rfil20230731

rfil20230731_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-13301

RF INDUSTRIES, LTD.

(Exact name of registrant as specified in its charter)

Nevada	88-0168936
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

16868 Via Del Campo Court, Suite 200 San Diego, California	92127
(Address of principal executive offices)	(Zip Code)
(858) 549-6340
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Common Stock, $0.01 par value per share	RFIL	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

The number of shares of the issuer’s Common Stock, par value $0.01 per share, outstanding as of September 14, 2023 was 10,289,891.

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)

	July 31,		October 31,
	2023		2022
	(Unaudited)		(Note 1)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	4,063	$	4,532
Trade accounts receivable, net of allowance for doubtful accounts of $224 and $126, respectively		9,293		14,812
Inventories		20,204		21,054
Other current assets		1,280		5,849
TOTAL CURRENT ASSETS		34,840		46,247

Property and equipment:
Equipment and tooling		4,764		4,497
Furniture and office equipment		5,491		3,447
		10,255		7,944
Less accumulated depreciation		5,287		4,771
Total property and equipment, net		4,968		3,173

Operating lease right of use assets, net		11,961		13,480
Goodwill		8,085		8,085
Amortizable intangible assets, net		14,017		15,296
Non-amortizable intangible assets		1,174		1,174
Deferred tax assets		2,734		1,816
Other assets		277		295
TOTAL ASSETS	$	78,056	$	89,566

Item 1: Financial Statements (continued)

RF INDUSTRIES, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	July 31,		October 31,
	2023		2022
	(Unaudited)		(Note 1)
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	2,702	$	5,652
Accrued expenses		4,507		8,814
Revolving credit facility		1,000		-
Current portion of Term Loan		2,424		2,424
Current portion of operating lease liabilities		1,418		1,887
Income taxes payable		-		759
TOTAL CURRENT LIABILITIES		12,051		19,536

Operating lease liabilities		14,276		15,025
Term Loan, net of current portion of debt issuance cost		11,325		13,136
TOTAL LIABILITIES		37,652		47,697

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Common stock - authorized 20,000,000 shares of $0.01 par value; 10,289,891 and 10,193,287 shares issued and outstanding at July 31, 2023 and October 31, 2022, respectively		103		102
Additional paid-in capital		25,878		25,118
Retained earnings		14,423		16,649
TOTAL STOCKHOLDERS' EQUITY		40,404		41,869
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	78,056	$	89,566

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)

	Three Months Ended July 31,						Nine Months Ended July 31,
	2023			2022			2023			2022

Net sales	$	15,652		$	23,842		$	56,294		$	62,265
Cost of sales		11,828			16,594			41,263			44,853

Gross profit		3,824			7,248			15,031			17,412

Operating expenses:
Engineering		690			791			2,535			2,101
Selling and general		5,144			5,369			15,186			13,838
Total operating expenses		5,834			6,160			17,721			15,939

Operating (loss) income		(2,010	)		1,088			(2,690	)		1,473

Other expense		(117	)		(177	)		(342	)		(280	)

(Loss) income before (benefit) provision for income taxes		(2,127	)		911			(3,032	)		1,193
(Benefit) provision for income taxes		(482	)		140			(806	)		196

Consolidated net (loss) income	$	(1,645	)	$	771		$	(2,226	)	$	997

(Loss) earnings per share:
Basic	$	(0.16	)	$	0.08		$	(0.22	)	$	0.10
Diluted	$	(0.16	)	$	0.08		$	(0.22	)	$	0.10

Weighted average shares outstanding:
Basic		10,290,265			10,127,244			10,267,652			10,100,767
Diluted		10,290,265			10,238,932			10,267,652			10,233,209

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)

	For the Three Months Ended July 31, 2023
						Additional
	Common Stock					Paid-in			Retained
	Shares			Amount		Capital			Earnings			Total
Balance, May 1, 2023		10,290,377		$	103	$	25,634		$	16,068		$	41,805

Stock-based compensation expense		-			-		246			-			246

Tax withholding related to vesting of restricted stock		(486	)		-		(2	)		-			(2	)

Consolidated net loss		-			-		-			(1,645	)		(1,645	)

Balance, July 31, 2023		10,289,891		$	103	$	25,878		$	14,423		$	40,404

	For the Nine Months Ended July 31, 2023
						Additional
	Common Stock					Paid-in			Retained
	Shares			Amount		Capital			Earnings			Total
Balance, November 1, 2022		10,193,287		$	102	$	25,118		$	16,649		$	41,869

Exercise of stock options		45,000			-		85			-			85

Stock-based compensation expense		-			-		687			-			687

Issuance of restricted stock		54,092			1		-			-			1

Tax withholding related to vesting of restricted stock		(2,488	)		-		(12	)		-			(12	)

Consolidated net loss		-			-		-			(2,226	)		(2,226	)

Balance, July 31, 2023		10,289,891		$	103	$	25,878		$	14,423		$	40,404

Item 1: Financial Statements (continued)

RF INDUSTRIES, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, except share amounts)

	For the Three Months ended July 31, 2022
						Additional
	Common Stock					Paid-In			Retained
	Shares			Amount		Capital			Earnings		Total
Balance, May 1, 2022		10,118,685		$	102	$	24,648		$	15,427	$	40,177

Exercise of stock options		37,927			-		93			-		93

Stock-based compensation expense		-			-		191			-		191

Tax withholding related to vesting of restricted stock		(421	)		-		(3	)		-		(3	)

Consolidated net income		-			-		-			771		771

Balance, July 31, 2022		10,156,191		$	102	$	24,929		$	16,198	$	41,229

	For the Nine Months ended July 31, 2022
						Additional
	Common Stock					Paid-In			Retained
	Shares			Amount		Capital			Earnings		Total
Balance, November 1, 2021		10,058,571		$	101	$	24,301		$	15,201	$	39,603

Exercise of stock options		60,854			1		149			-		150

Stock-based compensation expense		-			-		498			-		498

Issuance of restricted stock		39,666			-		-			-		-

Tax withholding related to vesting of restricted stock		(2,900	)		-		(19	)		-		(19	)

Consolidated net income		-			-		-			997		997

Balance, July 31, 2022		10,156,191		$	102	$	24,929		$	16,198	$	41,229

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)

	Nine Months Ended July 31,
	2023			2022
OPERATING ACTIVITIES:
Consolidated net (loss) income	$	(2,226	)	$	997

Adjustments to reconcile consolidated net (loss) income to net cash provided by (used in) operating activities:
Bad debt expense		82			13
Depreciation and amortization		1,795			1,155
Stock-based compensation expense		687			498
Amortization of debt issuance cost		7			4
Tax payments related to shares cancelled for vested restricted stock awards		(12	)		(19	)
Deferred income taxes		(918	)		126
Changes in operating assets and liabilities:
Trade accounts receivable		5,438			229
Inventories		850			(3,980	)
Other current assets		4,570			(1,006	)
Right of use assets		300			78
Other long-term assets		18			(224	)
Accounts payable		(2,950	)		1,464
Accrued expenses		(4,307	)		1,261
Income taxes payable		(760	)		-
Net cash provided by operating activities		2,574			596

INVESTING ACTIVITIES:
Capital expenditures		(2,311	)		(430	)
Purchase of Microlab, net of cash acquired ($33)		-			(24,442	)
Net cash used in investing activities		(2,311	)		(24,872	)

FINANCING ACTIVITIES:
Proceeds from exercise of stock options		86			149
Debt issuance cost		-			(32	)
Revolving credit facility		1,000			-
Term Loan payments		(1,818	)		(808	)
Term Loan		-			17,000
Net cash (used in) provided by financing activities		(732	)		16,309

Net decrease in cash and cash equivalents		(469	)		(7,967	)

Cash and cash equivalents, beginning of period		4,532			13,053

Cash and cash equivalents, end of period	$	4,063		$	5,086

Supplemental cash flow information – income taxes paid	$	19		$	223

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 for a fair statement of the financial position. Information included in the condensed consolidated balance sheet as of October 31, 2022 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, 2022 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2022 that was previously filed with the Securities and Exchange Commission (“SEC”). Operating results for the nine months ended July 31, 2023 are not necessarily indicative of the results that may be expected for the year ended October 31, 2023. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Form 10-K.

Our accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand along with the current Credit Facility (as defined below), to meet its obligations as they become due.

Although we have incurred operating losses during the nine months ended July 31, 2023, we have implemented certain cost-cutting measures to reduce our operating expenses and to help drive positive operating cash flow and increase liquidity. Our plan includes consolidating facilities and recognizing the related operating efficiencies and synergies in our production operations. The Company intends to continue to pursue additional continuous improvement and cost reduction measures, as well as organic growth in revenue and profitability.

Management believes that these actions will enable the Company to continue as a going concern through at least 12 months from the date these unaudited condensed consolidated financial statements are available to be issued.

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, 2023 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”, “we”, “us”, or “our” 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”, “we”, “us”, or “our” 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.

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, 2023 and October 31, 2022, the carrying amounts reflected in the accompanying unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximated their carrying value due to their short-term nature.

Recent accounting standards

Recently issued accounting pronouncements not yet adopted:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued 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 unaudited condensed consolidated financial statements.

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 radio frequency 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 condensed 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 15 years. Total costs, as of October 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:

Cash consideration paid at closing	$	24,250,000
Post-closing adjustment		225,000
Total consideration transferred	$	24,475,000

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

Current assets	$	6,620,000
Property and equipment		198,000
Intangible assets		13,840,000
Goodwill		5,617,000
Noninterest-bearing liabilities		(1,800,000	)
Net assets acquired at fair value	$	24,475,000

The following unaudited pro forma financial information presents the combined operating results of the Company and Microlab as if the acquisition 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:

	Three Months Ended July 31,					Nine Months Ended July 31,
	2023			2022		2023			2022

Revenue	$	15,652		$	23,842	$	56,294		$	68,369
Net (loss) income		(1,645	)		771		(2,226	)		1,510

(Loss) Earnings per share
Basic	$	(0.16	)	$	0.08	$	(0.22	)	$	0.15
Diluted	$	(0.16	)	$	0.08	$	(0.22	)	$	0.15

Basic		10,290,265			10,127,244		10,267,652			10,100,767
Diluted		10,290,265			10,238,932		10,267,652			10,233,209

Note 3 – 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, 2023, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $2.9 million.

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2023			2022			2023			2022
Wireless provider		*			16	%		13	%		23	%
Distributor A		12	%		*			*			*

For the three months ended July 31, 2023, a distributor customer accounted for 12% of net sales and 12% of total net accounts receivable balance, and a wireless carrier customer accounted for less than 10% of net sales. For the nine months ended July 31, 2023, the same wireless carrier customer accounted for 13% of net sales and 4% of total net accounts receivable balance; for the three months ended July 31, 2022, it accounted for 16% of net sales and 19% of total net accounts receivable balance; for the nine months ended July 31, 2022, it accounted for 23% of net sales and 19% of total net accounts receivable balance. We also have another distributor customer whose sales were less than 10% of our net sales but for which we had an 11% of total net accounts receivable balance for both the three and nine months ended July 31,2023; for the three and nine months ended July 31, 2022, it accounted for 5% of total net account receivable balance. Although these customers have been significant customers of the Company, the written agreements with these customers do not have any minimum purchase obligations and these customers 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 4 – 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):

	July 31, 2023		October 31, 2022

Raw materials and supplies	$	14,107	$	15,238
Work in process		510		439
Finished goods		5,587		5,377

Totals	$	20,204	$	21,054

For the three months ended July 31, 2023, a single vendor accounted for 10% of inventory purchases. For the three months ended July 31, 2022, the same vendor accounted for 17% of inventory purchases. For the nine months ended July 31, 2023, this vendor accounted for 17% of inventory purchases and it accounted for 28% of inventory purchases for the nine months ended July 31, 2022. We have arrangements with this vendor to purchase products based on purchase orders that we periodically issue.

Note 5 – Other current assets

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

	July 31, 2023		October 31, 2022

Employee retention credit ("ERC")	$	176	$	1,636
Prepaid taxes		30		-
Prepaid expense		665		972
Reimbursement for tenant improvements		-		2,810
Other		409		431


Totals	$	1,280	$	5,849

Pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“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 Internal Revenue Service (IRS). The period assessed for eligibility of the ERC is on a calendar year basis. As of July 31, 2023, the remaining portion of the ERC that we have not yet received is included as other receivables in other current assets.

Note 6 – Accrued expenses and other current liabilities

Accrued expenses consist of the following (in thousands):

	July 31, 2023		October 31, 2022

Wages payable	$	2,163	$	3,634
Accrued receipts		1,050		2,136
Other accrued expenses		1,294		1,847
Tenant improvements payable		-		1,197

Totals	$	4,507	$	8,814

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

Note 7 – Loss per share

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding increased by the effects of assuming that other potentially dilutive securities (such as stock options) outstanding during the period had been exercised and the treasury stock method had been applied. During the three and nine months ended July 31, 2023 we reported a net loss, and in periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation due to their anti-dilutive effect. Potentially issuable securities that are out-of-the-money totaled 814,154 and 471,464 shares for the three months ended July 31, 2023 and 2022, respectively, and 750,967 and 482,889 shares for the nine months ended July 31, 2023 and 2022, respectively, and 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:

	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022

Weighted average shares outstanding for basic earnings per share		10,290,265		10,127,244		10,267,652		10,100,767

Add effects of potentially dilutive securities-assumed exercise of stock options		-		111,688		-		132,442

Weighted average shares outstanding for diluted earnings per share		10,290,265		10,238,932		10,267,652		10,233,209

Note 8 – Stock-based compensation and equity transactions

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 vested on January 10, 2023; and (ii) the remaining restricted shares and options shall vest in 12 equal quarterly installments over the next three years. All incentive stock options expire 10 years from the date of grant.

On January 10, 2023, we granted a total of 54,092 shares of restricted stock and 108,181 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, 2024; and (ii) the remaining restricted shares and options shall vest in 12 equal quarterly installments over the next three years. Also on January 10, 2023, we granted another manager 50,000 incentive stock options. These options shall vest in five equal installments on each of the next five anniversaries of January 10, 2023, the grant date. All incentive stock options expire 10 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, 2023 and 2022.

The weighted average fair value of employee stock options that were granted during the nine months ended July 31, 2023 and 2022 was estimated to be $3.21 and $3.77, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

	Nine Months Ended July 31,
	2023			2022
Risk-free interest rate		3.76	%		1.47	%
Dividend yield		0.00	%		0.00	%
Expected life of the option (in years)		7.01			7.00
Volatility factor		54.30	%		53.36	%

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 2023 and 2022 option grants. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The dividend yield is based upon the historical dividend yield.

Company stock option plans

Descriptions of our stock option plans are included in Note 9 to our audited financial statements included in our Annual Report on Form 10-K for the year ended October 31, 2022. A summary of the status of the options granted under our stock option plans as of July 31, 2023 and the changes in options outstanding during the nine months then ended is presented in the table that follows:

				Weighted
				Average
	Shares			Exercise Price
Outstanding at November 1, 2022		691,005		$	5.87
Options granted		158,181		$	5.46
Options exercised		(45,000	)	$	1.90
Options cancelled		-		$	-
Options outstanding at July 31, 2023		804,186		$	6.01
Options exercisable at July 31, 2023		471,466		$	6.34
Options vested and expected to vest at July 31, 2023		798,697		$	6.02

Weighted average remaining contractual life of options outstanding as of July 31, 2023: 6.68 years

Weighted average remaining contractual life of options exercisable as of July 31, 2023: 5.65 years

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2023: 6.69 years

Aggregate intrinsic value of options outstanding at July 31, 2023: $124,280

Aggregate intrinsic value of options exercisable at July 31, 2023: $80,120

Aggregate intrinsic value of options vested and expected to vest at July 31, 2023: $122,285

As of July 31, 2023, $866,591 and $528,229 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 2.74 and 1.30 years, respectively.

Stock option expense

During the three months ended July 31, 2023 and 2022, stock-based compensation expense totaled $246,000 and $191,000, respectively, and was classified in selling and general expense. During the nine months ended July 31, 2023 and 2022, stock-based compensation expense totaled $687,000 and $498,000, respectively, and was classified in selling and general expenses.

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, 2023, we had two reportable segments – RF Connector and Cable Assembly (“RF Connector”) segment and 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 of 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 user.

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.

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, 2023 and 2022 (in thousands):

	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022

United States	$	13,955	$	19,925	$	50,967	$	56,292
Foreign Countries:
Canada		703		2,218		1,875		3,179
Italy		300		1,214		1,692		1,387
Mexico		-		29		3		106
All Other		694		456		1,757		1,301
		1,697		3,917		5,327		5,973

Totals	$	15,652	$	23,842	$	56,294	$	62,265

Net sales, (loss) income before (benefit) provision for income taxes and other related segment information for the three months ended July 31, 2023 and 2022 are as follows (in thousands):

	RF Connector			Custom Cabling
	and			Manufacturing and
	Cable Assembly			Assembly			Corporate			Total
2023
Net sales	$	7,799		$	7,853		$	-		$	15,652
(Loss) income before benefit for income taxes		(1,103	)		(713	)		(311	)		(2,127	)
Depreciation and amortization		488			143			-			631
Total assets		49,175			20,528			8,353			78,056

2022
Net sales	$	10,495		$	13,347		$	-		$	23,842
Income (loss) before provision for income taxes		988			600			(677	)		911
Depreciation and amortization		390			147			-			537
Total assets		48,351			26,553			12,291			87,195

Net sales, (loss) income before (benefit) provision for income taxes and other related segment information for the nine months ended July 31, 2023 and 2022 are as follows (in thousands):

	RF Connector			Custom Cabling
	and			Manufacturing and
	Cable Assembly			Assembly			Corporate			Total
2023
Net sales	$	25,507		$	30,787		$	-		$	56,294
(Loss) income before benefit from income taxes		(1,162	)		(823	)		(1,047	)		(3,032	)
Depreciation and amortization		1,359			436			-			1,795
Total assets		49,175			20,528			8,353			78,056

2022
Net sales	$	21,928		$	40,337		$	-		$	62,265
Income (loss) before benefit from income taxes		1,621			1,721			(2,149	)		1,193
Depreciation and amortization		720			435			-			1,155
Total assets		48,351			26,553			12,291			87,195

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 (benefit) provision 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 (benefits) provisions of ($482,000) and $140,000 for the three months ended July 31, 2023 and 2022, respectively. The effective tax rate was 22.7% for the three months ended July 31, 2023, compared to 15.4% for the three months ended July 31, 2022. For the nine months ended July 31, 2023 and 2022, we recorded income tax (benefits) provisions of ($806,000) and $196,000, respectively. The effective tax rate was 26.6% for the nine months ended July 31, 2023, compared to 16.4% for the nine months ended July 31, 2022. The change in effective tax rate for the nine months ended July 31, 2023 compared to the nine months ended July 31, 2022 was primarily driven by stock-based compensation windfall/shortfalls and the Company's full year forecasted financial loss.

We had $168,000 and $121,000 of unrecognized tax benefits, as of July 31, 2023 and October 31, 2022, respectively. The unrecognized tax benefits, if recognized, would result in a net tax benefit of $164,000 as of July 31, 2023.

Note 11 – Intangible assets

Intangible assets consist of the following (in thousands):

	July 31, 2023			October 31, 2022
Amortizable intangible assets:
Non-compete agreement (estimated life 5 years)	$	423		$	423
Accumulated amortization		(367	)		(334	)
		56			89

Customer relationships (estimated lives 7 - 15 years)		6,058			6,058
Accumulated amortization		(3,364	)		(3,074	)
		2,694			2,984

Backlog (estimated life 1 - 2 years)		327			327
Accumulated amortization		(327	)		(313	)
		-			14

Patents (estimated life 10 - 14 years)		368			368
Accumulated amortization		(167	)		(143	)
		201			225

Tradename (estimated life 15 years)

SEC Form 10-Q filed by RF Industries Ltd.