Optical Cable Corp: Form 10-Q for the period ended Jul 31, 2024

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 or disputes, and potential litigation, claims, and other actions or disputes against us or with 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, commercial/enterprise, military, industrial, broadcast, mining, petrochemical, renewable energy 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 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 affecting fixed-costs coverage and production efficiencies which may impact gross profits and gross profit margins; 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) market variations in existing product inventory levels available, generally or in certain markets, impacting sales orders for products, (iii) timing of large sales orders, and (iv) high sales concentration among a limited number of customers in certain markets, particularly the wireless carrier market; terrorist attacks or acts of war, any current or potential future military conflicts, and acts of civil unrest; cold wars and economic sanctions as a result of these activities; changes in the level of spending by the United States government, including, but not limited to military spending; ability to recruit and retain key personnel (including production personnel); poor labor relations; increasing labor costs; delays, extended lead times and/or changes in availability of needed raw materials, equipment and/or supplies; shipping and other logistics challenges; impact of inflation on costs, including raw materials and labor, and ability to pass along any increased costs to customers; impact of rising interest rates increasing the cost of capital; impact of cybersecurity risks and incidents and the related actual or potential costs and consequences of such risks and incidents, including costs and regulations to limit such risks; the impact of data privacy laws, including any applicable international privacy laws, and the related actual or potential costs and consequences; the impact of changes in accounting policies and related costs of compliance, including changes by the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board (“PCAOB”), the Financial Accounting Standards Board (“FASB”), and/or the International Accounting Standards Board (“IASB”); our ability to continue to successfully comply with, and the cost of compliance with, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 or any revisions to that act which apply to us; the impact of changes and potential changes in federal laws and regulations adversely affecting our business and/or which result in increases in our direct and indirect costs, including our direct and indirect costs of compliance with such laws and regulations; rising healthcare costs; impact of new or changed government laws and regulations on healthcare costs; the impact of changes in state or federal tax laws and regulations increasing our costs and/or impacting the net return to investors owning our shares; any changes in the status of our compliance with covenants with our lenders; our continued ability to maintain and/or secure future debt financing and/or equity financing to adequately finance our ongoing operations; the impact of future consolidation among competitors and/or among customers adversely affecting our position with our customers and/or our market position; actions by customers adversely affecting us in reaction to the expansion of our product offering in any manner, including, but not limited to, by offering products that compete with our customers, and/or by entering into alliances with, making investments in or with, and/or acquiring parties that compete with and/or have conflicts with our customers; voluntary or involuntary delisting of the Company’s common stock from any exchange on which it is traded; the deregistration by the Company from SEC reporting requirements as a result of the small number of holders of the Company’s common stock; adverse reactions by customers, vendors or other service providers to unsolicited proposals regarding the ownership or management of the Company; the additional costs of considering, responding to and possibly defending our position on unsolicited proposals regarding the ownership or management of the Company; direct and indirect impacts of weather, natural disasters and/or epidemic, pandemic or endemic diseases in the areas of the world in which we operate, market our products and/or acquire raw materials including impacts on supply chains, labor constraints impacting our production volumes and costs; any present or future government mandates, travel restrictions, shutdowns or other regulations regarding any epidemic, pandemic or endemic diseases; an increase in the number of shares of the Company’s common stock issued and outstanding; economic downturns generally and/or in one or more of the markets in which we operate; changes in market demand, exchange rates, productivity, market dynamics, market confidence, macroeconomic and/or other economic conditions in the areas of the world in which we operate and market our products; and our success in managing the risks involved in the foregoing.

We caution readers that the foregoing list of important factors is not exclusive. Furthermore, we incorporate by reference those factors included in current reports on Form 8‑K and/or in our other filings.

Dollar amounts presented in the following discussion have been rounded to the nearest hundred thousand, except in the case of amounts less than one million and except in the case of the table set forth in the “Results of Operations” section, the amounts in which both cases have been rounded to the nearest thousand.

Overview of Optical Cable Corporation

Optical Cable Corporation (or OCC®) is a leading manufacturer of a broad range of fiber optic and copper data communication cabling and connectivity solutions primarily for the enterprise market and various harsh environment and specialty markets (collectively, the non-carrier markets), and also the wireless carrier market, offering integrated suites of high quality products which operate as a system solution or seamlessly integrate with other components. Our product offerings include designs for uses ranging from enterprise network, data center, residential, campus and Passive Optical LAN (“POL”) installations to customized products for specialty applications and harsh environments, including military, industrial, mining, petrochemical, renewable energy and broadcast applications, as well as the wireless carrier market. Our products include fiber optic and copper cabling, hybrid cabling (which includes fiber optic and copper elements in a single cable), fiber optic and copper connectors, specialty fiber optic, copper and hybrid connectors, fiber optic and copper patch cords, pre-terminated fiber optic and copper cable assemblies, racks, cabinets, datacom enclosures, patch panels, face plates, multimedia boxes, fiber optic reels and accessories and other cable and connectivity management accessories, and are designed to meet the most demanding needs of end-users, delivering a high degree of reliability and outstanding performance characteristics.

OCC® is internationally recognized for pioneering the design and production of fiber optic cables for the most demanding military field applications, as well as of fiber optic cables suitable for both indoor and outdoor use, and creating a broad product offering built on the evolution of these fundamental technologies. OCC is also internationally recognized for pioneering the development of innovative copper connectivity technology and designs used to meet industry copper connectivity data communications standards.

Founded in 1983, Optical Cable Corporation is headquartered in Roanoke, Virginia with offices, manufacturing and warehouse facilities located in Roanoke, Virginia, near Asheville, North Carolina, and near Dallas, Texas. We primarily manufacture our fiber optic cables at our Roanoke facility which is ISO 9001:2015 registered and MIL-STD-790G certified, primarily manufacture our enterprise connectivity products at our Asheville facility which is ISO 9001:2015 registered, and primarily manufacture our harsh environment and specialty connectivity products at our Dallas facility which is ISO 9001:2015 registered and MIL-STD-790G certified.

OCC designs, develops and manufactures fiber optic and hybrid cables for a broad range of enterprise, harsh environment, wireless carrier and other specialty markets and applications. We refer to these products as our fiber optic cable offering. OCC designs, develops and manufactures fiber and copper connectivity products for the enterprise market, including a broad range of enterprise and residential applications. We refer to these products as our enterprise connectivity product offering. OCC designs, develops and manufactures a broad range of specialty fiber optic connectors and connectivity solutions principally for use in military, harsh environment and other specialty applications. We refer to these products as our harsh environment and specialty connectivity product offering.

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 Third Quarter of Fiscal Year 2024

• Consolidated net sales for the third quarter of fiscal year 2024 decreased 4.2% to $16.2 million, compared to $16.9 million for the same period last year. We believe this is consistent with weakness experienced in our industry generally and in certain of our target markets, which we believe we began to experience during the third quarter of fiscal year 2023. Net sales for the third quarter of fiscal year 2024 sequentially increased slightly compared to $16.1 million for the second quarter of fiscal year 2024.
• Gross profit decreased 23.4% to $3.9 million in the third quarter of fiscal year 2024, compared to $5.1 million for the third quarter of fiscal year 2023, and decreased slightly compared to $4.0 million for the second quarter of fiscal year 2024.
• Gross profit margin (gross profit as a percentage of net sales) was 24.2% during the third quarter of fiscal year 2024, compared to 30.2% for the third quarter of fiscal year 2023 and compared to 25.1% for the second quarter of fiscal year 2024.
• SG&A expenses were $5.2 million during the third quarter of fiscal year 2024, compared to $5.0 million for the same period last year. SG&A expenses as a percentage of net sales were 32.3% during the third quarter of fiscal year 2024, compared to 29.3% during the same period in fiscal year 2023 and compared to 33.0% during the second quarter of fiscal year 2024.
• Net loss was $1.6 million, or $0.20 per share, during the third quarter of fiscal year 2024, compared to net income of $101,000, or $0.01 per share, for the comparable period last year.

Results of Operations

We sell our products internationally and domestically to our customers which include major distributors, various regional and smaller distributors, original equipment manufacturers and value-added resellers. All of our sales to customers outside of the United States are denominated in U.S. dollars. We can experience fluctuations in the percentage of net sales to customers outside of the United States and in the United States from period to period based on the timing of large orders, coupled with the impact of increases and decreases in sales to customers in various regions of the world. Sales outside of the U.S. can also be impacted by fluctuations in the exchange rate of the U.S. dollar compared to other currencies.

Net sales consist of gross sales of products by the Company and its subsidiaries on a consolidated basis less discounts, refunds and returns. Revenue is recognized at the time product is transferred to the customer (including distributors) at an amount that reflects the consideration expected to be received in exchange for the product. Our customers generally do not have the right of return unless a product is defective or damaged and is within the parameters of the product warranty in effect for the sale.

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 and other manufacturing efficiencies are more easily achieved. 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 July 31, 2024 and 2023

Net Sales

Consolidated net sales for the third quarter of fiscal year 2024 decreased 4.2% to $16.2 million, compared to net sales of $16.9 million for the same period last year, and increased slightly compared to net sales of $16.1 million during the second quarter of fiscal year 2024. We experienced an increase in net sales in our enterprise market during the third quarter of fiscal year 2024, which was more than offset by decreases in net sales in our specialty markets, including the wireless carrier market.

Net sales to customers in the United States decreased 8.0%, while net sales to customers outside of the United States increased 15.6% in the third quarter of fiscal year 2024, compared to the same period last year. We can experience fluctuations in sales from quarter to quarter in the various markets (both industries and geographies) in which we operate for various reasons.

Net sales for the third quarter of fiscal year 2024 were negatively impacted by various macroeconomic pressures, risks and uncertainties in our industry—which we believe is consistent with weakness experienced in our industry generally and which we began to experience during the third quarter of fiscal year 2023. While certain of our markets continue to show signs of softness, we believe there are positive indicators in certain of our markets. Our quarterly sequential net sales have increased through the third quarter of fiscal 2024, although the growth has not been as robust as we initially anticipated. Overall, we believe opportunities to improve net sales will continue into fiscal year 2025.

Gross Profit

Our gross profit was $3.9 million in the third quarter of fiscal year 2024, a decrease of 23.4% compared to gross profit of $5.1 million in the third quarter of fiscal year 2023, and compared to $4.0 million for the second quarter of fiscal year 2024.

Gross profit margin, or gross profit as a percentage of net sales, was 24.2% in the third quarter of fiscal year 2024 compared to 30.2% in the third quarter of fiscal year 2023, and compared to 25.1% for the second quarter of fiscal year 2024.

Gross profit margin for the third quarter of fiscal 2024 when compared to the same period last year was negatively impacted by lower volumes, as fixed charges were spread over lower sales, as well as decreased plant efficiency, as fewer sales and lower backlog impacted the flow of products through our manufacturing facilities—the impact of operating leverage. Additionally, our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix.

While production volume decreased during the third quarter of fiscal year 2024 compared to the same period last year, we have not implemented reductions in production personnel like others in our industry have done—with various personnel reductions at manufacturers and distributors. Our planned restraint in this regard is consistent with our view of expected opportunities as we prepare for fiscal year 2025, as well as considering the time it takes to train new production personnel in certain areas of our production operations.

Selling, General, and Administrative Expenses

SG&A expenses increased to $5.2 million during the third quarter of fiscal year 2024, compared to $5.0 million during the third quarter of fiscal year 2023, with no significant changes when comparing the two periods. SG&A expenses as a percentage of net sales were 32.3% in the third quarter of fiscal year 2024, compared to 29.3% in the third quarter of fiscal year 2023, as fixed SG&A expenses were spread over lower net sales. By comparison, SG&A expenses as a percentage of net sales were 33.0% during the second quarter of fiscal year 2024.

Royalty Income (Expense), Net

We recognized royalty expense, net of royalty income, totaling $7,000 during the third quarter of fiscal years 2024 and 2023. 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 $14,000 of amortization expense, associated with intangible assets, during the third quarter of fiscal years 2024 and 2023.

Income (loss) from operations

We reported a loss from operations of $1.3 million for the third quarter of fiscal year 2024, compared to income from operations of $138,000 for the third quarter of fiscal year 2023, and compared to a net loss from operations of $1.3 million for the second quarter of fiscal year 2024.

Other Income (Expense), Net

We recognized other expense, net in the third quarter of fiscal year 2024 of $213,000, compared to $39,000 in the third quarter of fiscal year 2023.

Other expense, net for the third quarter of fiscal years 2024 and 2023 is comprised primarily of interest expense and other miscellaneous items, partially offset by gain on insurance proceeds received for damage to property and equipment totaling $90,000 and $256,000, respectively.

Income (Loss) Before Income Taxes

We reported a loss before income taxes of $1.6 million for the third quarter of fiscal year 2024, compared to income before income taxes of $100,000 for the third quarter of fiscal year 2023. The change was primarily due to the decrease in gross profit of $1.2 million and the increase in SG&A expenses of $280,000.

Income Tax Expense

Income tax expense totaled $7,000 in the third quarter of fiscal year 2024, compared to income tax benefit of $1,000 in the third quarter of fiscal year 2023. Our effective tax rate was less than negative one percent for the third quarter of fiscal years 2024 and 2023.

Fluctuations in our effective tax rates are primarily due to permanent differences in U.S. GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level such that permanent differences in U.S. GAAP and tax accounting treatment have a disproportional impact on the projected effective tax rate.

We previously established a valuation allowance against all of our net deferred tax assets. As a result of establishing a full valuation allowance against our net deferred tax assets, if we generate sufficient taxable income in subsequent periods to realize a portion or all of our net deferred tax assets, our effective income tax rate could be unusually low due to the tax benefit attributable to the necessary decrease in our valuation allowance. Further, if we generate losses before taxes in subsequent periods, our effective income tax rate could also be unusually low as any increase in our net deferred tax asset from such a net operating loss for tax purposes would be offset by a corresponding increase to our valuation allowance against our net deferred tax assets.

If we generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the removal of any valuation allowance against our net deferred tax asset is appropriate, then during the period in which such determination is made, we will recognize the non-cash benefit of such removal of the valuation allowance in income tax expense on our consolidated statement of operations, which will increase net income and will also increase the net deferred tax asset on our consolidated balance sheet. If we do not generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the reduction or removal of any valuation allowance against our net deferred tax asset is appropriate, then no such non-cash benefit would be realized. There can be no assurance regarding any future realization of the benefit by us of all or part of our net deferred tax assets.

As of October 31, 2023, the valuation allowance against our total gross deferred tax assets totaled $4.0 million.

Net Income (Loss)

Net loss for the third quarter of fiscal year 2024 was $1.6 million, or $0.20 per share, compared to net income of $101,000, or $0.01 per share, for the third quarter of fiscal year 2023. This change was primarily due to the decrease in income before income taxes of $1.7 million.

Nine Months Ended July 31, 2024 and 2023

Net Sales

Consolidated net sales for the first nine months of fiscal year 2024 were $47.2 million, a decrease of 14.0% compared to net sales of $54.8 million for the same period last year. We experienced a decrease in net sales in both our enterprise and specialty markets, including the wireless carrier market, in the first nine months of fiscal year 2024, compared to the same period last year. We believe this is consistent with weakness being experienced in our industry generally and in certain of our target markets, which we began to experience during the third quarter of fiscal year 2023.

Net sales to customers in the United States decreased 14.7% and net sales to customers outside of the United States decreased 10.8% in the first nine months of fiscal year 2024, compared to the same period last year. We can experience fluctuations in sales from quarter to quarter in the various markets (both industries and geographies) in which we operate for various reasons.

The first nine months of fiscal year 2023 was positively impacted by our higher-than-typical sales order backlog/forward load of more than $12.0 million that existed at the end of fiscal year 2022, while our sales order backlog/forward load at the end of fiscal year 2023 had returned to more normal levels at approximately $5.4 million. At the end of the first nine months of fiscal year 2024, our sales order backlog/forward load has increased to $6.5 million when compared to $5.6 million as of April 30, 2024 and $5.0 million as of January 31, 2024.

Additionally, net sales for the first nine months of fiscal year 2024 were negatively impacted by various macroeconomic pressures, risks and uncertainties in our industry—which we believe is consistent with weakness being experienced in our industry generally. While certain of our markets continue to show signs of softness, we believe there are positive indicators in certain of our markets. Our quarterly sequential net sales have increased through the third quarter of fiscal 2024, although the growth has not been as robust as we initially anticipated. Overall, we believe opportunities to improve net sales will continue into fiscal year 2025.

Gross Profit

Our gross profit was $11.7 million in the first nine months of fiscal year 2024, a decrease of 36.6% compared to gross profit of $18.4 million in the first nine months of fiscal year 2023. Gross profit margin was 24.7% in the first nine months of fiscal year 2024 compared to 33.6% in the first nine months of fiscal year 2023.

Gross profit margin for the first nine months of fiscal 2024 was negatively impacted by lower volumes, as fixed charges were spread over lower sales, as well as decreased plant efficiency, as fewer sales and lower backlog impacted the flow of products through our manufacturing facilities—the impact of operating leverage. Additionally, our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix.

While production volume decreased during the first nine months of fiscal year 2024 compared to the same period last year, we have not implemented reductions in production personnel like others in our industry have done—with various personnel reductions at manufacturers and distributors. Our planned restraint in this regard is consistent with our view of expected opportunities as we prepare for fiscal year 2025, as well as considering the time it takes to train new production personnel in certain areas of our production operations.

Selling, General, and Administrative Expenses

SG&A expenses decreased 2.6% to $15.7 million during the first nine months of fiscal year 2024, compared to $16.1 million for the same period last year. SG&A expenses as a percentage of net sales were 33.2% in the first nine months of fiscal year 2024, compared to 29.3% in the first nine months of fiscal year 2023, as fixed SG&A expenses were spread over lower net sales.

The decrease in SG&A expenses during the first nine months of fiscal year 2024 compared to the same period last year was primarily the result of decreases in employee and contracted sales personnel-related costs totaling $410,000 and shipping costs totaling $213,000. Included in employee and contracted sales personnel-related costs are employee incentives and commissions which decreased due to decreased net sales and the financial results during the first nine months of fiscal year 2024. Shipping costs decreased primarily due to the decrease in net sales.

Royalty Income (Expense), Net

We recognized royalty expense, net of royalty income, totaling $20,000 during the first nine months of fiscal years 2024 and 2023. Royalty income and/or expense 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 $41,000 of amortization expense, associated with intangible assets, during the first nine months of fiscal year 2024, compared to $40,000 during the first nine months of fiscal year 2023.

Income (loss) from operations

We reported a loss from operations of $4.0 million for the first nine months of fiscal year 2024, compared to income from operations of $2.3 million for the first nine months of fiscal year 2023.

Other Income (Expense), Net

We recognized other expense, net in the first nine months of fiscal year 2024 of $524,000, compared to other income, net of $1.2 million in the first nine months of fiscal year 2023. Other expense, net for the first nine months of fiscal year 2024 is comprised of interest expense and other miscellaneous items, partially offset by gain on insurance proceeds totaling $309,000. Other income, net for the first nine months of fiscal year 2023 is comprised primarily of the gain on insurance proceeds received for damage to property and equipment totaling $2.0 million, partially offset by interest expense and other miscellaneous items.

The change in other expense, net during the first nine months of fiscal year 2024 compared to the same period last year was primarily due to a decrease in gain on insurance proceeds received in the first nine months of fiscal year 2024 for damage to property and equipment totaling $1.6 million.

Income (Loss) Before Income Taxes

We reported a loss before income taxes of $4.6 million for the first nine months of fiscal year 2024, compared to income before income taxes of $3.4 million for the first nine months of fiscal year 2023. The change was primarily due to the decrease in gross profit of $6.7 million and the decrease in gain on insurance proceeds, net of $1.6 million, partially offset by the decrease in SG&A expenses of $425,000.

Income Tax Expense (Benefit)

Income tax expense totaled $21,000 in the first nine months of fiscal year 2024, compared to $106,000 in the first nine months of fiscal year 2023. Our effective tax rate was less than negative one percent for the first nine months of fiscal year 2024 and 3.1% for the first nine months of fiscal year 2023.

Fluctuations in our effective tax rates are primarily due to permanent differences in U.S. GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level such that permanent differences in U.S. GAAP and tax accounting treatment have a disproportional impact on the projected effective tax rate.

We previously established a valuation allowance against all of our net deferred tax assets. As a result of establishing a full valuation allowance against our net deferred tax assets, if we generate sufficient taxable income in subsequent periods to realize a portion or all of our net deferred tax assets, our effective income tax rate could be unusually low due to the tax benefit attributable to the necessary decrease in our valuation allowance. Further, if we generate losses before taxes in subsequent periods, our effective income tax rate could also be unusually low as any increase in our net deferred tax asset from such a net operating loss for tax purposes would be offset by a corresponding increase to our valuation allowance against our net deferred tax assets.

If we generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the removal of any valuation allowance against our net deferred tax asset is appropriate, then during the period in which such determination is made, we will recognize the non-cash benefit of such removal of the valuation allowance in income tax expense on our consolidated statement of operations, which will increase net income and will also increase the net deferred tax asset on our consolidated balance sheet. If we do not generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the reduction or removal of any valuation allowance against our net deferred tax asset is appropriate, then no such non-cash benefit would be realized. There can be no assurance regarding any future realization of the benefit by us of all or part of our net deferred tax assets.

As of October 31, 2023, the valuation allowance against our total gross deferred tax assets totaled $4.0 million.

Net Income (Loss)

Net loss for the first nine months of fiscal year 2024 was $4.6 million, or $0.59 per share, compared to net income of $3.3 million, or $0.42 per share, for the first nine months of fiscal year 2023. This change was primarily due to the decrease in income before income taxes of $8.0 million, which includes the $1.6 million decrease in gain on insurance proceeds, net.

Financial Condition

Total assets decreased $6.3 million, or 14.3%, to $37.6 million at July 31, 2024, from $43.9 million at October 31, 2023. This decrease was primarily due to a $4.5 million decrease in inventories. Inventories decreased largely as the result of the timing of certain raw material purchases as well as lower replenishment rates due to lower sales and the timing of sales of stock inventory.

Total liabilities decreased $1.9 million, or 10.0%, to $17.2 million at July 31, 2024, from $19.2 million at October 31, 2023. The decrease in total liabilities was primarily due to a decrease in accounts payable and accrued expenses, including accrued compensation and payroll taxes, totaling $786,000, primarily resulting from the timing of certain vendor and payroll related payments, and net repayments on our Revolver totaling $1.0 million.

Total shareholders’ equity at July 31, 2024 decreased $4.4 million in the first nine months of fiscal year 2024 resulting primarily from a net loss of $4.6 million.

Liquidity and Capital Resources

Our primary capital needs have been to fund working capital requirements through our Revolver. Our primary source of capital for these purposes has been existing cash, cash provided by operations and borrowings under our Revolver (see “Credit Facilities” below).

Our cash totaled $797,000 as of July 31, 2024, a decrease of $672,000 compared to $1.5 million as of October 31, 2023. The decrease in cash for the nine months ended July 31, 2024 primarily resulted from net cash used in financing activities of $1.3 million (including a $1.0 million net reduction in our Revolver) and capital expenditures of $313,000, partially offset by cash provided by operating activities of $665,000 and insurance proceeds, net totaling $271,000.

On July 31, 2024, we had working capital of $22.2 million compared to $27.3 million on October 31, 2023. The ratio of current assets to current liabilities as of July 31, 2024 was 4.2 to 1.0, compared to 4.5 to 1.0 as of October 31, 2023. The decrease in working capital and in the current ratio was primarily due to the decrease in cash of $672,000 and the decrease in inventories of $4.5 million, partially offset by the decrease in accounts payable and accrued expenses, including accrued compensation and payroll taxes, totaling $786,000.

As of July 31, 2024 and October 31, 2023, we had outstanding loan balances under our Revolver totaling $7.3 million and $8.3 million, respectively. As of July 31, 2024 and October 31, 2023, we had other outstanding bank loan balances, excluding our Revolver, totaling $2.6 million and $2.7 million, respectively.

Net Cash

Net cash provided by operating activities was $665,000 in the first nine months of fiscal year 2024, compared to net cash used in operating activities of $929,000 for the first nine months of fiscal year 2023. Net cash provided by operating activities during the first nine months of fiscal year 2024 primarily resulted from certain adjustments to reconcile a net loss of $4.6 million to net cash provided by operating activities including depreciation and amortization of $644,000 and share-based compensation expense of $329,000. Additionally, decreases in inventories of $4.5 million further contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by the cash flow impact of decreases in accounts payable and accrued expenses, including accrued compensation and payroll taxes, of $790,000, and by an adjustment to reconcile a net loss of $4.6 million to net cash provided by operating activities for gain on insurance proceeds, net totaling $309,000.

Net cash used in operating activities during the first nine months of fiscal year 2023 primarily resulted from an increase in inventories totaling $5.5 million and an adjustment to reconcile net income of $3.3 million to net cash used in operating activities for the gain on insurance proceeds received for damage to property and equipment totaling $2.0 million, partially offset by the cash flow impact of decreases in trade accounts receivable, net totaling $1.7 million, and by certain other adjustments to reconcile net income of $3.3 million to net cash used in operating activities including depreciation and amortization of $716,000 and share-based compensation expense of $463,000.

Net cash used in investing activities totaled $43,000 in the first nine months of fiscal year 2024, compared to net cash provided by investing activities of $1.6 million in the first nine months of fiscal year 2023. Net cash used in investing activities during the first nine months of fiscal year 2024 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment totaling $313,000, partially offset by net insurance proceeds of $271,000. Net cash provided by investing activities during the first nine months of fiscal year 2023 resulted primarily from the net insurance proceeds received for damage to property and equipment totaling $2.0 million, partially offset by purchases of property and equipment and deposits for the purchase of property and equipment totaling $371,000.

Net cash used in financing activities totaled $1.3 million for the first nine months of fiscal year 2024, compared to net cash provided by financing activities of $845,000 in the first nine months of fiscal year 2023. Net cash used in financing activities in the first nine months of fiscal year 2024 resulted primarily from net repayments on our revolving line of credit totaling $1.0 million. Net cash provided by financing activities in the first nine months of fiscal year 2023 resulted primarily from net proceeds on our revolving line of credit totaling $1.3 million, partially offset by principal payments on long-term debt totaling $253,000.

Credit Facilities

We have credit facilities consisting of a real estate term loan, as amended and restated (the “Virginia Real Estate Loan”) and a Revolving Credit Master Promissory Note and related Loan and Security Agreement (collectively, the “Revolver”).

The Virginia Real Estate Loan is with Northeast Bank and is payable in monthly installments of principal and interest. Principal is calculated using the unpaid balance of the loan and a two hundred forty (240) month amortization schedule. Interest is computed on the aggregate principal balance outstanding at a rate equal to the Prime Rate, adjusted monthly on the fifth day of each calendar month in accordance with changes to the Prime Rate, provided, however, that the interest rate is never less than 8.5% per annum on the basis of a 360-day year times the actual number of days elapsed. The Prime Rate was 8.5% per annum at July 31, 2024 and October 31, 2023. The maturity date of the Virginia Real Estate Loan is May 5, 2026.

On October 31, 2023, OCC and Northeast Bank entered into an Omnibus Amendment of Loan Documents (the “Amendment”) to modify certain loan documents currently in effect between the parties related to the Virginia Real Estate Loan and a supplemental real estate term loan (the “North Carolina Real Estate Loan”). The primary purpose of the Amendment was to: (i) pay off the principal balance of the North Carolina Real Estate Loan; (ii) pay down the principal balance on the Virginia Real Estate Loan; (iii) extend the maturity date of the Virginia Real Estate Loan through May 5, 2026; (iv) release the collateral of the North Carolina Real Estate Loan; and (v) effective October 5, 2023, modify the interest rate of the Virginia Real Estate Loan to a variable rate equal to the Prime Rate, provided that the interest rate shall never be less than 8.5% per annum.

The Loan is secured by a first lien deed of trust on the land and buildings at our headquarters and manufacturing facilities located in Roanoke, Virginia.

The Company had an outstanding balance on its Virginia Real Estate Loan of $2.6 million, as of July 31, 2024.

On June 27, 2024, we entered into a Modification Agreement with North Mill Capital LLC (now doing business as SLR Business Credit, “SLR”) to modify the existing Loan and Security Agreement (“Loan Agreement”) dated July 24, 2020. In addition to certain other modifications to the Loan Agreement as set forth in the Modification Agreement, the Modification Agreement provides a two-year extension of the initial term of the Loan Agreement to July 24, 2027 and increases eligible inventory maximum from $5,000,000 to $7,000,000.

The Revolver with SLR provides us with one or more advances in an amount up to: (a) 85% of the aggregate outstanding amount of eligible accounts (the “eligible accounts loan value”); plus (b) the lowest of (i) an amount up to 35% of the aggregate value of eligible inventory, (ii) $7.0 million, and (iii) an amount not to exceed 100% of the then outstanding eligible accounts loan value; minus (c) $1.15 million.

The maximum aggregate principal amount subject to the Revolver is $18.0 million. Interest accrues on the daily balance at the per annum rate of 1.5% above the Prime Rate in effect from time to time, but not less than 4.75% (the “Applicable Rate”). As a result, the Revolver accrued interest at a 10.0% rate at July 31, 2024 and October 31, 2023. In the event of a default, interest may become 6.0% above the Applicable Rate. 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 July 31, 2024, we had $7.3 million of outstanding borrowings on our Revolver and $2.2 million in available credit.

Capital Expenditures

We did not have any material commitments for capital expenditures as of July 31, 2024. During our 2024 fiscal year budgeting process, we included an estimate for capital expenditures of $1.0 million for the fiscal year. We anticipate these expenditures, to the extent made, will be funded out of our working capital, cash provided by operations or borrowings under our Revolver, as appropriate. Capital expenditures are reviewed and approved based on a variety of factors including, but not limited to, current cash flow considerations, the expected return on investment, project priorities, impact on current or future product offerings, availability of personnel necessary to implement and begin using acquired equipment, and economic conditions in general. Additionally, total capital expenditures exceeding $1.0 million per fiscal year would require approval from our lender.

Corporate acquisitions and other strategic investments, if any, are considered outside of our annual capital expenditure budgeting process.

Future Cash Flow Considerations

We believe that our future cash flow from operations, our cash on hand and our existing credit facilities will be adequate to fund our operations for at least the next twelve months.

From time to time, we are involved in various claims, legal actions and regulatory reviews arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.

Seasonality

We typically expect net sales to be relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year, and excluding other volatility, we would normally expect 48% of total net sales to occur during the first half of a fiscal year and 52% of total net sales to occur during the second half of a fiscal year. We believe this historical seasonality pattern is generally indicative of an overall trend and reflective of the buying patterns and budgetary cycles of our customers. However, this pattern may be altered during any quarter or year by the quarterly and annual volatility of orders received for the wireless carrier market, the timing of larger projects, timing of orders from larger customers, other economic factors impacting our industry or impacting the industries of our customers and end-users, and various macroeconomic conditions. While we believe seasonality may be a factor that impacts our quarterly net sales results, particularly when excluding the volatility of sales in the wireless carrier market, we are not able to reliably predict net sales based on seasonality because these other factors can also, and often do, substantially impact our net sales patterns during the year. Furthermore, while we have seen some improvement in net sales in the third quarter of fiscal year 2024, it is not at a level that we are confident our typical seasonality pattern will materialize for the second half of fiscal year 2024.

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 2023 provides a summary of our significant accounting policies. Those significant accounting policies detailed in our fiscal year 2023 Form 10-K did not change during the period from November 1, 2023 through July 31, 2024.

New Accounting Standards

In November 2023, the FASB issued Accounting Standards Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 requires enhanced disclosures about significant segment expenses and enhanced disclosures in interim periods. The guidance in ASU 2023-07 will be applied retrospectively and is effective for annual reporting periods in fiscal years beginning after December 15, 2023 and interim reporting periods in fiscal years beginning after December 31, 2024, with early adoption permitted. We are currently evaluating the impact ASU 2023-07 will have on our financial statement disclosures.

In December 2023, the FASB issued Accounting Standards Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). The objective of ASU 2023-09 is to enhance disclosures related to income taxes, including specific thresholds for inclusion within the tabular disclosure of income tax rate reconciliation and specified information about income taxes paid. ASU 2023-09 is effective for public companies starting in annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact ASU 2023-09 will have on our financial statement disclosures.

There are no other new accounting standards issued, but not yet adopted by us, which are expected to materially impact our financial position, operating results or financial statement disclosures.

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in reports under the Exchange Act are recorded, processed and summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.

Our management evaluated, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), the effectiveness of the Company’s disclosure controls and procedures as of July 31, 2024. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of July 31, 2024, and that there were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter ended July 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.