10-Q 1 nssc-20220331x10q.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, 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: May 17, 2022

COMMON STOCK, $.01 PAR VALUE PER SHARE     36,733,540

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, 2022

Condensed Consolidated Balance Sheets March 31, 2022 (unaudited) and June 30, 2021

3

Condensed Consolidated Statements of Income for the Three Months ended March 31, 2022 and 2021 (unaudited)

4

Condensed Consolidated Statements of Income for the Nine Months ended March 31, 2022 and 2021 (unaudited)

5

Condensed Consolidated Statements of Stockholders Equity for the Nine Months Ended March 31, 2022 and 2021 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2022 and 2021 (unaudited)

7

Notes to Condensed Consolidated Financial Statements (unaudited)

8

ITEM 2.

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

27

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

30

ITEM 4.

Controls and Procedures

31

PART II:  OTHER INFORMATION

ITEM 1A.

Risk Factors

31

ITEM 6.

Exhibits

32

SIGNATURE PAGE

33

2

PART I:           FINANCIAL INFORMATION

Item 1.  Financial Statements

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2022

    

(unaudited)

    

June 30, 2021

    

(in thousands, except share data)

CURRENT ASSETS

  

 

  

Cash and cash equivalents

$

42,127

$

34,806

Marketable securities

5,245

5,413

Accounts receivable, net of allowance for doubtful accounts of $226 at both March 31, 2022 and June 30, 2021

 

24,209

 

28,081

Inventories, net

 

35,101

 

24,933

Prepaid expenses and other current assets

 

2,726

 

2,408

Total Current Assets

 

109,408

 

95,641

Inventories - non-current, net

 

7,577

 

6,767

Property, plant and equipment, net

 

7,997

 

7,836

Intangible assets, net

 

4,398

 

4,691

Operating lease asset

7,356

7,373

Other assets

 

370

 

243

TOTAL ASSETS

$

137,106

$

122,551

CURRENT LIABILITIES

  

 

  

Accounts payable

$

9,935

$

6,095

Accrued expenses

 

8,223

 

6,582

Accrued salaries and wages

 

3,261

 

3,478

Current portion of long-term debt

2,386

Accrued income taxes

 

1,321

 

1,709

Total Current Liabilities

 

22,740

 

20,250

Long term debt, net of current portion

1,518

Deferred income taxes

 

369

 

380

Accrued income taxes

 

940

 

925

Long term operating lease liabilities

7,073

7,090

TOTAL LIABILITIES

 

31,122

 

30,163

COMMITMENTS AND CONTINGENCIES (Note 13)

 

  

 

  

STOCKHOLDERS’ EQUITY

Common Stock, par value $0.01 per share; 100,000,000 shares authorized as of March 31, 2022 (Note 10) and 80,000,000 shares authorized as of June 30, 2021; 39,627,255 and 39,595,883 shares issued; and 36,733,540 and 36,702,168 shares outstanding, respectively

396

396

Additional paid-in capital

 

19,735

 

18,201

Retained earnings

 

105,374

 

93,312

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

 

(19,521)

 

(19,521)

TOTAL STOCKHOLDERS’ EQUITY

 

105,984

 

92,388

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

137,106

$

122,551

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, 

    

2022

    

2021

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

Net sales:

 

Equipment revenues

$

23,873

$

19,335

Service revenues

 

12,032

 

8,893

 

35,905

 

28,228

Cost of sales:

 

  

 

  

Equipment related expenses

 

19,334

 

14,074

Service-related expenses

 

1,538

 

1,244

 

20,872

 

15,318

Gross Profit

 

15,033

 

12,910

Operating expenses:

Research and development

 

2,009

 

1,902

Selling, general, and administrative expenses

 

8,442

 

5,980

Total Operating Expenses

10,451

7,882

Operating Income

 

4,582

 

5,028

Other (expense) income:

 

 

  

Interest and other income (expense), net

 

(177)

 

(44)

Income before Provision for Income Taxes

 

4,405

 

4,984

Provision for Income Taxes

 

1,132

 

624

Net Income

$

3,273

$

4,360

Income per share:

 

  

 

  

Basic

$

0.09

$

0.12

Diluted

$

0.09

$

0.12

Weighted average number of shares outstanding:

 

  

 

  

Basic

 

36,743,000

 

36,697,000

Diluted

 

36,879,000

 

36,823,000

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, 

2022

    

2021

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

Net sales:

Equipment revenues

$

67,080

$

54,249

Service revenues

 

33,284

 

24,357

 

100,364

 

78,606

Cost of sales:

 

  

 

 

  

Equipment related expenses

 

56,077

 

39,980

Service-related expenses

 

4,355

 

3,621

 

60,432

 

43,601

Gross Profit

 

39,932

 

35,005

Operating expenses:

Research and development

 

5,918

 

5,675

Selling, general, and administrative expenses

 

23,983

 

17,979

Total Operating Expenses

 

29,901

 

23,654

Operating Income

 

10,031

 

 

11,351

Other (expense) income:

 

 

 

  

Interest and other income (expense), net

 

(102)

 

(53)

Gain on extinguishment of debt

3,904

Income before Provision for Income Taxes

 

13,833

 

11,298

Provision for Income Taxes

 

1,771

 

1,422

Net Income

$

12,062

$

9,876

Income per share:

 

  

 

  

Basic

$

0.33

$

0.27

Diluted

$

0.33

$

0.27

Weighted average number of shares outstanding:

 

  

 

  

Basic

 

36,723,000

 

36,696,000

Diluted

 

36,873,000

 

36,804,000

See accompanying notes to condensed consolidated financial statements.

5

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)

Nine months ended March 31, 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, 2021, Prior to considering Retrospective effect of Stock Split

21,244,799

$

212

$

18,201

 

(2,893,715)

$

(19,521)

$

93,496

$

93,237

Retrospective Effects of 2:1 Stock Split Declared on December 20, 2021

18,351,084

$

184

 

$

(184)

$

Balances at June 30, 2021, considering Retrospective effect of Stock Split

 

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

Net income

 

 

 

 

$

1,037

$

1,037

Stock-based compensation expense

 

$

1,255

 

 

 

$

1,255

Stock options exercised

24,588

 

$

139

 

 

 

$

139

Balances at December 31, 2021

 

39,625,471

$

396

$

19,700

 

(2,893,715)

$

(19,521)

$

102,101

$

102,676

Net income

$

3,273

$

3,273

Stock-based compensation expense

$

35

$

35

Stock options exercised

1,784

Balances at March 31, 2022

39,627,255

$

396

$

19,735

 

(2,893,715)

$

(19,521)

$

105,374

$

105,984

    

Nine months ended March 31, 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, 2020, Prior to considering Retrospective effect of Stock Split

21,241,066

$

212

$

17,766

 

(2,893,715)

$

(19,521)

$

78,083

$

76,540

Retrospective Effects of 2:1 Stock Split Declared on December 20, 2021

18,347,351

$

184

 

$

(184)

$

Balances at June 30, 2020, considering Retrospective effect of Stock Split

 

39,588,417

$

396

$

17,766

 

(2,893,715)

$

(19,521)

$

77,899

$

76,540

Net income

 

 

 

 

 

$

2,319

$

2,319

Stock-based compensation expense

 

 

$

104

 

 

 

$

104

Balances at September 30, 2020

 

39,588,417

$

396

$

17,870

 

(2,893,715)

$

(19,521)

$

80,218

$

78,963

Net income

 

 

 

 

 

$

3,197

$

3,197

Stock-based compensation expense

 

 

$

84

 

 

 

$

84

Balances at December 31, 2020

 

39,588,417

$

396

$

17,954

 

(2,893,715)

$

(19,521)

$

83,415

$

82,244

Net income

 

 

 

 

 

$

4,360

$

4,360

Stock-based compensation expense

$

84

$

84

Stock options exercised

 

5,720

 

 

 

 

Balances at March 31, 2021

39,594,137

$

396

$

18,038

(2,893,715)

$

(19,521)

$

87,775

$

86,688

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, 

    

2022

    

2021

    

(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

  

 

  

Net income

$

12,062

$

9,876

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

 

  

 

Depreciation and amortization

 

1,320

 

1,267

Unrealized loss on marketable securities

226

42

(Recovery of) provision for doubtful accounts

 

 

(130)

Change to inventory reserve

 

331

 

Deferred income taxes

 

(11)

 

55

Stock based compensation expense

 

1,379

 

272

Gain on extinguishment of debt

(3,904)

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

3,872

 

707

Inventories

 

(11,309)

 

5,749

Prepaid expenses and other current assets

 

(318)

 

165

Other assets

 

(127)

 

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

 

4,892

 

(1,572)

Net Cash Provided by Operating Activities

 

8,413

 

16,431

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Purchases of property, plant, and equipment

 

(1,189)

 

(566)

Purchases of marketable securities

(58)

(5,403)

Net Cash Used in Investing Activities

 

(1,247)

 

(5,969)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Proceeds from stock option exercises

 

155

 

Net Cash Provided by Financing Activities

 

155

 

Net increase in Cash and Cash Equivalents

 

7,321

 

10,462

CASH AND CASH EQUIVALENTS - Beginning

 

34,806

 

18,248

CASH AND CASH EQUIVALENTS - Ending

$

42,127

$

28,710

SUPPLEMENTAL CASH FLOW INFORMATION

 

  

 

  

Interest paid

$

12

$

14

Income taxes paid

$

2,154

$

1,847

See accompanying notes to condensed consolidated financial statements.

7

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MARCH 31, 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, wireless recurring 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 equipment 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 is affected by the housing and construction markets. Deterioration of the current economic conditions may also affect this trend.

Our results for fiscal 2021 and the first three quarters of fiscal 2022 reflected the increase in customer demand after the challenging business environment resulting from the COVID-19 pandemic. While the Company believes this recovery will continue, there can be no assurances that it will do so in the event of a return to building and construction restrictions that might result from a return to higher levels of COVID-19 cases.

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 total 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

8

include management’s judgments associated with reserves for sales returns and allowances, allowance for doubtful accounts, inventory reserves, valuation of intangible assets 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 March 31, 2022 and June 30, 2021 due to their short-term maturities. Long-term debt and lease liabilities reflect fair value based on prevailing market rates.

Cash and Cash Equivalents

Cash and cash equivalents include approximately $63,000 of short-term time deposits at both March 31, 2022 and June 30, 2021, respectively. The Company considers all highly liquid investments with original maturities of three months or less to be 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 March 31, 2022 and June 30, 2021. 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, 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 $226,000 as of both March 31, 2022 and June 30, 2021. 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, 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

9

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

The Company’s acquisition of substantially all of the assets and certain liabilities of G. Marks Hardware, Inc. (“Marks”) in August 2008 included intangible assets recorded at fair value on the date of acquisition. The customer relationships are amortized over their estimated useful lives of twenty years. At the acquisition date, the Marks trade name was deemed to have an indefinite life. During the 4th quarter of fiscal 2020, the Company determined that the trade-name was impaired. Accordingly, the Company recorded an impairment charge of $1,852,000 and reclassified the remaining balance of the underlying asset from indefinite-lived to a long-lived asset with a remaining useful life of 20 years as of June 30, 2020.

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

March 31, 2022

June 30, 2021

    

Carrying

    

Accumulated

    

Net book

    

Carrying

    

Accumulated

    

Net book

value

amortization

value

value

amortization

value

Customer relationships

$

9,800

(9,096)

$

704

$

9,800

$

(8,955)

$

845

Trade name

4,048

 

(354)

 

3,694

 

4,048

 

(202)

 

3,846

$

13,848

$

(9,450)

$

4,398

$

13,848

$

(9,157)

$

4,691

Amortization expense for intangible assets subject to amortization was approximately $98,000 and $106,000 for the three months ended March 31, 2022 and 2021, respectively. Amortization expense for intangible assets subject to amortization was approximately $293,000 and $319,000 for the nine months ended March 31, 2022 and 2021, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2022 - $390,000; 2023 - $361,000; 2024 - $336,000; 2025 - $315,000; and 2026 - $297,000. The weighted average remaining amortization period for intangible assets was 16.3 years and 16.9 years at March 31, 2022 and June 30, 2021, 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.

10

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.

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 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 March 31, 2022 and 2021 was $655,000 and $229,000, respectively. Advertising expense for the nine months ended March 31, 2022 and 2021 was $2,253,000 and $919,000, 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, 2022 and 2021 was $2,009,000 and $1,902,000, respectively. R&D expense for the nine months ended March 31, 2022 and 2021 was $5,918,000 and $5,675,000, respectively.

11

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, 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

$

3,273

$

4,360

36,743

36,697

$

0.09

$

0.12

Effect of Dilutive Securities:

  

 

Stock Options

 

136

 

126

 

 

Diluted EPS

$

3,273

$

4,360

36,879

 

36,823

$

0.09

$

0.12

Options to purchase 388,000 and 16,000 shares of common stock were excluded for the three months ended March 31, 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.

The following provides a reconciliation of information used in calculating the per share amounts for the nine months ended March 31, 2022 and 2021 (in thousands, except share and per share data):

Weighted Average

Net Income per

Net Income

Shares

 Share

2022

    

2021

    

2022

    

2021

    

2022

    

2021

Basic EPS

$

12,062

$

9,876

36,723

36,696

$

0.33

$

0.27

Effect of Dilutive Securities:

  

 

  

 

 

 

  

 

  

Stock Options

 

 

150

 

108

 

 

Diluted EPS

$

12,062

$

9,876

 

36,873

 

36,804

$

0.33

$

0.27

Options to purchase 156,145 and 53,333 shares of common stock were excluded for the nine months ended March 31, 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.

12

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 $35,000 and $84,000 were recognized for the three months ended March 31, 2022 and 2021, respectively. Stock-based compensation costs of $1,379,000 and $272,000 were recognized for the nine months ended March 31, 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 or nine months ended March 31, 2022 or 2021.

Comprehensive Income

For the three and nine months ended March 31, 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 14.

Shipping and Handling Sales and Costs

The Company records the amount billed to customers for shipping and handling in net sales ($106,000 and $91,000 in the three months ended March 31, 2022 and 2021, respectively and $318,000 and $290,000 in the nine months ended March 31, 2022 and 2021, respectively); and classifies the costs associated with these sales in cost of sales ($339,000 and $281,000 in the three months ended March 31, 2022 and 2021, respectively and $1,033,000 and $732,000 in the nine months ended March 31, 2022 and 2021, respectively).

Leases

Effective July 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective transition option of applying the new standard at the adoption date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. Adoption of the new standard resulted in the recording of an operating ROU asset and lease liabilities of approximately $7.7 million. Given the length of the lease term, the right-of-use asset and corresponding liability assume a weighted discount rate as disclosed below. A change in the rate utilized could have a material effect on the amounts reported. Financial positions for reporting periods beginning on or after July 1, 2019 are presented under new guidance, while prior period amounts are not adjusted and continue to be reported in accordance

13

with previous guidance. See Note 13 – Commitments and Contingencies; Leases for additional accounting policies and transition 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, 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.

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, 2022 and June 30, 2021, the Company included refund liabilities of approximately $4,771,000 and $4,277,000, respectively, in current liabilities. As of March 31, 2022 and June 30, 2021, the Company included return-related assets of approximately $961,000 and $890,000, respectively, in other current assets.

As a percentage of gross sales, returns, rebates and allowances were 11% and 10% for the three months ended March 31, 2022 and 2021, respectively. As a percentage of gross sales, returns, rebates and allowances were 10% and 9% for the nine months ended March 31, 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 March 31, 

Nine months ended March 31, 

    

2022

    

2021

    

2022

    

2021

Major Product Lines:

  

 

  

  

 

  

Intrusion and access alarm products

$

12,667

$

8,956

$

33,230

$

24,517

Door locking devices

 

11,206

 

10,379

 

33,850

 

29,732

Services

 

12,032

 

8,893

 

33,284

 

24,357

Total Revenues

$

35,905

$

28,228

$

100,364

$

78,606

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 did not have any customers which exceeded 10% of net sales for the three or nine months ended March 31, 2022 and March 31, 2021, respectively. The Company had three customers with an accounts receivable balance that comprised 13%, 15% and 13% of the Company’s accounts receivable at March 31, 2022. The same three customers had accounts receivable balances that comprise of 12%, 19% and 11%, of the Company’s accounts receivable at June 30, 2021.

NOTE 4 – 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, 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, 2022 and 2021, are as follows (in thousands):

Three months ended March 31, 

Nine months ended March 31, 

2022

    

2021

    

2022

    

2021

Net gains recognized during the period on marketable securities

$

19

$

3

$

58

$

3

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

 

 

 

 

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

 

(191)

 

(42)

 

(226)

 

(42)

$

(172)

$

(39)

$

(168)

$

(39)

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 March 31, 2022 and June 30, 2021, respectively (in thousands):

March 31, 2022

June 30, 2021

Unrealized

Unrealized

Cost

    

Fair Value

    

Gain (Loss)

    

Cost

    

Fair Value

    

Gain (Loss)

Marketable Securities

$

5,481

$

5,245

$

(236)

$

5,422

$

5,413

$

(9)

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.

15

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):

    

March 31, 

    

June 30, 

2022

2021

Component parts

$

27,950

$

17,245

Work-in-process

 

8,016

 

6,158

Finished product

 

6,712

 

8,297

$

42,678

$

31,700

Classification of inventories, net of reserves:

 

  

 

  

Current

$

35,101

$

24,933

Non-current

 

7,577

 

6,767

$

42,678

$

31,700

NOTE 6 – Property, Plant, and Equipment

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

    

March 31, 2022

    

June 30, 2021

    

Useful Life in Years