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, 2020March 31, 2021
☐ 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 LLC |
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 YES ☐ NoNO
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 YES ☐No 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 ☐
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. ☐
| 1 |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes YES ☒ NoNO
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 |
| Common stock, par value $.01 |
| 2 |
CLEARFIELD, INC.
FORM 10-Q
TABLE OF CONTENTS
| 3 |
CLEARFIELD, INC.
CONDENSED BALANCE SHEETS
(Unaudited) | September 30, | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 9,278,968 | $ | 10,081,721 | ||||
Short-term investments | 11,093,527 | 13,524,270 | ||||||
Accounts receivables, net | 9,099,727 | 9,118,639 | ||||||
Inventories, net | 14,881,952 | 9,012,980 | ||||||
Other current assets | 602,700 | 769,161 | ||||||
Total current assets | 44,956,874 | 42,506,771 | ||||||
Property, plant and equipment, net | 5,354,082 | 5,413,241 | ||||||
Other Assets | ||||||||
Long-term investments | 28,072,000 | 23,902,000 | ||||||
Goodwill | 4,708,511 | 4,708,511 | ||||||
Intangible assets, net | 4,875,117 | 5,147,135 | ||||||
Right of use lease asset | 2,710,073 | - | ||||||
Other | 186,571 | 210,905 | ||||||
Total other assets | 40,552,272 | 33,968,551 | ||||||
Total Assets | $ | 90,863,228 | $ | 81,888,563 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current Liabilities | ||||||||
Current portion of lease liability | $ | 672,384 | $ | - | ||||
Accounts payable | 3,878,915 | 3,173,599 | ||||||
Accrued compensation | 3,279,018 | 3,224,860 | ||||||
Accrued expenses | 987,205 | 208,603 | ||||||
Total current liabilities | 8,817,522 | 6,607,062 | ||||||
Other Liabilities | ||||||||
Long-term portion of lease liability | 2,299,835 | - | ||||||
Deferred taxes | 101,690 | 101,690 | ||||||
Deferred rent | - | 246,424 | ||||||
Total other liabilities | 2,401,525 | 348,114 | ||||||
Total liabilities | 11,219,047 | 6,955,176 | ||||||
Shareholders’ Equity | ||||||||
Preferred stock, $.01 par value; 500,000 shares; no shares issued or outstanding | - | - | ||||||
Common stock, authorized 50,000,000, $.01 par value; 13,647,005 and 13,641,805 shares issued and outstanding as of June 30, 2020 and September 30, 2019 | 136,470 | 136,418 | ||||||
Additional paid-in capital | 57,443,281 | 56,976,162 | ||||||
Retained earnings | 22,064,430 | 17,820,807 | ||||||
Total shareholders’ equity | 79,644,181 | 74,933,387 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 90,863,228 | $ | 81,888,563 | ||||
| (Unaudited) March 31, 2021 | September 30, 2020 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 22,338,721 | $ | 16,449,636 | ||||
| Short-term investments | 9,957,831 | 10,582,527 | ||||||
| Accounts receivables, net | 13,195,295 | 10,496,672 | ||||||
| Inventories, net | 14,627,176 | 14,408,538 | ||||||
| Other current assets | 717,599 | 585,436 | ||||||
| Total current assets | 60,836,622 | 52,522,809 | ||||||
| Property, plant and equipment, net | 4,749,530 | 4,952,819 | ||||||
| Other Assets | ||||||||
| Long-term investments | 25,565,000 | 25,143,000 | ||||||
| Goodwill | 4,708,511 | 4,708,511 | ||||||
| Intangible assets, net | 4,793,137 | 4,986,216 | ||||||
| Right of use lease assets | 2,724,233 | 2,539,100 | ||||||
| Deferred tax asset | 178,118 | 178,118 | ||||||
| Other | 262,352 | 266,857 | ||||||
| Total other assets | 38,231,351 | 37,821,802 | ||||||
| Total Assets | $ | 103,817,503 | $ | 95,297,430 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Current portion of lease liability | $ | 887,677 | $ | 665,584 | ||||
| Accounts payable | 5,011,965 | 3,689,587 | ||||||
| Accrued compensation | 5,496,056 | 4,856,885 | ||||||
| Accrued expenses | 492,758 | 1,202,753 | ||||||
| Total current liabilities | 11,888,456 | 10,414,809 | ||||||
| Other Liabilities | ||||||||
| Long-term portion of lease liability | 2,080,562 | 2,129,343 | ||||||
| Total other liabilities | 2,080,562 | 2,129,343 | ||||||
| Total liabilities | 13,969,018 | 12,544,152 | ||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, $.01 par value; 500,000 shares; no shares issued or outstanding | - | - | ||||||
| Common stock, authorized 50,000,000, $.01 par value; 13,732,806 and 13,649,962 shares issued and outstanding as of March 31, 2021 and September 30, 2020. | 137,328 | 136,500 | ||||||
| Additional paid-in capital | 57,794,061 | 57,502,905 | ||||||
| Retained earnings | 31,917,096 | 25,113,873 | ||||||
| Total shareholders’ equity | 89,848,485 | 82,753,278 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 103,817,503 | $ | 95,297,430 | ||||
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
| 4 |
CLEARFIELD, INC.
CLEARFIELD, INC. | ||||||||||||||||
CONDENSED STATEMENTS OF EARNINGS | ||||||||||||||||
UNAUDITED | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net sales | $ | 25,970,045 | $ | 21,892,244 | $ | 65,756,545 | $ | 61,065,759 | ||||||||
Cost of sales | 15,179,875 | 13,479,617 | 39,087,407 | 37,681,191 | ||||||||||||
Gross profit | 10,790,170 | 8,412,627 | 26,669,138 | 23,384,568 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 7,207,157 | 6,870,994 | 21,965,038 | 20,374,613 | ||||||||||||
Income from operations | 3,583,013 | 1,541,633 | 4,704,100 | 3,009,955 | ||||||||||||
Interest income | 174,555 | 212,894 | 615,523 | 517,474 | ||||||||||||
Income before income taxes | 3,757,568 | 1,754,527 | 5,319,623 | 3,527,429 | ||||||||||||
Income tax expense | 763,000 | 454,000 | 1,076,000 | 849,000 | ||||||||||||
Net income | $ | 2,994,568 | $ | 1,300,527 | $ | 4,243,623 | $ | 2,678,429 | ||||||||
Net income per share Basic | $ | 0.22 | $ | 0.10 | $ | 0.31 | $ | 0.20 | ||||||||
Net income per share Diluted | $ | 0.22 | $ | 0.10 | $ | 0.31 | $ | 0.20 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 13,497,955 | 13,446,289 | 13,510,413 | 13,422,885 | ||||||||||||
Diluted | 13,497,955 | 13,451,671 | 13,547,124 | 13,434,009 | ||||||||||||
CONDENSED STATEMENTS OF EARNINGS
UNAUDITED
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net sales | $ | 29,691,934 | $ | 20,408,509 | $ | 56,784,081 | $ | 39,786,500 | ||||||||
| Cost of sales | 16,750,354 | 12,257,076 | 32,473,256 | 23,907,532 | ||||||||||||
| Gross profit | 12,941,580 | 8,151,433 | 24,310,825 | 15,878,968 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | 8,490,120 | 7,431,261 | 16,145,657 | 14,757,881 | ||||||||||||
| Income from operations | 4,451,460 | 720,172 | 8,165,168 | 1,121,087 | ||||||||||||
| Interest income | 123,324 | 217,725 | 257,055 | 440,968 | ||||||||||||
| Income before income taxes | 4,574,784 | 937,897 | 8,422,223 | 1,562,055 | ||||||||||||
| Income tax expense | 935,000 | 190,000 | 1,619,000 | 313,000 | ||||||||||||
| Net income | $ | 3,639,784 | $ | 747,897 | $ | 6,803,223 | $ | 1,249,055 | ||||||||
| Net income per share Basic | $ | 0.27 | $ | 0.05 | $ | 0.50 | $ | 0.09 | ||||||||
| Net income per share Diluted | $ | 0.27 | $ | 0.05 | $ | 0.50 | $ | 0.09 | ||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 13,730,150 | 13,521,172 | 13,711,135 | 13,516,608 | ||||||||||||
| Diluted | 13,779,779 | 13,521,172 | 13,738,090 | 13,571,674 | ||||||||||||
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
| 5 |
CLEARFIELD, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
UNAUDITED
For the three months ended June 30, 2020 | ||||||||||||||||||||
Common Stock | Additional | Retained | Total share- | |||||||||||||||||
Shares | Amount | paid-in capital | earnings | holders’ equity | ||||||||||||||||
Balance at March 31, 2020 | $ | 136,276 | $ | 57,042,604 | $ | 19,069,862 | $ | 76,248,742 | ||||||||||||
Repurchase of common stock | - | - | - | - | - | |||||||||||||||
Stock-based compensation expense | - | - | 213,361 | - | 213,361 | |||||||||||||||
Restricted stock issuance, net | - | - | - | - | - | |||||||||||||||
Issuance of common stock under employee stock purchase plan | 15,116 | 151 | 178,973 | - | 179,124 | |||||||||||||||
Exercise of stock options, net of shares exchanged for payment | 4,250 | 43 | 8,343 | - | 8,386 | |||||||||||||||
Tax withholding related to vesting of restricted stock grants | - | - | - | - | - | |||||||||||||||
Net income | - | - | - | 2,994,568 | 2,994,568 | |||||||||||||||
Balance at June 30, 2020 | $ | 136,470 | $ | 57,443,281 | $ | 22,064,430 | $ | 79,644,181 | ||||||||||||
For the three months ended March 31, 2021
For the three months ended June 30, 2019 | ||||||||||||||||||||
Common Stock | Additional | Retained | Total share- | |||||||||||||||||
Shares | Amount | paid-in capital | earnings | holders’ equity | ||||||||||||||||
Balance at March 31, 2019 | 13,668,408 | $ | 136,684 | $ | 56,725,019 | $ | 14,632,553 | $ | 71,494,256 | |||||||||||
Stock-based compensation expense | - | - | 433,438 | - | 433,438 | |||||||||||||||
Restricted stock issuance, net | (6,538 | ) | (65 | ) | 65 | - | - | |||||||||||||
Issuance of common stock under employee stock purchase plan | 19,923 | 199 | 167,752 | - | 167,951 | |||||||||||||||
Exercise of stock options, net of shares exchanged for payment | - | - | - | - | - | |||||||||||||||
Tax withholding related to vesting of restricted stock grants | (29,924 | ) | (299 | ) | (424,804 | ) | - | (425,103 | ) | |||||||||||
Net income | - | - | - | 1,300,527 | 1,300,527 | |||||||||||||||
Balance at June 30, 2019 | 13,651,869 | $ | 136,519 | $ | 56,901,470 | $ | 15,933,080 | $ | 72,971,069 | |||||||||||
| Common Stock | Additional | Retained | Total share- | |||||||||||||||||
| Shares | Amount | paid-in capital | earnings | holders’ equity | ||||||||||||||||
| Balance at December 31, 2020 | 13,727,906 | $ | 137,279 | $ | 57,696,847 | $ | 28,277,312 | $ | 86,111,438 | |||||||||||
| Stock-based compensation expense | - | - | 334,178 | - | 334,178 | |||||||||||||||
| Restricted stock issuance, net of forfeitures | (1,178 | ) | (12 | ) | 12 | - | - | |||||||||||||
| Exercise of stock options, net of shares exchanged for payment | 7,828 | 79 | (193,733 | ) | - | (193,654 | ) | |||||||||||||
| Tax withholding related to vesting of restricted stock grants | (1,750 | ) | (18 | ) | (43,243 | ) | - | (43,261 | ) | |||||||||||
| Net income | - | - | - | 3,639,784 | 3,639,784 | |||||||||||||||
| Balance at March 31, 2021 | 13,732,806 | $ | 137,328 | $ | 57,794,061 | $ | 31,917,096 | $ | 89,848,485 | |||||||||||
For the three months ended March 31, 2020
| Common Stock | Additional | Retained | Total share- | |||||||||||||||||
| Shares | Amount | paid-in capital | earnings | holders’ equity | ||||||||||||||||
| Balance at December 31, 2019 | 13,657,459 | $ | 136,575 | $ | 57,383,020 | $ | 18,321,965 | $ | 75,841,560 | |||||||||||
| Repurchase of common stock | (41,796 | ) | (418 | ) | (428,236 | ) | - | (428,654 | ) | |||||||||||
| Stock-based compensation expense | - | - | 87,937 | - | 87,937 | |||||||||||||||
| Restricted stock issuance, net | 9,580 | 96 | (96 | ) | - | - | ||||||||||||||
| Exercise of stock options, net of shares exchanged for payment | 2,396 | 23 | (21 | ) | - | 2 | ||||||||||||||
| Net income | - | - | - | 747,897 | 747,897 | |||||||||||||||
| Balance at March 31, 2020 | 13,627,639 | $ | 136,276 | $ | 57,042,604 | $ | 19,069,862 | $ | 76,248,742 | |||||||||||
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
| 6 | |||||
For the nine months ended June 30, 2020 | ||||||||||||||||||||
Common Stock | Additional | Retained | Total share- | |||||||||||||||||
Shares | Amount | paid-in capital | earnings | holders’ equity | ||||||||||||||||
Balance as of September 30, 2019 | 13,641,805 | $ | 136,418 | $ | 56,976,162 | $ | 17,820,807 | $ | 74,933,387 | |||||||||||
Repurchase of common stock | (41,796 | ) | $ | (418 | ) | $ | (428,236 | ) | $ | - | $ | (428,654 | ) | |||||||
Stock-based compensation expense | - | - | 541,884 | - | 541,884 | |||||||||||||||
Restricted stock issuance, net | 9,580 | 96 | (96 | ) | - | - | ||||||||||||||
Issuance of common stock under employee stock purchase plan | 30,223 | 302 | 348,474 | - | 348,776 | |||||||||||||||
Exercise of stock options, net of shares exchanged for payment | 7,646 | 76 | 10,892 | - | 10,968 | |||||||||||||||
Tax withholding related to vesting of restricted stock grants | (453 | ) | (4 | ) | (5,799 | ) | - | (5,803 | ) | |||||||||||
Net income | - | - | - | 4,243,623 | 4,243,623 | |||||||||||||||
Balance at June 30, 2020 | 13,647,005 | $ | 136,470 | $ | 57,443,281 | $ | 22,064,430 | $ | 79,644,181 | |||||||||||
For the nine months ended June 30, 2019 | ||||||||||||||||||||
Common Stock | Additional | Retained | Total share- | |||||||||||||||||
Shares | Amount | paid-in capital | earnings | holders’ equity | ||||||||||||||||
Balance as of September 30, 2018 | 13,646,553 | $ | 136,466 | $ | 55,483,759 | $ | 13,254,651 | $ | 68,874,876 | |||||||||||
Stock-based compensation expense | - | - | 1,535,628 | - | 1,535,628 | |||||||||||||||
Restricted stock issuance, net | (6,890 | ) | (69 | ) | 69 | - | - | |||||||||||||
Issuance of common stock under employee stock purchase plan | 37,235 | 372 | 313,519 | - | 313,891 | |||||||||||||||
Exercise of stock options, net of shares exchanged for payment | 5,440 | 54 | (30 | ) | - | 24 | ||||||||||||||
Tax withholding related to vesting of restricted stock grants | (30,469 | ) | (304 | ) | (431,475 | ) | - | (431,779 | ) | |||||||||||
Net income | - | - | - | 2,678,429 | 2,678,429 | |||||||||||||||
Balance at June 30, 2019 | 13,651,869 | $ | 136,519 | $ | 56,901,470 | $ | 15,933,080 | $ | 72,971,069 | |||||||||||
CLEARFIELD, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
UNAUDITED
For the six months ended March 31, 2021
| Common Stock | Additional | Retained | Total share- | |||||||||||||||||
| Shares | Amount | paid-in capital | earnings | holders’ equity | ||||||||||||||||
| Balance as of September 30, 2020 | 13,649,962 | $ | 136,500 | $ | 57,502,905 | $ | 25,113,873 | $ | 82,753,278 | |||||||||||
| Stock-based compensation expense | - | - | 623,235 | - | 623,235 | |||||||||||||||
| Restricted stock issuance, net of forfeitures | 36,509 | 365 | (365 | ) | - | - | ||||||||||||||
| Issuance of common stock under employee stock purchase plan | 15,011 | 150 | 178,931 | - | 179,081 | |||||||||||||||
| Exercise of stock options, net of shares exchanged for payment | 33,543 | 336 | (456,460 | ) | - | (456,124 | ) | |||||||||||||
| Tax withholding related to vesting of restricted stock grants | (2,219 | ) | (23 | ) | (54,185 | ) | - | (54,208 | ) | |||||||||||
| Net income | - | - | - | 6,803,223 | 6,803,223 | |||||||||||||||
| Balance at March 31, 2021 | 13,732,806 | $ | 137,328 | $ | 57,794,061 | $ | 31,917,096 | $ | 89,848,485 | |||||||||||
For the six months ended March 31, 2020
| Common Stock | Additional | Retained | Total share- | |||||||||||||||||
| Shares | Amount | paid-in capital | earnings | holders’ equity | ||||||||||||||||
| Balance as of September 30, 2019 | 13,641,805 | $ | 136,418 | $ | 56,976,162 | $ | 17,820,807 | $ | 74,933,387 | |||||||||||
| Repurchase of common stock | (41,796 | ) | $ | (418 | ) | $ | (428,236 | ) | $ | - | $ | (428,654 | ) | |||||||
| Stock-based compensation expense | - | - | 328,523 | - | 328,523 | |||||||||||||||
| Restricted stock issuance, net | 9,580 | 96 | (96 | ) | - | - | ||||||||||||||
| Issuance of common stock under employee stock purchase plan | 15,107 | 151 | 169,501 | - | 169,652 | |||||||||||||||
| Exercise of stock options, net of shares exchanged for payment | 3,396 | 33 | 2,549 | - | 2,582 | |||||||||||||||
| Tax withholding related to vesting of restricted stock grants | (453 | ) | (4 | ) | (5,799 | ) | - | (5,803 | ) | |||||||||||
| Net income | - | - | - | 1,249,055 | 1,249,055 | |||||||||||||||
| Balance at March 31, 2020 | 13,627,639 | $ | 136,276 | $ | 57,042,604 | $ | 19,069,862 | $ | 76,248,742 | |||||||||||
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
| 7 |
CLEARFIELD, INC.
CLEARFIELD, INC. | ||||||||
CONDENSED STATEMENTS OF CASH FLOWS | ||||||||
UNAUDITED | ||||||||
Nine Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 4,243,623 | $ | 2,678,429 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 1,824,517 | 1,613,394 | ||||||
Change in allowance for doubtful accounts | - | 210,000 | ||||||
Amortization of discount on investments | (64,327 | ) | (43,601 | ) | ||||
Stock-based compensation | 541,884 | 1,535,628 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 18,912 | 3,308,314 | ||||||
Inventories, net | (5,868,972 | ) | 625,873 | |||||
Other assets | 190,796 | (116,872 | ) | |||||
Accounts payable, accrued expenses and deferred rent | 1,553,798 | (901,754 | ) | |||||
Net cash provided by operating activities | 2,440,231 | 8,909,411 | ||||||
Cash flows from investing activities | ||||||||
Purchases of property, plant and equipment and intangible assets | (1,493,341 | ) | (1,099,089 | ) | ||||
Purchases of investments | (31,837,930 | ) | (17,444,393 | ) | ||||
Proceeds from maturities of investments | 30,163,000 | 7,235,000 | ||||||
Net cash used in investing activities | (3,168,271 | ) | (11,308,482 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of common stock under employee stock purchase plan | 348,776 | 313,891 | ||||||
Proceeds from issuance of common stock upon exercise of stock options | 10,968 | 24 | ||||||
Tax withholding related to vesting of restricted stock grants | (5,803 | ) | (431,779 | ) | ||||
Repurchase of common stock | (428,654 | ) | - | |||||
Net cash used in financing activities | (74,713 | ) | (117,864 | ) | ||||
Decrease in cash and cash equivalents | (802,753 | ) | (2,516,935 | ) | ||||
Cash and cash equivalents, beginning of period | 10,081,721 | 8,547,777 | ||||||
Cash and cash equivalents, end of period | 9,278,968 | 6,030,842 | ||||||
Supplemental disclosures for cash flow information | ||||||||
Cash paid during the year for income taxes | $ | 469,529 | $ | 1,081,068 | ||||
Non-cash financing activities | ||||||||
Cashless exercise of stock options | $ | 10,962 | $ | 17,390 | ||||
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
| Six Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 6,803,223 | $ | 1,249,055 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 1,139,261 | 1,210,961 | ||||||
| Change in allowance for doubtful accounts | 209,612 | - | ||||||
| Amortization of discount on investments | - | (55,641 | ) | |||||
| Stock-based compensation | 623,235 | 328,523 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (2,908,235 | ) | 1,049,108 | |||||
| Inventories, net | (218,638 | ) | (2,675,123 | ) | ||||
| Other assets | (188,542 | ) | 98,010 | |||||
| Accounts payable and accrued expenses | 1,239,733 | 1,091,431 | ||||||
| Net cash provided by operating activities | 6,699,649 | 2,296,324 | ||||||
| Cash flows from investing activities | ||||||||
| Purchases of property, plant and equipment and intangible assets | (682,009 | ) | (1,183,336 | ) | ||||
| Purchases of investments | (6,448,304 | ) | (19,076,930 | ) | ||||
| Proceeds from maturities of investments | 6,651,000 | 16,720,000 | ||||||
| Net cash used in investing activities | (479,313 | ) | (3,540,266 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of common stock under employee stock purchase plan | 179,081 | 169,652 | ||||||
| Tax withholding related to exercise of stock options | (456,124 | ) | 2,582 | |||||
| Tax withholding related to vesting of restricted stock grants | (54,208 | ) | (5,803 | ) | ||||
| Repurchase of common stock | - | (428,654 | ) | |||||
| Net cash used in financing activities | (331,251 | ) | (262,223 | ) | ||||
| Increase (Decrease) in cash and cash equivalents | 5,889,085 | (1,506,165 | ) | |||||
| Cash and cash equivalents, beginning of period | 16,449,636 | 10,081,721 | ||||||
| Cash and cash equivalents, end of period | $ | 22,338,721 | $ | 8,575,556 | ||||
| Supplemental disclosures for cash flow information | ||||||||
| Cash paid during the year for income taxes | $ | 2,331,002 | $ | 355,657 | ||||
| Non-cash financing activities | ||||||||
| Cashless exercise of stock options | $ | 1,269,414 | $ | 7,737 | ||||
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
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NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying (a) condensed balance sheet as of September 30, 2019, 2020, which has been derived from audited financial statements, and (b) unaudited interim condensed financial statements as of and for the three and ninesix months ended June 30, 2020 March 31, 2021 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-K10-K for the year ended September 30, 2019.2020.
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.
Recently AdoptedFor the purposes of comparability, certain prior period amounts have been reclassified to conform to current period classification. There was no impact to prior period net income or shareholders’ equity.
New Accounting Pronouncements
Effective October 1, 2019 we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02,Leases, using the effective date method under the modified retrospective approach. The amended guidance requires lessees, at the commencement date, to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and to record a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In July 2018, January 2017, the FASB issued ASU 2018-11,Leases, Targeted Improvements,2017-04, Intangibles-Goodwill, which gave companiesoffers amended guidance to simplify the optionaccounting for goodwill impairment by removing Step 2 of applying the new standard atgoodwill impairment test. A goodwill impairment will now be measured as the adoption date, rather than retrospectivelyamount by which a reporting unit’s carrying value exceeds its fair value, limited to the earliest period presentedamount of goodwill allocated to that reporting unit. This guidance is to be applied on a prospective basis effective for the Company’s interim and annual periods beginning after December 15, 2019. The new guidance is effective for the Company beginning in the financial statements.first quarter of fiscal 2021. The Company elected the package of practical expedients permitted under the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company also elected the practical expedient to not recognize a lease liability and ROU asset for short-term leases less than 12 months. We chose the option to apply the new standard at the adoption date, and therefore we are not required to restate the financial statements for prior periods, nor are we required to provide the disclosures required by the new standard for prior periods. Upon adoption, we recognized an approximate $2.4 million right-of-use asset, and an approximate $2.6 million lease liability. Our adoption of ASU 2017-04 in the new standardfirst quarter of fiscal 2021 did not impact our cash flows or have a material impact on our resultsthe Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of operations. We have expandedCredit 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 our financial statement disclosures to comply with the requirements of the new standard.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.
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The following is a reconciliation of the numerator and denominator of the net income per common share computations for the three and ninesix months ended June 30, 2020 March 31, 2021 and 2019:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 2,994,568 | $ | 1,300,527 | $ | 4,243,623 | $ | 2,678,429 | ||||||||
Weighted average common shares | 13,497,955 | 13,446,289 | 13,510,413 | 13,422,885 | ||||||||||||
Dilutive potential common shares | - | 5,382 | 36,711 | 11,124 | ||||||||||||
Weighted average dilutive common shares outstanding | 13,497,955 | 13,451,671 | 13,547,124 | 13,434,009 | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.22 | $ | 0.10 | $ | 0.31 | $ | 0.20 | ||||||||
Diluted | $ | 0.22 | $ | 0.10 | $ | 0.31 | $ | 0.20 | ||||||||
2020:
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | 3,639,784 | $ | 747,897 | $ | 6,803,223 | $ | 1,249,055 | ||||||||
| Weighted average common shares | 13,730,150 | 13,521,172 | 13,711,135 | 13,516,608 | ||||||||||||
| Dilutive potential common shares | 49,629 | - | 26,956 | 55,066 | ||||||||||||
| Weighted average dilutive common shares outstanding | 13,779,779 | 13,521,172 | 13,738,090 | 13,571,674 | ||||||||||||
| Net income per common share: | ||||||||||||||||
| Basic | $ | 0.27 | $ | 0.05 | $ | 0.50 | $ | 0.09 | ||||||||
| Diluted | $ | 0.27 | $ | 0.05 | $ | 0.50 | $ | 0.09 | ||||||||
Note 3. Cash, Cash Equivalents, and Investments
The Company invests its excess cash in bank certificates of deposit (“CDs”) that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”) and United States Treasury (“Treasuries”) securities with terms of not more than five years, as well as money market accounts. CDs and Treasuries with original maturities of more than three months are reported as held-to-maturity investments and are recorded at amortized cost, which approximates fair value due to the negligible risk of changes in value due to interest rates. The maturity dates of the Company’s investments as of JuneMarch 31, 2021 and September 30, 2020 and September 30, 2019 are as follows:
June 30, 2020 | September 30, 2019 | March 31, 2021 | September 30, 2020 | |||||||||||||
Less than one year | $ | 11,093,527 | $ | 13,524,270 | $ | 9,957,831 | $ | 10,582,527 | ||||||||
1-5 years | 28,072,000 | 23,902,000 | 25,565,000 | 25,143,000 | ||||||||||||
Total | $ | 39,165,527 | $ | 37,426,270 | $ | 35,522,831 | $ | 35,725,527 | ||||||||
Note 4. Stock-Based Compensation
The Company recorded $213,361$334,178 and $541,884$623,235 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 ninesix months ended June 30, 2020, respectively.March 31, 2021, respectively, For the three months ended June 30, 2020, $207,653March 31, 2021, $313,658 of this expense is included in selling, general and administrative expense, and $5,708$20,520 is included in cost of sales. For the ninesix months ended June 30, 2020, $526,580March 31, 2021, $594,546 of this expense is included in selling, general and administrative expense, and $15,304$28,689 is included in cost of sales. The Company recorded $433,438$87,937 and $1,535,628$328,523 of compensation expense related to current and past stock option grants, restricted stock grants, non-qualified stock options and the Company’s ESPP for the three and ninesix months ended June 30, 2019, March 31, 2020, respectively. For the three months ended June 30, 2019, $410,784March 31, 2020, $83,140 of this expense is included in selling, general and administrative expense, and $22,654$4,797 is included in cost of sales. For the ninesix months ended June 30, 2019, $1,450,489March 31, 2020, $318,928 of this expense is included in selling, general and administrative expense, and $85,139$9,595 is included in cost of sales. As of June 30, 2020, $ 2,147,356March 31, 2021, $3,182,923 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 4.23.4 years.
Stock Options
The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. During the ninesix months ended June 30, 2020, March 31, 2021, the Company granted employees non-qualified stock options to purchase an aggregate of 121,350105,089 shares of common stock with a weighted average contractual term of 5.71five years, a 4.71 year weighted average three-year vesting term, and ana weighted average exercise price of $12.43.$23.74. During the ninesix months ended June 30, 2019, March 31, 2020, the Company granted employees non-qualified stock options to purchase an aggregate of 172,000116,600 shares of common stock with a weighted average contractual term of four5.78 years, a threeweighted average 4.78 year vesting term, and a weighted averagean exercise price of $12.17.$12.43.
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This
The fair value of stock option awards during the ninesix months ended June 30, 2020 March 31, 2021 was estimated as of the grant date using the range of assumptions listed below:
Nine months ended June 30, 2020 | ||||
Dividend yield | 0% | |||
Expected volatility | 39.5 | – | 44.9% | |
Risk-free interest rate | 0.24 | – | 1.69% | |
Expected life (in years) | 4 | - | 6 | |
Vesting period (in years) | 3 | - | 5 | |
| Six months ended | ||||
| March 31, 2021 | ||||
| Dividend yield | 0 | % | ||
| Expected volatility | 46.9 | % | ||
| Risk-free interest rate | 0.24 | % | ||
| Expected life (years) | 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-couponzero-coupon U.S. governmental bonds havingwith 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-yearfive-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 ninesix months ended June 30, 2020:March 31, 2021:
Number of options | Weighted average exercise price | |||||||
Outstanding as of September 30, 2019 | 290,750 | $ | 11.86 | |||||
Granted | 121,350 | 12.43 | ||||||
Exercised | (8,500 | ) | 2.58 | |||||
Cancelled or Forfeited | (48,250 | ) | 13.35 | |||||
Outstanding as of June 30, 2020 | 355,350 | $ | 12.08 | |||||
| Number of options | Weighted average exercise price | |||||||
| Outstanding as of September 30, 2020 | 337,100 | $ | 12.48 | |||||
| Granted | 105,089 | 23.74 | ||||||
| Exercised | (101,800 | ) | 12.47 | |||||
| Forfeited or Expired | (25,309 | ) | 13.89 | |||||
| Outstanding as of March 31, 2021 | 315,080 | $ | 16.13 | |||||
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, 2020, March 31, 2021, the weighted average remaining contractual term for all outstanding and exercisable stock options was 2.312.79 years and their aggregate intrinsic value was $278,995. During the nine months ended June 30, 2020, the Company received proceeds of $10,968 from the exercise of stock options. During the nine months ended June 30, 2019, the Company received proceeds of $24 from the exercise of stock options.$890,093.
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 ninesix months ended June 30, 2020, March 31, 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 six months ended March 31, 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.
During the six months ended March 31, 2020, the Company granted non-employee directors elected at the Company’s 2020 Annual Meeting of Shareholders restricted stock awards totaling 5,830 shares of common stock, with a vesting term of approximately one year and a fair value of $10.72 per share. In February, the Company granted 5,000 shares of restricted stock, with a vesting term of approximately one year and a fair value of $11.01 per share. The Company also granted 8,625 performance stock units entitling the participant to receive the same number of shares of the Company’s common stock, upon achievement of a fiscal year 2020 performance goal. The shares issued to the participant in settlement of the performance stock unit, if any, will be restricted stock subject to forfeiture that will vest one year following the settlement date of the performance stock unit. The Company has determined the fair value per underlying share of the performance stock unit awards to be $11.86 as of the grant date. These performance stock unit awards were forfeited during the nine months ended June 30, 2020.
During the nine months ended June 30, 2019, the Company granted non-employee directors restricted stock awards totaling 4,340 shares of common stock, with a vesting term of approximately one year and a fair value of $14.40 per share.
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Restricted stock transactions during the ninesix months ended June 30, 2020 March 31, 2021 are summarized as follows:
Number of shares | Weighted average grant date fair value | Number of shares | Weighted average grant date fair value | |||||||||||||
Unvested shares as of September 30, 2019 | 130,440 | $ | 13.25 | |||||||||||||
| Unvested shares as of September 30, 2020 | 109,070 | $ | 12.97 | |||||||||||||
Granted | 19,455 | 11.30 | 39,807 | 24.20 | ||||||||||||
Vested | (5,740 | ) | 14.01 | (12,230 | ) | 11.08 | ||||||||||
Forfeited | (9,875 | ) | 12.03 | (3,298 | ) | 16.07 | ||||||||||
Unvested as of June 30, 2020 | 134,280 | $ | 13.02 | |||||||||||||
| Unvested as of March 31, 2021 | 133,349 | $ | 16.41 | |||||||||||||
Employee Stock Purchase Plan
Clearfield, Inc.’sThe 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 that participating employees may 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-monthsix-month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phases that ended on June 30,December 31, 2020 and December 31, 2019, employees purchased 15,11615,011 and 15,107 shares at a price of $11.85$11.93 and $11.23 per share, respectively. In FebruaryAfter the employee purchase on December 31, 2020, the shareholders of Clearfield approved an increase of 200,000 in the shares authorized for issuance under the ESPP. As a result, as of June 30, 2020, the Company has 219,623204,612 shares of common stock were available for future purchasespurchase under the ESPP.
Note 5. Revenue
Revenue Recognition
Net sales include products and shipping and handling charges. Revenue is measured as the amount of consideration we expectthe Company expects to receive in exchange for transferring products. All revenue is recognized when we satisfy ourthe Company satisfies its performance obligations under the contract. We recognizeThe 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. We recognizeThe 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 ourthe 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.
Our revenuesRevenues related to the following geographic areas were as follows for the three and ninesix months ended:
Three Months Ended June 30, | Nine Months Ended June 30, | Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
United States | $ | 25,090,614 | $ | 20,243,754 | $ | 62,765,455 | $ | 55,861,025 | $ | 27,743,937 | $ | 19,489,270 | $ | 53,776,138 | $ | 37,731,957 | ||||||||||||||||
All other countries | 879,431 | 1,648,490 | 2,991,090 | 5,204,734 | 1,947,997 | 919,239 | 3,007,943 | 2,054,543 | ||||||||||||||||||||||||
Total Net Sales | $ | 25,970,045 | $ | 21,892,244 | $ | 65,756,545 | $ | 61,065,759 | $ | 29,691,934 | $ | 20,408,509 | $ | 56,784,081 | $ | 39,786,500 | ||||||||||||||||
Clearfield
The Company manufactures and sells a proprietary product line designed for the Broadband Service Provider marketplace. In addition, the CompanyCompany’s Legacy business provides Build-to-Printbuild-to-print services for original equipment manufacturers requiring copper and fiber cable assemblies built to their specification.
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The percentages of our sales by markets were as follows for the three and ninesix months ended:
Three Months Ended June 30, | Nine Months Ended June 30, | Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2020 | 2020 | 2020 | |||||||||||||||||||||||||
Broadband service providers | 97 | % | 97 | % | 96 | % | 95 | % | 97 | % | 96 | % | 98 | % | 95 | % | ||||||||||||||||
Build-to-print customers | 3 | % | 3 | % | 4 | % | 5 | % | ||||||||||||||||||||||||
| Legacy customers | 3 | % | 4 | % | 2 | % | 5 | % | ||||||||||||||||||||||||
Total Net Sales | 100 | % | 100 | % | 100 | % | 100 | % | 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, customers; National Carriers, which includes large national and global wireline and wireless providers also referred to as Tier 1’s, multiple system operators (“MSO’s”), which include cable television companies,; and internationalInternational 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 JuneMarch 31, 2021 and September 30, 2020, and September 30, 2019, the balance in the allowance for doubtful accounts was $289,085.$79,473 and $289,085, respectively. The allowance for doubtful accounts decreased by the amount recovered during the three months ended March 31, 2021 on an account previously reserved.
See Note 7, “Major Customer Concentration” for further information regarding accounts receivable and net sales.
Note 6. Inventories
Inventories consist of the following as of:
June 30, 2020 | September 30, 2019 | March 31, 2021 | September 30, 2020 | |||||||||||||
Raw materials | $ | 11,340,314 | $ | 7,115,298 | $ | 11,932,008 | $ | 12,287,134 | ||||||||
Work-in-progress | 1,384,876 | 540,962 | ||||||||||||||
| Work-in-process | 2,191,469 | 1,033,021 | ||||||||||||||
Finished goods | 2,156,763 | 1,356,720 | 1,541,111 | 2,048,514 | ||||||||||||
| Inventories, gross | 15,664,588 | 15,368,669 | ||||||||||||||
| Inventory reserve | (1,037,412 | ) | (960,131 | ) | ||||||||||||
Inventories, net | $ | 14,881,952 | $ | 9,012,980 | $ | 14,627,176 | $ | 14,408,538 | ||||||||
Note 7. Major Customer Concentration
For the three months ended June 30, 2020, CustomerMarch 31, 2021, Customers A comprised 20% and Customer B comprised 21% and 11% of the Company’s net sales.sales, respectively. For the ninesix months ended June 30, 2020, March 31, 2021, Customers A and B comprised 20% and 11% of the Company’s net sales, respectively. Both of these customers arewere distributors. For the three months ended June 30, 2019, March 31, 2020, Customer A comprised 21% of the Company’s net sales. For the six months ended March 31, 2020, Customers A, B and BC comprised 19%20%, 11% and 12%10%, respectively, of the Company’s net sales. Both Customers A and B areAll of these customers were distributors. For the nine months ended June 30, 2019, Customers A and B comprised 18% and 10%, respectively, while Customer C comprised 11% of the Company’s net sales. Customer C is a private label original equipment manufacturer. These major customers, like our other customers, purchase our products from time to time through purchase orders, and we do the Company does not have any agreements that obligate these major customers to purchase products from us in the future from us.future.
As of JuneMarch 31, 2021, Customers A and B accounted for 10% and 14% of accounts receivable, respectively. As of September 30, 2020, 2 customersCustomers A and B accounted for 17%12% and 11% respectively, or 28% in the aggregate,13%, of accounts receivable. Both of these customers are distributors. As of September 30, 2019, two customers accounted for 16%, and 12%, respectively, or 28% in the aggregate of accounts receivable.receivable, respectively. Both of these customers are distributors.
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Note 8. 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, 2019 2020 did not indicate an impairment of goodwill. During the ninesix months ended June 30, 2020, March 31, 2021, 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, 2020, March 31, 2021, the Company has 2226 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 2020 did not indicate an impairment of our intangible assets. During the ninesix months ended June 30, 2020, March 31, 2021, there were no triggering events that indicate potential impairment exists.
Note 9. Income Taxes
For the three and ninesix months ended June 30, 2020, March 31, 2021, the Company recorded income tax expense of $763,000$935,000 and $1,076,000$1,619,000, reflecting an effective tax rate of 20.4% and 19.2%, respectively. The differences between the effective tax rate and the statutory tax rate were primarily related to excess tax benefits from non-qualified stock options exercised during the quarter, research and development credits, and foreign derived intangibles income deduction (FDII). For the three and six months ended March 31, 2020, the Company recorded income tax expense of $190,000 and $313,000, reflecting an effective tax rate of 20.3% and 20.2%20.0%, 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 differences between the effective tax rate and the statutory tax rate were related to nondeductible meals and entertainment, nondeductible stock compensation, foreign derived intangibles income deduction (FDII)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 asset for expected utilization using a “more likely than not” criteria by assessing the available positive and negative factors surrounding its recoverability.recoverability and determined that as of March 31, 2021 and September 30, 2020 a valuation allowance against our 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, 2020 and September 30, 2019, the Company had a remaining valuation allowance of approximately $47,000 related to state net operating loss carry forwardsMarch 31, 2021, 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.
Note 10. Leases
ClearfieldThe Company leases a 71,000an 85,000 square foot facility at 7050 Winnetka Avenue North, Brooklyn Park, Minnesota consisting of our corporate offices, manufacturing and warehouse space. The lease term is ten years and two months, and commencedending on January 1, 2015. On June 30, 2019, the Company amended its lease to add 14,000 square feet to this facility, with the lease term for the additional space coterminous with the original lease.February 28, 2025. Upon proper notice and payment of a termination fee of approximately $249,000, the Company has a one-timeone-time option to terminate the lease effective as of the last day of the eighth year of the term after the Company commenced paying base rent. The renewal and termination options have not been included within the lease term because it is not reasonably certain that wethe Company will exercise either option.
We also haveOn October 9, 2020, the Company entered into an indirect lease arrangement for aits original 46,000 square foot manufacturing facility in Tijuana, Mexico. The Company had previously been leasing this facility on a month to month basis after its three-year lease expired on July 31, 2020. The new lease term is three years and commenced on August 1, 2017. years. This lease does not containcontains a written option to renew.renew and rent payments that increase annually based on U.S. inflation for the preceding 12 months.
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On February 12, 2020, the Company entered into an indirect lease arrangement for an additional 52,000 square foot manufacturing facility in Tijuana, Mexico. The lease term is approximately 42 months and commenced on February 12, 2020. The lease contains written options to renew for two additional consecutive periods of three years each.
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 we arethe Company is reasonably certain to exercise. OurThe Company’s leases do not contain any material residual value guarantees or material restrictive covenants. As of June 30, 2020, we do March 31, 2021, the Company does not have material lease commitments that have not commenced.
Operating lease expense included within cost of goods sold and selling, general and administrative expense was as follows for the three and ninesix months ended June 30, 2020:March 31, 2021:
Operating lease expense under ASC842, Leases, within: | Three months ended June 30, 2020 | Nine months ended June 30, 2020 | ||||||
Cost of goods sold | $ | 247,897 | $ | 652,399 | ||||
Selling, general and administrative | 54,345 | 166,109 | ||||||
Total lease expense | $ | 302,242 | $ | 818,508 | ||||
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
| Operating lease expense within: | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Cost of sales | $ | 252,459 | $ | 218,874 | $ | 505,395 | $ | 404,502 | ||||||||
| Selling, general and administrative | 55,335 | 55,398 | 110,733 | 111,764 | ||||||||||||
| Total lease expense | $ | 307,794 | $ | 274,272 | $ | 616,128 | $ | 516,266 | ||||||||
Future maturities of lease liabilities were as follows as of June 30, 2020:March 31, 2021:
Operating Leases | ||||
2020 (remainder of fiscal year) | $ | 202,586 | ||
2021 | 752,423 | |||
2022 | 772,803 | |||
2023 | 744,963 | |||
2024 | 516,725 | |||
Thereafter | 217,552 | |||
Total lease payments | $ | 3,207,052 | ||
Less: Interest | (234,833 | ) | ||
Present value of lease liabilities | $ | 2,972,219 | ||
| FY2021 | $ | 485,717 | ||
| FY2022 | 986,844 | |||
| FY2023 | 943,682 | |||
| FY2024 | 516,725 | |||
| FY2025 | 217,552 | |||
| Thereafter | - | |||
| Total lease payments | 3,150,520 | |||
| Less: Interest | (182,281 | ) | ||
| Present value of lease liabilities | $ | 2,968,239 |
The weighted average term and weighted average discount rate for ourthe Company’s leases as of June 30, 2020 March 31, 2021 were 4.213.33 years and 3.40%, respectively, compared to 4.78 years and 3.48%, respectively.respectively, as of March 31, 2021. For the three and ninesix months ended June 30, 2020, March 31, 2021, the operating cash outflows from ourthe Company’s leases were $237,726was $240,066 and $574,381, respectively.
Rent expense for our operating leases as accounted for under ASC 840,Leases, included within cost of goods sold$479,801, respectively, compared to $168,815 and selling, general and administrative expense was as follows$336,655, for the three and ninesix months ended June 30, 2019.
Operating lease expense under ASC840, Leases, within: | Three months ended June 30, 2019 | Nine months ended June 30, 2019 | ||||||
Cost of goods sold | $ | 158,932 | $ | 491,878 | ||||
Selling, general and administrative | 54,990 | 162,366 | ||||||
Total lease expense | $ | 213,922 | $ | 654,244 | ||||
March 31, 2020, respectively.
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As previously disclosed in Note B of the Notes to the Financial Statements in our 2019 Annual Report on Form 10-K, prior to the adoption of ASU 2016-02,Leases (Topic 842), the future minimum payments required under lease agreements were as follows:
As of September 30, 2019 | ||||
2020 | $ | 643,040 | ||
2021 | 479,213 | |||
2022 | 491,397 | |||
2023 | 503,895 | |||
2024 | 516,720 | |||
Thereafter | 217,551 | |||
Total minimum lease payments | $ | 2,851,816 | ||
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, 2019,2020 and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, 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 ourthe Company’s financial condition and results of operations as of and for the three and ninesix months ended June 30,March 31, 2021 and 2020 and 2019 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, 2019.2020.
OVERVIEW
General
Clearfield, Inc. (“Clearfield” or the “Company”) 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 Broadband Service Providers in the United States (“U.S.”), which include Community Broadband, MSO’s, and National Carriers, and MSO’s, while also serving the broadband needs of the 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-Printits Legacy customers which include original equipment manufacturers (OEM) requiring copper and fiber cable assemblies built to their specifications.
The Company has historically focused on the unserved or underserved rural communities that receive 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 manufacturing 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 customers, some made through two-tier distribution (channel) partners, sales agents and manufacturing 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”Under U.S. federal and “stay safe” executive orders adoptedstate guidance in response to the novel coronavirusCOVID-19 pandemic, Clearfield’s operations are classified as part of the Cybersecurity and Infrastructure Security Agency (“COVID-19”CISA”) pandemic. We havecritical infrastructure sector and similar categorization in Minnesota. In March 2020, we transitioned our corporate employees at our Brooklyn Park headquarters to remote work arrangements.arrangements and they currently continue remote work. In accordance with the CDCCenters for Disease Control and WHOPrevention (“CDC”) and World Health Organization (“WHO”) guidelines, we alsoimplemented and have implementedcontinued health and safety measures for the production staff that remain onsite at our Brooklyn Park facility. We have continued to maintainmaintained our manufacturing capacity in Brooklyn Park with these personnel.personnel at near historic levels. Similarly, we have implemented the recommended health and safety measures for the production staff that remains onsite at our Tijuana, Mexico manufacturing facilities.
The Throughout the COVID-19 pandemic, the Company ishas closely monitoringmonitored the operations and staffing levels at its Brooklyn Park facility and its two 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.Mexico.
Since
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Due to 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 challengesrisks to timely supply of materials to our facilities, we have taken multiple actions to ensure sufficient safety stock inventory levels at both our Minnesota and Mexico facilitiesfacilities. Additionally, we made the decision to maximize the availability of all product lines at all three of our plants by assuring that each location can manufacture across our broad product portfolio. These actions, combined with our historic practice of dual sourcing most of our components, has positioned us to meet our obligations to customers and timely product deliveries fromto fulfill our order backlog going forward. However, in the facilities due toevent of serious border restrictions or border delays. Depending on the severity of these border issues,delays, component material shortages, supply chain transportation delays, or other serious disruption in our supply chain, 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, 2020March 31, 2021 vS. three months ended JUNE 30, 2019March 31, 2020
Net sales for the thirdsecond quarter of fiscal 20202021 ended June 30, 2020March 31, 2021 were $25,970,000,$29,692,000, an increase of approximately 19%45% or $4,078,000,$9,283,000, from net sales of $21,892,000$20,409,000 for the thirdsecond quarter of fiscal 2019.2020. Net sales to Broadband Service Providers were $25,293,000$28,934,000 in the thirdsecond quarter of fiscal 20202021 versus $21,127,000$19,642,000 in the same period of fiscal 2019.2020. Among this group, the Company recorded $879,000 $1,948,000 in internationalInternational sales for the thirdsecond quarter of fiscal 20202021 versus $1,648,000$919,000 in the same period of fiscal 2019.2020. Net sales to Build-to-PrintLegacy customers decreased $87,000 to $678,000were $758,000 in the thirdsecond quarter of fiscal 2020 from $765,0002021 versus $766,000 in the same period of fiscal 2019.2020. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, internationalInternational sales represented 3%7% and 8%5% of total net sales for the thirdsecond quarter of fiscal 20202021 and 2019,2020, respectively.
The increase in net sales for the quarter ended June 30, 2020March 31, 2021 of $4,078,000$9,283,000 compared to the quarter ended June 30, 2019March 31, 2020 was driven primarily by increased sales to Community Broadband Service Providers, MSO and International customers of $8,296,000, $1,581,000, and $1,029,000, respectively. Offsetting this was decreased sales to Tier 1 customers of $3,004,000, $1,218,000 and $637,000, respectively. Offsetting this were decreased$1,623,000. Net sales to InternationalLegacy customers of $769,000remained relatively consistent over this period. The increase to Community Broadband and MSO customers was due to lowercontinuing increased demand for eachfiber connectivity products in response to COVID-19 driven by customers accelerating their purchasing decisions and deployment schedules of our fiber optic solutions and the need for high-speed broadband required in the period.work from anywhere environment. The declineincrease in international revenueInternational sales was driven by government funding of deployments within those markets. The decrease in sales to Tier 1 customers is due to COVID-19 constraints limiting the fiscal third quarter 2020 was primarily related to currency conversion issues indeployment of fiber products into the Company’s international markets that have made the Company’s products temporarily cost-prohibitive, causing customers to delay purchasing decisions.access part of Tier 1 networks.
Revenue from all customers is obtained from purchase orders submitted from time to time.time, with a limited number of customers recently issuing purchase orders for longer time frames. 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 deliveryits supply chains or changes in customer ordering patterns due to COVID-19.COVID-19, global supply chain issues and the impact of government programs. The Company’s ability to recognize revenue in the fourth quarter of 2020future 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 thirdsecond quarter of fiscal 20202021 was $15,180,000,$16,750,000, an increase of $1,700,000,$4,493,000, or 13%37%, from $13,480,000$12,257,000 in the comparable period of fiscal 2019.2020. Gross profit percent was 41.5%43.6% of net sales in the second quarter of fiscal 2020 third quarter,2021, an increase from 38.4%39.9% of net sales for the second quarter of fiscal 2019 third quarter.2020. Gross profit increased $2,378,000,$4,790,000 or 28%59%, to $10,790,000$12,942,000 for the three months ended June 30, 2020March 31, 2021 from $8,413,000$8,151,000 in the comparable period in fiscal 2019. 2020. The increase in gross profit in the thirdsecond quarter of fiscal 20202021 was due to increased volume of net sales described above 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,plants and 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 $318,000 in the comparable period in fiscal 2019.higher sales volumes. In the thirdsecond quarter of fiscal 2020,2021, the Company did not experience any significant impacts on cost of sales due to COVID-19.
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Selling, general and administrative expenses increased $336,000,$1,058,000, or 5%14%, to $7,207,000$8,490,000 in the thirdsecond quarter fiscal 20202021 from $6,871,000$7,431,000 for the fiscal 2019 third2020 second quarter. The increase in expense in the thirdsecond quarter of fiscal 20202021 consists primarily of increases of $692,000$1,405,000 in compensation expense due to additional personnel,headcount and $279,000 in product certification testing expenses,increased wages and performance compensation accruals driven by higher net sales, and increased stock compensation expense of $231,000, offset by lowera recovery of bad debt expense of $210,000 and a decrease in travel and entertainment and marketing costsexpenses of $499,000 and $126,000, respectively,$335,000 due to COVID-19 restrictions. In the thirdsecond quarter of fiscal 2020,2021, other than the travel and marketingentertainment costs mentioned above, 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, 2020March 31, 2021 was $3,583,000$4,451,000 compared to $1,542,000$720,000 for the comparable quarter of fiscal 2019,2020, an increase of approximately 132%518%. This increase is attributable to increased gross profit driven by higher sales, offset by higher selling, general and administrative expenses.
Interest income for the quarter ended June 30, 2020March 31, 2021 was $175,000$123,000 compared to $213,000$218,000 for the comparable quarter for fiscal 2019.2020. The decrease is due to lower interest rates earned on investments in the thirdsecond quarter of fiscal 2020.2021. 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 $763,000$935,000 and $454,000$190,000 for the three months ended June 30,March 31, 2021 and 2020, and 2019, 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 $309,000$745,000 from the thirdsecond quarter for fiscal 20192020 is primarily due to increased income from operations. The decrease in the income tax expense rate to 20.3% for the thirdsecond quarter of fiscal 20202021 was 20.4%, relatively unchanged from 25.9% for20.3% recorded in the thirdsecond quarter of fiscal 2019 is primarily due to increased research and development tax credits and FDII deduction.2020.
The Company’s net income for the three months ended June 30, 2020March 31, 2021 was $2,995,000,$3,640,000, or $0.22$0.27 per basic and diluted share. The Company’s net income for the three months ended June 30, 2019March 31, 2020 was $1,301,000,$748,000, or $0.10$0.05 per basic and diluted share.
NINESix months ended JUNE 30, 2020March 31, 2021 vS. NINEsix months ended June 30, 2019March 31, 2020
Net sales for the ninesix months ended June 30, 2020March 31, 2021 were $65,757,000,$56,784,000, an increase of 8%43%, or approximately $4,691,000,$16,998,000, from net sales of $61,066,000$39,787,000 for the first ninesix months of fiscal 2019.2020. Net sales to Broadband Service providers were $63,102,000$55,507,000 for the first ninesix months of fiscal 2020,2021, versus $57,887,000$37,798,000 in the same period of fiscal 2019.2020. Among this group, the Company recorded $2,991,000$3,008,000 in International sales versus $5,205,000$2,055,000 in the same period of fiscal 2019.2020. Net sales to Build-to-PrintLegacy customers were $2,655,000$1,277,000 in the first ninesix months of fiscal 20202021 versus $3,179,000$1,990,000 in the same period of fiscal 2019.2020. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, internationalInternational sales represented 5% and 9% of total net sales for the first ninesix months of fiscal 20202021 and 2019, respectively.2020.
The increase in net sales for the ninesix months ended June 30, 2020March 31, 2021 of $4,691,000$16,998,000 compared to the ninesix months ended June 30, 2019March 31, 2020 is primarily attributable to an increase in sales to Tier 1,Community Broadband, MSO and Community BroadbandInternational customers of $2,960,000, $2,773,000$16,490,000, $2,282,000 and $1,701,000$907,000, respectively. This was offset by decreased sales to InternationalTier 1 and Legacy customers of $2,213,000,$1,999,000, and Build-to-Print$683,000, respectively. The increase to Community Broadband and MSO customers was due to increased demand in response to COVID-19 driven by customers accelerating their purchasing decisions and deployment schedules of $530,000.our fiber optic solutions and the need for high-speed broadband required in the work from anywhere environment. The increase in International sales was driven by government funding of deployments within those markets. The decrease in sales to Tier 1 customers is the result of COVID-19 constraints limiting the deployment of fiber products into the access part of the network.
Cost of sales for the ninesix months ended June 30, 2020March 31, 2021 was $39,087,000,$32,473,000, an increase of $1,406,000,$8,566,000, or 4%36%, from $37,681,000$23,908,000 in the comparable period of fiscal 2019.2020. Gross profit percent was 40.6%42.8% of net sales in the fiscal 20202021 first ninesix months, up from 38.3%39.9% for the comparable ninesix months in fiscal 2019.2020. Gross profit increased $3,285,000,$8,432,000, or 14%53%, to $26,669,000$24,311,000 for the ninesix months ended June 30, 2020March 31, 2021 from $23,385,000$15,879,000 in the comparable period in fiscal 2019. 2020. The increase in gross profit in the ninesix months ended June 30, 2020March 31, 2021 was due to increased volume of net sales described above and a higher gross profit percent. The increase in gross profit percent was primarily due to improvedfavorable product mix and cost reduction efforts across the Company’s product lines, including greater use of its Mexico manufacturing plants and efficiencies and costs in its manufacturing facilities, and lower tariff costs. Tariff costs were $288,000 inrealized from higher sales volumes. In the ninesix months ended June 30, 2020, compared to $877,000 in the comparable nine month period. In the nine months ended June 30, 2020,March 31, 2021, the Company did not experience any significant impacts on cost of sales due to COVID-19.
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Selling, general and administrative expenses increased 8%9%, or $1,590,000,$1,388,000, from $20,375,000$14,758,000 for the first ninesix months of fiscal 20192020 to $21,965,000$16,146,000 for the first ninesix months of fiscal 2020.2021. The increase in the first ninesix months of fiscal 20202021 consists primarily of increases of $2,524,000$2,214,000 in compensation expense due to additional personnel along with increased wages and $536,000 in product certification testing expenses,performance compensation accruals driven by higher net sales, and increased stock compensation expense of $276,000, offset by a recovery of bad debt expense of $210,000 and decreases of $924,000 in stock-based compensation expense, and lower travel, entertainment and marketing coststrade show expenses of $590,000 and $178,000, respectively,$807,000 due to COVID-19 restrictions. In the six months ended March 31, 2021, other than the travel, entertainment and trade show costs mentioned above, the Company did not experience any significant impacts on selling, general and administrative expense due to COVID-19.
Income from operations for the ninesix months ended June 30, 2020March 31, 2021 was $4,704,000$8,165,000 compared to income from operations of $3,010,000$1,121,000 for the first ninesix months of fiscal 2019, a2020, an increase of $1,694,000,$7,044,000, or 56%628%. This increase is primarily attributable to increased gross profit driven by higher sales, offset by increased selling, general and administrative expenses.
Interest income for the ninesix months ended June 30, 2020March 31, 2021 was $616,000$257,000 compared to $517,000$441,000 for the comparable period for fiscal 2019.2020. The increasedecrease is due to increased balances and higherlower interest rates earned on investments in the first halfsecond quarter of fiscal 2020.2021. We expect interest income to decline due to the prevailing lower interest rates in the current economic environment.
We recorded a provision for income taxes of $1,076,000$1,619,000 and $849,000$313,000 for the ninesix months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The increase in tax expense of $227,000$1,306,000 from the ninesix months ended June 30, 2019March 31, 2020 is primarily due to increased pre-tax income offset by a lower effective tax rate for the nine months ended June 30, 2020.from operations. The decrease in the effectiveincome tax expense rate to 20.2%19.2% for the ninesix months ended June 30, 2020March 31, 2021 from 24.1%20.0% for the ninesix months ended June 30, 2019March 31, 2020 is primarily due to increased research and development credits and FDII deduction. excess tax benefits from non-qualified stock options exercised during the six months ended March 31, 2021.
The Company’s net income for the first ninesix months of fiscal 2021 ended March 31, 2021 was $6,803,000, or $0.50 per basic and diluted share. The Company’s net income for the first six months of fiscal 2020 ended June 30,March 31, 2020 was $4,244,000,$1,249,000, or $0.31$0.09 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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2020,March 31, 2021, our principal source of liquidity was our cash, cash equivalents and short-term investments. Those sources total $20,372,000$32,297,000 as of June 30, 2020March 31, 2021 compared to $23,606,000$27,032,000 as of September 30, 2019.2020. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, U.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 $28,072,000$25,565,000 as of June 30, 2020,March 31, 2021, compared to $23,902,000$25,143,000 as of September 30, 2019.2020. 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 thirdsecond quarter 2020,of fiscal 2021, our cash, cash equivalents and short-term and long-term investments remained consistent at $48.4increased to $57.9 million compared to $54.4 million as of the prior quarter end. We had no long-term debt obligations as of June 30, 2020March 31, 2021 or September 30, 2019.2020.
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 to mitigate the potential impacts of COVID-19 on the Company’s business.
Duebusiness 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 mitigatingor supply chain, logistics, and customer fulfillment risks caused by COVID-19.risks.
Operating Activities
Net cash provided by operating activities totaled $2,440,000$6,700,000 for the ninesix months ended JuneMarch 31, 2021. This was primarily due to net income of $6,803,000, non-cash expenses for depreciation and amortization of $1,139,000, and stock-based compensation of $623,000 in addition to changes in operating assets and liabilities providing cash. The primary changes in operating assets and liabilities using cash include an increase in accounts receivable of $2,908,000, offset by increases in accounts payable and accrued expenses of $1,240,000. The increase in accounts receivable is due to increased sales during the most recent quarter and the timing of payments from customers. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Days sales outstanding, which measures how quickly receivables are collected, increased five days to 40 days from September 30, 2020 to March 31, 2021. The increase in accounts payable and accrued expenses is due to the timing of payments to vendors in the quarter and $2,373,000 of fiscal 2020 accrued bonus compensation accruals paid in the first quarter of fiscal 2021.
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Net cash provided by operating activities totaled $2,296,000 for the six months ended March 31, 2020. This was primarily due to net income of $4,244,000,$1,249,000, non-cash expenses for depreciation and amortization of $1,825,000,$1,211,000, and stock-based compensation of $542,000$329,000 in addition to changes in operating assets and liabilities providing cash. Changes in operating assets and liabilities using cash include an increaseincreases in inventory of $5,869,000, offset by increases in$2,675,000 and accounts payable, accrued expenses and deferred rent of $1,554,000. $1,091,000, offset by a decrease in accounts receivable of $1,049,000. 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 the COVID-19 virus on the Company’s supply chain and manufacturing locations.chain. 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, decreasedincreased one day to 3236 days from September 30, 2019 to June 30,March 31, 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-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.
Investing Activities
We invest our excess cash in money market accounts, U.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 ninesix months ended June 30,March 31, 2021, we used cash to purchase $6,448,000 of FDIC-backed securities and received $6,651,000 on CDs that matured. Purchases of property, plant and equipment, mainly related to manufacturing equipment, consumed $682,000 of cash during the six months ended March 31, 2021.
During the six months ended March 31, 2020, we used cash to purchase $31,838,000$19,077,000 of both FDIC-backed and treasury securities and received $30,163,000$16,720,000 on CDs and treasuries that matured. Purchases of property, plant and equipment, mainly related to manufacturing equipment, consumed $1,493,000$1,183,000 of cash during the ninesix months ended June 30,March 31, 2020.
DuringFinancing Activities
For the ninesix months ended June 30, 2019,March 31, 2021, we received $179,000 from employees’ participation and purchase of stock through our ESPP, 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$456,000 related to information technologyshare withholding for taxes associated with the issuance of common stock upon cashless exercise of stock options and manufacturing equipment, consumed $1,100,000used $54,000 to pay for taxes as a result of cashemployees’ vesting of restricted shares using share withholding. We did not repurchase common stock under our share repurchase program in the ninesix months ended June 30, 2019.March 31, 2021.
Financing Activities
For the ninesix months ended June 30,March 31, 2020, we received $349,000$170,000 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 share repurchase program in the ninesix months ended June 30,March 31, 2020.
As of June 30,March 31, 2021 and March 31, 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.
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, approximately $5,400,000 in additional shares were available for purchase 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-based compensation, and valuation of inventory, long-lived assets, finite lived intangible assets and 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, 2019.2020. Management made no changes to the Company’s critical accounting policies during the quarter ended June 30, 2020.March 31, 2021.
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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 quarter ended June 30, 2020.March 31, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2020.March 31, 2021. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes to the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, that occurred during the quarter ended June 30, 2020 March 31, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
There are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position or results of operations.
The most significantrisk factor below supplements and should be read in conjunction with the risk factors applicable to the Company are described inunder Part I,II, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2019, as updated by our Quarterly Report on Form 10-Q for2020.
If any of the quarter ended March 31, 2020. There have been no material changes from the risk factors previously disclosedrisks set forth below or in our Annual Report on Form 10-K for the year September 30, 2020 actually occur, our business, results of operations and financial condition and the market price of our common stock could be negatively impacted. Although we believe that these are most significant risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our performance or financial condition. Any forecast regarding our future performance, including, but not limited to, forecasts regarding future net sales, timing of customer orders, impact of government programs on customer demand, product mix, margins, expenses, or net income, are forward-looking statements. These forward-looking statements reflect various assumptions and are subject to significant uncertainties and risks that could cause the actual results to differ materially from those described in the forward-looking statement, including the risks reflected in these risk factors.
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We depend on the availability of sufficient supply of certain materials and global disruptions in the supply chain for these materials could prevent us from meeting customer demand for our products.
We purchase critical components for our products, including injected molded parts, various cabling, optical components, and connectors from third parties, some of whom are single- or limited-source suppliers.
We depend on the ability of these third-party suppliers to secure a sufficient supply of raw materials and maintain sufficient manufacturing and shipping capacity. The global supply chain for raw materials critical to our products, such as updated.resin used to manufacture plastics and fiber optic cable, recently has suffered shortages, shipping delays and shipping shortages. This has led some manufacturers who depend on these raw materials to experience shortages, delivery delays and price increases for both the raw materials and shipping, with the corresponding consequence that these manufacturers may be delayed in delivering products to their customers or may charge higher prices for these products, or there may be increased shipping costs associated with the products. Some manufacturers have allocated short supply among their customers. Additionally, the COVID-19 pandemic has driven demand for certain goods that have exacerbated these disruptions as supply has not kept pace with demand. We believe these global supply chain issues will persist and will likely intensify in 2021 due to the complex and compounding problems associated with shortages of personnel due to the COVID-19 pandemic, backlogs at ports, shortages of shipping containers, freezing weather in Texas affecting the petrochemical industry, the blockage of the Suez Canal affecting the flow of trade, and other logistical issues.
In the first half of fiscal 2021, Clearfield has experienced and expects to continue to experience increased demand for its products from its customers, putting pressure on Clearfield’s supply chain to meet demand amidst these global issues. While we have not experienced significant increases in costs or delays in obtaining the materials and components for our products from our suppliers, we cannot assure you that we will not experience these costs or delays in the future. Clearfield’s ability to recognize revenue in the future for customer orders will depend on our ability to manufacture and deliver products to the customers and fulfill its other contractual obligations. Our ability to meet expected future customer demand for our products will in turn depend upon our suppliers receiving timely and adequate supply of raw materials to be able to produce the critical materials and components they supply to us. Although we place a high value on long-term relationships with our suppliers, generally we do not have long-term supply contracts but instead conduct business on an order-by-order basis. Therefore, we also compete with other companies for the production capacity of manufacturers of the materials and components we need for our products. We also are exposed to potentially increasing costs associated with the materials and components we purchase from suppliers or increased costs associated with shipping generally. We may attempt to mitigate the effect of increases in our cost of goods sold through sourcing or stocking initiatives and by selectively increasing the prices of our products. However, we may be unable to fully pass on these costs to our customers.
The reduction of available production capacity among our suppliers, their failures to meet production deadlines or increases to us in their manufacturing or shipping costs may impact our ability to deliver quality products to our customers on a timely basis, make our products less competitive due to extended delivery times or increased price, negatively impact our customer or distributor relationships, and result in lower net sales and profit.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NoneIn the three months ended March 31, 2021, the Company repurchased shares of stock as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) | ||||||||||||
| January 1-31, 2021 | — | $ | — | — | $ | 4,980,671 | ||||||||||
| February 1-28, 2021 | 1,750 | 24.72 | — | 4,980,671 | ||||||||||||
| March 1-31, 2021 | — | — | — | 4,980,671 | ||||||||||||
| Total | 1,750 | 24.72 | — | $ | 4,980,671 | |||||||||||
| (1) | Amount remaining from the aggregate $12,000,000 repurchase authorizations approved by the Company’s Board of Directors on April 25, 2017. |
In the three months ended March 31, 2021, the Company repurchased a total of 1,750 shares in connection with payment of taxes upon vesting of restricted stock previously issued to employees.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Not applicable.
| Exhibit 31.1* | – | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act | ||
| Exhibit 31.2 * | – | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act | ||
| Exhibit 32.1 ** | – | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350 | ||
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* Filed herewith.
**Furnished herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CLEARFIELD, INC.
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| CLEARFIELD, INC. | |||
| /s/ Cheryl Beranek | |||
By: Cheryl Beranek | |||
| Its: President and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| April 28, 2021 | /s/ Daniel Herzog | ||
By: Daniel Herzog | |||
| Its: Chief Financial Officer | |||
| (Principal Financial and Accounting Officer) |
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