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
  For the
quarterly period ended December 31, 2009
  [   
      ]
                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)
 Minnesota
              41-1347235(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
  5480
Nathan Lane North, Suite 120, Plymouth, Minnesota 55442
 (Address
of principal executive offices and zip code)
  (763)
476-6866
 (Registrant’s
telephone number, including area code)
  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.
  xYES      oNO
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files).
 o YES     oNO
  Indicate
by check mark whether the registrant is a “large accelerated filer”, an
“accelerated filer”, a “non-accelerated filer” or a “smaller reporting company”
(as defined in Rule 12b-2 of the Exchange Act).
  Large accelerated
      filer o
                Accelerated filero
                Non-accelerated filero
                Smaller Reporting
      Company x
   Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  oYES      xNO
  Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
  Class:
              Outstanding
      at February 2, 2010Common
      stock, par value $.01
              11,995,331
   
 
 CLEARFIELD,
INC.
 FORM
10-Q
 TABLE
OF CONTENTS
 
   PART I.  FINANCIAL INFORMATION
                1ITEM 1.  FINANCIAL STATEMENTS
                1ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                7ITEM 3.    QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK
                10ITEM  4.   CONTROLS AND
      PROCEDURES
                10PART II. OTHER INFORMATION
                11ITEM 1.  LEGAL PROCEEDINGS
                11ITEM 1A.  RISK FACTORS
                11ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
                11ITEM 3. DEFAULTS UPON SENIOR SECURITIES
                11ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
                11ITEM 5. OTHER INFORMATION
                11ITEM 6. Exhibits
                11SIGNATURES
                12
 
 
 
 PART I.  FINANCIAL INFORMATION
 
 ITEM
1.  FINANCIAL STATEMENTS
 
 CLEARFIELD,
INC.
 CONSOLIDATED  CONDENSED
BALANCE SHEETS
 UNAUDITED
 December
      31, 2009
                
                
                September
      30, 2009AssetsCurrent
      AssetsCash
      and cash equivalents
                
                $
                4,375,289
                
                
                $
                4,731,735Short-term
      investments
                
                
                1,153,566
                
                
                
                2,108,566Accounts
      receivable, net
                
                
                1,739,721
                
                
                
                2,723,414Inventories
                
                
                1,241,314
                
                
                
                1,153,862Other
      current assets
                
                
                217,376
                
                
                
                180,635Total
      current assets
                
                
                8,727,266
                
                
                
                10,898,212Property,
      plant and equipment, net
                
                
                1,255,763
                
                
                
                1,319,492Other
      AssetsLong-term
      investments
                
                
                3,876,000
                
                
                
                2,840,000Goodwill
                
                
                2,570,511
                
                
                
                2,570,511Deferred
      taxes –long term
                
                
                2,209,745
                
                
                
                2,231,990Other
                
                
                176,368
                
                
                
                176,368Notes
      receivable
                
                
                381,553
                
                
                
                392,186Total
      other assets
                
                
                9,214,177
                
                
                
                8,211,055Total
      Assets
                
                $
                19,197,206
                
                
                $
                20,428,759Liabilities
      and Shareholders’ EquityCurrent
      LiabilitiesCurrent
      maturities of long-term debt
                
                $
                16,715
                
                
                $
                33,081Accounts
      payable
                
                
                733,536
                
                
                
                1,212,541Accrued
      compensation
                
                
                557,390
                
                
                
                1,159,245Accrued
      expenses
                
                
                69,108
                
                
                
                88,139Total
      current liabilities
                
                
                1,376,749
                
                
                
                2,493,006Deferred
      rent
                
                
                86,068
                
                
                
                87,942Total
      Liabilities
                
                
                1,462,817
                
                
                
                2,580,948Shareholders’
      EquityUndesignated
      shares, 4,999,500 authorized shares; no shares issued and
      outstanding
                
                
                -
                
                
                
                -Preferred
      stock, $.01 par value;  500 shares; no shares
      outstanding
                
                
                -
                
                
                
                -Common
      stock, authorized 50,000,000, $ .01 par value; 11,978,831 and 11,794.631,
      shares issued and outstanding at December 31, 2009 and September 30,
      2009
                
                
                119,788
                
                
                
                119,746Additional
      paid-in capital
                
                
                52,418,356
                
                
                
                52,372,139Accumulated
      deficit
                
                
                (34,803,755
                )
                
                
                (34,644,074
                )Total
      Shareholders’ Equity
                
                
                17,734,389
                
                
                
                17,847,811Total
      Liabilities and Shareholders’ Equity
                
                $
                19,197,206
                
                
                $
                20,428,759
 
 
 SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
   1
  CLEARFIELD,
INC.
 CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
 UNAUDITED
 Three
      Months EndedDecember
      31,2009
                
                
                2008Revenues
                
                $
                4,942,667
                
                
                $
                5,933,287Cost
      of sales
                
                
                3,240,959
                
                
                
                3,919,079Gross
      profit
                
                
                1,701,708
                
                
                
                2,014,208Operating
      expensesSelling,
      general and administrative
                
                
                1,889,615
                
                
                
                1,804,978Income
      (loss) from operations
                
                
                (187,907
                )
                
                
                209,230Other
      income (expense)Interest
      income
                
                
                38,056
                
                
                
                31,750Interest
      expense
                
                
                (584
                )
                
                
                (1,906
                )Other
      income
                
                
                14,515
                
                
                
                13,64451,987
                
                
                
                43,488Income
      (loss)  before income taxes
                
                
                (135,920
                )
                
                
                252,718Income
      tax expense
                
                
                23,761
                
                
                
                35,231Net
      income  (loss)
                
                $
                (159,681
                )
                
                $
                217,487Net
      income (loss)per share:Basic
                
                $
                (.01
                )
                
                $
                .02Diluted
                
                $
                (.01
                )
                
                $
                .02Weighted
      average shares outstanding:Basic
                
                
                11,977,266
                
                
                
                11,938,131Diluted
                
                
                11,977,266
                
                
                
                11,938,131
 
 
 SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
  2
 
 CLEARFIELD,
INC.
 CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
 UNAUDITED
 Three
      Months Ended December 31,2009
                
                
                2008Cash
      flow from operating activitiesNet
      income (loss)
                
                $
                (159,681
                )
                
                $
                217,487Adjustments
      to reconcile net income (loss) to net cash provided by (used
      in)  operating activities:Depreciation
      and amortization
                
                
                114,425
                
                
                
                108,715Deferred
      taxes
                
                
                22,245
                
                
                
                22,355Stock
      based compensation
                
                
                40,817
                
                
                
                29,119Changes
      in operating assets and liabilities:Accounts
      receivable, net
                
                
                983,693
                
                
                
                782,854Inventories
                
                
                (87,452
                )
                
                
                188,536Prepaid
      expenses and other
                
                
                (26,108
                )
                
                
                (57,369
                )Accounts
      payable and accrued expenses
                
                
                (1,101,765
                )
                
                
                (1,260,336
                )Net
      cash provided by (used in) operating activities
                
                
                (213,826
                )
                
                
                31,361Cash
      flow from investing activitiesPurchases
      of property and equipment
                
                
                (50,696
                )
                
                
                (36,338
                )Purchase
      of investments
                
                
                (1,356,000
                )
                
                
                -Sale
      of investments
                
                
                1,275,000
                
                
                
                3,200,000Net
      cash provided by (used in) investing activities
                
                
                (131,696
                )
                
                
                3,259,940Cash
      flow from financing activitiesRepayment
      of long-term debt
                
                
                (16,366
                )
                
                
                (15,044
                )Proceeds
      from issuance of common stock
                
                
                5,442Net
      cash used in financing activities
                
                
                (10,924
                )
                
                
                (15,044
                )Increase
      (decrease) in cash and cash equivalents
                
                
                (356,446
                )
                
                
                3,276,257Cash
      and cash equivalents at beginning of period
                
                
                4,731,735
                
                
                
                4,333,709Cash
      and cash equivalents at end of period
                
                $
                4,375,289
                
                
                $
                7,609,966
 
 
 SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
   3
  NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
 Note
1.  Basis of Presentation
  The
accompanying consolidated condensed financial statements are unaudited and have
been prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information,
pursuant to the rules and regulations of the Securities and Exchange
Commission.  Pursuant to such rules and regulations, certain financial
information and footnote disclosures normally included in the financial
statements have been condensed or omitted.  However, in the opinion of
management, the financial statements include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the financial
position and results of operations and cash flows of the interim periods
presented. These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended
September 30, 2009.
  In
preparation of the Company’s consolidated financial statements, management is
required to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses during the reporting
periods. As future events and their effects cannot be determined with precision,
actual results could differ significantly from these estimates.
 
 We
evaluated our quarter ended December 31, 2009 consolidated financial statements
for subsequent events through the date the financial statements were issued
which is February 4, 2010,the date this Quarterly Report on Form 10-Q was filed.
We are not aware of any subsequent events which would require recognition or
disclosure in the financial statements
  
  Note
2.  Net Income (Loss) Per Share
  Basic net
income per common share (“EPS”) is computed by dividing net income by the
weighted average number of common shares outstanding for the reporting period.
Diluted EPS equals net income divided by the sum of the weighted average number
of shares of common stock outstanding plus all additional common stock
equivalents, such as stock options, when dilutive.
  
  Note  3.
Cash Equivalents and Investments
 
 The
Company currently invests its excess cash in money market accounts and bank
certificates of deposit (CD’s) that are fully insured by the FDIC with a term of
not more than three years. CD’s with original maturities of more than three
months are reported as held-to-maturity investments. These investments in CD’s
are classified as held to maturity and are valued at cost which approximates
fair value. These investments are considered Level 2 investments under fair
value measurements. The maturity dates of our CD’s at December 31, 2009 are as
follows:
  Less
      than one year
                
                $
                3,407,2541-3
      years
                
                
                3,876,000Total
                
                $
                7,283,254
 
  Note
4.  Stock Based Compensation
 
 The
Company recorded $40,817 and $29,119 of compensation expense related to current
and past option grants for the three month periods ended December 31, 2009 and
2008, respectively.  This expense is included in selling, general and
administrative expense.  There was no tax benefit from recording this
non-cash expense.  As of December 31, 2009, $353,488 of total
unrecognized compensation expense related to non-vested awards is expected to be
recognized over a weighted average period of approximately 2.05
years.
  We used
the Black-Scholes option pricing model to determine the weighted average fair
value of options during the three-month periods ended December 31, 2009 and 2008
respectively
   4
  During the
three-month period ended December 31, 2009, the Company granted executive
officers and key employees incentive stock options to purchase an aggregate of
85,000 shares of common stock with a contractual term of 7 years, a three year
vesting term and an exercise price of $3.30 with a fair value of $1.96 per
share.
  The
weighted-average fair values at the grant date for options issued during the
three months ended December 31, 2009 and 2008 were $2.01 and $.43, respectively.
This fair value was estimated at grant date using the weighted-average
assumptions listed below.
  Three
      months ended December 31,2009
                
                2008Dividend
      yield
                0%
                
                0%Expected
      volatility
                70.52%
                
                43.73%Average
      risk-free interest rate
                2.20%
                
                2.84%Expected
      life
                5
      years
                
                5
      yearsVesting
      period
                3
      years
                
                3
      years
 
  The
expected stock price volatility is based on the historical volatility of the
Company’s stock for a period approximating the expected life. The expected life
represents the period of time that options are expected to be outstanding after
their grant date. The risk-free interest rate reflects the interest rate at
grant date on zero-coupon U.S. governmental bonds having a remaining life
similar to the expected option term.
  The
following table summarizes information about the stock options outstanding at
December 31, 2009.
  
 Options
      Outstanding
                
                Options
      ExercisableRange
      of Exercise Prices
                
                Number
      Outstanding
                
                Weighted
      Average Remaining Contractual Life
                
                
                Weighted
      Average Exercise Price
                
                Number
      Exercisable
                
                Weighted
      Average Exercise Price$   0.00-1.09
                
                826,100
                
                6.71
      years
                
                
                $      1.04
                
                318,099
                
                $          1.041.10-1.49
                
                115,900
                
                3.15
      years
                
                
                1.27
                
                55,400
                
                1.341.50-1.99
                
                20,000
                
                0.08
      years
                
                
                1.60
                
                18,600
                
                1.602.00-5.00
                
                85,000
                
                6.89
      years
                
                
                3.30
                
                -
                
                -1,047,000
                
                6.22
      years
                
                
                1.26
                
                393,099
                
                1.11
 
 Note
5.   Inventories
 
 Inventories
consist of the following as of:
  December 31, 2009
                
                
                September 30, 2009Raw
      materials
                
                $
                1,018,000
                
                
                $
                873,439Work-in-progress
                
                
                13,579
                
                
                
                23,031Finished
      goods
                
                
                209,735
                
                
                
                257,392$
                1,241,314
                
                
                $
                1,153,862
 
  Note
6.  Major Customer Concentration
  
 Two
customers, Power & Telephone Supply Company and MTS Systems Corporation,
comprised approximately 28% and 35% of total sales for the periods ended
December 31, 2009 and December 31, 2008, respectively. Power & Telephone
Supply Company is a distributor and it accounted for 19% and 25% of revenue for
the corresponding respective periods. MTS Systems Corporation is an end-use
customer and it accounted for 9% and 10% of revenues for the corresponding
respective periods. MTS Systems Corporation purchases our product through its
standard form of purchase order with pricing established by a schedule that is
in effect from July 1, 2008 through June 30, 2011. Power & Telephone Supply
Company purchases our product through its standard form of purchase
order.
   5
  At
December 31, 2009, ten customers accounted for 50% of accounts receivable two of
such customers were Power & Telephone Supply Company and MTS Systems. At
December 31, 2008, seven customers accounted for 50% of accounts receivable two
of such customers were Power & Telephone Supply Company and MTS
Systems.
 
  Note
7. Goodwill
   The
Company analyzes its goodwill in accordance with ASC 350-20 which requires that
goodwill be tested for impairment annually or at an interim period when events
occur or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount.
   The
Company assesses the valuation or potential impairment of its goodwill by
utilizing a present value technique to measure fair value by estimating future
cash flows. We construct a discounted cash flow analysis based on various sales
and cost assumptions to estimate the fair value of Clearfield (which is the only
reporting unit). The fair values are then compared with the corresponding book
value of Clearfield. Where available and as appropriate comparative market
multiples are used to corroborate the results of the present value method. We
consider our net book value and market capitalization when we test for goodwill
impairment because we have one reporting unit.
  The result
of the analysis performed in the fourth fiscal quarter ended September 30, 2009
did not indicate an impairment of goodwill.  The Company will analyze
goodwill more frequently should changes in events or circumstances occur. During
the quarter ended December 31, 2009, no events or circumstances have occurred
that suggest an impairment exists.
 
  Note
8.  Income Taxes
  We
recorded a provision for income taxes of $24,000 and $35,000, for the three
months ended December 31, 2009 and 2008 respectively.  Our tax
provision includes estimated federal alternative minimum taxes and state
franchise taxes, but is primarily related to deferred tax expense related to
book and income tax basis difference in goodwill on prior asset
acquisitions.
 
 As of
September 30, 2009, the Company had U.S. federal and state net operating
loss (NOL) carry forwards of approximately $31,684,000 and $23,573,000,
respectively, which expire in fiscal years 2019 to 2027. The Company has
recently completed an Internal Revenue Code Section 382 analysis of the loss
carry-forwards and has determined that all of the Company’s loss carry-forwards
are utilizable and not restricted under Section 382.
 
 Deferred
taxes recognize the impact of temporary differences between the amounts of the
assets and liabilities recorded for financial statement purposes and such amount
measured in accordance with tax laws.  Realization of net operating
loss carry forward and other deferred tax temporary differences are contingent
upon future taxable earnings.  The Company’s deferred tax asset was
reviewed for expected utilization using a “more likely than not” approach as
required by ASC 740 by assessing the available positive and negative factors
surrounding its recoverability. Accordingly, the Company recorded a full
valuation allowance at September 30, 2008.  For the year ended
September 30, 2009, the Company has reduced the portion of the valuation
allowance related to our net operating loss carryforwards (NOL’s) and other
deferred tax assets that we believe are more likely than not to be realized
based upon estimates of future taxable income.
 
 During the
fourth quarter of fiscal year 2009, the Company reversed a portion of its
valuation allowance in consideration of all available positive and negative
evidence, including our historical operating results, current financial
condition, and potential future taxable income.  Our future potential
taxable income was evaluated based primarily on anticipated operating results
for fiscal years 2010 through 2012. We determined that projecting operating
results beyond 2012 involves substantial uncertainty and we discounted forecasts
beyond 2012 as a basis to support our deferred tax assets. The reduction in the
valuation allowance in the fourth quarter resulted in a non-cash income tax
benefit of approximately $2.5 million.  At September 30, 2009 the
Company continues to record a valuation allowance of approximately $9.3 million
against its remaining deferred tax assets. We will continue to assess the
assumptions used to determine the amount of our valuation allowance and may
adjust the valuation allowance in future periods based on changes in assumptions
of estimated future income and other factors. If the valuation allowance is
reduced, we would record an income tax benefit in the period the valuation
allowance is reduced. If the valuation allowance is increased, we would record
additional income tax expense. For the three months ended December 31, 2009, the
Company has determined that no additional change in valuation allowance is
warranted at this time.
 
 6
 
 The
Company is subject to income taxes in the U.S. federal jurisdiction, and various
state jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant
judgment to apply. With few exceptions, the Company is no longer subject to U.S.
federal, state and local, income tax examinations by tax authorities for fiscal
years ending prior 1993
 
  Note
9.  Certain Relationships and Transactions
  India
Facility
 
 On
June 28, 2007, we sold all of our interest in our Indian subsidiary to an
entity controlled by Anil K. Jain, our former chief executive officer, on
terms deemed by the independent directors to be fair and reasonable to the
Company.  The purchase price of $500,000 is payable over five years
and is fully secured by pledges of Clearfield, Inc. stock and Dr. Jain’s
payments under his separation agreement, as well as by a guarantee from Dr.
Jain. The balance of the outstanding note at December 31, 2009 is $425,441 with
accrued interest of $2,514. The rate of interest charged is 7% and the note is
current.
 
 
 
 Note
10.  Accounting Pronouncements
  New
Accounting Pronouncements
  In June
2009, the FASB issued new standards on variable interest entities (VIE), as
codified in 810-10, which requires an entity to perform a qualitative analysis
to determine whether the enterprise’s variable interest gives it a controlling
financial interest in a VIE. This analysis identifies a primary beneficiary of a
VIE as the entity that has both of the following characteristics: i) the power
to direct the activities of a VIE that most significantly impact the entity’s
economic performance and ii) the obligation to absorb losses or receive benefits
from the entity that could potentially be significant to the VIE. The Company is
required to complete ongoing reassessments of the primary beneficiary of a VIE
and will be required by the Company effective October 1, 2010. The Company does
not expect it to have a material effect on its financial
statements.
  
   ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  
 The
statements contained in this 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 such
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 II, Item 1A, “Risk
Factors,” of our Annual Report on Form 10-K for the year ended September 30,
2009, 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 as 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 month periods ended December 31, 2009 and
2008 should be read in conjunction with the consolidated 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, 2009.
  
 7
  OVERVIEW
  General
  Clearfield,
Inc. manufactures and sells a broad range of telecommunications equipment and
products.  Our principal products are standard and custom connectivity
products for telecommunications customers, including fiber distribution systems,
optical components, outside plant (“OSP”) cabinets, and fiber and copper cable
assemblies.  Our highly configurable products are used for the cable
management requirements of the Fiber-to-the-Home (“FTTH”) marketplace and in
designing and terminating custom cable assemblies for commercial and industrial
original equipment manufacturers (“OEM’s”).  Over the past four years,
we have expanded our product offerings and broadened our customer base. We
believe our solid reputation of quality service and competitive and innovative
product lines differentiate us from our competitors.
  Given the
impact of the economic downturn and uncertain timing and extent of any recovery
on our customers, we are unable to provide short term guidance regarding our
future results of operations. We closely monitor the trends with in our industry
and our customer base, as well as the impact of legislation and government
initiatives on our customers, in developing our short-term and long-term
strategies.
  
  RESULTS
OF OPERATIONS
  THREE
MONTHS ENDED DECEMBER 31, 2009 VS. THREE MONTHS ENDED DECEMBER 31,
2008
  Revenues
for the first fiscal quarter of 2010 ended December 31, 2009 were $4,943,000, a
decrease of 17% or approximately $990,000 from revenue of $5,933,000 for the
first fiscal quarter of 2009.
 
 Revenue
from broadband service providers and commercial data networks amounted to
$4,128,000, or 84% of revenue, for the first quarter of 2010 compared to
$4,786,000, or 81% of revenue, for the comparable period of 2009, a decline of
$658,000 or 14%. This is a reflection of the overall economic climate. In
addition there has been a delay in projects by telephone companies and service
providers as they apply for government stimulus funds. The largest contributor
to the reduced revenue is reduction is a single distributor from our Eastern
region; they experienced the same economic downturn. Our revenue to them is down
37% over the prior year for this comparable quarter.
 
 Revenue
from OEM’s consisting primarily of sales of fiber optic and copper cable
assemblies produced to customer design specifications amounted to $814,000, or
16% of revenue, for the first quarter of 2010 compared to $1,147,000, or 19% of
revenue, for the comparable period of 2009. Our OEM business declined $333,000
or 29% for the first quarter of fiscal year 2010 as compared to the first
quarter of fiscal year 2009. This reduction is a direct reflection of the
business of the underlying OEM customers that have been negatively impacted by
the weakening in the U.S. economy.
 
 Gross
profit percentage improved to 34.4 % from 33.9% for comparable quarters of
fiscal 2010 and 2009. Gross profit declined from $2,014,000 for the first
quarter of 2009 to $1,702,000 for 2010 a reduction of 15% or $312,000. The
increase in gross margin as a percent of revenues is due to the results of
product mix weighted toward the FieldSmart architecture. Manufacturing
efficiencies and sourcing strategies contribute to lower cost of
goods.
 
 Selling,
general and administrative expenses increased 5% or $85,000 from $1,805,000 for
the first quarter of 2009 to $1,890,000 for the first quarter of 2010. This
increase is composed of increased marketing staff and field product management
personnel an investment necessary to continue to build our brand. We did not
meet thresholds for our revenue plan and as a result did not record performance
bonus expense along with that we did not achieve all of our sales goals
resulting in reduced sale commissions.
 
 We
incurred a loss from operations for the first quarter of fiscal 2010 ended
December 31, 2009 in the amount of $188,000 compared to income of $209,000 for
the same period ended December 31, 2008. This decrease is directly attributable
to reduced revenue.
 
 Interest
income for the quarter ended December 31, 2009 was $38,000 compared to $32,000
for the comparable period for fiscal 2009. The Company invests its excess cash
in FDIC backed bank certificates of deposit.
   8
  Interest
expense decreased to $500 for the quarter ended December 31, 2009 compared to
$2,000 for the comparable period for fiscal 2009. Interest for both years is
attributable to financing associated with the enterprise information system
installed during 2007 and 2008.
 
 Other
income consists of $15,000 and $14,000 for the quarters ended December 31 of
2009 and 2008, respectively.  This is attributable to rental income
from our Aberdeen, South Dakota facility.
 
 Income tax
expense was $24,000 and $35,000 for the quarters ended December 31 of 2009 and
2008, respectively. Tax expenses related to goodwill were $22,000 and $22,000
respectively for the corresponding quarters. The balance was paid to various
states for income and franchise taxes as well as alternative minimum tax (ATM)
which was applicable for the quarter ended December 31, 2008.
 
 The
Company’s net loss for the first quarter of fiscal 2010 ended December 31, 2009
was $160,000, or $0.01 basic and diluted share. For the first quarter of fiscal
2009 ended December 31, 2008 the Company earned net income of $217,000, or $0.02
per basic and diluted share.
 
 
  LIQUIDITY AND CAPITAL
RESOURCES
  As of
December 31, 2009, our principal source of liquidity was our cash and cash
equivalents and short term investments. Those sources total $5,529,000 at
December 31, 2009 compared to $6,840,000 at September 30, 2009.  Our
non-operating cash and long term-investments are invested in bank certificates
of deposit (CD) that are guaranteed by the Federal Deposit Insurance Corporation
(FDIC) and in bank money market accounts also guaranteed by the FDIC.
Non-operating cash and long-term investments were $3,876,000 and $2,840,000 at
December 31, 2009 and September 30, 2009, respectively. All CDs are purchased
with the intent to hold to maturity, we have built a CD ladder in which they
range from three months to three years in term.   The Company is
currently expecting to fund operations with its working capital which is the
combination of cash flow from operations, accounts receivable and inventory
which is managed to meet customer demand.  The Company also intends on
utilizing its cash assets primarily for its continued organic
growth.  Additionally, the Company may use its available cash for
potential future strategic initiatives or alliances.  We believe our
cash and cash equivalents at December 31, 2009, along with cash flow from future
operations, will be sufficient to fund our working capital and capital resources
needs for the next 12 months.
  Operating
Activities
  Net cash
used by operations for the three months ended December 31, 2009 totaled
$214,000. This was primarily due to net loss of $160,000 and a decrease in
accounts payable and accrued expenses of $1,102,000  due to decreased
inventory purchases and annul bonus payouts, and an increase in inventories of
$87,000. This was offset by depreciation of $114,000, deferred taxes of $22,000,
stock based compensation of $41,000 and a decrease in accounts receivable of $
984,000.
  Net cash
generated for the three months ended December 31, 2008 totaled $31,000. This was
primarily due to our net income of $217,000, depreciation of $109,000, deferred
taxes of $22,000, stock based compensation of $29,000, and an increase in
accounts receivable of $783,000 and inventory of $189,000. This was offset by a
decrease in accounts payable and accrued expenses of $1,260,000 and an increase
of $61,000 in prepaid expenses.
  Investing
Activities
  We invest
our excess cash in money market accounts and bank CD’s in denominations across
numerous banks so that they are guaranteed under the FDIC. We believe we obtain
a competitive rate of return given the economic climate along with the security
provided by the FDIC. During the three month period ended December 31, 2009 we
utilized cash to purchase $1,356,000 of securities and received $1,275,000 on
CD’s that have matured.  Purchases of capital equipment and
information technology equipment consumed $51,000 of cash.
  For the
three months ended December 31, 2008 we sold our Auction Rate Securities at par
for $3,200,000 and purchased equipment, consuming cash of $36,000.
  In the
remainder of fiscal 2010, we expect capital expenditures to be approximately
$100,000, primarily reflecting investments in capital equipment, tooling and
information technology.
   9
 
 Financing
Activities
  For the
three month period ended December 31, 2009 we used a net of $16,000 for
scheduled debt principal payments principally associated with the financing of
our IT systems and received $5,000 from the issuance of stock as a result of
employees exercising options.
  For the
three months ended December 31, 2008 we used a net of $15,000 to make scheduled
debt principal payments principally associated with the financing of our IT
systems.
  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 consolidated financial statements because
they require the most difficult, subjective and complex judgments include
revenue recognition, stock-based compensation, deferred tax asset valuation
allowances, accruals for uncertain tax positions, and impairment of goodwill and
long-lived assets.
  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,
2009.  Management made no changes to the Company’s critical accounting
policies during the quarter ended December 31, 2009.
  In
applying its critical accounting policies, management reassesses its estimates
each reporting period based on available information. Changes in such estimates
did not have a significant impact on earnings for the quarter ended December 31,
2009.
  
  RECENTLY ISSUED ACCOUNTING
STANDARDS
  See Note
10 in the Notes to Consolidated Condensed Financial Statements located in Part
I, Item 1 of this Report.
  
  ITEM 3.    QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
  Not
applicable.
  
  ITEM  4.   CONTROLS
AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
 
 Under the
supervision and with the participation of our management, including our Chief
Executive Officer  and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report,these 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
that occurred during the quarter ended December 31, 2009 that materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
 
 
 10
 
 PART II. OTHER INFORMATION
 
 ITEM
1.  LEGAL PROCEEDINGS
  The
Company is exposed to a number of asserted and unasserted legal claims
encountered in the ordinary course of business.  Although the outcome
of any such legal action cannot be predicted, management believes that 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, 2009. There have been no material changes from the risk factors
previously disclosed in our Annual Report on Form 10-K.
  ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  None.
  ITEM
3. DEFAULTS UPON SENIOR SECURITIES
  None.
  ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  None.
  ITEM
5. OTHER INFORMATION
  None.
  ITEM
6. EXHIBITS
  Exhibit
31.1 – Certification of Chief Executive Officer pursuant to Rules 13a-14 and
15d-14 of the Exchange Act
  Exhibit
31.2 – Certification of Chief Financial Officer pursuant to Rules 13a-14 and
15d-14 of the Exchange Act
 
 Exhibit
32.1 – Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. §1350
   11
  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.
 
 
 February
      4, 2010
                
                /s/
      Cheryl P. BeranekBy:
      Cheryl P. Beranek
                  Its:  President
      and Chief Executive Officer(Principal
      Executive Officer)/s/
      Bruce G. BlackeyBy:  Bruce
      G. Blackey
                  Its:  Chief
      Financial Officer(Principal
      Financial and Accounting Officer)
   12