10-Q 1 nssc-20240331x10q.htm 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: March 31, 2024

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                         TO                         .

Commission File number:                0-10004                     

NAPCO SECURITY TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

Delaware

11-2277818

(State or other jurisdiction of

(IRS Employer Identification

incorporation of organization)

Number)

 

 

333 Bayview Avenue

 

Amityville, New York

11701

(Address of principal executive offices)

(Zip Code)

(631) 842-9400

(Registrant’s telephone number including area code)

 

 

(Former name, former address and former fiscal year if

changed from last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.01 per share

NSSC

Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or 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:            Yes            No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).             Yes              No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

Number of shares outstanding of each of the issuer’s classes of common stock, as of: May 3, 2024

COMMON STOCK, $.01 PAR VALUE PER SHARE     36,872,639

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

Page

PART I:  FINANCIAL INFORMATION

ITEM 1.

Financial Statements

3

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX –March 31, 2024

Condensed Consolidated Balance Sheets as of March 31, 2024 and June 30, 2023 (unaudited)

3

Condensed Consolidated Statements of Income for the Three Months ended March 31, 2024 and 2023 (unaudited)

4

Condensed Consolidated Statements of Income for the Nine Months ended March 31, 2024 and 2023 (unaudited)

5

Condensed Consolidated Statements of Stockholders Equity for the Nine Months Ended March 31, 2024 and 2023 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2024 and 2023 (unaudited)

7

Notes to Condensed Consolidated Financial Statements (unaudited)

8

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

31

ITEM 4.

Controls and Procedures

32

PART II:  OTHER INFORMATION

ITEM 1.

Legal Proceedings

33

ITEM 1A.

Risk Factors

33

ITEM 6.

Exhibits

34

SIGNATURE PAGE

35

2

PART I:           FINANCIAL INFORMATION

Item 1.  Financial Statements

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

    

March 31, 2024

    

June 30, 2023

    

(in thousands, except share data)

CURRENT ASSETS

  

 

  

Cash and cash equivalents

$

55,518

$

35,955

Investments - other

26,671

25,660

Marketable securities

5,348

5,136

Accounts receivable, net of allowance for credit losses of $105 and $131 as of March 31, 2024 and June 30, 2023, respectively

 

30,273

 

26,069

Inventories, net

 

37,010

 

35,062

Income tax receivable

75

Prepaid expenses and other current assets

 

3,379

 

3,402

Total Current Assets

 

158,199

 

131,359

Inventories - non-current, net

 

13,093

 

13,287

Property, plant and equipment, net

 

8,978

 

9,308

Intangible assets, net

 

3,686

 

3,939

Deferred income taxes

4,983

2,652

Right-of-use asset

5,564

5,797

Other assets

 

289

 

312

TOTAL ASSETS

$

194,792

$

166,654

CURRENT LIABILITIES

  

 

  

Accounts payable

$

6,913

$

8,061

Accrued expenses

 

9,737

 

8,079

Accrued salaries and wages

 

3,095

 

3,546

Accrued income taxes

 

203

 

Total Current Liabilities

 

19,948

 

19,686

Accrued income taxes

 

1,102

 

1,110

Long term right-of-use liability

5,556

5,689

TOTAL LIABILITIES

 

26,606

 

26,485

COMMITMENTS AND CONTINGENCIES (Note 13)

 

  

 

  

STOCKHOLDERS’ EQUITY

Common Stock, par value $0.01 per share; 100,000,000 shares authorized as of March 31, 2024 and June 30, 2023; 39,766,354 and 39,663,812 shares issued; and 36,872,639 and 36,770,097 shares outstanding, respectively.

398

397

Additional paid-in capital

 

22,855

 

21,553

Retained earnings

 

164,454

 

137,740

Less: Treasury Stock, at cost (2,893,715 shares)

 

(19,521)

 

(19,521)

TOTAL STOCKHOLDERS’ EQUITY

 

168,186

 

140,169

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

194,792

$

166,654

See accompanying notes to condensed consolidated financial statements.

3

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

    

Three Months ended March 31, 

    

2024

    

2023

(in thousands, except for share and per share data)

Net sales:

 

Equipment revenues

$

29,735

$

28,390

Service revenues

 

19,532

 

15,142

 

49,267

 

43,532

Cost of sales:

 

  

 

  

Equipment related expenses

 

21,179

 

20,780

Service-related expenses

 

1,604

 

1,473

 

22,783

 

22,253

Gross Profit

 

26,484

 

21,279

Operating expenses:

Research and development

 

2,757

 

2,314

Selling, general, and administrative expenses

 

9,233

 

8,425

Total Operating Expenses

11,990

10,739

Operating Income

 

14,494

 

10,540

Other income:

 

 

  

Interest and other income, net

 

637

 

437

Income before Provision for Income Taxes

 

15,131

 

10,977

Provision for Income Taxes

 

1,935

 

1,428

Net Income

$

13,196

$

9,549

Income per share:

 

  

 

  

Basic

$

0.36

$

0.26

Diluted

$

0.36

$

0.26

Weighted average number of shares outstanding:

 

  

 

  

Basic

 

36,835,000

 

36,793,000

Diluted

 

37,118,000

 

37,082,000

See accompanying notes to condensed consolidated financial statements.

4

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Nine Months Ended March 31, 

2024

    

2023

(in thousands, except for share and per share data)

Net sales:

Equipment revenues

$

83,133

$

81,511

Service revenues

 

55,357

 

43,828

 

138,490

 

125,339

Cost of sales:

 

  

 

 

  

Equipment-related expenses

 

59,332

 

70,341

Service-related expenses

 

5,249

 

4,799

 

64,581

 

75,140

Gross Profit

 

73,909

 

50,199

Operating expenses:

Research and development

 

7,736

 

6,964

Selling, general, and administrative expenses

 

26,319

 

24,719

Total Operating Expenses

 

34,055

 

31,683

Operating Income

 

39,854

 

 

18,516

Other income:

 

 

 

  

Interest and other income, net

 

1,806

 

521

Income before Provision for Income Taxes

 

41,660

 

19,037

Provision for Income Taxes

 

5,376

 

2,475

Net Income

$

36,284

$

16,562

Income per share:

 

  

 

  

Basic

$

0.99

$

0.45

Diluted

$

0.98

$

0.45

Weighted average number of shares outstanding:

 

  

 

  

Basic

 

36,792,000

 

36,736,000

Diluted

 

37,032,000

 

36,983,000

5

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)

Nine months ended March 31, 2024 (in thousands, except for share data)

Common Stock

Treasury Stock

    

Number of

    

    

Additional

    

    

    

    

 

Shares

 

Paid-in

 

Number of

 

Retained

 

Issued

Amount

 

Capital

Shares

Amount

Earnings

Total

Balances at June 30, 2023

 

39,663,812

$

397

$

21,553

 

(2,893,715)

$

(19,521)

$

137,740

$

140,169

Net income

 

 

 

 

 

 

10,478

10,478

Stock-based compensation expense

 

 

307

 

 

 

307

Cash dividend ($.08 per share)

 

 

 

 

(2,942)

(2,942)

Balances at September 30, 2023

 

39,663,812

$

397

$

21,860

 

(2,893,715)

$

(19,521)

$

145,276

$

148,012

Net income

 

 

 

 

12,610

12,610

Stock-based compensation expense

 

303

 

 

 

303

Stock options exercised

11,892

 

 

 

 

Cash dividend ($.08 per share)

 

 

 

 

(2,941)

(2,941)

Balances at December 31, 2023

 

39,675,704

$

397

$

22,163

 

(2,893,715)

$

(19,521)

$

154,945

$

157,984

Net income

13,196

13,196

Stock-based compensation expense

266

266

Stock options exercised

90,650

1

426

427

Cash dividend ($.10 per share)

 

 

 

 

(3,687)

(3,687)

Balances at March 31, 2024

39,766,354

$

398

$

22,855

 

(2,893,715)

$

(19,521)

$

164,454

$

168,186

    

Nine months ended March 31, 2023 (in thousands, except share data)

    

Common Stock

  

Treasury Stock

  

  

    

Number of

    

    

Additional

    

    

    

    

 

Shares

 

Paid-in

 

Number of

 

Retained

 

Issued

Amount

 

Capital

Shares

Amount

Earnings

Total

Balances at June 30, 2022

 

39,628,197

$

396

$

20,005

 

(2,893,715)

$

(19,521)

$

112,911

$

113,791

Net income

 

 

 

 

 

3,084

3,084

Stock-based compensation expense

 

 

477

 

 

 

477

Stock options exercised

8,480

45

45

Balances at September 30, 2022

 

39,636,677

$

396

$

20,527

 

(2,893,715)

$

(19,521)

$

115,995

$

117,397

Net income

 

 

 

 

 

3,929

3,929

Stock-based compensation expense

 

 

335

 

 

 

335

Stock options exercised

2,756

Balances at December 31, 2022

 

39,639,433

$

396

$

20,862

 

(2,893,715)

$

(19,521)

$

119,924

$

121,661

Net income

 

 

 

 

 

$

9,549

9,549

Stock-based compensation expense

322

322

Stock options exercised

 

22,062

 

1

36

 

 

 

37

Balances at March 31, 2023

39,661,495

$

397

$

21,220

(2,893,715)

$

(19,521)

$

129,473

$

131,569

See accompanying notes to condensed consolidated financial statements.

6

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine Months ended March 31, 

    

2024

    

2023

    

(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

  

 

  

Net income

$

36,284

$

16,562

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

Depreciation and amortization

 

1,627

 

1,398

Gain on disposal of fixed asset

(15)

Interest expense (income) on other investments

112

(177)

Unrealized (gain) loss on marketable securities

(52)

23

(Recovery) of credit losses

 

(26)

 

(118)

Change to inventory reserve

 

634

 

(85)

Deferred income taxes

 

(2,331)

 

(1,400)

Stock based compensation expense

 

876

 

1,134

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

(4,178)

 

5,166

Inventories

 

(2,388)

 

(813)

Prepaid expenses and other current assets

 

23

 

228

Income tax receivable

75

(688)

Other assets

 

22

 

48

Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes

 

354

 

(8,847)

Net Cash Provided by Operating Activities

 

31,032

 

12,416

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Purchases of property, plant, and equipment

 

(1,043)

 

(2,547)

Proceeds from disposal of fixed asset

38

Purchases of marketable securities

(160)

(110)

Purchases of other investments

(1,123)

(30,185)

Redemption of other investments

10,091

Net Cash Used in Investing Activities

 

(2,326)

 

(22,713)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Proceeds from stock option exercises

 

427

 

82

Cash paid for dividend

 

(9,570)

 

Net Cash (Used in) Provided by Financing Activities

 

(9,143)

 

82

Net increase (decrease) in Cash and Cash Equivalents

 

19,563

 

(10,215)

CASH AND CASH EQUIVALENTS - Beginning

 

35,955

 

41,730

CASH AND CASH EQUIVALENTS - Ending

$

55,518

$

31,515

SUPPLEMENTAL CASH FLOW INFORMATION

 

  

 

  

Interest paid

$

8

$

12

Income taxes paid

$

7,437

$

6,421

See accompanying notes to condensed consolidated financial statements.

7

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

March 31, 2024

NOTE 1 - Nature of Business and Summary of Significant Accounting Policies

Nature of Business:

Napco Security Technologies, Inc (“NAPCO”, “the Company”, “we”) is one of the leading manufacturers and designers of high-tech electronic security devices, cellular communication services for intrusion and fire alarm systems as well as a leading provider of school safety solutions. We offer a diversified array of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products. These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment. We have experienced significant growth in recent years, primarily driven by fast growing recurring service revenues generated from wireless communication services for intrusion and fire alarm systems, as well as our school security products that are designed to meet the increasing needs to enhance school security as a result of on-campus shooting and violence in the U.S. Our wireless communication services have led to substantial growth in our monthly recurring revenues.

The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of the Company’s hardware products want to install these products prior to the summer; therefore, sales of these products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company's fiscal first quarter. In addition, demand for our products may be affected by the housing and construction markets. Deterioration of the current economic conditions may also affect this trend. The monthly recurring service revenue, which is less susceptible to these fluctuations, allows us to generate a more consistent and predictable stream of income and mitigates the risk of fluctuation in market demand for our equipment products.

Significant Accounting Policies:

Principles of Consolidation

The consolidated financial statements include the accounts of Napco Security Technologies, Inc. and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Accounting Estimates

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical estimates include management’s judgments associated with reserves for sales returns and allowances, allowance for credit losses, overhead expenses applied to inventory, inventory reserves, valuation of intangible assets, share based compensation and income taxes. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The methods and assumptions used to estimate the fair value of the following classes of financial instruments were: Current Assets and Current Liabilities - The carrying amount of cash and cash equivalents, certificates of deposits, marketable securities, current receivables and payables and certain other short-term financial instruments approximate their fair value as of March 31, 2024 and June 30, 2023 due to their short-term maturities. Lease liabilities reflect fair value based on prevailing market rates.

Cash and Cash Equivalents and Investments – other

Cash and cash equivalents include approximately $36,106,000 of short-term time deposits, consisting of several certificates of deposit totaling $5,340,000 and $30,766,000 in money market funds as of March 31, 2024. Cash and cash equivalents include approximately $15,242,000 of short-term time deposits, consisting of several certificates of deposit totaling $15,179,000 and $63,000 in a money

8

market fund as of June 30, 2023. The Company classifies these highly liquid investments with original maturities of three months or less as cash equivalents. Certificates of deposit with an original maturity greater than three months are classified as Investments-other.

Cash and cash equivalents consist of the following as of (in thousands):

March 31, 2024

    

June 30, 2023

    

  

 

  

Cash

$

19,412

$

20,713

Money Market Fund

 

30,766

 

63

Certificates of Deposit

5,340

15,179

$

55,518

$

35,955

Investments-other consists of the following as of (in thousands):

March 31, 2024

    

June 30, 2023

    

  

 

  

Certificates of Deposit

$

26,671

$

25,660

$

26,671

$

25,660

Certificates of deposit are recorded at the original cost plus accrued interest. The Company’s Certificates of deposits consist of the following as of (in thousands):

March 31, 2024

Balance Sheet Classification

    

Interest Rate

    

Maturity Date

    

Cost

    

Carrying Value

Cash and Cash Equivalents

4.65%

5/22/2024

$

5,313

$

5,340

Investments - other

4.55% - 5.40%

4/24/2024 - 9/23/2024

26,484

26,671

The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of March 31, 2024 and June 30, 2023. The Company has not historically experienced any credit losses with balances in excess of FDIC limits.

Marketable Securities

The Company’s marketable securities include investments in mutual funds, which invest primarily in various government and corporate obligations, stocks and money market funds. The Company’s marketable securities are reported at fair value with the related unrealized and realized gains and losses included in other expense (income). Realized gains or losses on mutual funds are determined on a specific identification basis. The Company would record an impairment charge if the cost of the available-for-sale securities exceeds the estimated fair value of the securities and the decline in value is determined to be other-than-temporary. During the three and nine months ended March 31, 2024, the Company did not record an impairment charge regarding its investment in marketable securities because

9

management believes, based on its evaluation of the circumstances, that the decline in fair value below the cost of certain of the Company’s marketable securities is temporary.

Accounts Receivable

Accounts receivable is stated net of the reserves for credit losses of $105,000 and $131,000 as of March 31, 2024 and June 30, 2023, respectively. Our reserves for credit losses are subjective critical estimates that have a direct impact on reported net earnings. These reserves are based upon the evaluation of our accounts receivable aging, specific exposures, sales levels and historical trends.

Inventories

Inventories are valued at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (FIFO) method. The reported net value of inventory includes finished saleable products, work-in-process and raw materials that will be sold or used in future periods. Inventory costs include raw materials, direct labor and overhead. The Company’s overhead expenses are applied based, in part, upon estimates of the proportion of those expenses that are related to procuring and storing raw materials as compared to the manufacture and assembly of finished products. These proportions, the method of their application, and the resulting overhead included in ending inventory, are based in part on subjective estimates and actual results could differ from those estimates.

In addition, the Company records an inventory obsolescence reserve, which represents any excess of the cost of the inventory over its estimated realizable value. This reserve is calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends, product life cycle, requirements to support forecasted sales, and the ability to find alternate applications of its raw materials and to convert finished product into alternate versions of the same product to better match customer demand. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. There is inherent professional judgment and subjectivity made by both production and engineering members of management in determining the estimated obsolescence percentage.

The Company also regularly reviews the period over which its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from the balance sheet date are classified as non-current.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major renewals and improvements are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition is reflected in income.

Depreciation is recorded over the estimated service lives of the related assets using primarily the straight-line method. Amortization of leasehold improvements is calculated by using the straight-line method over the estimated useful life of the asset or lease term, whichever is shorter.

Long-Lived and Intangible Assets

Long-lived assets are amortized over their useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets in question may not be recoverable. Impairment would be recorded in circumstances where undiscounted cash flows expected to be generated by an asset are less than the carrying value of that asset.

10

Intangible assets consisted of the follows (in thousands):

March 31, 2024

June 30, 2023

    

Carrying

    

Accumulated

    

Net book

    

Carrying

    

Accumulated

    

Net book

value

amortization

value

value

amortization

value

Customer relationships

$

9,800

(9,403)

$

397

$

9,800

(9,302)

$

498

Trade name

4,048

 

(759)

 

3,289

 

4,048

 

(607)

 

3,441

$

13,848

$

(10,162)

$

3,686

$

13,848

$

(9,909)

$

3,939

Amortization expense for intangible assets subject to amortization was approximately $84,000 and $90,000 for the three months ended March 31, 2024 and 2023, respectively. Amortization expense for intangible assets subject to amortization was approximately $253,000 and $271,000 for the nine months ended March 31, 2024 and 2023, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2024 - $336,000; 2025 - $315,000; 2026 - $297,000; 2027 - $283,000; and 2028 - $269,000. The weighted average remaining amortization period for intangible assets was 15.0 years and 15.5 years at March 31, 2024 and June 30, 2023, respectively.

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.

For product sales, the Company typically transfers control at a point in time upon shipment or delivery of the product. For monthly communication services the Company satisfies its performance obligation as the services are rendered and therefore recognizes revenue over the monthly period.

Typically timing of revenue recognition coincides with the timing of invoicing to the customers, at which time the Company has an unconditional right to consideration. As such, the Company typically records a receivable when revenue is recognized.

The contract with the customer states the final terms of the sale, including the description, quantity, and price of each product purchased. Payment for product sales is typically due within 30 and 180 days of the delivery date. Payment for monthly communication services is billed on a monthly basis and is typically due at the beginning of the month of service or in 30 days for customers with an open account.

In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration. Such elements of variable consideration include product returns and sales incentives, such as volume rebates and discounts, and early-payment discounts.

The Company provides limited standard warranty for defective products, usually for a period of 24 to 36 months. The Company accepts returns for such defective products as well as for other limited circumstances. The Company also provides rebates to customers for meeting specified purchasing targets and other coupons or credits in limited circumstances. The Company establishes reserves for the estimated returns, rebates and credits and measures such variable consideration based on the expected value method using an analysis of historical data. Changes to the estimated variable consideration in subsequent periods are not material.

The Company analyzes sales returns, rebates and credits and is able to make reasonable and reliable estimates of product returns based on the Company’s past history. Estimates for sales returns, rebates and credits are based on several factors including actual returns, rebates and credits and based on expected return data communicated to it by its customers. Accordingly, the Company believes that its historical returns, rebates and credits analysis is an accurate basis for its allowance for sales returns. Actual results could differ from those estimates.

Advertising and Promotional Costs

Advertising and promotional costs are included in "Selling, General and Administrative" (“SG&A”) expenses in the consolidated statements of income and are expensed as incurred. Advertising expense for the three months ended March 31, 2024 and 2023 was

11

$395,000 and $926,000, respectively. Advertising expense for the nine months ended March 31, 2024 and 2023 was $1,852,000 and $2,185,000, respectively.

Research and Development Costs

Research and development (“R&D”) costs incurred by the Company are charged to expense as incurred and are included in operating expenses in the consolidated statements of income. Company-sponsored R&D expense for the three months ended March 31, 2024 and 2023 was $2,757,000 and $2,314,000, respectively. Company-sponsored R&D expense for the nine months ended March 31, 2024 and 2023 was $7,736,000 and $6,964,000, respectively.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Net Income per Share

Basic net income per common share (Basic EPS) is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share (Diluted EPS) is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents and convertible securities then outstanding.

The following provides a reconciliation of information used in calculating the per share amounts for the three months ended March 31, 2024 and 2023 (in thousands, except share and per share data):

Net Income

Weighted Average Shares

Net Income per Share

    

2024

    

2023

    

2024

2023

2024

    

2023

Basic EPS

$

13,196

$

9,549

36,835

36,793

$

0.36

$

0.26

Effect of Dilutive Securities:

  

 

Stock Options

 

283

 

289

 

 

Diluted EPS

$

13,196

$

9,549

37,118

 

37,082

$

0.36

$

0.26

Options to purchase 0 shares of common stock were excluded for both the three months ended March 31, 2024 and 2023, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.

12

The following provides a reconciliation of information used in calculating the per share amounts for the nine months ended March 31, 2024 and 2023 (in thousands, except share and per share data):

Weighted Average

Net Income per

Net Income

Shares

 Share

2024

    

2023

    

2024

    

2023

    

2024

    

2023

Basic EPS

$

36,284

$

16,562

36,792

36,736

$

0.99

$

0.45

Effect of Dilutive Securities:

  

 

  

 

 

 

  

 

  

Stock Options

 

 

240

 

247

 

(0.01)

 

Diluted EPS

$

36,284

$

16,562

 

37,032

 

36,983

$

0.98

$

0.45

Options to purchase 24,167 and 8,379 shares of common stock were excluded for the nine months ended March 31, 2024 and 2023, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.

Stock-Based Compensation

The Company has established five share incentive programs as discussed in Note 9.

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the vesting period. Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors.

Stock-based compensation costs of $266,000 and $322,000 were recognized for the three months ended March 31, 2024 and 2023, respectively. Stock-based compensation costs of $876,000 and $1,134,000 were recognized for the nine months ended March 31, 2024 and 2023, respectively.

Foreign Currency

The Company has determined the functional currency of all foreign subsidiaries is the U.S. Dollar. All foreign operations are considered a direct and integral part or extension of the Company’s operations. The day-to-day operations of all foreign subsidiaries are dependent on the economic environment of the U.S. Dollar. Therefore, no realized and unrealized gains and losses associated with foreign currency translation are recorded for the three and nine months ended March 31, 2024 or 2023.

Comprehensive Income

For the three and nine months ended March 31, 2024 and 2023, the Company’s operations did not give rise to material items includable in comprehensive income, which were not already included in net income. Accordingly, the Company’s comprehensive income approximates its net income for all periods presented.

Segment Reporting

The Company’s reportable operating segments are determined based on the Company’s management approach. The management approach is based on the way that the chief operating decision maker organizes the segments within an enterprise for making operating decisions and assessing performance. The Company’s results of operations are reviewed by the chief operating decision maker on a consolidated basis and the Company operates in only one segment. The Company has presented required geographical data in Note 14.

Shipping and Handling Sales and Costs

The Company records the amount billed to customers for shipping and handling in net sales ($93,000 and $106,000 in the three months ended March 31, 2024 and 2023, respectively, and $279,000 and $346,000 in the nine months ended March 31, 2024 and 2023, respectively); and classifies the costs associated with these sales in cost of sales ($421,000 and $437,000 in the three months ended March 31, 2024 and 2023, respectively, and $1,181,000 and $1,285,000 in the nine months ended March 31, 2024 and 2023, respectively).

13

Leases

The Company records a right of use asset and corresponding liability for the operating lease on our Consolidated Balance Sheets, excluding short-term leases (leases with terms of 12 months or less) as described under ASU No. 2016-02, Leases (Topic 842). Lease payments are discounted using a third-party secured incremental borrowing rate based on information available at lease commencement. The Company analyzes whether or not amendments to existing leases classify as a Lease Modification or a full or partial termination of the existing lease. See Note 13 – Commitments and Contingencies; Leases for additional accounting policies and disclosures.

Recently Issued Accounting Standards

Reference Rate Reform (ASC Topic 848)

In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”), which is expected to be phased out for new arrangements at the end of calendar 2021, and applies to lease contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate. On February 9, 2024, the Company’s bank has shifted to the Benchmark Replacement as defined in the Fourth Amended and Restated Credit Agreement (“Amended Agreement”) with the bank. The new benchmark rate is the Secured Overnight Financing Rate (SOFR) (see Note 8). The transition did not have a material impact on the condensed consolidated financial statements.

NOTE 2 – Revenue Recognition and Contracts with Customers

The Company is engaged in one major line of business: the development, manufacture, and distribution of security products, encompassing access control systems, door security products, intrusion and fire alarm systems, alarm communication services, and video surveillance products for commercial and residential use. The Company also provides wireless communication service for intrusion and fire alarm systems on a monthly basis. All of these products and services are used for commercial, residential, institutional, industrial and governmental applications, and are sold primarily to independent distributors, dealers and installers of security equipment. Sales to unaffiliated customers are primarily shipped from the United States.

As of March 31, 2024 and June 30, 2023, the Company included refund liabilities of approximately $5,224,000 and $5,521,000, respectively, in current liabilities. As of March 31, 2024 and June 30, 2023, the Company included return-related assets of approximately $1,316,000 and $1,338,000, respectively, in other current assets.

As a percentage of gross sales, returns, rebates and allowances were 6% and 8% for the three months ended March 31, 2024 and 2023, respectively. As a percentage of gross sales, returns, rebates and allowances were 6% for both the nine months ended March 31, 2024 and 2023, respectively.

The Company disaggregates revenue from contracts with customers into major product lines. The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. As noted in the accounting policy footnote, the Company’s business consists of one operating segment. Following is the disaggregation of revenues based on major product lines (in thousands):

Three months ended March 31, 

Nine months ended March 31, 

    

2024

    

2023

    

2024

    

2023

Major Product Lines:

  

 

  

  

 

  

Intrusion and access alarm products

$

10,139

$

11,530

$

30,693

$

36,405

Door locking devices

 

19,596

 

16,860

 

52,440

 

45,106

Services

 

19,532

 

15,142

 

55,357

 

43,828

Total Revenues

$

49,267

$

43,532

$

138,490

$

125,339

14

NOTE 3 – Business and Credit Concentrations

An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company had two customers with an accounts receivable balance that comprised of 16% and 11% as of March 31, 2024. As of June 30, 2023, the accounts receivable balance with these respective customers were 19% and 14%. Sales to either of these customers did not exceed 10% of net sales during the three and nine months ended March 31, 2024. Sales to one of these customers was 12% and 10% of net sales during the three and nine months ended March 31, 2023.

NOTE 4 – Marketable Securities

The Company’s marketable securities include investments in fixed income mutual funds, which invest primarily in various government and corporate obligations, stocks and money market funds, and are reported at their fair values. The disaggregated net gains and losses on the marketable securities recognized within the accompanying condensed consolidated statements of income for the three and nine months ended March 31, 2024 and 2023, are as follows (in thousands):

Three months ended March 31, 

Nine months ended March 31, 

2024