10-Q 1 nssc-20220930x10q.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: September 30, 2022

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: November 4, 2022

COMMON STOCK, $.01 PAR VALUE PER SHARE     36,744,755

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

Page

PART I:  FINANCIAL INFORMATION

ITEM 1.

Financial Statements

3

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX –September 30, 2022

Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and June 30, 2022

3

Condensed Consolidated Statements of Income for the Three Months ended September 30, 2022 and 2021 (unaudited)

4

Condensed Consolidated Statements of Stockholders Equity for the Three Months Ended September 30, 2022 and 2021 (unaudited)

5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2022 and 2021 (unaudited)

6

Notes to Condensed Consolidated Financial Statements (unaudited)

7

ITEM 2.

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

24

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

27

ITEM 4.

Controls and Procedures

27

PART II:  OTHER INFORMATION

ITEM 1A.

Risk Factors

28

ITEM 6.

Exhibits

29

SIGNATURE PAGE

30

2

PART I:           FINANCIAL INFORMATION

Item 1.  Financial Statements

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2022

    

(unaudited)

    

June 30, 2022

    

(in thousands, except share data)

CURRENT ASSETS

  

 

  

Cash and cash equivalents

$

29,448

$

41,730

Investments - other

10,008

Marketable securities

4,943

5,068

Accounts receivable, net of allowance for doubtful accounts of $216 and $243 as of September 30, 2022 and June 30, 2022, respectively

 

21,342

 

29,218

Inventories, net

 

52,055

 

40,781

Income tax receivable

379

Prepaid expenses and other current assets

 

2,840

 

2,838

Total Current Assets

 

121,015

 

119,635

Inventories - non-current, net

 

11,782

 

9,005

Property, plant and equipment, net

 

7,920

 

7,939

Intangible assets, net

 

4,210

 

4,300

Deferred income taxes

251

Operating lease asset

6,046

7,350

Other assets

 

374

 

347

TOTAL ASSETS

$

151,598

$

148,576

CURRENT LIABILITIES

  

 

  

Accounts payable

$

13,440

$

11,072

Accrued expenses

 

7,907

 

9,489

Accrued salaries and wages

 

2,633

 

4,064

Accrued income taxes

 

 

1,868

Total Current Liabilities

 

23,980

 

26,493

Deferred income taxes

 

 

166

Accrued income taxes

 

1,067

 

1,058

Long term operating lease liabilities

5,836

7,068

TOTAL LIABILITIES

 

30,883

 

34,785

COMMITMENTS AND CONTINGENCIES (Note 12)

 

  

 

  

STOCKHOLDERS’ EQUITY

Common Stock, par value $0.01 per share; 100,000,000 shares authorized as of September 30, 2022 and June 30, 2022; 39,636,677 and 39,628,197 shares issued; and 36,742,962 and 36,734,482 shares outstanding, respectively

396

396

Additional paid-in capital

 

20,527

 

20,005

Retained earnings

 

119,313

 

112,911

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

 

(19,521)

 

(19,521)

TOTAL STOCKHOLDERS’ EQUITY

 

120,715

 

113,791

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

151,598

$

148,576

See accompanying notes to condensed consolidated financial statements.

3

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

    

Three Months ended September 30, 

    

2022

    

2021

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

Net sales:

 

Equipment revenues

$

25,687

$

20,827

Service revenues

 

13,806

 

10,224

 

39,493

 

31,051

Cost of sales:

 

  

 

  

Equipment related expenses

 

19,665

 

16,172

Service-related expenses

 

1,661

 

1,423

 

21,326

 

17,595

Gross Profit

 

18,167

 

13,456

Operating expenses:

Research and development

 

2,428

 

1,931

Selling, general, and administrative expenses

 

8,490

 

7,346

Total Operating Expenses

10,918

9,277

Operating Income

 

7,249

 

4,179

Other (expense) income:

 

 

  

Interest and other (expense) income, net

 

(103)

 

17

Gain on extinguishment of debt

3,904

Income before Provision for Income Taxes

 

7,146

 

8,100

Provision for Income Taxes

 

744

 

348

Net Income

$

6,402

$

7,752

Income per share:

 

  

 

  

Basic

$

0.17

$

0.21

Diluted

$

0.17

$

0.21

Weighted average number of shares outstanding:

 

  

 

  

Basic

 

36,762,000

 

36,700,000

Diluted

 

36,990,000

 

36,844,000

See accompanying notes to condensed consolidated financial statements.

4

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)

Three months ended September 30, 2022 (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, 2022

 

39,628,197

$

396

$

20,005

 

(2,893,715)

$

(19,521)

$

112,911

$

113,791

Net income

 

 

 

 

 

 

6,402

6,402

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)

$

119,313

$

120,715

    

Three months ended September 30, 2021 (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, 2021

 

39,595,883

$

396

$

18,201

 

(2,893,715)

$

(19,521)

$

93,312

$

92,388

Net income

 

 

 

 

 

7,752

7,752

Stock-based compensation expense

 

 

89

 

 

 

89

Stock options exercised

5,000

16

16

Balances at September 30, 2021

 

39,600,883

$

396

$

18,306

 

(2,893,715)

$

(19,521)

$

101,064

$

100,245

See accompanying notes to condensed consolidated financial statements.

5

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three Months ended September 30, 

    

2022

    

2021

    

(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

  

 

  

Net income

$

6,402

$

7,752

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

  

 

Depreciation and amortization

 

457

 

438

Gain on disposal of fixed asset

(15)

Interest (income) on other investments

(8)

Unrealized loss (gain) on marketable securities

153

(3)

Provision for (recovery of) doubtful accounts

 

(27)

 

Change to inventory reserve

 

71

 

Deferred income taxes

 

(417)

 

21

Stock based compensation expense

 

477

 

89

Gain on extinguishment of debt

(3,904)

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

7,903

 

2,738

Inventories

 

(14,121)

 

(1,824)

Prepaid expenses and other current assets

 

(2)

 

540

Income tax receivable

(379)

Other assets

 

(27)

 

(89)

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

 

(2,432)

 

(2,295)

Net Cash (Used in) Provided by Operating Activities

 

(1,965)

 

3,463

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Purchases of property, plant, and equipment

 

(372)

 

(522)

Proceeds from disposal of fixed asset

38

Purchases of marketable securities and other investments

(10,028)

(19)

Net Cash Used in Investing Activities

 

(10,362)

 

(541)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Proceeds from stock option exercises

 

45

 

16

Net Cash Provided by Financing Activities

 

45

 

16

Net (decrease) increase in Cash and Cash Equivalents

 

(12,282)

 

2,938

CASH AND CASH EQUIVALENTS - Beginning

 

41,730

 

34,806

CASH AND CASH EQUIVALENTS - Ending

$

29,448

$

37,744

SUPPLEMENTAL CASH FLOW INFORMATION

 

  

 

  

Interest paid

$

4

$

4

Income taxes paid

$

3,398

$

2,169

See accompanying notes to condensed consolidated financial statements.

6

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

September 30, 2022

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.

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 all of 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 revenue, which is less susceptable 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.

Stock Split

In December 2021, the Company's Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend of the Company's common stock, payable to stockholders of record on December 20, 2021. The additional shares were distributed on January 4, 2022. All share and per share amounts (except par value) have been retroactively adjusted to reflect the stock split. There was no net effect on stockholders’ equity as a result of the stock split. Upon distribution of the dividend, the total number of shares outstanding increased from 18,365,878 to 36,731,756.

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 doubtful accounts, 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, current receivables and payables and certain other short-term financial instruments approximate their fair value as of September 30, 2022 and 2021 due to their short-term maturities. Long-term debt and lease liabilities reflect fair value based on prevailing market rates.

7

Cash and Cash Equivalents

Cash and cash equivalents include approximately $5,066,000 and $63,000 of short-term time deposits at September 30, 2022 and June 30, 2022, respectively. The Company classifies all highly liquid investments with original maturities of three months or less as cash equivalents. During the three months ended September 30, 2022, the Company purchased three certificate of deposits totaling $15,000,000. One certificate of deposit with a original maturity of three months has been included in cash and cash equivalents while two with original maturities greater than three months have been included in investments - other. Certificate of deposits are recorded at the original cost plus accrued interest. As of September 30, 2022 and June 30, 2022, the Company included $5,003,000 and $0, respectively, of certificate of deposits within Cash and Cash equivalents. The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of September 30, 2022 and June 30, 2022. The Company has not historically experienced any credit losses with balances in excess of FDIC limits.

Investments – other

The Company classifies certificates of deposit with an original maturity greater than three months as investments - other. Certificate of deposits are recorded at the original cost plus accrued interest. As of September 30, 2022 and June 30, 2022, the Company included $10,008,000 and $0, respectively, of certificate of deposits within investments - other.  

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 months ended September 30, 2022, the Company did not record an impairment charge regarding its investment in marketable securities because 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 doubtful accounts of $216,000 and $243,000 as of both September 30, 2022 and June 30, 2022. Our reserves for doubtful accounts 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.

8

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. Intangible assets determined to have indefinite lives were not amortized but were tested for impairment at least annually.

Changes in intangible assets are as follows (in thousands):

September 30, 2022

June 30, 2022

    

Carrying

    

Accumulated

    

Net book

    

Carrying

    

Accumulated

    

Net book

value

amortization

value

value

amortization

value

Customer relationships

$

9,800

(9,183)

$

617

$

9,800

(9,143)

$

657

Trade name

4,048

 

(455)

 

3,593

 

4,048

 

(405)

 

3,643

$

13,848

$

(9,638)

$

4,210

$

13,848

$

(9,548)

$

4,300

Amortization expense for intangible assets subject to amortization was approximately $90,000 and $98,000 for the three months ended September 30, 2022 and 2021, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2023 - $361,000; 2024 - $336,000; 2025 - $315,000; 2026 - $297,000; and 2027 - $283,000. The weighted average remaining amortization period for intangible assets was 16.0 years and 16.2 years at September 30, 2022 and June 30, 2022, 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.

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.

9

The Company analyzes sales returns and is able to make reasonable and reliable estimates of product returns based on the Company’s past history. Estimates for sales returns are based on several factors including actual returns and based on expected return data communicated to it by its customers. Accordingly, the Company believes that its historical returns 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" expenses in the consolidated statements of income and are expensed as incurred. Advertising expense for the three months ended September 30, 2022 and 2021 was $754,000 and $1,086,000, 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 September 30, 2022 and 2021 was $2,428,000 and $1,931,000, 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 September 30, 2022 and 2021 (in thousands, except share and per share data):

Net Income

Weighted Average Shares

Net Income per Share

    

2022

    

2021

    

2022

2021

2022

    

2021

Basic EPS

$

6,402

$

7,752

36,762

36,700

$

0.17

$

0.21

Effect of Dilutive Securities:

  

 

Stock Options

 

228

 

144

 

 

Diluted EPS

$

6,402

$

7,752

36,990

 

36,844

$

0.17

$

0.21

Options to purchase 62,500 and 0 shares of common stock were excluded for the three months ended September 30, 2022 and 2021, 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.

10

Stock-Based Compensation

The Company has established four 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 $477,000 and $89,000 were recognized for the three months ended September 30, 2022 and 2021, 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 months ended September 30, 2022 or 2021.

Comprehensive Income

For the three months ended September 30, 2022 and 2021, 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 13.

Shipping and Handling Sales and Costs

The Company records the amount billed to customers for shipping and handling in net sales ($112,000 and $106,000 in the three months ended September 30, 2022 and 2021, respectively); and classifies the costs associated with these sales in cost of sales ($394,000 and $333,000 in the three months ended September 30, 2022 and 2021, respectively).

Leases

The Company records lease assets and correspoinding lease liabilities 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 borring 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 12 – 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 at the end of calendar 2021,

11

and applies to lease contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate.

In January 2021, the FASB issued authoritative guidance that makes amendments to the new rules on accounting for reference rate reform. The amendments clarify that for all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in ASC Topic 848.

Effective for the Company – This guidance can be applied for a limited time through December 31, 2022. The guidance will no longer be available to apply after December 31, 2022.

Impact on consolidated financial statements – The Company’s bank has notified the Company that its LIBOR option will continue to be available to it through June 30, 2023, at which time the option will shift to the Benchmark Replacement as defined in the agreement with the bank (see Note 8). The Company does not believe that this transition will have a material impact on its financial condition.

Financial Instruments – Credit Losses (Topic 326)

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which requires financial assets measured at amortized cost, such as our trade receivables, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectations for each pool of similar financial assets. ASU 2016-13 becomes effective for the Company beginning in the quarter ended September 30, 2023. The Company is currently evaluating the impact of adoption on its 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 September 30, 2022 and June 30, 2022, the Company included refund liabilities of approximately $4,242,000 and $5,863,000, respectively, in current liabilities. As of September 30, 2022 and June 30, 2022, the Company included return-related assets of approximately $987,000 and $974,000, respectively, in other current assets.

As a percentage of gross sales, returns, rebates and allowances were 5% and 8% for the three months ended September 30, 2022 and 2021, 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 September 30, 

    

2022

    

2021

Major Product Lines:

  

 

  

Intrusion and access alarm products

$

13,532

$

9,796

Door locking devices

 

12,155

 

11,031

Services

 

13,806

 

10,224

Total Revenues

$

39,493

$

31,051

12

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 one customer with an accounts receivable balance that comprised of 15% and 16% as of September 30, 2022 and June 30, 2022. Sales to this customer did not exceed 10% of net sales during the three months ended September 30, 2022 and 2021, respectively. The Company had another customer with an accounts receivable balance of 24% and 22%  as of September 30, 2022 and June 30, 2022. Sales to this customer were 11% and 14% for the three months ended September 30, 2022 and 2021, respectively.

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 ended September 30, 2022 and 2021, are as follows (in thousands):

Three months ended September 30, 

2022

    

2021

    

Net gains recognized during the period on marketable securities

$

$

Less: Net gains recognized during the period on marketable securities sold during the period

 

 

Unrealized (losses) recognized during the reporting period on marketable securities still held at the reporting date

 

(153)

 

3

$

(153)

$

3

The fair values of the Company’s marketable securities are determined as being the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the Company utilizes the three-tier value hierarchy, as prescribed by US GAAP, which prioritizes the inputs used in measuring fair value as follows:

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s marketable securities, which are considered available-for-sale securities, are re-measured to fair value on a recurring basis and are valued using Level 1 inputs using quoted prices (unadjusted) for identical assets in active markets.

The following tables summarize the Company’s investments at September 30, 2022 and June 30, 2022, respectively (in thousands):

September 30, 2022

June 30, 2022

Unrealized

Unrealized

Cost

    

Fair Value

    

Gain (Loss)

    

Cost

    

Fair Value

    

Gain (Loss)

Mutual Funds - Level 1

$

5,531

4,943

$

(588)

$

5,504

$

5,068

$

(436)

Investment income is recognized when earned and consists principally of interest income from fixed income mutual funds. Realized gains and losses on sales of investments are determined on a specific identification basis.

13

NOTE 5 - Inventories

Inventories, net of reserves are valued at lower of cost (first-in, first-out method) or net realizable value. Inventories, net of reserves consist of the following (in thousands):

    

September 30, 

    

June 30, 

2022

2022

Component parts

$

42,098

$

32,656

Work-in-process

 

10,403

 

10,085

Finished product

 

11,336

 

7,045

$

63,837

$

49,786

Classification of inventories, net of reserves:

 

  

 

  

Current

$

52,055

$

40,781

Non-current

 

11,782

 

9,005

$

63,837

$

49,786

NOTE 6 – Property, Plant, and Equipment

Property, plant and equipment consist of the following (in thousands):

    

September 30, 2022

    

June 30, 2022

    

Useful Life in Years

Land

$

904

$

904

N/A

Buildings

 

8,911

 

8,911

30 to 40

Molds and dies

 

7,495

 

7,480

3 to 5

Furniture and fixtures

 

3,082

 

3,030

5 to 10

Machinery and equipment

 

26,832

 

26,696

7 to 10

Building improvements

 

2,557

 

2,464

Shorter of the lease term or life of asset

 

49,781

 

49,485

  

Less: accumulated depreciation and amortization

 

(41,861)

 

(41,546)

  

$

7,920

$

7,939

  

Depreciation and amortization expense on property, plant, and equipment was approximately $367,000 and $340,000 for the three months ended September 30, 2022 and 2021, respectively.

NOTE 7 - Income Taxes

The provision for income taxes represents Federal, foreign, and state and local income taxes. The effective rate differs from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions, global intangible low-taxed income (“GILTI”), tax benefit of R&D credits, and certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, and state and local income taxes. In addition, changes in judgment from the evaluation of new information resulting in the recognition de-recognition or re-measurement of a tax position taken in a prior annual period is recognized separately in the quarter of the change.

For the three months ended September 30, 2022 and September 30,2021, the Company recognized net income tax expense of $744,000 and $348,000, respectively. During the three months ended September 30, 2022, the Company’s reserve for uncertain income tax positions increased by $12,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes. As of Septemebr 30, 2022, the Company had accrued interest totaling $100,000, as well as $678,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. For the three months ended September 30, 2022, additional interest expense was accrued for in the amount of $12,000. The Company claims R&D tax credits on eligible R&D expenditures. The R&D tax credits are recognized as a reduction to income tax expense.

14

The Company does not expect that our unrecognized tax benefits will significantly change within the next twelve months. We file a consolidated U.S. income tax return and tax returns in certain state and local and foreign jurisdictions. As of September 30, 2022, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes for fiscal years 2018 and thereafter.

In January 2022, the Company received a letter from the IRS (“IRS”) notifying it that the IRS would be examining the Company’s income tax return for fiscal year ended June 30, 2020. Management believes that its provision for income taxes for this period is adequate. However, the outcome cannot be predicted with certainty.

NOTE 8 - Long-Term Debt

As of September 30, 2022 and June 30, 2022, the Company had a revolving line of credit of $11,000,000 (“Revolver Agreement”) which expires in June 2024.

Outstanding balances and interest rates as of September 30, 2022 and June 30, 2022 are as follows (dollars in thousands):

September 30, 2022

June 30, 2022

 

    

Outstanding

    

Interest Rate

Outstanding

    

Interest Rate

 

Revolving line of credit:

 

  

 

  

Current maturities

$

n/a

$

n/a

Long-term debt

 

n/a

 

n/a

$

$

The Revolver Agreement also provides for a LIBOR-based interest rate option of LIBOR plus 1.15% to 2.00%, depending on the ratio of outstanding debt to EBITDA, which is to be measured and adjusted quarterly, a prime rate-based option of the prime rate plus 0.25% and other terms and conditions as more fully described in the Revolver Agreement. The Company’s obligations under the Revolver Agreement continue to be secured by substantially all of its domestic assets, including but not limited to, deposit accounts, accounts receivable, inventory, equipment and fixtures and intangible assets. In addition, the Company’s wholly owned subsidiaries, with the exception of the Company’s foreign subsidiaries, have issued guarantees and pledges of all of their assets to secure the Company’s obligations under the Revolver Agreement. All of the outstanding common stock of the Company’s domestic subsidiaries and 65% of the common stock of the Company’s foreign subsidiaries has been pledged to secure the Company’s obligations under the Revolver Agreement. The Revolver Agreement contains various restrictions and covenants including, among others, restrictions on payment of dividends, restrictions on borrowings and compliance with certain financial ratios, as defined in the Revolver Agreement. In September 2020, the Company and its lender amended the Revolver Agreement, which had an expiration date of June 2021, to expire in June 2024. The amended Revolver Agreement also removed certain requirements and restrictions on the Company as well as removing the mortgage on the Company’s Amityville facility.

During the fourth quarter of fiscal 2020, the Company received the proceeds of promissory notes dated between April 17, 2020 and May 7, 2020 (the "PPP Loan Agreement"), entered into between the Company and HSBC Bank USA N.A., as lender (the "Lender). Lender made the loans pursuant to the Paycheck Protection Program (the "PPP"), created by Section 1102 of the CARES Act and governed by the CARES Act, Section 7(a)(36) of the Small Business Act, any rules or guidance that has been issued by the Small Business Association (“SBA”) implementing the PPP and acting as guarantor, or any other applicable loan program requirements, as defined in 13 CFR § 120.10, as amended from time to time. Pursuant to the PPP Loan Agreement, the Lender made loans to the Company with an aggregate principal amount of $3,904,000 (the "PPP Loan"). The PPP Loan and related extinguishement was accounted for in accordance with ASC 470 “Debt”.

Pursuant to the CARES Act, the loans may be forgiven by the SBA. During the year ended June 30, 2022, the PPP Loans were forgiven, in their entirety, in accordance with guidelines set forth in the PPP loan documents. The Company recognized a gain on the extinguishment of debt during the quarter ended September 30, 2021 in the amount of $3,904,000 within the other (expense) income section in the accompanying condensed consolidated statements of income. The SBA reserves the right to audit PPP forgiveness applications for a period of six years from the date of forgiveness. It has indicated that it will audit all of those that are in excess of $2 million.

15

NOTE 9 - Stock Option

The Company follows ASC 718 (“Share-Based Payment”), which requires that all share-based payments to employees, including stock options, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period. For the three months ended September 30, 2022 and 2021, the Company recorded non-cash compensation expense of $477,000 ($0.01 per basic and diluted share) and $89,000 ($0.00 per basic and diluted share), respectively, relating to stock-based compensation.

2022 Employee Stock Option Plan

The Company’s Board of Directors approved a new Employee Stock Option Plan (“2022 Plan”) in August 2022. The 2022 Plan is subject to shareholder approval at the Company’s annual shareholder’s meeting in December 2022. The plan would authorize the granting of awards, the exercise of which would allow up to an aggregate of 950,000 shares of the Company’s common stock to be acquired by the holders of such awards. The terms of the 2022 Plan are substantially the same as those of the 2012 Employee Stock Option Plan. The 2022 Plan is intended to replace the 2012 Employee Stock Option Plan, which expires in 2022.

2012 Employee Stock Option Plan

In December 2012, the stockholders approved the 2012 Employee Stock Option Plan (the 2012 Employee Plan). The 2012 Employee Plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 1,900,000 shares of the Company’s common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options (“ISOs”) or non-incentive stock options, to valued employees. Any plan participant who is granted ISOs and possesses more than 10% of the voting rights of the Company’s outstanding common stock must be granted an option with a price of at least 110% of the fair market value on the date of grant.

Under the 2012 Employee Plan, stock options may be granted to valued employees with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable, in whole or in part, at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At September 30, 2022, 555,380 stock options were outstanding, 183,852 stock options were exercisable and 1,101,420 stock options were available for grant under this plan.  No options may be granted under this plan after December 2022. 37,500 Options were granted during the three months ended September 30, 2022. There were no options granted during the three months ended September 30, 2021. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

16

    

2022

    

2021

Risk-free interest rates

3.03

%  

n/a

Expected lives

7.27 Years

n/a

Expected volatility

43

%  

n/a

Expected dividend yields

0

%  

n/a

The following table reflects activity under the 2012 Employee Plan for the three months ended September 30:

2022

2021

Weighted average

Weighted average

    

Options

    

exercise price

    

Options

    

exercise price

    

Outstanding, beginning of year

523,080

$

18.59

214,080

$

9.59

Granted

37,500

$

26.94

Forfeited/Lapsed

Exercised

(5,200)

 

$

8.64

 

(5,000)

 

$

3.16

Outstanding, end of period

555,380

$

19.25

 

209,080

$

9.74

Exercisable, end of period

183,852

$

15.26

 

97,976

$

8.48

Weighted average fair value at grant date of options granted

$

13.36

 

n/a

 

Total intrinsic value of options exercised

$

107,000

$

94,000

 

Total intrinsic value of options outstanding

$

5,684,000

$

2,467,000

 

Total intrinsic value of options exercisable

$

2,586,000

$

1,280,000

 

5,200 and 5,000 stock options were exercised during the three months ended September 31, 2022 and 2021, respectively. $45,000 and $16,000 cash was received from the option exercises during the three months ended September 30, 2022 and 2021, respectively. The actual tax benefit realized for the tax deductions from option exercises during the three months ended September 30, 2022 and 2021 was $0 for each period.

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at September 30, 2022:

Options outstanding

Options exercisable

    

    

Weighted average

    

    

    

Number

remaining

Weighted average

Number

Weighted average

Range of exercise prices

outstanding

contractual life

exercise price

exercisable

exercise price

$2.99 ‑ $26.94

555,380

8.30

$

19.25

183,852

$

15.26

555,380

8.30

$

19.25

183,852

$

15.26

As of September 30, 2022, there was $2,651,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 37,500 and 0 options were granted during the three months ended September 30, 2022 and 2021, respectively. 12,300 and 4,800 options vested during the three months ended September 30, 2022 and 2021, respectively. The total grant date fair value of the options vesting during the three months ended September 30, 2022 and 2021 under this plan was $129,000 and $29,000, respectively.

2012 Non-Employee Stock Option Plan

In December 2012, the stockholders approved the 2012 Non-Employee Stock Option Plan (the 2012 Non-Employee Plan). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 100,000 shares of the Company’s common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.

Under the 2012 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At September 30, 2022, 20,400 stock options were outstanding, 11,280 stock options were exercisable and no further stock options were available for grant under this plan.

17

There were no options granted during the three months ended September 30, 2022 and 2021. No options may be granted under this plan after December 2022. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

2022

    

2021

Risk-free interest rates

n/a

n/a

Expected lives

n/a

n/a

Expected volatility

n/a

n/a

Expected dividend yields

n/a

n/a

The following table reflects activity under the 2012 Non-Employee Plan for the three months ended September 30:

2022

2021

    

    

Weighted average

    

    

Weighted average

    

Options

exercise price

Options

exercise price

Outstanding, beginning of year

20,400

$

14.39

12,000

$

6.55

Granted

Forfeited/Lapsed

Exercised

 

 

Outstanding, end of period

20,400

$

14.39

 

12,000

$

6.55

Exercisable, end of period

11,280

$

8.92

 

6,240

$

6.04

Weighted average fair value at grant date of options granted

n/a

n/a

 

  

Total intrinsic value of options exercised

n/a

$

n/a

 

  

Total intrinsic value of options outstanding

$

300,000

$

180,000

 

  

Total intrinsic value of options exercisable

$

227,000

$

97,000

 

  

No stock options were exercised during the three months ended September 30, 2022 or 2021. No cash was received from option exercises during either of the three months ended September 30, 2022 or 2021 and the actual tax benefit realized for the tax deductions from option exercises was $0 for both periods.

The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at September 30, 2022:

Options outstanding

Options exercisable

Weighted average

Weighted

Weighted

Number

remaining

average exercise

Number

average exercise

Range of exercise prices

outstanding

    

contractual life