What changed in this filing

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Item 1. Financial Statements

2024-03-13 compared with 2023-09-12 · 235 added, 371 removed, 326 unchanged (65% of the section changed)

3 unchanged sentences

Current assets:

Restricted cash

Trade accounts receivable, net of allowance for doubtful accounts of $ 77,410 at July 31, 2023 and $ 69,643 at October 31, 2022

Trade accounts receivable, net of allowance for credit losses of $ 59,215 at January 31, 2024 and $ 71,189 at October 31, 2023

Income taxes refundable - current

5 unchanged sentences

Other assets, net

Liabilities and Shareholders ’

Liabilities and Shareholders ’ Equity

Current liabilities:

8 unchanged sentences

Total liabilities

Shareholders’

Shareholders’ equity:

Preferred stock, no par value, authorized 1,000,000 shares;

1 unchanged sentence

Common stock, no par value, authorized 50,000,000 shares;

issued and outstanding 7,893,681 shares at July 31, 2023 and 7,893,194 shares at October 31, 2022

issued and outstanding 7,853,357 shares at January 31, 2024 and 7,893,681 shares at October 31, 2023

Retained earnings

Total shareholders’

Total shareholders’ equity

Commitments and contingencies

Total liabilities and shareholders’

Total liabilities and shareholders’ equity

See accompanying condensed notes to condensed consolidated financial statements.

2 unchanged sentences

Three Months Ended

Nine Months Ended

Cost of goods sold

5 unchanged sentences

Interest expense, net

Gain on insurance proceeds received for damage to property and equipment

Other income (expense), net

Other expense, net

Income (loss) before income taxes

Income tax expense (benefit)

Income tax expense

Net income (loss)

3 unchanged sentences

OPTICAL CABLE CORPORATION

Condensed Consolidated Statements of Shareholders’

Nine Months Ended July 31, 2023

Shareholders’

Condensed Consolidated Statements of Shareholders’ Equity

Three Months Ended January 31, 2024

Shareholders’

Balances at October 31, 2023

1 unchanged sentence

Balances at January 31, 2024

Share-based compensation, net

Balances at April 30, 2023

Share-based compensation, net

Balances at July 31, 2023

Nine Months Ended July 31, 2022

Shareholders’

Three Months Ended January 31, 2023

Shareholders’

Balances at October 31, 2022

1 unchanged sentence

Balances at January 31, 2023

Share-based compensation, net

Balances at April 30, 2022

Share-based compensation, net

Balances at July 31, 2022

See accompanying condensed notes to condensed consolidated financial statements.

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

Nine Months Ended

Three Months Ended

Cash flows from operating activities:

2 unchanged sentences

Depreciation and amortization

Bad debt expense

Bad debt recovery

Share-based compensation expense

Gain on insurance proceeds received for damage to property and equipment

Gain on insurance proceeds, net

Loss on disposal of property and equipment

3 unchanged sentences

Prepaid expenses and other assets

Income taxes refundable

Increase (decrease) in:

6 unchanged sentences

Purchase of and deposits for the purchase of property and equipment

Insurance proceeds received for damange to property and equipment, net

Investment in intangible assets

Proceeds from sale of property and equipment

Net cash provided by (used in) investing activities

Net cash used in investing activities

Cash flows from financing activities:

Payroll taxes withheld and remitted on share-based payments

Proceeds from note payable, revolver

3 unchanged sentences

Principal payments on finance lease

Net cash provided by financing activities

Net increase in cash and restricted cash

Net cash provided by (used in) financing activities

Net decrease in cash

Cash at beginning of period

Cash and restricted cash at end of period

Cash at end of period

See accompanying condensed notes to condensed consolidated financial statements.

1 unchanged sentence

Condensed Notes to Condensed Consolidated Financial Statements

Nine Months Ended July 31, 2023

(1)       

The accompanying unaudited condensed consolidated financial statements of Optical Cable Corporation and its subsidiaries (collectively, the “Company”

or “OCC®”) have been prepared in accordance with U.S.

generally accepted accounting principles for interim financial information and the instructions to Form 10‑Q and Regulation S‑X.

Three Months Ended January 31, 2024

The accompanying unaudited condensed consolidated financial statements of Optical Cable Corporation and its subsidiaries (collectively, the “Company” or “OCC ® ”) have been prepared in accordance with U.S.

generally accepted accounting principles for interim financial information and the instructions to Form 10‑Q and Regulation S‑X.

Accordingly, they do not include all of the information and notes required by U.S.

1 unchanged sentence

In the opinion of management, all material adjustments considered necessary for a fair presentation have been included.

Operating results for the nine months ended July 31, 2023 are not necessarily indicative of the results for the fiscal year ending October 31, 2023 because the following items, among other things, may impact those results:

Operating results for the three months ended January 31, 2024 are not necessarily indicative of the results for the fiscal year ending October 31, 2024 because the following items, among other things, may impact those results:

changing macroeconomic conditions in various markets, supply chain and labor constraints impacting production volumes, any increased costs related to government and private industry mandates in the areas of the world in which we operate, changes in market conditions, seasonality, inflation and interest rates, changes in technology, competitive conditions, timing of certain projects and purchases by key customers, significant variations in sales resulting from high volatility and timing of large sales orders among a limited number of customers in certain markets, ability of management to execute its business plans, continued ability to maintain and/or secure future debt and/or equity financing to adequately finance ongoing operations;

as well as other variables, uncertainties, contingencies and risks set forth as risks in the Company’s Annual Report on Form 10‑K for the fiscal year ended October 31, 2022 (including those set forth in the “Forward-Looking Information”

section), or as otherwise set forth in other filings by the Company as variables, contingencies and/or risks possibly affecting future results.

The unaudited condensed consolidated financial statements and condensed notes are presented as permitted by Form 10‑Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10‑K for the fiscal year ended October 31, 2022.

Stock Incentive Plans and Other Share ‑

Based Compensation

As of July 31, 2023, there were approximately 356,000 remaining shares available for grant under the Optical Cable Corporation Stock Incentive Plan (“2017 Plan”).

Share-based compensation expense for employees, a consultant and non-employee Directors recognized in the condensed consolidated statements of operations for the three months and nine months ended July 31, 2023 was $ 173,500 and $ 463,181 , respectively.

as well as other variables, uncertainties, contingencies and risks set forth as risks in the Company’s Annual Report on Form 10‑K for the fiscal year ended October 31, 2023 (including those set forth in the “Forward-Looking Information” section), or as otherwise set forth in other filings by the Company as variables, contingencies and/or risks possibly affecting future results.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10‑K for the fiscal year ended October 31, 2023.

Stock Incentive Plans and Other Share ‑ Based Compensation

As of January 31, 2024, there were approximately 396,000 remaining shares available for grant under the Optical Cable Corporation Stock Incentive Plan (“2017 Plan”).

Share-based compensation expense for employees, a consultant and non-employee Directors recognized in the condensed consolidated statements of operations for the three months ended January 31, 2024 and 2023 was $ 159,151 and $ 135,041 , respectively.

Share-based compensation expense is entirely related to expense recognized in connection with the vesting of restricted stock awards or other stock awards.

4 unchanged sentences

Condensed Notes to Condensed Consolidated Financial Statements

Nine Months Ended July 31, 2023

During the three months ended July 31, 2023, OCC granted restricted stock awards totaling 28,560 shares to non-employee Directors under the 2017 Plan.

The shares are subject to a one-year vesting period and are part of the non-employee Directors’

annual compensation for service on the Board of Directors.

Restricted stock award activity during the nine months ended July 31, 2023 consisted of stock grants totaling 28,560 shares and restricted shares withheld for taxes in connection with the vesting of restricted shares totaling 28,073 shares.

Three Months Ended January 31, 2024

Restricted stock award activity during the three months ended January 31, 2024 consisted of restricted shares withheld for taxes in connection with the vesting of restricted shares totaling 40,324 shares.

OCC restricted stock grants provide the participant with the option to surrender shares to pay for withholding tax obligations resulting from any vesting restricted shares, or to pay cash to the Company or taxing authorities in the amount of the withholding taxes owed on the value of any vesting restricted shares in order to avoid surrendering shares.

As of July 31, 2023, the estimated amount of compensation cost related to unvested equity-based compensation awards in the form of service-based and operational performance-based shares that the Company will recognize over a 1.4 year weighted-average period is approximately $ 664,000 .

Allowance for Doubtful Accounts for Trade Accounts Receivable

A summary of changes in the allowance for doubtful accounts for trade accounts receivable for the nine months ended July 31, 2023 and 2022 follows:

Nine Months Ended

The Company accrued $ 107,661 as of January 31, 2024 related to the surrender of shares by participants to pay for withholding taxes on shares that vested on January 31, 2024.

As of January 31, 2024, the estimated amount of compensation cost related to unvested equity-based compensation awards in the form of service-based and operational performance-based shares that the Company will recognize over a 1.2 year weighted-average period is approximately $ 356,000 .

Allowance for Credit Losses for Trade Accounts Receivable

A summary of changes in the allowance for credit losses for trade accounts receivable for the three months ended January 31, 2024 and 2023 follows:

Three Months Ended

Balance at beginning of period

Bad debt expense

Bad debt recovery

Balance at end of period

(4)       

Inventories as of July 31, 2023 and October 31, 2022 consist of the following:

Inventories as of January 31, 2024 and October 31, 2023 consist of the following:

Finished goods

2 unchanged sentences

Production supplies

(5)       

Product Warranties

As of July 31, 2023 and October 31, 2022, the Company’s accrual for estimated product warranty claims totaled $ 80,000 and $ 75,000 , respectively, and is included in accounts payable and accrued expenses.

Warranty claims expense for the three months and nine months ended July 31, 2023 totaled $ 26,048 and $ 55,700 , respectively.

Warranty claims expense for the three months and nine months ended July 31, 2022 totaled $ 24,071 and $ 47,606 , respectively.

As of January 31, 2024 and October 31, 2023, the Company’s accrual for estimated product warranty claims totaled $ 75,000 and $ 80,000 , respectively, and is included in accounts payable and accrued expenses.

Warranty claims expense for the three months ended January 31, 2024 and 2023 totaled $ 5,188 and $ 16,574 , respectively.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Nine Months Ended July 31, 2023

The following table summarizes the changes in the Company’s accrual for product warranties during the nine months ended July 31, 2023 and 2022:

Nine Months Ended

Three Months Ended January 31, 2024

The following table summarizes the changes in the Company’s accrual for product warranties during the three months ended January 31, 2024 and 2023:

Three Months Ended

Balance at beginning of period

3 unchanged sentences

Balance at end of period

(6)        

Long-term Debt and Notes Payable

The Company has credit facilities consisting of a real estate term loan, as amended and restated (the “Virginia Real Estate Loan”), a supplemental real estate term loan, as amended and restated (the “North Carolina Real Estate Loan”) and a Revolving Credit Master Promissory Note and related agreements (collectively, the “Revolver”).

Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are with Northeast Bank, have a fixed interest rate of 3.95 % and are secured by a first lien deed of trust on the Company’s real property.

Also see note 12.

Long-term debt as of October 31, 2022 consists of the following:

Virginia Real Estate Loan ($ 6.5 million original principal) payable in monthly installments of $ 31,812 , including interest (at 3.95 %), with final payment of $ 3,318,029 due May 1, 2024

North Carolina Real Estate Loan ($ 2.24 million original principal) payable in monthly installments of $ 10,963 , including interest (at 3.95 %), with final payment of $ 711,773 due May 1, 2024

Total long-term debt

Current installments

Long-term debt, excluding current installments

The Revolver with North Mill Capital LLC (now doing business as SLR Business Credit, “SLR”) provides the Company with one or more advances in an amount up to:

(a) 85 % of the aggregate outstanding amount of eligible accounts (the “eligible accounts loan value”);

The Company has 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 maturity date is May 5, 2026.

The Loan remains generally secured by a first lien deed of trust on the land and buildings at the Company’s headquarters and manufacturing facilities located in Roanoke, Virginia.

All other terms of the Virginia Real Estate Loan remain unaltered and remain in full force and effect.

The Company had an outstanding balance on its Virginia Real Estate Loan of $ 2.7 million, as of January 31, 2024 and October 31, 2023.

The Revolver with North Mill Capital LLC (now doing business as SLR Business Credit, “SLR”) provides the Company with one or more advances in an amount up to:

(a) 85 % of the aggregate outstanding amount of eligible accounts (the “eligible accounts loan value”);

plus (b) the lowest of (i) an amount up to 35 % of the aggregate value of eligible inventory, (ii) $ 5,000,000 , and (iii) an amount not to exceed 100 % of the then outstanding eligible accounts loan value;

minus (c) $ 1,150,000 .

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Nine Months Ended July 31, 2023

The maximum aggregate principal amount subject to the Revolver is $ 18,000,000 .

Interest accrues on the daily balance at the per annum rate of 1.5 % above the Prime Rate in effect from time to time, but not less than 4.75 % (the “Applicable Rate”).

In the event of a default, interest may become 6.0 % above the Applicable Rate.

As of July 31, 2023, the Revolver accrued interest at the prime lending rate plus 1.5 % (resulting in a 10.0 % rate at July 31, 2023).

As of January 31, 2024, the Revolver accrued interest at the prime lending rate plus 1.5 % (resulting in a 10.0 % rate at January 31, 2024).

The termination date of the Revolver is July 24, 2025 and the loan may be extended in one year periods subject to the agreement of SLR.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months Ended January 31, 2024

The Revolver is secured by all of the following assets:

4 unchanged sentences

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, 2023, the Company had $ 7.3 million of outstanding borrowings on its Revolver and $ 3.9 million in available credit.

As of January 31, 2024, the Company had $ 7.5 million of outstanding borrowings on its Revolver and $ 2.3 million in available credit.

As of October 31, 2023, the Company had $ 8.3 million of outstanding borrowings on its Revolver and $ 2.6 million in available credit.

(7)       

The Company has an operating lease agreement for approximately 34,000 square feet of office, manufacturing and warehouse space in Plano, Texas (near Dallas).

9 unchanged sentences

When the lease term ends, the remaining net book value of the right-of-use asset will be classified as property and equipment.

The Company’s lease contracts may include options to extend or terminate the leases.

The Company exercises judgment to determine the term of those leases when such options are present and include such options in the calculation of the lease term when it is reasonably certain that it will exercise those options.

2 unchanged sentences

The Company uses its incremental borrowing rate based on information available at the time of lease commencement to measure the present value of future payments.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Nine Months Ended July 31, 2023

Operating lease expense is recognized on a straight-line basis over the lease term.

Short term leases with an initial term of 12 months or less are expensed as incurred.

The Company’s short term leases have month-to-month terms.

Operating lease right-of-use assets of $ 688,579 and $ 662,328 were included in other assets at July 31, 2023 and October 31, 2022, respectively.

Operating lease liabilities of $ 404,947 and $ 334,575 , respectively, were included in accounts payable and accrued expenses, and other noncurrent liabilities, at July 31, 2023.

Operating lease liabilities of $ 355,183 and $ 374,570 , respectively, were included in accounts payable and accrued expenses, and other noncurrent liabilities at October 31, 2022.

Operating lease expense recognized during the three months and nine months ended July 31, 2023 totaled $ 109,145 and $ 321,621 , respectively.

Operating lease expense recognized during the three months and nine months ended July 31, 2022 totaled $ 103,333 and $ 310,000 , respectively.

The weighted average remaining lease term was 23.6 months and the weighted average discount rate was 7.2 % as of July 31, 2023.

For the three months and nine months ended July 31, 2023, cash paid for operating lease liabilities totaled $ 110,025 and $ 328,992 , respectively.

For the three months and nine months ended July 31, 2022, cash paid for operating lease liabilities totaled $ 108,683 and $ 323,802 , respectively.

For the nine months ended July 31, 2023 and 2022, there were no right-of-use assets obtained in exchange for new operating lease liabilities.

Finance lease right-of-use assets of $ 148,716 and $ 170,839 were included in other assets at July 31, 2023 and October 31, 2022, respectively.

Finance lease liabilities of $ 37,017 and $ 102,984 , respectively, were included in accounts payable and accrued expenses, and other noncurrent liabilities at July 31, 2023.

Finance lease liabilities of $ 35,724 and $ 130,911 , respectively, were included in accounts payable and accrued expenses, and other noncurrent liabilities at October 31, 2022.

Interest expense related to the finance lease totaled $ 1,734 and $ 5,517 , respectively, for the three months and nine months ended July 31, 2023.

Interest expense related to the finance lease totaled $ 2,150 and $ 6,751 , respectively, for the three months and nine months ended July 31, 2022.

For the three months ended July 31, 2023 and 2022, amortization expense related to the finance lease totaled $ 7,374 .

For the nine months ended July 31, 2023 and 2022, amortization expense related to the finance lease totaled $ 22,123 .

The remaining lease term for the finance lease is 37 months and the discount rate is 4.75 % as of July 31, 2023.

For the three months ended July 31, 2023, cash paid for the finance lease liability totaled $ 1,734 for interest and $ 8,983 for principal.

For the nine months ended July 31, 2023, cash paid for the finance lease liability totaled $ 5,517 for interest and $ 26,635 for principal.

For the three months ended July 31, 2022, cash paid for the finance lease liability totaled $ 2,150 for interest and $ 8,567 for principal.

For the nine months ended July 31, 2022, cash paid for the finance lease liability totaled $ 6,751 for interest and $ 25,401 for principal.

The Company’s short term leases have month-to-month terms.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Nine Months Ended July 31, 2023

The Company’s future payments due under leases reconciled to the lease liabilities are as follows:

Operating leases

Finance lease

Three Months Ended January 31, 2024

Operating lease right-of-use assets of $ 502,998 and $ 596,578 were included in other assets at January 31, 2024 and October 31, 2023, respectively.

Operating lease liabilities of $ 378,805 and $ 163,099 , respectively, were included in accounts payable and accrued expenses, and other noncurrent liabilities, at January 31, 2024.

Operating lease liabilities of $ 414,159 and $ 227,925 , respectively, were included in accounts payable and accrued expenses, and other noncurrent liabilities at October 31, 2023.

Operating lease expense recognized during the three months ended January 31, 2024 and 2023 totaled $ 109,144 and $ 103,333 , respectively.

The weighted average remaining lease term was 18.6 months and the weighted average discount rate was 7.4 % as of January 31, 2024.

For the three months ended January 31, 2024 and 2023, cash paid for operating lease liabilities totaled $ 111,188 and $ 109,815 , respectively.

For the three months ended January 31, 2024, there were no right-of-use assets obtained in exchange for new operating lease liabilities.

For the three months ended January 31, 2023, right-of-use assets obtained in exchange for new operating lease liabilities totaled $ 316,028 and there was a reduction in right-of-use assets for modified operating lease liabilities totaling $ 15,719 .

Finance lease right-of-use assets of $ 133,968 and $ 141,342 were included in other assets at January 31, 2024 and October 31, 2023, respectively.

Finance lease liabilities of $ 37,905 and $ 83,806 , respectively, were included in accounts payable and accrued expenses, and other noncurrent liabilities at January 31, 2024.

Finance lease liabilities of $ 37,459 and $ 93,451 , respectively, were included in accounts payable and accrued expenses, and other noncurrent liabilities at October 31, 2023.

Interest expense related to the finance lease totaled $ 1,518 and $ 1,944 , respectively, for the three months ended January 31, 2024 and 2023.

For the three months ended January 31, 2024 and 2023, amortization expense related to the finance lease totaled $ 7,374 .

The remaining lease term for the finance lease is 31 months and the discount rate is 4.75 % as of January 31, 2024.

For the three months ended January 31, 2024, cash paid for the finance lease liability totaled $ 1,518 for interest and $ 9,199 for principal.

For the three months ended January 31, 2023, cash paid for the finance lease liability totaled $ 1,944 for interest and $ 8,773 for principal.

The Company’s future payments due under leases reconciled to the lease liabilities are as follows:

Total undiscounted lease payments

1 unchanged sentence

Total lease liability

(1) Remaining three months of fiscal year 2023.

(8)       

(1) Remaining nine months of fiscal year 2024.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months Ended January 31, 2024

Fair Value Measurements

The carrying amounts reported in the condensed consolidated balance sheets as of July 31, 2023 and October 31, 2022 for cash, restricted cash, trade accounts receivable, other receivables, current installments of long-term debt, accounts payable and accrued expenses, and accrued compensation and payroll taxes approximate fair value because of the short maturity of these instruments.

The carrying value of the Company’s note payable, revolver –

noncurrent approximates fair value based on the variable interest rate of the revolver, which is the market rate as of July 31, 2023 and October 31, 2022.

The carrying amounts reported in the condensed consolidated balance sheets as of January 31, 2024 and October 31, 2023 for cash, trade accounts receivable, income taxes refundable – current, other receivables, current installments of long-term debt, accounts payable and accrued expenses, accrued compensation and payroll taxes, and income taxes payable approximate fair value because of the short maturity of these instruments.

The carrying value of the Company’s note payable, revolver – noncurrent, and long-term debt, excluding current installments, approximates fair value because the interest rates vary with the market.

Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

(9)       

Net Income (Loss) Per Share

3 unchanged sentences

Three months ended

Nine months ended

Net income (loss) (numerator)

1 unchanged sentence

Basic and diluted net income (loss) per share

Weighted average unvested shares for the three months and nine months ended July 31, 2022 totaling 377,470 and 351,340 , respectively, while issued and outstanding, were not included in the computation of basic and diluted net loss per share for the three months and nine months ended July 31, 2022 (because to include such shares would have been antidilutive, or in other words, to do so would have reduced the net loss per share for that period).

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Nine Months Ended July 31, 2023

(10)      

Weighted average unvested shares for the three months ended January 31, 2024 totaling 142,565 , while issued and outstanding, were not included in the computation of basic and diluted net loss per share for the three months ended January 31, 2024 (because to include such shares would have been antidilutive, or in other words, to do so would have reduced the net loss per share for that period).

Segment Information and Business and Credit Concentrations

The Company provides credit, in the normal course of business, to various commercial enterprises, governmental entities and not‑for‑profit organizations.

Concentration of credit risk with respect to trade receivables is normally limited due to the Company’s large number of customers.

The Company provides credit, in the normal course of business, to various commercial enterprises, governmental entities and not‑for‑profit organizations.

Concentration of credit risk with respect to trade receivables is normally limited due to the Company’s large number of customers.

The Company also manages exposure to credit risk through credit approvals, credit limits and monitoring procedures.

Management believes that credit risks as of July 31, 2023 have been adequately provided for in the condensed consolidated financial statements.

Management believes that credit risks as of January 31, 2024 have been adequately provided for in the condensed consolidated financial statements.

The Company includes all entities under common ownership for the purpose of calculating business concentrations.

For the three months and nine months ended July 31, 2023, 16.1 % and 16.3 %, respectively, of consolidated net sales were attributable to one national distributor customer.

For the three months and nine months ended July 31, 2022, 15.8 % and 16.7 %, respectively, of consolidated net sales were attributable to one national distributor customer.

For the three months ended January 31, 2024 and 2023, 15.5 % and 14.8 %, respectively, of consolidated net sales were attributable to one national distributor customer.

The Company has a single reportable segment for purposes of segment reporting.

(11)      

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months Ended January 31, 2024

Revenue Recognition

Revenues consist of product sales that are recognized at a specific point in time under the core principle of recognizing revenue when control transfers to the customer.

The Company considers customer purchase orders, governed by master sales agreements or the Company’s standard terms and conditions, to be the contract with the customer.

For each contract, the promise to transfer the control of the products, each of which is individually distinct, is considered to be the identified performance obligation.

The Company evaluates each customer’s credit risk when determining whether to accept a contract.

In determining transaction prices, the Company evaluates whether fixed order prices are subject to adjustment to determine the net consideration to which the Company expects to be entitled.

3 unchanged sentences

Since the Company typically invoices the customer at the same time that performance obligations are satisfied, no contract assets are recognized.

The Company’s contract liability represents advance consideration received from customers prior to transfer of the product.

This liability was $ 82,500 as of July 31, 2023 and $ 317,310 as of October 31, 2022.

Sales to certain customers are made pursuant to agreements that provide price adjustments and limited return rights with respect to the Company’s products.

The Company’s contract liability represents advance consideration received from customers prior to transfer of the product.

This liability was $ 89,325 as of January 31, 2024 and $ 110,336 as of October 31, 2023.

Sales to certain customers are made pursuant to agreements that provide price adjustments and limited return rights with respect to the Company’s products.

The Company maintains a reserve for estimated future price adjustment claims, rebates and returns as a refund liability.

The Company’s refund liability was $ 225,899 as of July 31, 2023 and $ 233,494 as of October 31, 2022.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Nine Months Ended July 31, 2023

The Company’s refund liability was $ 291,823 as of January 31, 2024 and $ 252,264 as of October 31, 2023.

The Company offers standard product warranty coverage which provides assurance that its products will conform to contractually agreed-upon specifications for a limited period from the date of shipment.

5 unchanged sentences

The commissions are expensed as selling expenses during the period that the related products are transferred to customers.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months Ended January 31, 2024

Disaggregation of Revenue

The following table presents net sales attributable to the United States and all other countries in total for the three months and nine months ended July 31, 2023 and 2022:

The following table presents net sales attributable to the United States and all other countries in total for the three months ended January 31, 2024 and 2023:

Three months ended

Nine months ended

United States

1 unchanged sentence

Total net sales

(12)      

Restricted Cash and Gain on Insurance Proceeds

Restricted Cash

At the end of December 2022, an office building and its contents at the Company’s Asheville facilities sustained water damage resulting from a burst pipe in the sprinkler system.

The office building is separate from the Company’s manufacturing building which houses its manufacturing operations and certain offices at the same location.

The Company has insurance coverage for the office building, its contents and certain business expenses to cover damages and any losses incurred.

As of July 31, 2023, the Company has restricted cash of $ 1,517,885 , resulting from the receipt of a portion of the proceeds from the insurance claim for which offsetting expenses have not yet been incurred.

The insurance proceeds recorded as restricted cash relate to the collateral for the Company’s real estate term loans with Northeast Bank and, as a result, are held in escrow.

Cash may be released from escrow as the Company submits details of expenses incurred for restoration and repair of the related property to Northeast Bank.

Any cash remaining in escrow after any restoration and repairs are completed, will be available for the benefit of the Company or to pay down the real estate term loans once Northeast Bank is satisfied that the collateral has been returned to an acceptable state.

Cash may also be released from escrow in the event the Company pays off the real estate term loans with Northeast Bank.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Nine Months Ended July 31, 2023

Gain on Insurance Proceeds

During the second and third fiscal quarters of fiscal year 2023, the Company received insurance proceeds in connection with the office building and its contents at the Company’s Asheville facilities sustaining water damage from a burst pipe at the end of December 2022.

The office building damaged is separate from the Company’s manufacturing building, which houses its manufacturing operations and certain offices at the same location.

There was no significant impact to the Company’s operations as a result of this event.

Insurance proceeds for all assets covered, net of applicable deductibles, received through July 31, 2023 totaled $ 2,328,515 .

During the first nine months of fiscal year 2023, the Company recorded a loss on property and equipment totaling $ 7,538 and incurred expenses for building stabilization and cleaning, removal of damaged items, and other miscellaneous and related activities totaling $ 376,345 .

Insurance proceeds received in excess of expenses incurred through July 31, 2023, a net total of $ 1,952,170 , is included in other income (expense), net as a gain on insurance proceeds received for damage to property and equipment on the Company’s condensed consolidated statement of operations.

To the extent the Company incurs expenses in future periods for renovation, repair or replacement or damaged assets, the Company may recognize offsetting losses in those future periods.

The Company does not expect any future restoration and repair costs to exceed any insurance proceeds.

(13)     

Contingencies          

From time to time, the Company is involved in various claims, legal actions and regulatory reviews arising in the ordinary course of business.

In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

New Accounting Standards Not Yet Adopted

There are no new accounting standards issued, but not yet adopted by the Company, which are expected to materially impact the Company’s financial position, operating results or financial statement disclosures.

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations

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.

The Company is currently evaluating the impact ASU 2023-09 will have on its 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.

The Company is currently evaluating the impact ASU 2023-09 will have on its financial statement disclosures.

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

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. 

or “OCC®”), the Company’s future results of operations and future financial condition, and/or the future equity value of the Company.

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:

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dollar relative to certain foreign currencies) and import and/or export tariffs imposed by the U.S.

and other countries that affect certain geographic markets, industry market sector, and/or the economy as a whole;

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;

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significant variations in sales resulting from:

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;

(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;

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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;

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;

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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;

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;

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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;

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We caution readers that the foregoing list of important factors is not exclusive.

Furthermore, we incorporate by reference those factors included in current reports on Form 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.

Furthermore, we incorporate by reference those factors included in current reports on Form 8‑K and/or in our other filings.

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.

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 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.

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 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.

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We market and sell the products manufactured at our Dallas facility through our wholly owned subsidiary Applied Optical Systems, Inc.

(“AOS”) under the names Optical Cable Corporation and OCC®

by the efforts of our integrated OCC sales team.

(“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 2023

Consolidated net sales for the third quarter of fiscal year 2023 decreased 2.5% to $16.9 million, compared to $17.4 million for the same period last year.

Consolidated net sales for the first nine months of fiscal year 2023 increased 11.9% to $54.8 million, compared to net sales of $49.0 million for the same period last year.

Gross profit increased 6.4% to $5.1 million in the third quarter of fiscal year 2023, compared to $4.8 million for the third quarter of fiscal year 2022.

For the first nine months of fiscal year 2023, gross profit increased 32.6% to $18.4 million, compared to gross profit of $13.9 million in the first nine months of fiscal year 2022.

Gross profit margin (gross profit as a percentage of net sales) increased to 30.2% during the third quarter of fiscal year 2023, compared to 27.7% for the third quarter of fiscal year 2022.

Gross profit margin increased to 33.6% in the first nine months of fiscal year 2023, compared to 28.3% for the same period last year.

SG&A expenses were $5.0 million during the third quarters of fiscal years 2023 and 2022.

SG&A expenses as a percentage of net sales were 29.3% during the third quarter of fiscal year 2023, compared to 28.5% during the same period in fiscal year 2022.

In the first nine months of fiscal year 2023, SG&A expenses as a percentage of net sales were 29.3%, compared to 30.1% for the same period of fiscal year 2022.

Net income was $101,000, or $0.01 per share, during the third quarter of fiscal year 2023, compared to a net loss of $372,000, or $0.05 per share, for the comparable period last year.

Net income for the first nine months of fiscal year 2023 was $3.3 million, or $0.42 per share, compared to a net loss of $1.5 million, or $0.20 per share, for the first nine months of fiscal year 2022.

During the second and third quarters of fiscal year 2023, we received insurance proceeds in connection with our office building and its contents at our Asheville facilities sustaining water damage from a burst pipe at the end of December 2022.

As a result, we recognized a gain on insurance proceeds received for damage to property and equipment totaling $256,000 during the third quarter of fiscal year 2023 and totaling $2.0 million during the first nine months of fiscal year 2023, which is reflected as income under other income (expense), net.

To the extent we incur expenses in future periods to restore, repair or replace damaged assets, we may recognize offsetting losses in those future periods.

At this time, we do not expect any future restoration and repair costs to exceed any insurance proceeds.

The office building damaged is separate from our manufacturing building, which houses our manufacturing operations and certain offices at the same location.

There was no significant impact to our operations as a result of this event.

OCC’s wholly owned subsidiary Centric Solutions LLC (“Centric Solutions”) provides cabling and connectivity solutions for the data center market.

Centric Solutions’ business is located at OCC’s facility near Dallas, Texas.

Optical Cable Corporation™, OCC ® , Procyon ® , Superior Modular Products™, SMP Data Communications™, Applied Optical Systems™, Centric Solutions™ and associated logos are trademarks of Optical Cable Corporation.

Summary of Company Performance for First Quarter of Fiscal Year 2024

Consolidated net sales for the first quarter of fiscal year 2024 decreased 18.8% to $14.9 million, compared to $18.3 million for the same period last year, which we believe is consistent with weakness being experienced in our industry generally and in certain of our target markets.

Gross profit decreased 43.1% to $3.7 million in the first quarter of fiscal year 2024, compared to $6.5 million for the first quarter of fiscal year 2023.

Gross profit margin (gross profit as a percentage of net sales) was 25.0% during the first quarter of fiscal year 2024, compared to 35.7% for the first quarter of fiscal year 2023.

SG&A expenses were $5.1 million during the first quarter of fiscal year 2024, compared to $5.5 million for the same period last year.

SG&A expenses as a percentage of net sales were 34.3% during the first quarter of fiscal year 2024, compared to 29.8% during the same period in fiscal year 2023.

Net loss was $1.4 million, or $0.18 per share, during the first quarter of fiscal year 2024, compared to net income of $810,000, or $0.10 per share, for the comparable period last year.

Results of Operations

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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.

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.

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Three Months Ended

Nine Months Ended

SG&A expenses

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Net income (loss)

Three Months Ended July 31, 2023 and 2022

Consolidated net sales for the third quarter of fiscal year 2023 decreased 2.5% to $16.9 million, compared to net sales of $17.4 million for the same period last year.

We experienced a decrease in net sales in our enterprise market in the third quarter of fiscal year 2023, compared to the same period last year, but the decrease was partially offset by increases in net sales in our specialty markets.

Net sales to customers in the United States decreased 3.1%, or $448,000, while net sales to customers outside of the United States remained flat at $2.7 million in the third quarter of fiscal year 2023 and 2022.

Three Months Ended January 31, 2024 and 2023

Consolidated net sales for the first quarter of fiscal year 2024 decreased 18.8% to $14.9 million, compared to net sales of $18.3 million for the same period last year.

We experienced a decrease in net sales primarily in our enterprise and wireless carrier markets in the first quarter 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.

Net sales to customers in the United States decreased 17.9% and net sales to customers outside of the United States decreased 22.1% in the first 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.

Our sales order backlog/forward load continues to remain at higher than typical levels, although decreasing to approximately $6.8 million at the end of the third quarter of fiscal year 2023, compared to approximately $8.0 million at the end of the second quarter of fiscal year 2023 and more than $12.0 million at the end of the fourth quarter of fiscal year 2022.

Net sales for the third quarter of fiscal year 2023 were negatively impacted by various macroeconomic pressures, risks and uncertainties as well as a brief shutdown in our manufacturing operations resulting from a cyber incident that occurred in June 2023.

While certain of our markets are showing signs of continued softening (including our enterprise and wireless carrier markets), we believe there are positive indicators in certain of our other markets.

Additionally, our manufacturing operations have returned to normal functionality after being impacted by the cyber incident that occurred in June 2023.

Our gross profit was $5.1 million in the third quarter of fiscal year 2023, an increase of 6.4% compared to gross profit of $4.8 million in the third quarter of fiscal year 2022.

Gross profit margin, or gross profit as a percentage of net sales, increased to 30.2% in the third quarter of fiscal year 2023 compared to 27.7% in the third quarter of fiscal year 2022.

Our gross profit margins tend to be higher when we achieve higher net sales levels due to our operating leverage, as certain fixed manufacturing costs are spread over higher sales.

We experienced improved gross profit margins when comparing the third quarter of fiscal year 2023 to the same period in 2022, despite a decrease in net sales levels when comparing the two periods.

We attribute this improvement to gains in production efficiencies as well as the impact of a more fully trained workforce.

While we experienced improvement in production labor recruitment during the third quarter of fiscal year 2022 needed to increase production capacity at the time, the training of the new employees impacts labor costs and efficiency until those employees are fully trained and operating at capacity.

The first quarter 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 quarter of fiscal year 2024, our sales order backlog/forward load remains at a more typical level of approximately $5.0 million.

Additionally, net sales for the first quarter of fiscal year 2024 were negatively impacted by various macroeconomic pressures, risks and uncertainties in our industry.

While certain of our markets continue to show signs of softness (including our enterprise and wireless carrier markets), we believe there are positive indicators in certain of our other markets.

Overall, we expect our net sales to begin to grow compared to the first quarter of fiscal year 2024 during fiscal year 2024.

Our gross profit was $3.7 million in the first quarter of fiscal year 2024, a decrease of 43.1% compared to gross profit of $6.5 million in the first quarter of fiscal year 2023.

Gross profit margin, or gross profit as a percentage of net sales, was 25.0% in the first quarter of fiscal year 2024 compared to 35.7% in the first quarter of fiscal year 2023.

Gross profit margin for the first quarter 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 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—including manufacturers and distributors.

Our planned restraint in this regard is consistent with our view of expected opportunities as we continue fiscal year 2024, 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 were $5.0 million during the third quarter of fiscal years 2023 and 2022.

SG&A expenses as a percentage of net sales were 29.3% in the third quarter of fiscal year 2023, compared to 28.5% in the third quarter of fiscal year 2022.

SG&A expenses decreased to $5.1 million during the first quarter of fiscal year 2024, compared to $5.5 million during the first quarter of fiscal year 2023.

SG&A expenses as a percentage of net sales were 34.3% in the first quarter of fiscal year 2024, compared to 29.8% in the first quarter of fiscal year 2023, as fixed SG&A expenses were spread over lower net sales.

The decrease in SG&A expenses during the first quarter 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 $210,000 and shipping costs totaling $107,000.

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 quarter 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 $7,000 during the third quarter of fiscal years 2023 and 2022.

We recognized royalty expense, net of royalty income, totaling $7,000 during the first 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 2023 and 2022.

Income (loss) from operations

We reported income from operations of $138,000 for the third quarter of fiscal year 2023, compared to a loss from operations of $166,000 for the third quarter of fiscal year 2022.

Other Income (Expense), Net

We recognized other expense, net in the third quarter of fiscal year 2023 of $39,000, compared to $196,000 in the third quarter of fiscal year 2022.

Other expense, net for the fiscal quarter ended July 31, 2023 is comprised primarily of interest expense and other miscellaneous items, partially offset by the gain on insurance proceeds received for damage to property and equipment totaling $256,000.

The decrease in other expense, net during the third quarter of fiscal year 2023 compared to the same period last year was primarily due to the gain on insurance proceeds received.

During the third quarter of fiscal year 2023, we received additional insurance proceeds in connection with our office building and its contents at our Asheville facilities sustaining water damage from a burst pipe in a sprinkler system at the end of December 2022.

In connection with this event, we recognized a gain on insurance proceeds received for damage to property and equipment during the third quarter of fiscal year 2023 totaling $256,000.

Also see additional information regarding the gain on insurance proceeds received for damage to property and equipment in the description below under Other Income (Expense), Net for the nine months ended July 31, 2023.

To the extent we incur expenses in future periods to restore, repair or replace damaged assets, we may recognize offsetting losses in those future periods.

At this time, we do not expect future restoration and repair costs to exceed any insurance proceeds.

The office building sustaining water damage at our Asheville facilities is separate from our manufacturing building, which houses our manufacturing operations and certain offices at the same location.

There was no significant impact to our operations as a result of this event.

Income (Loss) Before Income Taxes

We reported income before income taxes of $100,000 for the third quarter of fiscal year 2023, compared to a loss before income taxes of $362,000 for the third quarter of fiscal year 2022.

The improvement was primarily due to the increase in gross profit of $308,000, and the gain on insurance proceeds received for damage to property and equipment of $256,000.

Income Tax Expense (Benefit)

Income tax benefit totaled $1,000 in the third quarter of fiscal year 2023, compared to income tax expense of $10,000 in the third quarter of fiscal year 2022.

Our effective tax rate was less than negative one percent for the third quarter of fiscal year 2023 and negative 2.7% for the third quarter of fiscal year 2022.

Fluctuations in our effective tax rates are primarily due to permanent differences in U.S.

GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level such that permanent differences in U.S.

GAAP and tax accounting treatment have a disproportional impact on the projected effective tax rate.

We previously established a valuation allowance against all of our net deferred tax assets.

As a result of establishing a full valuation allowance against our net deferred tax assets, if we generate sufficient taxable income in subsequent periods to realize a portion or all of our net deferred tax assets, our effective income tax rate could be unusually low due to the tax benefit attributable to the necessary decrease in our valuation allowance.

Further, if we generate losses before taxes in subsequent periods, our effective income tax rate could also be unusually low as any increase in our net deferred tax asset from such a net operating loss for tax purposes would be offset by a corresponding increase to our valuation allowance against our net deferred tax assets.

If we generate sufficient income before taxes in subsequent periods such that U.S.

GAAP would permit us to conclude that the removal of any valuation allowance against our net deferred tax asset is appropriate, then during the period in which such determination is made, we will recognize the non-cash benefit of such removal of the valuation allowance in income tax expense on our consolidated statement of operations, which will increase net income and will also increase the net deferred tax asset on our consolidated balance sheet.

If we do not generate sufficient income before taxes in subsequent periods such that U.S.

GAAP would permit us to conclude that the reduction or removal of any valuation allowance against our net deferred tax asset is appropriate, then no such non-cash benefit would be realized.

There can be no assurance regarding any future realization of the benefit by us of all or part of our net deferred tax assets.

As of October 31, 2022, the valuation allowance against our total gross deferred tax assets totaled $4.4 million.

Net Income (Loss)

Net income for the third quarter of fiscal year 2023 was $101,000, or $0.01 per share, compared to a net loss of $372,000, or $0.05 per share, for the third quarter of fiscal year 2022.

This improvement was primarily due to the increase in income before income taxes of $462,000, which includes the $256,000 gain on insurance proceeds received for damage to property and equipment included in other income, net.

Nine Months Ended July 31, 2023 and 2022

Consolidated net sales for the first nine months of fiscal year 2023 were $54.8 million, an increase of 11.9% compared to net sales of $49.0 million for the same period last year.

We experienced increases in net sales in our specialty markets in the first nine months of fiscal year 2023, compared to the same period last year, but the increases were partially offset by decreases in net sales in our enterprise market.

Net sales to customers in the United States increased 7.3%, or $3.0 million, and net sales to customers outside of the United States increased 37.7%, or $2.8 million, in the first nine months of fiscal year 2023, compared to the same period last year.

We can experience fluctuations in sales from quarter to quarter in the various markets in which we operate for various reasons. 

Our sales order backlog/forward load continues to remain at higher than typical levels, although decreasing to approximately $6.8 million at the end of the first nine months of fiscal year 2023, compared to approximately $8.0 million at the end of the second quarter of fiscal year 2023 and more than $12.0 million at the end of fiscal year 2022.

While we experienced some negative impacts to net sales during the first nine months of fiscal year 2023 by various macroeconomic pressures, risks and uncertainties in addition to the softening of certain of our markets, we believe there are positive indicators in certain of our other markets.

We believe our net sales benefited from increased production throughput during the first nine months of fiscal year 2023, compared to the same period last year, as well as our higher than typical levels of sales order backlog/forward load.

Additionally, improved product pricing, increased to cover certain inflationary costs, began to take effect for new orders received during the latter half of fiscal year 2022.

Our gross profit was $18.4 million in the first nine months of fiscal year 2023, an increase of 32.6% compared to gross profit of $13.9 million in the first nine months of fiscal year 2022.

Gross profit margin increased to 33.6% in the first nine months of fiscal year 2023 compared to 28.3% in the first nine months of fiscal year 2022.

Our gross profit margins tend to be higher when we achieve higher net sales levels due to our operating leverage as certain fixed manufacturing costs are spread over higher sales.

We experienced improved gross profit margins when comparing the first nine months of fiscal year 2023 to the same period in 2022.

We attribute this improvement to the positive impact of our operating leverage as sales levels increased, gains in production efficiencies, as well as the impact of a more fully trained workforce.

Our gross profit margin percentages are also heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix.

Selling, General, and Administrative Expenses

SG&A expenses increased 8.8% to $16.1 million during the first nine months of fiscal year 2023, compared to $14.8 million for the same period last year.

SG&A expenses as a percentage of net sales were 29.3% in the first nine months of fiscal year 2023, compared to 30.1% in the first nine months of fiscal year 2022.

The increase in SG&A expenses during the first nine months of fiscal year 2023 compared to the same period last year was primarily the result of increases in employee and contracted sales personnel related costs totaling $1.1 million.

Included in employee and contracted sales personnel related costs are employee incentives and commissions which increased due to increased net sales and the improved financial results during the first nine months of fiscal year 2023.

Also contributing to the increase in SG&A expenses during the first nine months of fiscal year 2023 were increases in shipping expenses and increases in travel and marketing expenses.

Shipping expenses increased due to the increase in net sales and the increase in the costs charged by shippers, when compared to the same period last year.

Travel and marketing expenses increased due to the return to a more typical level of business travel and an increase in the number of, and the attendance at, tradeshows during the first nine months of fiscal year 2023, when compared to the same period last year.

Royalty Income (Expense), Net

We recognized royalty expense, net of royalty income, totaling $20,000 during the first nine months of fiscal years 2023 and 2022.

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 $40,000 of amortization expense, associated with intangible assets, during the first nine months of fiscal year 2023, compared to $37,000 during the first nine months of fiscal year 2022.

We recognized $14,000 of amortization expense, associated with intangible assets, during the first quarter of fiscal year 2024, compared to $13,000 for the first quarter of fiscal year 2023.

Income (loss) from operations

We reported income from operations of $2.3 million for the first nine months of fiscal year 2023, compared to a loss from operations of $941,000, for the first nine months of fiscal year 2022.

We reported a loss from operations of $1.4 million for the first quarter of fiscal year 2024, compared to income from operations of $1.0 million for the first quarter of fiscal year 2023.

Other Income (Expense), Net

We recognized other income, net in the first nine months of fiscal year 2023 of $1.2 million, compared to other expense, net of $578,000 in the first nine months of fiscal year 2022.

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 income, net during the first nine months of fiscal year 2023 compared to the same period last year was primarily due to the insurance proceeds received.

In connection with this event, we recognized a gain on insurance proceeds received for damage to property and equipment during the first nine months of fiscal year 2023 totaling $2.0 million.

To the extent we incur expenses in future periods to restore, repair or replace damaged assets, we may recognize offsetting losses in those future periods.

At this time, we do not expect any future restoration and repair costs to exceed any insurance proceeds.

There was no significant impact to our operations as a result of this event.

We recognized other expense, net in the first quarter of fiscal year 2024 of $19,000, compared to $203,000 in the first quarter of fiscal year 2023.

Other expense, net for the fiscal quarter ended January 31, 2024 is comprised primarily of interest expense and other miscellaneous items, partially offset by gain on insurance proceeds for damage to property and equipment totaling $235,000.

The decrease in other expense, net during the first quarter of fiscal year 2024 compared to the same period last year was primarily due to the gain on insurance proceeds.

Income (Loss) Before Income Taxes

We reported income before income taxes of $3.4 million for the first nine months of fiscal year 2023, compared to a loss before income taxes of $1.5 million for the first nine months of fiscal year 2022.

The improvement was primarily due to the increase in gross profit of $4.5 million, and the gain on insurance proceeds received for damage to property and equipment of $2.0 million, partially offset by the increase in SG&A expenses of $1.3 million.

Income Tax Expense (Benefit)

Income tax expense totaled $106,000 in the first nine months of fiscal year 2023, compared to $17,000 in the first nine months of fiscal year 2022.

Our effective tax rate was 3.1% for the first nine months of fiscal year 2023 and negative 1.1% for the first nine months of fiscal year 2022.

We reported a loss before income taxes of $1.4 million for the first quarter of fiscal year 2024, compared to income before income taxes of $842,000 for the first quarter of fiscal year 2023.

The change was primarily due to the decrease in gross profit of $2.8 million, partially offset by the decrease in SG&A expenses of $362,000 and the gain on insurance proceeds for damage to property and equipment of $235,000.

Income Tax Expense

Income tax expense totaled $7,000 in the first quarter of fiscal year 2024, compared to $32,000 in the first quarter of fiscal year 2023.

Our effective tax rate was less than negative one percent for the first quarter of fiscal year 2024 and 3.9% for the first quarter of fiscal year 2023.

Fluctuations in our effective tax rates are primarily due to permanent differences in U.S.

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Net Income (Loss)

This change was primarily due to the increase in income before income taxes of $5.0 million, which includes the $2.0 million gain on insurance proceeds received for damage to property and equipment.

Net loss for the first quarter of fiscal year 2024 was $1.4 million, or $0.18 per share, compared to net income of $810,000, or $0.10 per share, for the first quarter of fiscal year 2023.

This change was primarily due to the decrease in income before income taxes of $2.3 million.

Financial Condition

Total assets increased $5.0 million, or 12.3%, to $45.6 million at July 31, 2023, from $40.6 million at October 31, 2022.

This increase was primarily due to a $5.5 million increase in inventories and a $1.5 million increase in restricted cash.

Inventories increased largely as the result of the timing of certain raw material purchases, increases in work in process levels related to pending shipments, and the increase in finished goods inventory resulting from higher replenishment rates of stock inventory toward targeted levels.

Restricted cash increased resulting from the receipt of a portion of the proceeds from the insurance claim related to water damage from a burst pipe in the sprinkler system in our Asheville office building for which offsetting expenses have not yet been incurred.

The insurance proceeds recorded in restricted cash relate to the collateral for the Company’s real estate term loans with Northeast Bank and, as a result, are held in escrow.

Cash may be released from escrow as the Company submits details of expenses incurred for restoration and repair of the related property to Northeast Bank.

Cash may also be released from escrow in the event the Company pays off the real estate term loans with Northeast Bank.

Total liabilities increased $1.3 million, or 7.1%, to $19.7 million at July 31, 2023, from $18.4 million at October 31, 2022.

The increase in total liabilities was primarily due to net borrowings on our Revolver totaling $1.3 million.

Total shareholders’

equity at July 31, 2023 increased $3.7 million in the first nine months of fiscal year 2023.

The increase resulted from net income of $3.3 million and share-based compensation, net of $347,000.

Total assets decreased $3.4 million, or 7.7%, to $40.5 million at January 31, 2024, from $43.9 million at October 31, 2023.

This decrease was primarily due to a $1.2 million decrease in cash, a $1.3 million decrease in trade accounts receivable, net, and a $744,000 decrease in inventories.

Further detail regarding the decrease in cash is provided in our discussion of “Liquidity and Capital Resources.” The decrease in trade accounts receivable, net resulted from the decrease in net sales in the first quarter of fiscal year 2024 when compared to the fourth quarter of fiscal year 2023.

Inventories decreased largely as the result of the timing of certain raw material purchases and decreases in work in process levels related to lower levels of open orders at the end of the first quarter of fiscal year 2024 when compared to the fourth quarter of fiscal year 2023.

Total liabilities decreased $2.0 million, or 10.5%, to $17.1 million at January 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 $1.0 million, primarily resulting from the timing of certain vendor and payroll related payments, and net repayments on our Revolver totaling $864,000.

Total shareholders’ equity at January 31, 2024 decreased $1.4 million in the first quarter of fiscal year 2024 resulting from a net loss of $1.4 million.

Liquidity and Capital Resources

Our primary capital needs have been to fund working capital requirements through payments on our Revolver.

Our primary source of capital for these purposes has been existing cash, cash provided by operations and borrowings under our Revolver (see “Credit Facilities”

Our unrestricted cash of $193,000 and restricted cash of $1.5 million totaled $1.7 million as of July 31, 2023, an increase of $1.5 million compared to unrestricted cash of $216,000 as of October 31, 2022.

The increase in cash and restricted cash for the nine months ended July 31, 2023 primarily resulted from insurance proceeds received for damage to property and equipment totaling $2.0 million, net, and cash provided by financing activities of $845,000, partially offset by cash used in operating activities of $929,000.

On July 31, 2023, we had working capital of $23.2 million, excluding restricted cash of $1.5 million, compared to $23.7 million on October 31, 2022.

The ratio of current assets, excluding restricted cash of $1.5 million, to current liabilities as of July 31, 2023 was 3.0 to 1.0 compared to 4.2 to 1.0 as of October 31, 2022.

The increase in working capital, excluding restricted cash, was primarily due to the increase in inventories of $5.5 million, partially offset by the decrease in trade accounts receivable, net of $1.7 million and the increase in current installments of long-term debt of $3.9 million.

The decrease in the current ratio, excluding restricted cash, was primarily due to the fact that current assets, excluding restricted cash, increased 12.2% while current liabilities increased 57.9%.

As of July 31, 2023 and October 31, 2022, we had outstanding loan balances under our Revolver totaling $7.3 million and $6.0 million, respectively.

As of July 31, 2023 and October 31, 2022, we had other outstanding bank loan balances, excluding our Revolver, totaling $4.3 million and $4.5 million, respectively.

Net cash used in operating activities was $929,000 in the first nine months of fiscal year 2023, compared to $1.7 million for the first nine months of fiscal year 2022.

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 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 operating activities during the first nine months of fiscal year 2022 primarily resulted from an increase in inventories totaling $2.4 million and the cash flow impact of increases in trade accounts receivable, net totaling $1.8 million, partially offset by certain adjustments to reconcile a net loss of $1.5 million to net cash used in operating activities including depreciation and amortization of $820,000 and share-based compensation expense of $325,000.

Additionally, the cash flow impact of decreases in other receivables of $2.2 million and increases in accounts payable and accrued expenses of $920,000 further contributed to offset net cash used in operating activities.

Net cash provided by investing activities totaled $1.6 million in the first nine months of fiscal year 2023, compared to net cash used in investing activities of $216,000 in the first nine months of fiscal year 2022.

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 investing activities during the first nine months of fiscal year 2022 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment.

Net cash provided by financing activities totaled $845,000 for the first nine months of fiscal year 2023, compared to $2.0 million in the first nine months of fiscal year 2022.

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 debt totaling $253,000.

Net cash provided by financing activities in the first nine months of fiscal year 2022 resulted primarily from net proceeds on our revolving line of credit totaling $2.4 million, partially offset by principal payments on long-term debt totaling $243,000.

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 $221,000 as of January 31, 2024, a decrease of $1.2 million compared to $1.5 million as of October 31, 2023.

The decrease in cash for the three months ended January 31, 2024 primarily resulted from net cash used in operating activities of $261,000, capital expenditures of $80,000 and cash used in financing activities of $906,000 (including an $864,000 net reduction in our Revolver).

Our total cash of $1.5 million at October 31, 2023 was higher than is typically the case due to a short-term timing difference between the borrowings under our Revolver and expenditures as of October 31, 2023.

Under the terms of our Revolver, cash receipts are swept daily to reduce the Revolver balance outstanding.

On January 31, 2024, we had working capital of $25.1 million compared to $27.3 million on October 31, 2023.

The ratio of current assets to current liabilities as of January 31, 2024 was 4.7 to 1.0 compared to 4.5 to 1.0 as of October 31, 2023.

The decrease in working capital was primarily due to the decrease in cash of $1.2 million, the decrease in trade accounts receivable, net of $1.3 million and the decrease in inventories of $744,000, partially offset by the decrease in accounts payable and accrued expenses, including accrued compensation and payroll taxes, totaling $1.0 million.

The increase in the current ratio was primarily due to the fact that current assets decreased 9.1% while current liabilities decreased 13.4%.

As of January 31, 2024 and October 31, 2023, we had outstanding loan balances under our Revolver totaling $7.5 million and $8.3 million, respectively.

As of January 31, 2024 and October 31, 2023, we had other outstanding bank loan balances, excluding our Revolver, totaling $2.7 million.

Net cash used in operating activities was $261,000 in the first quarter of fiscal year 2024, compared to $630,000 for the first quarter of fiscal year 2023.

Net cash used in operating activities during the first quarter of fiscal year 2024 primarily resulted from the cash flow impact of decreases in accounts payable and accrued expenses, including accrued compensation and payroll taxes, totaling $1.2 million and adjustments to reconcile a net loss of $1.4 million to net cash used in operating activities for the gain on insurance proceeds totaling $235,000, partially offset by decreases in the cash flow impact of trade accounts receivable, net totaling $1.3 million, decreases in inventories totaling $744,000 and certain other adjustments to reconcile a net loss of $1.4 million to net cash used in operating activities including depreciation and amortization of $213,000 and share-based compensation expense of $159,000.

Net cash used in operating activities during the first quarter of fiscal year 2023 primarily resulted from an increase in inventories totaling $2.8 million, partially offset by certain adjustments to reconcile net income of $810,000 to net cash used in operating activities including depreciation and amortization of $248,000 and share-based compensation expense of $135,000.

Additionally, the cash flow impact of decreases in trade accounts receivable, net of $1.1 million and increases in accounts payable and accrued expenses of $120,000 further contributed to offset net cash used in operating activities.

Net cash used in investing activities totaled $80,000 in the first quarter of fiscal year 2024, compared to $106,000 in the first quarter of fiscal year 2023.

Net cash used in investing activities during the first quarter of fiscal years 2024 and 2023 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment.

Net cash used in financing activities totaled $906,000 for the first quarter of fiscal year 2024, compared to net cash provided by financing activities of $707,000 in the first quarter of fiscal year 2023.

Net cash used in financing activities in the first quarter of fiscal year 2024 resulted primarily from net repayments on our revolving line of credit totaling $864,000.

Net cash provided by financing activities in the first quarter of fiscal year 2023 resulted primarily from net proceeds on our revolving line of credit totaling $823,000, partially offset by principal payments on long-term debt totaling $83,000.

Credit Facilities

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

Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are with Northeast Bank, have a fixed interest rate of 3.95%, a termination date of May 1, 2024, if not refinanced prior to that time, and are secured by a first lien deed of trust on the Company’s real property.

The Revolver with North Mill Capital LLC (doing business as SLR Business Credit, “SLR”) provides us with one or more advances in an amount up to:

(a) 85% of the aggregate outstanding amount of eligible accounts (the “eligible accounts loan value”);

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 maturity date is May 5, 2026.

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

All other terms of the Virginia Real Estate Loan remain unaltered and remain in full force and effect.

The Company had an outstanding balance on its Virginia Real Estate Loan of $2.7 million, as of January 31, 2024.

The Revolver with North Mill Capital LLC (doing business as SLR Business Credit, “SLR”) provides us with one or more advances in an amount up to:

(a) 85% of the aggregate outstanding amount of eligible accounts (the “eligible accounts loan value”);

plus (b) the lowest of (i) an amount up to 35% of the aggregate value of eligible inventory, (ii) $5.0 million, and (iii) an amount not to exceed 100% of the then outstanding eligible accounts loan value;

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The maximum aggregate principal amount subject to the Revolver is $18.0 million.

Interest accrues on the daily balance at the per annum rate of 1.5% above the Prime Rate in effect from time to time, but not less than 4.75% (the “Applicable Rate”).

In the event of a default, interest may become 6.0% above the Applicable Rate.

As of July 31, 2023, the Revolver accrued interest at the prime lending rate plus 1.5% (resulting in a 10.0% rate at July 31, 2023).

As of January 31, 2024, the Revolver accrued interest at the prime lending rate plus 1.5% (resulting in a 10.0% rate at January 31, 2024).

The termination date of the Revolver is July 24, 2025 and the loan may be extended in one year periods subject to the agreement of SLR.

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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, 2023, we had $7.3 million of outstanding borrowings on our Revolver and $3.9 million in available credit.

As of January 31, 2024, we had $7.5 million of outstanding borrowings on our Revolver and $2.3 million in available credit.

Capital Expenditures

We did not have any material commitments for capital expenditures as of July 31, 2023.

We did not have any material commitments for capital expenditures as of January 31, 2024.

During our 2024 fiscal year budgeting process, we included an estimate for capital expenditures of $1.0 million for the fiscal year.

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

Our office building and its contents at our Asheville facilities sustained water damage from a burst pipe at the end of December 2022.

The office building damaged is separate from our manufacturing building, which houses our manufacturing operations and certain offices at the same location.

There was no significant impact to our operations as a result of this event.

At this time, we do not expect any future costs to restore, repair or replace damaged assets to exceed any insurance proceeds.

To the extent we have future expenditures as a result of this event, such expenditures may be expensed or capitalized in future periods, in accordance with U.S.

Future Cash Flow Considerations

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We believe this historical seasonality pattern is generally indicative of an overall trend and reflective of the buying patterns and budgetary cycles of our customers.

However, this pattern may be altered during any quarter or year by the quarterly and annual volatility of orders received for the wireless carrier market, the timing of larger projects, timing of orders from larger customers, other economic factors impacting our industry or impacting the industries of our customers and end-users, and macroeconomic conditions.

While we believe seasonality may be a factor that impacts our quarterly net sales results, particularly when excluding the volatility of sales in the wireless carrier market, we are not able to reliably predict net sales based on seasonality because these other factors can also, and often do, substantially impact our net sales patterns during the year.

We believe we are not seeing our typical seasonality pattern in fiscal year 2023 as a result of softening in certain markets, combined with the reduction in our backlog during the first two quarters of the fiscal year.

Additionally, we experienced a decrease in production and shipping days of approximately seven days during the third quarter of fiscal 2023 resulting from a shutdown related to a cyber incident.

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.

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.

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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 2022 Form 10-K did not change during the period from November 1, 2022 through July 31, 2023.

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

New Accounting Standards

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

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.

We are currently evaluating the impact ASU 2023-09 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”).

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements