Background
Clearfield, Inc. (referred to herein as “Clearfield,” “we,”
“us,” “our,” and the “Company”) designs, manufactures and distributes fiber protection, fiber
management and fiber delivery solutions to enable rapid and cost-effective fiber-fed deployment throughout the broadband service
provider space across North America. Our “fiber to anywhere” platform serves the unique requirements of leading incumbent
local exchange carriers (Traditional Carriers), wireless operators, MSO/cable TV companies, and competitive local exchange carriers
(Alternative Carriers), while also catering to the broadband needs of the utility/municipality, enterprise, and data center markets.
We were incorporated under the laws of Minnesota and founded in
1979. Our corporate headquarters are located at 7050 Winnetka Avenue North, Suite 100, Brooklyn Park, Minnesota, 55428, and our
corporate website is www.seeclearfield.com. The information available on our website is not part of this Report. Our annual report
on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge at our website as soon as reasonably practicable
after we file such material with, or furnish it to, the Securities and Exchange Commission. Our filings with the Securities and
Exchange Commission are also available at www.sec.gov.
Description of Business
Clearfield is focused on providing fiber management, fiber protection,
and fiber delivery products that accelerate the turn-up of Gigabit speed bandwidth to residential homes, businesses, and network
infrastructure in the wireline and wireless access network. We offer a broad portfolio of fiber products that allow service providers
to build fiber networks faster, meet service delivery demands, and align build costs with take rates.
Our products allow our customers to connect twice as many homes in their Fiber to the Home (FTTH) builds by using fewer resources in less time. Our products speed up the time to revenue for our service provider customers in Multiple Dwelling Units (MDUs) and Multiple Tenant Units (MTUs) by reducing the amount of labor and materials needed to provide Gigabit service. Our products help make business services more profitable through faster building access, easier reconfiguration and quicker services turn-up. Finally, Clearfield is removing barriers to wireless 4G/5G small cell, Cloud Radio Access Network (C-RAN), and distributed antenna system (DAS) deployments through better fiber management, test access, and fiber protection.
Substantially all of the final build and
assembly is completed at Clearfield’s plants in Brooklyn Park, Minnesota and 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.
On February 20, 2018, the Company completed
the acquisition of a portfolio of Telcordia certified outdoor active cabinet products from Calix, Inc. (“Calix”) upon
the terms and conditions contained in an Asset Purchase Agreement dated February 20, 2018. The introduction of the Clearfield active
cabinet line expanded the Company’s product portfolio by adding powered cabinets, which provides customers a single point
of contact for cabinet solutions—both passive and powered. The acquisition enables Clearfield to expand its Fiber-to-Anywhere
expertise to include active powered electronic cabinet platforms while leveraging its supply chain. The acquisition also enables
Clearfield to capitalize on and expand its reach to a broader customer base, including service providers in the Tier 1 and Tier
2 markets.
Products
Product development
for Clearfield’s product line program has mainly been conducted internally. We believe that the communication industry environment
is constantly evolving, and our success depends on our ability to anticipate and respond to these changes. Our focus is to analyze
the environment and technology and work to develop products that simplify our customers’ business by developing innovative
high-quality products utilizing modular design wherever possible. Research and development are reflected in Selling, General,
& Administrative expenses.
FieldSmart® is a
series of panels, cabinets, wall boxes and other enclosures that house the Clearview components to provide a consistent design
from the inside plant of the telco’s “central office” or cable television’s “head-end,” all
the way through the outside plant to the access network to within the home or business. The central building block of FieldSmart
is the patented technology surrounding the Clearview® Cassette.
WaveSmart® optical
components are integrated for signal coupling, splitting, termination, multiplexing, demultiplexing and attenuation for a seamless
integration within our fiber management platform. The products are built and tested for harsh environments to meet the strictest
industry standards ensuring customers trouble-free performance in extreme outside plant conditions.
The Outdoor Cabinet (“ODC”) and Fiber Active
Cabinet (“FAC”) product lines feature either fully integrated, fully engineered cabinets equipped with specific
active electronics configurations or universal cabinets ready for mounting other electronic equipment. Both product lines feature
Clearfield’s fiber management solutions housing the Clearview Cassette. The FieldSmart® FAC product line of outdoor active
cabinets feature multiple sizes for universal configurations of electronic equipment.
StreetSmart is a portfolio of fiber management product engineered from street-proven
experience. The StreetSmart portfolio enables easy access to fibers while maintaining fiber management and fiber routing design
principles.
FieldShield®
is a patented fiber pathway and protection method aimed at reducing the cost of broadband deployment. FieldShield starts
with a ruggedized microduct designed to support all aerial, direct bury, and inside plant “last mile” needs.
FieldShield Microduct is strong enough to be placed using traditional methods of boring and plowing, leveraging existing conduit
placement equipment, as well as newer, less disruptive technologies such as micro trenching or saw cutting.
The Company’s
YOURx® Platform uses a modular, building block approach with tool-less system design focusing on the
fiber drop to the customer. The YOURx platform consists of hardened terminals, test access points, and multiple drop cable options
designed for the most challenging portion of the access network across all fiber drop cable media.
CraftSmart®
is a full line of optical protection field enclosures, extending Clearfield presence
in the fiber industry. The CraftSmart Fiber Protection Pedestals (FPP) and CraftSmart Fiber Protection Vaults (FPV) are integrated
solutions, optimized to house FieldSmart products at the last mile access point of the network in above-grade or below-grade installations.
Clearfield manufactures high quality Fiber
and Copper assemblies with an industry-standard or customer-specified configuration. In addition, Clearfield’s
engineering services team works alongside the engineering design departments of our original equipment manufacturer (OEM) customers
to design and manufacture custom solutions for both in-the-box as well as network connectivity assemblies specific to that customer’s
product line.
Markets and Customers
Clearfield’s products are sold across broadband service providers, which
we categorize as National Carrier (wireless/wireless national telco carriers (Tier 1)), Community Broadband (Tier 2 and 3 telco
carriers, utilities, municipalities, and alternative carriers), Multiple Service Operators (cable television), International (primarily
Central/Latin America and Canada), and Legacy Build-to-Print copper and fiber assemblies (primarily contract manufacturing). The
Company’s products are sold direct to customers through the Company’s sales force as well as through authorized Distributors.
In addition, the Company uses manufacturing sales representatives and sales agents for customer and geography specific needs.
FTTP
Fiber to the Premise (also called Fiber
to the Home) is a means of delivering the highest possible level of bandwidth directly to the user. The Company’s sales and
marketing efforts have principally been focused on the U.S., with investments in Canada and Central/Latin America.
FTTB
Fiber to the Business is principally for Multiple Service Operators
(cable television) and wireless/wireless national telco carriers (Tier 1) to penetrate the business marketplace.
FTT-Cell site
Fiber to the Cell site is the trend in which wireless service providers
enhance their coverage for bandwidth. Currently, the majority of these cell sites are served by fiber.
DAS
A distributed-antenna system, or DAS,
is a network of spatially separated antenna nodes connected to a common source via a transport medium that provides wireless service
within a geographic area or structure.
C-RAN
C-RAN uses front-haul fiber to connect
the Remote Radio Head (RRH) to a Baseband Unit (BBU) located in a datacenter (i.e., the cloud). C-RAN is an evolution of RAN cellular
architecture that traditionally used fiber to backhaul signals from the BBU at a tower back to the mobile core network.
Build to Print
In addition to a proprietary product line
designed for the broadband service provider marketplace, Clearfield provides contract manufacturing services for original equipment
manufacturers requiring copper and fiber cable assemblies built to their specification.
Competition
Competitors to the FieldSmart product lines include, but are not limited
to, products offered by Corning Cabling Systems, Inc., OFS (Furukawa Electric North America, Inc.), AFL Telecommunications (a subsidiary
of Fujikura Ltd.), Fujikura Ltd., Nokia, and CommScope, Inc. Competitors
to the CraftSmart product line include products offered by Emerson Network Power, a subsidiary of Vertiv Co., and Charles Industries,
Ltd., a subsidiary of Amphenol. Competitors to FieldShield include products offered by PPC Broadband, Inc. Nearly all of these
firms are substantially larger than Clearfield and as a result may be able to procure necessary components and labor at much lower
prices. Clearfield believes that it has a competitive advantage with customers who can leverage the cost savings the Clearview
Cassette can provide and those who require quick-turn, high-performance customized products, and that it is at a competitive disadvantage
with customers who principally seek large volume commodity products.
Sources of Materials and Contract Manufacturing Services
Numerous purchased materials, components, and labor are used in the manufacturing
of the Company’s products. Most of these are readily available from multiple suppliers. However, some components and third
party contract manufacturing services are purchased from a single or a limited number of suppliers. The loss of access to some
components and third party contract manufacturing services could have an adverse effect on our ability to deliver products on a
timely basis and on our financial performance.
Major Customers and Financial Information
about Geographic Areas
For the fiscal years ended September 30,
2020 and 2019, the Company had two customers that comprised 30% and 29% of 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 we do not have any agreements that obligate these major customers to purchase products in the future from us.
As of September 30, 2020, two customers
accounted for 25% of accounts receivable. Both of these customers were distributors. As of September 30, 2019, two customers accounted
for 28% of accounts receivable. Both of these customers were distributors.
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 countries in the Caribbean, Canada, Central and South America.
Patents and Trademarks
As of September 30, 2020, we had 22 patents granted and multiple
patent applications pending both inside and outside the United States. We have also developed and are using several trademarks
and logos to market and promote our products, including Clearview®, FieldSmart®, FieldShield®,
CraftSmart®, and YOURx®.
Backlog
Backlog reflects purchase order commitments
for our products received from customers that have yet to be fulfilled. Backlog orders are generally shipped within three months.
The Company had a backlog of $10,663,000, and $4,210,000 as of September 30, 2020 and 2019, respectively.
Seasonality
We are affected by the seasonal trends
in the industries we serve. We typically experience sequentially lower sales in our first and second fiscal year quarters, primarily
due to customer budget cycles, deployment schedules of outdoor products, some customer geographical concentrations as well as
standard vacation and holiday calendars. Sales usually reach a seasonal peak in our third and fourth fiscal quarters.
Human Capital Resources
As of September 30, 2020, the Company had approximately 230 U.S.
based full-time employees, which include approximately 130 office personnel and approximately 100 manufacturing personnel. The
substantial majority of these employees work out of our Brooklyn Park, Minnesota headquarters. None of our employees are covered
by any collective bargaining agreement. The Company’s office personnel are comprised of sales, marketing, engineering, and
administrative personnel. The manufacturing personnel include both individuals directly involved in the manufacturing of our products,
as well as warehouse and operations supervisory personnel. Certain positions within our organization require industry specific
technical knowledge. We have been successful in attracting and retaining qualified technical personnel for these positions and
the Company has training programs that allow manufacturing and other technical employees to develop the necessary skillset for
their roles. Our manufacturing personnel currently work in two shifts as needed at our Brooklyn Park facility. We also employ seasonal,
part-time employees and independent contractors. The Company contracts for approximately 230 personnel in its Mexico facilities
through a Maquiladora agreement and these manufacturing personnel are also currently working in two shifts as needed. All manufacturing
employees and the Company’s production operations are monitored with metrics and goals based on quality, productivity, and
ability to meet shipping promise dates. As a measure of quality, we focus on First Pass Yield (“FPY”), which is calculated
as the percentage of product that meets all performance criteria upon first completion from our manufacturing floor and requires
no rework. The Company target for FPY ranges from 92-99%, depending on key manufacturing steps and the product line being produced.
We also measure our On-Time Delivery (“OTD”) which is determined by the Company’s ability to ship product on
the date necessary, accounting for standard shipping times, in order to meet the agreed upon delivery date with our customers.
The Company’s OTD target is a minimum of 95%. This metric is important as the Company has taken a strategic approach to be
able to offer low industry lead times for our customers.
Developments Regarding, and Actions
Taken in Response to, COVID-19
Under U.S. federal and state guidance in
response to the COVID-19 pandemic, Clearfield’s operations are classified as part of a 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 remote work. In accordance with the CDC and 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 monitoring the operations and staffing levels at its Brooklyn Park facility
and its two manufacturing facilities in Tijuana, Mexico, the second of which was added in February 2020.
Due to the threats 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 order
backlog going forward. However, in the event of serious border restrictions or border delays or 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.
Although COVID-19’s impact began
to deepen in March 2020 here in the United States, we did not experience any material customer ordering delays or negative changes
in ordering patterns. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted and,
among other things, provided specific funding for broadband connections, distance learning, telehealth, and telework. The CARES
Act requires all construction funded under that program to be complete by December 31, 2020. Due to the significant increase in
demand for broadband experienced by our customers and target customers, the CARES Act provisions and other government programs
helping fund deployments, some Clearfield customers accelerated their purchasing decisions and deployments in response to COVID-19.
This was particularly true among our core community broadband customers. On the other hand, COVID has impacted the deployments
plans for certain 5G deployments both in the near and mid-term for our Tier 1 national carrier customers. In the second half of
our fiscal year, we saw a temporary pause in new deployments by the carriers because of these restrictions. However, deployment
of optical components, specifically related to optimizing existing fiber assets to meet exploding bandwidth requirements, increased.
We expect these trends to continue into our fiscal 2021.
The Company's actual results could differ
materially from those anticipated in the forward-looking statements included in this discussion of the impact of COVID-19 as a
result of certain factors, including, but not limited to, those discussed in “Risk Factors” included in Part I, Item
1A. Risk Factors of this Form 10-K.
Risks Relating to Our Operations
The COVID-19 pandemic has significantly
impacted worldwide economic conditions and could have a material adverse effect on our business, financial condition and operating
results.
As a result of the COVID-19 pandemic, governmental
authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the virus,
such as travel bans and restrictions, limits on gatherings, quarantines, shelter-in-place orders, and business shutdowns. We have
manufacturing operations in the U.S. and Mexico that have been affected by the outbreak and we have taken measures to try to contain
it. Measures providing for business shutdowns generally exclude certain essential services, and those essential services commonly
include critical infrastructure and the businesses that support that critical infrastructure. While both of our facilities currently
remain operational, these measures have impacted and may further impact our workforce and operations, as well as those of our customers
and suppliers. The constraints and limits imposed on our operations may slow or diminish our product development activities and
qualification activities with our customers. Although many governmental measures have had specific expiration dates, some of those
measures have already been extended more than once; as a result, there is considerable uncertainty regarding the duration of such
measures and potential future measures. Restrictions on our manufacturing, support operations or workforce, or similar limitations
for our suppliers, could limit our ability to meet customer demand and could have a material adverse effect on our financial condition
and results of operations. Furthermore, restrictions or disruptions of transportation, such as reduced availability of air transport,
port closures and increased border controls or closures, have started to result in higher costs and delays, which could harm our
profitability, make our products less competitive, or cause our customers to seek alternative suppliers.
In response to these developments, we have
modified our business practices, including restricting employee travel, modifying employee work locations, implementing social
distancing and enhanced sanitary measures in our facilities, and cancelling attendance at industry events and conferences. Many
of our customers, suppliers, and service providers have made similar modifications. The resources available to employees working
remotely may not enable them to maintain the same level of productivity and efficiency, particularly our sales employees whose
in-person access to our customers and customer prospects has been significantly limited. While we have experienced only limited
absenteeism from those employees who are required to be on-site to perform their jobs, absenteeism may increase in the future and
may harm our productivity. Further, our increased reliance on remote access to our information systems increases our exposure to
potential cybersecurity breaches. We may take further actions as government authorities require or recommend or as we determine
to be in the best interests of our employees, customers, partners and suppliers. There is no certainty that such measures will
be sufficient to mitigate the risks posed by COVID-19, in which case our ability to continue operations may be significantly negatively
impacted, and we may be required to temporarily suspend our operations in the U.S. or in Mexico or in both locations. The resumption
of normal business operations after such interruptions may be delayed or constrained by lingering effects of COVID-19 on our suppliers,
third-party service providers, and/or customers.
In addition, government funding programs
such as the CARES Act, which was enacted in March 2020 in response to the COVID-19 pandemic, provides grant money for customers
that deploy products by certain calendar dates. The Company has increased its inventory to respond to increased demand related
to this program. If the program ends or is not extended, we could see a decrease in orders which may result in decreasing customer
purchasing patterns. If the programs are extended by governments, we may not be able to predict increases and decreased in customer
purchasing patterns.
The degree to which COVID-19 impacts our
results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to,
the duration and spread of the outbreak, its severity, the actions to contain the virus and address its impact, and how quickly
and to what extent normal economic and operating conditions can resume.
We rely on single-source suppliers, which could cause delays, increases in costs or prevent us from completing customer orders, all of which could materially harm our business.
We assemble our products using materials and components supplied by various subcontractors and suppliers. We purchase critical components for our products, including injected molded parts, various cabling, optical components, 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, lost sales and quality control problems.
Further, the costs to obtain certain raw materials and supplies, such as fiber and copper cabling, are subject to price fluctuations, which may be substantial, because of global market demands. Many companies utilize the same raw materials and supplies in the production of their products as we use in our products. Companies with more resources than us may have a competitive advantage in obtaining raw materials and supplies due to greater purchasing power. Some raw materials or supplies may be subject to regulatory actions, which may affect available supplies. Further, tariffs may be imposed by the U.S. on imports from other countries that are the single- or limited-source of our materials and components. Tariffs increase the cost of the materials and components that go into making our products, but we are generally unable to pass long these increased costs to our customers. Accordingly, these increased costs adversely impact the gross margin that we earn on our products. Furthermore, due to general economic conditions in the United States and globally, our suppliers may experience financial difficulties, which could result in increased delays, additional costs, or loss of a supplier.
The termination or interruption of any of these relationships, or the failure of these manufacturers or suppliers to supply components or raw materials to us on a timely basis or in sufficient quantities, likely would cause us to be unable to meet orders for our products and harm our reputation and our business. Identifying and qualifying alternative suppliers would take time, involve significant additional costs and may delay the production of our products. If we fail to forecast our manufacturing requirements accurately or fail to properly manage our inventory with our contract manufacturers, we could incur additional costs, experience manufacturing delays and lose sales. Further, if we obtain a new supplier or assemble our product using an alternative source of supply, we may need to conduct additional testing of our products to ensure they meet our quality and performance standards. Any delays in delivery of our product to distributors or customers could be extended, and our costs associated with the change in product manufacturing could increase.
The failure of our third-party manufacturers to manufacture the products for us or the failure of our suppliers of components and raw materials to supply us these items consistent with our requirements as to quality, quantity and timeliness could materially harm our business by causing delays, lost sales, increases in costs and lower gross profit margins.
An increasing amount of products
manufactured by the Company are produced outside the United States, including in our Mexico facilities. The Company’s manufacturing
facilities in Mexico are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows
the Company to import certain items from the United States into Mexico duty-free, provided that such items, after processing, are
exported from Mexico within a stipulated time frame. Maquiladora status, which is renewed periodically, is subject to various restrictions
and requirements, including compliance with the terms of the Maquiladora program and other local regulations. Failure to comply
with these regulations or other disruptions within the program could adversely affect the Company’s financial position, results
of operations, and cash flows.
Due to COVID-19, the Company
has increased its safety stock of inventory at multiple facilities in order to be able to manufacture it products to increased
levels in the case there is a shut down or short term disruptions at any of its production facilities. As a result, the Company
has increased inventory of high run rate components to meet increased orders for fiber optic products. Should ordering patterns
decline in the short term for any reason, the Company may have excess inventory.
A significant percentage
of our sales in the last three fiscal years have been made to a small number of customers, and the loss of these major customers
could adversely affect us.
Our customer base includes direct customers, original equipment manufacturers (OEMs) and distributors. For fiscal years 2020 and 2019, the Company had two customers that comprised 30% and 29% of net sales, respectively. Both of these customers are distributors.
These customers, like our other customers, purchase our products from time to time through purchase orders. We do not have any agreements that obligate our customers to purchase products in the future from us. Our agreements with our distributor customers do not prohibit them from purchasing or offering products or services that compete with ours.
We believe that the loss of our major distributor customers would
likely result in purchases being re-directed through other sales channels, for example our other distributors, independent sales
representatives, or through direct sales by the Company to customers. However, there can be no assurance that the loss of a distributor
customer would not have an adverse effect on our sales or gross margins in this event.
The loss of any one or more of our key customers, the substantial reduction, delay or cancellation in orders from any such customer or our inability to collect the accounts receivable from these customers, could have a material adverse effect on our business, financial position and results of operations.
Further consolidation among our customers may result in the loss of some customers and may reduce sales during the pendency of business combinations and related integration activities.
We believe consolidation among our customers in the future will continue in order for them to increase market share and achieve greater economies of scale. In connection with this merger and acquisition activity, our customers may postpone or cancel orders for our product based on revised plans for technology or network expansion pending consolidation activity. Customers integrating large-scale acquisitions may also reduce their purchases of equipment during the integration period, or postpone or cancel orders.
The impact of significant mergers among our customers on our business is likely to be unclear until sometime after such transactions are completed, which may take a year or more. After a consolidation occurs, a customer may choose to reduce the number of vendors from which it purchases equipment and may choose one of our competitors as its preferred vendor. There can be no assurance that we will continue to supply equipment to the surviving communications service provider after a business combination is completed.
We may be subject to risks associated with acquisitions, and the risks could adversely affect future operating results.
We monitor our product portfolio and business and customer trends. In response, we have made and may continue to make acquisitions. The success of our acquisitions will depend on our ability to integrate the new products or operations with our existing products or operations. We cannot ensure that the expected benefits of any acquisition will be realized or will be realized within the time frames we expect. Costs could be incurred on pursuits or proposed acquisitions that have not yet or may not close which could impact our operating results, financial condition, or cash flows. Additionally, after the acquisition, unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not recoverable as an adjustment to the purchase price. The price we pay for a business or product line may exceed the value we realize, and we cannot provide assurance that we will obtain the expected revenues, anticipated synergies and strategic benefits of any acquisition within the time we expect or at all. Acquisitions may result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could negatively impact our financial results.
Product defects or the failure of our products to meet specifications could cause us to lose customers and sales or to incur unexpected expenses.
If our products do not meet our customers’ performance requirements, our customer relationships may suffer. Also, our products may contain defects or fail to meet product specifications. Any failure or poor performance of our products could result in:
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lack of or delayed market acceptance of our products;
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delayed product shipments;
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unexpected expenses and diversion of resources to replace defective products or identify and correct the source of errors;
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damage to our reputation and our customer relationships;
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delayed recognition of sales or reduced sales;
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increased product warranty claims; and
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product liability claims or other claims for damages that may be caused by any product defects or performance failures.
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Our products are often critical to the performance of telecommunications systems. We offer customers limited warranty provisions. If the limitations on the product warranties are unenforceable in a particular jurisdiction or if we are exposed to product liability claims that are not covered by insurance, a claim could harm our business.
We are dependent on key personnel.
Our failure to attract and retain skilled personnel could hinder the management of our business, our research and development, our sales and marketing efforts and our manufacturing capabilities. Our future success depends to a significant degree upon the continued services of key senior management personnel, including Cheryl Beranek, our Chief Executive Officer and John Hill, our Chief Operating Officer. We have employment agreements with Ms. Beranek and Mr. Hill that provide that if we terminate the employment of either executive without cause or if the executive terminates her or his employment for good reason, we would be required to make specified payments to them as described in their employment agreements. We have key person life insurance on Ms. Beranek and Mr. Hill. We also have employment agreements with other key management. Further, our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. Our inability to retain or attract qualified personnel could have a significant negative effect and thereby materially harm our business and financial condition.
Our business is dependent on interdependent management information
systems.
We rely on effective management information systems, including our enterprise resource planning (“ERP”) software, for critical business operations and to support strategic business decisions. We rely on our ERP system to support such important business operations as processing sales orders and invoicing, manufacturing, shipping, inventory control, purchasing and supply chain management, human resources, and financial reporting. Some of these systems are made up of multiple software and system providers. The interdependence of these solutions and systems is a risk, and the failure of any one system could have a material adverse effect on our overall information technology infrastructure. We also rely on management information systems to produce information for business decision-making and planning and to support e-commerce activities. Failure to maintain an adequate digital platform to support e-commerce activities could have a material adverse impact on our business through lost sales opportunities. If we are unable to maintain our management information systems, including our IT infrastructure, to support critical business operations and to produce information for business decision-making activities, we could experience a material adverse impact on our business or an inability to timely and accurately report our financial results.
Our IT systems may also be vulnerable to disruptions from human error, outdated applications, computer viruses, natural disasters, unauthorized access, cyber-attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruptions, cyber-attack or other security breach results in a loss or damage to our data, or inappropriate disclosure of confidential information, it could harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Risks Relating to Our Markets and Industry
To compete effectively, we must continually
improve existing products and introduce new products that achieve market acceptance.
The telecommunications equipment industry
is characterized by rapid technological changes, evolving industry standards, changing market conditions and frequent new product
and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry
standards can make our existing products, or products under development, obsolete or unmarketable. In order to remain competitive
and increase sales, we will need to anticipate and adapt to these rapidly changing technologies, enhance our existing products
and introduce new products to address the changing demands of our customers.
Many of our competitors have greater engineering
and product development resources than we have. Although we expect to continue to invest resources in product development activities,
our efforts to achieve and maintain profitability will require us to be selective and focused with our research and development
expenditures. In addition, sales to certain broadband service providers may require third-party independent laboratory testing
in order to obtain industry certifications to be able to sell to those customers. Further, our existing and development-stage products
may become obsolete if our competitors introduce newer or more appealing technologies. If these technologies are patented or proprietary
to our competitors, we may not be able to access these technologies.
If we fail to anticipate or respond in
a cost-effective and timely manner to technological developments, changes in industry standards or customer requirements, or if
we experience any significant delays in product development or introduction, our business, operating results and financial condition
could be affected adversely.
Changes in government funding programs may cause our customers and prospective
customers to delay, reduce, or accelerate purchases, leading to unpredictable and irregular purchase cycles.
The telecommunications and cable television industries are subject to significant and changing U.S. federal and state regulation, some of which subsidizes or encourages spending on initiatives that utilize our products.
For example, programs like the Connect America Fund (CAF), which provides
a capital expenditure subsidy for the build-out of the country’s broadband network, and the Rural Digital Opportunity Fund
(RDOF), which will provide a capital expenditure subsidy for the support high-speed broadband networks in rural America, may subsidize
or encourage spending by our customers or prospective customers on capital spending projects that utilize our products. Customers
may seek to time or otherwise adjust their technology or network expansion projects to the availability of subsidies under these
or other programs, which will affect the timing and size of orders for our products. In addition, other universal service and inter-carrier
compensation reforms scheduled to begin in the coming years will eliminate subsidies that carriers have traditionally relied upon
to support service in high-cost, rural areas. Further, changes in government programs in our industry or uncertainty regarding
future changes could adversely impact our customers’ or prospective customers’ decisions regarding timing and amounts
of capital spending, which could decrease demand for our products, delay orders or result in pricing pressure from these customers.
In addition, government funding programs such as the CARES Act, which was enacted in March 2020 in response to the COVID-19 pandemic,
provides grants to our customers and prospective customers for deploying improved broadband connections to unserved and underserved
areas of the United States provided they are deployed by specific calendar deadlines, which may cause customers and prospective
customers to accelerate their purchases for their long term network deployment plans into a shorter timeframe.
Intense competition in our industry
may result in price reductions, lower gross profits and loss of market share.
Competition in the telecommunications equipment
and services industry is intense. Our competitors may have or could develop or acquire marketing, financial, development and personnel
resources that exceed ours. Our ability to compete successfully will depend on whether we can continue to advance the technology
of our products and develop new products, the acceptance of our products among our customers and prospective customers, and our
ability to anticipate customer needs in product development, as well as the price, quality and reliability of our products, our
delivery and service capabilities and our control of operating expenses.
We cannot assure you that we will be able
to compete successfully against our current or future competitors. Competition from manufacturers of telecommunications equipment
such as ours may result in price reductions, lower gross profit margins, increased discounts to customers, and loss of market share
could require increased spending by us on research and development, sales and marketing, and customer support.
Our success depends upon adequate protection
of our patent and intellectual property rights.
Our future success depends in part upon
our proprietary technology. We attempt to protect our proprietary technology through patents, trademarks, copyrights and trade
secrets. However, these legal means afford us only limited protection and may not adequately protect our rights or remedies to
gain or keep any advantages we may have over our competitors. Accordingly, we cannot predict whether these protections will be
adequate, or whether our competitors will develop similar technology independently, without violating our proprietary rights.
Our competitors, many of which have significant
resources, may make substantial investments in competing products and technologies, or may apply for and obtain patents that will
prevent, limit, or interfere with our ability to manufacture or market our products. We may litigate to enforce patents issued
to us and to defend against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our
proprietary rights and the rights of others.
Litigation has been in the past and may
be necessary in the future to defend or enforce our intellectual property rights, to protect our patents and trade secrets, and
to determine the validity and scope of our proprietary rights. Any litigation also may involve
substantial costs and diversion of the attention of company management away from operational activities. Any claim of infringement
against us could involve significant liabilities to third parties, could require us to seek licenses from third parties, and could
prevent us from manufacturing, selling or using our products. The occurrence of this litigation or the effect of an adverse determination
in the current litigation or similar future litigation could have a material adverse effect on our business, financial condition
and results of operations.
If the telecommunications
market does not expand as we expect, our business may not grow as fast as we expect, which could adversely impact our business,
financial condition and operating results.
Our future success as
a provider of fiber management, fiber protection and fiber delivery products depends on the continued growth of demand for fiber
broadband and, in particular, the continued expansion in the United States and in our other markets of information networks, particularly
those directly or indirectly dependent upon a fiber optic infrastructure. As part of that growth, we anticipate that demand for
voice, video, and other data services delivered over high-speed connections (both wired and wireless) will continue to increase.
If this demand does not increase, the need for enhanced high-speed bandwidth using fiber connections may not increase. Currently,
demand for high-speed broadband capabilities and access is increasing but future growth may be limited by several factors, including,
among others: (1) relative strength or weakness of the global economy or certain countries or regions, including the impact of
the current global recession due to COVID-19, (2) an uncertain regulatory environment, and (3) uncertainty regarding long-term
sustainable business models as multiple industries, such as the cable, traditional telecommunications, wireless and satellite industries,
offer competing content delivery solutions. The telecommunications market also has experienced periods of overcapacity, some of
which have occurred even during periods of relatively high network usage and bandwidth demands. If the factors described above
were to occur and cause the demand for fiber broadband capabilities or access to slow, stop or reverse, our business, financial
condition and operating results would be negatively affected.
We face risks associated with expanding
our sales outside of the United States.
We believe that our future growth depends
in part upon our ability to increase sales in international markets. These sales are subject to a variety of risks, including fluctuations
in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements,
longer accounts receivable payment cycles, potentially adverse tax consequences, and export license requirements. In addition,
we are subject to the risks inherent in conducting business internationally, including political and economic instability and unexpected
changes in diplomatic and trade relationships. Currency fluctuations may also increase the relative price of our product in international
markets and thereby could also cause our products to become less affordable or less price competitive than those of international
manufacturers. These risks associated with international operations may have a material adverse effect on our revenue from or costs
associated with international sales.
Risks Relating to
Our Common Stock
Our operating results may fluctuate
significantly from quarter to quarter, which may make budgeting for expenses difficult and may negatively affect the market price
of our common stock.
Because many purchases by customers of
our products relate to a specific customer project and are procured by the customer from time to time through purchase orders,
the short-term demand for our products can fluctuate significantly. This fluctuation can be further affected by the long sales
cycles necessary to obtain contracts to supply equipment for these projects, the availability of capital to fund our customers’
projects, changes, or delays in customer deployment schedules and the impact of the government regulation
to encourage service to unserved or underserved communities, rural areas or other high cost areas on customer buying patterns.
These long sales cycles may result in significant effort expended with no resulting sales or sales that are not made in
the anticipated quarter or fiscal year. Certain customers and prospective customers, typically larger broadband service providers,
are conducive to these long sales cycles which may be multi-year efforts. Demand for our products will also depend upon the extent
to which our customers and prospective customers initiate these projects and the extent to which we are selected to provide our
equipment in these projects, neither of which can be assured. In addition, a sharp increase in demand could result in actual lead
times longer than quoted, and a sharp decrease in demand could result in excess stock. These factors generally result in fluctuations,
sometimes significant, in our operating results. Other factors that may affect our quarterly operating results include:
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the volume and timing of orders from and shipments to our customers, particularly significant customers;
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mergers and acquisitions activity among our customers;
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work stoppages and other developments affecting the operations of our customers;
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the timing of and our ability to obtain required certifications or qualifications to sell products,
the timing of and our ability to obtain new customer contracts, and the timing of revenue recognition;
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the timing of new product and service announcements;
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the availability of products and services;
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market acceptance of new and enhanced versions of our products and services, including the impact
of government regulations on customers purchasing decisions;
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variations in the mix of products and services we sell;
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the utilization of our production capacity and employees, including foreign operations;
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the availability and cost of key components of our products, including the impact of new or increased
tariffs; and
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accounting treatment related to stock-based compensation.
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Further, we budget our expenses based in
part on expectations of future sales. If sales levels in a particular quarter are lower than expected, our operating results will
be affected adversely.
Because of these factors, our quarterly
operating results are difficult to predict and are likely to vary in the future. If our operating results are below financial analysts’
or investors’ expectations, the market price of our common stock may fall abruptly and significantly.
Our stock price has been volatile
historically and may continue to be volatile. The price of our common stock may fluctuate significantly.
The trading price of our common stock has
been and may continue to be subject to wide fluctuations. Our stock price may fluctuate in response to a number of events and factors,
such as quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors,
changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies
that investors may deem comparable to us, and new reports relating to trends in our markets or general economic conditions.
In addition, the stock market is subject
to price and volume fluctuations that affect the market prices for companies in general, and small-capitalization, high-technology
companies like us in particular. These broad market and industry fluctuations may adversely affect the price of our common stock,
regardless of our operating performance. Further, any failure by us to meet or exceed the expectations of financial analysts or
investors is likely to cause a decline in our common stock price. Further, recent economic conditions have resulted in significant
fluctuations in stock prices for many companies, including Clearfield. We cannot predict when the stock markets and the market
for our common stock may stabilize. In addition, although our common stock is listed on the NASDAQ Stock Market, our common stock
has at times experienced low trading volume in the past. Limited trading volume subjects our common stock to greater
price volatility and may make it difficult for our shareholders to sell shares at an attractive price.
Anti-takeover provisions in our organizational documents, Minnesota law and other agreements could prevent or delay a change in control of our company.
Certain provisions of our articles of incorporation and bylaws, Minnesota law, and other agreements may make it more difficult for a third-party to acquire, or discourage a third-party from attempting to acquire, control of our company, including:
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the provisions of our bylaws setting forth the advance notice and information requirements for shareholder proposals, including nominees for directors, to be considered properly brought before shareholders;
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the right of our board of directors to establish more than one class or series of shares and to fix the relative rights and preferences of any such different classes or series;
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the provisions of Minnesota law relating to business combinations and control share acquisitions; and
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the
provisions of our equity compensation plans allowing for the acceleration of vesting or payments of awards granted under the
plans in the event of specified events that result in a “change in control” and provisions of agreements with
certain of our executive officers requiring payments if their employment is terminated and there is a “change in
control.”
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These measures could discourage or prevent a takeover of us or changes in our management, even if an acquisition or such changes would be beneficial to our shareholders. This may have a negative effect on the price of our common stock.