Exhibit 13.1

Table of Contents

OPTICAL CABLE CORPORATION

Annual Report

2023

Optical Cable Corporation (OCC)   

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Optical Cable Corporation (OCC)

Letter from the CEO

Dear Shareholders of Optical Cable Corporation (OCC®):

During fiscal year 2023, we demonstrated the strength of OCC’s market position, the efficiencies generated by our operating leverage, and our ability to navigate and successfully execute our growth strategies in volatile markets.

We started off the year strong, building on our momentum and delivering strong financial and operational performance. Like many others in our industry, however, we experienced significant volatility and a softening of demand in certain markets as fiscal year 2023 progressed—particularly in the enterprise and wireless carrier markets.

Thanks to our diversified markets and product offerings, we finished fiscal year 2023 having achieved growth by all measures—net sales, gross profit and gross profit margin, as well as income from operations, and earnings per share, compared to the prior fiscal year.

Strong Position and Execution Reflected in Financial Performance

OCC Net Sales by Quarter

(fiscal years 2020-2023) (in 000s)

Optical Cable Corporation (OCC)

OCC SG&A Expenses

Dollars (in 000s) and % of Net Sales

(fiscal years 2019-2023)

Our Core Strengths Create Opportunities and Long-Term Value

We believe OCC remains uniquely positioned in the fiber optic and copper cabling and connectivity industry.  Our differentiated core strengths and capabilities enable OCC to offer top-tier products and application solutions and to compete successfully against much larger competitors.

OCC’s core strengths and capabilities include:

Optical Cable Corporation (OCC)

Many of the costs incurred to maintain and build upon our strengths and capabilities, along with our public company costs, are fixed. As a result, as OCC grows net sales, gross profit and profitability tend to increase at a faster rate than that of net sales. This creates operating leverage for OCC as fixed production costs and fixed SG&A expenses remain relatively stable, and are spread over higher net sales levels.

OCC remains committed to leveraging our core strengths and capabilities, identifying growth opportunities, and executing our strategies and initiatives to create long-term value for our shareholders.

Looking Forward to Fiscal Year 2024

I am proud of the OCC team’s accomplishments during fiscal year 2023—particularly given the market volatility the industry experienced during the year. 

Looking ahead to fiscal year 2024, we are optimistic about OCC’s opportunities.  At the same time, we are cautious of current market conditions and the impacts of soft market demand on our operating and production efficiencies.  To that end, we continue to monitor changing industry and macroeconomic trends and believe we are prepared to implement appropriate business adjustments as necessary.

Moving forward, we remain as focused as ever on driving growth, operating efficiently, and identifying and capturing additional growth opportunities to ensure we are executing for our customers and end-users while generating long-term value for our shareholders.

Thank you for your continued support.

Optical Cable Corporation (OCC)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This report may contain certain forward-looking information within the meaning of the federal securities laws. The forward-looking information may include, among other information, (i) statements concerning our outlook for the future, (ii) statements of belief, anticipation or expectation, (iii) future plans, strategies or anticipated events, and (iv) similar information and statements concerning matters that are not historical facts. Such forward-looking information is subject to known and unknown variables, uncertainties, contingencies and risks that may cause actual events or results to differ materially from our expectations. Such known and unknown variables, uncertainties, contingencies and risks (collectively, “factors”) may also adversely affect Optical Cable Corporation and its subsidiaries (collectively, the “Company” or “OCC®”), the Company’s future results of operations and future financial condition, and/or the future equity value of the Company. Factors that could cause or contribute to such differences from our expectations or that could adversely affect the Company include, but are not limited to: the level of sales to key customers, including distributors; timing of certain projects and purchases by key customers; the economic conditions affecting network service providers; corporate and/or government spending on information technology; actions by competitors; fluctuations in the price of raw materials (including optical fiber, copper, gold and other precious metals, plastics and other materials); fluctuations in transportation costs; our dependence on customized equipment for the manufacture of certain of our products in certain production facilities; our ability to protect our proprietary manufacturing technology; market conditions influencing prices or pricing in one or more of the markets in which we participate, including the impact of increased competition; our dependence on a limited number of suppliers for certain product components; the loss of or conflict with one or more key suppliers or customers; an adverse outcome in any litigation, claims and other actions, and potential litigation, claims and other actions against us; an adverse outcome in any regulatory reviews and audits and potential regulatory reviews and audits; adverse changes in state tax laws and/or positions taken by state taxing authorities affecting us; technological changes and introductions of new competing products; changes in end-user preferences for competing technologies relative to our product offering; economic conditions that affect the telecommunications sector, the data communications sector, certain technology sectors and/or certain industry market sectors (for example, commercial/enterprise, military, industrial, broadcast, mining, petrochemical, renewable energy and wireless carrier industry market sectors); economic conditions that affect U.S.-based manufacturers; economic conditions or changes in relative currency strengths (for example, the strengthening of the U.S. dollar relative to certain foreign currencies) and import and/or export tariffs imposed by the U.S. and other countries that affect certain geographic markets, industry market sectors, and/or the economy as a whole; changes in demand for our products from certain competitors for which we provide private label connectivity products; changes in the mix of products sold during any given period (due to, among other things, seasonality or varying strength or weaknesses in particular markets in which we participate) which may impact gross profits and gross profit margins or net sales; variations in orders and production volumes of hybrid cables (fiber and copper) with high copper content, which tend to have lower gross profit margins; significant variations in sales resulting from: (i) high volatility within various geographic markets, within targeted markets and industries, for certain types of products, and/or with certain customers (whether related to the market generally or to specific customers’ business in particular), (ii) market variations in existing product inventory levels available, generally or in certain markets, impacting sales orders for products, (iii) timing of large sales orders, and (iv) high sales concentration among a limited number of customers in certain markets, particularly the wireless carrier market; terrorist attacks or acts of war, any current or potential future military conflicts, and acts of civil unrest; cold wars and economic sanctions as a result of these activities; changes in the level of spending by the United States government, including, but not limited to military spending; ability to recruit and retain key personnel (including production personnel); poor labor relations; increasing labor costs; delays, extended lead times and/or changes in availability of needed raw materials, equipment and/or supplies; shipping and other logistics challenges; impact of inflation on costs, including raw materials and labor, and ability to pass along any increased costs to customers; impact of rising interest rates increasing the cost of capital; impact of cybersecurity risks and incidents and the related actual or potential costs and consequences of such risks and incidents, including costs and regulations to limit such risks; the impact of data privacy laws, including any applicable international privacy laws, and the related actual or potential costs and consequences; the impact of changes in accounting policies and related costs of compliance, including changes by the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board (“PCAOB”), the Financial Accounting Standards Board (“FASB”), and/or the International Accounting Standards Board (“IASB”); our ability to continue to successfully comply with, and the cost of compliance with, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 or any revisions to that act which apply to us; the impact of changes and potential changes in federal laws and regulations adversely affecting our business and/or which result in increases in our direct and indirect costs, including our direct and indirect costs of compliance with such laws and regulations; rising healthcare costs; impact of new or changed government laws and regulations on healthcare costs; the impact of changes in state or federal tax laws and regulations increasing our costs and/or impacting the net return to investors owning our shares; any changes in the status of our compliance with covenants with our lenders; our continued ability to maintain and/or secure future debt financing and/or equity financing to adequately finance our ongoing operations; the impact of future consolidation among competitors and/or among customers adversely affecting our position with our customers and/or our market position; actions by customers adversely affecting us in reaction to the expansion of our product offering in any manner, including, but not limited to, by offering products that compete with our customers, and/or by entering into alliances with, making investments in or with, and/or acquiring parties that compete with and/or have conflicts with our customers; voluntary or involuntary delisting of the Company’s common stock from any exchange on which it is traded; the deregistration by the Company from SEC reporting requirements as a result of the small number of holders of the Company’s common stock; adverse reactions by customers, vendors or other service providers to unsolicited proposals regarding the ownership or management of the Company; the additional costs of considering, responding to and possibly defending our position on unsolicited proposals regarding the ownership or management of the Company; direct and indirect impacts of weather, natural disasters and/or epidemic, pandemic or endemic diseases in the areas of the world in which we operate, market our products and/or acquire raw materials including impacts on supply chains, labor constraints impacting our production volumes and costs; any present or future government mandates, travel restrictions, shutdowns or other regulations regarding any epidemic, pandemic or endemic diseases; an increase in the number of shares of the Company’s common stock issued and outstanding; economic downturns generally and/or in one or more of the markets in which we operate; changes in market demand, exchange rates, productivity, market dynamics, market confidence, macroeconomic and/or other economic conditions in the areas of the world in which we operate and market our products; and our success in managing the risks involved in the foregoing.

Optical Cable Corporation (OCC)

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

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

Overview of Optical Cable Corporation

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

Optical Cable Corporation (OCC)

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

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

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

We market and sell the products manufactured at our Dallas facility through our wholly owned subsidiary Applied Optical Systems, Inc. (“AOS”) under the names Optical Cable Corporation and OCC® by the efforts of our integrated OCC sales team.

The OCC team seeks to provide top-tier communication solutions by bundling all of our fiber optic and copper data communication product offerings into systems that are best suited for individual data communication needs and application requirements of our customers and the end-users of our systems.

OCC’s wholly owned subsidiary Centric Solutions LLC (“Centric Solutions”) provides cabling and connectivity solutions for the data center market. Centric Solutions’ business is located at OCC’s facility near Dallas, Texas.

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

Summary of Company Performance for Fiscal Year 2023

Optical Cable Corporation (OCC)

Results of Operations

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

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

Cost of goods sold consists of the cost of materials, product warranty costs and compensation costs, and overhead and other costs related to our manufacturing operations. The largest percentage of costs included in cost of goods sold is attributable to costs of materials.

Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix. To the extent not impacted by product mix, gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales and other manufacturing efficiencies are more easily achieved. Hybrid cables (containing fiber and copper) with higher copper content tend to have lower gross profit margins.

Selling, general and administrative expenses (“SG&A expenses”) consist of the compensation costs for sales and marketing personnel, shipping costs, trade show expenses, customer support expenses, travel expenses, advertising, bad debt expense, the compensation costs for administration and management personnel, legal, accounting, advisory and professional fees, costs incurred to settle litigation or claims and other actions against us, and other costs associated with our operations.

Royalty income (expense), net consists of royalty income earned on licenses associated with our patented products, net of royalty and related expenses.

Amortization of intangible assets consists of the amortization of the costs, including legal fees, associated with internally developed patents that have been granted. Amortization of intangible assets is calculated using the straight-line method over the estimated useful lives of the intangible assets.

Optical Cable Corporation (OCC)

Other income (expense), net consists of interest expense and other miscellaneous income and expense items not directly attributable to our operations.

The following table sets forth and highlights fluctuations in selected line items from our consolidated statements of operations for the periods indicated:

Net Sales

Consolidated net sales for fiscal year 2023 were $72.2 million, an increase of 4.5% compared to net sales of $69.1 million for fiscal year 2022.  We experienced increases in net sales in our specialty markets in fiscal year 2023, compared to fiscal year 2022, but the increases were partially offset by decreases in net sales in our enterprise and wireless carrier markets.

We believe there continue to be indicators of strength in certain of our markets—particularly our specialty markets—as we end fiscal year 2023. While OCC has benefited from market and product diversification, like others in our industry, our net sales during fiscal year 2023 were impacted by various macroeconomic pressures, risks and uncertainties in addition to the softening of certain of our targeted markets.

We also believe our net sales benefited from increased production throughput during fiscal year 2023, compared to last year, as well as our higher than typical levels of sales order backlog/forward load at the end of fiscal year 2022. Additionally, improved product pricing, increased to cover certain inflationary costs, began to take effect. Our sales order backlog/forward load has returned to more typical levels at approximately $5.4 million at the end of fiscal year 2023, compared to more than $12.0 million at the end of fiscal year 2022.

Consolidated net sales for fiscal year 2022 were $69.1 million, an increase of 16.8% compared to net sales of $59.1 million for fiscal year 2021. We experienced increases in net sales in both our enterprise and specialty markets, including the wireless carrier market, in fiscal year 2022 compared to fiscal year 2021.

During fiscal year 2022, we continued to see product demand, sales and production volume increase compared to fiscal year 2021. Our sales order backlog/forward load exceeded $12.0 million at the end of fiscal year 2022—approximately three-to-four times higher than typical levels—as product demand continued to be robust.

At the same time, we believed continuing and lingering direct and indirect impacts of the COVID-19 pandemic and certain macroeconomic trends as the COVID-19 pandemic had become more endemic-like in the U.S. created challenges that affected production volumes and sales despite increased demand during fiscal year 2022.

Our production volumes continued to be tempered (which impacted net sales) during fiscal year 2022 as we experienced certain supply chain challenges (including availability of materials, increased lead times, and increased costs) for certain raw materials, as well as challenges recruiting additional personnel (particularly, production personnel).

We experienced improvement in production personnel recruitment as well as improvements in availability of certain materials beginning in the second half of fiscal year 2022. While production labor recruitment improved, training of new production employees impacted production volumes (and labor costs) until those employees were fully trained and operating at full capacity, and certain new employees were still in the process of being trained as of the end of fiscal year 2022.

Optical Cable Corporation (OCC)

Net sales to customers outside of the United States were approximately 18%, 15% and 18% of total net sales for fiscal years 2023, 2022 and 2021, respectively. Net sales to customers in the United States increased 1.1% and net sales to customers outside of the United States increased 23.0% in fiscal year 2023, compared to last year.

We typically expect net sales to be relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year, and excluding other volatility, we would normally expect 48% of total net sales to occur during the first half of a fiscal year and 52% of total net sales to occur during the second half of a fiscal year. We believe this historical seasonality pattern is generally indicative of an overall trend and reflective of the buying patterns and budgetary cycles of our customers. However, this pattern may be altered during any quarter or year by the quarterly and annual volatility of orders received for the wireless carrier market, the timing of larger projects, timing of orders from larger customers, other economic factors impacting our industry or impacting the industries of our customers and end-users, and macroeconomic conditions. While we believe seasonality may be a factor that impacts our quarterly net sales results, particularly when excluding the volatility of sales in the wireless carrier market, we are not able to reliably predict net sales based on seasonality because these other factors can also, and often do, substantially impact our net sales patterns during the year. We believe we did not see our typical seasonality pattern in fiscal year 2023 as a result of the 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 year 2023 resulting from a shutdown related to a previously disclosed cyber incident.

Gross Profit

Gross profit was $22.3 million in fiscal year 2023, compared to gross profit of $20.5 million in fiscal year 2022, an increase of 8.7%. Gross profit margin, or gross profit as a percentage of net sales, was 30.9% in fiscal year 2023 compared to 29.7% in fiscal year 2022.

Our gross profit margin tends 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 and other manufacturing efficiencies are more easily achieved.  We experienced improved gross profit margins when comparing fiscal year 2023 to fiscal year 2022—particularly during the first and second quarters of fiscal year 2023 when our gross profit margins were 35.7% and 34.6%, respectively, compared to the first and second quarters of fiscal year 2022 with gross profit margins of 28.0% and 29.3%, respectively. 

We attribute the overall improvement of our gross profit margin in fiscal year 2023 compared to fiscal year 2022 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.

Gross profit was $20.5 million in fiscal year 2022, compared to gross profit of $16.3 million in fiscal year 2021, an increase of 26.0%. Gross profit margin, or gross profit as a percentage of net sales, was 29.7% in fiscal year 2022 compared to 27.5% in fiscal year 2021.

Gross profit margins during fiscal year 2022 were impacted by increases in production labor and material costs, offset by necessary prospective price increases on new sales orders for many of our products. We experienced improvement in production personnel recruitment during the second half of fiscal year 2022, needed to increase production capacity to meet existing product demand; however, training of new production employees impacted labor costs (and production volumes) until those employees were fully trained and operating at capacity.

Selling, General and Administrative Expenses

SG&A expenses increased 6.3% to $21.2 million during fiscal year 2023, compared to $20.0 million for fiscal year 2022. SG&A expenses as a percentage of net sales were 29.4% in fiscal year 2023, compared to 28.9% in fiscal year 2022.

Optical Cable Corporation (OCC)

The increase in SG&A expenses during fiscal year 2023 compared to last year was primarily the result of increases in employee and contracted sales personnel related costs totaling $1.0 million. Included in employee and contracted sales personnel related costs are employee incentives and commissions which increased due to increased net sales and improved financial results during fiscal year 2023.

Also contributing to the increase in SG&A expenses during fiscal year 2023 were increases in travel and marketing expenses, totaling $260,000, which 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 fiscal year 2023 when compared to last year.

SG&A expenses increased 9.4% to $20.0 million during fiscal year 2022, compared to $18.2 million for fiscal year 2021. SG&A expenses as a percentage of net sales were 28.9% in fiscal year 2022, compared to 30.8% in fiscal year 2021.

The increase in SG&A expenses during fiscal year 2022 compared to fiscal year 2021 was primarily the result of increases in employee and contracted sales personnel related costs totaling $1.0 million. The increase in employee and contracted sales personnel related costs during fiscal year 2022 was primarily due to increased commission expense as a result of the increase in sales, new hires (net of terminations) and increases in compensation expense (including increases in response to changing labor market conditions), all when compared to fiscal year 2021. Also contributing to the increase in SG&A expenses during fiscal year 2022 were increases in travel expenses totaling $211,000, increases in shipping costs totaling $190,000, and increases in marketing expenses totaling $159,000. Both travel and marketing expenses increased due to the increase in business travel and trade shows participation during fiscal year 2022, post-COVID-19 restrictions, when compared to fiscal year 2021. Shipping costs increased due to the increase in net sales and the increase in costs charged by shippers during fiscal year 2022.

Royalty Income (Expense), Net

We recognized royalty expense, net of royalty income, totaling $26,000 during fiscal year 2023, compared to $27,000 during fiscal year 2022. Royalty income and/or expense may fluctuate based on sales of licensed products and estimates of amounts for non-licensed product sales, if any.

We recognized royalty expense, net of royalty income, totaling $27,000 during fiscal year 2022, compared to royalty income, net of royalty and related expenses, totaling $37,000 during fiscal year 2021.

Amortization of Intangible Assets

We recognized $54,000 of amortization expense, associated with intangible assets, during fiscal year 2023, compared to $52,000 during fiscal year 2022 and $46,000 during fiscal year 2021.

Income (Loss) from Operations

Our income from operations increased 110% to $993,000 during fiscal year 2023, compared to $473,000 for fiscal year 2022. We reported a loss from operations of $2.0 million for fiscal year 2021.

Other Income (Expense), Net

We recognized other income, net of $1.2 million in fiscal year 2023, compared to other expense, net of $795,000 in fiscal year 2022. Other income, net for fiscal year 2023 is comprised primarily of the gain on insurance proceeds for damage to property and equipment totaling $2.2 million, partially offset by interest expense and other miscellaneous items.

During 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 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 fiscal year 2023 totaling $2.2 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.

Optical Cable Corporation (OCC)

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.

We recognized other expense, net in fiscal year 2022 of $795,000, compared to other income, net of $8.6 million in fiscal year 2021. Other expense, net for fiscal year 2022 is comprised primarily of interest expense together with other miscellaneous items. The change in other expense, net during fiscal year 2022 compared to fiscal year 2021 was primarily due to the extinguishment of our Paycheck Protection Program loan (“PPP Loan”) (including accrued interest) totaling $5.0 million and the Employee Retention Tax Credit (“ERTC”) of $4.3 million, both of which were recognized as other income in fiscal year 2021, but did not recur in fiscal year 2022.

Income (Loss) Before Income Taxes

We reported income before income taxes of $2.2 million for fiscal year 2023 compared to a loss before income taxes of $322,000 for fiscal year 2022. The improvement was primarily due to the increase in gross profit of $1.8 million, and the gain on insurance proceeds received for damage to property and equipment of $2.2 million, partially offset by the increase in SG&A expenses of $1.3 million.

We reported a loss before income taxes of $322,000 for fiscal year 2022, compared to income before income taxes of $6.6 million for fiscal year 2021. This change was primarily due to the gain on the extinguishment of the PPP Loan (including accrued interest) of $5.0 million and the ERTC of $4.3 million, both of which were recognized during fiscal year 2021, but did not recur in fiscal year 2022, and the increase in SG&A expenses of $1.7 million, partially offset by the increase in gross profit of $4.2 million in fiscal year 2022 compared to fiscal year 2021.

Income Tax Expense (Benefit)

Income tax expense totaled $146,000 for fiscal year 2023 compared to $25,000 for fiscal year 2022. Our effective tax rate for fiscal year 2023 was 6.6%, compared to negative 7.7% for 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.

Income tax expense totaled $25,000 in fiscal year 2022, compared to income tax benefit of $20,000 in fiscal year 2021. Our effective tax rate for fiscal year 2022 was negative 7.7%, compared to less than negative one percent for fiscal year 2021.

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.

Optical Cable Corporation (OCC)

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

See also “Critical Accounting Policies and Estimates” herein and Note 12 to the Consolidated Financial Statements.

Net Income (Loss)

Net income for fiscal year 2023 was $2.1 million compared to a net loss of $347,000 for fiscal year 2022. This change was primarily due to the increase in income before income taxes of $2.5 million in fiscal year 2023, compared to fiscal year 2022.

Net loss for fiscal year 2022 was $347,000 compared to net income of $6.6 million for fiscal year 2021. This change was primarily due to the decrease in income before income taxes of $6.9 million in fiscal year 2022, compared to fiscal year 2021.

Financial Condition

Total assets increased $3.3 million, or 8.2%, to $43.9 million at October 31, 2023, from $40.6 million at October 31, 2022. This increase was primarily due to a $4.3 million increase in inventories, partially offset by a $2.2 million decrease in trade accounts receivable, net. Inventories increased largely as the result of the timing of certain raw material purchases, increases in work in process levels related to pending shipments, and the increase in finished goods inventory resulting from higher replenishment rates of stock inventory toward targeted levels. The decrease in trade accounts receivable, net, resulted from the decrease in net sales in the fourth quarter of fiscal year 2023 when compared to the fourth quarter of fiscal year 2022.

Total liabilities increased $759,000, or 4.1%, to $19.2 million at October 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 $2.3 million, partially offset by the payoff of our North Carolina Real Estate Loan and the pay down of the balance of our Virginia Real Estate Loan totaling $1.9 million.

Total shareholders’ equity at October 31, 2023 increased $2.6 million, or 11.6%, during fiscal year 2023. The increase resulted from net income of $2.1 million and share-based compensation, net of $496,000.

Liquidity and Capital Resources

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

As of October 31, 2023 and 2022, we had an outstanding loan balance under our Revolver totaling $8.3 million and $6.0 million, respectively. As of October 31, 2023 and 2022, we had outstanding loan balances, excluding our Revolver, totaling $2.7 million and $4.5 million, respectively.

Our cash totaled $1.5 million and $216,000 as of October 31, 2023 and 2022, respectively. The increase in cash for the year ended October 31, 2023 primarily resulted from insurance proceeds received for damage to property and equipment totaling $1.9 million and cash provided by financing activities of $220,000, partially offset by cash used in operating activities of $396,000 and capital expenditures totaling $521,000.

On October 31, 2023, we had working capital of $27.3 million, compared to $23.7 million as of October 31, 2022. The ratio of current assets to current liabilities as of October 31, 2023, was 4.5 to 1 compared to 4.2 to 1 as of October 31, 2022. The increase in working capital and in the current ratio was primarily due to the $1.3 million increase in cash and the $4.3 million increase in inventories, partially offset by the $2.2 million decrease in trade accounts receivable, net.

Optical Cable Corporation (OCC)

Net Cash

Net cash used in operating activities was $396,000 in fiscal year 2023, compared to $1.6 million in fiscal year 2022 and net cash provided by operating activities of $2.1 million in fiscal year 2021.

Net cash used in operating activities during fiscal year 2023 primarily resulted from an increase in inventories totaling $4.3 million and adjustments to reconcile net income of $2.1 million to net cash used in operating activities for the gain on insurance proceeds totaling $2.2 million, partially offset by the cash flow impact of decreases in trade accounts receivable, net totaling $2.2 million and certain other adjustments to reconcile net income of $2.1 million to net cash used in operating activities including depreciation and amortization of $946,000 and share-based compensation expense of $611,000.

Net cash used in operating activities during fiscal year 2022 primarily resulted from an increase in inventories totaling $3.1 million and the cash flow impact of increases in trade accounts receivable, net totaling $2.6 million, partially offset by certain adjustments to reconcile a net loss of $347,000 to net cash used in operating activities including depreciation and amortization of $1.1 million and share-based compensation expense of $412,000. Additionally, the cash flow impact of decreases in other receivables of $2.2 million and increases in accounts payable and accrued expenses of $1.1 million further contributed to offset net cash used in operating activities.

Net cash provided by operating activities during fiscal year 2021 primarily resulted from net income of $6.6 million, plus net adjustments to reconcile net income to net cash provided by operating activities, including depreciation and amortization of $1.2 million and share-based compensation expense of $336,000. Additionally, the cash flow impact of increases in accounts payable and accrued expenses of $1.4 million and decreases in inventories totaling $796,000 further contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by an adjustment to reconcile net income of $6.6 million to net cash provided by operating activities for the gain related to the forgiveness of the principal amount of the PPP Loan totaling $5.0 million, an increase in other receivables totaling $2.2 million and the cash flow impact of increases in trade accounts receivable, net of $825,000.

Net cash provided by investing activities totaled $1.4 million in fiscal year 2023, compared to net cash used in investing activities of $292,000 in fiscal year 2022 and $193,000 in fiscal year 2021. Net cash provided by investing activities during fiscal year 2023 resulted primarily from insurance proceeds received for damage to property and equipment, net totaling $1.9 million, partially offset by purchases of property and equipment and deposits for the purchase of property and equipment totaling $521,000. Net cash used in investing activities during fiscal years 2022 and 2021 resulted primarily from the purchase of property and equipment and deposits for the purchase of property and equipment.

Net cash provided by financing activities totaled $220,000 in fiscal year 2023, compared to $2.0 million in fiscal year 2022 and net cash used in financing activities totaling $1.9 million in fiscal year 2021.

Net cash provided by financing activities in fiscal year 2023 resulted primarily from net proceeds on our revolving line of credit totaling $2.3 million, partially offset by principal payments on debt totaling $1.9 million. Net cash provided by financing activities in fiscal year 2022 resulted primarily from net proceeds on our revolving line of credit totaling $2.5 million, partially offset by principal payments on long-term debt totaling $325,000. Net cash used in financing activities in fiscal year 2021 resulted primarily from net repayments on our Revolver totaling $1.5 million and principal payments on long-term debt totaling $312,000.

Optical Cable Corporation (OCC)

Credit Facilities

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

On October 31, 2023, OCC and Northeast Bank entered into an Omnibus Amendment of Loan Documents (the “Amendment”) to modify certain loan documents currently in effect between the parties related to the Virginia Real Estate Loan and a supplemental real estate term loan (the “North Carolina Real Estate Loan”). The primary purpose of the Amendment was to: (i) pay off the North Carolina Real Estate Loan; (ii) pay down the balance on the Virginia Real Estate Loan; (iii) extend the maturity date of the Virginia Real Estate Loan through May 5, 2026, with principal payments being made on a 20-year amortization schedule; (iv) release the collateral of the North Carolina Real Estate Loan; and (v) effective October 5, 2023, modify the interest rate of the Virginia Real Estate Loan to a variable rate equal to the Prime Rate, provided that the interest rate shall never be less than 8.5% per annum.

The Virginia Real Estate 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 Revolver with North Mill Capital LLC (now doing business as SLR Business Credit, “SLR”) provides us with one or more advances in an amount up to: (a) 85% of the aggregate outstanding amount of eligible accounts (the “eligible accounts loan value”); plus (b) the lowest of (i) an amount up to 35% of the aggregate value of eligible inventory, (ii) $5.0 million, and (iii) an amount not to exceed 100% of the then outstanding eligible accounts loan value; minus (c) $1.15 million. The term of the Revolver expires on July 24, 2025, unless otherwise extended or renewed.

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 October 31, 2023, the Revolver accrued interest at the prime lending rate plus 1.5% (resulting in a 10.0% rate at October 31, 2023). The loan may be extended in one year periods subject to the agreement of SLR.

The Revolver is secured by all of the following assets: properties, rights and interests in property of the Company whether now owned or existing, or hereafter acquired or arising, and wherever located; all accounts, equipment, commercial tort claims, general intangibles, chattel paper, inventory, negotiable collateral, investment property, financial assets, letter-of-credit rights, supporting obligations, deposit accounts, money or assets of the Company, which hereafter come into the possession, custody, or control of SLR; all proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing; any and all tangible or intangible property resulting from the sale, lease, license or other disposition of any of the foregoing, or any portion thereof or interest therein, and all proceeds thereof; and any other assets of the Company which may be subject to a lien in favor of SLR as security for the obligations under the Revolver.

As of October 31, 2023, we had $8.3 million of outstanding borrowings on our Revolver and $2.6 million in available credit. As of October 31, 2022, we had $6.0 million of outstanding borrowings on our Revolver and $5.9 million in available credit.

Capital Expenditures

We did not have any material commitments for capital expenditures as of October 31, 2023. We expected capital expenditures in fiscal year 2023 would not exceed $1.0 million. We incurred capital expenditures totaling $521,000 for items including new manufacturing equipment, improvements to existing manufacturing equipment, new information technology equipment and software, upgrades to existing information technology equipment and software, and other capitalizable expenditures for property, plant and equipment for fiscal year 2023.

Optical Cable Corporation (OCC)

During our 2024 fiscal year budgeting process, we included an estimate for capital expenditures of $1.0 million for the year. Any capital expenditures will be funded out of our working capital, cash provided by operations or borrowings under our Revolver, as appropriate. This amount includes estimates for capital expenditures for similar types of items as those purchased in fiscal year 2023. Capital expenditures are reviewed and approved based on a variety of factors including, but not limited to, current cash flow considerations, the expected return on investment, project priorities, impact on current or future product offerings, availability of personnel necessary to implement and begin using acquired equipment, and economic conditions in general. Historically, we have spent less than our budgeted capital expenditures in most fiscal years.

Future Cash Flow Considerations

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

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

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based on the consolidated financial statements and accompanying notes which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 1 to the consolidated financial statements provides a summary of our significant accounting policies. The following are areas requiring significant judgments and estimates due to uncertainties as of the reporting date: revenue recognition, trade accounts receivable and the allowance for credit losses, inventories, deferred tax assets (and valuation allowances thereon), long-lived assets and commitments and contingencies.

Application of the critical accounting policies discussed in the section that follows requires management’s significant judgments, often as a result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. We are not currently aware of any reasonably likely events or circumstances that would result in materially different results.

Revenue Recognition

Management views revenue recognition as a critical accounting estimate since we must estimate an allowance for sales returns for the reporting period. This allowance reduces net sales for the period and is based on our analysis and judgment of historical trends, identified returns and the potential for additional returns. The estimates for sales returns did not materially differ from actual results for the years ended October 31, 2023, 2022 and 2021.

Trade Accounts Receivable and the Allowance for Credit Losses

Management views trade accounts receivable net of the related allowance for credit losses as a critical accounting estimate since the allowance for credit losses is based on judgments and estimates concerning the likelihood that individual customers will pay the amounts included as receivable from them. In determining the amount of allowance for credit losses to be recorded for individual customers, we assess the net amount expected to be collected from each customer. In addition, we establish an allowance for all other receivables for which no specific allowances are deemed necessary. This portion of the allowance for credit losses is based on a percentage of total trade accounts receivable with different percentages used based on different age categories of receivables. The percentages used are based on our expectations of net amounts expected to be collected.

Optical Cable Corporation (OCC)

Inventories

Management views the determination of the net realizable value of inventories as a critical accounting estimate since it is based on judgments and estimates regarding the salability of individual items in inventory and an estimate of the ultimate selling prices for those items. Individual inventory items are reviewed and adjustments are made based on the age of the inventory and our judgment as to the salability of that inventory in order for our inventories to be valued at the lower of cost and net realizable value.

Deferred Tax Assets

Management views the valuation of deferred tax assets as a critical accounting estimate since we must assess whether it is “more likely than not” that we will realize the benefits of our gross deferred tax assets and determine an appropriate valuation allowance if we conclude such an allowance is appropriate. This determination requires that we consider all available evidence, both positive and negative, in making this assessment. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.

Generally, a cumulative loss in recent years is a significant piece of negative evidence that is quite difficult to overcome under U.S. GAAP. Since the amount of our loss before income taxes in fiscal year 2015 exceeded our income before taxes during the previous two fiscal years, we believed that U.S. GAAP required us to treat as significant negative evidence that it was “more likely than not” that we would be unable to realize the future benefits of our deferred tax assets in the coming years—significant negative evidence that was quite difficult to overcome under U.S. GAAP and which we were not able to overcome with sufficient objectively verifiable positive evidence.

While we believe that ultimately we will utilize the benefit of our net deferred tax assets in the future (prior to any expiration of the usability of such deferred tax assets for income tax purposes), we concluded as a result of our cumulative loss position and insufficient objectively verifiable positive evidence, it was appropriate under U.S. GAAP for us to establish a full valuation allowance against net deferred tax assets as of October 31, 2015. The valuation allowance against our net deferred tax assets does not in any way impact our ability to use future tax deductions such as our net operating loss carryforwards; rather, the valuation allowance indicates, according to the provisions of Accounting Standards Codification 740, Income Taxes, it is “more likely than not” that our deferred tax assets will not be realized.

The valuation allowance that was established will be maintained until there is sufficient positive evidence to conclude that it is “more likely than not” that our net deferred tax assets will be realized. Our income tax expense for future periods will be reduced to the extent of corresponding decreases in our valuation allowance. There can be no assurance regarding any future realization of the benefit by us of all or part of our net deferred tax assets.

Long-lived Assets

Management views the determination of the carrying value of long-lived assets as a critical accounting estimate since we must determine an estimated economic useful life in order to properly amortize or depreciate our long-lived assets and because we must consider if the value of any of our long-lived assets have been impaired, requiring adjustment to the carrying value.

Economic useful life is the duration of time the asset is expected to be productively employed by us, which may be less than its physical life. Management’s assumptions on wear and tear, obsolescence, technological advances and other factors affect the determination of estimated economic useful life. The estimated economic useful life of an asset is monitored to determine if it continues to be appropriate in light of changes in business circumstances. For example, technological advances or excessive wear and tear may result in a shorter estimated useful life than originally anticipated. In such a case, we would depreciate the remaining net book value of an asset over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. We must also consider similar issues when determining whether or not an asset has been impaired to the extent that we must recognize a loss on such impairment.

Optical Cable Corporation (OCC)

The Company amortizes intangible assets over their respective finite lives up to their estimated residual values.

Commitments and Contingencies

Management views accounting for contingencies as a critical accounting estimate since loss contingencies arising from product warranties and defects, claims, assessments, litigation, fines and penalties and other sources require judgment as to any probable liabilities incurred. For example, accrued product warranty costs recorded by us are based primarily on historical experience of actual warranty claims and costs as well as current information with respect to warranty claims and costs. Actual results could differ from the expected results determined based on such estimates of loss contingencies.

Quantitative and Qualitative Disclosures About Market Risk

We do not engage in transactions in derivative financial instruments or derivative commodity instruments. As of October 31, 2023 our financial instruments were not exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk.

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.

Disagreements with Accountants

We did not have any disagreements with our accountants on any accounting matter or financial disclosure made during our fiscal year ended October 31, 2023.

Optical Cable Corporation (OCC)

Optical Cable Corporation (OCC)

Optical Cable Corporation (OCC)

Optical Cable Corporation (OCC)

Optical Cable Corporation (OCC)

Notes to Consolidated Financial Statements

Years ended October 31, 2023, 2022 and 2021