ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
Statements made in this Annual Report on Form 10-K, in the Company’s other SEC filings, in press releases and in oral statements, that are not statements of historical fact are “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward-looking statements. The words “believes,” “expects,” “anticipates,” “seeks,” “may,” “will,” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The risks and uncertainties that could cause actual results to differ materially and adversely from those expressed or implied by the forward-looking statements include those risks described in Part I, Item 1A “Risk Factors.”
Overview of Business: Clearfield, Inc. designs, manufactures and distributes fiber optic management, protection and delivery products for communications networks. Our “fiber to the anywhere” platform serves the unique requirements of leading broadband service providers in the United States, which include Community Broadband, National Carriers, and Multiple System Operators (“MSO’s” or “cable TV”), while also serving the broadband needs of the International markets, primarily in the Caribbean, in Canada, and Central and South America. These customers are collectively included in the category of Broadband Service Providers. The Company also provides contract manufacturing services to its Legacy customers for build-to-print services which include OEM requiring copper and fiber cable assemblies built to their specifications. The Company’s sales channels include direct to customer, through distribution partners, and to original equipment suppliers who private label its products. The Company’s products are sold by its sales employees and independent sales representatives.
Critical Accounting Policies:In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our sales, income from operations and net income, as well as on the value of certain assets and liabilities on our balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance, as these policies affect the reported amounts of sales, expenses and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include:
● Revenue recognition
● Accounting for stock-based compensation
● Income taxes
Revenue Recognition Our revenue is comprised of the sale of our products to customers and is recognized when the Company satisfies its performance obligations under the contract. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. The majority of our contracts have a single performance obligation and are short term in nature. We recognize 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. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of sales. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenue) basis.
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Stock-Based Compensation We measure and recognize compensation expense for all stock-based awards at fair value over the requisite service period. We use the Black-Scholes option pricing model to determine the fair value of options. For restricted stock grants, fair value is determined as the average price of the Company’s stock on the date of grant. Equity-based compensation expense is broken out between cost of sales and selling, general and administrative expenses based on the classification of the employee. The determination of fair value of stock-based awards on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.
The expected terms of the options are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility is based on historical and expected future volatility of the Company’s stock. The Company has not historically issued any dividends and does not expect to in the future. Forfeitures for both option and restricted stock grants are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from estimates.
If factors change and we employ different assumptions in the determination of the fair value of grants in future periods, the related compensation expense that we record may differ significantly from what we have recorded in the current periods.
Income TaxesWe account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, Income Taxes, under which deferred income taxes are recognized based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. The recorded valuation allowance is based on significant estimates and judgments and if the facts and circumstances change, the valuation allowance could materially change.
In accounting for uncertainty in income taxes, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
As of September 30, 2021 and 2020, the Company had no U.S. federal net operating loss (“NOL”) carry-forwards. The state NOLs of $769,000 at September 30, 2020 were fully utilized during fiscal 2021 resulting in no state NOLs at September 30, 2021.
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As part of the process of preparing our financial statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that these deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not or unknown, we must establish a valuation allowance. If the valuation allowance is reduced, the Company would record an income tax benefit in the period in which that determination is made. If the valuation allowance is increased, the Company would record additional income tax expense.
The Company files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. Based on its evaluation, the Company has concluded that it has no significant unrecognized tax benefits. With limited exceptions, the Company is no longer subject to U.S. federal and state income tax examinations for fiscal years ending prior to 2004. We are generally subject to U.S. federal and state tax examinations for all tax years since 2004 due to our NOL carryforwards and the utilization of the carryforwards in years still open under statute.
Impairment of Long-Lived Assets, Intangible Assets and GoodwillThe Company’s long-lived assets as of September 30, 2021 consisted primarily of property, plant and equipment, right of use lease assets, patents, intangibles, and goodwill. The Company reviews the carrying amount of its property, plant and equipment, right of use lease assets, and intangible assets if events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When this review indicates the carrying amount of an asset or asset group exceeds the sum of the future undiscounted cash flows expected to be generated by the assets, the Company recognizes an asset impairment charge against operations for the amount by which the carrying amount of the impaired asset exceeds its fair value.
Determining fair values of property, plant and equipment, right of use lease assets, and intangible assets using a discounted cash flow method involves significant judgment and requires the Company to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Judgments are based on historical experience, current market trends, consultations with external valuation specialists and other information. If facts and circumstances change, the use of different estimates and assumptions could result in a materially different outcome. The Company generally develops these forecasts based on recent sales data for existing products, planned timing of new product launches or acquisitions, and estimated future growth of the FTTP market.
The Company operates as one reporting unit and reviews the carrying amount of goodwill annually in the fourth quarter of each fiscal year and more frequently if events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company determines its fair value for goodwill impairment testing purposes by calculating its market capitalization and comparing that to the Company’s carrying value. The Company’s goodwill impairment test for the years ended September 30, 2021 and 2020 resulted in excess fair value over carrying value and therefore, no adjustments were made to goodwill. During the year ended September 30, 2021, there were no triggering events that indicated goodwill could be impaired.
A significant reduction in our market capitalization or in the carrying amount of net assets of a reporting unit could result in an impairment charge. If the carrying amount of a reporting unit exceeds its fair value, the Company would measure the possible goodwill impairment loss based on an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill. An impairment loss would be based on significant estimates and judgments, and if the facts and circumstances change, a potential impairment could have a material impact on the Company’s financial statements.
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No impairment of long-lived assets, intangible assets or goodwill has occurred during the years ended September 30, 2021 and 2020, respectively.
Valuation of InventoryThe Company maintains a material amount of inventory to support its manufacturing operations and customer demand. This inventory is stated at the lower of cost or net realizable value. On a regular basis, the Company reviews its inventory and identifies that which is excess, slow moving and obsolete by considering factors such as inventory levels, expected product life and forecasted sales demand. Any identified excess, slow moving and obsolete inventory is written down to its market value through a charge to cost of sales. It is possible that additional inventory write-down charges may be required in the future if there is a significant decline in demand for the Company’s products and the Company does not adjust its inventory procurement accordingly.
Results of Operations
Year ended September 30, 2021 compared to year ended September 30, 2020
Net sales for fiscal year 2021 increased 51%, or $47,681,000, to $140,755,000 from net sales of $93,075,000 in 2020. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 7% and 4% of net sales for the years ended September 30, 2021 and 2020, respectively.
Sales in fiscal year 2021 to broadband service providers were 98% of net sales, or $138,021,000 compared to $89,571,000, or 96%, of net sales in fiscal 2020. Among this group, the Company recorded $9,470,000 in international sales in fiscal year 2021 versus $4,054,000 in fiscal year 2020. Sales to Legacy customers in 2021 were 2% of net sales, or $2,734,000 compared to $3,503,000, or 4%, of net sales in fiscal year 2020.
The increase in net sales for fiscal year 2021 of $47,681,000 compared to fiscal year 2020 is primarily attributable to an increase in sales to Community Broadband, MSO and International customers of $38,920,000, $6,245,000 and $5,396,000 respectively. This was offset by decreased sales to Tier 1 and Legacy customers of $2,172,000, and $708,000, 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 our fiber optic solutions and the need for high-speed broadband required in the work from anywhere environment, as well as market share gains among customers in these markets. The increase in International sales is a result of increased demand as purchases in the prior year were negatively affected by COVID-19. The decrease in sales to Tier 1 customers is due to a reduction in capital spending in the consumer markets for fiber to the home at one of our Tier 1 customers resulting in a slower pace of their spend with us.
Revenue from all customers is obtained from purchase orders submitted from time to time. Accordingly, the Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue has become further limited by potential disruption to its supply chains or changes in customer ordering patterns due to COVID-19. The Company’s ability to recognize revenue in the future 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.
Cost of sales for fiscal year 2021 was $79,578,000, an increase of $24,417,000, or 44%, from the $55,160,000 in fiscal year 2020. Gross profit increased 61%, or $23,264,000, from $37,914,000 for fiscal year 2020 to $61,178,000 for fiscal year 2021. Gross profit percent was 43.5% in fiscal year 2021 compared to 40.7% for fiscal year 2020. The year-over-year increase in gross profit was due to increased sales volume. The increase in gross profit percent was primarily due to favorable product mix associated with higher net sales in the Company’s Community Broadband markets, improved overhead absorption gained from increased sales volumes, and greater use of its Mexico manufacturing plants in fiscal 2021 compared to fiscal year 2020. In fiscal year 2021, the Company did experience increased material and supply chain transportation costs in its cost of sales due to substantial material demand and strained supply chain and transportation systems caused by COVID-19 and expects that to continue in fiscal year 2022.
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Selling, general and administrative expense for fiscal year 2021 was $35,944,000, an increase of $6,414,000, or 22%, compared to $29,530,000 for fiscal year 2020. This increase is primarily composed of an increase of $6,146,000 in compensation costs due to additional personnel and higher performance-based compensation accruals as well as sales commissions due to higher sales volumes. In addition, stock compensation expenses increased $471,000 due to issuances of equity awards in fiscal 2021. These were partially offset by lower travel and entertainment costs in fiscal year 2021 of $263,000 due to a full year of COVID-19 restrictions, and a recovery of bad debt expense of $210,000.
Income from operations for fiscal year 2021 was $25,234,000 compared to $8,384,000 for fiscal year 2020. This increase is attributable to increased sales and gross profit, partially offset by increased selling, general and administrative expenses as described above.
Interest income in fiscal year 2021 was $500,000 compared to $771,000 for fiscal year 2020. The decrease is due to lower interest rates earned on increased investment balances in fiscal 2021. The Company invests its excess cash primarily in FDIC-backed bank certificates of deposit, treasury securities, and money market accounts. We expect interest income to decline due to the prevailing lower interest rates in the current economic environment.
Income tax expense for fiscal year 2021 was $5,407,000 compared to $1,862,000 for fiscal year 2020. The increase in tax expense of $3,545,000 from the year ended September 30, 2020 is primarily due to the increase in taxable income for fiscal year 2021. The increase in the income tax expense rate to 21.0% for fiscal year 2021 from 20.3% for fiscal year 2020 is due to dilution of the permanent differences between tax and book income as a result of substantially higher taxable income in fiscal year 2021. Our provision for income taxes includes current federal tax expense, state income tax expense, and deferred tax expense.
Net income for fiscal year 2021 was $20,327,000 or $1.48 per basic and $1.47 per diluted share compared to $7,293,000 or $0.53 per basic and diluted share for the fiscal year 2020.
Liquidity and Capital Resources
As of September 30, 2021, the Company had combined balances of cash, cash equivalents, short term and long-term investments of $60,503,000 compared to $52,175,000 as of September 30, 2020. As of September 30, 2021, our principal source of liquidity was our cash and cash equivalents and short-term investments. Those sources total $23,590,000 as of September 30, 2021 compared to $27,032,000 as of September 30, 2020. Investments considered long-term were $36,913,000 as of September 30, 2021 compared to $25,143,000 as of September 30, 2020. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, U.S. Treasury securities and money market accounts. 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. We had no long-term debt obligations as of September 30, 2021 or 2020, respectively.
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 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 execution of the share repurchase program adopted by our Board of Directors. The share repurchase program was originally adopted on November 13, 2014 with $8,000,000 authorized for common stock repurchases. On April 25, 2017, our Board of Directors increased the authorization to $12,000,000 of common stock. In April 2020, in response to COVID-19, the Company suspended its share repurchase program. During the year ended September 30, 2021, the Company did not repurchase any shares under the stock repurchase program.
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Operating Activities
Net cash generated from operations for the fiscal year ended September 30, 2021 totaled $10,903,000. Cash provided by operations included net income of $20,327,000 for the fiscal year ended September 30, 2021, non-cash expenses for depreciation and amortization of $2,302,000, stock-based compensation of $1,280,000, and decrease in allowance for doubtful accounts of $210,000, in addition to changes in operating assets and liabilities using cash. Changes in operating assets and liabilities using cash include an increase in net inventories of $13,116,000 and accounts receivables of $9,151,000. The increase in inventory is a result of additional stocking levels to support the Company’s increased sales backlog and higher demand, and stocking of high turn and long lead time components to limit manufacturing delays due to raw material component shortages and delays. The increase in accounts receivable was due to higher net sales. Days sales outstanding, which measures how quickly receivables are collected, increased 1 day from 38 to 39 from September 30, 2020 to September 30, 2021. Also, changes in operating assets and liabilities providing cash include an increase in accounts payable and accrued expenses of $9,776,000, due to timing of accounts payable and $6,513,000 in fiscal year 2021 incentive compensation accruals to be paid after year end.
Net cash generated from operations for the fiscal year ended September 30, 2020 totaled $6,656,000. Cash provided by operations included net income of $7,293,000 for the fiscal year ended September 30, 2020, non-cash expenses for depreciation and amortization of $2,422,000, stock-based compensation of $774,000, slightly offset by a non-cash amortization of discounts on investments of $64,000, in addition to changes in operating assets and liabilities using cash. Changes in operating assets and liabilities using cash include an increase in net inventories of $5,396,000 and accounts receivables of $1,378,000. The increase in inventory is a result of additional stocking levels to support the Company’s increased backlog and higher demand, and additional safety stock across the Company’s multiple locations due to the uncertainty of COVID-19 on the Company’s supply chain and manufacturing locations. The increase in accounts receivable was due to higher net sales offset by improved days sales outstanding in the current year. Days sales outstanding, which measures how quickly receivables are collected, decreased 9 days from 47 to 38 from September 30, 2019 to September 30, 2020. Also, changes in operating assets and liabilities providing cash include an increase in accounts payable and accrued expenses of $3,152,000.
Investing Activities
For the fiscal year ended September 30, 2021, we purchased $24,809,000 of FDIC-backed certificates of deposit and U.S. Treasuries and had $13,255,000 of FDIC-backed certificates of deposit and U.S. Treasuries mature or be called. The result is cash used in investing activities of $13,600,000 in fiscal year 2021. The increase in cash used in investing activities was driven by increased investment of cash in excess of operating needs into long-term investments. During fiscal year 2021, we used $2,046,000 in cash for the purchase of capital equipment and software and for obtaining patents. These purchases were mainly related to manufacturing and information technology equipment. In fiscal year 2022, the Company intends to continue investing in the necessary information technology, manufacturing equipment and facility needs, including expansion into its new 318,000 square foot leased facility detailed in Part I, Item 2. “Properties” to support ongoing revenue growth opportunities.
For the fiscal year ended September 30, 2020, we used $1,806,000 in cash for the purchase of capital equipment and for obtaining patents. These purchases were mainly related to manufacturing equipment, including the expansion to a second manufacturing facility in Mexico, as well as information technology equipment. During fiscal year 2020, we purchased $34,057,000 of FDIC-backed certificates of deposit and U.S. Treasuries and had $35,822,000 of FDIC-backed certificates of deposit and U.S. Treasuries mature or be called. The result is cash used in investing activities of $41,000 in fiscal year 2020. The decrease in cash used in investing activities was driven by reduced purchases of long-term investments due to the current low interest rate environment.
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Financing Activities
For the fiscal year ended September 30, 2021, the Company received $384,000 from employees’ purchase of stock through our Employee Stock Purchase Plan (“ESPP”). The Company used $462,000 to pay for taxes related to employees’ exercises of stock options and $458,000 to pay for taxes related to employees’ vesting of restricted shares using share withholding. As a result, the net cash used in financing activities during fiscal year 2021 was $536,000.
For the fiscal year ended September 30, 2020, the Company used $429,000 of cash to repurchase its own common stock prior to the suspension of the share repurchase plan in April 2020. For the fiscal year ended September 30, 2020, the Company received $349,000 from employees’ purchase of stock through our ESPP. The Company used $176,000 to pay for taxes related to employees’ exercises of stock options and vesting of restricted shares using share withholding. As a result, the net cash used in financing activities during fiscal year 2020 was $247,000.
New Accounting Pronouncements:
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-04, Intangibles-Goodwill, which offers amended guidance to simplify the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount 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 first quarter of fiscal 2021. The adoption of ASU 2017-04 in the first quarter of fiscal 2021 did not have a material impact on the Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. In November 2018, the FASB issued update ASU 2018-19 that clarifies the scope of the standard in the amendments in ASU 2016-13. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Financial instruments impacted include accounts receivable, trade receivables, other financial assets measured at amortized cost and other off-balance sheet credit exposures. The new guidance is effective for the Company beginning in the first quarter of fiscal 2023, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure is not required for a smaller reporting company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Clearfield, Inc.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm 26
Financial Statements
Balance Sheets 27
Statements of Earnings 28
Statements of Shareholders’ Equity 29
Statements of Cash Flows 30
Notes to Financial Statements 31
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of Clearfield, Inc.:
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Clearfield, Inc. (the "Company") as of September 30, 2021 and 2020, the related statements of earnings, shareholders’ equity and cash flows for the years ended September 30, 2021 and 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for the years ended September 30, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved or are especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Baker Tilly US, LLP
We have served as the Company's auditor since 2014.
Minneapolis, Minnesota
November 10, 2021
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CLEARFIELD, INC.
BALANCE SHEETS
Assets
Current Assets
Other Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Other Liabilities
Shareholders’ Equity
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
27
CLEARFIELD, INC.
STATEMENTS OF EARNINGS
Year Ended Year Ended
September 30, September 30,
Operating expenses
Net income per share Basic $ 1.48 $ 0.53
Net income per share Diluted $ 1.47 $ 0.53
Weighted average shares outstanding:
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
28
CLEARFIELD, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
Common Stock Additional Retained Total share-
Shares Amount paid-in capital earnings holders’ equity
Restricted stock issuance, net of forfeitures 8,580 86 (86 ) - -
Restricted stock issuance, net of forfeitures 35,609 356 (356 ) - -
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
29
CLEARFIELD, INC.
STATEMENTS OF CASH FLOWS
Year Ended September 30,
Cash flows from operating activities
Change in allowance for doubtful accounts 209,612 -
Amortization of discount on investments (7,326 ) (64,327 )
Loss on disposal of assets - 5,785
Changes in operating assets and liabilities:
Cash flows from investing activities
Cash flows from financing activities
Repurchase of common stock - (428,654 )
Increase (Decrease) in cash and cash equivalents (3,233,355 ) 6,367,915
Supplemental disclosures for cash flow information
Non-cash financing activities
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
30
NOTES TO FINANCIAL STATEMENTS
NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Clearfield, Inc. (the “Company”) is a manufacturer of a broad range of standard and custom passive connectivity products to customers throughout the United States and internationally. These products include fiber distribution systems, optical components, Outside Plant (“OSP”) cabinets, and fiber and copper cable assemblies that serve the communication service provider, including Fiber-to-the-Premises (“FTTP”), large enterprise, and original equipment manufacturer (“OEM”) markets.
Revenue Recognition: Our revenue is comprised of the sale of our products to customers and is recognized when the Company satisfies its performance obligations under the contract. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. The majority of our contracts have a single performance obligation and are short term in nature. We recognize revenue by transferring the promised products to the customer, with substantially all revenue recognized at the point in time when the customer obtains control of the products. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of sales. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenue) basis.
Cash and Cash Equivalents: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents as of September 30, 2021 and 2020 consist entirely of short-term money market accounts.
The Company maintains cash balances at multiple financial institutions, and at times, such balances exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Investments: The Company currently 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 are as follows:
Fair Value of Financial Instruments: The financial statements include the following financial instruments: cash and cash equivalents, short-term investments, long-term investments, accounts receivable, accounts payable and accrued expenses. Other than long-term investments, all financial instruments’ carrying values approximate fair values because of the short-term nature of the instruments. Long-term investments’ carrying value approximates fair value due to the negligible risk of changes in value due to interest rates.
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 does not charge interest on past due receivables. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as whole. The Company writes off accounts receivable when they become uncollectible; payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
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The allowance for doubtful accounts activity for the years ended September 30, 2021 and 2020 is as follows:
Inventories: Inventories consist of finished goods, raw materials and work-in-process and are stated at the lower of average cost (which approximates first-in, first-out) or net realizable value. Inventory is valued using material costs, labor charges, and allocated factory overhead charges and consists of the following:
On a regular basis, the Company reviews its inventory and identifies that which is excess, slow moving, and obsolete by considering factors such as inventory levels, expected product life, and forecasted sales demand. A reserve is established for any identified excess, slow moving, and obsolete inventory down to its net realizable value through a charge to cost of sales. Inventory write-down charges may be required in the future if there is a significant decline in demand for the Company’s products and the Company does not adjust its manufacturing production accordingly or if new products are not accepted by the market.
Property, Plant and Equipment: Property, plant and equipment are recorded at cost. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance are charged to expense when incurred. Depreciation is provided in amounts sufficient to relate the cost of assets to operations over their estimated useful lives. Leasehold improvements are amortized over the shorter of the remaining term of the lease or estimated life of the asset.
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Estimated useful lives of the assets are as follows:
Years
Equipment 3 – 7
Leasehold improvements 7-10 or life of lease
Vehicles 3
Property, plant and equipment consist of the following:
Depreciation expense for the years ended September 30, 2021 and 2020 was $1,699,311 and $1,944,186, respectively.
Goodwill and Intangible Assets: The Company operates as one reporting unit and reviews the carrying amount of goodwill annually in the fourth quarter of each fiscal year and more frequently if events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company determines its fair value for goodwill impairment testing purposes by calculating its market capitalization and comparing that to the Company’s carrying value. The Company’s goodwill impairment test for the years ended September 30, 2021 and 2020 resulted in excess fair value over carrying value and therefore, no adjustments were made to goodwill. During the years ended September 30, 2021 and 2020, there were no triggering events that indicated goodwill could be impaired.
A significant reduction in our market capitalization or in the carrying amount of net assets of a reporting unit could result in an impairment charge. If the carrying amount of a reporting unit exceeds its fair value, the Company would measure the possible goodwill impairment loss based on an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill. An impairment loss would be based on significant estimates and judgments, and if the facts and circumstances change, a potential impairment could have a material impact on the Company’s financial statements.
No impairment of goodwill has occurred during the years ended September 30, 2021 or 2020, respectively.
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 September 30, 2021, the Company has 30 patents granted and multiple pending applications both inside and outside the United States.
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In addition, the Company has various finite life intangible assets, most of which were acquired as a result of the acquisition of a portfolio of Telcordia certified outdoor active cabinet products from Calix, Inc. (“Calix”) during fiscal year 2018. Finite life intangible assets as of September 30, 2021 and 2020 are as follows:
Years Gross Carrying Amount Accumulated Amortization Net Book Value Amount
Years Gross Carrying Amount Accumulated Amortization Net Book Value Amount
Amortization expense related to these assets for the years ended September 30, 2021 and 2020 was $602,492 and $477,568, respectively.
Our future estimated amortization expense for intangibles as follows as of September 30, 2021:
Estimated amortization expense
Impairment of Long-Lived Assets: The Company assesses potential impairments to its long-lived assets or asset groups when there is evidence that events occur or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.
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Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its fair value and is recorded as a reduction in the carrying value of the related asset or asset group and a charge to operating results. No impairment of long-lived assets occurred during the years ended September 30, 2021 or 2020, respectively.
Income Taxes: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. The Company establishes a valuation allowance to reduce the deferred tax assets when it is more likely than not that a deferred tax asset will not be realizable. Changes in tax rates are reflected in the tax provision as they occur.
In accounting for uncertainty in income taxes, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. As of both September 30, 2021 and September 30, 2020, the Company did not have any unrecognized tax benefits. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We do not expect any material changes in our unrecognized tax benefits over the next 12 months.
Stock-Based Compensation: We measure and recognize compensation expense for all stock-based awards at fair value over the requisite service period. We use the Black-Scholes option pricing model to determine the fair value of options. For restricted stock grants, fair value is determined as the average price of the Company’s stock on the date of grant. Equity-based compensation expense is broken out between cost of sales and selling, general and administrative expenses based on the classification of the employee. The determination of fair value of stock-based awards on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.
The expected terms of the options are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility is based on historical and expected future volatility of the Company’s stock. The Company has not historically issued any dividends and does not expect to in the future. Forfeitures for both option and restricted stock grants are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from estimates.
If factors change and we employ different assumptions in the determination of the fair value of grants in future periods, the related compensation expense that we record may differ significantly from what we have recorded in the current periods.
Research and Development Costs: Research and development costs amounted to $1,243,499 and $1,269,542 for the years ended September 30, 2021 and 2020, respectively, and are charged to expense when incurred.
Advertising Costs: Advertising costs amounted to $436,253 and $296,571 for the years ended September 30, 2021 and 2020, respectively, and are charged to expense when incurred.
Net Income Per Share: Basic and diluted net income per share is computed by dividing net income by the weighted average number of common shares outstanding and the weighted average number of dilutive shares outstanding, respectively.
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Weighted average common shares outstanding for the years ended September 30, 2021 and 2020 were as follows:
Dilutive potential common shares 63,594 -
Earnings per share:
There were no antidilutive shares for the year ended September 30, 2021 and 337,100 shares for the year ended September 30, 2020, respectively, that were excluded from the above calculation as they were considered antidilutive in nature.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. Significant estimates include the rebates related to revenue recognition, stock-based compensation and the valuation of inventory, long-lived assets, finite lived intangible assets and goodwill. Actual results may differ materially from these estimates.
For 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:
In January 2017, the FASB issued ASU 2017-04,Intangibles-Goodwill, which offers amended guidance to simplify the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount 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 first quarter of fiscal 2021. The adoption of ASU 2017-04 in the first quarter of fiscal 2021 did not have a material impact on the Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13,Measurement of Credit Losses on Financial Instruments. In November 2018, the FASB issued update ASU 2018-19 that clarifies the scope of the standard in the amendments in ASU 2016-13. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Financial instruments impacted include accounts receivable, trade receivables, other financial assets measured at amortized cost and other off-balance sheet credit exposures. The new guidance is effective for the Company beginning in the first quarter of fiscal 2023, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial statements.
NOTE 2– SHAREHOLDERS’ EQUITY
Share Repurchase Program: On November 13, 2014, the Company announced that its Board of Directors had approved a stock repurchase program under which it will purchase up to $8,000,000 of its outstanding shares of common stock. On April 25, 2017, the Board of Directors increased the repurchase authorization by $4,000,000 to $12,000,000 of common stock. The program does not obligate Clearfield to repurchase any particular amount of common stock during any period. The repurchase will be funded by cash on hand. The repurchase program is expected to continue indefinitely until the maximum dollar amount of shares has been repurchased or until the repurchase program is earlier modified, suspended or terminated by the board of directors. 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. As of September 30, 2021, the Company had $4,980,671 remaining in its share repurchase program to repurchase its outstanding shares of common stock.
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The Company is authorized to issue 50,000,000 shares of common stock at $.01 par value and 5,000,000 undesignated shares. From the undesignated shares, 500,000 shares have been designated as Series B Junior Participating Preferred Shares and none of such shares have been issued or are outstanding. The Board of Directors may, by resolution, establish from the remaining undesignated shares different classes or series of shares and may fix the relative rights and preferences of shares in any class or series.
Stock-Based Compensation: The Company’s stock-based compensation plans are administered by the Compensation Committee of the Board of Directors, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award.
The Company currently has one equity compensation plan, the 2007 Stock Compensation Plan, from which it grants equity awards that are used as an incentive for directors, officers, and other employees. The 2007 Stock Compensation Plan has 667,465 shares available for issue as of September 30, 2021. As of September 30, 2021, $2,529,274 of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a period of approximately 3.1 years. The Company recorded related compensation expense for the years ended September 30, 2021 and 2020 of $1,280,135 and $773,555, respectively. For the year ended September 30, 2021, $1,222,756 of this expense was included in selling, general and administrative expense and $57,379 was included in cost of sales. For the year ended September 30, 2020, $752,011 of this expense was included in selling, general and administrative expense and $21,544 was included in cost of sales.
Stock Options: The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. During the fiscal year ended September 30, 2021, the Company granted employees non-qualified stock options to purchase an aggregate of 105,089 shares of common stock with a weighted average contractual term of five years, a weighted average three-year vesting term, and a weighted average exercise price of $23.74 During the fiscal year ended September 30, 2020, the Company granted employees non-qualified stock options to purchase an aggregate of 121,350 shares of common stock with a weighted average contractual term of 5.71 years, a 4.71 year weighted average vesting term, and an exercise price of $12.43.
Dividend yield 0% 0%
Weighted average expected volatility 46.9% 39.5 - 44.9%
Weighted average risk-free interest rate 0.24% 0.24 - 1.69%
Weighted average expected life (years) 5 4 - 6
Vesting period (years) 3 3 - 5
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 at grant date on zero-coupon U.S. governmental bonds having a remaining life similar to the expected option term.
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Options are generally granted at fair market values determined on the date of grant and vesting normally occurs over a three to five-year period. The maximum contractual term is normally six years. Shares issued upon exercise of a stock option are issued from the Company’s authorized but unissued shares. There were 79,833 options vested during the year ended September 30, 2021 and 44,000 options vested during the year ended September 30, 2020. For the year ended September 30, 2021, there were 101,966 stock options that were exercised using a cashless method of exercise. For the year ended September 30, 2020, there were 14,688 stock options that were exercised using a cashless method of exercise. The intrinsic value of options exercised during the years ended September 30, 2021 and 2020 was $1,314,900 $332,468, respectively.
Option transactions under the 2007 Stock Compensation Plan during the years ended September 30, 2021 and 2020 are summarized as follows:
Number of shares Weighted average exercise price Weighted average fair value
The following table summarizes information concerning options exercisable under the 2007 Stock Compensation Plan:
The following table summarizes information concerning options currently outstanding at:
Restricted Stock: The Company’s 2007 Stock Compensation Plan permits our Compensation Committee to grant other stock-based awards. The Company has awarded restricted stock grants to employees that vest over one to ten years.
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Restricted stock transactions during the years ended September 30, 2021 and 2020 are summarized as follows:
Number of shares Weighted average grant date fair value
The fair value of restricted shares vested during the year end September 30, 2021 and 2020 was $1,364,007 and $496,829, respectively. The Company repurchased a total of 11,754 shares of our common stock at an average price of $39.32 in connection with payment of taxes upon the vesting of restricted stock previously issued to employees for the year ended September 30, 2021. The Company repurchased a total of 10,038 shares of our common stock at an average price of $17.57 in connection with payment of taxes upon the vesting of restricted stock previously issued to employees for the year ended September 30, 2020.
Employee Stock Purchase Plan: The Clearfield, Inc. 2010 Employee Stock Purchase Plan (“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-month phases, with phases beginning on July 1 and January 1 of each calendar year. For the phases that ended on December 31, 2020 and June 30, 2021, employees purchased 15,011 and 9,739 shares at a price of $11.93 and $21.01 per share, respectively. For the phases that ended on December 31, 2019 and June 30, 2020, employees purchased 15,107 and 15,116 shares, respectively, at a price of $11.23 and $11.85, respectively. As of September 30, 2021, the Company has withheld approximately $143,768 from employees participating in the phase that began on July 1, 2021. In February 2020, the shareholders of Clearfield approved an increase of 200,000 in the shares authorized for issuance under the ESPP. After the employee purchase on June 30, 2021, 194,873 shares of common stock were available for future purchase under the ESPP.
NOTE 3– INCOME TAXES
Components of income tax expense are as follows for the years ended:
September 30, September 30,
Current:
Deferred:
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The following is a reconciliation of the federal statutory income tax rate to the effective tax rate as a percent of pre-tax income for the following years ended:
September 30, September 30,
Federal statutory rate 21.0 % 21.0 %
State income taxes 2.2 % 2.0 %
Permanent differences:
Change in valuation allowance - (0.5% )
Expiration and utilization of state NOL’s - 0.4 %
Research and development credits (0.7% ) (2.5% )
Excess tax expense (benefits) from stock-based compensation (1.5% ) (0.1% )
As of September 30, 2021 and 2020, the current income tax payable was approximately $933,000 and $845,000, respectively. Current income tax payable amounts are included in Accrued Expenses in the Company’s balance sheets.
As of September 30, 2021 and 2020, the Company had no U.S. federal net operating loss (“NOL”) carry-forwards. The state NOL carryforwards of $769,000 at September 30, 2020 were fully utilized during fiscal 2021 resulting in no state NOL carryforwards at September 30, 2021. In addition, as of September 30, 2021, the Company had Minnesota research and development tax credits of $300,033. As of September 30, 2020, the Company had Minnesota research and development and alternative minimum tax credits of $337,000 and $32,000, respectively. The Company has not recorded a valuation allowance on these research and development related deferred tax assets as the Company believes it is more likely than not they will be utilized before they begin to expire in fiscal year 2031.
Significant components of deferred income tax assets and liabilities are as follows at:
September 30, September 30,
Deferred income tax assets (liabilities):
Net operating loss carry forwards and credits 300,032 351,446
Valuation allowance - -
Realization of NOL carryforwards and other deferred tax temporary differences are contingent upon future taxable earnings. The Company’s deferred tax assets were reviewed for expected utilization by assessing the available positive and negative factors surrounding their recoverability. As of September 30, 2021 and 2020,no valuation allowance was deemed necessary as the Company determined it was more likely than not that the Company’s deferred tax assets will be realized.
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The valuation allowance activity for the years ended September 30, 2021 and 2020 is as follows:
September 30, 2021 $ - $ - $ - $ -
The Company is required to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than notthreshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies the interpretation to all tax positions for which the statute of limitations remained open. The Company had no liability for unrecognized tax benefits and did not recognize any interest or penalties during the years ended September 30, 2021 or 2020.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for fiscal years ending prior to 2004. We are generally subject to U.S. federal and state tax examinations for all tax years since 2004 due to our NOL carryforwards and the utilization of the carryforwards in years still open under statute.
NOTE 4– CONCENTRATIONS
Suppliers: The Company purchases critical components for our products, including injection molded parts and connectors from third parties, some of whom are single- or limited-source suppliers. If any of our suppliers are unable to ship critical components, we may be unable to manufacture and ship products to our distributors or customers. If the price of these components increases for any reason, or if these suppliers are unable or unwilling to deliver, we may have to find another source, which could result in interruptions, increased costs, delays, loss of sales and quality control problems.
Customers: For the fiscal years ended September 30, 2021 and 2020, the Company had two customers that comprised 28% and 30% of net sales, respectively. Both of these customers are distributors. These major customers, like our other customers, purchase our products from time to time through purchase orders, and we do not have any agreements that obligate these major customers to purchase products in the future from us.
As of September 30, 2021, one customer accounted for 17% of accounts receivable. This customer is a telecommunications service provider in the Company’s Community Broadband market. As of September 30, 2020, two customers accounted for 25% of accounts receivable. Both of these customers were distributors.
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 customers in the Caribbean, in Canada, and Central and South America.
The following table presents our domestic and international sales for each of the last two fiscal years:
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Year Ended September 30,
Clearfield sells its products to the Broadband Service Provider marketplace. In addition, the Company provides Legacy services for original equipment manufacturers requiring copper and fiber cable assemblies built to their specification.
The percentages of our sales by these markets were as follows for each of the last two fiscal years:
Year Ended September 30,
Broadband service providers $ 98 % $ 96 %
Legacy customers 2 % 4 %
Total Net Sales $ 100 % $ 100 %
Broadband Service Providers are made up of Community Broadband, which includes local and regional telecom companies, utilities, municipalities and alternative carriers, also referred to as Tier 2 and 3 customers, National Carriers, which includes large national and global wireline and wireless providers also referred to as Tier 1’s, MSO’s, which include cable television companies, and international customers.
Long-lived assets: As of September 30, 2021 and 2020, the Company had property, plant, and equipment with a net book value of $1,768,837 and $1,686,209, respectively, located in Mexico. All other property, plant, and equipment is located within the United States.
NOTE 5– EMPLOYEE BENEFIT PLAN
The Company maintains a contributory 401(k) profit sharing benefit plan, whereby eligible employees may contribute a portion of their earnings, not to exceed annual amounts allowed under the Internal Revenue Code. The Company matched 100% of the first3% and 50% of the next 3% of the participant’s eligible compensation that was contributed by the participant. The Company’s contributions under this plan were $914,942 and $838,946 for the years ended September 30, 2021 and 2020, respectively.
NOTE 6- LEASES
Clearfield leases a 71,000 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 commenced 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. Upon proper notice and payment of a termination fee of approximately $249,000, the Company has a one-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 we will exercise either option.
On October 9, 2020, the Company entered into an indirect lease arrangement for its existing 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. This lease contains an option to 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.
In July 2021, the Company entered into an indirect lease arrangement for an approximately 318,000 square foot manufacturing facility that is currently being constructed in Tijuana, Mexico. The lease term is for 7 years of which 5 years are mandatory, commencing March 1st, 2022. The lease contains written options to renew for two additional consecutive periods of 5 years each. We expect to begin transitioning the current Mexico manufacturing operations into the newly leased facility in the second quarter of fiscal 2022. The lease calls for monthly rental payments of $162,232, increasing 2% annually. Upon lease commencement, we will recognize an additional right of use asset and associated lease liability of approximately $9,432,000. As this lease has not yet commenced as of September 30, 2021, the future payments under this agreement are not included in the future lease payments schedule below.
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 are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense included within cost of sales and selling, general and administrative expense was as follows for the year ended September 30, 2021 and 2020:
Our future lease obligations for leases that have commenced were as follows as of September 30, 2021:
Operating Leases
Thereafter -
Present value of lease liabilities $ 2,529,934
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As of September 30, 2021, the weighted average term and weighted average discount rate for our leases were 3.09 years and 3.41%, respectively. As of September 30, 2020, the weighted average term and weighted average discount rate for our leases were 3.99 years and 3.48%, respectively. For the year ended September 30, 2021 and 2020, the operating cash outflows from our leases were $1,289,982 and $812,107, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 September 30, 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.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that, as of September 30, 2021, our internal control over financial reporting was effective. Management reviewed the results of its assessment with our Audit Committee.
Changes in Internal Control over Financial Reporting
No changes in the Company’s internal control over financial reporting occurred during the fourth quarter of fiscal year 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
None.
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PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by Item 10 to be included in our Proxy Statement for our 2021 Annual Meeting of Shareholders (the “2022 Proxy Statement”), which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year for which this report is filed, is incorporated herein by reference into this section.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 to be included in the 2022 Proxy Statement, is incorporated herein by reference into this section.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
See “Equity Compensation Plan Information” under Item 5, “Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of Part II hereof.
The remainder of the information required by Item 12 to be included in the 2022 Proxy Statement, is incorporated herein by reference into this section.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 to be included in the 2022 Proxy Statement, is incorporated herein by reference into this section.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 to be included in the 2022 Proxy Statement, is incorporated herein by reference into this section.
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report.
(1) Financial Statements.
The financial statements of Clearfield, Inc. are filed herewith under Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
(2) Certain financial statement schedules have been omitted because they are not required, not applicable, or the required information is provided in other financial statements or the notes to the financial statements.
(3) Exhibits: See Items 15(b) below.
(b) Exhibits.
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EXHIBIT INDEX
Number Description Incorporated by Reference to
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Number Description Incorporated by Reference to
23.1 Consent of Baker Tilly US, LLP **
101.INS Inline XBRL Instance Document **
101.SCH Inline XBRL Taxonomy Extension Schema **
101.CAL Inline XBRL Taxonomy Calculation Linkbase **
101.LAB Inline XBRL Taxonomy Labels Linkbase **
101.PRE Inline XBRL Taxonomy Presentation Linkbase **
101.DEF Inline XBRL Taxonomy Definition Linkbase **
* Indicates a management contract or compensatory plan or arrangement.
** Filed herewith.
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: November 10, 2021 /s/ Cheryl Beranek
Cheryl Beranek
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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Each person whose signature appears below hereby constitutes and appoints Cheryl Beranek and Daniel Herzog and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments to this Form 10-K and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.
Signatures Title Date
/s/ Ronald G. Roth Ronald G. Roth Director November 10, 2021
/s/ Roger G. Harding Roger G. Harding Director November 10, 2021
/s/ Donald R. Hayward Donald R. Hayward Director November 10, 2021
/s/ Charles N. Hayssen Charles N. Hayssen Director November 10, 2021
/s/ Patrick F. Goepel Patrick F. Goepel Director November 10, 2021
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