10-Q 1 clfd20240331_10q.htm FORM 10-Q clfd20240331_10q.htm
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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

 

For the quarterly period ended March 31, 2024

 

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 office)

 

(Zip Code)

 

(763) 476-6866

(Registrant’s telephone number, including area code)

 

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 par value

CLFD

The Nasdaq Stock Market

 

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

 

 

Yes  ☐ No

 

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

 

Yes  ☐ No

 

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

 

1

 

 

Large accelerated filer  ☒

Non-accelerated filer  ☐

Accelerated filer ☐

Smaller reporting company  

Emerging growth company 

 

 

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

 

 

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

 

Yes ☒ No

 

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

 

Class:

Outstanding as of May 1, 2024

Common stock, par value $.01

14,233,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 
 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

 

CLEARFIELD, INC.

 

CONSOLIDATED BALANCE SHEETS

 

(IN THOUSANDS, EXCEPT SHARE DATA)

 
   

March 31,
2024 (Unaudited)

   

September 30,
2023

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 15,818     $ 37,827  

Short-term investments

    127,089       130,286  

Accounts receivables, net

    21,899       28,392  

Inventories, net

    83,985       98,055  

Other current assets

    8,641       1,695  

Total current assets

    257,432       296,255  
                 

Property, plant and equipment, net

    22,434       21,527  
                 

Other Assets

               

Long-term investments

    6,523       6,343  

Goodwill

    6,568       6,528  

Intangible assets, net

    6,219       6,092  

Right-of-use lease assets

    12,394       13,861  
Deferred tax asset     2,842       3,039  

Other

    991       1,872  

Total other assets

    35,537       37,735  

Total Assets

  $ 315,403     $ 355,517  
                 

Liabilities and Shareholders Equity

               

Current Liabilities

               

Current portion of lease liability

  $ 3,761     $ 3,737  

Current maturities of long-term debt

    2,159       2,112  

Accounts payable

    5,914       8,891  

Accrued compensation

    5,871       5,571  

Accrued expenses

    2,740       2,404  

Factoring liability

    5,931       6,289  

Total current liabilities

    26,376       29,004  
                 

Other Liabilities

               

Long-term portion of lease liability

    9,098       10,629  

Deferred tax liability

    721       721  

Total liabilities

    36,195       40,354  
                 

Shareholders’ Equity

               

Preferred stock, $.01 par value; 500,000 shares; no shares

               

issued or outstanding

    -       -  

Common stock, authorized 50,000,000, $.01 par value;

               

14,409,995 and 15,254,725 shares issued and outstanding

               

as of March 31, 2024 and September 30, 2023, respectively

    144       153  

Additional paid-in capital

    162,697       188,218  

Accumulated other comprehensive income (loss)

    130       (544 )

Retained earnings

    116,237       127,336  

Total shareholders’ equity

    279,208       315,163  

Total Liabilities and Shareholders Equity

  $ 315,403     $ 355,517  
                 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

4

 

 

 

CLEARFIELD, INC.

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(UNAUDITED)

 

(IN THOUSANDS, EXCEPT SHARE DATA)

 
                                 
   

Three Months Ended

   

Six Months Ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

    2024    

2023

 
                                 

Net sales

  $ 36,910     $ 71,809     $ 71,140     $ 157,751  
                                 

Cost of sales

    34,078       48,246       63,611       103,539  
                                 

Gross profit

    2,832       23,563       7,529       54,212  
                                 
Operating expenses                                

Selling, general and administrative

    12,573       11,508       25,432       24,266  

(Loss) Income from operations

    (9,741 )     12,055       (17,903 )     29,946  
                                 

Net investment income

    1,849       1,395       3,918       1,698  

Interest expense

    (102 )     (112 )     (228 )     (356 )
                                 

(Loss) Income before income taxes

    (7,994 )     13,338       (14,213 )     31,288  
                                 

Income tax (benefit) expense

    (2,083 )     2,974       (3,034 )     6,669  

Net (loss) income

  $ (5,911 )   $ 10,364     $ (11,179 )   $ 24,619  
                                 

Net (loss) income per share Basic

    (0.40 )     0.67       (0.75 )     1.68  

Net (loss) income per share Diluted

  $ (0.40 )   $ 0.67     $ (0.75 )   $ 1.67  
                                 

Weighted average shares outstanding:

                               

Basic

    14,629,489       15,233,848       14,922,811       14,693,829  

Diluted

    14,629,489       15,260,769       14,922,811       14,766,938  
                                 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

5

 

 

 

 

 

CLEARFIELD, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

(UNAUDITED)

 

(IN THOUSANDS)

 
   
    Three Months Ended      

Six Months Ended

 
   

March 31,

     

March 31,

 
   

2024

    2023      

2024

    2023  
                                   

Comprehensive (loss) income:

                                 

Net (loss) income

  $ (5,911 )   $ 10,364       $ (11,179 )   $ 24,619  

Other comprehensive (loss) income, net of tax

                                 

Unrealized (loss) gain on available-for-sale investments

    (45 )     197         245       339  

Unrealized (loss) gain on foreign currency translation

    (301 )     302  

 

    429       1,326  

Total other comprehensive (loss) income

    (346 )     499         674       1,665  
                                   

Total comprehensive (loss) income

  $ (6,257 )   $ 10,863       $ (10,505 )   $ 26,284  
                                   

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

6

 

 

 

 

CLEARFIELD, INC.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

 

(UNAUDITED)

 

(IN THOUSANDS)

 
                                     

For the three months ended March 31, 2024

                 

Accumulated other

             
 

Common Stock

 

Additional

 

comprehensive

 

Retained

 

Total share-

 
 

Shares

 

Amount

 

paid-in capital

 

income (loss)

 

earnings

 

holders’ equity

 

Balance at December 31, 2023

  14,939   $ 149   $ 177,322   $ 476   $ 122,148   $ 300,095  

Stock-based compensation expense

  -     -     1,012     -     -     1,012  

Issuance of common stock under equity compensation plans, net

  14     -     -     -     -     -  

Repurchase of shares for payment of withholding taxes for vested restricted stock grants

  -     -     (4 )   -     -     (4 )

Repurchase of common stock

  (544 )   (5 )   (15,624 )   -     -     (15,629 )
Exercise of stock options, net of shares exchanged for payment   1     -     (9 )   -     -     (9 )

Other comprehensive loss

  -     -     -     (346 )   -     (346 )

Net loss

  -     -     -     -     (5,911 )   (5,911 )

Balance at March 31, 2024

  14,410   $ 144   $ 162,697   $ 130   $ 116,237   $ 279,208  
                                     

For the three months ended March 31, 2023

                 

Accumulated other

             
 

Common Stock

 

Additional

 

comprehensive

 

Retained

 

Total share-

 
 

Shares

 

Amount

 

paid-in capital

 

income (loss)

 

earnings

 

holders’ equity

 

Balance at December 31, 2022

  15,218   $ 152   $ 185,404   $ (733 ) $ 109,058   $ 293,881  

Stock-based compensation expense

  -     -     784     -     -     784  

Issuance of common stock under equity compensation plans, net

  33     1     -     -     -     1  

Exercise of stock options, net of shares exchanged for payment

  3     -     (130 )   -     -     (130 )

Other comprehensive income

  -     -     -     499     -     499  

Net income

  -     -     -     -     10,364     10,364  

Balance at March 31, 2023

  15,255   $ 153   $ 186,058   $ (234 ) $ 119,422   $ 305,399  
                                     
                                     

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

7

 

 

CLEARFIELD, INC.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

 

(UNAUDITED)

 

(IN THOUSANDS)

 
                                                 
                                                 

For the six months ended March 31, 2024

                         

Accumulated other

                 
   

Common Stock

   

Additional

   

comprehensive

   

Retained

   

Total share-

 
   

Shares

   

Amount

   

paid-in capital

   

income (loss)

   

earnings

   

holders’ equity

 

Balance as of September 30, 2023

    15,255     $ 153     $ 188,218     $ (544 )   $ 127,336     $ 315,163  

Stock-based compensation expense

    -       -       2,284       -       -       2,284  

Issuance of common stock under employee stock purchase plan

    10       -       250       -       -       250  

Issuance of common stock under equity compensation plans, net

    132       1       (1 )     -       -       -  

Repurchase of shares for payment of withholding taxes for vested restricted stock grants

    (9 )     -       (240 )     -       -       (240 )

Exercise of stock options, net of shares exchanged for payment

    1       -       (9 )     -       -       (9 )

Repurchase of common stock

    (979 )     (10 )     (27,804 )     -       -       (27,814 )

Adoption of new accounting pronouncement

    -       -       -       -       80       80  

Other comprehensive income

    -       -       -       674       -       674  

Net loss

    -       -       -       -       (11,179 )     (11,179 )

Balance at March 31, 2024

    14,410     $ 144     $ 162,697     $ 130     $ 116,237     $ 279,208  
                                                 

For the six months ended March 31, 2023

                         

Accumulated other

                 
   

Common Stock

   

Additional

   

comprehensive

   

Retained

   

Total share-

 
   

Shares

   

Amount

   

paid-in capital

   

income (loss)

   

earnings

   

holders’ equity

 

Balance as of September 30, 2022

    13,818     $ 138     $ 54,539     $ (1,898 )   $ 94,803     $ 147,582  

Stock-based compensation expense

    -       -       1,444       -       -       1,444  

Issuance of common stock under employee stock purchase plan

    5       -       299       -       -       299  

Issuance of common stock under equity compensation plans, net

    51       1       954       -       -       954  

Exercise of stock options, net of shares exchanged for payment

    10       -       (471 )     -       -       (471 )

Repurchase of shares for payment of withholding taxes for stock grants

    (10 )     -       (954 )     -       -       (954 )

Issuance of common stock, net

    1,380       14       130,248       -       -       130,262  

Other comprehensive income

    -       -       -       1,665       -       1,665  

Net income

    -       -       -       -       24,619       24,619  

Balance at March 31, 2023

    15,255     $ 153     $ 186,058     $ (234 )   $ 119,422     $ 305,399  
                                                 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

8

 

 

 

 

CLEARFIELD, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(UNAUDITED)

 

(IN THOUSANDS)

 
   

Six Months

   

Six Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

 

Cash flows from operating activities

               

Net (loss) income

  $ (11,179 )   $ 24,619  

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    3,572       2,822  

Amortization of discount on investments

    (2,196 )     (1,139 )

Deferred taxes

    (195 )     (35 )

Stock-based compensation

    2,284       1,444  

Changes in operating assets and liabilities, net of acquired amounts:

               

Accounts receivable

    6,600       16,353  

Inventories, net

    14,414       (17,243 )

Other assets

    (5,951 )     (2,407 )

Accounts payable and accrued expenses

    (2,752 )     (14,273 )

Net cash provided by operating activities

    4,597       10,141  
                 

Cash flows from investing activities

               

Purchases of property, plant and equipment, and intangible assets

    (4,389 )     (4,797 )

Purchases of investments

    (47,748 )     (99,126 )

Proceeds from sales and maturities of investments

    53,293       100,743  

Net cash provided by (used in) investing activities

    1,156       (3,180 )
                 

Cash flows from financing activities

               

Repayment of long-term debt

    -       (16,700 )

Proceeds from issuance of common stock under employee stock purchase plan

    250       299  

Repurchase of shares for payment of withholding taxes for stock grants

    (240 )     (954 )

Tax withholding and proceeds related to exercise of stock options

    (9 )     (471 )

Issuance of stock under equity compensation plans

    -       954  

Net proceeds from issuance of common stock

    -       130,262  

Repurchase of common stock

    (27,814 )     -  

Net cash (used in) provided by financing activities

    (27,813 )     113,390  
                 

Effect of exchange rates on cash

    51       80  

(Decrease) increase in cash and cash equivalents

    (22,009 )     120,431  

Cash and cash equivalents, beginning of period

    37,827       16,650  

Cash and cash equivalents, end of period

  $ 15,818     $ 137,081  
                 

Supplemental disclosures for cash flow information

               

Cash paid for income taxes

  $ 157     $ 10,211  

Cash paid for interest expense

  $ 172     $ 266  

Non-cash financing activities

               

Cashless exercise of stock options

  $ 19     $ 510  
                 
                 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

9

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Summary of Significant Accounting Policies

 

Unless the context otherwise requires, for purposes of this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company,” and “Clearfield,” refer to Clearfield, Inc. and subsidiaries.

 

Basis of Presentation

 

The accompanying (a) consolidated balance sheet as of September 30, 2023, which has been derived from audited financial statements, and (b) unaudited interim consolidated financial statements as of and for the three and six months ended March 31, 2024 have been prepared by 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. In the opinion of management, the consolidated 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, seasonality, and other factors. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023.

 

In preparation of the Company’s consolidated 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.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Clearfield, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Recently Adopted Accounting Pronouncements

 

On October 1, 2023, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, and subsequent amendments to the initial guidance: ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, and ASU No. 2020-02 (collectively, Topic 326). This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses (CECL). The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. The Company adopted Topic 326 using the modified retrospective method for all financial assets measured at amortized cost, which are primarily trade accounts receivable for the Company. Results for reporting periods beginning after October 1, 2023, are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The impact of adopting Topic 326 as of October 1, 2023, was not material to the consolidated financial statements.

 

New Accounting Pronouncements

 

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 is intended to enhance financial reporting by requiring incremental disclosures for significant segment expenses on an annual and interim basis by public entities required to report segment information in accordance with Accounting Standards Codification Topic 280. The amendments in ASU 2023-07 are to be applied retrospectively to all periods presented in the financial statements and early adoption is permitted. This standard will be applicable to the Company for the 2025 annual period and quarterly periods thereafter. The Company is evaluating its disclosure approach for ASU 2023-07 and anticipates adopting the standard on October 1, 2024 and filings thereafter.

 

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The new guidance is expected to improve income tax disclosures primarily related to the rate reconciliation and income taxes paid information by requiring 1) consistent categories and greater disaggregation of information in the rate reconciliation and 2) income taxes paid disaggregated by jurisdiction. The guidance is effective for the Company on a prospective basis, although retrospective application is permitted, as of October 1, 2024 for the annual period. Early adoption is permitted. The Company is evaluating its disclosure approach for ASU 2023-09 and anticipates adopting the standard on October 1, 2024 and filings thereafter.

 

10

 

 

Note 2. Net Income (Loss) Per Share

 

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

 

The following is a reconciliation of the numerator and denominator of the net income (loss) per common share computations for the three and six months ended March 31, 2024, and 2023:

 

   

Three Months Ended March 31,

   

Six Months Ended March 31,

 

(In thousands, except for share data)

 

2024

   

2023

   

2024

   

2023

 

Net (loss) income

  $ (5,911 )   $ 10,364     $ (11,179 )   $ 24,619  

Weighted average common shares

    14,629,489       15,233,848       14,922,811       14,693,829  

Dilutive potential common shares

    -       26,921       -       73,109  

Weighted average dilutive common shares outstanding

    14,629,489       15,260,769       14,922,811       14,766,938  

Net (loss) income per common share:

                               

Basic

  $ (0.40 )   $ 0.67     $ (0.75 )   $ 1.68  

Diluted

  $ (0.40 )   $ 0.67     $ (0.75 )   $ 1.67  

 

 

 

Note 3. Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The following table presents the Company’s cash and cash equivalents balances:

 

(In thousands)

 

March 31,

2024

   

September 30,

2023

 

Cash and cash equivalents:

               

Cash, including money market accounts

  $ 2,893     $ 11,360  

Money market funds

    12,925       26,467  

Total cash and cash equivalents

  $ 15,818     $ 37,827  

 

 

Note 4. Investments

 

The Company invests in certificates of deposit that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”) and United States Treasury securities with terms of not more than five years, as well as money market funds. The Company’s investment portfolio is classified as available-for-sale, which is reported at fair value. The unrealized gain or loss on investment securities is recorded in other comprehensive income (loss), net of tax. Realized gains and losses on available-for-sale securities are recognized upon sale and are included in net investment income in the consolidated statement of earnings.

 

11

 

As of March 31, 2024, available-for-sale investments consisted of the following:

 

   

March 31, 2024

 

(In thousands)

 

Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Short-Term

                               

U.S. Treasury securities

  $ 124,960     $ 1     $ (81 )   $ 124,880  

Certificates of deposit

    2,221       -       (12 )     2,209  

Investment securities – short-term

  $ 127,181     $ 1     $ (93 )   $ 127,089  

Long-Term

                               

U.S Treasury securities

  $ 6,737     $ -     $ (442 )   $ 6,295  

Certificates of deposit

    248       -       (20 )     228  

Investment securities – long-term

  $ 6,985     $ -     $ (462 )   $ 6,523  

 

As of September 30, 2023, available-for-sale investments consist of the following:

 

   

September 30, 2023

 

(In thousands)

 

Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Short-Term

                               

U.S treasury securities

  $ 122,534     $ -     $ (143 )   $ 122,391  

Certificates of deposit

    8,014       -       (119 )     7,895  

Investment securities – short-term

  $ 130,548     $ -     $ (262 )   $ 130,286  

Long-Term

                               

U.S treasury securities

  $ 6,719     $ -     $ (596 )   $ 6,123  

Certificates of deposit

    248       -       (28 )     220  

Investment securities – long-term

  $ 6,967     $ -     $ (624 )   $ 6,343  

 

As of March 31, 2024, investments in debt securities in an unrealized loss position were as follows:

 

   

In Unrealized Loss Position For Less Than 12 Months

   

In Unrealized Loss Position For Greater Than 12 Months

 

(In thousands)

 

Fair Value

   

Gross Unrealized Losses

   

Fair Value

   

Gross Unrealized Losses

 

U.S treasury securities

  $ 124,880     $ (84 )   $ 6,295     $ (438 )

Certificates of deposit

    245       -       2,192       (32 )

Investment securities

  $ 125,125     $ (84 )   $ 8,487     $ (470 )

 

As of September 30, 2023, investments in debt securities in an unrealized loss position were as follows:

 

   

In Unrealized Loss Position For Less Than 12 Months

   

In Unrealized Loss Position For Greater Than 12 Months

 

(In thousands)

 

Fair Value

   

Gross Unrealized Losses

   

Fair Value

   

Gross Unrealized Losses

 

U.S treasury securities

  $ 112,908     $ (131 )   $ 15,606     $ (608 )

Certificates of deposit

    245       -       7,870       (147 )

Investment securities

  $ 113,153     $ (131 )   $ 23,476     $ (755 )

 

As of March 31, 2024, there were 18 securities in an unrealized loss position which is due to the market paying a higher interest rate than the coupon rate on these securities. As of September 30, 2023, there were 42 securities in an unrealized loss position which is due to the securities paying lower interest rates than the market. As of March 31, 2024 and September 30, 2023, there are no securities which are other than temporarily impaired as the Company intends to hold these securities until their value recovers and there is negligible credit risk due to the nature of the securities which are backed by the FDIC and the U.S. federal government.

 

12

 

 

Note 5. Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

The following provides information regarding fair value measurements for the Company’s investment securities as of March 31, 2024, according to the three-level fair value hierarchy:

 

   

Fair Value Measurements as of March 31, 2024

 

(In thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Cash equivalents:

                               

Money market funds

  $ 12,925     $ 12,925     $ -     $ -  

Total cash equivalents

  $ 12,925     $ 12,925     $ -     $ -  

Investment securities:

                               

Certificates of deposit

  $ 2,437     $ -     $ 2,437     $ -  

U.S. Treasury securities

    131,175       -       131,175       -  

Total investment securities

  $ 133,612     $ -     $ 133,612     $ -  

 

The following provides information regarding fair value measurements for the Company’s investment securities as of September 30, 2023, according to the three-level fair value hierarchy:

 

   

Fair Value Measurements as of September 30, 2023

 

(In thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Cash equivalents:

                               

Money market funds

  $ 26,467     $ 26,467     $ -     $ -  

Total cash equivalents

  $ 26,467     $ 26,467     $ -     $ -  

Investment securities:

                               

Certificates of deposit

  $ 8,115     $ -     $ 8,115     $ -  

U.S. Treasury securities

    128,514       -       128,514       -  

Total investment securities

  $ 136,629     $ -     $ 136,629     $ -  

 

During the three and six months ended March 31, 2024, and the year ended September 30, 2023, the Company owned no Level 3 securities and there were no transfers within the fair value level hierarchy.

 

13

 

Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets, and right-of-use assets for operating leases are subject to non-recurring fair value measurements if they are deemed impaired. The Company had no re-measurements of non-financial assets to fair value in the three or six months ended March 31, 2024, and the year ended September 30, 2023.

 

 

Note 6. Other Comprehensive Income (Loss)

 

Changes in components of other comprehensive income (loss), net of tax, are as follows:

 

(In thousands)

 

Available-for-Sale Securities

   

Foreign Currency Translation

    Accumulated Other Comprehensive Income (Loss)  

Balances at September 30, 2023

  $ (682 )   $ 138     $ (544 )

Other comprehensive income for the three months ended December 31, 2023

    291       729       1,020  

Balances at December 31, 2023

  $ (391 )   $ 867     $ 476  

Other comprehensive (loss) for the three months ended March 31, 2024

    (45 )     (301 )     (346 )

Balances at March 31, 2024

  $ (436 )   $ 566     $ 130  

 

 

Note 7. Stock-Based Compensation

 

The Company recorded $1,012,000 and $2,284,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options, performance stock units, and the Company’s Employee Stock Purchase Plan (“ESPP”) for the three and six months ended March 31, 2024. For the three months ended March 31, 2024, $952,000 of this expense is included in selling, general and administrative expense, and $60,000 is included in cost of sales. For the six months ended March 31, 2024, $2,180,000 of this expense is included in selling, general and administrative expense, and $104,000 is included in cost of sales. The Company recorded $784,000 and $1,444,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options, and the Company’s Employee Stock Purchase Plan (“ESPP”) for the three and six months ended March 31, 2023. For the three months ended March 31, 2023, $736,000 of this expense is included in selling, general and administrative expense, and $48,000 is included in cost of sales. For the six months ended March 31, 2023, $1,361,000 of this expense is included in selling, general and administrative expense, and $83,000 is included in cost of sales. As of March 31, 2024, $6,779,000 of total unrecognized compensation expense related to non-vested restricted stock awards and stock options is expected to be recognized over a period of approximately 2.6 years.

 

Stock Options

 

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted. During the six months ended March 31, 2024, the Company granted employees non-qualified stock options to purchase an aggregate of 111,299 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 $26.18 per share. During the six months ended March 31, 2023, the Company granted employees non-qualified stock options to purchase an aggregate of 19,084 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 $95.06 per share.

 

 

14

 

The fair value of stock option awards during the six months ended March 31, 2024, was estimated as of the respective grant dates using the assumptions listed below:

 

   

Six months ended March 31, 2024

 

Dividend yield

    0.00 %

Expected volatility

    61.71 %

Risk-free interest rate

    4.55 %

Expected life

 

3.5 years

 

Vesting period

 

3 years

 

 

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

 

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

 

The following is a summary of stock option activity during the six months ended March 31, 2024:

 

   

Number of options

   

Weighted average exercise price

 

Outstanding as of September 30, 2023

    254,124     $ 37.04  

Granted

    111,299       26.18  

Exercised

    (1,501 )     12.40  

Forfeited or expired

    (4,345 )     38.13  

Outstanding as of March 31, 2024

    359,577     $ 33.77  

 

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of March 31, 2024, the weighted average remaining contractual term for all outstanding and exercisable stock options was 1.92 years and their aggregate intrinsic value was $1,452,000.

 

Restricted Stock

 

During the six months ended March 31, 2024, the Company granted employees restricted stock awards totaling 136,157 shares of common stock, with a vesting term of approximately three years and a fair value of $29.63 per share based on the stock price on the grant date. During the six months ended March 31, 2023, the Company granted employees restricted stock awards totaling 34,674 shares of common stock, with a vesting term of approximately three years and a fair value of $72.26 per share.

 

Restricted stock transactions during the six months ended March 31, 2024, are summarized as follows:

 

   

Number of shares

   

Weighted average grant date fair value

 

Unvested shares as of September 30, 2023

    90,575     $ 49.92  

Granted

    136,157       26.43  

Vested

    (37,569 )     54.35  

Forfeited

    (2,967 )     31.48  

Unvested as of March 31, 2024

    186,196     $ 30.98  

 

Performance Stock

 

During the six months ended March 31, 2024, the Company granted 47,745 performance stock units which entitles the participant to receive the same number of shares of the Company’s common stock, upon achievement of a fiscal year 2024 performance goal. The Company has determined the fair value per underlying share of the performance stock unit awards to be $26.18 as of the grant date.

 

Compensation expense for the performance stock units is measured using the fair value of our common stock at the grant date. As of March 31, 2024, the Company does not believe it is probable that these performance stock unit awards will vest based on achievement of established performance criteria, and previously recognized compensation expense related to these awards has been reversed to $0. The Company did not issue any performance stock units in the six months ended March 31, 2023.

 

15

 

Bonus Stock

 

The Company did not issue any bonus stock in the six months ended March 31, 2024. During the six months ended March 31, 2023, the Company granted employees an aggregate of 9,144 shares of stock as a discretionary bonus for fiscal 2022 performance. The bonus stock consisted of common stock with no vesting period or restrictions. The fair value on the date of issuance was $104.36 per share.

 

Employee Stock Purchase Plan

 

The Company’s ESPP allows participating employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP is available to all employees subject to certain eligibility requirements. Terms of the ESPP provide those participating employees the ability to purchase the Company’s common stock on a voluntary after-tax basis. Employees may purchase the Company’s common stock at a price that is no less than the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period or phase. The ESPP is carried out in six-month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phase that ended on December 31, 2023, employees purchased 10,104 shares at a price of $24.72 per share. After the employee purchase on December 31, 2023, 158,147 shares of common stock were available for future purchase under the ESPP.

 

 

Note 8. Revenue

 

Revenue Recognition

 

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

 

Disaggregation of Revenue

 

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

 

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

 

   

Three Months Ended March 31,

   

Six Months Ended March 31,

 

(In thousands)

 

2024

   

2023

   

2024

   

2023

 

United States

  $ 26,963     $ 58,671     $ 54,524     $ 134,409  

All other countries

    9,947       13,138       16,616       23,342  

Total Net Sales

  $ 36,910     $ 71,809     $ 71,140     $ 157,751  

 

The Company 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.

 

16

 

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

 

   

Three Months Ended March 31,

   

Six Months Ended March 31,

 

(In thousands)

 

2024

   

2023

   

2024

   

2023

 

Broadband service providers

    93 %     96 %     93 %     97 %

Other customers

    7 %     4 %     7 %     3 %

Total Net Sales

    100 %     100 %     100 %     100 %

 

 

Broadband Service Providers are made up of Community Broadband, which includes local and regional telecom companies, utilities, municipalities and alternative carriers, also referred to as Tier 2 and Tier 3 customers; National Carriers, which includes large national and global wireline and wireless providers, also referred to as Tier 1 customers; Large Regional Service Providers with a national footprint; Multiple System Operators (“MSO’s”), which include cable television companies; and International customers.

 

Accounts Receivable

 

Credit is extended based on the evaluation of a customer’s financial condition, and collateral is generally not required. Accounts that are outstanding longer than the contractual payment terms are considered past due. On October 1, 2023, the Company adopted the cumulative expected credit loss model (“CECL”). Upon adoption of the CECL, the Company measures the allowance for credit losses using an expected credit loss model, which uses a lifetime expected credit loss allowance for all accounts receivable. To measure the expected credit losses, accounts receivable are grouped based on shared credit risk characteristics and the days past due. In calculating an allowance for credit losses, the Company uses its historical experience, external indicators, and forward-looking information to calculate expected credit losses using an aging method. The Company assesses impairment of accounts receivable on a collective basis as they possess shared credit risk characteristics which have been grouped based on the days past due. The expected loss rates are based on the Company’s historical credit losses experience. The historical loss rates are adjusted to reflect current and forward-looking information. As of March 31, 2024, the Company’s allowance for credit losses was $0.

 

As of September 30, 2023, prior to the adoption of CECL, the Company’s allowance for doubtful accounts was $79,000. Upon the adoption of CECL, the prior allowance for doubtful accounts was recorded as a benefit to beginning retained earnings.

 

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

 

 

Note 9. Major Customer Concentration

 

For the three months ended March 31, 2024, the Company had two customers that comprised 15% and 11% of the Company’s net sales, respectively. Both customers are distributors. For the six months ended March 31, 2024, the Company had two customers that comprised 17% and 14% of the Company’s net sales, respectively. Both customers are distributors.

 

For the three months ended March 31, 2023, the Company had one customer that comprised 17% of the Company’s net sales. That customer is a distributor. For the six months ended March 31, 2023, the Company had one customer that comprised 16% of the Company’s net sales. That customer is a distributor.

 

As of March 31, 2024, three customers account for 15%, 13% and 10% of accounts receivable, respectively. These customers are all distributors. As of September 30, 2023, three customers accounted for 16%, 13%, and 11% of accounts receivable, respectively. These customers are also distributors.

 

17

 

 

Note 10. Inventories

 

Inventories consist of finished goods, raw materials, and work-in-process and are stated at average cost, subject to the lower of cost or net realizable value. Certain components of the Company’s inventory classified as raw materials or finished goods can be used as a component to manufacture products or can be sold directly to the customer. Inventory is valued using material costs, labor charges, and allocated factory overhead charges and consists of the following:

 

(In thousands)

 

March 31,

2024

   

September 30,

2023

 

Raw materials

  $ 64,830     $ 73,657  

Work-in-process

    2,052       1,462  

Finished goods

    31,653       29,696