UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


	☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: ~~September 30,~~December 31, 2022


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


Commission File number: 0-10004

NAPCO SECURITY TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

Delaware		11-2277818
(State or other jurisdiction of		(IRS Employer Identification
incorporation of organization)		Number)

333 Bayview Avenue
Amityville, New York		11701
(Address of principal executive offices)		(Zip Code)

(631) 842-9400

(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year if

changed from last report)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		NSSC		Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ⌧ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ☐

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

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

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of: ~~November 4, 2022~~February 3, 2023

COMMON STOCK, $.01 PAR VALUE PER SHARE ~~36,744,755~~36,745,718

Table of Contents

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

			Page

PART I: FINANCIAL INFORMATION

	ITEM 1.	Financial Statements	3

		NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX ~~–September 30,~~–December 31, 2022

		Condensed Consolidated Balance Sheets as of ~~September 30,~~December 31, 2022 (unaudited) and June 30, 2022	3

		Condensed Consolidated Statements of Income for the Three Months ended ~~September 30,~~December 31, 2022 and 2021 (unaudited)	4
		Condensed Consolidated Statements of ~~Stockholders Equity~~Income for the ~~Three~~Six Months ~~Ended September 30,~~ended December 31, 2022 and 2021 (unaudited)	5
		Condensed Consolidated Statements of Stockholders Equity for the Six Months Ended December 31, 2022 and 2021 (unaudited)	6
		Condensed Consolidated Statements of Cash Flows for the ~~Three~~Six Months Ended ~~September~~December 30, 2022 and 2021 (unaudited)	67

		Notes to Condensed Consolidated Financial Statements (unaudited)	78

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2427

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	2731

	ITEM 4.	Controls and Procedures	2731

PART II: OTHER INFORMATION

	ITEM 1A.	Risk Factors	2832

	ITEM 6.	Exhibits	2933

SIGNATURE PAGE			3034

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2022				December 31, 2022
	(unaudited)		June 30, 2022		(unaudited)		June 30, 2022

	(in thousands, except share data)				(in thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents	$	29,448	$	41,730	$	32,007	$	41,730
Investments - other		10,008		—		10,068		—
Marketable securities		4,943		5,068		5,028		5,068
Accounts receivable, net of allowance for doubtful accounts of $216 and $243 as of September 30, 2022 and June 30, 2022, respectively		21,342		29,218
Accounts receivable, net of allowance for credit losses of $215 and $243 as of December 31, 2022 and June 30, 2022, respectively						20,985		29,218
Inventories, net		52,055		40,781		48,661		40,781
Income tax receivable		379		—
Prepaid expenses and other current assets		2,840		2,838		2,827		2,838
Total Current Assets		121,015		119,635		119,576		119,635
Inventories - non-current, net		11,782		9,005		15,531		9,005
Property, plant and equipment, net		7,920		7,939		7,984		7,939
Intangible assets, net		4,210		4,300		4,119		4,300
Deferred income taxes		251		—		828		—
Operating lease asset		6,046		7,350		5,961		7,350
Other assets		374		347		364		347
TOTAL ASSETS	$	151,598	$	148,576	$	154,363	$	148,576

CURRENT LIABILITIES
Accounts payable	$	13,440	$	11,072	$	8,110	$	11,072
Accrued expenses		7,907		9,489		7,215		9,489
Accrued salaries and wages		2,633		4,064		2,383		4,064
Accrued income taxes		—		1,868		291		1,868
Total Current Liabilities		23,980		26,493		17,999		26,493
Deferred income taxes		—		166		—		166
Accrued income taxes		1,067		1,058		1,082		1,058
Long term operating lease liabilities		5,836		7,068		5,786		7,068
TOTAL LIABILITIES		30,883		34,785		24,867		34,785
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY
Common Stock, par value $0.01 per share; 100,000,000 shares authorized as of September 30, 2022 and June 30, 2022; 39,636,677 and 39,628,197 shares issued; and 36,742,962 and 36,734,482 shares outstanding, respectively		396		396
Common Stock, par value $0.01 per share; 100,000,000 shares authorized as of December 31, 2022 and June 30, 2022; 39,639,433 and 39,628,197 shares issued; and 36,745,718 and 36,734,482 shares outstanding, respectively						396		396
Additional paid-in capital		20,527		20,005		20,862		20,005
Retained earnings		119,313		112,911		127,759		112,911
Less: Treasury Stock, at cost (2,893,715 shares)		(19,521)		(19,521)		(19,521)		(19,521)
TOTAL STOCKHOLDERS’ EQUITY		120,715		113,791		129,496		113,791
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	151,598	$	148,576	$	154,363	$	148,576

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)


	Three Months ended September 30,				Three Months ended December 31,
	2022		2021		2022		2021

	(in thousands, except for share and per share data)				(in thousands, except for share and per share data)
Net sales:
Equipment revenues	$	25,687	$	20,827	$	27,434	$	22,380
Service revenues		13,806		10,224		14,880		11,028
		39,493		31,051		42,314		33,408
Cost of sales:
Equipment related expenses		19,665		16,172		21,187		20,571
Service-related expenses		1,661		1,423		1,665		1,394
		21,326		17,595		22,852		21,965

Gross Profit		18,167		13,456		19,462		11,443

Operating expenses:
Research and development		2,428		1,931		2,222		1,978
Selling, general, and administrative expenses		8,490		7,346		7,804		8,195
Total Operating Expenses		10,918		9,277		10,026		10,173

Operating Income		7,249		4,179		9,436		1,270

Other (expense) income:
Interest and other (expense) income, net		(103)		17
Gain on extinguishment of debt		—		3,904
Other income (expense):
Interest and other income (expense), net						187		58
Income before Provision for Income Taxes		7,146		8,100		9,623		1,328
Provision for Income Taxes		744		348		1,177		291
Net Income	$	6,402	$	7,752	$	8,446	$	1,037

Income per share:
Basic	$	0.17	$	0.21	$	0.23	$	0.03
Diluted	$	0.17	$	0.21	$	0.23	$	0.03

Weighted average number of shares outstanding:
Basic		36,762,000		36,700,000		36,772,000		36,728,000
Diluted		36,990,000		36,844,000		36,997,000		36,898,000

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)


	Six Months Ended December 31,
	2022		2021

	(in thousands, except for share and per share data)
Net sales:
Equipment revenues	$	53,121	$	43,207
Service revenues		28,686		21,252
		81,807		64,459
Cost of sales:
Equipment related expenses		40,852		36,743
Service-related expenses		3,326		2,817
		44,178		39,560

Gross Profit		37,629		24,899

Operating expenses:
Research and development		4,650		3,909
Selling, general, and administrative expenses		16,294		15,541
Total Operating Expenses		20,944		19,450

Operating Income		16,685		5,449

Other income (expense):
Interest and other income (expense), net		84		75
Gain on extinguishment of debt		—		3,904
Income before Provision for Income Taxes		16,769		9,428
Provision for Income Taxes		1,921		639
Net Income	$	14,848	$	8,789

Income per share:
Basic	$	0.40	$	0.24
Diluted	$	0.40	$	0.24

Weighted average number of shares outstanding:
Basic		36,731,000		36,720,000
Diluted		36,957,000		36,877,000

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)

Three months ended September 30, 2022 (in thousands, except for share data)

Common Stock

Treasury Stock


Number of



Additional








Shares

Paid-in

Number of

Retained

Issued

Amount

Capital

Shares

Amount

Earnings

Total
Balances at June 30, 2022

39,628,197

$
396

$
20,005

(2,893,715)

$
(19,521)

$
112,911

$
113,791
Net income

—

—

—

—

—

6,402

6,402
Stock-based compensation expense

—

—

477

—

—

—

477
Stock options exercised

8,480

—

45

—

—

—

45
Balances at September 30, 2022

39,636,677

$
396

$
20,527

(2,893,715)

$
(19,521)

$
119,313

$
120,715


	Six months ended December 31, 2022 (in thousands, except for share data)
	Common Stock					Treasury Stock
	Number of			Additional
	Shares			Paid-in		Number of			Retained
	Issued	Amount		Capital		Shares	Amount		Earnings		Total
Balances at June 30, 2022	39,628,197	$	396	$	20,005	(2,893,715)	$	(19,521)	$	112,911	$	113,791
Net income	—		—		—	—		—		6,402		6,402
Stock-based compensation expense	—		—		477	—		—		—		477
Stock options exercised	8,480		—		45	—		—		—		45
Balances at September 30, 2022	39,636,677	$	396	$	20,527	(2,893,715)	$	(19,521)	$	119,313	$	120,715
Net income	—		—		—	—		—		8,446		8,446
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)	$	127,759	$	129,496

Three months ended September 30, 2021 (in thousands, except share data)


Common Stock



Treasury Stock






Number of



Additional








Shares

Paid-in

Number of

Retained

Issued

Amount

Capital

Shares

Amount

Earnings

Total
Balances at June 30, 2021

39,595,883

$
396

$
18,201

(2,893,715)

$
(19,521)

$
93,312

$
92,388
Net income

—

—

—

—

—

7,752

7,752
Stock-based compensation expense

—

—

89

—

—

—

89
Stock options exercised

5,000

—

16

—

—

—

16
Balances at September 30, 2021

39,600,883

$
396

$
18,306

(2,893,715)

$
(19,521)

$
101,064

$
100,245


	Six months ended December 31, 2021 (in thousands, except share data)
	Common Stock					Treasury Stock
	Number of			Additional
	Shares			Paid-in		Number of			Retained
	Issued	Amount		Capital		Shares	Amount		Earnings		Total
Balances at June 30, 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

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three Months ended September 30,


2022

2021


(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES





Net income

$
6,402

$
7,752

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



Depreciation and amortization

457

438

Gain on disposal of fixed asset

(15)

—

Interest (income) on other investments

(8)

—

Unrealized loss (gain) on marketable securities

153

(3)

Provision for (recovery of) doubtful accounts

(27)

—

Change to inventory reserve

71

—

Deferred income taxes

(417)

21

Stock based compensation expense

477

89

Gain on extinguishment of debt

—

(3,904)

Changes in operating assets and liabilities:





Accounts receivable

7,903

2,738

Inventories

(14,121)

(1,824)

Prepaid expenses and other current assets

(2)

540

Income tax receivable

(379)

—

Other assets

(27)

(89)

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

(2,432)

(2,295)

Net Cash (Used in) Provided by Operating Activities

(1,965)

3,463

CASH FLOWS FROM INVESTING ACTIVITIES





Purchases of property, plant, and equipment

(372)

(522)

Proceeds from disposal of fixed asset

38

—

Purchases of marketable securities and other investments

(10,028)

(19)

Net Cash Used in Investing Activities

(10,362)

(541)

CASH FLOWS FROM FINANCING ACTIVITIES





Proceeds from stock option exercises

45

16

Net Cash Provided by Financing Activities

45

16

Net (decrease) increase in Cash and Cash Equivalents

(12,282)

2,938

CASH AND CASH EQUIVALENTS - Beginning

41,730

34,806

CASH AND CASH EQUIVALENTS - Ending

$
29,448

$
37,744

SUPPLEMENTAL CASH FLOW INFORMATION





Interest paid

$
4

$
4

Income taxes paid

$
3,398

$
2,169


	Six Months ended December 31,
	2022		2021

	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	14,848	$	8,789
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		928		884
Gain on disposal of fixed asset		(15)		—
Interest (income) on other investments		(68)		—
Unrealized loss (gain) on marketable securities		118		36
(Recovery of) provision for credit losses		(28)		—
Change to inventory reserve		350		—
Deferred income taxes		(994)		96
Stock based compensation expense		812		1,344
Gain on extinguishment of debt		—		(3,904)
Changes in operating assets and liabilities:
Accounts receivable		8,261		4,550
Inventories		(14,755)		(5,287)
Prepaid expenses and other current assets		11		(207)
Income tax receivable		—		—
Other assets		(17)		(130)
Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes		(8,363)		1,630
Net Cash Provided by (Used in) Operating Activities		1,088		7,801
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment		(816)		(771)
Proceeds from disposal of fixed asset		38		—
Purchases of marketable securities and other investments		(10,078)		(40)
Net Cash Used in Investing Activities		(10,856)		(811)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock option exercises		45		155
Net Cash Provided by Financing Activities		45		155

Net (decrease) increase in Cash and Cash Equivalents		(9,723)		7,145
CASH AND CASH EQUIVALENTS - Beginning		41,730		34,806
CASH AND CASH EQUIVALENTS - Ending	$	32,007	$	41,951
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	8	$	8
Income taxes paid	$	4,469	$	2,154

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

~~September 30,~~December 31, 2022

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

Nature of Business:

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

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

Significant Accounting Policies:

Principles of Consolidation

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

Stock Split

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

Accounting Estimates

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

Fair Value of Financial Instruments

The methods and assumptions used to estimate the fair value of the following classes of financial instruments were: Current Assets and Current Liabilities - The carrying amount of cash and cash equivalents, certificates of deposits, current receivables and payables and

Table of Contents

certain other short-term financial instruments approximate their fair value as of ~~September 30,~~December 31, 2022 and 2021 due to their short-term maturities. Long-term debt and lease liabilities reflect fair value based on prevailing market rates.

~~Table of Contents~~

Cash and Cash Equivalents and Investments – other

Cash and cash equivalents include approximately ~~$5,066,000~~$20,112,000 and $63,000 of short-term time deposits, consisting of several certificates of deposit totaling $20,049,000 and $0, at ~~September 30,~~December 31, 2022 and June 30, 2022, ~~respectively.~~respectively, and $63,000 in a money market fund as of both December 31, 2022 and June 30, 2022. The Company classifies ~~all~~these highly liquid investments with original maturities of three months or less as cash equivalents. ~~During the three months ended September 30, 2022, the Company purchased three certificate~~Certificates of ~~deposits totaling $15,000,000. One certificate of deposit~~Deposit with aan original maturity ~~of three months has been included in cash and cash equivalents while two with original maturities~~ greater than three months ~~have been included in investments - other. Certificate~~are classified as Investments-other.

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


	December 31, 2022		June 30, 2022

Cash	$	11,895	$	41,667
Money Market Fund		63		63
Certificates of Deposit		20,049		—
	$	32,007	$	41,730

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


	December 31, 2022		June 30, 2022

Certificates of Deposit	$	10,068	$	—
	$	10,068	$	—

Certificates of deposit are recorded at the original cost plus accrued interest. AsThe Company’s Certificates of ~~September 30, 2022 and June 30, 2022,~~Deposit consist of the ~~Company included $5,003,000 and $0, respectively,~~following as of ~~certificate of deposits within Cash and Cash equivalents.~~ (in thousands):


December 31, 2022

Balance Sheet Classification	Interest Rate		Maturity Date		Cost		Carrying Value
Cash and Cash Equivalents		4.25% - 4.40%		2/23/2023 - 3/21/2023	$	20,000	$	20,049
Investments - other		2.25% - 2.50%		1/23/2023 - 2/21/2023		10,000		10,068

The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of ~~September 30,~~December 31, 2022 and June 30, 2022. The Company has not historically experienced any credit losses with balances in excess of FDIC limits.

~~Investments – other~~

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

Marketable Securities

The Company’s marketable securities include investments in mutual funds, which invest primarily in various government and corporate obligations, stocks and money market funds. The Company’s marketable securities are reported at fair value with the related unrealized and realized gains and losses included in other expense (income). Realized gains or losses on mutual funds are determined on a specific identification basis. The Company would record an impairment charge if the cost of the available-for-sale securities exceeds the estimated fair value of the securities and the decline in value is determined to be other-than-temporary. During the ~~three~~six months ended ~~September 30,~~December 31, 2022, the Company did not record an impairment charge regarding its investment in marketable securities because

Table of Contents

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

Accounts Receivable

Accounts receivable is stated net of the reserves for ~~doubtful accounts~~credit losses of ~~$216,000~~$215,000 and $243,000 as of ~~both September 30,~~December 31, 2022 and June 30, ~~2022.~~2022, respectively. Our reserves for ~~doubtful accounts~~credit losses are subjective critical estimates that have a direct impact on reported net earnings. These reserves are based upon the evaluation of our accounts receivable aging, specific exposures, sales levels and historical trends.

Inventories

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

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

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

~~Table of Contents~~

Property, Plant, and Equipment

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

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

Long-Lived and Intangible Assets

Long-lived assets are amortized over their useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets in question may not be recoverable. Impairment would be recorded in circumstances

Table of Contents

where undiscounted cash flows expected to be generated by an asset are less than the carrying value of that asset. Intangible assets determined to have indefinite lives were not amortized but were tested for impairment at least annually.

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


	September 30, 2022						June 30, 2022						December 31, 2022						June 30, 2022
	Carrying		Accumulated		Net book		Carrying		Accumulated		Net book		Carrying		Accumulated		Net book		Carrying		Accumulated		Net book
	value		amortization		value		value		amortization		value		value		amortization		value		value		amortization		value
Customer relationships	$	9,800		(9,183)	$	617	$	9,800		(9,143)	$	657	$	9,800		(9,223)	$	577	$	9,800		(9,143)	$	657
Trade name		4,048		(455)		3,593		4,048		(405)		3,643		4,048		(506)		3,542		4,048		(405)		3,643
	$	13,848	$	(9,638)	$	4,210	$	13,848	$	(9,548)	$	4,300	$	13,848	$	(9,729)	$	4,119	$	13,848	$	(9,548)	$	4,300

Amortization expense for intangible assets subject to amortization was approximately $90,000 and $98,000 for the three months ended ~~September 30,~~December 31, 2022 and 2021, respectively. Amortization expense for intangible assets subject to amortization was approximately $181,000 and $196,000 for the six months ended December 31, 2022 and 2021, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2023 - $361,000; 2024 - $336,000; 2025 - $315,000; 2026 - $297,000; and 2027 - $283,000. The weighted average remaining amortization period for intangible assets was ~~16.0~~15.8 years and 16.2 years at ~~September 30,~~December 31, 2022 and June 30, 2022, respectively.

Revenue Recognition

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

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

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

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

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

~~Table of Contents~~

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

Advertising and Promotional Costs

Advertising and promotional costs are included in "Selling, General and Administrative" expenses in the consolidated statements of income and are expensed as incurred. Advertising expense for the three months ended ~~September 30,~~December 31, 2022 and 2021 was ~~$754,000~~$505,000 and ~~$1,086,000,~~

Table of Contents

$512,000, respectively. Advertising expense for the six months ended December 31, 2022 and 2021 was $1,259,000 and $1,598,000, respectively.

Research and Development Costs

Research and development (“R&D”) costs incurred by the Company are charged to expense as incurred and are included in operating expenses in the consolidated statements of income. Company-sponsored R&D expense for the three months ended ~~September 30,~~December 31, 2022 and 2021 was ~~$2,428,000~~$2,222,000 and ~~$1,931,000,~~$1,978,000, respectively. Company-sponsored R&D expense for the six months ended December 31, 2022 and 2021 was $4,650,000 and $3,909,000, respectively.

Income Taxes

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

Net Income per Share

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

The following provides a reconciliation of information used in calculating the per share amounts for the three months ended ~~September 30,~~December 31, 2022 and 2021 (in thousands, except share and per share data):


	Net Income				Weighted Average Shares		Net Income per Share				Net Income				Weighted Average Shares		Net Income per Share
	2022		2021		2022	2021	2022		2021		2022		2021		2022	2021	2022		2021
Basic EPS	$	6,402	$	7,752	36,762	36,700	$	0.17	$	0.21	$	8,446	$	1,037	36,772	36,728	$	0.23	$	0.03
Effect of Dilutive Securities:
Stock Options		—		—	228	144		—		—		—		—	225	170		—		—
Diluted EPS	$	6,402	$	7,752	36,990	36,844	$	0.17	$	0.21	$	8,446	$	1,037	36,997	36,898	$	0.23	$	0.03

Options to purchase ~~62,500~~0 and 080,435 shares of common stock were excluded for the three months ended ~~September 30,~~December 31, 2022 and 2021, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.

1012

Table of Contents

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


					Weighted Average		Net Income per
	Net Income				Shares		Share
	2022		2021		2022	2021	2022		2021
Basic EPS	$	14,848	$	8,789	36,731	36,720	$	0.40	$	0.24
Effect of Dilutive Securities:
Stock Options		—		—	226	157		—		—
Diluted EPS	$	14,848	$	8,789	36,957	36,877	$	0.40	$	0.24

Options to purchase 12,568 and 40,217 shares of common stock were excluded for the six months ended December 31, 2022 and 2021, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.

Stock-Based Compensation

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

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

Stock-based compensation costs of ~~$477,000~~$335,000 and ~~$89,000~~$1,255,000 were recognized for the three months ended ~~September 30,~~December 31, 2022 and 2021, respectively. Stock-based compensation costs of $812,000 and $1,344,000 were recognized for the six months ended December 31, 2022 and 2021, respectively.

Foreign Currency

The Company has determined the functional currency of all foreign subsidiaries is the U.S. Dollar. All foreign operations are considered a direct and integral part or extension of the Company’s operations. The day-to-day operations of all foreign subsidiaries are dependent on the economic environment of the U.S. Dollar. Therefore, no realized and unrealized gains and losses associated with foreign currency translation are recorded for the three or six months ended ~~September 30,~~December 31, 2022 or 2021.

Comprehensive Income

For the three and six months ended ~~September 30,~~December 31, 2022 and 2021, the Company’s operations did not give rise to material items includable in comprehensive income, which were not already included in net income. Accordingly, the Company’s comprehensive income approximates its net income for all periods presented.

Segment Reporting

The Company’s reportable operating segments are determined based on the Company’s management approach. The management approach is based on the way that the chief operating decision maker organizes the segments within an enterprise for making operating decisions and assessing performance. The Company’s results of operations are reviewed by the chief operating decision maker on a consolidated basis and the Company operates in only one segment. The Company has presented required geographical data in Note 13.

Shipping and Handling Sales and Costs

The Company records the amount billed to customers for shipping and handling in net sales ($~~112,000~~128,000 and $106,000 in the three months ended ~~September 30,~~December 31, 2022 and 2021, respectively, and $240,000 and $212,000 in the six months ended December 31, 2022 and 2021, respectively); and classifies the costs associated with these sales in cost of sales ($~~394,000~~454,000 and ~~$333,000~~$361,000 in the three months ended ~~September 30,~~December 31, 2022 and 2021, respectively, and $848,000 and $694,000 in the six months ended December 31, 2022 and 2021, respectively).

Table of Contents

Leases

The Company records lease assets and ~~correspoinding~~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 borring rate based on information available at lease commencement. The Company analyzes whether or not amendments to existing leases classify as a Lease Modification or a full or partial termination of the existing lease. See Note 12 – Commitments and Contingencies; Leases for additional accounting policies and disclosures.

Recently Issued Accounting Standards

Reference Rate Reform (ASC Topic 848)

In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”), which is expected to be phased out for new arrangements at the end of calendar 2021,

~~Table of Contents~~

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

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

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

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

~~Financial Instruments – Credit Losses (Topic 326)~~14

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~“Financial Instruments - Credit Losses (Topic 326),”~~ ~~which requires financial assets measured at amortized cost, such as our trade receivables, to be presented net~~Table of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectations for each pool of similar financial assets. ASU 2016-13 becomes effective for the Company beginning in the quarter ended September 30, 2023. The Company is currently evaluating the impact of adoption on its consolidated financial statements.Contents

NOTE 2 – Revenue Recognition and Contracts with Customers

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

As of ~~September 30,~~December 31, 2022 and June 30, 2022, the Company included refund liabilities of approximately ~~$4,242,000~~$4,096,000 and $5,863,000, respectively, in current liabilities. As of ~~September 30,~~December 31, 2022 and June 30, 2022, the Company included return-related assets of approximately ~~$987,000~~$909,000 and $974,000, respectively, in other current assets.

As a percentage of gross sales, returns, rebates and allowances were 5% and 8%13% for the three months ended ~~September 30,~~December 31, 2022 and 2021, respectively. As a percentage of gross sales, returns, rebates and allowances were 5% and 11% for the six months ended December 31, 2022 and 2021, respectively.

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


	Three months ended September 30,				Three months ended December 31,				Six months ended December 31,
	2022		2021		2022		2021		2022		2021
Major Product Lines:
Intrusion and access alarm products	$	13,532	$	9,796	$	11,342	$	10,767	$	24,874	$	20,563
Door locking devices		12,155		11,031		16,092		11,613		28,247		22,644
Services		13,806		10,224		14,880		11,028		28,686		21,252
Total Revenues	$	39,493	$	31,051	$	42,314	$	33,408	$	81,807	$	64,459

~~Table of Contents~~

NOTE 3 – Business and Credit Concentrations

An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company had one customer with an accounts receivable balance that comprised of ~~15%~~13% and 16% as of ~~September 30,~~December 31, 2022 and June 30, 2022. Sales to this customer did not exceed 10% of net sales during the three or six months ended ~~September 30,~~December 31, 2022 and ~~2021, respectively.~~2021. The Company had another customer with an accounts receivable balance of ~~24%~~14% and 22% as of ~~September 30,~~December 31, 2022 and June 30, 2022. Sales to this customer ~~were 11%~~was 10% for the six months ended December 31, 2021. Sales for the three and ~~14% for~~six months ended December 31, 2022 and the three months ended ~~September~~December 31, 2021 did not exceed 10% of net sales. The Company had another customer with an accounts receivable balance that comprised of 11% as of December 31, 2022. As of June 30, 2022, the accounts receivable balance with this respective customer did not exceed 10%. Sales for the three and six months ended December 31, 2022 and 2021 ~~respectively.~~did not exceed 10% either.

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

Table of Contents

on the marketable securities recognized within the accompanying condensed consolidated statements of income for the three and six months ended ~~September 30,~~December 31, 2022 and 2021, are as follows (in thousands):


	Three months ended September 30,				Three months ended December 31,				Six months ended December 31,
	2022		2021		2022		2021		2022		2021

Net gains recognized during the period on marketable securities	$	—	$	—	$	—	$	21	$	—	$	40
Less: Net gains recognized during the period on marketable securities sold during the period		—		—		—		—		—		—
Unrealized (losses) recognized during the reporting period on marketable securities still held at the reporting date		(153)		3		35		(39)		(118)		(36)
	$	(153)	$	3	$	35	$	(18)	$	(118)	$	4

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

•

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

The following tables summarize the Company’s investments at ~~September 30,~~December 31, 2022 and June 30, 2022, respectively (in thousands):


	September 30, 2022						June 30, 2022						December 31, 2022						June 30, 2022
					Unrealized						Unrealized						Unrealized						Unrealized
	Cost		Fair Value		Gain (Loss)		Cost		Fair Value		Gain (Loss)		Cost		Fair Value		Gain (Loss)		Cost		Fair Value		Gain (Loss)
Mutual Funds - Level 1	$	5,531		4,943	$	(588)	$	5,504	$	5,068	$	(436)	$	5,582		5,028	$	(554)	$	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.

~~Table of Contents~~

NOTE 5 - Inventories

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


	September 30,		June 30,		December 31,		June 30,
	2022		2022		2022		2022
Component parts	$	42,098	$	32,656	$	42,931	$	32,656
Work-in-process		10,403		10,085		10,551		10,085
Finished product		11,336		7,045		10,710		7,045
	$	63,837	$	49,786	$	64,192	$	49,786

Classification of inventories, net of reserves:
Current	$	52,055	$	40,781	$	48,661	$	40,781
Non-current		11,782		9,005		15,531		9,005
	$	63,837	$	49,786	$	64,192	$	49,786

Table of Contents

NOTE 6 – Property, Plant, and Equipment

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


	September 30, 2022		June 30, 2022		Useful Life in Years	December 31, 2022		June 30, 2022		Useful Life in Years

Land	$	904	$	904	N/A	$	904	$	904	N/A
Buildings		8,911		8,911	30 to 40		8,911		8,911	30 to 40
Molds and dies		7,495		7,480	3 to 5		7,502		7,480	3 to 5
Furniture and fixtures		3,082		3,030	5 to 10		3,137		3,030	5 to 10
Machinery and equipment		26,832		26,696	7 to 10		27,029		26,696	3 to 10
Building improvements		2,557		2,464	Shorter of the lease term or life of asset		2,742		2,464	Shorter of the lease term or life of asset
		49,781		49,485			50,225		49,485
Less: accumulated depreciation and amortization		(41,861)		(41,546)			(42,241)		(41,546)
	$	7,920	$	7,939		$	7,984	$	7,939

Depreciation and amortization expense on property, plant, and equipment was approximately ~~$367,000~~$379,000 and ~~$340,000~~$348,000 for the three months ended ~~September 30,~~December 31, 2022 and 2021, respectively. Depreciation and amortization expense on property, plant, and equipment was approximately $747,000 and $690,000 for the six months ended December 31, 2022 and 2021, respectively.

NOTE 7 - Income Taxes

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

For the ~~three~~six months ended ~~September 30,~~December 31, 2022 and ~~September 30,2021,~~December 31,2021, the Company recognized net income tax expense of ~~$744,000~~$1,921,000 and ~~$348,000,~~$639,000, respectively. During the ~~three~~six months ended ~~September 30,~~December 31, 2022, the Company’s reserve for uncertain income tax positions increased by ~~$12,000.~~$24,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes. As of ~~Septemebr 30,~~December 31, 2022, the Company had accrued interest totaling ~~$100,000,~~$112,000, as well as $678,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. For the ~~three~~six months ended ~~September 30,~~December 31, 2022, additional interest expense was accrued for in the amount of ~~$12,000. The Company claims R&D tax credits on eligible R&D expenditures. The R&D tax credits are recognized as a reduction to income tax expense.~~$24,000.

~~Table of Contents~~

The Company does not expect that our unrecognized tax benefits will ~~significantly~~ change within the next twelve ~~months.~~months due to statute of limitation lapses. We file a consolidated U.S. income tax return and tax returns in certain state and local and foreign jurisdictions. As of ~~September 30,~~December 31, 2022, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes for fiscal years 2018 and thereafter.

In ~~January~~December 2022, the Company received a letter from the IRS (“IRS”) notifying it that the IRS ~~would be examining~~has closed it's examination of the Company’s income tax return for fiscal year ended June 30, 2020. ~~Management believes that its provision for income taxes for~~There has been no changes proposed in relation to this ~~period is adequate. However, the outcome cannot be predicted with certainty.~~examination.

Table of Contents

NOTE 8 - Long-Term Debt

As of ~~September 30,~~December 31, 2022 and June 30, 2022, the Company had a revolving line of credit of $11,000,000 (“Revolver Agreement”) which expires in June 2024.

Outstanding balances and interest rates as of ~~September 30,~~December 31, 2022 and June 30, 2022 are as follows (dollars in thousands):


	~~September 30,~~December 31, 2022			June 30, 2022
	Outstanding		Interest Rate	Outstanding		Interest Rate
Revolving line of credit:
Current maturities	$	—	n/a	$	—	n/a
Long-term debt		—	n/a		—	n/a
	$	—		$	—

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

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

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

~~Table of Contents~~

NOTE 9 - Stock Option

The Company follows ASC 718 (“Share-Based Payment”), which requires that all share-based payments to employees, including stock options, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period. For the three months ended ~~September 30,~~December 31, 2022 and 2021, the Company recorded non-cash compensation expense of ~~$477,000~~$335,000 ($0.01 per basic and diluted share) and ~~$89,000~~$1,255,000 ($~~0.00~~0.03 per basic and diluted share), respectively, relating to stock-based compensation. For the six months ended December 31, 2022 and 2021, the Company recorded non-cash compensation expense of

Table of Contents

$812,000 ($0.02 per basic and diluted share) and $1,344,000 ($0.04 per basic and diluted share), respectively, relating to stock-based compensation.

2022 Employee Stock Option Plan

The Company’s Board of Directors approved a new Employee Stock Option Plan (“(the 2022 ~~Plan”)~~Employee Plan) in August 2022. The 2022 Employee Plan ~~is subject to shareholder approval~~was approved by the Company’s shareholders at the Company’s annual shareholder’s meeting in December 2022. The plan ~~would authorize~~authorizes the granting of awards, the exercise of which would allow up to an aggregate of 950,000 shares of the Company’s common stock to be acquired by the holders of such awards. The terms of the 2022 Plan are substantially the same as those of the 2012 Employee Stock Option Plan. The 2022 Plan is intended to replace the 2012 Employee Stock Option Plan, which ~~expires~~expired in 2022. As of December 31, 2022, no options have been granted 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 1,900,000 shares of the Company’s common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options (“ISOs”) or non-incentive stock options, to valued employees. Any plan participant who is granted ISOs and possesses more than 10% of the voting rights of the Company’s outstanding common stock must be granted an option with a price of at least 110% of the fair market value on the date of grant.

Under the 2012 Employee Plan, stock options may be granted to valued employees with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable, in whole or in part, at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At ~~September 30,~~December 31, 2022, ~~555,380~~553,380 stock options were outstanding, ~~183,852~~262,252 stock options were exercisable and ~~1,101,420~~no further stock options were available for grant under this plan.

0 and 37,500 Options were granted during the three and six months ended December 31, 2022. 338,000 Options were granted during the three and six months ended December 31, 2021. No options may be granted under this plan after December 2022. ~~37,500 Options were granted during the three months ended September 30, 2022. There were no options granted during the three months ended September 30, 2021.~~ The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	2022		2021
Risk-free interest rates	3.03	%	1.64	%
Expected lives	7.27 Years		10 Years
Expected volatility	43	%	43	%
Expected dividend yields	0	%	0	%

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

1619

Table of Contents

2022

2021

Risk-free interest rates

3.03
%
n/a

Expected lives

7.27 Years

n/a

Expected volatility

43
%
n/a

Expected dividend yields

0
%
n/a


	2022				2021
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		523,080	$	18.59		214,080	$	9.59
Granted		37,500	$	26.94		338,000	$	23.17
Forfeited/Lapsed		—		—		—		—
Exercised		(7,200)	$	7.07		(28,000)	$	5.54
Outstanding, end of period		553,380	$	18.90		524,080	$	18.56
Exercisable, end of period		262,252	$	16.88		160,576	$	15.06
Weighted average fair value at grant date of options granted	$	13.36			$	12.16
Total intrinsic value of options exercised	$	159,000			$	485,000
Total intrinsic value of options outstanding	$	4,746,000			$	3,367,000
Total intrinsic value of options exercisable	$	2,779,000			$	1,595,000

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

2022

2021

Weighted average

Weighted average


Options

exercise price

Options

exercise price

Outstanding, beginning of year

523,080

$
18.59

214,080

$
9.59

Granted

37,500

$
26.94

—

—

Forfeited/Lapsed

—

—

—

—

Exercised

(5,200)

$
8.64

(5,000)

$
3.16

Outstanding, end of period

555,380

$
19.25

209,080

$
9.74

Exercisable, end of period

183,852

$
15.26

97,976

$
8.48

Weighted average fair value at grant date of options granted

$
13.36

n/a

Total intrinsic value of options exercised

$
107,000

$
94,000

Total intrinsic value of options outstanding

$
5,684,000

$
2,467,000

Total intrinsic value of options exercisable

$
2,586,000

$
1,280,000

~~5,200~~2,000 and ~~5,000~~7,200 stock options were exercised during the three and six months ended ~~September~~December 31, 2022, respectively. The 2,000 options that were exercised during the three months ended December 31, 2022, were settled by exchanging 207 shares of the Company’s common stock which were retired and ~~2021, respectively.~~returned to unissued status upon receipt. $0 and $45,000 ~~and $16,000~~ cash was received from the option exercises during the three and six months ended ~~September 30,~~December 31, 2022, respectively. The actual tax benefit realized for the tax deductions from option exercises during the three and six months ended December 31, 2022 was $0 and $0, respectively. 23,000 and 28,000 stock options were exercised during the three and six months ended December 31, 2021, respectively. $139,000 and $155,000 cash was received from the option exercises during the three and six months ended December 31, 2021, respectively. The actual tax benefit realized for the tax deductions from option exercises during the three and six months ended ~~September 30, 2022 and~~December 31, 2021 was $0 for ~~each period.~~both periods.

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at ~~September 30,~~December 31, 2022:


	Options outstanding				Options exercisable			Options outstanding				Options exercisable
		Weighted average							Weighted average
	Number	remaining	Weighted average		Number	Weighted average		Number	remaining	Weighted average		Number	Weighted average
Range of exercise prices	outstanding	contractual life	exercise price		exercisable	exercise price		outstanding	contractual life	exercise price		exercisable	exercise price
$2.99 ‑ $26.94	555,380	8.30	$	19.25	183,852	$	15.26
$3.14 ‑ $26.94								553,380	8.07	$	18.90	262,252	$	16.88
	555,380	8.30	$	19.25	183,852	$	15.26	553,380	8.07	$	18.90	262,252	$	16.88

As of ~~September 30,~~December 301, 2022, there was ~~$2,651,000~~$2,445,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 0 and 37,500 ~~and 0 options~~Options were granted during the three and six months ended ~~September 30, 2022~~December 31, 2022. 80,400 and ~~2021, respectively. 12,300 and 4,800~~92,700 options vested during the three and six months ended ~~September 30,~~December 31, 2022, respectively. The total grant date fair value of the options vesting during the three and six months ended December 31, 2022 under this plan was $754,000 and $883,000, respectively. 338,000 Options were granted during the three and six months ended December 31, 2021. 85,600 and 90,400 options vested during the three and six months ended December 31, 2021, respectively. The total grant date fair value of the options vesting during the three and six months ended ~~September 30, 2022 and~~December 31, 2021 under this plan was ~~$129,000~~$913,000 and ~~$29,000,~~$942,000, respectively.

2012 Non-Employee Stock Option Plan

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

Under the 2012 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At ~~September 30,~~December 31, 2022, 20,400 stock options were outstanding, ~~11,280 stock options were exercisable and no further stock options were available for grant under this plan.~~

~~Table of Contents~~

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

2022

2021

Risk-free interest rates
n/a

n/a

Expected lives
n/a

n/a

Expected volatility
n/a

n/a

Expected dividend yields
n/a

n/a

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

2022

2021




Weighted average



Weighted average


Options

exercise price

Options

exercise price

Outstanding, beginning of year

20,400

$
14.39

12,000

$
6.55

Granted

—

—

—

—

Forfeited/Lapsed

—

—

—

—

Exercised

—

—

—

—

Outstanding, end of period

20,400

$
14.39

12,000

$
6.55

Exercisable, end of period

11,280

$
8.92

6,240

$
6.04

Weighted average fair value at grant date of options granted

n/a

n/a



Total intrinsic value of options exercised

n/a

$
n/a



Total intrinsic value of options outstanding

$
300,000

$
180,000



Total intrinsic value of options exercisable

$
227,000

$
97,000

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

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

Options outstanding

Options exercisable

Weighted average

Weighted

Weighted

Number

remaining

average exercise

Number

average exercise
Range of exercise prices

outstanding

contractual life

price

exercisable

price
$4.35 - $22.93

20,400

7.40

$
14.39

11,280

$
8.92

20,400

7.40

$
14.39

11,280

$
8.92

As of September 30, 2022, there was $64,000 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 months ended September 30, 2022 and 2021. No options vested during the three months ended September 30, 2022 and 2021.

~~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.

~~Table of Contents~~

~~option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At September 30, 2022, 82,700 stock options were outstanding, 38,740~~13,200 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 six months ended ~~September 30, 2022~~December 31, 2022. 9,600 Options were granted during the three and six months ended December 31, 2021. No options may be granted under this plan after December ~~2028.~~2022. The fair value of each ~~option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:~~

2022

2021

Risk-free interest rates

n/a

n/a

Expected lives

n/a

n/a

Expected volatility

n/a

n/a

Expected dividend yields

n/a

n/a

~~The following table reflects activity under the 2018 Non-Employee Plan for the three months ended September 30:~~

2022

2021




Weighted average



Weighted average


Options

exercise price

Options

exercise price

Outstanding, beginning of year

89,000

$
14.91

70,100

$
11.93

Granted

—

—

—

—

Forfeited/Lapsed

—

—

—

—

Exercised

(6,300)

$
14.41

—

—

Outstanding, end of period

82,700

$
14.95

70,100

$
11.93

Exercisable, end of period

38,740

$
12.75

29,960

$
11.68

Weighted average fair value at grant date of options granted

n/a

n/a

Total intrinsic value of options exercised

$
99,000

n/a

Total intrinsic value of options outstanding

$
1,169,000

$
674,000

Total intrinsic value of options exercisable

$
633,000

$
295,000

6,300 and 0 options were exercised during the three months ended September 30, 2022 and 2021, respectively. The 6,300 options that were exercised during the three months ended September 30, 2022, were settled by exchanging 3,020 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 either the three months ended September 30, 2022 and 2021 and the actual tax benefit realized for the tax deductions from option exercises was $21,000 and $0, respectively.

~~The following table summarizes information about stock options outstanding under the 2018 Non-Employee Plan at September 30 2022:~~

Options outstanding

Options exercisable




Weighted average

Weighted



Weighted

Number

remaining

average exercise

Number

average exercise
Range of exercise prices

outstanding

contractual life

price

exercisable

price
$8.10 - $22.93

82,700

7.53

$
14.95

38,740

$
12.75

82,700

7.53

$
14.95

38,740

$
12.75

As of September 30, 2022, there was $228,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2018 Non-Employee Plan. No options were granted during the three months ended September 30, 2022 and 2021. No options vested during the three months ended September 30, 2022.

~~2020 Non-Employee Stock Option Plan~~

1920

Table of Contents

option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	2022	2021
Risk-free interest rates	n/a	1.68	%
Expected lives	n/a	10 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 six months ended December 31:


	2022				2021
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		20,400	$	14.39		12,000	$	6.55
Granted		—		—		9,600	$	22.93
Forfeited/Lapsed		—		—		—		—
Exercised		—		—		—		—
Outstanding, end of period		20,400	$	14.39		21,600	$	13.83
Exercisable, end of period		13,200	$	10.95		11,760	$	8.28
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	$	267,000			$	241,000
Total intrinsic value of options exercisable	$	218,000			$	197,000

No stock options were exercised during the three and six months ended December 31, 2022 and 2021, respectively. No cash was received from option exercises during the three and six months ended December 31, 2022 and 2021, 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 December 31, 2022:


	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	7.15	$	14.39	13,200	$	10.95
	20,400	7.15	$	14.39	13,200	$	10.95

As of December 31, 2022, there was $58,000 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 six months ended December 31, 2022, respectively. 1,920 options vested during the three and six months ended December 31, 2022, respectively. The total grant date fair value of the options vesting during the three and six months ended December 31, 2022 under this plan was $19,000 for both periods. 9,600 Options were granted during the three and six months ended December 31, 2021. 5,520 options vested during the three and six months ended December 31, 2021 for both periods. The total grant date fair value of the options vesting during the three and six months ended December 31, 2021 under this plan was $34,000 for both periods.

2018 Non-Employee Stock Option Plan

Table of Contents

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 2018 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 December 31, 2022, 79,100 stock options were outstanding, 49,440 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 six months ended December 31, 2022. 23,500 Options were granted during the three and six monthse ended December 31, 2021. 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:


	2022	2021
Risk-free interest rates	n/a	1.68	%
Expected lives	n/a	10 Years
Expected volatility	n/a	43	%
Expected dividend yields	n/a	0	%

The following table reflects activity under the 2018 Non-Employee Plan for the six months ended December 31:


	2022				2021
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		89,000	$	14.91		70,100	$	11.93
Granted		—		—		23,500	$	22.93
Forfeited/Lapsed		—		—		—		—
Exercised		(9,900)	$	16.27		(3,000)	$	11.68
Outstanding, end of period		79,100	$	14.74		90,600	$	14.79
Exercisable, end of period		49,440	$	13.02		41,260	$	12.96
Weighted average fair value at grant date of options granted		n/a			$	12.58
Total intrinsic value of options exercised	$	124,000			$	39,000
Total intrinsic value of options outstanding	$	1,008,000			$	924,000
Total intrinsic value of options exercisable	$	715,000			$	496,000

3,600 and 9,900 options were exercised during the three and six months ended December 31, 2022, respectively. The 3,600 options that were exercised during the three months ended December 31, 2022, were settled by exchanging 2,637 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. The 9,900 options that were exercised during the six months ended December 31, 2022 were settled by exchanging 5,657 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 six months ended December 31, 2022. and the actual tax benefit realized for the tax deductions from option exercises was $5,000 and $26,000, respectively. 3,000 options were exercised during the three and six months ended December 31, 2021, respectively. The 3,000 options that were exercised during the three months ended December 31, 2021, were settled by exchanging 1,412 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. For the three and six months ended December 31, 2021 the actual tax benefit realized for the tax deductions from option exercises was $8,000 each period.

Table of Contents

The following table summarizes information about stock options outstanding under the 2018 Non-Employee Plan at December 31, 2022:


	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	79,100	7.25	$	14.74	49,440	$	13.02
	79,100	7.25	$	14.74	49,440	$	13.02

As of December 31, 2022, there was $197,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2018 Non-Employee Plan. No options were granted during the three and six months ended December 31, 2022, respectively. 14,300 options vested during the three and six months ended December 31, 2022, respectively. The total grant date fair value of the options vesting during the three and six months ended December 31, 2022 under this plan was $114,000 for both periods. 23,500 options were granted during the three and six months ended December 31, 2021. 14,300 options vested during the three and six months ended December 31, 2021. The total grant date fair value of the options vesting during the three and six months ended December 31, 2021 under this plan was $125,000 for both periods

2020 Non-Employee Stock Option Plan

In May 2020, the stockholders approved the 2020 Non-Employee Stock Option Plan (the “2020 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 2020 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At ~~September 30,~~December 31, 2022, 51,900 stock options were outstanding, ~~14,380~~17,760 stock options were exercisable and 48,100 stock options were available for grant under this plan.

0 and 25,000 Options were granted during the three and six months ended ~~September 30,~~December 31, 2022. ~~There~~16,900 Options were ~~no options~~ granted during the three and six months ended ~~September 30,~~December 31, 2021. No options may be granted under this plan after May 2030. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	2022		2021	2022		2021
Risk-free interest rates	3.03	%	n/a	3.03	%	1.68	%
Expected lives	7.27 Years		n/a	7.27 Years		10 Years
Expected volatility	43	%	n/a	43	%	43	%
Expected dividend yields	0	%	n/a	0	%	0	%

The following table reflects activity under the 2020 Non-Employee Plan for the ~~three~~six months ended ~~September 30:~~December 31:


	2022				2021				2022				2021
			Weighted average				Weighted average				Weighted average				Weighted average
	Options		exercise price		Options		exercise price		Options		exercise price		Options		exercise price
Outstanding, beginning of year		26,900	$	18.64		10,000	$	11.40		26,900	$	18.64		10,000	$	11.40
Granted		25,000	$	26.94		—		—		25,000	$	26.94		16,900	$	22.93
Forfeited/Lapsed		—		—		—		—		—		—		—		—
Exercised		—		—		—		—		—		—		—		—
Outstanding, end of period		51,900	$	22.64		10,000	$	11.40		51,900	$	22.64		26,900	$	18.64
Exercisable, end of period		14,380	$	19.51		4,000	$	11.40		17,760	$	20.16		7,380	$	16.68
Weighted average fair value at grant date of options granted	$	13.36			$	n/a			$	13.36			$	12.58
Total intrinsic value of options exercised		n/a				n/a				n/a				n/a
Total intrinsic value of options outstanding	$	334,000			$	101,000			$	251,000			$	171,000
Total intrinsic value of options exercisable	$	138,000			$	41,000			$	130,000			$	61,000

Table of Contents

No stock options were exercised during the three and six months ended ~~September 30,~~December 31, 2022 orand 2021. No cash was received from option exercises during either of the three and six months ended ~~September 30,~~December 31, 2022 or 2021 and the actual tax benefit realized for the tax deductions from option exercises was $0 for both periods.

The following table summarizes information about stock options outstanding under the 2020 Non-Employee Plan at ~~September 30,~~December 31, 2022:


	Options outstanding				Options exercisable			Options outstanding				Options exercisable
		Weighted average							Weighted average
	Number	remaining	Weighted average		Number	Weighted average		Number	remaining	Weighted average		Number	Weighted average
Range of exercise prices	outstanding	contractual life	exercise price		exercisable	exercise price		outstanding	contractual life	exercise price		exercisable	exercise price
$11.40 - $26.94	51,900	9.25	$	22.64	14,380	$	19.51	51,900	8.99	$	22.64	17,760	$	20.16
	51,900	9.25	$	22.64	14,380	$	19.51	51,900	8.99	$	22.64	17,760	$	20.16

As of ~~September 30,~~December 31, 2022, there was ~~$374,000~~$346,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan. ~~25,000~~0 and 025,000 options were granted during the three and six months ended ~~September 30,~~December 31, 2022, respectively. 3,380 and ~~2021, respectively. 7,000 and 2,000~~10,380 options vested during the three and six months ended ~~September 30, 2022~~December 31, 2022. 3,380 and ~~2021, respectively.~~5,380 options vested during the three and six months ended December 31, 2021. The total grant date fair value of the options vesting during the three and six months ended ~~September 30,~~December 31, 2022 under this plan was $34,000 and $113,000. The total grant date fair value of the options vesting during the three and six months ended December 31, 2021 under this plan was ~~$79,000~~$34,000 and ~~$12,000, respectively.~~$46,000.

~~Table of Contents~~

NOTE 10 – Stockholders’ Equity Transactions

On September 16, 2014, the Company’s board of directors authorized the repurchase of up to 2 million of the approximately 38.8 million shares of the Company’s common stock then outstanding. Such 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 loan agreement described in Note 8, the Company’s lender gave its consent to this stock repurchase plan. During the three and six months ended ~~September 30,~~December 31, 2022 and the fiscal year ended June 30, 2022, the Company did not repurchase any shares of its outstanding common stock. Pursuant to the PPP described in Note 8, the Company may not 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 ~~September 30,~~December 31, 2022, certain employees and Directors exercised stock options under the Company's 2012 Employee and 2018 Non-Employee Stock Option Plan totaling ~~11,500~~5,600 shares. ~~6,300~~All 5,600 of these exercises were completed as cashless exercises as allowed for under the Plan, 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 ~~3,020~~2,844 and was based upon the per share price on the effective date of the option exercise.

During the six months ended December 31, 2022, certain employees and Directors exercised stock options under the Company's 2012 Employee and 2018 Non-Employee Stock Option Plan totaling 17,100 shares. 11,900 of these exercises were completed as cashless exercises as allowed for under the Plan, 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 5,864 and was based upon the per share price on the effective date of the option exercise. $45,000 cash was received from the other 5,200 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

Table of Contents

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 11 - 401(k) Plan

The Company maintains a 401(k) plan (“the Plan”) that covers all U.S. non-union employees with and is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. Company contributions to this plan are discretionary and totaled ~~$63,000~~$61,000 and ~~$36,000~~$123,000 for the three and six months ended ~~September 30, 2022~~December 31, 2022. Company contributions to this plan are discretionary and ~~2021, respectively.~~totaled $37,000 and $73,000 for the six months ended December 31, 2021.

NOTE 12 - Commitments and Contingencies

Leases

Our lease obligation consists of a 99-year lease, entered into by one of the Company’s foreign subsidiaries, for approximately four acres of land in the Dominican Republic on which the Company’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

~~Table of Contents~~

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.

For the three months ~~September 30,~~December 31, 2022 and 2021 cash payments against operating lease liabilities totaled $92,000 and $72,000 for each period. For the six months December 31, 2022 and 2021, cash payments against operating lease liabilities totaled $164,000 and $144,000 for each period.

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


Weighted-average remaining lease term	7069 Years
Weighted-average discount rate	6.25	%

The following is a schedule, by years, of maturities of lease liabilities as of ~~September 30,~~December 31, 2022 (in thousands):


Year Ending June 30,	Amount		Amount
2023	$	249	$	164
2024		316		316
2025		299		299
2026		282		282
2027		267		267
Thereafter		4,633		4,633
Total	$	6,046	$	5,961

Operating lease expense totaled approximately ~~$80,000~~$131,000 and $79,000 for ~~each~~ the three months ended ~~September 30,~~December 31, 2022 and 2021, respectively. Operating lease expense totaled approximately $211,000 and $160,000 for the six months ended December 31, 2022 and 2021, 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’s financial position and results of operations.

Table of Contents

Employment Agreements

As of ~~September 30,~~December 31, 2022, the Company was obligated under two employment agreements and one severance agreement. The employment agreements are with the Company’s CEO, CFO and the Senior Vice President of Engineering (“the SVP of Engineering”). The employment agreement with the CEO provides for an annual salary of $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’s 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 Engineering expires in August 2024 and provides for an annual salary of $361,000, 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 Executive Vice President of Operations and Chief Financial Officer and provides for, if terminated by the Company without cause or within three months of a change in corporate control of the Company, severance of nine month’s salary, continued company-sponsored health insurance for six months from the date of termination and certain non-compete and other restrictive provisions.

~~Table of Contents~~

NOTE 13 – 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-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.

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


	Three months ended September 30,				Three months ended December 31,				Six months ended December 31,
	2022		2021		2022		2021		2022		2021
Sales to external customers (1):
Domestic	$	39,259	$	30,782	$	41,886	$	33,023	$	81,145	$	63,806
Foreign		234		269		428		385		662		653
Total Net Sales	$	39,493	$	31,051	$	42,314	$	33,408	$	81,807	$	64,459


	September 30, 2022		June 30, 2022		December 31, 2022		June 30, 2022
Identifiable assets:
United States	$	92,826	$	98,791	$	97,384	$	98,791
Dominican Republic (2)		58,772		49,785		56,979		49,785
Total Identifiable Assets	$	151,598	$	148,576	$	154,363	$	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 ~~(September 30,~~(December 31, 2022 = ~~$49,032;~~$47,383; June 30, 2022 = $38,755), operating lease assets ~~(September 30,~~(December 31, 2022 = ~~$6,046;~~$5,961; June 30, 2022 = $7,350) and fixed assets ~~(September 30,~~(December 31, 2022 = ~~$3,167;~~$3,098; June 30, 2022 = $3,253) located at the Company’s principal manufacturing facility in the Dominican Republic.

NOTE 14 - Subsequent Events

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

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

2326

Table of Contents

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

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

This Quarterly Report on Form 10-Q and the documents we incorporate by reference 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, as amended, or the Exchange Act. All statements, other than statements of historical fact, included or incorporated in this prospectus regarding our strategy, future operations, clinical trials, collaborations, intellectual property, cash resources, financial position, future revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. The 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. There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. See “Risk Factors” in our Annual Report on Form 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

Since 1969, NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high-quality security solutions, building many of the industry’s widely recognized brands, such as NAPCO Security Systems, Alarm Lock, Continental Access, Marks USA, and other popular product lines: including Gemini and F64-Series hardwire/wireless intrusion systems and iSee Video internet video solutions. We are also dedicated to developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks, including our StarLink, iBridge, and more recently the iSecure product lines. Today, millions of businesses, institutions, homes, and people around the globe are protected by products from the NAPCO Group of Companies.

Economic and Other Factors

We are subject to the effects of general economic and market conditions. If 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 becoming too high in relation to our revenues and cash flows.

2427

Table of Contents

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 these products prior to the summer; therefore, sales of these products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company's fiscal first quarter. The monthly recurring service revenue, which is less susceptable to these fluctuations, allows us to generate a more consistent and predictable stream of income and mitigates the risk of fluctuation in market demand for our equipment products.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are fully described in Note 1 to the Company’s consolidated financial statements included in its 2022 Annual Report on Form 10-K. Management believes these critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Results of Operations


	Three months ended September 30,								Three months ended December 31,								Six months ended December 31,
	(dollars in thousands)								(dollars in thousands)								(dollars in thousands)
							% Increase/								% Increase/								% Increase/
	2022			2021			(decrease)		2022			2021			(decrease)		2022			2021			(decrease)
Net sales: equipment revenues	$	25,687		$	20,827		23.3	%	$	27,434		$	22,380		22.6	%	$	53,121		$	43,207		22.9	%
service revenues		13,806			10,224		35.0	%		14,880			11,028		34.9	%		28,686			21,252		35.0	%
Total net sales		39,493			31,051		27.2	%		42,314			33,408		26.7	%		81,807			64,459		26.9	%
Gross Profit: equipment		6,022			4,655		29.4	%		6,247			1,809		245.3	%		12,269			6,464		89.8	%
services		12,145			8,801		38.0	%		13,215			9,634		37.2	%		25,360			18,435		37.6	%
Total gross profit		18,167			13,456		35.0	%		19,462			11,443		70.1	%		37,629			24,899		51.1	%
Gross profit as a % of net sales:		46.0	%		43.3	%	6.2	%		46.0	%		34.3	%	34.1	%		46.0	%		38.6	%	19.1	%
equipment		23.4	%		22.4	%	4.5	%		22.8	%		8.1	%	181.7	%		23.1	%		15.0	%	54.4	%
services		88.0	%		86.1	%	2.2	%		88.8	%		87.4	%	1.7	%		88.4	%		86.7	%	1.9	%

Research and development		2,428			1,931		25.7	%		2,222			1,978		12.3	%		4,650			3,909		19.0	%
Selling, general and administrative		8,490			7,346		15.6	%		7,804			8,195		(4.8)	%		16,294			15,541		4.8	%
Selling, general and administrative as a percentage of net sales		21.5	%		23.7	%	(9.3)	%		18.4	%		24.5	%	(24.9)	%		19.9	%		24.1	%	(17.4)	%
Operating income		7,249			4,179		73.5	%		9,436			1,270		643.0	%		16,685			5,449		206.2	%
Interest and other (expense) income, net		(103)			17		(705.9)	%
Interest and other income (expense), net										187			58		222.4	%		84			75		12.0	%
Gain on extinguishment of debt		—			3,904		(100.0)	%		—			—		—			—			3,904		(100.0)	%
Provision for income taxes		744			348		113.8	%		1,177			291		304.5	%		1,921			639		200.6	%
Net income		6,402			7,752		(17.4)	%		8,446			1,037		714.5	%		14,848			8,789		68.9	%

Net Sales for the three months ended ~~September 30,~~December 31, 2022 increased by ~~$8,442,000,~~$8,906,000, or ~~27.2%~~26.7%, to ~~$39,493,000~~$42,314,000 as compared to ~~$31,051,000~~$33,408,000 for the same period a year ago. The increase in sales for the three months ended ~~September 30,~~December 31, 2022 was due primarily to increased recurring communication service revenues ($~~3,582,000)~~3,852,000), Alarm Lock brand door-locking products ($3,191,000), Marks brand door-locking products ($1,288,000), and Continental brand access control products ($664,000) partialy offset by Napco brand intrusion products, which include the Company’s cellular radio products which declined ($89,000). Net Sales for the six months ended December 31, 2022 increased by $17,348,000, or 26.9%, to $81,807,000 as compared to $64,459,000 for the same period a year ago. The increase in sales for the six months ended December 31, 2022 was due primarily to increased recurring communication service revenues ($7,434,000), Napco brand intrusion products, which include the Company’s cellular radio products ($~~3,332,000)~~3,242,000), Alarm Lock brand door-locking products ($~~1,126,000)~~4,317,000), Marks brand door-locking products ($1,285,000), and Continental brand access control products ($~~402,000)~~1,069,000). The Company’s increase in equipment sales was primarily due to customer demand returning after the decline during the COVID-19 pandemic and the related closures throughout the United States.

2528

Table of Contents

The Company's gross profit increased by ~~$4,711,000~~$8,019,000 to ~~$18,167,000,~~$19,462,000, or 46.0% of net sales, for the three months ended ~~September 30,~~December 31, 2022 as compared to ~~$13,456,000,~~$11,443,000, or ~~43.3%~~34.3% of net sales, for the same period a year ago. Gross profit on equipment sales was ~~$6,022,000,~~$6,247,000, or ~~23.4%~~22.8% of net equipment sales, for the three months ended ~~September 30,~~December 31, 2022 and ~~$4,655,000,~~$1,809,000, or ~~22.4%~~8.1% of net equipment sales, for the same period a year ago. Gross profit on service revenues was ~~$12,145,000,~~$13,215,000, or ~~88.0%~~88.8% of net service revenues, for the three months ended ~~September 30,~~December 31, 2022 and ~~$8,801,000,~~$9,634,000, or ~~86.1%~~87.4% of net service revenues, for the same period a year ago. The increase in gross profit in dollars and as a percentage of net sales on equipment sales and service revenues was was primarily the result of the increase in revenues 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~~increase 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.

The Company's gross profit increased by $12,730,000 to $37,629,000, or 46.0% of net sales, for the six months ended December 31, 2022 as compared to $24,899,000, or 38.6% of net sales, for the same period a year ago. Gross profit on equipment sales was $12,269,000, or 23.1% of net equipment sales, for the six months ended December 31, 2022 and $6,464,000, or 15.0% of net equipment sales, for the same period a year ago. Gross profit on service revenues was $25,360,000, or 88.4% of net service revenues, for the six months ended December 31, 2022 and $18,435,000, or 86.7% of net service revenues, for the same period a year ago. The increase in gross profit in dollars and as a percentage of net sales on equipment sales and service revenues was was primarily the result of the increase in revenues of each as described 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 increase 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.

Research and development expenses for the three months ended ~~September 30,~~December 31, 2022 increased ~~$497,000~~$244,000 to ~~$2,428,000,~~$2,222,000, or ~~6.2%~~5.3% of net sales, as compared to ~~$1,931,000,~~$1,978,000, or ~~6.2%~~5.9% of net sales, for the same period a year ago. Research and development expenses for the six months ended December 31, 2022 increased $741,000 to $4,650,000, or 5.7% of net sales, as compared to $3,909,000, or 6.1% 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 expenses for the three months ended ~~September 30,~~December 31, 2022 ~~increased 15.6%~~decreased by $391,000 or 4.8% to ~~$8,490,000~~$7,804,000 from ~~$7,346,000~~$8,195,000 for the same period a year ago. Selling, general and administrative expenses as a percentage of net sales decreased to ~~21.5%~~18.4% for the three months ended ~~September 30,~~December 31 2022 as compared to ~~23.7%~~24.5% for the same period a year ago. The decrease in dollars resulted primarily from higher stock option expense and legal expenses incurred in the three months ended December 31, 2021. 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. Selling, general and administrative expenses for the six months ended December 31, 2022 increased by 753,000 or 4.8% to $16,294,000 from $15,541,000 for the same period a year ago. Selling, general and administrative expenses as a percentage of net sales decreased to 19.9% for the six months ended December 31 2022 as compared to 24.1% for the same period a year ago. The increase in dollars resulted primarily from increases in ~~sales commissions, stock option~~credit card processing fees, insurance expense and ~~legal~~commission expenses. 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.

Interest and other income (expense) ~~income,~~, net for the three months ended ~~September 30,~~December 31, 2022 ~~decreased~~increased by ~~$120,000~~$129,000 to ~~an expense~~income of ~~$103,000~~$187,000 as compared to income of ~~$17,000~~$58,000 for the same period a year ago. Interest and other income (expense), net for the six months ended December 31, 2022 increased by $9,000 to income of $84,000 as compared to income of $75,000 for the same period a year ago.

Gain on extinguishment of debt resulted from a one-time gain in the three months ended September 30, 2021 which resulted from the forgiveness of the Company’s PPP loans as described in Note 8 to the condensed consolidated financial statements.

Table of Contents

The Company’s provision for income taxes for the three months ended ~~September 30,~~December 31, 2022 increased by ~~$396,000~~$886,000 to ~~$744,000~~$1,177,000 as compared to ~~$348,000~~$291,000 for the same period a year ago. The increase in the provision for income taxes for the three months was primarily due to higher taxable income in the U.S. The Company’s effective rate for income tax was ~~10.4%~~12.2% and ~~4.3%~~21.9% for the three months ended ~~September 30,~~December 31, 2022 and 2021, respectively. The Company’s provision for income taxes for the six months ended December 31, 2022 increased by $1,282,000 to $1,921,000 as compared to $639,000 for the same period a year ago. The increase in the provision for income taxes for the six months was primarily due to higher taxable income in the U.S. The Company’s effective rate for income tax was 11.5% and 6.8% for the six months ended December 31, 2022 and 2021, respectively. The effective rate for the ~~three~~six months ended ~~September 30,~~December 31, 2021 was reduced due to the other income of $3.9 million being non-taxable.

Net income for the three months ended ~~September 30,~~December 31, 2022 ~~decreased~~increased by ~~$1,350,000~~$7,409,000 to ~~$6,402,000~~$8,446,000 or ~~$0.17~~$0.23 per diluted share as compared to ~~$7,752,000~~$1,037,000 or ~~$0.21~~$0.03 per diluted share for the same period a year ago. Net income for the six months ended December 31, 2022 increased by $6,059,000 to $14,848,000 or $0.40 per diluted share as compared to $8,789,000 or $0.24 per diluted share for the same period a year ago. The ~~decrease~~increase in net income for the three and six months ended ~~September 30,~~December 31, 2022 was primarily due to the ~~inclusion of income from the forgiveness of debt in other income in the three months ended September 30, 2021 as well as the other~~ items described above. ~~Due to~~Without the inclusion of $3.9 million of income from the forgiveness of debt net income and diluted earnings per share for the ~~three~~six months ended ~~September 30,~~December 31, 2021 would have been ~~$3.8~~$4.9 million and ~~$0.10, respectively.~~$0.13, respectively

~~Table of Contents~~

Liquidity and Capital Resources

During the ~~three~~six months ended ~~September 30,~~December 31, 2022, the Company utilized a portion of its cash balance at June 30, 2022 ($~~12,365,000~~10,856,000 of $41,730,000) ~~to fund operations ($1,965,000) and~~ to purchase marketable securities and other investments ($~~10,028,000)~~10,078,000) and property, plant and equipment ($~~372,000)~~816,000). During the six months ended December 31, 2022, the Company generated a cash flow from operations of $1,088,000. 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 ~~September 30,~~December 31, 2022 decreased by ~~$7,876,000~~$8,233,000 to ~~$21,342,000~~$20,985,000 as compared to $29,218,000 at June 30, 2022. This decrease is primarily the result of the higher sales volume of equipment during the quarter ended June 30, 2022, which is typically the Company’s highest, as compared to the quarter ended ~~September 30,~~December 31, 2022. In addition, sales of the Company’s radio communication products 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 December 2022.

Inventories, which include both current and non-current portions, increased by ~~$14,051,000~~$14,406,000 to ~~$63,837,000~~$64,192,000 at ~~June 30,~~December 31, 2022 as compared to $49,786,000 at June 30, 2022. The increase was due primarily to ~~higher costs of component parts and freight-in as well as~~ a build-up of inventory of the Company’s radio products in order to mitigate potential supply chain interuptions of these ~~products..~~products. The increase was also due to the ongoing shortages of certain component parts and the Company purchasing large quantities of these hard to source component parts when they become available. As these challenges begin to subside, the Company believes it’s inventory levels will decrease.

Accounts payable and accrued expenses, not including income taxes payable, decreased by ~~$645,000~~$6,917,000 to ~~$23,980,000~~$17,708,000 as of ~~September 30,~~December 31, 2022 as compared to $24,625,000 as of June 30, 2022. This decrease is primarily due to a decrease in the Company’s accrued refund liability, which is explained in Note 2 to the Notes to the Company’s Consolidated Financial Statements, and a decrease in accrued salaries, a decrease in accrued annual bonuses and ~~commissions as partially offset by an increase~~a decrease in accounts payable which relates to the ~~increase~~Company reducing purchases of component parts in ~~invertory discussed above.~~the latter part of the quarter ended December 31, 2022 after building up it’s inventory in fiscal 2022.

As of ~~September~~December 30, 2022 and 2021, long-term debt consisted of a revolving line of credit of $11,000,000 (“Revolver Agreement”), with no amounts outstanding, which expires in June 2024. The revolving credit facility contains various restrictions and covenants including, among others, restrictions on borrowings and compliance with certain financial ratios, as defined in the agreement. The Company’s long-term debt is described more fully in Note 8 to the condensed consolidated financial statements.

As of ~~September 30,~~December 31, 2022, 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 has a refund liability of $4,096,000 as of December 31, 2022 for customer returns and promotional credits as more fully discussed in Note 2 to the Condensed Consolidated Financial Statements.

Table of Contents

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 these credit 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 ~~$868,000.~~$944,000.

ITEM 4: Controls and Procedures

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’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’s control objectives.

~~Table of Contents~~

At the conclusion of the period ended ~~September 30,~~December 31, 2022, 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. As disclosed in our Annual Report on Form 10-K for the year ended June 30, 2022, management 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 result in any identified misstatements to the financial statements and there were no changes to the previously released financial results. Based on this material weaknesses, the Company’s management concluded that at June 30, 2022 the Company’s internal controls over financial reporting were not effective.

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 review and reconciliation controls over the forecasted sales and usage 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.

Management is currently designing and implementing additional controls and procedures to remediate these items and expects to complete these actions during fiscal 2023. These include, but are not limited to, modifying 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 its forecasted sales and usage data used in calculating its reserve for excess and slow-moving inventory.

During the three and six months ended ~~September 30,~~December 31, 2022, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. As of ~~September 30,~~December 31, 2022, the Company’s controls over financial reporting were not ~~effective.~~effective because of the two material weaknesses noted above.

Table of Contents

PART II: OTHER INFORMATION

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, 2022. There has been no material change in the risk factors previously disclosed in the Company’s Form 10-K for the three and six months ended ~~September 30,~~December 31, 2022.

2832

Table of Contents

Item 6. Exhibits


31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Richard L. Soloway, Chairman of the Board and President
31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Kevin S. Buchel, Executive Vice President and Chief Financial Officer
32.1	Section 1350 Certifications
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	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

2933

Table of Contents

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.

~~November 7, 2022~~February 6, 2023

NAPCO SECURITY TECHNOLOGIES, INC.

(Registrant)


By:	/s/ RICHARD L. SOLOWAY

	Richard L. Soloway
	Chairman of the Board of Directors, President and Secretary
	(Chief Executive Officer)


By:	/s/ KEVIN S. BUCHEL

	Kevin S. Buchel
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

3034