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 sectors, and/or the economy as a whole; changes in demand for our products from certain competitors for which we provide private label connectivity products; changes in the mix of products sold during any given period (due to, among other things, seasonality or strength or weaknesses in particular markets in which we participate) which may impact gross profits and gross profit margins or net sales; variations in orders and production volumes of hybrid cables (fiber and copper) with high copper content, which tend to have lower gross profit margins; significant variations in sales resulting from high volatility, timing of large sales orders, and high sales concentration among a limited number of customers in certain markets, particularly the wireless carrier market; terrorist attacks or acts of war, and any current or potential future military conflicts; changes in the level of military spending or other spending by the United States government, including, but not limited to reductions in government spending due to automatic budget cuts or sequestration; ability to recruit and retain key personnel; poor labor relations; the impact of cybersecurity risks and incidents, and the related actual or potential costs and consequences, in compliance with the federal securities laws; the impact of data privacy laws and the General Data Protection Regulation and the related actual or potential costs and consequences; the impact of changes in accounting policies and related costs of compliance, including changes by the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board (“PCAOB”), the Financial Accounting Standards Board (“FASB”), and/or the International Accounting Standards Board (“IASB”); our ability to continue to successfully comply with, and the cost of compliance with, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 or any revisions to that act which apply to us; the impact of changes and potential changes in federal laws and regulations adversely affecting our business and/or which result in increases in our direct and indirect costs, including our direct and indirect costs of compliance with such laws and regulations; rising healthcare costs; the impact of the Patient Protection and Affordable Care Act of 2010, the Health Care and Education Reconciliation Act of 2010, and any revisions to those acts that apply to us and the related legislation and regulation associated with those acts, which directly or indirectly result in increases to our costs; the impact of changes in state or federal tax laws and regulations increasing our costs and/or impacting the net return to investors owning our shares; any changes in the status of our compliance with financial debt covenants with our lender; our ability to maintain and/or secure debt financing and/or equity financing to adequately finance our ongoing operations; the impact of future consolidation among competitors and/or among customers adversely affecting our position with our customers and/or our market position; actions by customers adversely affecting us in reaction to the expansion of our product offering in any manner, including, but not limited to, by offering products that compete with our customers, and/or by entering into alliances with, making investments in or with, and/or acquiring parties that compete with and/or have conflicts with our customers; voluntary or involuntary delisting of the Company’s common stock from any exchange on which it is traded; the deregistration by the Company from SEC reporting requirements as a result of the small number of holders of the Company’s common stock; a continued suspension of dividends declared to shareholders due to inadequate or alternative uses of cash on hand; adverse reactions by customers, vendors or other service providers to unsolicited proposals regarding the ownership or management of the Company; the additional costs of considering, responding to and possibly defending our position on unsolicited proposals regarding the ownership or management of the Company; impact of weather or natural disasters in the areas of the world in which we operate, market our products and/or acquire raw materials; an increase in the number of shares of the Company’s common stock issued and outstanding; 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 which in both cases have been rounded to the nearest thousand.
Overview of Optical Cable Corporation
Optical Cable Corporation (or OCC
®
) is a leading manufacturer of a broad range of fiber optic and copper data communication cabling and connectivity solutions primarily for the enterprise market and various harsh environment and specialty markets (collectively, the non-carrier markets), and also the wireless carrier market, offering integrated suites of high quality products which operate as a system solution or seamlessly integrate with other providers’ offerings. Our product offerings include designs for uses ranging from enterprise network, datacenter, residential, campus and Passive Optical LAN (“POL”) installations to customized products for specialty applications and harsh environments, including military, industrial, mining, petrochemical and broadcast applications, and for the wireless carrier market. Our products include fiber optic and copper cabling, fiber optic and copper connectors, specialty fiber optic and copper connectors, fiber optic and copper patch cords, pre-terminated fiber optic and copper cable assemblies, racks, cabinets, datacom enclosures, patch panels, face plates, multi-media boxes, fiber optic reels and accessories and other cable and connectivity management accessories, and are designed to meet the most demanding needs of end-users, delivering a high degree of reliability and outstanding performance characteristics.
OCC
®
is internationally recognized for pioneering the design and production of fiber optic cables for the most demanding military field applications, as well as of fiber optic cables suitable for both indoor and outdoor use, and creating a broad product offering built on the evolution of these fundamental technologies. OCC is also internationally recognized for pioneering the development of innovative copper connectivity technology and designs used to meet industry copper connectivity data communications standards.
Founded in 1983, Optical Cable Corporation is headquartered in Roanoke, Virginia with offices, manufacturing and warehouse facilities located in Roanoke, Virginia, near Asheville, North Carolina and near Dallas, Texas. We primarily manufacture our fiber optic cables at our Roanoke facility which is ISO 9001:2015 registered and MIL-STD-790G certified, primarily manufacture our enterprise connectivity products at our Asheville facility which is ISO 9001:2015 registered, and primarily manufacture our harsh environment and specialty connectivity products at our Dallas facility which is ISO 9001:2015 registered and MIL-STD-790G certified.
OCC designs, develops and manufactures fiber optic cables for a broad range of enterprise, harsh environment, wireless carrier and other specialty markets and applications. We refer to these products as our fiber optic cable offering. OCC designs, develops and manufactures fiber and copper connectivity products for the enterprise market, including a broad range of enterprise and residential applications. We refer to these products as our enterprise connectivity product offering. OCC designs, develops and manufactures a broad range of specialty fiber optic connectors and connectivity solutions principally for use in military, harsh environment and other specialty applications. We refer to these products as our harsh environment and specialty connectivity product offering.
We market and sell the products manufactured at our Dallas facility through our wholly owned subsidiary Applied Optical Systems, Inc. (“AOS”) under the names Optical Cable Corporation and OCC
®
by the efforts of our integrated OCC sales team.
The OCC team seeks to provide top-tier communication solutions by bundling all of our fiber optic and copper data communication product offerings into systems that are best suited for individual data communication needs and application requirements of our customers and the end-users of our systems.
OCC’s wholly owned subsidiary Centric Solutions LLC (“Centric Solutions”) provides cabling and connectivity solutions for the datacenter market. Centric Solutions’ business is located at OCC’s facility near Dallas, Texas.
Optical Cable Corporation, OCC
®
, Procyon
®
, Superior Modular Products
™
, SMP Data Communications
™
, Applied Optical Systems
™
, Centric Solutions
™
and associated logos are trademarks of Optical Cable Corporation.
Summary of Company Performance for First Quarter of Fiscal Year 2019
● Consolidated net sales for the first quarter of fiscal year 2019 were $16.8 million, a decrease of 4.6% compared to consolidated net sales of $17.6 million for the same period last year.
● Gross profit decreased 31.9% to $3.6 million in the first quarter of fiscal year 2019, compared to $5.2 million for the first quarter of fiscal year 2018.
● Gross profit margin (gross profit as a percentage of net sales) was 21.3% during the first quarter of fiscal year 2019, compared to 29.8% for the first quarter of fiscal year 2018.
● Net loss was $3.3 million, or $0.44 per share, during the first quarter of fiscal year 2019, compared to a net loss of $410,000, or $0.06 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 products. Our customers generally do not have the right of return unless a product is defective or damaged and is within the parameters of the product warranty in effect for the sale.
Cost of goods sold
consists of the cost of materials, product warranty costs and compensation costs, and overhead and other costs related to our manufacturing operations. The largest percentage of costs included in cost of goods sold is attributable to costs of materials.
Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix. To the extent not negatively impacted by product mix, gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales. Hybrid cables (fiber and copper) with higher copper content tend to have lower gross profit margins.
Selling, general and administrative expenses
(“SG&A expenses”) consist of the compensation costs for sales and marketing personnel, shipping costs, trade show expenses, customer support expenses, travel expenses, advertising, bad debt expense, the compensation costs for administration and management personnel, legal, accounting, advisory and professional fees, costs incurred to settle litigation or claims and other actions against us, and other costs associated with our operations.
Royalty income
(expense)
, net
consists of royalty income earned on licenses associated with our patented products, net of royalty and related expenses.
Amortization of intangible assets
consists of the amortization of the costs, including legal fees, associated with internally developed patents that have been granted. Amortization of intangible assets is calculated using the straight-line method over the estimated useful lives of the intangible assets.
Other
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
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Net sales
|
|
$
|
16,751,000
|
|
|
$
|
17,551,000
|
|
|
|
(4.6
|
)%
|
Gross profit
|
|
|
3,563,000
|
|
|
|
5,229,000
|
|
|
|
(31.9
|
)%
|
SG&A expenses
|
|
|
6,774,000
|
|
|
|
5,558,000
|
|
|
|
21.9
|
%
|
Net loss
|
|
|
(3,310,000
|
)
|
|
|
(410,000
|
)
|
|
|
(707.1
|
)%
|
Three Months Ended January 31, 2019 and 2018
Net Sales
Consolidated net sales for the first quarter of fiscal year 2019 decreased 4.6% to $16.8 million compared to net sales of $17.6 million for the same period last year. We experienced a decrease in net sales in both our specialty and enterprise markets in the first quarter of fiscal year 2019 compared to the same period last year. Impacting the net decrease in the specialty markets was $1.2 million in net sales related to a military project during the first quarter of last year that did not recur this year.
Net sales to customers in the United States decreased 2.0% in the first quarter of fiscal year 2019, compared to the same period last year and net sales to customers outside of the United States decreased 14.1% compared to the same period last year.
OCC’s decrease in net sales during the first quarter of fiscal year 2019, when compared to the same period last year, is primarily due to the negative impact of throughput constraints and inefficiencies in our Roanoke facility that resulted from the expansion, training, and restructuring of our manufacturing workforce and from process changes─initiatives intended to ultimately increase throughput and efficiency in order to meet increased product demand over the short- and long-term. While every effort is being made to eliminate the initial negative impact and realize the anticipated benefits of these initiatives, we may continue to see some negative impacts on our net sales and gross profit margin during our second quarter.
Our backlog/forward load was higher than typical at the end of our first quarter. As of January 31, 2019, our sales order backlog/forward load was $10.0 million, or approximately 5 to 6 weeks of net sales (on a trailing 12 month basis). By comparison, our sales order backlog/forward load was $8.0 million, or approximately 7 to 8 weeks of net sales (on a trailing 12 month basis) as of October 31, 2018 (the end of our fiscal year 2018).
Gross Profit
Our gross profit was $3.6 million in the first quarter of fiscal year 2019, a decrease of 31.9% compared to gross profit of $5.2 million in the first quarter of fiscal year 2018. Gross profit margin, or gross profit as a percentage of net sales, was 21.3% in the first quarter of fiscal year 2019 compared to 29.8% in the first quarter of fiscal year 2018.
Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis, and this was a factor putting downward pressure on our gross profit margin during the first quarter. Additionally, gross profit margin in the first quarter of fiscal year 2019 was negatively impacted by the throughput constraints and inefficiencies that we experienced at our Roanoke facility that resulted from the expansion, training, and restructuring of our manufacturing workforce and from process changes─initiatives intended to ultimately increase throughput and efficiency in order to meet increased product demand over the short- and long-term. In the short-term though, these efforts led to increased labor related costs totaling approximately $870,000 and other costs which negatively impacted gross profit in the first quarter of fiscal 2019 that did not occur in the first quarter of fiscal year 2018. While every effort is being made to eliminate the initial negative impact and realize the anticipated benefits of these initiatives, our gross profit margin during the second quarter may continue to be adversely affected.
Selling, General, and Administrative Expenses
SG&A expenses increased 21.9% to $6.8 million during the first quarter of fiscal year 2019, compared to $5.6 million for the same period last year. SG&A expenses as a percentage of net sales were 40.4% in the first quarter of fiscal year 2019, compared to 31.7% in the first quarter of fiscal year 2018.
The increase in SG&A expenses during the first quarter of fiscal year 2019 compared to the same period last year was primarily the result of increases in employee related costs totaling $1.1 million. The largest increase in employee related costs was a result of share-based compensation expense increasing $749,000 in the first quarter of fiscal year 2019 compared to the same period in fiscal year 2018, as a result of previously granted long-term, performance-based equity grants that vested on January 31, 2019. The increase in share-based compensation expense resulted from our improved financial performance in fiscal year 2018 compared to fiscal year 2017. While most of the share-based compensation expense related to the shares vesting shares on January 31, 2019 was recognized during fiscal year 2018; as previously disclosed, an additional expense was anticipated in the first quarter of fiscal year 2019 since there remained a risk of forfeiture related to such vesting shares that did not expire until January 31, 2019.
The higher share-based compensation expense incurred in the first quarter of fiscal year 2019 is not expected to recur in the remaining three quarters of fiscal year 2019. Additionally, long-term, performance-based equity grants normally considered for grant to employees in January of each year were not made in January 2019.
Royalty
Income (
Expense
)
, Net
We recognized royalty expense, net of royalty income, totaling $218 during the first quarter of fiscal year 2019 compared to royalty income, net of royalty and related expenses, totaling $5,000 during the first quarter of fiscal year 2018.
Amortization of Intangible Assets
We recognized $9,000 of amortization expense, associated with intangible assets, during the first quarter of fiscal year 2019, compared to $7,000 during the first quarter of fiscal year 2018.
Other Expense, Net
We recognized other expense, net in the first quarter of fiscal year 2019 of $117,000 compared to $119,000 in the first quarter of fiscal year 2018. 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 $3.3 million for the first quarter of fiscal year 2019, compared to a loss before income taxes of $450,000 for the first quarter of fiscal year 2018. The increase was primarily due to the decrease in gross profit of $1.7 million and the increase in SG&A expenses of $1.2 million, compared to the same period in 2018.
Income Tax Benefit
Income tax benefit totaled $27,000 in the first quarter of fiscal year 2019, compared to $39,000 for the same period in fiscal year 2018. Our effective tax rate for the first quarter of fiscal year 2019 was less than one percent compared to 8.8% for the first quarter of fiscal year 2018.
Fluctuations in our effective tax rates are primarily due to permanent differences in U.S. GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level such that permanent differences in U.S. GAAP and tax accounting treatment have a disproportional impact on the projected effective tax rate.
During fiscal year 2015, we established a valuation allowance against all of our net deferred tax assets. As a result of establishing a full valuation allowance against our net deferred tax assets, if we generate sufficient taxable income in subsequent periods to realize a portion or all of our net deferred tax assets, our effective income tax rate could be unusually low due to the tax benefit attributable to the necessary decrease in our valuation allowance. Further, if we generate losses before taxes in subsequent periods, our effective income tax rate could also be unusually low as any increase in our net deferred tax asset from such a net operating loss for tax purposes would be offset by a corresponding increase to our valuation allowance against our net deferred tax assets.
If we generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the removal of any valuation allowance against our net deferred tax asset is appropriate, then during the period in which such determination is made, we will recognize the non-cash benefit of such removal of the valuation allowance in income tax expense on our consolidated statement of operations, which will increase net income and will also increase the net deferred tax asset on our consolidated balance sheet. If we do not generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the reduction or removal of any valuation allowance against our net deferred tax asset is appropriate, then no such non-cash benefit would be realized. There can be no assurance regarding any future realization of the benefit by us of all or part of our net deferred tax assets.
Net Loss
Net loss for the first quarter of fiscal year 2019 was $3.3 million compared to $410,000 for the first quarter of fiscal year 2018. This increase was due to the increase in loss before income taxes of $2.9 million.
Financial Condition
Total assets decreased $931,000, or 2.2%, to $42.2 million at January 31, 2019, from $43.1 million at October 31, 2018. This decrease was primarily due to a $3.0 million decrease in trade accounts receivable, net, partially offset by an increase in inventories totaling $2.0 million. The decrease in trade accounts receivable, net largely resulted from the decrease in net sales in the first quarter of fiscal year 2019 when compared to the fourth quarter of fiscal year 2018. Inventories increased largely as the result of the replenishment of stock inventory to previous levels and the timing of certain raw material purchases.
Total liabilities increased $2.4 million, or 14.6%, to $18.7 million at January 31, 2019, from $16.3 million at October 31, 2018. The increase in total liabilities was primarily due to an increase in accounts payable and accrued expenses totaling $1.7 million, primarily resulting from purchases of raw materials and the timing of certain vendor payments, and an increase in note payable to bank under our revolving credit facility due to net borrowings of $1.8 million, partially offset by a decrease in accrued compensation and payroll taxes totaling $988,000.
Total shareholders’ equity at January 31, 2019 decreased $3.3 million in the first quarter of fiscal year 2019. The decrease resulted primarily from a net loss of $3.3 million.
Liquidity and Capital Resources
Our primary capital needs have been to fund working capital requirements and to make principal payments on long-term debt and our note payable to bank. Our primary source of capital for these purposes has been existing cash, borrowings under our revolving credit facility and cash provided by operations.
Our cash totaled $418,000 as of January 31, 2019, an increase of $241,000, compared to $177,000 as of October 31, 2018. The increase in cash for the three months ended January 31, 2019 primarily resulted from net cash provided by financing activities of $1.7 million, partially offset by capital expenditures totaling $344,000 and cash used in operating activities of $1.2 million.
On January 31, 2019, we had working capital of $22.6 million compared to $24.0 million on October 31, 2018. The ratio of current assets to current liabilities as of January 31, 2019 was 3.9 to 1 compared to 4.4 to 1 as of October 31, 2018. The decrease in working capital and in the current ratio was primarily due to the $3.0 million decrease in trade accounts receivable, net and the net increase in accounts payable and accrued expenses, including accrued compensation and payroll taxes, of $682,000, partially offset by the $2.0 million increase in inventories.
As of January 31, 2019 and October 31, 2018, we had outstanding loan balances under our revolving credit facilities totaling $4.8 million and $3.0 million, respectively. As of January 31, 2019 and October 31, 2018, we had outstanding loan balances, excluding our revolving credit facility, totaling $6.4 million.
Net Cash
Net cash used in operating activities was $1.2 million in the first quarter of fiscal year 2019, compared to $298,000 in the first quarter of fiscal year 2018. Net cash used in operating activities during the first quarter of fiscal year 2019 primarily resulted from an increase in inventories totaling $2.0 million and the decrease in accrued compensation and payroll taxes totaling $1.9 million, partially offset by a decrease in the cash flow impact of decreases in trade accounts receivable, net totaling $3.0 million and certain adjustments to reconcile a net loss of $3.3 million to net cash used in operating activities including depreciation and amortization of $443,000 and share-based compensation expense of $862,000. Additionally, the cash flow impact of increases in accounts payable and accrued expense totaling $1.7 million further contributed to offset net cash used in operating activities.
Net cash used in operating activities during the first quarter of fiscal year 2018 primarily resulted from an increase in the cash flow impact of increases in trade accounts receivable, net totaling $2.4 million and an increase in inventories totaling $840,000, partially offset by certain adjustments to reconcile a net loss of $410,000 to net cash used in operating activities including depreciation and amortization of $408,000 and share-based compensation expense of $113,000. Additionally, the cash flow impact of increases in accounts payable and accrued expense of $2.5 million further contributed to offset net cash used in operating activities.
Net cash used in investing activities totaled $344,000 in the first quarter of fiscal year 2019, compared to $68,000 in the first quarter of fiscal year 2018. Net cash used in investing activities during the first quarter of fiscal years 2019 and 2018 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment.
Net cash provided by financing activities totaled $1.7 million in the first quarter of fiscal year 2019, compared to $3,000 in the first quarter of fiscal year 2018. Net cash provided by financing activities in the first quarter of fiscal year 2019 resulted primarily from proceeds from a note payable to our bank under our line of credit, net of repayments, totaling $1.8 million, partially offset by principal payments on long-term debt totaling $63,000. Net cash provided by financing activities in the first quarter of fiscal year 2018 resulted primarily from proceeds from a note payable to our bank under our line of credit, net of repayments, totaling $200,000, partially offset by payroll taxes withheld and remitted on share-based payments totaling $135,000 and principal payments on long-term debt totaling $61,000.
We have a plan (the “Repurchase Plan”), approved by our Board of Directors on July 14, 2015, to purchase and retire up to 400,000 shares of our common stock, or approximately 6.0% of the shares then outstanding. When the Repurchase Plan was approved, we had anticipated that the purchases would be made over a 24- to 36-month period, but there was no definite time period for repurchase or plan expiration. As of January 31, 2019, we had 398,400 shares remaining to purchase under this Repurchase Plan, and we have made no specific determination whether and over what period these shares may be purchased.
We have repurchased outstanding common stock outside of the Repurchase Plan through an odd lot repurchase offer. During the first quarter of fiscal year 2019, we repurchased and retired 258 shares for $1,257, outside of the Repurchase Plan.
Credit Facilities
We have credit facilities consisting of a real estate term loan, as amended and restated (the “Virginia Real Estate Loan”), a supplemental real estate term loan, as amended and restated (the “North Carolina Real Estate Loan”), and a Revolving Credit Note (“Revolver”).
Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are with Pinnacle Bank (“Pinnacle”), have a fixed interest rate of 3.95% and are secured by a first priority lien on all of our personal property and assets, all money, goods, machinery, equipment, fixtures, inventory, accounts, chattel paper, letter of credit rights, deposit accounts, commercial tort claims, documents, instruments, investment property and general intangibles now owned or hereafter acquired by us and wherever located, as well as a first lien deed of trust on our real property.
Our Revolver with Pinnacle provides the Company with a $7.0 million revolving line of credit (“Revolving Loan”) for our working capital needs. Under the Revolver, Pinnacle provides us with one or more revolving loans in a collective maximum principal amount of $7.0 million. We may borrow, repay, and reborrow at any time or from time to time while the Revolving Loan is in effect. The maturity date of the Revolver is currently April 30, 2020.
The applicable margin in the Revolving Credit Note has a floor on the interest rate for the Revolving Credit Note such that the rate will never be less than 2.50% per annum. The Revolving Loan accrues interest at LIBOR plus 2.50% (resulting in a 5.02% rate at January 31, 2019). The Revolving Loan is payable in monthly payments of interest only with principal and any outstanding interest due and payable at maturity.
The Revolving Loan is secured by a perfected first lien security interest on all assets, including but not limited to, accounts, as-extracted collateral, chattel paper, commodity accounts, commodity contracts, deposit accounts, documents, equipment, fixtures, furniture, general intangibles, goods, instruments, inventory, investment property, letter of credit rights, payment intangibles, promissory notes, software and general tangible and intangible assets owned now or later acquired. The Revolving Loan is also cross-collateralized with our real property.
As of January 31, 2019, we had $4.8 million of outstanding borrowings on our Revolving Loan and $2.2 million in available credit.
Capital Expenditures
We did not have any material commitments for capital expenditures as of January 31, 2019. During our 2019 fiscal year budgeting process, we included an estimate for capital expenditures of $2.5 million for the year. We anticipate these expenditures will be funded out of our working capital or borrowings, including under our credit facility. Capital expenditures are reviewed and approved based on a variety of factors including, but not limited to, current cash flow considerations, the expected return on investment, project priorities, impact on current or future product offerings, availability of personnel necessary to implement and begin using acquired equipment, and economic conditions in general. Historically, we have spent less than our budgeted capital expenditures in most fiscal years.
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 or any additional credit facilities we may originate 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, which we believe may be partially due to the construction cycles, buying patterns and budgetary considerations of our customers. Although our net sales in 2018 did not follow this trend, our trend for the last three fiscal years has been that an average of approximately 51%, 48% and 47% of our net sales occurred during the first half of fiscal years 2018, 2017 and 2016, respectively, and an average of approximately 49%, 52% and 53% of our net sales occurred during the second half of fiscal years 2018, 2017 and 2016, respectively.
As was the case in fiscal year 2018, this trend may be substantially altered during any quarter or year by the timing of larger projects, timing of orders from larger customers, other economic factors impacting our industry or impacting the industries of our customers and end-users, and macroeconomic conditions. While we believe seasonality may be a factor that impacts our quarterly net sales results, we are not able to reliably predict net sales based on seasonality because these other factors can also substantially impact our net sales patterns during the year. We also believe net sales may not follow this trend in periods when overall economic conditions in the industry and/or in the world are atypical.
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 2018 provides a summary of our significant accounting policies. Those significant accounting policies detailed in our fiscal year 2018 Form 10-K did not change during the period from November 1, 2018 through January 31, 2019 other than to reflect changes required by the adoption of ASC 606 related to revenue recognition. See also note 10.
New
Accounting
Standards
In February 2016, the FASB issued Accounting Standards Update 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 requires the recognition of a separate lease liability representing the required lease payments over the lease term and a separate lease asset representing the right to use the underlying asset during the same lease term. Additionally, this ASU provides clarification regarding the identification of certain components of contracts that would represent a lease as well as requires additional disclosures to the notes of the financial statements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842), Targeted Improvements
, which provides an additional (and optional) transition method to adopt the new lease standard. Under the new transition method, an entity would initially apply the new lease requirements in the period of adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. We expect the adoption of this guidance may result in an increase to our long-term assets and liabilities on our consolidated balance sheet depending on the resulting impact of any decision by us to renew, extend or replace our two existing real estate leases, as the current leases expire; however, we do not expect the adoption to have a material impact on our results of operations, financial position and liquidity and our related financial statement disclosures.
In June 2018, the FASB issued Accounting Standards Update 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
(“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under
Revenue from Contracts with Customers
(Topic 606). ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The adoption of ASU 2018-07 is not expected to have a material impact on our results of operations, financial position or liquidity or our related financial statement disclosures.
In June 2018, the FASB issued Accounting Standards Update 2018-08,
Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
(“ASU 2018-08”). ASU 2018-08 applies to entities that receive or make contributions, which primarily are not-for-profit entities but also affects business entities that make contributions. In the context of business entities that make contributions, the FASB clarified that a contribution is conditional if the arrangement includes both a barrier for the recipient to be entitled to the assets transferred and a right of return for the assets transferred (or a right of release of the business entity’s obligation to transfer assets). The recognition of contribution expense is deferred for conditional arrangements and is immediate for unconditional arrangements. ASU 2018-08 requires modified prospective transition to arrangements that have not been completed as of the effective date or that are entered into after the effective date, but full retrospective application to each period presented is permitted. ASU 2018-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The adoption of ASU 2018-08 is not expected to have a material impact on our results of operations, financial position or liquidity or our related financial statement disclosures.
There are no other new accounting standards issued, but not yet adopted by us, which are expected to be applicable to our financial position, operating results or financial statement disclosures.