Clearfield, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-16106

Clearfield, Inc.

(Exact name of Registrant as specified in its charter)

7050 Winnetka Avenue North, Suite 100, Brooklyn Park, Minnesota 55428

(Address of principal executive offices and zip code)

(763) 476-6866

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] YES [_] NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

[X] YES [_] NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company in Rule 12b-2 of the Exchange Act.

Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]

Smaller reporting company [X] Emerging growth company [_]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[_] YES [X] NO

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

CLEARFIELD, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED BALANCE SHEETS

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED STATEMENTS OF EARNINGS

UNAUDITED

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

UNAUDITED

For the three months ended March 31, 2020          

For the three months ended March 31, 2019          

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

UNAUDITED

For the six months ended March 31, 2020          

For the six months ended March 31, 2019          

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

CLEARFIELD, INC.

CONDENSED STATEMENTS OF CASH FLOWS

UNAUDITED      

SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTES TO CONDENSED FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT’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” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events and typically address the Company’s expected future business and financial performance. Words such as  “plan,” “expect,” “aim,” “believe,” “project,” “target,” “anticipate,” “intend,” “estimate,” “will,” “should,” “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 Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended September 30, 2019, as well as in other filings we make with the Securities and Exchange Commission, which should be considered an integral part of Part I, Item 2, “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 our financial condition and results of operations as of and for the three and six months ended March 31, 2020 and 2019 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, 2019.

OVERVIEW

General

Clearfield, Inc. 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 Broadband Service Providers in the United States, which include Community Broadband, National Carriers, and MSO’s, while also serving the broadband needs of the 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 Build-to-Print 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-served or under-served rural communities who 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 manufacturing 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, some made through two-tier distribution (channel) partners, sales agents and manufacturing representatives, and sales through original equipment suppliers who private label their products.

Due to the role Clearfield’s solutions play in supporting communications infrastructure, the Company’s operations in Minnesota have been classified as critical sector work under the State of Minnesota “stay at home” executive order adopted in response to the novel coronavirus (“COVID-19”) pandemic. We have transitioned our corporate employees at our Brooklyn Park headquarters to remote work arrangements. In accordance with the CDC and WHO guidelines, we also have implemented health and safety measures for the production staff that remain onsite at our Brooklyn Park facility. We have continued to maintain our manufacturing capacity in Brooklyn Park with these personnel. Similarly, we have implemented the recommended health and safety measures for the production staff that remains onsite at our Tijuana, Mexico manufacturing facilities.

The Company is closely monitoring the operations and staffing levels at its manufacturing facilities in Tijuana, Mexico and the status of restrictions at the U.S.-Mexico border. The State of Baja California, where our facilities are located, has adopted an order that has temporarily suspended the operations of other manufacturers in the region. While our operations in Tijuana have not been affected, we may become subject to local enforcement of the order at any time.

Even if our manufacturing capacity in Mexico continues, we may experience challenges to timely supply of materials to our Mexico facilities and timely product deliveries from the facilities due to border restrictions or border delays. Depending on the severity of these border issues, 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.

We dual source all our components and most of our supply chain partners remain operational and continue to provide the necessary components for our products to be manufactured in Minnesota and Mexico. We continue to monitor our supply chain, however uncertainties caused by the impact of COVID-19 present significant risk of disruption in our supply chain.

Should the Company experience a disruption in our ability to continue to produce in one or both of our facilities, disruption in our supply chain, or a decline in operational abilities, our contingency plans would result in a potentially significant increase in manufacturing costs and could impair our ability to fulfill customer orders.

RESULTS OF OPERATIONS

Three months ended MArch 31, 2020 vS. three months ended mARCH 31, 2019

Net sales for the second quarter of fiscal 2020 ended March 31, 2020 were $20,409,000, an increase of approximately 7% or $1,324,000, from net sales of $19,084,000 for the second quarter of fiscal 2019. Net sales to Broadband Service Providers were $19,642,000 in the second quarter of fiscal 2020 versus $17,948,000 in the same period of fiscal 2019. Among this group, the Company recorded $919,000 in international sales for the second quarter of fiscal 2020 versus $1,949,000 in the same period of fiscal 2019. Net sales to build-to-print customers were $766,000 in the second quarter of fiscal 2020 versus $1,136,000 in the same period of fiscal 2019. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 5% and 10% of total net sales for the second quarter of fiscal 2020 and 2019, respectively.

The increase in net sales for the quarter ended March 31, 2020 of $1,324,000 compared to the quarter ended March 31, 2019 was driven by increased sales to Tier 1 and MSO customers of $1,549,000 and $1,130,000, respectively. Offsetting this were decreased sales to International customers of $1,005,000, and Build-to-Print customers of $475,000, due to lower demand for each in the period. Additionally, sales to Community Broadband customers increased $125,000, relatively unchanged from the prior period.

Revenue from all customers is obtained from purchase orders submitted from time to time. Accordingly, 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 has become further limited by potential disruption to product delivery or changes in customer ordering patterns due to COVID-19. The Company’s ability to recognize revenue in the third quarter of 2020 for its backlog of customer orders will depend on the Company’s ability to manufacture and deliver products to the customers and fulfill its other contractual obligations. During March 2020, the Company experienced increased orders as the Company’s customers remained committed to their 5G builds and other projects to expand communications networks, which are part of the world’s critical infrastructure. The Company believes that Tier 1 customers may expand their 5G-related capital expenditure budgets, which may lead to accelerated opportunities for sales due to COVID-19. However, at this time, the Company does not have visibility into how long these customer ordering trends will continue. We expect that restrictions on our employees’ ability to access our customers may negatively impact sales in future quarters.

Cost of sales for the second quarter of fiscal 2020 was $12,257,000, an increase of $198,000, or 1.6%, from $12,059,000 in the comparable period of fiscal 2019. Gross profit percent was 39.9% of net sales in the fiscal 2020 second quarter, an increase from 36.8% of net sales for the fiscal 2019 second quarter. Gross profit increased $1,126,000, or 16%, to $8,151,000 for the three months ended March 31, 2020 from $7,025,000 in the comparable period in fiscal 2019. The increase in gross profit in the second quarter of fiscal 2020 was due to increased volume while the increase in gross profit percent was primarily due to improved manufacturing costs, supply chain management initiatives and lower tariff costs. Gross profit was negatively impacted by tariff costs of approximately $61,000 for the three months ended March 31, 2020 and $268,000 in the comparable period in fiscal 2019. In the second quarter of fiscal 2020 ended March 31, 2020, the Company did not experience any significant impacts on cost of sales due to COVID-19.

Selling, general and administrative expenses increased $704,000, or 10%, to $7,431,000 in the fiscal 2020 second quarter from $6,728,000 for the fiscal 2019 second quarter. The increase in expense in the second quarter of fiscal 2020 consists primarily of increases of $1,176,000 in compensation expense due to additional personnel, $187,000 in product certification testing expenses and $174,000 in outside sales representative commissions, offset by decreases of $449,000 in stock based compensation expense and $210,000 in bad debt expense related to a customer bankruptcy occurring in the prior year period. In the second quarter of fiscal 2020 ended March 31, 2020, the Company did not experience any significant impacts on selling, general and administrative expense due to COVID-19.

Income from operations for the quarter ended March 31, 2020 was $720,000 compared to $297,000 for the comparable quarter of fiscal 2019, an increase of approximately 142%. This increase is attributable to increased gross profit, offset by higher selling, general and administrative expenses.

Interest income for the quarter ended March 31, 2020 was $218,000 compared to $169,000 for the comparable quarter for fiscal 2019. The increase is due to increased balances and higher interest rates earned on investments in the second quarter of fiscal 2020. We expect interest income to decline due to the prevailing lower interest rates and the potential for further decreases in rates in the current economic environment The Company invests its excess cash in FDIC-backed bank certificates of deposit, U.S. treasury securities, and money market accounts.

We recorded a provision for income taxes of $190,000 and a provision for income taxes of $99,000 for the three months ended March 31, 2020 and 2019, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The increase in tax expense of $91,000 from the second quarter for fiscal 2019 is primarily due to increased income from operations. The decrease in the income tax expense rate to 20.3% for the second quarter of fiscal 2020 from 21.2% for the second quarter of fiscal 2019 is primarily due to increased research and development tax credits.

The Company’s net income for the three months ended March 31, 2020 was $748,000, or $0.05 per basic and diluted share. The Company’s net income for the three months ended March 31, 2019 was $368,000, or $0.02 per basic and diluted share.

Six months ended March 31, 2020 vS. six months ended March 31, 2019

Net sales for the six months ended March 31, 2020 were $39,787,000, an increase of 2%, or approximately $613,000, from net sales of $39,174,000 for the first six months of fiscal 2019. Net sales to Broadband Service providers were $37,798,000 for the first six months of fiscal 2020, versus $36,761,000 in the same period of fiscal 2019. Among this group, the Company recorded $2,055,000 in international sales versus $3,533,000 in the same period of fiscal 2019. Net sales to build-to-print customers were $1,990,000 in the first six months of fiscal 2020 versus $2,413,000 in the same period of fiscal 2019. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 5% and 9% of total net sales for the first six months of fiscal 2020 and 2019, respectively.

The increase in net sales for the six months ended March 31, 2020 of $613,000 compared to the six months ended March 31, 2019 is primarily attributable to an increase in sales to Tier 1 and MSO customers of $2,324,000 and $1,555,000, respectively. This was offset by decreased sales to International customers of $1,445,000, Community Broadband customers of $1,304,000 and Build-to-Print of $518,000.

Cost of sales for the six months ended March 31, 2020 was $23,908,000, a decrease of $294,000, or 1%, from $24,202,000 in the comparable period of fiscal 2019. Gross profit percent was 39.9% of net sales in the fiscal 2020 first six months, up from 38.2% for the comparable six months in fiscal 2019. Gross profit increased $907,000, or 6%, to $15,879,000 for the six months ended March 31, 2020 from $14,972,000 in the comparable period in fiscal 2019. The increase in gross profit in the six months ended March 31, 2020 was due to increased volume and a higher gross profit percent. The increase in gross profit percent was primarily due to improved manufacturing efficiencies and costs in its manufacturing facilities, and lower tariff costs. Tariff costs were $161,000 in the six months ended March 31, 2020, compared to $559,000 in the comparable six month period. In the six months ended March 31, 2020, the Company did not experience any significant impacts on cost of sales due to COVID-19.

Selling, general and administrative expenses increased 9%, or $1,254,000, from $13,504,000 for the first six months of fiscal 2019 to $14,758,000 for the first six months of fiscal 2020. The decrease in the first six months of fiscal 2020 consists primarily of increases of $1,932,000 in compensation expense due to additional personnel, $257,000 in product certification testing expenses and $333,000 in outside sales representative commissions, offset by decreases of $721,000 in stock based compensation expense and $210,000 in bad debt expense related to a customer bankruptcy in the prior year period. In the six months ended March 31, 2020, the Company did not experience any significant impacts on selling, general and administrative expense due to COVID-19.

Income from operations for the six months ended March 31, 2020 was $1,121,000 compared to income from operations of $1,468,000 for the first six months of fiscal 2019, a decrease of $347,000, or 24%. This decrease is primarily attributable to increased gross profit, offset by increased selling, general and administrative expenses.

Interest income for the six months ended March 31, 2020 was $441,000 compared to $305,000 for the comparable period for fiscal 2019. The increase is due to increased balances and higher interest rates earned on investments in fiscal 2020.

We recorded a provision for income taxes of $313,000 and a provision for income taxes of $395,000 for the six months ended March 31, 2020 and 2019, respectively. The decrease in tax expense of $82,000 from the six months ended March 31, 2019 is primarily due a lower effective tax rate for the six months ended March 31, 2020. The decrease in the income tax expense rate to 20.0% for the six months ended March 31, 2020 from 22.3% for the six months ended March 31, 2019 is primarily due to increased research and development credits.

The Company’s net income for the first six months of fiscal 2020 ended March 31, 2020 was $1,249,000, or $0.09 per basic and diluted share. The Company’s net income for the first six months of fiscal 2019 ended March 31, 2019 was $1,378,000, or $0.10 per basic and diluted share.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2020, our principal source of liquidity was our cash, cash equivalents and short-term investments. Those sources total $23,284,000 as of March 31, 2020 compared to $23,606,000 as of September 30, 2019. 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 or backed by the U. S. Government. Investments considered long-term were $25,130,000 as of March 31, 2020, compared to $23,902,000 as of September 30, 2019. 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. We had no long-term debt obligations as of March 31, 2020 or September 30, 2019.

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 and potential future strategic transactions, as well as to mitigate the potential impacts of COVID-19 on the Company’s business. Due to the uncertainties caused by COVID-19 and the Company’s desire to maintain capital flexibility, the Board of Directors has suspended the share repurchase program originally adopted on November 13, 2014. As originally adopted, the Board of Directors authorized $8,000,000 for common stock repurchases and on April 25, 2017, our Board of Directors increased the authorization to $12,000,000 of common stock. As of March 31, 2020, there was approximately $4,981,000 remaining for repurchases under the authorization.

Due to the economic crisis resulting from the COVID-19 pandemic, we expect that our future cash flow may be negatively impacted due to COVID -19 impacts within our operating and investing activities. We also expect that our uses of cash may be materially impacted by increased operating expense associated with mitigating supply chain, logistics, customer fulfillment risks caused by COVID-19.

Operating Activities

Net cash used in operating activities totaled $2,296,000 for the six months ended March 31, 2020. This was primarily due to net income of $1,249,000, non-cash expenses for depreciation and amortization of $1,211,000, and stock based compensation of $329,000 in addition to changes in operating assets and liabilities providing cash. Changes in operating assets and liabilities using cash include increases in inventory of $2,675,000 and accounts payable, accrued expenses and deferred rent of $1,091,000, offset by a decrease in accounts receivable of $1,049,000. The increase in inventory is a result of additional stocking levels to support the Company’s increased backlog, and additional safety stock due to the uncertainty of the COVID-19 virus on the Company’s supply chain. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Day’s sales outstanding, which measures how quickly receivables are collected, increased one day to 36 days from September 30, 2019 to March 31, 2020.

Net cash provided by operating activities totaled $8,473,000 for the six months ended March 31, 2019. This was primarily due to net income of $1,378,000, non-cash expenses for depreciation and amortization of $1,064,000, and stock based compensation of $1,102,000 in addition to changes in operating assets and liabilities providing cash. Changes in operating assets and liabilities providing cash include decreases in accounts receivable and inventories of $3,623,000 and $1,777,000, respectively. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Day’s sales outstanding, which measures how quickly receivables are collected, decreased from 52 days at September 30, 2018 to 43 days at March 31, 2019. The decrease in inventory is a result of stocking levels being maintained by suppliers, which reduced the Company’s inventory.

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 and U.S. Government on these investments. During the six months ended March 31, 2020, we used cash to purchase $19,077,000 of both FDIC-backed and treasury securities and received $16,720,000 on CDs and treasuries that matured. Purchases of property, plant and equipment, mainly related to manufacturing equipment, consumed $1,183,000 of cash during the six months ended March 31, 2020.

During the six months ended March 31, 2019, we used cash to purchase $12,274,000 of both FDIC-backed and treasury securities and received $3,572,000 on CDs that matured. Purchases of patents and capital equipment, mainly related to information technology and manufacturing equipment, consumed $552,000 of cash in the six months ended March 31, 2019.

Financing Activities

For the six months ended March 31, 2020, we received $170,000 from employees’ participation and purchase of stock through our ESPP and used $6,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding. We used $429,000 to repurchase 41,796 shares of our common stock under the share repurchase program in the six months ended March 31, 2020. As of March 31, 2020, we had the authority to purchase approximately $4,981,000 in additional shares under the repurchase program announced on November 13, 2014 that was subsequently increased on April 25, 2017.

For the six months ended March 31, 2019, we received $146,000 from employees’ participation and purchase of stock through our ESPP and used $7,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding. We did not repurchase our common stock under the repurchase program in the six months ended March 31, 2019. As of March 31, 2019, we had authority to purchase approximately $5,400,000 in additional shares under the repurchase program announced on November 13, 2014 that was subsequently increased on April 25, 2017.

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 based compensation, and valuation of inventory, long-lived assets, finite lived intangible assets and 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, 2019. Management made no changes to the Company’s critical accounting policies during the quarter ended March 31, 2020.

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 March 31, 2020.

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 March 31, 2020. 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 March 31, 2020 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

There are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position or results of operations.

ITEM 1A. RISK FACTORS

The most significant risk factors applicable to the Company are described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2019. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, except for the addition of the following risk factor:

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, which have been affected by the outbreak and 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, vendors 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 vendors and 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.

The outbreak has significantly increased economic and demand uncertainty. We anticipate that the current outbreak or continued spread of COVID-19 will cause an economic slowdown, and it is possible that it could cause a global recession.

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 events and conferences. Many of our suppliers, vendors 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.

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.

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

In the three months ended March 31, 2020, the Company repurchased shares of stock as follows:

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On April 11, 2020, the Company received a $3.7 million loan under the Payroll Protection Program (PPP) within the Coronavirus Aid Relief and Economic Security (CARES) Act.

The Company carefully reviewed the economic impact and uncertainty caused by COVID-19 and the necessity of the PPP loan request to support the Company’s ongoing operations and believes that the Company made the required certifications for the PPP loan in good faith under the standards established by the CARES Act and the PPP regulations at the time of the Company’s loan application and the receipt of the loan.

However, due to the uncertainties caused by the changing guidance and statements from the U.S. Small Business Administration and U.S. Department of Treasury issued following the time of the Company’s loan application and the receipt of the loan, the Company repaid the PPP loan in full on April 30, 2020.

ITEM 6. Exhibits

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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