Clearfield, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Unless the context otherwise requires, for purposes of this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company,” and “Clearfield,” refer to Clearfield, Inc. On November 11, 2025, the Company completed the sale of its Nestor Cables business. In connection with this sale, the historical results of the Nestor Cables business and certain assets and liabilities of this business are reported in our condensed consolidated financial statements as held for sale/discontinued operations beginning with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2025. Our continuing operations comprise one operating segment and one reportable segment.

Basis of Presentation

The accompanying (a) condensed consolidated balance sheet as of September 30, 2025, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and six months ended March 31, 2026 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. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations, and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period, due to variability in customer purchasing patterns, seasonality, and other factors. These condensed consolidated 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, 2025.

In preparation of the Company’s condensed 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.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Clearfield, Inc. and its wholly owned subsidiaries through November 11, 2025, the date on which Clearfield, Inc. completed the sale of its Nestor Cables business. As of and subsequent to that date, Clearfield, Inc. had no subsidiaries requiring consolidation. All significant intercompany accounts and transactions have been eliminated in consolidation.

New Accounting Pronouncements Not Yet Adopted

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-09, Income Taxes (Topic 740):Improvements to Income Tax Disclosures. The new guidance is expected to improve income tax disclosures primarily related to the rate reconciliation and income taxes paid information by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation, and (2) income taxes paid disaggregated by jurisdiction. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The standard is effective for our annual period beginning October 1, 2025. The Company is currently evaluating the impact of this standard on our financial statements and related disclosures.

In November 2024, the FASB issued ASU No. 2024-03,Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. ASU No. 2024-03 addresses the disaggregation of income statement expenses and aims to provide more detailed information about the types of expenses included in commonly presented expense captions, such as cost of sales, selling, general, and administrative expenses (SG&A), and research and development. ASU 2024-03 can be applied either prospectively to financial statements issued for reporting periods after the effective date or retrospectively to any or all prior periods presented in the financial statements. The Company is evaluating the impact of this standard on our financial statements and related disclosures, including the Company’s adoption approach for ASU 2024-03 and anticipates adopting the standard for the annual period starting October 1, 2027.

In September 2025, the FASB issued ASU No. 2025-06,Targeted Improvements to the Accounting for Internal-Use Software. The ASU replaces the current stage-based capitalization model with a principles-based approach that permits capitalization of internal-use software costs once (1) management has authorized and committed to fund the project, and (2) it is probable the project will be completed and the software will function as intended. Costs incurred while significant development uncertainty exists must be expensed as incurred. ASU 2025-06 can be applied prospectively, retrospectively, or using a modified retrospective approach. The Company is evaluating the impact of this standard on our financial statements and related disclosures, including the Company’s adoption approach for ASU 2025-06 and anticipates adopting the standard for the annual period starting October 1, 2028.

Note 2. Net (Loss) Income Per Share

Basic net (loss) income per common share (“EPS”) is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net (loss) 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.

The following is a reconciliation of the numerator and denominator of the net (loss) income per common share computations for the three and six months ended March 31, 2026, and 2025:

For the three and six months ended March 31, 2026,139,791 and 185,779 stock options, as well as 51,838 and 60,477 performance stock units respectively, were not included in the computation of diluted net (loss) income per share because the effect would have been anti-dilutive. For the three and six months ended March 31, 2025,400,266 and 402,551 stock options as well as 76,121 and 76,121 performance stock units, respectively, were not included in the computation of diluted net (loss) income per share because the effect would have been anti-dilutive.

Note 3. Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The following table presents the Company’s cash and cash equivalents balances:

The Company maintains cash balances at multiple financial institutions, and at times, such balances exceeded insured limits. The Company has not experienced any losses in such accounts.

Note 4. Investments

The Company invests in United States Treasury securities (“Treasuries”) with terms of not more than five years and certificates of deposit (“CDs”) that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company’s investment portfolio is classified as available-for-sale, which is reported on the condensed consolidated balance sheets at fair value. The unrealized gain or loss on investment securities is recorded in other comprehensive income, net of tax. Realized gains and losses on available-for-sale securities are recognized upon sale and are included in net investment income in the condensed consolidated statement of earnings.

As of March 31, 2026, available-for-sale investments consisted of the following:

As of September 30, 2025, available-for-sale investments consisted of the following:

As of March 31, 2026, investments in debt securities in an unrealized loss position were as follows:

As of September 30, 2025, investments in debt securities in an unrealized loss position were as follows:

As of March 31, 2026, and September 30, 2025, there weresix securities in an unrealized loss position which is due to the market paying a higher interest rate than the coupon rate on these securities. As of March 31, 2026, and September 30, 2025, there areno securities which are other than temporarily impaired as the Company intends to hold these securities until their value recovers and there is limited credit risk due to the nature of the securities which are backed by the FDIC and U.S. federal government. The Company hadno allowance for credit losses on investments for the three and six months ended March 31, 2026, and the fiscal year ended September 30, 2025.

Note 5. Fair Value Measurements

The Company determines the fair value of its assets and liabilities based on the market price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair value of Treasuries and CDs based on valuations provided by an external pricing service, which obtains them from a variety of industry standard data providers.

The Company’s investments are categorized according to the three-level fair value hierarchy which distinguishes between observable and unobservable inputs, in one of the following levels:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those with fair value measurements that are determined using pricing models, discounted cash flow valuation or similar techniques, as well as significant management judgment or estimation.

The following provides information regarding fair value measurements for the Company’s investment securities as of March 31, 2026, according to the three-level fair value hierarchy:

The following provides information regarding fair value measurements for the Company’s investment securities as of September 30, 2025, according to the three-level fair value hierarchy:

During the three and six months ended March 31, 2026 and the fiscal year ended September 30, 2025, the Company ownedno Level 3 securities and there were no transfers within the fair value level hierarchy.

Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets, and right-of-use assets for operating leases are subject to non-recurring fair value measurements if they are deemed impaired. The Company had no re-measurements of non-financial assets to fair value during the three and six months ended March 31, 2026. For the fiscal year ended September 30, 2025, the Company re-measured certain non-financial assets to fair value related to the impairment of goodwill and long-lived assets of the Nestor Cables business. See Note 13 for further details.

Note 6. Other Comprehensive Income (Loss)

Changes in components of other comprehensive income (loss), net of tax for the three and six months ended March 31, 2026, are as follows:

Changes in components of other comprehensive income (loss), net of tax for the three and six months ended March 31, 2025, are as follows:

Note 7. Stock-Based Compensation

The Company recorded $1,318,000 and $2,589,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options, performance stock units, and the Company’s Employee Stock Purchase Plan (“ESPP”) for the three and six months ended March 31, 2026, respectively. For the three months ended March 31, 2026, $1,285,000 of this expense is included in selling, general and administrative expense, and $33,000 is included in cost of sales. For the six months ended March 31, 2026, $2,514,000 of this expense is included in selling, general and administrative expense, and $75,000 is included in cost of sales As of March 31, 2026, $9,088,000 of total unrecognized compensation expense related to non-vested restricted stock awards, performance share units and stock options is expected to be recognized over a period of approximately 2.6 years.

The Company recorded $1,171,000 and $2,221,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options, performance stock units, and the Company’s Employee Stock Purchase Plan (“ESPP”) for the three and six months ended March 31, 2025, respectively. For the three months ended March 31, 2025, $1,119,000 of this expense is included in selling, general and administrative expense, and $52,000 is included in cost of sales. For the six months ended March 31, 2025, $2,132,000 of this expense is included in selling, general and administrative expense, and $89,000 is included in cost of sales. As of March 31, 2025, $7,123,000 of total unrecognized compensation expense related to non-vested restricted stock awards and stock options is expected to be recognized over a period of approximately 2.6 years.

Stock Options

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted. During the six months ended March 31, 2026, the Company did not grant any employees non-qualified stock options. During the six months ended March 31, 2025, the Company granted employees non-qualified stock options to purchase an aggregate of 38,198 shares of common stock with a weighted average contractual term offive years, a weighted average vesting term of approximately three years, and a weighted average exercise price of $30.90 per share.

Options are granted with exercise prices at fair market values determined on the date of grant and vesting normally occurs over athree tofive-year period. Shares issued upon exercise of a stock option are issued from the Company’s authorized but unissued shares.

The following is a summary of stock option activity during the six months ended March 31, 2026:

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of March 31, 2026, the weighted average remaining contractual term for all outstanding and exercisable stock options was 1.77 years and their aggregate intrinsic value was $2,123,630.

Restricted Stock

During the six months ended March 31, 2026, the Company granted employees restricted stock awards totaling 150,518 shares of common stock, with a vesting term of approximately three years and a fair value of $29.36 per share based on the stock price on the grant date. During the six months ended March 31, 2025, the Company granted employees restricted stock awards totaling 104,691 shares of common stock, with a vesting term of approximately three years and a fair value of $30.90 per share based on the stock price on the grant date.

During the six months ended March 31, 2026, the Company certified the performance results for the fiscal year 2025 measurement period for the 50,747 performance stock unit awards subject to the fiscal year 2025 performance period. Based upon fiscal year 2025 performance,33,834 shares of the Company’s common stock were settled into restricted stock subject to restrictions on transfer that will lapse on the first two anniversaries of the settlement date.

During the six months ended March 31, 2026, the Company granted two newly appointed non-employee directors restricted stock awards totaling 652 shares of common stock, with a vesting term of approximatelyone year and a fair value of $30.66 per share. During the six months ended March 31, 2025, the Company granted two newly appointed non-employee directors restricted stock awards totaling 610 shares of common stock, with a vesting term of approximatelyone year and a fair value of $32.74 per share.

During the six months ended March 31, 2026, the Company granted the non-employee directors restricted stock awards totaling 17,808 shares of common stock, with a vesting term of approximatelyone year and a fair value of $31.44 per share. During the six months ended March 31, 2025, the Company granted the non-employee directors restricted stock awards totaling 17,886 shares of common stock, with a vesting term of approximatelyone year and a fair value of $32.42 per share.

Restricted stock transactions during the six months ended March 31, 2026, are summarized as follows:

Performance Stock Units

During the six months ended March 31, 2026, the Company granted 69,117 performance stock units which entitle the participant to receive one share of the Company’s common stock for each performance stock unit awarded, subject to the achievement of fiscal year 2026 performance goals. Achievement of the goals can result in 50% to 150% of the shares being awarded, with two-thirds of the earned shares being issued as stock subject to restrictions on transfer that will lapse in equal amounts on the first two anniversaries of the settlement date. The Company has determined the fair value per underlying share of the performance stock unit awards to be $29.36 as of the grant date. The fair value of these performance stock unit awards is based on the closing market price of the Company’s common stock on the grant date and is recognized as compensation expense over the vesting period based on the probable number of awards to vest at each reporting date.

Compensation expense for the performance stock units is measured using the fair value of our common stock at the grant date. As of March 31, 2026, the Company believes it is probable that approximately 75% of these performance stock unit awards will vest based on achievement of established performance goals and has recognized compensation expense accordingly.

During the six months ended March 31, 2026, the Company certified the performance results for the fiscal year 2025 measurement period for the 50,747 performance stock unit awards subject to the fiscal year 2025 performance period, which resulted in a payout percentage of 100%. Of the 50,747 performance stock units earned,16,913 shares of the Company’s common stock vested at settlement and 33,834 shares of the Company’s common stock were released as restricted stock subject to restrictions on transfer that will lapse in equal amounts on the first two anniversaries of the settlement date.

The following is a summary of performance stock unit activity during the six months ended March 31, 2026:

Employee Stock Purchase Plan

The Company’s ESPP allows participating employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP is available to all employees subject to certain eligibility requirements. Terms of the ESPP provide those participating employees the ability to purchase the Company’s common stock on a voluntary after-tax basis. Employees may purchase the Company’s common stock at a price that is no less than the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period or phase. The ESPP is carried out in six-month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phase that ended on December 31, 2025, employees purchased 9,668 shares at a price of $24.78 per share. For the phase that ended on December 31, 2024, employees purchased 11,415 shares at a price of $26.35 per share.

After the employee purchase on December 31, 2025,112,285 shares of common stock were available for future purchase under the ESPP.

Note 8. Revenue

Revenue Recognition

Our revenue is comprised of the sale of our products to customers and is recognized when the Company satisfies its performance obligations under the applicable sales contract. A performance obligation is a promise in a sales contract to transfer a distinct product or service to a customer. Substantially all our sales contracts have a single performance obligation and are short term in nature. For those transactions where all performance obligations will be satisfied within one year or less, we apply the practical expedient outlined in ASC 606-10-32-18, which allows us not to adjust promised consideration for the effects of a significant financing component if we expect at contract inception that the period between when we transfer the promised products to a customer and when the customer pays for those products will be one year or less. We recognize revenue by transferring the promised products to the customer, in an amount that reflects the consideration we expect to receive in exchange for those products and services, with substantially all revenue recognized at the point in time when the customer obtains control of the products upon shipment. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of sales. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenue) basis.

Disaggregation of Revenue

The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Sales outside the United States are principally to customers in Canada, the Caribbean, Central/South America, and Mexico.

Revenues related to the following geographic areas were as follows for the three and six months ended:

The Company sells its products to the Broadband Service Provider marketplace. Broadband Service Providers are made up of Community Broadband, which includes local and regional telecom companies, utilities, municipalities and alternative carriers, also referred to as Tier 2 and Tier 3 customers; National Carriers, which includes large national and global wireline and wireless providers, also referred to as Tier 1 customers; Large Regional Service Providers with a national footprint; Multiple System Operators (“MSOs”), which include cable television companies; and international customers. In addition, Legacy is made up of services for original equipment manufacturers requiring copper and fiber cable assemblies built to their specification as well as other miscellaneous sales.

The percentages of our sales by markets were as follows for the three and six months ended:

Accounts Receivable

Credit is extended based on the evaluation of a customer’s financial condition, and collateral is generally not required. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company measures the allowance for credit losses using an expected credit loss model, which uses a lifetime expected credit loss allowance for all accounts receivable. To measure the expected credit losses, accounts receivable are grouped based on shared credit risk characteristics and the days past due. In calculating an allowance for credit losses, the Company uses its historical experience, external indicators, and forward-looking information to calculate expected credit losses using an aging method. The Company assesses impairment of accounts receivable on a collective basis as they possess shared credit risk characteristics which have been grouped based on the days past due. The expected loss rates are based on the Company’s historical credit losses experience. The historical loss rates are adjusted to reflect current and forward-looking information. As of March 31, 2026, and September 30, 2025, the Company’s allowance for credit losses was $0.

See Note 9 “Major Customer Concentration” for further information regarding accounts receivable and net sales.

Note 9. Major Customer Concentration

For the three months ended March 31, 2026, the Company hadthree customers, Customer A, Customer B and Customer C, which accounted for approximately 15%,15% and 13% of net sales, respectively. Two of these customers are distributors and one is a large regional broadband service provider. For the six months ended March 31, 2026, the Company hadthree customers, Customer A, Customer B and Customer C, which accounted for approximately 15%,14% and 11% of net sales, respectively.

For the three months ended March 31, 2025, the Company hadthree customers, Customer A, Customer B and Customer C, which accounted for approximately 16%,14% and 14% of net sales, respectively. Two of these customers are distributors and one is a large regional broadband service provider. For the six months ended March 31, 2025, the Company hadthree customers, Customer A, Customer B and Customer C, which accounted for approximately 16%,13% and 12% of net sales, respectively.

As of March 31, 2026, the Company hadtwo customers, Customer A and Customer B, which accounted for approximately 29% and 13% of accounts receivable, respectively. One of these customers is a distributor and one is a large regional broadband service provider. As of September 30, 2025, the Company hadtwo customers, Customer A and Customer B, which accounted for approximately 17% and 11% of accounts receivable, respectively. Both of these customers are distributors.

Note 10. Inventories

Inventories consist of finished goods, raw materials, and work-in-process and are stated at average cost, subject to the lower of cost or net realizable value. Certain components of the Company’s inventory classified as raw materials or finished goods can be used as a component to manufacture products or can be sold directly to the customer. Inventory is valued using material costs, labor charges, and allocated factory overhead charges and consists of the following:

On a regular basis, the Company reviews its inventory and identifies that which is excess, slow moving, and obsolete by considering factors such as inventory levels, expected product life, and forecasted sales demand. A reserve is established to write-down the inventory to net realizable value for any identified excess, slow moving, and obsolete inventory through a charge to cost of sales. Inventory write-down charges may be required in the future if there is a significant decline in demand for the Company’s products and the Company does not adjust its manufacturing production accordingly, if new products are not accepted by the market, or if products are end of life through life cycle management.

Note 11. Goodwill and Intangible Assets

The Company tests goodwill for impairment annually at fiscal year-end, or more frequently when events or changes in circumstances indicate that the asset might be impaired. The Company assesses qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The result of the analysis performed as of September 30, 2025, didnot indicate an impairment of goodwill related to continuing operations. Refer to Note 13 for discussion of the discontinued operations and impairment of assets held for sale of the Nestor Cables business as of September 30, 2025. During the six months ended March 31, 2026, there were no triggering events that indicate potential impairment exists. There were no changes in the carrying amount of goodwill for continuing operations for the three and six months ended March 31, 2026. The Company’s next annual test for goodwill impairment will be performed as of September 30, 2026 and will include an analysis of the value of goodwill for the Clearfield, Inc. reportable segment.

The Company capitalizes legal costs incurred to obtain patents. Once accepted by either the United States Patent and Trademark Office or the equivalent office of a foreign country, these legal costs are amortized using the straight-line method over the remaining estimated lives, not exceeding 20 years. As of March 31, 2026, the Company has 68 patents granted and multiple pending applications both inside and outside the United States.

In addition, the Company has various finite lived intangible assets, most of which were acquired as a result of prior acquisitions. The Company analyzes its intangible assets for impairment annually or at interim periods when events occur or changes in circumstances indicate potential impairment. The result of the analysis performed as of September 30, 2025, didnot indicate an impairment of our intangible assets related to continuing operations. Refer to Note 13 for discussion of the discontinued operations and impairment of assets held for sale of the Nestor Cables business as of September 30, 2025. During the six months ended March 31, 2026, there were no triggering events that indicate potential impairment exists.

Finite lived intangible assets as of March 31, 2026, are as follows:

Finite lived intangible assets as of September 30, 2025, are as follows:

Amortization expense related to these assets was $1,316,000 and $1,016,000 for the six months ended March 31, 2026, and 2025, respectively. Estimated future amortization expense for identifiable intangibles during the next five years is as follows:

Note 12. Segment Reporting

Following the classification of the Nestor Cables business as discontinued operations in the fourth quarter of the year ended September 30, 2025, the Company’s continuing operations represent one operating segment andone reportable segment. All segment information related to the discontinued Nestor Cables business has been excluded from continuing operations and is presented separately in Note 13 – Assets Held for Sale and Discontinued Operations.

The Company’s chief operating decision maker (CODM) is the Chief Executive Officer. The CODM reviews financial information and makes resource allocation decisions based on consolidated financial results, using net income (loss) as the measure of segment performance. The CODM considers budget-to-actual variances when making decisions regarding the allocation of resources and assessing performance of the segment. The components of net income (loss) reviewed by the CODM, including significant segment expenses, are identical to the captions presented in the Company’s condensed consolidated statements of earnings. Amounts for additional information required by ASC 280,Segment Reporting, including depreciation and amortization expense, stock-based compensation expense, and capital expenditures are identical to those presented in the Company’s condensed consolidated statements of cash flows. The CODM is not regularly provided additional expense information beyond what is presented in the condensed consolidated financial statements. Because the financial information used by the CODM is at the same level of detail as that presented in the condensed consolidated financial statements, no additional segment information is presented. The measure of segment assets is reported on the condensed consolidated balance sheets as total consolidated assets. In addition, a description of the types of products and services from which the reportable segment derives its revenues as well as the entity-wide information can be found in Note 8 – Revenue.

Note 13. Assets Held for Sale and Discontinued Operations

During the fourth quarter of fiscal year 2025, the Company committed to a plan to sell its Nestor Cables business. As of September 30, 2025, the criteria for classification as held for sale under ASC 205-20 were met. Accordingly, the assets and liabilities of the Nestor Cables business have been classified as held for sale in the Company’s condensed consolidated balance sheets as of September 30, 2025. On November 11, 2025, the Company completed the sale of its Nestor Cables business for cash proceeds of $1. The historical results of the Nestor Cables business are reported as discontinued operations in the Company’s condensed consolidated financial statements.

Upon classification as held for sale, the Nestor Cables disposal group was measured at the lower of its carrying amount or fair value less costs to sell, resulting in an impairment charge of $16,589,000 recorded during the three months ended September 30, 2025. The total impairment charge included $2,022,000 related to the impairment of goodwill and $13,078,000 related to the impairment of the long-lived assets of the disposal group. No additional impairment was recorded during the three and six months ended March 31, 2026.

The following table summarizes the results of discontinued operations for the three and six months ended March 31, 2026 and 2025:

The major classes of assets and liabilities of the discontinued operations classified as held for sale on the consolidated balance sheets were as follows:

Note 14. Income Taxes

For the three and six months ended March 31, 2026, the Company recorded an income tax benefit of $176,000 and $177,000, reflecting an effective tax rate of 25.0% and 18.0%, respectively. The difference between the effective tax rate and the statutory tax rate for the three and six months ended was primarily due to the nondeductibility of certain executive compensation under Section 162(m) of the Internal Revenue Code, which increased the effective tax rate, and discrete events during the period, including impact of excess tax benefits from the vesting of restricted stock, which reduced the income tax benefit recognized during the period.

For the three and six months ended March 31, 2025, the Company recorded an income tax expense of $722,000 and $775,000, reflecting an effective tax rate of 22.1% and 26.1%, respectively. The difference between the effective tax rate and the statutory tax rate for the three and six months ended March 31, 2025, was primarily due to discrete events during the period, including excess tax shortfall from vesting of restricted stock as well as a decrease in pre-tax book loss from continuing operations.

Deferred taxes recognize the impact of temporary differences between the amounts of the assets and liabilities recorded for financial statement purposes and these amounts measured in accordance with tax laws. The Company’s realization of deferred tax temporary differences is contingent upon future taxable earnings. The Company reviewed its deferred tax asset for expected utilization using a “more likely than not” criteria by assessing the available positive and negative factors surrounding its recoverability and determined that as of March 31, 2026, and September 30, 2025, a valuation allowance against its U.S. deferred tax assets is not required. The Company will continue to assess the need for a valuation allowance based on changes in assumptions of estimated future income and other factors in future periods.

As of March 31, 2026, the Company doesnot have any unrecognized tax benefits. It is the Company’s practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not expect any material changes in its unrecognized tax positions over the next 12 months.

Note 15. Leases

The Company leases an approximately 85,000 square foot facility at 7050 Winnetka Avenue North, Brooklyn Park, Minnesota consisting of corporate offices, manufacturing, and warehouse space. The original lease term wasten years and two months, ending on February 28, 2025, with a renewal option. In April 2024, the Company exercised the renewal option, which extended the lease term three additional years to end on February 29, 2028. The exercise of the renewal option added a right of use asset and corresponding lease liability of $1,337,000 upon lease commencement.

The Company indirectly leases an approximately 318,000 square foot manufacturing facility in Tijuana, Mexico that operates as a Maquiladora. The lease commenced in April 2024, and has a term ofseven years, of which five years are mandatory. The lease contains two options to extend the term of the lease for additional periods offive years each. The lease calls for monthly base rental payments of approximately $169,000, increasing 2% annually. The renewal options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option.

The Company additionally leases an approximately 105,000 square foot warehouse and manufacturing facility in Brooklyn Park, Minnesota. The original lease term wasfive years ending on February 28, 2027, with rent payments increasing annually. The lease includes an option to extend the lease for an additional five years. In March 2026, the Company notified the landlord that the Company is exercising its right to extend the term of the lease. As a result of this notification, management determined that exercise of the right to extend the lease became reasonably certain, and the Company remeasured the associated right-of-use asset and lease liability accordingly. The remeasurement resulted in an increase to the right-of-use asset and corresponding liability of $3,553,000. In April 2026, the Company signed a lease amendment that extends the term of the lease for an additional period of 61 months to end on April 30, 2032.

Right-of-use lease assets and lease liabilities are recognized as of the commencement date based on the present value of the remaining lease payments over the lease term which include renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants.

Operating lease expense included within cost of sales and selling, general and administrative expense was as follows for the three and six months ended:

Future maturities of lease liabilities were as follows as of March 31, 2026:

The weighted average term and weighted average discount rate for the Company’s leases as of March 31, 2026, were 4.10 years and 7.15%, respectively, compared 3.56 years and 7.34%, respectively, as of March 31, 2025. For the three and six months ended March 31, 2026, the operating cash outflows from the Company’s leases were $838,000 and $1,673,000, respectively, compared to $819,000 and $1,635,000 for the three and six months ended March 31, 2025, respectively.

Note 16. Debt

On April 27, 2022, the Company entered into a loan agreement and a security agreement with a bank that provides the Company with a $40,000,000 revolving line of credit that is secured by certain of the Company’s assets. The original maturity date of the line of credit was April 27, 2025. Borrowed amounts bear interest at a variable rate of the CME Group one-month term Secured Overnight Financing Rate (“SOFR”) plus 1.85%, but not less than 1.80% per annum. As of March 31, 2026, the interest rate was 5.52%. The loan agreement and the security agreement contain customary affirmative and negative covenants and requirements relating to the Company and its operations. On August 5, 2024, the Company entered into an amendment to the loan agreement that, among other things, (i) eliminated the requirement that the Company maintain a debt service coverage ratio of not less than 1.20 to 1 as of the end of each fiscal year for the fiscal year then ended and that the Company maintain a debt to cash flow ratio of not greater than 2 to 1 measured as of the end of each of the Company’s fiscal quarters for the trailing 12 month period; (ii) added a requirement that the Company maintain accounts with the bank with a minimum aggregate liquidity of unrestricted and unencumbered cash and cash equivalents at all times of not less than the outstanding principal balance of the Company’s revolving credit promissory note payable to the bank; and (iii) waived the Company’s compliance with the debt to cash flow ratio for the fiscal quarter ended June 30, 2024.

On April 25, 2025, the Company entered into an amendment to the loan agreement that extended the maturity of the line of credit from April 27, 2025, to April 25, 2026. On April 25, 2026, the Company entered into an amendment to the loan agreement that, among other things, (i) extended the maturity of the line of credit from April 25, 2026, to July 24, 2026, (ii) incorporated updated interest and payment provisions into the loan agreement that had previously been included in the promissory note issued under the loan agreement, (iii) added several events that constitute a default under the loan agreement, and (iv) added a jury trial waiver for any judicial proceedings in which the parties are involved which arise out of or are related to the loan agreement.

As of March 31, 2026 and September 30, 2025, the Company hadno borrowings against this line of credit. As of March 31, 2026 and September 30, 2025, the Company was in compliance with all applicable covenants. The line of credit is collateralized by the Company’s assets of $263,547,000 as of March 31, 2026.

ITEM 2. MANAGEMENT’**S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS