Note 8. Goodwill and PatentsIntangibles

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 in the fourth quarter ended as of September 30, 2018 2019 did not indicate an impairment of goodwill. During the nine months ended June 30, 2019, 2020, 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, 2019, 2020, the Company has 1722 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. (“Calix”) 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, 2019 did not indicate an impairment of our intangible assets. During the nine months ended June 30, 2020, there were no triggering events that indicate potential impairment exists.

Note 9. Income Taxes

For the three and nine months ended June 30, 2020, the Company recorded income tax expense of $763,000 and $1,076,000 reflecting an effective tax rate of 20.3% and 20.2%, respectively. For the three and nine months ended June 30, 2019, the Company recorded a provision for income taxes of $454,000 and $849,000, respectively, reflecting an effective tax rate of 25.9% and 24.1%, respectively. The Tax Cut and Jobs Act of 2017 (the “Tax Reform Act”) was enacted on December 22, 2017. The Tax Reform Act reduced certain federal corporate income tax rates effective January 1, 2018 and changed certain other provisions. Additionally, differences between the effective tax rate and the statutory tax rate arewere related to discrete items for the three and nine months ended June 30, 2019, including unfavorable tax shortfalls related to stock-based compensation awards, nondeductible meals and entertainment, and research and development credits.

As of both June 30, 2019 and September 30, 2018, the Company had a remaining valuation allowance of approximately $105,000 related to state net operating loss carry forwards the Company does not expect to utilize. As a result of recording the impact of the Tax Reform Act on its deferred assets and liabilities, the Company recorded an increase in its valuation allowance against state net operating losses carried forward of approximately $32,000 in the nine months ended June 30, 2018. Based on the Company’s analysis and review of long-term forecasts and all available evidence, the Company determined that there should be no further change in the valuation allowance for the three and nine months ended June 30, 2019.

For the three and nine months ended June 30, 2018, the Company recordednondeductible stock compensation, foreign derived intangibles income tax expense of $766,000 and $462,000, respectively, reflecting an effective tax rate of 30.4% and 16.2%, respectively. The effective tax rate for the nine months ended June 30, 2018 is a blended rate reflecting the anticipated benefit of three quarters of federal tax rate reductions for fiscal 2018. Our nine months tax expense reflects a lower tax rate and a one-time benefit of $384,000 related to the favorable impact of a revaluation of our net deferred tax liability that decreased the income tax provision for the nine months ended June 30, 2018 and reduced long-term deferred tax liabilities during the nine months ended June 30, 2018. Additionally, differences between the effective tax rate and the statutory tax rate are related to discrete items for the three and nine months ended June 30, 2018, including unfavorable tax shortfalls related to stock-based compensation awards, nondeductible meals and entertainment, favorable domestic manufacturing deduction (FDII) and research and development credits.

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 assetsasset for expected utilization using a “more likely than not” criteria by assessing the available positive and negative factors surrounding its recoverability.

As of June 30, 2020 and September 30, 2019, the Company had a remaining valuation allowance of approximately $47,000 related to state net operating loss carry forwards the Company does not expect to utilize. Based on the Company’s analysis and review of long-term forecasts and all available evidence, the Company determined that there should be no further change in the valuation allowance for the nine months ended June 30, 2020.

As of June 30, 2020, we do 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events and typically address the Company’s expected future business and financial performance. Words such as  “plan,” “expect,” “aim,” “believe,” “project,” “target,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other words and terms of similar meaning, typically identify these forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual results could differ from those projected in any forward-looking statements because of the factors identified in and incorporated by reference from Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended September 30, 2018,2019, as well as in other filings we make with the Securities and Exchange Commission, which should be considered an integral part of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements included herein are made as the date of this Quarterly Report on Form 10-Q and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion and analysis of our financial condition and results of operations as of and for the three and nine months ended June 30, 20192020 and 20182019 should be read in conjunction with the financial statements and related notes in Item 1 of this report and our Annual Report on Form 10-K for the year ended September 30, 2018.2019.

OVERVIEW

General

Clearfield, Inc. designs, manufactures and distributes fiber optic management, protection and delivery products for communications networks. Our “fiber to the anywhere” platform serves the unique requirements of leading incumbent local exchange carriers (TraditionalBroadband Service Providers in the United States, which include Community Broadband, National Carriers, within the Tier 2 and Tier 3 broadband markets), including large national and global telecom providers (Tier 1), wireless operators, MSO/cable TV companies, utility/municipality, enterprise, data center and military markets,MSO’s, while also serving the broadband needs of the competitive local exchange carriers (Alternative Carriers).International markets, primarily countries in the Caribbean, Canada, and Central and South America. These customers are collectively included in Broadband Service Providers. The Company also provides contract manufacturing services for Build-to-Print customers which include original equipment manufacturers (OEM) requiring copper and fiber cable assemblies built to their specifications.  

The Company has historically focused on the un-servedunserved or under-servedunderserved rural communities whothat receive their voice, video and data services from independent telephone companies. By aligning its in-house engineering and technical knowledge alongside its customers, the Company has been able to develop, customize and enhance products from design through production. Final build and assembly of the Company’s products is completed at Clearfield’s plantsmanufacturing facilities in Brooklyn Park, Minnesota, and Tijuana, Mexico, with manufacturing support from a network of domestic and global manufacturing partners. Clearfield specializes in producing these products on both a quick-turn and scheduled delivery basis. The Company deploys a hybrid sales model with some sales made directly to the customer,customers, some made through two-tier distribution (channel) partners, sales agents and somemanufacturing representatives, and sales through original equipment suppliers who private label their products.

Due to the role Clearfield’s solutions play in supporting communications infrastructure, the Company’s operations in Minnesota have been classified as critical sector work under the State of Minnesota’s “stay at home” and “stay safe” executive orders adopted in response to the novel coronavirus (“COVID-19”) pandemic. We have transitioned our corporate employees at our Brooklyn Park headquarters to remote work arrangements. In accordance with the CDC and WHO guidelines, we also have implemented health and safety measures for the production staff that remain onsite at our Brooklyn Park facility. We have continued to maintain our manufacturing capacity in Brooklyn Park with these personnel. Similarly, we have implemented the recommended health and safety measures for the production staff that remains onsite at our Tijuana, Mexico manufacturing facilities.

The Company is closely monitoring the operations and staffing levels at its manufacturing facilities in Tijuana, Mexico and the status of restrictions at the U.S.-Mexico border. The State of Baja California, where our facilities are located, adopted an order that temporarily suspended the operations of other manufacturers in the region. While our operations in Tijuana have not been affected, we may become subject to local enforcement orders at any time.

Since the start of the pandemic, we have continued to be fully operational in both our US and Mexico manufacturing facilities and have established multiple contingency plans in the event our ability to operate is diminished or eliminated at either location. Even if our manufacturing capacity in Mexico continues, we may experience challenges to timely supply of materials to our Mexico facilities and timely product deliveries from the facilities due to border restrictions or border delays. Depending on the severity of these border issues, we may experience diminished or temporarily suspended operations, longer lead times than typical for product deliveries, or temporarily suspended product deliveries, which would result in delayed or reduced revenue from the affected orders in production and higher operating costs.

We dual source all our components and most of our supply chain partners remain operational and continue to provide the necessary components for our products to be manufactured in Minnesota and Mexico. We continue to monitor our supply chain, however uncertainties caused by the impact of COVID-19 present significant risk of disruption in our supply chain.

Should the Company experience a disruption in our ability to continue to produce in one or both of our facilities, disruption in our supply chain, or a decline in operational abilities, our contingency plans would result in a potentially significant increase in manufacturing costs and could impair our ability to fulfill customer orders.

RESULTS OF OPERATIONS

Three months ended June 30, 20192020 vS. three months ended JuneJUNE 30, 20182019

Net sales for the third quarter of fiscal 20192020 ended June 30, 20192020 were $21,892,000,$25,970,000, an increase of approximately 2%,19% or $412,000,$4,078,000, from net sales of $21,481,000$21,892,000 for the third quarter of fiscal 2018.2019. Net sales to broadband service providers and commercial data networks customersBroadband Service Providers were $21,127,000$25,293,000 in the third quarter of fiscal 2019,2020 versus $20,543,000$21,127,000 in the same period of fiscal 2018.2019. Among this group, the Company recorded $1,648,000 $879,000 in international sales for the third quarter of fiscal 2019,2020 versus $1,811,000$1,648,000 in the same period of fiscal 2018.2019. Net sales to build-to-print and OEMBuild-to-Print customers were $765,000decreased $87,000 to $678,000 in the third quarter of fiscal 2019 versus $938,0002020 from $765,000 in the same period of fiscal 2018.2019. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 8%3% and 8% of total net sales for the third quartersquarter of fiscal 20192020 and 2018,2019, respectively.

The increase in net sales for the quarter ended June 30, 20192020 of $412,000$4,078,000 compared to the quarter ended June 30, 2018 is primarily attributable2019 was driven by increased sales to an increase in sales toCommunity Broadband Service Providers, MSO and Tier 1 customers of $3,004,000, $1,218,000 and $637,000, respectively. Offsetting this were decreased sales to International customers of $769,000 due to lower demand for each in the amount of $1,040,000. Offsetting this increase were decreasesperiod. The decline in salesinternational revenue in the fiscal third quarter 2020 was primarily related to OEMcurrency conversion issues in the Company’s international markets that have made the Company’s products temporarily cost-prohibitive, causing customers of $173,000, International sales of $171,000, and broadband service providers of $284,000 when compared to the same period due to a decrease in demand. delay purchasing decisions.

Revenue from all customers is obtained from purchase orders submitted from time to time. Accordingly, the Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue has become further limited by potential disruption to product delivery or changes in customer ordering patterns due to COVID-19. The Company’s ability to recognize revenue in the fourth quarter of 2020 for its backlog of customer orders will depend on the Company’s ability to manufacture and deliver products to the customers and fulfill its other contractual obligations. Beginning March 2020, the Company has experienced increased orders as the Company’s customers remained committed to their builds and other projects to expand communications networks, which are part of the world’s critical infrastructure. However, while national carriers have declared a commitment to capital equipment expenditures despite the COVID pandemic, COVID has impacted the deployments plans for 5G both in the near and mid-term. At this time, the Company does not have visibility into how long these customer ordering trends will continue. We expect that restrictions on our employees’ ability to access our customers may negatively impact sales in future quarters.

Cost of sales for the third quarter of fiscal 20192020 was $13,480,000,$15,180,000, an increase of $491,000,$1,700,000, or 4%13%, from $12,989,000$13,480,000 in the comparable period of fiscal 2018.2019. Gross profit percent was 38.4%41.5% of net sales in the fiscal 20192020 third quarter, a decreasean increase from 39.5%38.4% of net sales for the fiscal 20182019 third quarter. Gross profit was $8,413,000increased $2,378,000, or 28%, to $10,790,000 for the three months ended June 30, 219, or relatively unchanged2020 from $8,492,000$8,413,000 in the comparable period in fiscal 2018. 2019. The decreaseincrease in gross profit in the third quarter of fiscal 2020 was due to increased volume while the increase in gross profit percent was primarily due to a favorable product mix and cost reduction efforts across the Company’s product lines, including greater use of its Mexico manufacturing plant, efficiencies realized from supply chain programs, and lower tariff costs. Gross profit was negatively impacted by tariff costs of approximately $127,000 for the three months ended June 30, 2020 and product mix.$318,000 in the comparable period in fiscal 2019. In the third quarter of fiscal 2020, the Company did not experience any significant impacts on cost of sales due to COVID-19.

Selling, general and administrative expenses increased $784,000,$336,000, or 13%5%, to $7,207,000 in the third quarter fiscal 2020 from $6,871,000 infor the fiscal 2019 third quarter from $6,087,000 for the fiscal 2018 third quarter. The increase in expense in the third quarter of fiscal 2019 is a result2020 consists primarily of an increaseincreases of $632,000$692,000 in compensation costsexpense due primarily to additional personnel, and performance incentive plan compensation, and $213,000$279,000 in external sales commissions and agent fees. These were slightlyproduct certification testing expenses, offset by a decreaselower travel, entertainment and marketing costs of $61,000 in professional fees in$499,000 and $126,000, respectively, due to COVID-19 restrictions. In the quarter.third quarter of fiscal 2020, other than the travel and marketing costs mentioned, the Company did not experience any significant impacts on selling, general and administrative expense due to COVID-19.

Income from operations for the quarter ended June 30, 20192020 was $1,542,000$3,583,000 compared to income from operations of $2,405,000$1,542,000 for the comparable quarter of fiscal 2018, a decrease2019, an increase of approximately 36%132%. This decreaseincrease is primarily attributable to increased gross profit, offset by higher selling, general and administrative expenses for the quarter ended June 30, 2019 as noted above.expenses.

Interest income for the quarter ended June 30, 20192020 was $213,000$175,000 compared to $117,000$213,000 for the comparable quarter for fiscal 2018.2019. The increasedecrease is due mainly to higherlower interest rates earned on its investments in the third quarter of fiscal 2019.2020. We expect interest income to decline due to the prevailing lower interest rates and the potential for further decreases in rates in the current economic environment. The Company invests its excess cash in FDIC-backed bank certificates of deposit, U.S. treasury securities, and money market accounts.

We recorded a provision for income taxes of $454,000$763,000 and $766,000$454,000 for the three months ended June 30, 20192020 and 2018, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The decrease in tax expense of $312,000 from the third quarter of fiscal 2018 is primarily due to decreased income from operations in the third quarter of fiscal 2019. The decrease in the income tax expense rate to 25.9% for the third quarter of fiscal 2019, from 30.4% for the third quarter of fiscal 2018 is primarily due to the Tax Reform Act that resulted in a lower federal tax rate and higher tax shortfalls related to stock-based compensation awards in the third quarter of fiscal 2018.

The Company’s net income for the three months ended June 30, 2019 was $1,301,000, or $0.10 per basic and diluted share. The Company’s net income for the three months ended June 30, 2018 was $1,755,000, or $0.13 per basic and diluted share.

NINE months ended JUNE 30, 2019 vS. NINE months ended JUne 30, 2018

Net sales for the nine months ended June 30, 2019 were $61,066,000, an increase of 11%, or approximately $5,887,000, from net sales of $55,178,000 for the first nine months of fiscal 2018. Net sales to broadband service providers and commercial data networks customers were $57,887,000 for the first nine months of fiscal 2019, versus $52,541,000 in the same period of fiscal 2018. Among this group, the Company recorded $5,205,000 in international sales versus $3,946,000 in the same period of fiscal 2018. Net sales to build-to-print and OEM customers were $3,179,000 in the first nine months of fiscal 2019 versus $2,637,000 in the same period of fiscal 2018. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 9% and 7% of total net sales for the first nine months of fiscal 2019 and 2018, respectively.

The increase in net sales for the nine months ended June 30, 2019 of $5,887,000 compared to the nine months ended June 30, 2018 is primarily attributable to an increase in sales to an OEM manufacturer in the amount of $3,753,000 driven by the acquisition of our active cabinet line in February 2018. In addition, sales to international customers increased $1,237,000 due to higher demand in the Company’s Latin America market. Sales to build-to-print customers also increased $541,000 during the same period due to an increase in demand.

Cost of sales for the nine months ended June 30, 2019 was $37,681,000, an increase of $4,883,000, or 15%, from $32,798,000 in the comparable period of fiscal 2018. Gross profit percent was 38.3% of net sales in the fiscal 2019 first nine months, down from 40.6% for the comparable nine months in fiscal 2018. Gross profit increased $1,004,000, or 4.5%, to $23,385,000 for the nine months ended June 30, 2019 from $22,380,000 in the comparable period in fiscal 2018. The decrease in gross profit percent was primarily due to the integration of the Company’s acquired powered cabinet line into its manufacturing processes as well as a higher percentage of sales associated with these products, which have lower gross margins.

Selling, general and administrative expenses increased 3%, or $518,000, from $19,857,000 for the first nine months of fiscal 2018 to $20,375,000 for the first nine months of fiscal 2019. The increase in the first nine months of fiscal 2019 consists primarily of an increase of $1,515,000 in compensation costs due primarily to additional sales and engineering personnel and performance based compensation accruals, $313,000 in external sales commission and agent fees, $210,000 in bad debt expense, and an increase of $198,000 of depreciation and amortization expense. These were partially offset by a decrease of $2,033,000 in legal expenses, mainly due to the defense of the patent infringement litigation including a one-time payment of $850,000 in settlement of that litigation that occurred in the fiscal 2018 second quarter,

Income from operations for the nine months ended June 30, 2019 was $3,010,000 compared to income from operations of $2,523,000 for the first nine months of fiscal 2018, an increase of $487,000, or 19%. This increase is primarily attributable to increased gross profit, offset by increased selling, general and administrative expenses as described above.

Interest income for the nine months ended June 30, 2019 was $517,000 compared to $332,000 for the comparable period for fiscal 2018. The increase is due mainly to higher interest rates earned on its investments in fiscal 2019.

We recorded a provision for income taxes of $849,000 and $462,000 for the nine months ended June 30, 2019 and 2018, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The increase in tax expense of $387,000$309,000 from the nine months ended June 30, 2018third quarter for fiscal 2019 is primarily due to the Tax Reform Act enacted on December 22, 2017 that resulted in a lower federal tax rate and a one-time benefit of $384,000 related to the favorable impact of a revaluation of our net deferred tax liability that decreased the income tax provision and lower profitability in the first nine months fiscal 2018, as well as increased income from operations in fiscal 2019. operations. The increasedecrease in the income tax expense rate to 24.1%20.3% for the third quarter of fiscal 2020 from 25.9% for the third quarter of fiscal 2019 is primarily due to increased research and development tax credits and FDII deduction.

The Company’s net income for the three months ended June 30, 2020 was $2,995,000, or $0.22 per basic and diluted share. The Company’s net income for the three months ended June 30, 2019 was $1,301,000, or $0.10 per basic and diluted share.

NINE months ended JUNE 30, 2020 vS. NINE months ended June 30, 2019

Net sales for the nine months ended June 30, 2020 were $65,757,000, an increase of 8%, or approximately $4,691,000, from net sales of $61,066,000 for the first nine months of fiscal 2019. Net sales to Broadband Service providers were $63,102,000 for the first nine months of fiscal 2020, versus $57,887,000 in the same period of fiscal 2019. Among this group, the Company recorded $2,991,000 in International sales versus $5,205,000 in the same period of fiscal 2019. Net sales to Build-to-Print customers were $2,655,000 in the first nine months of fiscal 2020 versus $3,179,000 in the same period of fiscal 2019. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 5% and 9% of total net sales for the first nine months of fiscal 2020 and 2019, respectively.

The increase in net sales for the nine months ended June 30, 2020 of $4,691,000 compared to the nine months ended June 30, 2019 is primarily attributable to an increase in sales to Tier 1, MSO, and Community Broadband customers of $2,960,000, $2,773,000 and $1,701,000 respectively. This was offset by decreased sales to International customers of $2,213,000, and Build-to-Print of $530,000.

Cost of sales for the nine months ended June 30, 2020 was $39,087,000, an increase of $1,406,000, or 4%, from $37,681,000 in the comparable period of fiscal 2019. Gross profit percent was 40.6% of net sales in the fiscal 2020 first nine months, up from 38.3% for the comparable nine months in fiscal 2019. Gross profit increased $3,285,000, or 14%, to $26,669,000 for the nine months ended June 30, 2020 from $23,385,000 in the comparable period in fiscal 2019. The increase in gross profit in the nine months ended June 30, 2020 was due to increased volume and a higher gross profit percent. The increase in gross profit percent was primarily due to improved manufacturing efficiencies and costs in its manufacturing facilities, and lower tariff costs. Tariff costs were $288,000 in the nine months ended June 30, 2020, compared to $877,000 in the comparable nine month period. In the nine months ended June 30, 2020, the Company did not experience any significant impacts on cost of sales due to COVID-19.

Selling, general and administrative expenses increased 8%, or $1,590,000, from $20,375,000 for the first nine months of fiscal 2019 from 16.2%to $21,965,000 for the first nine months of fiscal 20182020. The increase in the first nine months of fiscal 2020 consists primarily of increases of $2,524,000 in compensation expense due to additional personnel, and $536,000 in product certification testing expenses, offset by decreases of $924,000 in stock-based compensation expense, and lower travel, entertainment and marketing costs of $590,000 and $178,000, respectively, due to COVID-19 restrictions.

Income from operations for the nine months ended June 30, 2020 was $4,704,000 compared to income from operations of $3,010,000 for the first nine months of fiscal 2019, a increase of $1,694,000, or 56%. This increase is primarily attributable to increased gross profit, offset by increased selling, general and administrative expenses.

Interest income for the nine months ended June 30, 2020 was $616,000 compared to $517,000 for the comparable period for fiscal 2019. The increase is due to increased balances and higher interest rates earned on investments in the first half of fiscal 2020.

We recorded a provision for income taxes of $1,076,000 and $849,000 for the nine months ended June 30, 2020 and 2019, respectively. The increase in tax expense of $227,000 from the nine months ended June 30, 2019 is primarily due to increased pre-tax income offset by a lower effective tax rate for the Tax Reform Act as described above.nine months ended June 30, 2020. The decrease in the effective tax rate to 20.2% for the nine months ended June 30, 2020 from 24.1% for the nine months ended June 30, 2019 is primarily due to increased research and development credits and FDII deduction.

The Company’s net income for the first nine months of fiscal 2020 ended June 30, 2020 was $4,244,000, or $0.31 per basic and diluted share. The Company’s net income for the first nine months of fiscal 2019 ended June 30, 2019 was $2,678,000, or $0.20 per basic and diluted share.The Company’s net income for the first nine months of fiscal 2018 ended June 30, 2018 was $2,393,000, or $0.18 per basic and diluted share.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2019,2020, our principal source of liquidity was our cash, cash equivalents and short-term investments. Those sources total $20,669,000$20,372,000 as of June 30, 20192020 compared to $17,478,000$23,606,000 as of September 30, 2018.2019. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, treasuryU.S. Treasury securities and money market accounts. Substantially all of our funds are insured by the FDIC or backed by the U.S. Government. Investments considered long-term were $22,519,000$28,072,000 as of June 30, 2019,2020, compared to $17,974,000$23,902,000 as of September 30, 2018.2019. We believe the combined balances of short-term cash and investments along with long-term investments provide a more accurate indication of our available liquidity. At the end of the third quarter 2020, our cash, cash equivalents and short-term and long-term investments remained consistent at $48.4 million compared to the prior quarter end. We had no long-term debt obligations as of June 30, 20192020 or September 30, 2018.2019.

We believe our existing cash equivalents and short-term investments, along with cash flow from operations, will be sufficient to meet our working capital and investment requirements for beyond the next 12 months. The Company intends on utilizing its available cash and assets primarily for its continued organic growth and potential future strategic transactions, as well as executionto mitigate the potential impacts of COVID-19 on the share repurchase program adopted by our Board of Directors. The share repurchase program was originally adopted on November 13, 2014 with $8,000,000 authorized for common stock repurchases. On April 25, 2017, our Board of Directors increased the authorization to $12,000,000 of common stock.
Company’s business.

Due to the economic crisis resulting from the COVID-19 pandemic, our future cash flow from operating and investing activities may be negatively impacted. Our uses of cash may also be materially impacted by increased operating expense associated with mitigating supply chain, logistics, and customer fulfillment risks caused by COVID-19.

Operating Activities

Net cash provided by operating activities totaled $2,440,000 for the nine months ended June 30, 2020. This was primarily due to net income of $4,244,000, non-cash expenses for depreciation and amortization of $1,825,000, and stock-based compensation of $542,000 in addition to changes in operating assets and liabilities providing cash. Changes in operating assets and liabilities using cash include an increase in inventory of $5,869,000, offset by increases in accounts payable, accrued expenses and deferred rent of $1,554,000. The increase in inventory is a result of additional stocking levels to support the Company’s increased backlog and higher demand, and additional safety stock across the Company’s multiple locations due to the uncertainty of COVID-19 on the Company’s supply chain and manufacturing locations. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Day’s sales outstanding, which measures how quickly receivables are collected, decreased one day to 32 days from September 30, 2019 to June 30, 2020.

Net cash provided by operating activities totaled $8,909,000 for the nine months ended June 30, 2019. This was primarily due to net income of $2,678,000, non-cash expenses for depreciation and amortization of $1,613,000, and stock basedstock-based compensation of $1,536,000 in addition to changes in operating assets and liabilities providing cash. Changes in operating assets and liabilities providing cash include decreases in accounts receivable and inventories of $3,308,000 and $626,000, respectively. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Day’s sales outstanding, which measures how quickly receivables are collected, decreased from 52 days at September 30, 2018 to 39 days at June 30, 2019. The decrease in inventory is a result of stocking levels being maintained by suppliers, which reduced the Company’s inventory.

Net cash provided by operating activities totaled $4,299,000 for the nine months ended June 30, 2018. This was primarily due to net income of $2,393,000, non-cash expenses for depreciation and amortization of $1,547,000, and stock-based compensation of $1,488,000, slightly offset by a non-cash benefit to deferred taxes of $384,000 related to the newly enacted Tax Reform Act, in addition to changes in operating assets and liabilities using cash. Changes in operating assets and liabilities providing cash include a decrease to inventories of $1,546,000, net of the acquisition of $2,781,000 in inventories as a result of the product line acquisition of Calix powered cabinets that occurred during the nine months ended June 30, 2018. Changes in operating assets and liabilities using cash include an increase in accounts receivable from September 30, 2017 to June 30, 2018 of $2,414,000. The increase in accounts receivable was primarily due to increased net sales for the three months ended June 30, 2018 when compared to the three months ended September 30, 2017. Additionally, day’s sales outstanding, which measures how quickly receivables are collected, increased five days to 41 days from September 30, 2017 to June 30, 2018.

Investing Activities

We invest our excess cash in money market accounts, treasuryU.S. Treasury securities and bank CDs in denominations across numerous banks. We believe we obtain a competitive rate of return given the economic climate along with the security provided by the FDIC and U.S. Government on these investments. During the nine months ended June 30, 2020, we used cash to purchase $31,838,000 of both FDIC-backed and treasury securities and received $30,163,000 on CDs and treasuries that matured. Purchases of property, plant and equipment, mainly related to manufacturing equipment, consumed $1,493,000 of cash during the nine months ended June 30, 2020.

During the nine months ended June 30, 2019, we used cash to purchase $17,444,000 of both FDIC-backed and treasury securities and received $7,235,000 on CDs that matured. Purchases of patents and capital equipment, mainly related to information technology and manufacturing equipment, consumed $1,100,000 of cash in the nine months ended June 30, 2019.

DuringFinancing Activities

For the nine months ended June 30, 2018,2020, we acquiredreceived $349,000 from employees’ participation and purchase of stock through our ESPP and used $6,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding. We used $429,000 to repurchase 41,796 shares of our common stock under the powered cabinet product line from Calix for the amount of $10,350,000, which was paid from our available cash. Additionally, we invest our excess cash in money market accounts and bank CDs in denominations across numerous banks. We believe we obtain a competitive rate of return given the economic climate along with the security provided by the FDIC on these investments. During the nine months ended June 30, 2018, we used cash to purchase $5,403,000 of FDIC-backed securities and received $4,444,000 on CDs that matured. Prosecution of patents and purchases of capital equipment, mainly related to information technology and manufacturing equipment, consumed $920,000 of cashshare repurchase program in the nine months ended June 30, 2018.2020. As of June 30, 2020, we had the authority to purchase approximately $4,981,000 in additional shares under the repurchase program announced on November 13, 2014 that was subsequently increased on April 25, 2017. In April 2020, the Board of Directors suspended the share repurchase plan due to uncertainties caused by COVID-19 and the Company’s desire to maintain capital flexibility.

Financing Activities

For the nine months ended June 30, 2019, we received $314,000 from employees’ participation and purchase of stock through our ESPP and used $432,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding. We did not repurchase our common stock under the repurchase program in the nine months ended June 30, 2019. As of June 30, 2019, we had authority to purchase approximately $5,400,000 in additional shares under the repurchase program announced on November 13, 2014 that was subsequently increased on April 25, 2017.

For the nine months ended June 30, 2018, we received $298,000 from employees’ participation andwere available for purchase of stock through our ESPP. We also received $21,000 from stock option exercises. The Company used $349,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding. Additionally, we used $1,371,000 to repurchase our common stock in the nine months ended June 30, 2018. As of June 30, 2018, we had authority to purchase approximately $5,798,000 in additional shares under the repurchase program announced on November 13, 2014 that was subsequently increased on April 25, 2017.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting policies. The accounting policies considered by management to be the most critical to the presentation of the financial statements because they require the most difficult, subjective and complex judgments include revenue recognition, stock basedstock-based compensation, deferred tax assetand valuation allowances, accruals for uncertain tax positions,of inventory, long-lived assets, finite lived intangible assets and impairment of goodwill and long-lived assets.goodwill.

These accounting policies are described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended September 30, 2018.2019. Management made no changes to the Company’s critical accounting policies during the quarter ended June 30, 2019.2020.

In applying its critical accounting policies, management reassesses its estimates each reporting period based on available information. Changes in these estimates did not have a significant impact on earnings for the nine months or quarter ended June 30, 2019.2020.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures