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; changes in demand for our products from certain
competitors for which we provide private label connectivity products; changes in
the mix of products sold during any given period (due to, among other things,
seasonality or varying strength or weaknesses in particular markets in which we
participate) which may impact gross profits and gross profit margins or net
sales; variations in orders and production volumes of hybrid cables (fiber and
copper) with high copper content, which tend to have lower gross profit margins;
significant variations in sales resulting from: (i) high volatility within
various geographic markets, within targeted markets and industries, for certain
types of products, and/or with certain customers (whether related to the market
generally or to specific customers' business in particular), (ii) timing of
large sales orders, and (iii) high sales concentration among a limited number of
customers in certain markets, particularly the wireless carrier market;
terrorist attacks or acts of war, any current or potential future military
conflicts, and acts of civil unrest; changes in the level of military spending
or other spending by the United States government, including, but not limited to
reductions in government spending due to automatic budget cuts or sequestration;
ability to recruit and retain key personnel; poor labor relations; increasing
labor costs; the impact of cybersecurity risks and incidents and the related
actual or potential costs and consequences of such risks and incidents,
including costs to limit such risks; the impact of data privacy laws and the
General Data Protection Regulation and the related actual or potential costs and
consequences; the impact of changes in accounting policies and related costs of
compliance, including changes by the Securities and Exchange Commission ("SEC"),
the Public Company Accounting Oversight Board ("PCAOB"), the Financial
Accounting Standards Board ("FASB"), and/or the International Accounting
Standards Board ("IASB"); our ability to continue to successfully comply with,
and the cost of compliance with, the provisions of Section 404 of the
Sarbanes-Oxley Act of 2002 or any revisions to that act which apply to us; the
impact of changes and potential changes in federal laws and regulations
adversely affecting our business and/or which result in increases in our direct
and indirect costs, including our direct and indirect costs of compliance with
such laws and regulations; rising healthcare costs; 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 result 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; 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; impact of failing to receive
forgiveness of all or substantially all of the principal balance of the Small
Business Administration ("SBA") Payroll Protection Program Loan we received in
connection with the COVID-19 pandemic; the impact of future consolidation among
competitors and/or among customers adversely affecting our position with our
customers and/or our market position; actions by customers adversely affecting
us in reaction to the expansion of our product offering in any manner,
including, but not limited to, by offering products that compete with our
customers, and/or by entering into alliances with, making investments in or
with, and/or acquiring parties that compete with and/or have conflicts with our
customers; voluntary or involuntary delisting of the Company's common stock from
any exchange on which it is traded; the deregistration by the Company from SEC
reporting requirements as a result of the small number of holders of the
Company's common stock; adverse reactions by customers, vendors or other service
providers to unsolicited proposals regarding the ownership or management of the
Company; the additional costs of considering, responding to and possibly
defending our position on unsolicited proposals regarding the ownership or
management of the Company; impact of weather, natural disasters and/or epidemic
or pandemic diseases (such as COVID-19) in the areas of the world in which we
operate, market our products and/or acquire raw materials; 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 COVID-19 pandemic had a significant negative impact on businesses and
individuals in the United States and globally-including OCC. Actions taken by
governments and private industry to limit the spread of the disease resulted in
an unprecedented disruption of normal activities as businesses were forced to
shut down or operate on a limited basis.



We were obligated to continue to operate during the COVID-19 pandemic because
our workforce is classified a "Defense Industrial Base Essential Critical
Infrastructure Workforce" under guidelines from the U.S. Department of Defense
and an "Essential Critical Infrastructure Workforce" under guidelines by the
U.S. Department of Homeland Security, Cybersecurity and Infrastructure Security
Agency (CISA).


OCC's sales, production volumes and many costs were significantly and negatively impacted by the COVID-19 pandemic.





As the pandemic began, OCC assembled a team charged with overseeing our efforts
to ensure the health and safety of all employees while continuing to supply
product to our customers. That team has monitored and continues to monitor the
latest CDC, Federal, state and other regulatory guidance, works to secure
personal protective equipment, finds ways to help mitigate risk, and identifies
opportunities for us to meet or exceed health and safety guidelines and
recommended protocols.



As a result of the foregoing, OCC made a number of changes to business
operations in response to the COVID-19 pandemic including, but not limited to:
limiting business travel and face-to-face meetings, having a portion of our
non-manufacturing employees work remotely, and implementing strict social
distancing, symptom self-assessments, and sanitation and mask protocols within
its facilities.



We believe we have followed and are continuing to follow or exceed all Centers
for Disease Control and Prevention ("CDC") and public officials' guidelines as
such guidelines have changed from time to time during the pandemic.



As vaccination rates have increased and the effects of the COVID-19 pandemic
have begun to recede, we have begun to adjust our precautionary measures, as
appropriate. We have modified our protocols with respect to certain travel and
meeting restrictions, while maintaining appropriate social distancing, symptom
self-assessments, sanitation, and mask protocols. We have encouraged all of our
employees to be vaccinated, but have not implemented a vaccination mandate at
this time.



We have begun to see positive indicators of future strengthening in many of our
markets particularly during the second quarter of fiscal year 2021, with
increasing sales and production volumes. We are hopeful that we will continue to
benefit from improvement in our markets during the second half of fiscal year
2021.



The extent to which the COVID-19 pandemic will affect OCC in the future will
depend on ongoing developments, which are still uncertain, including, but not
limited to, the duration and severity of the outbreak, the timing of recovery in
certain of OCC's markets, any resurgence of the virus, the successful
distribution and administration of any current or future vaccines and boosters,
as well as a variety of other unknowable factors.



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, and for
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.



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OCC® is internationally recognized for pioneering the design and production of
fiber optic cables for the most demanding military field applications, as well
as of fiber optic cables suitable for both indoor and outdoor use, and creating
a broad product offering built on the evolution of these fundamental
technologies. OCC is also internationally recognized for pioneering the
development of innovative copper connectivity technology and designs used to
meet industry copper connectivity data communications standards.



Founded in 1983, Optical Cable Corporation is headquartered in Roanoke, Virginia
with offices, manufacturing and warehouse facilities located in Roanoke,
Virginia, near Asheville, North Carolina, and near Dallas, Texas. We primarily
manufacture our fiber optic cables at our Roanoke facility which is ISO
9001:2015 registered and MIL-STD-790G certified, primarily manufacture our
enterprise connectivity products at our Asheville facility which is ISO
9001:2015 registered, and primarily manufacture our harsh environment and
specialty connectivity products at our Dallas facility which is ISO 9001:2015
registered and MIL-STD-790G certified.



OCC designs, develops and manufactures fiber optic and hybrid cables for a broad
range of enterprise, harsh environment, wireless carrier and other specialty
markets and applications. We refer to these products as our fiber optic cable
offering. OCC designs, develops and manufactures fiber and copper connectivity
products for the enterprise market, including a broad range of enterprise and
residential applications. We refer to these products as our enterprise
connectivity product offering. OCC designs, develops and manufactures a broad
range of specialty fiber optic connectors and connectivity solutions principally
for use in military, harsh environment and other specialty applications. We
refer to these products as our harsh environment and specialty connectivity
product offering.



We market and sell the products manufactured at our Dallas facility through our
wholly owned subsidiary Applied Optical Systems, Inc. ("AOS") under the names
Optical Cable Corporation and OCC® by the efforts of our integrated OCC sales
team.



The OCC team seeks to provide top-tier communication solutions by bundling all
of our fiber optic and copper data communication product offerings into systems
that are best suited for individual data communication needs and application
requirements of our customers and the end-users of our systems.



OCC's wholly owned subsidiary Centric Solutions LLC ("Centric Solutions") provides cabling and connectivity solutions for the data center market. Centric Solutions' business is located at OCC's facility near Dallas, Texas.





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



Summary of Company Performance for Second Quarter of Fiscal Year 2021

? Consolidated net sales for the second quarter of fiscal year 2021 increased

5.9% to $15.7 million, compared to $14.9 million for the same period last

year. Sequentially, net sales increased 32.5% in the second quarter of fiscal

year 2021, compared to net sales of $11.9 million for the first quarter of


    fiscal year 2021.



? Gross profit increased 20.6% to $4.8 million in the second quarter of fiscal

year 2021, compared to $4.0 million for the second quarter of fiscal year

2020. Sequentially, gross profit increased 108.7% in the second quarter of

fiscal year 2021, compared to gross profit of $2.3 million for the first


    quarter of fiscal year 2021.



? Gross profit margin (gross profit as a percentage of net sales) increased to

30.6% during the second quarter of fiscal year 2021, compared to 26.9% for the


    second quarter of fiscal year 2020.




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? SG&A expenses decreased 17.3% to $4.6 million during the second quarter of

fiscal year 2021, compared to $5.5 million during the second quarter of fiscal


    year 2020.



? Net income was $3.4 million, or $0.45 per share, during the second quarter of

fiscal year 2021, compared to a net loss of $1.7 million, or $0.23 per share,


    for the comparable period last year.




  ? On February 22, 2021, we submitted to our lender our application for

forgiveness of the entire principal balance and accrued interest on the United

States Small Business Administration ("SBA") Paycheck Protection Program loan

in the amount of $5.0 million ("PPP Loan") we received on April 15, 2020, with


    the entire loan amount and accrued interest included in our current
    liabilities at April 30, 2021.



? During the second quarter of fiscal year 2021, we qualified for a $3.4 million

Employee Retention Tax Credit ("ERTC"), which is reflected as income under

other income (expense), net, and as a receivable under current assets-other

receivables. We expect that we will receive credits totaling approximately

$900,000 for the remainder of the second calendar quarter that will be
    recorded as other income in our fiscal third quarter of 2021.




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.


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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.





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                                  Six Months Ended
                              April 30,                 Percent                  April 30,                 Percent
                        2021             2020           Change             2021             2020           Change
Net sales           $ 15,741,000     $ 14,863,000             5.9 %    $ 27,618,000     $ 27,751,000            (0.5 )%
Gross profit           4,819,000        3,997,000            20.6 %       7,129,000        6,401,000            11.4 %
SG&A expenses          4,590,000        5,550,000           (17.3 )%      8,898,000       10,374,000           (14.2 )%

Net income (loss) 3,385,000 (1,689,000 ) 300.4 % 1,244,000 (4,281,000 ) 129.1 %

Three Months Ended April 30, 2021 and 2020

Net Sales



Consolidated net sales for the second quarter of fiscal year 2021 increased 5.9%
to $15.7 million, compared to net sales of $14.9 million for the same period
last year. We experienced an increase in net sales in both our enterprise and
specialty markets, including the wireless carrier market, in the second quarter
of fiscal year 2021, compared to the same period last year.



Sequentially, net sales increased 32.5% in the second quarter of fiscal year
2021, compared to net sales of $11.9 million for the first quarter of fiscal
year 2021.


We believe net sales during the second quarter of fiscal year 2021 were positively impacted by the lifting of some restrictions and the reopening of certain markets that had been negatively impacted by the COVID-19 pandemic.





Net sales to customers in the United States increased 4.4% and net sales to
customers outside of the United States increased 11.8% in the second quarter of
fiscal year 2021, compared to the same period last year. We believe that we will
continue to see a positive impact on our net sales as the impact of COVID-19 on
our customers and end-users declines.



We are beginning to see some positive indicators of future strengthening in some
of our markets and are hopeful we will continue to benefit from improvement in
our markets during the second half of fiscal year 2021. However, we cannot fully
anticipate or reasonably estimate the continuing impacts of the pandemic on our
various markets and customers.



Gross Profit



Our gross profit was $4.8 million in the second quarter of fiscal year 2021, an
increase of 20.6% compared to gross profit of $4.0 million in the second quarter
of fiscal year 2020. Gross profit margin, or gross profit as a percentage of net
sales, increased to 30.6% in the second quarter of fiscal year 2021 compared to
26.9% in the second quarter of fiscal year 2020.



Sequentially, gross profit increased 108.7% in the second quarter of fiscal year
2021, compared to gross profit of $2.3 million for the first quarter of fiscal
year 2021.



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



Selling, General, and Administrative Expenses





SG&A expenses decreased 17.3% to $4.6 million during the second quarter of
fiscal year 2021, compared to $5.5 million for the same period last year. SG&A
expenses as a percentage of net sales were 29.2% in the second quarter of fiscal
year 2021, compared to 37.3% in the second quarter of fiscal year 2020.



The decrease in SG&A expenses during the second quarter of fiscal year 2021
compared to the same period last year was primarily the result of decreases in
bad debt expense totaling $447,000, decreases in employee related costs totaling
$387,000 and decreases in marketing expenses totaling $138,000. During the
second quarter of fiscal year 2020, our bad debt expense increased significantly
due to concerns about collectability of certain customer accounts during the
COVID-19 pandemic environment. Such collectability concerns did not recur during
the second quarter of fiscal year 2021, therefore, our bad debt expense has
decreased significantly and has returned to a more typical level. Included in
employee related costs are compensation costs which decreased primarily due to
terminations, net of new hires, which were impacted by our ongoing cost control
initiatives. Marketing expenses decreased primarily due to the continuing
cancellation of tradeshows during the second quarter of fiscal year 2021 due to
the COVID-19 pandemic.


Royalty Income (Expense), Net





We recognized royalty income, net of royalty and related expenses, totaling
$43,000 during the second quarter of fiscal year 2021 compared to $3,000 during
the second quarter of fiscal year 2020. 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.



Amortization of Intangible Assets

We recognized $11,000 of amortization expense, associated with intangible assets, during the second quarter of fiscal year 2021, compared to $10,000 during the second quarter of fiscal year 2020.





Other Income (Expense), Net



We recognized other income, net in the second quarter of fiscal year 2021 of
$3.1 million, compared to other expense, net of $124,000 in the second quarter
of fiscal year 2020. Other income, net for the fiscal quarter ended April 30,
2021 is comprised primarily of the ERTC, partially offset by interest expense
and other miscellaneous items. The change in other income, net during the second
quarter of fiscal year 2021 compared to the same period last year was primarily
due to the ERTC.



The ERTC, created in the March 2020 CARES Act and then subsequently amended by
the Consolidated Appropriation Act ("CAA") of 2021 and the American Rescue Plan
Act ("ARPA") of 2021, is a refundable payroll credit for qualifying businesses
keeping employees on their payroll during the COVID-19 pandemic.  Under CAA and
ARPA 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 December 31, 2021.  Qualified wages are limited to $10,000 per
employee per calendar quarter in 2021 so the maximum ERTC available is $7,000
per employee per calendar quarter.



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OCC is an eligible small employer under the gross receipts decline test when
comparing the first calendar quarter of 2021 to the same quarter in calendar
year 2019, which qualifies us to claim ERTC in both the first and second
calendar quarters of 2021 under the amended ERTC program. During the second
quarter of fiscal year 2021, we qualified for a refundable payroll tax credit
totaling $3.4 million. We expect that we will receive credits totaling
approximately $900,000 for the remainder of the second calendar quarter that
will be recorded as other income in our fiscal third quarter of 2021.



Income (Loss) Before Income Taxes





We reported income before income taxes of $3.4 million for the second quarter of
fiscal year 2021, compared to a net loss of $1.7 million for the second quarter
of fiscal year 2020. The change was primarily due to the ERTC of $3.4 million,
the increase in gross profit of $822,000 and the decrease in SG&A expenses of
$960,000 compared to the same period in 2020.



Income Tax Expense



Income tax expense totaled $7,000 in the second quarter of fiscal year 2021,
compared to $5,000 in the second quarter of fiscal year 2020. Our effective tax
rate was less than one percent for the second quarter of fiscal year 2021 and
less than negative one percent for the second quarter of fiscal year 2020.



Fluctuations in our effective tax rates are primarily due to permanent
differences in U.S. GAAP and tax accounting for various tax deductions and
benefits, but can also be significantly different from the statutory tax rate
when income or loss before taxes is at a level such that permanent differences
in U.S. GAAP and tax accounting treatment have a disproportional impact on the
projected effective tax rate.



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



If we generate sufficient income before taxes in subsequent periods such that
U.S. GAAP would permit us to conclude that the removal of any valuation
allowance against our net deferred tax asset is appropriate, then during the
period in which such determination is made, we will recognize the non-cash
benefit of such removal of the valuation allowance in income tax expense on our
consolidated statement of operations, which will increase net income and will
also increase the net deferred tax asset on our consolidated balance sheet. If
we do not generate sufficient income before taxes in subsequent periods such
that U.S. GAAP would permit us to conclude that the reduction or removal of any
valuation allowance against our net deferred tax asset is appropriate, then no
such non-cash benefit would be realized. There can be no assurance regarding any
future realization of the benefit by us of all or part of our net deferred tax
assets. As of October 31, 2020, the valuation allowance against our total gross
deferred tax assets totaled $4.8 million.



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Net Income (Loss)



Net income for the second quarter of fiscal year 2021 was $3.4 million compared
to a net loss of $1.7 million for the second quarter of fiscal year 2020. This
change was primarily due to the increase in income before income taxes of $5.1
million.


Six Months Ended April 30, 2021 and 2020

Net Sales



Consolidated net sales for the first half of fiscal year 2021 were $27.6
million, a decrease of less than one percent compared to net sales of $27.8
million for the same period last year. We experienced slight decreases in net
sales in both our enterprise and specialty markets in the first half of fiscal
year 2021, compared to the same period last year.



We believe net sales during the first half of fiscal year 2021, specifically
beginning in our second fiscal quarter, were positively impacted by the lifting
of some restrictions and the reopening of certain markets that had been
negatively impacted by the COVID-19 pandemic. Net sales to customers in the
United States decreased 1.2% while net sales to customers outside of the United
States increased 2.4% in the first half of fiscal year 2021, compared to the
same period last year. We believe that we will continue to see a trend of
improving net sales to the extent the impact of COVID-19 on our customers and
end-users declines.



We are beginning to see some positive indicators of future strengthening in some
of our markets and are hopeful we will continue to benefit from improvement in
our markets during the second half of fiscal year 2021. However, we cannot fully
anticipate or reasonably estimate the continuing impacts of the pandemic on our
various markets and customers.



Gross Profit



Our gross profit was $7.1 million in the first half of fiscal year 2021, an
increase of 11.4% compared to gross profit of $6.4 million in the first half of
fiscal year 2020. Gross profit margin increased to 25.8% in the first half of
fiscal year 2021 compared to 23.1% in the first half of fiscal year 2020.



Our gross profit margins tend to be higher when we achieve higher net sales
levels, as certain fixed manufacturing costs are spread over higher sales. This
operating leverage, which is beneficial at higher sales levels, positively
impacted our gross profit margin during the first half of fiscal year 2021,
particularly beginning in the second fiscal quarter. Additionally, actions that
we took in fiscal years 2020 and 2019 contributed to the increase in our gross
profit margin in the first half of fiscal year 2021, resulting in an improved
gross profit margin when compared to the first half of fiscal year 2020, even
considering the slight decrease in sales when comparing the two periods. 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 decreased 14.2% to $8.9 million during the first half of fiscal
year 2021, compared to $10.4 million for the same period last year. SG&A
expenses as a percentage of net sales were 32.2% in the first half of fiscal
year 2021, compared to 37.4% in the first half of fiscal year 2020.



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The decrease in SG&A expenses during the first half of fiscal year 2021 compared
to the same period last year was primarily the result of decreases in employee
related costs totaling $823,000, decreases in bad debt expense totaling
$410,000, decreases in travel expenses totaling $165,000 and decreases in
marketing expenses totaling $160,000. Included in employee related costs are
compensation costs which decreased primarily due to terminations, net of new
hires, which were impacted by our ongoing cost control initiatives. During the
first half of fiscal year 2020, our bad debt expense increased due to concerns
about collectability of certain customer accounts during the COVID-19 pandemic
environment. Such collectability concerns did not recur during the first half of
fiscal year 2021, therefore, our bad debt expense has decreased significantly
and has returned to a more typical level. Travel expenses and marketing expenses
decreased primarily due to the decrease in business travel and the continuing
cancellation of tradeshows during the first half of fiscal year 2021 due to the
COVID-19 pandemic.


Royalty Income (Expense), Net





We recognized royalty income, net of royalty and related expenses, totaling
$50,000 during the first half of fiscal year 2021 compared to royalty expense,
net of royalty income, of $15,000 during the first half of fiscal year 2020.
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.



Amortization of Intangible Assets

We recognized $22,000 of amortization expense, associated with intangible assets, during the first half of fiscal year 2021, compared to $20,000 during the first half of fiscal year 2020.

Other Income (Expense), Net





We recognized other income, net in the first half of fiscal year 2021 of $3.0
million, compared to other expense, net of $263,000 in the first half of fiscal
year 2020. Other income, net for the first half of fiscal year 2021 is comprised
primarily of the ERTC, partially offset by interest expense and other
miscellaneous items. The change in other income, net during the first half of
fiscal year 2021 compared to the same period last year was primarily due to the
ERTC.



The ERTC, created in the March 2020 CARES Act and then subsequently amended by
the CAA of 2021 and the ARPA of 2021, is a refundable payroll credit for
qualifying businesses keeping employees on their payroll during the COVID-19
pandemic.  Under CAA and ARPA 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 December 31, 2021.  Qualified wages are limited to
$10,000 per employee per calendar quarter in 2021 so the maximum ERTC available
is $7,000 per employee per calendar quarter.



OCC is an eligible small employer under the gross receipts decline test when
comparing the first calendar quarter of 2021 to the same quarter in calendar
year 2019, which qualifies us to claim ERTC in both the first and second
calendar quarters of 2021 under the amended ERTC program. During the first half
of fiscal year 2021, we qualified for a refundable payroll tax credit totaling
$3.4 million.


Income (Loss) Before Income Taxes





We reported income before income taxes of $1.2 million for the first half of
fiscal year 2021, compared to a net loss of $4.3 million for the first half of
fiscal year 2020. The change was primarily due to the ERTC of $3.4 million, the
increase in gross profit of $728,000 and the decrease in SG&A expenses of $1.5
million compared to the same period in 2020.



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Income Tax Expense (Benefit)



Income tax benefit totaled $26,000 in the first half of fiscal year 2021,
compared to income tax expense of $10,000 in the first half of fiscal year 2020.
Our effective tax rate was negative 2.1% for the first half of fiscal year 2021
and less than negative one percent for the first half of fiscal year 2020.



Fluctuations in our effective tax rates are primarily due to permanent
differences in U.S. GAAP and tax accounting for various tax deductions and
benefits, but can also be significantly different from the statutory tax rate
when income or loss before taxes is at a level such that permanent differences
in U.S. GAAP and tax accounting treatment have a disproportional impact on the
projected effective tax rate.



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



If we generate sufficient income before taxes in subsequent periods such that
U.S. GAAP would permit us to conclude that the removal of any valuation
allowance against our net deferred tax asset is appropriate, then during the
period in which such determination is made, we will recognize the non-cash
benefit of such removal of the valuation allowance in income tax expense on our
consolidated statement of operations, which will increase net income and will
also increase the net deferred tax asset on our consolidated balance sheet. If
we do not generate sufficient income before taxes in subsequent periods such
that U.S. GAAP would permit us to conclude that the reduction or removal of any
valuation allowance against our net deferred tax asset is appropriate, then no
such non-cash benefit would be realized. There can be no assurance regarding any
future realization of the benefit by us of all or part of our net deferred tax
assets. As of October 31, 2020, the valuation allowance against our total gross
deferred tax assets totaled $4.8 million.



Net Income (Loss)



Net income for the first half of fiscal year 2021 was $1.2 million compared to a
net loss of $4.3 million for the first half of fiscal year 2020. This change was
primarily due to the increase in income before income taxes of $5.5 million.



Financial Condition



Total assets increased $3.9 million, or 10.7%, to $40.5 million at April 30,
2021, from $36.6 million at October 31, 2020. This increase was primarily due to
a $3.4 million increase in other receivables due to the ERTC and a $1.1 million
increase in trade accounts receivable, net, resulting from the increase in net
sales in the second quarter of fiscal year 2021 when compared to the fourth
quarter of fiscal year 2020.



Total liabilities increased $2.5 million, or 11.9%, to $23.8 million at April
30, 2021, from $21.3 million at October 31, 2020. The increase in total
liabilities was primarily due to an increase in accounts payable and accrued
expenses totaling $1.5 million primarily resulting from the timing of raw
material purchases and certain vendor payments. Also contributing to the
increase in total liabilities was an increase in note payable, revolver -
noncurrent totaling $948,000 due to net borrowings on our revolver.



Total shareholders' equity at April 30, 2021 increased $1.4 million in the first
half of fiscal year 2021. The increase resulted from net income of $1.2 million
and share-based compensation, net of $142,000.



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Liquidity and Capital Resources





Our primary capital needs have been to fund working capital requirements and to
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 $361,000 as of April 30, 2021, an increase of $220,000, compared to $141,000 as of October 31, 2020. The increase in cash for the six months ended April 30, 2021 primarily resulted from net cash provided by financing activities of $717,000, partially offset by capital expenditures totaling $90,000 and cash used in operating activities of $392,000.





On April 30, 2021, we had working capital of $18.2 million compared to $19.1
million on October 31, 2020. The ratio of current assets to current liabilities
as of April 30, 2021 was 2.6 to 1.0 compared to 4.0 to 1.0 as of October 31,
2020. The decrease in working capital and in the current ratio was primarily due
to the $3.4 million reclassification of a portion of the PPP Loan from
noncurrent to current, based on the maturity date of the loan (without
considering our pending PPP Loan forgiveness application), and the $1.5 million
increase in accounts payable and accrued expenses, partially offset by the
increase in other receivables of $3.4 million due to the ERTC and the $1.1
million increase in trade accounts receivable, net.



As of April 30, 2021 and October 31, 2020, we had outstanding loan balances
under our Revolver totaling $5.9 million and $5.0 million, respectively. As of
April 30, 2021 and October 31, 2020, we had outstanding loan balances, excluding
our Revolver, totaling $10.0 million and $10.1 million, respectively.



Net Cash



Net cash used in operating activities was $392,000 in the first half of fiscal
year 2021, compared to $816,000 in the first half of fiscal year 2020. Net cash
used in operating activities during the first half of fiscal year 2021 primarily
resulted from an increase in other receivables totaling $3.4 million and the
cash flow impact of increases in trade accounts receivable, net totaling $1.1
million, partially offset by certain adjustments to reconcile net income of $1.2
million to net cash used in operating activities including depreciation and
amortization of $641,000 and share-based compensation expense of $142,000.
Additionally, the cash flow impact of increases in accounts payable and accrued
expenses of $1.5 million further contributed to offset net cash used in
operating activities.



Net cash used in operating activities during the first half of fiscal year 2020
primarily resulted from the cash flow impact of increases in accounts payable
and accrued expenses, including accrued compensation and payroll taxes, totaling
$1.2 million, partially offset by decreases in the cash flow impact of trade
accounts receivable, net totaling $2.1 million, decreases in inventories
totaling $1.1 million and certain adjustments to reconcile a net loss of $4.3
million to net cash used in operating activities including depreciation and
amortization of $775,000 and bad debt expense of $452,000.



Net cash used in investing activities totaled $105,000 in the first half of
fiscal year 2021, compared to $104,000 in the first half of fiscal year 2020.
Net cash used in investing activities during the first half fiscal years 2021
and 2020 resulted primarily from purchases of property and equipment and
deposits for the purchase of property and equipment.



Net cash provided by financing activities totaled $717,000 in the first half of
fiscal year 2021, compared to $4.7 million in the first half of fiscal year
2020. Net cash provided by financing activities in the first half of fiscal year
2021 resulted primarily from net proceeds on our revolving line of credit
totaling $948,000, partially offset by principal payments on long-term debt
totaling $181,000. Net cash provided by financing activities in the first half
of fiscal year 2020 resulted from proceeds received from a PPP Loan totaling
$5.0 million and advances on a note payable to our bank under our line of credit
totaling $350,000, partially offset by principal payments on long-term debt
totaling $592,000.



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We have a plan approved by our Board of Directors on July 14, 2015 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 April 30, 2021 we had 398,400 shares remaining to purchase
under this Repurchase Plan, and we have made no specific determination whether
and over what period these shares may or may not be purchased. Until future
notice, we have no current plans to repurchase and retire our common stock and
have suspended the Repurchase Plan.



Credit Facilities



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



Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are
with Pinnacle Bank ("Pinnacle"), have a fixed interest rate of 3.95% and are
secured by a first lien deed of trust on our real property.



In fiscal year 2020, we obtained an unsecured PPP Loan through Pinnacle in the
amount of $5.0 million. The loan was made through the SBA as part of the PPP
under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The
interest rate is fixed at 1.00% per year, and the Company has accrued but unpaid
interest of $51,998 on the PPP Loan as of April 30, 2021, which is included in
accounts payable and accrued expenses. Under the CARES Act and the Paycheck
Protection Program Flexibility Act of 2020, all or a portion of this loan
(principal and interest) may be forgiven if certain requirements are met. We
believe we have met those requirements and we applied for forgiveness of the
entire balance of the loan (including accrued interest), submitting an
application to our lender on February 22, 2021. If the loan is not forgiven, we
will pay principal and interest payments of approximately $560,000 every month,
beginning ten months following the coverage period which ended September 29,
2020. We can repay the PPP Loan without any prepayment penalty. All remaining
principal and accrued interest is due and payable two years from the effective
date of the PPP Loan (April 15, 2022).



Our 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) $1.5 million.



The maximum aggregate principal amount subject to the Revolver is $18.0 million.
Interest accrues on the daily balance at the per annum rate of 1.5% above the
Prime Rate in effect from time to time, but not less than 4.75% (the "Applicable
Rate"). In the event of a default, interest may become 6.0% above the Applicable
Rate. As of April 30 2021, the Revolver accrued interest at the prime lending
rate plus 1.5% (resulting in a 4.75% rate at April 30, 2021). The initial term
of the Revolver is three years, with a termination date of July 24, 2023. After
the initial term and unless otherwise terminated, the loan may be extended in
one year periods subject to the agreement of SLR.



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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 April 30, 2021, we had $5.9 million of outstanding borrowings on our Revolver and $2.5 million in available credit.





Capital Expenditures



We did not have any material commitments for capital expenditures as of April
30, 2021. We expect capital expenditures in fiscal year 2021 will not exceed
$750,000. 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.



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. We believe our seasonality pattern in fiscal year 2020 was impacted by
the COVID-19 pandemic, resulting in significantly lower total net sales for all
of fiscal year 2020, and no typically anticipated seasonal increase in total net
sales during the second half of the fiscal year. Our typical seasonality was
also impacted in fiscal years 2019 and 2018, by the quarterly and annual
volatility of orders received for the wireless carrier market, the timing of
larger projects, the timing of orders from larger customers, other economic
factors impacting our industry or impacting the industries of our customers and
end-users, and macroeconomic conditions. While we believe seasonality may be a
factor that impacts our quarterly net sales results, particularly when excluding
the volatility of sales in the wireless carrier market, we are not able to
reliably predict the effects of seasonality on net sales because these other
factors can also substantially impact our net sales patterns during the year.



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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 2020 provides a summary of our significant accounting
policies. Those significant accounting policies detailed in our fiscal year 2020
Form 10-K did not change during the period from November 1, 2020 through April
30, 2021.



New Accounting Standards



In December 2019, the FASB issued Accounting Standards Update 2019-12, Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"),
which is intended to simplify various aspects related to accounting for income
taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic
740 and also clarifies and amends existing guidance to improve consistent
application. ASU 2019-12 is effective for fiscal years beginning after December
15, 2020, with early adoption permitted. The adoption of ASU 2019-12 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.



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