CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements and related disclosures have been prepared
in accordance with U.S. generally accepted accounting principles ("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 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.
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Revenue Recognition
Revenue is recorded in an amount that reflects the consideration to which we
expect to be entitled in exchange for goods or services promised to customers.
In accordance with ASC 606, we follow a five-step model to: (1) identify the
contract with our customer; (2) identify our performance obligations in our
contract; (3) determine the transaction price for our contract; (4) allocate the
transaction price to our performance obligations; and (5) recognize revenue when
(or as) each performance obligation is satisfied. In accordance with this
accounting principle, we recognize revenue using the output method at a point in
time when finished goods have been transferred to the customer and there are no
other obligations to customers after the title of the goods have transferred.
Title of goods are transferred based on shipping terms for each customer - for
shipments with terms of FOB Shipping Point, title is transferred upon shipment;
for shipments with terms of FOB Destination, title is transferred upon delivery.
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 makes provisions as
necessary to properly reflect inventory value. Because inventories have, during
the past couple 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 our 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 reviews 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.
We account for uncertain tax positions by determining if it is "more likely than
not" that a tax position will be sustained by the appropriate taxing authorities
upon examination based on the technical merits of the position. An uncertain
income tax position is not recognized if it has less than a 50% likelihood of
being sustained. We recognize interest and penalties related to certain
uncertain tax positions as a component of income tax expense and the accrued
interest and penalties are included in deferred and income taxes payable in our
consolidated balance sheets. See Note 8 to the Consolidated Financial Statements
included in this Report for more information on our accounting for uncertain tax
positions.
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.
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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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For recently issued accounting pronouncements that may affect us, see Note 1 of
Notes to Consolidated Financial Statements.
OVERVIEW
During the periods covered by this Annual Report, we marketed a variety of
connector products, including connectors and cables, standard and custom cable
assemblies, wiring harnesses and fiber optic cable products to numerous
industries for use in thousands of products. We aggregate our operating
divisions into segments that have similar economic characteristics and are
similar in the majority of 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. We have two reportable segments - the RF Connector and Cable
Assembly ("RF Connector") segment and the Custom Cabling Manufacturing and
Assembly ("Custom Cabling") segment - based upon this evaluation.
In the fiscal years covered by this Annual Report, the RF Connector segment was
comprised of one division, while the Custom Cabling segment was comprised of
four divisions. The five divisions that met the quantitative thresholds for
segment reporting in the fiscal year ended October 31, 2021 were the RF
Connector and Cable Assembly division, Cables Unlimited, Rel-Tech, C Enterprises
and Schrofftech subsidiaries.
For the year ended October 31, 2021, most of our revenues were generated from
the Custom Cabling segment from its sale of fiber optic cable, copper cabling,
custom patch cord assemblies and wiring harnesses This segment sells customized
cable assemblies and wiring harnesses that are integrated into customers'
products, as well as fiber optic cables used in the build out of wireless
carrier 4G and 5G networks. In fiscal 2021, Custom Cabling sales increased due
to increased sales to wireless carriers, including sales of fiber optic cables
used in the build out of 4G and 5G networks. The percentage of our revenues
generated by the Custom Cabling segment increased from 66% of our total sales in
fiscal 2020 to 73% for the fiscal year ended October 31, 2021.
Revenues from the RF Connector segment were generated from the sales of RF
connector products and connector cable assemblies and accounted for 27% of our
total sales for the fiscal year ended October 31, 2021. This segment, which
historically produces amongst the highest margins of the five production sites,
is known for its quick turnaround of high-quality customized solutions in the
form of cable assemblies.
In March 2020, the World Health Organization (the "WHO") declared coronavirus
("COVID-19") a pandemic emergency. The COVID-19 pandemic has negatively impacted
regional and global economies, disrupted global supply chains, and created
significant volatility and disruption of financial markets. The global impact of
the outbreak has been rapidly evolving and certain jurisdictions, including in
regions where we or third parties on which we rely have manufacturing
facilities, have also reacted by instituting quarantines, restrictions on
travel, social distancing protocols and restrictions on types of business that
may continue to operate. While we have continued our operations during the
pandemic, the impact of the COVID-19 pandemic has affected both our operations
and those of our vendors and customers. Our operations in both fiscal 2020 and
2021 were negatively affected by partial shutdowns of our facilities
(particularly in the Northeast), by changes that we had to make on our operating
methods and procedures, and by a fluctuating workforce as at times, some of our
employees stayed at home. Many of our customers and vendors have likewise had
temporary closures of their facilities and have otherwise been impacted by
changes in their industries. As a result, there has been some volatility in the
overall demand for our products, and certain costs have increased. We have taken
measures to protect the health and safety of our employees, and we continue to
work with our customers and vendors to minimize potential disruptions in
addressing the challenges posed by this global pandemic.
The extent of the impact of the COVID-19 pandemic on our operational and
financial performance will depend on future developments, including the duration
and spread of the pandemic and related actions taken by domestic and
international jurisdictions to prevent disease spread, all of which are
uncertain and cannot be predicted. The outbreak impacted our performance for the
fiscal year ended October 31, 2021. Because of the impact that COVID-19 has on
our operations, in May 2020 we applied for and received loans under the Paycheck
Protection Program ("PPP") of the CARES Act totaling approximately $2.8 million
("PPP Loans"). The funds from the PPP Loans were used to retain employees,
maintain payroll and benefits, and make lease and utility payments. Without the
PPP Loans, we would have made material reductions in our workforce (particularly
at Cables Unlimited). In February 2021, all of the $2.8 million of PPP Loans
were forgiven and considered paid in full (including applicable interest) by the
Small Business Administration ("SBA").
In March 2021, the Internal Revenue Service ("IRS") released Notice 2021-20,
which retroactively eliminated the restriction that prevented employers who
received a PPP loan from qualifying for the Employee Retention Credit ("ERC").
This action enabled us to apply for the ERC. The ERC is a refundable tax credit
against certain employment wages. Upon determination that the employer has
complied with all of the conditions required to receive the credit, a receivable
is recognized and the credit reduces salaries and wages. For the 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, which is $1.8
million.
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The COVID-19 pandemic and the financial assistance that the U.S. government
provided to U.S. businesses in response to the pandemic significantly affected
the Company's operations and its financial results for the fiscal year ended
October 31, 2021. The COVID-19 pandemic negatively impacted the Company's sales
as customers curtailed their wireless infrastructure capital expenditures in
response to the economic uncertainty created by the pandemic. Throughout the
latter part of the prior fiscal year, and continuing into the first two quarters
of fiscal 2021, net sales remained low and the Company experienced operating
losses. As the COVID-19 pandemic seemed to be easing in early 2021, and as
capital infrastructure project expenditures increased, so did the Company's net
sales. During the third quarter of fiscal 2021, net sales increased by $5.7
million (or 60%) from the third quarter of fiscal 2020 and further increased by
an additional 38% from the third to the fourth quarter of fiscal 2021. During
the Company's fourth quarter, the Company's operations returned to
profitability. Because the Company experienced net losses from its operations in
the first three quarters of fiscal 2021, the Company would have experienced net
losses for the fiscal year ended October 31, 2021. However, because the impact
of the ERC on the Company's labor costs during the second and third quarters of
fiscal 2021, and because of the PPP Loan forgiveness during those quarters, the
Company realized net income for the fiscal year.
Financial Condition
The following table presents certain key measures of financial condition as of
October 31, 2021 and 2020 (in thousands, except percentages):
2021 2020
Amount % Total Assets Amount % Total Assets
Cash and cash equivalents $ 13,053 26.3 % $ 15,797 38.7 %
Current assets 40,648 81.9 % 30,865 75.6 %
Current liabilities 9,370 18.9 % 6,664 16.3 %
Working capital 31,278 63.0 % 24,201 59.3 %
Property and equipment, net 708 1.4 % 810 2.0 %
Total assets 49,648 100.0 % 40,822 100.0 %
Stockholders' equity 39,603 79.8 % 32,064 78.5 %
Liquidity and Capital Resources
We believe that our existing current assets and the amount of cash we expect
that we will generate from current operations will be sufficient to fund our
anticipated liquidity and capital resource needs for at least twelve months from
the date of this Annual Report.
As of October 31, 2021, we had a total of $13.1 million of cash and cash
equivalents compared to a total of $15.8 million of cash and cash equivalents as
of October 31, 2020. As of October 31, 2021, we had working capital of $31.2
million and a current ratio of approximately 4.3:1 with current assets of $40.6
million and current liabilities of $9.4 million.
As of October 31, 2021, our backlog was $33.3 million compared to a backlog of
$6.3 million as of October 31, 2020. Since purchase orders are submitted from
customers based on the timing of their requirements, our ability to predict
orders in future periods or trends in future periods is limited. Furthermore,
purchase orders may be subject to shipment delays and to cancellation from
customers, although we have not historically experienced material cancellations
of purchase orders.
As of October 31, 2021, we used $3.1 million of cash in our operating activities
despite our net income of $6.1 million. The net outflow of cash was due in part
to increased inventory purchases (which increased our inventory balance by $2.6
million), and cash used for our trade accounts receivable ($7.9 million) due to
the increase in sales and timing of collections. The foregoing cash usage was
partially offset by an increase in noncash credits of $0.5 million from deferred
income taxes and $0.7 million from stock-based compensation expense.
Our goal to expand and grow our business both organically and through
acquisitions may require material additional capital equipment. In the past, we
have purchased all additional equipment, or financed some of our equipment and
furnishings requirements through capital leases. 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.
We have entered into the Purchase Agreement pursuant to which we expect to
acquire Microlab by approximately April 2022. The acquisition may materially
impact the Company's liquidity in the future if the acquisition is consummated
and financed on the terms currently anticipated. Under the Purchase Agreement,
the Company has agreed to pay the $24,250,000 purchase price of Microlab in
cash. This cash purchase price will be paid in part from the Company's cash on
hand and from borrowings the Company expects to obtain under a credit facility.
The Company has received a non-binding commitment letter from a major commercial
bank pursuant to which the Company is seeking to obtain an up to $20,000,000
credit facility. The credit facility has not yet been completed and is subject
to certain conditions. Therefore, no assurance can be given that commercial
bank will, in fact, extend the credit facility to the Company. By using some of
its cash on hand to pay a portion of the Microlab purchase price, the Company
will reduce the amount of cash it has available to fund its anticipated working
capital and other needs. The monthly debt service obligations under the credit
facility will require the Company to make significant monthly payments of
principal and interest, which could negatively impact the Company's liquidity.
The credit facility, if obtained, will contain financial and other covenants,
such as a limit on the ratio of debt to earnings before interest, taxes,
depreciation and amortization. A breach of any of the covenants could result in
a default under the credit facility. Upon the occurrence of an event of default
under any the credit facility, the commercial bank could terminate all
commitments to extend further credit and elect to declare amounts outstanding
thereunder to be immediately due and payable. The credit facility will be
secured by a lien on substantially all of the Company's assets.
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Results of Operations
The following summarizes the key components of our consolidated results of
operations for the fiscal years ended October 31, 2021 and 2020 (in thousands,
except percentages):
2021 2020
% of % of
Amount Net Sales Amount Net Sales
Net sales $ 57,424 100.0 % $ 43,044 100.0 %
Cost of sales 39,656 69.1 % 31,478 73.1 %
Gross profit 17,768 30.9 % 11,566 26.9 %
Engineering expenses 1,479 2.6 % 1,989 4.6 %
Selling and general expenses 11,874 20.7 % 9,980 23.2 %
Operating income (loss) 4,415 7.7 % (403 ) -0.9 %
Other income (loss) 2,802 4.9 % (45 ) -0.1 %
Income (loss) before provision for
income taxes 7,217 12.6 % (448 ) -1.0 %
Provision (benefit) for income
taxes 1,036 1.8 % (367 ) -0.9 %
Consolidated net income (loss) 6,181 10.8 % (81 ) -0.2 %
Net sales for the year ended October 31, 2021 ("fiscal 2021") increased by $14.4
million (or 33%) to $57.4 million, as compared to net sales of $43.0 million for
the year ended October 31, 2020 ("fiscal 2020"). Most of the net sales for the
year ($36.3 million of the $57.4 million) were realized in the second half of
the fiscal year that is primarily attributable to the increase at the Custom
Cabling segment. Net sales in the Custom Cabling segment increased by $13.3
million, or 47%, to $41.8 million compared to $28.5 million in fiscal 2020. The
increase reflects the increase in sales to wireless carriers, primarily related
to the sales of fiber optic cables used in the build out of 4G and 5G networks.
Net sales for fiscal 2021at the RF Connector segment increased by $1.0 million,
or 7%, to $15.6 million compared to $14.6 million in fiscal 2020.
Gross profit for fiscal 2021 increased by $6.2 million to $17.8 million, and
gross margins increased to 30.9% of sales from 26.9% of sales in fiscal 2020.
The increase in gross profit and gross margins was due to the ERC that the
Company was eligible to claim for production employees. The ERC reduced our
labor costs and thereby increased our gross profits. Excluding the benefit of
the ERC, our gross profits for fiscal 2021 would have been $15.2 million, which
is an increase of $3.6 million compared to fiscal 2020, and gross margins would
have been 26.4%.
Engineering expenses decreased $0.5 million to $1.5 million for fiscal 2021
compared to $2.0 million in fiscal 2020. The decrease was primarily due to the
ERC the Company was eligible to claim for engineering employees. Excluding the
benefit of the ERC, engineering expenses would have been $1.8 million, which is
a decrease of $0.2 million compared to fiscal 2020. This decrease is due to a
reduction in engineering marketing personnel, which costs are included in the
engineering costs. Engineering expenses represent costs incurred relating to the
ongoing development of new products.
Selling and general expenses increased by $1.9 million to $11.9 million (to
20.7% of sales) in fiscal 2021 compared to $10.0 million (23.2% of sales) in
fiscal 2020 largely due to (i) increase in bonuses of ($0.8 million) due to the
increase in sales and business performance, (ii) increase in commissions due to
the increase in sales ($0.3 million), and (iii) acquisition related charges
($0.1 million). The increase is also due in part to the hiring of additional
sales people in the last half of the 2020 fiscal year and in the first quarter
of fiscal 2021. Excluding the benefit of the ERC, selling and general expenses
would have been $12.4 million (22% of sales), which is a increase of $2.4
million compared to fiscal 2020
In February 2021, all of the $2.8 million of PPP Loans were forgiven and
considered paid in full (including applicable interest), which debt forgiveness
is reflected as "Other Income".
For fiscal 2021, pretax (loss) income for the Custom Cabling segment and the RF
Connector segment was $1.9 million and $2.5 million, respectively, as compared
to $(2.4) million and $2.0 million for fiscal 2020. The pretax income at both
the Custom Cabling and RF Connector segments in fiscal 2021 was primarily due to
the ERC the Company was eligible to claim and the PPP Loan forgiveness.
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The provision (benefit) for income taxes was $1.0 million or 14.4% and $(0.4)
million or 82.0% of income before income taxes for fiscal 2021 and 2020,
respectively. The change in effective tax rate for fiscal 2021 and 2020 was
primarily driven by the disproportionate impact of various permanent book-tax
differences with respect to our forecasted book income or loss in each period.
For fiscal 2021, net income was $6.2 million and fully diluted earnings per
share was $0.61 per share as compared to a net loss of $(0.1) million and fully
diluted earnings per share of $0.01 per share for fiscal 2020.
Inflation and Rising Costs
The cost to manufacture the Company's products is influenced by the cost of raw
materials and labor. The Company has recently experienced higher costs as a
result of the increasing cost of labor and the increasing cost of raw materials.
The cost of raw materials is due in part to a shortage in the availability of
certain products, the higher cost of shipping, and inflation. Labor costs have
risen recently as a result of increases in the minimum wage laws and an
increased demand for workers. The Company may, from time to time, try to offset
these cost increases by increasing the prices of its products. However, because
the prices of certain of the Company's products, particularly those under
longer-term manufacturing contracts for communications related products, are
fixed until the goods are manufactured and delivered, implementing price
increases often is often not feasible.
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