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; cold wars and economic sanctions as a
result of these activities; changes in the level of spending by the United
States government, including, but not limited to military spending; ability to
recruit and retain key personnel (including production personnel); poor labor
relations; increasing labor costs; delays, extended lead times and/or changes in
availability of needed raw materials, equipment and/or supplies; shipping and
other logistics challenges; impact of inflation or hyperinflation on costs,
including raw materials and labor, and ability to pass along any increased costs
to customers; impact of rising interest rates increasing the cost of capital;
impact of cybersecurity risks and incidents and the related actual or potential
costs and consequences of such risks and incidents, including costs and
regulations 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; impact of new or changed
government laws and regulations on healthcare 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; 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; direct and indirect impacts of weather, natural
disasters and/or epidemic, pandemic or endemic diseases (such as COVID-19) in
the areas of the world in which we operate, market our products and/or acquire
raw materials including impacts on supply chains, labor constraints impacting
our production volumes and costs; any present or future government mandates,
travel restrictions, shutdowns or other regulations regarding any epidemic,
pandemic or endemic diseases; 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.
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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 8K, 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
As the COVID-19 pandemic has become more endemic-like in the U.S., we believe
continuing and lingering direct and indirect impacts of the COVID-19 pandemic
and certain macroeconomic trends have created certain challenges that have
affected production volumes and sales. While improving, we have continued to
experience certain challenges recruiting additional personnel (particularly,
production personnel), as well as certain raw material supply chain challenges,
which can impact sales, shipped product volumes, pricing and lead times for
certain products. The Company has taken steps to successfully mitigate (to a
certain extent) the impacts of these challenges; however, at this time the
Company believes these challenges may continue.
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The extent to which any continuing and lingering direct and indirect impacts of
the COVID-19 pandemic and certain related macroeconomic trends may continue to
affect OCC will depend on ongoing developments, which are subject to
uncertainty, including, but not limited to: any supply chain and labor
constraints impacting our production volumes and costs; any impact on certain of
OCC's markets; any resurgence of the virus (including its variant strains); the
degree of immunity provided by any current or future vaccines and boosters; any
government mandates, travel restrictions, shutdowns or other regulations related
to COVID-19 impacting the markets in which we operate, market our products
and/or acquire materials; as well as a variety of other unknowable factors. We
cannot fully anticipate or reasonably estimate all the ways in which the current
global health crisis and its direct and indirect effects could adversely impact
our business in the future.
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 components. 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, renewable energy and broadcast applications,
as well as 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.
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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 2023
? Consolidated net sales for the first quarter of fiscal year 2023 increased
26.6% to $18.3 million, compared to $14.4 million for the same period last
year.
? Gross profit increased 61.2% to $6.5 million in the first quarter of fiscal
year 2023, compared to $4.0 million for the first quarter of fiscal year 2022.
? Gross profit margin (gross profit as a percentage of net sales) increased to
35.7% during the first quarter of fiscal year 2023, compared to 28.0% for the
first quarter of fiscal year 2022.
? SG&A expenses increased to $5.5 million during the first quarter of fiscal
year 2023 compared to $4.8 million during the first quarter of fiscal year
2022. SG&A expenses as a percentage of net sales were 29.8% during the first
quarter of fiscal year 2023, compared to 33.1% during the same period in
fiscal year 2022.
? Net income was $810,000, or $0.10 per share, during the first quarter of
fiscal year 2023, compared to a net loss of $936,000, or $0.12 per share, for
the comparable period last year.
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.
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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
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
January 31, Percent
2023 2022 Change
Net sales $ 18,284,000 $ 14,440,000 26.6 %
Gross profit 6,521,000 4,046,000 61.2
SG&A expenses 5,455,000 4,780,000 14.1
Net income (loss) 810,000 (936,000 ) 186.6
Three Months Ended January 31, 2023 and 2022
Net Sales
Consolidated net sales for the first quarter of fiscal year 2023 increased 26.6%
to $18.3 million, compared to net sales of $14.4 million for the same period
last year. We experienced an increase in net sales in both our enterprise and
specialty markets, including the wireless carrier market, in the first quarter
of fiscal year 2023, compared to the same period last year.
Net sales to customers in the United States increased 20.0% and net sales to
customers outside of the United States increased 61.4% in the first quarter of
fiscal year 2023, compared to the same period last year. We can experience
fluctuations in sales from quarter to quarter in the various markets (both
industries and geographies) in which we operate for various reasons.
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We believe the increase in net sales was positively impacted by increased
product demand and increased production throughput during the first quarter of
fiscal year 2023, compared to the same period last year, as well as improved
product pricing which began to take effect for new orders received during the
latter half of fiscal year 2022. Our sales order backlog/forward load exceeded
$11.0 million at the end of the first quarter of fiscal year 2023-continuing to
be higher than typical levels while down from more than $12.0 million at the end
of the fourth quarter of fiscal year 2022. We continued to see some positive
indicators in our markets during the first quarter of fiscal year 2023, and at
this time we believe we will benefit from this trend during fiscal year 2023;
however, such expectations could be negatively impacted by macroeconomic and
geopolitical risks, and any further direct and indirect impacts of the COVID-19
pandemic.
Gross Profit
Our gross profit was $6.5 million in the first quarter of fiscal year 2023, an
increase of 61.2% compared to gross profit of $4.0 million in the first quarter
of fiscal year 2022. Gross profit margin, or gross profit as a percentage of net
sales, increased to 35.7% in the first quarter of fiscal year 2023 compared to
28.0% in the first quarter of fiscal year 2022.
Our gross profit margins tend to be higher when we achieve higher net sales
levels due to our operating leverage as certain fixed manufacturing costs are
spread over higher sales. This operating leverage, which is beneficial at higher
sales levels, positively impacted our gross profit margin during the first
quarter of fiscal year 2023 when compared to the same period last year. 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.
Selling, General, and Administrative Expenses
SG&A expenses increased to $5.5 million during the first quarter of fiscal year
2023, compared to $4.8 million for the same period last year. SG&A expenses as a
percentage of net sales were 29.8% in the first quarter of fiscal year 2023,
compared to 33.1% in the first quarter of fiscal year 2022.
The increase in SG&A expenses during the first quarter of fiscal year 2023
compared to the same period last year was primarily the result of increases in
employee and contracted sales personnel related costs totaling $461,000.
Included in employee and contracted sales personnel related costs are employee
incentives and commissions which increased due to increased net sales and the
improved financial results during the first quarter of fiscal year 2023.
Also contributing to the increase in SG&A expenses during the first quarter of
fiscal year 2023 were increases in shipping costs totaling $96,000 due to the
increase in net sales and the increase in the costs charged by shippers, when
compared to the same period last year.
Royalty Income (Expense), Net
We recognized royalty expense, net of royalty income, totaling $7,000 during the
first quarter of fiscal years 2023 and 2022. 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 $13,000 of amortization expense, associated with intangible
assets, during the first quarter of fiscal year 2023, compared to $12,000 during
the first quarter of fiscal year 2022.
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Other Income (Expense), Net
We recognized other expense, net in the first quarter of fiscal year 2023 of
$203,000, compared to $170,000 in the first quarter of fiscal year 2022. Other
expense, net is comprised primarily of interest expense together with other
miscellaneous items.
Income (Loss) Before Income Taxes
We reported income before income taxes of $842,000 for the first quarter of
fiscal year 2023, compared to a loss before income taxes of $923,000 for the
first quarter of fiscal year 2022. The improvement was primarily due to the
increase in gross profit of $2.5 million, partially offset by the increase in
SG&A expenses of $675,000.
Income Tax Expense (Benefit)
Income tax expense totaled $32,000 in the first quarter of fiscal year 2023,
compared to $13,000 in the first quarter of fiscal year 2022. Our effective tax
rate was 3.9% for the first quarter of fiscal year 2023 and negative 1.4% for
the first quarter of fiscal year 2022.
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.
We previously 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. As of October 31, 2022, the valuation allowance against our total gross
deferred tax assets totaled $4.4 million.
Net Income (Loss)
Net income for the first quarter of fiscal year 2023 was $810,000 compared to a
net loss of $936,000 for the first quarter of fiscal year 2022. This improvement
was primarily due to the increase in income before income taxes of $1.8 million.
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Financial Condition
Total assets increased $1.9 million, or 4.8%, to $42.5 million at January 31,
2023, from $40.6 million at October 31, 2022. This increase was primarily due to
a $2.8 million increase in inventories, partially offset by a $1.1 million
decrease in trade accounts receivable, net. Inventories increased largely as the
result of the timing of certain raw material purchases, increases in work in
process levels related to pending shipments, and the increase in finished goods
inventory resulting from higher replenishment rates of stock inventory. Trade
accounts receivable, net decreased due primarily to the decrease in net sales in
the first quarter of fiscal year 2023 when compared to the fourth quarter of
fiscal year 2022.
Total liabilities increased $1.1 million, or 6.0%, to $19.5 million at January
31, 2023, from $18.4 million at October 31, 2022. The increase in total
liabilities was primarily due to net borrowings on our Revolver totaling
$823,000 and an increase in accounts payable and accrued expenses totaling
$204,000 primarily resulting from the timing of raw material purchases and
certain vendor payments.
Total shareholders' equity at January 31, 2023 increased $844,000 in the first
quarter of fiscal year 2023. The increase resulted from net income of $810,000
and share-based compensation, net of $34,000.
Liquidity and Capital Resources
Our primary capital needs have been to fund working capital requirements through
payments on our Revolver. 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 $186,000 as of January 31, 2023, a decrease of $30,000 compared
to $216,000 as of October 31, 2022. The decrease in cash for the three months
ended January 31, 2023 primarily resulted from net cash used in operating
activities of $630,000 and capital expenditures totaling $105,000, partially
offset by net cash provided by financing activities of $707,000.
On January 31, 2023, we had working capital of $25.4 million compared to $23.7
million on October 31, 2022. The ratio of current assets to current liabilities
as of January 31, 2023 was 4.3 to 1.0 compared to 4.2 to 1.0 as of October 31,
2022. The increase in working capital and in the current ratio was primarily due
to the increase in inventories of $2.8 million, partially offset by the $1.1
million decrease in trade accounts receivable, net.
As of January 31, 2023 and October 31, 2022, we had outstanding loan balances
under our Revolver totaling $6.8 million and $6.0 million, respectively. As of
January 31, 2023 and October 31, 2022, we had other outstanding bank loan
balances, excluding our Revolver, totaling $4.4 million and $4.5 million,
respectively.
Net Cash
Net cash used in operating activities was $630,000 in the first quarter of
fiscal year 2023, compared to $1.9 million for the first quarter of fiscal year
2022. Net cash used in operating activities during the first quarter of fiscal
year 2023 primarily resulted from an increase in inventories totaling $2.8
million, partially offset by certain adjustments to reconcile net income of
$810,000 to net cash used in operating activities including depreciation and
amortization of $248,000 and share-based compensation expense of $135,000.
Additionally, the cash flow impact of decreases in trade accounts receivable,
net of $1.1 million and increases in accounts payable and accrued expenses of
$120,000 further contributed to offset net cash used in operating activities.
Net cash used in operating activities during the first quarter of fiscal year
2022 primarily resulted from an increase in inventories totaling $1.6 million,
partially offset by certain adjustments to reconcile a net loss of $936,000 to
net cash used in operating activities including depreciation and amortization of
$286,000 and share-based compensation expense of $124,000. Additionally, the
cash flow impact of increases in accounts payable and accrued expenses,
including accrued compensation and payroll taxes, of $572,000 further
contributed to offset net cash used in operating activities.
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Net cash used in investing activities totaled $106,000 in the first quarter of
fiscal year 2023, compared to $81,000 in the first quarter of fiscal year 2022.
Net cash used in investing activities during the first quarter of fiscal years
2023 and 2022 resulted primarily from purchases of property and equipment and
deposits for the purchase of property and equipment.
Net cash provided by financing activities totaled $707,000 for the first quarter
of fiscal year 2023, compared to $2.0 million in the first quarter of fiscal
year 2022. Net cash provided by financing activities in the first quarter of
fiscal year 2023 resulted primarily from net proceeds on our revolving line of
credit totaling $823,000, partially offset by principal payments on long-term
debt totaling $83,000. Net cash provided by financing activities in the first
quarter of fiscal year 2022 resulted primarily from net proceeds on our
revolving line of credit totaling $2.1 million, partially offset by principal
payments on long-term debt totaling $80,000.
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 Master Promissory Note and related agreements (collectively,
the "Revolver").
Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are
with Northeast Bank, have a fixed interest rate of 3.95% and are secured by a
first lien deed of trust on the Company's real property.
The Revolver with North Mill Capital LLC (doing business as SLR Business Credit,
"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) $1.15 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, 2023, the Revolver accrued interest at the prime lending
rate plus 1.5% (resulting in a 9.0% rate at January 31, 2023). The termination
date of the Revolver is July 24, 2025 and 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, 2023, we had $6.8 million of outstanding borrowings on our
Revolver and $4.8 million in available credit.
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Capital Expenditures
We did not have any material commitments for capital expenditures as of January
31, 2023. During our 2023 fiscal year budgeting process, we included an estimate
for capital expenditures of $1.0 million for the fiscal year. 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. Additionally,
total capital expenditures exceeding $1.0 million per fiscal year would require
approval from our lender.
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 cycles of our customers. However, this pattern may be
altered during any quarter or year 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 net sales based on seasonality because these other factors can also, and
often do, 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 10Q and Regulation SX. 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 2022 provides a summary of our significant accounting
policies. Those significant accounting policies detailed in our fiscal year 2022
Form 10-K did not change during the period from November 1, 2022 through January
31, 2023.
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New Accounting Standards
There are no 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.
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