Optical Cable (OCC) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements and management's analysis, revealing a significant decline in profitability and sales Item 1. Financial Statements The unaudited financial statements for the nine months ended July 31, 2019, indicate a significant net loss due to declining sales Condensed Consolidated Balance Sheets The balance sheet reflects decreased total assets and shareholders' equity, contrasted by a significant rise in total liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | July 31, 2019 | October 31, 2018 | | :--- | :--- | :--- | | Total Assets | $41,518 | $43,098 | | Total Current Assets | $30,351 | $31,047 | | Total Liabilities | $19,662 | $16,288 | | Total Current Liabilities | $14,136 | $7,028 | | Total Shareholders' Equity | $21,856 | $26,811 | - The increase in current liabilities is significantly impacted by the reclassification of $5.65 million of 'Note payable to bank' to current, as the revolver matures in June 2020[12][49] Condensed Consolidated Statements of Operations The company's performance shifted from a net income to a significant net loss, driven by a sharp decline in net sales Key Performance Indicators (in thousands) | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $17,367 | $23,117 | $53,075 | $67,555 | | Gross Profit | $4,491 | $7,027 | $13,363 | $21,212 | | Income (Loss) from Operations | ($937) | $660 | ($4,633) | $1,887 | | Net Income (Loss) | ($1,085) | $438 | ($5,013) | $1,419 | | EPS (Basic and Diluted) | ($0.15) | $0.06 | ($0.68) | $0.19 | Condensed Consolidated Statement of Shareholders' Equity Shareholders' equity declined substantially, primarily as a direct result of the net loss incurred during the period Changes in Shareholders' Equity (Nine Months Ended July 31, 2019) | Description | Amount | | :--- | :--- | | Balance at October 31, 2018 | $26,810,837 | | Adoption of ASC 606 | $61,763 | | Share-based compensation, net | ($1,282) | | Repurchase and retirement of common stock | ($1,333) | | Net loss | ($5,012,739) | | Balance at July 31, 2019 | $21,856,426 | Condensed Consolidated Statements of Cash Flows Cash from operations turned negative due to the net loss, though the overall cash position improved via financing activities Net Cash Flow Summary (Nine Months Ended July 31, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | ($47) | $1,046 | | Net cash used in investing activities | ($541) | ($545) | | Net cash provided by (used in) financing activities | $1,510 | ($355) | | Net increase in cash | $922 | $146 | Condensed Notes to Condensed Consolidated Financial Statements The notes detail the adoption of Topic 606, debt covenant issues, and significant customer concentration - The company adopted the new revenue recognition standard, Topic 606, on November 1, 2018, using the modified retrospective method, which did not materially impact results[22][23] - The company's credit facilities require compliance with financial covenants, but as of July 31, 2019, the current ratio was 2.1 to 1.0, below the required 3.0 to 1.0, leading to a subsequent loan modification[48][49][156] - Significant customer concentration exists, with two customers accounting for 14.5% and 14.1% of consolidated net sales in the first nine months of fiscal 2019[57] Net Sales by Geography (Nine Months Ended July 31) | Region | 2019 | 2018 | | :--- | :--- | :--- | | United States | $43,460,603 | $58,013,199 | | Outside the United States | $9,614,308 | $9,542,114 | | Total Net Sales | $53,074,911 | $67,555,313 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the sales decline to non-recurring prior-year orders and discusses cost controls and debt covenant challenges Results of Operations Operational results worsened significantly due to the non-recurrence of large domestic customer orders from the previous year Financial Performance Summary (in thousands) | Metric | Q3 2019 | Q3 2018 | % Change | 9M 2019 | 9M 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $17,367 | $23,117 | (24.9)% | $53,075 | $67,555 | (21.4)% | | Gross profit | $4,491 | $7,027 | (36.1)% | $13,363 | $21,212 | (37.0)% | | SG&A expenses | $5,418 | $6,370 | (14.9)% | $17,969 | $19,329 | (7.0)% | | Net income (loss) | ($1,085) | $438 | (347.6)% | ($5,013) | $1,419 | (453.2)% | - The decrease in net sales is primarily due to large, non-recurring orders from one domestic customer in fiscal 2018; excluding this customer, sales to all other customers increased[100][119] - The company is actively focused on cost control and correcting manufacturing inefficiencies, with benefits not expected to be fully realized until after Q4 2019[103][122] Financial Condition, Liquidity and Capital Resources The company's financial condition weakened, marked by a significant drop in working capital and potential debt covenant non-compliance - Working capital decreased from $24.0 million to $16.2 million, and the current ratio fell from 4.4 to 1.0 to 2.1 to 1.0, primarily due to the reclassification of revolver debt[141] - Management believes it is possible the company will not comply with the fixed charge coverage ratio covenant at the fiscal year-end[159][167] - Subsequent to the quarter end, the company entered into a Seventh Loan Modification Agreement which suspended the current ratio financial covenant for the quarter[155][156] Item 4. Controls and Procedures The company's disclosure controls and procedures were concluded to be effective with no material changes to internal controls - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures and concluded they were effective as of July 31, 2019[181] PART II. OTHER INFORMATION This section details a subsequent loan modification agreement and lists all exhibits filed with the report Item 5. Other Information The company entered into a loan modification agreement subsequent to the quarter's end to address a financial covenant breach - The company entered into a Seventh Loan Modification Agreement with its lender, Pinnacle Bank, on September 11, 2019[182] - Key terms include reducing the credit line from $7.0 million to $6.5 million, requiring a $500,000 principal reduction, and changing the revolver interest rate[183] - In exchange, the lender agreed to suspend the current ratio financial covenant for the fiscal quarter ended July 31, 2019[184] Item 6. Exhibits This section lists key filed documents, including the loan modification agreement and Sarbanes-Oxley certifications - The Seventh Loan Modification Agreement dated September 11, 2019, is filed as Exhibit 4.22[196] - Certifications by the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[203]