Optical Cable (OCC) - 2021 Q4 - Annual Report

PART I Item 1. Business OCC manufactures fiber optic and copper data communication solutions for enterprise, harsh environment, specialty, and wireless carrier markets - Optical Cable Corporation (OCC) and its subsidiaries are headquartered in Roanoke, Virginia, with additional facilities near Asheville, North Carolina, and Dallas, Texas[12] - OCC is a leading manufacturer of fiber optic and copper data communication cabling and connectivity solutions, primarily for enterprise, harsh environment, specialty, and wireless carrier markets[13][22] - The company's product offerings include designs for enterprise networks, data centers, residential, campus, Passive Optical LAN (POL), military, industrial, mining, petrochemical, broadcast, and wireless carrier applications[14][22] - OCC is internationally recognized for pioneering fiber optic cables for demanding military field applications and for innovative copper connectivity technology[17][26][30] - Manufacturing facilities are ISO 9001:2015 registered, with Roanoke and Dallas facilities also MIL-STD-790G certified for military applications[18] Overview Founded in 1983, OCC manufactures fiber optic and copper data communication solutions for diverse markets, offering integrated systems - Optical Cable Corporation was incorporated in Virginia in 1983 and is headquartered in Roanoke, Virginia[12] - The Company, including subsidiaries Applied Optical Systems, Inc. (AOS) and Centric Solutions LLC, manufactures fiber optic and copper data communication cabling and connectivity solutions[13][20] - Products serve enterprise, harsh environment, specialty, and wireless carrier markets, offering integrated system solutions[13][14] Products OCC offers a comprehensive range of patented fiber optic and copper cabling, connectivity, and cable management solutions - OCC's product range includes fiber optic and copper cabling, hybrid cabling, various connectors (fiber optic, copper, specialty), patch cords, pre-terminated assemblies, racks, cabinets, enclosures, and other cable management accessories[15][23] - The company has been granted 38 patents for innovative designs in fiber optic and copper connectivity and fiber optic cable over the past five years[23] - Products are predominantly passive systems used for data, video, radio frequency, and voice communications over short- to moderate-distances[24] - Fiber Optic Cable Products: Diverse tight-buffered fiber optic cables for enterprise, data centers, residential, campus, POL, military, industrial, mining, petrochemical, broadcast, and wireless carrier markets, complying with standards like MIL-PRF-85045/8B, DNV, MSHA, and ABS[25][27][28] - Copper Datacom Cable Products: High-quality UTP and F/UTP cables in Category 5e, 6, and 6A performance ratings, available in riser and plenum configurations[29] - Fiber Optic and Copper Enterprise Connectivity Products: Comprehensive solutions for equipment rooms, telecommunications closets, data centers, and workstations, including enclosures, connectors, patch panels, jacks, patch cords, faceplates, and residential wiring products, with OCC pioneering high-performance RJ45 connectivity[31][32][33][34] - Harsh Environment and Specialty Connectivity Products: Specialty fiber optic connectors, ruggedized copper datacom connectors, and deployable systems for military, industrial, mining, oil & gas, petrochemical, and broadcast applications, featuring hermaphroditic designs and patented lightweight reels[35] Distribution Methods of Products and Services OCC distributes its products through a diverse network including major distributors, OEMs, VARs, and direct sales to end-users - Products are sold through major distributors, regional distributors, specialty and smaller distributors, original equipment manufacturers (OEMs), value-added resellers (VARs), and in some cases, directly to end-users[36] Competitive Business Conditions, Positions in the Industry and Methods of Competition The data communications market is highly competitive, with OCC facing larger, more established manufacturers possessing greater resources - The fiber optic and copper data communications markets are highly competitive, with OCC competing against large manufacturers such as Corning, CommScope, Belden, and Prysmian Group[37] - Some competitors are more established, have greater market recognition, and possess significantly larger financial, R&D, production, and marketing resources[38] Compliance with Government Laws and Regulations The company reports no material violations of government laws or regulations and no significant compliance expenditures in fiscal year 2021 - The company is not aware of any material violations of government laws and regulations at its facilities and incurred no material compliance expenditures in fiscal year 2021 beyond ordinary course of business[39] Customers and End-Users OCC serves a global customer base in approximately 50 countries, including commercial, government, and military sectors, and private labels for competitors - OCC has a global customer base, selling in approximately 50 countries in fiscal year 2021[40] - End-users include commercial institutions, government agencies, industrial and manufacturing facilities, cable assembly houses, military, educational institutions, and wireless carriers[41][42] - The company also private labels copper connectivity products for other major manufacturers, including competitors[42] Employees and Human Capital Resources As of October 31, 2021, OCC employed 322 non-unionized individuals in the US, focusing on safety, benefits, and development - As of October 31, 2021, OCC employed 322 persons in the United States, none of whom are unionized[42] - The company focuses on employee safety, benefits, development, and training, actively recruiting to address difficulties in hiring skilled labor, particularly in manufacturing, exacerbated by COVID-19[43][44] - Measures taken to protect employees during the COVID-19 pandemic include mask requirements, social distancing, sanitation, and symptom checks, with no known virus exposure illnesses at facilities[45] Seasonality Net sales historically show higher seasonality in the second half of the fiscal year, influenced by market volatility - Historically, net sales are expected to be lower in the first half and higher in the second half of each fiscal year (48% vs. 52%)[46] - This pattern can be substantially altered by volatility in wireless carrier market orders, timing of large projects, major customer orders, economic factors, and macroeconomic conditions, as seen in fiscal years 2019-2021[46] Historical Net Sales Distribution (First Half vs. Second Half) | Fiscal Year | First Half Net Sales (%) | Second Half Net Sales (%) | | :---------- | :----------------------- | :------------------------ | | 2021 | 47% | 53% | | 2020 | 50% | 50% | | 2019 | 50% | 50% | Item 1A. Risk Factors As a 'smaller reporting company,' OCC is not required to detail risk factors here; they are referenced in other reports - Item 1A. Risk Factors is not required for a 'smaller reporting company' as defined in Rule 12b-2[47] - Risk factors are mentioned under 'Forward-Looking Information' in the Company's Annual Report (Exhibit 13.1) and Quarterly Reports on Form 10-Q[48] Item 1B. Unresolved Staff Comments Optical Cable Corporation has no unresolved staff comments to report - No unresolved staff comments[49] Item 2. Properties OCC owns primary manufacturing facilities in Virginia and North Carolina, leases others, operating at 40-45% capacity in fiscal year 2021 - The company owns its Roanoke, Virginia facility (146,000 sq ft on 23 acres) for corporate headquarters and fiber optic cable manufacturing[50] - The Asheville, North Carolina facility (64,000 sq ft on 13 acres) is owned and primarily houses enterprise connectivity manufacturing[51] - A 34,000 sq ft facility near Dallas, Texas, is leased for harsh environment and specialty connectivity manufacturing and the Centric Solutions business[52] - An additional 36,000 sq ft warehouse in Roanoke, Virginia, is leased for raw material storage[53] - During fiscal year 2021, the company operated at approximately 40% to 45% of its collective production equipment capacity on average[54] - Full utilization of capacity would require hiring and training additional personnel, securing more warehousing space, and potentially acquiring additional production equipment[55] Item 3. Legal Proceedings OCC is involved in routine legal matters, but management anticipates no material adverse effect on its financial position or operations - The company is involved in various claims, legal actions, and regulatory reviews in the ordinary course of business[56] - Management believes these matters will not have a material adverse effect on financial position, results of operations, or liquidity[56] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to Optical Cable Corporation - Mine Safety Disclosures are not applicable[57] PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters As of October 31, 2021, OCC had 7.9 million common shares outstanding, with 37.2% owned by employees and directors, and a suspended stock repurchase plan Common Stock and Market Value Data | Metric | Value | As Of Date | | :------------------------------------------------------------------ | :-------------- | :--------------- | | Common Shares Outstanding | 7,897,477 | October 31, 2021 | | Common Shares Outstanding (as of Dec 15, 2021) | 7,872,164 | December 15, 2021 | | Percentage owned by employees and directors | 37.2% | October 31, 2021 | | Aggregate market value of common stock held by non-affiliates | $19,417,539 | April 30, 2021 | - A stock repurchase plan, approved on July 14, 2015, to purchase and retire up to 400,000 shares, has been suspended, with 398,400 shares remaining to be purchased[61] Item 6. Reserved This item is reserved and contains no information - Item 6 is reserved[63] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section's information is incorporated by reference from the Company's Annual Report for the fiscal year ended October 31, 2021 - Information is incorporated by reference from the Company's Annual Report for the fiscal year ended October 31, 2021 (Exhibit 13.1)[63] Item 7A. Quantitative and Qualitative Disclosures About Market Risk As of October 31, 2021, OCC did not use derivative financial instruments and its financial instruments were not exposed to significant market risks - The Company did not engage in derivative financial instruments or derivative commodity instruments[64] - As of October 31, 2021, financial instruments were not exposed to significant market risk due to interest rate, foreign currency exchange, commodity price, or equity price risk[64] Item 8. Financial Statements and Supplementary Data Consolidated Financial Statements, Notes, and the Independent Registered Public Accounting Firm's Report are incorporated by reference from the Annual Report - Information is incorporated by reference from the Company's Annual Report for the fiscal year ended October 31, 2021 (Exhibit 13.1)[65] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure OCC reported no changes in accountants and no disagreements on accounting or financial disclosure matters during fiscal year 2021 - There were no changes in accountants during the fiscal year ended October 31, 2021[66] - The Company had no disagreements with its accountants on any accounting matter or financial disclosure[66] Item 9A. Controls and Procedures Management concluded OCC's disclosure controls and internal control over financial reporting were effective as of October 31, 2021 - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of October 31, 2021[69] - Management is responsible for establishing and maintaining adequate internal control over financial reporting, designed to provide reasonable assurance regarding financial reporting reliability[70] - Management concluded that, as of October 31, 2021, the Company's internal control over financial reporting was effective, based on the COSO 2013 framework[71] - There were no changes in internal controls over financial reporting during the fourth quarter of the fiscal year that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[72] Item 9B. Other Information There is no other information to report under this item - None[73] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, Section 16(a) compliance, and the code of ethics is incorporated by reference from the 2022 Proxy Statement - Information on Directors, Executive Officers, and compliance with Section 16(a) is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders[75][76][77] - Information concerning the Company's code of ethics is incorporated by reference to the Proxy Statement under the heading 'Code of Ethics'[78] Item 11. Executive Compensation Information regarding executive and director compensation is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders - Information on Executive Compensation and Director Compensation is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders[78] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity compensation plan details and stock ownership information are incorporated by reference from the 2022 Proxy Statement Equity Compensation Plan Information | Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | (b) Weighted average exercise price of outstanding options, warrants, and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | :------------------------------------------------ | :------------------------------------------------------------------------------------------------ | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------------------------------------------------ | | Second Amended & Restated 2011 Stock Incentive Plan | 4,983 shares | $ — | — | | 2017 Stock Incentive Plan | 478,501 shares | $ — | 2,004 shares | | Total | 483,484 shares | $ — | 2,004 shares | (1) Includes restricted shares that are issued and outstanding, but have not yet vested and are subject to forfeiture - Information concerning stock ownership by directors, executive officers, and beneficial owners is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders[81] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders - Information on certain transactions with management is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Shareholders[82] Item 14. Principal Accounting Fees and Services Information on principal accounting fees, services, and pre-approval policies is incorporated by reference from the 2022 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement under the heading 'Independent Registered Public Accounting Firm'[83] - Information on pre-approval policies for audit and non-audit services is incorporated by reference from the Proxy Statement under the heading 'Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm'[84] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all 10-K exhibits, including financial statements, corporate governance, stock plans, loan agreements, and SOX certifications - Consolidated financial statements and related notes are incorporated by reference from pages 22 to 44 of the Company's Annual Report (Exhibit 13.1)[86] - All financial statement schedules are omitted as the required information is inapplicable or presented in the consolidated financial statements or notes[86] - Exhibits include corporate organizational documents (Articles of Amendment, Bylaws), stock certificates, Stockholder Protection Rights Agreements, and various credit and loan agreements, including numerous modifications with Pinnacle Bank and a Loan and Security Agreement with North Mill Capital LLC[86][88][91] - Key exhibits also include stock incentive plans (2011, 2017), employment agreements, and certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[91][93] - The report includes iXBRL formatted financial statements and a Cover Page Interactive Data File[96] SIGNATURES SIGNATURES The report is duly signed on December 20, 2021, by Optical Cable Corporation's Chairman, President, CEO, CFO, and other directors - The report was signed on December 20, 2021, by Neil D. Wilkin, Jr. (Chairman, President, and CEO) and Tracy G. Smith (Senior Vice President and CFO)[98] - Additional signatures include Randall H. Frazier, John M. Holland, John A. Nygren, Craig H. Weber, and John B. Williamson, III, all Directors[98]