Optical Cable Corp 10-Q for FY2021 Q1
Optical Cable Corp (OCC)
About this 10-Q
Optical Cable Corp filed this 10-Q on March 15, 2021, covering the quarter ended January 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended January 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $11.88M
- down 7.8% from $12.89M a year earlier
- Net loss
- $2.14M
- compared with a net loss of $2.59M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number
OPTICAL CABLE CORPORATION
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation | (I.R.S. Employer |
| or organization) | Identification No.) |
(Address of principal executive offices, including zip code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. (See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act). (Check one):
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | Smaller Reporting Company | |||
| Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of March 5, 2021,
OPTICAL CABLE CORPORATION
Three Months Ended January 31, 2021
| SIGNATURES | 34 |
| Condensed Consolidated Balance Sheets |
||||||
| (Unaudited) |
| January 31, | October 31, | |||||||
|
| 2021 | 2020 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Trade accounts receivable, net of allowance for doubtful accounts of $ at January 31, 2021 and $ at October 31, 2020 | ||||||||
| Income taxes refundable - current | ||||||||
| Other receivables | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Other assets, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Note payable, SBA PPP loan - current | $ | $ | ||||||
| Current installments of long-term debt | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Accrued compensation and payroll taxes | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Note payable, SBA PPP loan - noncurrent | ||||||||
| Note payable, revolver - noncurrent | ||||||||
| Long-term debt, excluding current installments | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, par value, authorized shares; issued and outstanding | ||||||||
| Common stock, par value, authorized shares; issued and outstanding shares at January 31, 2021 and shares at October 31, 2020 | ||||||||
| Retained earnings (accumulated deficit) | ( | ) | ||||||
| Total shareholders’ equity | ||||||||
| Commitments and contingencies | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
| See accompanying condensed notes to condensed consolidated financial statements. |
| Condensed Consolidated Statements of Operations |
||||||||||
| (Unaudited) |
| Three Months Ended | ||||||||
| January 31, | ||||||||
| 2021 | 2020 | |||||||
| Net sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Royalty (income) expense, net | ( | ) | ||||||
| Amortization of intangible assets | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other expense, net: | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other, net | ( | ) | ||||||
| Other expense, net | ( | ) | ( | ) | ||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per share: Basic and diluted | $ | ( | ) | $ | ( | ) | ||
| See accompanying condensed notes to condensed consolidated financial statements. |
| Condensed Consolidated Statements of Shareholders’ Equity |
||||||||||||||
| (Unaudited) |
| Three Months Ended January 31, 2021 | |||||||||||||||
| Retained Earnings | Total | ||||||||||||||
| Common Stock | (Accumulated | Shareholders’ | |||||||||||||
| Shares | Amount | Deficit) | Equity | ||||||||||||
| Balances at October 31, 2020 | $ | $ | |||||||||||||
| Share-based compensation, net | ( | ) | |||||||||||||
| Net loss | — | ( | ) | ( | ) | ||||||||||
| Balances at January 31, 2021 | $ | ( | ) | $ | |||||||||||
| Three Months Ended January 31, 2020 | ||||||||||||||||
| Total | ||||||||||||||||
| Common Stock | Retained | Shareholders’ | ||||||||||||||
| Shares | Amount | Earnings | Equity | |||||||||||||
| Balances at October 31, 2019 | $ | $ | $ | |||||||||||||
| Adoption of accounting standard ASU 2018-07 | — | ( | ) | |||||||||||||
| Share-based compensation, net | ( | ) | ||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||
| Balances at January 31, 2020 | $ | $ | $ | |||||||||||||
| See accompanying condensed notes to condensed consolidated financial statements. |
| Condensed Consolidated Statements of Cash Flows |
||||||||||
| (Unaudited) |
| Three Months Ended | ||||||||
| January 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt recovery | ( | ) | ( | ) | ||||
| Share-based compensation expense | ||||||||
| Loss on sale of property and equipment | ||||||||
| (Increase) decrease in: | ||||||||
| Trade accounts receivable | ||||||||
| Other receivables | ||||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Income taxes refundable | ||||||||
| Other assets | ||||||||
| Increase (decrease) in: | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accrued compensation and payroll taxes | ( | ) | ||||||
| Income taxes payable | ||||||||
| Other noncurrent liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchase of and deposits for the purchase of property and equipment | ( | ) | ( | ) | ||||
| Investment in intangible assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from note payable, revolver | ||||||||
| Payments on note payable, revolver | ( | ) | ||||||
| Principal payments on long-term debt | ( | ) | ( | ) | ||||
| Payments for financing costs | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase in cash | ||||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| See accompanying condensed notes to condensed consolidated financial statements. |
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2021
(Unaudited)
| (1) | General |
The accompanying unaudited condensed consolidated financial statements of Optical Cable Corporation and its subsidiaries (collectively, the “Company” or “OCC®”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10‑Q and Regulation S‑X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended January 31, 2021 are not necessarily indicative of the results for the fiscal year ending October 31, 2021 because the following items, among other things, may impact those results: impacts of the COVID-19 pandemic including (but not limited to) related government and private industry mandates in the areas of the world in which we operate, changes in market conditions, seasonality, changes in technology, competitive conditions, timing of certain projects and purchases by key customers, significant variations in sales resulting from high volatility and timing of large sales orders among a limited number of customers in certain markets, ability of management to execute its business plans, continued ability to maintain and/or secure future debt and/or equity financing to adequately finance ongoing operations; as well as other variables, uncertainties, contingencies and risks set forth as risks in the Company’s Annual Report on Form 10‑K for the fiscal year ended October 31, 2020 (including those set forth in the “Forward-Looking Information” section), or as otherwise set forth in other filings by the Company as variables, contingencies and/or risks possibly affecting future results. The unaudited condensed consolidated financial statements and condensed notes are presented as permitted by Form 10‑Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10‑K for the fiscal year ended October 31, 2020.
| (2) | Stock Incentive Plans and Other Share‑Based Compensation |
As of January 31, 2021, there were approximately
Share-based compensation expense for employees, a consultant and non-employee Directors recognized in the condensed consolidated statements of operations for the three months ended January 31, 2021 and 2020 was $
Restricted and Other Stock Awards
The Company has granted, and anticipates granting from time to time, restricted stock awards subject to approval by the Compensation Committee of the Board of Directors. Since fiscal year 2004, the Company has exclusively used restricted stock awards for all share-based compensation of employees and consultants, and restricted stock awards or stock awards to non-employee members of the Board of Directors.
Restricted stock award activity during the three months ended January 31, 2021 consisted of restricted stock forfeited totaling
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2021
(Unaudited)
As of January 31, 2021, the estimated amount of compensation cost related to unvested equity-based compensation awards in the form of service-based and operational performance-based shares that the Company will recognize over a
| (3) | Allowance for Doubtful Accounts for Trade Accounts Receivable |
A summary of changes in the allowance for doubtful accounts for trade accounts receivable for the three months ended January 31, 2021 and 2020 follows:
| Three Months Ended | ||||||||
| January 31, | ||||||||
| 2021 | 2020 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Bad debt recovery | ( | ) | ( | ) | ||||
| Balance at end of period | $ | $ | ||||||
| (4) | Inventories |
Inventories as of January 31, 2021 and October 31, 2020 consist of the following:
| January 31, | October 31, | |||||||
| 2021 | 2020 | |||||||
| Finished goods | $ | $ | ||||||
| Work in process | ||||||||
| Raw materials | ||||||||
| Production supplies | ||||||||
| Total | $ | $ | ||||||
| (5) | Product Warranties |
As of January 31, 2021 and October 31, 2020, the Company’s accrual for estimated product warranty claims totaled $
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2021
(Unaudited)
The following table summarizes the changes in the Company’s accrual for product warranties during the three months ended January 31, 2021 and 2020:
| Three Months Ended | ||||||||
| January 31, | ||||||||
| 2021 | 2020 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Liabilities accrued for warranties issued during the period | ||||||||
| Warranty claims and costs paid during the period | ( | ) | ( | ) | ||||
| Changes in liability for pre-existing warranties during the period | ( | ) | ( | ) | ||||
| Balance at end of period | $ | $ | ||||||
| (6) | Long-term Debt and Notes Payable to Bank |
The Company has credit facilities consisting of a real estate term loan, as amended and restated (the “Virginia Real Estate Loan”), a supplemental real estate term loan, as amended and restated (the “North Carolina Real Estate Loan”), a Revolving Credit Master Promissory Note and related agreements (collectively, the “Revolver”) and a Paycheck Protection Program loan (“PPP Loan”) implemented by the United States Small Business Administration (“SBA”).
Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are with Pinnacle Bank (“Pinnacle”), have a fixed interest rate of
Long-term debt as of January 31, 2021 and October 31, 2020 consists of the following:
| January 31, | October 31, | |||||||
| 2021 | 2020 | |||||||
| Virginia Real Estate Loan ($ original principal) payable in monthly installments of $, including interest (at ), with final payment of $ due | $ | $ | ||||||
| North Carolina Real Estate Loan ($ original principal) payable in monthly installments of $, including interest (at ), with final payment of $ due | ||||||||
| Total long-term debt | ||||||||
| Less current installments | ||||||||
| Long-term debt, excluding current installments | $ | $ | ||||||
In fiscal year 2020, the Company obtained an unsecured PPP Loan through Pinnacle in the amount of $
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2021
(Unaudited)
The Revolver with SLR Business Credit, formerly known as North Mill Capital LLC, (“SLR”) provides the Company with one or more advances in an amount up to: (a)
The maximum aggregate principal amount subject to the Revolver is $
The Revolver is secured by all of the following assets: properties, rights and interests in property of the Company whether now owned or existing, or hereafter acquired or arising, and wherever located; all accounts, equipment, commercial tort claims, general intangibles, chattel paper, inventory, negotiable collateral, investment property, financial assets, letter-of-credit rights, supporting obligations, deposit accounts, money or assets of the Company, which hereafter come into the possession, custody, or control of SLR; all proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing; any and all tangible or intangible property resulting from the sale, lease, license or other disposition of any of the foregoing, or any portion thereof or interest therein, and all proceeds thereof; and any other assets of the Company which may be subject to a lien in favor of SLR as security for the obligations under the Loan Agreement.
As of January 31, 2021 the Company had $
| (7) | Leases |
The Company has an operating lease agreement for approximately
The Company has an operating lease agreement for approximately
The Company also leases certain office equipment under operating leases with initial
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2021
(Unaudited)
The Company’s lease contracts may include options to extend or terminate the lease. The Company exercises judgment to determine the term of those leases when such options are present and include such options in the calculation of the lease term when it is reasonably certain that it will exercise those options.
The Company includes contract lease components in its determination of lease payments, while non-lease components of the contracts, such as taxes, insurance, and common area maintenance, are expensed as incurred. At commencement, right-of-use assets and lease liabilities are measured at the present value of future lease payments over the lease term. The Company uses its incremental borrowing rate based on information available at the time of lease commencement to measure the present value of future payments.
Operating lease expense is recognized on a straight-line basis over the lease term. Short term leases with an initial term of 12 months or less are expensed as incurred. The Company’s short term leases have month-to-month terms.
Operating lease right-of-use assets of $
Operating lease expense recognized during the three months ended January 31, 2021 and 2020 totaled $
The weighted average remaining lease term was
The Company’s future payments due under operating leases reconciled to the lease liability are as follows:
| Fiscal Year | Future Payments | |||
| 2021 (1) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total undiscounted lease payments | ||||
| Present value discount | ( | ) | ||
| Total operating lease liability | $ | |||
| (1) Remaining nine months of fiscal year 2021 |
For the three months ended January 31, 2021 and 2020, cash paid for operating lease liabilities totaled $
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2021
(Unaudited)
| (8) | Fair Value Measurements |
The carrying amounts reported in the condensed consolidated balance sheets as of January 31, 2021 and October 31, 2020 for cash, trade accounts receivable, income taxes refundable – current, other receivables, note payable, SBA PPP Loan – current and accounts payable and accrued expenses, including accrued compensation and payroll taxes, approximate fair value because of the short maturity of these instruments. The carrying values of the Company’s note payable, SBA Loan – noncurrent, note payable, revolver - noncurrent and long-term debt approximate fair value based on similar long-term debt issues available to the Company as of January 31, 2021 and October 31, 2020. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
| Net Loss Per Share |
Basic net loss per share excludes dilution and is computed by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net loss of the Company.
The following is a reconciliation of the numerators and denominators of the net loss per share computations for the periods presented:
| Three months ended | ||||||||
| January 31, | ||||||||
| 2021 | 2020 | |||||||
| Net loss (numerator) | $ | ( | ) | $ | ( | ) | ||
| Shares (denominator) | ||||||||
| Basic and diluted net loss per share | $ | ( | ) | $ | ( | ) | ||
Weighted average unvested shares for the three months ended January 31, 2021 and 2020 totaling
| (10) | Segment Information and Business and Credit Concentrations |
The Company provides credit, in the normal course of business, to various commercial enterprises, governmental entities and not‑for‑profit organizations. Concentration of credit risk with respect to trade receivables is normally limited due to the Company’s large number of customers. The Company also manages exposure to credit risk through credit approvals, credit limits and monitoring procedures. Management believes that credit risks as of January 31, 2021 have been adequately provided for in the condensed consolidated financial statements. The Company includes all entities under common ownership for the purpose of calculating business concentrations.
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2021
(Unaudited)
For the three months ended January 31, 2021,
The Company has a single reportable segment for purposes of segment reporting.
| (11) | Revenue Recognition |
Revenues consist of product sales that are recognized at a specific point in time under the core principle of recognizing revenue when control transfers to the customer. The Company considers customer purchase orders, governed by master sales agreements or the Company’s standard terms and conditions, to be the contract with the customer. For each contract, the promise to transfer the control of the products, each of which is individually distinct, is considered to be the identified performance obligation. The Company evaluates each customer’s credit risk when determining whether to accept a contract.
In determining transaction prices, the Company evaluates whether fixed order prices are subject to adjustment to determine the net consideration to which the Company expects to be entitled. Contracts do not include financing components, as payment terms are generally due 30 to 90 days after shipment. Taxes assessed by governmental authorities and collected from the customer including, but not limited to, sales and use taxes and value-added taxes, are not included in the transaction price and are not included in net sales.
The Company recognizes revenue at the point in time when products are shipped or delivered from its manufacturing facility to its customer, in accordance with the agreed upon shipping terms. Since the Company typically invoices the customer at the same time that performance obligations are satisfied, no contract assets are recognized. The Company’s contract liability represents advance consideration received from customers prior to transfer of the product. This liability was $
Sales to certain customers are made pursuant to agreements that provide price adjustments and limited return rights with respect to the Company’s products. The Company maintains a reserve for estimated future price adjustment claims, rebates and returns as a refund liability. The Company’s refund liability was $
The Company offers standard product warranty coverage which provides assurance that its products will conform to contractually agreed-upon specifications for a limited period from the date of shipment. Separately-priced warranty coverage is not offered. The warranty claim is generally limited to a credit equal to the purchase price or a promise to repair or replace the product for a specified period of time at no additional charge.
The Company accounts for shipping and handling activities related to contracts with customers as a cost to fulfill its promise to transfer control of the related product. Shipping and handling costs are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.
The Company incurs sales commissions to acquire customer contracts that are directly attributable to the contracts. The commissions are expensed as selling expenses during the period that the related products are transferred to customers.
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2021
(Unaudited)
Disaggregation of Revenue
The following table presents net sales attributable to the United States and all other countries in total for the three months ended January 31, 2021 and 2020:
| Three months ended | ||||||||
| January 31, | ||||||||
| 2021 | 2020 | |||||||
| United States | $ | $ | ||||||
| Outside the United States | ||||||||
| Total net sales | $ | $ | ||||||
| (12) | Contingencies |
From time to time, the Company is involved in various claims, legal actions and regulatory reviews arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
The COVID-19 pandemic has had a significant impact on businesses and individuals in the United States and globally. Actions taken by governments and private industry to limit the spread of the disease have resulted in an unprecedented disruption of normal activities as businesses have been forced to shut down or operate on a limited basis. The Company is obligated and continues to operate during the COVID-19 pandemic because the Company’s workforce is classified a “Defense Industrial Base Essential Critical Infrastructure Workforce” under guidelines from the U.S. Department of Defense and an “Essential Critical Infrastructure Workforce” under guidelines by the U.S. Department of Homeland Security, Cybersecurity and Infrastructure Security Agency (CISA).
While continuing to operate, the Company has been negatively impacted by the COVID-19 pandemic: revenues in its markets, production volumes and operations, and access to capital markets have all been negatively impacted.
The Company made a number of changes to business operations in response to the COVID-19 pandemic, including: severely limiting business travel and face-to-face meetings, having a portion of its non-manufacturing employees work remotely, and implementing strict social distancing, symptom self-assessments and mask protocols within its facilities.
The extent to which the COVID-19 pandemic will affect the Company in the future will depend on ongoing developments, which are highly uncertain and cannot be reasonably predicted, including, but not limited to, the duration and severity of the outbreak, the timing and extent of the easing of restrictions on businesses and individuals, the timing of recovery in certain of the Company’s markets, the potential for a resurgence of the virus, as well as a variety of other unknowable factors. The longer the various impacts of COVID-19 persist, the greater the potential negative financial effects on the Company.
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2021
(Unaudited)
| (13) | New Accounting Standards Not Yet Adopted |
In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2019-12 is not expected to have a material impact on the Company’s results of operations, financial position or liquidity or its related financial statement disclosures.
There are no other new accounting standards issued, but not yet adopted by the Company, which are expected to materially impact the Company’s financial position, operating results or financial statement disclosures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This Form 10-Q may contain certain forward-looking information within the meaning of the federal securities laws. The forward-looking information may include, among other information, (i) statements concerning our outlook for the future, (ii) statements of belief, anticipation or expectation, (iii) future plans, strategies or anticipated events, and (iv) similar information and statements concerning matters that are not historical facts. Such forward-looking information is subject to known and unknown variables, uncertainties, contingencies and risks that may cause actual events or results to differ materially from our expectations. Such known and unknown variables, uncertainties, contingencies and risks (collectively, “factors”) may also adversely affect Optical Cable Corporation and its subsidiaries (collectively, the “Company” or “OCC®”), the Company’s future results of operations and future financial condition, and/or the future equity value of the Company. Factors that could cause or contribute to such differences from our expectations or that could adversely affect the Company include, but are not limited to: the level of sales to key customers, including distributors; timing of certain projects and purchases by key customers; the economic conditions affecting network service providers; corporate and/or government spending on information technology; actions by competitors; fluctuations in the price of raw materials (including optical fiber, copper, gold and other precious metals, plastics and other materials); fluctuations in transportation costs; our dependence on customized equipment for the manufacture of certain of our products in certain production facilities; our ability to protect our proprietary manufacturing technology; market conditions influencing prices or pricing in one or more of the markets in which we participate, including the impact of increased competition; our dependence on a limited number of suppliers for certain product components; the loss of or conflict with one or more key suppliers or customers; an adverse outcome in any litigation, claims and other actions, and potential litigation, claims and other actions against us; an adverse outcome in any regulatory reviews and audits and potential regulatory reviews and audits; adverse changes in state tax laws and/or positions taken by state taxing authorities affecting us; technological changes and introductions of new competing products; changes in end-user preferences for competing technologies relative to our product offering; economic conditions that affect the telecommunications sector, the data communications sector, certain technology sectors and/or certain industry market sectors (for example, mining, oil & gas, military, and wireless carrier industry market sectors); economic conditions that affect U.S.-based manufacturers; economic conditions or changes in relative currency strengths (for example, the strengthening of the U.S. dollar relative to certain foreign currencies) and import and/or export tariffs imposed by the U.S. and other countries that affect certain geographic markets, industry market sector, and/or the economy as a whole; changes in demand for our products from certain competitors for which we provide private label connectivity products; changes in the mix of products sold during any given period (due to, among other things, seasonality or varying strength or weaknesses in particular markets in which we participate) which may impact gross profits and gross profit margins or net sales; variations in orders and production volumes of hybrid cables (fiber and copper) with high copper content, which tend to have lower gross profit margins; significant variations in sales resulting from: (i) high volatility within various geographic markets, within targeted markets and industries, for certain types of products, and/or with certain customers (whether related to the market generally or to specific customers’ business in particular), (ii) timing of large sales orders, and (iii) high sales concentration among a limited number of customers in certain markets, particularly the wireless carrier market; terrorist attacks or acts of war, any current or potential future military conflicts, and acts of civil unrest; changes in the level of military spending or other spending by the United States government, including, but not limited to reductions in government spending due to automatic budget cuts or sequestration; ability to recruit and retain key personnel; poor labor relations; the impact of cybersecurity risks and incidents and the related actual or potential costs and consequences of such risks and incidents, including costs to limit such risks; the impact of data privacy laws and the General Data Protection Regulation and the related actual or potential costs and consequences; the impact of changes in accounting policies and related costs of compliance, including changes by the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board (“PCAOB”), the Financial Accounting Standards Board (“FASB”), and/or the International Accounting Standards Board (“IASB”); our ability to continue to successfully comply with, and the cost of compliance with, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 or any revisions to that act which apply to us; the impact of changes and potential changes in federal laws and regulations adversely affecting our business and/or which result in increases in our direct and indirect costs, including our direct and indirect costs of compliance with such laws and regulations; rising healthcare costs; the impact of the Patient Protection and Affordable Care Act of 2010, the Health Care and Education Reconciliation Act of 2010, and any revisions to those acts that apply to us and the related legislation and regulation associated with those acts, which directly or indirectly result in increases to our costs; the impact of changes in state or federal tax laws and regulations increasing our costs and/or impacting the net return to investors owning our shares; any changes in the status of our compliance with covenants with our lenders; our continued ability to maintain and/or secure future debt financing and/or equity financing to adequately finance our ongoing operations; impact of failing to receive forgiveness of all or substantially all of the principal balance of the Small Business Administration (“SBA”) Payroll Protection Program Loan we received in connection with the COVID-19 pandemic; the impact of future consolidation among competitors and/or among customers adversely affecting our position with our customers and/or our market position; actions by customers adversely affecting us in reaction to the expansion of our product offering in any manner, including, but not limited to, by offering products that compete with our customers, and/or by entering into alliances with, making investments in or with, and/or acquiring parties that compete with and/or have conflicts with our customers; voluntary or involuntary delisting of the Company’s common stock from any exchange on which it is traded; the deregistration by the Company from SEC reporting requirements as a result of the small number of holders of the Company’s common stock; adverse reactions by customers, vendors or other service providers to unsolicited proposals regarding the ownership or management of the Company; the additional costs of considering, responding to and possibly defending our position on unsolicited proposals regarding the ownership or management of the Company; impact of weather, natural disasters and/or epidemic or pandemic diseases (such as COVID-19) in the areas of the world in which we operate, market our products and/or acquire raw materials; an increase in the number of shares of the Company’s common stock issued and outstanding; economic downturns generally and/or in one or more of the markets in which we operate; changes in market demand, exchange rates, productivity, market dynamics, market confidence, macroeconomic and/or other economic conditions in the areas of the world in which we operate and market our products; and our success in managing the risks involved in the foregoing.
We caution readers that the foregoing list of important factors is not exclusive. Furthermore, we incorporate by reference those factors included in current reports on Form 8‑K, and/or in our other filings.
Dollar amounts presented in the following discussion have been rounded to the nearest hundred thousand, except in the case of amounts less than one million and except in the case of the table set forth in the “Results of Operations” section, the amounts in which both cases have been rounded to the nearest thousand.
Overview of COVID-19 Effects
Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence. The COVID-19 pandemic has had a significant impact on businesses and individuals in the United States and globally. Actions taken to limit the spread of the disease have resulted in an unprecedented disruption of normal activities as businesses have been forced to shut down or operate on a limited basis. Additionally, the COVID-19 pandemic has increased the level of volatility and uncertainty globally and has created economic disruption.
OCC continues to operate during the COVID-19 pandemic because our workforce is classified a “Defense Industrial Base Essential Critical Infrastructure Workforce” under guidelines from the U.S. Department of Defense and an “Essential Critical Infrastructure Workforce” under guidelines by the U.S. Department of Homeland Security, Cybersecurity and Infrastructure Security Agency (CISA).
While continuing to operate, revenues in our markets, production volumes, and operations have been significantly and negatively impacted by the COVID-19 pandemic. OCC also continues to incur additional costs in connection with employee safety initiatives and programs.
As of January 31, 2021, our facilities continue to operate at reduced production levels with personnel levels somewhat lower than those prior to the COVID-19 pandemic.
OCC continues to severely limit business travel and face-to-face meetings, has a portion of its non-manufacturing employees work remotely, and reinforces its strict social distancing, symptom self-assessments, sanitation, and mask protocols within its facilities. We believe we are following or exceeding all Centers for Disease Control and Prevention (“CDC”) and public officials’ guidelines as such guidelines have changed from time to time during the pandemic. We continue to take precautionary measures, make contingency plans and improve our response to the ongoing situation. We have assembled a team charged with overseeing our efforts to ensure the health and safety of all employees while continuing to supply product to our customers. That team constantly monitors the latest CDC, Federal, state and other regulatory guidance, works to secure personal protective equipment, finds new ways to help mitigate risk, and identifies opportunities for us to exceed recommendations.
The extent to which the COVID-19 pandemic will affect OCC in the future will depend on ongoing developments, which are highly uncertain and cannot be reasonably predicted, including, but not limited to, the duration and severity of the outbreak, the timing and extent of the easing of restrictions on businesses and individuals, the timing of recovery in certain of OCC’s markets, any resurgence of the virus, the successful distribution and administration of a vaccine, as well as a variety of other unknowable factors. The longer COVID-19 persists, the greater the potential negative financial effects on OCC.
We are beginning to see some positive indicators of future strengthening in some of our markets and are hopeful we will begin to benefit from improvement in our markets during the second half of fiscal year 2021. However, we cannot fully predict the duration or scope of the pandemic, and we cannot fully anticipate or reasonably estimate all the ways in which the current global health crisis and market conditions could adversely impact our business in the future.
Our net sales continue to be negatively impacted by weakness in our markets caused by the COVID-19 pandemic, and this was the case in our first quarter. This trend could continue until the pandemic subsides and macroeconomics, particularly in the United States, and our markets return to pre-COVID-19 levels. At this time, it is uncertain how long the pandemic and its impact on our net sales will continue, but it is likely that we will see additional impacts past the second quarter of fiscal year 2021 (which ends April 30, 2021). As the impact of COVID-19 evolves, we will continue to evaluate our financial position and liquidity needs in light of future developments.
Overview of Optical Cable Corporation
Optical Cable Corporation (or OCC®) is a leading manufacturer of a broad range of fiber optic and copper data communication cabling and connectivity solutions primarily for the enterprise market and various harsh environment and specialty markets (collectively, the non-carrier markets), and also the wireless carrier market, offering integrated suites of high quality products which operate as a system solution or seamlessly integrate with other providers’ offerings. Our product offerings include designs for uses ranging from enterprise network, data center, residential, campus and Passive Optical LAN (“POL”) installations to customized products for specialty applications and harsh environments, including military, industrial, mining, petrochemical and broadcast applications, and for the wireless carrier market. Our products include fiber optic and copper cabling, hybrid cabling (which includes fiber optic and copper elements in a single cable), fiber optic and copper connectors, specialty fiber optic, copper and hybrid connectors, fiber optic and copper patch cords, pre-terminated fiber optic and copper cable assemblies, racks, cabinets, datacom enclosures, patch panels, face plates, multimedia boxes, fiber optic reels and accessories and other cable and connectivity management accessories, and are designed to meet the most demanding needs of end-users, delivering a high degree of reliability and outstanding performance characteristics.
OCC® is internationally recognized for pioneering the design and production of fiber optic cables for the most demanding military field applications, as well as of fiber optic cables suitable for both indoor and outdoor use, and creating a broad product offering built on the evolution of these fundamental technologies. OCC is also internationally recognized for pioneering the development of innovative copper connectivity technology and designs used to meet industry copper connectivity data communications standards.
Founded in 1983, Optical Cable Corporation is headquartered in Roanoke, Virginia with offices, manufacturing and warehouse facilities located in Roanoke, Virginia, near Asheville, North Carolina, and near Dallas, Texas. We primarily manufacture our fiber optic cables at our Roanoke facility which is ISO 9001:2015 registered and MIL-STD-790G certified, primarily manufacture our enterprise connectivity products at our Asheville facility which is ISO 9001:2015 registered, and primarily manufacture our harsh environment and specialty connectivity products at our Dallas facility which is ISO 9001:2015 registered and MIL-STD-790G certified.
OCC designs, develops and manufactures fiber optic and hybrid cables for a broad range of enterprise, harsh environment, wireless carrier and other specialty markets and applications. We refer to these products as our fiber optic cable offering. OCC designs, develops and manufactures fiber and copper connectivity products for the enterprise market, including a broad range of enterprise and residential applications. We refer to these products as our enterprise connectivity product offering. OCC designs, develops and manufactures a broad range of specialty fiber optic connectors and connectivity solutions principally for use in military, harsh environment and other specialty applications. We refer to these products as our harsh environment and specialty connectivity product offering.
We market and sell the products manufactured at our Dallas facility through our wholly owned subsidiary Applied Optical Systems, Inc. (“AOS”) under the names Optical Cable Corporation and OCC® by the efforts of our integrated OCC sales team.
The OCC team seeks to provide top-tier communication solutions by bundling all of our fiber optic and copper data communication product offerings into systems that are best suited for individual data communication needs and application requirements of our customers and the end-users of our systems.
OCC’s wholly owned subsidiary Centric Solutions LLC (“Centric Solutions”) provides cabling and connectivity solutions for the data center market. Centric Solutions’ business is located at OCC’s facility near Dallas, Texas.
Optical Cable Corporation™, OCC®, Procyon®, Superior Modular Products™, SMP Data Communications™, Applied Optical Systems™, Centric Solutions™ and associated logos are trademarks of Optical Cable Corporation.
Summary of Company Performance for First Quarter of Fiscal Year 2021
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Consolidated net sales for the first quarter of fiscal year 2021 were $11.9 million, down 7.8% compared to $12.9 million for the same period last year, as sales continued to be negatively impacted due to the COVID-19 pandemic. |
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Gross profit was $2.3 million in the first quarter of fiscal year 2021, a decrease of 3.9% compared to $2.4 million for the first quarter of fiscal year 2020. |
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Gross profit margin (gross profit as a percentage of net sales) was 19.4% during the first quarter of fiscal year 2021, compared to 18.7% for the first quarter of fiscal year 2020. |
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SG&A expenses decreased 10.7% to $4.3 million during the first quarter of fiscal year 2021, compared to $4.8 million during the first quarter of fiscal year 2020. |
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Net loss was $2.1 million, or $0.29 per share, during the first quarter of fiscal year 2021, compared to $2.6 million, or $0.35 per share, for the comparable period last year. |
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On February 22, 2021, we submitted to our lender our application for forgiveness of the entire principal balance and accrued interest on the United States Small Business Administration (“SBA”) Paycheck Protection Program loan in the amount of $5.0 million (“PPP Loan”) we received on April 15, 2020. |
Results of Operations
We sell our products internationally and domestically to our customers which include major distributors, various regional and smaller distributors, original equipment manufacturers and value-added resellers. All of our sales to customers outside of the United States are denominated in U.S. dollars. We can experience fluctuations in the percentage of net sales to customers outside of the United States and in the United States from period to period based on the timing of large orders, coupled with the impact of increases and decreases in sales to customers in various regions of the world. Sales outside of the U.S. can also be impacted by fluctuations in the exchange rate of the U.S. dollar compared to other currencies.
Net sales consist of gross sales of products by the Company and its subsidiaries on a consolidated basis less discounts, refunds and returns. Revenue is recognized at the time product is transferred to the customer (including distributors) at an amount that reflects the consideration expected to be received in exchange for the product. Our customers generally do not have the right of return unless a product is defective or damaged and is within the parameters of the product warranty in effect for the sale.
Cost of goods sold consists of the cost of materials, product warranty costs and compensation costs, and overhead and other costs related to our manufacturing operations. The largest percentage of costs included in cost of goods sold is attributable to costs of materials.
Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix. To the extent not negatively impacted by product mix, gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales. Hybrid cables (containing fiber and copper) with higher copper content tend to have lower gross profit margins.
Selling, general and administrative expenses (“SG&A expenses”) consist of the compensation costs for sales and marketing personnel, shipping costs, trade show expenses, customer support expenses, travel expenses, advertising, bad debt expense, the compensation costs for administration and management personnel, legal, accounting, advisory and professional fees, costs incurred to settle litigation or claims and other actions against us, and other costs associated with our operations.
Royalty income (expense), net consists of royalty income earned on licenses associated with our patented products, net of royalty and related expenses.
Amortization of intangible assets consists of the amortization of the costs, including legal fees, associated with internally developed patents that have been granted. Amortization of intangible assets is calculated using the straight-line method over the estimated useful lives of the intangible assets.
Other income (expense), net consists of interest expense and other miscellaneous income and expense items not directly attributable to our operations.
The following table sets forth and highlights fluctuations in selected line items from our condensed consolidated statements of operations for the periods indicated:
| Three Months Ended |
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| January 31, |
Percent |
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| 2021 |
2020 |
Change |
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| Net sales |
$ | 11,877,000 | $ | 12,887,000 | (7.8 | )% | ||||||
| Gross profit |
2,309,000 | 2,404,000 | (3.9 | )% | ||||||||
| SG&A expenses |
4,308,000 | 4,824,000 | (10.7 | )% | ||||||||
| Net loss |
(2,141,000 | ) | (2,592,000 | ) | (17.4 | )% | ||||||
Three Months Ended January 31, 2021 and 2020
Net Sales
Consolidated net sales for the first quarter of fiscal year 2021 were $11.9 million, a decrease of 7.8%, compared to net sales of $12.9 million for the same period last year. We experienced a decrease in net sales in both our enterprise and specialty markets, including the wireless carrier market, in the first quarter of fiscal year 2021, compared to the same period last year.
We believe net sales during the first quarter of fiscal year 2021 were negatively impacted by the COVID-19 pandemic as certain businesses continued to limit operations and/or reduced or delayed product purchases.
Net sales to customers in the United States decreased 7.5% and net sales to customers outside of the United States decreased 9.4% in the first quarter of fiscal year 2021, compared to the same period last year. The decreases, we believe, were a result of the COVID-19 pandemic and its effects on our customers. Specifically, we continue to see certain projects in our sales pipeline that we believe have been put on hold as a result of the impact COVID-19 is having on our customers and end-users. We expect that once the impact of COVID-19 on our customers and end-users declines, we will begin to see a positive impact on our net sales.
We are beginning to see some positive indicators of future strengthening in some of our markets and are hopeful we will begin to benefit from improvement in our markets during the second half of fiscal year 2021. However, we cannot fully predict the duration or scope of the COVID-19 pandemic, and we cannot fully anticipate or reasonably estimate the continuing impacts of the pandemic on our various markets and customers.
Gross Profit
Our gross profit was $2.3 million in the first quarter of fiscal year 2021, a decrease of 3.9% compared to gross profit of $2.4 million in the first quarter of fiscal year 2020. Gross profit margin, or gross profit as a percentage of net sales, increased to 19.4% in the first quarter of fiscal year 2021 compared to 18.7% in the first quarter of fiscal year 2020.
Our gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales. This operating leverage, which is beneficial at higher sales levels, was the primary factor putting downward pressure on our gross profit margin during the first quarter of both fiscal year 2021 and 2020. Actions that we took in fiscal years 2020 and 2019 positively impacted our gross profit margin in the first quarter of fiscal year 2021, resulting in a slightly improved gross profit margin when compared to the first quarter of fiscal year 2020, even considering a decrease in sales of approximately $1 million when comparing the two periods. Our gross profit margin percentages are also heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix from quarter to quarter.
Selling, General, and Administrative Expenses
SG&A expenses decreased 10.7% to $4.3 million during the first quarter of fiscal year 2021, compared to $4.8 million for the same period last year. SG&A expenses as a percentage of net sales were 36.3% in the first quarter of fiscal year 2021, compared to 37.4% in the first quarter of fiscal year 2020.
The decrease in SG&A expenses during the first quarter of fiscal year 2021 compared to the same period last year was primarily the result of decreases in employee related costs totaling $437,000 and decreases in travel expenses totaling $100,000. Included in employee related costs are commissions, which decreased due to the reduction in commissionable sales during the first quarter of fiscal year 2021, and compensation costs, which decreased primarily due to terminations, net of new hires. Travel expenses decreased due to the continuing decline/halt in business travel and cancellation of tradeshows during the first quarter of fiscal year 2021 due to the COVID-19 pandemic. During the pandemic, we have implemented a number of cost savings initiatives which are continuing.
Royalty Income (Expense), Net
We recognized royalty income, net of royalty and related expenses, totaling $7,000 during the first quarter of fiscal year 2021 compared to royalty expense, net of royalty income, of $18,000 during the first quarter of fiscal year 2020. Royalty expense and/or income may fluctuate based on sales of related licensed products and estimates of amounts for non-licensed product sales, if any.
Amortization of Intangible Assets
We recognized $11,000 of amortization expense, associated with intangible assets, during the first quarter of fiscal year 2021, compared to $10,000 during the first quarter of fiscal year 2020.
Other Expense, Net
We recognized other expense, net in the first quarter of fiscal year 2021 of $171,000 compared to $139,000 in the first quarter of fiscal year 2020. Other expense, net is comprised primarily of interest expense together with other miscellaneous items. The increase in other expense, net during the first quarter of fiscal year 2021 compared to the same period last year was primarily due to increased interest expense resulting from the amortization of deferred financing fees related to our Revolver with SLR Business Credit, formerly North Mill Capital LLC, (“SLR”) which closed in July 2020.
Loss Before Income Taxes
We reported a loss before income taxes of $2.2 million for the first quarter of fiscal year 2021, compared to $2.6 million for the first quarter of fiscal year 2020. The decrease was primarily due to the decrease in SG&A expenses of $516,000, partially offset by the decrease in gross profit of $95,000, compared to the same period in 2020.
Income Tax Expense
Income tax benefit totaled $32,000 in the first quarter of fiscal year 2021, compared to income tax expense of $5,000 in the first quarter of fiscal year 2020. Our effective tax rate was 1.5% for the first quarter of fiscal year 2021 and less than negative one percent for the first quarter of fiscal year 2020.
Fluctuations in our effective tax rates are primarily due to permanent differences in U.S. GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level such that permanent differences in U.S. GAAP and tax accounting treatment have a disproportional impact on the projected effective tax rate.
During fiscal year 2015, we established a valuation allowance against all of our net deferred tax assets. As a result of establishing a full valuation allowance against our net deferred tax assets, if we generate sufficient taxable income in subsequent periods to realize a portion or all of our net deferred tax assets, our effective income tax rate could be unusually low due to the tax benefit attributable to the necessary decrease in our valuation allowance. Further, if we generate losses before taxes in subsequent periods, our effective income tax rate could also be unusually low as any increase in our net deferred tax asset from such a net operating loss for tax purposes would be offset by a corresponding increase to our valuation allowance against our net deferred tax assets.
If we generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the removal of any valuation allowance against our net deferred tax asset is appropriate, then during the period in which such determination is made, we will recognize the non-cash benefit of such removal of the valuation allowance in income tax expense on our consolidated statement of operations, which will increase net income and will also increase the net deferred tax asset on our consolidated balance sheet. If we do not generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the reduction or removal of any valuation allowance against our net deferred tax asset is appropriate, then no such non-cash benefit would be realized. There can be no assurance regarding any future realization of the benefit by us of all or part of our net deferred tax assets.
Net Loss
Net loss for the first quarter of fiscal year 2021 was $2.1 million compared to $2.6 million for the first quarter of fiscal year 2020. This decrease was primarily due to the decrease in loss before income taxes of $413,000.
Financial Condition
Total assets decreased $1.2 million, or 3.3%, to $35.4 million at January 31, 2021, from $36.6 million at October 31, 2020. This decrease was primarily due to a $1.3 million decrease in trade accounts receivable, net, resulting from the decrease in net sales in the first quarter of fiscal year 2021 when compared to the fourth quarter of fiscal year 2020.
Total liabilities increased $908,000, or 4.3%, to $22.2 million at January 31, 2021, from $21.3 million at October 31, 2020. The increase in total liabilities was primarily due to an increase in accounts payable and accrued expenses totaling $1.3 million primarily resulting from the timing of raw material purchases and certain vendor payments.
Total shareholders’ equity at January 31, 2021 decreased $2.1 million in the first quarter of fiscal year 2021. The decrease resulted from a net loss of $2.1 million.
Liquidity and Capital Resources
Our primary capital needs have been to fund working capital requirements and to make principal payments on long-term debt. Our primary source of capital for these purposes has been existing cash, cash provided by operations and borrowings under our Revolver (see “Credit Facilities” below).
Our cash totaled $452,000 as of January 31, 2021, an increase of $311,000, compared to $141,000 as of October 31, 2020. The increase in cash for the three months ended January 31, 2021 primarily resulted from net cash provided by operating activities of $525,000, partially offset by capital expenditures totaling $41,000 and net repayments on our Revolver and long-term debt totaling $133,000.
On January 31, 2021, we had working capital of $15.1 million compared to $19.1 million on October 31, 2020. The ratio of current assets to current liabilities as of January 31, 2021 was 2.6 to 1.0 compared to 4.0 to 1.0 as of October 31, 2020. The decrease in working capital and in the current ratio was primarily due to the $1.3 million decrease in trade accounts receivable, net, the $1.4 million increase in accounts payable and accrued expenses, including accrued compensation and payroll taxes, and the $1.7 million reclassification of a portion of the PPP Loan from noncurrent to current, based on the maturity date of the loan.
As of January 31, 2021 and October 31, 2020, we had outstanding loan balances under our Revolver totaling $4.9 million and $5.0 million, respectively. As of January 31, 2021 and October 31, 2020, we had outstanding loan balances, excluding our Revolver, totaling $10.1 million.
Net Cash
Net cash provided by operating activities was $525,000 in the first quarter of fiscal year 2021, compared to $544,000 in the first quarter of fiscal year 2020. Net cash provided by operating activities during the first quarter of fiscal year 2021 primarily resulted from certain adjustments to reconcile a net loss of $2.1 million to net cash provided by operating activities including depreciation and amortization of $324,000. Additionally, the cash flow impact of decreases in trade accounts receivable, net totaling $1.3 million and the cash flow impact of increases in accounts payable and accrued expenses, including accrued compensation and payroll taxes, totaling $1.4 million further contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by increases in inventories totaling $280,000 and increases in other noncurrent liabilities totaling $346,000.
Net cash provided by operating activities during the first quarter of fiscal year 2020 primarily resulted from certain adjustments to reconcile a net loss of $2.6 million to net cash provided by operating activities including depreciation and amortization of $393,000. Additionally, the cash flow impact of decreases in trade accounts receivable, net totaling $3.6 million and the decrease in inventories totaling $915,000 further contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by the cash flow impact of decreases in accounts payable and accrued expenses, including accrued compensation and payroll taxes, totaling $1.7 million.
Net cash used in investing activities totaled $57,000 in the first quarter of fiscal year 2021, compared to $68,000 in the first quarter of fiscal year 2020. Net cash used in investing activities during the first quarter of fiscal years 2021 and 2020 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment.
Net cash used in financing activities totaled $158,000 in the first quarter of fiscal year 2021, compared to $319,000 in the first quarter of fiscal year 2020. Net cash used in financing activities in the first quarter of fiscal year 2021 resulted primarily from net repayments on our revolving line of credit and principal payments on long-term debt. Net cash used in financing activities in the first quarter of fiscal year 2020 resulted from principal payments on long-term debt.
We have a plan (the “Repurchase Plan”), approved by our Board of Directors on July 14, 2015, to purchase and retire up to 400,000 shares of our common stock, or approximately 6.0% of the shares then outstanding. When the Repurchase Plan was approved, we had anticipated that the purchases would be made over a 24- to 36-month period, but there was no definite time period for repurchase or plan expiration. As of January 31, 2021 we had 398,400 shares remaining to purchase under this Repurchase Plan, and we have made no specific determination whether and over what period these shares may or may not be purchased. Until future notice, we have suspended the Repurchase Plan and have no current plans to repurchase and retire our common stock.
Credit Facilities
We have credit facilities consisting of a real estate term loan, as amended and restated (the “Virginia Real Estate Loan”), a supplemental real estate term loan, as amended and restated (the “North Carolina Real Estate Loan”), a Revolving Credit Master Promissory Note and related agreements (collectively, the “Revolver”) and a PPP Loan implemented by the SBA.
Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are with Pinnacle Bank (“Pinnacle”), have a fixed interest rate of 3.95% and are secured by a first lien deed of trust on our real property.
In fiscal year 2020, we obtained an unsecured PPP Loan through Pinnacle in the amount of $5.0 million. The loan was made through the SBA as part of the PPP under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The interest rate is fixed at 1.00% per year, and the Company has accrued interest expense of $39,851 on the PPP Loan as of January 31, 2021. Under the CARES Act and the Paycheck Protection Program Flexibility Act of 2020, all or a portion of this loan (principal and interest) may be forgiven if certain requirements are met. We believe we have met those requirements and we applied for forgiveness of the entire balance of the loan (including accrued interest), submitting an application to our lender on February 22, 2021. If the loan is not forgiven, we will pay principal and interest payments of approximately $560,000 every month, beginning ten months following the coverage period which ended September 29, 2020. We can repay the PPP Loan without any prepayment penalty. All remaining principal and accrued interest is due and payable two years from the effective date of the PPP Loan (April 15, 2022).
Our Revolver with SLR provides us with one or more advances in an amount up to: (a) 85% of the aggregate outstanding amount of eligible accounts (the “eligible accounts loan value”); plus (b) the lowest of (i) an amount up to 35% of the aggregate value of eligible inventory, (ii) $5.0 million, and (iii) an amount not to exceed 100% of the then outstanding eligible accounts loan value; minus (c) $1.5 million.
The maximum aggregate principal amount subject to the Revolver is $18.0 million. Interest accrues on the daily balance at the per annum rate of 1.5% above the Prime Rate in effect from time to time, but not less than 4.75% (the “Applicable Rate”). In the event of a default, interest may become 6.0% above the Applicable Rate. As of January 31, 2021, the Revolver accrued interest at the prime lending rate plus 1.5% (resulting in a 4.75% rate at January 31, 2021). The initial term of the Revolver is three years, with a termination date of July 24, 2023. After the initial term and unless otherwise terminated, the loan may be extended in one year periods subject to the agreement of SLR.
The Revolver is secured by all of the following assets: properties, rights and interests in property of the Company whether now owned or existing, or hereafter acquired or arising, and wherever located; all accounts, equipment, commercial tort claims, general intangibles, chattel paper, inventory, negotiable collateral, investment property, financial assets, letter-of-credit rights, supporting obligations, deposit accounts, money or assets of the Company, which hereafter come into the possession, custody, or control of SLR; all proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing; any and all tangible or intangible property resulting from the sale, lease, license or other disposition of any of the foregoing, or any portion thereof or interest therein, and all proceeds thereof; and any other assets of the Company which may be subject to a lien in favor of SLR as security for the obligations under the Loan Agreement.
As of January 31, 2021, we had $4.9 million of outstanding borrowings on our Revolver and $1.2 million in available credit.
Capital Expenditures
We did not have any material commitments for capital expenditures as of January 31, 2021. We expect capital expenditures in fiscal year 2021 will not exceed $750,000. We anticipate these expenditures, to the extent made, will be funded out of our working capital, cash provided by operations or borrowings under our Revolver, as appropriate. Capital expenditures are reviewed and approved based on a variety of factors including, but not limited to, current cash flow considerations, the expected return on investment, project priorities, impact on current or future product offerings, availability of personnel necessary to implement and begin using acquired equipment, and economic conditions in general.
Corporate acquisitions and other strategic investments, if any, are considered outside of our annual capital expenditure budgeting process.
Future Cash Flow Considerations
We believe that our future cash flow from operations, our cash on hand and our existing credit facilities will be adequate to fund our operations for at least the next twelve months.
From time to time, we are involved in various claims, legal actions and regulatory reviews arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.
Seasonality
We typically expect net sales to be relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year, and excluding other volatility, we would normally expect 48% of total net sales to occur during the first half of a fiscal year and 52% of total net sales to occur during the second half of a fiscal year. We believe this historical seasonality pattern is generally indicative of an overall trend and reflective of the buying patterns and budgetary considerations of our customers. However, this pattern may be substantially altered during any quarter or year based on a variety of factors. We believe our seasonality pattern in fiscal year 2020 was impacted by the COVID-19 pandemic, resulting in significantly lower total net sales for all of fiscal year 2020, and no typically anticipated seasonal increase in total net sales during the second half of the fiscal year. Our typical seasonality was also impacted in fiscal years 2019 and 2018, by the quarterly and annual volatility of orders received for the wireless carrier market, the timing of larger projects, timing of orders from larger customers, other economic factors impacting our industry or impacting the industries of our customers and end-users, and macroeconomic conditions. While we believe seasonality may be a factor that impacts our quarterly net sales results, particularly when excluding the volatility of sales in the wireless carrier market, we are not able to reliably predict the effects of seasonality on net sales because these other factors can also substantially impact our net sales patterns during the year.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based on the condensed consolidated financial statements and accompanying condensed notes that have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the instructions to Form 10‑Q and Regulation S‑X. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 1 to the consolidated financial statements filed with our Annual Report on Form 10-K for fiscal year 2020 provides a summary of our significant accounting policies. Those significant accounting policies detailed in our fiscal year 2020 Form 10-K did not change during the period from November 1, 2020 through January 31, 2021.
New Accounting Standards
In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2019-12 is not expected to have a material impact on our results of operations, financial position or liquidity or our related financial statement disclosures.
There are no other new accounting standards issued, but not yet adopted by us, which are expected to be applicable to our financial position, operating results or financial statement disclosures.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in reports under the Exchange Act are recorded, processed and summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.
Our management evaluated, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), the effectiveness of the Company’s disclosure controls and procedures as of January 31, 2021. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of January 31, 2021, and that there were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter ended January 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Exhibit Index
| Exhibit No. | Description | |
| 3.1 |
|
|
| 3.2 |
|
|
| 3.3 |
|
|
| 4.1 |
|
|
| 4.2 |
|
|
| 4.3 |
|
|
| 4.4 |
|
|
| 4.5 |
|
|
| 4.6 |
|
|
PART II. OTHER INFORMATION
| 4.7 |
|
|
| 4.8 |
|
|
| 4.9 |
|
|
| 4.10 |
|
|
| 4.11 |
|
|
| 4.12 |
|
|
| 4.13 |
|
|
| 4.14 |
|
|
| 4.15 |
|
|
| 4.16 |
|
|
PART II. OTHER INFORMATION
| 4.17 |
|
|
| 4.18 |
|
|
| 4.19 |
|
|
| 4.20 |
|
|
| 4.21 |
|
|
| 4.22 |
|
|
| 4.23 |
|
|
| 4.24 |
|
|
PART II. OTHER INFORMATION
| 4.25 |
|
|
| 4.26 |
|
|
| 4.27 |
|
|
| 4.28 |
|
|
| 4.29 |
|
|
| 4.30 |
|
|
| 10.1* |
|
|
| 10.2* |
|
|
| 10.3* |
|
|
| 10.4* |
|
|
| 10.5* |
|
|
PART II. OTHER INFORMATION
PART II. OTHER INFORMATION
| 11.1 |
|
|
| 31.1 |
|
|
| 31.2 |
|
|
| 32.1 |
|
|
| 32.2 |
|
|
| 101 |
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at January 31, 2021 and October 31, 2020, (ii) Condensed Consolidated Statements of Operations for the three months ended January 31, 2021 and 2020, (iii) Condensed Consolidated Statements of Shareholders’ Equity for the three months ended January 31, 2021 and 2020, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2021 and 2020, and (v) Condensed Notes to Condensed Consolidated Financial Statements. FILED HEREWITH.
|
| 104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * |
Management contract or compensatory plan or agreement. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
OPTICAL CABLE CORPORATION |
| (Registrant) | |
|
|
|
|
|
|
| Date: March 15, 2021 |
/s/ Neil D. Wilkin, Jr. |
|
|
Neil D. Wilkin, Jr. |
|
|
Chairman of the Board of Directors, |
| President and Chief Executive Officer | |
| Date: March 15, 2021 | /s/ Tracy G. Smith |
| Tracy G. Smith | |
| Senior Vice President and Chief Financial | |
| Officer |
Exhibit 31.1
CERTIFICATION
I, Neil D. Wilkin, Jr., certify that:
|
|
1. |
I have reviewed this quarterly report on Form 10-Q of Optical Cable Corporation; |
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
|
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: March 15, 2021 |
/s/ Neil D. Wilkin, Jr. |
|
|
Neil D. Wilkin, Jr. |
|
|
Chairman of the Board of Directors, President |
| and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Tracy G. Smith, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Optical Cable Corporation; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: March 15, 2021 |
/s/ Tracy G. Smith |
|
|
Tracy G. Smith |
|
|
Senior Vice President and |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Optical Cable Corporation (the “Company”) on Form 10-Q for the quarter ended January 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of January 31, 2021, and for the period then ended.
|
Date: March 15, 2021 |
/s/ Neil D. Wilkin, Jr. |
|
|
Neil D. Wilkin, Jr. |
|
|
Chairman of the Board of Directors, |
| President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Optical Cable Corporation (the “Company”) on Form 10-Q for the quarter ended January 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of January 31, 2021, and for the period then ended.
|
Date: March 15, 2021 |
/s/ Tracy G. Smith |
|
|
Tracy G. Smith |
|
|
Senior Vice President and |
| Chief Financial Officer |