This report contains forward-looking statements. These statements relate to future events or the Company's future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "except," "plan," "anticipate," "believe," "estimate," "predict," "potential," or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company, nor any other person, assumes responsibility for the accuracy and completeness of the forward-looking statements. The Company is under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in its expectations.
The following discussion should be read in conjunction with the Company's unaudited condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company's business, including without limitation the disclosures made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption "Risk Factors," and the audited consolidated financial statements and related notes included in the Company's Annual Report filed on Form 10-K for the year ended October 31, 2021 and other reports and filings made with the Securities and Exchange Commission.
Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to bad debts, inventory reserves, earn-out liabilities, and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Inventories are stated at the lower of cost or net realizable value, with cost determined using the weighted average cost method of accounting. Certain items in inventory may be considered obsolete or excess and, as such, we periodically review our inventories for excess and slow moving items and make provisions as necessary to properly reflect inventory value. Because inventories have, during the past few years, represented up to one-fourth of our total assets, any reduction in the value of our inventories would require us to take write-offs that would affect our net worth and future earnings.
We record an allowance for doubtful accounts based upon our assessment of various factors. We consider historical experience, the age of the accounts receivable balance, credit quality of our customers, current economic conditions and other factors that may affect a customer's ability to pay.
We assess property, plant and equipment and intangible assets, which are considered definite-lived assets, for impairment. Definite-lived assets are reviewed when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value.
We amortize our intangible assets with definite useful lives over their estimated useful lives and review these assets for impairment.
We test our goodwill and trademarks and indefinite-lived assets for impairment at least annually or more frequently if events or changes in circumstances indicate these assets may be impaired. These events or circumstances require significant judgment and could include a significant change in the business climate, legal factors, operating performance indicators, competition and sale or disposition of all or a portion of a division. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.
The purchase agreement for the acquisition of Schrofftech provided for an earn-out payment of up to $2.4 million, which amount was earned through October 31, 2021. Since the earn-out period has expired, no earn-out liability was required to be recorded for the fiscal quarter ended April, 2022. The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure. The earn-out was revalued quarterly using a present value approach, and any resulting increase or decrease were recorded into selling and general expenses. Changes in the amount of the actual results and forecasted scenarios resulted in an adjustment to the fair value. Significant judgment was employed in determining the appropriateness of the assumptions used in calculating the fair value of the earn-out as of the acquisition date.
We record a tax provision for the anticipated tax consequences of the reported results of operations. Income taxes are accounted for under the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates as of the date of the financial statements that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The calculation of the tax provision involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management's expectations could have a material impact on our financial condition and operating results.
We use the Black-Scholes model to value the stock option grants. This valuation is affected by our stock price as well as assumptions regarding a number of inputs which involve significant judgments and estimates. These inputs include the expected term of employee stock options, the expected volatility of the stock price, the risk-free interest rate and expected dividends.
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. Since the acquisition of Schrofftech in November 2019, we also 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, 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 5G small cell integrated enclosures.
For the six months ended April 30, 2022, most of our revenues were generated from the Custom Cabling segment from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which collectively accounted for 70% of the Company's total sales. Revenues from the RF Connector segment were generated from the sales of RF connector products and cable assemblies and accounted for 30% of total sales for the six months ended April 30, 2021. The RF Connector segment mostly sells standardized products regularly used by customers and, therefore, has a more stable revenue stream when compared to the Custom Cabling segment. The Custom Cabling segment mostly designs, manufactures, and sells customized cabling and wireless-related equipment under larger purchase orders. Accordingly, the Custom Cabling segment is more dependent upon larger project orders, and its revenues are, therefore, more volatile than the revenues of the RF Connector segment.
The COVID-19 coronavirus pandemic, in its various strains, negatively affected both our operations and those of our customers. The extent of the impact of the COVID-19 pandemic on our future 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 in fiscal year 2021 and for the three and six months ended April 30, 2022. During the periods covered by this report, the operations at all locations were affected intermittently as some of our employee schedules were impacted, and as certain customers scaled back operations or otherwise delayed or deferred orders for our products. Because of the impact that COVID-19 had on our operations, in May 2020 we applied for and received loans under the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 ("CARES Act") totaling approximately $2.8 million ("PPP Loans"). In February 2021, all of the $2.8 million of PPP Loans were forgiven and considered paid in full (including applicable interest) by the Small Business Administration ("SBA").
In March 2021, the Internal Revenue Service ("IRS") released Notice 2021-20, which retroactively eliminated the restriction that prevented employers who received a PPP loan from qualifying for the Employee Retention Credit ("ERC"), which is a refundable tax credit against certain employment taxes. Upon determination that the employer has complied with all of the conditions required to receive the credit, a receivable is recognized and the credit reduces salaries and wages. For the fiscal year ended October 31, 2021, we qualified and filed to claim the ERC and have recorded the credit as a receivable in Other Current Assets. As of April 30, 2022, we carried a $1.7 million the ERC receivable in Other Current Assets.
Historically, we have been able to fund our liquidity and other capital requirements from funds we generated from operations. On March 1, 2022, we acquired Microlab. The acquisition of Microlab has affected both our liquidity and our capital resources. In order to acquire Microlab, we used $7.3 million of our cash on hand to pay a portion of the purchase price, thereby reducing the amount available for future acquisitions, for investments in the expansion of our existing businesses and assets, or as a reserve for unanticipated financial requirements. In connection with the purchase of Microlab, we entered into the Credit Facility and borrowed the full $17 million amount available under the Term Loan. We believe that our remaining and existing assets and the cash we expect to generate from operations and from our current backlog of unfulfilled orders, will be sufficient to fund our liquidity needs during the next twelve months from the date of this filing based on the following:
As of April 30, 2022, we had a total of $3.8 million of cash and cash equivalents with access to $3.0 million under the Revolving Credit Facility. As of April 30, 2022, we had working capital of $27 million and a current ratio of approximately 3:1 with current assets of $41.6 million and current liabilities of $14.6 million.
As of April 30, 2022, we had $27.6 million of backlog, compared to $33.3 million as of October 31, 2021. Since purchase orders are submitted from customers based on the timing of their requirements, our ability to predict orders in future periods or trends in future periods is limited. Furthermore, purchase orders may be subject to cancellation from customers, although we have not historically experienced material cancellations of purchase orders.
In the six months ended April 30, 2022, we used $1.7 million of cash in our operating activities despite our net income of $0.2 million. The net outflow of cash was due in part to increased inventory purchases (which increased our inventory balance by $4.0 million), and cash used for other current assets. The cash used for other current assets represents of ($1.1 million) which consists of ($0.3 million) in application of prepaid taxes, ($0.6 million) in prepaid expenses and ($0.3 million) in deposits for inventory purchases.
During the six months ended April 30, 2022, we also spent $0.3 million on capital expenditures, and $24.2 million on the purchase of Microlab offset by $17 million from the Term Loan as noted above. The cash used in operating activities and the amounts spent on capital expenditures were partially offset by $0.1 million of proceeds that we received from the exercise of stock options.
Our goal to expand and grow our business both organically and through acquisitions may require material additional capital equipment. In the past, we have purchased all additional equipment, or financed some of our equipment and furnishings requirements through leases. Currently, no additional capital equipment purchases have been identified that would require significant additional leasing or capital expenditures during the next twelve months. We also believe that based on our current financial condition, our current backlog of unfulfilled orders and our anticipated future operations, we would be able to finance our expansion, if necessary.
From time to time, we may undertake acquisitions of other companies or product lines in order to diversify our product and solutions offerings and customer base. Conversely, we may undertake the disposition of a division or product line due to changes in our business strategy or market conditions. Acquisitions may require the outlay of cash, which may reduce our liquidity and capital resources while dispositions may increase our cash position, liquidity and capital resources. Since our goal is to continue to expand our operations and accelerate our growth through future acquisitions, we may use some of our current capital resources to fund any acquisitions we may undertake in the future.
Three Months Ended April 30, 2022 vs. Three Months Ended April 30, 2021
Net sales for the three months ended April 30, 2022 (the "fiscal 2022 quarter") increased by 94%, or $10.4 million, to $21.5 million as compared to the three months ended April 30, 2021 (the "fiscal 2021 quarter") due to an increase in net sales at the Custom Cabling segment and a $3.4 million increase as a result of our consolidation of the results of Microlab, which we acquired in March 2022. Net sales in the Custom Cabling segment increased by $6.5 million, or 86%, to $14 million, compared to $7.5 million in the fiscal 2021 quarter primarily because of increased sales of products to wireless carriers, primarily related to hybrid fiber optic cables used in the build out of 4G and 5G networks. Net sales for the fiscal 2022 quarter at the RF Connector segment increased by $3.9 million, or 109%, to $7.5 million as compared to $3.6 million in the fiscal 2021 quarter, due primarily to the acquisition of Microlab whose results are included in the RF Connector segment.
Gross profit for the fiscal 2022 quarter increased by $1.3 million to $6.1 million and gross margins decreased to 28.3% of sales compared to 43.1% of net sales in the fiscal 2021 quarter due primarily to the ERC that the Company was eligible to claim for the production employees in fiscal quarter 2021. The ERC refundable employee tax credit reduced our labor costs and thereby increased our gross profits in fiscal quarter 2021 compared to fiscal quarter 2022. Excluding the benefit of the ERC, our gross profits for the fiscal 2021 quarter would have been $3.0 million with gross margins of 27.1%.
Engineering expenses increased by $0.7 million to $0.9 million in the fiscal 2022 quarter compared to $0.2 million in the fiscal 2021 quarter due primarily to the additional engineering expenses of $0.4 million from Microlab and to the ERC of $0.2 million the Company was eligible to claim for engineering employees in fiscal 2021 quarter. Engineering expenses represent costs incurred relating to the ongoing research and development of new processes and products.
Selling and general expenses increased by $2.6 million to $4.5 million (21% of sales) compared to $1.9 million (17% of sales) in the second quarter last year due to the ERC the Company was eligible to claim for the general and administrative employees. Excluding the benefit of the ERC, selling and general expenses would have been $2.5 million (23% of sales). Microlab accounted for $0.6 million of the selling and general expenses and acquisition related expenses and other one-time charges (including attorney fees and broker fees) accounted for $0.6 million for the fiscal 2022 quarter. Selling and general expenses also increased as a result of the increase in net sales during the current fiscal 2022 quarter.
For the fiscal 2022 quarter, the Custom Cabling segment and the RF Connector segment had pretax income of $0.8 million and $0.6 million, respectively, as compared to $1.2 million and $1.5 million of income, respectively, for the comparable second quarter last year. The pretax income at both the Custom Cabling and RF Connector segments in the fiscal 2021 quarter was primarily due to the ERC the Company was eligible to claim.
For the fiscal 2022 and 2021 quarters, we recorded income tax provisions of $136,000 and $648,000, respectively. The effective tax rate was 21% for the fiscal 2022 quarter, compared to 24.2% for the fiscal 2021 quarter. The change in effective tax rate for the fiscal 2022 and 2021 quarters was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to our forecasted book income or loss in each period.
For the fiscal 2022 quarter, net income was $0.5 million and fully diluted earnings per share was $0.05 per share, compared to a net income of $4.8 million and fully diluted earnings per share of $0.48 per share for the fiscal 2021 quarter. For the fiscal 2022 quarter, the diluted weighted average shares outstanding was 10,243,636 as compared to 10,129,472 for the fiscal 2021 quarter.
Six Months Ended April 30, 2022 vs. Six Months Ended April 30, 2021
Net sales for the six months ended April 30, 2022 (the "fiscal 2022 six-month period") of $38.4 million increased by 82%, or $17.4 million, compared to the six months ended April 30, 2021 (the "fiscal 2021 six-month period") due to a stronger fiscal 2022 first quarter and the acquisition of Microlab in March 2022. The increase in net sales is attributable to the Custom Cabling segment, which increased by $13.1 million, or 94%, to $27.0 million compared to $13.9 million in the fiscal 2021 six-month period. The increase was primarily in our project-based business which resulted from the upturn in carrier spending in the fiscal 2022 six-month period. Net sales for the fiscal 2022 six-month period at the RF Connector segment increased by $4.3 million, or 61%, to $11.4 million compared to $7.1 million in the fiscal 2021 six-month period of which $3.4 million was a result of the Microlab acquisition.
Gross profit for the fiscal 2022 six-month period increased by $2.8 million to $10.2 million and gross margins decreased to 26.5% of sales from 35.0% of sales in the fiscal 2021 six-month period. The increase in gross profit primarily related to the overall increase in sales and decrease in gross margins was primarily due to the ERC the Company was eligible to claim for production employees for the fiscal 2021 six-month period. Excluding the benefit of the ERC, our gross profits for the fiscal 2021 six-month period would have been $5.6 million and gross margins would have been 26.6%.
Engineering expenses increased $0.7 million to $1.3 million for the fiscal 2022 six-month period compared to $0.6 million in the fiscal 2021 six-month period primarily due to the ERC the Company was eligible to claim for engineering employees in fiscal 2021 quarter as well as the acquisition of Microlab in March 2022. Excluding the benefit of the ERC, engineering expenses would have been $0.9 million, which is a increase of $0.4 million compared to the fiscal 2022 six-month period which includes $0.4 million from Microlab. Engineering expenses represent costs incurred relating to the ongoing research and development of new products.
Selling and general expenses increased by $3.9 million to $8.5 million (22% of sales) compared to $4.6 million (22% of sales) in the six-month period last year due to the ERC the Company was eligible to claim on general and administrative employees. Excluding the benefit of the ERC, selling and general expenses would have been $5.3 million (25% of sales), which is an increase of $3.2 million compared to the fiscal 2022 six-month period. Microlab accounted for $0.6 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 $1.4 million for the fiscal 2022 six-month period. Selling and general expenses also increased as a result of the increase in net sales during the current fiscal 2022 quarter.
For the fiscal 2022 six-month period, pretax income for the Custom Cabling segment and the RF Connector segment was $1.1 million and $0.6 million, respectively, as compared to $0.1 million and $1.9 million of income, respectively, for the comparable six-month period last year. The pretax income at the Custom Cabling and RF Connector segments in the six-month period of fiscal 2021 was primarily due to the ERC the Company was eligible to claim.
For the fiscal 2022 and 2021 six-month periods, we recorded income tax provisions of $56,000 and $454,000, respectively. The effective tax rate was 20.4% for the fiscal 2022 six-month period, compared to 21.8% for the fiscal 2021 six-month period. The change in effective tax rate for the fiscal 2022 and 2021 six-month periods was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to our forecasted book income or loss in each period.
For the fiscal 2022 six-month period, net income was $0.2 million and fully diluted income per share was $0.02 per share as compared to a net income of $4.4 million and fully diluted earnings per share of $0.44 per share for the fiscal 2021 six-month period. For the fiscal 2022 six-month period, the diluted weighted average shares outstanding was 10,229,704 as compared to 10,096,916 for the fiscal 2021 six-month period.
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