Clearfield, Inc., (the “Company”) is a manufacturer of a broad range of standard and custom passive connectivity products to customers throughout the United States and internationally. These products include fiber distribution systems, optical components, Outside Plant (“OSP”) cabinets, and fiber and copper cable assemblies that serve the communication service provider, including Fiber-to-the-Premises (“FTTP”), large enterprise, and original equipment manufacturer (“OEM”) markets.

 

Revenue is recognized when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed, acceptance by the customer is reasonably certain and collection is reasonably assured. This generally occurs upon shipment of product to the customer. Sales of the Company’s products are subject to limited warranty obligations that are included in the Company’s terms and conditions. Also, the Company offers limited discounts and rebates to customers which are recorded in net sales on an estimated basis as the sales are recognized. The Company records freight revenues billed to customers as sales and the related shipping and handling cost in cost of sales. Taxes collected from customers and remitted to governmental authorities are presented on a net basis.

The Company considers all highly liquid investments with original maturities of months or less to be cash equivalents. Cash equivalents at and consist entirely of short-term money market accounts.

 

The Company maintains cash balances at several financial institutions, and at times, such balances exceed insured limits. The Company has experienced any losses in such accounts and believes it is exposed to any significant credit risk on cash and cash equivalents.

 

The Company currently invests its excess cash in bank certificates of deposit (“CD’s”) that are fully insured by the Federal Deposit Insurance Corporation (“FDIC)” with a term of more than years. CD’s with original maturities of more than months are reported as held-to-maturity investments and are recorded at amortized cost, which approximates fair value due to the negligible risk of changes in value due to interest rates. The maturity dates of our CD’s are as follows:

 

		September 30, 2017				September 30, 2016
Less than one year		$	5,937,150			$	5,527,075
1-5 years			19,816,000				10,703,000
Total		$	25,753,150			$	16,230,075

Credit is extended based on the evaluation of a customer’s financial condition and collateral is generally required. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company does charge interest on past due receivables. The Company determines its allowance 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 and is as follows:

 

Year Ended		Balance at Beginning of Year				Additions Charged to Costs and Expenses				Less Write-offs				Balance at End of Year
September 30, 2017		$	93,473			$	-			$	(14,388	)		$	79,085
September 30, 2016			79,473				25,000				(11,000	)			93,473
September 30, 2015			97,950				-				(18,477	)			79,473

The financial statements include the following financial instruments: cash and cash equivalents, short-term investments, long-term investments, accounts receivable, accounts payable and accrued expenses. Other than long-term investments, all financial instruments’ carrying values approximate fair values because of the short-term nature of the instruments. Long-term investments’ carrying value approximates fair value due to the negligible risk of changes in value due to interest rates.

Inventories consist of finished goods, raw materials and work in process and are stated at the lower of average cost (which approximates in, out) or market. Inventory is valued using material costs, labor charges, and allocated factory overhead charges and consists of the following:

 

		September 30, 2017				September 30, 2016
Raw materials		$	5,991,863			$	5,702,762
Work-in-process			724,248				471,305
Finished goods			1,737,456				2,199,088
Inventories		$	8,453,567			$	8,373,155

 

Inventory is stated at the lower of cost or market. On a regular basis, the Company reviews its inventory and identifies that which is excess, slow moving, and obsolete by considering factors such as inventory levels, expected product life, and forecasted sales demand. Any identified excess, slow moving, and obsolete inventory is written down to its market value through a charge to cost of sales. It is possible that additional inventory write-down charges be required in the future if there is a significant decline in demand for the Company’s products and the Company does adjust its manufacturing production accordingly or if new products are accepted by the market.

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	-	7
Leasehold improvements		7	-	10 or life of lease
Vehicles			3

 

Property, plant and equipment consist of the following:

 

		September 30, 2017				September 30, 2016
Manufacturing Equipment		$	5,370,962			$	4,585,422
Office Equipment			3,600,006				3,513,002
Leasehold Improvements			2,404,331				2,422,669
Vehicles			193,702				193,702
Property, plant and equipment, gross			11,569,001				10,714,795
Less accumulated depreciation			6,134,829				4,933,981
Property, plant and equipment, net		$	5,434,172			$	5,780,814

Depreciation expense for the years ended and were and respectively.

The Company operates as reporting unit and reviews the carrying amount of goodwill annually in the quarter of each fiscal year and more frequently if events or changes in circumstances indicate that the carrying amount of the assets 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 and resulted in excess fair value over carrying value and therefore, adjustments were made to goodwill. During the year ended there were 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.

 

impairment of goodwill has occurred during the years ended or 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, exceeding years. As of the Company has patents granted and multiple pending applications both inside and outside the United States.

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 be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset or asset group is recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is 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. During the year ended the Company incurred an impairment charge on long-lived assets of which was charged to selling, general, and administrative expenses. This impairment was related to the cancellation of an enterprise resource planning software implementation. impairment of long-lived assets occurred during the years ended or respectively.

 

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 that a deferred tax asset will 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 sustain the position following an audit. For tax positions meeting the more likely than threshold, the amount recognized in the financial statements is the largest benefit that has a greater than percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

: We measure and recognize compensation expense for all stock-based payments at fair value over the requisite service period. We use the Black-Scholes option pricing model to determine the weighted average 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 payment 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 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 historically issued any dividends and does 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 differ significantly from what we have recorded in the current periods.

 

: Research and development costs amounted to and in and respectively, and are charged to expense when incurred.

 

: Advertising costs amounted to and in and respectively, and are charged to expense when incurred.

 

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 and were as follows:

 

Year ended September 30,		2017				2016				2015
Net income		$	3,847,839			$	8,013,062			$	4,682,008
Weighted average common shares			13,532,375				13,372,579				13,216,010
Dilutive potential common shares			128,431				290,770				371,522
Weighted average dilutive common shares outstanding			13,660,806				13,663,349				13,587,532
Earnings per share:
Basic		$	0.28			$	0.60			$	0.35
Diluted		$	0.28			$	0.59			$	0.34

 

There were potentially dilutive shares excluded from the calculation above for the years ended and

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. Significant estimates include the deferred tax asset valuation allowance, the valuation of our inventory, rebates related to revenue recognition, performance compensation accruals and the valuation of long-lived assets and goodwill. Actual results differ materially from these estimates.

 

In the FASB issued guidance creating Accounting Standards Codification (“ASC”) Section . The new section will replace Section “Revenue Recognition” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for annual reporting periods beginning after and interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after including interim periods within that reporting period.

 

In the FASB issued ASU -  which applies to all inventory except inventory that is measured using last-in, -out (“LIFO”) or the retail inventory method. Inventory measured using -in, -out (“FIFO”) or average cost is covered by the new amendments. Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments will take effect for public business entities for fiscal years beginning after including interim periods within those fiscal years. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. We do expect adoption to have a material impact on our financial statements.

 

In the FASB issued ASU - , which requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact the adoption of this ASU will have on our financial statements.

 

In the FASB issued ASU - which offers amended guidance to simplify the accounting for goodwill impairment by removing Step of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. This guidance is to be applied on a prospective basis effective for the Company’s interim and annual periods beginning after with early adoption permitted for any impairment tests performed after The Company is evaluating the impact the adoption of this ASU will have on our financial statements.