NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Clearfield, Inc. and subsidiaries (the “Company”) manufactures a broad range of standard and custom passive connectivity products to customers throughout the United States and internationally and since the July 26, 2022 acquisition of Nestor Cables Ltd, manufactures fiber optic and copper telecommunication cables and equipment through its Finnish subsidiaries. Refer to Note 11 for further information regarding the acquisition of Nestor Cables.
We are engaged in global operations. Our operations currently comprise of two reportable segments: the Clearfield Operating Segment, (referred to herein as “Clearfield”) and, since July 26, 2022, the Nestor Cables Operating Segment (referred to herein as “Nestor Cables” or “Nestor”). Prior to July 26, 2022, we were considered to be in a single reporting segment and operating unit structure.
The Company’s 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.
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.
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, 2022, and 2021 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. Historically, the Company’s investment portfolio had been classified as held-to-maturity and recorded at amortized cost. During the second quarter of fiscal 2022, the Company sold investments and has reclassified its investment portfolio to available-for-sale, which is reported at fair value. The unrealized gain or loss on investment securities is recorded in other comprehensive income, net of tax.
Foreign Currency Translation: Balance sheets and statement of earnings of our international subsidiaries are measured using local currency as their functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year-end. Statements of operations accounts are translated at the average rates of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as a cumulative translation adjustment in shareholders’ equity.
Comprehensive Income: Total comprehensive income and the components of accumulated other comprehensive loss are presented in the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Shareholders' Equity. Accumulated other comprehensive loss is composed of foreign currency translation effects and unrealized gains and losses on available-for-sale marketable debt securities. We use the individual item approach for releasing income tax effects from accumulated other comprehensive loss.
Fair Value of Financial Instruments: The financial statements include the following financial instruments: cash and cash equivalents, investments, accounts receivable and accounts payable. The Company estimates the fair value of investments as of the balance sheet date. All other financial instruments’ carrying values approximate fair values because of the short-term nature of the instruments.
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.
The allowance for doubtful accounts activity for the years ended September 30, 2022, and 2021 is as follows:
Year Ended | | Balance at Beginning of Year | | | Additions (Recoveries) Charged to Costs and Expenses | | | Less Write-offs | | | Balance at End of Year | |
September 30, 2022 | | $ | 79,000 | | | $ | - | | | $ | - | | | $ | 79,000 | |
September 30, 2021 | | $ | 289,000 | | | $ | (210,000 | ) | | $ | - | | | $ | 79,000 | |
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:
| | September 30, 2022 | | | September 30, 2021 | |
In thousands | | | | | | | | |
Raw materials | | $ | 66,440 | | | $ | 23,072 | |
Work-in-process | | | 7,294 | | | | 2,482 | |
Finished goods | | | 10,803 | | | | 3,361 | |
Inventories, gross | | | 84,537 | | | | 28,915 | |
Inventory reserve | | | (2,329 | ) | | | (1,391 | ) |
Inventories, net | | $ | 82,208 | | | $ | 27,524 | |
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 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.
Estimated useful lives of the assets are as follows:
| Years |
Equipment | 3 – 15 |
Leasehold improvements | 7-10 or life of lease |
Vehicles | 3 |
Property, plant and equipment consist of the following:
(In thousands) | | September 30, 2022 | | | September 30, 2021 | |
Manufacturing equipment | | $ | 18,418 | | | $ | 9,179 | |
Office equipment | | | 4,174 | | | | 2,901 | |
Leasehold improvements | | | 5,000 | | | | 2,590 | |
Vehicles | | | 340 | | | | 246 | |
Construction in progress | | | 1,715 | | | | 150 | |
Property, plant and equipment, gross | | | 29,647 | | | | 15,066 | |
Less accumulated depreciation | | | 11,418 | | | | 10,068 | |
Property, plant and equipment, net | | $ | 18,229 | | | $ | 4,998 | |
Depreciation expense for the years ended September 30, 2022, 2021, and 2020 was $2,647,000, $1,699,000, and $1,944,000, respectively.
Goodwill and Intangible Assets: The Company operates as two reporting units 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, 2022, 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, 2022, 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, 2022, 2021 and 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, 2022, the Company has 36 patents granted and multiple pending applications both inside and outside the United States.
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 and the acquisition of Nestor Cables as of July 26, 2022. Refer to Note 11 for further information regarding the acquisition of Nestor Cables. Finite life intangible assets as of September 30, 2022, and 2021 are as follows:
| | September 30, 2022 | |
(In thousands) | | Years | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Book Value Amount | |
Customer relationships | | | 15 | | | $ | 4,833 | | | $ | 1,273 | | | $ | 3,559 | |
Certifications | | | 8 | | | | 584 | | | | 133 | | | | 451 | |
Trademarks | | | 8-10 | | | | 1,306 | | | | 586 | | | | 720 | |
Patents | | | 20 | | | | 931 | | | | 118 | | | | 813 | |
Developed Technology | | | 10 | | | | 295 | | | | 5 | | | | 290 | |
Other | | | 5 | | | | 6 | | | | 6 | | | | - | |
Software | | | 1-3 | | | | 2,452 | | | | 1,909 | | | | 543 | |
Totals | | | | | | $ | 10,407 | | | $ | 4,030 | | | $ | 6,376 | |
| | September 30, 2021 | |
(In thousands) | | Years | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Book Value Amount | |
Customer relationships | | | 15 | | | $ | 3,742 | | | $ | 904 | | | $ | 2,838 | |
Certifications | | | 8 | | | | 1,068 | | | | 484 | | | | 584 | |
Trademarks | | | 8 | | | | 563 | | | | 255 | | | | 308 | |
Patents | | | 20 | | | | 790 | | | | 85 | | | | 706 | |
Other | | | 5 | | | | 31 | | | | 25 | | | | 6 | |
Software | | | 1-3 | | | | 1,960 | | | | 1,705 | | | | 255 | |
Totals | | | | | | $ | 8,154 | | | $ | 3,458 | | | $ | 4,696 | |
Amortization expense related to these assets for the years ended September 30, 2022, 2021, and 2020 was $766,000, $602,000, and $478,000, respectively.
Our future estimated amortization expense for intangibles is as follows as of September 30, 2022:
(In thousands) | | Estimated amortization expense | |
FY 2023 | | $ | 865 | |
FY 2024 | | | 786 | |
FY 2025 | | | 685 | |
FY 2026 | | | 470 | |
FY 2027 | | | 394 | |
Total | | $ | 3,200 | |
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.
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, 2022, 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 September 30, 2022, and 2021, 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.
Share Repurchase Program: Effective January 27, 2022, the Company reinstated its stock repurchase program that had been suspended in April 2020 due to COVID uncertainty. In addition, effective January 27, 2022, the Company’s board of directors increased the share repurchase program by an additional $10 million to an aggregate of $22 million, from the previous $12 million. As of September 30, 2022, we have repurchased an aggregate of 565,590 shares for approximately $7,019,000, leaving approximately $14,981,000 available within our $22,000,000 stock repurchase program. The repurchase program does not obligate the Company to repurchase any particular amount of common stock during any period. The repurchase will be funded by cash on hand. During the year ended September 30, 2022, the Company did not repurchase any shares under the stock repurchase program.
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.
Research and Development Costs: Research and development costs amounted to $895,000, $1,243,000 and $1,267,000 for the years ended September 30, 2022, 2021, and 2020, respectively, and are charged to expense when incurred.
Advertising Costs: Advertising costs amounted to $537,000, $436,000 and $297,000 for the years ended September 30, 2022, 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.
Weighted average common shares outstanding for the years ended September 30, 2022, 2021 and 2020 were as follows:
Year ended September 30, (In thousands except share data) | | 2022 | | | 2021 | | | 2020 | |
Net income | | $ | 49,362 | | | $ | 20,327 | | | $ | 7,293 | |
Weighted average common shares | | | 13,771,665 | | | | 13,720,699 | | | | 13,643,355 | |
Dilutive potential common shares | | | 134,319 | | | | 63,593 | | | | - | |
Weighted average dilutive common shares outstanding | | | 13,905,984 | | | | 13,784,294 | | | | 13,643,355 | |
Earnings per share: | | | | | | | | | | | | |
Basic | | | 3.58 | | | $ | 1.48 | | | $ | 0.53 | |
Diluted | | | 3.55 | | | $ | 1.47 | | | $ | 0.53 | |
There were no antidilutive shares for the years ended September 30, 2022 or 2021, and 337,100 shares for the year ended September 30, 2020 that were excluded from the above calculation as they were considered antidilutive in nature.
Use of Estimates: The preparation of consolidated 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.
Reclassification: 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 June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. In November 2018, the FASB issued update ASU 2018-19 that clarifies the scope of the standard in the amendments in ASU 2016-13. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Financial instruments impacted include accounts receivable, trade receivables, other financial assets measured at amortized cost and other off-balance sheet credit exposures. The new guidance is effective for the Company beginning in the first quarter of fiscal 2023, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial statements.
NOTE 2 – STOCK BASED COMPENSATION
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 580,000 shares available for issue as of September 30, 2022. As of September 30, 2022, $3,664,000 of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a period of approximately 2.1 years. The Company recorded related compensation expense for the years ended September 30, 2022, 2021 and 2020 of $2,339,000, $1,280,000 and $774,000, respectively. For the year ended September 30, 2022, $2,213,000 of this expense was included in selling, general and administrative expense and $126,000 was included in cost of sales. For the year ended September 30, 2021, $1,223,000 of this expense was included in selling, general and administrative expense and $57,000 was included in cost of sales. For the year ended September 30, 2020, $752,000 of this expense was included in selling, general and administrative expense and $22,000 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, 2022, the Company granted employees non-qualified stock options to purchase an aggregate of 62,730 shares of common stock with a weighted average contractual term of five years, a weighted average three-year vesting term, and a weighted average exercise price of $66.48. During the 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 5 years, a 3-year weighted average vesting term, and an 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.
| | Year ended September 30, 2022 | | | Year ended September 30, 2021 | | | Year ended September 30, 2020 | |
Dividend yield | | | 0 | % | | | 0 | % | | | 0 | % |
Weighted average expected volatility | | | 52.02 | % | | | 46.90 | % | | | 39.5 –44.9 | % |
Weighted average risk-free interest rate | | | 0.97 | % | | | 0.24 | % | | | 0.24 - 1.69 | % |
Weighted average expected life | | 5 years | | | 5 years | | | 4 - 6 years | |
Vesting period | | 3 years | | | 3 years | | | 3 – 5 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 at grant date on zero-coupon U.S. governmental bonds having a remaining life similar to the expected option term.
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 113,727 options vested during the year ended September 30, 2022, 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, 2022, there were 125,651 stock options that were exercised using a cashless method of exercise. 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, 2022, 2021 and 2020 was $11,279,000, $1,315,000, and $332,000 respectively.
Option transactions under the 2007 Stock Compensation Plan during the years ended September 30, 2022, 2021 and 2020 are summarized as follows:
| | Number of shares | | | Weighted average exercise price | | | Weighted average fair value | |
Outstanding as of September 30, 2019 | | | 290,750 | | | $ | 11.86 | | | | | |
Granted | | | 121,350 | | | | 12.43 | | | $ | 4.62 | |
Exercised | | | (26,750 | ) | | | 4.01 | | | | | |
Forfeited and expired | | | (48,250 | ) | | | 13.35 | | | | | |
Outstanding as of September 30, 2020 | | | 337,100 | | | $ | 12.48 | | | | | |
Granted | | | 105,089 | | | | 23.74 | | | $ | 8.14 | |
Exercised | | | (101,966 | ) | | | 12.47 | | | | | |
Forfeited and expired | | | (38,709 | ) | | | 13.68 | | | | | |
Outstanding as of September 30, 2021 | | | 301,514 | | | $ | 16.25 | | | | | |
Granted | | | 62,730 | | | | 66.48 | | | $ | 25.54 | |
Exercised | | | (125,651 | ) | | | 12.92 | | | | | |
Forfeited and expired | | | (2,084 | ) | | | 19.94 | | | | | |
Outstanding as of September 30, 2022 | | | 236,509 | | | $ | 31.30 | | | | | |
The following table summarizes information concerning options exercisable under the 2007 Stock Compensation Plan:
Year ended | | Exercisable | | Weighted average remaining contractual life | | Weighted average exercise price | | | Aggregate intrinsic value (in thousands) | |
September 30, 2022 | | | 39,276 | | 2.78 years | | $ | 20.26 | | | $ | 3,314 | |
September 30, 2021 | | | 51,201 | | 2.29 years | | $ | 12.28 | | | $ | 1,632 | |
September 30, 2020 | | | 97,333 | | 2.19 years | | $ | 12.76 | | | $ | 721 | |
The following table summarizes information concerning options currently outstanding at:
Year Ended | | Number outstanding | | Weighted average remaining contractual life | | Weighted average exercise price | | | Aggregate intrinsic value (in thousands) | |
September 30, 2022 | | | 236,509 | | 3.3 years | | $ | 31.30 | | | $ | 17,343 | |
September 30, 2021 | | | 301,514 | | 3.22 years | | $ | 16.25 | | | $ | 8,412 | |
September 30, 2020 | | | 337,100 | | 3.43 years | | $ | 12.48 | | | $ | 721 | |
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.
Restricted stock transactions during the years ended September 30, 2022, 2021 and 2020 are summarized as follows:
| | Number of shares | | | Weighted average grant date fair value | |
Unvested shares as of September 30, 2019 | | | 130,440 | | | $ | 13.25 | |
Granted | | | 19,455 | | | | 10.30 | |
Vested | | | (29,950 | ) | | | 13.36 | |
Forfeited | | | (10,875 | ) | | | 12.14 | |
Unvested shares as of September 30, 2020 | | | 109,070 | | | $ | 12.98 | |
Granted | | | 39,807 | | | | 24.20 | |
Vested | | | (35,840 | ) | | | 12.48 | |
Forfeited | | | (4,198 | ) | | | 15.45 | |
Unvested shares as of September 30, 2021 | | | 108,839 | | | $ | 17.14 | |
Granted | | | 29,512 | | | | 65.90 | |
Vested | | | (37,094 | ) | | | 17.78 | |
Forfeited | | | (2,749 | ) | | | 16.84 | |
Unvested shares as of September 30, 2022 | | | 98,508 | | | $ | 31.51 | |
The fair value of restricted shares vested during the year end September 30, 2022, 2021 and 2020 was $3,744,000, $1,364,000 and $497,000, respectively. The Company repurchased a total of 13,292 shares of our common stock at an average price of $105.78 in connection with payment of taxes upon the vesting of restricted stock previously issued to employees for the year ended September 30, 2022. 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, 2021 and June 30, 2022, employees purchased 7,678 and 5,605 shares at a price of $32.43 and $52.66 per share, respectively. For the phases that ended on December 31, 2020 and June 30, 2021, employees purchased 15,011 and 9,739 shares, respectively, at a price of $11.93 and $21.01, respectively. As of September 30, 2021, the Company has withheld approximately $191,352 from employees participating in the phase that began on July 1, 2022. In February 2020, the shareholders of Clearfield, Inc. approved an increase of 200,000 in the shares authorized for issuance under the ESPP. After the employee purchase on June 30, 2022, 181,590 shares of common stock were available for future purchase under the ESPP.
NOTE 3 – Investments
The Company invests in CDs that are fully insured by the FDIC as well as U.S. Treasury and money market securities. Historically, the Company’s investment portfolio had been classified as held-to-maturity and recorded at amortized cost. During the second quarter of fiscal 2022, the Company sold investments and has reclassified its investment portfolio to available-for-sale, which is reported at fair value. The unrealized gain or loss on investment securities is recorded in other comprehensive income (loss), net of tax. The proceeds from sales of investments during the year ended September 30, 2022 was $14,365,000. Related to this sale, the Company recorded within earnings gross realized gains on the sale of $92,000 partially offset by gross realized losses of $53,000. The specific identification method is used to determine the cost of the securities sold. The Company’s sale of investment securities was associated with its need to respond to significant unanticipated and unprecedented growth in its sales order backlog coupled with supply chain challenges to obtain the inventory necessary for fulfillment of these orders, as well as the reevaluation of the Company’s approach to use of available capital. The Company did not sell investment securities during the years ended September 30, 2021 and 2020.
At September 30, 2022, available-for-sale investments consist of the following:
| | September 30, 2022 | |
(In thousands) | | Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
Short-Term | | | | | | | | | | | | | |
Certificates of deposit | | | 5,945 | | | | - | | | | 143 | | | | 5,802 | |
Investment securities – short-term | | $ | 5,945 | | | $ | - | | | $ | 143 | | | $ | 5,802 | |
Long-Term | | | | | | | | | | | | | |
U.S treasury securities | | $ | 16,178 | | | $ | - | | | $ | 1,085 | | | $ | 15,093 | |
Certificates of deposit | | | 8,016 | | | | - | | | | 362 | | | | 7,654 | |
Investment securities – long-term | | $ | 24,194 | | | $ | - | | | $ | 1,447 | | | $ | 22,747 | |
At September 30, 2022, investments in debt securities in an unrealized loss position were as follows:
| | In Unrealized Loss Position For Less Than 12 Months | | | In Unrealized Loss Position For Greater Than 12 Months | |
(In thousands) | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | |
U.S treasury securities | | $ | - | | | $ | - | | | $ | 15,093 | | | $ | 1,085 | |
Certificates of deposit | | | 6,345 | | | | 176 | | | | 7,111 | | | | 329 | |
Investment securities | | $ | 6,345 | | | $ | 176 | | | $ | 22,204 | | | $ | 1,414 | |
As of September 30, 2022, there were 62 securities in an unrealized loss position which is due to the securities paying lower interest rates than the market. As of September 30, 2022, there are no securities which are other than temporarily impaired as the Company intends to hold these securities until their value recovers and there is negligible credit risk due to the nature of the securities which are backed by the FDIC and US federal government.
NOTE 4 – Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the market price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair value of U.S. treasury securities, and certificates of deposit based on valuations provided by an external pricing service, who obtains them from a variety of industry standard data providers.
The Company’s investments are categorized according to the three-level fair value hierarchy which distinguishes between observable and unobservable inputs, in one of the following levels:
Level 1- Quoted prices in active markets for identical assets or liabilities.
Level 2- Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3- Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those with fair value measurements that are determined using pricing models, discounted cash flow valuation or similar techniques, as well as significant management judgment or estimation.
The following provides information regarding fair value measurements for our investment securities as of September 30, 2022 according to the three-level fair value hierarchy:
| | Fair Value Measurements at September 30, 2022 | |
(In thousands) | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Investment securities: | | | | | | | | | | | | | | | | |
U.S treasury securities | | $ | 15,093 | | | $ | - | | | $ | 15,093 | | | $ | - | |
Certificates of deposit | | | 13,456 | | | | - | | | | 13,456 | | | | - | |
Total investment securities | | $ | 28,549 | | | $ | - | | | $ | 28,549 | | | $ | - | |
During the year ended September 30, 2022, we owned no Level 3 securities and there were no transfers within the fair value level hierarchy.
Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets and right-of-use assets for operating leases are subject to non-recurring fair value measurements if they are deemed impaired. We had no re-measurements of non-financial assets to fair value in the year-end September 30, 2022.
NOTE 5 – Other Comprehensive Loss
Changes in components of other comprehensive loss and taxes related to items of other comprehensive loss are as follows:
| | Year ended September 30, 2022 | |
(In thousands) | | Before Tax | | | Tax Effect | | | Net of Tax Amount | |
Unrealized losses on available-for-sale securities | | $ | (1,590 | ) | | $ | 366 | | | $ | (1,224 | ) |
Unrealized loss on foreign currency translation | | | (854 | ) | | | 180 | | | | (674 | ) |
| | | | | | | | | | | | |
Other comprehensive loss | | $ | (2,444 | ) | | $ | 546 | | | $ | (1,898 | ) |
The Company did not have any other comprehensive income or loss for the years ended September 30, 2021, and 2020.
NOTE 6 – INCOME TAXES
Components of income tax expense are as follows for the years ended:
| | September 30, | | | September 30, | | | September 30, | |
(In thousands) | | 2022 | | | 2021 | | | 2020 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 13,230 | | | $ | 5,154 | | | $ | 1,966 | |
State | | | 1,532 | | | | 440 | | | | 175 | |
Foreign | | | 48 | | | | - | | | | - | |
Current income tax expense | | | 14,810 | | | | 5,594 | | | | 2,142 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (509 | ) | | | (234 | ) | | | (252 | ) |
State | | | 6 | | | | 47 | | | | (26 | ) |
Foreign | | | 165 | | | | - | | | | - | |
Deferred income tax expense | | | (334 | ) | | | (187 | ) | | | (280 | ) |
Income tax expense | | $ | 14,472 | | | $ | 5,407 | | | $ | 1,862 | |
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, | | | September 30, | |
| | 2022 | | | 2021 | | | 2020 | |
Federal statutory rate | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % |
State income taxes | | | 2.1 | % | | | 2.2 | % | | | 2.0 | % |
Foreign income taxes | | | 0.4 | % | | | - | | | | - | |
Permanent differences | | | 4.6 | % | | | - | | | | - | |
Change in valuation allowance | | | - | | | | - | | | | (0.5% | ) |
Expiration and utilization of state NOL’s | | | - | | | | - | | | | 0.4 | % |
Research and development credits | | | (0.5% | ) | | | (0.7% | ) | | | (2.5% | ) |
Excess tax expense (benefits) from stock-based compensation | | | (4.9% | ) | | | (1.5% | ) | | | (0.1% | ) |
Effective Tax rate | | | 22.7 | % | | | 21.0 | % | | | 20.3 | % |
As of September 30, 2022 and 2021, the current income tax payable was approximately $1,791,000, and $933,000, respectively. Current income tax payable amounts are included in accrued expenses in the Company’s consolidated balance sheets.
As of September 30, 2022 and 2021, 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, 2022. In addition, as of September 30, 2022, the Company had Minnesota research and development tax credits of $292,000. As of September 30, 2021, the Company had Minnesota research and development tax credits of $300,000. 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, | |
(In thousands) | | 2022 | | | 2021 | |
Deferred income tax assets (liabilities): | | | | | | | | |
Intangibles | | $ | (102 | ) | | $ | (92 | ) |
Property and equipment depreciation | | | (1,068 | ) | | | (381 | ) |
Net operating loss carry forwards and credits | | | 256 | | | | 300 | |
Stock-based compensation | | | 416 | | | | 231 | |
Inventories | | | 813 | | | | 519 | |
Prepaid expenses | | | (163 | ) | | | (48 | ) |
Accrued expenses and reserves | | | 1,020 | | | | 519 | |
Foreign currency translation | | | 180 | | | | - | |
Unrealized loss on investments | | | 365 | | | | - | |
Goodwill | | | (1,077 | ) | | | (683 | ) |
Net deferred tax asset | | $ | 640 | | | $ | 365 | |
Realization of NOL carryforwards and other deferred tax temporary differences are contingent upon future taxable earnings. The deferred tax assets and deferred tax liabilities are not netted due to being within different tax jurisdictions. 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, 2022 and 2021, 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.
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 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 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, 2022 or 2021.
The Company is subject to income taxes in the U.S. federal and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Clearfield, Inc. is generally subject to U.S. federal examination for all tax years after 2017 and state examinations for all tax years after 2013 due to unexpired research and development credit carryforwards still open under statute. Nestor is generally subject to Finland examination for all tax years after 2018.
NOTE 7 – 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 year ended September 30, 2022, the Company had one customer that comprised 14% of net sales. This customer is a distributor. 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 were 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, 2022, one customer accounted for 20% of accounts receivable. This customer is a distributor. As of September 30, 2021, one customer accounted for 17% of accounts receivable. This customer was a telecommunications service provider in the Company’s Community Broadband market.
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, and in Central and South America.
The following table presents our domestic and international sales for each of the last three fiscal years:
| | Year Ended September 30, | |
| | 2022 | | | 2021 | | | 2020 | |
United States | | $ | 255,607 | | | $ | 131,285 | | | $ | 89,022 | |
All Other Countries | | | 15,276 | | | | 9,470 | | | | 4,053 | |
Total Net Sales | | $ | 270,883 | | | $ | 140,755 | | | $ | 93,075 | |
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.
The percentages of our sales by these markets were as follows for each of the last three fiscal years:
| | Year Ended September 30, | |
| | 2022 | | | 2021 | | | 2020 | |
Broadband service providers | | | 99 | % | | | 98 | % | | | 96 | % |
Legacy customers | | | 1 | % | | | 2 | % | | | 4 | % |
Total Net Sales | | | 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 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, 2022 and 2021, the Company had property, plant, and equipment with a net book value of $4,213,000, and $1,769,000, respectively, located in Mexico. In addition as of September 30, 2022, the Nestor Cables acquisition brought property, plant, and equipment with a net book value $6,916,000 and $280,000 in Oulu, Finland and Keila, Estonia, respectively. All other property, plant, and equipment is located within the United States.
NOTE 8 – EMPLOYEE BENEFIT PLAN
Clearfield, Inc. 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 first 3% 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 $1,129,000, $915,000 and $839,000 for the years ended September 30, 2022, 2021 and 2020, respectively.
Nestor Cables is mandated by the Finnish government to participate in a pension and social expense plan to which Nestor and its employees make contributions. The plan is accounted for as defined contribution plan and Nestor Cables is responsible for an average of 17.45% of employees wages. Nestor’s contributions under this plan were $204,000 under the plan for the year ended September 30, 2022.
NOTE 9 – LEASES
Clearfield, Inc. leases an 85,000 square foot facility at 7050 Winnetka Avenue North, Brooklyn Park, Minnesota consisting of corporate offices, manufacturing and warehouse space. The lease term is ten years and two months, ending on February 28, 2025 and is renewable. The renewal options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option.
In July 2021, Clearfield, Inc. entered into an indirect lease arrangement for an approximately 318,000 square foot manufacturing facility in Tijuana, Mexico. The lease term is for 7 years of which 5 years are mandatory, commencing March 2022. The lease contains written options to renew for two additional consecutive periods of 5 years each. The lease calls for monthly rental payments of $162,000, increasing 2% annually. The renewal options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option.
On November 19, 2021, Clearfield, Inc. signed a lease for a 105,000 square foot warehouse in Brooklyn Park, Minnesota. The lease term is five years commencing March 2022 and ending on February 28, 2027, with rent payments increasing annually. The lease includes an option to extend the lease for an additional five years. The renewal option has not been included within the lease term because it is not reasonably certain that the Company will exercise the option. The lease commenced in the second quarter of fiscal 2022.
Nestor leases an approximately 25,000 square foot manufacturing facility in Oulu, Finland, which is utilized for the operations of Nestor Cables. The original lease term ends on October 31, 2022, but auto renews indefinitely until terminated with two years written notice. It is not reasonably certain that the Company will not exercise the termination option. The lease calls for monthly rental payments of approximately $40,000 Rent is increased each year on January 1st based upon the cost-of-living index published by the Finnish government.
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:
(In thousands) Operating lease expense under ASC842, Leases, within: | | Year ended September 30, 2022 | | | Year ended September 30, 2021 | | | Year ended September 30, 2020 | |
Cost of sales | | $ | 2,534 | | | $ | 999 | | | | 905 | |
Selling, general and administrative | | | 277 | | | | 217 | | | | 221 | |
Total lease expense | | $ | 2,801 | | | $ | 1,216 | | | | 1,126 | |
Our future lease obligations for leases that have commenced were as follows as of September 30, 2022:
(In thousands) | | Operating Leases | |
FY 2023 | | $ | 3,775 | |
FY 2024 | | | 3,823 | |
FY 2025 | | | 3,056 | |
FY 2026 | | | 2,868 | |
FY 2027 | | | 1,196 | |
Thereafter | | | - | |
Total lease payments | | | 14,718 | |
Less: Interest | | | (921 | ) |
Present value of lease liabilities | | $ | 13,797 | |
As of September 30, 2022, the weighted average term and weighted average discount rate for our leases were 4.04 years and 3.22%, respectively. 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. For the year ended September 30, 2022, 2021, and 2020 the operating cash outflows from our leases were $2,064,000, $1,290,000, and $812,000, respectively.
NOTE 10 – DEBT
On April 27, 2022, the Company entered into a loan agreement and a security agreement with a bank that provides the Company with a $40,000,000 revolving line of credit that is secured by certain of the Company’s U.S. assets. The line of credit matures on April 27, 2025 and borrowed amounts will bear interest at a variable rate of the CME Group one-month term Secured Overnight Financing Rate (“SOFR”) plus 1.85%, but not less than 1.80% per annum. As of September 30, 2022, the interest rate was 4.36%. The loan agreement and the security agreement contains customary affirmative and negative covenants and requirements relating to the Company and its operations, including a requirement that the Company maintain a debt service coverage ratio of not less than 1.20 to 1 as of the end of each fiscal year for the fiscal year then ended and maintain a debt to cash flow ratio of not greater than 2 to 1 measured as of the end of each of the Company’s fiscal quarters for the trailing twelve (12) month period. Debt service coverage ratio is the ratio of Cash Available for Debt Service to Debt Service, each as defined in the loan agreement. Debt and Cash Flow are also as defined in the loan agreement for the purposes of the debt to cash flow ratio covenant. As of September 30, 2022, the Company has borrowed $16,700,000 against this line of credit. As of September 30, 2022, the Company was in compliance with all covenants. The line of credit is collateralized by Clearfield, Inc’s assets of $198,087,000 as of September 30, 2022.
During March 2021, Nestor Cables entered into a loan agreement, providing $2 million senior loan with a term of three years. The National Emergency Supply Agency (“NESA”) pays the interest, capped at 5% with the interest to be paid by NESA when the loan is used for stockpiling purposes and is repayable with a 2% additional interest penalty if there is a violation of the terms. The loan is due on March 31, 2024. The loan is fully secured by a Finnish Government guarantee. If used for any purposes other than stockpiling, the lender has the right to terminate the agreement and the entire outstanding balance will become due. As of September 30, 2022, Nestor Cables was in compliance with all covenants. The interest expense associated with this loan has been presented net of government payments on the Company’s income statement.
The Company did not have any debt as of September 30, 2021.
NOTE 11 – ACQUISITION OF NESTOR CABLES
On July 26, 2022, the Company, through its newly formed wholly owned subsidiary, Clearfield Finland Ltd., acquired 100% of the share capital of Nestor Cables Ltd (“Nestor”), a leading developer and manufacturer of fiber optic cable solutions located in Finland, upon the terms and conditions contained in a Share Sale and Purchase Agreement entered into on May 17, 2022. The total purchase price and the acquisition date fair value of the consideration transferred for the shares totaled €7.9 million ($8.0 million) in addition to €7.6 million ($7.8 million) related to the repayment of certain of Nestor’s debt. The purchase price was funded from a draw of $16.7 million under the Company’s revolving line of credit. The purchase of Nestor Cables is expected to provide the Company with the ability to vertically integrate the supply fiber optic cables and fulfill customer demand more rapidly. Nestor Cables technical expertise is expected to extend the supply of the Company’s FieldShield product line into the North American market, to reduce cost and complexity of transportation. Finally, Nestor enhances the possibility of introducing Clearfield, Inc.’s cassette-based fiber management solutions into the European market.
The following table summarizes the estimated fair value of the assets and liabilities acquired as of July 26, 2022:
(in thousands) | | | | |
Cash | | $ | 72 | |
Accounts receivables | | | 10,562 | |
Inventories | | | 11,377 | |
Other current assets | | | 173 | |
Total current assets | | | 22,184 | |
Property and equipment | | | 7,689 | |
Intangibles assets | | | 1,840 | |
Right of use lease asset | | | 1,297 | |
Goodwill | | | 1,762 | |
Other | | | 55 | |
Total assets | | $ | 34,827 | |
Accounts payable | | | 5,839 | |
Accrued compensation | | | 1,430 | |
Accrued expenses | | | 1,916 | |
Deferred tax liability | | | 621 | |
Lease liability | | | 1,297 | |
Factoring liability | | | 5,849 | |
Long term debt | | | 2,045 | |
Total liabilities | | $ | 18,997 | |
Net assets acquired | | $ | 15,830 | |
The Nestor acquisition resulted in approximately $1,700,000 of goodwill due to intangible assets not qualifying for separate recognition as well as expected synergies. The goodwill created from the acquisition of Nestor Cables is expected to be deductible for tax purposes.
Nestor Cables acquired accounts receivable balance is the gross amount which is expected to be collected, which approximates fair value. As of the acquisition date no allowance for uncollectible amounts is deemed necessary.
The intangible assets acquired include customer relationships, developed technology and trademarks. The remaining weighted average useful life of intangible assets acquired is 12.78 years as of the acquisition date. Refer to Note 1 for further information.
The Company incurred approximately $1,600,000 in legal, professional, and other costs related to the acquisition which were accounted for as selling, general and administrative expenses when incurred. Refer to Note 12-Segment Reporting for the operating results of Nestor Cables from the date of acquisition through September 30, 2022.
The Company has a fiscal year end of September 30 and reports its financial results in U.S. GAAP. Nestor Cables has historically had a fiscal year end of December 31 and reported its results under Finnish Accounting Standards. Accordingly, it is impracticable to disclose the revenue and earnings of the combined entity as though the business combination occurred as of the beginning of the comparable prior year periods due to the differing basis of accounting and reporting periods of the entities requiring assumptions about management’s intent that cannot be independently substantiated. In addition, these disclosures would require significant estimates that are not possible to reliably establish in order to distinguish objective information that provides evidence of circumstances that existed on the dates at which those amounts would have been recognized, measured and disclosed and would have been available when the financial statements for that prior period were issued.
NOTE 12 – SEGMENT REPORTING
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.
Upon closing of the acquisition of Nestor Cables, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision -maker (“CODM”), in deciding how to allocate resources and in assessing performance. Based upon the Company’s assessment, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
For the year ended September 30, 2022, the Company has two reportable segments: (1) Clearfield and (2) Nestor Cables. Clearfield’s Finnish holding company Clearfield Finland Ltd purchased Nestor Cables Ltd, including its Estonia subsidiary Nestor Cables Baltics on July 26, 2022. These entities comprise the Nestor Cables Segment. Refer to Note 11 -Acquisition of Nestor Cables for additional information on this transaction.
Financial results for the reportable segments are prepared on a basis consistent with the internal disaggregation of financial information to assist the CODM in making internal operating decisions. For consolidated reporting, the Company eliminates transactions between reportable segments.
The following table summarizes the amounts between the two reportable segments year ended September 30, 2022.
| | Year ended September 30, 2022 | |
(in thousands) | | Clearfield | | | Nestor Cables | | | Consolidated | |
Revenue from external customers | | $ | 263,822 | | | $ | 7,061 | | | $ | 270,883 | |
Revenue from internal customers (Clearfield, Inc.) | | | - | | | | 182 | | | | 182 | |
Net investment income | | | 327 | | | | 1 | | | | 328 | |
Interest Expense | | | 141 | | | | 170 | | | | 311 | |
Depreciation and amortization | | | 3,174 | | | | 239 | | | | 3,413 | |
Stock based compensation | | | 2,339 | | | | - | | | | 2,339 | |
Income taxes | | | 14,258 | | | | 214 | | | | 14,472 | |
Net Income (loss) | | | 49,771 | | | | (409 | ) | | | 49,362 | |
Capital Expenditures | | | 8,487 | | | | 13 | | | | 8,500 | |
Goodwill | | | 4,709 | | | | 1,693 | | | | 6,402 | |
Total Assets | | $ | 198,255 | | | $ | 30,873 | | | $ | 229,128 | |
NOTE 13 – FINANCING RECEIVABLES
Nestor Cables factors certain of its accounts receivable, with recourse provisions that is accounted for as a secured borrowing. Nestor Cables has a total factoring liability of $4,391,000 as of September 30, 2022. Nestor receives cash for 80% of the receivable balance from the bank initially and the remaining 20% when the invoice is paid up to a limit of €12.5 million ($12.3 million). Due to the conditions mentioned above, these transactions do not qualify as a sale and are thus accounted for as secured borrowing. The contractual interest rate on Nestor’s factoring arrangements is the 3-month Euribor rate plus a range of .75% to 1.3%. The average interest rate for the year ended September 30, 2022, was 2.14%. These agreements are indefinite with a termination notice period ranging from zero to one month.