Clearfield, Inc.: Form 10-Q for the period ended Jun 30, 2024

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 “may,” “plan,” “expect,” “aim,” “believe,” “project,” “target,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could,” “outlook,” “continue” 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, 2023 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 nine months ended June 30, 2024, and 2023 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, 2023.

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. Our “fiber to anywhere” platform serves the unique requirements of Community Broadband customers (Tier 2 and 3 telco carriers, utilities, municipalities, and alternative carriers), Multiple System Operators (cable television), Large Regional Service Providers (ILEC operating a multi-state network with more than 500,000 subscribers), National Carriers (wireline/wireless national telco carriers (Tier 1)), and International customers (primarily Europe, Canada, Mexico, and Caribbean Markets).

We are engaged in global operations. Our operations currently comprise of two reportable segments: the Clearfield Operating Segment (referred to herein as “Clearfield”), and the Nestor Cables Operating Segment (referred to herein as “Nestor Cables” or “Nestor”), which we established following our acquisition of Nestor Cables on July 26, 2022. Prior to July 26, 2022, we had a single reportable segment structure.

Clearfield Operating Segment

Clearfield is focused on providing fiber management, fiber protection, and fiber delivery products that accelerate the turn-up of fiber-based networks in 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 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 deployments in backhaul from the tower to the cloud and fiber fronthaul from the tower to the antenna at the cell site 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 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.

Nestor Cables Operating Segment

As of July 26, 2022, Clearfield through its Finnish subsidiary, Clearfield Finland Oy, acquired Nestor Cables Oy. Nestor Cables is based in Oulu, Finland, with operations in Keila, Estonia through its wholly owned subsidiary, Nestor Cables Baltics OÜ. 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 our acquisition, Nestor Cables had been a supplier to Clearfield for over a decade and that relationship continued following the closing of the acquisition. Nestor 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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2024, VS. THREE MONTHS ENDED JUNE 30, 2023

Net sales for the third quarter of fiscal 2024 ended June 30, 2024, were $48,793,000, a decrease of approximately 20%, or $12,491,000, from net sales of $61,284,000 for the third quarter of fiscal 2023. Net sales to Broadband Service Providers were $46,028,000 in the third quarter of fiscal 2024 versus $59,731,000 in the same period of fiscal 2023. Net sales to Legacy customers were $820,000 in the third quarter of 2024 versus $1,553,000 in the same period of fiscal 2023. In addition, the Company recorded $16,493,000 in international sales for the third quarter of 2024 versus $14,186,000 in the same period of fiscal 2023. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. International sales represented 34% and 23% of total net sales for the third quarter of 2024 and 2023, respectively.

The decrease in net sales for the quarter ended June 30, 2024, of $12,491,000 compared to the quarter ended June 30, 2023, was primarily driven by decreased sales to Large Regional customers of $12,092,000, or 76%, and MSO customers of $3,637,000, or 39%, partially offset by increased sales to International customers of $2,307,000, or 16%. The decrease in sales in the Large Regional Service Provider customer and MSO customer markets for the quarter ended June 30, 2024, as compared to the quarter ended June 30, 2023, is due to lower demand as customers digest existing products previously purchased during the period of long lead time supply chain created by the pandemic. The increase in sales to International customers was driven by increased sales by the Nestor Cables segment during the current quarter.

Order backlog as of June 30, 2024 was $32,582,000, a decrease of 31% compared to $47,179,000 as of March 31, 2024, and a decrease of $74,704,000 or 56%, from June 30, 2023. The year-over-year decrease was also due to the lull in demand as customers digest previously purchased products.

Revenue from customers is obtained from purchase orders submitted from time to time, with a limited number of customers 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 customer deployment schedules and factors affecting customer ordering patterns, including the digestion of customer’s excess inventory. 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 third quarter of 2024 was $38,101,000, a decrease of $4,109,000, or 10%, from $42,210,000 in the comparable period of fiscal 2023. Gross profit percent was 21.9% of net sales in the third quarter of 2024, a decrease from 31.1% of net sales for the third quarter of 2023. Gross profit decreased $8,382,000, or 44%, to $10,692,000 for the three months ended June 30, 2024, from $19,074,000 in the comparable period in fiscal 2023. The Company’s gross profit was negatively impacted by an increase in inventory reserves of $1,154,000 during the three months ended June 30, 2024. While gross margin was down from the year ago quarter, it showed a significant improvement from the previous quarter due to improved production capacity and lower excess inventory charges due to better utilization from higher revenue in the quarter.

Selling, general and administrative expenses decreased $450,000, or 3%, to $12,999,000 in the third quarter of 2024 from $13,449,000 for the third quarter of 2023.

Loss from operations for the quarter ended June 30, 2024, was $2,307,000 compared to income from operations of $5,625,000 for the comparable quarter of fiscal 2023, a decrease of approximately 141%. The decrease is the result of decreased net sales and gross profit margin as explained above.

Net investment income for the quarter ended June 30, 2024, was $1,735,000 compared to $1,630,000 for the comparable quarter for fiscal 2023. The increase in interest income is due to higher interest rates earned during the three months ended June 30, 2024, as compared to the prior year quarter.

Interest expense for the quarter ended June 30, 2024, remained relatively consistent at $153,000, compared to $195,000 for the comparable period of fiscal 2023. Interest expense incurred during these periods is related to factoring liabilities in the Nestor segment.

The Company recorded an income tax benefit of $277,000 and an income tax expense of $1,842,000 for the three months ended June 30, 2024, and 2023, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The decrease in tax expense of $2,119,000 in the third quarter of fiscal 2024 from the third quarter of fiscal 2023 is primarily due to decreased income from operations. The income tax expense rate for the third quarter of fiscal 2024 increased to 38.2% from 26.1% recorded in the third quarter of fiscal 2023 due to the higher percentage impact of discrete items due to a low level of pre-tax book loss in the third quarter.

The Company’s net loss for the three months ended June 30, 2024, was $447,000, or $0.04 per basic and diluted share. The Company’s net income for the three months ended June 30, 2023, was $5,218,000, or $0.33 per basic and diluted share. The decrease in basic and diluted earnings per share for the three months ended June 30, 2024, as compared to June 30, 2023, was due to lower net income as a result of decreased net sales and gross profit margin and increased selling, general and administrative expenses as detailed above.

NINE MONTHS ENDED JUNE 30, 2024 VS. NINE MONTHS ENDED JUNE 30, 2023

Net sales for the nine months ended June 30, 2024, were $119,933,000, a decrease of approximately 45%, or $99,102,000, from net sales of $219,035,000 for the nine months ended June 30, 2023. Net sales to Broadband Service Providers were $112,203,000 in the nine months ended June 30, 2024, versus $211,231,000 in the same period of fiscal 2023. Among this group, the Company recorded $33,110,000 in international sales for the nine months ended June 30, 2024, versus $37,527,000 in the same period of fiscal 2023. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 28% and 17% of total net sales for the nine months ended June 30, 2024, and June 30, 2023, respectively. Net sales to Legacy customers were $2,310,000 in the nine months ended June 30, 2024, versus $7,804,000 in the same period of fiscal 2023.

The decrease in net sales for the nine months ended June 30, 2024, of $99,102,000 compared to the nine months ended June 30, 2023, was primarily driven by decreased sales to Community Broadband Service Providers of $41,244,000, or 46%, Large Regional customers of $28,511,000, or 66%, MSO customers of $24,289,000, or 60%, and International customers of $4,417,000, or 12%. The decrease in sales across these markets for the quarter ended June 30, 2024, as compared to the quarter ended June 30, 2023, is mainly due to lower demand as customers digest existing products previously purchased during the period of long lead time supply chain created by the pandemic.

Revenue from customers is obtained from purchase orders submitted from time to time, with a limited number of customers 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 including the digestion of customer’s excess inventory. 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 nine months ended June 30, 2024, was $101,712,000, a decrease of $44,038,000, or 30%, from $145,750,000 in the comparable period of fiscal 2023. Gross profit percent was 15.2% of net sales for the nine months ended June 30, 2024, a decrease from 33.5% of net sales for the nine months ended June 30, 2023. Gross profit decreased $55,064,000, or 75%, to $18,221,000 for the nine months ended June 30, 2024, from $73,285,000 in the comparable period in fiscal 2023. Gross profit margin was negatively affected by unabsorbed overhead in our manufacturing facilities due to lower levels of demand. The Company’s gross profit was also negatively impacted by an increase in inventory reserves of $8,944,000 during the nine months ended June 30, 2024. Inventory reserves are primarily due to excess inventory due to the lull in demand while customers draw down their existing products previously purchased during the period of long lead time supply chain created by the pandemic.

Selling, general and administrative expenses increased $724,000, or 2%, to $38,430,000 in the nine months ended June 30, 2024, from $37,714,000 for the comparable period of fiscal 2023.

Loss from operations for the nine months ended June 30, 2024, was $20,210,000 compared to income from operations of $35,571,000 for the comparable quarter of fiscal 2023, a decrease of 157%. The decrease is the result of decreased net sales and gross profit margin and increased selling, general and administrative expenses explained above.

Net investment income for the nine months ended June 30, 2024, was $5,653,000 compared to $3,328,000 for the comparable quarter for fiscal 2023. The increase in interest income is due to higher interest rates earned and a higher average investments balance in the nine months ended June 30, 2024. The higher investments balance is a result of the Company’s capital raise of $130,262,000 completed late in the first fiscal quarter of 2023.

Interest expense for the nine months ended June 30, 2024, was $381,000 compared to $551,000 for the comparable quarter of fiscal 2023. The decrease was due to repayment of the Company’s line of credit in December 2022, which had been previously drawn on for the acquisition of Nestor Cables, following the Company’s secondary offering completed in December 2023.

The Company recorded an income tax benefit of $3,311,000 and an income tax expense of $8,511,000 for the nine months ended June 30, 2024, and 2023, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The decrease in tax expense of $11,822,000 in the third quarter of fiscal 2024 from the third quarter of fiscal 2023 is primarily due to decreased income from operations. The income tax expense rate for the nine months ended June 30, 2024, and 2023 remained unchanged at 22.2%.

The Company’s net loss for the nine months ended June 30, 2024, was $11,626,000, or $0.79 per basic share and per diluted share. The Company’s net income for the nine months ended June 30, 2023, was $29,837,000, or $2.01 per basic share or $2.00 per diluted share. The decrease in basic and diluted earnings per share for the nine months ended June 30, 2024, as compared to June 30, 2023, was due to lower net income as a result of lower sales, lower gross profit margin and higher selling, general and administrative expenses as detailed above.

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.

Reportable segments are as follows:

• Clearfield Segment – The Clearfield segment designs, manufactures, and sells fiber management, protection, and delivery solutions. For the three months ended June 30, 2024, and 2023, net sales from the Clearfield segment comprised 69% and 78% of the Company’s total net sales, respectively. For the nine months ended June 30, 2024, and 2023, net sales from the Clearfield segment compromised 75% and 85% of the Company’s total net sales, respectively.
• Nestor Cables Segment – The Nestor Cables segment designs, manufactures, and sells fiber optic and copper telecommunication cables and equipment. For the three months ended June 30, 2024, and 2023, net sales from the Nestor Cables segment comprised 31% and 22% of the Company’s total net sales, respectively. For the nine months ended June 30, 2024, and 2023, net sales from the Nestor Cables segment compromised 25% and 15% of the Company’s total net sales, respectively.

Clearfield Segment

The following table provides net sales and net income for the Clearfield segment for the three and nine months ended:

(In thousands)

Net sales in the Clearfield segment decreased 30%, or $14,186,000, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. Net sales in the Clearfield segment decreased 52%, or $97,291,000, for the nine months ended June 30, 2024, as compared to the nine months ended June 30, 2023, resulting from decreased sales to its Community Broadband, MSO/Cable TV, and Large Regional customers as these customers work to digest inventory that was purchased previously during the period of long lead time supply chain created by the pandemic.

Net income (loss) in the Clearfield segment for the three months ended June 30, 2024, decreased 109%, or $5,627,000, as compared to the three months ended June 30, 2023. Net income (loss) in the Clearfield segment for the nine months ended June 30, 2024, decreased 129%, or $39,125,000, as compared to the nine months ended June 30, 2023, driven by the changes in sales outlined above, as well as lower gross profit margin which was negatively affected by the buildup in capacity that was not utilized and increased reserves for excess inventory.

Nestor Cables Segment

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

(In thousands)

Net sales in the Nestor Cables segment increased 13%, or $1,695,000, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, excluding sales to the Clearfield Segment. Net sales in the Nestor Cables segment decreased 6%, or $1,810,000 for the nine months ended June 30, 2024, as compared to the nine months ended June 30, 2023, excluding sales to the Clearfield Segment.

Net loss in the Nestor Cables segment for the three months ended June 30, 2024, increased 55%, or $38,000, as compared to the three months ended June 30, 2023. Net loss in the Nestor Cables segment for the nine months ended June 30, 2024, increased 549%, or $2,338,000, as compared to the nine months ended June 30, 2023.

Liquidity and Capital Resources

As of June 30, 2024, our principal source of liquidity was our cash, cash equivalents, and short-term investments. These sources total $123,819,000 as of June 30, 2024, compared to $168,113,000 as of September 30, 2023. Additionally, we have a line of credit for $40 million that has no outstanding borrowing as of June 30, 2024. 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 $24,180,000 as of June 30, 2024, compared to $6,343,000 as of September 30, 2023. 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 June 30, 2024, our cash, cash equivalents, and short-term and long-term investments totaled $147,999,000, compared to $174,456,000 as of September 30, 2023.

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 beyond the next 12 months. The Company intends on utilizing its available cash and assets primarily for its continued organic growth, potential future strategic transactions, and the Company’s share repurchase program.

Operating Activities

Net cash provided by operating activities totaled $8,464,000 for the nine months ended June 30, 2024. This consisted of a net loss of $11,626,000, non-cash expenses for depreciation and amortization of $5,481,000, stock-based compensation of $3,437,000, amortization of discounts on investments of $3,304,000 and increased deferred income taxes of $3,523,000, in addition to changes in operating assets and liabilities providing and using cash. The primary change in operating assets and liabilities providing cash was a decrease in inventory of $23,440,000 and a decrease in accounts payable and accrued expenses of $1,643,000. The decrease in inventory is due to decreased inventory purchases during the nine months ending June 30, 2024, as the Company utilizes inventory on hand to fulfill customer orders and achieve lower stocking levels to support the decreased sales order backlog, as well as higher excess inventory reserves. The primary change in operating assets and liabilities using cash was an increase in other assets of $8,030,000, related to the increases in prepaid taxes and prepaid expenses.

Net cash provided by operating activities totaled $13,481,000 for the nine months ended June 30, 2023. This was primarily due to net income of $29,837,000, non-cash expenses for depreciation and amortization of $4,411,000, stock-based compensation of $2,504,000, and non-cash income related to amortization of discounts on investments of $2,429,000, 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 $20,326,000 and an increase in inventory of $21,510,000. 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 June 30, 2023, to support previously anticipated demand. The primary change in operating assets and liabilities providing cash was a decrease in accounts receivable of $24,519,000. Days sales outstanding, which measures how quickly receivables are collected, decreased 5 days to 47 days as of June 30, 2023, compared to 52 days from September 30, 2022.

Investing Activities

We invest our excess cash in money market accounts, U.S. Treasury securities, money market funds, and bank certificates of deposit in denominations across numerous banks. We believe we obtain a competitive rate of return given the economic climate and relative risk profile of these investments. During the nine months ended June 30, 2024, we received proceeds from the maturity of investment securities of $142,067,000 and used cash to purchase $124,137,000 of investment securities. Purchases of property, plant, and equipment, mainly related to manufacturing equipment and intangible assets, consumed $5,608,000 of cash during the nine months ended June 30, 2024.

During the nine months ended June 30, 2023, we received proceeds from maturities of investments of $105,077,000 and used cash to purchase $210,923,000 of investment securities. Purchases of property, plant and equipment, mainly related to manufacturing equipment and intangible assets, consumed $6,529,000 of cash during the nine months ended June 30, 2023.

Financing Activities

For the nine months ended June 30, 2024, we used cash to repurchase $33,374,000 of our common stock on the open market under our stock repurchase program, which includes U.S. Federal excise taxes. We received $586,000 from employees’ participation and purchase of stock through our ESPP, used $240,000 for payment of withholding taxes for vesting of restricted stock grants, and used $9,000 related to share withholding for the exercise price and taxes associated with the issuance of common stock upon cashless exercises of stock options.

For the nine months ended June 30, 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 $612,000 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 $493,000 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 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 nine months ended June 30, 2023.

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, 2023. Management made no changes to the Company’s critical accounting estimates during the quarter ended June 30, 2024.

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 June 30, 2024.

Clearfield is exposed to market risk due to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, and commodity prices. Changes in those factors could impact the Company’s results of operations and financial condition. For a discussion of sensitivity analysis related to these types of market risks, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended September 30, 2023. There have been no material changes in information that would have been provided in the context of Item 3 for the quarter ended June 30, 2024.

The Company currently invests its excess cash in bank certificates of deposit that are fully insured by the Federal Deposit Insurance Corporation and United States Treasury 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 condensed 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 for the three months ended June 30, 2024, would have increased or decreased by approximately $164,000 and $544,000, or approximately 1%, for the three and nine months ended June 30, 2024, 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 condensed consolidated 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 condensed 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 June 30, 2024. 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 June 30, 2024, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, 2023. There have been no material changes from the risk factors previously disclosed.