Note

Stock-Based Compensation

The Company recorded

$519,223

and

$1,488,304

of compensation expense related to current and past option grants, restricted stock grants and the Company’s Employee Stock Purchase Plan (“ESPP”) for the

three

and

nine

months ended

June 30, 2018,

respectively. For the

three

months ended

June 30, 2018,

$477,193

of this expense is included in selling, general and administrative expense, and

$42,030

is included in cost of sales. For the

nine

months ended

June 30, 2018,

$1,362,213

of this expense is included in selling, general and administrative expense, and

$126,091

is included in cost of sales. The Company recorded

$590,419

and

$1,774,330

of compensation expense related to current and past equity awards for the

three

and

nine

months ended

June 30, 2017,

respectively. For the

three

months ended

June 30, 2017,

$535,719

of this expense was included in selling, general and administrative expense, and

$54,700

was included in cost of sales. For the

nine

months ended

June 30, 2017,

$1,610,229

of this expense was included in selling, general and administrative expense, and

$164,101

was included in cost of sales. As of

June 30, 2018,

$3,894,131

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

6.3

years.

We used the Black-Scholes option pricing model to determine the weighted average fair value of options granted during the

nine

months ended

June 30, 2018.

During the

nine

months ended

June 30, 2018,

the Company granted employees non-qualified stock options to purchase an aggregate of

72,000

shares of common stock with a contractual term of

five

years, a

three

year vesting term, and an exercise price of

$13.35.

There were

stock options granted during the

nine

months ended

June 30, 2017.

The weighted-average fair value at the grant date for options issued during the

nine

months ended

June 30, 2018

was

$5.15.

This fair value was estimated at the grant date using the assumptions listed below:

		Nine months ended June 30, 2018
Dividend yield		0%
Average expected volatility		45.63%
Average risk-free interest rate		2.61%
Expected life (years)		4
Vesting period (years)		3

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 is a summary of stock option activity during the

nine

months ended

June 30, 2018:

	Number of options			Weighted average exercise price
Outstanding at September 30, 2017		38,950		$	2.79
Granted		72,000			13.35
Exercised		(7,350	)		3.67
Cancelled or Forfeited		-			-
Outstanding at June 30, 2018		103,600		$	10.06

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of

June 30, 2018,

the weighted average remaining contractual term for all outstanding stock options was

3.99

years and their aggregate intrinsic value was

$102,052.

As of

June 30, 2018,

the weighted average remaining contractual term for all exercisable stock options was

2.14

years and their aggregate intrinsic value was

$267,652.

During the

nine

months ended

June 30, 2018,

the Company received proceeds of

$21,174

from the exercise of stock options. During the

nine

months ended

June 30, 2017,

exercised stock options totaled

15,850

shares, resulting in

$28,718

of proceeds to the Company.

Restricted Stock

The Company’s

2007

Stock Compensation Plan permits its Compensation Committee to grant stock-based awards, including stock options and restricted stock, to key employees and non-employee directors. The Company has made restricted stock grants that vest over

one

ten

years.

During the

nine

months ended

June 30, 2018,

the Company granted non-employee directors restricted stock awards totaling

3,795

shares of common stock, with a vesting term of approximately

one

year and a fair value of

$16.45

per share. Also, the Company granted employees a restricted stock award totaling

3,000

shares of common stock, with a vesting term of

one

year and a fair value of

$13.35

per share

During the

nine

months ended

June 30, 2017,

the Company granted non-employee directors restricted stock awards totaling

3,795

shares of common stock, with a vesting term of approximately

one

year and a fair value of

$16.45

per share.

Restricted stock transactions during the

nine

months ended

June 30, 2018

are summarized as follows:

	Number of shares			Weighted average grant date fair value
Unvested shares at September 30, 2017		370,530		$	15.24
Granted		7,235			14.17
Vested		(85,933	)		17.39
Forfeited		(12,284	)		15.54
Unvested at June 30, 2018		279,548		$	14.54

Employee Stock Purchase Plan

Clearfield, Inc.’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 that participating employees

may

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

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 phases that ended on

June 30, 2018

and

December 31, 2017,

employees purchased

15,932

and

14,242

shares at a price of

$9.39

and

$10.41

per share, respectively. After the employee purchase on

June 30, 2018,

87,081

shares of common stock were available for future purchase under the ESPP.