Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q10-Q/A (Amendment No 1.)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:DECEMBERMarch 31, 20172023

OR

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                     

0-10004

NAPCO SECURITY TECHNOLOGIES, INC.

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

(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

The Nasdaq Stock Market LLC

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:            Yesx           No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).             Yesx             No¨

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

Large accelerated filer Accelerated Filer¨ Accelerated Filerx Non-Accelerated Filer¨filer Non-accelerated filer Smaller reporting company¨ Emerging growth 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¨Act. 

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

Yes ¨Nox

Number of shares outstanding of each of the issuer’s classes of common stock, as of: February 7, 2018May 5, 2023

COMMON STOCK, $.01 PAR VALUE PER SHARE     18,708,54736,767,780

EXPLANATORY NOTE

Napco Security Technologies, Inc. (“Company”) is filing this Amendment No. 1 on Form 10-Q/A (the “Amendment”) to amend its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 8, 2023 (the “Original Report”). In filing this amendment, the Company is restating its previously issued unaudited financial statements for the periods contained therein to account for changes to the Company’s inventory valuation, which led to changes in, among other things, cost of goods sold, gross profit, operating income and net income as more fully described below. Those previously issued financial statements should no longer be relied upon. Except as described below, all other information in, and the exhibits to, the Original Report remain unchanged. Accordingly, this Amendment should be read in conjunction with the Original Report and with our filings with the SEC made after the Original Report. This Amendment speaks as of the date of the Original Report, and the Company has not updated the Original Report to reflect events occurring subsequent to the date of the Original Report.

Background and Effects of the Restatement

In the course of preparing the Company’s fiscal fourth quarter and year-end financial statements, management of the Company identified certain errors related to the Company’s calculation of cost of goods sold (“COGS”) and inventory for the period ended December 31, 2022. Specifically, the costs of several raw material components fluctuated significantly during fiscal 2023, and the Company’s costing procedures did not appropriately account for such fluctuations. As a result, inventories were overstated and COGS was understated, resulting in overstated gross profit, operating income, provision for income taxes and net income for each period. The effects of these changes on the financial statements for these periods are shown in Note 1A to the Condended Consolidated Financial Statements.

Internal Control Over Financial Reporting

In connection with the restatement, management has assessed the effectiveness of the Company’s internal control over financial reporting. Based on this assessment, the Company identified a material weakness in its internal control over financial reporting resulting in the conclusion by the Company’s Chief Executive Officer and Chief Financial Officer that the internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2022. Management is taking steps towards remediating the material weakness in the Company’s internal control over financial reporting. For additional information related to the material weakness in internal control over financial reporting and the related remedial measures, see “Part II – Item 9A. Controls and Procedures.”

Items Amended in this Filing

This Amendment sets forth the Original Form 10-Q, as modified and superseded where necessary to reflect the restatement and the related internal control considerations. Accordingly, the following items included in the Original Form 10-Q have been amended:

• Part I, Item 1, Condensed Consolidated Financial Statements

• Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations

• Part I, Item 4, Controls and Procedures

• Part II, Item 1A, Risk Factors

Additionally, in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the Company is including with this Amendment currently dated certifications from its Chief Executive Officer and Chief Financial Officer. These certifications are filed or furnished, as applicable, as Exhibits 31.1, 31.2 and 32.1.

2

Table of Contents

PART I:           FINANCIAL INFORMATION

PART I:
FINANCIAL INFORMATION

Item 1.Financial Statements

Item 1.  Financial Statements

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

  

December 31, 2017

(unaudited) 

  June 30, 2017 
  (in thousands, except for share data) 
ASSETS        
CURRENT ASSETS        
Cash and cash equivalents $3,949  $3,454 
Accounts receivable, net of allowance for doubtful accounts of $175 and $155 at December 31, 2017 and June 30, 2017, respectively, and other reserves  17,361   20,275 
Inventories, net  26,687   26,212 
Prepaid expenses and other current assets  1,139   1,330 
         
Total Current Assets  49,136   51,271 
         
Inventories - non-current, net  5,179   4,367 
Deferred income taxes  1,461   644 
Property, plant and equipment, net  6,710   6,543 
Intangible assets, net  7,731   7,916 
Other assets  270   121 
         
TOTAL ASSETS $70,487  $70,862 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
CURRENT LIABILITIES        
Accounts payable $4,488  $5,653 
Accrued expenses  2,177   2,209 
Accrued salaries and wages  1,876   2,322 
Accrued income taxes  976   289 
Total Current Liabilities  9,517   10,473 
Long-term debt, net of current maturities  2,000   3,500 
         
Total Liabilities  11,517   13,973 
         
COMMITMENTS AND CONTINGENCIES        
         
STOCKHOLDERS' EQUITY        
Common Stock, par value $0.01 per share; 40,000,000 shares authorized;  21,179,192 and 21,174,507 shares issued; and 18,826,742 and 18,844,657 shares outstanding, respectively  212   212 
Additional paid-in capital  16,790   16,638 
Retained earnings  53,894   51,771 
   70,896   68,621 
Less: Treasury Stock, at cost (2,352,450 and 2,329,850 shares, respectively)  (11,926)  (11,732)
         
TOTAL STOCKHOLDERS' EQUITY  58,970   56,889 
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $70,487  $70,862 

March 31, 2023

    

(as Restated)

(unaudited)

    

June 30, 2022

    

(in thousands, except share data)

CURRENT ASSETS

  

 

  

Cash and cash equivalents

$

31,515

$

41,730

Investments - other

20,271

Marketable securities

5,155

5,068

Accounts receivable, net of allowance for credit losses of $125 and $243 as of March 31, 2023 and June 30, 2022, respectively

 

24,170

 

29,218

Inventories, net

 

38,725

 

40,781

Income tax receivable

688

Prepaid expenses and other current assets

 

2,610

 

2,838

Total Current Assets

 

123,134

 

119,635

Inventories - non-current, net

 

11,960

 

9,005

Property, plant and equipment, net

 

9,335

 

7,939

Intangible assets, net

 

4,029

 

4,300

Deferred income taxes

1,234

Operating lease asset

5,878

7,350

Other assets

 

299

 

347

TOTAL ASSETS

$

155,869

$

148,576

CURRENT LIABILITIES

  

 

  

Accounts payable

$

7,005

$

11,072

Accrued expenses

 

7,648

 

9,489

Accrued salaries and wages

 

2,843

 

4,064

Accrued income taxes

 

 

1,868

Total Current Liabilities

 

17,496

 

26,493

Deferred income taxes

 

 

166

Accrued income taxes

 

1,067

 

1,058

Long term operating lease liabilities

5,737

7,068

TOTAL LIABILITIES

 

24,300

 

34,785

COMMITMENTS AND CONTINGENCIES (Note 13)

 

  

 

  

STOCKHOLDERS’ EQUITY

Common Stock, par value $0.01 per share; 100,000,000 shares authorized as of March 31, 2023 and June 30, 2022; 39,661,495 and 39,628,197 shares issued; and 36,767,780 and 36,734,482 shares outstanding, respectively

397

396

Additional paid-in capital

 

21,220

 

20,005

Retained earnings

 

129,473

 

112,911

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

 

(19,521)

 

(19,521)

TOTAL STOCKHOLDERS’ EQUITY

 

131,569

 

113,791

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

155,869

$

148,576

See accompanying notes to condensed consolidated financial statements.

3

4

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

    

Three Months ended March 31, 

    

2023 (as Restated)

    

2022

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

Net sales:

 

Equipment revenues

$

28,390

$

23,873

Service revenues

 

15,142

 

12,032

 

43,532

 

35,905

Cost of sales:

 

  

 

  

Equipment related expenses

 

20,780

 

19,334

Service-related expenses

 

1,473

 

1,538

 

22,253

 

20,872

Gross Profit

 

21,279

 

15,033

Operating expenses:

Research and development

 

2,314

 

2,009

Selling, general, and administrative expenses

 

8,425

 

8,442

Total Operating Expenses

10,739

10,451

Operating Income

 

10,540

 

4,582

Other income (expense):

 

 

  

Interest and other income (expense), net

 

437

 

(177)

Income before Provision for Income Taxes

 

10,977

 

4,405

Provision for Income Taxes

 

1,428

 

1,132

Net Income

$

9,549

$

3,273

Income per share:

 

  

 

  

Basic

$

0.26

$

0.09

Diluted

$

0.26

$

0.09

Weighted average number of shares outstanding:

 

  

 

  

Basic

 

36,793,000

 

36,743,000

Diluted

 

37,082,000

 

36,879,000

See accompanying notes to condensed consolidated financial statements.

5

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

  Three months ended December 31, 
  2017  2016 
  (In thousands, except share and per share data) 
    
Net sales $21,112  $20,715 
Cost of sales  14,272   14,098 
         
Gross Profit  6,840   6,617 
Selling, general, and administrative expenses  5,674   5,553 
         
Operating Income  1,166   1,064 
         
Other expense:        
Interest, net  22   18 
         
Income before Income Taxes  1,144   1,046 
Income tax  (benefit) expense  (89)  189 
         
Net Income $1,233  $857 
         
Net Income per share:        
Basic $0.07  $0.05 
Diluted $0.07  $0.05 
         
Weighted average number of shares outstanding:        
Basic  18,849,000   18,798,000 
Diluted  18,883,000   18,851,000 

Nine Months Ended March 31, 

2023 (as Restated)

    

2022

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

Net sales:

Equipment revenues

$

81,511

$

67,080

Service revenues

 

43,828

 

33,284

 

125,339

 

100,364

Cost of sales:

 

  

 

 

  

Equipment-related expenses

 

70,341

 

56,077

Service-related expenses

 

4,799

 

4,355

 

75,140

 

60,432

Gross Profit

 

50,199

 

39,932

Operating expenses:

Research and development

 

6,964

 

5,918

Selling, general, and administrative expenses

 

24,719

 

23,983

Total Operating Expenses

 

31,683

 

29,901

Operating Income

 

18,516

 

 

10,031

Other income (expense):

 

 

 

  

Interest and other income (expense), net

 

521

 

(102)

Gain on extinguishment of debt

3,904

Income before Provision for Income Taxes

 

19,037

 

13,833

Provision for Income Taxes

 

2,475

 

1,771

Net Income

$

16,562

$

12,062

Income per share:

 

  

 

  

Basic

$

0.45

$

0.33

Diluted

$

0.45

$

0.33

Weighted average number of shares outstanding:

 

  

 

  

Basic

 

36,736,000

 

36,723,000

Diluted

 

36,983,000

 

36,873,000

See accompanying notes to condensed consolidated financial statements.

4

6

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF INCOMESTOCKHOLDERS EQUITY (unaudited)

  Six months ended December 31, 
  2017  2016 
  (In thousands, except share and per share data) 
    
Net sales $42,286  $40,883 
Cost of sales  28,567   27,814 
         
Gross Profit  13,719   13,069 
Selling, general, and administrative expenses  11,494   11,289 
         
Operating Income  2,225   1,780 
         
Other expense:        
Interest, net  48   42 
         
Income before Income Taxes  2,177   1,738 
Income tax expense  54   313 
         
Net Income $2,123  $1,425 
         
Net Income per share:        
Basic $0.11  $0.08 
Diluted $0.11  $0.08 
         
Weighted average number of shares outstanding:        
Basic  18,848,000   18,792,000 
Diluted  18,881,000   18,844,000 

Nine months ended March 31, 2023 (as Restated) (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

 

 

 

 

 

 

3,084

3,084

Stock-based compensation expense

 

 

477

 

 

 

477

Stock options exercised

8,480

 

45

 

 

 

45

Balances at September 30, 2022

 

39,636,677

$

396

$

20,527

 

(2,893,715)

$

(19,521)

$

115,995

$

117,397

Net income

 

 

 

 

3,929

3,929

Stock-based compensation expense

 

335

 

 

 

335

Stock options exercised

2,756

 

 

 

 

Balances at December 31, 2022

 

39,639,433

$

396

$

20,862

 

(2,893,715)

$

(19,521)

$

119,924

$

121,661

Net income (as restated)

9,549

9,549

Stock-based compensation expense

322

322

Stock options exercised

22,062

1

36

37

Balances at March 31, 2023

39,661,495

$

397

$

21,220

 

(2,893,715)

$

(19,521)

$

129,473

$

131,569

    

Nine months ended March 31, 2022 (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

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

See accompanying notes to condensed consolidated financial statements.

5

7

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

  Six months ended December 31, 
  2017  2016 
  (in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $2,123  $1,425 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  672   649 
Provision for doubtful accounts  20    
Deferred income taxes  (817)  184 
Stock based compensation expense  136   98 
Changes in operating assets and liabilities:        
Accounts receivable  2,894   2,745 
Inventories  (1,287)  (2,369)
Prepaid expenses and other current assets  190   80 
Other assets  (151)   
Accounts payable, accrued expenses and accrued income taxes  (956)  148 
         
Net Cash Provided by Operating Activities  2,824   2,960 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of property, plant, and equipment  (651)  (580)
         
Net Cash Used in Investing Activities  (651)  (580)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Principal payments on long-term debt  (1,500)  (2,450)
Proceeds from stock option exercise  16   49 
Cash paid for purchase of treasury stock  (194)   
         
Net Cash Used in Financing Activities  (1,678)  (2,401)
         
Net Increase (Decrease)  in Cash and Cash Equivalents  495   (21)
CASH AND CASH EQUIVALENTS - Beginning  3,454   3,805 
         
CASH AND CASH EQUIVALENTS - Ending $3,949  $3,784 
         
SUPPLEMENTAL CASH FLOW INFORMATION        
Interest paid, net $45  $49 
Income taxes paid $184  $53 
Surrender of common shares  3  $44 

Nine Months ended March 31, 

    

2023 (as Restated)

    

2022

    

(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

  

 

  

Net income

$

16,562

$

12,062

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

 

  

 

Depreciation and amortization

 

1,398

 

1,320

Gain on disposal of fixed asset

(15)

Interest income on other investments

(177)

Unrealized loss (gain) on marketable securities

23

226

Recovery of credit losses

 

(118)

 

Change to inventory reserve

 

(85)

 

331

Deferred income taxes

 

(1,400)

 

(11)

Stock based compensation expense

 

1,134

 

1,379

Gain on extinguishment of debt

(3,904)

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

5,166

 

3,872

Inventories

 

(813)

 

(11,309)

Prepaid expenses and other current assets

 

228

 

(318)

Income tax receivable

(688)

Other assets

 

48

 

(127)

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

 

(8,847)

 

4,892

Net Cash Provided by (Used in) Operating Activities

 

12,416

 

8,413

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Purchases of property, plant, and equipment

 

(2,547)

 

(1,189)

Proceeds from disposal of fixed asset

38

Purchases of marketable securities

(110)

(58)

Purchases of other investments

(30,185)

Redemption of other investments

10,091

Net Cash Used in Investing Activities

 

(22,713)

 

(1,247)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Proceeds from stock option exercises

 

82

 

155

Net Cash Provided by Financing Activities

 

82

 

155

Net (decrease) increase in Cash and Cash Equivalents

 

(10,215)

 

7,321

CASH AND CASH EQUIVALENTS - Beginning

 

41,730

 

34,806

CASH AND CASH EQUIVALENTS - Ending

$

31,515

$

42,127

SUPPLEMENTAL CASH FLOW INFORMATION

 

  

 

  

Interest paid

$

12

$

12

Income taxes paid

$

6,421

$

2,154

See accompanying notes to condensed consolidated financial statements.

6

8

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

DECEMBERMarch 31, 20172023

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

Nature of Business:

Napco Security Technologies, Inc. and Subsidiaries (the "Company" or “Napco”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 manufacturerarray of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products for commercial and residential use.products. These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment.

We have experienced significant growth in recent years, primarily driven by fast growing recurring service revenues generated from wireless communication services for intrusion and fire alarm systems, as well as our school security products that are designed to meet the increasing needs to enhance school security as a result of on-campus shooting and violence in the U.S. Our wireless communication services have led to the substantial growth in our monthly recurring revenues.

The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of Napco'sthe Company’s hardware products want to install itsthese products prior to the summer; therefore, sales of itsthese 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 isfor 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 service revenue, which is less susceptible to these fluctuations, allows us to generate a more consistent and predictable stream of income and mitigates the risk of fluctuation in market demand for our equipment products.

Significant Accounting Policies:

Principles of Consolidation

The unaudited condensed consolidated financial statements of the Company, including these notes, have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations promulgated by the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended June 30, 2017 and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on September 13, 2017. Results of consolidated operations for the interim periods are not necessarily indicative of a full year’s operating results. The unaudited condensed consolidated financial statements herein include the accounts of the CompanyNapco Security Technologies, Inc. and its wholly ownedwholly-owned subsidiaries. All significant inter-company accountsbalances and transactions have been eliminated.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 GAAPGenerally 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'smanagement’s judgments associated with reserves for sales returns and allowances, allowance for doubtful accounts,credit losses, overhead expenses applied to inventory, inventory reserves, valuation ofintangible 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 short-termand cash equivalents, certificates of deposit,deposits, current receivables and payables and

9

certain other short-term financial instruments approximate their fair value as of DecemberMarch 31, 20172023 and June 30, 2022 due to their short-term maturities; Long-Term Debt - The carrying amounts of the Company’s long-termmaturities.Long-term debt at December 31, 2017 in the amount of $2,000,000 and at June 30, 2017 in the amount of $3,500,000 approximateslease liabilities reflect fair value.

value based on prevailing market rates.

Cash and Cash Equivalents

and Investments – other

Cash and cash equivalents include approximately $460,000$10,225,000 of short-term time deposits, consisting of several certificates of deposit at Decembertotaling $10,162,000 and $63,000 in a money market fund as of March 31, 20172023. Cash and cash equivalents include approximately $63,000 of short-term time deposits, consisting of $63,000 in a money market fund as of June 30, 2017.2022. The Company considers allclassifies these highly liquid investments with original maturities of three months or less to beas cash equivalents. Certificates of Deposit with an original maturity greater than three months are classified as Investments-other.

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

March 31, 2023

    

June 30, 2022

    

  

 

  

Cash

$

21,290

$

41,667

Money Market Fund

 

63

 

63

Certificates of Deposit

10,162

$

31,515

$

41,730

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

March 31, 2023

    

June 30, 2022

    

  

 

  

Certificates of Deposit

$

20,271

$

$

20,271

$

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

March 31, 2023

Balance Sheet Classification

    

Interest Rate

    

Maturity Date

    

Cost

    

Carrying Value

Cash and Cash Equivalents

4.55% - 4.70%

4/24/2023 - 5/22/2023

$

10,000

$

10,162

Investments - other

4.75% - 4.90%

6/23/2023 - 9/21/2023

20,185

20,271

The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of DecemberMarch 31, 20172023 and June 30, 2017.2022. The Company has not historically not experienced any credit losses with balances in excess of FDIC limitslimits.

Marketable Securities

7

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 nine months ended March 31, 2023, the Company did not record an impairment charge regarding its investment in marketable securities because

10

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 accountscredit losses of $175,000$125,000 and $243,000 as of DecemberMarch 31, 20172023 and $155,000 as of June 30, 2017 and for returns and other allowances of $1,145,000 as of December 31, 2017 and $1,250,000 as of June 30, 2017.2022, respectively. Our reserves for doubtful accounts and for returns and other allowancescredit losses are subjective critical estimates that have a direct impact on reported net earnings. These reserves are based upon the evaluation of our accounts receivable aging, specific exposures, sales levels and historical trends.

Inventories

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

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

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

Property, Plant, and Equipment

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

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

Long-Lived and Intangible Assets

IntangibleLong-lived assets determined to have indefinite lives are not amortized. Intangible assets with definite lives are amortized over their useful lives. Indefinite-lived intangible assets are reviewed for impairment at least annually at the Company’s fiscal year end of June 30 or more often whenever there is an indication that the carrying amount may not be recovered.

The Company’s acquisition of substantially all of the assetslives 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 intangible assets are amortized over their estimated useful lives of twenty years (customer relationships). The Marks trade name was deemed to have an indefinite life.

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

  December 31, 2017  June 30, 2017 
  Cost  Accumulated
amortization
  Net book
value
  Cost  Accumulated
amortization
  Net book
value
 
                   
Customer relationships $9,800  $(7,969) $1,831  $9,800  $(7,784) $2,016 
Trade name  5,900      5,900   5,900      5,900 
  $15,700  $(7,969) $7,731  $15,700  $(7,784) $7,916 

Amortization expense for intangible assets subject to amortization was approximately $92,000 and $110,000 for the three months ended December 31, 2017 and 2016, respectively. Amortization expense for intangible assets subject to amortization was approximately $185,000 and $220,000 for the six months ended December 31, 2017 and 2016, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2018 - $371,000; 2019 - $313,000; 2020 -$264,000; 2021 - $223,000; and 2022 - $188,000. The weighted average amortization period for intangible assets was 10.6 years and 11.6 years at December 31, 2017 and 2016, respectively.

8

Long-Lived Assets

Long-lived assets 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

11

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.

Intangible assets consisted of the follows (in thousands):

March 31, 2023

June 30, 2022

    

Carrying

    

Accumulated

    

Net book

    

Carrying

    

Accumulated

    

Net book

value

amortization

value

value

amortization

value

Customer relationships

$

9,800

(9,262)

$

538

$

9,800

(9,143)

$

657

Trade name

4,048

 

(557)

 

3,491

 

4,048

 

(405)

 

3,643

$

13,848

$

(9,819)

$

4,029

$

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 March 31, 2023 and 2022, respectively. Amortization expense for intangible assets subject to amortization was approximately $271,000 and $293,000 for the nine months ended March 31, 2023 and 2022, 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 15.7 years and 16.2 years at March 31, 2023 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 recognizes revenue when the following criteria are met: (i) persuasive evidenceprovides limited standard warranty for defective products, usually for a period of an agreement exists, (ii) there is a fixed24 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 determinable priceother coupons or credits in limited circumstances. The Company establishes reserves for the Company's product or service, (iii) shipmentestimated returns, rebates and passagecredits and measures such variable consideration based on the expected value method using an analysis of title occurs or service has been provided, and (iv) collectability is reasonably assured. Revenues from product sales are recorded at the time the product is shipped or deliveredhistorical data. Changes to the customer pursuant to the terms of the sale. Revenues for servicesestimated variable consideration in subsequent periods are recorded at the time the service is provided to the customer pursuant to the terms of sale. The Company reports its sales on a net sales basis, with net sales being computed by deducting from gross sales the amount of actual sales returns and other allowances and the amount of reserves established for anticipated sales returns and other allowances.

Sales Returns and Other Allowances

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. As a percentage of gross sales, sales returns, rebates and allowances were 8% for the each of the six months ended December 30, 2017 and 2016, respectively.

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 DecemberMarch 31, 20172023 and 20162022 was $462,000$926,000 and $498,000,

12

$655,000, respectively. Advertising expense for the sixthree months ended DecemberMarch 31, 20172023 and 20162022 was $1,103,000$2,185,000 and $1,172,000,$2,253,000, 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 "Cost of Sales"operating expenses in the consolidated statements of income. Company-sponsored research and developmentR&D expense for the three months ended DecemberMarch 31, 20172023 and 20162022 was $1,639,000$2,314,000 and $1,609,000,$2,009,000, respectively. Company-sponsored research and developmentR&D expense for the sixnine months ended DecemberMarch 31, 20172023 and 20162022 was $3,246,000$6,964,000 and $3,237,000,$5,918,000, 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 enactment of H. R. 1, Tax Cuts and Jobs Act on December 22, 2017 reduced the U. S. Corporate income tax rate to 21% and had a favorable impact on the Company’s net deferred tax liabilities. The effect on the deferred tax assets and liabilities for theof a change in tax raterates is recognized in income in the three and six month periods ending December 31, 2017 whichperiod 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 Perper Share

(2023 amounts as restated)

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.

9

The following provides a reconciliation of information used in calculating the per share amounts for the three months ended DecemberMarch 31, 2023 and 2022 (in thousands, except share and per share data):

Net Income

Weighted Average Shares

Net Income per Share

    

2023

    

2022

    

2023

2022

2023

    

2022

Basic EPS

$

9,549

$

3,273

36,793

36,743

$

0.26

$

0.09

Effect of Dilutive Securities:

  

 

Stock Options

 

289

 

136

 

Diluted EPS

$

9,549

$

3,273

37,082

 

36,879

$

0.26

$

0.09

  Net Income  Weighted Average Shares  Net Income per Share 
  2017  2016  2017  2016  2017  2016 
                   
Basic EPS $1,233  $857   18,849   18,798  $0.07  $0.05 
Effect of Dilutive Securities:                        
Stock Options        34   53       
                         
Diluted EPS $1,233  $857   18,883   18,851  $0.07  $0.05 

Options to purchase 8700 and 5,000388,000 shares of common stock were excluded for the three months ended DecemberMarch 31, 20172023 and 2016,2022, 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 respective periods.period.

13

The following provides a reconciliation of information used in calculating the per share amounts for the sixnine months ended DecemberMarch 31, 2023 and 2022 (in thousands, except share and per share data):

Weighted Average

Net Income per

Net Income

Shares

 Share

2023

    

2022

    

2023

    

2022

    

2023

    

2022

Basic EPS

$

16,562

$

12,062

36,736

36,723

$

0.45

$

0.33

Effect of Dilutive Securities:

  

 

  

 

 

 

  

 

  

Stock Options

 

 

247

 

150

 

 

Diluted EPS

$

16,562

$

12,062

 

36,983

 

36,873

$

0.45

$

0.33

  Net Income  Weighted Average Shares  Net Income per Share 
  2017  2016  2017  2016  2017  2016 
                   
Basic EPS $2,123  $1,425   18,848   18,792  $0.11  $0.08 
Effect of Dilutive Securities:                        
Stock Options        33   52       
                         
Diluted EPS $2,123  $1,425   18,881   18,844  $0.11  $0.08 

Options to purchase 4358,379 and 5,000156,145 shares of common stock were excluded for the sixnine months ended DecemberMarch 31, 20172023 and 2016,2022, 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 respective periods.

period.

Stock-Based Compensation

The Company has established twofour share incentive programs as discussed in Note 7.

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 $103,000$322,000 and $65,000$35,000 were recognized for the three months ended DecemberMarch 31, 20172023 and 2016,2022, respectively. Stock-based compensation costs of $136,000$1,134,000 and $98,000$1,379,000 were recognized for sixthe nine months ended DecemberMarch 31, 20172023 and 2016,2022, respectively. The effect on both Basic and Diluted Earnings per share was $0.00 for the three and six months ended December 31, 2017 and 2016.

Foreign Currency

The Company has determined the functional currency of all foreign subsidiaries is the U.S. Dollar. All assetsforeign operations are considered a direct and liabilitiesintegral part or extension of the Company’s operations. The day-to-day operations of all foreign subsidiaries are translated intodependent on the economic environment of the U.S. Dollars at fiscal period-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the fiscal period. TheDollar. Therefore, no realized and unrealized gains and losses associated with foreign currency translation as well as related other comprehensive income, were not significantare recorded for the either of the three and sixor nine months ended DecemberMarch 31, 2017 and 2016.

2023 or 2022.

Comprehensive Income

For the three and sixnine months ended DecemberMarch 31, 20172023 and 2016,2022, the Company'sCompany’s operations did not give rise to significantmaterial items includable in comprehensive income, which were not already included in net income. Accordingly, the Company'sCompany’s comprehensive income approximates its net income for all periods presented.

10

Segment Reporting

The Company’s reportable operating segments are determined based on the Company'sCompany’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'sCompany’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 11.

14.

Shipping and Handling RevenuesSales and Costs

The Company records the amount billed to customers for shipping and handling in net sales ($125,000106,000 and $105,000$106,000 in the three months ended DecemberMarch 31, 20172023 and 2016,2022, respectively, and $247,000$346,000 and $245,000$318,000 in the sixnine months ended DecemberMarch 31, 20172023 and 2016,2022, respectively); and classifies the costs associated with these revenuessales in cost of sales ($252,000437,000 and $217,000$339,000 in the three months ended DecemberMarch 31, 20172023 and 2016,2022, respectively, and $459,000$1,285,000 and $433,000$1,033,000 in the sixnine months ended DecemberMarch 31, 20172023 and 2016,2022, respectively).

14

Leases

The Company records lease assets and corresponding 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 borrowing rate based on information available at lease commencement. The Company analyzes whether or not amendments to existing leases classify as a Lease Modification or a full or partial termination of the existing lease. See Note 13 – Commitments and Contingencies; Leases for additional accounting policies and disclosures.

Recently Issued Accounting Standards

Reference Rate Reform (ASC Topic 848)

In March 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that changes the way companies account for certain aspects of share-based payments to employees. The most significant impact relates to the accounting for income tax effects of share-based compensation awards.  This new guidance is part of the FASB’s simplification initiative and requires that all excess tax benefits and tax deficiencies be recorded as income tax expense or benefit in the income statement. In addition, companies are required to treat the tax effects of exercised or vested awards as discrete items in the period that they occur.  Other updates include changing the threshold on tax withholding requirements.  Under this guidance, an employer can withhold up to the maximum statutory withholding rates in a jurisdiction without tainting the award classification.  Additionally, this guidance allows companies to elect a forfeiture recognition method whereby they account for forfeitures as they occur (actual) or they estimate the number of awards expected to be forfeited (current GAAP).  Lastly, as it relates to public entities, this guidance also provides requirements for the cash flow classification of cash paid by an employer when directly withholding shares for tax-withholding purposes and excess tax benefits.  This guidance became effective for the Company’s fiscal 2018 first quarter and the guidance prescribes different transition methods for the various provisions (i.e., retrospective, modified retrospective or prospective).  The adoption of this standard did not have a material effect on our consolidated results of operations and financial condition.

In February 2016,2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”), which is expected to be phased out for new arrangements at the end of calendar 2021, and applies to lease contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that requires lesseeshave LIBOR as the benchmark rate.

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 1A – Restatement of Previously Issued Financial Statements

During the preparation of the Company’s consolidated financial statements for the fiscal year ended June 30, 2023, management of the Company identified certain errors related to the Company’s calculation of cost of goods sold (“COGS”) and inventory for each of the first three quarters of fiscal 2023. Specifically, the costs of several raw materials fluctuated significantly during fiscal 2023, the Company’s costing procedures did not appropriately account for most leases on theirsuch fluctuations. As a result, inventories were overstated and COGS was understated, resulting in overstated gross profit, operating income and net income for each period.

The effects of the restatement resulted in a decrease to overall inventory (current and non-current inventory) and increase to cost of sales of $10,101,000, a decrease to the provision for income taxes of $975,000 and a decrease to net income and retained earnings of $9,126,000 as of and for the nine months ended March 31, 2023. Net cash provided by operating activities remained the same. The effects of the restatement resulted in an increase to cost of sales of $1,392,000, a decrease to the provision for income taxes of $101,000 and a decrease to net income of $1,291,000 for the three months ended March 31, 2023.

The table below sets forth the consolidated balance sheets withinformation, including the liability being equalbalances originally reported and the restated balances as of March 31, 2023 (in thousands):

As of March 31, 2023

    

As

    

previously

As

reported

Restated

Inventory - Current

$

46,921

$

38,725

Income Tax Receivable

688

Inventory - Non-Current

 

13,865

 

11,960

Accrued Income Taxes

287

Retained earnings

 

138,599

 

129,473

15

The table below sets forth the consolidated statements of income information, including the balances originally reported and the restated balances for the three months ended March 31, 2023:

Three Months ended March 31, 2023

(in thousands, except for per share data)

    

As

    

previously

reported

As Restated

Equipment-related expenses

$

19,388

$

20,780

Cost of sales

20,861

22,253

Gross profit

 

22,671

 

21,279

Operating income

 

11,932

 

10,540

Income before provision for income taxes

12,369

10,977

Provision for income taxes

 

1,529

 

1,428

Net income

 

10,840

 

9,549

Income per share:

 

  

 

  

Basic

$

0.29

$

0.26

Diluted

$

0.29

$

0.26

The table below sets forth the consolidated statements of income information, including the balances originally reported and the restated balances for the nine months ended March 31, 2023:

Nine Months ended March 31, 2023

(in thousands, except for per share data)

    

As

    

previously

reported

As Restated

Equipment-related expenses

$

60,240

$

70,341

Cost of sales

65,039

75,140

Gross profit

 

60,300

 

50,199

Operating income

 

28,617

 

18,516

Income before provision for income taxes

29,138

19,037

Provision for income taxes

 

3,450

 

2,475

Net income

 

25,688

 

16,562

Income per share:

 

  

 

  

Basic

$

0.70

$

0.45

Diluted

$

0.69

$

0.45

16

The table below sets forth the consolidated statements of cash flows information, including the balances originally reported and the restated balances for the nine months ended March 31, 2023:

Nine Months ended March 31, 2023

(in thousands)

    

As

    

previously

reported

As Restated

Net income

$

25,688

$

16,562

Change to inventory obsolescence reserve

 

960

 

(85)

Inventories

(11,959)

(813)

Income tax receivable

 

 

(688)

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

(8,560)

(8,847)

Net Cash Provided by Operating Activities

 

12,416

 

12,416

In addition to the present value of the lease payments.  The right-of-use asset will be based on the lease liability adjusted for certain costs such as direct costs.  Lease expense will be recognized similar to current accounting guidance with operating leases resulting in a straight-line expense and financing leases resulting in a front-loaded expense similar to the current accounting for capital leases.  This guidance becomes effective for the Company’s fiscal 2020 first quarter, with early adoption permitted.  This guidance must be adopted using a modified retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative period in therestated consolidated financial statements, the information contained in notes 1, 5, 7 and provides for certain practical expedients.  14 have been restated.

NOTE 2 – Revenue Recognition and Contracts with Customers

The Company is currently evaluatingengaged in one major line of business: the timing, impactdevelopment, manufacture, and methoddistribution of applying this guidancesecurity 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 its consolidated financial statements.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, 2023 and June 30, 2022, the Company included refund liabilities of approximately $4,841,000 and $5,863,000, respectively, in current liabilities. As of March 31, 2023 and June 30, 2022, the Company included return-related assets of approximately $1,132,000 and $974,000, respectively, in other current assets.

In July 2015, the FASB issued ASU 2015-11 “Inventory (Topic 330): Simplifying the MeasurementAs a percentage of Inventory” (“ASU 2015-11”). The amendments in ASU 2015-11 simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of costgross sales, returns, rebates and net realizable value (“NRV”). ASU 2015-11 was effectiveallowances were 8% and 10% for the Company’s quarterthree months ended September 30, 2017. March 31, 2023 and 2022, respectively. As a percentage of gross sales, returns, rebates and allowances were 6% and 11% for the nine months ended March 31, 2023 and 2022, respectively.

The adoption of this standard did not have a material effect on our consolidated results of operations and financial condition.

In May 2014, the FASB issued authoritative guidance that defines how companies should report revenuesCompany disaggregates revenue from contracts with customers.customers into major product lines. The standard requires an entity to recognizeCompany determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the transfernature, amount, timing, and uncertainty of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  It provides companies with a single comprehensive five-step principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance.  In August 2015,cash flows are affected by economic factors. As noted in the FASB deferred the effective date of the new revenue standard by one year.  As a result, the new standard would not be effective for the Company until fiscal 2019.  In addition, the FASB is allowing companies to early adopt this guidance foraccounting policy footnote, the Company’s fiscal 2018.  The guidance permits an entity to applybusiness consists of one operating segment. Following is the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the yeardisaggregation of adoption, through a cumulative adjustment.  The Company will apply this new guidance when it becomes effective and has not yet selected a transition method.  The Company is currently evaluating the impact of adoptionrevenues based on its consolidated financial statements.major product lines (in thousands):

11

Three months ended March 31, 

Nine months ended March 31, 

    

2023

    

2022

    

2023

    

2022

Major Product Lines:

  

 

  

  

 

  

Intrusion and access alarm products

$

11,530

$

12,667

$

36,405

$

33,230

Door locking devices

 

16,860

 

11,206

 

45,106

 

33,850

Services

 

15,142

 

12,032

 

43,828

 

33,284

Total Revenues

$

43,532

$

35,905

$

125,339

$

100,364

NOTE 2 -3 – Business and Credit Concentrations

An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company had two customers, bothone customer with an accounts receivable balance that comprised of which are nationwide distributors12% of the Company’s products, withoverall accounts receivable balances that comprised 15% and 14%as of March 31, 2023. As of June 30, 2022, the accounts receivable balance with this

17

respective customer did not exceed 10% of the Company’s overall accounts receivable. Sales to this customer did not exceed 10% of the Company’s net sales during the three and nine months ended March 31, 2023 and 2022. The Company had another customer with an accounts receivable balance that comprised 16% of the Company’s overall accounts receivable at DecemberJune 30, 2023. This customer’s accounts receivable balance did not exceed 10% of the Company’s overall accounts receivable at March 31, 20172023. 31, 2023. Sales to this customer did not exceed 10% of the Company’s net sales during the three and 24%nine months ended March 31, 2023 and 2022. The Company had another customer with an accounts receivable balance that comprised 19% and 22% of the Company’s overall accounts receivable as of March 31, 2023 and June 30, 2022, respectively. Sales to this customer was 12% and 10% at June 30, 2017. Sales to neither of these customers exceeded 10% of net sales in either of the three or six months ended December 31, 2017. Sales to one of these customers comprised 13% and 14% ofCompany’s net sales for the three and sixnine months ended December 2016,March 31, 2023, respectively. Sales to this customer did not exceed 10% of the Company’s net sales for the three and nine months ended March 31, 2022.

NOTE 4 – Marketable Securities

The Company’s marketable securities include investments in fixed income mutual funds, which invest primarily in various government and corporate obligations, stocks and money market funds, and are reported at their fair values. The disaggregated net gains and losses on the marketable securities recognized within the accompanying condensed consolidated statements of income for the three and nine months ended March 31, 2023 and 2022, are as follows (in thousands):

Three months ended March 31, 

Nine months ended March 31, 

2023

    

2022

    

2023

    

2022

Net gains recognized during the period on marketable securities

$

32

$

19

$

110

$

58

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

 

 

 

 

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

 

95

 

(191)

 

(23)

 

(226)

$

127

$

(172)

$

87

$

(168)

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, 2023 and June 30, 2022, respectively (in thousands):

March 31, 2023

June 30, 2022

Unrealized

Unrealized

Cost

    

Fair Value

    

Gain (Loss)

    

Cost

    

Fair Value

    

Gain (Loss)

Mutual Funds - Level 1

$

5,613

5,155

$

(458)

$

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.

18

NOTE 35 - Inventories

Inventories, net of reserves are valued at lower of cost (first-in, first-out method) or NRV. The Company regularly reviews parts and finished goods inventories on hand and, when necessary, records a provision for excess or obsolete inventories. 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.

net realizable value. Inventories, net of reserves consist of the following (in thousands):

 December 31,
2017
 June 30,
2017
 
     

    

March 31, 

    

June 30, 

2023 (as Restated)

2022

Component parts $17,310  $16,638 

$

33,477

$

32,656

Work-in-process  4,610   4,415 

 

8,029

 

10,085

Finished product  9,946   9,526 

 

9,179

 

7,045

        
 $31,866  $30,579 
        

$

50,685

$

49,786

Classification of inventories, net of reserves:Classification of inventories, net of reserves:     

 

  

 

  

Current $26,687  $26,212 

$

38,725

$

40,781

Non-current  5,179   4,367 

 

11,960

 

9,005

        
 $31,866  $30,579 

$

50,685

$

49,786

NOTE 46 – Property, Plant, and Equipment

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

 December 31,
2017
 June 30,
2017
 Useful Life in Years
    

    

March 31, 2023

    

June 30, 2022

    

Useful Life in Years

Land $904  $904  

$

904

$

904

N/A

Buildings  8,911   8,911  30 to 40

 

8,911

 

8,911

30 to 40

Molds and dies  7,171   7,058  3 to 5

 

7,507

 

7,480

3 to 5

Furniture and fixtures  2,599   2,570  5 to 10

 

3,350

 

3,030

5 to 10

Machinery and equipment  22,544   22,183  7 to 10

 

28,275

 

26,696

3 to 10

Leasehold improvements  633   485  Shorter of the lease term or life of asset
  42,762   42,111  

Building improvements

 

3,009

 

2,464

Shorter of the lease term or life of asset

 

51,956

 

49,485

  

Less: accumulated depreciation and amortization  (36,052)  (35,568) 

 

(42,621)

 

(41,546)

  

 $6,710  $6,543  

$

9,335

$

7,939

  

Depreciation and amortization expense on property, plant, and equipment was $248,000approximately $380,000 and $213,000$338,000 for the three months ended DecemberMarch 31, 20172023 and 2016,2022, respectively. Depreciation and amortization expense on property, plant, and equipment was $484,000approximately $1,127,000 and $422,000$1,028,000 for the sixnine months ended DecemberMarch 31, 20172023 and 2016,2022, respectively.

12

NOTE 57 - Income Taxes

(2023 amounts as restated)

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. OurThe Company’s 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. For the three and six months ended December 31, 2017 the effective tax rate was favorably impacted by the enactment of H.R. 1, Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. The Act reduced the U.S. Corporate income tax rate to 21% and resulted in a $286,000 reduction in the Company’s net deferred tax liabilities. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. federal statutory rate of approximately 27.55% for fiscal 2018 and a 21% U.S. federal statutory rate for subsequent fiscal years. The Company reported $208,000 of provisional expense on its unremitted foreign earnings. Accounting Standard Codification (“ASC”) 740 requires filers to record the effects of tax law changes in the period enacted. However, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), that permits filers to record provisional amounts during a measurement period ending no later than one year from the date of the Act’s enactment. As of December 31, 2017, the Company has not completed accounting for the tax effects of enactment of the Act; however, the Company has made a reasonable estimate of the effects on the existing deferred balances as well as the computation of the one-time transition tax. 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 nine months ended March 31, 2023 and March 31, 2022, the Company recognized net income tax expense of $2,475,000 and $1,771,000, respectively. During the nine months ended March 31, 2023, the Company’s reserve for uncertain income tax positions increased by $36,000.  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 March 31, 2023, the Company had accrued interest totaling $124,000, 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 nine months ended March 31, 2023, additional interest expense was accrued for in the amount of $36,000.

19

The Company does not expect that ourits unrecognized tax benefits will significantly change within the next twelve months. We filemonths due to statute of limitation lapses. The Company files a consolidated U.S. income tax return and tax returns in certain state and local and foreign jurisdictions. As of DecemberMarch 31, 2017 we remain2023, the Company remains subject to examination in all tax jurisdictions for all relevant jurisdictional statutes for fiscal years 20142018 and thereafter.

TheIn December 2022, the Company received a letter from the IRS (“IRS”) notifying it that the IRS has identifiedclosed its U.S. Federalexamination of the Company’s income tax return and its State returnfor fiscal year ended June 30, 2020.  There has been no changes proposed in New York as its major tax jurisdictions.relation to this examination.  

NOTE 68 - Long-Term Debt

As of December 31, 2017, long-term debt consisted of2022 and June 30, 2022, the Company had a revolving line of credit facility of $11,000,000 (the “Revolving Credit Facility”“Revolver Agreement”) which expires in June 2021.

2024.

Outstanding balances and interest rates as of DecemberMarch 31, 20172023 and June 30, 20172022 are as follows (dollars in thousands):

  December 31, 2017  June 30, 2017 
  Outstanding  Interest Rate  Outstanding  Interest Rate 
             
Revolving line of credit $2,000   2.5% $3,500   2.2%

March 31, 2023

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 Revolving Credit Facility (the “Agreement”)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. In addition, the Agreement provides for availability under the Revolving Credit Facility to be limited to the lesser of $11,000,000 or the result of a borrowing base formula based upon the Company’s Accounts Receivables and Inventory values net of certain deductions. 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, and the Company’s corporate headquarters in Amityville, NY, equipment and fixtures and intangible assets. In addition, the Company’s wholly-ownedwholly 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”). The 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 extinguishment 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.

20

NOTE 79 - Stock Options

Option

The Company follows ASC 718 “Share-Based(“Share-Based Payment”), which requires that all share basedshare-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. TheFor the three months ended March 31, 2023 and 2022, the Company recorded non-cash compensation expense relating to stock-based compensation of $103,000$322,000 ($0.01 per basic and $65,000 for the three months ended December 31, 2017diluted share) and 2016, respectively$35,000 ($0.00 per basic and diluted share for each period). The share), respectively, relating to stock-based compensation. For the nine months ended March 31, 2023 and 2022, the Company recorded non-cash compensation expense of $1,134,000 ($0.03 per basic and diluted share) and $1,379,000 ($0.04 per basic and diluted share), respectively, relating to stock-based compensationcompensation.  

2022 Employee Stock Option Plan

In December 2022, the stockholders approved the 2022 Employee Stock Option Plan (the “2022 Employee Plan”). The plan authorizes the granting of $136,000awards, 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. 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 $98,000 forpossesses more than 10% of the six months ended December 31, 2017voting 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 2022 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 2016, respectively ($0.00are exercisable, in whole or in part, at 20% per basic and diluted share for each period).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, no stock options were granted or outstanding under the 2022 Employee Plan.

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 950,0001,900,000 shares of the Company'sCompany’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'sCompany’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.

13

grant and a term of 10 years.

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 DecemberMarch 31, 2017, 88,1002023, 522,580 stock options were granted, 60,300outstanding, 236,652 stock options were exercisable and 823,900no further stock options were available for grant under this plan.

0 and 37,500 options were granted during the three and nine months ended March 31, 2023. 0 and 338,000 options were granted during the three and nine months ended March 31, 2022, respectively. No further 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:

    

2023

    

2022

Risk-free interest rates

3.03

%  

1.64

%  

Expected lives

7.27 Years

6.18 Years

Expected volatility

43

%  

43

%  

Expected dividend yields

0

%  

0

%  

The following table reflects activity under the 2012 Employee Plan for the sixnine months ended December 31,:March 31:

  2017  2016 
  Options  Weighted average
exercise price
  Options  Weighted average
exercise price
 
             
Outstanding, beginning of year  70,600  $5.84   112,500  $5.54 
Granted  20,000   8.97   5,000   8.15 
Terminated/Lapsed        (400)  6.31 
Exercised  (2,500)  6.31   (1,500)  6.31 
                 
Outstanding, end of period  88,100  $6.53   115,600  $5.64 
                 
Exercisable, end of period  60,300  $6.03   74,500  $5.57 
                 
Weighted average fair value at grant date of options granted $111,000      $26,000     
                 
Total intrinsic value of options exercised $7,000      $9,000     
Total intrinsic value of options outstanding $279,000      $331,000     
Total intrinsic value of options exercisable $221,000      $218,000     

21

2023

2022

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

338,000

$

23.17

Forfeited/Lapsed

Exercised

(38,000)

 

$

10.63

 

(29,000)

 

$

5.45

Outstanding, end of period

522,580

$

19.34

 

523,080

$

18.59

Exercisable, end of period

236,652

$

17.47

 

164,776

$

15.01

Weighted average fair value at grant date of options granted

$

13.36

 

$

12.16

 

Total intrinsic value of options exercised

$

787,000

$

502,000

 

Total intrinsic value of options outstanding

$

9,531,000

$

1,903,000

 

Total intrinsic value of options exercisable

$

4,760,000

$

1,085,000

 

50030,800 and 1,50038,000 stock options were exercised during the three and nine months ended DecemberMarch 31, 20172023, respectively. 27,600 of the 30,800 options that were exercised during the three months ended March 31, 2023, were settled by exchanging 9,943 shares of the Company’s common stock which were retired and 2016, respectively. $3,000returned to unissued status upon receipt. 29,600 of the 38,000 options that were exercised during the nine months ended March 31, 2023, were settled by exchanging 10,150 shares of the Company’s common stock which were retired and $9,000returned to unissued status upon receipt. $36,000 and $81,000 cash was received from the option exercises during the three and nine months ended DecemberMarch 31, 2017 and 2016, respectively, and the2023, respectively. The actual tax benefit realized for the tax deductions from option exercises during the three and nine months ended March 31, 2023 was $0 for each of these periods. 2,500 and 1,500$0, respectively. 1,000 and 29,000 stock options were exercised during the sixthree and nine months ended DecemberMarch 31, 20172022, respectively. 1,000 options that were exercised during the three and 2016, respectively. $16,000nine months ended March 31, 2023, were settled by exchanging 153 shares of the Company’s common stock which were retired and $9,000returned to unissued status upon receipt. $0 and $155,000 cash was received from the option exercises during the sixthree and nine months ended DecemberMarch 31, 2017 and 2016, respectively, and the2022, respectively. The actual tax benefit realized for the tax deductions from option exercises during the three and nine months ended March 31, 2022 was $0$3,000 for each of theseboth periods.

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at DecemberMarch 31, 2017:2023:

  Options outstanding  Options exercisable 
Range of
exercise prices
 Number
outstanding
  Weighted average
remaining
contractual life
  Weighted average
exercise price
  Number
exercisable
  Weighted average
exercise price
 
                
$4.29-$9.63  88,100   7.3  $6.53   60,300  $6.03 
   88,100   7.3  $6.53   60,300  $6.03 

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

$3.15 ‑ $26.94

522,580

7.90

$

19.34

236,652

$

17.47

522,580

7.90

$

19.34

236,652

$

17.47

As of DecemberMarch 31, 2017,2023, there was $132,000$2,208,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 20,0000 and 5,000 options37,500 Options were granted during the three and sixnine months ended DecemberMarch 31, 20172023, respectively. 5,200 and 2016,97,900 options vested during the three and nine months ended March 31, 2023, respectively. The total grant date fair value of the options vesting during the three and nine months ended DecemberMarch 31, 2017 and 20162023 under this plan was $80,000$33,000 and $59,000,$916,000, respectively. 0 and 338,000 options were granted during the three and nine months ended March 31, 2022. 5,200 and 95,600 options vested during the three and nine months ended March 31, 2022, respectively. The total grant date fair value of the options vesting during the sixthree and nine months ended DecemberMarch 31, 2017 and 20162022 under this plan was $96,000$36,000 and $75,000,$975,000, respectively.

14

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 50,000100,000 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

22

option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At March 31, 2023, 20,400 stock options were outstanding, 13,920 stock options were exercisable and no further stock options were available for grant under this plan.

There were no options granted during the three and nine months ended March 31, 2023. 0 and 9,600 Options were granted during the three and nine months ended March 31, 2022. 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:

2023

    

2022

Risk-free interest rates

n/a

1.68

%  

Expected lives

n/a

6.18 Years

Expected volatility

n/a

43

%  

Expected dividend yields

n/a

0

%  

The following table reflects activity under the 2012 Non-Employee Plan for the nine months ended March 31:

2023

2022

    

    

Weighted average

    

    

Weighted average

    

Options

exercise price

Options

exercise price

Outstanding, beginning of year

20,400

$

14.39

12,000

$

6.55

Granted

9,600

$

22.93

Forfeited/Lapsed

Exercised

 

 

Outstanding, end of period

20,400

$

14.39

 

21,600

$

13.83

Exercisable, end of period

13,920

$

10.99

 

12,480

$

8.48

Weighted average fair value at grant date of options granted

n/a

$

12.58

 

  

Total intrinsic value of options exercised

n/a

$

n/a

 

  

Total intrinsic value of options outstanding

$

473,000

$

168,000

 

  

Total intrinsic value of options exercisable

$

370,000

$

155,000

 

  

No stock options were exercised during the three and nine months ended March 31, 2023 and 2022, respectively. No cash was received from option exercises during the three and nine months ended March 31, 2023 and 2022, respectively, 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 March 31, 2023:

Options outstanding

Options exercisable

Weighted average

Weighted

Weighted

Number

remaining

average exercise

Number

average exercise

Range of exercise prices

outstanding

    

contractual life

price

    

exercisable

price

$4.35 - $22.93

20,400

6.90

$

14.39

13,920

$

10.99

20,400

6.90

$

14.39

13,920

$

10.99

As of March 31, 2022, there was $52,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. No options were granted during the three and nine months ended March 31, 2023, respectively. 720 and 2,640 options vested during the three and nine months ended March 31, 2023, respectively. The total grant date fair value of the options vesting during the three and nine months ended March 31, 2023 under this plan was $5,000 and $24,000, respectively. 0 and 9,600 Options were granted during the three and nine months ended March 31, 2022. 720 and 6,240 options vested during the three and nine months ended March 31, 2022, respectively. The total grant date fair value of the options vesting during the three and nine months ended March 31, 2022 under this plan was $5,000 and $39,000, respectively.

23

2018 Non-Employee Stock Option Plan

In December 2018, the stockholders approved the 2018 Non-Employee Stock Option Plan (the “2018 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 20122018 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 DecemberMarch 31, 2017, 29,2002023, 77,500 stock options were granted, 15,200outstanding, 53,220 stock options were exercisable and no further stock options were available for grant under this plan.

There were no options granted during the three and nine months ended March 31, 2023. 0 and 23,500 Options were granted during the three and nine months ended March 31, 2022. No options may be granted under this plan after December 2028. 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:

2023

    

2022

Risk-free interest rates

n/a

1.68

%  

Expected lives

n/a

6.18 Years

Expected volatility

n/a

43

%  

Expected dividend yields

n/a

0

%  

The following table reflects activity under the 20122018 Non-Employee Plan for the sixnine months ended December 31,:March 31:

 2017 2016 
 Options Weighted average
exercise price
 Options Weighted average
exercise price
 
         

2023

2022

    

    

Weighted average

    

    

Weighted average

    

Options

 

exercise price

Options

 

exercise price

Outstanding, beginning of year  14,200  $4.69   35,000  $4.73 

89,000

$

14.91

70,100

$

11.93

Granted  15,000   8.70       

 

 

23,500

 

$

22.93

Terminated/Lapsed            

Forfeited/Lapsed

 

 

 

Exercised        (5,200)  4.76 

(11,500)

 

$

15.14

 

(4,600)

 

$

10.43

                
Outstanding, end of period  29,200  $6.75   29,800  $4.73 

77,500

$

14.88

 

89,000

$

14.91

                
Exercisable, end of period  15,200  $5.53   20,800  $4.76 

53,220

$

13.03

 

45,040

$

12.98

                
Weighted average fair value at grant date of options granted $83,000       n/a     

n/a

$

12.58

                
Total intrinsic value of options exercised  n/a      $25,000     

$

164,000

$

58,000

Total intrinsic value of options outstanding $86,000      $112,000     

$

1,760,000

$

556,000

Total intrinsic value of options exercisable $63,000      $78,000     

$

1,307,000

$

351,000

No stock1,600 and 11,500 options were exercised during the three or sixand nine months ended DecemberMarch 31, 2017.2023, respectively. The 1,600 options that were exercised during the three months ended March 31, 2023 were settled by exchanging 395 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. The 11,500 options that were exercised during the nine months ended March 31, 2023 were settled by exchanging 6,052 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. No cash was received from option exercises during the three or sixand nine months ended DecemberMarch 31, 20172023. and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods. 5,200$8,000 and $34,000, respectively. 1,600 and 4,600 options were exercised during the three and sixnine months ended DecemberMarch 31, 2016. All of2022, respectively. The 1,600 options that were exercised during the 5,200 exercisesthree months ended March 31, 2022, were settled by exchanging 3,056663 shares of the Company’s common stock which were retired and returned to authorized.unissued status upon receipt. The 4,600 options that were exercised during the nine months ended March 31, 2022, were settled by exchanging 2,075 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. No cash was received from option exercises during the three and sixnine months ended DecemberMarch 31, 20162022. For the three and nine months ended March 31, 2022 the actual tax benefit realized for the tax deductions from option exercises was $0 for each$4,000 and $12,000, respectively.

24

The following table summarizes information about stock options outstanding under the 20122018 Non-Employee Plan at DecemberMarch 31, 2017:2023:

  Options outstanding  Options exercisable 
Range of
exercise prices
 Number
outstanding
  Weighted average
remaining
contractual life
  Weighted
average exercise
price
  Number
exercisable
  Weighted
average exercise
price
 
                
$4.37 - $8.70  29,200   8.1  $6.75   15,200  $5.53 
   29,200   8.1  $6.75   15,200  $5.53 

Options outstanding

Options exercisable

    

    

Weighted average

    

Weighted

    

    

Weighted

Number

remaining

average exercise

Number

average exercise

Range of exercise prices

outstanding

contractual life

price

exercisable

price

$8.10 - $22.93

77,500

 

7.03

$

14.88

 

53,220

$

13.03

77,500

 

7.03

$

14.88

 

53,220

$

13.03

As of DecemberMarch 31, 2017,2023, there was $72,000$166,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 20122018 Non-Employee Plan. 15,000No options were granted during the three and sixnine months ended DecemberMarch 31, 2017. No2023, respectively. 5,380 and 19,680 options were grantedvested during the three or sixand nine months ended DecemberMarch 31, 2016.2023, respectively. The total grant date fair value of the options vesting during the three and nine months ended DecemberMarch 31, 2017 and 20162023 under this plan was $22,000$35,000 and $6,000,$149,000, respectively. 0 and 23,500 options were granted during the three and nine months ended March 31, 2022. 5,380 and 19,680 options vested during the three and nine months ended March 31, 2022. The total grant date fair value of the options vesting during the sixthree and nine months ended December 31, 2017 and 20162021 under this plan was $39,000$35,000 and $22,000,$160,000, respectively.

15

2002 Employee2020 Non-Employee Stock Option Plan

In December 2002,May 2020, the stockholders approved the 2002 Employee2020 Non-Employee Stock Option Plan (the “2002 Employee“2020 Non-Employee Plan”). This plan expired in October 2012. This plan authorizedauthorizes the granting of awards, the exercise of which would allow up to an aggregate of 1,836,000100,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may have grantedgrant stock options which were intended to qualify as incentive stock options (ISOs),non-employee directors and consultants to key employees. Any plan participant who was granted ISOsthe Company and possessed more than 10% of the voting rights of the Company's outstanding common stock must have been granted an option with a price of at least 110% of the fair market value on the date of grant.

its subsidiaries.

Under the 2002 Employee2020 Non-Employee Plan, stock options have beenmay be granted to key 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 frombeginning 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 DecemberMarch 31, 2017, 1,471,480 stock options had been granted and no2023, 56,900 stock options were exercisable. No furtheroutstanding, 18,760 stock options were exercisable and 43,100 stock options were available for grant under this plan.

5,000 and 30,000 Options were granted during the three and nine months ended March 31, 2023 under the 2020 Non-Employee Plan. 0 and 16,900 Options were granted during the three and nine months ended March 31, 2022. No options may be granted under this plan after May 2030. The fair value of each option granted was estimated on the plan’s expiration in October 2012.date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

    

2023

 

2022

 

Risk-free interest rates

 

3.03 - 3.40

%

1.68

%  

Expected lives

 

7.23 - 7.27 Years

6.18 Years

Expected volatility

 

43

%

43

%  

Expected dividend yields

 

0

%

0

%  

The following table reflects activity under the 2002 Employee plan2020 Non-Employee Plan for the threenine months ended December 31,:March 31:

 2017 2016 
 Options Weighted average
exercise price
 Options Weighted average
exercise price
 
         

2023

2022

Weighted average

Weighted average

    

Options

    

exercise price

Options

    

exercise price

Outstanding, beginning of year  5,000  $5.35   102,500  $6.04 

 

26,900

 

$

18.64

10,000

 

$

11.40

Granted            

 

30,000

$

27.57

16,900

$

22.93

Terminated/Lapsed        (10,500)  6.02 

Forfeited/Lapsed

Exercised  (5,000)  5.35   (52,000)  6.31 

 

 

 

                
Outstanding, end of period    $   40,000  $5.69 

 

56,900

$

23.35

26,900

$

18.64

                
Exercisable, end of period    $   40,000  $5.69 

 

18,760

$

20.73

7,380

$

16.68

                
Weighted average fair value at grant date of options granted  n/a       n/a     

$

13.74

 

  

$

12.58

 

Total intrinsic value of options exercised $20,000      $114,000     

 

n/a

 

  

 

n/a

 

Total intrinsic value of options outstanding  n/a      $113,000     

$

810,000

 

  

$

91,000

 

Total intrinsic value of options exercisable  n/a      $113,000     

$

316,000

 

  

$

36,000

 

25

No stock options were exercised during the three and sixnine months ended DecemberMarch 31, 2017, respectively. The 5,000 exercises were settled in cashless exercises by exchanging 2,815 shares of2023 and 2022 under the Company’s common stock which were retired and returned to unissued status.2020 Non-Employee Plan. No cash was received from option exercises during either of the three or sixand nine months ended DecemberMarch 31, 20172023 or 2022 and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of theseboth periods. 52,000

The following table summarizes information about stock options outstanding under the 2020 Non-Employee Plan at March 31, 2023:

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

$11.40 - $30.71

 

56,900

 

8.84

$

23.35

 

18,760

$

20.73

 

56,900

 

8.84

$

23.35

 

18,760

$

20.73

As of March 31, 2023, there was $376,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan. 5,000 and 30,000 options were exercisedgranted during the three and sixnine months ended DecemberMarch 31, 2016. 45,500 of the 52,000 exercises were settled by exchanging 40,655 shares of the Company’s common stock which were retired2023, respectively. 1,000 and returned to authorized. The remaining 6,500 exercises were paid for in cash. $40,000 was received from option exercises11,380 options vested during the three and sixnine months ended DecemberMarch 31, 20162023. The total grant date fair value of the options vesting during the three and nine months ended March 31, 2023 under this plan was $16,000 and $129,000. 0 and 5,380 options vested during the actual tax benefit realized forthree and nine months ended March 31, 2022. The total grant date fair value of the tax deductions from option exercisesoptions vesting during the three and nine months ended March 31, 2022 under this plan was $0 for each of these periods.and $55,000.

NOTE 810 – Stockholders’ Equity Transactions

On September 16, 2014, the Company’s board of directors authorized the repurchase of up to 12 million of the approximately 19.438.8 million shares of the Company’s common stock then outstanding. The repurchase willSuch repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions and the market price of the common stock. Relative to the LoanRevolver Agreement described in Note 6,8, the Company’s lender gave its consent to this stock repurchase plan. 22,600 shares were purchased under this plan duringDuring the three and sixnine months ended March 31, 2023 and the fiscal year ended June 30, 2022, the Company did not repurchase any shares of its outstanding common stock. Pursuant to the PPP loan described in Note 8, the Company was not allowed to repurchase any of its shares of common stock until 12 months after the termination of the term loans described therein which occurred between August, 2021 and September, 2021.

On December 6, 2021, the stockholders of the Company approved an amendment of the Company’s Certificate of Incorporation increasing the number of authorized shares the Company may issue to 100,000,000 shares of common stock at $.01 par value per share.

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.

During the three months ended March 31, 2017.2023, certain employees and directors exercised stock options under the Company's 2012 Employee and 2018 Non-Employee Stock Option Plans totaling 32,400 shares. 29,200 of the 32,400 of these exercises were completed as cashless exercises as allowed for under the plans, where the exercise shares are issued by the Company in exchange for shares of the Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees was 10,338 and was based upon the per share price on the effective date of the option exercise. $36,000 cash was received from the other 3,200 options exercised.

During the nine months ended March 31, 2023, certain employees and directors exercised stock options under the Company's 2012 Employee and 2018 Non-Employee Stock Option Plans totaling 49,500 shares. 41,100 of these exercises were completed as cashless exercises as allowed for under the plans, where the exercise shares are issued by the Company in exchange for shares of the Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees was 16,202 and was based upon the per share price on the effective date of the option exercise. $81,000 cash was received from the other 8,400 shares exercised.

During fiscal 2022, certain employees and directors exercised stock options under the Company's 2012 Employee and Non-Employee  and 2018 Non-employee Stock Option Plans totaling 34,800 shares. 6,800 of these exercises were completed as cashless exercises as allowed for under the plans, where the exercise shares are issued by the Company in exchange for shares of the Company's common

26

stock that are owned by the optionees. The number of shares surrendered by the optionees was 2,486 and was based upon the per share price on the effective date of the option exercise.

NOTE 911 – Related Party Transaction

On February 13, 2023, the Company's President and Chairman and the Company’s Executive Vice President and Chief Financial Officer sold 2,012,500 and 87,500 shares of our common stock, respectively, as selling stockholders in an underwritten secondary public offering at a public offering price of $31.50 per share. In connection with such offering, the selling stockholders granted the underwriters an option to purchase additional shares (the “Greenshoe Option”).  On February 15, 2023, the underwriters exercised in full the Greenshoe Option, pursuant to which the selling stockholders sold a total of 300,000 additional shares of common stock at the same public offering price.  The Company did not sell any shares in the offering and received no proceeds from the offerings, but the Company incurred $496,000 in offering expenses, which are recorded in selling, general, and administrative expenses in the accompanying condensed consolidated statements of income.

NOTE 12 - 401(k) Plan

The Company maintains a 401(k) plan (“the Plan”) that coversis available to all U.S. non-union employees with one or more years of service and is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. Company contributions to this plan are discretionary and totaled $33,000$64,000 and $27,000$187,000 for the three and nine months ended DecemberMarch 31, 20172023. Company contributions to this plan are discretionary and 2016, respectivelytotaled $59,000 and $64,000 and $55,000$132,000 for the sixthree and nine months ended DecemberMarch 31, 2017 and 2016, respectively2022.

16

NOTE 1013 - Commitments and Contingencies

Leases

Leases

The Company is committed under various operating leases, not including the landOur lease discussed below, which do not extend beyond fiscal 2023.

Rent expense, with the exceptionobligation consists of the landa 99-year lease, referred to below, totaled approximately $7,000 and $6,000 for the three months ended December 31, 2017 and 2016, respectively and $13,000 and $12,000 for the six months ended December 31, 2017 and 2016, respectively.

Land Lease

On April 26, 1993,entered into by one of the Company'sCompany’s foreign subsidiaries, entered into a 99 year lease, expiring in 2092, for approximately four acres of land in the Dominican Republic at an annual cost of $288,000, on which the Company'sCompany’s principal production facility is located. The lease, which commenced on April 26, 1993 and expires in 2092, initially had an annual base rent of approximately $235,000 plus $53,000 in annual service charges. On September 14, 2022, a lease modification was executed which provides for an annual base rent of $235,000 plus $105,000 in annual service charges. The service charges increase 2% annually over the remaining life of the lease. The modification resulted in a remeasurement of the operating lease asset and liability, and the effect was a reduction to the asset and liability of $1.3 million.

Operating leases are included in operating lease right-of-use assets, accrued expenses and operating lease liabilities, non-current on our condensed consolidated balance sheets.

LitigationFor the three months March 31, 2023 and 2022, cash payments against operating lease liabilities totaled $85,000 and $72,000, respectively. For the nine months March 31, 2023 and 2022, cash payments against operating lease liabilities totaled $249,000 and $216,000, respectively.

Supplemental balance sheet information related to operating leases was as follows:

Weighted-average remaining lease term

69 Years

Weighted-average discount rate

6.25

%

27

The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2023 (in thousands):

Year Ending June 30, 

    

Amount

2023

$

81

2024

 

316

2025

 

299

2026

 

282

2027

 

267

Thereafter

4,633

Total

$

5,878

Operating lease expense totaled approximately $123,000 and $80,000 for the three months ended March 31, 2023 and 2022, respectively. Operating lease expense totaled approximately $334,000 and $239,000 for the nine months ended March 31, 2023 and 2022, respectively.

Litigation

In the normal course of business, the Company is a party to claims and/or litigation. Management believes that the settlement of such claims and/or litigation, considered in the aggregate, will not have a material adverse effect on the Company'sCompany’s financial position and results of operations.

Employment Agreements

As of December 31, 2017,September 30, 2022, the Company was obligated under threetwo employment agreements and one severance agreement. The employment agreements are with the Company’s CEO Senior Vice President of Sales and Marketing (“the SVP of Sales”) and the Senior Vice President of Engineering (“the SVP of Engineering”). The severance agreement is with the Company’s CFO.

The employment agreement with the CEO provides for an annual salary of $730,000,$872,000, as adjusted for inflation; incentive compensation as may be approved by the Board of Directors from time to time and a termination payment in an amount up to 299% of the average of the prior five calendar year'syears’ compensation, subject to certain limitations, as defined in the agreement. The employment agreement renews annually in August unless either party gives the other notice of non-renewal at least six months prior to the end of the applicable term.

The employment agreement with the SVP of SalesEngineering expires in October 2018August 2024 and provides for an annual salary of $334,000, a bonus arrangement for fiscal 2018$361,000, and, if terminated by the Company without cause, severance of nine months’ salary and continued company-sponsored health insurance for six months from the date of termination. The employment agreement with the SVP of Engineering expires in August 2018 and provides for an annual salary of $302,000, a bonus arrangement for fiscal 2018 and, if terminated by the Company without cause, severance of nine month’s salary and continued company-sponsored health insurance for six months from the date of termination.

The severance agreement is with the SeniorExecutive Vice President of Operations and FinanceChief Financial Officer and provides for, if terminated by the Company without cause or within three months of a change in corporate control of the Registrant,Company, severance of nine month’smonths’ salary, continued company-sponsored health insurance for six months from the date of termination and certain non-compete and other restrictive provisions. Each of the severance agreements with the SVP of Sales, the SVP of Engineering and the Senior Vice President of Operations and Finance contains non-compete restrictions for three years after the employee’s termination of employment.

NOTE 11 -14 – Geographical Data

The Company is engaged in one major line of business: the development, manufacture, and distribution of security products, encompassing access control systems, door securitydoor-locking products, intrusion and fire alarm systems and video surveillance products for commercial and residential use. The Company also provides wireless communication service for intrusion and fire alarm systems. 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. Sales to unaffiliated customers are primarily shipped from the United States. The Company has customers worldwide with major concentrations in North America.

17

28

Financial Information Relating to Domestic and Foreign Operations (in thousands):

 Three months ended December 31, Six months ended December 31, 
 2017 2016 2017 2016 
Sales to external customers(1):                
                

Three months ended March 31, 

Nine months ended March 31, 

    

2023

    

2022

    

2023

    

2022

Sales to external customers (1):

  

 

  

  

 

  

Domestic $20,451  $20,100  $41,103  $39,593 

$

43,228

$

35,522

$

124,373

$

99,327

Foreign  661   615   1,183   1,290 

 

304

 

383

 

966

 

1,037

                
Total Net Sales $21,112  $20,715  $42,286  $40,883 

$

43,532

$

35,905

$

125,339

$

100,364

 December 31, 2017 June 30, 2017      

    

March 31, 2023

    

June 30, 2022

    

(as Restated)

Identifiable assets:          

  

 

  

          
United States $52,124  $55,550       

$

111,016

$

98,791

Dominican Republic (2)  18,363   15,312         

 

44,853

 

49,785

                
Total Identifiable Assets $70,487  $   70,862         

$

155,869

$

148,576

(1)All of the Company’s sales originate in the United States and are shipped primarily from the Company’s facilities in the United States. There were no sales into any one foreign country in excess of 10% of total Net Sales.
(2)Consists primarily of inventories (March 31, 2023 = $34,428; June 30, 2022 = $38,755), operating lease assets (March 31, 2023 = $5,878; June 30, 2022 = $7,350) and fixed assets (March 31, 2023 = $4,083; June 30, 2022 = $3,253) located at the Company’s principal manufacturing facility in the Dominican Republic.

(1) All

NOTE 15 - Subsequent Events

The Company has evaluated subsequent events occurring after the date of the Company's sales originatecondensed consolidated financial statements for events requiring recording or disclosure in the condensed consolidated financial statements.

On May 5, 2023, the Company’s Board of Directors declared a cash dividend of $.0625 per share payable on June 12, 2023 to stockholders of record on May 22, 2023.

On August 18, 2023, the Company’s Board of Directors declared a cash dividend of $.08 per share payable on September 22, 2023 to stockholders of record on September 1, 2023.

On August 29, 2023, a purported class action was filed in the United States District Court for the Eastern District of New York against the Company, its Chairman and are shipped primarily fromChief Executive Officer, and its Chief Financial Officer, alleging violations of the Company's facilitiesSecurities Exchange Act of 1934 in connection with statements made in the United States. There were no sales into any one foreign country in excess of 10% of total Net Sales.

(2) Consists primarily of inventories (DecemberCompany’s quarterly reports on Form 10-Q for the quarters ended September 30, 2022, December 31, 2017 = $14,765, June 30, 2017 = $11,831)2022 and long-lived assets (DecemberMarch 31, 2017 = $3,379, June 30, 2017 = $3,233) located at2023 (the “10-Q’s”). The Company previously announced that it was going to restate the Company's principal manufacturing facilityfinancial statements contained in the Dominican Republic.10-Qs. The Company intends to vigorously defend against the action.

29

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Restatement of Previously Issued Financial Statements

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been amended and restated to give effect to the restatement of our financial statements, as more fully described in Note 1A to our financial statements entitled “Restatement of Previously Issued Financial Statements”. For further detail regarding the restatement, see “Explanatory Note” and “Item 4. Controls and Procedures.”

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

This Quarterly Report on Form 10-Q and the information incorporateddocuments we incorporate by reference may include "Forward-Looking Statements"contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934. The Company intends1934, as amended, or the Forward-Looking Statements to be covered by the Safe Harbor Provisions for Forward-Looking Statements.Exchange Act. All statements, other than statements of historical fact, included or incorporated in this prospectus regarding the Company's expectedour strategy, future operations, clinical trials, collaborations, intellectual property, cash resources, financial position, and operating results, its business strategy, its financingfuture revenues, projected costs, prospects, plans, and the outcomeobjectives of any contingenciesmanagement are Forward-Looking Statements.forward-looking statements. The Forward-Looking Statements are based on current estimates and projections about our industry and our business. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," or variations of such words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “could,” “should,” “potential,” “likely,” “projects,” “continue,” “will,” “schedule,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such Forward-Looking Statements. The Forward-Looking Statementsforward-looking statements. There are subject to risks and uncertaintiesa number of important factors that could cause our actual results to differ materially from those set forthindicated or implied by any Forward-Looking Statements. For example, the Company is highly dependent on its Chief Executive Officer for strategic planning. If he is unable to perform his services for any significant period of time, the Company's ability to grow could be adversely affected. In addition, factors that could cause actual results to differ materially from the Forward-Looking Statements include, but are not limited to, uncertain economic, military and political conditionsforward-looking statements. See “Risk Factors” in the world, our ability to maintain and develop competitive products, adverse tax consequences of offshore operations, the ability to maintain adequate financing and significant fluctuations in the exchange rate between the Dominican Peso and the U.S. Dollar. The Company’s Risk Factors are discussed in more detail in Item 1A in the Company’s 2017 Annual Report on Form 10-K.

10-K for the year ended June 30, 2022 for more information. These factors and the other cautionary statements made in this prospectus and the documents we incorporate by reference should be read as being applicable to all related forward-looking statements whenever they appear in this prospectus and the documents we incorporate by reference. In addition, any forward-looking statements represent our estimates only as of the date that this prospectus is filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. We do not assume any obligation to update any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.

Overview

The CompanyNapco 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 manufacturerarray of security products, encompassing access control systems, door securitydoor-locking products, intrusion and fire alarm systems and video surveillance products for commercial and residential use.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. International sales accountedWe have experienced significant growth in recent years, primarily driven by fast growing recurring service revenues generated from wireless communication services for approximately 3%intrusion and fire alarm systems, as well as our school security products that are designed to meet the increasing needs to enhance school security as a result of on-campus shooting and violence in the U.S. Our wireless communication services have led to the substantial growth in our revenuesmonthly recurring revenues.

Since 1969, NAPCO has established a heritage and proven record in the professional security community for eachreliably delivering both advanced technology and high-quality security solutions, building many of the six months ended December 31, 2017industry’s widely recognized brands, such as NAPCO Security Systems, Alarm Lock, Continental Access, Marks USA, and 2016.

The Company ownsother popular product lines: including Gemini and operates manufacturing facilities in Amityville, New YorkF64-Series hardwire/wireless intrusion systems and iSee Video internet video solutions. We are also dedicated to developing innovative technology and producing the Dominican Republic. A significant portionnext generation of reliable security solutions that utilize remote communications and wireless networks, including our operating costsStarLink, iBridge, and more recently the iSecure product lines. Today, millions of businesses, institutions, homes, and people around the globe are fixed, and do not fluctuate with changes in production levels or utilizationprotected by products from the NAPCO Group of our manufacturing capacity. As production levels rise and factory utilization increases, the fixed costs are spread over increased output, which may contribute to increasing profit margins. Conversely, when production levels decline our fixed costs are spread over reduced levels, which may contribute to decreasing margins.Companies.

18

30

Economic and Other Factors

We are subject to the effects of general economic and market conditions. In the event thatIf the U.S. or international economic conditions deteriorate, our revenue, profit and cash-flow levels could be materially adversely affected in future periods. In the event of such deterioration, many of our current or potential future customers may experience serious cash flow problems and as a result may modify, delay or cancel purchases of our products. Additionally, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to us. If such events do occur, they may result in our fixed and semi-variable expenses beingbecoming too high in relation to our revenues and cash flows.

Seasonality

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 itsthese products prior to the summer; therefore, sales of itsthese 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, demandOur monthly recurring service revenue, which is affected by the housingless susceptible to these fluctuations, allows us to generate a more consistent and construction markets. Deterioration of the current economic conditions may also affect this trend.

predictable income stream.

Critical Accounting Policies and Estimates

The Company'sCompany’s significant accounting policies are fully described in Note 1 to the Company'sCompany’s consolidated financial statements included in its 20172022 Annual Report on Form 10-K. Management believes the followingthese critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition

The Company recognizes revenue when the following criteria are met: (i) persuasive evidence of an agreement exists, (ii) there is a fixed and determinable price for the Company's product or service, (iii) shipment and passage of title occurs or service has been provided, and (iv) collectability is reasonably assured. Revenues from product sales are recorded at the time the product is shipped or delivered to the customer pursuant to the terms of the sale. Revenues for services are recorded at the time the service is provided to the customer pursuant to the terms of sale. The Company reports its sales on a net sales basis, with net sales being computed by deducting from gross sales the amount of actual sales returns and other allowances and the amount of reserves established for anticipated sales returns and other allowances.

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.

Concentration of Credit Risk

An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company had two customers, both of which are nationwide distributors of the Company’s products, with accounts receivable balances that comprised 15% and 14% of the Company’s accounts receivable at December 31, 2017 and 24% and 10% at June 30, 2017. Sales to neither of these customers exceeded 10% of net sales in either of the three or six months ended December 31, 2017. Sales to one of these customers comprised 13% and 14% of net sales for the three and six months ended December 2016, respectively.

In the ordinary course of business, we have established a reserve for doubtful accounts and customer deductions in the amount of $175,000 as of December 31, 2017 and $155,000 as of June 30, 2017. Our reserve for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the evaluation of accounts receivable agings, specific exposures and historical or anticipated events.

Sales Returns and Other Allowances

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. As a percentage of gross sales, sales returns, rebates and allowances were 8% for the each of the six months ended December 30, 2017 and 2016, respectively.

19

Inventories

Inventories are valued at the lower of cost or NRV, 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 the difference between the cost of the inventory and its estimated NRV, based on various product sales projections. 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. There is inherent professional judgment and subjectivity made by both production and engineering members of management in determining the estimated obsolescence percentage. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. 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.

Intangible Assets

Intangible assets determined to have indefinite lives are not amortized. Intangible assets with definite lives are amortized over their useful lives. Indefinite-lived intangible assets are reviewed for impairment at least annually at the Company’s fiscal year end of June 30 or more often whenever there is an indication that the carrying amount may not be recovered. Impairment testing is performed in two steps: (i) the Company determines if there is impairment by comparing the fair value of a reporting unit with its carrying value, and (ii) if there is impairment, the Company measures the amount of impairment loss by comparing the implied fair value of intangible assets with the carrying amount of the intangible assets.

Income Taxes

The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2014 and forward years are still open for examination.

For the six months ended December 31, 2017, the Company recognized a net income tax expense of $54,000. For the six months ended December 31, 2017, the effective tax rate was favorably impacted by the enactment of H.R. 1, Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. The Act reduced the U.S. Corporate income tax rate to 21% and resulted in a $286,000 reduction in the Company’s net deferred tax liabilities. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. federal statutory rate of approximately 27.55% for fiscal 2018 and a 21% U.S. federal statutory rate for subsequent fiscal years.

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 the deferred tax assets and liabilities for the change in tax rate is recognized in income in the three and six month period ending December 31, 2017 which 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.

In addition, the Company reported $208,000 of provisional expense on its unremitted foreign earnings. Accounting Standard Codification (“ASC”) 740 requires filers to record the effects of tax law changes in the period enacted. However, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), that permits filers to record provisional amounts during a measurement period ending no later than one year from the date of the Act’s enactment. As of December 31, 2017, the Company has not completed accounting for the tax effects of enactment of the Act; however, the Company has made a reasonable estimate of the effects on the existing deferred balances as well as the computation of the one-time transition tax.

During the six months ended December 31, 2017 the Company increased its reserve for uncertain income tax positions by $32,000. 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 December 31, 2017, the Company had accrued interest totaling $0 and $215,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company uses the flow through method to account for investment tax credits earned on eligible research and development expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense.

The Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis.

20

Results of Operations

    

Three months ended March 31, 

    

Nine months ended March 31, 

(dollars in thousands)

(dollars in thousands)

 

 

 

 

% Increase/

 

 

 

% Increase/

    

2023 (as Restated)

    

2022

    

(decrease)

    

2023 (as Restated)

    

2022

    

 (decrease)

Net sales: equipment revenues

$

28,390

$

23,873

 

18.9

%  

$

81,511

$

67,080

 

21.5

%

service revenues

15,142

12,032

25.8

%  

43,828

33,284

31.7

%

Total net sales

43,532

35,905

21.2

%  

125,339

100,364

24.9

%

Gross Profit: equipment

7,610

4,539

67.7

%  

11,170

11,003

1.5

%

services

13,669

10,494

30.3

%  

39,029

28,929

34.9

%

Total gross profit

 

21,279

 

15,033

 

41.5

%  

 

50,199

 

39,932

 

25.7

%

Gross profit as a % of net sales:

 

48.9

%  

 

41.9

%  

16.7

%  

 

40.1

%  

 

39.8

%  

0.8

%

equipment

26.8

%  

19.0

%  

41.1

%  

13.7

%  

16.4

%  

(16.5)

%

services

90.3

%  

87.2

%  

3.5

%  

89.1

%

86.9

%

2.5

%

Research and development

 

2,314

 

2,009

 

15.2

%  

 

6,964

 

5,918

 

17.7

%

Selling, general and administrative

 

8,425

 

8,442

 

(0.2)

%  

 

24,719

 

23,983

 

3.1

%

Selling, general and administrative as a percentage of net sales

 

19.4

%  

 

23.5

%  

(17.4)

%  

 

19.7

%  

 

23.9

%  

(17.5)

%

Operating income

 

10,540

 

4,582

 

130.0

%  

 

18,516

 

10,031

 

84.6

%

Interest and other income (expense), net

 

437

 

(177)

 

(346.9)

%  

 

521

 

(102)

 

(610.8)

%

Gain on extinguishment of debt

 

 

3,904

(100.0)

%

Provision for income taxes

 

1,428

 

1,132

 

26.1

%  

 

2,475

 

1,771

 

39.8

%

Net income

 

9,549

 

3,273

 

191.8

%  

 

16,562

 

12,062

 

37.3

%

  Three months ended December 31,
(dollars in thousands)
  Six months ended December 31,
(dollars in thousands)
 
  2017  2016  % Increase/  
(decrease)
  2017  2016  % Increase/  
(decrease)
 
                   
Net sales $21,112  $20,715   1.9% $42,286  $40,883   3.4%
                         
Gross profit  6,840   6,617   3.4%  13,719   13,069   5.0%
Gross profit as a % of net sales  32.4%  31.9%  1.6%  32.4%  32.0%  1.3%
                         
Selling, general and administrative  5,674   5,553   2.2%  11,494   11,289   1.8%
Selling, general and administrative as a percentage of net sales  26.9%  26.8%  0.4%  27.2%  27.6%  (1.4)%
                         
Operating income  1,166   1,064   9.6%  2,225   1,780   25.0%
Interest expense, net  22   18   22.2%  48   42   14.3%
Provision (benefit) for income taxes  (89)  189   (147.1)%  54   313   (82.7)%
                         
Net income  1,233   857   43.9%  2,123   1,425   49.0%

Net Sales for the three months ended DecemberMarch 31, 20172023 increased by $397,000$7,627,000, or 21.2%, to $21,112,000$43,352,000 as compared to $20,715,000$35,905,000 for the same period a year ago. The increase in sales for the three months ended DecemberMarch 31, 20172023 was due primarily to increased intrusion sales ($545,000), which resulted primarily from an increase of $968,000, a 52% increase over last year’s second quarter,revenue increases in recurring revenuecommunication services related to the Company’s intrusion($3,110,000), Alarm Lock brand door-locking products ($4.278,000), Marks brand door-locking products ($927,000), and Continental brand access control products ($377,000)113,000) as partially offset by a decrease in the Company’s door-lockingNapco brand intrusion products ($525,000)1,250,000). Net Sales for the sixnine months ended DecemberMarch 31, 20172023 increased by $1,403,000$24,975,000, or 24.9%, to $42,286,000

31

$125,339,000 as compared to $40,883,000$100,364,000 for the same period a year ago. The increase in sales for the sixnine months ended DecemberMarch 31, 20172023 was due primarily to increased intrusion sales ($1,235,000), which resulted primarily from an increase of $1,894,000, a 54% increase over the same period a year ago,revenue increases in recurring revenuecommunication services related to($10,544,000), Napco brand intrusion products, which include the Company’s intrusioncellular radio products ($1,993,000), Alarm Lock brand door-locking products ($9,045,000), Marks brand door-locking products ($2,212,000), and Continental brand access control products ($703,000) as partially offset by1,182,000). The Company’s increase in equipment sales was primarily due to a decreasegeneral increase in demand for the Company’s door-locking products ($535,000).hardware products.

GrossThe Company's gross profit increased by $6,246,000 to $21,279,000, or 48.9% of net sales, for the three months ended DecemberMarch 31, 2017 increased to $6,840,000 or 32.4% of sales2023 as compared to $6,617,000$15,033,000, or 31.9%41.9% of net sales, for the same period a year ago. Gross profit on equipment sales was $7,610,000, or 26.8% of net equipment sales, for the sixthree months ended DecemberMarch 31, 2017 increased to $13,719,0002023 and $4,539,000, or 32.4%19.0% of net equipment sales, as compared to $13,069,000for the same period a year ago. Gross profit on service revenues was $13,669,000, or 32.0%90.3% of salesnet service revenues, for the three months ended March 31, 2023 and $10,494,000, or 87.2% of net service revenues, for the same period a year ago. The increase in gross profit for the threein dollars and six monthsas a percentage of net sales on equipment sales and service revenues was primarily due tothe result of the increase in salesrevenues of each as described above.above as well as increased availability and lower costs of components and transportation as compared to the same period last year, which resulted from improvements within the Company’s supply chain. The increases in revenues resulted in improved overhead absorption rates. In addition, the increase in gross margin on service revenues was due, in part, to increased service revenues relating to the Company’s fire radios, which have higher monthly selling prices than the Company’s intrusion radios.

Selling, general and administrative expensesThe Company's gross profit increased by $10,267,000 to $50,199,000, or 40.1% of net sales, for the threenine months ended DecemberMarch 31, 2017 increased by $121,0002023 as compared to $5,674,000 from $5,553,000$39,932,000, or 39.8% of net sales, for the same period a year ago. Selling, general and administrative expensesGross profit on equipment sales was $11,170,000, or 13.7% of net equipment sales, for the sixnine months ended DecemberMarch 31, 2017 increased by $205,000 to $11,494,000 from $11,289,0002023 and $11,003,000, or 16.4% of net equipment sales, for the same period a year ago. Selling, general and administrative expenses as a percentageGross profit on service revenues was $39,029,000, or 89.1% of net sales remained relatively constant at 26.9%service revenues, for the threenine months ended DecemberMarch 31, 2017 as compared to 26.8% for the same period a year ago. Selling, general2023 and administrative expenses as a percentage$28,929,000, or 86.9% of net sales decreased to 27.2% for the six months ended December 31, 2017 from 27.6% for the same period a year ago. The increase for the three months was due primarily to increased sales commissions. The increase in dollars for the six months was due primarily to increased sales commissions as well as increased accounting costs associated with the audit of the Company’s internal control procedures which was performed primarily during the quarter ended September 30, 2017. The audit became required when the Company’s public float exceeded $75,000,000 at December 31, 2016, resulting in the Company being classified as an Accelerated Filer and subject to additional compliance requirements under the Sarbanes-Oxley Act of 2002. The decrease as a percentage of sales for the six months is due primarily to the increase in net sales being proportionally greater than the increase in these expenses.

Interest expense, net for the three months ended December 31, 2017 increased by $4,000 to $22,000 as compared to $18,000 for the same period a year ago. Interest expense, net for the six months ended December 31, 2017 increased by $6,000 to $48,000 as compared to $42,000service revenues, for the same period a year ago. The increase in interestgross profit in dollars on equipment sales for the nine months ended March 31, 2023 was primarily the result of the increase in revenues as described above, which improved overhead absorption rates, increased availability and lower costs of components and transportation as compared to the same period last year as well as a favorable shift in product mix the Company’s Alarm Lock brand door locking products, which typically have higher margins. These factors were mostly offset by the lower margins realized during the first two quarters of fiscal 2023 which resulted, in part, The decrease in gross profit as a percentage of equipment sales was primarily the result of the sale of the remaining portion of finished goods that were in opening inventory that contained certain higher priced components as disclosed in the Form 10-Q/A for the period ending September 30, 2022. The Company purchased these components at a significant premium during the supply chain interruptions during the latter part of fiscal 2022 in order to continue to supply the Company’s communication devices that led to the creation of recurring service revenues for the Company. The effect of these higher-priced components on the nine months ended March 31, 2023 was partially offset by the higher sales volume during this period as compared to the same period a year ago. The increase in gross margin on service revenues was due primarily to increased service revenues relating to the Company’s fire radios, which have higher monthly selling prices than the Company’s intrusion radios.

Research and development expenses for the three months ended March 31, 2023 increased $305,000 to $2,314,000, or 5.3% of net sales, as compared to $2,009,000, or 5.6% of net sales, for the same period a year ago. Research and development expenses for the nine months ended March 31, 2023 increased $1,046,000 to $6,964,000, or 5.6% of net sales, as compared to $5,918,000, or 5.9% of net sales, for the same period a year ago. The increase in dollars was due primarily to salary increases and additional staff.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2023 remained relatively consistent at $8,425,000 as compared to $8,442,000 for the same period a year ago. SG&A expenses as a percentage of net sales decreased to 19.4% for the three months ended March 31, 2023 as compared to 23.5% for the same period a year ago. The decrease as a percentage of net sales was due primarily to the increase in net sales without the need to increase to increase SG&A expenses. SG&A expenses for the nine months ended March 31, 2023 increased by $736,000, or 3.1%, to $24,719,000 from $23,983,000 for the same period a year ago. SG&A expenses as a percentage of net sales decreased to 19.7% for the nine months ended March 31, 2023 as compared to 23.9% for the same period a year ago. The increase in dollars resulted primarily from increases in expenses relating to the Company's President and Chairman and the Company’s Executive Vice President and Chief Financial Officer selling shares of our Common stock in an underwritten secondary public offering, which is discussed more fully in Note 11 to the Condensed Consolidated financial statements, and credit card processing fees related to our monthly recurring service revenues. The decrease as a percentage of net sales was due primarily to the increase in net sales as partially offset by the aforementioned increase in expense dollars.

32

Interest and other income (expense), net for the three months ended March 31, 2023 increased by $614,000 to income of $437,000 as compared to expense of $177,000 for the same period a year ago. Interest and other income (expense), net for the nine months ended March 31, 2023 increased by $623,000 to income of $521,000 as compared to expense of $102,000 for the same period a year ago. The increases in income for the three and sixnine months was primarily due to interest income on certificates of deposits purchased during the nine months ended DecemberMarch 31, 20172023.

Gain on extinguishment of debt resulted from an increasea one-time gain in interest ratesthe nine months ended March 31, 2022 which resulted from the forgiveness of the Company’s PPP loans as partially offset by reduced outstanding debt.

described in Note 8 to the condensed consolidated financial statements.

The Company’s provision for income taxes for the three months ended DecemberMarch 31, 2017 decreased2023 increased by $278,000$296,000 to a benefit of $89,000$1,428,000 as compared to a provision of $189,000$1,132,000 for the same period a year ago. The Company’s provision for income taxes for the six months ended December 31, 2017 decreased by $259,000 to $54,000 as compared to $313,000 for the same period a year ago. The changeincrease in the provision for income taxes for the three months ended March 31, 2023 was caused primarily by recent changesdue to higher taxable income in the Federal tax code. As a result, theU.S. The Company’s effective rate for income tax was (8)%13.0% and 18%25.7% for the three months ended DecemberMarch 31, 20172023 and 2016, respectively and 2% and 18%2022, respectively. The Company’s provision for income taxes for the sixnine months ended DecemberMarch 31, 20172023 increased by $704,000 to $2,475,000 as compared to $1,771,000 for the same period a year ago. The increase in the provision for income taxes for the nine months ended March 31, 2023 was primarily due to higher taxable income in the U.S. The Company’s effective rate for income tax was 13.0% and 2016,12.8% for the nine months ended March 31, 2023 and 2022, respectively.

21

Net income increased by $376,000 to $1,233,000 or $0.07 per diluted share for the three months ended DecemberMarch 31, 20172023 increased by $6,276,000 to $9,549,000 or $0.26 per diluted share as compared to $857,000$3,273,000 or $0.05$0.09 per diluted share for the same period a year ago. Net income for the nine months ended March 31, 2023 increased by $698,000$4,500,000 to $2,123,000$16,562,000 or $0.11$0.45 per diluted share for the six months ended December 31, 2017 as compared to $1,425,000$12,062,000 or $0.08$0.33 per diluted share for the same period a year ago. The changeincrease in net income for the three and sixnine months ended DecemberMarch 31, 20172023 was primarily due to the items described above.

33

Liquidity and Capital Resources

During the sixnine months ended DecemberMarch 31, 20172023, the Company utilized a portion of its cash generated from operationsbalance at June 30, 2022 ($2,345,00032,732,000 of $2,824,000)$41,730,000) to purchase marketable securities and other investments ($30,185,000) and property, plant and equipment ($651,000), re-pay outstanding debt ($1,500,000)2,547,000). The securities and repurchaseinvestments consist of money market accounts, CD’s and time deposits. During the nine months ended March 31, 2023, the Company common stock ($194,000).generated cash flows from operations of $12,416,000. The Company believes its current working capital, cash flows from operations and its revolving credit agreement will be sufficient to fund the Company’s operations through the next twelve months.

Accounts receivable at DecemberMarch 31, 20172023 decreased $2,914,000by $5,048,000 to $17,361,000$24,170,000 as compared to $20,275,000$29,218,000 at June 30, 2017.2022. This decrease iswas primarily the result of the lowerhigher sales volume of equipment during the quarter ended December 31, 2017June 30, 2022, which is typically the Company’s highest, as compared to the quarter ended June 30, 2017, which is typicallyMarch 31, 2023. In addition, sales of the Company’s highest.

radio communication devices were unusually high in the month of June 2022 due to the Company fulfilling backorders of these products which had built up during the world-wide supply chain difficulties. Sales of these products were at more normal levels in the month of March 2023.

Inventories, which include both current and non-current portions, increased by $899,000 to $50,685,000 at DecemberMarch 31, 2017 increased $1,287,000 to $31,866,0002023 as compared to $30,579,000$49,786,000 at June 30, 2017. This2022. The increase iswas due primarily the resultto a build-up of inventory of the Company’s level-loading its production output throughoutradio products in order to mitigate potential supply chain interruptions of these products. The increase was also due to the year, whereas the Company’s sales are typically highest in the fourth quarter. This was partially offset byongoing shortages of certain component parts and the Company selling inventory of its recently introduced products. Inventory levelspurchasing large quantities of these products had been increased inhard to source component parts when they become available. As these challenges have begun to subside, the fourth quarter of fiscal 2017 in anticipation of customer demand.

Company believes its inventory levels will decrease.

Accounts payable and accrued expenses, other than accruednot including income taxes payable, decreased $1,643,000by $7,129,000 to $8,541,000$17,496,000 as of DecemberMarch 31, 20172023 as compared to $10,184,000 at$24,625,000 as of June 30, 2017.2022. This decrease was primarily due primarilyto a decrease in the Company’s accrued refund liability, which is explained in Note 2 to the inventory increaseNotes to the Company’s Condensed Consolidated Financial Statements, accrued employee compensation, and accounts payable, which relates to the Company reducing purchases of component parts in the fourthlatter part of the quarter ofended March 31, 2023 after building up its inventory in fiscal 2017 as described above.

2022.

As of DecemberMarch 31, 2017,2023 and 2022, long-term debt consisted of a revolving line of credit facility of $11,000,000 (“Revolver Agreement”) which expires in June 2021. As of December 31, 2017, the Company had $2,000,000 in2024. There was no outstanding borrowings and $9,000,000 in availabilitybalance under the Agreement.Revolver Agreement at March 31, 2023 and June 30, 2022. The Company’s long-term debt is described more fully in Note 6 to the condensed consolidated financial statements. The Agreementrevolving credit facility contains various restrictions and covenants including, among others, restrictions on borrowings and compliance with certain financial ratios, as defined in the restated agreement.

The Company’s long-term debt is described more fully in Note 8 to the condensed consolidated financial statements.

As of DecemberMarch 31, 20172023, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business. In addition, the Company’s balance sheet reflects a refund liability of $4,841,000 as of March 31, 2023 for customer returns and promotional credits which is more fully discussed in Note 2 to the Condensed Consolidated Financial Statements.

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

The Company's principal financial instrument is long-term debt (consisting of a revolving credit facility) that provides for interest based on the prime rate or LIBOR as described in the agreement. The Company is affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by the Company under thisthese credit facility. At December 31, 2017, an aggregate principal amount of approximately $2,000,000 was outstanding under the Company's credit facility with a weighted average interest rate of approximately 2.5%. If principal amounts outstanding under the Company's credit facility remained at this level for an entire year and the interest rate increased or decreased, respectively, by 1% the Company would pay or save, respectively, an additional $20,000 in interest that year.

facilities.

All foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto its foreign customers. As a result, if exchange rates move against foreign customers, the Company could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company's business, financial condition and results of operations. We are also exposed to foreign currency risk relative to expenses incurred in Dominican Pesos ("RD$"), the local currency of the Company's production facility in the Dominican Republic. The result of a 10% strengthening or weakening in the U.S. dollar to the RD$ would result in an annual increase or decrease in income from operations of approximately $630,000.$885,000.

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ITEM 4: Controls and Procedures

(as Restated)

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management'smanagement’s control objectives.

22

At the conclusion of the period ended DecemberMarch 31, 2017,2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The Company determined that it did not have effective disclosure controls and procedures as of December 31, 2017. As disclosed in our Annual Report on Form 10-K for the year ended June 30, 2017, we2022, management initially identified two material weaknesses in internal control.

One material weakness in internal control related to ineffective information technology general controls (ITGCs) in the area of user access and lack of effective program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes. Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. We believe that these control deficiencies were a result of: IT control processes lacking sufficient documentation and risk-assessment procedures to assess changes in the IT environment and program change management of personnel that could impact internal controls over financial reporting. The material weakness did not haveresult in any identified misstatements to the financial statements and there were no changes to the previously released financial results as a result of this material weakness.

The second material weakness in internal control related to the reserve for excess and slow-moving inventory. This control deficiency was a result of a lack of effective disclosurereview and reconciliation controls over the forecasted sales and proceduresusage data. The material weakness did not result in a material misstatement to the financial statements, there were no changes to the previously released financial results as a result of this material weakness.  Based on these material weaknesses, the Company’s management concluded that at June 30, 2017.

Management's review over its2022 the Company’s internal controls at the conclusion of fiscal 2017 identified conditions which they deemed to be material weaknesses, (as defined by standards established by the SEC and the Public Company Accounting Oversight Board): 1. The documentation of a key review control over product shipments was not designed properly to evidence the operating effectiveness of the control, and a portion of the Company’s shipmentsfinancial reporting were not subjected to this review control due to in-process consolidation of warehouse operations. 2. Controls around subscription-based service revenue were not assessed at the transaction level because they are largely automated, but subjected only to management-level reasonableness review. 3. Management’s reviews of price lists and pricing discounts are not formally documented on a consistent basis, and 4. Review of system-based pricing for certain products and services was not performed to correct data entry errors, although no significant errors were detected. effective.

Management is currently designing and implementing additional controls and procedures to remediate these items and expects to complete these actions during fiscal 2018.2024. These actions include, but are not limited to, retaining a different third-party consulting firmmodifying its program change-management process over certain of its information technology (IT) systems that support the Company’s financial reporting processes as well as implementing changes to assistits forecasted sales and usage data used in calculating its reserve for excess and slow-moving inventory.

In addition to the foregoing, during the Company’s closing of its books for the period ended June 30, 2023, management identified an additional material weakness related to the Company’s Cost of Goods Sold (“COGS”) and Inventory during the quarter ended March 31, 2023. COGS reflected in the evaluationCompany’s Original Form 10-Q was based on inventory costing as of June 30, 2022. However, in the period following June 30, 2022, substantial fluctuations occurred in material costs due to various macroeconomic factors. Our inventory costing process did not identify these fluctuations in a timely manner resulting in Inventory being overstated and reviewCOGS being understated and resulting in an overstated gross profit, operating income and net income for the three months ended March 31, 2023. While the Company has begun the process to take measures which it believes will remediate the underlying causes of this material weakness, there can be no assurance as to when the remediation plan will be fully developed and implemented and whether such measures will be effective. Until the Company’s internal controls.remediation plan is fully implemented and effective, the Company will continue to devote time, attention and financial resources to these efforts.

During the three months ended DecemberMarch 31, 2017,2023, there were no changes in the Company'sCompany’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal controls over financial reporting. The Company doesreporting except as described above. As of March 31, 2023 the Company’s controls over financial reporting were not have effective disclosure controls and procedures aseffective.

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PART II: OTHER INFORMATION

Item 1A.Risk Factors

Item 1A. Risk Factors

Information regarding the Company’s Risk Factors are set forth in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017.2022. There has been no material change in the risk factors previously disclosed in the Company’s Form 10-K for the three months ended March 31, 2023 except for the following risk factor:

The Company faces risks related to the restatement of its previously issued condensed financial statements with respect to the first three quarters of fiscal year ended June 30, 2017 during the three months ended December 31, 2017.2023 (the “Affected Periods”).

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Period Total Number
of Shares
Purchased
  Average
Price
Paid per
Share
  Total Number of
Shares Purchased
as Part of
Publically
Announced Plans
or Programs
  Maximum
Number of Shares
that May Yet Be
Purchased Under
Plans or Programs
 
             
October 1, 2017 - October 31, 2017    $      354,185 
November 1, 2017 – November 30, 2017    $      354,185 
December 1, 2017 – December 31, 2017  22,600  $8.53   22,600   331,585 
                 
Total for the Quarter ended December 31, 2017  22,600  $8.53   22,600   331,585 

As discussed in the Explanatory Note and in Note 1A to the condensed financial statements in this Form 10-Q/A , we determined to restate certain information in our previously issued condensed financial statements for the Affected Periods. As a result, we have become subject to a number of additional risks and uncertainties, which may affect investor confidence in the accuracy of our financial disclosures, including the following:

On September 16, 2014

We will face litigation under the federal and state securities laws and other claims arising from the restatement. One such case has already been filed and we will likely face additional complaints. See Note 15-Subsequent Events. The cost of defending against those claims, the adequacy of our directors’ and officers’ liability insurance and the ultimate outcome of any such litigation cannot be predicted at this time

The processes undertaken to effect the restatement may not be adequate to identify and correct all errors in our historical financial statements, and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement.

The restatement has demonstrated an additional material weakness in our internal controls over financial reporting. The process of remediating that weakness and implementing new procedures and systems to correct the problems that led to the restatement will likely be time consuming and expensive and there can be no assurance how long that process will take or if the corrective measures will be successful. Furthermore, the implementation of those measures may result in an ongoing increase in administrative expenses which may adversely affect the Company’s boardprofitability.

36

Table of directors authorized the repurchase of up to 1 million of the approximately 19.4 million shares of the Company’s common stock then outstanding. The repurchase will be made from time to time in the open market or in privately negotiated transactions subject to market conditions and the market price of the common stock.Contents

23

Item 6.Exhibits

Item 6. Exhibits

31.1

31.1

Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Richard L. Soloway, Chairman of the Board and President

31.2

31.2

Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Kevin S. Buchel, SeniorExecutive Vice President of Operations and FinanceChief Financial Officer

32.1

32.1

Section 1350 Certifications

101.INS

101.INS

Inline XBRL Instance Document(the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

24

37

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

September 1, 2023

February 8, 2018NAPCO SECURITY TECHNOLOGIES, INC.

(Registrant)

NAPCO SECURITY TECHNOLOGIES, INC.
(Registrant)

By:

By:

/s/ RICHARD L. SOLOWAY

Richard L. Soloway

Chairman of the Board of Directors, President and Secretary

(Chief Executive Officer)

By:

By:

/s/ KEVIN S. BUCHEL

Kevin S. Buchel

Senior

Executive Vice President of Operations and Finance and Treasurer

Chief Financial Officer

(Principal Financial and Accounting Officer)

25

38