Exhibit 13.1

Table of Contents

 

 

OPTICAL CABLE CORPORATION

 

Annual Report

 

2018

 

 

TABLE OF CONTENTS

 

3	Selected Consolidated Financial Information

 

4	Letter from the CEO

 

7	Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23	Consolidated Financial Statements

 

27	Notes to Consolidated Financial Statements

 

45	Report of Independent Registered Public Accounting Firm

 

46	Corporate Information

 

 

Optical Cable Corporation (OCC)

 

 

 

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Optical Cable Corporation (OCC)

 

 

Selected Consolidated Financial Information

(in thousands, except per share data)

 

		Years ended October 31,
		2018				2017				2016					2015 (1)				2014
Consolidated Statement of Operations Information:
Net sales		$	87,828			$	64,093			$	64,616			$	73,569			$	82,978
Cost of goods sold			59,955				43,295				44,891				51,773				54,506
Gross profit			27,873				20,798				19,725				21,796				28,472
Selling, general and administrative expenses			26,131				21,969				20,761				24,043				26,989
Royalty (income) expense, net			(33	)			120				164				124				110
Amortization of intangible assets			35				26				17				11				41
Income (loss) from operations			1,740				(1,317	)			(1,217	)			(2,382	)			1,332
Other expense, net:
Interest expense, net			(608	)			(523	)			(621	)			(440	)			(414	)
Other, net			(80	)			96				43				7				(28	)
Income (loss) before income taxes			1,052				(1,744	)			(1,795	)			(2,815	)			890
Income tax expense (benefit)			(17	)			(5	)			6				1,482				267
Net income (loss)		$	1,069			$	(1,739	)		$	(1,801	)		$	(4,297	)		$	623
Net loss attributable to noncontrolling interest			—				—				(22	)			(42	)			(61	)
Net income (loss) attributable to OCC		$	1,069			$	(1,739	)		$	(1,779	)		$	(4,255	)		$	684
Net income (loss) per share attributable to OCC		$	0.14			$	(0.27	)		$	(0.28	)		$	(0.69	)		$	0.10
Weighted average shares:
Basic and diluted			7,593				6,547				6,443				6,201				6,764
Consolidated Balance Sheet Information:
Cash		$	177			$	891			$	1,879			$	1,083			$	1,090
Working capital			24,019				22,907				22,196				23,504				26,075
Total assets			43,098				40,139				40,666				45,029				50,039
Bank debt			9,420				12,370				11,946				13,227				9,997
Total shareholders’ equity attributable to OCC			26,811				23,690				24,765				26,631				31,007

 

(1)  Fiscal year 2015 includes a $2.4 million non-cash charge related to the establishment of an allowance against OCC's net deferred tax assets.  The deferred tax asset valuation allowance in fiscal year 2015 increased income tax expense, increased net loss, increased net loss attributable to OCC, reduced total assets attributable to OCC and reduced total shareholders' equity attributable to OCC, in each case by $2.4 million.  The deferred tax asset valuation allowance also increased the net loss per share attributable to OCC by $0.39 per share in fiscal year 2015.  See "Income Tax Expense (Benefit)" in the Management Discussion and Analysis section of this annual report and Note 12 to the Consolidated Financial Statements.

 

 

Optical Cable Corporation (OCC)

 

 

Letter from the CEO

 

 

Dear Shareholders of Optical Cable Corporation (OCC^®):

 

During fiscal 2018, Optical Cable Corporation delivered strong financial performance while continuing to execute on our growth strategies and market initiatives.

 

We recorded the highest annual net sales in company history in fiscal 2018, with double-digit growth in both net sales and gross profit.

 

Consolidated net sales increased 37.0%, resulting in gross profit growth of 34.0%.

 

 

Market Strength. Significant Opportunities.

 

Optical Cable Corporation has successfully built strong market positions in a broad range of targeted markets over the years—including in enterprise, harsh environment and specialty markets.

 

Our market strength is built on our innovative and top-tier cabling and connectivity products, our team’s expertise and customer service focus, and our commitment to continual improvement.

 

This competitive market positioning is one of OCC’s most valuable assets. It has earned us the respect of other industry participants—particularly competitors much larger than OCC. It is a point of pride for our team. And, it provides opportunities and operating leverage to grow in our markets and create shareholder value over the long term.

 

 

Record Financial Performance Reflects Strong Execution.

 

In fiscal 2018, we significantly increased our fiber optic cable production volumes to meet increased demand. While our increased production enabled sales growth, it also created some operational challenges. OCC continues to take steps to manage spikes in demand and increase production capacity, including hiring additional personnel. We are optimistic about our ability to meet rising demand in 2019 and beyond, and remain focused on capitalizing on the momentum we are building to drive the business to greater heights.

 

OCC’s key financial performance metrics for fiscal year 2018 include:

 

●

Consolidated net sales for fiscal year 2018 were $87.8 million, an increase of 37.0% compared to net sales of $64.1 million in fiscal year 2017. OCC achieved sales growth in its specialty markets, particularly in the wireless carrier and military markets during the year. U.S. net sales increased 45.0% in fiscal 2018, and net sales outside of the U.S. increased 4.1%.

 

Optical Cable Corporation (OCC)

 

 

●

Gross profit grew 34.0% to $27.9 million in fiscal year 2018, compared to gross profit of $20.8 million in fiscal year 2017.

 

●

Selling, General & Administrative expenses as a percentage of net sales were 29.8% in fiscal year 2018, compared to 34.3% in fiscal year 2017, as OCC benefited from its operating leverage. SG&A expenses were $26.1 million during fiscal year 2018, compared to $22.0 million for fiscal year 2017. Employee related costs, including employee incentives and sales commissions, increased as a result of significant growth in net sales and gross profits. Generally, our ability to maintain our enviable market positions in target markets relative to much larger competitors tends to require SG&A expenses at a higher percentage of net sales than those larger competitors.

 

●

Net income was $1.1 million, or $0.14 per share, in fiscal 2018, a significant improvement when compared to a net loss for fiscal year 2017.

 

●

During fiscal year 2018, we achieved positive net cash provided by operating activities of $3.2 million.

 

●

OCC’s balance sheet remains strong:

 

o

We reduced total bank debt by $3.0 million (or 23.9%) to $9.4 million during fiscal year 2018.

 

o

We secured a $6.0 million special revolving loan in the second quarter of fiscal year 2018 for working capital needs from our bank. Our outstanding balance on the special revolving loan never exceeded $2.8 million during its term and the final payment on the loan was made before the end of July 2018, prior to its maturity on October 1, 2018.

 

o

OCC’s ratio of current assets to current liabilities was 4.4 to 1 as of October 31, 2018.

 

 

Driving Continued Value Creation in 2019.

 

As we begin fiscal year 2019, the OCC team is committed to advancing our key strategic initiatives designed to drive top- and bottom-line growth and create substantial long-term shareholder value.

 

In particular, we are focused on sales, marketing, and product initiatives to grow sales in targeted markets and strengthen our market positions. We are also continuing our operational initiatives to increase manufacturing efficiencies and effect process improvements.

 

Importantly, the interests of our Board of Directors and our current employees are aligned with those of our shareholders. Current employees and members of the Board of Directors own more than 38.0% of OCC’s outstanding common shares at the end of fiscal 2018. As a result, we are laser-focused on taking actions that will deliver enhanced shareholder value.

 

Optical Cable Corporation (OCC)

 

 

Looking ahead, we are excited about capitalizing on opportunities before us. And, we are confident in our ability to continue to meet the evolving needs of our customers, end-users and all of our other stakeholders.

 

I would like to thank our team of dedicated employees, who have worked tirelessly to achieve our strong results in 2018 and who will continue to drive our success in 2019 and beyond. We are deeply grateful for their dedication and contributions.

 

Thank you for your investment and trust in OCC.

 

 

	/s/ Neil D. Wilkin, Jr.
	Neil D. Wilkin, Jr.
	Chairman of the Board,
	President and Chief Executive Officer
	December 19, 2018

 

Optical Cable Corporation (OCC)

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Information

 

This report 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 litigation, claims and other actions, and potential litigation, claims and other actions against us; an adverse outcome in 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 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 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 high volatility, timing of large sales orders, and high sales concentration among a limited number of customers in certain markets, particularly the wireless carrier market; terrorist attacks or acts of war, and any current or potential future military conflicts; 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, in compliance with the federal securities laws; 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 financial debt covenants with our lender; our ability to maintain and/or secure debt financing and/or equity financing to adequately finance our ongoing operations; 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; a continued suspension of dividends declared to shareholders due to inadequate or alternative uses of cash on hand; 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 or natural disasters 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; further 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.

 

 

Optical Cable Corporation (OCC)

 

 

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 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, datacenter, 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, fiber optic and copper connectors, specialty fiber optic and copper connectors, fiber optic and copper patch cords, pre-terminated fiber optic and copper cable assemblies, racks, cabinets, datacom enclosures, patch panels, face plates, multi-media 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. 

 

 

Optical Cable Corporation (OCC)

 

 

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 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 datacenter 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 Fiscal Year 2018

 

●

During fiscal year 2018, OCC recorded the highest annual net sales in the Company’s history. Consolidated net sales for fiscal year 2018 were $87.8 million, an increase of 37.0% compared to net sales of $64.1 million for fiscal year 2017.

 

●

Gross profit increased 34.0% to $27.9 million in fiscal year 2018, compared to $20.8 million for fiscal year 2017.

 

●

Gross profit margin (gross profit as a percentage of net sales) was 31.7% for fiscal year 2018, compared to 32.4% for fiscal year 2017.

 

●

Net income was $1.1 million, or $0.14 per share, during fiscal year 2018, compared to a net loss of $1.7 million, or $0.27 per share, during fiscal year 2017.

 

 

Optical Cable Corporation (OCC)

 

 

●

During fiscal year 2018, we achieved positive net cash provided by operating activities of $3.2 million.

 

●

We reduced our total bank debt by $3.0 million (or 23.9%) to $9.4 million during fiscal year 2018.

 

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. 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 of product shipment or delivery to the customer (including distributors) provided that the customer takes ownership and assumes risk of loss (based on shipping terms), collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. 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 (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 expense, net consists of interest expense and other miscellaneous income and expense items not directly attributable to our operations.

 

 

Optical Cable Corporation (OCC)

 

 

The following table sets forth and highlights fluctuations in selected line items from our consolidated statements of operations for the periods indicated:

 

		Fiscal Years Ended												Fiscal Years Ended
		October 31,												October 31,
										Percent												Percent
		2018				2017				Change				2017				2016				Change
Net sales		$	87,800,000			$	64,100,000				37.0	%		$	64,100,000			$	64,600,000				(0.8	)%
Gross profit			27,900,000				20,800,000				34.0				20,800,000				19,700,000				5.4
SG&A expenses			26,100,000				22,000,000				18.9				22,000,000				20,800,000				5.8
Net income (loss)			1,100,000				(1,700,000	)			161.5				(1,700,000	)			(1,800,000	)			2.3

 

Net Sales

 

OCC recorded the highest annual net sales in the Company’s history during fiscal year 2018. Consolidated net sales for fiscal year 2018 increased 37.0% to $87.8 million, compared to net sales of $64.1 million in fiscal year 2017.

 

During fiscal year 2018, we experienced an increase in net sales in our specialty markets compared to last year, particularly in our wireless carrier and military markets. This increase in the specialty markets was partially offset by a decrease in net sales in our enterprise markets.

 

OCC’s increase in net sales during fiscal year 2018, when compared to fiscal year 2017, has been driven primarily by significant orders from one customer with whom OCC has done business for a number of years. Annual net sales to this customer have significantly fluctuated over the years—reaching an all-time high of $28.6 million during fiscal year 2018. Currently, we do not anticipate that sales to this customer will trend at the same level in fiscal year 2019 as it did in fiscal year 2018, however, we cannot predict the level of future sales to this customer at this time.

 

Consolidated net sales for fiscal year 2017 were $64.1 million, a decrease of less than one percent when compared to net sales of $64.6 million in fiscal year 2016. During fiscal year 2017, OCC’s net sales in the enterprise market (including OEM) remained relatively stable, while OCC achieved increases in a number of industrial and specialty markets, compared to fiscal year 2016. These increases, however, were offset by decreases in net sales in the wireless carrier and military markets.

 

Net sales to customers outside of the United States were approximately 15%, 20% and 20% of total net sales for fiscal years 2018, 2017 and 2016, respectively. Net sales to customers in the United States increased 45.0% during fiscal year 2018 compared to fiscal year 2017, and net sales to customers outside of the United States increased 4.1%.

 

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. We believe this historical seasonality pattern is generally indicative of an overall trend and reflective of the buying patterns and budgetary cycles of our customers. However, this pattern may be substantially altered during any quarter or year, as was the case in fiscal year 2018, by 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, we are not able to reliably predict net sales based on seasonality because these other factors can also substantially impact our net sales patterns during the year.

 

Gross Profit

 

Gross profit increased 34.0% to $27.9 million in fiscal year 2018 from $20.8 million in fiscal year 2017. Gross profit margin, or gross profit as a percentage of net sales, was 31.7% for fiscal year 2018, compared to 32.4% for fiscal year 2017.

 

Optical Cable Corporation (OCC)

 

 

Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis. Gross profit margin in fiscal year 2018 was negatively impacted by a shift in product mix toward the sale of certain lower margin products in fiscal year 2018 compared to fiscal year 2017. However, the significant increase in net sales levels during fiscal year 2018 for our fiber optic cable products helped to offset the impact of the decrease in gross profit margin on gross profit, as certain fixed manufacturing costs were spread over higher sales and we benefited from our operating leverage.

 

Gross profit increased 5.4% to $20.8 million in fiscal year 2017 from $19.7 million in fiscal year 2016. Gross profit margin, or gross profit as a percentage of net sales, increased to 32.4% for fiscal year 2017, compared to 30.5% for fiscal year 2016.

 

Gross profit margin improved in all categories of OCC’s product offerings during fiscal year 2017 including fiber optic cable, enterprise connectivity, and harsh environment and specialty connectivity, primarily due to a shift in product mix toward the sale of certain higher margin products compared to fiscal year 2016. Toward the end of fiscal year 2017, we started new manufacturing efficiency initiatives which we believe benefited OCC.

 

Selling, General and Administrative Expenses

 

SG&A expenses increased $4.2 million, or 18.9%, to $26.1 million in fiscal year 2018 from $22.0 million in fiscal year 2017. SG&A expenses as a percentage of net sales were 29.8% in fiscal year 2018, compared to 34.3% in fiscal year 2017, as we benefited from our operating leverage. We experience positive operating leverage when certain selling, general and administrative expenses are spread over higher consolidated net sales levels.

 

The increase in SG&A expenses during fiscal year 2018 compared to last year was primarily the result of increases in employee related costs totaling $4.0 million; including an increase in employee incentives and commissions totaling $2.5 million due to increased net sales and the improved financial results during fiscal year 2018, and an increase in share-based compensation expense totaling $1.4 million as a result of the expected vesting of previously granted long-term, performance-based equity grants. The share-based compensation expense increase is the result of changes in the number of shares of restricted stock estimated to vest on January 31, 2019, based on operational performance measures. The determination of the number of shares expected to vest on January 31, 2019 is impacted by our improved financial performance in fiscal year 2018 compared to fiscal year 2017. Because the vesting of these shares will not occur until January 31, 2019, we also expect to recognize over $800,000 in share-based compensation expense in our first quarter of fiscal year 2019, compared to the first quarter of fiscal year 2018.

 

SG&A expenses increased $1.2 million, or 5.8%, to $22.0 million in fiscal year 2017 from $20.8 million in fiscal year 2016. SG&A expenses as a percentage of net sales were 34.3% in fiscal year 2017, compared to 32.1% in fiscal year 2016.

 

The increase in SG&A expenses during fiscal year 2017 compared to fiscal year 2016 was primarily the result of increased employee related costs totaling $837,000, increased marketing expenses totaling $170,000, and increased legal fees totaling $164,000. Employee related costs increased when comparing fiscal year 2017 to fiscal year 2016 largely as a result of new hires, selectively added to accomplish strategic objectives, and increases in healthcare insurance costs. Marketing expenses increased due to a number of new marketing initiatives and work related to future product launches. Legal fees increased primarily due to legal action undertaken by the Company during the first six months of fiscal year 2017. This legal action resulted in the favorable settlement of certain legal matters during the second quarter of fiscal year 2017. As a result, the reversal of approximately $171,000 previously accrued was included in “Other Expense, net” described below. As expected, legal fees did not recur at the same level in the second half of fiscal year 2017.

 

Optical Cable Corporation (OCC)

 

 

Royalty Income (Expense), Net

 

We recognized royalty income, net of royalty and related expenses, totaling $33,000 during fiscal year 2018, compared to royalty expense, net of royalty income totaling $120,000 during fiscal year 2017. The change when comparing fiscal year 2018 to last year is due to the expiration of a patent in the fourth quarter of fiscal year 2017 that was previously licensed by OCC from a third party for product sold by OCC. We expect the trend of royalty income to offset royalty expense to continue in fiscal year 2019.

 

We recognized royalty expense, net of royalty income, totaling $120,000 during fiscal year 2017, compared to $164,000 during fiscal year 2016.

 

Amortization of Intangible Assets

 

We recognized $35,000 of amortization expense, associated with intangible assets, during fiscal year 2018, compared to $26,000 during fiscal year 2017 and $17,000 during fiscal year 2016.

 

Other Expense, Net

 

We recognized other expense, net of $688,000 in fiscal year 2018 compared to $427,000 in fiscal year 2017. Other expense, net for fiscal year 2018 is comprised of: interest expense totaling $608,000 related primarily to monies borrowed in connection with the acquisition of SMP Data Communications in fiscal year 2008, borrowings under our revolving credit facilities, and other interest incurred in the normal course of business; and other miscellaneous items which may fluctuate from period to period. The increase in other expense, net during fiscal year 2018 compared to fiscal year 2017 was primarily due to income of approximately $171,000, recognized in fiscal year 2017 that did not recur in fiscal year 2018, and increased interest expense resulting from increased borrowings on our revolving credit facilities, including our Special Project Revolver which was not in place during fiscal year 2017, and was paid in full in July 2018 prior to its expiration on October 1, 2018.

 

We recognized other expense, net of $427,000 in fiscal year 2017 compared to $578,000 in fiscal year 2016. Other expense, net for fiscal year 2017 is comprised of: interest expense totaling $523,000 related primarily to monies borrowed in connection with the acquisition of SMP Data Communications in fiscal year 2008, borrowings under our revolving credit facility, and other interest incurred in the normal course of business; and other miscellaneous items which may fluctuate from period to period. The decrease in other expense, net during fiscal year 2017 compared to fiscal year 2016 was primarily due to income of approximately $171,000, resulting from the reversal of amounts previously accrued upon the favorable settlement of certain legal matters, and the decrease in the interest rate, effective December 21, 2016, and changes in the balance of our Revolving Credit Note.

 

Income (Loss) Before Income Taxes

 

We reported income before income taxes of $1.1 million for fiscal year 2018 compared to a loss before income taxes of $1.7 million for fiscal year 2017. This change was primarily due to the increase in gross profit of $7.1 million, partially offset by the increase in SG&A expenses of $4.2 million in fiscal year 2018, compared to fiscal year 2017.

 

We reported a loss before income taxes of $1.7 million for fiscal year 2017 compared to $1.8 million for fiscal year 2016. This improvement was primarily due to the increase in gross profit of $1.1 million, offset by the increase in SG&A expenses of $1.2 million in fiscal year 2017 compared to fiscal year 2016.

 

Optical Cable Corporation (OCC)

 

 

Income Tax Benefit

 

Income tax benefit totaled $17,000 for fiscal year 2018 compared to $5,000 for fiscal year 2017. Our effective tax rate for fiscal year 2018 was negative 1.6%, compared to less than one percent for fiscal year 2017.

 

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.

 

Income tax benefit totaled $5,000 for fiscal year 2017, compared to income tax expense of $6,000 for fiscal year 2016. Our effective tax rate was less than one percent in fiscal year 2017, compared to less than negative one percent in fiscal year 2016.

 

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—as has been the case during fiscal year 2018. 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 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.

 

The Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, lowers the statutory federal corporate income tax rate from 35% to 21%. The reduction of the statutory federal corporate tax rate to 21% became effective on January 1, 2018. Because our fiscal year 2018 commenced on November 1, 2017, the annual statutory federal corporate tax rate applicable to fiscal year 2018 is a blended rate of 23.2%. Beginning in our 2019 fiscal year, the annual statutory federal corporate tax rate will be 21%. As a result of the reduction in the federal corporate tax rate, we remeasured our net deferred tax assets and the corresponding valuation allowance in the first quarter of fiscal year 2018 which is the period that includes the enactment date of the Tax Act. The Company recognized a reduction in the value of our net deferred tax assets of approximately $1.3 million which was offset by the change in the corresponding valuation allowance of $1.3 million. As of October 31, 2018, we have completed our analysis of the revaluation of our net deferred tax assets and have no material changes to the discrete adjustment recognized in the first quarter of fiscal year 2018. Because we decreased both our net deferred tax assets and our valuation allowance by the same amount, there was no impact on our results of operations from the remeasurement. Any future benefit we may realize from our net deferred tax assets is effectively reduced by $1.3 million.

 

See also “Critical Accounting Policies” below and Note 12 to the Consolidated Financial Statements.

 

 

Optical Cable Corporation (OCC)

 

 

Net Income (Loss)

 

Net income for fiscal year 2018 was $1.1 million compared to a net loss of $1.7 million for fiscal year 2017. This change was due primarily to the increase in income before income taxes of $2.8 million in fiscal year 2018, compared to fiscal year 2017.

 

Net loss for fiscal year 2017 was $1.7 million compared to $1.8 million for fiscal year 2016. This improvement was primarily due to the decrease in loss before income taxes of $51,000.

 

Financial Condition

 

Total assets increased $3.0 million, or 7.4%, to $43.1 million at October 31, 2018, from $40.1 million at October 31, 2017. This increase is primarily due to a $3.9 million increase in trade accounts receivable, net largely resulting from the increase in net sales in the fourth quarter of fiscal year 2018 when compared to the fourth quarter of fiscal year 2017.

 

Total liabilities decreased $162,000, or 1.0%, to $16.3 million at October 31, 2018, from $16.4 million at October 31, 2017. The decrease in total liabilities was primarily due to a $3.0 million decrease in note payable to bank and long-term debt, including current installments, partially offset by an increase in accounts payable and accrued expenses, including accrued compensation and payroll taxes, totaling $2.8 million. The decrease in note payable to bank is due to repayments on our revolving credit facilities and the increase in accounts payable and accrued expenses, including accrued compensation and payroll taxes, is primarily due to purchases of raw materials in preparation for the manufacture and shipment of orders and the timing of certain vendor and payroll related payments.

 

Total shareholders’ equity at October 31, 2018 increased $3.1 million, or 13.2%, during fiscal year 2018. The increase resulted primarily from net income of $1.1 million and share-based compensation, net of $2.1 million.

 

Liquidity and Capital Resources

 

Our primary capital needs during fiscal year 2018 have been to fund working capital requirements and capital expenditures and to make principal payments on long-term debt and our notes payable to bank. Our primary source of capital for these purposes has been existing cash, borrowings under our revolving credit facilities (including our Special Project Revolving Loan) and cash provided by operations. As of October 31, 2018 and 2017, we had an outstanding loan balance under our revolving credit facility totaling $3.0 million and $5.7 million, respectively. As of October 31, 2018 and 2017, we had outstanding loan balances, excluding our revolving credit facility, totaling $6.4 million and $6.7 million, respectively.

 

In April 2018, we secured a Special Project Revolving Loan permitting us to borrow up to $6 million for the working capital needs related to the fulfillment and processing of certain orders. Our outstanding balance on the Special Project Revolving Loan never exceeded $2.8 million during its term, and the final payment on the revolver was made in July 2018 prior to its maturity on October 1, 2018.

 

Our cash totaled $177,000 and $891,000 as of October 31, 2018 and 2017, respectively. For the year ended October 31, 2018, net cash provided by operating activities of $3.2 million was offset by net cash used in financing activities of $3.2 million and capital expenditures totaling $689,000.

 

On October 31, 2018, we had working capital of $24.0 million, compared to $22.9 million as of October 31, 2017. The ratio of current assets to current liabilities as of October 31, 2018, was 4.4 to 1 compared to 6.5 to 1 as of October 31, 2017. The increase in working capital was primarily due to the $3.9 million increase in trade accounts receivable, net, partially offset by the $2.8 million increase in accounts payable and accrued expenses, including accrued compensation and payroll taxes. The decrease in the current ratio was primarily due to the fact that current assets increased $3.9 million, or 14.6%, while current liabilities increased $2.8 million, or 67.5%.

 

 

Optical Cable Corporation (OCC)

 

 

Net Cash

 

Net cash provided by operating activities was $3.2 million in fiscal year 2018 compared to net cash used in operating activities of $687,000 in fiscal year 2017 and net cash provided by operating activities of $3.2 million in fiscal year 2016.

 

Net cash provided by operating activities during fiscal year 2018 primarily resulted from net income of $1.1 million, plus net adjustments to reconcile net income to net cash provided by operating activities, including depreciation and amortization of $1.8 million and share-based compensation expense of $2.2 million. Additionally, the cash flow impact of increases in accounts payable and accrued expenses, including accrued compensation and payroll taxes, of $2.8 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 the cash flow impact of increases in trade accounts receivable, net of $3.9 million and increases in inventories of $693,000.

 

Net cash used in operating activities during fiscal year 2017 primarily resulted from an increase in inventories totaling $1.8 million, partially offset by certain adjustments to reconcile a net loss of $1.7 million to net cash used in operating activities including depreciation, amortization and accretion of $1.7 million and share-based compensation expense of $787,000.

 

Net cash provided by operating activities during fiscal year 2016 primarily resulted from certain adjustments to reconcile a net loss of $1.8 million to net cash provided by operating activities including depreciation, amortization and accretion of $2.1 million and share-based compensation expense of $801,000. Additionally, the decrease in inventories of $2.8 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 the cash flow impact of decreases in accounts payable and accrued expenses of $997,000.

 

Net cash used in investing activities totaled $734,000 in fiscal year 2018 compared to $584,000 in fiscal year 2017 and $676,000 in fiscal year 2016. Net cash used in investing activities during fiscal years 2018, 2017 and 2016 resulted primarily from the purchase of property and equipment and deposits for the purchase of property and equipment.

 

Net cash used in financing activities totaled $3.2 million in fiscal year 2018 compared to net cash provided by financing activities totaling $283,000 in fiscal year 2017 and net cash used in financing activities totaling $1.7 million in fiscal year 2016.

 

Net cash used in financing activities in fiscal year 2018 resulted primarily from repayments on our notes payable to our bank under our lines of credit, net of advances, totaling $2.7 million and principle payments on long-term debt totaling $251,000. Net cash provided by financing activities in fiscal year 2017 resulted primarily from proceeds from a note payable to our bank under our line of credit, net of repayments, totaling $700,000, partially offset by principal payments on long-term debt totaling $276,000. Net cash used in financing activities in fiscal year 2016 resulted primarily from repayments on the revolving credit facility totaling $1.0 million, principal payments on our long-term debt totaling $281,000, the payment of dividends previously declared totaling $141,000 and refinancing costs totaling $138,000.

 

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 October 31, 2018, 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 be purchased.

 

 

Optical Cable Corporation (OCC)

 

 

We have repurchased outstanding common stock outside of the Repurchase Plan through an odd lot repurchase offer. During fiscal year 2018, we repurchased and retired a total of 272 shares for $2,000, outside of the Repurchase Plan.

 

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”) and a Revolving Credit Note (“Revolver”).

 

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 priority lien on all of our personal property and assets, all money, goods, machinery, equipment, fixtures, inventory, accounts, chattel paper, letter of credit rights, deposit accounts, commercial tort claims, documents, instruments, investment property and general intangibles now owned or hereafter acquired by us and wherever located, as well as a first lien deed of trust on our real property.

 

Our Revolver with Pinnacle provides the Company with a $7.0 million revolving line of credit (“Revolving Loan”) for our working capital needs. Under the Revolver, Pinnacle provides us with one or more revolving loans in a collective maximum principal amount of $7.0 million. We may borrow, repay, and reborrow at any time or from time to time while the Revolving Loan is in effect.

 

The applicable margin in the Revolving Credit Note has a floor on the interest rate for the Revolving Credit Note such that the rate will never be less than 2.50% per annum. The Revolving Loan accrues interest at LIBOR plus 2.50% (resulting in a 4.74% rate at October 31, 2018). The Revolving Loan is payable in monthly payments of interest only with principal and any outstanding interest due and payable at maturity.

 

On April 10, 2018, we entered into a Fourth Loan Modification Agreement with Pinnacle to modify the Credit Agreement dated April 26, 2016 entered into between the Company and Pinnacle and the term loans dated April 26, 2016. The Fourth Loan Modification Agreement extended the maturity date of the Revolving Loan to September 30, 2019 and modified two financial covenants for the Company.

 

Also on April 10, 2018, we entered into a Special Project Loan Agreement and Special Project Revolver with Pinnacle which provided the Company with a $6.0 million revolving line of credit (the “Special Project Revolving Loan”) for the working capital needs related to the fulfillment and processing of certain orders. Under the Special Project Revolver, Pinnacle provided us with one or more revolving loans in a collective maximum principal amount of $6.0 million. We could borrow, repay, and reborrow at any time or from time to time while the Special Project Revolving Loan was in effect.

 

The Special Project Revolving Loan accrued interest at LIBOR plus 4.0%. The Special Project Revolving Loan was payable in monthly payments of interest only with principal and any outstanding interest due and payable at maturity. The Special Project Revolving Loan matured on October 1, 2018, according to the terms of the agreement.

 

Our outstanding balance on the Special Project Revolving Loan never exceeded $2.8 million during its term, and the final payment on the revolver was made in July 2018 prior to its maturity on October 1, 2018. On October 15, 2018, we entered into a Fifth Loan Modification Agreement with Pinnacle to modify the Credit Agreement dated April 26, 2016 entered into between the Company and Pinnacle and the term loans dated April 26, 2016. The Fifth Loan Modification Agreement extends the maturity date of the Revolving Loan to April 30, 2020 and modifies three financial covenants for the Company. All other terms of the Revolving Loan remain unaltered and in effect.

 

 

Optical Cable Corporation (OCC)

 

 

The Revolving Loan continues to be secured by a perfected first lien security interest on all assets, including but not limited to, accounts, as-extracted collateral, chattel paper, commodity accounts, commodity contracts, deposit accounts, documents, equipment, fixtures, furniture, general intangibles, goods, instruments, inventory, investment property, letter of credit rights, payment intangibles, promissory notes, software and general tangible and intangible assets owned now or later acquired. The Revolving Loan is also cross-collateralized with our real property.

 

As of October 31, 2018, we had $3.0 million of outstanding borrowings on our Revolving Loan and $4.0 million in available credit. As of October 31, 2017, we had $5.7 million of outstanding borrowings on our Revolving Loan and approximately $1.3 million in available credit.

 

Capital Expenditures

 

We did not have any material commitments for capital expenditures as of October 31, 2018. During our 2018 fiscal year budgeting process, we included an estimate for capital expenditures of $2.0 million for the year. We incurred capital expenditures totaling $689,000 for items including new manufacturing equipment, improvements to existing manufacturing equipment, new information technology equipment and software, upgrades to existing information technology equipment and software, furniture and other capitalizable expenditures for property, plant and equipment for fiscal year 2018.

 

During our 2019 fiscal year budgeting process, we included an estimate for capital expenditures of $2.5 million for the year. Any capital expenditures will be funded out of our working capital, cash provided by operations or borrowings under our credit facility, as appropriate. This amount includes estimates for capital expenditures for similar types of items as those purchased in fiscal year 2018. 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. Historically, we have spent less than our budgeted capital expenditures in most fiscal years.

 

Future Cash Flow Considerations

 

We believe that our 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.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of financial condition and results of operations is based on the consolidated financial statements and accompanying notes which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

Optical Cable Corporation (OCC)

 

 

Note 1 to the consolidated financial statements provides a summary of our significant accounting policies. The following are areas requiring significant judgments and estimates due to uncertainties as of the reporting date: revenue recognition, trade accounts receivable and the allowance for doubtful accounts, inventories, deferred tax assets, long-lived assets and commitments and contingencies.

 

Application of the critical accounting policies discussed in the section that follows requires management’s significant judgments, often as a result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. We are not currently aware of any reasonably likely events or circumstances that would result in materially different results.

 

Revenue Recognition

 

Management views revenue recognition as a critical accounting estimate since we must estimate an allowance for sales returns for the reporting period. This allowance reduces net sales for the period and is based on our analysis and judgment of historical trends, identified returns and the potential for additional returns. The estimates for sales returns did not materially differ from actual results for the years ended October 31, 2018, 2017 and 2016.

 

Trade Accounts Receivable and the Allowance for Doubtful Accounts

 

Management views trade accounts receivable net of the related allowance for doubtful accounts as a critical accounting estimate since the allowance for doubtful accounts is based on judgments and estimates concerning the likelihood that individual customers will pay the amounts included as receivable from them. In determining the amount of allowance for doubtful accounts to be recorded for individual customers, we consider the age of the receivable, the financial stability of the customer, discussions that may have occurred with the customer and our judgment as to the overall collectibility of the receivable from that customer. In addition, we establish an allowance for all other receivables for which no specific allowances are deemed necessary. This general allowance for doubtful accounts is based on a percentage of total trade accounts receivable with different percentages used based on different age categories of receivables. The percentages used are based on our historical experience and our current judgment regarding the state of the economy and the industry.

 

Inventories

 

Management views the determination of the net realizable value of inventories as a critical accounting estimate since it is based on judgments and estimates regarding the salability of individual items in inventory and an estimate of the ultimate selling prices for those items. Individual inventory items are reviewed and adjustments are made based on the age of the inventory and our judgment as to the salability of that inventory in order for our inventories to be valued at the lower of cost and net realizable value.

 

Deferred Tax Assets

 

Management views the valuation of deferred tax assets as a critical accounting estimate since we must assess whether it is “more likely than not” that we will realize the benefits of our gross deferred tax assets and determine an appropriate valuation allowance if we conclude such an allowance is appropriate. This determination requires that we consider all available evidence, both positive and negative, in making this assessment. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.

 

Generally, a cumulative loss in recent years is a significant piece of negative evidence that is quite difficult to overcome under U.S. GAAP. Since the amount of our loss before income taxes in fiscal year 2015 exceeded our income before taxes during the previous two fiscal years, we believed that U.S. GAAP required us to treat as significant negative evidence that it was “more likely than not” that we would be unable to realize the future benefits of our deferred tax assets in the coming years—significant negative evidence that was quite difficult to overcome under U.S. GAAP and which we were not able to overcome with sufficient objectively verifiable positive evidence.

 

 

Optical Cable Corporation (OCC)

 

 

While we believed that ultimately we will utilize the benefit of our net deferred tax assets in the future (prior to any expiration of the usability of such deferred tax assets for income tax purposes), we concluded as a result of our cumulative loss position and insufficient objectively verifiable positive evidence, it was appropriate under U.S. GAAP for us to establish a full valuation allowance against net deferred tax assets as of October 31, 2015.

 

The valuation allowance against our net deferred tax assets does not in any way impact our ability to use future tax deductions such as our net operating loss carryforwards; rather, the valuation allowance indicates, according to the provisions of Accounting Standards Codification 740, Income Taxes, it is “more likely than not” that our deferred tax assets will not be realized.

 

The valuation allowance that was established will be maintained until there is sufficient positive evidence to conclude that it is “more likely than not” that our net deferred tax assets will be realized. Our income tax expense for future periods will be reduced to the extent of corresponding decreases in our valuation allowance. There can be no assurance regarding any future realization of the benefit by us of all or part of our net deferred tax assets. 

 

Long-lived Assets

 

Management views the determination of the carrying value of long-lived assets as a critical accounting estimate since we must determine an estimated economic useful life in order to properly amortize or depreciate our long-lived assets and because we must consider if the value of any of our long-lived assets have been impaired, requiring adjustment to the carrying value.

 

Economic useful life is the duration of time the asset is expected to be productively employed by us, which may be less than its physical life. Management’s assumptions on wear and tear, obsolescence, technological advances and other factors affect the determination of estimated economic useful life. The estimated economic useful life of an asset is monitored to determine if it continues to be appropriate in light of changes in business circumstances. For example, technological advances or excessive wear and tear may result in a shorter estimated useful life than originally anticipated. In such a case, we would depreciate the remaining net book value of an asset over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. We must also consider similar issues when determining whether or not an asset has been impaired to the extent that we must recognize a loss on such impairment.

 

The Company amortizes intangible assets over their respective finite lives up to their estimated residual values.

 

Commitments and Contingencies

 

Management views accounting for contingencies as a critical accounting estimate since loss contingencies arising from product warranties and defects, claims, assessments, litigation, fines and penalties and other sources require judgment as to any probable liabilities incurred. For example, accrued product warranty costs recorded by us are based primarily on historical experience of actual warranty claims and costs as well as current information with respect to warranty claims and costs. Actual results could differ from the expected results determined based on such estimates of loss contingencies.

 

 

Optical Cable Corporation (OCC)

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

We do not engage in transactions in derivative financial instruments or derivative commodity instruments. As of October 31, 2018 our financial instruments were not exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk.

 

New Accounting Standards

 

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model that expands disclosure requirements and requires an entity to recognize revenue when promised goods or services are transferred to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”) which defers the effective date of the new revenue recognition standard by one year. Under ASU 2015-14, the new revenue recognition standard is effective for the Company beginning in fiscal year 2019. The FASB has also issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20 and ASU 2017-14 all of which clarify certain implementation guidance within ASU 2014-09. We are currently evaluating the potential impact of the adoption of this guidance, but do not anticipate that the adoption will significantly change the timing or amount of revenue recognized. Therefore, we believe the adoption will be limited to expanded disclosures with no material impact on our results of operations, financial position and liquidity.

 

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires the recognition of a separate lease liability representing the required lease payments over the lease term and a separate lease asset representing the right to use the underlying asset during the same lease term. Additionally, this ASU provides clarification regarding the identification of certain components of contracts that would represent a lease as well as requires additional disclosures to the notes of the financial statements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted. We are currently evaluating the provisions of ASU 2016-02 in order to determine the impact on our results of operations, financial position and liquidity and our related financial statement disclosures. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provides an additional (and optional) transition method to adopt the new lease standard. Under the new transition method, an entity would initially apply the new lease requirements in the period of adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. We expect the adoption of this guidance may result in an increase to our long-term assets and liabilities on our consolidated balance sheet depending on the resulting impact of any decision by us to renew, extend or replace our two existing real estate leases, as the current leases expire; however, we do not expect the adoption to have a material impact on our results of operations, financial position and liquidity and our related financial statement disclosures.

 

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance related to the classification of certain cash receipts and cash payments on the statement of cash flows. The pronouncement provides clarification guidance on eight specific cash flow presentation issues that have developed due to diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The adoption of ASU 2016-15 is not expected to have a material impact on our results of operations, financial position or liquidity or our related financial statement disclosures.

 

In October 2016, the FASB issued Accounting Standards Update 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the transfer occurs.  Under current GAAP, entities are prohibited from recognizing current and deferred income taxes for an intra-entity transfer until the asset is sold to a third party.  Examples of assets that would be affected by the new guidance are intellectual property and property, plant and equipment.  ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The adoption of ASU 2016-16 is not expected to have a material impact on our results of operations, financial position or liquidity or our related financial statement disclosures.

 

 

Optical Cable Corporation (OCC)

 

 

In June 2018, the FASB issued Accounting Standards Update 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The adoption of ASU 2018-07 is not expected to have a material impact on our results of operations, financial position or liquidity or our related financial statement disclosures.

 

In June 2018, the FASB issued Accounting Standards Update 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (“ASU 2018-08”). ASU 2018-08 applies to entities that receive or make contributions, which primarily are not-for-profit entities but also affects business entities that make contributions. In the context of business entities that make contributions, the FASB clarified that a contribution is conditional if the arrangement includes both a barrier for the recipient to be entitled to the assets transferred and a right of return for the assets transferred (or a right of release of the business entity’s obligation to transfer assets). The recognition of contribution expense is deferred for conditional arrangements and is immediate for unconditional arrangements. ASU 2018-08 requires modified prospective transition to arrangements that have not been completed as of the effective date or that are entered into after the effective date, but full retrospective application to each period presented is permitted. ASU 2018-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The adoption of ASU 2018-08 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.

 

Disagreements with Accountants

 

We did not have any disagreements with our accountants on any accounting matter or financial disclosure made during our fiscal year ended October 31, 2018.

 

 

Optical Cable Corporation (OCC)

 

 

Consolidated Balance Sheets

October 31, 2018 and 2017

 

 

 

See accompanying notes to consolidated financial statements.

 

 

Optical Cable Corporation (OCC)

 

 

Consolidated Statements of Operations

Years ended October 31, 2018, 2017 and 2016

 

 

 

See accompanying notes to consolidated financial statements.

 

 

Optical Cable Corporation (OCC)

 

 

Consolidated Statements of Shareholders' Equity

Years ended October 31, 2018, 2017 and 2016

 

 

 

See accompanying notes to consolidated financial statements.

 

 

Optical Cable Corporation (OCC)

 

 

Consolidated Statements of Cash Flows

Years Ended October 31, 2018, 2017 and 2016

 

 

 

See accompanying notes to consolidated financial statements.

 

 

Optical Cable Corporation (OCC)

 

 

Notes to Consolidated Financial Statements

Years ended October 31, 2018, 2017 and 2016

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Optical Cable Corporation

Roanoke, Virginia

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Optical Cable Corporation and Subsidiaries (the Company) as of October 31, 2018 and 2017, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended October 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Brown, Edwards & Company, L.L.P.

 

We have served as the Company’s auditor since 2016.

 

1715 Pratt Drive, Suite 2700

Blacksburg, Virginia

December 19, 2018

 

 

Optical Cable Corporation (OCC)

 

  

Corporate Information

 

 

Corporate Headquarters

Optical Cable Corporation (OCC)

5290 Concourse Drive

Roanoke, VA 24019

 

Primary Legal Counsel

Woods Rogers PLC

10 South Jefferson Street

Suite 1400

Roanoke, VA 24011

 

Independent Registered Public Accounting Firm

Brown, Edwards & Company, L.L.P.

1715 Pratt Drive

Suite 2700

Blacksburg, VA 24060

 

Transfer Agent

American Stock Transfer & Trust Company, LLC

6201 15^th Avenue

Brooklyn, NY 11219

 

Form 10-K Report

Shareholders may obtain a copy of Optical Cable Corporation’s Form 10-K, including exhibits, as filed with the Securities and Exchange Commission from the SEC website at http://www.sec.gov. Our SEC filings are also available to the public on our website at http://www.occfiber.com/investor-relations/ under the tab “SEC Filings”.

 

Annual Meeting

The 2019 annual meeting of shareholders will be held at 10:00 a.m. on Tuesday, March 26, 2019, at the Green Ridge Recreation Center, 7415 Wood Haven Road, Roanoke, Virginia.

 

 

Optical Cable Corporation (OCC)

 

 

Corporate Information

(Continued)

 

Common Stock and Dividend Data

 

Our common stock is traded on the Nasdaq Global Market under the symbol OCC. According to the records of our transfer agent, the Company had approximately 275 shareholders of record as of December 11, 2018. Additionally, there are approximately 1,000 beneficial owners as of December 11, 2018. On December 11, 2018, our common stock closed at a price of $3.86 per share.

 

Employees of the Company and members of the Board of Directors owned at least 38.2% of the shares outstanding as of October 31, 2018, including shares still subject to potential forfeiture based on vesting requirements.

 

The following table sets forth for the fiscal periods indicated the high and low bid prices of our common stock, as reported on the Nasdaq Global Market, during the two most recent fiscal years:

 

		Range of Bid Prices
Fiscal year ended October 31, 2018		High				Low
Fourth Quarter		$	6.40			$	3.40
Third Quarter		$	4.15			$	2.70
Second Quarter		$	3.00			$	2.30
First Quarter		$	2.60			$	2.20

 

		Range of Bid Prices
Fiscal year ended October 31, 2017		High				Low
Fourth Quarter		$	2.75			$	2.13
Third Quarter		$	3.35			$	2.30
Second Quarter		$	3.70			$	2.50
First Quarter		$	3.80			$	2.45

 

Dividend Declaration

 

In October 2010, the Board of Directors authorized the initiation of a quarterly cash dividend and declared a cash dividend on our common stock of $0.01 per share. In fiscal year 2011, we declared dividends of $0.01 per share on a quarterly basis. In fiscal year 2012, the dividend rate was increased to $0.015 per share and we declared dividends at the increased rate on a quarterly basis. In fiscal year 2013, the dividend rate was increased to $0.02 per share and we declared dividends at the increased rate on a quarterly basis for fiscal years 2013, 2014 and 2015. In January 2016, the Board of Directors suspended the declaration of dividends to shareholders. The payment of future dividends, if any, and the amount of future dividends is at the discretion of our Board of Directors and may change at any time. The declaration and payment of any future dividends by the Company is dependent on the consideration of various relevant factors by the Board of Directors, including, but not limited to, recent and future earnings, cash flow and financial condition, future investment opportunities, and/or other relevant factors.

 

 

Optical Cable Corporation (OCC)

 

 

Corporate Information

(Continued)

 

 

Executive Officers of Optical Cable Corporation

 

Neil D. Wilkin, Jr.	Chairman of the Board, President and
	Chief Executive Officer
Tracy G. Smith	Senior Vice President, Chief Financial Officer
	and Corporate Secretary

 

Board of Directors of Optical Cable Corporation

 

Neil D. Wilkin, Jr., Chairman	Chairman of the Board, President
	and Chief Executive Officer
	Optical Cable Corporation
Randall H. Frazier	President and Founder
	R. Frazier, Incorporated
John M. Holland	President and Founder
	Holland Technical Services
John A. Nygren	Retired, former President
	ChemTreat, Inc.
Craig H. Weber	Chief Executive Officer
	Home Care Delivered, Inc.
John B. Williamson, III	Chairman of the Board
	RGC Resources, Inc. and
	Roanoke Gas Company

 

 

Optical Cable Corporation (OCC)