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Note 1 - Unaudited Interim Condensed Consolidated Financial Statements
 6 Months Ended
Apr. 30, 2020
Notes to Financial Statements  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]
Note
1
–
Unaudited interim condensed consolidated financial statements
 
Our accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form
10
-Q. Accordingly, they do
not
include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, which are normal and recurring, have been included in order to make the information
not
misleading. Information included in the consolidated balance sheet as of
October 31, 2019
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, 2019
included in our Annual Report on Form
10
-K (“Form
10
-K”) for the year ended
October 31, 2019
that was previously filed with the Securities and Exchange Commission (“SEC”). Operating results for the
six
months ended
April 30, 2020
are
not
necessarily indicative of the results that
may
be expected for the year ending
October 31, 2020.
The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form
10
-K for the year ended
October 31, 2019.
 
Principles of consolidation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of RF Industries, Ltd. and our
four
wholly-owned subsidiaries, Cables Unlimited, Inc. (“Cables Unlimited”), Rel-Tech Electronics, Inc. (“Rel-Tech”), C Enterprises, Inc. (“C Enterprises”), and Schroff Technologies International, Inc. (“Schrofftech”). C Enterprises is a wholly-owned subsidiary that RF Industries, Ltd. acquired effective
March 15, 2019.
For periods on or before
January 31, 2019,
references herein to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, and Rel-Tech, and periods between
January 31, 2019
and
October 31, 2019,
references to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, and C Enterprises. Schrofftech is a wholly-owned subsidiary that RF Industries, Ltd. acquired effective
November 1, 2019.
For periods after
October 31, 2019,
references to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech. All intercompany balances and transactions have been eliminated in consolidation.
 
Risks and uncertainties
 
In
March 2020,
the World Health Organization (the “WHO”) declared coronavirus (COVID-
19
) a pandemic emergency. The COVID-
19
pandemic has negatively impacted regional and global economies, disrupted global supply chains, and created significant volatility and disruption of financial markets. The global impact of the outbreak has been rapidly evolving and certain jurisdictions, including those where we have operations, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, social distancing protocols and restrictions on types of business that
may
continue to operate. While we have been deemed an “essential” business, and therefore have been permitted to continue our operations, the impact of the COVID-
19
pandemic has affected both our operations and those of our customers. Our operations have been 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 our reduced workforce as many 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, overall demand for our products has been reduced, 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
three
and
six
months ended
April 30, 2020.
We currently expect the decline caused by the economic slowdown to persist through the remainder of
2020.
The operations of our Cables Unlimited, Inc. subsidiary in Long Island, New York, was particularly affected as many employees stayed at home and as local customers shut down or otherwise delayed, deferred or cancelled orders for our products. Because of the severe impact that COVID-
19
has on our Northeastern operations, in
May 2020
we applied for and received a
$2.8
million of loans (the “PPP Loans”) under the Paycheck Protection Program of the CARES Act. The funds from the PPP Loans are being 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). We anticipate that most of the PPP Loans will be eligible for forgiveness in accordance with the provisions of the CARES Act. To the extent
not
forgiven, the PPP Loans have a
two
-year term, a fixed interest rate of
1%,
and principal and interest payments are deferred for
six
months.
 
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. U.S. 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
April 30, 2020
and
October 31, 2019,
the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximated their carrying value due to their short-term nature. See Note
5
for discussion on the fair value of other long-term liabilities.
 
Revenue recognition
 
In accordance with Accounting Standards Update ASU
No.
2014
-
09,
Revenue from Contacts with Customers (Topic
606
) (“ASC
606”
), we recognize revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. 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 control of the goods have transferred. Control of goods are transferred based on shipping terms for each customer – for shipments with terms of FOB Shipping Point, control is transferred upon shipment; for shipments with terms of FOB Destination, control is transferred upon delivery.
 
Leases
 
In accordance with ASU
No.
2016
-
02,
Leases, we determine if an arrangement is a lease at inception. Operating leases are included in our consolidated balance sheet as operating lease right of use (“ROU”) assets, other current liabilities, and operating lease liabilities. Finance leases are included in finance ROU assets, other current liabilities, and finance lease liabilities on our consolidated balance sheet. ROU assets represent our right to use an underlying asset for the duration of the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do
not
provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms
may
include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term and is recognized on the consolidated statements of operations.
 
Recent accounting standards
 
Recently issued accounting pronouncements
not
yet adopted:
 
In
January 2017,
the FASB issued ASU
No.
2017
-
04,
Intangibles—Goodwill and Other, which simplifies the accounting for goodwill impairments by eliminating step
2
from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.” The guidance is effective for fiscal years beginning after
December 15, 2019.
Early adoption is permitted. We are currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements.
 
In
June 2016,
the 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.
Early adoption is permitted. We are currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements.
 
Recently issued accounting pronouncements adopted:
 
In
February 2016,
the FASB issued ASU
No.
2016
-
02,
Leases. This ASU requires lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under the current GAAP. Under ASU
2016
-
02,
lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients. We adopted the standard as of
November 1, 2019,
the beginning of our fiscal
2020,
applying the modified retrospective method. We elected the package of practical expedients permitted under the transition guidance with the new standard, which among other things, allows us to carryforward the historical lease classification. We elected the policy which allows us to combine the nonlease components with its related lease components rather than separating, and the policy election to keep leases with an initial term of
12
months or less off of the balance sheet. We have recognized those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The adoption of the standard resulted in a material recognition of additional right of use assets and lease liabilities of approximately
$2.3
million and
$2.4
million, respectively, as of
November 1, 2019,
but did
not
materially affect our consolidated net income.