R F INDUSTRIES LTD - Quarter Report: 2022 July (Form 10-Q)

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 (“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, have been included in order to make the information not misleading. Information included in the consolidated balance sheet as of October 31, 2021 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, 2021 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2021 that was previously filed with the Securities and Exchange Commission (“SEC”). Operating results for the nine months ended July 31, 2022 are not necessarily indicative of the results that may be expected for the year ending October 31, 2022. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Form 10-K.

Principles of consolidation

The accompanying unaudited condensed consolidated financial statements for the periods ended on or before January 31, 2022 include the accounts of 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”).  The unaudited condensed consolidated financial statements for the three and nine months ended July 31, 2022 include the accounts of RF Industries, Ltd. and our five wholly-owned subsidiaries: Cables Unlimited, Inc. (“Cables Unlimited”), Rel-Tech Electronics, Inc. (“Rel-Tech”), C Enterprises, Inc. (“C Enterprises”), Schroff Technologies International, Inc. (“Schrofftech”), and Microlab/FXR LLC (“Microlab”).  Microlab is a wholly-owned subsidiary that RF Industries, Ltd. acquired on March 1, 2022.  For periods on or before January 31, 2022, references herein to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech and for all periods after January 31, 2022, reference to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, Schrofftech and Microlab.  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.

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 the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 (“CARES Act”) totaling approximately $2.8 million (“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 fiscal year ended October 31, 2021, we qualified and filed to claim the ERC and have recorded this as an other receivable classified in other current assets. As of July 31, 2022, the ERC in other receivable classified in other current assets were $1.7 million.

We considered the impact of the COVID-19 related economic slowdown on our evaluation of goodwill and non-amortizable intangibles impairment indicators as of July 31, 2022. Although no impairment indicators were identified, it is possible that impairments could emerge as the impact of the crisis becomes clearer, and those impairment losses could be material.

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, 2022 and October 31, 2021, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximated their carrying value due to their short-term nature. See Note 5 for discussion on the fair value of other current liabilities.

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 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, 2022 or October 31, 2021.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance was effective for the Company beginning on November 1, 2021 and prescribes different transition methods for the various provisions. The adoption of this standard had no material impact on the Company’s financial statements or related disclosures.

Note 2 – Business acquisition

On March 1, 2022, the Company completed its purchase (the “Purchase Transaction”) of 100% of the issued and outstanding membership interests of Microlab, a New Jersey limited liability company, from Wireless Telecom Group, Inc, a New Jersey corporation (the “Seller”) pursuant to the Membership Interest Purchase Agreement (the “Purchase Agreement”) dated December 16, 2021, with the Seller. The consideration for the Purchase Transaction was $24,250,000, subject to certain post-closing adjustments as set forth in the Purchase Agreement. The purchase price was paid in cash at the closing. The Company funded $17 million of the cash purchase price from the funds obtained under the Term Loan (as defined in Note 13) and paid the remaining amount of the cash purchase price with cash on hand. During the three months ended July 31, 2022, we paid an additional $225,000 in purchase consideration as a result of certain post-closing adjustments relating to net working capital.

The acquisition was accounted for with the acquisition method of accounting. The acquired assets and assumed liabilities have been recorded at their estimated fair values. We determined the estimated fair values with the assistance of appraisals or valuations performed by an independent third-party specialist. Microlab designs and manufactures high-performance RF and Microwave products enabling signal distribution and deployment of in-building DAS (distributed antenna systems), wireless base stations and small cell networks. The Microlab acquisition further diversifies and strengthens the portfolio of products that we offer to the market and allows us to provide a more complete solution to our customers in key market segments. All manufacturing operations are performed at Microlab’s facilities in New Jersey.

The acquisition closed on March 1, 2022, accordingly, subsequent to March 1, 2022, Microlab’s financial results have been included in the results of the RF Connector and Cable Assembly (“RF Connector”) segment as well as in the consolidated statements of operations. The Company expects the goodwill recorded to be deductible for income tax purposes. Acquired amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives ranging from one to ten years. Total costs, as of July 31, 2022, related to the acquisition of Microlab were approximately $1.3 million and have been expensed as incurred and categorized in selling and general expenses.

The following table summarizes the components of the purchase price at fair values at March 1, 2022:

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

The current purchase price allocation is preliminary. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition dates during the measurement periods. Any adjustments to the preliminary purchase price allocation identified during the measurement period, which will not exceed one year from the acquisition date, will be accounted for prospectively.

The following unaudited pro forma financial information presents the combined operating results of the Company and Microlab as if both acquisitions had occurred as of the beginning of the earliest period presented. Pro forma data is subject to various assumptions and estimates and is presented for informational purposes only. This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results.

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

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): 

For the three months ended July 31, 2022, one vendor accounted for 17% of inventory purchases, while one vendor accounted for 27% of inventory purchases for the three months ended July 31, 2021. For the nine months ended July 31, 2022, one vendor accounted for 28% of inventory purchases and one vendor accounted for 17% of inventory purchases for the nine months ended July 31, 2021. We have arrangements with our vendors to purchase products based on purchase orders that we periodically issue.

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

Note 5 – Accrued expenses

Accrued expenses consist of the following (in thousands):

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

Note 6 – Earnings per share

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

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

Note 7 – Stock-based compensation and equity transactions

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

On January 10, 2022, we granted a total of 39,666 shares of restricted stock and 106,001 incentive stock options to one manager and three officers. 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 10, 2023; 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 May 2, 2022, we granted a total of 39,000 incentive stock options to the following:

No other shares or options were granted to Company employees during the three and nine months ended July 31, 2022 and 2021.

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

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 2022 and 2021 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, 2021. A summary of the status of the options granted under our stock option plans as of July 31, 2022 and the changes in options outstanding during the nine months then ended is presented in the table that follows:

Weighted average remaining contractual life of options outstanding as of July 31, 2022: 6.86 years

Weighted average remaining contractual life of options exercisable as of July 31, 2022: 6.12 years

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2022: 6.87 years

Aggregate intrinsic value of options outstanding at July 31, 2022: $992,000

Aggregate intrinsic value of options exercisable at July 31, 2022: $497,000

Aggregate intrinsic value of options vested and expected to vest at July 31, 2022: $984,000

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

Under the compensation policies adopted by the Compensation Committee, directors who also are officers and/or employees of the Company do not receive any compensation for serving on the Board. For their service as directors beginning in 2020 until the annual meeting of stockholders held in 2021, non-employee directors (i.e., directors who are not employed by the Company as officers or employees) were awarded $50,000 as Board fees, which amount was payable (a) one-half in cash ($25,000), with payments made on a quarterly basis, and (b) one-half through the grant of restricted shares that vest on a quarterly basis. In addition, the Chairman of the Board of Directors and the Chair of each committee of the Board of Directors received an annual retainer of $15,000, also payable in restricted shares, that vests in four equal quarterly installments commencing on September 15, 2020 and ending on the earlier of September 15, 2021 or the next annual meeting of stockholders. In each case, the equity portion of the award was calculated based on the 20-day average trailing closing price of the Company's common stock from the date of grant ($4.34); and cash and stock payments were pro-rated for board members who served less than the entire service period during fiscal 2021.

On September 8, 2021, the Board of Directors determined that the compensation payable to directors as Board fees for the next year ending with the 2022 annual meeting of stockholders was the same as they received in 2021 (i.e., $50,000). In addition, effective September 8, 2021, the Board determined that both Board fees and additional chair fees would be paid half in cash and half in restricted stock, and, in light of the additional work required by the chairs, revised the chair fees as follows, $25,000 for the Chairman of the Board, $25,000 for the Audit Committee Chair, $20,000 for the Compensation Committee Chair, $20,000 for the Strategic Planning and Capital Allocation Chair, and $10,000 for the Nominating & Governance Chair. The cash and restricted stock fees vest in four equal quarterly installments commencing on December 8, 2021, with the restricted stock portion determined by dividing the amount of the fee by the 20-day average trailing closing price of the Company’s common stock from the date of grant ($8.21). Accordingly, on September 8, 2021, Mr. Holdsworth was granted 5,785 shares of restricted stock; Ms. Cefali, 4,871 shares; Mr. Garland, 4,567 shares; and Mr. Fink, 3,044 shares.

Stock option expense

During the three months ended July 31, 2022 and 2021, stock-based compensation expense totaled $191,000 and $374,000, respectively, and was classified in selling and general expenses. During the nine months ended July 31, 2022 and 2021, stock-based compensation expense totaled $498,000 and $634,000, respectively, and was classified in selling and general expenses.

Note 8 – 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, 2022, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $3.8 million.

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

For the nine months ended July 31, 2022, one wireless carrier customer accounted for 23% of net sales and 19% of total net accounts receivable balance. Two customers, both distributors, accounted for approximately 12% and 11% of net sales and had accounts receivable balances that accounted for 8% and 8%, respectively, of the total net accounts receivable balance for the nine months ended July 31, 2021. Although these customers have been on-going major customers of the Company, the written agreements with these customers do not have any minimum purchase obligations and they could stop buying our products at any time and for any reason. 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, 2022, we had two segments – the RF Connector segment and the Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment.

The RF Connector segment consists of two divisions and the Custom Cabling segment consists of four divisions. The six divisions that met the quantitative thresholds for segment reporting are the RF Connector and Cable Assembly division (“RF Connector division”), Cables Unlimited, Rel-Tech, C Enterprises, Schrofftech, and Microlab. While each segment has similar products and services, there was little overlapping of these services to their customer base. 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 and Microlab divisions constitutes the RF Connector segment, and the Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech divisions constitute the Custom Cabling segment.

As reviewed by our chief operating decision maker, we evaluate the performance of each segment based on income or loss before income taxes. 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, 2022 and 2021 (in thousands):

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

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

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 our quarterly provision (benefit) for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

We recorded income tax provisions of $140,000 and $272,000 for the three months ended July 31, 2022 and 2021, respectively. The effective tax rate was 15.4% for the three months ended July 31, 2022, compared to 15.2% for the three months ended July 31, 2021. For the nine months ended July 31, 2022 and 2021, we recorded income tax provisions of $196,000 and $727,000, respectively. The effective tax rate was 16.4% for the nine months ended July 31, 2022, compared to 22.1% for the nine months ended July 31, 2021. The change in effective tax rate for the nine months ended July 31, 2022 compared to the nine months ended July 31, 2021 was primarily driven by stock compensation windfall benefits and increased benefit from research and development tax credits.

We had $211,000 and $141,000 of unrecognized tax benefits, inclusive of interest and penalties, as of July 31, 2022 and October 31, 2021, respectively. The unrecognized tax benefits, if recognized, would result in a net tax benefit of $206,000 as of July 31, 2022.

Note 11 – Intangible assets

Intangible assets consist of the following (in thousands):

Amortization expense for the nine months ended July 31, 2022 and the year ended October 31, 2021 was $850,000 and $442,000, respectively. As of July 31, 2022, the weighted-average amortization period for the amortizable intangible assets is 9.72 years.

Note 12 – Commitments

We have operating leases for corporate offices, manufacturing facilities, and certain storage units. Our leases have remaining lease terms of 1 year to 10 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 $16,000 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, 2022 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, 2022 were as follows:

As of July 31, 2022, operating lease ROU asset was $14 million and operating lease liability totaled $16.8 million, of which $1.6 million is classified as current. There were no finance leases as of July 31, 2022.

The Cables and Connectors facilities, consisting of four buildings for a total of 21,908 square feet, are leased by RF Industries, Ltd. We renewed the lease effective as of effective August 1, 2022, for 6 month term expiring on January 31, 2023. The monthly rental payment under the new lease currently is $33,957.40 per month.

The Cables and Connectors and C Enterprises facilities will relocate and consolidate into one building consisting of a total86,952 square feet, which is leased by RF Industries, Ltd. The lease will commence December 1, 2022, for a 120-month term expiring November 30, 2032. The monthly rental payments under the lease will be $139,123 per month for the first year and will increase annually. During the three months ended July 31, 2022, the Company obtained possession of the building to begin construction and renovation, which resulted in a lease liability of $15.6 million ($14.9 million in long-term and $726,000 in current lease liability), a right of use asset of $12.8 million and other receivables related to tenant improvement allowance of $2.7 million being recorded. The discount rate used to calculate the lease liability was 3.76%. Further, as a result of the early possession, the Company recognized additional rent expense of $135,000 for the three months ended July 31, 2022.

Note 13 – Term Loan, Line of credit and PPP loans

In February 2022, we entered into an agreement for a revolving line of credit (the “Revolving Credit Facility”) in the amount of $3.0 million and a $17.0 million term loan (the “Term Loan”, and together with the Revolving Credit Facility, the “Credit Facility”). Amounts outstanding under the Revolving Credit Facility shall bear interest at a rate of 2.0% plus the Bloomberg Short-Term Bank Yield Index Rate (“base interest rate”). The maturity date of the Revolving Credit Facility is March 1, 2024. The Company drew down the entire amount of the Term Loan on March 1, 2022. The primary interest rate for Term Loan is 3.76% per annum. The maturity date of the Term Loan is March 1, 2027.

Borrowings under the Credit Facility are secured by a security interest in certain assets of the Company and contains certain loan covenants. The Credit Facility requires the maintenance of certain financial covenants, including: (i) consolidated debt to EBITDA ratio not to exceed 3.00 to 1.00; (ii) consolidated fixed charge coverage ratio of at least 1.25 to 1.00; and (iii) consolidated minimum EBITDA of at least $600,000 for the discrete quarter ending January 31, 2022. In addition, the Credit Facility contains customary affirmative and negative covenants. 

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

In May 2020, we applied for and received loans under the PPP of the CARES Act totaling approximately $2.8 million. 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 our New York Facility). As of April 30, 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, 2022, nor did we pay any dividends during the three or nine months ended July 31, 2021.

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, 2021 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.

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. 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 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 5G small cell integrated enclosures.

For the nine months ended July 31, 2022, most of our revenues were generated from the Custom Cabling segment from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which collectively accounted for 65% of the Company’s total sales. Revenues from the RF Connector segment were generated from the sales of RF connector products and cable assemblies and accounted for 70% of total sales for the nine months ended July 31, 2021. The RF Connector segment mostly sells standardized products regularly used by customers and, therefore, has a more stable revenue stream when compared to the Custom Cabling segment. 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.

The COVID-19 coronavirus pandemic, in its various strains, negatively affected both our operations and those of our customers. The extent of the impact of the COVID-19 pandemic on our future operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by domestic and international jurisdictions to prevent disease spread, all of which are uncertain and cannot be predicted. The outbreak impacted our performance in fiscal year 2021 and for the three and nine months ended July 31, 2022. During the periods covered by this report, the operations at all locations were affected intermittently as some of our employee schedules were impacted, and as certain customers scaled back operations or otherwise delayed or deferred orders for our products. 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 Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 (“CARES Act”)  totaling approximately $2.8 million (“PPP Loans”). 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”), 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 fiscal year ended October 31, 2021, we qualified and filed to claim the ERC and have recorded the credit as a receivable in Other Current Assets. As of July 31, 2022, we carried a $1.7 million the ERC receivable in Other Current Assets.

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. The acquisition of Microlab has affected both our liquidity and our capital resources. In order to acquire Microlab, we used $7.3 million of our cash on hand to pay a portion of the purchase price, thereby reducing the amount available for future acquisitions, for investments in the expansion of our existing businesses and assets, or as a reserve for unanticipated financial requirements. 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. We believe that our remaining and existing assets and the cash we expect to generate from operations and from our current backlog of unfulfilled orders, will be sufficient to fund our liquidity needs during the next twelve months from the date of this filing based on the following:

As of July 31, 2022, we had a total of $5.1 million of cash and cash equivalents with access to $3.0 million under the Revolving Credit Facility. As of July 31, 2022, we had working capital of $30.1 million and a current ratio of approximately 3:1 with current assets of $47.1 million and current liabilities of $17.0 million.

As of July 31, 2022, we had $30.6 million of backlog, compared to $33.3 million as of October 31, 2021. Since purchase orders are submitted from customers based on the timing of their requirements, our ability to predict orders in future periods or trends in future periods is limited. Furthermore, purchase orders may be subject to cancellation from customers, although we have not historically experienced material cancellations of purchase orders.

In the nine months ended July 31, 2022, we generated $0.6 million of cash in our operating activities. This net inflow of cash is primarily related to our net income of $0.9 million, $1.2 million from depreciation and amortization and $0.5 million from stock-based compensation expense, $1.5 million from accounts payable, and $1.3 million from accrued expenses. The cash usage was primarily due to an increase to our inventory purchases ($4 million). The cash used for other current assets represents ($1 million) which consists of ($0.2 million) in other receivables, ($0.5 million) in prepaid expenses and ($0.3 million) in deposits for inventory purchases.

During the nine months ended July 31, 2022, we also spent $0.4 million on capital expenditures, and $24.4 million on the purchase of Microlab offset by $17 million from the Term Loan as noted above. The cash used in operating activities and the amounts spent on capital expenditures were partially offset by $0.1 million of proceeds that we received from the exercise of stock options.

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 leases. Currently, no additional capital equipment purchases have been identified that would require significant additional leasing or capital expenditures during the next twelve 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 July 31, 2022 vs. Three Months Ended July 31, 2021

Net sales for the three months ended July 31, 2022 (the “fiscal 2022 quarter”) increased by 56%, or $8.6 million, to $23.8 million as compared to the three months ended July 31, 2021 (the “fiscal 2021 quarter”) due to an increase in net sales at the Custom Cabling segment and a $6.5 million increase as a result of our consolidation of the results of Microlab, which we acquired in March 2022. Net sales in the Custom Cabling segment increased by $2 million, or 18%, to $13.3 million, compared to $11.3 million in the fiscal 2021 quarter primarily because of increased sales of products to wireless carriers, primarily related to hybrid fiber optic cables used in the build out of 4G and 5G networks. Net sales for the fiscal 2022 quarter at the RF Connector segment increased by $6.6 million, or 167%, to $10.5 million as compared to $3.9 million in the fiscal 2021 quarter, due primarily to the acquisition of Microlab whose results are included in the RF Connector segment.

Gross profit for the fiscal 2022 quarter increased by $2.2 million to $7.2 million and gross margins decreased to 30.4% of sales compared to 33.2% of net sales in the fiscal 2021 quarter due primarily to the ERC that the Company was eligible to claim for the production employees in fiscal quarter 2021. The ERC refundable employee tax credit reduced our labor costs and thereby increased our gross profits in fiscal quarter 2021 compared to fiscal quarter 2022. Excluding the benefit of the ERC, our gross profits for the fiscal 2021 quarter would have been $4.2 million with gross margins of 27.7%.

Engineering expenses increased by $0.4 million to $0.8 million in the fiscal 2022 quarter compared to $0.4 million in the fiscal 2021 quarter due primarily to the additional engineering expenses of $0.3 million from Microlab and to the ERC of $0.5 million the Company was eligible to claim for engineering employees in fiscal 2021 quarter. Engineering expenses represent costs incurred relating to the ongoing research and development of new processes and products.

Selling and general expenses increased by $1.9 million to $5.4 million (23% of sales) compared to $3.5 million (23% of sales) in the third quarter last year due to the ERC the Company was eligible to claim for the general and administrative employees. Excluding the benefit of the ERC, selling and general expenses would have been $3.4 million (22% of sales). The increase is largely due to (i) Microlab accounted for $1.4 million of the selling and general expenses and (ii) acquisition related expenses and other one-time charges (including professional fees, system implementation charges and severance) accounted for $114,000 and (iii) additional rent expense of $135,000 (non-cash) related to lease accounting for the fiscal 2022 quarter. Selling and general expenses also increased as a result of the increase in net sales during the current fiscal 2022 quarter.

For the fiscal 2022 quarter, the Custom Cabling segment and the RF Connector segment had pretax income of $0.6 million and $1.0 million, respectively, as compared to $0.9 million and $0.3 million of income, respectively, for the comparable third quarter last year. The pretax income at both the Custom Cabling and RF Connector segments in the fiscal 2021 quarter was primarily due to the ERC the Company was eligible to claim.

For the fiscal 2022 and 2021 quarters, we recorded income tax provisions of $140,000 and $272,000, respectively. The effective tax rate was 15.4% for the fiscal 2022 quarter, compared to 22.7% for the fiscal 2021 quarter. The change in effective tax rate for the fiscal 2022 and 2021 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 2022 quarter, net income was $0.8 million and fully diluted earnings per share was $0.08 per share, compared to a net income of $0.9 million and fully diluted earnings per share of $0.09 per share for the fiscal 2021 quarter.  For the fiscal 2022 quarter, the diluted weighted average shares outstanding was 10,238,932 as compared to 10,150,396 for the fiscal 2021 quarter.

Nine Months Ended July 31, 2022 vs. Nine Months Ended July 31, 2021

Net sales for the nine months ended July 31, 2022 (the “fiscal 2022 nine-month period”) of $62.3 million increased by 72%, or $26 million, compared to the nine months ended July 31, 2021 (the “fiscal 2021 nine-month period”) due to a stronger fiscal 2022 first quarter and the acquisition of Microlab in March 2022. The increase in net sales is attributable to the Custom Cabling segment, which increased by $15 million, or 60%, to $40.3 million compared to $25.3 million in the fiscal 2021 nine-month period. The increase was primarily in our project-based business which resulted from the upturn in carrier spending in the fiscal 2022 nine-month period. Net sales for the fiscal 2022 nine-month period at the RF Connector segment increased by $10.8 million, or 98%, to $21.9 million compared to $11.1 million in the fiscal 2021 nine-month period of which $9.9 million was a result of the Microlab acquisition.

Gross profit for the fiscal 2022 nine-month period increased by $5.0 million to $17.4 million and gross margins decreased to 28.0% of sales from 34.2% of sales in the fiscal 2021 nine-month period. The increase in gross profit primarily related to the overall increase in sales and decrease in gross margins was primarily due to the ERC the Company was eligible to claim for production employees for the fiscal 2021 nine-month period. Excluding the benefit of the ERC, our gross profits for the fiscal 2021 nine-month period would have been $9.8 million and gross margins would have been 27.0%.

Engineering expenses increased $1.1 million to $2.1 million for the fiscal 2022 nine-month period compared to $1.0 million in the fiscal 2021 nine-month period primarily due to the ERC the Company was eligible to claim for engineering employees in fiscal 2021 quarter as well as the acquisition of Microlab in March 2022. Excluding the benefit of the ERC, engineering expenses would have been $1.3 million, which is an increase of $0.8 million compared to the fiscal 2022 nine-month period which includes $0.7 million from Microlab. Engineering expenses represent costs incurred relating to the ongoing research and development of new products.

Selling and general expenses increased by $5.7 million to $13.8 million (22% of sales) compared to $8.1 million (22% of sales) in the nine-month period last year due to the ERC the Company was eligible to claim on general and administrative employees. Excluding the benefit of the ERC, selling and general expenses would have been $8.7 million (24% of sales), which is an increase of $5.1 million compared to the fiscal 2022 nine-month period. Microlab accounted for $2 million of the selling and general expenses and acquisition related expenses and other one-time charges (including attorney fees, due diligence and broker fees) accounted for $1.6 million for the fiscal 2022 nine-month period. Selling and general expenses also increased as a result of the increase in net sales during the current fiscal 2022 quarter.

For the fiscal 2022 nine-month period, pretax income for the Custom Cabling segment and the RF Connector segment was $1.7 million and $1.6 million, respectively, as compared to $1.1 million and $2.2 million of income, respectively, for the comparable nine-month period last year. The pretax income at the Custom Cabling and RF Connector segments in the nine-month period of fiscal 2021 was primarily due to the ERC the Company was eligible to claim.

For the fiscal 2022 and 2021 nine-month periods, we recorded income tax provisions of $196,000 and $727,000, respectively. The effective tax rate was 16.5% for the fiscal 2022 nine-month period, compared to 22.1% for the fiscal 2021 nine-month period. The change in effective tax rate for the fiscal 2022 and 2021 nine-month periods was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to our forecasted book income or loss in each period.

For the fiscal 2022 nine-month period, net income was $1 million and fully diluted income per share was $0.10 per share as compared to a net income of $5.4 million and fully diluted earnings per share of $0.53 per share for the fiscal 2021 nine-month period.  For the fiscal 2022 nine-month period, the diluted weighted average shares outstanding was 10,233,209 as compared to 10,131,172 for the fiscal 2021 nine-month period.

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

As described throughout our quarterly report, during the quarter ended April 30, 2022, we acquired Microlab, which is now a wholly owned subsidiary of RF Industries. We are currently integrating policies, processes, technology, and operations for the consolidated company and will continue to evaluate our internal control over financial reporting as we develop and execute our integration plans.

Changes in Internal Control Over Financial Reporting

During the third quarter of fiscal year 2022, other than as described above, 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, 2021 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 reports filed with the Securities and Exchange Commission (the “SEC”). 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.

Global economic conditions and any related impact on our supply chain and the markets where we do business could adversely affect our results of operations.

The uncertain state of the global economy (including the current conflict between Russia and Ukraine and related economic and other retaliatory measures taken by the United States, European Union and others) continues to impact businesses around the world. Deteriorating economic conditions or financial uncertainty in any of the markets in which we sell our products could reduce business confidence and adversely impact spending patterns, and thereby could adversely affect our sales and results of operations. In challenging and uncertain economic environments such as the current one, we cannot predict whether or when such circumstances may improve or worsen, or what impact, if any, such circumstances could have on our business, financial condition and results of operations, or on the price of our common stock.

Recent inflationary pressures have increased the cost of energy and raw materials and may adversely affect our results of operations. If inflation continues to rise and further impact the cost of energy and raw materials, we may not be able to offset cost increases to our products through price adjustments without negatively impacting consumer demand, which could adversely affect our sales and results of operations.

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, 2022 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.