Napco Security (NSSC) 10-Q 2021 Q2 Quarterly report

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: DECEMBER 31, 2020

OR

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

Commission File number:                0-10004                     

NAPCO SECURITY TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

Delaware	11-2277818
(State or other jurisdiction of	(IRS Employer Identification
incorporation of organization)	Number)
333 Bayview Avenue
Amityville, New York	11701
(Address of principal executive offices)	(Zip Code)

(631) 842-9400

(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year if

changed from last report)

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

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

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

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

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

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

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: February 8, 2021

COMMON STOCK, $.01 PAR VALUE PER SHARE     18,347,351

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

			Page
PART I:  FINANCIAL INFORMATION
	ITEM 1.	Financial Statements	3
		NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX –DECEMBER 31, 2020
		Condensed Consolidated Balance Sheets December 31, 2020 (unaudited) and June 30, 2020	3
		Condensed Consolidated Statements of Income for the Three Months ended December 31, 2020 and 2019 (unaudited)	4
		Condensed Consolidated Statements of Income for the Six Months ended December 31, 2020 and 2019 (unaudited)	5
		Condensed Consolidated Statements of Stockholders Equity for the Six Months ended December 31, 2020 and 2019 (unaudited)	6
		Condensed Consolidated Statements of Cash Flows for the Six Months ended December 31, 2020 and 2019 (unaudited)	7
		Notes to Condensed Consolidated Financial Statements (unaudited)	8
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	28
	ITEM 4.	Controls and Procedures	28
PART II:  OTHER INFORMATION
	ITEM 1A.	Risk Factors	29
	ITEM 6.	Exhibits	30
SIGNATURE PAGE			31

2

PART I:           FINANCIAL INFORMATION

Item 1.  Financial Statements

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2020
	(unaudited)		June 30, 2020
	(in thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents	$	26,796	$	18,248
Accounts receivable, net of allowance for doubtful accounts of $196 and $326 at December 31, 2020 and June 30, 2020, respectively, and other reserves		21,223		22,932
Inventories, net		29,383		35,231
Prepaid expenses and other current assets		1,860		2,049
Total Current Assets		79,262		78,460
Inventories - non-current, net		8,653		6,524
Property, plant and equipment, net		7,842		8,088
Intangible assets, net		4,903		5,116
Operating lease asset		7,384		7,395
Other assets		249		255
TOTAL ASSETS	$	108,293	$	105,838
CURRENT LIABILITIES
Accounts payable	$	4,402	$	6,547
Accrued expenses		5,273		5,744
Accrued salaries and wages		2,114		2,181
Current portion of long-term debt		1,084		1,794
Accrued income taxes		606		1,148
Total Current Liabilities		13,479		17,414
Long term debt, net of current portion		2,820		2,110
Deferred income taxes		30		112
Accrued income taxes		1,257		1,188
Long term operating lease liabilities		7,102		7,113
Total Liabilities		24,688		27,937
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common Stock, par value $0.01 per share; 40,000,000 shares authorized; 21,241,066 shares issued; and 18,347,351 shares outstanding		212		212
Additional paid-in capital		17,954		17,766
Retained earnings		84,960		79,444
Less: Treasury Stock, at cost (2,893,715 shares)		(19,521)		(19,521)
TOTAL STOCKHOLDERS’ EQUITY		83,605		77,901
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	108,293	$	105,838

See accompanying notes to condensed consolidated financial statements.

3

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months ended December 31,
	2020		2019
Net sales:	(in thousands, except for share and per share data)
Equipment revenues	$	19,016	$	20,045
Service revenues		8,189		5,784
		27,205		25,829
Cost of sales:
Equipment related expenses		14,599		12,602
Service related expenses		1,203		1,100
		15,802		13,702
Gross Profit		11,403		12,127
Research and development		1,884		1,823
Selling, general, and administrative expenses		5,850		6,310
		7,734		8,133
Operating Income		3,669		3,994
Other expense (income):
Interest expense (income), net		3		(9)
Income before Provision for Income Taxes		3,666		4,003
Provision for Income Taxes		469		431
Net Income	$	3,197	$	3,572
Income per share:
Basic	$	0.17	$	0.19
Diluted	$	0.17	$	0.19
Weighted average number of shares outstanding:
Basic		18,347,000		18,478,000
Diluted		18,402,000		18,538,000

See accompanying notes to condensed consolidated financial statements.

4

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Six Months ended December 31,
	2020		2019
Net sales:	(in thousands, except for share and per share data)
Equipment revenues	$	34,914	$	40,966
Service revenues		15,464		11,148
		50,378		52,114
Cost of sales:
Equipment related expenses		25,906		26,240
Service related expenses		2,377		2,229
		28,283		28,469
Gross Profit		22,095		23,645
Research and development		3,773		3,572
Selling, general, and administrative expenses		11,999		12,470
		15,772		16,042
Operating Income		6,323		7,603
Other expense (income):
Interest expense (income), net		9		(2)
Income before Provision for Income Taxes		6,314		7,605
Provision for Income Taxes		798		800
Net Income	$	5,516	$	6,805
Income per share:
Basic	$	0.30	$	0.37
Diluted	$	0.30	$	0.37
Weighted average number of shares outstanding:
Basic		18,347,000		18,478,000
Diluted		18,397,000		18,537,000

See accompanying notes to condensed consolidated financial statements.

5

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)

	Six months ended December 31, 2020 (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, 2020	21,241,066	$	212	$	17,766	(2,893,715)	$	(19,521)	$	79,444	$	77,901
Net income	0		0		0	0		0		2,319		2,319
Stock-based compensation expense	0		0		104	0		0		0		104
Balances at September 30, 2020	21,241,066	$	212	$	17,870	(2,893,715)	$	(19,521)	$	81,763	$	80,324
Net income	0		0		0	0		0		3,197		3,197
Stock-based compensation expense	0		0		84	0		0		0		84
Balances at December 31, 2020	21,241,066	$	212	$	17,954	(2,893,715)	$	(19,521)	$	84,960	$	83,605

	Six months ended December 31, 2019 (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, 2019	21,227,094	$	212	$	17,103	(2,749,310)	$	(17,067)	$	70,924	$	71,172
Net income	0		0		0	0		0		3,233		3,233
Stock-based compensation expense	0		0		17	0		0		0		17
Balances at September 30, 2019	21,227,094	$	212	$	17,120	(2,749,310)	$	(17,067)	$	74,157	$	74,422
Net income	—		—		—	—		—		3,572		3,572
Stock-based compensation expense	—		—		308	—		—		—		308
Balances at December 31, 2019	21,227,094	$	212	$	17,428	(2,749,310)	$	(17,067)	$	77,729	$	78,302

See accompanying notes to condensed consolidated financial statements.

6

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Six Months ended December 31,
	2020		2019
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,516	$	6,805
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		855		744
(Recovery of) provision for doubtful accounts		(130)		39
Deferred income taxes		(82)		491
Stock based compensation expense		188		325
Changes in operating assets and liabilities:
Accounts receivable		1,839		2,833
Inventories		3,719		(7,068)
Prepaid expenses and other current assets		189		218
Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes		(3,157)		426
Net Cash Provided by Operating Activities		8,937		4,813
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment		(389)		(1,063)
Net Cash Used in Investing Activities		(389)		(1,063)
Net Change in Cash and Cash Equivalents		8,548		3,750
CASH AND CASH EQUIVALENTS - Beginning		18,248		8,028
CASH AND CASH EQUIVALENTS - Ending	$	26,796	$	11,778
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	10	$	18
Income taxes paid	$	1,351	$	734

See accompanying notes to condensed consolidated financial statements.

7

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

DECEMBER 31, 2020

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

Nature of Business:

Napco Security Technologies, Inc. (“NAPCO”, “the Company”, “we”) is one of the leading manufacturers and designers of high-tech electronic security devices, wireless 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. While recurring service revenues have continued to increase during the COVID-19 pandemic, equipment sales were negatively impacted by the economic slowdown associated with this pandemic.

The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of the Company’s products want to install its products prior to the summer; therefore sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company's fiscal first quarter. In addition, demand for our products is affected by the housing and construction markets. Deterioration of the current economic conditions may also affect this trend.

Our fourth quarter of fiscal 2020 and the first and second quarters of fiscal 2021 reflected the challenging business environment resulting from the COVID-19 pandemic. The COVID-19 pandemic has caused difficulties for security equipment professionals getting access to both commercial and residential installation sites. We sell our products primarily through distribution to dealers and we are now seeing strong sell-through statistics from several of our largest distributors.  

Significant Accounting Policies:

Principles of Consolidation

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

Accounting Estimates

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

Fair Value of Financial Instruments

The methods and assumptions used to estimate the fair value of the following classes of financial instruments were: Current Assets and Current Liabilities - The carrying amount of cash and cash equivalents, certificates of deposits, current receivables and payables and certain other short-term financial instruments approximate their fair value as of December 31, 2020 and June 30, 2020 due to their short-term maturities. Long-term debt and lease liabilities approximate fair value based on prevailing market rates.

8

Cash and Cash Equivalents

Cash and cash equivalents include approximately $460,000 of short-term time deposits at December 31, 2020 and June 30, 2020. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of December 31, 2020 and June 30, 2020. The Company has not historically experienced any credit losses with balances in excess of FDIC limits.

Accounts Receivable

Accounts receivable is stated net of the reserves for doubtful accounts of $196,000 as of December 31, 2020 and $326,000 as of June 30, 2020. Our reserves for doubtful accounts are subjective critical estimates that have a direct impact on reported net earnings. These reserves are based upon the evaluation of our accounts receivable aging, specific exposures, sales levels and historical trends.

Inventories

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

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

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

Property, Plant, and Equipment

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

Depreciation is recorded over the estimated service lives of the related assets using 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.

Intangible Assets

Intangible assets with definite lives are amortized over their useful lives and are reviewed for impairment whenever there is an indication that the carrying amount may not be recovered.

9

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

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

	December 31, 2020						June 30, 2020
	Carrying		Accumulated		Net book		Carrying		Accumulated		Net book
	value		amortization		value		value		amortization		value
Customer relationships	$	9,800	$	(8,844)	$	956	$	9,800	$	(8,732)	$	1,068
Trade name		4,048		(101)		3,947		4,048		—		4,048
	$	13,848	$	(8,945)	$	4,903	$	13,848	$	(8,732)	$	5,116

Amortization expense for intangible assets subject to amortization was approximately $107,000 and $66,000 for the three months ended December 31, 2020 and 2019, respectively. Amortization expense for intangible assets subject to amortization was approximately $213,000 and $132,000 for the six months ended December 31, 2020 and 2019, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows:2021 - $425,000; 2022 - $390,000; 2023 - $362,000; 2024 - $336,000; and 2025 - $315,000. The weighted average remaining amortization period for intangible assets was 17.2 years and 17.5 years at December 31, 2020 and June 30, 2020, respectively.

Long-Lived Assets

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

Revenue Recognition

The Company recognizes revenue when its customers obtain control of its products or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods and services. See Note 2 – Revenue Recognition for additional accounting policies and transition disclosures.

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 December 31, 2020 and 2019 was $347,000 and $627,000, respectively. Advertising expense for the six months ended December 31, 2020 and 2019 was $690,000 and $1,141,000, 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. Research and development expense for the three months ended December 31, 2020 and 2019 was $1,884,000 and $1,823,000, respectively. Research and development expense for the six months ended December 31, 2020 and 2019 was $3,773,000 and $3,572,000, respectively.

10

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.

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 December 31 (in thousands, except per share data):

	Net Income				Weighted Average Shares		Net Income per Share
	2020		2019		2020	2019	2020		2019
Basic EPS	$	3,197	$	3,572	18,347	18,478	$	0.17	$	0.19
Effect of Dilutive Securities:
Stock Options		—		—	55	60		—		—
Diluted EPS	$	3,197	$	3,572	18,402	18,538	$	0.17	$	0.19

Options to purchase 32,000 and 36,000 shares of common stock were excluded for the three months ended December 31, 2020 and 2019, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.

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

					Weighted Average		Net Income per
	Net Income				Shares		Share
	2020		2019		2020	2019	2020		2019
Basic EPS	$	5,516	$	6,805	18,347	18,478	$	0.30	$	0.37
Effect of Dilutive Securities:
Stock Options		—		—	50	59		—		—
Diluted EPS	$	5,516	$	6,805	18,397	18,537	$	0.30	$	0.37

Options to purchase 36,000 and 18,000 shares of common stock were excluded for the six months ended December 31, 2020 and 2019, 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 8.

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.

11

Stock-based compensation costs of $84,000 and $308,000 were recognized for the three months ended December 31, 2020 and 2019, respectively. Stock-based compensation costs of $188,000 and $325,000 were recognized for the six months ended December 31, 2020 and 2019, 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, 0 realized and unrealized gains and losses associated with foreign currency translation are recorded for the three or six months ended December 31, 2020 or 2019.

Comprehensive Income

For the three and six  months ended December 31, 2020 and 2019, 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 1 segment. The Company has presented required geographical data in Note 12.

Shipping and Handling Sales and Costs

The Company records the amount billed to customers for shipping and handling in net sales ($93,000 and $108,000 in the three months ended December 31, 2020 and 2019, respectively and $199,000 and $220,000 in the six months ended December 31, 2020 and 2019, respectively); and classifies the costs associated with these revenues in cost of sales ($230,000 and $271,000 in the three months ended December 31, 2020 and 2019, respectively, and $451,000 and $531,000 in the six months ended December 31, 2020 and 2019, respectively).

Leases

Effective July 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective transition option of applying the new standard at the adoption date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. Adoption of the new standard resulted in the recording of an operating ROU asset and lease liabilities of approximately $7.7 million. Given the length of the lease term, the right-of-use asset and corresponding liability assume a weighted discount rate as disclosed below. A change in the rate utilized could have a material effect on the amounts reported. Financial positions for reporting periods beginning on or after July 1, 2019 are presented under new guidance. See Note 11 – Commitments and Contingencies; Leases for additional accounting policies and transition disclosures.

NOTE 2 – Revenue Recognition and Contracts with Customers

Net Sales

The Company is engaged in two major lines of business: (1) 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 and (2) the Company provides wireless communication service for intrusion and fire alarm systems on a monthly basis. These products and services 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.

12

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.

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. As of December 31, 2020 and June 30, 2020, the Company included refund liabilities of approximately $3,798,000 and $3,331,000, respectively, in current liabilities. As of December 31, 2020 and June 30, 2020, the Company included return-related assets of approximately $792,000 and $701,000, respectively, in other current assets.

The Company analyzes sales returns and is able to make reasonable and reliable estimates of product returns based on the Company’s past history. Estimates for sales returns are based on several factors including actual returns and based on expected return data communicated to it by its customers. Accordingly, the Company believes that its historical returns analysis is an accurate basis for its allowance for sales returns. Actual results could differ from those estimates. As a percentage of gross sales, sales returns, rebates and allowances were 13% and 11% for the three months ended December 31, 2020 and 2019, respectively. As a percentage of gross sales, sales returns, rebates and allowances were 11% and 9% for the six months ended December 31, 2020 and 2019, 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 December 31,				Six months ended December 31,
	2020		2019		2020		2019
Major Product Lines:
Intrusion and access alarm products	$	8,235	$	7,772	$	15,560	$	15,786
Door locking devices		10,781		12,273		19,354		25,180
Services		8,189		5,784		15,464		11,148
Total Revenues	$	27,205	$	25,829	$	50,378	$	52,114

13

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 18% and 24% of the Company’s accounts receivable at December 31, 2020 and June 30, 2020, respectively. Sales to this customer comprised 14% and 10% of net sales in the three and six months ended December 31, 2020, respectively. Sales to this customer comprised 10% of net sales in the six months ended December 31, 2019, respectively. The Company had another customer with an accounts receivable balance that comprised 12% of the Company’s accounts receivable at December 31, 2020. The customer's accounts receivable balance did not exceed 10% of accounts receivable at June 30, 2020. Sales to this customer did not exceed 10% of net sales in either of the six or three months ended December 31, 2020 and 2019. The Company had another customer with an accounts receivable balance that comprised 11% of the Company's accounts receivable at December 31, 2020.The customer’s accounts receivable balance did not exceed 10% of accounts receivable at June 30, 2020. Sales to this customer did not exceed 10% of net sales in either of the six or three months ended December 31, 2020 and 2019.

NOTE 4 - Inventories

Inventories, net of reserves are valued at lower of cost (first-in, first-out method) or net realizable value. The Company regularly reviews parts and finished goods inventories on hand and, when necessary, records a provision for excess or obsolete inventories. The Company also regularly reviews the period over which its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from the balance sheet date are classified as non-current.

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

	December 31,		June 30,
	2020		2020
Component parts	$	20,839	$	22,877
Work-in-process		6,628		7,276
Finished product		10,569		11,602
	$	38,036	$	41,755
Classification of inventories, net of reserves:
Current	$	29,383	$	35,231
Non-current		8,653		6,524
	$	38,036	$	41,755

NOTE 5 – Property, Plant, and Equipment

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

	December 31, 2020		June 30, 2020		Useful Life in Years
Land	$	904	$	904	—
Buildings		8,911		8,911	30 to 40
Molds and dies		7,352		7,337	3 to 5
Furniture and fixtures		2,792		2,792	5 to 10
Machinery and equipment		25,253		24,878	7 to 10
Building improvements		2,173		2,173	Shorter of the lease term or life of asset
		47,385		46,995
Less: accumulated depreciation and amortization		(39,543)		(38,907)
	$	7,842	$	8,088

14

Depreciation and amortization expense on property, plant, and equipment was approximately $319,000 and $311,000 for the three months ended December 31, 2020 and 2019, respectively. Depreciation and amortization expense on property, plant, and equipment was approximately $637,000 and $606,000 for the six months ended December 31, 2020 and 2019, respectively.

NOTE 6 - 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 six months ended December 31, 2020, the Company recognized net income tax expense of $798,000. During the six months ended December 31, 2020, the Company increased its reserve for uncertain income tax positions by $69,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes. As of December 31, 2020, the Company had accrued interest totaling $100,000 as well as $918,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company claims R&D tax credits on eligible R&D expenditures. The R&D tax credits are recognized as a reduction to income tax expense.

The Company does not expect that our unrecognized tax benefits will significantly change within the next twelve months. We file a consolidated U.S. income tax return and tax returns in certain state and local and foreign jurisdictions. As of December 31, 2020, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes for fiscal years 2017 and thereafter.

The Company was audited by the IRS for fiscal year 2016.  In July 2019, the Company received a Form 4549-A, Income Tax Examination Changes from the IRS proposing an adjustment to income for the fiscal 2016 tax year regarding deemed dividends based on its interpretation under Internal Revenue Code (“IRC”) Section 956 arising from the intercompany balances on the books of the Company. In August 2019, the Company filed a formal protest with the IRS requesting an opportunity to appeal the examination findings to the Appeals Office.  During fiscal year 2020, the Company settled the issue at Appeals and recorded a provision for the federal and state impact of $762,000 and $70,000 respectively. During the six months ended December 31, 2020, the Company recorded an additional provision of $15,000 for interest. As of December 31, 2020 all federal and state liabilities related to the fiscal year 2016 audit have been paid.  

The Company is currently under audit for the fiscal year 2017.  The IRS has raised the IRC Section 956 issue that was settled during the fiscal year 2016 audit.  The Company strongly believes that the position of the IRS with regard to this matter is inconsistent with the provisions of IRC Section 956 and that the Company is willing to litigate, if necessary to argue its position.  During fiscal year 2020, the Company’s provision for income taxes included a provision for the incremental tax liability of $657,000 and interest of $66,000 was recorded for the 2017 and 2018 fiscal years.  For the six months ended December 31, 2020, additional interest expense was accrued for in the amount of $12,000.

The Company has identified its U.S. Federal income tax return and its State return in New York as its major tax jurisdictions.

NOTE 7 - Long-Term Debt

As of December 31, 2020, long-term debt consisted of a revolving line of credit of $11,000,000 (“Revolver Agreement”) which expires in June 2024 and term loans from the U.S. Small Business Administration totaling $3,904,000 through its Payroll Protection Program.

15

Outstanding balances and interest rates as of December 31, 2020 and June 30, 2020 are as follows (dollars in thousands):

	December 31, 2020				June 30, 2020
	Outstanding		Interest Rate		Outstanding		Interest Rate
Revolving line of credit	$	—	n/a		$	—	n/a
Term loans		3,904	1	%		3,904	1	%
		3,904				3,904
Less: current maturities		(1,084)				(1,794)
Long-term debt	$	2,820			$	2,110

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 (“Notes”) dated between April 17, 2020 and May 7, 2020 (the “PPP Loan Agreement”), entered into between the Company and HSBC Bank USA N.A., as lender (the “Lender). The Lender made the loans pursuant to the Paycheck Protection Program (the “PPP”), created by Section 1102 of the CARES Act and governed by the CARES Act, Section 7(a)(36) of the Small Business Act, any rules or guidance that has been issued by the 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”).

Pursuant to the CARES Act, the loan may be forgiven by the SBA. The Company anticipates applying for forgiveness of these loans during fiscal 2021. The amount of loan forgiveness is determined by and is subject to the sole approval of the SBA. The amount of loan forgiveness is determined by calculating allowable expenses during a period of 24 weeks from the date of the receipt of the loan proceeds (the “Effective Period”) and may be reduced if loan proceeds are not used for qualified expenses. To receive loan forgiveness, the Company must apply for loan forgiveness and provide documentation as requested by the SBA. There will be no loan forgiveness without the Company’s submission of the proper application and documentation to Lender to include all SBA requirements. Not more than 25% of the amount forgiven can be attributable to non-payroll costs. While the Company believes it is eligible for forgiveness, no assurance can be provided that the Company will obtain forgiveness of the PPP Loan in whole or in part or, if forgiven, will not be disallowed by the SBA if audited.

The maturity dates of the PPP Loan are between April 17, 2022 and May 7, 2022, which is two years from the PPP Loan Agreement date. The interest accrues from the date of disbursement of the PPP Loan (the “Effective Date”). The PPP Loan bears interest at a fixed rate equal to one percent (1%) per annum and interest will accrue from the Effective Date. PPP Loan payments are deferred for ten months after the end of the effective period. Subject to  adjustment for any PPP Loan forgiveness granted by the CARES Act, the Company will subsequently pay 18 fully amortized monthly consecutive principal and interest payments for all principal and all accrued interest not yet paid, with the first PPP Loan payment due on the date that is ten months after the end of the effective period. The proceeds of the PPP Loan shall be used for the following purposes only: (i) payroll costs as defined by the CARES Act, (ii) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (iii) mortgage interest payments, (iv) rent payments, (v) utility payments, (vi) interest payments on any other debt obligations incurred before February 15, 2020, and/or (vii) refinancing a SBA Economic Injury Disaster Loan made between January 31, 2020 and April 3, 2020.

16

The PPP Loan and the related documentation contain customary events of default, including: (i) any representation or warranty made, or financial or other information provided, by the Company under the PPP Loan Agreement being false or misleading in any material respect; (ii) the failure by the Company to make required payments; (iii) the failure by the Company to perform or comply with certain agreements; and (iv) the dissolution or termination of the Company's existence as a going business, the insolvency of the Company, the appointment of a receiver for any part of the Company's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Company. Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then the Company will pay that amount. Lender may hire or pay someone else to help collect this Note if the Company does not pay. The Company will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. The Company also will pay any court costs, in addition to all other sums provided by law.

Should the Company default on the PPP Loan, SBA may be required to pay Lender under the SBA guarantee. SBA may then seek recovery of these funds from the Company and the Company may not claim or assert against SBA any immunities or defenses available under local law to defeat, modify or otherwise limit the Company's obligation to repay to SBA any funds advanced by Lender to the Company. If the Company defaults on the SBA-guaranteed loan and SBA suffers a loss, the names of the small business will be referred for listing in the Credit Alert Verification Reporting System (CAIVRS) database, which may affect their eligibility for further assistance.

The Company is accounting for the PPP Loan as debt in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 470, Debt and accrues interest in accordance with the interest method under FASB ASC 835-30.

The Company will not impute additional interest at a market rate (even though the stated interest rate may be below market) as transactions where interest rates are prescribed by governmental agencies are excluded from the scope of the FASB ASC 835-30 guidance on imputing interest.

For purposes of de-recognition or forgiveness of the liability, FASB ASC 470-50-15-4 refers to guidance in FASB ASC 405-20. Based on the guidance in FASB ASC 405-20-40-1, the proceeds from the loan would remain recorded as a liability until either (1) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or (2) the debtor pays off the loan to the creditor. Once the loan is, in part or wholly, forgiven and legal release is received, the Company will reduce the liability by the amount forgiven and record a gain on extinguishment.

NOTE 8 - Stock Options

The Company follows ASC Topic 718, "Compensation-Stock Compensation", 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. The Company recorded non-cash compensation expense relating to stock-based compensation of $84,000 and $308,000 for the three months ended December 31, 2020 and 2019, respectively ($0.00 and $0.02 per basic and diluted share for each period, respectively) and $188,000 and $325,000 for the six months ended December 31, 2020 and 2019, respectively ($0.01 and $0.02 per basic and diluted share for each period, respectively).

2012 Employee Stock Option Plan

In December 2012, the stockholders approved the 2012 Employee Stock Option Plan (" 2012 Employee Plan"). The 2012 Employee Plan 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. Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options ("ISOs"), 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.

17

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 December 31, 2020, 117,840 stock options were outstanding, 47,800 stock options were exercisable and 731,960 stock options were available for grant under this plan.

NaN options were granted during the three or six months ended December 31, 2020. The fair value of each option granted during the six months ended December 31, 2019 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2019
Risk-free interest rates	1.80% - 2.10	%
Expected lives	10 years
Expected volatility	45%-46	%
Expected dividend yields	0	%

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

	2020				2019
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		117,840	$	18.84		72,500	$	11.01
Granted		—		—		28,000		30.13
Exercised		—		—		—		—
Outstanding, end of period		117,840	$	18.84		100,500	$	16.34
Exercisable, end of period		47,800	$	14.66		48,400	$	11.10
Weighted average fair value at grant date of options granted		n/a			$	16.57
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	963,000			$	1,359,000
Total intrinsic value of options exercisable	$	590,000			$	895,000

NaN stock options were exercised during the six or three months ended December 31, 2020 or 2019. NaN cash was received from option exercises during either of the six or three months ended December 31, 2020 or 2019 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 Employee Plan at December 31, 2020:

	Options outstanding				Options exercisable
		Weighted average
	Number	remaining	Weighted average		Number	Weighted average
Range of exercise prices	outstanding	contractual life	exercise price		exercisable	exercise price
$4.37‑$33.59	117,840	7.9	$	18.84	47,800	$	14.66
	117,840	7.9	$	18.84	47,800	$	14.66

18

As of December 31, 2020, there was $748,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 0 and 28,000 options were granted during the six months ended December 31, 2020 and 2019, respectively. 10,400 and 13,000 options vested during the three months ended December 31, 2020 and 2019, respectively. 12,800 and 14,600 options vested during the six months ended December 31, 2020 and 2019, respectively. The total fair value of the options vesting during the three months ended December 31, 2020 and 2019 under this plan was $106,000 and $133,000, respectively. The total fair value of the options vesting during the six months ended December 31, 2019 and 2018 under this plan was $135,000 and $150,000, 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 50,000 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 December 31 2020, 12,000 stock options were outstanding, 8,520 stock options were exercisable and 0 further stock options were available for grant under this plan.

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

	2020				2019
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		12,000	$	10.29		10,200	$	7.99
Exercised		—		0		—		—
Outstanding, end of period		12,000	$	10.29		10,200	$	7.99
Exercisable, end of period		8,520	$	9.08		5,400	$	7.35
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	$	191,000			$	218,000
Total intrinsic value of options exercisable	$	146,000			$	119,000

NaN stock options were exercised during the six or three months ended December 31, 2020 or 2019. NaN cash was received from option exercises during either of the six or three months ended December 31, 2020 or 2019 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, 2020:

	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
$4.37 - $23.35	12,000	6.7	$	10.29	8,520	$	9.08
	12,000	6.7	$	10.29	8,520	$	9.08

19

As of December 31, 2020, there was $24,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. NaN options were granted during the six or three months ended. 2,760 and 2,400 options vested during the six and three months ended December 31, 2020 and 2019, respectively. The total fair value of the options vesting during the six and three months ended December 31, 2020 and 2019 under this plan was $18,000 and $13,000, respectively.

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 50,000 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 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, 2020, 48,400 stock options were outstanding, 18,640 stock options were exercisable and 0 stock options were available for grant under this plan.

NaN options were granted during the three or six months ended December 31, 2020.  The fair value of each option granted during the six months ended December 31, 2019 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2019
Risk-free interest rates	1.80	%
Expected lives	10 years
Expected volatility	45	%
Expected dividend yields	0	%

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

	2020				2019
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		48,400	$	23.48		15,200	$	16.20
Granted		—		—		16,000		30.54
Outstanding, end of period		48,400	$	23.48		31,200	$	23.55
Exercisable, end of period		18,640	$	22.44		8,800	$	21.41
Weighted average fair value at grant date of options granted		n/a			$	17.40
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	202,000			$	200,000
Total intrinsic value of options exercisable	$	98,000			$	74,000

NaN stock options were exercised during the six or three months ended December 31, 2020 or 2019. NaN cash was received from option exercises during either of the six or three months ended December 31, 2020 or 2019 and the actual tax benefit realized for the tax deductions from option exercises was $0 for both periods.

20

The following table summarizes information about stock options outstanding under the 2018 Non-Employee Plan at December 31, 2020:

	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
$16.20-$30.54	48,400	8.6	$	23.48	12,240	$	22.44
	48,400	8.6	$	23.48	12,240	$	22.44

As of December 31, 2020, there was $344,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 0 and 16,000 options were granted during the six months ended December 31, 2020 and 2019, respectively. 6,400 options vested during the six and three months ended December 31, 2020 and 2019, respectively. The total fair value of the options vesting during the six and three months ended December 31, 2020 and 2019 under this plan was $88,000.

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 50,000 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 December 31, 5,000 stock options were outstanding, 1,000 stock options were exercisable and 45,000 stock options were available for grant under this plan.

The fair value of each option granted during the six months ended December 31 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:    

	2020
Risk-free interest rates	0.62	%
Expected lives	10 years
Expected volatility	45	%
Expected dividend yields	—	%

The following table reflects activity under the 2020 Non-Employee Plan for the six months ended December 31,:

	2020
			Weighted average
	Options		exercise price
Outstanding, beginning of year		—		—
Granted		5,000	$	22.80
Exercised		—		—
Outstanding, end of period		5,000	$	22.80
Exercisable, end of period		1,000	$	22.80
Weighted average fair value at grant date of options granted	$	12.20
Total intrinsic value of options exercised		n/a
Total intrinsic value of options outstanding	$	17,000
Total intrinsic value of options exercisable	$	3,000

21

NaN stock options were exercised during the six or three months ended December 31, 2020 or 2019. NaN cash was received from option exercises during either of the six or three months ended December 31, 2020 or 2019 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 December 31, 2020:

	Options outstanding				Options exercisable
		Weighted average
	Number	remaining	Weighted average		Number	Weighted average
Range of exercise prices	outstanding	contractual life	exercise price		exercisable	exercise price
$22.80	5,000	9.7	$	22.80	1,000	$	22.80
	5,000	9.7	$	22.80	1,000	$	22.80

As of December 31, 2020, there was $43,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan. 0 options were granted during the three months ended December 31, 2020. 5,000 options were granted during the six months ended December 31, 2020. 1,000 options vested during the six months ended December 31, 2020. 0 options vested during the three months ended December 31, 2020. The total fair value of the options vesting during the six months ended December 31, 2020 under this plan was $12,000.

NOTE 9 – Stockholders’ Equity Transactions

On September 16, 2014 the Company’s board of directors authorized the repurchase of up to 1 million of the approximately 19.4 million shares of the Company’s common stock then outstanding. 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. Pursuant to the PPP Loan Agreement described in Note 7, the Company may not repurchase any of its shares of common stock until 12 months after the termination of the term loans described therein. NaN shares were repurchased during the six months ended December 31, 2020. During the fiscal year ended June 30, 2020 the Company repurchased 144,405 shares of its outstanding common stock at a weighted average price of $16.99. Shares repurchased through June 30, 2020 are included in the Company’s Treasury Stock as of June 30, 2020.

During fiscal 2020, certain employees and Directors exercised stock options under the Company's 2012 Employee and Non-Employee Stock Option Plans totaling 15,600 shares. 3,600 of these exercises were completed as cashless exercises as allowed for under the Plans, where the exercise shares are issued by the Company in exchange for shares of the Company's common stock that are owned by the optionees. The number of shares surrendered by the optionees was 1,628 and was based upon the per share price on the effective date of the option exercise.

NOTE 10 – Related Party Transaction

On December 15, 2020, 2,333,071 shares of common stock were sold in a secondary offering by an existing shareholder, the Company's President and Chairman. On December 21, 2020, the underwriters of the secondary offering fully exercised the option granted at the time of the secondary offering to purchase an additional 334,961 shares of common stock at the secondary offering price of $26.00 per share ("Greenshoe"), less underwriting discounts and commissions, which consists solely of shares sold by the Company's President and Chairman. The Company received 0 proceeds from the secondary offering or the Greenshoe but incurred $289,000 in offering expenses, which are recorded in selling, general, and administrative expenses in the accompanying condensed consolidated statements of income.

NOTE 11 - 401(k) Plan

The Company maintains a 401(k) plan (“the Plan”) that covers all U.S. non-union employees with one or more years of service and is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. Company contributions to this plan are discretionary and totaled $36,000 and $34,000 for the three months ended December 31, 2020 and 2019, respectively. Company contributions to this plan are discretionary and totaled $68,000 and $64,000 for the six months ended December 31, 2020 and 2019, respectively.

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NOTE 12 - Commitments and Contingencies

Leases

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

Our lease obligation consists of a 99 year lease which commenced on April 26, 1993 with one of the Company’s foreign subsidiaries, expiring in 2092, for approximately four acres of land in the Dominican Republic at an annual cost of $288,000, on which the Company’s principal production facility is located.

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 and six months ended December 30, 2020, cash payments against operating lease liabilities totaled $72,000 and $144,000, respectively. For the three and six months ended December 31, 2019, cash payments against operating lease liabilities totaled $72,000 and $168,000, respectively.

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

Weighted-average remaining lease term	71 years
Weighted-average discount rate	3.55	%

The following is a schedule, by years, of maturities of lease liabilities as of December 31, 2020 (in thousands):

Year Ending June 30,	Amount
2021	$	143
2022		277
2023		268
2024		258
2025		249
Thereafter		6,189
Total	$	7,384

Operating lease expense totaled approximately $79,000 and $79,000, for the three months ended December 31, 2020 and 2019, respectively. Operating lease expense totaled approximately $158,000 and $158,000, for the six months ended December 31, 2020 and 2019, 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.

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Employment Agreements

As of December 31, 2020, the Company was obligated under two employment agreements and one severance agreement. The employment agreements are with the Company’s CEO and the Senior Vice President of Engineering (“the SVP of Engineering”). The employment agreement with the CEO provides for an annual salary of $752,000, 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 2022 and provides for an annual salary of $333,798, 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 Senior Vice President of Operations and Finance 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.

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

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

	Three months ended December 31,				Six months ended December 31,
	2020		2019		2020		2019
Sales to external customers(1):
Domestic	$	26,793	$	25,236	$	49,682	$	51,055
Foreign		412		593		696		1,059
Total Net Sales	$	27,205	$	25,829	$	50,378	$	52,114

	December 31, 2020		June 30, 2020
Identifiable assets:
United States	$	73,635	$	69,436
Dominican Republic (2)		34,658		36,402
Total Identifiable Assets	$	108,293	$	105,838

(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 (December 31, 2020 = $23,648; June 30, 2020 = $25,246), operating lease assets (December 31, 2020 = $7,384; June 30, 2020 = $7,395) and fixed assets (December 31, 2020 = $3,276; June 30, 2020 = $3,481) 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 consolidated financial statements for events requiring recording or disclosure in the consolidated financial statements.

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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 actually 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, 2020 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

Napco Security Technologies, Inc (“NAPCO”, “the Company”, “we”) is one of the leading manufacturers and designers of high-tech electronic security devices, wireless 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. While recurring service revenues have continued to increase during the COVID-19 pandemic, equipment sales were negatively impacted by the economic slowdown associated with this pandemic.

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 best-known 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. In the event that 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.

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Seasonality

The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of the Company’s products want to install its products prior to the summer; therefore sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company's fiscal first quarter. In addition, demand for our products is affected by the housing and construction markets. Deterioration of the current economic conditions may also affect this trend.

Our fourth quarter of fiscal 2020 and the first and second quarters of fiscal 2021 reflected the challenging business environment resulting from the COVID-19 pandemic. The COVID-19 pandemic has caused difficulties for security equipment professionals getting access to both commercial and residential installation sites. We sell our products primarily through distribution to dealers and we are now seeing strong sell-through statistics from several of our largest distributors. Increased sell-through of our products from our distributors to the alarm and locking dealers during the quarter as compared to the same quarter last year, which was pre COVID-19, indicates that security equipment professionals are getting increased access to both commercial and residential installation sites and using more and more of our 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 2020 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 December 31,								Six months ended December 31,
	(dollars in thousands)								(dollars in thousands)
							% Increase/								% Increase/
	2020			2019			(decrease)		2020			2019			(decrease)
Net sales: equipment revenues	$	19,016		$	20,045		(5.13)	%	$	34,914		$	40,966		(14.77)	%
service revenues		8,189			5,784		41.58	%		15,464			11,148		38.72	%
		27,205			25,829		5.33	%		50,378			52,114		(3.33)	%
Gross profit: equipment		4,417			7,443		(40.66)	%		9,008			14,726		(38.83)	%
services		6,986			4,684		49.15	%		13,087			8,919		46.73	%
		11,403			12,127		(5.97)	%		22,095			23,645		(6.56)	%
Gross profit as a % of net sales:		41.92	%		46.95	%	(10.73)	%		43.86	%		45.37	%	(3.34)	%
equipment		23.23	%		37.13	%	(37.44)	%		25.80	%		35.95	%	(28.23)	%
services		85.31	%		80.98	%	5.34	%		84.63	%		80.01	%	5.78	%
Research and development		1,884			1,823		3.35	%		3,773			3,572		5.63	%
Selling, general and administrative		5,850			6,310		(7.29)	%		11,999			12,470		(3.78)	%
Selling, general and administrative as a percentage of net sales		21.50	%		24.43	%	(11.98)	%		23.82	%		23.93	%	(0.46)	%
Operating income		3,669			3,994		(8.14)	%		6,323			7,603		(16.84)	%
Interest expense (income), net		3			(9)		(133.33)	%		9			(2)		(550.00)	%
Provision for income taxes		469			431		8.82	%		798			800		(0.25)	%
Net income		3,197			3,572		(10.50)	%		5,516			6,805		(18.94)	%

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Results of Operations

Sales for the three months ended December 31, 2020 increased by $1,376,000 to $27,207,000 as compared to $25,829,000 for the same period a year ago. Sales for the six months ended December 31, 2020 decreased by $1,736,000 to $50,378,000 as compared to $52,114,000 for the same period a year ago. The increase in sales for the three months ended December 31, 2020 was due primarily to increased recurring communication service revenues ($2,405,000) and sales of intrusion and access products ($463,000) as partially offset by a decrease in sales of door-locking products ($1,492,000). Sales of the Company’s door-locking products continue to be negatively impacted by the COVID-19 pandemic. The decrease in sales for the six months ended December 31, 2020 was due primarily to decreased sales of door-locking products ($5,826,000) and intrusion and access products ($226,000) as partially offset by an increase in recurring communication service revenues ($4,316,000)

Gross profit for the three months ended December 31, 2020 decreased to $11,403,000 or 41.9% of sales as compared to $12,127,000 or 47.0% of sales for the same period a year ago. Gross profit on equipment sales for the three months ended December 31, 2020 decreased to $4,417,000 or 23.2% of equipment sales as compared to $7,443,000 or 37.1% of equipment sales for the same period a year ago. Gross profit on sales of services for the three months ended December 31, 2020 increased to $6,986,000 or 85.3% of service sales as compared to $4,684,000 or 81.0% of service sales for the same period a year ago. Gross profit for the six months ended December 31, 2020 decreased to $22,095,000 or 43.9% of sales as compared to $23,645,000 or 45.4% of sales for the same period a year ago. Gross profit on equipment sales for the six months ended December 31, 2020 decreased to $9,008,000 or 25.8% of equipment sales as compared to $14,726,000 or 36.0% of equipment sales for the same period a year ago. Gross profit on sales of services for the six months ended December 31, 2020 increased to $13,087,000 or 84.6% of service sales as compared to $8,919,000 or 80.0% of service sales for the same period a year ago. The decrease in gross profit and gross profit as a percentage of equipment sales for the three and six months was primarily due to the decrease in net sales of equipment, an unfavorable shift in product mix from door-locking products to intrusion products as well as lower overhead absorption which resulted from the Company’s lower purchasing and production levels. The lower levels of component part purchases and production were due to the Company’s efforts to reduce its inventory levels as well as the reduced hardware revenues discussed above. The increase in gross profit and gross profit as a percentage of service sales for the three and six months ended December 31, 2020 was due primarily to the increase in service revenues as well as a favorable shift in service product mix to higher margin service plans.

Research and development expenses for the three months ended December 31, 2020 increased $61,000 to $1,884,000 as compared to $1,823,000 for the same period a year ago. Research and development expenses for the six months ended December 31, 2020 increased $201,000 to $3,773,000 as compared to $3,572,000 for the same period a year ago. These increases were due primarily to increased payroll.

Selling, general and administrative expenses for the three months ended December 31, 2020 decreased 7.3% to $5,850,000 from $6,310,000 for the same period a year ago. Selling, general and administrative expenses as a percentage of net sales decreased to 21.5% for the three months ended December 31, 2020 as compared to 24.4% for the same period a year ago. Selling, general and administrative expenses for the six months ended December 31, 2020 decreased 3.8% to $11,999,000 from $12,470,000 for the same period a year ago. Selling, general and administrative expenses as a percentage of net sales remained relatively constant at 23.8% for the six months ended December 31, 2020 as compared to 23.9% for the same period a year ago. The decreases in Selling, general and administrative expenses and as a percentage of sales for the three and six months was primarily due to decreased travel, tradeshow and stock option expense.

Interest expense, net for the three months ended December 31, 2020 remained relatively constant at $3,000 as compared to $(9,000) for the same period a year ago. Interest expense, net for the six months ended December 31, 2020 remained relatively constant at $9,000 as compared to $(2,000) for the same period a year ago.

The Company’s provision for income taxes for the three months ended December 31, 2020 increased by $38,000 to $469,000 as compared to $431,000 for the same period a year ago. The Company’s provision for income taxes for the six months ended December 31, 2020 remained relatively constant at $798,000 as compared to $800,000 for the same period a year ago. The increase in the provision for income taxes for the three months was primarily due to accrued interest and state tax resulting from the Company's settlement of the IRS audit for the fiscal year ended June 30, 2016 as well as higher taxable income in the U.S, as compared to income in the DR. The Company’s effective rate for income tax was 13% and 11% for the three months and the six months ended December 31, 2020 and 2019, respectively.

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Net income for the three months ended December 31, 2020 decreased by $375,000 to $3,197,000 or $0.17 per diluted share as compared to $3,572,000 or $0.19 per diluted share for the same period a year ago. Net income for the six months ended December 31, 2020 decreased by $1,289,000 to $5,516,000 or $0.30 per diluted share as compared to $6,805,000 or $0.37 per diluted share for the same period a year ago. The decrease in net income for the three and six months ended December 31, 2020 was primarily due to the items described above.

Liquidity and Capital Resources

During the three months ended December 31, 2020 the Company utilized a portion of its cash generated from operations ($390,000 of $8,938,000) to purchase property, plant and equipment. 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 December 31, 2020 decreased by $1,709,000 as compared to June 30, 2020.  This decrease is primarily the result of the higher sales volume of equipment during the quarter ended June 30, 2020, which is typically the Company’s highest, as compared to the quarter ended December 31, 2020 as well as extending longer payment terms for certain customers during the quarter ended June 30, 2020 to assist them during the economic slowdown resulting from the COVID-19 pandemic.

Inventories at December 31, 2020 decreased by $3,719,000 from June 30, 2020. This decrease is primarily the result of the Company utilizing some of the additional inventory it had built up during the COVID-19 pandemic as partially offset by level-loading its production output throughout the year, whereas the Company’s sales are typically highest in the fourth quarter. The non-current portion of inventory increased $2,391,000 primarily due to the Company reducing its production planning in response to decreased demand during the COVID pandemic.

Accounts payable and accrued expenses other than accrued income taxes decreased by $2,683,000 as of December 31, 2020 as compared to June 30, 2020. This decrease was due primarily to the Company’s efforts to reduce its inventory levels by decreasing purchases of component parts and production levels.

As of December 31, 2020, the Company maintained a revolving credit facility of $11,000,000 which expires in June 2024 and term loans from the U.S. Small Business Administration totaling $3,904,000 through its Payroll Protection Program (“PPP”). As of December 31, 2020, the Company had no outstanding borrowings and $11,000,000 in availability under the revolving credit facility and $3,904,000 outstanding under the PPP term loans. The Company’s long-term debt is described more fully in Note 7 to the condensed consolidated financial statements. The facility contains various restrictions and covenants including, among others, restrictions on borrowings and compliance with certain financial ratios, as defined in the agreement.

As of December 31, 2020 the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

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 $700,000.

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.

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At the conclusion of the period ended December 31, 2020, 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. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at December 31, 2020.

During the three months ended December 31, 2020, 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.

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, 2020. There has been no material change in the risk factors previously disclosed in the Company’s Form 10-K for the three months ended December 31, 2020.

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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, Senior Vice President of Operations and Finance
32.1	Section 1350 Certifications
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

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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.

February 9, 2021

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
	Senior Vice President of Operations and Finance and Treasurer
	(Principal Financial and Accounting Officer)

31