clfd20220630

clfd20220630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to ___________________

Commission File Number 0-16106

Clearfield, Inc.

(Exact name of Registrant as specified in its charter)

Minnesota	41-1347235
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7050 Winnetka Avenue North, Suite 100, Brooklyn Park, Minnesota 55428

(Address of principal executive offices and zip code)

(763) 476-6866

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.01 par value	CLFD	The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class:	Outstanding as of July 19, 2022
Common stock, par value $.01	13,777,682

CLEARFIELD, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	4
ITEM 1. FINANCIAL STATEMENTS	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	24
ITEM 4. CONTROLS AND PROCEDURES	24
PART II. OTHER INFORMATION	24
ITEM 1. LEGAL PROCEEDINGS	24
ITEM 1A. RISK FACTORS	24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	26
ITEM 4. MINE SAFETY DISCLOSURES	26
ITEM 5. OTHER INFORMATION	26
ITEM 6. EXHIBITS	26
SIGNATURES	27

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

	June 30, 2022 (Unaudited)			September 30, 2021
Assets
Current Assets
Cash and cash equivalents	$	14,192		$	13,216
Short-term investments		3,894			10,374
Accounts receivables, net		31,594			19,438
Inventories, net		69,341			27,524
Other current assets		1,050			954
Total current assets		120,071			71,506

Property, plant and equipment, net		9,567			4,998

Other Assets
Long-term investments		24,994			36,913
Goodwill		4,709			4,709
Intangible assets, net		4,691			4,696
Right of use lease assets		12,715			2,305
Deferred tax asset		647			365
Other		553			420
Total other assets		48,309			49,408
Total Assets	$	177,947		$	125,912

Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of lease liability	$	2,774		$	915
Accounts payable		16,243			9,215
Accrued compensation		8,918			8,729
Accrued expenses		2,758			1,613
Total current liabilities		30,693			20,472

Other Liabilities
Long-term portion of lease liability		10,480			1,615
Total liabilities		41,173			22,087

Shareholders’ Equity
Preferred stock, $.01 par value; 500,000 shares; no shares issued or outstanding		-			-
Common stock, authorized 50,000,000, $.01 par value; 13,777,682 and 13,732,188 shares issued and outstanding as of June 30, 2022 and September 30, 2021		138			137
Additional paid-in capital		59,784			58,246
Accumulated other comprehensive loss		(960	)		-
Retained earnings		77,812			45,442
Total shareholders’ equity		136,774			103,825
Total Liabilities and Shareholders’ Equity	$	177,947		$	125,912

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED STATEMENTS OF EARNINGS

UNAUDITED

(IN THOUSANDS, EXCEPT SHARE DATA)

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2022		2021		2022		2021

Net sales	$	71,250	$	38,735	$	175,854	$	95,519

Cost of sales		41,943		21,598		100,411		54,071

Gross profit		29,307		17,137		75,443		41,448

Operating expenses
Selling, general and administrative		12,721		9,435		33,877		25,581
Income from operations		16,586		7,702		41,566		15,867

Net investment income		43		121		284		378

Income before income taxes		16,629		7,823		41,850		16,245

Income tax expense		3,884		1,725		9,480		3,344
Net income	$	12,745	$	6,098	$	32,370	$	12,901

Net income per share Basic	$	0.93	$	0.44	$	2.35	$	0.94
Net income per share Diluted	$	0.92	$	0.44	$	2.33	$	0.94

Weighted average shares outstanding:
Basic		13,772,269		13,732,913		13,760,950		13,718,394
Diluted		13,899,698		13,812,510		13,900,019		13,762,897

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

(IN THOUSANDS)

	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2022			2021		2022			2021

Net Income	$	12,745		$	6,098	$	32,370		$	12,901

Other comprehensive loss before income taxes:
Unrealized losses on available-for-sale adjustments		(309	)		-		(1,241	)		-

Total other comprehensive loss before income taxes		(309	)		-		(1,241	)		-

Income tax benefit		(74	)		-		(281	)		-

Total other comprehensive loss		(235	)		-		(960	)		-

Total comprehensive income	$	12,510		$	6,098	$	31,410		$	12,901

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

UNAUDITED

(IN THOUSANDS)

For the three months ended June 30, 2022									Accumulated other
	Common Stock					Additional			comprehensive			Retained		Total share-
	Shares			Amount		paid-in capital			loss			earnings		holders’ equity
Balance at March 31, 2022		13,773		$	138	$	58,949		$	(725	)	$	65,067	$	123,429
Stock-based compensation expense		-			-		638			-			-		638
Restricted stock issuance, net of forfeitures		(3	)		-		-			-			-		-
Issuance of common stock under employee stock purchase plan		6			-		294			-			-		294
Withholding related to exercise of stock options		2			-		(97	)		-			-		(97	)
Other comprehensive loss		-			-		-			(235	)		-		(235	)
Net income		-			-		-			-			12,745		12,745
Balance at June 30, 2022		13,778		$	138	$	59,784		$	(960	)	$	77,812	$	136,774

For the three months ended June 30, 2021							Accumulated other
	Common Stock				Additional		comprehensive		Retained		Total share-
	Shares		Amount		paid-in capital		loss		earnings		holders’ equity
Balance at March 31, 2021		13,733	$	137	$	57,794	$	-	$	31,917	$	89,848
Stock-based compensation expense		-		-		343		-		-		343
Issuance of common stock under employee stock purchase plan		10		-		205		-		-		205
Net income		-		-		-		-		6,098		6,098
Balance at June 30, 2021		13,743	$	137	$	58,342	$	-	$	38,015	$	96,494

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

UNAUDITED

(IN THOUSANDS)

For the nine months ended June 30, 2022									Accumulated other
	Common Stock					Additional			comprehensive			Retained		Total share-
	Shares			Amount		paid-in capital			loss			earnings		holders’ equity
Balance as of September 30, 2021		13,732		$	137	$	58,246		$	-		$	45,442	$	103,825
Stock-based compensation expense		-			-		1,647			-			-		1,647
Restricted stock issuance, net of forfeitures		27			1		-			-			-		1
Issuance of common stock under employee stock purchase plan		13			-		544			-			-		544
Withholding related to exercise of stock options		10			-		(379	)		-			-		(379	)
Repurchase of shares for payment of withholding taxes for vested restricted stock grants		(4	)		-		(274	)		-			-		(274	)
Other Comprehensive Loss		-			-		-			(960	)		-		(960	)
Net income		-			-		-			-			32,370		32,370
Balance at June 30, 2022		13,778		$	138	$	59,784		$	(960	)	$	77,812	$	136,774

For the nine months ended June 30, 2021									Accumulated other
	Common Stock					Additional			comprehensive		Retained		Total share-
	Shares			Amount		paid-in capital			loss		earnings		holders’ equity
Balance as of September 30, 2020		13,650		$	137	$	57,503		$	-	$	25,114	$	82,754
Stock-based compensation expense		-			-		966			-		-		966
Restricted stock issuance, net of forfeitures		37			-		-			-		-		-
Employee stock purchase plan		24			-		383			-		-		383
Withholding related to exercise of stock options		34			-		(456	)		-		-		(456	)
Repurchase of shares for payment of withholding taxes for vested restricted stock grants		(2	)		-		(54	)		-		-		(54	)
Net income		-			-		-			-		12,901		12,901
Balance at June 30, 2021		13,743		$	137	$	58,342		$	-	$	38,015	$	96,494

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED STATEMENTS OF CASH FLOWS

UNAUDITED

	Nine Months Ended June 30,
	2022			2021
Cash flows from operating activities
Net income	$	32,370		$	12,901
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		2,174			1,725
Change in allowance for doubtful accounts		-			210
Stock-based compensation		1,647			966
Changes in operating assets and liabilities:
Accounts receivable		(12,156	)		(5,896	)
Inventories, net		(41,816	)		(6,571	)
Other assets		(185	)		(261	)
Accounts payable and accrued expenses		8,677			5,043
Net cash (used in) provided by operating activities		(9,289	)		8,117

Cash flows from investing activities
Purchases of property, plant and equipment and intangible assets		(6,764	)		(1,275	)
Purchases of investments		(248	)		(11,904	)
Proceeds from sales and maturities of investments		17,386			10,044
Net cash provided by (used in) investing activities		10,374			(3,135	)

Cash flows from financing activities
Proceeds from issuance of common stock under employee stock purchase plan		544			383
Repurchase of shares for payment of withholding taxes for vested restricted stock grants		(274	)		(54	)
Withholding related to exercise of stock options		(379	)		(456	)
Net cash used in financing activities		(109	)		(127	)

Increase in cash and cash equivalents		976			4,855

Cash and cash equivalents, beginning of period		13,216			16,450

Cash and cash equivalents, end of period	$	14,192		$	21,305

Supplemental disclosures for cash flow information
Cash paid during the year for income taxes	$	9,913		$	3,560

Non-cash financing activities
Cashless exercise of stock options	$	276		$	1,269

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying (a) condensed balance sheet as of September 30, 2021, which has been derived from audited financial statements, and (b) unaudited interim condensed financial statements as of and for the three and nine months ended June 30, 2022 have been prepared by Clearfield, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to these rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period, due to variability in customer purchasing patterns and seasonal, operating and other factors. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021.

In preparation of the Company’s financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses during the reporting periods. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. In November 2018, the FASB issued update ASU 2018-19 that clarifies the scope of the standard in the amendments in ASU 2016-13. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Financial instruments impacted include accounts receivable, trade receivables, other financial assets measured at amortized cost and other off-balance sheet credit exposures. The new guidance is effective for the Company beginning in the first quarter of fiscal 2023, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial statements.

Note 2. Net Income Per Share

Basic net income per common share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net income divided by the sum of the weighted average number of shares of common stock outstanding plus all additional common stock equivalents, such as stock options, when dilutive.

The following is a reconciliation of the numerator and denominator of the net income per common share computations for the three and nine months ended June 30, 2022 and 2021:

	Three Months Ended June 30,				Nine Months Ended June 30,
(In thousands, except for share data)	2022		2021		2022		2021
Net income	$	12,745	$	6,098	$	32,370	$	12,901
Weighted average common shares		13,772,269		13,732,913		13,760,950		13,718,394
Dilutive potential common shares		127,429		79,597		139,069		44,503
Weighted average dilutive common shares outstanding		13,899,698		13,812,510		13,900,019		13,762,897
Net income per common share:
Basic	$	0.93	$	0.44	$	2.35	$	0.94
Diluted	$	0.92	$	0.44	$	2.33	$	0.94

Note 3. Investments

The Company invests in certificates of deposit (“CDs”) that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”) as well as U.S. Treasury and money market securities. Historically, the Company’s investment portfolio had been classified as held-to-maturity and recorded at amortized cost. During the second quarter of fiscal 2022, the Company sold investments and has reclassified its investment portfolio to available-for-sale, which is reported at fair value. The unrealized gain or loss on investment securities is recorded in other comprehensive income, net of tax.

At June 30, 2022, available-for-sale investments consist of the following:

	June 30, 2022
(In thousands)	Cost		Unrealized Gains		Unrealized Losses		Fair Value
Short-Term
Certificates of deposit		3,962		1		69		3,894
Investment securities – short-term	$	3,962	$	1	$	69	$	3,894
Long-Term
U.S treasury securities	$	16,167	$	-	$	825	$	15,342
Certificates of deposit		10,000		1		348		9,652
Investment securities – long-term	$	26,167	$	1	$	1,173	$	24,994

At June 30, 2022, investments in debt securities in an unrealized loss position were as follows:

	In Unrealized Loss Position For Less Than 12 Months				In Unrealized Loss Position For Greater Than 12 Months
(In thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
U.S treasury securities	$	15,342	$	825	$	-	$	-
Certificates of deposit		9,637		267		3,569		151
Investment securities	$	24,979	$	1,092	$	3,569	$	151

As of June 30, 2022, there were 60 securities in an unrealized loss position which is due to the securities paying lower interest rates than the market. As of June 30, 2022, there are no securities which are other than temporarily impaired as the Company intends to hold these securities until their value recovers and there is negligible credit risk due to the nature of the securities which are backed by the FDIC and US federal government.

Note 4. Fair Value Measurements

The Company determines the fair value of its assets and liabilities based on the market price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair value of U.S. treasury securities, and certificates of deposit based on valuations provided by an external pricing service, who obtains them from a variety of industry standard data providers.

The Company’s investments are categorized according to the three-level fair value hierarchy which distinguishes between observable and unobservable inputs, in one of the following levels:

Level 1- Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those with fair value measurements that are determined using pricing models, discounted cash flow valuation or similar techniques, as well as significant management judgment or estimation.

The following provides information regarding fair value measurements for our investment securities as of June 30, 2022 according to the three-level fair value hierarchy:

	Fair Value Measurements at June 30, 2022
(In thousands)	Total		Level 1		Level 2		Level 3
Investment securities:
U.S treasury securities	$	15,342	$	-	$	15,342	$	-
Certificates of deposit		13,546		-		13,546		-
Total investment securities	$	28,888	$	-	$	28,888	$	-

During the nine months ended June 30, 2022 and the year ended September 30, 2021, we owned no Level 3 securities and there were no transfers within the fair value level hierarchy.

Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets and right-of-use assets for operating leases are subject to non-recurring fair value measurements if they are deemed impaired. We had no re-measurements of non-financial assets to fair value in the three or nine months ended June 30, 2022.

Note 5. Other Comprehensive Loss

Changes in components of other comprehensive loss and taxes related to items of other comprehensive income (loss) are as follows:

	Three Months Ended June 30, 2022
(In thousands)	Before Tax			Tax Effect			Net of Tax Amount
Unrealized losses on available-for-sale securities	$	(309	)	$	(74	)	$	(235	)

Other comprehensive loss	$	(309	)	$	(74	)	$	(235	)

	Nine Months Ended June 30, 2022
(In thousands)	Before Tax			Tax Effect			Net of Tax Amount
Unrealized losses on available-for-sale securities	$	(1,241	)	$	(281	)	$	(960	)

Other comprehensive loss	$	(1,241	)	$	(281	)	$	(960	)

At June 30, 2022 components of accumulated other comprehensive loss is as follows:

(In thousands)	Available-for-Sale Securities			Accumulated Other Comprehensive Loss
Balances at September 30, 2021	$	-		$	-
Other comprehensive loss for the nine months ended June 30, 2022		(960	)		(960	)
Balances at June 30, 2022	$	(960	)	$	(960	)

Note 6. Stock-Based Compensation

The Company recorded $638,000 and $1,647,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options and the Company’s Employee Stock Purchase Plan (“ESPP”) for the three and nine months ended June 30, 2022, respectively. For the three months ended June 30, 2022, $606,000 of this expense is included in selling, general and administrative expense, and $32,000 is included in cost of sales. For the nine months ended June 30, 2022, $1,552,000 of this expense is included in selling, general and administrative expense, and $95,000 is included in cost of sales. The Company recorded $343,055 and $966,290 of compensation expense related to current and past restricted stock grants, non-qualified stock options and the Company’s ESPP for the three and nine months ended June 30, 2021, respectively. For the three months ended June 30, 2021, $328,710 of this expense is included in selling, general and administrative expense, and $14,345 is included in cost of sales. For the nine months ended June 30, 2021, $923,256 of this expense is included in selling, general and administrative expense, and $43,034 is included in cost of sales. As of June 30, 2022, $4,020,000 of total unrecognized compensation expense related to non-vested restricted stock awards and stock options is expected to be recognized over a period of approximately 2.4 years.

Stock Options

The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. During the nine months ended June 30, 2022, the Company granted employees non-qualified stock options to purchase an aggregate of 62,730 shares of common stock with a weighted average contractual term of five years, a weighted average three-year vesting term, and a weighted average exercise price of $66.48. During the nine months ended June 30, 2021, the Company granted employees non-qualified stock options to purchase an aggregate of 105,089 shares of common stock with a weighted average contractual term of five years, a weighted average three-year vesting term, and a weighted average exercise price of $23.74

The fair value of stock option awards during the nine months ended June 30, 2022 was estimated as of the respective grant dates using the assumptions listed below:

	Nine months ended June 30, 2022
Dividend yield		0	%
Expected volatility		52.02	%
Risk-free interest rate		0.97	%
Expected life (years)		3.5
Vesting period (years)		3

The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life. The expected life represents the period of time that options are expected to be outstanding after their grant date. The risk-free interest rate reflects the interest rate as of the grant date on zero-coupon U.S. governmental bonds with a remaining life similar to the expected option term.

Options are granted at fair market values determined on the date of grant and vesting normally occurs over a three to five-year period. Shares issued upon exercise of a stock option are issued from the Company’s authorized but unissued shares.

The following is a summary of stock option activity during the nine months ended June 30, 2022:

	Number of options			Weighted average exercise price
Outstanding as of September 30, 2021		301,514		$	16.25
Granted		62,730			66.48
Exercised		(20,169	)		13.70
Forfeited or Expired		(2,084	)		19.94
Outstanding as of June 30, 2022		341,991		$	25.59

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of June 30, 2022, the weighted average remaining contractual term for all outstanding and exercisable stock options was 1.91 years and their aggregate intrinsic value was $6,824,000.

Restricted Stock

The Company’s 2007 Stock Compensation Plan permits its Compensation Committee to grant stock-based awards, including stock options and restricted stock, to key employees and non-employee directors. The Company has made restricted stock grants that vest over one to ten years.

During the nine months ended June 30, 2022, the Company granted newly elected non-employee directors restricted stock awards totaling 318 and 2,758 shares of common stock, with a vesting term of approximately one year and a fair value of $62.77 and $63.35 per share, respectively. During the nine months ended June 30, 2022, the Company granted non-employees restricted stock awards totaling 3,118 shares of common stock, with a vesting term of approximately one year and a fair value of $64.11 per share. During the nine months ended June 30, 2022, the Company also granted employees restricted stock awards totaling 23,318 shares of common stock, with a vesting term of approximately three years and a fair value of $66.48 per share.

During the nine months ended June 30, 2021, the Company granted non-employee directors elected at the Company’s 2021 Annual Meeting of Shareholders restricted stock awards totaling 2,120 shares of common stock, with a vesting term of approximately one year and a fair value of $32.41 per share. During the nine months ended June 30, 2021, the Company also granted employees restricted stock awards totaling 37,687 shares of common stock, with a vesting term of approximately three years and a fair value of $23.74 per share.

Restricted stock transactions during the nine months ended June 30, 2022 are summarized as follows:

	Number of shares			Weighted average grant date fair value
Unvested shares as of September 30, 2021		108,839		$	17.14
Granted		29,512			65.90
Vested		(14,384	)		25.02
Forfeited		(2,749	)		16.84
Unvested as of June 30, 2022		121,218		$	28.08

Employee Stock Purchase Plan

The Company’s ESPP allows participating employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP is available to all employees subject to certain eligibility requirements. Terms of the ESPP provide those participating employees the ability to purchase the Company’s common stock on a voluntary after-tax basis. Employees may purchase the Company’s common stock at a price that is no less than the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period or phase. The ESPP is carried out in six-month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phase that ended on June 30, 2022 and December 31, 2021, employees purchased 5,605 and 7,678 shares at a price of $52.66 and $32.43 per share, respectively. After the employee purchase on June 30, 2022, 181,590 shares of common stock were available for future purchase under the ESPP.

Note 7. Revenue

Revenue Recognition

Net sales include products and shipping and handling charges. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract. The Company recognizes revenue by transferring the promised products to the customer, with substantially all revenue recognized at the point in time the customer obtains control of the products. The Company recognizes revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of the Company’s contracts have a single performance obligation and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.

Disaggregation of Revenue

The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Sales outside the United States are principally to countries in the Caribbean, Canada, Central and South America.

Revenues related to the following geographic areas were as follows for the three and nine months ended:

	Three Months Ended June 30,				Nine Months Ended June 30,
(In thousands)	2022		2021		2022		2021
United States	$	68,788	$	35,810	$	170,010	$	89,586
All other countries		2,462		2,925		5,844		5,933
Total Net Sales	$	71,250	$	38,735	$	175,854	$	95,519

The Company manufactures and sells a proprietary product line designed for the Broadband Service Provider marketplace. In addition, the Company’s Legacy business provides build-to-print services for original equipment manufacturers requiring copper and fiber cable assemblies built to their specification.

The percentages of our sales by markets were as follows for the three and nine months ended:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2022			2021			2022			2021
Broadband service providers		99	%		98	%		99	%		98	%
Legacy customers		1	%		2	%		1	%		2	%
Total Net Sales		100	%		100	%		100	%		100	%

Broadband Service Providers are made up of Community Broadband, which includes local and regional telecom companies, utilities, municipalities and alternative carriers, multiple system operators (“MSO’s, or Cable TV”), which are also referred to as Tier 2 and Tier 3 customers; National Carriers, which includes large national and global wireline and wireless providers also referred to as Tier 1’s; and International customers.

Accounts Receivable

Credit is extended based on the evaluation of a customer’s financial condition, and collateral is generally not required. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company writes off accounts receivable when they become uncollectible; payments subsequently received on such receivables are credited to the allowance for doubtful accounts. As of both June 30, 2022 and September 30, 2021, the balance in the allowance for doubtful accounts was $79,000.

See Note 9, “Major Customer Concentration” for further information regarding accounts receivable and net sales.

Note 8. Inventories

Inventories consist of the following as of:

(In thousands)	June 30, 2022			September 30, 2021
Raw materials	$	58,456		$	23,072
Work-in-process		6,437			2,482
Finished goods		6,131			3,361
Inventories, gross		71,023			28,915
Inventory reserve		(1,683	)		(1,391	)
Inventories, net	$	69,341		$	27,524

Note 9. Major Customer Concentration

For the three months ended June 30, 2022, Customers A, and B comprised 18% and 11% of the Company’s net sales, respectively. Customers A and B are distributors. For the nine months ended June 30, 2022, Customer A comprised 15% of the Company’s net sales. Customer A is a distributor. For the three months ended June 30, 2021, Customers A and C comprised 18% and 12% of the Company’s net sales, respectively. For the nine months ended June 30, 2021, Customers A and C comprised 20% and 11% of the Company’s net sales, respectively. Both of these customers were distributors. These major customers, like our other customers, purchase our products from time to time through purchase orders, and the Company does not have any agreements that obligate these major customers to purchase products from us in the future.

As of June 30, 2022, Customers A and D comprised 13% and 11% of the Company’s accounts receivable. Customer D is a National Carrier. As of September 30, 2021, Customer E was 16% of accounts receivable. Customer E is a regional broadband service provider.

Note 10. Goodwill and Intangibles

The Company analyzes its goodwill for impairment annually or at an interim period when events occur or changes in circumstances indicate potential impairment. The result of the analysis performed as of September 30, 2021 did not indicate an impairment of goodwill. During the nine months ended June 30, 2022, there were no triggering events that indicate potential impairment exists.

The Company capitalizes legal costs incurred to obtain patents. Once accepted by either the U.S. Patent Office or the equivalent office of a foreign country, these legal costs are amortized using the straight-line method over the remaining estimated lives, not exceeding 20 years. As of June 30, 2022, the Company has 31 patents granted and multiple pending applications both inside and outside the United States.

In addition, the Company has various finite lived intangible assets, most of which were acquired as a result of the acquisition of the active cabinet product line from Calix, Inc. during fiscal year 2018. The Company analyzes its intangible assets for impairment annually or at interim periods when events occur or changes in circumstances indicate potential impairment. The result of the analysis performed as of September 30, 2021 did not indicate an impairment of our intangible assets. During the nine months ended June 30, 2022, there were no triggering events that indicate potential impairment exists.

Note 11. Income Taxes

For the three and nine months ended June 30, 2022, the Company recorded income tax expense of $3,884,000 and $9,480,000, reflecting an effective tax rate of 23.4% and 22.7%, respectively. The difference between the effective tax rate and the statutory tax rate for the three and nine months ended June 30, 2022 was primarily related to Section 162(m) compensation deduction limitations, nondeductible acquisition costs, foreign derived intangibles income deduction (FDII), and research and development credits.

For the three and nine months ended June 30, 2021, the Company recorded income tax expense of $1,725,000 and $3,344,000, reflecting an effective tax rate of 22.1% and 20.6%, respectively. The differences between the effective tax rate and the statutory tax rate for the three and nine months ended June 30, 2021 were primarily related

to excess tax benefits from non-qualified stock options exercised during the period, research and development credits, and foreign derived intangibles income deduction (FDII).

Deferred taxes recognize the impact of temporary differences between the amounts of the assets and liabilities recorded for financial statement purposes and these amounts measured in accordance with tax laws. The Company’s realization of deferred tax temporary differences is contingent upon future taxable earnings. The Company reviewed its deferred tax asset for expected utilization using a “more likely than not” criteria by assessing the available positive and negative factors surrounding its recoverability and determined that as of June 30, 2022 and September 30, 2021 a valuation allowance against the deferred tax assets is not required. The Company will continue to assess the need for a valuation allowance based on changes in assumptions of estimated future income and other factors in future periods.

As of June 30, 2022, the Company does not have any unrecognized tax benefits. It is the Company’s practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not expect any material changes in its unrecognized tax positions over the next 12 months.

Note 12. Leases

The Company leases an 85,000 square foot facility at 7050 Winnetka Avenue North, Brooklyn Park, Minnesota consisting of corporate offices, manufacturing and warehouse space. The lease term is ten years and two months, ending on February 28, 2025 and is renewable. The renewal options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option.

In July 2021, the Company entered into an indirect lease arrangement for an approximately 318,000 square foot manufacturing facility in Tijuana, Mexico. The lease term is for 7 years of which 5 years are mandatory, commencing March 2022. The lease contains written options to renew for two additional consecutive periods of 5 years each. The lease calls for monthly rental payments of $162,000, increasing 2% annually. The renewal options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option.

On November 19, 2021, the Company signed a lease for a 105,000 square foot warehouse in Brooklyn Park, Minnesota. The lease term is five years commencing March 2022 and ending on February 28, 2027, with rent payments increasing annually. The lease includes an option to extend the lease for an additional five years. The renewal option has not been included within the lease term because it is not reasonably certain that the Company will exercise the option. The lease commenced in the second quarter of fiscal 2022.

Right-of-use lease assets and lease liabilities are recognized as of the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods the Company is reasonably certain to exercise. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.

Operating lease expense included within cost of goods sold and selling, general and administrative expense was as follows for the three and nine months ended:

Operating lease expense within:

Three Months Ended June 30,

Nine Months Ended June 30,

(in thousands)

2022

SEC Form 10-Q filed by Clearfield Inc.