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. 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; inflation and the ability to recover cost increases;
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; cold
wars and economic sanctions as a result of these activities; changes in the
level of spending by the United States government, including, but not limited to
military spending; ability to recruit and retain key personnel (including
production personnel); poor labor relations; increasing labor costs; delays,
extended lead times and/or changes in availability of needed raw materials,
equipment and/or supplies; shipping and other logistics challenges; impact of
inflation or hyperinflation on costs, including raw materials and labor, and
ability to pass along any increased costs to customers; impact of rising
interest rates increasing the cost of capital; impact of cybersecurity risks and
incidents and the related actual or potential costs and consequences of such
risks and incidents, including costs and regulations to limit such risks; the
impact of data privacy laws 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; direct and indirect
impacts of weather, natural disasters and/or epidemic, pandemic or endemic
diseases (such as COVID-19) in the areas of the world in which we operate,
market our products and/or acquire raw materials including impacts on supply
chains, labor constraints impacting our production volumes and costs; any
present or future government mandates, travel restrictions, shutdowns or other
regulations regarding any epidemic, pandemic or endemic diseases; an increase in
the number of shares of the Company's common stock issued and outstanding;
economic downturns generally and/or in one or more of the markets in which we
operate; changes in market demand, exchange rates, productivity, market
dynamics, market confidence, macroeconomic and/or other economic conditions in
the areas of the world in which we operate and market our products; and our
success in managing the risks involved in the foregoing.



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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 8­K, 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 direct and indirect effects of the COVID-19 pandemic continue to impact
global economic conditions. During the third quarter of fiscal year 2022, we
continued to see our sales and production volume increase. Sales order
backlog/forward load remains at higher than typical levels and product demand is
robust. At the same time, we continue to experience supply chain challenges
(including availability of materials, increased lead times, and increased costs)
for certain raw materials. While recently improving, we also continue to
experience challenges recruiting additional personnel (particularly, production
personnel). These challenges have impacted shipped product volumes and sales.
Additionally, as product demand has grown, these challenges have resulted in
longer lead times for certain products, and contributed to increases in sales
order backlog/forward load. The OCC team has taken steps to successfully
mitigate (to a certain extent) the impacts of these challenges; however, at this
time we believe these challenges will continue.



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The extent to which the COVID-19 pandemic will directly and indirectly affect
OCC in the future will depend on ongoing developments, which are subject to
uncertainty, including, but not limited to: supply chain and labor constraints
impacting our production volumes and costs; the continued recovery of certain of
OCC's markets; any resurgence of the virus (including its variant strains); the
degree of immunity provided by 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. We
cannot fully anticipate or reasonably estimate all the ways in which the current
global health crisis and its direct and indirect effects could adversely impact
our business in the future.



Each of our three facilities have been continuously open and operating since the
beginning of the COVID-19 pandemic. 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).

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.



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.



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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 Third Quarter of Fiscal Year 2022

? Consolidated net sales for the third quarter of fiscal year 2022 increased

11.2% to $17.4 million, compared to $15.6 million for the same period last


    year.

? Sales order backlog/forward load exceeded $15.0 million at the end of the

third quarter of fiscal year 2022-remaining approximately three-to-five times

higher than typical levels-as product demand continues to be robust. At the

same time, supply chain and labor constraints continue to impact production


    volumes, sales and costs.

? Gross profit increased 17.6% to $4.8 million in the third quarter of fiscal

year 2022, compared to $4.1 million for the third quarter of fiscal year 2021.

? Gross profit margin (gross profit as a percentage of net sales) was 27.7%

during the third quarter of fiscal year 2022, compared to 26.2% for the third


    quarter of fiscal year 2021.

? SG&A expenses increased to $5.0 million during the third quarter of fiscal

year 2022 compared to $4.5 million during the third quarter of fiscal year


    2021.

? Net loss was $372,000, or $0.05 per share, during the third quarter of fiscal

year 2022, compared to net income of $5.4 million, or $0.71 per share, for the

comparable period last year. In the third quarter of fiscal year 2021, we

recognized both a $5.0 million gain on the extinguishment of our Paycheck

Protection Program loan ("PPP Loan") and a $965,000 Employee Retention Tax


    Credit ("ERTC") as income.

? During the third quarter of fiscal year 2022, we received the remaining $2.2


    million of the ERTC receivable.




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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.



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.


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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                                 Nine Months Ended
                              July 31,                 Percent                  July 31,                 Percent
                        2022             2021           Change            2022             2021           Change
Net sales           $ 17,383,000     $ 15,635,000           11.2 %    $ 49,024,000     $ 43,252,000           13.3 %
Gross profit           4,808,000        4,090,000           17.6 %      13,888,000       11,219,000           23.8 %
SG&A expenses          4,954,000        4,531,000            9.4 %      14,771,000       13,428,000           10.0 %

Net income (loss) (372,000 ) 5,373,000 (106.9 %) (1,536,000 ) 6,616,000 (123.2 %)

Three Months Ended July 31, 2022 and 2021

Net Sales



Consolidated net sales for the third quarter of fiscal year 2022 increased 11.2%
to $17.4 million, compared to net sales of $15.6 million for the same period
last year. Sequentially, consolidated net sales increased 1.1% in the third
quarter of fiscal year 2022, compared to net sales of $17.2 million in the
second quarter of fiscal year 2022.



We experienced an increase in net sales in our specialty markets, including the
wireless carrier market, in the third quarter of fiscal year 2022, compared to
the same period last year, but the increase was partially offset by decreases in
net sales in our enterprise market. Net sales to customers in the United States
increased 13.5%, while net sales to customers outside of the United States
remained flat in the third quarter of fiscal year 2022, compared to the same
period last year. We can experience fluctuations in sales from quarter to
quarter in the various markets (both industries and geographies) in which we
operate for various reasons.



During the third quarter of fiscal year 2022, we continued to see product
demand, sales and production volume increase compared to the same period last
fiscal year. Our sales order backlog/forward load exceeded $15.0 million at the
end of the third quarter of fiscal year 2022-remaining approximately
three-to-five times higher this fiscal year than typical levels-as product
demand continues to be robust.



At the same time, we believe continuing and lingering direct and indirect
impacts of the COVID-19 pandemic have created challenges that have hampered
production volumes and sales despite increased demand. Our production volumes
continued to be tempered (which impacted net sales) during the third quarter of
fiscal year 2022 as we continued to experience supply chain challenges
(including availability of materials, increased lead times, and increased costs)
for certain raw materials, as well as challenges recruiting additional personnel
(particularly, production personnel). We experienced improvement in production
labor recruitment during the third quarter of fiscal year 2022; however,
training of new production employees impacts production volumes (and labor
costs) until those employees are fully trained and operating at capacity.

We believe we have taken appropriate actions to mitigate the impact of these supply chain and recruiting challenges. We have necessarily implemented prospective price increases on new sales orders for many of our products in response to increased material and production costs.





We are continuing to see positive indicators in our markets and believe we will
continue to benefit from continued strong demand in our markets during the
remainder of fiscal year 2022; however, such expectations could be negatively
impacted by macroeconomic and geopolitical risks, and further direct and
indirect impacts of the COVID-19 pandemic.



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Gross Profit



Our gross profit was $4.8 million in the third quarter of fiscal year 2022, an
increase of 17.6% compared to gross profit of $4.1 million in the third quarter
of fiscal year 2021. Sequentially, gross profit decreased 4.5% in the third
quarter of fiscal year 2022, compared to gross profit of $5.0 million for the
second quarter of fiscal year 2022.



Gross profit margin, or gross profit as a percentage of net sales, was 27.7% in
the third quarter of fiscal year 2022 compared to 26.2% in the third quarter of
fiscal year 2021.



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



Our gross profit margins tend to be higher when we achieve higher net sales
levels due to our operating leverage as certain fixed manufacturing costs are
spread over higher sales, which we believe partially offset the impact of raw
material cost increases during the third quarter of fiscal year 2022. 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.

Selling, General, and Administrative Expenses





SG&A expenses increased to $5.0 million during the third quarter of fiscal year
2022, compared to $4.5 million for the same period last year. SG&A expenses as a
percentage of net sales were 28.5% in the third quarter of fiscal year 2022,
compared to 29.0% in the third quarter of fiscal year 2021.



The increase in SG&A expenses during the third quarter of fiscal year 2022
compared to the same period last year was primarily the result of increases in
employee and contracted sales personnel related costs totaling $267,000. The
increase in employee and contracted sales personnel related costs during the
third quarter of fiscal year 2022 was primarily due to: increased commission
expense as a result of the increase in sales, new hires (net of terminations),
and increases in compensation expense (including increases in response to
changing labor market conditions), when compared to the third quarter of fiscal
year 2021.

Also contributing to the increase in SG&A expenses during the third quarter of fiscal year 2022 were increases in travel expenses due to the resumption of business travel during the third quarter of fiscal year 2022 post-COVID-19 restrictions, when compared to the same period last year.

Royalty Income (Expense), Net





We recognized royalty expense, net of royalty income, totaling $7,000 during the
third quarter of fiscal year 2022 compared to $5,000 during the third quarter of
fiscal year 2021. Royalty expense and/or income may fluctuate based on sales of
related licensed products and estimates of amounts for non-licensed product
sales, if any.

Amortization of Intangible Assets

We recognized $14,000 of amortization expense, associated with intangible assets, during the third quarter of fiscal year 2022, compared to $12,000 during the third quarter of fiscal year 2021.


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Other Income (Expense), Net



We recognized other expense, net in the third quarter of fiscal year 2022 of
$196,000, compared to other income, net of $5.8 million in the third quarter of
fiscal year 2021. Other expense, net for the fiscal quarter ended July 31, 2022
is comprised primarily of interest expense together with other miscellaneous
items.



The change in other expense, net during the third quarter of fiscal year 2022
compared to the same period last year was primarily due to the extinguishment of
our PPP Loan (including accrued interest) totaling $5.0 million and the ERTC of
$965,000, both of which were recognized as other income in the third quarter of
fiscal year 2021, but did not recur in the third quarter of fiscal year 2022.



The ERTC, created in the March 2020 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 were limited to $10,000 per employee per
calendar quarter in 2021 so the maximum ERTC available was $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 qualified the Company to claim ERTC in both the first and
second calendar quarters of 2021 under the amended ERTC program.

Income (Loss) Before Income Taxes





We reported a loss before income taxes of $362,000 for the third quarter of
fiscal year 2022, compared to income before income taxes of $5.4 million for the
third quarter of fiscal year 2021. The change was primarily due to the gain on
the extinguishment of the PPP Loan (including accrued interest) of $5.0 million
and the ERTC of $965,000, both of which were recognized during the third quarter
of fiscal year 2021, but did not recur in the third quarter of fiscal year 2022,
and the increase in SG&A expenses of $424,000, partially offset by the increase
in gross profit of $718,000.



Income Tax Expense (Benefit)



Income tax expense totaled $10,000 in the third quarter of fiscal year 2022,
compared to $4,000 in the third quarter of fiscal year 2021. Our effective tax
rate was negative 2.7% for the third quarter of fiscal year 2022 and less than
one percent for the third quarter of fiscal year 2021.



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.



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



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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 totaled $4.3 million.



Net Loss



Net loss for the third quarter of fiscal year 2022 was $372,000 compared to net
income $5.4 million for the third quarter of fiscal year 2021. This change was
primarily due to the decrease in income before income taxes of $5.7 million.

Nine Months Ended July 31, 2022 and 2021

Net Sales



Consolidated net sales for the first nine months of fiscal year 2022 were $49.0
million, an increase of 13.3% compared to net sales of $43.3 million for the
same period last year. We experienced increases in net sales in both our
enterprise and specialty markets, including the wireless carrier market, in the
first nine months of fiscal year 2022, compared to the same period last year.
Net sales to customers in the United States increased 18.8%, while net sales to
customers outside of the United States decreased 10.0% in the first nine months
of fiscal year 2022, compared to the same period last year. We can experience
fluctuations in sales from quarter to quarter in the various markets (both
industries and geographies) in which we operate for various reasons.



During the first nine months of fiscal year 2022, we continued to see product
demand, sales and production volume increase compared to the same period last
year. Our sales order backlog/forward load has exceeded $15.0 million at the end
of the third, second and first quarters of fiscal year 2022-remaining
approximately three-to-five times higher this fiscal year than typical levels-as
product demand continues to be robust.



At the same time, we believe continuing and lingering direct and indirect
impacts of the COVID-19 pandemic have created challenges that have hampered
production volumes and sales despite increased demand. Our production volumes
continued to be tempered (which impacted net sales) during the first nine months
of fiscal year 2022 as we continued to experience supply chain challenges
(including availability of materials, increased lead times, and increased costs)
for certain raw materials, as well as challenges recruiting additional personnel
(particularly, production personnel). We experienced improvement in production
labor recruitment during the third quarter of fiscal year 2022; however,
training of new production employees impacts production volumes (and labor
costs) until those employees are fully trained and operating at capacity.

We believe we have taken appropriate actions to mitigate the impact of these supply chain and recruiting challenges. We have necessarily implemented prospective price increases on new sales orders for many of our products in response to increased material and production costs.





We are continuing to see positive indicators in our markets and believe we will
continue to benefit from continued strong demand in our markets during the
remainder of fiscal year 2022; however, such expectations could be negatively
impacted by macroeconomic and geopolitical risks, and further direct and
indirect impacts of the COVID-19 pandemic.



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Gross Profit



Our gross profit was $13.9 million in the first nine months of fiscal year 2022,
an increase of 23.8% compared to gross profit of $11.2 million in the first nine
months of fiscal year 2021. Gross profit margin increased to 28.3% in the first
nine months of fiscal year 2022 compared to 25.9% in the first nine months of
fiscal year 2021.



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



Our gross profit margins tend to be higher when we achieve higher net sales
levels due to our operating leverage, as certain fixed manufacturing costs are
spread over higher sales. This operating leverage positively impacted our gross
profit margin during the first nine months of fiscal year 2022, particularly
during the first quarter of fiscal year 2022. This positive impact during the
first quarter of fiscal year 2022 was partially offset during the second and
third quarters by the impact of increasing costs of raw materials, created by
rapidly occurring inflation, for sales orders accepted prior to raw material
cost increases. Additionally, actions that we took in fiscal years 2020 and 2019
contributed to the increase in our gross profit margin in the first nine months
of fiscal year 2022, resulting in an improved gross profit margin when compared
to the first nine months of fiscal year 2021. 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.

Selling, General, and Administrative Expenses





SG&A expenses increased 10.0% to $14.8 million during the first nine months of
fiscal year 2022, compared to $13.4 million for the same period last year. SG&A
expenses as a percentage of net sales were 30.1% in the first nine months of
fiscal year 2022, compared to 31.0% in the first nine months of fiscal year
2021.



The increase in SG&A expenses during the first nine months of fiscal year 2022
compared to the same period last year was primarily the result of increases in
employee and contracted sales personnel related costs totaling $804,000. The
increase in employee and contracted sales personnel related costs during the
first nine months of fiscal year 2022 was primarily due to: increased commission
expense as a result of the increase in sales, new hires (net of terminations)
and increases in compensation expense (including increases in response to
changing labor market conditions), all when compared to the first nine months of
fiscal year 2021.



Also contributing to the increase in SG&A expenses during the first nine months
of fiscal year 2022 were increases in travel expenses, increases in shipping
costs, and increases in marketing expenses. Both travel and marketing expenses
increased due to the resumption of business travel during the first nine months
of fiscal year 2022 post-COVID-19 restrictions, when compared to the same period
last year. Shipping costs increased due to the increase in net sales and the
increase in costs charged by shippers during the first nine months of fiscal
year 2022.

Royalty Income (Expense), Net





We recognized royalty expense, net of royalty income, totaling $20,000 during
the first nine months of fiscal year 2022 compared to royalty income, net of
royalty and related expenses, of $45,000 during the first nine months of fiscal
year 2021. Royalty income and/or expense may fluctuate based on sales of related
licensed products and estimates of amounts for non-licensed product sales, if
any.



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Amortization of Intangible Assets

We recognized $37,000 of amortization expense, associated with intangible assets, during the first nine months of fiscal year 2022, compared to $34,000 during the first nine months of fiscal year 2021.





Other Income (Expense), Net



We recognized other expense, net in the first nine months of fiscal year 2022 of
$578,000, compared to other income, net of $8.8 million in the first nine months
of fiscal year 2021. Other expense, net for the first nine months of fiscal year
2022 is comprised primarily of interest expense together with other
miscellaneous items.



The change in other expense, net during the first nine months of fiscal year
2022 compared to the same period last year was primarily due to the
extinguishment of our PPP Loan (including accrued interest) totaling $5.0
million and the ERTC of $4.3 million, both of which were recognized as other
income in the first nine months of fiscal year 2021, but did not recur in the
first nine months of fiscal year 2022.



The ERTC, created in the March 2020 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 were limited to $10,000 per employee per
calendar quarter in 2021 so the maximum ERTC available was $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 qualified the Company to claim ERTC in both the first and
second calendar quarters of 2021 under the amended ERTC program.

Income (Loss) Before Income Taxes





We reported a loss before income taxes of $1.5 million for the first nine months
of fiscal year 2022, compared to income before income taxes of $6.6 million for
the first nine months of fiscal year 2021. The change was primarily due to the
gain on the extinguishment of the PPP Loan (including accrued interest) of $5.0
million and the ERTC of $4.3 million, both of which were recognized during the
first nine months of fiscal year 2021, but did not recur in the first nine
months of fiscal year 2022, and the increase in SG&A expenses of $1.3 million,
partially offset by the increase in gross profit of $2.7 million.



Income Tax Expense (Benefit)



Income tax expense totaled $17,000 in the first nine months of fiscal year 2022,
compared to income tax benefit of $22,000 in the first nine months of fiscal
year 2021. Our effective tax rate was negative 1.1% for the first nine months of
fiscal year 2022 and less than negative one percent for the first nine months of
fiscal year 2021.



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.



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



If we generate sufficient income before taxes in subsequent periods such that
U.S. GAAP would permit us to conclude that the removal of any valuation
allowance against our net deferred tax asset is appropriate, then during the
period in which such determination is made, we will recognize the non-cash
benefit of such removal of the valuation allowance in income tax expense on our
consolidated statement of operations, which will increase net income and will
also increase the net deferred tax asset on our consolidated balance sheet. If
we do not generate sufficient income before taxes in subsequent periods such
that U.S. GAAP would permit us to conclude that the reduction or removal of any
valuation allowance against our net deferred tax asset is appropriate, then no
such non-cash benefit would be realized. There can be no assurance regarding any
future realization of the benefit by us of all or part of our net deferred tax
assets. As of October 31, 2021, the valuation allowance against our total gross
deferred tax assets totaled $4.3 million.



Net Income (Loss)



Net loss for the first nine months of fiscal year 2022 was $1.5 million compared
to net income of $6.6 million for the first nine months of fiscal year 2021.
This change was primarily due to the decrease in income before income taxes of
$8.1 million.



Financial Condition



Total assets increased $1.1 million, or 2.9%, to $39.0 million at July 31, 2022,
from $37.9 million at October 31, 2021. This increase was primarily due to a
$2.4 million increase in inventories largely as the result of the timing of
certain raw material purchases (partially offset by a decrease in finished
goods) and a $1.8 million increase in trade accounts receivable, net, resulting
from the increase in net sales in the third quarter of fiscal year 2022 when
compared to the fourth quarter of fiscal year 2021, partially offset by the $2.2
million decrease in other receivables due primarily to the receipt of the
remaining portion of the ERTC receivable.



Total liabilities increased $2.4 million, or 15.4%, to $18.1 million at July 31,
2022, from $15.7 million at October 31, 2021. The increase in total liabilities
was primarily due to net borrowings on our Revolver totaling $2.4 million and an
increase in accounts payable and accrued expenses totaling $905,000 primarily
resulting from the timing of raw material purchases and certain vendor payments.



Total shareholders' equity at July 31, 2022 decreased $1.3 million in the first
nine months of fiscal year 2022. The decrease resulted from a net loss of $1.5
million, partially offset by share-based compensation, net of $214,000.

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 and borrowings under our Revolver (see "Credit Facilities" below).





Our cash totaled $192,000 as of July 31, 2022, an increase of $60,000 compared
to $132,000 as of October 31, 2021. The increase in cash for the nine months
ended July 31, 2022 primarily resulted from net cash provided by financing
activities of $2.0 million, partially offset by capital expenditures totaling
$197,000 and cash used in operating activities of $1.7 million.



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On July 31, 2022, we had working capital of $22.3 million compared to $21.4
million on October 31, 2021. The ratio of current assets to current liabilities
as of July 31, 2022 was 4.2 to 1.0 compared to 4.5 to 1.0 as of October 31,
2021. The increase in working capital was primarily due to the increase in
inventories of $2.4 million and the increase in trade accounts receivable, net
of $1.8 million, partially offset by the $2.2 million decrease in other
receivables and the $905,000 increase in accounts payable and accrued expenses.
The decrease in the current ratio was primarily due to the fact that current
assets increased $1.8 million, or 6.7%, while current liabilities increased
$908,000, or 14.7%.



As of July 31, 2022 and October 31, 2021, we had outstanding loan balances under
our Revolver totaling $5.9 million and $3.5 million, respectively. As of July
31, 2022 and October 31, 2021, we had outstanding loan balances, excluding our
Revolver, totaling $4.6 million and $4.9 million, respectively.



Net Cash



Net cash used in operating activities was $1.7 million in the first nine months
of fiscal year 2022, compared to $210,000 for the first nine months of fiscal
year 2021. Net cash used in operating activities during the first nine months of
fiscal year 2022 primarily resulted from an increase in inventories totaling
$2.4 million and the cash flow impact of increases in trade accounts receivable,
net totaling $1.8 million, partially offset by certain adjustments to reconcile
a net loss of $1.5 million to net cash used in operating activities including
depreciation and amortization of $820,000 and share-based compensation expense
of $325,000. Additionally, the cash flow impact of decreases in other
receivables of $2.2 million and increases in accounts payable and accrued
expenses of $920,000 further contributed to offset net cash used in operating
activities.



Net cash used in operating activities during the first nine months of fiscal
year 2021 primarily resulted from an increase in other receivables totaling $3.6
million and the cash flow impact of increases in trade accounts receivable, net
totaling $1.6 million and an adjustment to reconcile net income of $6.6 million
to net cash used in operating activities for the gain on the extinguishment of
debt - PPP Loan principal totaling $5.0 million, partially offset by decreases
in inventories totaling $1.4 million and certain other adjustments to reconcile
net income of $6.6 million to net cash used in operating activities including
depreciation and amortization of $914,000 and share-based compensation expense
of $217,000. Additionally, the cash flow impact of increases in accounts payable
and accrued expenses of $789,000 further contributed to offset net cash used in
operating activities.



Net cash used in investing activities totaled $216,000 in the first nine months
of fiscal year 2022, compared to $151,000 in the first nine months of fiscal
year 2021. Net cash used in investing activities during the first nine months of
fiscal years 2022 and 2021 resulted primarily from purchases of property and
equipment and deposits for the purchase of property and equipment.



Net cash provided by financing activities totaled $2.0 million for the first
nine months of fiscal year 2022, compared to $342,000 in the first nine months
of fiscal year 2021. Net cash provided by financing activities in the first nine
months of fiscal year 2022 resulted primarily from net proceeds on our revolving
line of credit totaling $2.4 million, partially offset by principal payments on
long-term debt totaling $243,000. Net cash provided by financing activities in
the first nine months of fiscal year 2021 resulted primarily from net proceeds
on our revolving line of credit totaling $642,000, partially offset by principal
payments on long-term debt totaling $233,000.



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 July 31, 2022, 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
continue to have no current plans to repurchase and retire our common stock and
have suspended the Repurchase Plan.



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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").



Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are
with Northeast Bank, have a fixed interest rate of 3.95% and are secured by a
first lien deed of trust on the Company's real property.



On July 5, 2022, we entered into a Modification Agreement with North Mill
Capital LLC (now doing business as SLR Business Credit, "SLR") to modify the
existing Loan and Security Agreement ("Loan Agreement") dated July 24, 2020. In
addition to certain other modifications to the Loan Agreement as set forth in
the Modification Agreement, the Modification Agreement provides a two-year
extension of the initial term of the Loan Agreement to July 24, 2025 and reduces
the dollar amount of the availability block from $1,500,000 to $1,150,000.



The Revolver with SLR provides us with one or more advances in an amount up to:
(a) 85% of the aggregate outstanding amount of eligible accounts (the "eligible
accounts loan value"); plus (b) the lowest of (i) an amount up to 35% of the
aggregate value of eligible inventory, (ii) $5.0 million, and (iii) an amount
not to exceed 100% of the then outstanding eligible accounts loan value; minus
(c) $1.15 million.



The 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 July 31, 2022, the Revolver accrued interest at the prime lending
rate plus 1.5% (resulting in a 7.0% rate at July 31, 2022). 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.

As of July 31, 2022, we had $5.9 million of outstanding borrowings on our Revolver and $4.9 million in available credit.





Capital Expenditures



We did not have any material commitments for capital expenditures as of July 31,
2022. During our 2022 fiscal year budgeting process, we included an estimate for
capital expenditures of $1.5 million for the year. We anticipate these
expenditures, to the extent made, will be funded out of our working capital,
cash provided by operations or borrowings under our Revolver, as appropriate.
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. Additionally, capital
expenditures above $1.0 million would require approval from our lender.



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Corporate acquisitions and other strategic investments, if any, 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



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 considerations of our customers. However, this pattern
may be substantially altered during any quarter or year based on a variety of
factors. 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 and the volatility of the direct and indirect effects of
the COVID-19 pandemic, we are not able to reliably predict the effects of
seasonality on net sales 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 information
and the instructions to Form 10­Q and Regulation S­X. 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 2021 provides a summary of our significant accounting
policies. Those significant accounting policies detailed in our fiscal year 2021
Form 10-K did not change during the period from November 1, 2021 through July
31, 2022.



New Accounting Standards



There are no new accounting standards issued, but not yet adopted by us, which
are expected to be applicable to our financial position, operating results or
financial statement disclosures.



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