RF Industries, Ltd. – Currently Listed as ‘RFIL’ on the Nasdaq Stock Market

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Company Overview

RF Industries, Ltd. (“RFIL”) is a business that has described their operations the following way:

RF Industries, Ltd. (together with subsidiaries, the “Company,” “we”, “us”, or “our”) is a national manufacturer and marketer of interconnect products and systems, including high-performance components such as RF connectors and adapters, dividers, directional couplers and filters, coaxial cables, data cables, wire harnesses, fiber optic cables, custom cabling, energy-efficient cooling systems and integrated small cell enclosures. Through our manufacturing and production facilities, we provide a wide selection of interconnect products and solutions primarily to telecommunications carriers and equipment manufacturers, wireless and network infrastructure carriers and manufacturers and to various original equipment manufacturers (“OEMs”) in several market segments. We also design, engineer, manufacture and sell energy-efficient cooling systems and integrated small cell solutions and related components.

We operate through two reporting segments: (i) the RF Connector and Cable Assembly (“RF Connector”) segment, and (ii) the Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment. The RF Connector segment primarily designs, manufactures, markets and distributes a broad range of RF connector, adapter, coupler, divider, and cable products, including coaxial passives and cable assemblies that are used in telecommunications and information technology, OEM markets and other end markets. The Custom Cabling segment designs, manufactures, markets and distributes custom copper and fiber cable assemblies, complex hybrid fiber optic and power solution cables, electromechanical wiring harnesses for a broad range of applications in a diverse set of end markets, energy-efficient cooling systems for wireless base stations and remote equipment shelters and custom designed, pole-ready 4G and 5G small cell integrated enclosures. [3]

This Security Issue came to our attention at the price of approximately 2.96 during late-2023, with drafting of this Piece initially beginning not too soon after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/BV ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio

Our Suspected Valuation at First Glance: Possibly ‘Silver’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 – 23].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from RFIL’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 1.49 in accordance with Table 2 – 3, and Table 2 – 4 above, whilst the best, average and worst-case scenarios are 1.22, 1.09 and 0.93 respectively, all of which are now below the minimum recommended figure of 1.5. The Issue only fails the acid test in the last of the four instances.

There is currently no long-term debt to exceed the net current asset value.

The Company has demonstrated three losses over the last decade, and it is our opinion that the earnings have not been too consistent. We believe the five- and 10-year averages cannot be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers.

The Company currently has not paid any cash dividends on their common stock since 2020.

The Company’s most recent annual earnings were negative whereas those of six years prior were positive; and conversely, looking at the three-year averages of our diluted EPS (beginning 2015) we can see that over the latest fiscal decade, the EPS have gone from a negative value to a positive value.

The discernible tangible equity per share is -0.40 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be -1.03, -1.37 and -1.70, respectively, all of which are negative and render the 120%-price-paid-to-DTE metric invalid in this instance.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were six main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following six points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Assessment of Going Concern

This topic for further discussion has earned its first-place position on account of its overwhelming significance. Please review the following excerpt:

Assessment of Going Concern (Note 1 to the Consolidated Financial Statements)

Significant judgment is exercised by the Company in determining whether there is substantial doubt the Company will continue as a going concern. Specifically, the Company’s forecasted cash flows are sensitive to significant assumptions such as projected revenue and projected operating results, all of which are affected by the expected future market or economic conditions, including the residual effects of the global pandemic, and inflation. Given these factors, the related audit effort in evaluating management’s judgments in determining the Company’s ability to continue as a going concern was challenging, subjective, and complex and required a high degree of auditor judgment. [5]

An obvious explanation detailing this concern’s provenance was not much provided by the Company, with the excerpt just showcased (taken directly from the latest 2023 10-K Form) being the foremost explanation. It seems rather obvious to us that if there exists such an earthshaking transgression then full elucidation should be thoroughly detailed, therefore we believe that those interested in RFIL as an addition to a suitable investment operation should aim to extract as much information about this ‘Assessment of Going Concern’ matter from Management as soon as possible; it comes across as rather obnoxious to include this and then swiftly move on. The concern could likely instil trepidation in many and we would not blame them; we place going concern concerns amongst the worst sort of revelations and we believe they are good grounds to have any interest in a Security Issue revoked. We’ll continue our discussion as per usual although as you can likely tell, this concern is enough for us to draw a non-favourable conclusion. As always it us up to the individual(s) to come to their own finalized conclusions, drawn from their own analysis.

Recent Losses

During the latest decade the Company has reported three net losses. Three. Typically we would not cover such an Issue but on account of the other (past) ratios, and the possibility of still unearthing an undervalued Security Issue we have proceeded. Although this will not be a habit.

The first net loss we’ll draw attention to is that of fiscal year 2020 for which a decrease in sales was a factor, a factor linked to cuts in capital expenditures as highlighted here:

Net sales for the year ended October 31, 2020 (“fiscal 2020”) decreased by $12.3 million (or 22%) to $43.0 million, as compared to net sales of $55.3 million for the year ended October 31, 2019 (“fiscal 2019”). The decrease in net sales is attributable to a decrease in net sales at the Custom Cabling segment, which decreased by $13.1 million, or 32%, to $28.5 million compared to $41.6 million in fiscal 2020. The decrease was primarily in our project-based business which declined following the slowdown in carrier capital expenditure spending. The project-based sales decrease was partially offset by additional sales from the newly acquired Schrofftech and C Enterprises subsidiaries. The sales decrease in net sales at the Custom Cabling segment was partially offset by an increase in net sales at the RF Connector segment. Net sales for fiscal 2020 at the RF Connector segment increased by $0.9 million, or 6%, to $14.6 million as compared to $13.7 million for fiscal 2019 as business from the Company’s distribution channel increased. [11]

The following paragraph provides an explanation as to why the Business cut down on the relevant expenditures:

Because of the decrease in capital expenditures by carriers as a result of COVID-19, Custom Cabling sales decreased in fiscal 2020, and the percentage of our revenues generated by the Custom Cabling segment decreased from 75% of our total sales in fiscal 2019 to 66% for the fiscal year ended October 31, 2020. [11]

Clearly one segment caused the consolidated net loss and it was not entirely a ‘company-wide’ issue.

Unlike for the year 2020 however, the loss for fiscal 2023 could not solely be placed on one particular segment as shown by the segment information below the line worded exactly as follows – ‘Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the years ended October 31, 2023 and 2022 are as follows (in thousands)’ (in the 2023 10-K Filing); before income tax deductions both business segments had already suffered a financial loss. The aforementioned line also demonstrates that net sales for the ‘RF Connector and Cable Assembly’ segment increased (as did the net loss for the segment) whilst those of the Custom Cabling Manufacturing and Assembly (“Custom Cabling”) decreased, an issue noted by RFIL themselves, i.e.:

Net sales for the year ended October 31, 2023 (“fiscal 2023”) of $72.2 million decreased by 15.4%, or $13.1 million, compared to the year ended October 31, 2022 (“fiscal 2022”). The decrease in net sales is attributable to the Custom Cabling segment, which decreased by $15.5 million, or 37.2%, to $26.2 million compared to $41.7 million in fiscal 2022, primarily related to wireless carrier network deployment slowdowns across the industry in fiscal 2023 impacting both our hybrid fiber sales and our small cell and direct air cooling products. [5]

In general, the losses seem like the natural order of things and not on account of anything stark, dramatic or something Shareholders should beware in the future (judging at least from the SEC Filings we utilize). Just a decrease in sales, typically observed in business cycles. Although we would not preclude anybody from remaining vigilant over this Issues filings in the next few years to come. Just as a precaution of course.

Acquisition Trends

The Company has a history of acquisitiveness. There was an acquisition in the earlier half of the decade but we’ll focus on the most recent happenings. Please review the following list of recently revealed business combinations:

  • “On March 15, 2019, through C Enterprises, Inc., its newly formed subsidiary, the Company purchased the business and assets of C Enterprises L.P., a California based designer and manufacturer of quality connectivity solutions to telecommunications and data communications distributors. In consideration for the C Enterprises business and assets, the Company paid $600,000 in cash and assumed certain liabilities…There were no intangible assets identified as part of the acquisition” [13].
  • “On November 4, 2019, the Company purchased all of the issued and outstanding shares of Schroff Technologies International, Inc. (‘Schrofftech’) from DRC Technologies, Inc., an unaffiliated party. Based in Rhode Island, Schrofftech is a Rhode Island based manufacturer and marketer of intelligent thermal control systems used by telecommunications companies across the U.S. and Canada, and shrouds for small cell integration and installation. The Company paid $4,000,000 in cash at the closing, of which $900,000 was deposited into two separate escrow accounts for a period of one year and two years, respectively, as security for any indemnification claims the Company may have against the seller. In addition to the cash paid at the closing, the Company agreed to pay up to an additional $2,400,000 as an earn-out payment if Schrofftech achieves certain adjusted earnings before interest, taxes, depreciation and amortization (‘EBITDA’) targets during the two-year period following the closing” [13].
  • “On December 16, 2021, the Company entered into the Purchase Agreement with Seller (Wireless Telecom Group, Inc.), and its wholly-owned subsidiary Microlab, pursuant to which we purchased 100% of the issued and outstanding membership interests of Microlab from the Seller on March 1, 2022. The consideration for the acquisition was $24,250,000, subject to certain post-closing adjustments as set forth in the Purchase Agreement. The purchase price was paid in cash at the closing. We funded most of the cash purchase price from the funds obtained under the $17 million ‘Term Loan’ with Bank of America, N.A. and paid the remaining amount of the cash purchase price with $7.3 million of cash on hand. The Term Loan was issued as part of a loan agreement with Bank of America, N.A. which also provided the Company with the $3 million ‘Revolving Credit Facility’” [7].

Negatively: From the details above it is apparent much debt was accumulated for these combinations, in particular with the Microlab acquisition; and unfortunately the Schrofftech and Microlab acquisitions involved many intangibles for the cost consideration although this was not the trend, as the C Enterprises L.P. acquisition involved no intangibles (although that acquisition was much smaller in comparison). Positively: these business acquisitions were linked to the core operations of the Company, even if tangentially; and there has not been any observable equity dilution for the then-current business owners.

We would not say the Company was overly dependent on this proclivity for income growth, although the C Enterprises move may have had such intentions behind it. The relevant comments below can perhaps help shed some light on why we believe this to be the case:

  • “The Company’s Custom Cabling segment generated $41.6 million of net sales for fiscal 2019, an increase of $3.3 million or 9% when compared to $38.4 million for fiscal 2018 as a result of $7.2 million of sales contributed from the C Enterprises division. This increase was partially offset by a sales decline in the wireless market due to the inclusion of the largest series of orders in the Company’s history in the fiscal 2018 second quarter. C Enterprises was acquired in March 2019 and, therefore, no revenues from this subsidiary were recorded in fiscal 2018” [13].
  • “The results of C Enterprises’ operations subsequent to March 15, 2019 have been included in the results of the Custom Cabling Manufacturing and Assembly segment (‘Custom Cabling segment’) as well as in the consolidated statements of operations. Costs related to the acquisition of C Enterprises were approximately $100,000 and have been expensed as incurred in fiscal 2019 and categorized in selling and general expenses. For the year ended October 31, 2020, C Enterprises contributed revenue of $10.9 million” [11].
  • “Net sales for the year ended October 31, 2020 (‘fiscal 2020’) decreased by $12.3 million (or 22%) to $43.0 million, as compared to net sales of $55.3 million for the year ended October 31, 2019 (‘fiscal 2019’). The decrease in net sales is attributable to a decrease in net sales at the Custom Cabling segment, which decreased by $13.1 million, or 32%, to $28.5 million compared to $41.6 million in fiscal 2020. The decrease was primarily in our project-based business which declined following the slowdown in carrier capital expenditure spending. The project-based sales decrease was partially offset by additional sales from the newly acquired Schrofftech and C Enterprises subsidiaries. The sales decrease in net sales at the Custom Cabling segment was partially offset by an increase in net sales at the RF Connector segment. Net sales for fiscal 2020 at the RF Connector segment increased by $0.9 million, or 6%, to $14.6 million as compared to $13.7 million for fiscal 2019 as business from the Company’s distribution channel increased” [11].

Our penultimate point will be in reference to mentioning of debt being secured by a security interest in certain assets of the Company which could be a positive for Shareholders, but more details could be provided as the full picture was not clearly painted.

Lastly we’ll showcase recent divestures made by RFIL as it appears they do not only look to expand:

Note 3 – Discontinued operations

On October 31, 2018, the Company sold all of the assets and liabilities of its subsidiary, Comnet Telecom Supply (“Comnet Telecom”). The Company and RAP Acquisition Inc. (“RAP Acquisition”), a New Jersey corporation, entered into a stock purchase agreement under which RAP Acquisition agreed to purchase 100% of the issued and outstanding shares of Comnet Telecom for a purchase price of $4,200,000 in cash. Comnet Telecom is a New Jersey-based manufacturer and supplier of telecommunications and data products, including fiber optic cables, cabling technologies, custom patch cord assemblies, data center consoles and other data center equipment. This division was one of the three subsidiaries of the “Custom Cabling Manufacturing and Assembly” segment. Comnet Telecom was acquired by the Company in January 2015 from Robert Portera, and has been a wholly-owned subsidiary of the Company since that time. Mr. Portera served as the President of Comnet Telecom during the period that Comnet Telecom was owned by the Company, and is the founder and principal of RAP Acquisition.

For the year ended October 31, 2018, the Company recognized pretax loss of $221,000 from the discontinued operations of the Comnet Telecom division, and an income tax benefit of $41,000. [13]

Negatively: This was only acquired on January 20, 2015 and it being sold no more than four years later could shake up Stockholder-trust. Positively: The initial purchasing decision was reversed and (the new business) not clung onto for what could be perceived as an overextended stay. We suspect the negative point here outweighs the positive but these and other considerations are as always up to the reader(s).

DEF 14A Forms

This subject material likely could have been a single bullet point under ‘Additional Observations Regarding the Company’s Filings’ part but we opted to separate it out for emphasis. RFIL’s 10-K Forms are usually filed in January and then the corresponding DEF 14A Forms are usually filed later in July the same year, a curious and excessive delay considering they are usually (in the general sense) filed within 120 days of the financial year end (which for RFIL would be at the end of October). Considering the typical timescale we’d like to know why these filing dates are so aberrant and we do believe that RFIL adhering to the standard, if nothing else, will at least make the Business appear more credible which likely benefits everybody involved.

Depreciation and Amortization

It was not clear where the depreciation and amortization charges were accounted for on the consolidated income statement. From looking at the consolidated statements of cash flows its clear D&A charges typically belong to the same order of magnitude as the net income, sometimes even trumping it, meaning if they were not correctly considered then earnings overstatements could be significant. Concerning the methodology for calculating the depreciation charges, the Company uses the straight-line method against the estimated useful lifetimes of the assets of ‘equipment, tooling and furniture’, which has been 3-5 years as of fiscal 2013, prior to which it was 3-7 years.

Material Weakness

Fiscal year 2016 brought forward the following material weakness:

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the above evaluation, the Company’s management has concluded that the system of internal controls over financial reporting were not effective as of October 31, 2016.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis.  Based on its assessment of the Company’s internal control over financial reporting, management has determined that a material weakness in its internal control over financial reporting existed as of October 31, 2016.  Specifically, the material weakness was noted in connection with the untimely review of the impairment analysis for goodwill prepared by third party subject matter experts. Management determined that the Company did not have adequate design or operation of internal controls to ensure the timely review of its accounting for certain complex estimates.  The material weakness resulted in an adjustment to goodwill and intangible assets, which was corrected by management prior to the issuance of the Company’s consolidated financial statement included in this Annual Report.

The Company is committed to maintaining a strong internal control environment. To address and remediate the material weakness in internal control over financial reporting described above, the Company intends to implement additional procedures to more timely review complex accounting estimates that are provided by third-party subject matter experts.

The material weakness cannot be considered to be completely addressed until the applicable additional controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. [19]

The next year, RFIL said they believe the “controls that have been implemented to remediate the material weakness are currently operating effectively for the fiscal year ended October 31, 2017” [17] so it appears swiftly remediated. Regardless however the mere existence of a Material Weakness is not something we take lightly as familiar readers know; another major negative strike against this Security.

Every year the report of Independent Registered Public Accounting Firm has the exact lines “the Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting” [5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25] but we think for the sake of credibility or instilling confidence within loyal Shareholders they should look at making use of the Independent Registered Public Accounting Firm, and have them do exactly this which they do not.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. The Business may currently be in business cycle trough.
  2. Repeatedly RFIL has some customer concentration risk exposure, showcased in the following two quotes:
    1. “For the year ended October 31, 2023, a wireless carrier customer accounted for approximately 10% of total sales and had no accounts receivable. Another distributor customer accounted for approximately 10% of total sales and for 11% of the total net accounts receivable. For the year ended October 31, 2022, the same wireless carrier accounted for approximately 20% of total sales, and a distributor accounted for less than 10% of total sales. These two customers’ accounts receivable balances each accounted for approximately 14% and 19% of the total net accounts receivable balance at October 31, 2022” [5].
    2. “Two customers, a wireless carrier, and a distributor, accounted for approximately 21% and 11%, respectively, of net sales for the year ended October 31, 2021, and their accounts receivable balances accounted for 28% and 8%, respectively, of our total net accounts receivable balance at October 31, 2021. For the year ended October 31, 2020, our two largest customers, both distributors, accounted for approximately 14% and 12% of net sales, and approximately 12% each of the total net accounts receivable balance at October 31, 2020” [9].
  3. The Company is not overly conservatively capitalized so may make for an interesting speculative purchase in that regard.
  4. There are no frequent predictions for any metric the following year, say for capital expenditures, so we are not able to comment on the Company’s forecasting capabilities as we like to.
  5. We do not here suspect any corporate pyramiding.
  6. The Company reiterates that their principles of consolidation include wholly-owned subsidiaries of RF Industries, Ltd. so there are no other stakeholder concerns in say a liquidation type event.
  7. We did not note any recurring non-recurring charges persisting for long periods of time, although there were a few nuisance items like the following:
    1. “Microlab accounted for $3.3 million of the selling and general expenses and acquisition related expenses and other one-time charges (including attorney fees, due diligence, and broker fees) accounted for $1.5 million and additional rent expense of $529,000 (non-cash) related to lease accounting for fiscal 2022. Selling and general expenses also increased as a result of the increase in net sales during the current fiscal 2022” [7].
    2. “We also incurred one-time charges totaling $0.9 million related to an additional rent expense of $444,000 (of which $387,000 was non-cash) related to lease accounting, $252,000 in facility move expenses, severance of $75,000, $63,000 in ERP system implementations, $50,000 in bank waiver amendment fees and $42,000 in bank covenant reviews in fiscal 2023 compared to acquisition related expenses and other one-time charges (including attorney fees, due diligence and broker fees) which accounted for $2.1 million in fiscal 2022” [5].
  8. During fiscal 2021, 294 shares were repurchased and during fiscal 2022, 329 shares were repurchased. Outside of that, no shares have been repurchased in recent years.
  9. The 10-K Forms to not mention comprehensive income even though the latest 10-K Filings stated the following – “Sales to customers located outside the United States, either directly or through U.S. and foreign distributors, accounted for approximately 9% and 12% of our net sales during the years ended October 31, 2023 and 2022, respectively” [5].
  10. There have been an equal number of year-over-year increases in cash and cash equivalents as there have been decreases over the latest decade.
  11. At present the inventories are stated at “lower of cost or net realizable value” [5, 7, 9, 11, 13, 15] and prior to the 2018 annual report they were “stated at the lower of cost or market” [17, 19, 21, 23, 25, 27, 29, 30, 31].
  12. The latest balance sheet listed and “other assets” which were not fully detailed, so we were unable to fully account for in our valuation(s).
  13. There are no large or concerning payments due in a year or so.
  14. There has recently been a decline in the value of the current assets but we believe this should be monitored before any panic sets in.
  15. Every year the Company says they “may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business” [3, 5, 7, 9, 11, 13, 15, 17] and “as of the date of this report, we are not subject to any proceeding that is not in the ordinary course of business or that is material to the financial condition of our business” [3, 5, 7, 9, 11, 13, 15, 17].
  16. The Company is both a “non-accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act, the former of which it began identifying as, as of fiscal 2018.
  17. ‘Evaluation of Goodwill and Indefinite Life Intangibles’ was a critical audit matter in the 2023 annual report, whereas in 2022 and 2021 the critical audit matter was ‘Evaluation of Goodwill and Tradename with indefinite life arising from the acquisition of Schroff Technologies International, Inc.’, both of which centre around the same principles.
  18. There is an entire ‘Risks Related to Our Common Stock’ section, not seeming necessary.

Points we feel may be considered negative

  1. The Company operates in a fast-paced technological space.
  2. We would not say the operations of the Company are the easiest for layman comprehension.
  3. This is a relatively small company in terms of consolidated financials.
  4. There exists an observable stock split from 2011 [32].
  5. The Company currently is not paying any cash dividends following a suspension in fiscal 2020 as explained in the following excerpt – “During fiscal 2020, we made two dividends distributions to our stockholders (for a total of $0.04 per share), but thereafter stopped paying dividends because of the decrease in revenues and profitability and the uncertainty associated with COVID-19” [11].
  6. The Company paid dividends during fiscal 2016 when a net loss occurred.
  7. There are related party transactions literally every year.
  8. When discussing the credit facility covenants, the latest 10-K Filing said the following – “As of July 31, 2023, we were not in compliance with the consolidated debt to EBITDA ratio nor were we in compliance with the consolidated fixed charge coverage ratio covenants (the ‘Defaults’). On September 12, 2023, we entered into Amendment No. 1 and Waiver to the Loan Agreement (‘Loan Amendment No. 1’) with the Bank, which, among other matters, provided for a temporary waiver of (i) the Defaults, and (ii) compliance with the consolidated debt to EBITDA ratio and the consolidated fixed charge coverage ratio minimum covenants for the quarterly periods ending October 31, 2023, January 31, 2024, April 30, 2024 and July 31, 2024” [5].
  9. Every year the Business says the following concerning a portion of their manufacturing requirements – “We depend on third-party contract manufacturers for a majority of our connector manufacturing needs” [5, 7, 9, 11].
  10. RFIL has observable haphazard tax rates; and concerning carryforwards, the latest 10-K Form said the following – “At October 31, 2023, the Company has gross United States federal and state net operating loss (NOL) carryforwards of $0.3 million and $0.2 million, respectively. The federal NOL carryforwards will carry forward indefinitely. The state NOL carryforwards of $0.2 million will begin to expire in 2043 unless previously utilized. At October 31, 2023, the Company also has IRC 163(j) interest carryforwards of $0.6 million, which will carry forward indefinitely. At October 31, 2023, the Company also has state research and development credit carryforwards of $0.2 million. The state credit carryforwards of $0.2 million will begin to expire in 2029 unless previously utilized and the remainder will carry forward indefinitely” [5].
  11. We observed several unfavourable Management situations:
    1. Directors serve staggered three-year terms.
    2. Whenever a Director leaves or retires, the number of Directors is reduced as opposed to a suitable replacement quickly being instated.
    3. The Company makes use of non-GAAP measures when determining EO compensation.
    4. Most of the latest 10 DEF 14A Forms detail delinquency as it pertains towards Section 16(a) of the Exchange Act although the latest two DEF 14As did not address the matter.
    5. There have often been salary increases in addition to bonuses paid after some not so impressive year-over-year showings from the Company.

Points we feel may be considered positive

  1. The Business has been around for a number of decades thus has stood the test of time.
  2. The Company profited during the economic downturn years of both 2008 and 2009.
  3. Currently there is a low institutional ownership of all the Company’s shares outstanding (24.04% at the time of this Piece’s posting [33]).

Possible Questions for RFIL’s Approximate 251 Stockholders to Consider, Investigate and/or Raise with Management

  1. The net income’s growth over the last decade has not visibly improved (at least on a consistent and reliable basis), what is Management doing to rectify this?
  2. Whenever a customer accounts for more than 10% of the Company’s revenue can their identity be disclosed?
  3. The percentage of sales to foreign customers as a percentage of total sales has increased over the last decade. Is this a direction the Company is intentionally heading towards?
  4. Why is there no mention of comprehensive income even though the latest 10-K Filings stated the following – “Sales to customers located outside the United States, either directly or through U.S. and foreign distributors, accounted for approximately 9% and 12% of our net sales during the years ended October 31, 2023 and 2022, respectively” [5]?
  5. Every year RFIL say the following regarding a portion of their manufacturing requirements – “We depend on third-party contract manufacturers for a majority of our connector manufacturing needs” [5, 7, 9, 11]. How much of the total manufacturing requirements do these connector manufacturing needs make up, and how many alternative suppliers do they have for them?
  6. Going forward can a full compressive breakdown of all ‘other’ assets (current and/or non-current) be provided in all 10-K and 10-Q Filings?
  7. Can the depreciation charges be delineated on the income statement?
  8. Can exact estimated useful lives of the depreciated assets be provided as opposed to ranges?
  9. The Company often said they are involved in various claims and lawsuits arising in the normal course of business. Is there a minimum estimated legal or settlement cost at which it is decided that the details of these will be provided to shareholders? And can examples of these claims and lawsuits be provided as they occur?
  10. At present the inventories are stated at “lower of cost or net realizable value” [5, 7, 9, 11, 13, 15] and prior to the 2018 annual report they were “stated at the lower of cost or market” [17, 19, 21, 23, 25, 27, 29, 30, 31]. Where was it made clear why this switch happened?
  11. If there are acquisitions or business combinations, can the Company always say how they were financed i.e., cash on hand, loan proceeds, debt issuance, issuance/selling of equity/common shares etc.?
  12. Why has the Company repeatedly amended their loan requirements the way they have?
  13. When the Company mentions debt being secured by security interests in certain assets of the Company, can it always be made very clear which assets they are referring to alongside their full values etc.?
  14. Going forward can the Company say what they expect of the following financial year’s capital expenditures?
  15. Is there an active share repurchase plan being implemented?
  16. The number of holders of the Company’s Common Stock according to the records of the Company’s transfer agent has dropped over the decade, being 387 as of October 31, 2013, and then 251 as of October 31, 2023. Why do Management think this is?
  17. Can the DEF 14A Forms be filed within 120 days of the financial years end? Why is that not currently the case?
  18. Why did the latest two DEF 14A Forms not mention Section 16(a) of the Exchange Act?
  19. Every year the Company says the following – “Our future success depends largely upon the continued service of our executive officers and other key management and technical personnel, and on our ability to continue to identify, attract, retain and motivate them” [5, 7, 9, 11], but then immediately proceeds to say that other than with the Chief Executive Officer there are no other written employment agreements with RFIL’s executive officers and managers. Has any consideration been given to implementing more employment agreements especially considering it has been said that RFIL’s future success depends largely upon the continued service of their executive officers and other key management and technical personnel?
  20. Was any Director or EO a company founder, co-founder, or descendant of such?
  21. Why do Directors serve staggered three-year terms as opposed to annual terms?
  22. Why has the Company not implemented a formal policy regarding Director attendance at annual meetings of stockholders?

 

Valuations

The price of this Security Issue at the time of this Piece’s publication is 3.71. Using our most recent three-year average of the diluted EPS (0.13) as opposed to the most recent EPS figure (-0.26) changed the P/E ratio from -14.40 to 28.62; and using our discernible tangible equity value per share (-0.40) as opposed to the stated book value per share (2.90, in accordance with Table 2 – 2) has changed the P/BV ratio from 1.28 to -9.32. With that in mind and considering current federal interest rates (5.50% at the time of writing), the current price does not appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

On account of a negative P/BV value, our P2/BV*E upper-limit check is not feasible.

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering both our adjustments and the Company’s financial changes since then:

  • The Company’s low P/BV ratio – no longer valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – no longer valid
  • The Company’s current ratio – no longer valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently overvalued on account of its current and previous quantitative showing.

Our Valuation: Rubber

Granted a lot of time has passed since this first came on our radar, alas we have the following to say: This Security Issue did not do well in our ‘Initial Discussions Regarding the Company’s Financials’ section and the qualitative matters we discussed were rather displeasing. At this point in time there is currently no pricing point at which we would assign this Issue a valuation of ‘Silver’ or higher.

At this point in time and all matters here considered, this is a stock pick we would most definitely neither follow nor add to a stock portfolio irrespective of the price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. RFIL’s 2nd 2024 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/740664/000143774924020196/rfil20240430_10q.htm
  4. RFIL’s 2024 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000143774924023597/rfil20240723_def14a.htm
  5. RFIL’s 2023 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000143774924002469/rfil20231031_10k.htm
  6. RFIL’s 2023 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000143774923020710/rfil20230722_def14a.htm
  7. RFIL’s 2022 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000143774923001684/rfil20221031_10k.htm
  8. RFIL’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000143774922017792/rfil20220722_def14a.htm
  9. RFIL’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000143774922000928/rfil20211031_10k.htm
  10. RFIL’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000143774921017646/rfil20210720_def14a.htm
  11. RFIL’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000143774920026051/rfil20201031_10k.htm
  12. RFIL’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000143774920015519/rfil20200720_def14a.htm
  13. RFIL’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000110465919074978/tm1925158d1_10k.htm
  14. RFIL’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000114420419036355/tv525870_def14a.htm
  15. RFIL’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420418065721/tv509107_10k.htm
  16. RFIL’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000114420418039764/tv498995_def14a.htm
  17. RFIL’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420418003386/tv483221_10k.htm
  18. RFIL’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000114420417038536/v471384_def14a.htm
  19. RFIL’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420417004183/v456943_10k.htm
  20. RFIL’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000114420416114190/v444637_def14a.htm
  21. RFIL’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420416077407/v429128_10k.htm
  22. RFIL’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000114420415043513/v415854_def14a.htm
  23. RFIL’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420415004460/v398964_10k.htm
  24. RFIL’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000114420414043462/v383838_def14a.htm
  25. RFIL’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420414002695/v364674_10k.htm
  26. RFIL’s 2013 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000114420413034587/v347554_def14a.htm
  27. RFIL’s 2012 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420413003372/v331598_10k.htm
  28. RFIL’s 2012 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/740664/000114420412039149/v318203_def14a.htm
  29. RFIL’s 2011 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420412004278/v245519_10k.htm
  30. RFIL’s 2010 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420411001882/v207297_10k.htm
  31. RFIL’s 2009 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/740664/000114420410004379/v171758_10k.htm
  32. https://www.splithistory.com/rfil/?l=1
  33. https://www.gurufocus.com/stock/RFIL/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K Filing/Annual Report which represents the financial year ended that same year, typically in the calendar month of October, i.e., any mention of the ‘2021 10-K Filing’ or ‘2021 Annual Report’ etc. refers to the 10-K Filing representing the fiscal year ended October 2021. The Filings are usually published a few months later, the following calendar year.

Throughout this Piece, any mention of a given year’s Proxy Statement refers to the DEF 14A Form/Proxy Statement which accompanied the most recent 10-K Filing, i.e., any mention of the ‘2022 Proxy Statement’ refers to the DEF 14A Form which accompanied the 2021 10-K Filing; usually published after the 10-K Filing (typically six calendar month(s) relative to the 10-K Filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V