Note 7. Major Customer Concentration

The following table summarizes customers comprisingFor the three months ended December 31, 2021, Customers A, B, and C comprised 15%,11%, and 10% or more of the Company’s net sales, forrespectively. Customers A and C are regional broadband service providers and Customer B is a distributor. For the three months ended December 31, 20172020, Customer B comprised 19% and December 31, 2016:Customer D comprised 12% of the Company’s net sales, respectively. Both of these customers are distributors. These major customers, like our other customers, purchase our products from time to time through purchase orders, and the Company does not have any agreements that obligate these major customers to purchase products from us in the future.

As of December 31, 2017, 2021, Customer D comprised 11% of the Company’s accounts receivable. This customer is a distributor. As of September 30, 2021, Customers A and B accounted for 15% and 14% of accounts receivable, respectively. As of September 30, 2017, Customer B accounted for 19%was 17% of accounts receivable. CustomersCustomer A and B are both distributors.

Note 8. Goodwill and PatentsIntangibles

The Company analyzes its goodwill for impairment annually or at an interim period when events occur or changes in circumstances indicate potential impairment. The result of the analysis performed in the fourth quarter ended as of September 30, 2017 2021 did not indicate an impairment of goodwill. During the quarterthree months ended December 31, 2017, 2021, there were no triggering events that indicate potential impairment exists.

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 December 31, 2017, 2021, the Company has 1231 patents granted and multiple pending applications both inside and outside the United States.

Note 9. Income Taxes

For the three months ended December 31, 2017, 2021, the Company recorded a benefit for income taxestax expense of $203,000,$2,780,000, reflecting an effective tax rate of negative 27.4%21.1%. The Tax Cutdifference between the effective tax rate and Jobs Act of 2017 (the “Tax Reform Act”) was enacted on December 22, 2017. The Tax Reform Act reduced certain federal corporate income tax rates effective January 1, 2018 and changed certain other provisions. The effectivethe statutory tax rate for the quarterthree months ended December 31, 2017 is a blended rate2021 was primarily related to excess tax benefits from restricted stock vesting during the period, Section 162(m) compensation deduction limitations, foreign derived intangibles income deduction (FDII), and research and development credits. For the three months ended December 31, 2020, the Company recorded income tax expense of $684,000 reflecting the anticipated benefit of three quarters of federalan effective tax rate reductions for fiscal 2018. Our first quarter tax benefit reflects a lower tax rate and a one-time benefit of $384,000 related to the favorable impact of a revaluation of our net deferred tax liability that decreased the income tax provision for the quarter ended December 31, 2017 and reduced long-term deferred tax liabilities as of December 31, 2017.17.8%.  The final impact of the Tax Reform Act may differ due to and among other things, changes in interpretations, assumptions made by the Company, the issuance of additional guidance, and actions the Company may take as a result of the Tax Reform Act. Additionally, differences between the effective tax rate and the statutory tax rate arewere primarily related to nondeductible meals and entertainment, favorable domestic manufacturing deduction andexcess tax benefits from non-qualified stock options exercised during the quarter as well as research and development credits.

As of December 31, 2017 and September 30, 2017, the Company had a remaining valuation allowance of approximately $191,000 and $159,000, respectively, related to state net operating loss carry forwards the Company does not expect to utilize. As a result of recording the impact of the Tax Reform Act on its deferred assets and liabilities, the Company recorded an increase in its valuation allowance against state net operating losses carried forward of approximately $32,000 in the quarter ended December 31, 2017. Based on the Company’s analysis and review of long-term forecasts and all available evidence, the Company determined that there should be no further change in the valuation allowance for the quarter ended December 31, 2017.

For the three months ended December 31, 2016, the Company recorded a provision for income taxes of $367,000, reflecting an effective tax rate of 29.5%. The primary difference between the effective tax rate and the statutory tax rate was related to nondeductible meals and entertainment, favorable domestic manufacturing deduction and research and development credits, expenses related to equity award compensation and favorable discrete items for the quarter from tax benefits related to stock-based compensation awards.

Deferred taxes recognize the impact of temporary differences between the amounts of the assets and liabilities recorded for financial statement purposes and these amounts measured in accordance with tax laws. The Company’s realization of deferred tax temporary differences is contingent upon future taxable earnings. The Company reviewed its deferred tax asset for expected utilization using a “more likely than not” criteria by assessing the available positive and negative factors surrounding its recoverability.recoverability and determined that as of December 31, 2021 and September 30, 2021 a valuation allowance against the deferred tax assets is not required. The Company will continue to assess the need for a valuation allowance based on changes in assumptions of estimated future income and other factors in future periods.

As of December 31, 2017, we do 2021, the Company does not have any unrecognized tax benefits. It is the Company’s practice to recognize interest and penalties accrued on any unrecognizedunrecognized tax benefits as a component of income tax expense. The Company does not expect any material changes in its unrecognized tax positions over the next 12 months.

Note 10. Leases

three months ended December 31, 2020.

ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are “forward-looking statements”“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events and typically address the Company’sCompany’s expected future business and financial performance. Words such as  “plan, “plan,” “expect,“expect,” “aim,“aim,” “believe,“believe,” “project,“project,” “target,“target,” “anticipate,“anticipate,” “intend,“intend,” “estimate,“estimate,” “will,“will,” “should,“should,” “could”“could” and other words and terms of similar meaning, typically identify these forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual results could differ from those projected in any forward-looking statements because of the factors identified in and incorporated by reference from PartI, Item 1A, “Risk“Risk Factors,” of our Annual Report on Form 10-K for the year ended September 30, 2017,2021 and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, as well as in other filings we make with the Securities and Exchange Commission, which should be considered an integral part of PartI, Item 2, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements included herein are made as the date of this Quarterly Report on Form 10-Q and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion and analysis of ourthe Company’s financial condition and results of operations as of and for the three months ended December 31, 20172021 and 20162020 should be read in conjunction with the financial statements and related notes in Item 1 of this report and our Annual Report on Form 10-K for the year ended September 30, 2017.2021.

OVERVIEW

General

Clearfield, Inc. (“Clearfield” or the “Company”) designs, manufactures, and distributes fiber optic management, protection and delivery products for communications networks. Our “fiber to the anywhere” platform serves the unique requirements of leading incumbent local exchange carriers (TraditionalBroadband Service Providers in the United States (“U.S.”), which include Community Broadband, MSO’s, and National Carriers, within the Tier 2 and Tier 3 broadband markets), including large national and global telecom providers (Tier 1), wireless operators, MSO/cable TV companies, utility/municipality, enterprise, data center and military markets, while also serving the broadband needs of the competitive local exchange carriers (Alternative Carriers).International markets, primarily countries in the Caribbean, Canada, and Central and South America. These customers are collectively included in Broadband Service Providers. The Company also provides contract manufacturing services for its Legacy customers which include original equipment manufacturers (OEM) requiring copper and fiber cable assemblies built to their specifications.  

The Company has historically focused on the un-servedunserved or under-servedunderserved rural communities whothat receive their voice, video and data services from independent telephone companies. By aligning its in-house engineering and technical knowledge alongside its customers, the Company has been able to develop, customize and enhance products from design through production. Final build and assembly of the Company’s products is completed at Clearfield’s plantsmanufacturing facilities in Brooklyn Park, Minnesota, and Tijuana, Mexico, with manufacturing support from a network of domestic and global manufacturing partners. Clearfield specializes in producing these products on both a quick-turn and scheduled delivery basis. The Company deploys a hybrid sales model with some sales made directly to the customer,customers, some made through two-tier distribution (channel) partners, sales agents and somemanufacturing representatives, and sales through original equipment suppliers who private label their products.

Under U.S. federal and state guidance in response to the COVID-19 pandemic, Clearfield’s operations are classified as part of the Cybersecurity and Infrastructure Security Agency (“CISA”) critical infrastructure sector and similar categorization in Minnesota. In March 2020, we transitioned our corporate employees at our Brooklyn Park headquarters to remote work arrangements and they currently continue primarily working remote. In accordance with the Centers for Disease Control and Prevention (“CDC”) and World Health Organization (“WHO”) guidelines, we implemented and have continued health and safety measures for the production staff that remain onsite at our Brooklyn Park facility. We have maintained our manufacturing capacity in Brooklyn Park with these personnel at near historic levels. Similarly, we have implemented the recommended health and safety measures for the production staff that remains onsite at our Tijuana, Mexico manufacturing facilities. Throughout the COVID-19 pandemic, the Company has closely monitored the operations and staffing levels at its Brooklyn Park facility and its two manufacturing facilities in Tijuana, Mexico.

Due to the risks to timely supply of materials to our facilities, we have taken multiple actions to ensure sufficient safety stock inventory levels at both our Minnesota and Mexico facilities. Additionally, we made the decision to maximize the availability of all product lines at all three of our plants by assuring that each location can manufacture across our broad product portfolio. These actions, combined with our historic practice of dual sourcing most of our components, has positioned us to meet our obligations to customers and to fulfill our sales backlog. However, in the event of serious border restrictions or border delays, continuing or worsening component material shortages, supply chain transportation delays, or other serious disruption in our supply chain, we may experience diminished or temporarily suspended operations, longer lead times than typical for product deliveries, or temporarily suspended product deliveries, which would result in delayed or reduced revenue from the affected orders in production and higher operating costs. In addition, due to the unprecedented lead-times and challenges in the global supply chain, we are working with our customers to place longer lead-time purchase orders to ensure availability of components and materials from our supply chain. Based on current supply chain dynamics, lead times have stretched to 8 to 12 weeks or longer for certain product categories. Progressing into 2022, the Company is working to manage lead times to more historic levels from receipt of purchase order.

In order to help meet customer demand and delivery expectations, we will be exiting our 52,000 square foot manufacturing facility in Mexico in the fiscal second quarter of 2022 for an approximately 318,000 square foot manufacturing facility in Mexico during second quarter of fiscal 2022.  Beginning in fiscal second quarter of 2022, we also expect to begin to use a 105,000 square foot warehouse being constructed in Brooklyn Park, MN.

RESULTS OF OPERATIONS

Three months ended DecemberTHREE MONTHS ENDED DECEMBER 31, 2017 vS. three months ended December2021 VS. THREE MONTHS ENDED DECEMBER 31, 20162020

Net sales for the first quarter of fiscal 20182022 ended December 31, 20172021 were $16,867,000, a decrease$51,109,000, an increase of approximately 8%89% or $1,399,000,$24,017,000, from net sales of $18,266,000$27,092,000 for the first quarter of fiscal 2017.2021.  Net sales to broadband service providers and commercial data networks customersBroadband Service Providers were $16,020,000$50,406,000 in the first quarter of fiscal 20182022 versus $17,020,000$26,570,000 in the same period of fiscal 2017.2021.  Among this group, the Company recorded $1,369,000$1,991,000 in international sales for the first quarter of fiscal 20182022 versus $1,586,000$1,060,000 in the same period of fiscal 2017.2021.  Net sales to build-to-print and OEMLegacy customers were $847,000$702,000 in the first quarter of fiscal 20182022 versus $1,246,000$515,000 in the same period of fiscal 2017.2021.  The Company allocates sales from external customers to geographic areas based on the location to which the product is transported.  Accordingly, international sales represented 8% and 9%4% of total net sales for the first quartersquarter of both fiscal 20182022 and 2017, respectively.2021.

The decreaseincrease in net sales for the quarter ended December 31, 20172021 of $1,399,000$24,017,000 compared to the quarter ended December 31, 2016 is2020 was driven primarily attributable to a decrease of $957,000 in netby increased sales to our customer baseCommunity Broadband Service Providers, and MSO customers of commercial data network providers, build-to-print$15,964,000, and OEM manufacturers,$6,081,000, respectively. The increase to Community Broadband and broadband service providers, outside of the Alternative Carrier group and international sales noted below, when compared to the same period of fiscal 2017. The declineMSO customers was due to decreased deploymentscontinuing increased demand for fiber connectivity products in response to COVID-19 driven by customers accelerating their purchasing decisions and deployment schedules of our fiber optic solutions and the Company’s Traditional Carrier and Tier 1 customers. Net sales were also negatively affected by a decreaseneed for high-speed broadband required in the ongoing builds of an Alternative Carrier customer of $225,000 in the quarter ended December 31, 2017. Also, international sales decreased $217,000 during the same period due to a decrease in demand. work from anywhere environment.

Revenue from all customers is obtained from purchase orders submitted from time to time. Accordingly, thetime, with a limited number of customers recently issuing purchase orders for longer time frames. The Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue is further limited by global supply chain issues. The Company’s ability to recognize revenue in the future for customer orders will depend on the Company’s ability to manufacture and deliver products to the customers and fulfill its other contractual obligations.

Cost of sales for the first quarter of fiscal 20182022 was $9,758,000, a decrease$28,137,000, an increase of $1,299,000,$12,414,000, or 12%79%, from $11,057,000$15,723,000 in the comparable period of fiscal 2017.2021. Gross profit percent was 42.1%44.9% of net sales in the fiscal 2018 first quarter upof fiscal 2022, an increase from 39.5%42.0% of net sales for the first quarter of fiscal 2017 first quarter.2021. Gross profit decreased $101,000,increased $11,603,000 or 1%102%, to $7,108,000$22,972,000 for the quarterthree months ended December 31, 20172021 from $7,209,000$11,369,000 in the comparable period in fiscal 2017. 2021. The decreaseincrease in gross profit in the first quarter of fiscal 20182022 was due to decreasedincreased volume of net sales described above while the increase in gross profit percent for the quarter was primarily due to a higher percentage of salesfavorable product mix associated with higher net sales in the integration of optical components within our product line, which typically haveCompany’s Community Broadband market, as well as improved manufacturing efficiencies realized with higher margins.sales volumes, offset by higher freight and transportation costs.

Selling, general and administrative expenses increased $446,000,$2,267,000 or 7%30%, to $6,464,000$9,923,000 in the fiscal 2018 first quarter fiscal 2022 from $6,018,000$7,656,000 for the fiscal 20172021 first quarter.  The increase in expense in the first quarter of fiscal 20182022 consists primarily of an increaseincreases of $612,000$1,842,000 in legal expenses, mainlycompensation expense due to litigationadditional headcount and increased wages and performance compensation accruals driven by higher net sales, increased travel and entertainment expenses of a patent infringement lawsuit,$172,000 due to reduced COVID-19 travel restrictions, and an increase of $201,000 in compensation costs due primarily to additional sales and engineering personnel, somewhat offset by decreases of $98,000 inincreased stock compensation expense and $426,000 in performance compensation accruals when compared to the fiscal 2017 first quarter.of $128,000.

Income from operations for the quarter ended December 31, 20172021 was $644,000$13,049,000 compared to income from operations of $1,191,000$3,714,000 for the comparable quarter of fiscal 2017, a decrease2021, an increase of approximately 46%251%. This decreaseincrease is attributable to decreasedincreased gross profit driven by higher sales in the Company’s Community Broadband and increasedMSO markets, offset by higher selling, general and administrative expenses.

Interest income for the quarter ended December 31, 20172021 was $96,000$120,000 compared to $53,000$134,000 for the comparable quarter for fiscal 2017.2021. The increasedecrease is due mainly to higherlower interest rates earned on its investments in the first quarter of fiscal 2018. The Company invests its excess cash primarily2022. We expect interest income may decline due to the prevailing lower interest rates in FDIC-backed bank certificates of deposit and money market accounts.the current economic environment.

We recorded a benefit for income taxes of $203,000 and a provision for income taxes of $367,000$2,780,000 and $684,000 for the quartersthree months ended December 31, 20172021 and 2016,2020, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The decreaseincrease in tax expense of $570,000$2,096,000 from the first quarter for fiscal 20172021 is primarily due to the Tax Reform Act enacted on December 22, 2017 that resulted in a lower federal tax rate and a one-time benefit of $384,000 related to the favorable impact of a revaluation of our net deferred tax liability that decreased theincreased income tax provision.from operations. The decrease in the income tax expense rate to negative 27.4% for the first quarter of fiscal 20182022 increased to 21.1%, from 29.5% for17.8% recorded in the first quarter of fiscal 2017 is primarily2021, due to the Tax Reform Act as described.increased taxable income.

The Company’s net income for the quarterthree months ended December 31, 20172021 was $943,000,$10,389,000, or $0.07$0.76 per basic share or $0.75 per diluted share. The Company’s net income for the three months ended December 31, 2020 was $3,163,000, or $0.23 per basic and diluted share. The Company’s net income increase in basic and diluted earnings per share for the quarterthree months ended December 31, 20162021 as compared to December 31, 2020 was $877,000, or $0.06 per basic and diluted share.due to higher net income.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2017,2021, our principal source of liquidity was our cash, cash equivalents and short-term investments. Those sources total $25,838,000 at$23,055,000 as of December 31, 20172021 compared to $24,473,000 at$23,590,000 as of September 30, 2017.2021. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, U.S. Treasury securities and money market accounts. Substantially all of our funds are insured by the FDIC. Investments considered long-term were $20,357,000$35,192,000 as of December 31, 2017,2021, compared to $19,816,000$36,913,000 as of September 30, 2017.2021. We believe the combined balances of short-term cash and investments along with long-term investments provide a more accurate indication of our available liquidity. At the end of the first quarter of fiscal 2022, our cash, cash equivalents and short-term and long-term investments decreased to $58.2 million compared to $60.5 million as of the prior quarter end. We had no long-term debt obligations atas of December 31, 20172021 or September 30, 2017.2021.

We believe our existing cash equivalents and short-term investments, along with cash flow from operations, will be sufficient to meet our working capital and investment requirements for beyond the next 12 months.  The Company intends on utilizing its available cash and assets primarily for its continued organic growth including expanding production capacity and facilities as well as inventory growth to meet customer demand, and potential future strategic transactions, the Company’s share repurchase program, as well as execution ofto mitigate the share repurchase program adopted by our Board of Directors. The share repurchase program was originally adoptedpotential impacts on November 13, 2014 with $8,000,000 authorized for common stock repurchases. On April 25, 2017, our Board of Directors increased the authorizationCompany’s business due to $12,000,000 of common stock.COVID-19 or supply chain, logistics, and customer fulfillment risks.

Operating Activities

Net cash providedused by operating activities totaled $2,005,000$34,000 for the three months ended December 31, 2017.2021. This was primarily due to net income of $943,000,$10,389,000, non-cash expenses for depreciation and amortization of $436,000,$639,000, and stock basedstock-based compensation of $483,000, slightly offset by a non-cash benefit to deferred taxes of $384,000 related to the newly enacted Tax Reform Act,$440,000 in addition to changes in operating assets and liabilities providing and using cash. ChangesThe primary change in operating assets and liabilities providingusing cash includewas an increase in inventory of $16,049,000, partially offset by decreases in accounts receivable of $3,108,000 and inventoriesincrease in accounts payable and accrued expenses of $1,667,000$1,750,000. The Company increased stocking levels of inventory during the quarter ending December 31, 2021 to support the Company’s increased sales order backlog, as well as provide for safety stock for anticipated demand considering current long lead times for components and $313,000, respectively.transportation within the global supply chain. We expect to maintain higher than historic stocking levels through fiscal year 2022. The decrease in accounts receivable is due to timing of payments from customers. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Days sales outstanding, which measures how quickly receivables are collected, decreased six11 days to 3029 days from September 30, 20172021 to December 31, 2017.2021. The decreaseincrease in inventory represents an adjustmentaccounts payable and accrued expenses is due to the timing of payments to vendors in the quarter. Beginning in second quarter of fiscal 2022, our cash payments on facilities leases will increase with our new Tijuana Mexico manufacturing facility and warehouse in Brooklyn Park, MN leases commencing.

Net cash provided by operating activities totaled $2,716,000 for seasonal demand along withthe three months ended December 31, 2020. This was primarily due to net income of $3,163,000, non-cash expenses for depreciation and amortization of $568,000, and stock-based compensation of $289,000 in addition to changes in stocking levels.operating assets and liabilities providing cash. Changes in working capital itemsoperating assets and liabilities using cash include a decrease in accounts payable and accrued expenses of $2,860,000, offset by decreases in inventory of $721,000 and deferred rentaccounts receivable of $1,498,000 which primarily reflects$699,000. The decrease in accounts payable and accrued expenses is due to the timing of payments to vendors in the quarter and $2,373,000 of fiscal 20172020 accrued bonus compensation accruals paid in the first quarter of fiscal 2018.

Net cash used2021. The decrease in operating activities totaled $605,000 for the three months ended December 31, 2016. This was primarilyinventory is a result of higher utilization of inventory components due to increased net income of $877,000, non-cash expenses for depreciation and amortization of $389,000, and stock based compensation of $594,000 offset by changes in operating assets and liabilities using cash. Changes in operating assets and liabilities providing cash include decreases in accounts receivable and other assets of $548,000 and $228,000, respectively.sales. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Days sales outstanding, which measures how quickly receivables are collected, increased threedecreased two days to 3833 days from September 30, 20162020 to December 31, 2016. The decrease in other assets primarily represents a decrease in the current income tax receivable. Changes in working capital items using cash include an increase in inventory of $341,000 and a decrease in accounts payable and accrued expenses of $2,900,000. The increase in inventory represents an adjustment for seasonal demand along with changes in stocking levels while the decrease in accounts payable and accrued expenses primarily reflects fiscal 2016 accrued bonus compensation accruals paid in the first quarter of fiscal 2017.2020.

Investing Activities

We invest our excess cash in money market accounts, U.S. Treasury securities and bank CDs in denominations across numerous banks. We believe we obtain a competitive rate of return given the economic climate along with the security provided by the FDIC on these investments. During the three months ended December 31, 2017,2021, we used cash to purchase $2,466,000$248,000 of U.S. Treasury and FDIC-backed securities and received $2,477,000$1,980,000 on CDs that matured. Purchases of patentsproperty, plant and capital equipment, mainly related to information technology and manufacturing equipment and intangible assets, consumed $230,000$2,051,000 of cash.cash during the three months ended December 31, 2021.

During the three months ended December 31, 2016,2020, we used cash to purchase $7,440,000$3,968,000 of FDIC-backed securities and received $2,459,000$4,426,000 on CDs that matured. Purchases of patentsproperty, plant and capital equipment, mainly related to information technology and manufacturing equipment, consumed $529,000$379,000 of cash.

Financing Activitiescash during the three months ended December 31, 2020.

Financing Activities

For the three months ended December 31, 2017,2021, we received $148,000$249,000 from employees’ participation and purchase of stock through our ESPP, we used $274,000 related to share withholding for exercise and taxes associated with the issuance of common stock upon cashless exercise of stock options and used $9,000$156,000 to pay for taxes as a result of employees’ exercises of stock options and vesting of restricted shares using share withholding. Additionally, we used $11,000 toWe did not repurchase our common stock under our share repurchase program in the three months ended December 31, 2017. 2021.

For the three months ended December 31, 2020, we received $179,000 from employees’ participation and purchase of stock through our ESPP, we used $262,000 related to share withholding for taxes associated with the issuance of common stock upon cashless exercise of stock options and used $11,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding.

As of both December 31, 2017,2021 and December 31, 2020, we had the authority to purchase approximately $7,159,000$4,981,000 in additional shares under the repurchase program announced on November 13, 2014 that was subsequently increased on April 25, 2017.

For  Effective January 27, 2022, the three months ended December 31, 2016, we received $170,000Company reinstated its stock repurchase program that had been suspended due to COVID uncertainty in April 2020. In addition, the Company’s board of directors increased the share repurchase program by an additional $10 million to an aggregate of $22 million, from employees’ participation and purchase of stock through our ESPP and used $10,000 to pay for taxes as a result of employees’ exercises of stock options and vesting of restricted shares using share withholding.the previous $12 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting policies. The accounting policies considered by management to be the most critical to the presentation of the financial statements because they require the most difficult, subjective and complex judgments include revenue recognition, stock basedstock-based compensation, deferred tax assetincome taxes and valuation allowances, accruals for uncertain tax positions,of inventory, long-lived assets, finite lived intangible assets and impairment of goodwill and long-lived assets.goodwill.

These accounting policies are described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended September 30, 2017.2021. Management made no changes to the Company’s critical accounting policies during the quarter ended December 31, 2017.2021.

In applying its critical accounting policies, management reassesses its estimates each reporting period based on available information. Changes in these estimates did not have a significant impact on earnings for the quarter ended December 31, 2017.2021.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2017.2021. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes to the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, that occurred during the quarter ended December 31, 20172021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On January 31, 2017, CommScope Technologies LLC (“CommScope”) filedThere are no pending legal proceedings against or involving the Company for which the outcome is likely to have a Complaint against Clearfield, Inc. in the United States District Court for the Districtmaterial adverse effect upon its financial position or results of Minnesota. The Complaint asserts infringement of thirteen CommScope patents by certain Clearfield products, including our FieldSmart® PON Cabinets, WaveSmart® Ruggedized Splitters, Clearview® Blue and Clearview® Classic Cassettes, FieldShield® Deployment Reel System, SmartRoute® Panel, FieldShield® Multiport SmarTerminal and FieldShield® Hardened Connectors. The asserted CommScope patents are U.S. Patent Nos. 7,233,731; 8,811,791; 7,198,409; 7,809,233; 9,201,206; 7,809,234; 7,816,602; 8,263,861; 8,705,929; 8,938,147; RE42,258; 7,397,997 and 9,122,021. CommScope’s Complaint seeks an injunction against further infringement and an award of unspecified compensatory and enhanced damages, interest, costs and attorneys’ fees.operations.

On April 24, 2017, we filed an Answer to CommScope’s Complaint denying all claims of infringement and asserting affirmative defenses on the grounds of non-infringement, invalidity and unenforceability, among others. Trial is scheduled for on or about August 1, 2019.

In the quarter ended December 31, 2017, we instituted three separate proceedings with the U.S. Patent and Trademark Office for inter partes reviews to challenge the validity of three of the CommScope patents. CommScope has filed preliminary responses to two of these proceedings. The parties are currently engaged in discovery.

We intend to vigorously defend this lawsuit and believe that none of our products violate any valid intellectual property of CommScope. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could negatively affect our business, results of operations and financial condition. In addition, this litigation may negatively affect our business, results of operations and financial condition due to the likely substantial cost of defense and potential diversion of the attention of company management away from operational activities.

In addition to the matter described above, we are exposed to a number of asserted and unasserted legal claims encountered in the ordinary course of business. Although the outcome of any such legal action cannot be predicted, we do not believe that any of these other claims or potential claims will be material to our business, results of operations or financial condition.

ITEM 1A. RISK FACTORS

The most significant risk factors applicable to the Company are described in Part I,II, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2017.2021 There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In the three months ending December 31, 2017, theThe Company repurchased shares of stock associated with exercise and satisfaction of employee tax withholding requirements on vesting or exercise of equity awards under the Company’s 2007 Stock Compensation Plan for the three months ended December 31, 2021 as follows:

In                   (1) Amount remaining from the three months ending December 31, 2017,aggregate $12,000,000 repurchase authorizations approved by the Company repurchased a totalCompany’s Board of 671 sharesDirectors on April 25, 2017. The repurchase program was suspended in connection with payment of taxes upon vesting of restricted stock previously issuedApril 2020 due to employees.COVID related uncertainty.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.Not applicable.

ITEM 6. ExhibitsEXHIBITS

Exhibit 31.1 – Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act

Exhibit 31.2 – Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act

Exhibit 32.1 – Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CLEARFIELD, INC.

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