Note 7. Stock-Based Compensation

On February 23, 2023, the Company’s shareholders approved the Clearfield, Inc. 2022 Stock Compensation Plan (the “2022 Plan”). The 2022 Plan became effective on the date of shareholder approval, and no further awards may be made under the Clearfield, Inc. Amended and Restated 2007 Stock Compensation Plan (the “Prior Plan”) following the effective date of the 2022 Plan. The total number of shares of stock reserved and available for distribution under the 2022 Plan upon approval was 1,461,461 shares, which includes the number of shares remaining for grant and delivery under the Prior Plan, plus any shares subject to outstanding awards under the Prior Plan as of the effective date of the 2022 Plan that were forfeited, cancelled or settled for cash.

The Company recorded $1,059,000 and $2,504,000 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 nine months ended June 30, 2023. For the three months ended June 30, 2023, $1,016,000 of this expense is included in selling, general and administrative expense, and $43,000 is included in cost of sales. For the nine months ended June 30, 2023, $2,377,000 of this expense is included in selling, general and administrative expense, and $126,000 is included in cost of sales. The Company recorded $638,000 and $1,647,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options, and the Company’s ESPP for the three and nine months ended June 30, 2022, respectively. For the three months ended June 30, 2022, $606,000 of this expense is included in selling, general and administrative expense, and $32,000 is included in cost of sales. For the nine months ended June 30, 2022, $1,552,000 of this expense is included in selling, general and administrative expense, and $95,000 is included in cost of sales. As of June 30, 2023, $5,385,000 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 2.9 years.

Stock Options

The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. During the nine months ended June 30, 2023, the Company granted employees non-qualified stock options to purchase an aggregate of 40,266 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 $64.38 per share. During the nine months ended June 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.

The fair value of stock option awards during the nine months ended June 30, 2023, was estimated as of the respective grant dates using the assumptions listed below:

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 nine months ended June 30, 2023:

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of June 30, 2023, the weighted average remaining contractual term for all outstanding and exercisable stock options was 2.53 years and their aggregate intrinsic value was $2,193,000.

Restricted Stock

The Company’s 2022 Stock Compensation Plan permits the Compensation Committee of the Board of Directors to grant stock-based awards, including stock options and restricted stock, to key employees and non-employee directors. The Company has made restricted stock grants that vest over one to ten years.

During the nine months ended June 30, 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. During the nine months ended June 30, 2023, the Company granted the non-employee directors restricted stock awards totaling 6,818 shares of common stock, with a vesting term of approximately one year and a fair value of $61.56 per share.

During the nine months ended June 30, 2022, the Company granted newly elected non-employee directors restricted stock awards totaling 318 and 2,758 shares of common stock, with a vesting term of approximately one year and a fair value of $62.77 and $63.35 per share, respectively. During the nine months ended June 30, 2022, the Company granted the non-employees directors restricted stock awards totaling 3,118 shares of common stock, with a vesting term of approximately one year and a fair value of $64.11 per share. During the nine months ended June 30, 2022, the Company also granted employees restricted stock awards totaling 23,318 shares of common stock, with a vesting term of approximately three years and a fair value of $66.48 per share.

Restricted stock transactions during the nine months ended June 30, 2023, are summarized as follows:

Bonus Stock

During the nine months ended June 30, 2023, the Company granted employees an aggregate of 9,144 shares of common 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. The 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 June 30, 2023, employees purchased 7,754 shares at a price of $40.25 per share. For the phase that ended on December 31, 2022, employees purchased 5,585 shares at a price of $53.52 per share. After the employee purchase on June 30, 2023, 168,251 shares of common stock were available for future purchase under the ESPP.