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Note A - Summary of Significant Accounting Policies | 12 Months Ended
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Sep. 30, 2018
Notes to Financial Statements |
Significant Accounting Policies [Text Block] | NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: 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 Recognition: 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. 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, 2018 and 2017 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 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 (“CD’s”) that are fully insured by the Federal Deposit Insurance Corporation (“FDIC)” with a term of not more than five years. CD’s with original maturities of more than three 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, 2018 |  | September 30, 2017
Less than one year |  | $ | 8,930,225 |  |  | $ | 5,937,150 |
1-5 years |  |  | 17,974,000 |  |  |  | 19,816,000 |
Total |  | $ | 26,904,225 |  |  | $ | 25,753,150 |
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 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, 2018, 2017, and 2016 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, 2018 |  | $ | 79,085 |  |  | $ | - |  |  | $ | - |  |  | $ | 79,085 |
September 30, 2017 |  |  | 93,473 |  |  |  | - |  |  |  | (14,388 | ) |  |  | 79,085 |
September 30, 2016 |  |  | 79,473 |  |  |  | 25,000 |  |  |  | (11,000 | ) |  |  | 93,473 |
Fair Value of Financial Instruments: 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: 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, 2018 |  |  |  | September 30, 2017 |
Raw materials |  | $ | 6,013,166 |  |  | $ | 5,991,863 |
Work-in-process |  |  | 560,988 |  |  |  | 724,248 |
Finished goods |  |  | 3,475,981 |  |  |  | 1,737,456 |
Inventories, net |  | $ | 10,050,135 |  |  | $ | 8,453,567 |
During the year ended September 30, 2018, as part of the acquisition described in Note F, the Company acquired inventory with a fair value of $2,781,000. Inventory is stated at the lower of cost or net realizable value. 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 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. Also during the year ended September 30, 2018, the Company adopted Accounting Standards Update (“ASU”) 2015 - 11, Inventory (Topic 330 ) Related to Simplifying the Measurement of Inventory which applies to all inventory except inventory that is measured using last-in, first -out or the retail inventory method. This adoption had no effect on the financial statements and was applied prospectively. Therefore, prior periods were not retrospectively adjusted. 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 | - | 7
Leasehold improvements |  |  | 7 | - | 10 or life of lease
Vehicles |  |  |  | 3 |
Property, plant and equipment consist of the following:
|  |  | September 30, 2018 |  |  |  | September 30, 2017 |
Manufacturing equipment |  | $ | 5,202,532 |  |  | $ | 5,370,962 |
Office equipment |  |  | 3,809,614 |  |  |  | 3,600,006 |
Leasehold improvements |  |  | 2,417,786 |  |  |  | 2,404,331 |
Vehicles |  |  | 226,221 |  |  |  | 193,702 |
Property, plant and equipment, gross |  |  | 11,656,153 |  |  |  | 11,569,001 |
Less accumulated depreciation |  |  | 6,911,569 |  |  |  | 6,134,829 |
Property, plant and equipment, net |  | $ | 4,744,584 |  |  | $ | 5,434,172 |
Depreciation expense for the years ended September 30, 2018, 2017, and 2016 were $1,748,945, $1,614,272, and $1,445,910, respectively. Goodwill and Intangible Assets: The Company operates as one reporting unit 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, 2018, 2017, and 2016 resulted in excess fair value over carrying value and therefore, no adjustments were made to goodwill. During the year ended September 30, 2018, 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, 2018, 2017, or 2016, 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, 2018, the Company has 15 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 as described in Note F in greater detail below. Finite life intangible assets at September 30, 2018 and 2017 are as follows:
|  | September 30, 2018
|  |  | Years |  |  |  | Gross Carrying Amount |  |  |  | Accumulated Amortization |  |  |  | Net Book Value Amount |
Customer relationships |  |  | 15 |  |  | $ | 3,742,000 |  |  | $ | 155,917 |  |  | $ | 3,586,083 |
Certifications |  |  | 8 |  |  |  | 1,068,000 |  |  |  | 83,437 |  |  |  | 984,563 |
Trademarks |  |  | 8 |  |  |  | 563,000 |  |  |  | 43,984 |  |  |  | 519,016 |
Patents |  |  | 20 |  |  |  | 393,002 |  |  |  | 24,981 |  |  |  | 368,021 |
Other |  |  | 5 |  |  |  | 31,091 |  |  |  | 6,219 |  |  |  | 24,872 |
Totals |  |  |  |  |  | $ | 5,797,093 |  |  | $ | 314,538 |  |  | $ | 5,482,555 |
|  | September 30, 2017
|  |  | Years |  |  |  | Gross Carrying Amount |  |  |  | Accumulated Amortization |  |  |  | Net Book Value Amount |
Patents |  |  | 20 |  |  | $ | 269,433 |  |  | $ | 15,737 |  |  | $ | 253,696 |
Other |  |  | 5 |  |  |  | 31,091 |  |  |  | - |  |  |  | 31,091 |
Totals |  |  |  |  |  | $ | 300,524 |  |  | $ | 15,737 |  |  | $ | 284,787 |
Amortization expense related to these assets for the years ended September 30, 2018, 2017, and 2016 were $298,801, $7,822, and $3,292, respectively. Estimated future annual amortization expense associated with finite lived intangible assets is expected to be as follows:
| Year ending September 30 |  |  |  | Amount |
| 2019 |  |  | $ | 471,215 |
| 2020 |  |  |  | 471,215 |
| 2021 |  |  |  | 471,215 |
| 2022 |  |  |  | 471,215 |
| 2023 |  |  |  | 464,997 |
| Thereafter |  |  |  | 3,132,698 |
| Total future amortization expense |  |  | $ | 5,482,555 |
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. During the year ended September 30, 2017, the Company incurred an impairment charge on long-lived assets of $643,604 which was charged to selling, general, and administrative expenses. This impairment was related to the cancellation of an enterprise resource planning software implementation. No impairment of long-lived assets occurred during the years ended September 30, 2018 or 2016, 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 both September 30, 2018 and September 30, 2017, 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 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 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. Research and Development Costs : Research and development costs amounted to $787,364, $865,568, and $838,122, for the years ended September 30, 2018, 2017, and 2016, respectively, and are charged to expense when incurred. Advertising Costs : Advertising costs amounted to $365,859, $378,217, and $350,399, for the years ended September 30, 2018, 2017, and 2016, 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, 2018, 2017, and 2016 were as follows:
Year ended September 30, |  | 2018 |  | 2017 |  | 2016
Net income |  | $ | 4,274,547 |  |  | $ | 3,847,839 |  |  | $ | 8,013,062 |
Weighted average common shares |  |  | 13,429,232 |  |  |  | 13,532,375 |  |  |  | 13,372,579 |
Dilutive potential common shares |  |  | 23,628 |  |  |  | 128,431 |  |  |  | 290,770 |
Weighted average dilutive common shares outstanding |  |  | 13,452,860 |  |  |  | 13,660,806 |  |  |  | 13,663,349 |
Earnings per share: |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.32 |  |  | $ | 0.28 |  |  | $ | 0.60 |
Diluted |  | $ | 0.32 |  |  | $ | 0.28 |  |  | $ | 0.59 |
There were 108,000 shares for the year ended September 30, 2018 that were excluded from the above calculation as they were considered antidilutive in nature. No shares were considered antidilutive for the years ended September 30, 2017 and 2016. Use of Estimates: 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 may differ materially from these estimates. Reclassifications: Certain comparative figures have been reclassified to conform to the current period's presentation. These reclassifications did not affect the prior periods' net income, shareholders’ equity, or cash flows. Recently Issued Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board (the “FASB”) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, Revenue from Contracts with Customers . The new section will replace Section 605, “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 December 15, 2017, and interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company has identified major revenue streams, performed an analysis of a sample of contracts to evaluate the impact of the standard, and begun drafting its accounting policies and evaluating the new disclosure requirements. The updated guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The updated guidance requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required for customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The Company anticipates there will be expanded financial statement disclosures in order to comply with the updated guidance and has decided that it would use the cumulative catch-up transition method should the adoption of this standard require any restatement. While the Company has not completed the entire assessment as of September 30, 2018, based on the work done to date, the Company believes the adoption of ASU 2015 - 14 will not have a material impact on our results of operations, cash flows, or financial position. In February 2016, the FASB issued ASU 2016 - 02, Leases , which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted. The guidance will be applied on a modified retrospective basis with the earliest period presented. Based on the effective date, this guidance will apply beginning October 1, 2019. While the Company is still in the process of evaluating the effect of adoption on our financial statements, it is expected the adoption will lead to a material increase in the assets and liabilities recorded on the balance sheets. In January 2017, the FASB issued ASU 2017 - 04 which offers amended guidance to simplify the accounting for goodwill impairment by removing Step 2 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 January 1, 2020, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company does not believe the adoption of this ASU will have a material impact on our financial statements.

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