Note 1 - Business activities and summary of significant accounting policies

Business activities

The Company’s business is comprised of the design, manufacture and/or sale of communications equipment primarily to the radio and other professional communications related industries. The Company conducted its operations through four related business divisions: (i) Connector and Cable Assembly Division is engaged in the design, manufacture and distribution of coaxial connectors and cable assemblies used primarily in radio and other professional communications applications; (ii) Aviel Division is engaged in the design, manufacture and sales of radio frequency, microwave and specialized connectors and connector assemblies for aerospace, original electronics manufacturers and military electronics applications; (iii) Bioconnect Division is engaged in the design, manufacture and sales of cable interconnects for medical monitoring applications; and (iv) the Cables Unlimited Division manufactures custom and standard cable assemblies, adapters, and electromechanical wiring harnesses for communication, computer, LAN, automotive and medical equipment.

During 2013, the Company sold and discontinued its operations of the RF Neulink and RadioMobile divisions (see Note 2). In addition, effective November 1, 2013, the Oddcables Division was integrated with the Connector and Cable Division.

Correction of immaterial errors

The Company identified the following immaterial errors in its previously issued audited consolidated financial statements as of and for the year ended October 31, 2013:

The provision for income taxes ($170,000), deferred tax asset ($173,000) and additional paid-in capital ($343,000) were understated as a result of an understatement in the amount of stock-based compensation previously expensed.

Inventory on hand was overstated and cost of sales was understated by $71,000 ($52,000 net of tax) as a result of not recording scrap and shrinkage for inventory held at a vendor location.

Prepaid expense was understated and cost of sales was overstated by $15,000 ($11,000 net of tax) for unrecorded vendor credits.

Bonus expense and accrued expense were understated by $20,000 ($15,000 net of tax) for an additional bonus net of bonus over accruals.

The errors in the accounting for the above items resulted in an overstatement of income from continuing operations before provision for income taxes of $76,000, an understatement of provision for income taxes of $150,000, an overstatement of income from continuing operations of $226,000, and an overstatement of primary and fully diluted earnings per common share of $0.03 for the year ended October 31, 2013.

The Company reviewed the accounting error utilizing SEC Staff Accounting Bulletin No. 99, “Materiality” (“SAB 99”) and SEC Staff Accounting Bulletin No. 108, “Effects of Prior Year Misstatements on Current Year Financial Statements” (“SAB 108”) and determined the impact of the errors to be immaterial to any prior period’s presentation. The accompanying 2013 audited financial statements reflect the corrections of the aforementioned immaterial errors.

Use of estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results may differ from those estimates.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of RF Industries, Ltd. and its wholly owned subsidiary, Cables Unlimited, Inc. (“Cables Unlimited”) (collectively the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

Cash equivalents

The Company considers all highly-liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Revenue recognition

Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. The Company recognizes revenue from product sales after purchase orders are received which contain a fixed price and the products are shipped. Most of the Company’s products are sold to continuing customers with established credit histories.

Inventories

Inventories, consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or market. Cost has been determined using the weighted average cost method.

Property and equipment

Equipment, tooling and furniture are recorded at cost and depreciated over their estimated useful lives (generally 3 to 5 years) using the straight-line method. Expenditures for repairs and maintenance are charged to operations in the period incurred.

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill is not amortized, but is subject to impairment analysis at least once annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. At October 31, 2014, the Company performed a qualitative assessment of factors to determine whether it was necessary to perform impairment testing. Based on the results of the work performed, the Company concluded that no impairment loss was warranted at October 31, 2014. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance and other relevant events, management expertise and stability at key positions. Additional impairment analyses at future dates may be performed to determine if indicators of impairment are present, and if so, such amount will be determined and the associated charge will be recorded to the Consolidated Statement of Income.

On June 15, 2011, the Company completed its acquisition of Cables Unlimited. Goodwill related to this acquisition is included within the Cables Unlimited reporting unit. As of October 31, 2014, the goodwill balance related solely to the Cables Unlimited acquisition. No goodwill impairment occurred in 2014 or 2013.

Long-lived assets including goodwill

The Company assesses 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 have made no material adjustments to our long-lived assets in any of the years presented.

The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment.

In addition, we test our goodwill and trademarks, indefinite-lived assets, for impairment at least annually or more frequently if events or changes in circumstances indicate these assets may be impaired. No goodwill or trademark impairments have been identified in any of the years presented.

Intangible assets

Intangible assets consist of the following as of October 31 (in thousands):

	2014		2013
Amortizable intangible assets:
Non-compete agreements (estimated life 5 years)	$	200	$	200
Accumulated amortization		(135)		(95)
		65		105

Customer relationships (estimated life 9.6 years)		1,730		1,730
Accumulated amortization		(608)		(428)
		1,122		1,302

Totals	$	1,187	$	1,407

Non-amortizable intangible assets:
Trademarks	$	410	$	410

Amortization expense for the years ended October 31, 2014 and 2013 was $220,000 for each year.

Estimated amortization expense related to finite lived intangible assets is as follows (in thousands):

Year ending
October 31,		Amount

	2015	$	220
	2016		206
	2017		180
	2018		180
	2019		180
	Thereafter		221
	Total	$	1,187

Advertising

The Company expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations were approximately $147,000 and $195,000 in 2014 and 2013, respectively.

Research and development

Research and development costs are expensed as incurred. The Company’s research and development expenses relate to its engineering activities, which consist of the design and development of new products for specific customers, as well as the design and engineering of new or redesigned products for the industry in general. During the years ended October 31, 2014 and 2013, the Company recognized $948,000 and $998,000 in engineering expenses, respectively.

Income taxes

The Company accounts for income taxes under the asset and liability method, based on the income tax laws and rates in the jurisdictions in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Management’s judgments and tax strategies are subject to audit by various taxing authorities.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Stock options

For stock option grants to employees, the Company recognizes compensation expense based on the estimated fair value of the options at the date of grant. Stock-based employee compensation expense is recognized on a straight-line basis over the requisite service period. The Company issues previously unissued common shares upon the exercise of stock options.

For the fiscal years ended October 31, 2014 and 2013, charges related to stock-based compensation amounted to approximately $390,000 and $232,000, respectively. For the fiscal years ended October 31, 2014 and 2013, stock-based compensation classified in cost of sales amounted to $67,000 and $58,000 and stock-based compensation classified in selling, general and engineering expense amounted to $323,000 and $174,000, respectively.

Earnings per share

Basic earnings per share is calculated by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally those issuable upon the exercise of stock options, were issued and the treasury stock method had been applied during the period. The greatest number of shares potentially issuable by the Company upon the exercise of stock options in any period for the years ended October 31, 2014 and 2013, that were not included in the computation because they were anti-dilutive, totaled 328,569 and 21,177, respectively.

The following table summarizes the computation of basic and diluted earnings per share:

	2014		2013
Numerators:
Consolidated net income (A)	$	1,439,000	$	3,602,000

Denominators:
Weighted average shares outstanding for basic earnings per share (B)		8,215,688		7,600,029
Add effects of potentially dilutive securities - assumed exercise of stock options		526,337		855,602

Weighted average shares outstanding for diluted earnings per share (C)		8,742,025		8,455,631

Basic earnings per share (A)/(B)	$	0.18	$	0.47

Diluted earnings per share (A)/(C)	$	0.16	$	0.43

Reclassification

Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated net income.

Recent accounting standards

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for the Company beginning in its first quarter of 2018. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.