Clearfield, Inc.: Form 10-Q for the period ended Mar 31, 2023

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, 2022 and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, as well as in other filings we make with the Securities and Exchange Commission, which should be considered an integral part of 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 the Company’s financial condition and results of operations as of and for the three and six months ended March 31, 2023 and 2022 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, 2022.

OVERVIEW

General

Clearfield, Inc., together with its subsidiaries, is referred to in this report as “we,” “us,” “our,” and the “Company.” We design, manufacture, and distribute fiber protection, fiber management, and fiber delivery solutions to enable rapid and cost-effective fiber-fed deployment throughout the broadband service provider space primarily across North America and Europe. Our “fiber to the anywhere” platform serves the unique requirements of leading Broadband Service Providers in the United States (“U.S.”), which include Community Broadband, MSO’s, Large Regional Service Providers, and National Carriers, while also serving the broadband needs of the International markets, primarily countries in Europe, the Caribbean, Canada, and Central and South America. These customers are collectively included in Broadband Service Providers. The Company also provides contract manufacturing services for its Legacy customers which include original equipment manufacturers (OEM) requiring copper and fiber cable assemblies built to their specifications.

We are engaged in global operations. Our operations are currently comprised of two reportable segments: the Clearfield Operating Segment (referred to herein as “Clearfield”) and, since July 26, 2022, the Nestor Cables Operating Segment (referred to herein as “Nestor Cables” or “Nestor”). Prior to July 26, 2022, we were considered to be in a single reporting segment and operating unit structure.

On July 26, 2022, the Company acquired Nestor Cables Ltd, a leading developer and manufacturer of fiber optic cable solutions located in Finland. The purchase of Nestor Cables is expected to provide the Company with the ability to vertically integrate the supply of fiber optic cables and help meet customer demand for its products. Nestor Cables’ technical expertise is expected to extend the supply of the Company’s FieldShield products into the North American market to reduce cost and complexity of transportation.

Upon closing of the acquisition of Nestor Cables on July 26, 2022, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), in deciding how to allocate resources and in assessing performance. Based upon the Company’s assessment, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.

Nestor Cables Operating Segment

As of July 26, 2022, Clearfield, through its Finnish subsidiary, Clearfield Finland Ltd, acquired Nestor Cables. Nestor Cables is based in Oulu, Finland, with operations in Keila, Estonia through its wholly-owned subsidiary, Nestor Cables Baltics Ltd. Nestor Cables manufactures fiber optic and copper telecommunication cables and equipment, which it distributes to telecommunication operators, network owners, electric companies, building contractors, and industrial companies. Prior to the acquisition, Nestor Cables had been a supplier to Clearfield for over a decade and that relationship continued following the closing of the acquisition. Nestor Cables has two types of production processes, the process of making cable in its Finland facility and the finished assembly portion of its business performed in Estonia. Nestor Cables’ customer base includes telecom operators, network owners, contractors, industries and wholesalers. Products are sold via distributors and directly to end users. Nestor Cables is subject to Finnish government regulation, and Nestor Cables Baltics is subject to Estonian government regulation.

Clearfield Operating Segment

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.

Clearfield’s products allow its customers to connect 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. The Company has historically focused on the unserved or underserved rural communities that receive 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 the manufacturing facility in Tijuana, Mexico that operates as a Maquiladora, 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 customers, some made through two-tier distribution (channel) partners, sales agents and manufacturing representatives, and some sales made through original equipment suppliers who private label their products.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2023 VS. THREE MONTHS ENDED MARCH 31, 2022

Net sales for the second quarter of fiscal 2023 ended March 31, 2023 were $71,809,000, an increase of approximately 34%, or $18,314,000, from net sales of $53,495,000 for the second quarter of fiscal 2022. Net sales to Broadband Service Providers were $69,168,000 in the second quarter of fiscal 2023 versus $52,832,000 in the same period of fiscal 2022. Among this group, the Company recorded $13,138,000 in international sales for the second quarter of fiscal 2023 versus $1,450,000 in the same period of fiscal 2022. Net sales to Legacy customers were $593,000 in the second quarter of fiscal 2023 versus $662,000 in the same period of fiscal 2022. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 18% and 3% of total net sales for the second quarter of fiscal 2023 and 2022, respectively. The increase in sales to international customers was primarily due to the acquisition of Nestor Cables as its sales are to European and other non-U.S. customers.

The increase in net sales for the quarter ended March 31, 2023 of $18,314,000 compared to the quarter ended March 31, 2022 was driven primarily by increased sales to international customers, Community Broadband Service Providers, and MSO customers of $11,676,000, $6,888,000, and $2,818,000, respectively. The increase in sales to international customers was primarily driven by the acquisition of Nestor Cables, which accounted for $11,358,000 of international sales. The increase in sales to Community Broadband and MSO customers was due to increased demand for fiber connectivity products and the need for high-speed broadband since the pandemic.

Order backlog as of March 31, 2023 was $107,586,000, a decrease of 21% compared to $136,269,000 as of December 31, 2022, and a decrease of $27,920,000, or 21%, from March 31, 2022. The decrease was due to the Company’s ability to fulfill customer orders more quickly and a return to pre-pandemic ordering patterns.

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

Cost of sales for the second quarter of fiscal 2023 was $48,246,000, an increase of $17,915,000, or 59%, from $30,331,000 in the comparable period of fiscal 2022. Gross profit percent was 32.8% of net sales in the second quarter of fiscal 2023, a decrease from 43.3% of net sales for the second quarter of fiscal 2022. Gross profit increased $399,000, or 2.0%, to $23,563,000 for the three months ended March 31, 2023, from $23,164,000 in the comparable period in fiscal 2022. Gross profit margin was negatively affected by the buildup in capacity in the Company’s Clearfield segment that was not utilized. Gross profit was also affected by lower gross profit realized in our Nestor Cables cable manufacturing business which was acquired in July 2022 and was not included in the comparable period of fiscal 2022. The Company expects to operate at these gross profit percentage levels for several quarters with improving margins realized as revenue levels increase and cost reduction measures are realized. Despite the decrease in gross profit margin percentage, gross profit remained relatively consistent.

Selling, general and administrative expenses increased $274,000, or 2%, to $11,507,000 in the second quarter fiscal 2023 from $11,233,000 for the fiscal 2022 second quarter. This increase is the result of the addition of $1,345,000 operating expenses of the Nestor Cables business acquired in July 2022, offset by the reversal of performance-based compensation accruals of approximately $1,032,000 during the fiscal 2023 second quarter.

Income from operations for the quarter ended March 31, 2023 remained relatively consistent at $12,056,000 compared to $11,931,000 for the comparable quarter of fiscal 2022.

Net investment income for the quarter ended March 31, 2023, was $1,395,000 compared to $121,000 for the comparable quarter for fiscal 2022. Net investment income for the quarter ended March 31, 2023 is compromised of interest income only. Net investment income for the quarter ended March 31, 2022, is comprised of $82,000 of interest income and $39,000 net realized gains on sales of investments during the quarter. The increase in interest income is due to higher interest rates earned on a higher investment balance during the second quarter of fiscal 2023. We expect interest income to remain at these levels through the remainder of the fiscal year, subject to changes in market interest rates.

Interest expense for the quarter ended March 31, 2023 was $112,000. The increase was due to debt held by Nestor Cables. The Company did not have any interest expense during the second quarter of fiscal 2022.

We recorded a provision for income taxes of $2,974,000 and $2,816,000 for the three months ended March 31, 2023 and 2022, 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 $158,000 from the second quarter for fiscal 2022 is primarily due to increased income from operations, partially offset by the decrease in the effective tax rate. The income tax expense rate for the second quarter of fiscal 2023 decreased to 22.3%, from 23.4% recorded in the second quarter of fiscal 2022, due primarily to decreased non-deductible expenses.

The Company’s net income for the three months ended March 31, 2023 was $10,364,000, or $0.67 per basic and diluted share. The Company’s net income for the three months ended March 31, 2022 was $9,236,000, or $0.67 per basic share and $0.66 per diluted share. The increase in basic and diluted earnings per share for the three months ended March 31, 2023 as compared to March 31, 2022 was due to higher net income, offset by the additional shares issued during the first quarter of fiscal 2023.

SIX MONTHS ENDED MARCH 31, 2023 VS. SIX MONTHS ENDED MARCH 31, 2022

Net sales for the six months ended March 31, 2023 were $157,751,000, an increase of approximately 50%, or $53,147,000, from net sales of $104,604,000 for the six months ended March 31, 2022. Net sales to Broadband Service Providers were $152,779,000 in the six months ended March 31, 2023 versus $103,238,000 in the same period of fiscal 2022. Among this group, the Company recorded $23,342,000 in international sales for the six months ended March 31, 2023 versus $3,456,000 in the same period of fiscal 2022. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 15% and 3% of total net sales for the six months ended March 31, 2023 and March 31, 2022, respectively. Net sales to Legacy customers were $1,343,000 in the six months ended March 31, 2023 versus $1,433,000 in the same period of fiscal 2022.

The increase in net sales for the six months ended March 31, 2023 of $53,147,000 compared to the six months ended March 31, 2022 was driven primarily by increased sales to Community Broadband Service Providers, MSO, and international customers of $70,757,000, $31,039,000 and $23,342,000, respectively. The increase to Community Broadband and MSO customers was due to increased demand for fiber connectivity products and the need for high-speed broadband since the pandemic. The increase in sales to international customers was primarily driven by the acquisition of Nestor Cables, which accounted for $18,945,000 of international sales.

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

Cost of sales for the six months ended March 31, 2023 was $103,539,000, an increase of $45,071,000, or 77%, from $58,468,000 in the comparable period of fiscal 2022. Gross profit percent was 34.4% of net sales for the six months ended March 31, 2023, a decrease from 44.1% of net sales for the six months ended March 31, 2022. Gross profit increased $8,076,000, or 18%, to $54,212,000 for the six months ended March 31, 2023, from $46,136,000 in the comparable period in fiscal 2022. Gross profit margin was negatively affected by the buildup in capacity in the Company’s Clearfield segment that was not utilized. Gross profit was also affected by lower gross profit realized in our Nestor Cables cable manufacturing business which was acquired in July 2022 and was not included in the comparable period of fiscal 2022. . Despite the decrease in gross profit margin percentage, gross profit remained relatively consistent. Given the dynamics impacting the industry, including rising supply costs, as well as our exposure to Large Regional Service Providers, we now expect gross margins to finish the fiscal year near 30%.

Selling, general and administrative expenses increased $3,111,000, or 15%, to $24,266,000 in the six months ended March 31, 2023, from $21,155,000 for the comparable period of fiscal 2022. The increase in expense for the six months ended March 31, 2023 consisted primarily of the additional operating expenses of $2,643,000 from the Nestor Cables business acquired in July 2022, increased travel and entertainment expenses, and stock-based compensation, partially offset by reversal of performance-based compensation accruals during the fiscal second quarter.

Income from operations for the six months ended March 31, 2023, was $29,946,000 compared to $24,981,000 for the comparable quarter of fiscal 2022, an increase of approximately 20%. This increase is attributable to increased net sales, partially offset by lower gross profit margin percentage and increased selling, general and administrative expenses.

Net investment income for the six months ended March 31, 2023, was $1,698,000 compared to $241,000 for the comparable quarter for fiscal 2022. The increase in interest income is due to higher interest rates earned and a higher average investments balance in the six months ended March 31, 2023. We expect interest income to remain at the levels experienced during the three months ended March 31, 2023 through the remainder of the fiscal year, subject to changes in market interest rates and changes in the average investments balance.

Interest expense for the quarter ended March 31, 2023, was $356,000. The Company did not have any interest expense during the second quarter of fiscal 2022. The increase in interest expense was due to $170,000 in interest on Clearfield’s line of credit which was repaid in the first quarter of fiscal 2023, and $186,000 in interest expense on debt held by Nestor Cables.

The Company recorded a provision for income taxes of $6,669,000 and $5,596,000 for the six months ended March 31, 2023, and March 31, 2022, respectively. The Company records its quarterly provision for income taxes based on its estimated annual effective tax rate for the year. The increase in tax expense of $1,073,000 from the six months ended March 31, 2022, is primarily due to increased income from operations. The income tax expense rate for the six months ended March 31, 2023 decreased to 21.3%, from 22.2% recorded in the comparable period of fiscal 2022, due to decreased non-deductible expenses.

The Company’s net income for the six months ended March 31, 2023, was $24,619,000, or $1.68 per basic share or $1.67 per diluted share. The Company’s net income for the six months ended March 31, 2022, was $19,626,000, or $1.43 per basic share or $1.41 per diluted share. The increase in basic and diluted earnings per share for the six months ended March 31, 2023, as compared to March 31, 2022 was due to higher net income, partially offset by the additional shares issued during the first quarter of fiscal 2023.

Reportable Segments

The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.

On July 26, 2022, Clearfield, through its newly created Finnish subsidiary, Clearfield Finland Ltd, acquired all of the equity of Nestor Cables Ltd, which has a wholly-owned Estonian subsidiary, Nestor Cables Baltics Ltd. Following the closing of the acquisition of Nestor Cables on July 26, 2022, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Prior to July 26, 2022, the Company was considered to be in a single reporting segment and operating unit structure. Based upon the Company’s assessment following the acquisition of Nestor Cables, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.

For the three and six months ended March 31, 2023, the Company has two reportable segments: (1) Clearfield and (2) Nestor Cables. The entities that comprise the Nestor Cables segment are Clearfield Finland Ltd, Nestor Cables Ltd and Nestor Cables Baltics Ltd.

Reportable segments are as follows:

• Clearfield Segment – Clearfield designs, manufactures and sells fiber management, protection, and delivery solutions.
• Nestor Cables Segment – Nestor Cables designs, manufactures, and sells fiber optic and copper telecommunication cables and equipment.

Clearfield Segment

The following table provides net sales and net income for the Clearfield Segment for the three and six months ended:

(In thousands)

Net sales in the Clearfield segment increased 13%, or $6,956,000, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Net sales in the Clearfield segment increased 33%, or $34,202,000, for the six months ended March 31, 2023 as compared to the six months ended March 31, 2022. The increase in net sales was driven by increased sales to the Company’s Community Broadband and MSO/Cable TV customers, offset by decreased sales to Large Regional Service Provider customers. The increased sales to Community Broadband and MSO/Cable TV customers was due to continuing demand for fiber connectivity products and the demand for high-speed broadband since the pandemic. The decreased sales to Large Regional Service Provider customers was due to slower inventory consumption from these customers who had accumulated an excess inventory position during the COVID-19 pandemic.

Net income in the Clearfield segment for the three months ended March 31, 2023 increased 13%, or $1,159,000, as compared to the three months ended March 31, 2022. Net income in the Clearfield segment for the six months ended March 31, 2023 increased 28%, or $5,487,000, as compared to the six months ended March 31, 2022 The increase in net income was driven by the increase in sales outlined aboveand decreased selling, general and administrative expenses resulting from the reversal of performance-based compensation accruals, partially offset by lower gross profit margin due to buildup in capacity that was not utilized.

Nestor Cables Segment

The following table provides net sales and net income for the Nestor Cables segment for the three and six months:

(In thousands)

Nestor Cables was acquired on July 26, 2022. Prior to the acquisition, the Company operated as one reporting segment.

Net sales in the Nestor Cables segment for the three and six months ended March 31, 2023 were $11,358,000 and $18,945,000, respectively, excluding sales to the Clearfield Segment.

Net income in the Nestor Cables segment for the three and six months ended March 31, 2023 was $402,000 and $92,000, respectively.

Liquidity and Capital Resources

As of March 31, 2023, our principal source of liquidity was our cash, cash equivalents, and short-term investments. Those sources total $157,065,000 as of March 31, 2023 compared to $22,452,000 as of September 30, 2022. Additionally, we have a line of credit for $40 million that has no outstanding borrowing as of March 31, 2023. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, U.S. Treasury securities, and money market funds. Investments considered long-term were $8,527,000 as of March 31, 2023, compared to $22,747,000 as of September 30, 2022. We believe the combined balances of short-term cash and investments, long-term investments, along with our line of credit provide a more accurate indication of our available liquidity. As of March 31, 2023, our cash, cash equivalents, and short-term and long-term investments totaled $165,592,000, compared to $45,199,000 as of September 30, 2022.

We believe our existing cash equivalents, short-term investments, and line of credit facility along with cash flow from operations will be sufficient to meet our working capital and investment requirements for beyond the next 12 months. The Company intends on utilizing its available cash and assets primarily for its continued organic growth including expanding production capacity and facilities, as well as inventory growth to meet previously anticipated customer demand, potential future strategic transactions, and the Company’s share repurchase program, as well as to mitigate the potential impacts on the Company’s business due to supply chain, logistics, and customer fulfillment risks.

Operating Activities

Net cash provided by operating activities totaled $10,141,000 for the six months ended March 31, 2023. This was primarily due to net income of $24,619,000, non-cash expenses for depreciation and amortization of $2,822,000, stock-based compensation of $1,444,000, and non-cash income related to amortization of discounts on investments of $1,139,000, in addition to changes in operating assets and liabilities providing and using cash. The primary change in operating assets and liabilities using cash was a decrease in accounts payable and accrued expenses of $14,273,000 and an increase in inventory of $17,243,000. The decrease in accounts payable and accrued expenses is due to the timing of payments to vendors. The Company increased stocking levels of inventory during the quarter ending March 31, 2023 to support previously anticipated demand. Days sales outstanding, which measures how quickly receivables are collected, decreased 3 days to 49 days as of March 31, 2023, compared to 52 days from September 30, 2022.

Net cash used by operating activities totaled $11,282,000 for the six months ended March 31, 2022. This was primarily due to net income of $19,626,000, non-cash expenses for depreciation and amortization of $1,362,000, and stock-based compensation of $1,010,000 in addition to changes in operating assets and liabilities providing and using cash. The primary change in operating assets and liabilities using cash was an increase in inventory of $33,394,000, and increases in accounts receivable of $2,398,000, partially offset by increases in accounts payable and accrued expenses of $3,344,000. The Company increased stocking levels of inventory during the quarter ending March 31, 2022 to support the Company’s increased sales order backlog, as well as provide for safety stock for anticipated demand considering then-current long lead times for components and transportation within the global supply chain. The Company maintained higher than historic stocking levels through fiscal year 2022. The increase in accounts receivable was due to increased sales in the quarter ending March 31, 2022 as well as timing of payments from customers. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Days sales outstanding decreased 3 days to 37 days from September 30, 2021 to March 31, 2022. The increase in accounts payable and accrued expenses was due to the timing of payments to vendors and inventory growth.

Investing Activities

We invest our excess cash in money market funds, U.S. Treasury securities and bank CDs not exceeding FDIC insured levels. We believe we obtain a competitive rate of return given the low credit risk on these investments. During the six months ended March 31, 2023, we received proceeds from maturities of investments of $100,743,000 and used cash to purchase $99,126,000 of investment securities. Purchases of property, plant and equipment, mainly related to manufacturing equipment and intangible assets, consumed $4,797,000 of cash during the six months ended March 31, 2023.

During the six months ended March 31, 2022, we received $17,386,000 on sales and maturities of investment securities and used cash to purchase $248,000 of investment securities. Purchases of property, plant and equipment, mainly related to manufacturing equipment and intangible assets, consumed $4,842,000 of cash during the six months ended March 31, 2022.

Financing Activities

For the six months ended March 31, 2023, we received $130,262,000 of net proceeds through the issuance of common stock. We used $16,700,000 to pay down the principal on our line of credit, which was originally drawn in the fourth quarter of fiscal 2022 to fund the acquisition of Nestor Cables. We received $299,000 from employees’ participation and purchase of stock through our ESPP, we received $954,000 related to the issuance of stock as payment for incentive compensation previously earned, we used $471,000 related to share withholding for the exercise price and taxes associated with the issuance of common stock upon cashless exercises of stock options, and used $954,000 for payment of withholding taxes for stock grants. We did not repurchase common stock under our share repurchase program in the six months ended March 31, 2023.

For the six months ended March 31, 2022, we received $249,000 from employees’ participation and purchase of stock through our ESPP, we used $282,000 related to share withholding for the exercise price and taxes associated with the issuance of common stock upon cashless exercises of stock options, and used $274,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding. We did not repurchase common stock under our share repurchase program in the six months ended March 31, 2022.

CRITICAL ACCOUNTING ESTIMATES

Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting estimates. The accounting estimates 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 the fair value of investments, stock-based compensation, and valuation of inventory, long-lived assets, finite lived intangible assets and goodwill.

These accounting estimates 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, 2022. Management made no changes to the Company’s critical accounting estimates during the quarter ended March 31, 2023.

In applying its critical accounting estimates, 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, 2023.

The Company currently invests its excess cash in bank certificates of deposit (“CDs”) that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”) and United States Treasury (“Treasuries”) securities with terms of not more than five years, as well as money market funds. The fair value of these investments fluctuates subject to changes in market interest rates.

Foreign Exchange Rates:

The Company uses the U.S. dollar as its reporting currency. The functional currency of Nestor Cables is the Euro. The changing relationships of the U.S. dollar to the Euro could have a material impact on our financial results. Fluctuations in the Euro to U.S. dollar exchange rate impacts our consolidated balance sheets, as well as sales, cost of sales, and net income. If the Euro had appreciated or depreciated by 10%, relative to the U.S. Dollar, our operating expenses would have increased or decreased by approximately $135,000 and $264,000, or approximately 1%, for the three and six months ended March 31, 2023, respectively. We do not hedge against foreign currency fluctuations. As such, fluctuations in foreign currency exchange rates could have a material impact on the Company’s financial statements.

Inflation:

Rising costs, including wages, logistics, components, and commodity prices, are negatively impacting our profitability. We are subject to market risk from fluctuating market prices of certain purchased commodities and raw materials such as fiber cable and other components, which has outpaced our ability to reduce the cost structure and manufacturability or increase prices. We do not hedge commodity prices. Accordingly, inflation impacts our profitability, including cost of sales and operating expenses and may have a material impact on the Company’s consolidated financial statements.

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, 2023. 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, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting except that the Company continues to integrate and improve the internal control over financial reporting environment of the Nestor Cables segment.

The most significant risk factors applicable to the Company are described in Part II, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2022, There have been no material changes from the risk factors previously disclosed .