ii) Cables Unlimited, Inc., the subsidiary that manufactures custom and standard
cable assemblies, complex hybrid fiber optic power solution cables, adapters, and electromechanical wiring harnesses for communication,
computer, LAN, automotive and medical equipment; (iii) Comnet Telecom Supply, Inc., the subsidiary that manufactures and sells
fiber optics cable, distinctive cabling technologies and custom patch cord assemblies, as well as other data center products; and
(iv) Rel-Tech Electronics, Inc., the subsidiary that designs and manufacturers of cable assemblies and wiring harnesses for blue
chip industrial, oilfield, instrumentation and military customers. Both the Cables Unlimited division and the Comnet Telecom division
are Corning Cables Systems CAH Connections SM Gold Program members that are authorized to manufacture fiber optic cable assemblies
that are backed by Corning Cables Systems’ extended warranty. During the fiscal year ended October 31, 2016, RF Industries,
Ltd. sold the Aviel Electronics division that designed, manufactured and distributed specialty and custom RF connectors, and discontinued
the Bioconnect division that manufactured and distributed cabling and interconnect products to the medical monitoring market.
Use of estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures. Actual results may differ from those estimates.
Principles of consolidation
The accompanying consolidated financial
statements include the accounts of RF Industries, Ltd., Cables Unlimited, Inc. (“Cables Unlimited”), Comnet Telecom
Supply, Inc. (“Comnet”), and Rel-Tech Electronics, Inc. (“Rel-Tech”), wholly-owned subsidiaries of RF Industries,
Ltd. All intercompany balances and transactions have been eliminated in consolidation.
Cash equivalents
The Company considers all highly-liquid
investments with an original maturity of three months or less when purchased to be cash equivalents.
Revenue recognition
Four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectability is reasonably assured. The Company recognizes revenue from product sales after
purchase orders are received which contain a fixed price and for shipments with terms of FOB Shipping Point, revenue is recognized
upon shipment, for shipments with terms of FOB Destination, revenue is recognized upon delivery and revenue from services is recognized
when services are performed, and the recovery of the consideration is considered probable.
Inventories
Inventories are stated at the lower of cost
or market, with cost determined using the weighted average cost of accounting. Cost includes materials, labor, and manufacturing
overhead related to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase
commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below
carrying value due to damage, physical deterioration, obsolescence, changes in price levels, or other causes, we reduce our inventory
to a new cost basis through a charge to cost of sales in the period in which it occurs. The determination of market value and the
estimated volume of demand used in the lower of cost or market analysis requires significant judgment.
In June 2015, the Company acquired Rel-Tech,
a company that valued its inventories using specific identification (last purchase price) on a FIFO basis. As of July 31, 2016,
Rel-Tech prospectively values its inventories cost using the weighted average cost of accounting.
Property and equipment
Equipment, tooling and furniture are recorded
at cost and depreciated over their estimated useful lives (generally 3 to 5 years) using the straight-line method. Expenditures
for repairs and maintenance are charged to operations in the period incurred.
Goodwill
Goodwill is recorded when the purchase price
paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill
is not amortized, but is subject to impairment analysis at least once annually, which the Company performs in October, or more
frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater
than its fair value.
We assess whether a goodwill impairment
exists using both qualitative and quantitative assessments at the reporting level. Our qualitative assessment involves determining
whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less
than its carrying amount, including goodwill. If based on this qualitative assessment we determine it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, we will not perform a quantitative assessment.
If the qualitative assessment indicates
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if we elect not to
perform a qualitative assessment, we perform a quantitative assessment, or two-step impairment test, to determine whether a goodwill
impairment exists at the reporting unit. The first step in our quantitative assessment identifies potential impairments by comparing
the estimated fair value of the reporting unit to its carrying value, including goodwill (“Step 1”). If the carrying
value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure
the amount of impairment (“Step 2”).
For the fiscal year 2016, Cables Unlimited
did not meet its sales volume and revenue goals, and the mix of product sold had lower margins than planned. These results, along
with changes in the competitive marketplace and an evaluation of business priorities, led to a shift in strategic direction and
reduced future revenue and profitability expectations for the business. The results of these changes and circumstances lead to
the determination that Cables Unlimited did not pass our qualitative assessment and therefore a quantitative assessment was required.
Upon completion of our Step 1 test, we found
that the results indicated that Cables Unlimited’s carrying value exceeded its estimated fair value, and as a result, the
Step 2 test was performed specific to Cables Unlimited. Under Step 2, the fair value of all assets and liabilities were estimated,
including customer list and backlog, for the purpose of deriving an estimate of the fair value of goodwill. The fair value of the
goodwill was then compared to the recorded goodwill to determine the amount of the impairment. Assumptions used in measuring the
value of these assets and liabilities included the discount rates used in valuing the intangible assets, and consideration of the
market environment in valuing the tangible assets.
Upon completion of our Step 2 test, our
Cables Unlimited division’s goodwill was determined to be impaired. As of October 31, 2016, the Company recorded a $2.6 million
impairment charge to goodwill. Cables Unlimited’s goodwill is included in the Custom Cabling Manufacturing and Assembly segment.
No other instances
of impairment were identified as of October 31, 2016 and no instances of goodwill impairment were identified during the year ended
October 31, 2017.
On June 15, 2011, the Company completed
its acquisition of Cables Unlimited. Goodwill related to this acquisition is included within the Cables Unlimited reporting unit.
Effective November 1, 2014, the Company also completed its acquisition of Comnet. Goodwill related to this acquisition is included
within the Comnet reporting unit. As of May 19, 2015, the Company completed its acquisition of the CompPro product line. Goodwill
related to this acquisition is included within the Connector and Cable Assembly Division. Effective June 1, 2015, the Company completed
its acquisition of Rel-Tech. Goodwill related to this acquisition is included within the Rel-Tech reporting unit.
Long-lived assets
The Company assesses property, plant and
equipment and intangible assets, which are considered definite-lived assets for impairment. Definite-lived assets are reviewed
when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company measures recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the
assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment
to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. The Company has made
no material adjustments to our long-lived assets in any of the years presented.
The Company amortizes its intangible assets
with definite useful lives over their estimated useful lives and reviews these assets for impairment.
In addition, the Company tests our trademarks
and indefinite-lived asset for impairment at least annually or more frequently if events or changes in circumstances indicate that
these assets may be impaired.
In 2016, upon completion of our Step 2 test
(see “Goodwill” above), our Cables Unlimited division’s trademark was determined to be impaired. As of October
31, 2016, the Company recorded a $150,000 impairment charge to its trademark. Cables Unlimited’s trademark is included in
the Custom Cabling Manufacturing and Assembly segment.
No instances of
impairment were identified as of October 31, 2017 and no other instances of impairment were identified as of October 31, 2016.
Earn-out liability
The purchase agreement for the Rel-Tech
acquisition provides for earn-out payments of up to $800,000 in the aggregate, last installment of which is payable May 31, 2018.
The initial earn-out liability was valued at its fair value using the Monte Carlo simulation and is included as a component of
the total purchase price. The earn-out was and will continue to be revalued quarterly using a present value approach and any resulting
increase or decrease will be recorded into selling and general expenses. Any changes in the assumed timing and amount of the probability
of payment scenarios could impact the fair value. Significant judgment is employed in determining the appropriateness of the assumptions
used in calculating the fair value of the earn-out as of the acquisition date. Accordingly, significant variances between actual
and forecasted results or changes in the assumptions can materially impact the amount of contingent consideration expense we record
in future periods.
The Company measures
at fair value certain financial assets and liabilities. U. S. GAAP specifies a hierarchy of valuation techniques based on whether
the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following
fair-value hierarchy:
Level 1— Quoted prices for
identical instruments in active markets;
Level 2— Quoted prices for
similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3— Valuations derived
from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The contingent
consideration liability represents future earn-out liability that we may be required to pay in conjunction with the acquisition
of Rel-Tech and Comnet. The Company estimates the fair value of the earn-out liability using a probability-weighted scenario of
estimated qualifying earn-out gross profit related to Rel-Tech and EBITDA related to Comnet 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 October 31, 2017 (in thousands):
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Earn-out liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
236
|
|
The following table summarizes our
financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2016 (in thousands):
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Earn-out liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
835
|
|
The following table summarizes the Level
3 transactions for the years ended October 31, 2017 and 2016 (in thousands):
|
|
Level 3
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
835
|
|
|
$
|
1,527
|
|
Payments
|
|
|
(578
|
)
|
|
|
(790
|
)
|
Change in value
|
|
|
(21
|
)
|
|
|
98
|
|
Ending Balance
|
|
$
|
236
|
|
|
$
|
835
|
|
Intangible assets
Intangible assets consist of the following
as of October 31 (in thousands):
|
|
2017
|
|
|
2016
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Non-compete agreements (estimated lives 3 - 5 years)
|
|
$
|
310
|
|
|
$
|
310
|
|
Accumulated amortization
|
|
|
(310
|
)
|
|
|
(273
|
)
|
|
|
|
-
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (estimated lives 7 - 15 years)
|
|
|
5,099
|
|
|
|
5,099
|
|
Accumulated amortization
|
|
|
(2,186
|
)
|
|
|
(1,644
|
)
|
|
|
|
2,913
|
|
|
|
3,455
|
|
|
|
|
|
|
|
|
|
|
Patents (estimated life 14 years)
|
|
|
142
|
|
|
|
142
|
|
Accumulated amortization
|
|
|
(25
|
)
|
|
|
(15
|
)
|
|
|
|
117
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,030
|
|
|
$
|
3,619
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
1,237
|
|
|
$
|
1,237
|
|
Amortization expense
for the years ended October 31, 2017 and 2016 was $589,000 and $649,000, respectively.
Impairment to trademarks
for the years ended October 31, 2017 and 2016 was $0 and $150,000, respectively.
Estimated amortization
expense related to finite lived intangible assets is as follows (in thousands):
Year ending
|
|
|
|
October 31,
|
|
Amount
|
|
|
|
|
|
2018
|
|
$
|
553
|
|
2019
|
|
|
553
|
|
2020
|
|
|
553
|
|
2021
|
|
|
413
|
|
2022
|
|
|
413
|
|
Thereafter
|
|
|
545
|
|
Total
|
|
$
|
3,030
|
|
Advertising
The Company expenses the cost of advertising
and promotions as incurred. Advertising costs charged to operations were approximately $130,000 and $156,000 in 2017 and 2016,
respectively.
Research and development
Research and development costs are expensed
as incurred. The Company’s research and development expenses relate to its engineering activities, which consist of the design
and development of new products for specific customers, as well as the design and engineering of new or redesigned products for
the industry in general. During the years ended October 31, 2017 and 2016, the Company recognized $845,000 and $747,000 in engineering
expenses, respectively.
Income taxes
The Company accounts for income taxes under
the asset and liability method, based on the income tax laws and rates in the jurisdictions in which operations are conducted and
income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Developing the provision (benefit)
for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and
strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that
may be required for deferred tax assets. Valuation allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Management’s judgments and tax strategies are subject to audit by various taxing authorities.
The Company recognizes accrued interest
and penalties related to unrecognized tax benefits as a component of income tax expense.
Stock options
For stock option grants to employees, the
Company recognizes compensation expense based on the estimated fair value of the options at the date of grant. Stock-based employee
compensation expense is recognized on a straight-line basis over the requisite service period. The Company issues previously unissued
common shares upon the exercise of stock options.
For the fiscal years ended October 31, 2017
and 2016, charges related to stock-based compensation amounted to approximately $214,000 and $206,000, respectively. For the fiscal
years ended October 31, 2017 and 2016, stock-based compensation classified in cost of sales amounted to $13,000 and $28,000 and
stock-based compensation classified in selling and general and engineering expense amounted to $201,000 and $178,000, respectively.
Earnings (loss) per share
Basic earnings (loss) per share is calculated
by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during
the period. The calculation of diluted earnings (loss) per share is similar to that of basic earnings (loss) per share, except
that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially
dilutive common shares, principally those issuable upon the exercise of stock options, were issued and the treasury stock method
had been applied during the period. The greatest number of shares potentially issuable by the Company upon the exercise of stock
options in any period for the years ended October 31, 2017 and 2016, that were not included in the computation because they were
anti-dilutive, totaled 737,512 and 824,441, respectively.
The following table summarizes the computation
of basic and diluted earnings (loss) per share:
|
|
2017
|
|
|
2016
|
|
Numerators:
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) (A)
|
|
$
|
382,000
|
|
|
$
|
(4,089,000
|
)
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings (loss) per share (B)
|
|
|
8,840,895
|
|
|
|
8,786,510
|
|
Add effects of potentially dilutive securities - assumed exercise of stock options
|
|
|
74,869
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings (loss) per share (C)
|
|
|
8,915,764
|
|
|
|
8,786,510
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share (A)/(B)
|
|
$
|
0.04
|
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share (A)/(C)
|
|
$
|
0.04
|
|
|
$
|
(0.47
|
)
|
Recent accounting standards
Recently issued
accounting pronouncements not yet adopted:
In August 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Classification of Certain
Cash Receipts and Cash Payments. The new standard will change the classification of certain cash payments and receipts within the
cash flow statement. Specifically, payments for debt prepayment or debt extinguishment costs, including third-party costs, premiums
paid, and other fees paid to lenders that are directly related to the debt prepayment or debt extinguishment, excluding accrued
interest, will now be classified as financing activities. Previously, these payments were classified as operating expenses. The
guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after
December 15, 2019, with early adoption permitted, and will be applied retrospectively. The Company does not expect that the adoption
of this new standard will have a material impact on its Consolidated Financial Statements.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02, Leases. This ASU requires lessees to recognize most leases on their balance sheets related to the
rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related
to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating
the impact the adoption of this new standard will have on its Consolidated Financial Statements.
In March 2016, the FASB issued Accounting
Standards Update No. 2016-09, Compensation – Stock Compensation. The new standard will modify several aspects of the accounting
and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements
of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for
award forfeitures over the vesting period. The new standard is effective for fiscal years beginning after December 15, 2016 and
interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption
of this new standard will have on its Consolidated Financial Statements effective for the quarter ending January 31, 2018.
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers. This guidance will supersede Topic 605, Revenue Recognition,
in addition to other industry-specific guidance, once effective. The new standard requires a company to recognize revenue in a
manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date, as a revision to ASU 2014-09, which revised the effective
date to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but
not prior to periods beginning after December 15, 2016 (i.e., the original adoption date per ASU 2014-09). In March 2016, the FASB
issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies certain aspects
of the principal-versus-agent guidance, including how an entity should identify the unit of accounting for the principal versus
agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions.
The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than as an agent.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,
which clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will
determine whether it recognizes revenue over time or at a point in time. The amendments also clarify when a promised good or service
is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial
in the context of a contract. The Company continues to assess the impact this new standard may have on its ongoing financial reporting.
The Company has identified its revenue streams both by contract and product type and is assessing each for potential impacts. For
the revenue streams assessed, the Company does not anticipate a material impact in the timing or amount of revenue recognized.
In January 2017, the FASB issued Accounting
Standards Update No. 2017-04, Intangibles-Goodwill and Other, which simplifies the accounting for goodwill impairments by eliminating
step 2 from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an
impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that
reporting unit.” The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted.
The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements.
Note 2 - Discontinued operations
During 2013, the Company sold its RF Neulink
and RadioMobile divisions, which together had comprised the Company’s RF Wireless segment. The divisions were sold pursuant
to asset purchase agreements, whereby no purchase price was paid at the closing. Rather, the agreements stipulated royalty payments
from each of the purchasers over a three-year period. For the years ended October 31, 2017 and 2016, the Company recognized approximately
$174,000 and $57,000, respectively, of aggregate royalty income for RF Neulink and RadioMobile, which amounts have been included
within discontinued operations.
During March 2016, the Company announced
the shutdown of its Bioconnect division, which comprised the entire operations of the Medical Cabling and Interconnect segment.
The closure is part of the Company’s ongoing plan to close or dispose of underperforming divisions that are not part of the
Company’s core operations. For the year ended October 31, 2017, the Company recognized approximately $10,000 of income
related to the sale of equipment for the Bioconnect division, which amounts have been included within discontinued operations.
For the year ended October 31, 2016, the Company recognized approximately $148,000 of loss for the Bioconnect division, which
amounts have been included within discontinued operations. Included in the fiscal year 2016 loss, the Company recognized a $148,000
pretax write-down on Bioconnect division’s inventory and fixed assets.
The following summarized financial information
related to the RF Neulink, RadioMobile and Bioconnect divisions is segregated from continuing operations and reported as discontinued
operations for the years ended October 31, 2017 and 2016 (in thousands):
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
174
|
|
|
$
|
57
|
|
Bioconnect
|
|
|
10
|
|
|
|
(148
|
)
|
Provision (benefit) for income taxes
|
|
|
68
|
|
|
|
(33
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
116
|
|
|
$
|
(58
|
)
|
Note 3 - Concentrations of credit risk
Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The
Company maintains its cash and cash equivalents with high-credit quality financial institutions. At October 31, 2017, the Company
had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $5.2 million.
Two customers accounted for approximately
20% and 11% of the Company’s net sales for the fiscal year ended October 31, 2017, and one customer accounted for approximately
15% of the Company’s net sales for the fiscal year ended October 31, 2016. At October 31, 2017 these customers’ accounts
receivable balance accounted for approximately 27% and 5% of the Company’s total net accounts receivable balances, and at
October 31, 2016, this customer’s accounts receivable balance accounted for approximately 20% of the Company’s total
net accounts receivable balance. Although these customers have been on-going major customers of the Company continuously
in the past, the written agreements with these customers do not have any minimum purchase obligations and the customers could stop
buying the Company’s 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 the Company’s future revenues and profits.
There was no product line that was significant
for the fiscal years ended October 31, 2017 and 2016.
Note 4 - Inventories and major vendors
Inventories, consisting of materials, labor
and manufacturing overhead, are stated at the lower of cost or market. Cost has been determined using the weighted average cost
method. In June 2015, the Company acquired Rel-Tech, a company that valued its inventories using specific identification (last
purchase price) on a FIFO basis. As of July 31, 2016, Rel-Tech values its inventory cost using the weighted average cost of accounting.
Inventories consist of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
2,520
|
|
|
$
|
2,642
|
|
Work in process
|
|
|
194
|
|
|
|
279
|
|
Finished goods
|
|
|
3,395
|
|
|
|
3,101
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,109
|
|
|
$
|
6,022
|
|
Purchases of inventory
from two major vendors during fiscal 2017 represented 7% and 5%, respectively, of total inventory purchases compared to two major
vendors who represented 9% and 6%, respectively, of total inventory purchases in fiscal 2016. The Company has arrangements with
these vendors to purchase product based on purchase orders periodically issued by the Company.
Note 5 - Other current assets
Other current assets consist of the following
(in thousands):
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
$
|
20
|
|
|
$
|
871
|
|
Prepaid expense
|
|
|
526
|
|
|
|
347
|
|
Notes receivable, current portion
|
|
|
83
|
|
|
|
83
|
|
Other
|
|
|
115
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
744
|
|
|
$
|
1,436
|
|
Long-term portion of notes receivable of
zero and $21,000 is recorded in other assets as of October 31, 2017 and 2016, respectively.
Note 6 - Accrued expenses and other
long-term liabilities
Accrued expenses consist
of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Wages payable
|
|
$
|
855
|
|
|
$
|
941
|
|
Accrued receipts
|
|
|
695
|
|
|
|
578
|
|
Earn-out liability
|
|
|
236
|
|
|
|
707
|
|
Other current liabilities
|
|
|
456
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,242
|
|
|
$
|
2,770
|
|
Accrued receipts represent
purchased inventory for which invoices have not been received.
The non-current portion
of the earn-out liability of $128,000 is recorded in other long-term liabilities as of October 31, 2016
Note 7 - Segment information
The Company aggregates operating divisions
into operating segments which have similar economic characteristics primarily in the following areas: (1) the nature of the product
and services; (2) the nature of the production process; (3) the type or class of customer for their products and services; (4)
the methods used to distribute their products or services; and (5) if applicable, the nature of the regulatory environment. As
of October 31, 2017, the Company had two segments - RF Connector and Cable Assembly, and Custom Cabling Manufacturing based upon
this evaluation.
The RF Connector and Cable Assembly segment
is comprised of one division, while the Custom Cabling Manufacturing and Assembly segment comprised of three divisions. The
four divisions that met the quantitative thresholds for segment reporting are Connector and Cable Assembly, Cables Unlimited, Comnet
and Rel-Tech. The specific customers are different for each division; however, there is some overlapping of product sales to them.
The methods used to distribute products are similar within each division aggregated.
Management identifies the
Company’s segments based on strategic business units that are, in turn, based along market lines. These strategic
business units offer products and services to different markets in accordance with their customer base and product usage. For
segment reporting purposes, the RF Connector and Cable Assembly division constitutes the RF Connector and Cable Assembly
segment, and the Cables Unlimited, Comnet and Rel-Tech division constitute the Custom Cabling Manufacturing segment.
As reviewed by the Company’s chief
operating decision maker, the Company evaluates the performance of each segment based on income or loss before income taxes. The
Company charges depreciation and amortization directly to each division within the segment. Accounts receivable, inventory, property
and equipment, 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.
Substantially all of the Company’s
operations are conducted in the United States; however, the Company derives a portion of its revenue from export sales. The Company
attributes sales to geographic areas based on the location of the customers. The following table presents the sales of the Company
by geographic area for the years ended October 31, 2017 and 2016 (in thousands):
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
30,232
|
|
|
$
|
29,257
|
|
Foreign Countries:
|
|
|
|
|
|
|
|
|
Canada
|
|
|
483
|
|
|
|
509
|
|
Israel
|
|
|
-
|
|
|
|
63
|
|
Mexico
|
|
|
78
|
|
|
|
234
|
|
All Other
|
|
|
171
|
|
|
|
178
|
|
|
|
|
732
|
|
|
|
984
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
30,964
|
|
|
$
|
30,241
|
|
Net sales, income (loss) from continuing
operations before provision (benefit) for income taxes and other related segment information for the years ended October 31, 2017
and 2016 are as follows (in thousands):
|
|
RF Connector
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing and
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
11,456
|
|
|
$
|
19,508
|
|
|
$
|
-
|
|
|
$
|
30,964
|
|
Income (loss) from continuing operations before provision (benefit) for income taxes
|
|
|
382
|
|
|
|
(11
|
)
|
|
|
29
|
|
|
|
400
|
|
Depreciation and amortization
|
|
|
177
|
|
|
|
700
|
|
|
|
-
|
|
|
|
877
|
|
Total assets
|
|
|
6,297
|
|
|
|
11,910
|
|
|
|
6,853
|
|
|
|
25,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
9,352
|
|
|
$
|
20,889
|
|
|
$
|
-
|
|
|
$
|
30,241
|
|
Loss from continuing operations before provision (benefit) for income taxes
|
|
|
(1,358
|
)
|
|
|
(3,232
|
)
|
|
|
(93
|
)
|
|
|
(4,683
|
)
|
Depreciation and amortization
|
|
|
194
|
|
|
|
842
|
|
|
|
-
|
|
|
|
1,036
|
|
Total assets
|
|
|
5,902
|
|
|
|
13,100
|
|
|
|
6,835
|
|
|
|
25,837
|
|
Note 8 - Income tax provision
The provision (benefit) for income taxes
for the fiscal years ended October 31, 2017 and 2016 consists of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
400
|
|
|
$
|
(332
|
)
|
State
|
|
|
24
|
|
|
|
(13
|
)
|
|
|
|
424
|
|
|
|
(345
|
)
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(293
|
)
|
|
|
(179
|
)
|
State
|
|
|
3
|
|
|
|
(128
|
)
|
|
|
|
(290
|
)
|
|
|
(307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
134
|
|
|
$
|
(652
|
)
|
Income tax at the federal statutory rate
is reconciled to the Company’s actual net provision (benefit) for income taxes as follows (in thousands, except percentages):
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
% of Pretax
|
|
|
|
|
|
% of Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes at federal statutory rate
|
|
$
|
136
|
|
|
|
34.0
|
%
|
|
$
|
(1,592
|
)
|
|
|
34.0
|
%
|
State tax provision, net of federal tax benefit
|
|
|
16
|
|
|
|
4.0
|
%
|
|
|
(53
|
)
|
|
|
1.1
|
%
|
Nondeductible differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible asset impairment
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
916
|
|
|
|
-19.6
|
%
|
Rel-Tech earn-out
|
|
|
(9
|
)
|
|
|
-2.3
|
%
|
|
|
52
|
|
|
|
-1.1
|
%
|
Qualified domestic production activities deduction
|
|
|
(66
|
)
|
|
|
-16.5
|
%
|
|
|
46
|
|
|
|
-1.0
|
%
|
ISO stock options
|
|
|
33
|
|
|
|
8.3
|
%
|
|
|
52
|
|
|
|
-1.1
|
%
|
Meals and entertainment
|
|
|
21
|
|
|
|
5.3
|
%
|
|
|
29
|
|
|
|
-0.6
|
%
|
Temporary true-ups
|
|
|
26
|
|
|
|
6.4
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
State tax refunds, net of federal expense
|
|
|
(4
|
)
|
|
|
-0.8
|
%
|
|
|
(38
|
)
|
|
|
0.8
|
%
|
R&D credits
|
|
|
(37
|
)
|
|
|
-9.3
|
%
|
|
|
(46
|
)
|
|
|
1.0
|
%
|
Other
|
|
|
18
|
|
|
|
4.4
|
%
|
|
|
(18
|
)
|
|
|
0.4
|
%
|
|
|
$
|
134
|
|
|
|
33.5
|
%
|
|
$
|
(652
|
)
|
|
|
13.9
|
%
|
The Company’s total deferred tax assets
and deferred tax liabilities at October 31, 2017 and 2016 are as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Reserves
|
|
$
|
375
|
|
|
$
|
216
|
|
Accrued vacation
|
|
|
122
|
|
|
|
134
|
|
Stock-based compensation awards
|
|
|
184
|
|
|
|
159
|
|
Uniform capitalization
|
|
|
130
|
|
|
|
148
|
|
Other
|
|
|
70
|
|
|
|
43
|
|
Total deferred tax assets
|
|
|
881
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Amortization / intangible assets
|
|
|
(805
|
)
|
|
|
(864
|
)
|
Depreciation / equipment and furnishings
|
|
|
(195
|
)
|
|
|
(211
|
)
|
Other
|
|
|
-
|
|
|
|
(34
|
)
|
Total deferred tax liabilities
|
|
|
(1,000
|
)
|
|
|
(1,109
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets (liabilities)
|
|
$
|
(119
|
)
|
|
$
|
(409
|
)
|
Deferred income tax assets and liabilities
are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable
or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected
to be realized. The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including
the amount and timing of future taxable income, and has determined it is more likely than not that the assets will be realized
in future tax years.
The Company had adopted the provisions of
ASC 740-10, which clarifies the accounting for uncertain tax positions. ASC 740-10 requires that the Company recognize the impact
of a tax position in the financial statements if the position is not more likely than not to be sustained upon examination based
on the technical merits of the position. The Company’s practice is to recognize interest and penalties related to income
tax matters in income from continuing operations. The Company has no material unrecognized tax benefits as of October 31, 2017.
The Company is subject to taxation in the
United States and state jurisdictions. The Company’s tax years for October 31, 2014 and forward are subject to examination
by the United States and October 31, 2013 and forward with state tax authorities.
On December 22, 2017, the Tax Cuts
and Jobs Act (the “Act”) was signed into United States tax law, which among other provisions will lower the
corporate tax rate to 21%. Given this date of enactment, our consolidated financial statements as of and for the year ended
October 31, 2017 do not reflect the impact of the Act. The Company is in the process of analyzing the potential aggregate
impact of the Act and will reflect any such impact in the quarterly report for the period in which the law was enacted.
Note 9 - Stock options
Incentive and non-qualified stock option plans
On March 9, 2010, the Company’s Board
of Directors adopted the RF Industries, Ltd. 2010 Stock Incentive Plan (the “2010 Plan”). In June 2010, the Company’s
stockholders approved the 2010 Plan by vote as required by NASDAQ. An aggregate of 1,000,000 shares of common stock was set aside
and reserved for issuance under the 2010 Plan. The Company’s stockholders approved the issuance of an additional 500,000
shares of common stock at its annual meeting held on September 5, 2014, another 500,000 shares of common stock at its annual meeting
held September 4, 2015 and another 1,000,000 shares of common stock at its annual meeting held September 8, 2017. As of October
31, 2017, 1,726,138 shares of common stock were remaining for future grants of stock options under the 2010 Plan.
Additional disclosures related to stock option plans
The fair value of each option granted in
2017 and 2016 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
|
|
2017
|
|
|
2016
|
|
Weighted average volatility
|
|
|
43.3
|
%
|
|
|
28.7
|
%
|
Expected dividends
|
|
|
5.0
|
%
|
|
|
2.4
|
%
|
Expected term (in years)
|
|
|
4.3
|
|
|
|
3.0
|
|
Risk-free interest rate
|
|
|
1.20
|
%
|
|
|
0.70
|
%
|
Weighted average fair value of options granted during the year
|
|
$
|
0.39
|
|
|
$
|
0.66
|
|
Weighted average fair value of options vested during the year
|
|
$
|
1.95
|
|
|
$
|
4.36
|
|
Expected volatilities are based on historical
volatility of the Company’s stock price and other factors. The Company used the historical method to calculate the expected
life of the 2017 option grants. The expected life represents the period of time that options granted are expected to be outstanding.
The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The
dividend yield is based upon the historical dividend yield.
Additional information regarding all of
the Company's outstanding stock options at October 31, 2017 and 2016 and changes in outstanding stock options in 2017 and 2016
follows:
|
|
2017
|
|
|
2016
|
|
|
|
Shares or
|
|
|
Weighted
|
|
|
Shares or
|
|
|
Weighted
|
|
|
|
Price Per
|
|
|
Average
|
|
|
Price Per
|
|
|
Average
|
|
|
|
Share
|
|
|
Exercise Price
|
|
|
Share
|
|
|
Exercise Price
|
|
Options outstanding at beginning of year
|
|
|
1,007,851
|
|
|
$
|
4.07
|
|
|
|
1,240,100
|
|
|
$
|
3.64
|
|
Options granted
|
|
|
449,068
|
|
|
$
|
1.61
|
|
|
|
104,936
|
|
|
$
|
3.36
|
|
Options exercised
|
|
|
(36,763
|
)
|
|
$
|
1.50
|
|
|
|
(180,067
|
)
|
|
$
|
0.27
|
|
Options forfeited
|
|
|
(260,385
|
)
|
|
$
|
4.10
|
|
|
|
(157,118
|
)
|
|
$
|
4.53
|
|
Options outstanding at end of year
|
|
|
1,159,771
|
|
|
$
|
3.19
|
|
|
|
1,007,851
|
|
|
$
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
926,272
|
|
|
$
|
3.08
|
|
|
|
724,457
|
|
|
$
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at end of year
|
|
|
1,159,002
|
|
|
$
|
3.19
|
|
|
|
1,002,522
|
|
|
$
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option price range at end of year
|
|
$
|
1.07 - $6.91
|
|
|
|
|
|
|
$
|
2.30 - $6.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of options exercised during year
|
|
$
|
55,000
|
|
|
|
|
|
|
$
|
456,000
|
|
|
|
|
|
Weighted average remaining contractual life of options outstanding
as of October 31, 2017: 4.19 years
Weighted average remaining contractual life of options exercisable
as of October 31, 2017: 3.18 years
Weighted average remaining contractual life of options vested
and expected to vest as of October 31, 2017: 4.19 years
Aggregate intrinsic value of options outstanding at October
31, 2017: $552,000
Aggregate intrinsic value of options exercisable at October
31, 2017: $503,000
Aggregate intrinsic value of options vested and expected to
vest at October 31, 2017: $552,000
As of October 31, 2017, $275,000 of expense
with respect to nonvested share-based arrangements has yet to be recognized which is expected to be recognized over a weighted
average period of 6.33 years.
Effective for the fiscal year ending October
31, 2017, non-employee directors receive $50,000 annually, which is paid one-half in cash and one-half through the grant of non-qualified
stock options to purchase shares of the Company’s common stock. Previously, for the fiscal year ended October 31, 2016, non-employee
directors received $30,000 annually. During the quarter ended January 31, 2017, the Company granted each of its four non-employee
directors 77,339 options. The number of stock options granted to each director was determined by dividing $25,000 by the fair value
of a stock option grant using the Black-Scholes model ($0.32 per share). These options vest ratably over fiscal year 2017. On June
9, 2017, the Company’s Board of Directors appointed Gerald Garland to serve as a director. Mr. Garland received a prorated
portion of the compensation paid by the Company. The number of stock options granted to Mr. Garland was determined by dividing
$9,863 (the portion of his director fee for the year ending October 31, 2017) by the fair value of a stock option grant using the
Black-Scholes model ($0.40 per share). These options vest ratably over the remaining portion of fiscal year 2017.
On April 6, 2016, Howard Hill, the Company’s
former Chief Operating Officer, retired from the Company. On becoming a non-employee member of the Board on April 7, 2016, Mr.
Hill was granted 33,744 options, representing the director compensation payable to him for his services for the remainder of the
2016 fiscal year. The number of stock options granted was determined by dividing his pro-rata portion of his stock based compensation
for serving on the Board of $8,750 by the fair value of a stock option grant using the Black-Scholes model ($0.26). These options
vested ratably over fiscal 2016.
Note 10 - Retirement plan
The Company has a 401(K) plan available
to its employees. For the years ended October 31, 2017 and 2016, the Company contributed and recognized as an expense $166,000
and $182,000, respectively, which amount represented 3% of eligible employee earnings under its Safe Harbor Non-elective Employer
Contribution Plan.
Note 11 - Related party transactions
During fiscal 2016 the Company had a note
receivable from stockholder of $67,000 that was due from a former Chief Executive Officer of the Company, earned interest at 6%
per annum (which interest was payable annually), and had no specific due date. The note was collateralized by property owned by
the former Chief Executive Officer. During fiscal 2016, the former Chief Executive Officer resigned as an employee of the Company
and, in connection with his resignation, repaid the foregoing promissory note in full.
On June 15, 2011, the Company purchased
Cables Unlimited, Inc., a New York corporation, from Darren Clark, the sole shareholder of Cables Unlimited, Inc. In connection
with the purchase of Cables Unlimited, the Company entered into a lease for the New York facilities from which Cables Unlimited
conducts its operations. Cables Unlimited’s monthly rent expense under the lease is $13,000 per month, plus payments of all
utilities, janitorial expenses, routine maintenance costs, and costs of insurance for Cables Unlimited’s business operations
and equipment. During the fiscal year ended October 31, 2017, the Company paid the landlord a total of $156,000 under the lease.
The owner and landlord of the facility is a company controlled by Darren Clark, the former owner of Cables Unlimited and the current
President of this subsidiary of the Company.
Note 12 - Cash dividend and declared
dividends
The Company paid quarterly dividends of
$0.02 per share during fiscal year 2017 for a total of $707,000. The Company paid quarterly dividends of $0.02, $0.02, $0.02 and
$0.07 per share during the three months ended October, 31, 2016, July 31, 2016, April 30, 2016 and January 31, 2016, respectively,
for a total of $1.1 million.
Note 13 - Commitments
As of October 31, 2017, the Company leases
its facilities in San Diego, California, Yaphank, New York, Milford, Connecticut and East Brunswick, New Jersey under non-cancelable
operating leases. Deferred rents, included in accrued expenses and other long-term liabilities, were $95,000 as of October 31,
2017 and $3,000 as of October 31, 2016. The San Diego lease also requires the payment of the Company's pro rata share of the real
estate taxes and insurance, maintenance and other operating expenses related to the facilities.
Rent expense under all operating leases totaled approximately
$644,000 and $628,000 in 2017 and 2016, respectively.
Minimum lease payments under these non-cancelable
operating leases in each of the years subsequent to October 31, 2017 are as follows (in thousands):
Year ending
|
|
|
|
October 31,
|
|
Amount
|
|
|
|
|
|
2018
|
|
$
|
645
|
|
2019
|
|
|
516
|
|
2020
|
|
|
441
|
|
2021
|
|
|
440
|
|
2022
|
|
|
359
|
|
Total
|
|
$
|
2,401
|
|
Note 14 - Line of credit
From May 2015 until September 2016, the
Company had a $5 million line of credit available to it from its bank. The Company did not use the line of credit and, effective
September 8, 2016, the Company terminated the line of credit.
Note 15 - Subsequent events
On December 13, 2017, the Board of Directors
of the Company declared a quarterly dividend of $0.02 per share that was paid on January 15, 2018 to stockholders of record on
December 31, 2017.
On December 22, 2017, the Tax Cuts and Jobs
Act (the “Act”) was signed into United States tax law, which among other provisions will lower the corporate tax rate
to 21%. Given this date of enactment, our financial statements for the year ended October 31, 2017 do not reflect the impact of
the Act. The Company is in the process of analyzing the potential aggregate impact of the Act and will reflect any such impact
in the quarterly report for the period in which the law was enacted.