Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2022
(Unaudited)
The accompanying unaudited condensed consolidated financial statements of Optical Cable Corporation and its subsidiaries (collectively, the “Company” or “OCC®”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10‑Q and Regulation S‑X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended January 31, 2022 are not necessarily indicative of the results for the fiscal year ending October 31, 2022 because the following items, among other things, may impact those results: impacts of the COVID-19 pandemic including (but not limited to) supply chain and labor constraints impacting production volumes and COVID-19 related government and private industry mandates in the areas of the world in which we operate, changes in market conditions, seasonality, changes in technology, competitive conditions, timing of certain projects and purchases by key customers, significant variations in sales resulting from high volatility and timing of large sales orders among a limited number of customers in certain markets, ability of management to execute its business plans, continued ability to maintain and/or secure future debt and/or equity financing to adequately finance ongoing operations; as well as other variables, uncertainties, contingencies and risks set forth as risks in the Company’s Annual Report on Form 10‑K for the fiscal year ended October 31, 2021 (including those set forth in the “Forward-Looking Information” section), or as otherwise set forth in other filings by the Company as variables, contingencies and/or risks possibly affecting future results. The unaudited condensed consolidated financial statements and condensed notes are presented as permitted by Form 10‑Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10‑K for the fiscal year ended October 31, 2021.
In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material impact on the Company’s results of operations, financial position or liquidity or its related financial statement disclosures.
| (2) | Stock Incentive Plans and Other Share‑Based Compensation |
As of January 31, 2022, there were approximately 49,000 remaining shares available for grant under the Optical Cable Corporation 2017 Stock Incentive Plan (“2017 Plan”).
Share-based compensation expense for employees, a consultant and non-employee Directors recognized in the condensed consolidated statements of operations for the three months ended January 31, 2022 and 2021 was $124,439 and $40,605, respectively. Share-based compensation expense is entirely related to expense recognized in connection with the vesting of restricted stock awards or other stock awards.
6
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2022
(Unaudited)
Restricted and Other Stock Awards
The Company has granted, and anticipates granting from time to time, restricted stock awards subject to approval by the Compensation Committee of the Board of Directors. Since fiscal year 2004, the Company has exclusively used restricted stock awards for all share-based compensation of employees and consultants, and restricted stock awards or stock awards to non-employee members of the Board of Directors.
Restricted stock award activity during the three months ended January 31, 2022 consisted of restricted shares forfeited totaling 25,313 shares and restricted shares withheld for taxes in connection with the vesting of restricted shares totaling 22,166. OCC restricted stock grants provide the participant with the option to surrender shares to pay for withholding tax obligations resulting from any vesting restricted shares, or to pay cash to the Company or taxing authorities in the amount of the withholding taxes owed on the value of any vesting restricted shares in order to avoid surrendering shares. The Company accrued $104,636 as of January 31, 2022 related to the surrender of shares by participants to pay for withholding taxes on shares that vested on January 31, 2022.
As of January 31, 2022, the estimated amount of compensation cost related to unvested equity-based compensation awards in the form of service-based and operational performance-based shares that the Company will recognize over a 3.8 year weighted-average period is approximately $1.1 million.
| (3) |
Allowance for Doubtful Accounts for Trade Accounts Receivable |
A summary of changes in the allowance for doubtful accounts for trade accounts receivable for the three months ended January 31, 2022 and 2021 follows:
| |
|
Three Months Ended |
|
| |
|
January 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Balance at beginning of period |
|
$ |
61,527 |
|
|
$ |
524,617 |
|
| Bad debt recovery |
|
|
(4,328 |
) |
|
|
(7,524 |
) |
| Balance at end of period |
|
$ |
57,199 |
|
|
$ |
517,093 |
|
Inventories as of January 31, 2022 and October 31, 2021 consist of the following:
| |
|
January 31, |
|
|
October 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Finished goods |
|
$ |
3,793,054 |
|
|
$ |
4,211,098 |
|
| Work in process |
|
|
4,400,300 |
|
|
|
4,023,693 |
|
| Raw materials |
|
|
9,355,877 |
|
|
|
7,763,325 |
|
| Production supplies |
|
|
357,672 |
|
|
|
305,692 |
|
| Total |
|
$ |
17,906,903 |
|
|
$ |
16,303,808 |
|
As of January 31, 2022 and October 31, 2021, the Company’s accrual for estimated product warranty claims totaled $75,000 and is included in accounts payable and accrued expenses. Warranty claims expense for the three months ended January 31, 2022 and 2021 totaled $7,894 and $18,348, respectively.
7
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2022
(Unaudited)
The following table summarizes the changes in the Company’s accrual for product warranties during the three months ended January 31, 2022 and 2021:
| | | Three Months Ended | |
| | | January 31, | |
| | | 2022 | | | 2021 | |
| Balance at beginning of period | | $ | 75,000 | | | $ | 85,000 | |
| Liabilities accrued for warranties issued during the period | | | 55,243 | | | | 50,251 | |
| Warranty claims and costs paid during the period | | | (7,894 | ) | | | (18,348 | ) |
| Changes in liability for pre-existing warranties during the period | | | (47,349 | ) | | | (31,903 | ) |
| Balance at end of period | | $ | 75,000 | | | $ | 85,000 | |
| (6) | Long-term Debt and Notes Payable |
The Company has credit facilities consisting of a real estate term loan, as amended and restated (the “Virginia Real Estate Loan”), a supplemental real estate term loan, as amended and restated (the “North Carolina Real Estate Loan”) 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.
Long-term debt as of January 31, 2022 and October 31, 2021 consists of the following:
| | | January 31, | | | October 31, | |
| | | 2022 | | | 2021 | |
| Virginia Real Estate Loan ($6.5 million original principal) payable in monthly installments of $31,812, including interest (at 3.95%), with final payment of $3,318,029 due May 1, 2024 | | $ | 3,842,812 | | | $ | 3,899,076 | |
| North Carolina Real Estate Loan ($2.24 million original principal) payable in monthly installments of $10,963, including interest (at 3.95%), with final payment of $711,773 due May 1, 2024 | | | 931,042 | | | | 954,375 | |
| Total long-term debt | | | 4,773,854 | | | | 4,853,451 | |
| Less current installments | | | 328,130 | | | | 324,840 | |
| Long-term debt, excluding current installments | | $ | 4,445,724 | | | $ | 4,528,611 | |
The Revolver with North Mill Capital LLC (now doing business as SLR Business Credit, “SLR”) provides the Company 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) $5,000,000, and (iii) an amount not to exceed 100% of the then outstanding eligible accounts loan value; minus (c) $1,500,000.
The maximum aggregate principal amount subject to the Revolver is $18,000,000. 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, 2022, the Revolver accrued interest at the prime lending rate plus 1.5% (resulting in a 4.75% rate at January 31, 2022). The initial term of the Revolver is three years, with a termination date of July 24, 2023. After the initial term and unless otherwise terminated, the loan may be extended in one year periods subject to the agreement of SLR.
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2022
(Unaudited)
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, 2022 the Company had $5.5 million of outstanding borrowings on its Revolver and $2.9 million in available credit. As of October 31, 2021, the Company had $3.5 million of outstanding borrowings on its Revolver and $4.4 million in available credit.
The Company has an operating lease agreement for approximately 34,000 square feet of office, manufacturing and warehouse space in Plano, Texas (near Dallas). The lease term expires on November 30, 2024.
The Company has an operating lease agreement for approximately 36,000 square feet of warehouse space in Roanoke, Virginia. The lease term expires on April 30, 2023.
The Company also leases certain equipment under operating leases with initial 60 month terms.
OCC leases printers that are used in the Roanoke, Virginia manufacturing facility. The lease term expires on August 22, 2026. The right-of-use asset is being amortized on a straight line basis over seven years. When the lease term ends, the remaining net book value of the right-of-use asset will be classified as property and equipment.
The Company’s lease contracts may include options to extend or terminate the lease. The Company exercises judgment to determine the term of those leases when such options are present and include such options in the calculation of the lease term when it is reasonably certain that it will exercise those options.
The Company includes contract lease components in its determination of lease payments, while non-lease components of the contracts, such as taxes, insurance, and common area maintenance, are expensed as incurred. At commencement, right-of-use assets and lease liabilities are measured at the present value of future lease payments over the lease term. The Company uses its incremental borrowing rate based on information available at the time of lease commencement to measure the present value of future payments.
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2022
(Unaudited)
Operating lease expense is recognized on a straight-line basis over the lease term. Short term leases with an initial term of 12 months or less are expensed as incurred. The Company’s short term leases have month-to-month terms.
Operating lease right-of-use assets of $938,870 and $1,028,639 were included in other assets at January 31, 2022 and October 31, 2021, respectively. Operating lease liabilities of $392,889 and $628,608 were included in accounts payable and accrued expenses, and other noncurrent liabilities, respectively, at January 31, 2022. Operating lease liabilities of $385,463 and $729,753 were included in accounts payable and accrued expenses, and other noncurrent liabilities, respectively, at October 31, 2021. Operating lease expense recognized during the three months ended January 31, 2022 and 2021 totaled $103,333 and $100,348, respectively.
The weighted average remaining lease term was 32.4 months and the weighted average discount rate was 5.0% as of January 31, 2022.
For the three months ended January 31, 2022 and 2021, cash paid for operating lease liabilities totaled $107,284 and $97,300, respectively. For the three months ended January 31, 2022 and 2021, there were no right-of-use assets obtained in exchange for new operating lease liabilities.
Financing lease right-of-use assets of $192,962 and $200,337 were included in other assets at January 31, 2022 and October 31, 2021, respectively. Financing lease liabilities of $34,476 and $157,862 were included in accounts payable and accrued expenses and other noncurrent liabilities, respectively, at January 31, 2022. Financing lease liabilities of $34,071 and $166,634 were included in accounts payable and accrued expenses and other noncurrent liabilities, respectively, at October 31, 2021. Interest expense and amortization expense related to the financing lease totaled $2,350 and $7,374, respectively, for the three months ended January 31, 2022.
The remaining lease term for the financing lease is 55 months and the discount rate is 4.75% as of January 31, 2022.
For the three months ended January 31, 2022, cash paid for the financing lease liability totaled $2,350 for interest and $8,366 for principal.
The Company’s future payments due under leases reconciled to the lease liabilities are as follows:
| Fiscal Year | | | Operating leases | | | Finance lease | |
| 2022 (1) | | | $ | 325,201 | | | $ | 32,151 | |
| 2023 | | | | 382,716 | | | | 42,868 | |
| 2024 | | | | 331,438 | | | | 42,868 | |
| 2025 | | | | 55,023 | | | | 42,868 | |
| 2026 | | | | — | | | | 55,715 | |
| Total undiscounted lease payments | | | | 1,094,378 | | | | 216,470 | |
| Present value discount | | | | (72,881 | ) | | | (24,132 | ) |
| Total lease liability | | | $ | 1,021,497 | | | $ | 192,338 | |
| (1) Remaining nine months of fiscal year 2022 | | | | | |
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2022
(Unaudited)
| (8) |
Fair Value Measurements |
The carrying amounts reported in the condensed consolidated balance sheets as of January 31, 2022 and October 31, 2021 for cash, trade accounts receivable, other receivables, note payable, and accounts payable and accrued expenses, including accrued compensation and payroll taxes, approximate fair value because of the short maturity of these instruments. The carrying values of the Company’s note payable, revolver – noncurrent, and long-term debt approximate fair value based on similar long-term debt issues available to the Company as of January 31, 2022 and October 31, 2021. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
| (9) |
Net Income (Loss) Per Share |
Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company.
The following is a reconciliation of the numerators and denominators of the net income (loss) per share computations for the periods presented:
| |
|
Three months ended |
|
| |
|
January 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Net loss (numerator) |
|
$ |
(935,793 |
) |
|
$ |
(2,141,480 |
) |
| Shares (denominator) |
|
|
7,511,190 |
|
|
|
7,352,781 |
|
| Basic and diluted net loss per share |
|
$ |
(0.12 |
) |
|
$ |
(0.29 |
) |
Weighted average unvested shares for the three months ended January 31, 2022 and 2021 totaling 363,450 and 183,346, respectively, while issued and outstanding, were not included in the computation of basic and diluted net loss per share for the three months ended January 31, 2022 and 2021 (because to include such shares would have been antidilutive, or in other words, to do so would have reduced the net loss per share for those periods).
| (10) | Segment Information and Business and Credit Concentrations |
The Company provides credit, in the normal course of business, to various commercial enterprises, governmental entities and not‑for‑profit organizations. Concentration of credit risk with respect to trade receivables is normally limited due to the Company’s large number of customers. The Company also manages exposure to credit risk through credit approvals, credit limits and monitoring procedures. Management believes that credit risks as of January 31, 2022 have been adequately provided for in the condensed consolidated financial statements. The Company includes all entities under common ownership for the purpose of calculating business concentrations.
For the three months ended January 31, 2022 and 2021, 17.2% and 23.3%, respectively, of consolidated net sales were attributable to one national distributor customer.
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2022
(Unaudited)
The Company has a single reportable segment for purposes of segment reporting.
Revenues consist of product sales that are recognized at a specific point in time under the core principle of recognizing revenue when control transfers to the customer. The Company considers customer purchase orders, governed by master sales agreements or the Company’s standard terms and conditions, to be the contract with the customer. For each contract, the promise to transfer the control of the products, each of which is individually distinct, is considered to be the identified performance obligation. The Company evaluates each customer’s credit risk when determining whether to accept a contract.
In determining transaction prices, the Company evaluates whether fixed order prices are subject to adjustment to determine the net consideration to which the Company expects to be entitled. Contracts do not include financing components, as payment terms are generally due 30 to 90 days after shipment. Taxes assessed by governmental authorities and collected from the customer including, but not limited to, sales and use taxes and value-added taxes, are not included in the transaction price and are not included in net sales.
The Company recognizes revenue at the point in time when products are shipped or delivered from its manufacturing facility to its customer, in accordance with the agreed upon shipping terms. Since the Company typically invoices the customer at the same time that performance obligations are satisfied, no contract assets are recognized. The Company’s contract liability represents advance consideration received from customers prior to transfer of the product. This liability was $215,466 as of January 31, 2022 and $308,406 as of October 31, 2021.
Sales to certain customers are made pursuant to agreements that provide price adjustments and limited return rights with respect to the Company’s products. The Company maintains a reserve for estimated future price adjustment claims, rebates and returns as a refund liability. The Company’s refund liability was $173,865 as of January 31, 2022 and $159,125 as of October 31, 2021.
The Company offers standard product warranty coverage which provides assurance that its products will conform to contractually agreed-upon specifications for a limited period from the date of shipment. Separately-priced warranty coverage is not offered. The warranty claim is generally limited to a credit equal to the purchase price or a promise to repair or replace the product for a specified period of time at no additional charge.
The Company accounts for shipping and handling activities related to contracts with customers as a cost to fulfill its promise to transfer control of the related product. Shipping and handling costs are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.
The Company incurs sales commissions to acquire customer contracts that are directly attributable to the contracts. The commissions are expensed as selling expenses during the period that the related products are transferred to customers.
12
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2022
(Unaudited)
Disaggregation of Revenue
The following table presents net sales attributable to the United States and all other countries in total for the three months ended January 31, 2022 and 2021:
| | | Three months ended | |
| | | January 31, | |
| | | 2022 | | | 2021 | |
| United States | | $ | 12,144,379 | | | $ | 9,703,610 | |
| Outside the United States | | | 2,295,916 | | | | 2,172,963 | |
| Total net sales | | $ | 14,440,295 | | | $ | 11,876,573 | |
| (12) |
Employee Retention Tax Credit |
The Employee Retention Tax Credit (“ERTC”), created in the March 2020 CARES Act and then subsequently amended by the Consolidated Appropriation Act (“CAA”) of 2021, the American Rescue Plan Act (“ARPA”) of 2021 and the Infrastructure Investment and Jobs Act (“IIJA”) of 2021, is a refundable payroll credit for qualifying businesses keeping employees on their payroll during the COVID-19 pandemic. Under CAA, ARPA and IIJA amendments, employers can claim a refundable tax credit against the employer share of social security tax equal to 70% of the qualified wages (including certain health care expenses) paid to employees after December 31, 2020 through September 30, 2021. Qualified wages were limited to $10,000 per employee per calendar quarter in 2021 so the maximum ERTC available was $7,000 per employee per calendar quarter.
OCC is an eligible small employer under the gross receipts decline test when comparing the first calendar quarter of 2021 to the same quarter in calendar year 2019, which qualified the Company to claim ERTC in both the first and second calendar quarters of 2021 under the amended ERTC program. The Company qualified for a refundable payroll tax credit totaling $3,375,815 during its second fiscal quarter and $964,550 during its third fiscal quarter of 2021 for a total of $4,340,365. There is $2,162,391 of the ERTC remaining in other receivables on the Company’s condensed consolidated balance sheet as of January 31, 2022.
From time to time, the Company is involved in various claims, legal actions and regulatory reviews arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
The COVID-19 pandemic has had a significant impact on businesses and individuals in the United States and globally. Actions taken by governments and private industry to limit the spread of the disease (including its variant strains) have resulted in an unprecedented disruption of normal activities as businesses have been forced to shut down or operate on a limited basis. The Company is obligated and continues to operate during the COVID-19 pandemic because the Company’s workforce is classified a “Defense Industrial Base Essential Critical Infrastructure Workforce” under guidelines from the U.S. Department of Defense and an “Essential Critical Infrastructure Workforce” under guidelines by the U.S. Department of Homeland Security, Cybersecurity and Infrastructure Security Agency (CISA).
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Consolidated Financial Statements
Three Months Ended January 31, 2022
(Unaudited)
In response to the continued uncertainty of the impact of COVID-19, the Company continues to maintain certain protocols at each of its facilities including: limiting business travel and face-to-face meetings, having a portion of its non-manufacturing employees work remotely, and implementing strict social distancing, symptom self-assessments and mask protocols within its facilities.
The extent to which the COVID-19 pandemic will affect the Company in the future will depend on ongoing developments, which are highly uncertain and cannot be reasonably predicted, including, but not limited to, the duration and severity of the outbreak, the timing and extent of the easing of restrictions on businesses and individuals, the timing of recovery in certain of the Company’s markets, the potential for a resurgence of the virus (including its variant strains), supply chain and labor constraints impacting production volumes, as well as a variety of other unknowable factors. The longer the various impacts of COVID-19 persist, the greater the potential negative financial effects on the Company.
| (14) |
New Accounting Standards Not Yet Adopted |
There are no new accounting standards issued, but not yet adopted by the Company, which are expected to materially impact the Company’s financial position, operating results or financial statement disclosures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This Form 10-Q may contain certain forward-looking information within the meaning of the federal securities laws. The forward-looking information may include, among other information, (i) statements concerning our outlook for the future, (ii) statements of belief, anticipation or expectation, (iii) future plans, strategies or anticipated events, and (iv) similar information and statements concerning matters that are not historical facts. Such forward-looking information is subject to known and unknown variables, uncertainties, contingencies and risks that may cause actual events or results to differ materially from our expectations. Such known and unknown variables, uncertainties, contingencies and risks (collectively, “factors”) may also adversely affect Optical Cable Corporation and its subsidiaries (collectively, the “Company” or “OCC®”), the Company’s future results of operations and future financial condition, and/or the future equity value of the Company. Factors that could cause or contribute to such differences from our expectations or that could adversely affect the Company include, but are not limited to: the level of sales to key customers, including distributors; timing of certain projects and purchases by key customers; the economic conditions affecting network service providers; corporate and/or government spending on information technology; actions by competitors; fluctuations in the price of raw materials (including optical fiber, copper, gold and other precious metals, plastics and other materials); fluctuations in transportation costs; our dependence on customized equipment for the manufacture of certain of our products in certain production facilities; our ability to protect our proprietary manufacturing technology; market conditions influencing prices or pricing in one or more of the markets in which we participate, including the impact of increased competition; our dependence on a limited number of suppliers for certain product components; the loss of or conflict with one or more key suppliers or customers; an adverse outcome in any litigation, claims and other actions, and potential litigation, claims and other actions against us; an adverse outcome in any regulatory reviews and audits and potential regulatory reviews and audits; adverse changes in state tax laws and/or positions taken by state taxing authorities affecting us; technological changes and introductions of new competing products; changes in end-user preferences for competing technologies relative to our product offering; economic conditions that affect the telecommunications sector, the data communications sector, certain technology sectors and/or certain industry market sectors (for example, mining, oil & gas, military, and wireless carrier industry market sectors); economic conditions that affect U.S.-based manufacturers; economic conditions or changes in relative currency strengths (for example, the strengthening of the U.S. dollar relative to certain foreign currencies) and import and/or export tariffs imposed by the U.S. and other countries that affect certain geographic markets, industry market sector, and/or the economy as a whole; changes in demand for our products from certain competitors for which we provide private label connectivity products; changes in the mix of products sold during any given period (due to, among other things, seasonality or varying strength or weaknesses in particular markets in which we participate) which may impact gross profits and gross profit margins or net sales; variations in orders and production volumes of hybrid cables (fiber and copper) with high copper content, which tend to have lower gross profit margins; significant variations in sales resulting from: (i) high volatility within various geographic markets, within targeted markets and industries, for certain types of products, and/or with certain customers (whether related to the market generally or to specific customers’ business in particular), (ii) timing of large sales orders, and (iii) high sales concentration among a limited number of customers in certain markets, particularly the wireless carrier market; terrorist attacks or acts of war, any current or potential future military conflicts, and acts of civil unrest; 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; 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 on costs 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 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; impact of weather, natural disasters and/or epidemic or pandemic diseases (such as COVID-19) in the areas of the world in which we operate, market our products and/or acquire raw materials including the impact of supply chain and labor constraints impacting our production volumes, any present or future government mandates, travel restrictions, shutdowns or other regulations regarding any epidemic or pandemic 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.
We caution readers that the foregoing list of important factors is not exclusive. Furthermore, we incorporate by reference those factors included in current reports on Form 8‑K, and/or in our other filings.
Dollar amounts presented in the following discussion have been rounded to the nearest hundred thousand, except in the case of amounts less than one million and except in the case of the table set forth in the “Results of Operations” section, the amounts in which both cases have been rounded to the nearest thousand.
Overview of COVID-19 Effects
The COVID-19 pandemic direct and indirect effects continue to have an impact on businesses and individuals in the United States and globally and continue to impact OCC as we begin fiscal year 2022. Actions taken by governments and private industry to limit the spread of the disease (including its variant strains) have resulted in the disruption of normal activities as businesses were forced to modify the way they conducted business or operate on a limited basis. When demand for products and services began to increase, the direct and indirect impacts of the COVID-19 pandemic created other challenges impacting supply chains, availability of personnel and other costs.
Since the beginning of the COVID-19 pandemic, OCC’s sales, production volumes and costs have been significantly impacted. As sales and production volume increased during fiscal year 2021, OCC began to experience supply chain challenges (including availability of materials, increased lead times, and increased costs) for certain of the raw materials used for manufacturing─this continued during our first quarter of fiscal year 2022. We continue to experience some challenges recruiting additional personnel. While the OCC team has successfully mitigated (to a certain extent) the impacts of these challenges, we believe these challenges will continue for now.
Each of our three facilities have been open and operating since the beginning of the COVID-19 pandemic. OCC’s workforce was classified a “Defense Industrial Base Essential Critical Infrastructure Workforce” under guidelines from the U.S. Department of Defense and an “Essential Critical Infrastructure Workforce” under guidelines by the U.S. Department of Homeland Security, Cybersecurity and Infrastructure Security Agency (CISA).
OCC continues to maintain certain protocols at each of our facilities in response to the continued uncertainty of the impact of COVID-19, including, but not limited to: limiting business travel and face-to-face meetings, having a portion of our non-manufacturing employees work remotely, and implementing strict social distancing, symptom self-assessments, and sanitation and mask protocols within our facilities. When employees have contracted COVID-19, we have also used contact tracing to have personnel quarantine and be tested to avoid any spread of the disease at our facilities. To date, these efforts have been successful at limiting the transmission of COVID-19 at our facilities. We have strongly encouraged all of our employees to be vaccinated, but have not implemented a vaccination mandate at this time.
OCC’s pandemic team monitors the latest guidance from the Centers for Disease Control and Prevention (“CDC”), federal, state and other regulatory agencies, works to secure personal protective equipment, finds ways to help mitigate risk and identifies opportunities for us to meet or exceed health and safety guidelines and recommended protocols. We believe we have followed and are continuing to follow or exceed all CDC and public officials’ guidelines as such guidelines have changed from time to time during the pandemic.
We continue to see positive indicators of future strengthening in many of our markets as we begin fiscal year 2022. We also continue to see increases in our sales order backlog/forward load and drawdowns of finished goods inventories to fill incoming orders. We believe that we will continue to benefit from improvement in our markets during fiscal year 2022; however, we cannot fully anticipate or reasonably estimate the continuing impacts of the pandemic on our various markets and customers, including impacts from emerging variants of COVID-19 in our various markets.
The extent to which the COVID-19 pandemic will affect OCC in the future will depend on ongoing developments, which are still uncertain, including, but not limited to: supply chain and labor constraints impacting our production volumes; the continued recovery of 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.
Since we cannot predict the duration or scope of the pandemic, we cannot fully anticipate or reasonably estimate all the ways in which the current global health crisis and financial market conditions 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 providers’ offerings. Our product offerings include designs for uses ranging from enterprise network, data center, residential, campus and Passive Optical LAN (“POL”) installations to customized products for specialty applications and harsh environments, including military, industrial, mining, petrochemical and broadcast applications, 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.
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 2022
| ● |
|
The COVID-19 pandemic and related effects continue to impact the global economy in various ways and continue to impact OCC as well. While demand for OCC’s products continued to increase in the first quarter of fiscal year 2022, challenges we managed during fiscal year 2021 continued as well, including supply chain challenges (availability, increased lead times and increased costs) for certain raw materials and challenges recruiting additional personnel─both challenges which have impacted production volumes. As demand for our products continued to increase during the first quarter of fiscal year 2022, our sales order backlog/forward load has also increased. |
| ● |
|
Consolidated net sales for the first quarter of fiscal year 2022 increased 21.6% to $14.4 million, compared to $11.9 million for the same period last year. |
| ● |
|
Gross profit increased 75.2% to $4.0 million in the first quarter of fiscal year 2022, compared to $2.3 million for the first quarter of fiscal year 2021. |
| ● |
|
Gross profit margin (gross profit as a percentage of net sales) increased to 28.0% during the first quarter of fiscal year 2022, compared to 19.4% for the first quarter of fiscal year 2021. |
| ● |
|
SG&A expenses increased to $4.8 million during the first quarter of fiscal year 2022 compared to $4.3 million during the first quarter of fiscal year 2021. |
| ● |
|
Net loss was $936,000, or $0.12 per share, during the first quarter of fiscal year 2022, compared to $2.1 million, or $0.29 per share, for the comparable period last year. |
| ● |
|
As of January 31, 2022, we have $2.2 million in ERTC still to be refunded. |
Results of Operations
We sell our products internationally and domestically to our customers which include major distributors, various regional and smaller distributors, original equipment manufacturers and value-added resellers. All of our sales to customers outside of the United States are denominated in U.S. dollars. We can experience fluctuations in the percentage of net sales to customers outside of the United States and in the United States from period to period based on the timing of large orders, coupled with the impact of increases and decreases in sales to customers in various regions of the world. Sales outside of the U.S. can also be impacted by fluctuations in the exchange rate of the U.S. dollar compared to other currencies.
Net sales consist of gross sales of products by the Company and its subsidiaries on a consolidated basis less discounts, refunds and returns. Revenue is recognized at the time product is transferred to the customer (including distributors) at an amount that reflects the consideration expected to be received in exchange for the product. Our customers generally do not have the right of return unless a product is defective or damaged and is within the parameters of the product warranty in effect for the sale.
Cost of goods sold consists of the cost of materials, product warranty costs and compensation costs, and overhead and other costs related to our manufacturing operations. The largest percentage of costs included in cost of goods sold is attributable to costs of materials.
Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix. To the extent not 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 |
|
| |
|
2022 |
|
|
2021 |
|
|
Change |
|
| Net sales |
|
$ |
14,440,000 |
|
|
$ |
11,877,000 |
|
|
|
21.6 |
% |
| Gross profit |
|
|
4,046,000 |
|
|
|
2,309,000 |
|
|
|
75.2 |
% |
| SG&A expenses |
|
|
4,780,000 |
|
|
|
4,308,000 |
|
|
|
11.0 |
% |
| Net loss |
|
|
(936,000 |
) |
|
|
(2,141,000 |
) |
|
|
56.3 |
% |
Three Months Ended January 31, 2022 and 2021
Net Sales
Consolidated net sales for the first quarter of fiscal year 2022 increased 21.6% to $14.4 million, compared to net sales of $11.9 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 2022, compared to the same period last year. Net sales to customers in the United States increased 25.2% and net sales to customers outside of the United States increased 5.7% in the first quarter of fiscal year 2022, compared to the same period last year.
During the first quarter of fiscal year 2022, we are still seeing direct and indirect impacts of COVID-19. While demand for our products has increased during the first quarter of fiscal year 2022, supply chain and labor constraints are impacting production volumes and, as a result, net sales. Our net sales in the first quarter of fiscal year 2021 were significantly impacted by the COVID-19 pandemic—in particular its impact on product demand.
As demand for our products continued to increase as we began fiscal year 2022, our sales order backlog/forward load also continued to increase to higher than typical levels. We continue to experience the direct and indirect impacts of the COVID-19 pandemic which we believe has created challenges that are hampering production volumes and sales. These include supply chain challenges (availability, increased lead times and increased costs) for certain raw materials, challenges recruiting additional personnel to increase production volumes, and other cost increases. We believe we have taken appropriate actions to mitigate the impact of these challenges. We also believe that we will continue to see a trend of improving demand for our products. To the extent the direct and indirect impacts of the COVID-19 pandemic on our customers, suppliers, workforce and end-users decline, we expect net sales to further increase.
We are continuing to see some positive indicators of future strengthening in some of our markets and believe we will continue to benefit from improvement in our markets during the remaining nine months of fiscal year 2022; however, we cannot fully anticipate or reasonably estimate the continuing impacts of the pandemic on our various markets and customers, including impacts from emerging variants of COVID-19 in our various markets.
Gross Profit
Our gross profit was $4.0 million in the first quarter of fiscal year 2022, an increase of 75.2% compared to gross profit of $2.3 million in the first quarter of fiscal year 2021. Gross profit margin, or gross profit as a percentage of net sales, increased to 28.0% in the first quarter of fiscal year 2022 compared to 19.4% in the first quarter of fiscal year 2021.
Our gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales. This operating leverage, which is beneficial at higher sales levels, positively impacted our gross profit margin during the first quarter of fiscal year 2022 when compared to the same period last year. Additionally, we believe actions we took and operational improvements we made in fiscal years 2020 and 2019 continue to have a positive impact on our gross profit margin. Our gross profit margin percentages are also heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix from quarter to quarter.
Selling, General, and Administrative Expenses
SG&A expenses increased to $4.8 million during the first quarter of fiscal year 2022, compared to $4.3 million for the same period last year. SG&A expenses as a percentage of net sales were 33.1% in the first quarter of fiscal year 2022, compared to 36.3% in the first quarter of fiscal year 2021.
The increase in SG&A expenses during the first quarter of fiscal year 2022 compared to the same period last year was primarily the result of increases in employee and contracted sales personnel related costs totaling $308,000. Included in employee and contracted sales personnel related costs are compensation costs which increased primarily due to new hires, net of terminations, increases in compensation expense (including increases in response to changing labor market conditions), accrued payroll taxes and share-based compensation expense which increased due to the vesting of operational performance-based restricted stock on January 31, 2022, and commissions which increased due to the increase in commissionable sales during the first quarter of fiscal year 2022.
Royalty Income (Expense), Net
We recognized royalty expense, net of royalty income, totaling $7,000 during the first quarter of fiscal year 2022 compared to royalty income, net of royalty and related expenses totaling $7,000 during the first quarter of fiscal year 2021. 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 $12,000 of amortization expense, associated with intangible assets, during the first quarter of fiscal year 2022, compared to $11,000 during the first quarter of fiscal year 2021.
Other Expense, Net
We recognized other expense, net in the first quarter of fiscal year 2022 of $170,000, compared to $171,000 in the first quarter of fiscal year 2021. Other expense, net is comprised primarily of interest expense together with other miscellaneous items.
Loss Before Income Taxes
We reported a loss before income taxes of $923,000 for the first quarter of fiscal year 2022, compared to $2.2 million for the first quarter of fiscal year 2021. The improvement was primarily due to the increase in gross profit of $1.7 million, partially offset by the increase in SG&A expenses of $472,000.
Income Tax Expense (Benefit)
Income tax expense totaled $13,000 in the first quarter of fiscal year 2022, compared to income tax benefit of $32,000 in the first quarter of fiscal year 2021. Our effective tax rate was negative 1.4% for the first quarter of fiscal year 2022 and 1.5% for the first quarter of fiscal year 2021.
Fluctuations in our effective tax rates are primarily due to permanent differences in U.S. GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level such that permanent differences in U.S. GAAP and tax accounting treatment have a disproportional impact on the projected effective tax rate.
During fiscal year 2015, we established a valuation allowance against all of our net deferred tax assets. As a result of establishing a full valuation allowance against our net deferred tax assets, if we generate sufficient taxable income in subsequent periods to realize a portion or all of our net deferred tax assets, our effective income tax rate could be unusually low due to the tax benefit attributable to the necessary decrease in our valuation allowance. Further, if we generate losses before taxes in subsequent periods, our effective income tax rate could also be unusually low as any increase in our net deferred tax asset from such a net operating loss for tax purposes would be offset by a corresponding increase to our valuation allowance against our net deferred tax assets.
If we generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the removal of any valuation allowance against our net deferred tax asset is appropriate, then during the period in which such determination is made, we will recognize the non-cash benefit of such removal of the valuation allowance in income tax expense on our consolidated statement of operations, which will increase net income and will also increase the net deferred tax asset on our consolidated balance sheet. If we do not generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the reduction or removal of any valuation allowance against our net deferred tax asset is appropriate, then no such non-cash benefit would be realized. There can be no assurance regarding any future realization of the benefit by us of all or part of our net deferred tax assets. As of October 31, 2021, the valuation allowance against our total gross deferred tax assets totaled $4.3 million.
Net Loss
Net loss for the first quarter of fiscal year 2022 was $936,000 compared to $2.1 million for the first quarter of fiscal year 2021. This improvement was primarily due to the improvement in loss before income taxes of $1.3 million.
Financial Condition
Total assets increased $1.2 million, or 3.1%, to $39.1 million at January 31, 2022, from $37.9 million at October 31, 2021. This increase was primarily due to a $1.6 million increase in inventories largely as the result of the timing of certain raw material purchases.
Total liabilities increased $2.1 million, or 13.4%, to $17.8 million at January 31, 2022, from $15.7 million at October 31, 2021. The increase in total liabilities was due primarily to net borrowings on our Revolver totaling $2.1 million.
Total shareholders’ equity at January 31, 2022 decreased $916,000 in the first three months of fiscal year 2022. The decrease resulted from a net loss of $936,000, partially offset by share-based compensation, net of $20,000.
Liquidity and Capital Resources
Our primary capital needs have been to fund working capital requirements, make payments on our Revolver and make principal payments on long-term debt. Our primary source of capital for these purposes has been existing cash, cash provided by operations and borrowings under our Revolver (see “Credit Facilities” below).
Our cash totaled $138,000 as of January 31, 2022, a slight increase compared to $132,000 as of October 31, 2021. The increase in cash for the three months ended January 31, 2022 primarily resulted from net cash provided by financing activities of $2.0 million, partially offset by capital expenditures totaling $73,000 and cash used in operating activities of $1.9 million.
On January 31, 2022, we had working capital of $22.3 million compared to $21.4 million on October 31, 2021. The ratio of current assets to current liabilities as of January 31, 2022 was 4.3 to 1.0 compared to 4.5 to 1.0 as of October 31, 2021. The increase in working capital was primarily due to the increase in inventories of $1.6 million, partially offset by the $650,000 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 $1.5 million, or 5.5%, while current liabilities increased $665,000, or 10.8%.
As of January 31, 2022 and October 31, 2021, we had outstanding loan balances under our Revolver totaling $5.5 million and $3.5 million, respectively. As of January 31, 2022 and October 31, 2021, we had outstanding loan balances, excluding our Revolver, totaling $4.8 million and $4.9 million, respectively.
Net Cash
Net cash used in operating activities was $1.9 million in the first quarter of fiscal year 2022, compared to net cash provided by operations of $525,000 for the first quarter of fiscal year 2021. 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.
Net cash provided by operating activities during the first quarter of fiscal year 2021 primarily resulted from certain adjustments to reconcile a net loss of $2.1 million to net cash provided by operating activities including depreciation and amortization of $324,000. Additionally, the cash flow impact of decreases in trade accounts receivable, net totaling $1.3 million and the cash flow impact of increases in accounts payable and accrued expenses, including accrued compensation and payroll taxes, totaling $1.4 million further contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by increases in inventories totaling $280,000 and increases in other noncurrent liabilities totaling $346,000.
Net cash used in investing activities totaled $81,000 in the first quarter of fiscal year 2022, compared to $57,000 in the first quarter of fiscal year 2021. Net cash used in investing activities during the first quarter of fiscal years 2022 and 2021 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment.
Net cash provided by financing activities totaled $2.0 million for the first quarter of fiscal year 2022, compared to net cash used in financing activities of $158,000 in the first quarter of fiscal year 2021. 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. Net cash used in financing activities in the first quarter of fiscal year 2021 resulted primarily from net repayments on our revolving line of credit and principal payments on long-term debt.
On July 14, 2015, our Board of Directors approved a plan to purchase and retire up to 400,000 shares of our common stock, or approximately 6.0% of the shares then outstanding (the “Repurchase Plan”). When the Repurchase Plan was approved, we had anticipated that the purchases would be made over a 24- to 36-month period, but there was no definite time period for repurchase or plan expiration. As of January 31, 2022, we had 398,400 shares remaining to purchase under this Repurchase Plan, and we have made no specific determination whether and over what period these shares may or may not be purchased. Until future notice, we continue to have no current plans to repurchase and retire our common stock and have suspended 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 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.
Our Revolver with North Mill Capital LLC (now 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) $1.5 million.
The maximum aggregate principal amount subject to the Revolver is $18.0 million. Interest accrues on the daily balance at the per annum rate of 1.5% above the Prime Rate in effect from time to time, but not less than 4.75% (the “Applicable Rate”). In the event of a default, interest may become 6.0% above the Applicable Rate. As of January 31, 2022, the Revolver accrued interest at the prime lending rate plus 1.5% (resulting in a 4.75% rate at January 31, 2022). The initial term of the Revolver is three years, with a termination date of July 24, 2023. After the initial term and unless otherwise terminated, the loan may be extended in one year periods subject to the agreement of SLR.
The Revolver is secured by all of the following assets: properties, rights and interests in property of the Company whether now owned or existing, or hereafter acquired or arising, and wherever located; all accounts, equipment, commercial tort claims, general intangibles, chattel paper, inventory, negotiable collateral, investment property, financial assets, letter-of-credit rights, supporting obligations, deposit accounts, money or assets of the Company, which hereafter come into the possession, custody, or control of SLR; all proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing; any and all tangible or intangible property resulting from the sale, lease, license or other disposition of any of the foregoing, or any portion thereof or interest therein, and all proceeds thereof; and any other assets of the Company which may be subject to a lien in favor of SLR as security for the obligations under the Loan Agreement.
As of January 31, 2022, we had $5.5 million of outstanding borrowings on our Revolver and $2.9 million in available credit.
Capital Expenditures
We did not have any material commitments for capital expenditures as of January 31, 2022. During our 2022 fiscal year budgeting process, we included an estimate for capital expenditures of $1.5 million for the 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, capital expenditures above $750,000 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 considerations of our customers. However, this pattern may be substantially altered during any quarter or year based on a variety of factors. 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 and the volatility of the direct and indirect effects of the COVID-19 pandemic, we are not able to reliably predict the effects of seasonality on net sales because these other factors can also substantially impact our net sales patterns during the year.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based on the condensed consolidated financial statements and accompanying condensed notes that have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the instructions to Form 10‑Q and Regulation S‑X. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 1 to the consolidated financial statements filed with our Annual Report on Form 10-K for fiscal year 2021 provides a summary of our significant accounting policies. Those significant accounting policies detailed in our fiscal year 2021 Form 10-K did not change during the period from November 1, 2021 through January 31, 2022.
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.