UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☐ |
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Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes
The number of shares of the issuer’s Common Stock, par value $0.01 per share, outstanding as of September 12, 2024 was
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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July 31, |
October 31, |
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2024 |
2023 |
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(Unaudited) |
(Note 1) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
$ | $ | ||||||
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Trade accounts receivable, net of allowance for credit losses of $ |
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Inventories |
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Other current assets |
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TOTAL CURRENT ASSETS |
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Property and equipment: |
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Equipment and tooling |
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Furniture and office equipment |
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Less accumulated depreciation |
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Total property and equipment, net |
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Operating lease right-of-use assets, net |
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Goodwill |
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Amortizable intangible assets, net |
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Non-amortizable intangible assets |
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Deferred tax assets |
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Other assets |
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TOTAL ASSETS |
$ | $ | ||||||
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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July 31, |
October 31, |
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2024 |
2023 |
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(Unaudited) |
(Note 1) |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
$ | $ | ||||||
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Accrued expenses |
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Line of credit |
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Current portion of Term Loan |
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Current portion of operating lease liabilities |
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TOTAL CURRENT LIABILITIES |
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Operating lease liabilities |
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Deferred tax liabilities |
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Term Loan, net of debt issuance cost |
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TOTAL LIABILITIES |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS’ EQUITY |
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Common stock - authorized |
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Additional paid-in capital |
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Retained earnings |
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TOTAL STOCKHOLDERS' EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ | $ | ||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share amounts)
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Three Months Ended July 31, |
Nine Months Ended July 31, |
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2024 |
2023 |
2024 |
2023 |
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Net sales |
$ | $ | $ | $ | ||||||||||||
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Cost of sales |
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Gross profit |
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Operating expenses: |
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Engineering |
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Selling and general |
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Total operating expenses |
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Operating loss |
( |
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Other expense |
( |
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Loss before benefit for income taxes |
( |
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Provision (benefit) for income taxes |
( |
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Consolidated net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Loss per share: | ||||||||||||||||
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Basic |
$ | ( |
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) | $ | ( |
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Diluted |
$ | ( |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands, except share amounts)
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For the Three Months Ended July 31, 2024 |
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Additional |
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Common Stock |
Paid-in |
Retained |
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Shares |
Amount |
Capital |
Earnings |
Total |
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Balance, May 1, 2024 |
$ | $ | $ | $ | ||||||||||||||||
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Stock-based compensation expense |
- | - | - | |||||||||||||||||
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Tax withholding related to vesting of restricted stock |
( |
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) | - | ( |
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Consolidated net loss |
- | - | - | ( |
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Balance, July 31, 2024 |
$ | $ | $ | $ | ||||||||||||||||
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For the Nine Months Ended July 31, 2024 |
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Additional |
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Common Stock |
Paid-in |
Retained |
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Shares |
Amount |
Capital |
Earnings |
Total |
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Balance, November 1, 2023 |
$ | $ | $ | $ | ||||||||||||||||
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Stock-based compensation expense |
- | - | - | |||||||||||||||||
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Issuance of restricted stock |
( |
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Tax withholding related to vesting of restricted stock |
( |
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Consolidated net loss |
- | - | - | ( |
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Balance, July 31, 2024 |
$ | $ | $ | $ | ||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands, except share amounts)
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For the Three Months Ended July 31, 2023 |
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Additional |
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Common Stock |
Paid-in |
Retained |
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Shares |
Amount |
Capital |
Earnings |
Total |
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Balance, May 1, 2023 |
$ | $ | $ | $ | ||||||||||||||||
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Stock-based compensation expense |
- | - | - | |||||||||||||||||
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Tax withholding related to vesting of restricted stock |
( |
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) | - | ( |
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Consolidated net loss |
- | - | - | ( |
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Balance, July 31, 2023 |
$ | $ | $ | $ | ||||||||||||||||
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For the Nine Months ended July 31, 2023 |
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Additional |
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Common Stock |
Paid-In |
Retained |
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Shares |
Amount |
Capital |
Earnings |
Total |
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Balance, November 1, 2022 |
$ | $ | $ | $ | ||||||||||||||||
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Exercise of stock options |
- | |||||||||||||||||||
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Stock-based compensation expense |
- | - | - | |||||||||||||||||
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Issuance of restricted stock |
- | |||||||||||||||||||
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Tax withholding related to vesting of restricted stock |
( |
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) | - | ( |
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Consolidated net loss |
- | - | - | ( |
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Balance, July 31, 2023 |
$ | $ | $ | $ | ||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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Nine Months Ended July 31, |
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2024 |
2023 |
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OPERATING ACTIVITIES: |
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Consolidated net loss |
$ | ( |
) | $ | ( |
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Adjustments to reconcile consolidated net loss to net cash provided by operating activities: |
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Allowance for credit losses |
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Depreciation and amortization |
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Stock-based compensation expense |
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Amortization of debt issuance cost |
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Tax payments related to shares cancelled for vested restricted stock awards |
( |
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Deferred income taxes |
( |
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Extinguishment of debt issuance cost |
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Changes in operating assets and liabilities: |
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Trade accounts receivable |
( |
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Inventories |
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Other current assets |
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Right-of-use assets |
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Other long-term assets |
( |
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Accounts payable |
( |
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Accrued expenses |
( |
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Income taxes payable |
( |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES: |
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Capital expenditures |
( |
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Net cash used in investing activities |
( |
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FINANCING ACTIVITIES: |
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Proceeds from exercise of stock options |
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Debt issuance cost |
( |
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Line of credit |
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Term Loan payments |
( |
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Net cash used in financing activities |
( |
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Net decrease in cash and cash equivalents |
( |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
$ | $ | ||||||
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Supplemental cash flow information – income taxes paid |
$ | $ | ||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
RF INDUSTRIES, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Unaudited interim condensed consolidated financial statements
Our accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“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 GAAP for complete financial statements. In the opinion of management, all adjustments, which are normal and recurring and other items of gain (loss) and expense required in our view under Accounting Standards Codification (“ASC”) 270, Interim Reporting, have been included for a fair statement of the financial position. Information included in the condensed consolidated balance sheet as of October 31, 2023 has been derived from, and certain terms used herein are defined in, the audited consolidated financial statements of RF Industries, Ltd. as of October 31, 2023 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2023 that was previously filed with the Securities and Exchange Commission (“SEC”). Operating results for the nine months ended July 31, 2024 are not necessarily indicative of the results that may be expected for the year ended October 31, 2024. 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.
Our accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand along with the current Credit Facility (as defined below), to meet its obligations as they become due.
Although we have incurred operating losses during the three and nine months ended July 31, 2024, we have implemented certain cost-cutting measures to reduce our operating expenses and to help drive positive operating cash flow and increase liquidity. Our plan includes consolidating facilities and recognizing the related operating efficiencies and synergies in our production operations. The Company intends to continue to pursue additional continuous improvement and cost reduction measures, as well as organic growth in revenue and profitability.
On March 15, 2024, the Company entered into the loan and security agreement with Eclipse Business Capital, as administrative agent (“EBC”), pursuant to which proceeds from initial drawings under the credit facility with EBC were used to repay in full the outstanding obligations under the prior revolving credit facility and term loan that we had with Bank of America, N.A, which such credit facility with Bank of America was terminated upon entry into the loan and security agreement with EBC.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of RF Industries, Ltd., Cables Unlimited, Inc. (“Cables Unlimited”), Rel-Tech Electronics, Inc. (“Rel-Tech”), C Enterprises, Inc. (“C Enterprises”), Schroff Technologies International, Ltd. (“Schrofftech”), and Microlab/FXR LLC (“Microlab”), wholly-owned subsidiaries of RF Industries, Ltd. All intercompany balances and transactions have been eliminated in consolidation.
Fair value measurement
We measure at fair value certain financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the following fair-value hierarchy:
Level 1— Quoted prices for identical instruments in active markets;
Level 2— Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3— Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
As of July 31, 2024 and October 31, 2023, the carrying amounts reflected in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximated their carrying value due to their short-term nature.
Recent accounting standards
Recently issued accounting pronouncements adopted:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments—Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The guidance is effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), which pushes back the effective date for public business entities that are smaller reporting companies, as defined by the SEC, to fiscal years beginning after December 15, 2022. The guidance was effective for the Company beginning on November 1, 2023 and the adoption of this standard had no material impact on the Company’s condensed consolidated financial statements or related disclosures.
Recently issued accounting pronouncements not yet adopted:
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning November 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, to expand the disclosure requirements for income taxes, specifically related to the effective tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning November 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.
Note 2 – Concentrations of credit risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We maintain our cash and cash equivalents with high-credit quality financial institutions. At July 31, 2024, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $
Sales from each customer that were 10% or greater of net sales were as follows:
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Three Months Ended July 31, |
Nine Months Ended July 31, |
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2024 |
2023 |
2024 |
2023 |
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Wireless provider A |
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Wireless provider B |
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Distributor A |
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Distributor B |
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For the three months ended July 31, 2024, wireless carrier and distributor customer accounted for 11% and 13% or more of net sales, and accounted for
Note 3 – Inventories and major vendors
Inventories, consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or net realizable value. Cost has been determined using the weighted average cost method. Inventories consist of the following (in thousands):
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July 31, 2024 |
October 31, 2023 |
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Raw materials and supplies |
$ | $ | ||||||
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Work in process |
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Finished goods |
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Totals |
$ | $ | ||||||
For the three months ended July 31, 2024, no single vendor accounted for 10% or more of inventory purchases. For the three months ended July 31, 2023, vendor accounted for
Note 4 – Other current assets
Other current assets consist of the following (in thousands):
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July 31, 2024 |
October 31, 2023 |
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Prepaid taxes |
$ | $ | ||||||
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Prepaid expense |
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Deposits |
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Other |
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Totals |
$ | $ | ||||||
Note 5 – Accrued expenses and other current liabilities
Accrued expenses consist of the following (in thousands):
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July 31, 2024 |
October 31, 2023 |
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Wages payable |
$ | $ | ||||||
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Accrued receipts |
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Other accrued expenses |
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Totals |
$ | $ | ||||||
Accrued receipts represent purchased inventory for which invoices have not been received.
Note 6 –Income (Loss) per share
Basic income (loss) per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding increased by the effects of assuming that other potentially dilutive securities (such as stock options) outstanding during the period had been exercised and the treasury stock method had been applied. During the three months ended July 31, 2024, we reported a net loss and, in periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation due to their anti-dilutive effect. Potentially issuable securities that are out-of-the-money totaled
The following table summarizes the computation of basic and diluted weighted average shares outstanding:
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Three Months Ended July 31, |
Nine Months Ended July 31, |
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2024 |
2023 |
2024 |
2023 |
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Weighted average shares outstanding for basic earnings per share |
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Add effects of potentially dilutive securities-assumed exercise of stock options |
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Weighted average shares outstanding for diluted earnings per share |
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Note 7 – Stock-based compensation and equity transactions
On January 11, 2023, we granted a total of
On August 29, 2023, we granted one employee
On November 1, 2023, we granted
On January 11, 2024, we granted a total of
On April 16, 2024, we granted a total of
other shares or options were granted to Company employees during the three and nine months ended July 31, 2024 and 2023.
The weighted average fair value of employee stock options that were granted during the nine months ended July 31, 2024 and 2023 was estimated to be $
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Nine Months Ended July 31, |
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2024 |
2023 |
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Risk-free interest rate |
% | % | ||||||
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Dividend yield |
% | % | ||||||
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Expected life of the option (years) |
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Volatility factor |
% | % | ||||||
Expected volatilities are based on historical volatility of our stock price and other factors. We used the historical method to calculate the expected life of the 2024 and 2023 option grants. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The dividend yield is based upon the historical dividend yield.
Company stock option plans
Descriptions of our stock option plans are included in Note 9 to our audited financial statements included in our Annual Report on Form 10-K for the year ended October 31, 2023. A summary of the status of the options granted under our stock option plans as of July 31, 2024 and the changes in options outstanding during the three months then ended is presented in the table that follows:
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Weighted |
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Average |
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Shares |
Exercise Price |
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Outstanding at November 1, 2023 |
$ | |||||||
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Options granted |
$ | |||||||
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Options exercised |
$ | - | ||||||
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Options cancelled |
( |
) | $ | |||||
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Options outstanding at July 31, 2024 |
$ | |||||||
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Options exercisable at July 31, 2024 |
$ | |||||||
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Options vested and expected to vest at July 31, 2024 |
$ | |||||||
Weighted average remaining contractual life of options outstanding as of July 31, 2024:
Weighted average remaining contractual life of options exercisable as of July 31, 2024:
Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2024:
Aggregate intrinsic value of options outstanding at July 31, 2024: $
Aggregate intrinsic value of options exercisable at July 31, 2024: $
Aggregate intrinsic value of options vested and expected to vest at July 31, 2024: $
As of July 31, 2024, $
Stock option expense
During the three months ended July 31, 2024 and 2023, stock-based compensation expense totaled $
Note 8 – Segment information
We aggregate operating divisions into reporting segments that have similar economic characteristics primarily in the following areas: (1) the nature of the product and services; (2) the nature of the production process; (3) the type or class of customer for their products and services; (4) the methods used to distribute their products or services; and (5) if applicable, the nature of the regulatory environment. Based upon this evaluation, as of July 31, 2024, we had reportable segments – RF Connector and Cable Assembly (“RF Connector”) segment and Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment.
Management identifies segments based on strategic business units that are, in turn, based along market lines. These strategic business units offer products and services to different markets in accordance with their customer base and product usage. For segment reporting purposes, the RF Connector, C Enterprises and Microlab divisions constitute the RF Connector segment, and the Cables Unlimited, Rel-Tech, and Schrofftech divisions constitute the Custom Cabling segment.
On August 1, 2023, C Enterprises moved and transitioned its physical operations into the RF Connector office in San Diego, CA. Given the synergies in consolidating both the operating divisions into one building, C Enterprises has been included in the RF Connector segment since August 1, 2023. Further, since the acquisition of C Enterprises in 2019, the customer base for the division has shifted more towards distribution as opposed to direct to end customer which is more aligned with the RF Connector segment. The segment change of including C Enterprise as part of the RF Connector segment was made retroactive to the beginning of our fiscal year starting November 1, 2022 and reclassified for fiscal 2022 for comparative purposes. In annual and interim periods reported prior to the transition on August 1, 2023, C Enterprises was included in the Custom Cabling segment.
The RF Connector segment consists of three divisions and the Custom Cabling segment consists of three 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. The biggest difference in segments is in the channels of sales: sales or product and services for the RF Connector segment were primarily through the distribution channel, while the Custom Cabling segment sales were through a combination of distribution and direct to the end customer.
As reviewed by our chief operating decision maker, we evaluate the performance of each segment based on income or loss before income taxes. We charge depreciation and amortization directly to each division within the segment. Accounts receivable, inventory, property and equipment, right-of-use assets, goodwill and intangible assets are the only assets identified by segment. Except as discussed above, the accounting policies for segment reporting are the same for the Company as a whole.
All of our operations are conducted in the United States; however, we derive a portion of our revenue from export sales. We attribute sales to geographic areas based on the location of the customers. The following table presents the sales by geographic area for the three and nine months ended July 31, 2024 and 2023 (in thousands):
|
Three Months Ended July 31, |
Nine Months Ended July 31, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
United States |
$ | $ | $ | $ | ||||||||||||
|
Foreign Countries: |
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|
Canada |
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|
Italy |
||||||||||||||||
|
Mexico |
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|
All Other |
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|
Totals |
$ | $ | $ | $ | ||||||||||||
Net sales to external customers, (loss) income before provision (benefit) for income taxes and other related segment information for the three months ended July 31, 2024 and 2023 are as follows (in thousands):
|
RF Connector |
Custom Cabling |
|||||||||||||||
|
and |
Manufacturing and |
|||||||||||||||
|
2024 |
Cable Assembly |
Assembly |
Corporate |
Total |
||||||||||||
|
Net sales |
$ | $ | $ | $ | ||||||||||||
|
(Loss) income before benefit for income taxes |
( |
) | ( |
) | ( |
) | ||||||||||
|
Depreciation and amortization |
||||||||||||||||
|
Total assets |
||||||||||||||||
|
2023 |
||||||||||||||||
|
Net sales |
$ | $ | $ | $ | ||||||||||||
|
(Loss) income before benefit for income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Depreciation and amortization |
||||||||||||||||
|
Total assets |
||||||||||||||||
Net sales to external customers, income (loss) before provision (benefit) for income taxes and other related segment information for the nine months ended July 31, 2024 and 2023 are as follows (in thousands):
|
RF Connector |
Custom Cabling |
|||||||||||||||
|
and |
Manufacturing and |
|||||||||||||||
|
2024 |
Cable Assembly |
Assembly |
Corporate |
Total |
||||||||||||
|
Net sales |
$ | $ | $ | $ | ||||||||||||
|
(Loss) income before benefit from income taxes |
( |
) | ( |
) | ( |
) | ||||||||||
|
Depreciation and amortization |
||||||||||||||||
|
Total assets |
||||||||||||||||
|
2023 |
||||||||||||||||
|
Net sales |
$ | $ | $ | $ | ||||||||||||
|
(Loss) income before benefit for income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Depreciation and amortization |
||||||||||||||||
|
Total assets |
||||||||||||||||
Note 9 – Income taxes
We use an estimated annual effective tax rate, which is based on expected annual taxable income (loss), statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate, to determine its quarterly provision (benefit) for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
We recorded income tax provisions benefits of $
We had $
The Company assesses all positive and negative evidence in determining if, based on the weight of such evidence, a valuation allowance is required to be recorded against the deferred tax assets as of July 31, 2024. The Company has evaluated future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In making such judgements, significant weight is given to evidence that can be objectively verified. After analyzing all available evidence, including the recent trend of continued losses, the Company has determined that it is not more likely than not that all of its deferred tax assets will be realized, and therefore, has recorded a partial valuation allowance against its deferred tax assets. The Company's valuation allowance was $
Note 10 – Intangible assets
Intangible assets consist of the following as of July 31, 2024 and October 31, 2023 (in thousands):
|
July 31, 2024 |
October 31, 2023 |
|||||||
|
Amortizable intangible assets: |
||||||||
|
Non-compete agreement (estimated life |
$ | $ | ||||||
|
Accumulated amortization |
( |
) | ( |
) | ||||
|
Customer relationships (estimated lives |
||||||||
|
Accumulated amortization |
( |
) | ( |
) | ||||
|
Backlog (estimated life |
||||||||
|
Accumulated amortization |
( |
) | ( |
) | ||||
|
Patents (estimated life |
||||||||
|
Accumulated amortization |
( |
) | ( |
) | ||||
|
Tradename (estimated life |
||||||||
|
Accumulated amortization |
( |
) | ( |
) | ||||
|
Proprietary Technology (estimated life |
||||||||
|
Accumulated amortization |
( |
) | ( |
) | ||||
|
Totals |
$ | $ | ||||||
|
Non-amortizable intangible assets: |
||||||||
|
Trademarks |
$ | $ | ||||||
Amortization expense for the nine months ended July 31, 2024 and the year ended October 31, 2023 was $
Note 11 – Commitments
We adopted ASU 2016-02 on November 1, 2019, and elected the practical expedient modified retrospective method whereby the lease qualification and classification was carried over from the accounting for leases under ASC 840. The lease contracts for the corporate headquarters, RF Connector division manufacturing facilities, Cables Unlimited, Rel-Tech, and C Enterprises commenced prior to the effective date of November 1, 2019, and were determined to be operating leases. All other new contracts have been assessed for the existence of a lease and for the proper classification into operating leases. The rate implicit in the leases was undeterminable and, therefore, the discount rate used in all lease contracts is our incremental borrowing rate.
We have operating leases for corporate offices, manufacturing facilities, and certain storage units. Our leases have remaining lease terms of year to years. A portion of our operating leases are leased from K&K Unlimited, a company controlled by Darren Clark, the former owner and current President of Cables Unlimited, to whom we make rent payments totaling $
We also have other operating leases for certain equipment. The components of our facilities and equipment operating lease expenses for the periods ending July 31, 2024 and 2023 were as follows (in thousands):
|
Three Months Ended July 31, |
Nine Months Ended July 31, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Operating lease cost |
$ | $ | $ | $ | ||||||||||||
Other information related to leases was as follows (in thousands):
|
July 31, 2024 |
October 31, 2023 |
|||||||
|
Supplemental Cash Flows Information |
||||||||
|
Right-of-use assets obtained in exchange for lease obligations: |
||||||||
|
Operating leases |
$ | $ | ||||||
|
Weighted Average Remaining Lease Term |
||||||||
|
Operating leases (in months) |
||||||||
|
Weighted Average Discount Rate |
||||||||
|
Operating leases |
% | % | ||||||
Future minimum lease payments under non-cancellable leases as of July 31, 2024 were as follows:
|
Year ending October 31, |
Operating Leases |
|||
|
2024 (excluding nine months ended July 31, 2024) |
$ | |||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
Thereafter |
||||
|
Total future minimum lease payments |
||||
|
Less imputed interest |
( |
) | ||
|
Total |
$ | |||
|
Reported as of July 31, 2024 |
Operating Leases |
|||
|
Current portion of operating lease liabilities |
$ | |||
|
Operating lease liabilities |
||||
|
Total |
$ | |||
As of July 31, 2024, operating lease right-of-use asset was $
Note 12 – Term Loan and Line of credit
In February 2022, we entered into a loan agreement (the “BofA Loan Agreement”) providing for a revolving line of credit (the “BofA Revolving Credit Facility”) in the amount of $
On September 12, 2023, we entered into Amendment No. 1 and Waiver to the BofA Loan Agreement (“Loan Amendment No. 1”) with BofA, which, among other matters, provided for a one-time waiver of our failure to comply with (i) the Debt Test for the period ended July 31, 2023 and (ii) the FCCR Test for the period ended July 31, 2023. Loan Amendment No. 1 also waived testing for compliance with the Debt Test and FCCR Test for the quarterly periods ending October 31, 2023, January 31, 2024, April 30, 2024 and July 31, 2024. Further, pursuant to Loan Amendment No. 1, we were required to maintain (i) (a) until September 21, 2023, minimum liquidity (week-end cash balance plus availability from the BofA Revolving Credit Facility) of $
On January 26, 2024, we entered into Amendment No. 2 to the BofA Loan Agreement (“Loan Amendment No. 2”) with BofA, which, among other matters, eliminated the requirement to maintain minimum EBITDA of $500,000 for the quarter ending January 31, 2024. Under Loan Amendment No. 2, the line of credit available to the Company under the BofA Revolving Credit Facility was lowered from $
On February 29, 2024, we entered into Amendment No. 3 to the BofALoan Agreement (“Loan Amendment No. 3”) with BofA, which, among other matters, deferred the requirement that the Company make an additional principal payment of $
On March 15, 2024, we entered into the EBC Credit Agreement and used proceeds from the initial drawings under the EBC Credit Facilities (as defined below) to repay in full outstanding obligations under the BofA Loan Agreement and to pay fees, premiums, costs and expenses, including fees payable in connection with the EBC Credit Agreement. The BofA Loan Agreement was terminated upon entry into the EBC Credit Agreement and is no longer in effect.
The EBC Credit Agreement provides for (i) a senior secured revolving loan facility of up to $
In the absence of an Event of Default (as defined in the EBC Credit Agreement) or certain other events (including the inability of EBC to determine the secured overnight financing rate “SOFR”), borrowings under (a) the EBC Revolving Loan Facility accrue interest at a rate of the one-month term SOFR reference rate plus an adjustment of
Borrowings under the EBC Credit Agreement are secured by a security interest in certain assets of the Company and are subject to certain loan covenants. The EBC Credit Facilities require the maintenance of certain financial covenants, including (i) Excess Availability (as defined in the EBC Credit Agreement) of at least, as of any date of determination, an amount equal to the greater of (a) $ and (b)
The foregoing description of the EBC Credit Agreement does not purport to be complete and is qualified in its entirety to the full text of the EBC Credit Agreement and First Amendment. We filed the EBC Credit Agreement as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended January 31, 2024 and the First Amendment is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q for the quarter ended July 31, 2024 and each is incorporated by reference herein.
Debt issuance costs related to the EBC Credit Agreement totaled $
As of July 31, 2024, our outstanding borrowings under the EBC Credit Agreement were $
Note 13 – Cash dividend and declared dividends
We did pay any dividends during the three or nine months ended July 31, 2024, during the three or nine months ended July 31, 2023.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “except,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company, nor any other person, assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in its expectations.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Risk Factors,” and the audited consolidated financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended October 31, 2023 and other reports and filings made with the Securities and Exchange Commission.
Critical Accounting Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these unaudited condensed consolidated financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to credit losses, inventory reserves, earn-out liabilities, and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Inventories - allowance for excess and slow moving items
Inventories are stated at the lower of cost or net realizable value, with cost determined using the weighted average cost method of accounting. Certain items in inventory may be considered obsolete or excess and, as such, we periodically review our inventories for excess and slow moving items and make provisions as necessary to properly reflect inventory value. Because inventories have, during the past few years, represented up to one-fourth of our total assets, any reduction in the value of our inventories would require us to take write-offs that would affect our net worth and future earnings.
Allowance for Credit Losses
Our accounts receivable arise primarily from sales on credit to customers. We establish an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers. During the three months ended July 31, 2024, we considered the current and expected future economic and market conditions and concluded that no material adjustment to Credit Losses was required as of July 31, 2024 relative to October 31, 2023.
Impairment testing on Long-Lived Assets Including Goodwill
We assess property, plant and equipment and intangible assets, which are considered definite-lived assets, for impairment. Definite-lived assets are reviewed when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value.
We amortize our intangible assets with definite useful lives over their estimated useful lives and review these assets for impairment.
We test our goodwill and trademarks and indefinite-lived assets for impairment at least annually or more frequently if events or changes in circumstances indicate these assets may be impaired. These events or circumstances require significant judgment and could include a significant change in the business climate, legal factors, operating performance indicators, competition and sale or disposition of all or a portion of a division. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.
Valuation Allowance on Deferred Income Taxes
We record a tax provision (benefit) for the anticipated tax consequences of the reported results of operations. Income taxes are accounted for under the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates as of the date of the financial statements that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
Stock-based Compensation
We use the Black-Scholes model to value the stock option grants. This valuation is affected by our stock price as well as assumptions regarding a number of inputs which involve significant judgments and estimates. These inputs include the expected term of employee stock options, the expected volatility of the stock price, the risk-free interest rate and expected dividends.
Overview
RF Industries, Ltd. (together with subsidiaries, the “Company,” “we”, “us”, or “our”) is a national manufacturer and marketer of interconnect products and systems, including high-performance components such as RF connectors and adapters, dividers, directional couplers and filters, coaxial cables, data cables, wire harnesses, fiber optic cables, custom cabling, energy-efficient cooling systems and integrated small cell enclosures. Through our manufacturing and production facilities, we provide a wide selection of interconnect products and solutions primarily to telecommunications carriers and equipment manufacturers, wireless and network infrastructure carriers and manufacturers and to various original equipment manufacturers (“OEMs”) in several market segments. We also design, engineer, manufacture and sell energy-efficient cooling systems and integrated small cell solutions and related components.
We operate through two reporting segments: (i) the RF Connector and Cable Assembly (“RF Connector”) segment, and (ii) the Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment. The RF Connector segment primarily designs, manufactures, markets and distributes a broad range of RF connector, adapter, coupler, divider, and cable products, including coaxial passives and cable assemblies that are used in telecommunications and information technology, OEM markets and other end markets. The Custom Cabling segment designs, manufactures, markets and distributes custom copper and fiber cable assemblies, complex hybrid fiber optic and power solution cables, electromechanical wiring harnesses 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 4G and 5G small cell integrated enclosures.
For the nine months ended July 31, 2024, revenues from the Custom Cabling segment were generated from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which collectively accounted for 39% 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 61% of total sales for the nine months ended July 31, 2024. The RF Connector segment mostly sells standardized products regularly used by customers and, therefore, has a more stable revenue stream. On the other hand, the Custom Cabling segment mostly designs, manufactures, and sells customized cabling and wireless-related equipment under larger purchase orders. Accordingly, the Custom Cabling segment is more dependent upon larger orders and its revenues can therefore be more volatile than the revenues of the RF Connector segment.
Our corporate headquarters are located at 16868 Via Del Campo Court, Suite 200, San Diego, CA 92127. Our phone number is (858) 549-6340.
Liquidity and Capital Resources
Historically, we have been able to fund our liquidity and other capital requirements from funds we generated from operations. However, we have incurred an operating loss during the nine months ended July 31, 2024. During the period, we have implemented certain cost-cutting measures to reduce our operating expenses and to help drive positive operating cash flow and increase liquidity. Our plan includes consolidating facilities and recognizing the related operating efficiencies and synergies in our production operations. We intend to continue to pursue additional continuous improvement and cost reduction measures, as well as organic growth in revenue and profitability.
As of July 31, 2024, we had a total of $1.8 million of cash and cash equivalents compared to a total of $4.9 million of cash and cash equivalents as of October 31, 2023. As of July 31, 2024, we had working capital of $11.0 million and a current ratio of approximately 1.6:1 with current assets of $29.4 million and current liabilities of $18.4 million. We believe that the amount of cash remaining, plus the amount available to us under the EBC Revolving Loan Facility, will be sufficient to fund our anticipated liquidity needs.
As of July 31, 2024, we had $20.1 million of backlog, compared to $16.1 million as of October 31, 2023. 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 nine months ended July 31, 2024, we generated $3.4 million of cash in our operating activities. This net inflow of cash is primarily related to $3.7 million from inventories, $1.9 million from depreciation and amortization, $0.7 million from stock-based compensation expense, $0.4 million from right-of-use assets, $0.5 million from accrued expenses, $0.2 million from other current assets, $68,000 from debt issuance amortization and $14,000 from extinguishment of debt issuance costs. The cash usage was primarily due to the net loss of $6.4 million, change in accounts receivable of $0.4 million and payments of accounts payable of $52,000. We also recorded a non-cash item of $2.7 million from deferred income taxes.
During the nine months ended July 31, 2024, we also spent $0.6 million on capital expenditures, $13.2 million in BofA Term Loan payments, $0.5 million of debt issuance cost and drew $7.7 million on the EBC Revolving Loan Facility (used to pay down the BofATerm Loan).
Our goal to expand and grow our business both organically and through acquisitions may require material additional capital equipment. In the past, we have purchased all additional equipment, or financed some of our equipment and furnishings requirements through capital leases. At this time, we have not identified any additional capital equipment purchases that would require significant additional leasing or capital expenditures during the next 12 months. We also believe that based on our current financial condition, our current backlog of unfulfilled orders, and our anticipated future operations, we would be able to finance our expansion, if necessary.
From time to time, we may undertake acquisitions of other companies or product lines in order to diversify our product and solutions offerings and customer base. Conversely, we may undertake the disposition of a division or product line due to changes in our business strategy or market conditions. Acquisitions may require the outlay of cash, which may reduce our liquidity and capital resources while dispositions may increase our cash position, liquidity and capital resources. Since our goal is to continue to expand our operations and accelerate our growth through future acquisitions, we may use some of our current capital resources to fund acquisitions we may undertake in the future.
Results of Operations
Three Months Ended July 31, 2024 vs. Three Months Ended July 31, 2023
Net sales for the three months ended July 31, 2024 (the “fiscal 2024 quarter”) increased by 7.6%, or $1.1 million, to $16.8 million as compared to the three months ended July 31, 2023 (the “fiscal 2023 quarter”). Net sales for the fiscal 2024 quarter at the Custom Cabling segment increased by $2.0 million, or 39.2%, to $7.1 million, compared to $5.1 million in the fiscal 2023 quarter. The increase was primarily the result of an increase in sales of thermal cooling and small cell enclosures at Schrofftech and hybrid fiber cables to wireless customers. Net sales for the fiscal 2024 quarter at the RF Connector segment decreased by $0.8 million, or 7.6%, to $9.7 million as compared to $10.5 million in the fiscal 2023 quarter. This was primarily due to a decrease in sales to some of our distributor customers related to seasonality, lower levels of inventory kept on hand in the channel, and the significantly lower carrier capital expenditure environment, leading to fewer carrier projects involving approved RF components.
Gross profit for the fiscal 2024 quarter increased by $1.1 million to $5.0 million, and gross margins increased to 29.5% of sales compared to 24.4% of sales in the fiscal 2023 quarter. The increase in gross profit and increase in gross margin was primarily the result of increased efficiencies from facility consolidation, cost reduction initiatives and product mix.
Engineering expenses decreased by $36,000 to $0.7 million in the fiscal 2024 quarter compared to $0.7 million in the fiscal 2023 quarter. The decrease was the result of more concentrated engineering activities coupled with other cost-savings initiatives. Engineering expenses represent costs incurred relating to the ongoing research and development of current and new products.
Selling and general expenses decreased by $0.4 million to $4.7 million (28.1% of sales) compared to $5.1 million (32.9% of sales) in the third quarter last year, primarily due to restructuring of sales and marketing activities along with related cost savings initiatives. We did not incur any one-time charges in the fiscal 2024 quarter.
For the fiscal 2024 quarter, the Custom Cabling segment had pretax income of $0.3 million and the RF Connector segment had a pretax loss of $0.7 million, as compared to $0.4 million loss and $1.4 million loss, respectively, for the comparable quarter last year. The increase in pretax income at the Custom Cabling segment was due to a more favorable product mix. The decrease in the pretax net income at the RF Connector segment was primarily due to decreased sales to some of our distributor customers based on lower levels of inventory kept on hand in the channel, and the lower carrier capital expenditure environment, leading to fewer carrier projects involving approved RF components.
For fiscal 2024 and 2023 quarters, we recorded income tax benefit of $52,000 and $482,000, respectively. The effective tax rate was 6.9% for the fiscal 2024 quarter, compared to 22.7% for the fiscal 2023 quarter. The change in the effective tax rate from the fiscal 2024 quarter to fiscal 2023 quarter was primarily driven by the recording of a valuation allowance of $3.6 million on our deferred tax asset.
For the fiscal 2024 quarter, net loss was $0.7 million and fully diluted loss per share was $0.07, compared to a net loss of $1.6 million and fully diluted loss per share of $0.16 for the fiscal 2023 quarter. For the fiscal 2024 quarter, the diluted weighted average shares outstanding were 10,495,082 as compared to 10,290,265 for the fiscal 2023 quarter.
Nine Months Ended July 31, 2024 vs. Nine Months Ended July 31, 2023
Net sales for the nine months ended July 31, 2024 (the “fiscal 2024 nine-month period”) of $46.4 million decreased by 17.6%, or $9.9 million, compared to the nine months ended July 31, 2023 (the “fiscal 2023 nine-month period”). The decrease in net sales is attributable mainly to the RF Connector segment, which decreased by $6.5 million, or 18.6%, to $28.4 million compared to $34.9 million in the fiscal 2023 nine-month period, primarily due to decreased sales to some of our distributor customers based on lower levels of inventory kept on hand in the channel, and the lower carrier capital expenditure environment, leading to fewer carrier projects involving approved RF components. The Net sales for the fiscal 2024 nine-month period at the Custom Cabling segment decreased by $3.4 million, or 15.9%, to $18.0 million compared to $21.4 million in the fiscal 2023 nine-month period, primarily due to a decrease in sales of hybrid fiber cables to wireless customers at Cables Unlimited.
Gross profit for the fiscal 2024 nine-month period decreased by $1.9 million to $13.1 million while gross margins increased to 28.2% of sales compared to 26.7% of sales in the fiscal 2023 nine-month period. The decrease in gross profit was primarily a result of the decrease in sales while gross margins remained relatively consistent due to product mix and other cost-savings initiatives.
Engineering expenses decreased $0.4 million to $2.1 million for the fiscal 2024 nine-month period compared to $2.5 million in the fiscal 2023 nine-month period. The decrease was primarily the result of headcount reduction, more concentrated engineering activities and other cost-savings initiatives. Engineering expenses represent costs incurred relating to the ongoing research and development of new products.
Selling and general expenses decreased by $1.3 million to $13.9 million (30.0% of sales) compared to $15.2 million (27.0% of sales) in the nine-month period last year primarily due to a decrease in variable compensation related to commissions and bonuses, resulting from lower sales. We also realized cost savings from restructuring, coupled with reduced general office and IT expenses. We incurred one-time charges of $0.2 million relating to consulting spend, severance, and an inventory appraisal in fiscal 2024.
For the fiscal 2024 nine-month period, pretax income for the Custom Cabling segment was $0.4 million and the pretax loss for the RF Connector segment was $3.1 million, as compared to $1.0 million loss and $1.0 million loss, respectively, for the comparable nine-month period last year.
For the fiscal 2024 and 2023 nine-month periods, we recorded income tax provision (benefit) of $2,766,000 and ($806,000), respectively. The effective tax rate was (76.9%) for the fiscal 2024 nine-month period, compared to 26.6% for the fiscal 2023 nine-month period. The change in effective tax rate for the fiscal 2024 and 2023 nine-month periods was primarily driven by the recording of a valuation allowance of $3.6 million on our deferred tax asset.
For the fiscal 2024 nine-month period, net loss was $6.4 million and fully diluted loss per share was ($0.61) per share as compared to a net loss of $2.2 million and fully diluted loss per share of $0.22 per share for the fiscal 2023 nine-month period. For the fiscal 2024 nine-month period, the diluted weighted average shares outstanding were 10,466,862 as compared to 10,267,652 for the fiscal 2023 nine-month period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required under this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide reasonable assurance only of achieving the desired control objectives, and we necessarily are required to apply our judgment in weighing the costs and benefits of possible new or different controls and procedures. Limitations are inherent in all control systems, so no evaluation of controls can provide absolute assurance that all control issues and any fraud have been detected. Because of the inherent limitations, we regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, and to maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of July 31, 2024.
Changes in Internal Control Over Financial Reporting
During the second quarter of fiscal 2024, the Company implemented additional internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
As described throughout this Quarterly Report, on March 15, 2024, the Company entered into the EBC Credit Agreement, under which proceeds from the initial drawings under the EBC Credit Facilities were used to repay in full the outstanding obligations under the BofA Loan Agreement. As a result of the EBC Credit Agreement and the loan structure, the Company implemented various processes and procedures which include continuous monitoring of the outstanding borrowings balance and the available borrowings, along with various updates to the payment process.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. As of the date of this report, we are not subject to any proceeding that is not in the ordinary course of business or that is material to the financial condition of our business.
Item 1A. Risk Factors
Our business, financial condition and operating results are affected by a number of factors, whether currently known or unknown, including risks specific to us or our industry, as well as risks that affect businesses in general. In addition to the information and risk factors set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2023, filed with the SEC on January 29, 2024. The risks disclosed in such Annual Report and in this Quarterly Report could materially adversely affect our business, financial condition, cash flows, or results of operations and thus our stock price. Other than the risk factor set forth below, we believe there have been no material changes in our risk factors from those disclosed in the Annual Report. However, additional risks and uncertainties not currently known or which we currently deem to be immaterial may also materially adversely affect our business, financial condition, or results of operations.
These risk factors may be important to understanding other statements in this Quarterly Report and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q. Because of such risk factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
The following is an updated risk factor to the risk factors previously disclosed and included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2023:
We entered into a Loan Agreement to fund our acquisition of Microlab, which was subsequently replaced with a new credit facility, which may expose us to additional risks, including risks associated with the inability to repay the loan on a timely basis.
On March 15, 2024, we entered into a new loan and security agreement (the “EBC Credit Agreement”), with Eclipse Business Capital as administrative agent (“EBC”) providing for (i) a senior secured revolving loan facility of up to $15.0 million (the “EBC Revolving Loan Facility”) and (ii) a senior secured revolving credit facility of up to $1.0 million (the “EBC Additional Line” and, together with the EBC Revolving Loan Facility, the “EBC Credit Facilities”) (with a $3.0 million swingline loan sublimit). Pursuant to the terms of the First Amendment to the EBC Credit Agreement, the EBC Additional Line was modified to provide for $1.0 million through July 12, 2024, $666,666.67 from July 13, 2024 through August 11, 2024 and $333,333.34 from August 12, 2024 through September 10, 2024. We used proceeds from the initial drawings under the EBC Credit Facilities to repay in full outstanding obligations under the loan agreement (the “BofA Loan Agreement”) previously entered into by us and Bank of America, N.A. (the “BofA”) used to fund our acquisition of Microlab. Additional proceeds from the initial drawings under the EBC Credit Facilities were used to pay fees, premiums, costs and expenses, including fees payable in connection with the EBC Credit Agreement. The BofA Loan Agreement was terminated upon entry into the EBC Credit Agreement and is no longer in effect.
Availability of borrowings under the EBC Credit Facilities will be based upon a borrowing base formula and periodic borrowing base certifications valuing certain of our accounts receivable and inventories, as reduced by certain reserves, if any.
In the absence of an Event of Default (as defined in the EBC Credit Agreement) or certain other events (including the inability of EBC to determine the secured overnight financing rate “SOFR”), borrowings under (a) the EBC Revolving Loan Facility accrue interest at a rate of the one-month term SOFR reference rate plus an adjustment of 0.11448% (“Adjusted Term SOFR”) plus 5.00%, and (b) the EBC Additional Line accrue interest at a rate of Adjusted term SOFR plus 6.50%, in each case subject to a floor of 2.00% for Adjusted Term SOFR. We will be required to pay a commitment fee for the unused portion of the EBC Revolving Loan Facility of 0.50% per annum. In addition to the foregoing unused commitment fee, we are required to pay certain other administrative fees pursuant to the terms of the EBC Credit Agreement.
Our failure to comply with the terms of the EBC Credit Agreement could result in a default under the agreement. EBC may accelerate the payment terms of the EBC Credit Agreement upon the occurrence of certain events of default set forth therein. Any event that could require us to repay debt prior to its due date could have a material adverse impact on our financial condition and results of operations and may affect our ability to continue as a going concern. Further, any renegotiation, refinancing or additional indebtedness that we incur in the future may subject us to further covenants.
Our ability to comply with terms contained in the EBC Credit Agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Even if we are able to comply with all of the applicable covenants and terms, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that we believe would be beneficial to us. In addition, our obligations under the EBC Credit Agreement are secured, on a first-priority basis, and such security interests could be enforced by EBC in the event of default by us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Insider Trading Arrangements
During the quarterly period ended July 31, 2024, director or officer adopted or terminated any Rule 10b5-1 trading arrangement, and/or any non-Rule 10b5-1 trading arrangement (as such terms are defined pursuant to Item 408 of Regulation S-K).
Item 6. Exhibits
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101.INS |
Inline XBRL Instance Document. |
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101.SCH |
Inline XBRL Taxonomy Schema. |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase. |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase. |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase. |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase. |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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RF INDUSTRIES, LTD. |
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Date: September 16, 2024 |
By: |
/s/ Robert Dawson |
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Robert Dawson Chief Executive Officer (Principal Executive Officer) |
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Date: September 16, 2024 |
By: |
/s/ Peter Yin |
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Peter Yin Chief Financial Officer (Principal Financial and Accounting Officer) |
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