R F INDUSTRIES LTD - Quarter Report: 2021 July (Form 10-Q)

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)

Item 1: Financial Statements (continued)

RF INDUSTRIES, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

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)

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) 

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)

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)

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 for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, which are normal and recurring, have been included in order to make the information not misleading. Information included in the consolidated balance sheet as of October 31, 2020 has been derived from, and certain terms used herein are defined in, the audited consolidated financial statements of RF Industries, Ltd. as of October 31, 2020 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2020 that was previously filed with the Securities and Exchange Commission (“SEC”). Operating results for the nine months ended July 31, 2021 are not necessarily indicative of the results that may be expected for the year ending October 31, 2021. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Form 10-K.

Principles of consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of RF Industries, Ltd. and our four wholly-owned subsidiaries: Cables Unlimited, Inc. (“Cables Unlimited”), Rel-Tech Electronics, Inc. (“Rel-Tech”), C Enterprises, Inc. (“C Enterprises”), and Schroff Technologies International, Inc. (“Schrofftech”). All references to the “Company,” “we,” “us,” or “our” collectively refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech. All intercompany balances and transactions have been eliminated in consolidation.

Risks and uncertainties

In March 2020, the World Health Organization (the “WHO”) declared coronavirus (“COVID-19”) a pandemic emergency. The COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains, and created significant volatility and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by domestic and international jurisdictions to prevent disease spread, all of which are uncertain and cannot be predicted.

The outbreak impacted our performance for the nine months ended July 31, 2021. During the periods covered by this report, the operations at all locations were affected intermittently as some of our employee schedules were impacted, and as certain customers scaled back operations or otherwise delayed or deferred orders for our products. Because of the impact that COVID-19 had on our operations, in May 2020 we applied for and received loans under the Paycheck Protection Program (“PPP”) of the CARES Act totaling approximately $2.8 million (“PPP Loans”). See Note 13 on discussions of the PPP Loans.

In March 2021, the Internal Revenue Service (“IRS”) released Notice 2021-20, which retroactively eliminated the restriction that prevented employers who received a PPP loan from qualifying for the Employee Retention Credit (“ERC”), which is a refundable tax credit against certain employment taxes. Upon determination that the employer has complied with all of the conditions required to receive the credit, a receivable is recognized and the credit reduces salaries and wages. For the nine months ended July 31, 2021, we qualified and filed to claim the ERC and have recorded this as an other receivable classified in other current assets.

We considered the impact of the COVID-19 related economic slowdown on our evaluation of goodwill and non-amortizable intangibles impairment indicators as of July 31, 2021. Although no impairment indicators were identified, it is possible that impairments could emerge as the impact of the crisis becomes clearer, and those impairment losses could be material.

Fair value measurement

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. The accounting principles generally accepted in the United States of America (“GAAP”) specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the following fair value hierarchy:

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

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; 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, 2021 and October 31, 2020, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and the current portion of the PPP Loans approximated their carrying value due to their short-term nature. See Note 5 for discussion on the fair value of other current liabilities.

Recent accounting standards

Recently issued accounting pronouncements not yet adopted:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. 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. Early adoption is permitted. We are currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements.

Recently issued accounting pronouncements adopted:

In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU requires lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under the current GAAP. Under ASU 2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients. We adopted the standard as of November 1, 2019, the beginning of our fiscal 2020, applying the modified retrospective method. We elected the package of practical expedients permitted under the transition guidance with the new standard, which among other things, allows us to carryforward the historical lease classification. We elected the policy which allows us to combine the nonlease components with their related lease components rather than separating, and the policy election to keep leases with an initial term of 12 months or less off of the balance sheet. Operating leases are included in our consolidated balance sheet as operating lease right of use (“ROU”) assets, other current liabilities, and operating lease liabilities. Finance leases are included in finance ROU assets, other current liabilities, and finance lease liabilities on our consolidated balance sheet. ROU assets represent our right to use an underlying asset for the duration of the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term and is recognized on the consolidated statements of operations. The adoption of the standard resulted in a material recognition of additional ROU assets and lease liabilities of approximately $2.3 million and $2.4 million, respectively, as of November 1, 2019, but did not materially affect our consolidated net loss.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments of this update, the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss should be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The guidance also still gives entities the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. We adopted the standard as of November 1, 2020, the beginning of our fiscal 2021, applying this prospectively. The adoption of the standard did not result in an impairment charge as of July 31, 2021.

Note 2 – Business acquisition

On November 4, 2019, we purchased the business of Schrofftech, a Rhode Island-based manufacturer and marketer of intelligent thermal control systems used by telecommunications companies across the U.S. and Canada, and shrouds for small cell integration and installation. At the closing, in consideration for the Schrofftech business, we paid the sellers $4 million in cash, and, if certain financial targets are met by Schrofftech over a two-year period, agreed to pay additional cash earn-out payments of up to $2.4 million.

The acquisition was accounted for as an acquisition of a business in accordance with the acquisition method of accounting. The acquired assets and assumed liabilities have been recorded at their estimated fair values. We determined the estimated fair values with the assistance of appraisals or valuations performed by an independent third-party specialist. Schrofftech serves the high growth wireless, telecom and cable markets. The Schrofftech business allows us to diversify the types of services provided for our customers in these markets. All manufacturing operations are performed at Schrofftech’s facilities in Rhode Island.

Although the closing occurred on November 4, 2019, the acquisition of Schrofftech is deemed to have become effective for financial accounting purposes as of November 1, 2019. Accordingly, subsequent to November 1, 2019, Schrofftech’s financial results have been included in the results of the Custom Cabling Manufacturing and Assembly segment (“Custom Cabling segment”) as well as in the consolidated statements of operations. Total costs related to the acquisition of Schrofftech were approximately $151,000 and have been expensed as incurred and categorized in selling and general expenses during periods prior to November 1, 2020.

The following table summarizes the components of the purchase price at fair values at November 1, 2019:

The following table summarizes the allocation of the purchase price at fair value at November 1, 2019:

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): 

One vendor accounted for 27% of inventory purchases for the three months ended July 31, 2021, and 17% of inventory purchases for the nine months ended July 31, 2021. Two vendors accounted for 12% and 10% of inventory purchases for the three months ended July 31, 2020, but no vendors accounted for more than 10% of inventory purchases for the nine months ended July 31, 2020. We have arrangements with our vendors to purchase products based on purchase orders that we periodically issue.

Note 4 – Other current assets

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

Pursuant to the CARES Act, eligible employers are able to claim an ERC, which is a refundable tax credit against certain employment taxes. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS. The period assessed for eligibility of the ERC is on a calendar year basis. For the first and second quarter of calendar year 2021, we were eligible to claim the ERC. As of July 31, 2021, the remaining portion of the ERC that we have not yet received is included as other receivables in other current assets.

Note 5 – Accrued expenses

Accrued expenses consist of the following (in thousands):

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

The purchase agreement for the Schrofftech acquisition provides for earn-out payments of up to $2.4 million, which are earned through October 31, 2021. The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure. The earn-out was and will continue to be revalued quarterly using a present value approach and any resulting increase or decrease will be recorded into selling and general expenses. Any changes in the amount of the actual results and forecasted scenarios could impact the fair value. Significant judgment is employed in determining the appropriateness of the assumptions used in calculating the fair value of the earn-out as of the acquisition date. Accordingly, significant variances between actual and forecasted results or changes in the assumptions can materially impact the amount of contingent consideration expense we record in future periods.

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

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of July 31, 2021 (in thousands):

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2020 (in thousands):

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

Note 6 – Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding increased by the effects of assuming that other potentially dilutive securities (such as stock options) outstanding during the period had been exercised and the treasury stock method had been applied. During the three and nine months ended July 31, 2020, we reported a net loss and diluted loss per share is computed the same as basic loss per share as the effect of utilizing the fully diluted share count would have reduced the net loss per share which has an anti-dilutive effect. Therefore, all outstanding stock options are excluded from the computation of diluted loss per share. Potentially issuable securities that are out-of-the-money totaled 298,015 and 402,838 shares for the three months ended July 31, 2021 and 2020, respectively, and 371,338 and 402,838 shares for the nine months ended July 31, 2021 and 2020, respectively. These shares were excluded from the calculation of diluted per share amounts because of their anti-dilutive effect.

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

Note 7 – Stock-based compensation and equity transactions

On December 6, 2019, one employee was granted 50,000 incentive stock options. These options vested 10,000 on the date of grant, and the balance vests as to 10,000 shares per year thereafter on each of the next four anniversaries of December 6, 2019, and expire ten years from the date of grant.

On January 9, 2020, we granted the following equity awards to our managers and officers:

On June 30, 2020, one employee was granted 10,000 incentive stock options. These options vested 2,500 on the date of grant, and the balance vests as to 2,500 shares per year thereafter on each of the next three anniversaries of June 30, 2020, and expire ten years from the date of grant.

On January 12, 2021, we granted a total of 33,500 shares of restricted stock and 67,000 incentive stock options to one manager and three officers. The shares of restricted stock and incentive stock options vest over four years as follows: (i) one-quarter of the restricted shares and options shall vest on January 12, 2022; and (ii) the remaining restricted shares and options shall vest in twelve equal quarterly installments over the next three years. All incentive stock options expire ten years from the date of grant.

On July 16, 2021, our Chief Executive Officer was granted incentive stock options to purchase 50,000 shares. These options immediately vested on the date of grant, and expire ten years from the date of grant.

No other shares or options were granted to Company employees during the three and nine months ended July 31, 2021 and 2020.

The weighted average fair value of employee stock options that were granted during the nine months ended July 31, 2021 and 2020 was estimated to be $3.38 and $3.06, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

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 2021 and 2020 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 of our Annual Report on Form 10-K for the year ended October 31, 2020. A summary of the status of the options granted under our stock option plans as of July 31, 2021 and the changes in options outstanding during the nine months then ended is presented in the table that follows:

Weighted average remaining contractual life of options outstanding as of July 31, 2021: 6.48 years

Weighted average remaining contractual life of options exercisable as of July 31, 2021: 5.59 years

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2021: 6.48 years

Aggregate intrinsic value of options outstanding at July 31, 2021: $2,729,000

Aggregate intrinsic value of options exercisable at July 31, 2021: $1,221,000

Aggregate intrinsic value of options vested and expected to vest at July 31, 2021: $2,713,000

As of July 31, 2021, $587,000 and $311,000 of expenses with respect to nonvested stock options and restricted shares, respectively, has yet to be recognized but is expected to be recognized over a weighted average period of 2.86 and 1.37 years, respectively.

Non-employee directors receive a compensation package of $50,000 annually, which is paid one-half in cash and one-half through the grant of non-qualified awards. For fiscal 2020, compensation payable to non-employee directors was prorated from November 1, 2019 through August 31, 2020. On November 4, 2019, we granted each of our five non-employee directors 3,270 shares of restricted stock. The number of restricted shares granted to each director was determined by prorating $25,000 for the ten months ended August 31, 2020 and dividing by the 20-day average closing stock price ($6.36). These restricted shares vested ratably through August 31, 2020. As compensation for services to be provided until the 2021 annual meeting of stockholders in September 2021, we granted each of our five non-employee directors 5,757 shares of restricted stock, which number was determined by dividing $25,000 by the 20-day average closing stock price ($4.34). On December 31, 2020, a new director joined the Board of Directors. We granted the new director 3,334 shares of restricted stock as payment for the year ending with the 2021 annual meeting. The number of restricted stock was determined by prorating $25,000 for the 8.5 months of service upon joining the Board of Directors through the 2021 annual meeting and dividing by the 20-day average closing stock price ($5.31).

Non-employee directors who are also a chairperson of a committee of the Board receive additional compensation of $15,000 annually. On June 5, 2020, the Board of Directors revised the committee chair compensation so that all future compensation from July 1, 2020 through the next annual meeting of the stockholders will be payable in shares of common stock rather than cash. Shares issued as compensation will be valued at the closing common stock price on the last day of each quarter. Accordingly, on July 31, 2020, each of the four committee chairpersons was awarded 279 shares at $4.47 per share. We account for these shares as stock-based compensation. On September 15, 2020, each of the four committee chairpersons was awarded 3,454 shares of restricted stock as payment for the $15,000 retainer payable to Chairpersons for the year ending with the 2021 annual meeting of stockholders. The number of restricted shares granted to each chairperson was determined by dividing $15,000 by the 20-day average closing stock price ($4.34).

One director was appointed as a chairperson of a new committee effective March 4, 2021, and was also appointed as the chairperson of another committee effective June 15, 2021.  Since directors who service as chairpersons of any of the Board’s committees receive additional compensation, which compensation is payable in shares of restricted stock, for the appointment effective March 4, 2021, the director received 1,344 shares of restricted stock.  The number of shares of restricted stock was determined by prorating $15,000 for the 6.5 months of service upon being appointed chairperson and dividing by the 20-day average closing stock price ($6.04).  For the appointment effective June 15, 2021, the director received 496 shares of restricted stock.  The number of restricted stock was determined by prorating $15,000 for the three months of service upon being appointed chairperson and dividing by the 20-day average closing stock price ($7.56).

Stock option expense

During the three months ended July 31, 2021 and 2020, stock-based compensation expense totaled $374,000 and $166,000, respectively, and was classified in selling and general expenses. During the nine months ended July 31, 2021 and 2020, stock-based compensation expense totaled $634,000 and $449,000, respectively, and was classified in selling and general expenses.

Note 8 – Concentrations of credit risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We maintain our cash and cash equivalents with high-credit quality financial institutions. At July 31, 2021, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $12.9 million.

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

The wireless provider had an accounts receivable balance that accounted for 36% of the total net accounts receivable balance at July 31, 2021. Distributor A and Distributor B had accounts receivable balances that accounted for 21% and 14%, respectively, of the total net accounts receivable balance at July 31, 2020. Although these customers have been on-going major customers of the Company, the written agreements with these customers do not have any minimum purchase obligations and they could stop buying our products at any time and for any reason. A reduction, delay or cancellation of orders from these customers or the loss of these customers could significantly reduce our future revenues and profits.

Note 9 – Segment information

We aggregate operating divisions into two 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, 2021, we had two segments – RF Connector and Cable Assembly (“RF Connector segment”) and Custom Cabling segment.

The RF Connector segment consisted of one division and the Custom Cabling segment was composed of four divisions. The five divisions that met the quantitative thresholds for segment reporting are the RF Connector and Cable Assembly division (“RF Connector division”), Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech. While each segment has similar products and services, there was little overlapping of these services to their customer base. The biggest difference in segments is in the channels of sales: sales or product and services for the RF Connector segment were primarily through the distribution channel, while the Custom Cabling segment sales were through a combination of distribution and direct to the end customer.

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

As reviewed by our chief operating decision maker, we evaluate the performance of each segment based on income or loss before income taxes. We charge depreciation and amortization directly to each division within the segment. Accounts receivable, inventory, property and equipment, ROU assets, goodwill and intangible assets are the only assets identified by segment. Except as discussed above, the accounting policies for segment reporting are the same for the Company as a whole.

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, 2021 and 2020 (in thousands):

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the three months ended July 31, 2021 and 2020 are as follows (in thousands): 

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the nine months ended July 31, 2021 and 2020 are as follows (in thousands): 

Note 10 – Income taxes

We use an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate, to determine 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 $272,000 and ($137,000) for the three months ended July 31, 2021 and 2020, respectively. The effective tax rate was 22.7% for the three months ended July 31, 2021, compared to (62.5%) for the three months ended July 31, 2020. For the nine months ended July 31, 2021 and 2020, we recorded income tax provisions (benefits) of $727,000 and ($148,000), respectively. The effective tax rate was 22.1% for the nine months ended July 31, 2021, compared to 38.2% for the nine months ended July 31, 2020. The effective tax rates for the three and nine months ended July 31, 2021 are excluding the PPP Loan forgiveness classified in Other Income. The change in effective tax rate for the nine months ended July 31, 2021 compared to the nine months ended July 31, 2020 was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to our forecasted book income or loss in each period.

We had $126,000 and $107,000 of unrecognized tax benefits, inclusive of interest and penalties, as of July 31, 2021 and October 31, 2020, respectively. The unrecognized tax benefits, if recognized, would result in a net tax benefit of $32,000 as of July 31, 2021.

Note 11 – Intangible assets

Intangible assets consist of the following (in thousands): 

Amortization expense for the nine months ended July 31, 2021 and the year ended October 31, 2020 was $347,000 and $692,000, respectively. As of July 31, 2021, the weighted-average amortization period for the amortizable intangible assets is 5.66 years.

Note 12 – Commitments

We have operating leases for corporate offices, manufacturing facilities, and certain storage units. Our leases have remaining lease terms of 1 year to 3 years, some of which include options to extend the leases for up to 5 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 $15,000 per month.

We also have other operating leases for certain equipment. The components of our facilities and equipment operating lease expenses for the period ended July 31, 2021 were as follows (in thousands):

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

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

As of July 31, 2021, operating lease ROU assets was $1.5 million and operating lease liability totaled $1.5 million, of which $848,000 is classified as current. There were no finance leases as of July 31, 2021.

Note 13 – Line of credit and PPP loans

In November 2019, we entered into an agreement for a revolving line of credit (“LOC”) in the amount of $5.0 million. Amounts outstanding under the LOC shall bear interest at a rate of 2.0% plus LIBOR Daily Floating Rate (“base interest rate”), with interest payable on the first day of each month. Borrowings under the LOC are secured by a security interest in certain assets of the Company. The LOC contains certain loan covenants. Failure to maintain the loan covenants may constitute an event of default, resulting in all outstanding amounts of principal and interest becoming immediately due and payable. All outstanding principal and interest is due and payable on December 1, 2021. On December 30, 2020, we closed the LOC with no amounts outstanding.

In May 2020 we applied for and received loans under the PPP of the CARES Act totaling approximately $2.8 million (“PPP Loans”). The funds from the PPP Loans were used to retain employees, maintain payroll and benefits, and make lease and utility payments. Without the PPP Loans, we would have made material reductions in our workforce (particularly at Cables Unlimited). As of July 31, 2021, the full amount of the PPP Loans has been forgiven and considered paid in full (including applicable interest).

Note 14 – Cash dividend and declared dividends

We did not pay any dividends during the three or nine months ended July 31, 2021, nor did we pay any dividends during the three months ended July 31, 2020. During the nine months ended July 31, 2020, we paid dividends of $0.02 per share for a total of $388,000. 

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 the Company’s future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “except,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company 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. The Company is under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in its expectations.

The following discussion should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company’s business, including without limitation the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Risk Factors,” and the audited consolidated financial statements and related notes included in the Company’s Annual Report filed on Form 10-K for the year ended October 31, 2020 and other reports and filings made with the Securities and Exchange Commission.

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.

Earn-out Liability

The purchase agreement for the acquisition of Schrofftech provides for an earn-out payment of up to $2.4 million, which amount is earned through October 31, 2021. The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure. The earn-out was and will continue to be revalued quarterly using a present value approach, and any resulting increase or decrease will be recorded into selling and general expenses. Any changes in the amount of the actual results and forecasted scenarios could impact the fair value. Significant judgment is employed in determining the appropriateness of the assumptions used in calculating the fair value of the earn-out as of the acquisition date. Accordingly, significant variances between actual and forecasted results or changes in the assumptions can materially impact the amount of contingent consideration expense we record in future periods.

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 coaxial and specialty cables and connectors, fiber optic cables and connectors, and electrical and electronic specialty cables and components. Through our manufacturing and production facilities, we provide a wide selection of interconnect products and solutions primarily to telecommunications carriers and equipment manufacturers, wireless and network infrastructure carriers and manufacturers and to various original equipment manufacturers (“OEMs”) in several market segments. Since the acquisition of Schrofftech in November 2019, we also manufacture and sell energy-efficient cooling systems and integrated small cell solutions and related components.

We operate through two reporting segments: (i) the RF Connector and Cable Assembly (“RF Connector”) segment, and (ii) the Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment. The RF Connector segment primarily designs, manufactures, markets and distributes a broad range of connector and cable products, including coaxial connectors and cable assemblies that are integrated with coaxial connectors, used in telecommunications and information technology OEM markets and other end markets. The Custom Cabling segment designs, manufactures, markets and distributes custom copper and fiber cable assemblies, complex hybrid fiber optic and power solution cables, electromechanical wiring harnesses, wiring harnesses for a broad range of applications in a diverse set of end markets, energy-efficient cooling systems for wireless base stations and remote equipment shelters and custom designed, pole-ready 5G small cell integrated enclosures.

For the nine months ended July 31, 2021, most of our revenues were generated from the Custom Cabling segment from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which collectively accounted for 70% of the Company’s total sales. Revenues from the RF Connector segment were generated from the sales of RF connector products and cable assemblies and accounted for 30% of total sales for the nine months ended July 31, 2021. The RF Connector segment mostly sells standardized products regularly used by customers and, therefore, has a more stable revenue stream. On the other hand, the Custom Cabling segment mostly designs, manufactures, and sells customized cabling and wireless-related equipment under larger purchase orders. Accordingly, the Custom Cabling segment is more dependent upon larger project orders, and its revenues are, therefore, more volatile than the revenues of the RF Connector segment.

In March 2020, the World Health Organization (the “WHO”) declared coronavirus (“COVID-19”) a pandemic emergency. The COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains, and created significant volatility and disruption of financial markets. The global impact of the outbreak has been rapidly evolving and certain jurisdictions, including in regions where we or third parties on which we rely have manufacturing facilities, have also reacted by instituting quarantines, restrictions on travel, social distancing protocols and restrictions on types of business that may continue to operate. While we have continued our operations during the pandemic, the impact of the COVID-19 pandemic has affected both our operations and those of our vendors and customers. Our operations in both the 2020 and 2021 periods were negatively affected by partial shutdowns of our facilities (particularly in the Northeast), by changes that we had to make on our operating methods and procedures, and by a fluctuating workforce as at times, some of our employees stayed at home. Many of our customers and vendors have likewise had temporary closures of their facilities and have otherwise been impacted by changes in their industries. As a result, there has been some volatility in the overall demand for our products, and certain costs have increased. We have taken measures to protect the health and safety of our employees, and we continue to work with our customers and vendors to minimize potential disruptions in addressing the challenges posed by this global pandemic.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by domestic and international jurisdictions to prevent disease spread, all of which are uncertain and cannot be predicted. The outbreak impacted our performance in fiscal year 2020 and for the nine months ended July 31, 2021. Because of the impact that COVID-19 had on our operations, in May 2020 we applied for and received loans under the Paycheck Protection Program (“PPP”) of the CARES Act totaling approximately $2.8 million (“PPP Loans”). The funds from the PPP Loans were used to retain employees, maintain payroll and benefits, and make lease and utility payments. Without the PPP Loans, we would have made material reductions in our workforce (particularly at Cables Unlimited). In February 2021, all of the $2.8 million of PPP Loans were forgiven and considered paid in full (including applicable interest) by the Small Business Administration (“SBA”).

In March 2021, the Internal Revenue Service (“IRS”) released Notice 2021-20, which retroactively eliminated the restriction that prevented employers who received a PPP loan from qualifying for the Employee Retention Credit (“ERC”). This action enabled us to apply for the ERC. The ERC is a refundable tax credit against certain employment wages. Upon determination that the employer has complied with all of the conditions required to receive the credit, a receivable is recognized and the credit reduces salaries and wages. For the nine months ended July 31, 2021, we qualified and filed to claim the ERC and have recorded this as an other receivable classified in other current assets. As of July 31, 2021, the amount of the ERC that we were eligible to receive is $2.8 million, which amount reduced our labor costs during the nine-month period.

Liquidity and Capital Resources

Historically, we have been able to fund our liquidity and other capital requirements from funds we generated from operations. While we still believe that our existing current assets, the amount of cash we anticipate will be generated from on-going operations, and funds we received from the PPP Loans collectively will be sufficient to fund our anticipated liquidity and capital resource needs for at least twelve months from the date of this filing, there are some uncertainties because of the unknown future impact of the COVID-19 pandemic on our business. Nevertheless, we believe that our existing assets and the cash we expect to generate from operations, including from our current backlog of unfulfilled orders, will be sufficient to fund our liquidity needs during the next twelve months from the date of this filing based on the following:

As of July 31, 2021, we had a total of $12.6 million of cash and cash equivalents compared to a total of $15.8 million of cash and cash equivalents as of October 31, 2020. As of July 31, 2021, we had working capital of $30.6 million and a current ratio of approximately 5.4:1 with current assets of $37.6 million and current liabilities of $7.0 million.

As of July 31, 2021, we had $31.9 million of backlog, compared to $6.3 million as of October 31, 2020. Since purchase orders are submitted from customers based on the timing of their requirements, our ability to predict orders in future periods or trends in future periods is limited. Furthermore, purchase orders may be subject to cancellation from customers, although we have not historically experienced material cancellations of purchase orders.

In the nine months ended July 31, 2021, we used $3.6 million of cash in our operating activities despite our net income of $5.4 million. The net outflow of cash was due in part to increased inventory purchases (which increased our inventory balance by $1.8 million), and cash used for other current assets ($3.3 million). The cash used for other current assets represents i) tax payments we made that we are expected to get refunded back of $0.7 million due to the impact of the passage of the Consolidated Appropriations Act (“CAA”) that allows for PPP loan expenses to be deducted on our tax return, and (ii) employee tax payments for which we will receive future tax credits of $2.8 million. The foregoing cash usage was partially offset by an increase in cash from noncash credits of $0.8 million as a result of the passage of the CAA, $0.6 million from depreciation and amortization, $0.6 million from stock-based compensation expense, and $4.9 million from the increase in accounts receivable as a result of the increase in sales.

During the nine months ended July 31, 2021, we also spent $0.2 million on capital expenditures. The cash used in operating activities and the amounts spent on capital expenditures were partially offset by $0.6 million of proceeds that we received from the exercise of stock options. As a result of the cash received from the exercise of stock options that partially offset our net cash used in operating and investing activities, our cash and cash equivalent balance decreased by $3.2 million during the July 31, 2021 nine-month period.

We do not anticipate making material additional capital equipment in the next twelve months. In the past, we have financed some of our equipment and furnishings requirements through capital leases. No additional capital equipment purchases have been currently identified that would require significant additional leasing or capital expenditures during the next twelve months.

In November 2019, we entered into a $5.0 million revolving line of credit that bore interest at a rate of 2.0% plus LIBOR Daily Floating Rate. We never used the line of credit and on December 30, 2020, we closed the line of credit. Accordingly, we currently do not have a credit facility available to us should we need to borrow amounts to fund either our working capital needs or any future unplanned capital expenditures.

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 July 31, 2021 vs. Three Months Ended July 31, 2020

Net sales for the three months ended July 31, 2021 (the “fiscal 2021 quarter”) increased by 60%, or $5.7 million, to $15.3 million as compared to the three months ended July 31, 2020 (the “fiscal 2020 quarter”) due to an increase in net sales at the Custom Cabling segment. Net sales in the Custom Cabling segment increased by $5.4 million, or 91%, to $11.3 million, compared to $5.9 million in the fiscal 2020 quarter primarily because of increased sales of products to wireless carriers, including fiber optic cables used in the build out of 4G and 5G networks. Net sales for the fiscal 2021 quarter at the RF Connector segment increased by $0.3 million, or 9%, to $3.9 million as compared to $3.6 million in the fiscal 2020 quarter due primarily to the general recovery of spend in the wireless market including the return of certain project-related deployments in locations like stadiums, large office buildings, and other public use venues.

Gross profit for the fiscal 2021 quarter increased by $2.3 million to $5.1 million and gross margins increased to 33.1% of sales compared to 28.6% of net sales in the fiscal 2020 quarter due primarily to the ERC that the Company was eligible to claim for the production employees. The ERC refundable employee tax credit reduced our labor costs and thereby increased our gross profits. Excluding the benefit of the ERC, our gross profits for the fiscal 2021 quarter would have been $4.2 million, which is an increase of $1.5 million compared to the fiscal 2020 quarter, and gross margins would have been 27.7%. The increase in gross margins is primarily due to the increase in sales at the Custom Cabling segment in the fiscal 2021 quarter.

Engineering expenses remained flat between the fiscal 2021 and 2020 quarters at $0.4 million due to the ERC the Company was eligible to claim for engineering employees. Excluding the benefit of the ERC, engineering expenses would have been $0.5 million, which is an increase of $0.1 million compared to the fiscal 2020 quarter. This increase is due to the increased business at the Custom Cabling segment, which required added research and development costs to support the business growth. Engineering expenses represent costs incurred relating to the ongoing research and development of new products.

Selling and general expenses increased by $1.0 million to $3.5 million (23% of sales) compared to $2.5 million (26% of sales) in the third quarter last year primarily due to (i) $0.3 million valuation adjustment to the Schrofftech earn-out liability made in the third quarter last year that resulted in a reduction to selling and general expenses (no valuation adjustment was made during the current period), (ii) a non-cash expense resulting from the accelerated vesting of an officer’s unvested remaining options upon the renewal of his employment agreement ($0.2 million), and (iii) increase in commissions payable as a result of the increase in sales ($0.1 million). The ERC the Company was eligible to claim for the general and administrative employees had minimal impact this quarter since most of the ERC for general and administrative employees were taken in our fiscal second quarter. Excluding the benefit of the ERC, selling and general expenses would have been $3.4 million (22% of sales).  This is lower than the selling and general expenses including the ERC as there were some credits included in our fiscal second quarter that were reallocated in the fiscal third quarter to cost of goods sold.

For the fiscal 2021 quarter, the Custom Cabling segment and the RF Connector segment had pretax income of $0.9 million and $0.3 million, respectively, as compared to $0.7 million loss and $0.5 million of income, respectively, for the comparable third quarter last year. The pretax income at both the Custom Cabling and RF Connector segments in the fiscal 2021 quarter was primarily due to the increase in sales, and in part, to the ERC the Company was eligible to claim.

For the fiscal 2021 and 2020 quarters, we recorded income tax provisions (benefits) of $272,000 and ($137,000), respectively. The effective tax rate was 22.7% for the fiscal 2021 quarter, compared to (62.5%) for the fiscal 2020 quarter. The change in effective tax rate for the fiscal 2021 and 2020 quarters was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to our forecasted book income or loss in each period.

For the fiscal 2021 quarter, net income was $0.9 million and fully diluted earnings per share was $0.09 per share, compared to a net loss of $0.1 million and fully diluted loss per share of $0.01 per share for the fiscal 2020 quarter. For the fiscal 2021 quarter, the diluted weighted average shares outstanding was 10,150,396 as compared to 9,714,700 for the fiscal 2020 quarter.

Nine Months Ended July 31, 2021 vs. Nine Months Ended July 31, 2020

Net sales for the nine months ended July 31, 2021 (the “fiscal 2021 nine-month period”) of $36.3 million increased by 12%, or $4.0 million, compared to the nine months ended July 31, 2020 (the “fiscal 2020 nine-month period”) due primarily to an increase in sales at the Custom Cabling segment. Net sales at the Custom Cabling segment increased by $3.5 million, or 16%, to $25.3 million compared to $21.8 million in the fiscal 2020 nine-month period. The increase reflects the increase in sales to wireless carriers, including sales of fiber optic cables used in the build out of 4G and 5G networks. Net sales for the fiscal 2021 nine-month period at the RF Connector segment increased by $0.5 million, or 5%, to $11.1 million compared to $10.6 million in the fiscal 2020 nine-month period.

Gross profit for the fiscal 2021 nine-month period increased by $3.9 million to $12.4 million and gross margins increased to 34.2% of sales from 26.5% of sales in the fiscal 2020 nine-month period. The increase in gross profit and gross margins was primarily due to the ERC that the Company was eligible to claim for production employees. The ERC refundable employee tax credit reduced our labor costs and thereby increased our gross profits. Excluding the benefit of the ERC, our gross profits for the fiscal 2021 nine-month period would have been $9.8 million, which is an increase of $1.2 million compared to the fiscal 2020 nine-month period, and gross margins would have been 27.0%.

Engineering expenses decreased $0.6 million to $1.0 million for the fiscal 2021 nine-month period compared to $1.6 million in the fiscal 2020 nine-month period primarily due to the ERC the Company was eligible to claim for engineering employees. Excluding the benefit of the ERC, engineering expenses would have been $1.3 million, which is a decrease of $0.2 million compared to the fiscal 2020 nine-month period. This decrease is due to a reduction in engineering marketing personnel, which costs are included in the engineering costs.

Selling and general expenses increased by $0.7 million to $8.1 million (22% of sales) compared to $7.4 million (23% of sales) in the nine-month period last year primarily due to (i) smaller valuation adjustment to the Schrofftech earn-out liability ($0.4 million) compared to the valuation adjustment in the nine-month period last year ($0.7 million), (ii) the non-cash expense resulting from the accelerated vesting of an officer’s unvested remaining options ($0.2 million), and (iii) increase in commissions due to the increase in sales ($0.1 million). The increase is also due in part to the hiring of additional sales people in the last half of the 2020 fiscal year and in the first quarter of fiscal 2021. Excluding the benefit of the ERC, selling and general expenses would have been $8.7 million (24% of sales), which is an increase of $1.1 million compared to the fiscal 2020 nine-month period.

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

For the fiscal 2021 nine-month period, pretax income for the Custom Cabling segment and the RF Connector segment was $1.1 million and $2.2 million, respectively, as compared to $1.9 million loss and $1.5 million of income, respectively, for the comparable nine-month period last year. The pretax income at the Custom Cabling and RF Connector segments in the nine-month period of fiscal 2021 was primarily due to the ERC the Company was eligible to claim and the PPP Loan forgiveness.

For the fiscal 2021 and 2020 nine-month periods, we recorded income tax provisions (benefits) of $727,000 and ($148,000), respectively. The effective tax rate was 22.1% for the fiscal 2021 nine-month period, compared to 38.2% for the fiscal 2020 nine-month period. The fiscal 2021 nine-month period’s effective tax rate is excluding the PPP Loan forgiveness classified in Other Income. The change in effective tax rate for the fiscal 2021 and 2020 nine-month periods was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to our forecasted book income or loss in each period.

For the fiscal 2021 nine-month period, net income was $5.4 million and fully diluted income per share was $0.53 per share as compared to a net loss of $0.2 million and fully diluted loss per share of $0.02 per share for the fiscal 2020 nine-month period. For the fiscal 2021 nine-month period, the diluted weighted average shares outstanding was 10,131,172 as compared to 9,661,054 for the fiscal 2020 nine-month period.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Nothing to report.

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 SEC’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, we concluded that our disclosure controls and procedures were effective as of that date.

Changes in Internal Control Over Financial Reporting

During the third quarter of fiscal 2021, there were no changes in the 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.

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

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020 filed with the SEC, which describe various risks and uncertainties to which we are or may become subject. Further, the current coronavirus (“COVID-19”) pandemic and actions taken to address the pandemic may exacerbate the risks described in our SEC reports. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

The COVID-19 pandemic has adversely impacted, and poses risks to, our business, the nature and extent of which are highly uncertain and unpredictable. In March 2020, the WHO characterized COVID-19 as a pandemic. This pandemic has resulted in a global health crisis that is adversely affecting broader economies, financial markets, and the business environment worldwide. We are monitoring the global impact of the COVID-19 pandemic and taking steps to mitigate the accompanying impact on our business by working with our employees, customers, suppliers, and other stakeholders. The pandemic is adversely affecting, and is expected to continue to adversely affect, certain elements of our business. Portions of our workforce may be unable to work effectively due to illness and containment measures, including quarantines, illness precautions, travel restrictions, and other restrictions. We experienced volatility in customer demand as their businesses were impacted by the pandemic. If the pandemic continues, recurs, or worsens, we may experience additional adverse impacts on our operational and commercial activities, including rising costs, volatility in customer orders and purchases and declines in our collections of accounts receivable. Furthermore, the pandemic has impacted and may further impact the broader U.S. economy, including negatively impacting economic growth, the proper functioning of financial and capital markets and interest rates, all of which could lead to a decline in our net sales. Due to the speed with which the situation is developing, the breadth of its spread and the range of governmental and community reactions thereto, there is uncertainty around its duration, ultimate impact and the timing of recovery. Therefore, the pandemic could lead to an extended disruption of economic activity and the impact on our stock price, access to capital, consolidated results of operations, financial position and cash flows could be material.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding the shares of common stock cancelled, and deemed to have been repurchased, during the three months ended July 31, 2021 in connection with employee tax withholding for shares of restricted stock that vested under our 2020 Equity Incentive Plan.

Item 3. Defaults upon Senior Securities

Nothing to report.

Item 4. Mine Safety Disclosures

Nothing to report.

Item 5. Other Information

Nothing to report.

Item 6. Exhibits

SIGNATURES

In accordance with 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.