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, 2022 and other reports and filings made
with the Securities and Exchange Commission.
Critical Accounting Policies
Our unaudited condensed consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). The preparation of these consolidated financial statements
requires us to make significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosure of
contingent assets and liabilities. We evaluate our estimates, including those
related to bad debts, inventory reserves, earn-out liabilities, and
contingencies on an ongoing basis. We base our estimates on historical
experience and on various other assumptions that are believed to be appropriate
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost
determined using the weighted average cost method of accounting. Certain items
in inventory may be considered obsolete or excess and, as such, we periodically
review our inventories for excess and slow moving items and make provisions as
necessary to properly reflect inventory value. Because inventories have, during
the past few years, represented up to one-fourth of our total assets, any
reduction in the value of our inventories would require us to take write-offs
that would affect our net worth and future earnings.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts based upon our assessment of
various factors. We consider historical experience, the age of the accounts
receivable balance, credit quality of our customers, current economic conditions
and other factors that may affect a customer's ability to pay.
Long-Lived Assets Including Goodwill
We assess property, plant and equipment and intangible assets, which are
considered definite-lived assets, for impairment. Definite-lived assets are
reviewed when there is evidence that events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. We measure
recoverability of these assets by comparing the carrying amounts to the future
undiscounted cash flows the assets are expected to generate. If property and
equipment and intangible assets are considered to be impaired, the impairment to
be recognized equals the amount by which the carrying value of the asset exceeds
its fair market value.
We amortize our intangible assets with definite useful lives over their
estimated useful lives and review these assets for impairment.
We test our goodwill and trademarks and indefinite-lived assets for impairment
at least annually or more frequently if events or changes in circumstances
indicate these assets may be impaired. These events or circumstances require
significant judgment and could include a significant change in the business
climate, legal factors, operating performance indicators, competition and sale
or disposition of all or a portion of a division. This analysis requires
significant judgments, including estimation of future cash flows, which is
dependent on internal forecasts, estimation of the long-term rate of growth for
our business, estimation of the useful life over which cash flows will occur,
and determination of our weighted average cost of capital.
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Income Taxes
We record a tax provision for the anticipated tax consequences of the reported
results of operations. Income taxes are accounted for under the asset and
liability method, under which deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for operating
losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using the currently enacted tax rates as of the date of the financial
statements that apply to taxable income in effect for the years in which those
tax assets are expected to be realized or settled. We record a valuation
allowance to reduce deferred tax assets to the amount that is believed more
likely than not to be realized.
The calculation of the tax provision involves significant judgment in estimating
the impact of uncertainties in the application of GAAP and complex tax laws.
Resolution of these uncertainties in a manner inconsistent with management's
expectations could have a material impact on our financial condition and
operating results.
Stock-based Compensation
We use the Black-Scholes model to value the stock option grants. This valuation
is affected by our stock price as well as assumptions regarding a number of
inputs which involve significant judgments and estimates. These inputs include
the expected term of employee stock options, the expected volatility of the
stock price, the risk-free interest rate and expected dividends.
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,
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 three months ended January 31, 2023, approximately half of our revenues
were generated from the Custom Cabling segment from the sale of fiber optics
cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which
collectively accounted for 51% 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 49% of total sales for the three months ended
January 31, 2023. The RF Connector segment mostly sells standardized products
regularly used by customers and, therefore, has a more stable revenue stream. On
the other hand, the Custom Cabling segment mostly designs, manufactures, and
sells customized cabling and wireless-related equipment under larger purchase
orders. Accordingly, the Custom Cabling segment is more dependent upon larger
orders, and its revenues are therefore, more volatile than the revenues of the
RF Connector segment.
We recently moved into new corporate headquarters located at 16868 Via Del Campo
Court, Suite 200, San Diego, CA 92127. Our phone number remains (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. On March 1, 2022, we
acquired Microlab. In connection with the purchase of Microlab, we entered into
the Credit Facility and borrowed the full $17 million amount available under the
Term Loan. As of the date of this report, we have not borrowed any amounts under
the Revolving Credit Facility. We believe that our existing assets and the cash
we expect to generate from operations (including those of Microlab) and from our
current backlog of unfulfilled orders, will be sufficient to fund our liquidity
needs during the next 12 months from the date of this filing based on the
following:
As of January 31, 2023, we had a total of $3.8 million of cash and cash
equivalents compared to a total of $4.5 million of cash and cash equivalents as
of October 31, 2022. As of January 31, 2023, we had working capital of $25.1
million and a current ratio of approximately 2.5:1 with current assets of $41.8
million and current liabilities of $16.7 million. On March 1, 2022, we used $7.3
million of our cash to fund a portion of the purchase price paid to acquire
Microlab. Nevertheless, we believe that the amount of cash remaining, plus the
amount available to us under the Revolving Credit Facility, will be sufficient
to fund our anticipated liquidity needs.
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As of January 31, 2023, we had $24.5 million of backlog, compared to $27.8
million as of October 31, 2022. The decrease in backlog relates primarily to
shipments made against orders for our hybrid fiber cables. Since purchase orders
are submitted from customers based on the timing of their requirements, our
ability to predict orders in future periods or trends in future periods is
limited. Furthermore, purchase orders may be subject to cancellation from
customers, although we have not historically experienced material cancellations
of purchase orders.
In the three months ended January 31, 2023, we generated $0.9 million of cash in
our operating activities. This net inflow of cash is primarily related to an
increase in other current assets of $2.7 million, the increase in deferred
revenue of $1.1 million, the collections of accounts receivable of $0.8 million,
$0.5 million from depreciation and amortization, and $0.2 million from
stock-based compensation expense. The cash usage was primarily due to accrued
expenses of $3.2 million, payments made to our accounts payable $0.8 million and
our net loss of $1.2 million. The cash generated by other current assets
represents $2.7 million which primarily consists of $1.5 million of
reimbursement for tenant improvements and $1.2 million received from ERC.
During the three months ended January 31, 2023, we also spent $1.1 million on
capital expenditures, and $0.6 million in Term Loan payments. The cash used in
operating activities and the amounts spent on capital expenditures were
partially offset by $0.1 million of proceeds that we received from the exercise
of stock options.
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 any acquisitions we may undertake in the future.
Results of Operations
Three Months Ended January 31, 2023 vs. Three Months Ended January 31, 2022
Net sales for the three months ended January 31, 2023 (the "fiscal 2023
quarter") increased by 8.4%, or $1.4 million, to $18.3 million as compared to
the three months ended January 31, 2022 (the "fiscal 2022 quarter"). Net sales
for the fiscal 2023 quarter at the Custom Cabling segment decreased by $3.7
million, or 28.5%, to $9.3 million, compared to $13.0 million in the fiscal 2022
quarter. The decrease was primarily the result of decreases in sales to
customers in the Tier-1 wireless carrier ecosystem related to our small cell
products and systems and our hybrid fiber cables compared to the prior year
first quarter. Net sales for the fiscal 2023 quarter at the RF Connector segment
increased by $5.2 million, or 130.9%, to $9.1 million as compared to $3.9
million in the fiscal 2022 quarter, primarily due to the addition of Microlab
which accounted for $5.1 million in sales.
Gross profit for the fiscal 2023 quarter increased by $1.0 million to $5.1
million due to the increase in net sales, and gross margins increased to 27.7%
of sales compared to 24.1% of sales in the fiscal 2022 quarter. This is
primarily driven by the addition of Microlab.
Engineering expenses increased by $0.5 million to $1.0 million in the fiscal
2023 quarter compared to $0.5 million in the fiscal 2022 quarter primarily due
to the addition of Microlab which accounted for $0.3 million of the increase. We
also incurred additional engineering expenses during the quarter related to the
engineering efforts associated with our integrated systems products. Engineering
expenses represent costs incurred relating to the ongoing research and
development of current and new products.
Selling and general expenses increased by $1.3 million to $5.3 million (28.9% of
sales) compared to $4.0 million (23.6% of sales) in the first quarter last year
primarily due to Microlab expenses of $1.3 million. We also incurred a one-time
expense related to severance of $50,000 and additional rent expense of $444,000
(of which $387,000 was non-cash) related to lease accounting in the fiscal 2023
quarter.
For the fiscal 2023 quarter, the Custom Cabling segment had a pretax loss of
$921,000 while the RF Connector segment had pretax income of $246,000, as
compared to $314,000 income and $56,000 of income, respectively, for the
comparable first quarter last year. The increase in the pretax net income at the
RF Connector segment was primarily due to the acquisition of Microlab. The
decrease in pretax income at the Custom Cabling segment was due primarily to the
decrease in sales of hybrid fiber cables to a tier-1 wireless customer and a
decrease in sales of small cell products and systems to customers in the Tier-1
wireless ecosystem.
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The benefit for income taxes was 12% and 22% of loss before income taxes for the
fiscal 2023 quarter and the fiscal 2022 quarter, respectively. The change in the
effective tax rate from the fiscal 2022 quarter to fiscal 2023 quarter was
primarily driven by the disproportionate impact of various permanent book-tax
differences with respect to our forecasted book income or loss in each period.
For the fiscal 2023 quarter, net loss was $1.2 million and fully diluted loss
per share was $0.11 per share, compared to a net loss of $277,000 and fully
diluted loss per share of $0.03 per share for the fiscal 2022 quarter. For the
fiscal 2023 quarter, the diluted weighted average shares outstanding was
10,222,540 as compared to 10,067,186 for the fiscal 2022 quarter.
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