Exhibit 13.1

Table of Contents

OPTICAL CABLE CORPORATION

Annual Report

2021

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Optical Cable Corporation (OCC)

Letter from the CEO

Dear Shareholders of Optical Cable Corporation (OCC®):

In 2021, the OCC team successfully executed ongoing initiatives to strengthen OCC during the pandemic and for the long-term—positioning us to capture current and future growth opportunities, realize improved operating efficiencies, and control and reduce costs.

The COVID-19 pandemic continued to significantly impact the global economy during much of 2021—and it impacted OCC as well. As we began the fiscal year, demand for our products continued to be hindered by the pandemic. As product demand began to grow during our second quarter, new macroeconomic pandemic-related challenges arose—in particular supply chain disruption and a tight labor market.

The OCC team met these emerging challenges with creative problem-solving and a focus on serving our customers, and protecting and strengthening our operational effectiveness.

I am incredibly grateful for the OCC team and their dedication and tireless efforts this past year. It is their resilience, perseverance and hard work that has enabled OCC to navigate these turbulent times and to well-position OCC for fiscal year 2022.

My sincere and continued thank you to every member of the OCC team and their families!

Successful Execution Driving Improved Results

Our results this year demonstrate our successful execution of our ongoing initiatives to strengthen OCC through the pandemic and for the long-term:

Optical Cable Corporation (OCC)

OCC also benefited from a Small Business Administration Payroll Protection Program loan (received in April 2020 and forgiven in full in July 2021), and Employee Retention Tax Credits. During critical periods of the COVID-19 pandemic, the loan and tax credits enabled OCC to preserve employee jobs and maintain our operational readiness, including our ability to service critical infrastructure customers such as the U.S. military and healthcare providers.

Leveraging Our Core Strengths to Create Long-term Value

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

OCC’s core strengths and capabilities include:

Optical Cable Corporation (OCC)

Many of the costs OCC incurs 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 the rate of increase 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.

We are confident leveraging OCC’s core strengths and capabilities enables us to deliver long-term value for shareholders.

Looking Forward to Fiscal Year 2022

As we begin fiscal year 2022, we are optimistic and excited by the opportunities before us.

Customer demand in OCC’s markets has significantly improved. And, we are beginning to see other impacts of the COVID-19 pandemic recede with some improvements in the availability of certain raw materials in our supply chains, and some improvements in recruiting additional members to our manufacturing team.

OCC is well-positioned to capitalize on existing and new revenue opportunities as the impacts of the pandemic on supply chains, labor availability and the global economy recede.

We are hopeful that these trends will continue, and we will continue to monitor potential and developing impacts of COVID-19, including new emerging variants, on OCC’s business and the global economy.

We appreciate the opportunity to meet the evolving needs of our customers, installers, specifiers and end-users—and are proud to provide OCC’s top-tier solutions, products, application and technical expertise.

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

We appreciate and thank you for your investment and continued trust in OCC! Be safe!

And, as we say, “Go OCC!”

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, mining, oil & gas, military, and wireless carrier industry market sectors); economic conditions that affect U.S.-based manufacturers; economic conditions or changes in relative currency strengths (for example, the strengthening of the U.S. dollar relative to certain foreign currencies) and import and/or export tariffs imposed by the U.S. and other countries that affect certain geographic markets, industry market sector, and/or the economy as a whole; changes in demand for our products from certain competitors for which we provide private label connectivity products; changes in the mix of products sold during any given period (due to, among other things, seasonality or varying strength or weaknesses in particular markets in which we participate) which may impact gross profits and gross profit margins or net sales; variations in orders and production volumes of hybrid cables (fiber and copper) with high copper content, which tend to have lower gross profit margins; significant variations in sales resulting from: (i) high volatility within various geographic markets, within targeted markets and industries, for certain types of products, and/or with certain customers (whether related to the market generally or to specific customers’ business in particular), (ii) timing of large sales orders, and (iii) high sales concentration among a limited number of customers in certain markets, particularly the wireless carrier market; terrorist attacks or acts of war, any current or potential future military conflicts, and acts of civil unrest; changes in the level of spending by the United States government, including, but not limited to military spending; ability to recruit and retain key personnel; poor labor relations; increasing labor costs; delays, extended lead times and/or changes in availability of needed raw materials, equipment and/or supplies; shipping and other logistic challenges; impact of inflation on costs and ability to pass along any increased costs to customers; impact of rising interest rates increasing the cost of capital; impact of cybersecurity risks and incidents and the related actual or potential costs and consequences of such risks and incidents, including costs to limit such risks; the impact of data privacy laws and the General Data Protection Regulation and the related actual or potential costs and consequences; the impact of changes in accounting policies and related costs of compliance, including changes by the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board (“PCAOB”), the Financial Accounting Standards Board (“FASB”), and/or the International Accounting Standards Board (“IASB”); our ability to continue to successfully comply with, and the cost of compliance with, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 or any revisions to that act which apply to us; the impact of changes and potential changes in federal laws and regulations adversely affecting our business and/or which result in increases in our direct and indirect costs, including our direct and indirect costs of compliance with such laws and regulations; rising healthcare costs; impact of new or changed government laws and regulations on healthcare costs; the impact of changes in state or federal tax laws and regulations increasing our costs and/or impacting the net return to investors owning our shares; any changes in the status of our compliance with covenants with our lenders; our continued ability to maintain and/or secure future debt financing and/or equity financing to adequately finance our ongoing operations; the impact of future consolidation among competitors and/or among customers adversely affecting our position with our customers and/or our market position; actions by customers adversely affecting us in reaction to the expansion of our product offering in any manner, including, but not limited to, by offering products that compete with our customers, and/or by entering into alliances with, making investments in or with, and/or acquiring parties that compete with and/or have conflicts with our customers; voluntary or involuntary delisting of the Company’s common stock from any exchange on which it is traded; the deregistration by the Company from SEC reporting requirements as a result of the small number of holders of the Company’s common stock; adverse reactions by customers, vendors or other service providers to unsolicited proposals regarding the ownership or management of the Company; the additional costs of considering, responding to and possibly defending our position on unsolicited proposals regarding the ownership or management of the Company; impact of weather, natural disasters and/or epidemic or pandemic diseases (such as COVID-19) in the areas of the world in which we operate, market our products and/or acquire raw materials, including the impact of any present or future government mandates, travel restrictions, shutdowns or other regulations regarding any epidemic or pandemic diseases; an increase in the number of shares of the Company’s common stock issued and outstanding; economic downturns generally and/or in one or more of the markets in which we operate; changes in market demand, exchange rates, productivity, market dynamics, market confidence, macroeconomic and/or other economic conditions in the areas of the world in which we operate and market our products; and our success in managing the risks involved in the foregoing.

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

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

Overview of COVID-19 Effects

The COVID-19 pandemic continued to have a significant impact on businesses and individuals in the United States and globally throughout much of 2021—including OCC. Actions taken by governments and private industry to limit the spread of the disease (including its variant strains) have resulted in the disruption of normal activities as businesses were forced to modify the way they conducted business or operate on a limited basis. When demand for products and services began to increase during 2021, the direct and indirect impacts of the COVID-19 pandemic created other challenges impacting supply chains, availability of personnel and costs.

Since the beginning of the COVID-19 pandemic, OCC’s sales, production volumes and costs have been significantly impacted. As sales and production volume increased during fiscal year 2021, OCC began to experience supply chain challenges (including availability of materials, increased lead times, and increased costs) for certain of the raw materials used for manufacturing─particularly beginning in our fiscal third quarter. We also began to experience some challenges recruiting additional personnel. OCC’s team has successfully mitigated (to a certain extent) the impacts of these new challenges. We believe these challenges will continue into fiscal year 2022.

Optical Cable Corporation (OCC)

Since March 2020, each of our three facilities have been open and operating. OCC’s workforce was classified a “Defense Industrial Base Essential Critical Infrastructure Workforce” under guidelines from the U.S. Department of Defense and an “Essential Critical Infrastructure Workforce” under guidelines by the U.S. Department of Homeland Security, Cybersecurity and Infrastructure Security Agency (CISA).

OCC continues to maintain certain protocols at each of our facilities in response to the continued uncertainty of the impact of COVID-19, including, but not limited to: limiting business travel and face-to-face meetings, having a portion of our non-manufacturing employees work remotely, and implementing strict social distancing, symptom self-assessments, and sanitation and mask protocols within our facilities. When employees have contracted COVID-19, we have also used contact tracing to have personnel quarantine and be tested to avoid any spread of the disease at our facilities. To date, these efforts have been successful with no known transmission of COVID-19 between any personnel at our facilities. We have strongly encouraged all of our employees to be vaccinated, but have not implemented a vaccination mandate at this time.

OCC’s pandemic team monitors the latest guidance from the Centers for Disease Control and Prevention (“CDC”), federal, state and other regulatory agencies, works to secure personal protective equipment, finds ways to help mitigate risk and identifies opportunities for us to meet or exceed health and safety guidelines and recommended protocols.  We believe we have followed and are continuing to follow or exceed all CDC and public officials’ guidelines as such guidelines have changed from time to time during the pandemic.

We began to see positive indicators of future strengthening in many of our markets beginning in the middle of our fiscal second quarter and continuing through our fourth quarter of fiscal year 2021, with increasing sales and production volumes compared to those in fiscal year 2020. We have also begun to see increases in our sales order backlog/forward load and drawdowns of finished goods inventories to fill incoming orders. We believe that we will continue to benefit from improvement in our markets during fiscal year 2022; however, we cannot fully anticipate or reasonably estimate the continuing impacts of the pandemic on our various markets and customers, including impacts from emerging variants of COVID-19 (such as the Delta and Omicron variants) in our various markets.

The extent to which the COVID-19 pandemic will affect OCC in the future will depend on ongoing developments, which are still uncertain, including, but not limited to: the duration and severity of the outbreak; the timing of recovery in certain of OCC’s markets; any resurgence of the virus (including its variant strains); the successful distribution and administration of any current or future vaccines and boosters; any government mandates, travel restrictions, shutdowns or other regulations related to COVID-19 impacting the markets in which we operate, market our products and/or acquire materials; as well as a variety of other unknowable factors.

Since we cannot predict the duration or scope of the pandemic, we cannot fully anticipate or reasonably estimate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future.

Overview of Optical Cable Corporation

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

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 2021

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. Hybrid cables (containing fiber and copper) with higher copper content tend to have lower gross profit margins.

Optical Cable Corporation (OCC)

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

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

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

Other income (expense), net consists of interest expense and other miscellaneous income and expense items not directly attributable to our operations. In fiscal year 2021, other income (expense), net includes the gain on the extinguishment of debt (including accrued interest) of an unsecured United States Small Business Administration (“SBA”) Paycheck Protection Program loan (“PPP Loan”) under the March 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the Employee Retention Tax Credit (“ERTC”) under the CARES Act, as subsequently amended.

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 2021 were $59.1 million, an increase of 7.0% compared to net sales of $55.3 million for fiscal year 2020. We experienced an increase in net sales in the wireless carrier and enterprise markets in fiscal year 2021, compared to fiscal year 2020, partially offset by decreases in other specialty markets.

We believe net sales during fiscal year 2021, specifically beginning in our second fiscal quarter, were positively impacted by the continued lifting of some restrictions and the reopening of certain markets that had been negatively impacted by the COVID-19 pandemic. When demand for products and services began to increase during 2021, the direct and indirect impacts of the COVID-19 pandemic created other challenges (particularly beginning in the third fiscal quarter) that we believe hampered additional increases in net sales. These challenges include supply chain challenges (availability, increased lead times and increased costs) for certain raw materials, challenges recruiting additional personnel to increase production volumes, and other cost increases. While OCC believes it took actions intended to mitigate the impact of these challenges on production volume, as demand for our products increased during fiscal year 2021, our sales order backlog/forward load more than doubled as we necessarily increased our lead times to customers. We believe that we will continue to see a trend of improving demand for our products and net sales to the extent the direct and indirect impacts of the COVID-19 pandemic on our customers, suppliers, workforce and end-users decline.

Optical Cable Corporation (OCC)

We are continuing to see some positive indicators of future strengthening in some of our markets and believe we will continue to benefit from improvement in our markets in fiscal year 2022; however, we cannot fully anticipate or reasonably estimate the continuing impacts of the pandemic on our various markets and customers, including impacts from emerging variants of COVID-19 (such as the Delta and Omicron variants) in our various markets.

We experienced a decrease in net sales in both our enterprise and specialty markets, including the wireless carrier market, in fiscal year 2020 compared to fiscal year 2019. Our net sales during fiscal year 2020 were negatively impacted by the COVID-19 pandemic as certain businesses limited operations and/or reduced or delayed product purchases. While net sales for both our enterprise markets and our specialty markets were negatively impacted by the pandemic during fiscal year 2020, our specialty markets were most significantly impacted—with net sales declining 30.0% compared to the prior year. Net sales in our enterprise markets decreased 11.4% in fiscal year 2020, compared to fiscal year 2019. Additionally, contributing to the decrease in net sales during fiscal 2020 was the fact that we fulfilled a number of large orders from one customer in the wireless carrier market in fiscal 2019 that did not recur at the same levels in fiscal 2020. Net sales to this customer decreased 6.1 million dollars in fiscal 2020. Historically, net sales to this customer have been volatile from quarter to quarter and from year to year.

Net sales to customers outside of the United States were approximately 18%, 19% and 18% of total net sales for fiscal years 2021, 2020 and 2019, respectively. Net sales to customers in the United States increased 8.7% while net sales to customers outside of the United States decreased less than one percent in fiscal year 2021, 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 substantially altered during any quarter or year, as was the case in fiscal years 2020 and 2019, 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. Additionally, we believe our seasonality pattern in fiscal year 2021 was impacted by the COVID-19 pandemic, resulting in lower net sales at the start of the fiscal year and higher net sales beginning in the second quarter of the fiscal year as some restrictions were lifted and certain markets reopened. This resulted in 47% of total net sales occurring in the first half of fiscal year 2021 and 53% of total net sales occurring in the second half of fiscal year 2021. 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.

Gross Profit

Gross profit was $16.3 million in fiscal year 2021, compared to gross profit of $14.1 million in fiscal year 2020, an increase of 15.5%. Gross profit margin, or gross profit as a percentage of net sales, was 27.5% in fiscal year 2021 compared to 25.5% in fiscal year 2020. Generally, gross profit margin improved during fiscal year 2021. Gross profit margin was 19.4%, 30.6%, 26.2% and 31.8% during the first, second, third and fourth quarters of fiscal year 2021, respectively.

Our gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales. This operating leverage, which is beneficial at higher sales levels, positively impacted our gross profit margin during fiscal year 2021, particularly beginning in the second fiscal quarter. Additionally, actions that we took in fiscal years 2020 and 2019 contributed to the increase in our gross profit margin in fiscal year 2021, resulting in an improved gross profit margin when compared to fiscal year 2020. Our gross profit margin percentages are also heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix from quarter to quarter.

Optical Cable Corporation (OCC)

Gross profit was $14.1 million in fiscal year 2020, compared to gross profit of $18.3 million in fiscal year 2019, a decrease of 23.0%, as a result of lower sales volumes caused by the COVID-19 pandemic.

Gross profit margin, or gross profit as a percentage of net sales, was 25.5% in fiscal year 2020 compared to 25.7% in fiscal year 2019, as the impact of manufacturing process and efficiency improvement initiatives during fiscal year 2019 which were anticipated to positively impact gross profit margins during fiscal year 2020, were offset as fixed production costs were spread over lower sales volumes in fiscal year 2020.

Selling, General and Administrative Expenses

SG&A expenses decreased $1.0 million, or 5.2%, to $18.2 million during fiscal year 2021, compared to $19.2 million for fiscal year 2020. This followed an SG&A expenses decrease of $4.2 million, or 17.9%, to $19.2 million in fiscal year 2020, compared to $23.4 million in fiscal year 2019. SG&A expenses as a percentage of net sales were 30.8% in fiscal year 2021, compared to 34.8% in fiscal year 2020.

The decrease in SG&A expenses during fiscal year 2021 compared to last year was primarily the result of decreases in employee and contracted sales personnel related costs totaling $787,000, decreases in bad debt expense totaling $414,000, decreases in travel expenses totaling $103,000 and decreases in marketing expenses totaling $102,000. Included in employee and contracted sales personnel related costs are compensation costs which decreased primarily due to terminations, net of new hires, which were impacted by our ongoing cost control initiatives. During fiscal year 2020, our bad debt expense increased due to collectability of certain customer accounts during the COVID-19 pandemic environment, after which our bad debt expense significantly decreased as it returned to a more typical level in fiscal year 2021. Travel expenses and marketing expenses decreased primarily due to the decrease in business travel and the continuing cancellation of tradeshows during fiscal year 2021 due to the COVID-19 pandemic. The decreases in SG&A expenses include the impact of our ongoing cost control initiatives.

SG&A expenses decreased 17.9% to $19.2 million during fiscal year 2020, compared to $23.4 million for fiscal year 2019. SG&A expenses as a percentage of net sales were 34.8% in fiscal year 2020, compared to 32.9% in fiscal year 2019, as net sales decreased at a higher rate than the decrease in SG&A expenses due to the impact of the COVID-19 pandemic on net sales.

The decrease in SG&A expenses during fiscal year 2020 compared to fiscal year 2019 was primarily the result of decreases in employee related SG&A costs totaling $2.9 million, decreases in travel expenses totaling $530,000, decreases in shipping costs totaling $464,000 and decreases in marketing expenses totaling $425,000. Included in employee related costs are employee incentives and commissions which decreased due to the financial results during fiscal year 2020 and decreases in compensation costs primarily due to terminations, net of new hires. Shipping costs decreased due to the decrease in net sales in fiscal year 2020 compared to fiscal year 2019. Both marketing and travel expenses decreased due to the decline/halt in business travel and cancellation of tradeshows during fiscal year 2020 due to the COVID-19 pandemic. The decreases in employee related costs, travel expenses, shipping costs and marketing expenses were partially offset by an increase in bad debt expense totaling $369,000 due to concerns about collectability of certain customer accounts during the COVID-19 pandemic environment and increases in legal and professional fees totaling $242,000 primarily due to non-capitalizable fees associated with legal advice related to, among other things, various financing strategies under consideration by us as well as certain related professional services. The decreases in SG&A expenses include the impact of our ongoing cost control initiatives.

Optical Cable Corporation (OCC)

Royalty Income (Expense), Net

We recognized royalty income, net of royalty and related expenses, totaling $37,000 during fiscal year 2021, compared to royalty expense, net of royalty income, totaling $332,000 during fiscal year 2020. 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 $332,000 during fiscal year 2020, compared to royalty income, net of royalty and related expenses totaling $7,000 during fiscal year 2019.

Amortization of Intangible Assets

We recognized $46,000 of amortization expense, associated with intangible assets, during fiscal year 2021, compared to $42,000 during fiscal year 2020 and $39,000 during fiscal year 2019.

Other Income (Expense), Net

We recognized other income, net of $8.6 million in fiscal year 2021, compared to other expense, net of $570,000 in fiscal year 2020. Other income, net for fiscal year 2021 is comprised primarily of the gain on the extinguishment of our PPP Loan (including accrued interest) totaling $5.0 million and the ERTC of $4.3 million, partially offset by interest expense on our revolving credit facility and term loans, and by other miscellaneous items. The change in other income, net during fiscal year 2021 compared to the same period last year was primarily due to the extinguishment of our PPP Loan (including accrued interest) and the ERTC.

The ERTC, created in the March 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and then subsequently amended by the Consolidated Appropriation Act (“CAA”) of 2021, the American Rescue Plan Act (“ARPA”) of 2021 and the Infrastructure Investment and Jobs Act (“IIJA”) of 2021, is a refundable payroll credit for qualifying businesses keeping employees on their payroll during the COVID-19 pandemic.  Under CAA, ARPA and IIJA amendments, employers can claim a refundable tax credit against the employer share of social security tax equal to 70% of the qualified wages (including certain health care expenses) paid to employees after December 31, 2020 through September 30, 2021.  Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 so the maximum ERTC available is $7,000 per employee per calendar quarter. 

OCC is an eligible small employer under the gross receipts decline test when comparing the first calendar quarter of 2021 to the same quarter in calendar year 2019, which qualifies us to claim ERTC in both the first and second calendar quarters of 2021. During fiscal year 2021, we recognized a refundable payroll tax credit totaling $4.3 million. We do not expect any additional credits. As of October 31, 2021, OCC has $2.2 million in recognized ERTC still to be refunded.

We recognized other expense, net of $570,000 in fiscal year 2020 compared to $513,000 in fiscal year 2019. Other expense, net for fiscal year 2020 is comprised of: interest expense totaling $570,000 related primarily to: borrowings under our revolving credit facilities and our two real estate term loans (for monies borrowed in connection with the acquisition of SMP Data Communications, now OCC’s Asheville facility); other interest incurred in the normal course of business; and other miscellaneous items which may fluctuate from period to period. The increase in other expense, net during fiscal year 2020 compared to fiscal year 2019 was primarily due to increased interest expense resulting from the amortization of deferred financing fees related to our new Revolving Credit Master Promissory Note and related agreements (collectively, the “Revolver”) with North Mill Capital, LLC (now doing business as SLR Credit, “SLR”).

 Optical Cable Corporation (OCC)

Income (Loss) Before Income Taxes

We reported income before income taxes of $6.6 million for fiscal year 2021 compared to a loss before income taxes of $6.1 million for fiscal year 2020. The change was primarily due to the gain on the extinguishment of the PPP Loan (including accrued interest) of $5.0 million, the ERTC of $4.3 million, the increase in gross profit of $2.2 million and the decrease in SG&A expenses of $1.0 million compared to fiscal year 2020.

We reported a loss before income taxes of $6.1 million for fiscal year 2020 compared to $5.7 million for fiscal year 2019. This increase was primarily due to the decrease in gross profit of $4.2 million and the increase in royalty expense, net of $338,000, partially offset by the decrease in SG&A expenses of $4.2 million in fiscal year 2020 compared to fiscal year 2019.

Income Tax Expense (Benefit)

Income tax benefit totaled $20,000 in fiscal year 2021, compared to income tax expense of $18,000 in fiscal year 2020. Our effective tax rate was less than negative one percent for fiscal years 2021 and 2020.

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 $18,000 for fiscal year 2020 compared to income tax benefit of $6,000 for fiscal year 2019. Our effective tax rate for fiscal year 2020 was less than negative one percent, compared to less than one percent for fiscal year 2019.

During fiscal year 2015, we established a valuation allowance against all of our net deferred tax assets. As a result of establishing a full valuation allowance against our net deferred tax assets, if we generate sufficient taxable income in subsequent periods to realize a portion or all of our net deferred tax assets, our effective income tax rate could be unusually low due to the tax benefit attributable to the necessary decrease in our valuation allowance. Further, if we generate losses before taxes in subsequent periods, our effective income tax rate could also be unusually low as any increase in our net deferred tax asset from such a net operating loss for tax purposes would be offset by a corresponding increase to our valuation allowance against our net deferred tax assets.

If we generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the removal of any valuation allowance against our net deferred tax asset is appropriate, then during the period in which such determination is made, we will recognize the non-cash benefit of such removal of the valuation allowance in income tax expense on our consolidated statement of operations, which will increase net income and will also increase the net deferred tax asset on our consolidated balance sheet. If we do not generate sufficient income before taxes in subsequent periods such that U.S. GAAP would permit us to conclude that the reduction or removal of any valuation allowance against our net deferred tax asset is appropriate, then no such non-cash benefit would be realized. There can be no assurance regarding any future realization of the benefit by us of all or part of our net deferred tax assets. As of October 31, 2021, the valuation allowance against our total gross deferred tax assets totals $4.3 million. In fiscal year 2021, OCC’s PPP Loan forgiveness is not included in U.S. federal taxable income, while the net benefit of the ERTC is taxable due to certain U.S. federal expense disallowance rules in connection with the ERTC.

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

Optical Cable Corporation (OCC)

Net Income (Loss)

Net income for fiscal year 2021 was $6.6 million compared to a net loss of $6.1 million for fiscal year 2020. This change was primarily due to the increase in income before income taxes of $12.7 million in fiscal year 2021, compared to fiscal year 2020.

Net loss for fiscal year 2020 was $6.1 million compared to $5.7 million for fiscal year 2019. This increase was primarily due to the increase in loss before income taxes of $428,000 in fiscal year 2020, compared to fiscal year 2019.

Financial Condition

Total assets increased $1.4 million, or 3.7%, to $37.9 million at October 31, 2021, from $36.6 million at October 31, 2020. This increase was primarily due to a $2.2 million increase in other receivables due to the ERTC and an $815,000 increase in trade accounts receivable, net, resulting from the increase in net sales in the fourth quarter of fiscal year 2021 when compared to the fourth quarter of fiscal year 2020, partially offset by a $796,000 decrease in inventories due largely as the result of the timing of certain raw material purchases as well as improved sales, including stock inventory that was not replenished to previous levels as production volumes for sales orders increased.

Total liabilities decreased $5.6 million, or 26.2%, to $15.7 million at October 31, 2021, from $21.3 million at October 31, 2020. The decrease in total liabilities was due primarily to a decrease in the PPP Loan totaling $5.0 million as a result of the forgiveness of the loan on July 1, 2021 and net repayments on our Revolver totaling $1.5 million, partially offset by an increase in accounts payable and accrued expenses totaling $1.4 million primarily resulting from the timing of raw material purchases and certain vendor payments.

Total shareholders’ equity at October 31, 2021 increased $6.9 million, or 45.5%, during fiscal year 2021. The increase resulted from net income of $6.6 million, and share-based compensation, net, of $336,000.

Liquidity and Capital Resources

Our primary capital needs have been to fund working capital requirements, make payments on our Revolver and make principal payments on long-term debt. Our primary source of capital for these purposes has been existing cash, cash provided by operations (which was positively impacted by the ERTC during fiscal year 2021), borrowings under our Revolver, and the PPP Loan (during fiscal year 2020).

As of October 31, 2021 and 2020, we had an outstanding loan balance under our Revolver totaling $3.5 million and $5.0 million, respectively. As of October 31, 2021 and 2020, we had outstanding loan balances, excluding our Revolver, totaling $4.9 million and $10.1 million, respectively.

Our cash totaled $132,000 and $141,000 as of October 31, 2021 and 2020, respectively. For the year ended October 31, 2021, net cash provided by operating activities of $2.1 million was offset by net cash used in financing activities of $1.9 million, and capital expenditures totaling $166,000.

On October 31, 2021, we had working capital of $21.4 million, compared to $19.1 million as of October 31, 2020. The ratio of current assets to current liabilities as of October 31, 2021, was 4.5 to 1 compared to 4.0 to 1 as of October 31, 2020. The increase in working capital and in the current ratio was primarily due to the increase in other receivables of $2.2 million due to the ERTC, the $815,000 increase in trade accounts receivable, net, the $1.6 million decrease in the current portion of the PPP Loan, partially offset by the $796,000 decrease in inventories and the $1.4 million increase in accounts payable and accrued expenses.

Optical Cable Corporation (OCC)

Net Cash

Net cash provided by operating activities was $2.1 million in fiscal year 2021, compared to net cash used in operating activities of $3.6 million in fiscal year 2020 and $284,000 in fiscal year 2019.

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 used in operating activities during fiscal year 2020 primarily resulted from the cash flow impact of decreases in accounts payable and accrued expenses, including accrued compensation and payroll taxes, totaling $3.3 million, partially offset by decreases in the cash flow impact of trade accounts receivable, net totaling $2.4 million, decreases in inventories totaling $996,000 and certain adjustments to reconcile a net loss of $6.1 million to net cash used in operating activities including depreciation and amortization of $1.4 million, bad debt expense of $425,000 and share-based compensation of $142,000.

Net cash used in operating activities during fiscal year 2019 primarily resulted from an increase in inventories totaling $621,000 and a decrease in accrued compensation and payroll taxes totaling $1.7 million, partially offset by a decrease in the cash flow impact of decreases in trade accounts receivable, net totaling $2.4 million and certain adjustments to reconcile a net loss of $5.7 million to net cash used in operating activities including depreciation and amortization of $1.7 million and share-based compensation expense of $981,000. Additionally, the cash flow impact of increases in accounts payable and accrued expense totaling $2.3 million further contributed to offset net cash used in operating activities.

Net cash used in investing activities totaled $193,000 in fiscal year 2021 compared to $168,000 in fiscal year 2020 and $550,000 in fiscal year 2019. Net cash used in investing activities during fiscal years 2021, 2020 and 2019 resulted primarily from the purchase of property and equipment and deposits for the purchase of property and equipment.

Net cash used in financing activities totaled $1.9 million in fiscal year 2021 compared to net cash provided by financing activities totaling $3.3 million in fiscal year 2020 and $1.2 million in fiscal year 2019.

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. Net cash provided by financing activities in fiscal year 2020 resulted from proceeds received from the PPP Loan totaling $5.0 million and advances on our revolving lines of credit totaling $19.9 million, partially offset by payments on our revolving lines of credit totaling $20.6 million, principal payments on long-term debt totaling $743,000 and deferred financing costs of $252,000. Net cash provided by financing activities in fiscal year 2019 resulted primarily from proceeds from a note payable to our bank under our line of credit, net of repayments, totaling $2.7 million, partially offset by payroll taxes withheld and remitted totaling $943,000 related to the vesting of restricted stock, and principal payments on long-term debt totaling $511,000.

Optical Cable Corporation (OCC)

On July 14, 2015, our Board of Directors approved a plan to purchase and retire up to 400,000 shares of our common stock, or approximately 6.0% of the shares then outstanding (the “Repurchase Plan”). When the Repurchase Plan was approved, we had anticipated that the purchases would be made over a 24- to 36-month period, but there was no definite time period for repurchase or plan expiration. As of October 31, 2021, we had 398,400 shares remaining to purchase under this Repurchase Plan, and we have made no specific determination whether and over what period these shares may or may not be purchased. Until future notice, we have no current plans to repurchase and retire our common stock and have suspended the Repurchase Plan.

Credit Facilities

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

Effective July 15, 2021, Northeast Bank purchased both the Virginia Real Estate Loan and the North Carolina Real Estate Loan from Pinnacle Bank (“Pinnacle”), with all the terms of the real estate loans remaining the same. The real estate loans have a fixed interest rate of 3.95% and are secured by a first lien deed of trust on the Company’s real property.

In fiscal year 2020, we obtained an unsecured PPP Loan through Pinnacle in the amount of $5.0 million. The loan was made through the United States Small Business Administration (SBA) as part of the Payroll Protection Plan (PPP) under the CARES Act. The interest rate was fixed at 1.00% per year, and the Company accrued interest of $60,323 on the PPP Loan. Under the CARES Act and the Paycheck Protection Program Flexibility Act of 2020, all or a portion of this loan (principal and interest) would be forgiven if certain requirements were met. We met these requirements and applied for forgiveness of the entire balance of the loan (including accrued interest), submitting an application to Pinnacle on February 22, 2021. On July 1, 2021, the SBA forgave the entire balance of the PPP Loan (including accrued interest). As a result, we recognized a gain on the extinguishment of debt of approximately $5.0 million during fiscal year 2021.

Our Revolver with North Mill Capital LLC (now doing business as SLR Business Credit, (SLR)) provides us with one or more advances in an amount up to: (a) 85% of the aggregate outstanding amount of eligible accounts (the “eligible accounts loan value”); plus (b) the lowest of (i) an amount up to 35% of the aggregate value of eligible inventory, (ii) $5.0 million, and (iii) an amount not to exceed 100% of the then outstanding eligible accounts loan value; minus (c) $1.5 million.

The maximum aggregate principal amount subject to the Revolver is $18.0 million. Interest accrues on the daily balance at the per annum rate of 1.5% above the Prime Rate in effect from time to time, but not less than 4.75% (the “Applicable Rate”). In the event of a default, interest may become 6.0% above the Applicable Rate. As of October 31, 2021, the Revolver accrued interest at the prime lending rate plus 1.5% (resulting in a 4.75% rate at October 31, 2021). The initial term of the Revolver is three years, with a termination date of July 24, 2023. After the initial term and unless otherwise terminated, the loan may be extended in one year periods subject to the agreement of SLR.

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

Optical Cable Corporation (OCC)

As of October 31, 2021, we had $3.5 million of outstanding borrowings on our Revolver and $4.4 million in available credit. As of October 31, 2020, we had $5.0 million of outstanding borrowings on our Revolver and $1.6 million in available credit.

Capital Expenditures

We did not have any material commitments for capital expenditures as of October 31, 2021. We expected capital expenditures in fiscal year 2021 would not exceed $750,000. We incurred capital expenditures totaling $166,000 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 2021.

During our 2022 fiscal year budgeting process, we included an estimate for capital expenditures of $1.5 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 2021. 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.