R F Industries Ltd 8-K/A, filed May 16, 2022
R F Industries Ltd (RFIL)
About this 8-K/A
R F Industries Ltd filed this 8-K/A on May 16, 2022, reporting on events of March 1, 2022.
Items reported
- Item 9.01: Financial statements and exhibits
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Amendment No. 1)
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Date of Report (date of earliest event reported):
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(Exact name of registrant as specified in its charter)
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(Commission File Number)
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(I.R.S. Employer
Identification No.) |
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(Address of Principal Executive Offices)
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(Registrant’s Telephone Number)
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Exhibit No.
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Description
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23.1
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99.1
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| 99.2 | Unaudited Pro Forma Condensed Combined Financial Statements of RF Industries for the year ended October 31, 2021. | |
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104
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Cover Page Interactive Data File (the cover page XBRL tags are embedded within inline XBRL document)
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May 16, 2022
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By:
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/s/ Peter Yin
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Peter Yin
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Chief Financial Officer
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Exhibit 23.1
INDEPENDENT AUDITORS’ CONSENT
We consent to the incorporation by reference in the Registration Statement of RF Industries, Ltd., on Form S-3 (File No. 333-260851) of our report dated May 13, 2022, with respect to our audit of the financial statements of Microlab/FXR, LLC as of December 31, 2021, and for the year then ended, which report appears in the amended Form 8-K of RF Industries, Ltd. filed with the U.S. Securities and Exchange Commission on May 16, 2022.
/s/ PKF O’Connor Davies, LLP
New York, NY
May 16, 2022
* * * * *
Exhibit 99.1
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Microlab FXR/LLC Financial Statements As of and for the twelve months ended December 31, 2021 |
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Independent Auditors’ Report |
3 |
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Financial Statements: |
5 |
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Balance Sheet as of December 31, 2021 |
5 |
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Statement of Operations for the Year Ended December 31, 2021 |
6 |
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Statement of Changes in Member’s Equity for Year Ended December 31, 2021 |
7 |
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Statement of Cash Flows for the Year Ended December 31, 2021 |
8 |
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Notes to Financial Statements |
9 |
| INDEPENDENT AUDITORS’ REPORT |
| Microlab/FXR LLC |
To the Member
Microlab FXR/LLC
We have audited the accompanying financial statements of Microlab FXR/LLC (the “Company”), which comprise the balance sheet as of December 31, 2021, and the related statement of operations, changes in member’s equity and cash flows for the year then ended, and the related notes to the financial statements.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Emphasis of Matter
As discussed in note 8, the Company’s membership interests were purchased by a third party in March 2022. Our opinion on the financial statements is not modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with generally accepted auditing standards, we:
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Exercise professional judgment and maintain professional skepticism throughout the audit. |
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Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
| INDEPENDENT AUDITORS’ REPORT |
| Microlab/FXR LLC |
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Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
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Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. |
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Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.
/s/ PKF O’Connor Davies, LLP
New York, New York
May 13, 2022
| BALANCE SHEET |
| Microlab/FXR LLC |
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December 31 |
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2021 |
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CURRENT ASSETS |
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Cash |
$ | 24,924 | ||
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Accounts receivable - net of reserves of $24,597 |
2,882,938 | |||
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Inventories - net of reserves of $228,099 |
3,986,267 | |||
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TOTAL CURRENT ASSETS |
6,894,129 | |||
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PROPERTY, PLANT AND EQUIPMENT - NET |
421,440 | |||
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OTHER ASSETS |
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Due from Parent |
13,780,869 | |||
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Goodwill |
1,351,391 | |||
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Other assets |
163,961 | |||
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TOTAL OTHER ASSETS |
15,296,221 | |||
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TOTAL ASSETS |
$ | 22,611,790 | ||
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CURRENT LIABILITIES |
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Accounts payable |
783,278 | |||
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Accrued expenses and other current liabilities |
1,181,722 | |||
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TOTAL CURRENT LIABILITIES |
1,965,000 | |||
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COMMITMENTS AND CONTINGENCIES |
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MEMBER’S EQUITY |
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Membership interests |
46,690 | |||
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Net member investment |
1,472,229 | |||
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Retained earnings |
19,127,871 | |||
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TOTAL MEMBER’S EQUITY |
20,646,790 | |||
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TOTAL LIABILITIES AND MEMBER’S EQUITY |
$ | 22,611,790 | ||
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF OPERATIONS |
| Microlab/FXR LLC |
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Year Ended December 31, 2021 |
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Net revenues |
$ | 17,756,291 | ||
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Cost of revenues |
10,259,418 | |||
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Gross profit |
7,496,873 | |||
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Operating expenses |
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Research and development |
900,474 | |||
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Sales and marketing |
2,374,241 | |||
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General and administrative |
4,049,361 | |||
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Total operating expenses |
7,324,076 | |||
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Operating income |
172,797 | |||
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Other income |
14,467 | |||
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Net income |
$ | 158,330 | ||
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF CHANGES IN MEMBER’S EQUITY |
| Microlab/FXR LLC |
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Membership Interests |
Net Member Investment |
Retained |
Total Member’s |
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Balances as of December 31, 2020 |
$ | 46,690 | $ | 1,472,229 | $ | 18,969,541 | $ | 20,488,460 | ||||||||
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Net income |
- | - | 158,330 | 158,330 | ||||||||||||
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Balances as of December 31, 2021 |
$ | 46,690 | $ | 1,472,229 | $ | 19,127,871 | $ | 20,646,790 | ||||||||
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF CASH FLOWS |
| Microlab/FXR LLC |
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Year Ended 2021 |
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CASH FLOWS USED BY OPERATING ACTIVITIES |
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Net income |
$ | 158,330 | ||
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation expense |
254,488 | |||
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Provision for doubtful accounts |
10,846 | |||
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Inventory reserves |
101,972 | |||
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Changes in assets and liabilities: |
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Accounts receivable |
(1,089,938 | ) | ||
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Inventories |
(439,001 | ) | ||
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Other assets |
(40,561 | ) | ||
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Accounts payable |
215,262 | |||
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Accrued expenses and other liabilities |
216,622 | |||
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Due from Parent |
743,684 | |||
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Net cash provided by operating activities |
131,704 | |||
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CASH FLOWS USED BY INVESTING ACTIVITIES |
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Capital expenditures |
(106,780 | ) | ||
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NET INCREASE/(DECREASE) IN CASH |
24,924 | |||
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Cash, at beginning of year |
- | |||
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CASH, AT END OF YEAR |
$ | 24,924 | ||
The accompanying notes are an integral part of these financial statements.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Microlab/FXR, LLC (“we”, “us”, “our” or the “Company”) is a New Jersey single member limited liability company wholly owned by Wireless Telecom Group, Inc. (“WTT” or “Parent”). We specialize in the manufacture of advanced radio frequency (“RF”) components which enable the deployment of wireless technology. Our customers include wireless carriers, network equipment manufacturers, tower companies, system integrators, neutral host providers and medical device manufacturers.
The accompanying financial statements represent the standalone financial statements of the Company prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). The standalone financial statements of the Company represent all the costs of doing business including certain allocations of corporate overhead including executive compensation, rent, accounting, advertising and marketing expenses and legal expenses and other general and administrative expenses. The corporate overhead allocations are based on a percentage of Microlab headcount to total parent headcount as of December 31, 2020. Total corporate allocations were $179,000 for the twelve months ended 2021.
Use of Estimates
The accompanying financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We base our assumptions, judgements and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates. The most significant estimates and assumptions include management’s analysis in support of inventory valuation, accounts receivable valuation, returns reserves, warranty accruals, goodwill and corporate overhead allocations.
Concentrations of Credit Risk, Purchases and Fair Value
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable.
Credit evaluations are performed on customers requiring credit over a certain amount. Credit risk is mitigated to a lesser extent through collateral such as letters of credit, bank guarantees or payment terms like cash in advance.
For the twelve months ended December 31, 2021, one customer accounted for 15.4% of the Company’s total net revenues. At December 31, 2021 two customers exceeded 10% of gross accounts receivable at 13.6% and 13.1%, respectively.
For the year ended December 31, 2021, four suppliers exceeded 10% of inventory purchases at 27.3%, 15.9%, 10.8% and 10.7%, respectively. These four suppliers represented 64.7% of inventory purchases for the twelve months ended December 31, 2021.
Cash
The Company is part of a centralized cash management arrangement with the Parent whereby excess cash balances are swept into an account held by the Parent. Cash and cash equivalents as of the balance sheet date represent cash in bank accounts that are in the legal name of the Company.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at the amount owed by the customer, net of allowances for doubtful accounts, returns and rebates. Estimated allowances for doubtful accounts are reviewed periodically taking into account the customer’s recent payment history, the customer’s current financial statements and other information regarding the customer’s credit worthiness. Account balances are charged off against the allowance when it is determined the receivable will not be recovered.
Due from Parent
Due from Parent represents the historical net amount due to the Company as a result of centralized cash management functions. The amount due from Parent at December 31, 2021 was not an includable asset in the sale of the Company (see Note 8).
Inventories
Inventories are stated at the lower of cost or net realizable value. Inventory cost is determined on an average cost basis. Net realizable value is based upon an estimated average selling price reduced by estimated costs of completion, disposal and transportation. Reductions in inventory valuation are included in cost of revenues in the accompanying Statement of Operations. Finished goods and work-in-process include material, labor and overhead expenses.
The Company reviews inventory for excess and obsolescence based on best estimates of future demand, product lifecycle status and product development plans. The Company uses historical information along with these future estimates to reduce the inventory cost basis. Subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Inventory carrying value is net of inventory reserves of approximately $228,099 as of December 31, 2021.
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Inventories consist of: |
December 31, |
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2021 |
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Raw materials |
$ | 2,058,493 | ||
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Work-in-process |
278,977 | |||
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Finished goods |
1,648,797 | |||
| $ | 3,986,267 | |||
Property, Plant and Equipment
Property, plant and equipment are reflected at cost, less accumulated depreciation.
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives for the property, plant and equipment are:
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Machinery and computer equipment/software (in years) |
3 | - | 8 | ||
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Furniture and fixtures (in years) |
5 | - | 7 |
Leasehold improvements are amortized over the shorter of the remaining term of the lease or the estimated economic life of the improvement. Repairs and maintenance are charged to operations as incurred; renewals and betterments are capitalized.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is evaluated for impairment annually, or more frequently if events occur or circumstances change that would indicate that goodwill might be impaired, by first performing a qualitative evaluation of events and circumstances impacting the reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if the Company determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise, we perform a quantitative impairment test.
The Company performed a qualitative assessment in the fourth quarter of 2021 and the qualitative assessment did not indicate any impairment of goodwill.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable, due from Parent and accrued liabilities, approximate fair value due to their relatively short maturities.
Research and Development Costs
Research and development (R&D) costs are charged to operations when incurred. R&D costs include salaries and benefits, depreciation expense on equipment used for R&D purposes and third-party material and consulting costs, if clearly related to an R&D activity. The amounts charged to operations for R&D costs for the year ended December 31, 2021 was $900,474.
Advertising Costs
The Company incurs no direct advertising or marketing expenses. Advertising and marketing expenses are included as part of the corporate allocation of expenses from the Parent.
Income Taxes
Microlab/FXR LLC is a single member disregarded entity and included as part of the Parent consolidated tax return. In Accordance with Accounting Standards Update 2019-12 the Company has elected not to allocate income tax to the standalone financial statements of the Company.
NOTE 2 – REVENUE
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied at a point in time.
Nature of Products
Hardware
The Company generally has one performance obligation in its arrangements involving the sales of its radio frequency components. When the terms of a contract include the transfer of multiple products, each distinct product is identified as a separate performance obligation. Generally, satisfaction occurs when control of the promised goods is transferred to the customer in exchange for consideration in an amount for which we expect to be entitled. Generally, control is transferred when legal title of the asset moves from the Company to the customer. We sell our products to a customer based on a purchase order, and the shipping terms per each individual order are primarily used to satisfy the single performance obligation. However, in order to determine control has transferred to the customer, the Company also considers:
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when the Company has a present right to payment for the asset |
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when the Company has transferred physical possession of the asset to the customer |
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when the customer has the significant risks and rewards of ownership of the asset |
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when the customer has accepted the asset |
Shipping and Handling
Shipping and handling activities performed after the customer obtains control are accounted for as fulfillment activities and recognized as cost of revenues.
Disaggregated Revenue
We disaggregate our revenue from contracts with customers by geographic location as we believe it best depicts how the nature, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below
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Twelve Months Ended December 31, 2021 |
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Total net revenues by geographic areas |
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Americas |
$ | 15,824,714 | ||
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EMEA |
1,483,255 | |||
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APAC |
448,322 | |||
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Total net revenue |
$ | 17,756,291 | ||
Net revenues are attributable to a geographic area based on the destination of the product shipment.
The majority of shipments in the Americas are to customers located within the United States. For the year ended December 31, 2021 and 2020, sales in the United States amounted to $15,097,608.
For the year ended December 31, 2021 shipments to the EMEA region were largely concentrated in the UK and the Netherlands. Shipments to the UK and the Netherlands in 2021 amounted to $244,657 and 317,535, respectively.
The largest concentration of shipments in the APAC region is to China, where shipments amounted to $323,663 for the year ended December 31, 2021.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, consist of the following as of December 31:
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2021 |
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Machinery & computer equipment/software |
$ | 3,099,133 | ||
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Furniture & fixtures |
167,118 | |||
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Leasehold improvements |
165,027 | |||
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Gross property, plant and equipment |
3,431,278 | |||
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Less: Accumulated depreciation |
3,009,838 | |||
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Net property, plant and equipment |
$ | 421,440 | ||
Depreciation expense of $254,488 was recorded for the year ended December 31, 2021.
NOTE 4 - OTHER ASSETS
Other assets consist of the following as of December 31:
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2021 |
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Deferred costs |
$ | 123,061 | ||
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Deposits |
27,869 | |||
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Demo assets |
13,031 | |||
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Total |
$ | 163,961 | ||
Product demo assets are net of accumulated amortization expense of $7,252 as of December 31, 2021. Amortization expense related to demo assets was $2,898 in 2021.
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following as of December 31:
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2021 |
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Goods received not invoiced |
$ | 778,176 | ||
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Accrued commissions |
70,093 | |||
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Returns reserve |
318,589 | |||
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Other |
14,864 | |||
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Total |
$ | 1,181,722 | ||
NOTE 6 - RETIREMENT PLAN
The Company is part of the Parent’s 401(k) profit sharing plan covering all eligible U.S. employees. Parent contributions to the plan for the year ended December 31, 2021 amounted to $39,250.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Warranties
The Company typically provides three year warranties on all of its products covering both parts and labor. The Company, at its option, repairs or replaces products that are defective during the warranty period if the proper preventive maintenance procedures have been followed by its customers.
Risks and Uncertainties
The conflict between Russia and Ukraine has led to and is expected to continue to lead to disruption, instability and volatility in global markets and industries. Our operations could be negatively impacted by the conflict. The U.S. government and other governments in jurisdictions in which we operate have imposed severe sanctions and export controls against Russia and Russian interests and threatened additional sanctions and controls. The impact of these measures, as well as potential responses to them by Russia, is currently unknown and they could adversely affect our business, supply chain, partners or customers.
The Company has been and continues to be unable to accurately predict the full impact that the COVID-19 Pandemic will have on our results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic, the nature and length of actions taken by governments, businesses and individuals to contain or mitigate its impact, the severity and duration of the economic impact caused by the pandemic, the uncertainty surrounding possible treatments and rollout of vaccines, along with the effectiveness of our response.
Proprietary information and know-how are important to the Company’s commercial success. There can be no assurance that others will not either develop independently the same or similar information or obtain and use proprietary information of the Company. Certain key employees have signed confidentiality and non-compete agreements regarding the Company’s proprietary information.
The Company believes that its products do not infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims in the future.
NOTE 8 – SUBSEQUENT EVENTS
Sale of Microlab/FXR LLC to RF Industries, Ltd.
On December 16, 2021, the Parent and the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with RF Industries, Ltd., a Nevada corporation (the “Buyer”) whereby the Buyer agreed to purchase 100% of the membership interests in Microlab for a purchase price of $24,250,000, subject to certain closing adjustments as forth in the Purchase Agreement. The board of directors of each of the Parent and the Buyer has unanimously approved the Purchase Agreement and the transactions contemplated thereby (collectively, the “Transaction”). On February 25, 2022, the shareholders of the Parent approved the transaction at a special meeting of shareholders held virtually via live webcast and on March 1, 2022, the Transaction closed. Concurrent with the closing, the Parent entered into a sublease with the Company for approximately 51% of the square footage of its corporate headquarters in Parsippany, NJ. The sublease term is March 1, 2022 until March 30, 2023 with monthly rental payments of $20,290.42 (“base rent”). In addition to the base rent, Microlab must pay 51% of real estate taxes, common area maintenance and management costs and all other amounts for which the Parent is responsible under the prime lease.
The Company has evaluated subsequent events through the date that the financial statements were available to be issued.
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial information presents the combination of the historical consolidated financial statements of RF Industries, Ltd. and its subsidiaries (“RF Industries”) and the historical financial statements of Microlab/FXR LLC (“Microlab”) after giving effect to RF Industries’ purchase of 100% of the issued and outstanding membership interests of Microlab from Wireless Telecom Group, Inc., a New Jersey corporation, as further described in Note 1, Description of Microlab Acquisition.
The unaudited pro forma condensed combined balance sheet as of October 31, 2021, is based on the individual historical consolidated balance sheets of RF Industries and Microlab and has been prepared to reflect the acquisition as if it had occurred on October 31, 2021, which was RF Industries’ 2021 fiscal year end. The unaudited pro forma condensed combined statements of operations for the fiscal year ended October 31, 2021, combine the historical results of operations of RF Industries and Microlab, and have been prepared to reflect the acquisition as if it had occurred on November 1, 2020, the first day of RF Industries’ fiscal year ended October 31, 2021.
RF Industries’ 2021 fiscal year ended on October 31, and Microlab’s 2021 fiscal year ended on December 31. As a result of RF Industries’ and Microlab’s different fiscal years:
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the unaudited pro forma condensed combined balance sheet as of October 31, 2021, combines RF Industries’ historical audited consolidated balance sheet as of October 31, 2021, and Microlab’s historical audited consolidated balance sheet as of December 31, 2021, and |
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the unaudited pro forma condensed combined statement of operations for the fiscal year ended October 31, 2021, combines RF Industries’ historical audited results of operations for the fiscal year ended October 31, 2021, and Microlab’s historical audited results of operations for the fiscal year ended December 31, 2021. |
The unaudited pro forma condensed combined financial information set forth below shows on a pro forma basis the effect of the following two directly related material transactions of RF Industries:
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the completion of the Microlab acquisition for a contractual purchase price of $24,250,000 and |
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the additional debt incurred to finance approximately $17 million of the acquisition consideration and payment of certain transaction expenses in connection with the acquisition. |
The following unaudited pro forma condensed combined financial statements contained herein are for informational purposes only and are not intended to present or be indicative of what the combined company’s financial condition or results of operations would have been, had the Microlab acquisition occurred on the dates indicated above. They also may not be useful in predicting, and are not intended to project, the future financial condition and results of operations of the combined company. The pro forma adjustments are preliminary and are based upon currently available information and certain assumptions which management believes are reasonable under the circumstances and which are described in the accompanying notes to the unaudited pro forma condensed combined financial information. The actual combined financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors, and do not reflect all the costs, benefits and synergies that may be incurred or realized as a result of the merger of operations of RF Industries and Microlab. To prepare the unaudited pro forma condensed combined financial information under the acquisition method of accounting, the fair value of Microlab’s assets and liabilities was based on preliminary estimates of fair value as of the date the acquisition was complete. Any excess of the purchase price over the fair value of assets acquired and liabilities assumed is recognized as goodwill. RF Industries has not yet completed the detailed valuation work necessary to finalize the estimated fair values of the Microlab assets acquired and liabilities assumed and to finalize the related allocation of purchase price. Consequently, the purchase price allocation included in the unaudited pro forma condensed combined financial information is preliminary and is subject to further adjustments, which may be material, as additional information becomes available and as additional analyses are performed.
The unaudited pro forma condensed combined financial statements should be read in conjunction with:
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the accompanying notes to the unaudited pro forma condensed combined financial information, |
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RF Industries’ audited consolidated financial statements and related notes as of and for the year ended October 31, 2021, which are included in RF Industries’ annual Report on Form 10-K for the year then ended filed on January 14, 2022, and |
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Microlab’s audited consolidated financial statements and related notes as of and for the year ended December 31, 2021, which are included in this filing. |
RF INDUSTRIES, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2021
(in thousands, except per share data)
|
Historical |
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|
RF Industries, Ltd. |
Microlab |
Transaction Accounting Adjustments |
Note Reference |
Financing Adjustments |
Note Reference |
Pro Forma Combined |
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|
Net sales |
$ | 57,424 | $ | 17,756 | $ | (283 | ) |
4g |
$ | 74,897 | ||||||||||||
|
Cost of sales |
39,656 | 10,259 | (283 | ) |
4g |
49,632 | ||||||||||||||||
|
Gross profit |
17,768 | 7,497 | - | - | 25,265 | |||||||||||||||||
|
Operating expenses: |
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|
Engineering |
1,479 | 900 | 2,379 | |||||||||||||||||||
|
Selling and general |
11,874 | 6,424 | 1,036 |
4a |
21,969 | |||||||||||||||||
| 2,755 |
4c |
|||||||||||||||||||||
| 59 |
4e |
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|
|
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|
Total operating expenses |
13,353 | 7,324 | 3,850 | - | 24,527 | |||||||||||||||||
|
Operating income (expense) |
4,415 | 173 | (3,850 | ) | - | 738 | ||||||||||||||||
|
Other income (expense) |
2,802 | (14 | ) | - | (608 | ) |
4d |
2,180 | ||||||||||||||
|
Income (loss) before provision for income taxes |
7,217 | 159 | (3,850 | ) | (608 | ) | 2,918 | |||||||||||||||
|
Provision (benefit) from income taxes |
1,036 | - | (903 | ) |
4i |
- | 133 | |||||||||||||||
|
Consolidated net income (loss) |
$ | 6,181 | $ | 159 | $ | (2,947 | ) | $ | (608 | ) | $ | 2,785 | ||||||||||
|
Income per share |
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|
Basic |
$ | 0.62 | $ | 0.28 | ||||||||||||||||||
|
Diluted |
$ | 0.61 | $ | 0.27 | ||||||||||||||||||
|
Weighted average shares outstanding |
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|
Basic |
9,978,683 | 9,978,683 | ||||||||||||||||||||
|
Diluted |
10,154,239 | 10,154,239 | ||||||||||||||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
RF INDUSTRIES, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF OCTOBER 31, 2021
(in thousands)
|
Historical |
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|
RF Industries, Ltd. |
Microlab |
Transaction Accounting Adjustments |
Note Reference |
Financing Adjustments |
Note Reference |
Pro Forma Combined |
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|
ASSETS |
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|
CURRENT ASSETS |
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|
Cash and cash equivalents |
$ | 13,053 | $ | 25 | $ | (25,315 | ) |
4a |
$ | 16,970 |
4b |
$ | 4,518 | |||||||||
| (175 | ) |
4e |
||||||||||||||||||||
| (40 | ) |
4e |
||||||||||||||||||||
|
Trade accounts receivable, net of allowances |
13,523 | 2,883 | (93 | ) |
4h |
16,313 | ||||||||||||||||
|
Inventories |
11,179 | 3,987 | 15,166 | |||||||||||||||||||
|
Other current assets |
2,893 | - | 41 |
4a |
4,093 | |||||||||||||||||
| 294 |
4e |
|||||||||||||||||||||
| 865 |
4i |
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|
|
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|
TOTAL CURRENT ASSETS |
40,648 | 6,895 | (24,423 | ) | 16,970 | 40,090 | ||||||||||||||||
|
PROPERTY, PLANT AND EQUIPMENT - NET |
708 | 421 | 1,129 | |||||||||||||||||||
|
OTHER ASSETS |
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|
Operating lease right of use assets, net |
1,453 | - | 307 |
4f |
1,760 | |||||||||||||||||
|
Due from Parent |
- | 13,781 | (13,781 | ) |
3b |
- | ||||||||||||||||
|
Goodwill |
2,467 | 1,351 | (1,351 | ) |
3b |
7,593 | ||||||||||||||||
| 5,126 |
3d |
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|
Amortizable intangible assets, net |
2,739 | - | 8,855 |
4c |
11,594 | |||||||||||||||||
|
Non-amortizable intangible assets |
1,174 | - | 2,000 |
3c |
3,174 | |||||||||||||||||
|
Deferred tax assets |
389 | - | 389 | |||||||||||||||||||
|
Other assets |
70 | 164 | 234 | |||||||||||||||||||
|
TOTAL OTHER ASSETS |
8,292 | 15,296 | 1,156 | 24,744 | ||||||||||||||||||
|
TOTAL ASSETS |
$ | 49,648 | $ | 22,612 | $ | (23,267 | ) | $ | 16,970 | $ | 65,963 | |||||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
RF INDUSTRIES, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF OCTOBER 31, 2021
(in thousands)
|
Historical |
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|
RF Industries, Ltd. |
Microlab |
Transaction Accounting Adjustments |
Note Reference |
Financing Adjustments |
Note Reference |
Pro Forma Combined |
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|
LIABILITIES AND STOCKHOLDERS' EQUITY |
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|
CURRENT LIABILITIES |
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|
Accounts payable |
$ | 3,504 | $ | 783 | $ | (93 | ) |
4h |
$ | 4,194 | ||||||||||||
|
Accrued expenses and other current liabilities |
5,034 | 1,182 | 150 |
4a |
6,974 | |||||||||||||||||
| 608 |
4d |
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|
Current portion of operating lease liabilities |
832 | - | 307 |
4f |
1,139 | |||||||||||||||||
|
TOTAL CURRENT LIABILITIES |
9,370 | 1,965 | 972 | - | 12,307 | |||||||||||||||||
|
OTHER LIABILITIES |
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|
Long-term debt, net |
- | - | 16,970 |
4b |
16,970 | |||||||||||||||||
|
Operating lease liabilities |
675 | - | 675 | |||||||||||||||||||
|
TOTAL LIABILITIES |
10,045 | 1,965 | 972 | 16,970 | 29,953 | |||||||||||||||||
|
COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS’ EQUITY |
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|
Membership interests |
- | 47 | (47 | ) |
4j |
- | ||||||||||||||||
|
Net member investment |
- | 1,472 | (1,472 | ) |
4j |
- | ||||||||||||||||
|
Common stock - authorized 20,000,000 shares of $0.01 par value; 10,058,571 shares issued and outstanding at October 31, 2021 |
101 | - | 101 | |||||||||||||||||||
|
Additional paid-in capital |
24,301 | - | 24,301 | |||||||||||||||||||
|
Retained earnings |
15,201 | 19,128 | (19,128 | ) |
4j |
11,609 | ||||||||||||||||
| (3,592 | ) | |||||||||||||||||||||
|
TOTAL STOCKHOLDERS' EQUITY |
39,603 | 20,647 | (24,239 | ) | - | 36,011 | ||||||||||||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ | 49,648 | $ | 22,612 | $ | (23,267 | ) | $ | 16,970 | $ | 65,963 | |||||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF MICROLAB ACQUISITION
On March 1, 2022, RF Industries, Ltd. (“RF Industries”) completed the purchase of 100% of the issued and outstanding membership interests of Microlab/FXR LLC (“Microlab”) from Wireless Telecom Group, Inc, a New Jersey corporation. 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 consideration for the Purchase Transaction was $24,250,000, subject to certain post-closing adjustments. The purchase price was paid in cash at the closing. RF Industries funded $17 million of the cash purchase price from the funds obtained under a term loan and paid the remaining amount of the purchase price with cash on hand.
NOTE 2 – BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined financial statements have been prepared to illustrate the estimated effects of the acquisition by RF Industries of Microlab using the acquisition method of accounting in accordance with Accounting Standards Codification 805, Business Combinations, (“ASC 805”). Under the acquisition method, the assets and liabilities of Microlab are generally recorded by RF Industries at their respective fair values as of the date the acquisition was completed based upon preliminary valuation using information known and knowable as of the date of this filing. The unaudited pro forma condensed combined balance sheet as of October 31, 2021, is based on the individual historical consolidated balance sheets of RF Industries and Microlab and has been prepared to reflect the acquisition as if it had occurred on October 31, 2021, which was RF Industries’ 2021 fiscal year end. The unaudited pro forma condensed combined statements of operations for the fiscal year ended October 31, 2021, combine the historical results of operations of RF Industries and Microlab, and have been prepared to reflect the acquisition as if it had occurred on November 1, 2020, the first day of RF Industries’ fiscal year ended October 31, 2021.
The unaudited pro forma condensed combined statements of operations do not reflect future events that may occur after the acquisition, including, but not limited to, certain costs, benefits and synergies that may be incurred or realized in connection with the acquisition. The unaudited pro forma condensed combined financial statements are for informational purposes only and do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated.
The valuations of the assets acquired and liabilities assumed are preliminary and have not yet been finalized as of the date of this filing. The purchase price allocations are preliminary and subject to potentially material changes, including the valuation of intangible assets and goodwill, among other items. The final purchase price allocation may be materially different than the preliminary purchase consideration allocation presented in the unaudited pro forma combined financial information. Any changes in the fair values of the net assets or total purchase consideration as compared with the information shown in the unaudited pro forma condensed combined financial information may change the amount of the total purchase price allocated to goodwill and other assets and liabilities and may impact the combined company’s balance sheet and statement of income. As a result of the foregoing, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information.
As of the date of this filing, RF Industries has not identified any differences in accounting policies that would have a material impact on the condensed combined financial statements.
NOTE 3 – CONSIDERATION TRANSFERRED AND PRELIMINARY PURCHASE PRICE
ALLOCATION
The unaudited pro forma condensed combined balance sheet has been adjusted to reflect the estimated fair values of Microlab’s identifiable assets acquired and liabilities assumed, and the excess of the consideration over these fair values is recorded as goodwill. RF Industries has not completed the detailed valuation work necessary to finalize the estimated fair values of the assets acquired and liabilities assumed and the related allocation of purchase price. The consideration transferred and preliminary fair value of Microlab’s assets acquired and liabilities assumed as if the acquisition occurred on October 31, 2021 are provided below.
|
Amount (in thousands) |
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|
Contractual purchase price |
$ | 24,250 | ||
|
Total consideration transferred |
$ | 24,250 | ||
|
Note |
Amount (in thousands) |
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|
Preliminary amounts of identifiable assets acquired and liabilities assumed: |
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|
Net book value of assets acquired as of 12/31/2021 |
a |
$ | 20,646 | ||
|
Elimination of pre-existing “due from parent” and goodwill |
b |
(15,132 | ) | ||
|
Adjusted net book value of assets acquired |
5,514 | ||||
|
Backlog |
c |
2,000 | |||
|
Customer Relationships |
c |
8,000 | |||
|
Tradename |
c |
2,000 | |||
|
Non-compete |
c |
800 | |||
|
Patents |
c |
810 | |||
|
Goodwill |
d |
5,126 | |||
|
Net assets acquired at fair value |
$ | 24,250 | |||
|
a. Reflects the historical book value of assets acquired from Microlab. |
|
b. Reflects the elimination of certain previously recorded assets by Microlab as part of purchase accounting. The historical book value of these assets was as follows: |
|
Amount (in thousands) |
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|
Due from Parent |
$ | 13,781 | ||
|
Goodwill |
1,351 | |||
|
Total Eliminations |
$ | 15,132 | ||
|
c. Reflects the estimated amount of Microlab's backlog, customer relationship, tradename, non-compete and patents to fair value based on preliminary valuation. |
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|
d. Goodwill is calculated as the difference between the fair value of the consideration transferred and the values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. |
NOTE 4 – TRANSACTION ACCOUNTING and FINANCING ADJUSTMENTS
|
a. Represents the impact to cash consisting of the following: |
|
October 31, 2021 (in thousands) |
||||
|
Contractual purchase price |
$ | (24,250 | ) | |
|
Key employee bonuses |
150 | |||
|
Insurance (50% of D&O tail policy) |
(138 | ) | ||
|
Security deposit for sublease |
(41 | ) | ||
|
Acquisition Related Fees |
(1,036 | ) | ||
|
Total change in cash |
(25,315 | ) | ||
|
The acquisition related fees of $1,036,000 consist of investment banker fees, legal fees and other professional consulting services and are not expected to recur and affect the Company’s income from operations beyond 12 months after the transaction. |
|
b. To adjust for the principal received, less financing costs in connection with the new Term Loan facility used to finance the Microlab acquisition as detailed below. |
|
October 31, 2021 (in thousands) |
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|
Proceeds from Term Loan |
$ | 17,000 | ||
|
Debt issuance costs |
(30 | ) | ||
|
Total change in debt |
$ | 16,970 | ||
|
c. To adjust for the net increase in amortization expense attributable to the preliminary estimated fair value of acquired identified definite-lived intangible assets for the fiscal year ended October 31, 2021 as follows: |
|
Fair Value (in thousands) |
Useful Life (Months) |
Amortization Expense (in thousands) |
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|
Backlog |
2,000 | 14 | 1,714 | |||||||||
|
Customer Relationships |
8,000 | 120 | 800 | |||||||||
|
Non-compete |
800 | 60 | 160 | |||||||||
|
Patents |
810 | 120 | 81 | |||||||||
|
Total |
$ | 11,610 | $ | 2,755 | ||||||||
|
d. Represents the interest expense in connection with the acquisition of Microlab related to proceeds from the Term Loan facility for the fiscal year ended October 31, 2021 as detailed below. |
|
Fiscal Year 2021 (in thousands) |
||||
|
Interest expense on New Term Loan facility |
$ | 602 | ||
|
Amortization of debt issuance costs |
6 | |||
|
Net adjustment to interest expense |
608 | |||
|
e. To adjust for the net increase in acquisition-related prepaid insurance and amortization expense, as follows: |
|
Amount (in thousands) |
||||
|
Representations & Warranty Insurance |
$ | 175 | ||
|
Underwriting Fee |
40 | |||
|
Directors & Officer Tail Insurance |
138 | |||
|
Total prepaid insurance |
353 | |||
|
Term (years) |
6 | |||
|
Amortization |
$ | 59 | ||
f. ASU 2016-02, Leases (ASC 842) requires a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with a term of more than twelve months. Amounts reflect the estimated impact of adopting ASC 842 as of October 31, 2021.
|
g. To adjust for intercompany sales: |
|
October 31, 2021 (in thousands) |
||||
|
Intercompany Sales |
$ | 283 | ||
Intercompany sales represents purchases made by RF Industries of Microlab products.
|
h. To adjust for intercompany payables and receivables: |
|
October 31, 2021 (in thousands) |
||||
|
Accounts Payable/ Accounts Receivable |
$ | 93 | ||
i. Represents the income tax impact of the pro forma adjustments, using the statutory federal rate of 21% which was the rate of RF Industries for the fiscal year ended October 31, 2021. This is not the effective tax rate of RF Industries or expected for the combined business, which would exclude the impact of various amounts such as the non-taxable PPP Loan forgiveness income, research and development tax credits and tax benefits associated with share-based compensation. The combined company’s effective tax rate and tax position could be significantly different (either higher or lower) depending on post-acquisition activities.
j. Represents elimination of membership interest, net membership investment, additional paid-in capital and retained earnings of Microlab.