OPTICAL CABLE CORP - Quarter Report: 2014 April (Form 10-Q)

Form 10-Q Index

Six Months Ended April 30, 2014

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OPTICAL CABLE CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying condensed notes to condensed consolidated financial statements.

OPTICAL CABLE CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying condensed notes to condensed consolidated financial statements.

OPTICAL CABLE CORPORATION

Condensed Consolidated Statement of Shareholders’ Equity

(Unaudited)

See accompanying condensed notes to condensed consolidated financial statements.

OPTICAL CABLE CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying condensed notes to condensed consolidated financial statements.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months and Six Months Ended April 30, 2014

(Unaudited)

The accompanying unaudited condensed consolidated financial statements of Optical Cable Corporation and its subsidiaries (collectively, the “Company” or “OCC^®”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting information and the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended April 30, 2014 are not necessarily indicative of the results for the fiscal year ending October 31, 2014 because the following items, among other things, may impact those results: changes in market conditions, seasonality, changes in technology, competitive conditions, ability of management to execute its business plans, as well as other variables, uncertainties, contingencies and risks set forth as risks in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2013 (including those set forth in the “Forward-Looking Information” section), or as otherwise set forth in other filings by the Company as variables, contingencies and/or risks possibly affecting future results. The unaudited condensed consolidated financial statements and condensed notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2013.

As of April 30, 2014, there were approximately 61,000 shares available for grant under the Optical Cable Corporation Amended and Restated 2011 Stock Incentive Plan (“Amended 2011 Plan”).

Share-based compensation expense for employees, a consultant and non-employee Directors recognized in the condensed consolidated statements of operations for the three months and six months ended April 30, 2014 was $308,601 and $464,013, respectively. Share-based compensation expense for employees and non-employee Directors recognized in the condensed consolidated statements of income for the three months and six months ended April 30, 2013 was $294,874 and $631,672, respectively. Share-based compensation expense is entirely related to expense recognized in connection with the vesting of restricted stock awards.

Restricted Stock Awards

The Company has granted, and anticipates granting from time to time, restricted stock awards subject to approval by the Compensation Committee of the Board of Directors.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months and Six Months Ended April 30, 2014

(Unaudited)

During the three months ended April 30, 2014, restricted stock awards under the Amended 2011 Plan totaling 338,034 and 25,000 shares were approved by the Compensation Committee of the Board of Directors of the Company for OCC employees and a consultant, respectively. Of the restricted stock awards granted to OCC employees, 169,030 are service-based awards which vest quarterly over approximately four years with the first vesting date occurring on July 31, 2014; and 169,004 shares are operational performance-based shares vesting over approximately six years beginning on January 31, 2016 based on the achievement of certain quantitative operational performance goals. The restricted stock award granted to the consultant is a service-based award which vests quarterly over approximately eight years with the first vesting date occurring on July 31, 2014.

During the three months ended April 30, 2014, restricted stock awards under the 2004 Non-employee Directors Stock Plan, as amended, totaling 29,424 shares were approved by the Board of Directors of the Company. The shares are part of the non-employee Director’s annual compensation for service on the Board of Directors, and the shares vest immediately upon grant. The Company recorded compensation expense totaling $112,105 during the three months and six months ended April 30, 2014 related to the grants to non-employee Directors.

Restricted stock award activity during the six months ended April 30, 2014 consisted of restricted share grants totaling 392,458 shares and 28,844 restricted shares forfeited or withheld for taxes in connection with the vesting of restricted shares.

As of April 30, 2014, the estimated amount of compensation cost related to unvested equity-based compensation awards in the form of service-based and operational performance-based shares that the Company will have to recognize over a 3.9 year weighted-average period is approximately $3.2 million.

A summary of changes in the allowance for doubtful accounts for trade accounts receivable for the six months ended April 30, 2014 and 2013 follows:

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months and Six Months Ended April 30, 2014

(Unaudited)

Inventories as of April 30, 2014 and October 31, 2013 consist of the following:

As of April 30, 2014 and October 31, 2013, the Company’s accrual for estimated product warranty claims totaled $165,000 and $190,000, respectively, and is included in accounts payable and accrued expenses. Warranty claims expense for the three months and six months ended April 30, 2014 totaled $88,996 and $109,535, respectively, and warranty claims expense for the three months and six months ended April 30, 2013 totaled $91,296 and $81,640, respectively.

The following table summarizes the changes in the Company’s accrual for product warranties during the six months ended April 30, 2014 and 2013:

The Company has credit facilities consisting of a real estate term loan, as amended (the “Virginia Real Estate Loan”), a supplemental real estate term loan, as amended (the “North Carolina Real Estate Loan”) and a revolving credit facility, as amended (the “Commercial Loan”).

Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are with Valley Bank, have a fixed interest rate of 4.25% and are secured by a first priority lien on all of the Company’s personal property and assets, except for the Company’s inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper, as well as a first lien deed of trust on the Company’s real property.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months and Six Months Ended April 30, 2014

(Unaudited)

Long-term debt as of April 30, 2014 and October 31, 2013 consists of the following:

The Commercial Loan provides the Company with a revolving line of credit for the working capital needs of the Company. Under the terms of the Commercial Loan, the Company may borrow an aggregate principal amount at any one time outstanding not to exceed the lesser of (i) $9.0 million, or (ii) the sum of 85% of certain receivables aged 90 days or less plus 35% of the lesser of $1.0 million or certain foreign receivables plus 25% of certain raw materials inventory. Within the revolving loan limit of the Commercial Loan, the Company may borrow, repay, and reborrow, at any time from time to time until August 31, 2015, the extended maturity date of the Commercial Loan.

Advances under the Commercial Loan accrue interest at LIBOR plus 2.2% (resulting in a 2.35% rate at April 30, 2014). Accrued interest on the outstanding principal balance is due on the first day of each month, with all then outstanding principal, interest, fees and costs due at the Commercial Loan maturity date of August 31, 2015.

The Commercial Loan is secured by a first priority lien on all of the Company’s inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper.

As of April 30, 2014, the Company had $3.0 million of outstanding borrowings on its Commercial Loan and $6.0 million in available credit. As of October 31, 2013, the Company had outstanding borrowings of $2.5 million on its Commercial Loan and $6.5 million in available credit.

The carrying amounts reported in the condensed consolidated balance sheets as of April 30, 2014 and October 31, 2013 for cash, trade accounts receivable, other receivables and accounts payable and accrued expenses, including accrued compensation and payroll taxes, approximate fair value because of the short maturity of these instruments. The carrying values of the Company’s note payable to bank and long-term debt approximate fair value based on similar long-term debt issues available to the Company as of April 30, 2014 and October 31, 2013. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months and Six Months Ended April 30, 2014

(Unaudited)

Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company.

The following is a reconciliation of the numerators and denominators of the net income (loss) per share computations for the periods presented:

Weighted-average unvested shares as of April 30, 2014 totaling 654,048 and 586,354, respectively, were not included in the computation of basic and diluted net loss per share for the three months and six months ended April 30, 2014 (because to include such shares would have been antidilutive, or in other words, to do so would have reduced the net loss per share for those periods).

The Company has a plan, approved by its Board of Directors on September 20, 2012, to purchase and retire up to 320,000 shares of the Company’s common stock, or approximately 4.9% of the shares then outstanding. At the time the plan was approved, the Company anticipated that the purchases would be made over a 12- to 24-month period, but there is no definite time period for repurchase. As of April 30, 2014, the Company had 123,500 shares of its outstanding common stock remaining to purchase under this plan.

On April 15, 2014, the Company declared a quarterly cash dividend of $0.02 per share on its common stock totaling $138,807. This amount is included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet as of April 30, 2014.

The Company provides credit, in the normal course of business, to various commercial enterprises, governmental entities and not-for-profit organizations. Concentration of credit risk with respect to trade receivables is limited due to the Company’s large number of customers. The Company also manages exposure to credit risk through credit approvals, credit limits and monitoring procedures. Management believes that credit risks as of April 30, 2014 and October 31, 2013 have been adequately provided for in the condensed consolidated financial statements.

OPTICAL CABLE CORPORATION

Condensed Notes to Condensed Consolidated Financial Statements

Three Months and Six Months Ended April 30, 2014

(Unaudited)

For the three months and six months ended April 30, 2014, 14.3% and 10.4%, respectively, of consolidated net sales were attributable to one customer. For the three months ended April 30, 2013, 10.2% of consolidated net sales were attributable to one customer. No single customer accounted for more than 10% of the Company’s consolidated net sales during the six months ended April 30, 2013.

For the six months ended April 30, 2014 and 2013, approximately 75% and 68%, respectively, of consolidated net sales were from customers in the United States, and approximately 25% and 32%, respectively, were from customers outside of the United States.

The Company has a single reportable segment for purposes of segment reporting, exclusive of Centric Solutions LLC (“Centric Solutions”). For the three months and six months ended April 30, 2014, Centric Solutions generated revenues, net of intercompany sales, totaling $365,590 and $555,404, respectively, and operating losses of $53,939 and $185,778, respectively. For the three months and six months ended April 30, 2013, Centric Solutions generated revenues, net of intercompany sales, totaling $623,804 and $877,326, respectively, and operating income of $137,630 and $59,920, respectively. Total assets of Centric Solutions of approximately $244,000 (net of intercompany amounts) are included in the total consolidated assets of the Company as of April 30, 2014.

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

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The amendments in ASU 2013-11 clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. If a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013, with early adoption permitted. The adoption of ASU 2013-11 is not expected to have a material impact on the Company's results of operations, financial position or liquidity or its related financial statement disclosures.

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Form 10-Q may contain certain forward-looking information within the meaning of the federal securities laws. The forward-looking information may include, among other information, (i) statements concerning our outlook for the future, (ii) statements of belief, anticipation or expectation, (iii) future plans, strategies or anticipated events, and (iv) similar information and statements concerning matters that are not historical facts. Such forward-looking information is subject to known and unknown variables, uncertainties, contingencies and risks that may cause actual events or results to differ materially from our expectations, and such variables, uncertainties, contingencies and risks 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 risks 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, and plastics and other materials affected by petroleum product pricing); fluctuations in transportation costs; our dependence on customized equipment for the manufacture of our products and our limited number of production facilities; our ability to protect our proprietary manufacturing technology; market conditions influencing prices or pricing; our dependence on a limited number of suppliers; the loss of or conflict with one or more key suppliers or customers; an adverse outcome in litigation, claims and other actions, and potential litigation, claims and other actions against us; an adverse outcome in 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; economic conditions that affect certain geographic markets and/or the economy as a whole; changes in demand for our products from certain competitors for which we provide private label connectivity products; terrorist attacks or acts of war, and any current or potential future military conflicts; changes in the level of military spending or other spending by the United States government; ability to retain key personnel; inability to recruit needed personnel; poor labor relations; 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; the impact of the Patient Protection and Affordable Care Act of 2010, the Health Care and Education Reconciliation Act of 2010, and any revisions to those acts that apply to us and the related legislation and regulation associated with those acts, which directly or indirectly results in increases to our 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; 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 and possibly defending our position on such unsolicited proposals; impact of weather or natural disasters in the areas of the world in which we operate, market our products and/or acquire raw materials; 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, or market and 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 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, offering an integrated suite of high quality, warranted products which operate as a system solution or seamlessly integrate with other providers’ offerings. Our product offerings include designs for uses ranging from commercial, enterprise network, datacenter, residential and campus installations to customized products for specialty applications and harsh environments, including military, industrial, mining and broadcast applications. Our products include fiber optic and copper cabling, fiber optic and copper connectors, specialty fiber optic and copper connectors, fiber optic and copper patch cords, pre-terminated fiber optic and copper cable assemblies, racks, cabinets, datacom enclosures, patch panels, face plates, multi-media boxes, 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.

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 also is internationally recognized for its role in establishing copper connectivity data communications standards, through its innovative and patented technologies.

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 9001:2008 registered and MIL-STD-790F certified, our enterprise connectivity products at our Asheville facility which is ISO 9001:2008 registered, and our military and harsh environment connectivity products and systems at our Dallas facility which is ISO 9001:2008 registered and MIL-STD-790F certified.

OCC designs, develops and manufactures fiber optic cables for a broad range of commercial and 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 commercial market, including a broad range of commercial 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 and other harsh environment applications. We refer to these products as our applied interconnect systems 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.

Optical Cable Corporation owns 70% of the authorized membership interests of Centric Solutions LLC (“Centric Solutions”). Centric Solutions is a business founded in 2008 to provide turnkey cabling and connectivity solutions for the datacenter market. Centric Solutions operates and goes to market independently from Optical Cable Corporation; however, in some cases, Centric Solutions may offer products from OCC’s product offering.

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

Summary of Company Performance for Second Quarter and first half of Fiscal Year 2014

Results of Operations

We sell our products internationally and domestically through our sales force 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.

Net sales consist of gross sales of products less discounts, refunds and returns. Revenue is recognized at the time of product shipment or delivery to the customer (including distributors) provided that the customer takes ownership and assumes risk of loss (based on shipping terms), collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. 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 both anticipated and unanticipated changes in product mix. Additionally, gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales.

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 and accounting 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 primarily of the amortization of intellectual property and customer list acquired in the acquisition of AOS on October 31, 2009. For fiscal years prior to fiscal year 2014, amortization of intangible assets also included the amortization of developed technology acquired in the acquisition of Superior Modular Products Incorporated, doing business as SMP Data Communications ("SMP Data Communications" or "SMP") on May 30, 2008 (these assets were fully amortized by the end of fiscal year 2013). Amortization of intangible assets is calculated using an accelerated method and 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.

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

Three Months Ended April 30, 2014 and 2013

Net Sales

Consolidated net sales for the second quarter of fiscal year 2014 increased 5.6% to $20.2 million compared to net sales of $19.1 million for the same period last year. We experienced an increase in net sales in our commercial markets in the second quarter of fiscal year 2014 compared to the same period last year, but this increase was partially offset by a decrease in net sales in our specialty markets.

Net sales to customers in the United States increased 14.1% in the second quarter of fiscal year 2014, compared to the same period last year, while net sales to customers outside of the United States decreased 14.3%.

Gross Profit

Our gross profit for each of the second quarters of fiscal years 2014 and 2013 was $6.7 million. Gross profit margin, or gross profit as a percentage of net sales, was 33.0% in the second quarter of fiscal year 2014 compared to 34.9% in the second quarter of fiscal year 2013.

Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on both anticipated and unanticipated changes in product mix. During the second quarter of fiscal year 2014, we experienced an increase in sales of certain products that negatively impacted our gross profit margin. At this time, we do not believe this is indicative of a trend; however, variations in product mix and the resulting impact on gross profit margin from quarter to quarter are difficult to predict.

Selling, General, and Administrative Expenses

SG&A expenses increased 6.7% to $6.8 million during the second quarter of fiscal year 2014, compared to $6.4 million for the same period last year. SG&A expenses as a percentage of net sales were 33.9% in the second quarter of fiscal year 2014 compared to 33.5% in the second quarter of fiscal year 2013.

The increase in SG&A expenses during the second quarter of fiscal year 2014 compared to the same period last year was primarily due to increased legal and professional fees. We do not believe the increased SG&A expenses indicate a trend toward higher SG&A expenses generally.

Royalty (Income) Expense, Net

We recognized royalty expense, net of royalty income, totaling $17,000 during the second quarter of fiscal year 2014, compared to royalty income, net of royalty and related expenses, totaling $44,000 during the same period last year. We expect the trend of royalty expense largely or completely offsetting royalty income to continue in fiscal year 2014 as a result of the decline in royalty income due to the expiration of patents for licensed products.

Amortization of Intangible Assets

We recognized $10,000 of amortization expense, associated with intangible assets, for the second quarter of fiscal year 2014, compared to amortization expense of $23,000 during the second quarter of fiscal year 2013. The decrease in amortization expense, when comparing the two periods, is primarily due to the fact that the purchased developed technology asset, acquired in connection with the acquisition of SMP Data Communications in 2008, was fully amortized during fiscal year 2013.

Other Expense, Net

We recognized other expense, net in the second quarter of fiscal year 2014 of $110,000 compared to $124,000 in the second quarter of fiscal year 2013. Other expense, net is comprised of interest expense and other miscellaneous items which may fluctuate from period to period.

Income (Loss) Before Income Taxes

We reported a loss before income taxes of $313,000 for the second quarter of fiscal year 2014 compared to income before income taxes of $158,000 for the second quarter of fiscal year 2013. This change was primarily due to the increase in SG&A expenses of $431,000, compared to the same period in 2013.

Income Tax Expense (Benefit)

Income tax benefit totaled $156,000 in the second quarter of fiscal year 2014 compared to income tax expense of $82,000 for the same period in fiscal year 2013. Our effective tax rate for the second quarter of fiscal year 2014 was 50.0% compared to 52.1% for the second quarter of fiscal year 2013.

Generally, 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.

Net Income (Loss)

Net loss attributable to OCC for the second quarter of fiscal year 2014 was $143,000 compared to net income attributable to OCC of $42,000 for the second quarter of fiscal year 2013. This change was due primarily to the decrease in income before taxes of $470,000, partially offset by the decrease in income taxes of $239,000, in the second quarter of fiscal year 2014, compared to the same period in fiscal year 2013.

Six Months Ended April 30, 2014 and 2013

Net Sales

Consolidated net sales for the first half of fiscal year 2014 increased approximately 1.0% to $36.7 million compared to net sales of $36.4 million for the same period last year. We experienced an increase in net sales during the first half of fiscal year 2014 in our commercial markets compared to the same period last year, but this increase was offset by decreases in net sales in our specialty markets.

Net sales to customers in the United States increased 10.2% in the first half of fiscal year 2014 compared to the same period last year, while net sales to customers outside of the United States decreased 19.3%.

Gross Profit

Our gross profit was $12.1 million in the first half of fiscal year 2014, a decrease of 8.5% compared to $13.2 million in the first half of fiscal year 2013. Gross profit margin, or gross profit as a percentage of net sales, decreased to 32.9% in the first half of fiscal year 2014 from 36.2% in the first half of fiscal year 2013.

Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on both anticipated and unanticipated changes in product mix. The lower gross profit margin in the first half of fiscal year 2014 when compared to the same period in fiscal year 2013 is attributable to (i) the negative impact of lower net sales during the first quarter of fiscal year 2014, as certain fixed manufacturing costs were spread over lower sales during that period, and (ii) an increase in sales of certain products that negatively impacted our gross profit margin during the second quarter of fiscal year 2014.

Selling, General, and Administrative Expenses

SG&A expenses increased 2.3% to $12.9 million for the first half of fiscal year 2014 from $12.6 million for the same period last year. SG&A expenses as a percentage of net sales were 35.1% in the first half of fiscal year 2014 compared to 34.6% in the first half of fiscal year 2013.

The increase in SG&A expenses during the first half of 2014 compared to the same period last year was primarily due to increased legal and professional fees. We do not believe the increased SG&A expenses indicate a trend toward higher SG&A expenses generally.

Royalty Expense, Net

We recognized royalty expense, net of royalty income, totaling $46,000 during the first half of fiscal year 2014, compared to $4,000 during the same period last year. We expect the trend of royalty expense largely or completely offsetting royalty income to continue in fiscal year 2014 as a result of the decline in royalty income due to the expiration of patents for licensed products.

Amortization of Intangible Assets

We recognized $19,000 of amortization expense, associated with intangible assets, for the first half of fiscal year 2014, compared to amortization expense of $47,000 during the first half of fiscal year 2013. The decrease in amortization expense, when comparing the two periods, is primarily due to the fact that the purchased developed technology asset, acquired in connection with the acquisition of SMP Data Communications in 2008, was fully amortized during fiscal year 2013.

Other Expense, Net

We recognized other expense, net in the first half of fiscal year 2014 of $201,000 compared to $236,000 in the first half of fiscal year 2013. Other expense, net is comprised of interest expense and other miscellaneous items which may fluctuate from period to period.

Income (Loss) Before Income Taxes

We reported a loss before income taxes of $1.1 million for the first half of fiscal year 2014 compared to income before income taxes of $309,000 for the first half of fiscal year 2013. This change was primarily due to the decrease in gross profit of $1.1 million in the first half of fiscal year 2014 and the increase in SG&A expenses of $288,000, compared to the same period in 2013.

Income Tax Expense (Benefit)

Income tax benefit totaled $480,000 in the first half of fiscal year 2014 compared to income tax expense of $122,000 for the same period in fiscal year 2013. Our effective tax rate for the first half of fiscal year 2014 was 44.5% compared to 39.6% for the first half of fiscal year 2013.

Generally, 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.

Net Income (Loss)

Net loss attributable to OCC for the first half of fiscal year 2014 was $555,000 compared to net income attributable to OCC of $172,000 for the first half of fiscal year 2013. The change was due primarily to the decrease in income before taxes of $1.4 million in the first half of fiscal year 2014, partially offset by the decrease in income taxes of $603,000, in the first half of fiscal year 2014, compared to the same period in fiscal year 2013.

Financial Condition

Total assets increased $2.1 million, or 4.7%, to $47.5 million at April 30, 2014, from $45.4 million at October 31, 2013. This increase was primarily due to a $1.5 million increase in trade accounts receivable, net. The increase in trade accounts receivable, net largely resulted from the increase in net sales in the second quarter of fiscal year 2014 when compared to the fourth quarter of fiscal year 2013 and the timing of collections.

Total liabilities increased $2.6 million, or 16.1%, to $18.4 million at April 30, 2014, from $15.9 million at October 31, 2013. The increase in total liabilities was primarily due to a $2.2 million increase in accounts payable and accrued expenses, including accrued compensation and payroll taxes, and a $500,000 increase in note payable to bank under our revolving line of credit. Accounts payable and accrued expenses, including accrued compensation and payroll taxes, increased primarily due to the timing of certain raw material purchases when comparing the two periods and the timing of certain vendor and payroll related payments.

Total shareholders’ equity attributable to OCC at April 30, 2014 decreased $398,000 in the first half of fiscal year 2014. The decrease resulted from a net loss attributable to OCC of $555,000 and dividends declared of $270,000, partially offset by share-based compensation, net of $420,000.

Liquidity and Capital Resources

Our primary capital needs during the first half of fiscal year 2014 have been to fund working capital requirements and capital expenditures. Our primary source of capital for these purposes has been existing cash, borrowings under our revolving credit facility and cash provided by operations. As of April 30, 2014 and October 31, 2013, we had outstanding loan balances under our revolving credit facility totaling $3.0 million and $2.5 million, respectively. As of April 30, 2014 and October 31, 2013, we had outstanding loan balances, excluding our revolving credit facility, totaling $7.6 million and $7.8 million, respectively.

Our cash totaled $291,000 as of April 30, 2014, a decrease of $460,000, compared to $750,000 as of October 31, 2013. The decrease in cash for the six months ended April 30, 2014 primarily resulted from capital expenditures totaling $868,000, partially offset by cash provided by operating activities of $406,000 and net cash provided by financing activities totaling $73,000.

On April 30, 2014, we had working capital of $26.7 million compared to $27.0 million on October 31, 2013. The ratio of current assets to current liabilities as of April 30, 2014 was 4.8 to 1 compared to 6.6 to 1 as of October 31, 2013. The decrease in working capital and in the current ratio was primarily due to the $2.2 million increase in accounts payable and accrued expenses, including accrued compensation and payroll taxes, partially offset by the $1.5 million increase in trade accounts receivable, net.

Net Cash

Net cash provided by operating activities was $406,000 in the first half of fiscal year 2014, compared to $1.6 million in the first half of fiscal year 2013. Net cash provided by operating activities during the first half of fiscal year 2014 primarily resulted from certain adjustments to reconcile a net loss of $600,000 to net cash provided by operating activities, including depreciation, amortization and accretion of $979,000 and share-based compensation expense of $464,000. Additionally, the cash flow impact of increases in accounts payable and accrued expenses, including accrued compensation and payroll taxes, of $2.1 million 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 the cash flow impact of increases in trade accounts receivable, net of $1.6 million.

Net cash provided by operating activities during the first half of fiscal year 2013 primarily resulted from net income of $187,000 plus net adjustments to reconcile net income to net cash provided by operating activities, including depreciation, amortization and accretion of $1.0 million and share-based compensation expense of $632,000. Additionally, decreases in accounts receivable of $2.2 million 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 increases in inventories of $1.0 million and the decrease in accrued compensation and payroll taxes of $1.9 million.

Net cash used in investing activities totaled $939,000 in the first half of fiscal year 2014 compared to $2.3 million in the first half of fiscal year 2013. Net cash used in investing activities during the first half of fiscal years 2014 and 2013 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment.

Net cash provided by financing activities totaled $73,000 in the first half of fiscal year 2014 compared to $845,000 in the first half of fiscal year 2013. Net cash provided by financing activities in the first half of fiscal year 2014 resulted primarily from proceeds from a note payable to our bank under our line of credit, net of repayments, of $500,000, partially offset by the $263,000 payment of dividends previously declared. Net cash provided by financing activities in the first half of fiscal year 2013 resulted primarily from proceeds from a note payable to our bank under our line of credit, net of repayments, of $2.0 million, partially offset by the repurchase and retirement of 129,500 shares of our common stock for $543,000.

Credit Facilities

We have credit facilities consisting of a real estate term loan, as amended (the “Virginia Real Estate Loan”), a supplemental real estate term loan, as amended (the “North Carolina Real Estate Loan”) and a revolving credit facility, as amended (the “Commercial Loan”).

Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are with Valley Bank, have a fixed interest rate of 4.25% and are secured by a first priority lien on all of our personal property and assets, except for our inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper, as well as a first lien deed of trust on the Company’s real property.

The Commercial Loan provides us with a revolving line of credit for the working capital needs of the Company. Under the terms of the Commercial Loan, we may borrow an aggregate principal amount at any one time outstanding not to exceed the lesser of (i) $9.0 million, or (ii) the sum of 85% of certain receivables aged 90 days or less plus 35% of the lesser of $1.0 million or certain foreign receivables plus 25% of certain raw materials inventory. Within the revolving loan limit of the Commercial Loan, we may borrow, repay, and reborrow, at any time until August 31, 2015, the extended maturity date of the Commercial Loan.

Advances under the Commercial Loan accrue interest at LIBOR plus 2.2% (resulting in a 2.35% rate at April 30, 2014). Accrued interest on the outstanding principal balance is due on the first day of each month, with all then outstanding principal, interest, fees and costs due at the Commercial Loan maturity date of August 31, 2015.

The Commercial Loan is secured by a first priority lien on all of our inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper.

As of April 30, 2014, we had $3.0 million of outstanding borrowings on our Commercial Loan and $6.0 million in available credit.

Capital Expenditures

For the six months ended April 30, 2014, we have spent approximately $555,000 to upgrade existing and add new manufacturing equipment at our fiber optic cable production facility in order to further improve our production capabilities. As of April 30, 2014, we have committed an additional $820,000 to support these efforts. We did not have any other material commitments for capital expenditures as of April 30, 2014. During our 2014 fiscal year budgeting process, we included an estimate for capital expenditures of $2.8 million for the year. These expenditures will be funded out of our working capital or borrowings under our credit facilities. 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 any given year.

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

Future Cash Flow Considerations

We believe that our future cash flow from operations, our cash on hand and our existing credit facilities 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.

Seasonality

Historically, net sales are relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year, which we believe may be partially due to construction cycles and budgetary considerations of our customers. For example, our trend for the last three fiscal years has been that an average of approximately 48%, 47% and 48% of our net sales occurred during the first half of fiscal years 2013, 2012 and 2011, respectively, and an average of approximately 52%, 53% and 52% of our net sales occurred during the second half of fiscal years 2013, 2012 and 2011, respectively. We believe net sales may not follow this pattern in periods when overall economic conditions in the industry and/or in the world are atypical.

As a result, 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. 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 by the timing of larger projects, 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, we are not able to reliably predict net sales based on seasonality because these other factors can also substantially impact our net sales patterns during the year.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based on the condensed consolidated financial statements and accompanying condensed notes that have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting information and the instructions to Form 10-Q and Regulation S-X. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 1 to the consolidated financial statements filed with our Annual Report on Form 10-K for fiscal year 2013 provides a summary of our significant accounting policies. Those significant accounting policies detailed in our fiscal year 2013 Form 10-K did not change during the period from November 1, 2013 through April 30, 2014.

New Accounting Considerations

In July 2013, the FASB issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The amendments in ASU 2013-11 clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. If a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013, with early adoption permitted. The adoption of ASU 2013-11 is not expected to have a material impact on our results of operations, financial position or liquidity or our related financial statement disclosures.

There are no other 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.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in reports under the Exchange Act are recorded, processed and summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.

Our management evaluated, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), the effectiveness of the Company’s disclosure controls and procedures as of April 30, 2014. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of April 30, 2014 and that there were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter ended April 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On September 20, 2012, the Company’s Board of Directors approved a plan to purchase and retire up to 320,000 shares of the Company’s common stock, or approximately 4.9% of the shares then outstanding. The Company at that time anticipated that the purchases would be made over a 12- to 24-month period unless the entire number of shares expected to be purchased under the plan was sooner acquired. For the three month period ended April 30, 2014, the Company did not repurchase and retire any shares of its outstanding common stock.

Item 6. Exhibits

The exhibits listed on the Exhibit Index are filed as part of, and incorporated by reference into, this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Exhibit Index