Napco Security (NSSC) 10-Q 2022 Q3 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: MARCH 31, 2022

OR

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

Commission File number:                0-10004                     

NAPCO SECURITY TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

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

(631) 842-9400

(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year if

changed from last report)

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

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

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

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

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

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

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of: May 17, 2022

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

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

			Page
PART I:  FINANCIAL INFORMATION
	ITEM 1.	Financial Statements	3
		NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX –MARCH 31, 2022
		Condensed Consolidated Balance Sheets March 31, 2022 (unaudited) and June 30, 2021	3
		Condensed Consolidated Statements of Income for the Three Months ended March 31, 2022 and 2021 (unaudited)	4
		Condensed Consolidated Statements of Income for the Nine Months ended March 31, 2022 and 2021 (unaudited)	5
		Condensed Consolidated Statements of Stockholders Equity for the Nine Months Ended March 31, 2022 and 2021 (unaudited)	6
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2022 and 2021 (unaudited)	7
		Notes to Condensed Consolidated Financial Statements (unaudited)	8
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	30
	ITEM 4.	Controls and Procedures	31
PART II:  OTHER INFORMATION
	ITEM 1A.	Risk Factors	31
	ITEM 6.	Exhibits	32
SIGNATURE PAGE			33

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PART I:           FINANCIAL INFORMATION

Item 1.  Financial Statements

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2022
	(unaudited)		June 30, 2021
	(in thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents	$	42,127	$	34,806
Marketable securities		5,245		5,413
Accounts receivable, net of allowance for doubtful accounts of $226 at both March 31, 2022 and June 30, 2021		24,209		28,081
Inventories, net		35,101		24,933
Prepaid expenses and other current assets		2,726		2,408
Total Current Assets		109,408		95,641
Inventories - non-current, net		7,577		6,767
Property, plant and equipment, net		7,997		7,836
Intangible assets, net		4,398		4,691
Operating lease asset		7,356		7,373
Other assets		370		243
TOTAL ASSETS	$	137,106	$	122,551
CURRENT LIABILITIES
Accounts payable	$	9,935	$	6,095
Accrued expenses		8,223		6,582
Accrued salaries and wages		3,261		3,478
Current portion of long-term debt		—		2,386
Accrued income taxes		1,321		1,709
Total Current Liabilities		22,740		20,250
Long term debt, net of current portion		—		1,518
Deferred income taxes		369		380
Accrued income taxes		940		925
Long term operating lease liabilities		7,073		7,090
TOTAL LIABILITIES		31,122		30,163
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ EQUITY
Common Stock, par value $0.01 per share; 100,000,000 shares authorized as of March 31, 2022 (Note 10) and 80,000,000 shares authorized as of June 30, 2021; 39,627,255 and 39,595,883 shares issued; and 36,733,540 and 36,702,168 shares outstanding, respectively		396		396
Additional paid-in capital		19,735		18,201
Retained earnings		105,374		93,312
Less: Treasury Stock, at cost (2,893,715 shares)		(19,521)		(19,521)
TOTAL STOCKHOLDERS’ EQUITY		105,984		92,388
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	137,106	$	122,551

See accompanying notes to condensed consolidated financial statements.

3

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months ended March 31,
	2022		2021
	(in thousands, except for share and per share data)
Net sales:
Equipment revenues	$	23,873	$	19,335
Service revenues		12,032		8,893
		35,905		28,228
Cost of sales:
Equipment related expenses		19,334		14,074
Service-related expenses		1,538		1,244
		20,872		15,318
Gross Profit		15,033		12,910
Operating expenses:
Research and development		2,009		1,902
Selling, general, and administrative expenses		8,442		5,980
Total Operating Expenses		10,451		7,882
Operating Income		4,582		5,028
Other (expense) income:
Interest and other income (expense), net		(177)		(44)
Income before Provision for Income Taxes		4,405		4,984
Provision for Income Taxes		1,132		624
Net Income	$	3,273	$	4,360
Income per share:
Basic	$	0.09	$	0.12
Diluted	$	0.09	$	0.12
Weighted average number of shares outstanding:
Basic		36,743,000		36,697,000
Diluted		36,879,000		36,823,000

See accompanying notes to condensed consolidated financial statements.

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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Nine Months Ended March 31,
	2022		2021
	(in thousands, except for share and per share data)
Net sales:
Equipment revenues	$	67,080	$	54,249
Service revenues		33,284		24,357
		100,364		78,606
Cost of sales:
Equipment related expenses		56,077		39,980
Service-related expenses		4,355		3,621
		60,432		43,601
Gross Profit		39,932		35,005
Operating expenses:
Research and development		5,918		5,675
Selling, general, and administrative expenses		23,983		17,979
Total Operating Expenses		29,901		23,654
Operating Income		10,031		11,351
Other (expense) income:
Interest and other income (expense), net		(102)		(53)
Gain on extinguishment of debt		3,904		—
Income before Provision for Income Taxes		13,833		11,298
Provision for Income Taxes		1,771		1,422
Net Income	$	12,062	$	9,876
Income per share:
Basic	$	0.33	$	0.27
Diluted	$	0.33	$	0.27
Weighted average number of shares outstanding:
Basic		36,723,000		36,696,000
Diluted		36,873,000		36,804,000

See accompanying notes to condensed consolidated financial statements.

5

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)

	Nine months ended March 31, 2022 (in thousands, except for share data)
	Common Stock					Treasury Stock
	Number of			Additional
	Shares			Paid-in		Number of			Retained
	Issued	Amount		Capital		Shares	Amount		Earnings		Total
Balances at June 30, 2021, Prior to considering Retrospective effect of Stock Split	21,244,799	$	212	$	18,201	(2,893,715)	$	(19,521)	$	93,496	$	93,237
Retrospective Effects of 2:1 Stock Split Declared on December 20, 2021	18,351,084	$	184		—	—		—	$	(184)	$	—
Balances at June 30, 2021, considering Retrospective effect of Stock Split	39,595,883	$	396	$	18,201	(2,893,715)	$	(19,521)	$	93,312	$	92,388
Net income	—		—		—	—		—		7,752		7,752
Stock-based compensation expense	—		—	$	89	—		—		—	$	89
Stock options exercised	5,000		—	$	16	—		—		—	$	16
Balances at September 30, 2021	39,600,883	$	396	$	18,306	(2,893,715)	$	(19,521)	$	101,064	$	100,245
Net income	—		—		—	—		—	$	1,037	$	1,037
Stock-based compensation expense	—		—	$	1,255	—		—		—	$	1,255
Stock options exercised	24,588		—	$	139	—		—		—	$	139
Balances at December 31, 2021	39,625,471	$	396	$	19,700	(2,893,715)	$	(19,521)	$	102,101	$	102,676
Net income	—		—		—	—		—	$	3,273	$	3,273
Stock-based compensation expense	—		—	$	35	—		—		—	$	35
Stock options exercised	1,784		—		—	—		—		—		—
Balances at March 31, 2022	39,627,255	$	396	$	19,735	(2,893,715)	$	(19,521)	$	105,374	$	105,984

	Nine months ended March 31, 2021 (in thousands, except share data)
	Common Stock					Treasury Stock
	Number of			Additional
	Shares			Paid-in		Number of			Retained
	Issued	Amount		Capital		Shares	Amount		Earnings		Total
Balances at June 30, 2020, Prior to considering Retrospective effect of Stock Split	21,241,066	$	212	$	17,766	(2,893,715)	$	(19,521)	$	78,083	$	76,540
Retrospective Effects of 2:1 Stock Split Declared on December 20, 2021	18,347,351	$	184		—	—		—	$	(184)	$	—
Balances at June 30, 2020, considering Retrospective effect of Stock Split	39,588,417	$	396	$	17,766	(2,893,715)	$	(19,521)	$	77,899	$	76,540
Net income	—		—		—	—		—	$	2,319	$	2,319
Stock-based compensation expense	—		—	$	104	—		—		—	$	104
Balances at September 30, 2020	39,588,417	$	396	$	17,870	(2,893,715)	$	(19,521)	$	80,218	$	78,963
Net income	—		—		—	—		—	$	3,197	$	3,197
Stock-based compensation expense	—		—	$	84	—		—		—	$	84
Balances at December 31, 2020	39,588,417	$	396	$	17,954	(2,893,715)	$	(19,521)	$	83,415	$	82,244
Net income	—		—		—	—		—	$	4,360	$	4,360
Stock-based compensation expense	—		—	$	84	—		—		—	$	84
Stock options exercised	5,720		—		—	—		—		—		—
Balances at March 31, 2021	39,594,137	$	396	$	18,038	(2,893,715)	$	(19,521)	$	87,775	$	86,688

See accompanying notes to condensed consolidated financial statements.

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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Nine Months ended March 31,
	2022		2021
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	12,062	$	9,876
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,320		1,267
Unrealized loss on marketable securities		226		42
(Recovery of) provision for doubtful accounts		—		(130)
Change to inventory reserve		331		—
Deferred income taxes		(11)		55
Stock based compensation expense		1,379		272
Gain on extinguishment of debt		(3,904)		—
Changes in operating assets and liabilities:
Accounts receivable		3,872		707
Inventories		(11,309)		5,749
Prepaid expenses and other current assets		(318)		165
Other assets		(127)		—
Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes		4,892		(1,572)
Net Cash Provided by Operating Activities		8,413		16,431
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment		(1,189)		(566)
Purchases of marketable securities		(58)		(5,403)
Net Cash Used in Investing Activities		(1,247)		(5,969)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock option exercises		155		—
Net Cash Provided by Financing Activities		155		—
Net increase in Cash and Cash Equivalents		7,321		10,462
CASH AND CASH EQUIVALENTS - Beginning		34,806		18,248
CASH AND CASH EQUIVALENTS - Ending	$	42,127	$	28,710
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	12	$	14
Income taxes paid	$	2,154	$	1,847

See accompanying notes to condensed consolidated financial statements.

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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MARCH 31, 2022

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

Nature of Business:

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

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

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

Significant Accounting Policies:

Principles of Consolidation

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

Stock Split

In December 2021, the Company's Board of Directors approved a 2-for-one stock split in the form of a 100% stock dividend of the Company’s common stock, payable to stockholders of record on December 20, 2021. The additional shares were distributed on January 4, 2022. All share and per share amounts (except par value) have been retroactively adjusted to reflect the stock split. There was no net effect on total stockholders' equity as a result of the stock split. Upon distribution of the dividend, the total number of shares outstanding increased from 18,365,878 to 36,731,756.

Accounting Estimates

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical estimates

8

include management’s judgments associated with reserves for sales returns and allowances, allowance for doubtful accounts, inventory reserves, valuation of intangible assets and income taxes. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The methods and assumptions used to estimate the fair value of the following classes of financial instruments were: Current Assets and Current Liabilities - The carrying amount of cash and cash equivalents, certificates of deposits, current receivables and payables and certain other short-term financial instruments approximate their fair value as of March 31, 2022 and June 30, 2021 due to their short-term maturities. Long-term debt and lease liabilities reflect fair value based on prevailing market rates.

Cash and Cash Equivalents

Cash and cash equivalents include approximately $63,000 of short-term time deposits at both March 31, 2022 and June 30, 2021, respectively. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of March 31, 2022 and June 30, 2021. The Company has not historically experienced any credit losses with balances in excess of FDIC limits.

Marketable Securities

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

Accounts Receivable

Accounts receivable is stated net of the reserves for doubtful accounts of $226,000 as of both March 31, 2022 and June 30, 2021. Our reserves for doubtful accounts are subjective critical estimates that have a direct impact on reported net earnings. These reserves are based upon the evaluation of our accounts receivable aging, specific exposures, sales levels and historical trends.

Inventories

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

In addition, the Company records an inventory obsolescence reserve, which represents any excess of the cost of the inventory over its estimated realizable value. This reserve is calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends, requirements to support forecasted sales, and the ability to find alternate applications of its raw materials and to convert finished product into alternate versions of the same product to better match customer demand. In addition, and as necessary, the Company

9

may establish specific reserves for future known or anticipated events. There is inherent professional judgment and subjectivity made by both production and engineering members of management in determining the estimated obsolescence percentage.

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

Property, Plant, and Equipment

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

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

Long-Lived and Intangible Assets

Long-lived assets are amortized over their useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets in question may not be recoverable. Impairment would be recorded in circumstances where undiscounted cash flows expected to be generated by an asset are less than the carrying value of that asset. Intangible assets determined to have indefinite lives were not amortized but were tested for impairment at least annually.

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

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

	March 31, 2022						June 30, 2021
	Carrying		Accumulated		Net book		Carrying		Accumulated		Net book
	value		amortization		value		value		amortization		value
Customer relationships	$	9,800		(9,096)	$	704	$	9,800	$	(8,955)	$	845
Trade name		4,048		(354)		3,694		4,048		(202)		3,846
	$	13,848	$	(9,450)	$	4,398	$	13,848	$	(9,157)	$	4,691

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

Revenue Recognition

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

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

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

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

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

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

Advertising and Promotional Costs

Advertising and promotional costs are included in "Selling, General and Administrative" expenses in the consolidated statements of income and are expensed as incurred. Advertising expense for the three months ended March 31, 2022 and 2021 was $655,000 and $229,000, respectively. Advertising expense for the nine months ended March 31, 2022 and 2021 was $2,253,000 and $919,000, respectively

Research and Development Costs

Research and development (“R&D”) costs incurred by the Company are charged to expense as incurred and are included in operating expenses in the consolidated statements of income. Company-sponsored R&D expense for the three months ended March 31, 2022 and 2021 was $2,009,000 and $1,902,000, respectively. R&D expense for the nine months ended March 31, 2022 and 2021 was $5,918,000 and $5,675,000, respectively.

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Income Taxes

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

Net Income per Share

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

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

	Net Income				Weighted Average Shares		Net Income per Share
	2022		2021		2022	2021	2022		2021
Basic EPS	$	3,273	$	4,360	36,743	36,697	$	0.09	$	0.12
Effect of Dilutive Securities:
Stock Options		—		—	136	126		—		—
Diluted EPS	$	3,273	$	4,360	36,879	36,823	$	0.09	$	0.12

Options to purchase 388,000 and 16,000 shares of common stock were excluded for the three months ended March 31, 2022 and 2021, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.

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

					Weighted Average		Net Income per
	Net Income				Shares		Share
	2022		2021		2022	2021	2022		2021
Basic EPS	$	12,062	$	9,876	36,723	36,696	$	0.33	$	0.27
Effect of Dilutive Securities:
Stock Options		—		—	150	108		—		—
Diluted EPS	$	12,062	$	9,876	36,873	36,804	$	0.33	$	0.27

Options to purchase 156,145 and 53,333 shares of common stock were excluded for the nine months ended March 31, 2022 and 2021, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.

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Stock-Based Compensation

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

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

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

Foreign Currency

The Company has determined the functional currency of all foreign subsidiaries is the U.S. Dollar. All foreign operations are considered a direct and integral part or extension of the Company’s operations. The day-to-day operations of all foreign subsidiaries are dependent on the economic environment of the U.S. Dollar. Therefore, 0 realized and unrealized gains and losses associated with foreign currency translation are recorded for the three or nine months ended March 31, 2022 or 2021.

Comprehensive Income

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

Segment Reporting

The Company’s reportable operating segments are determined based on the Company’s management approach. The management approach is based on the way that the chief operating decision maker organizes the segments within an enterprise for making operating decisions and assessing performance. The Company’s results of operations are reviewed by the chief operating decision maker on a consolidated basis and the Company operates in only 1 segment. The Company has presented required geographical data in Note 14.

Shipping and Handling Sales and Costs

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

Leases

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

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

Recently Issued Accounting Standards

Reference Rate Reform (ASC Topic 848)

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

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

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

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

NOTE 2 – Revenue Recognition and Contracts with Customers

The Company is engaged in 1 major line of business: the development, manufacture, and distribution of security products, encompassing access control systems, door security products, intrusion and fire alarm systems, alarm communication services, and video surveillance products for commercial and residential use. The Company also provides wireless communication service for intrusion and fire alarm systems on a monthly basis. All of these products and services are used for commercial, residential, institutional, industrial and governmental applications, and are sold primarily to independent distributors, dealers and installers of security equipment. Sales to unaffiliated customers are primarily shipped from the United States.

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

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

The Company disaggregates revenue from contracts with customers into major product lines. The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. As noted in the accounting policy footnote, the Company’s business consists of 1 operating segment. Following is the disaggregation of revenues based on major product lines (in thousands):

	Three months ended March 31,				Nine months ended March 31,
	2022		2021		2022		2021
Major Product Lines:
Intrusion and access alarm products	$	12,667	$	8,956	$	33,230	$	24,517
Door locking devices		11,206		10,379		33,850		29,732
Services		12,032		8,893		33,284		24,357
Total Revenues	$	35,905	$	28,228	$	100,364	$	78,606

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NOTE 3 – Business and Credit Concentrations

An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company did not have any customers which exceeded 10% of net sales for the three or nine months ended March 31, 2022 and March 31, 2021, respectively. The Company had 3 customers with an accounts receivable balance that comprised 13%, 15% and 13% of the Company’s accounts receivable at March 31, 2022. The same 3 customers had accounts receivable balances that comprise of 12%, 19% and 11%, of the Company’s accounts receivable at June 30, 2021.

NOTE 4 – Marketable Securities

The Company’s marketable securities include investments in mutual funds, which invest primarily in various government and corporate obligations, stocks and money market funds, and are reported at their fair values. The disaggregated net gains and losses on the marketable securities recognized within the accompanying condensed consolidated statements of income for the three and nine months ended March 31, 2022 and 2021, are as follows (in thousands):

	Three months ended March 31,				Nine months ended March 31,
	2022		2021		2022		2021
Net gains recognized during the period on marketable securities	$	19	$	3	$	58	$	3
Less: Net gains recognized during the year on marketable securities sold during the period		—		—		—		—
Unrealized (losses) gains recognized during the reporting year on marketable securities still held at the reporting date		(191)		(42)		(226)		(42)
	$	(172)	$	(39)	$	(168)	$	(39)

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

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

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

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

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

The following tables summarize the Company’s investments at March 31, 2022 and June 30, 2021, respectively (in thousands):

	March 31, 2022						June 30, 2021
					Unrealized						Unrealized
	Cost		Fair Value		Gain (Loss)		Cost		Fair Value		Gain (Loss)
Marketable Securities	$	5,481	$	5,245	$	(236)	$	5,422	$	5,413	$	(9)

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

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NOTE 5 - Inventories

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

	March 31,		June 30,
	2022		2021
Component parts	$	27,950	$	17,245
Work-in-process		8,016		6,158
Finished product		6,712		8,297
	$	42,678	$	31,700
Classification of inventories, net of reserves:
Current	$	35,101	$	24,933
Non-current		7,577		6,767
	$	42,678	$	31,700

NOTE 6 – Property, Plant, and Equipment

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

	March 31, 2022		June 30, 2021		Useful Life in Years
Land	$	904	$	904	N/A
Buildings		8,911		8,911	30 to 40
Molds and dies		7,478		7,416	3 to 5
Furniture and fixtures		2,936		2,813	5 to 10
Machinery and equipment		26,498		25,548	7 to 10
Building improvements		2,463		2,409	Shorter of the lease term or life of asset
		49,190		48,001
Less: accumulated depreciation and amortization		(41,193)		(40,165)
	$	7,997	$	7,836

Depreciation and amortization expense on property, plant, and equipment was approximately $338,000 and $302,000 for the three months ended March 31, 2022 and 2021, respectively. Depreciation and amortization expense on property, plant and equipment was approximately $1,028,000 and $939,000 for the nine months ended March 31, 2022 and 2021, respectively.

NOTE 7 - Income Taxes

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

For the three and nine months ended March 31, 2022, the Company recognized net income tax expense of $1,132,000 and $1,771,000, respectively. During the nine months ended March 31, 2022, the Company’s reserve for uncertain income tax positions increased by $6,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes. As of March 31, 2022, the Company had accrued interest totaling $82,000, as well as $678,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. For the nine months

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ended March 31, 2022, additional interest expense was accrued for in the amount of $6,000. The Company claims R&D tax credits on eligible R&D expenditures. The R&D tax credits are recognized as a reduction to income tax expense.

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 March 31, 2022, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes for fiscal years 2018 and thereafter.

The Company was audited by the IRS for fiscal year 2016. 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. As of March 31, 2021, all federal and state liabilities related to the fiscal year 2016 audit have been paid.

The Company was audited by the IRS for the fiscal year 2017. During the third quarter of fiscal 2021, the Company settled the issue and paid the IRS $399,000. The Company reported the results of the IRS exam to all the jurisdictions in which it files and paid taxes and interest totaling $97,000. In fiscal 2021, the Company paid the IRS $68,000 for interest. None of the payments were recorded to expense since adequate liabilities had previously been established. The Company has identified its U.S. Federal income tax return and its State return in New York as its major tax jurisdictions.

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

NOTE 8 - Long-Term Debt

As of March 31, 2022 and June 30, 2021, the Company had a revolving line of credit of $11,000,000 (“Revolver Agreement”) which expires in June 2024. Also, at June 30, 2021, long-term debt consisted of a term loan from the U.S. Small Business Administration through its Payroll Protection Program. All amounts borrowed under this loan were forgiven in the first quarter of fiscal 2022.

Outstanding balances and interest rates as of March 31, 2022 and June 30, 2021 are as follows (dollars in thousands):

	March 31, 2022				June 30, 2021
	Outstanding		Interest Rate		Outstanding		Interest Rate
Revolving line of credit	$	—	n/a		$	—	n/a
Term loans		—	n/a	%		3,904	1	%
		—				3,904
Less: current maturities		—				(2,386)
Long-term debt	$	—			$	1,518

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.

The Company received $3,904,000 in loans (the "PPP Loan"), entered into between the Company and HSBC Bank USA N.A., as lender (the "Lender”). The Lender made the loans pursuant to the Paycheck Protection Program (the "PPP"), created by Section 1102 of the CARES Act and governed by the CARES Act, Section 7(a)(36) of the Small Business Act, any rules or guidance that has been issued by the Small Business Association (“SBA”) implementing the PPP and acting as guarantor, or any other applicable loan program requirements, as defined in 13 CFR § 120.10, as amended from time to time.

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During the first quarter of fiscal 2022, the PPP Loans were forgiven in their entirety, in accordance with guidelines set forth in the PPP. The Company recognized a gain on the extinguishment of debt in the first quarter of 2022 in the amount of $3,904,000 within the other income (expense) section in the accompanying condensed consolidated statements of income. Under the PPP, the SBA reserves the right to audit PPP forgiveness applications for a period of six years from the date of forgiveness. The SBA has indicated that it will audit all of those that are in excess of $2 million.

NOTE 9 - Stock Option

The Company follows ASC 718 (“Share-Based Payment”), which requires that all share-based payments to employees, including stock options, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period. For the three months ended March 31, 2022 and 2021, the Company recorded non-cash compensation expense of $35,000 ($0.00 per basic and diluted share) and $84,000 ($0.00 per basic and diluted share), respectively, relating to stock-based compensation. For the nine months ended March 31, 2022 and 2021, the Company recorded non-cash compensation expense of $1,379,000 ($0.04 per basic and diluted share) and $272,000 ($.01 per basic and diluted share).

2012 Employee Stock Option Plan

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

Under the 2012 Employee Plan, stock options may be granted to valued employees with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable, in whole or in part, at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At March 31, 2022, 523,080 stock options were outstanding, 164,776 stock options were exercisable and 1,138,920 stock options were available for grant under this plan. NaN options may be granted under this plan after December 2022.

338,000 Options were granted during the nine months ended March 31, 2022. There were 0 options granted during the three months ended March 31, 2022. There were 0 options granted during the three or nine months ended March 31, 2021. The fair value of each

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

	2022		2021
Risk-free interest rates	1.64	%	n/a	%
Expected lives	6.18 Years		n/a
Expected volatility	43	%	n/a	%
Expected dividend yields	0	%	n/a	%

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

	2022				2021
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		214,080	$	9.59		235,680	$	9.42
Granted		338,000	$	23.17		—		—
Forfeited/Lapsed		—		—		(8,000)	$	4.08
Exercised		(29,000)	$	5.45		(3,600)	$	5.70
Outstanding, end of period		523,080	$	18.59		224,080	$	9.67
Exercisable, end of period		164,776	$	15.01		89,200	$	7.92
Weighted average fair value at grant date of options granted	$	12.16				n/a
Total intrinsic value of options exercised	$	502,000			$	42,000
Total intrinsic value of options outstanding	$	1,903,000			$	1,735,000
Total intrinsic value of options exercisable	$	1,085,000			$	847,000

1,000 and 29,000 stock options were exercised during the three and nine months ended March 31, 2022, respectively. The 1,000 options that were exercised during the three months ended March 31, 2022, were settled by exchanging 153 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. $155,000 cash was received from option exercises during the nine months ended March 31, 2022. The actual tax benefit realized for the tax deductions from option exercises during the three and nine months ended March 31, 2022 was $1,000 for both periods. 3,600 stock options were exercised during the three and nine months ended March 31, 2021, which were settled by exchanging 1,350 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.  The actual tax benefit realized for the tax deductions from option exercises during the three and nine months ended March 31, 2021 was $3,000 for both periods.

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at March 31, 2022:

	Options outstanding				Options exercisable
		Weighted average
	Number	remaining	Weighted average		Number	Weighted average
Range of exercise prices	outstanding	contractual life	exercise price		exercisable	exercise price
$2.19 ‑ $24.75	523,080	8.67	$	18.59	164,776	$	15.01
	523,080	8.67	$	18.59	164,776	$	15.01

As of March 31, 2022, there was $2,704,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 0 and 338,000 options were granted during the three and nine months ended March 31, 2022, respectively. There were 0 options granted during each of the three and nine months ended March 31, 2021. 5,200 and 95,600 options vested during the three and nine months ended March 31, 2022, respectively. 5,200 and 30,800 options vested during the three and nine months ended March 31, 2021, respectively. The total grant date fair value of the options vesting during the three months ended March 31, 2022 and 2021 under this plan was $36,000 and $63,000, respectively. The total grant date fair value of the options vesting during the nine months ended March 31, 2022 and 2021 under this plan was $975,000 and $168,000, respectively.

2012 Non-Employee Stock Option Plan

In December 2012, the stockholders approved the 2012 Non-Employee Stock Option Plan (the 2012 Non-Employee Plan). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 100,000 shares of the Company’s common

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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 March 31, 2022, 21,600 stock options were outstanding, 12,480 stock options were exercisable and 0 further stock options were available for grant under this plan.

9,600 Options were granted during the nine months ended March 31, 2022. There were 0 options granted during the three months ended March 31, 2022. There were 0 options granted during the three or six months ended March 31, 2021. NaN options may be granted under this plan after December 2022. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2022		2021
Risk-free interest rates	1.68	%	n/a	%
Expected lives	6.18 Years		n/a
Expected volatility	43	%	n/a	%
Expected dividend yields	0	%	n/a	%

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

	2022				2021
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		12,000	$	6.55		24,000	$	5.15
Granted		9,600	$	22.93		—		—
Forfeited/Lapsed		—		—		—		—
Exercised		—		0		(2,400)	$	4.35
Outstanding, end of period		21,600	$	13.83		21,600	$	5.23
Exercisable, end of period		12,480	$	8.48		14,640	$	4.57
Weighted average fair value at grant date of options granted	$	12.58				n/a
Total intrinsic value of options exercised		n/a			$	31,000
Total intrinsic value of options outstanding	$	168,000			$	263,000
Total intrinsic value of options exercisable	$	155,000			$	188,000

NaN stock options were exercised during the three or nine months ended March 31, 2022 or 2021. NaN cash was received from option exercises during either of the three or nine months ended March 31, 2022 or 2021 and the actual tax benefit realized for the tax deductions from option exercises was $0. 2,400 stock options were exercised during the three and nine months ended March 31, 2021, which were settled by exchanging 913 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. The actual tax benefit realized for the tax deductions from option exercises was $6,000 for both periods.

The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at March 31, 2022:

	Options outstanding				Options exercisable
		Weighted average	Weighted			Weighted
	Number	remaining	average exercise		Number	average exercise
Range of exercise prices	outstanding	contractual life	price		exercisable	price
$4.35 - $22.93	21,600	7.78	$	13.83	12,480	$	8.48
	21,600	7.78	$	13.83	12,480	$	8.48

As of March 31, 2022, there was $76,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. 0 and 9,600 options were granted during the three and nine months ended March 31, 2022. NaN options were granted during the three or nine months ended March 31, 2021. 720 and 6,240 options vested during the three and nine months ended March 31, 2022. 720 and 5,520 options vested during the three and nine months ended March 31, 2021. The total grant

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date fair value of the options vesting during the three months ended March 31, 2022 and 2021 under this plan was $5,000, for each period. The total grant date fair value of the options vesting during the nine months ended March 31, 2022 and 2021 under this plan was $39,000 and $18,000, 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 100,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.

Under the 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 March 31, 2022, 89,000 stock options were outstanding, 45,040 stock options were exercisable and 0 further stock options were available for grant under this plan.

23,500 Options were granted during the nine months ended March 31, 2022. There were 0 options granted during the three months ended March 31, 2022. There were 0 options granted during the three or nine months ended March 31, 2021. NaN options may be granted under this plan after December 2028. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2022		2021
Risk-free interest rates	1.68	%	n/a	%
Expected lives	6.18 Years		n/a
Expected volatility	43	%	n/a	%
Expected dividend yields	0	%	n/a	%

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

	2022				2021
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		70,100	$	11.93		96,800	$	11.74
Granted		23,500	$	22.93		—		—
Forfeited/Lapsed		—		—		—		—
Exercised		(4,600)	$	10.43		(3,200)	$	8.10
Outstanding, end of period		89,000	$	14.91		93,600	$	11.87
Exercisable, end of period		45,040	$	12.98		40,960	$	11.54
Weighted average fair value at grant date of options granted	$	12.58				n/a
Total intrinsic value of options exercised	$	58,000			$	30,000
Total intrinsic value of options outstanding	$	556,000			$	519,000
Total intrinsic value of options exercisable	$	351,000			$	241,000

1,600 and 4,600 options were exercised during the three months and nine months ended March 31, 2022. The 1,600 options that were exercised during the three months ended March 31, 2022, were settled by exchanging 663 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. The 4,600 options that were exercised during the nine months ended March 31, 2022, were settled by exchanging 2,075 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. NaN cash was received from option exercises during either of the three or nine months ended March 31, 2022 and the actual tax benefit realized for the tax deductions from option exercises was $4,000 and $12,000, respectively. 3,200 stock options were exercised during the three and nine months ended March 31, 2021, were settled by exchanging 1,217 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. NaN cash was received from option exercises during either of the three and nine months ended March 31, 2021 and the actual tax benefit realized for the tax deductions from option exercises was $6,000 for both periods.

21

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

	Options outstanding				Options exercisable
		Weighted average	Weighted			Weighted
	Number	remaining	average exercise		Number	average exercise
Range of exercise prices	outstanding	contractual life	price		exercisable	price
$8.10 - $22.93	89,000	8.00	$	14.91	45,040	$	12.98
	89,000	8.00	$	14.91	45,040	$	12.98

As of March 31, 2022, there was $302,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2018 Non-Employee Plan. 0 and 23,500 options were granted during the three and nine months ended March 31, 2022. NaN options were granted during the three or nine months ended March 31, 2021. 5,380 and 19,680 options vested during the three and nine months ended March 31, 2022. 6,880 and 19,680 options vested during the three and nine months ended March 31, 2021. The total grant date fair value of the options vesting during the three months ended March 31, 2022 and 2021 under this plan was $35,000 and $45,000, respectively. The total grant date fair value of the options vesting during the nine months ended March 31, 2022 and 2021 under this plan was $160,000 and $133,000, respectively.

2020 Non-Employee Stock Option Plan

In May 2020, the stockholders approved the 2020 Non-Employee Stock Option Plan (the “2020 Non-Employee Plan”). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 100,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.

Under the 2020 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At March 31, 2022, 26,900 stock options were outstanding, 7,380 stock options were exercisable and 73,100 stock options were available for grant under this plan.

16,900 and 10,000 Options were granted during the nine months ended March 31, 2022 and 2021, respectively. There were 0 options granted during the three months ended March 31, 2022 and 2021, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2022		2021
Risk-free interest rates	1.68	%	0.62	%
Expected lives	6.18 Years		10
Expected volatility	43	%	45	%
Expected dividend yields	0	%	0	%

The following table reflects activity under the 2020 Non-Employee Plan for the three months ended March 31:

	2022				2021
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		10,000	$	11.40		0		—
Granted		16,900	$	22.93		10,000	$	11.40
Forfeited/Lapsed		—		—		—		—
Exercised		—		—		—		—
Outstanding, end of period		26,900	$	18.64		10,000	$	11.40
Exercisable, end of period		7,380	$	16.68		2,000	$	11.40
Weighted average fair value at grant date of options granted	$	12.58			$	6.10
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	91,000			$	60,000
Total intrinsic value of options exercisable	$	36,000			$	12,000

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NaN stock options were exercised during the three or nine months ended March 31, 2022 or 2021. NaN cash was received from option exercises during either of the three or nine months ended March 31, 2022 or 2021 and the actual tax benefit realized for the tax deductions from option exercises was $0 for both periods.

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

	Options outstanding				Options exercisable
		Weighted average
	Number	remaining	Weighted average		Number	Weighted average
Range of exercise prices	outstanding	contractual life	exercise price		exercisable	exercise price
$11.40 - $22.93	26,900	9.14	$	18.64	7,380	$	16.68
	26,900	9.14	$	18.64	7,380	$	16.68

As of March 31, 2022, there was $147,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan. 16,900 and 10,000 options were granted during the nine months ended March 31, 2022 and 2021, respectively. There were 0 options granted during the three months ended March 31, 2022 and 2021, respectively. 0 and 5,380 options vested during the three and nine months ended March 31, 2022, respectively. 0 and 2,000 options vested during the three and nine months ended March 31, 2021, respectively. The total grant date fair value of the options vesting during the three and nine months ended March 31, 2022 under this plan was $0 and $55,000, respectively. The total grant date fair value of the options vesting during the three and nine months ended March 31, 2021 under this plan was $0 and $12,000, respectively.

NOTE 10 – Stockholders’ Equity Transactions

On September 16, 2014, the Company’s board of directors authorized the repurchase of up to 2 million of the approximately 38.8 million shares of the Company’s common stock then outstanding. Such repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions and the market price of the common stock. Relative to the loan agreement described in Note 8, the Company’s lender gave its consent to this stock repurchase plan. During the three and nine months ended March 31, 2022, and the fiscal year ended June 30, 2021, the Company did 0t repurchase any shares of its outstanding common stock. Pursuant to the PPP described in Note 8, the Company may not repurchase any of its shares of common stock until 12 months after the termination of the term loans described therein which occurred between August, 2021 and September, 2021.

During the three months ended March 31, 2022, certain employees and Directors exercised stock options under the Company's 2012 Employee and 2018 Non-Employee Stock Option Plan totaling 2,600 shares. All of these exercises were completed as cashless exercises as allowed for under the Plan, where the exercise shares are issued by the Company in exchange for shares of the Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees was 816 and was based upon the per share price on the effective date of the option exercise.

During the nine months ended March 31, 2022, certain employees and Directors exercised stock options under the Company's 2012 Employee and 2018 Non-Employee Stock Option Plan totaling 33,600 shares. 5,600 of these exercises were completed as cashless exercises as allowed for under the Plan, where the exercise shares are issued by the Company in exchange for shares of the Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees was 2,228 and was based upon the per share price on the effective date of the option exercise. $155,000 was received in exchange for the remaining 28,000 shares of the Company’s stock.

During fiscal 2021, certain employees and Directors exercised stock options under the Company's 2012 Employee and Non-Employee and 2018 Non-employee Stock Option Plans totaling 14,200 shares. All 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 6,734 and was based upon the per share price on the effective date of the option exercise.

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

23

In December 2021, the Company's Board of Directors approved a 2-for-one stock split in the form of a 100% stock dividend of the Company’s common stock payable to stockholders of record on December 20, 2021. The additional shares were distributed on January 4, 2022. All share and per share amounts (except par value) have been retroactively adjusted to reflect the stock split. There was no net effect on total stockholders' equity as a result of the stock split.

NOTE 11 – Related Party Transaction

On December 15, 2020, 4,666,142 shares of common stock were sold in a secondary offering by 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 669,922 shares of common stock at the secondary offering price of $13.00 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 12 - 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 $59,000 and $32,000 for the three months ended March 31, 2022 and 2021, respectively. Company contributions to this plan are discretionary and totaled $132,000 and $100,000 for the nine months ended March 31, 2022 and 2021, respectively.

NOTE 13 - Commitments and Contingencies

Leases

Our lease obligation consists of a 99-year lease, entered into by one of the Company’s foreign subsidiaries, for approximately 4 acres of land in the Dominican Republic on which the Company’s principal production facility is located. The lease, which commenced on April 26, 1993 and expires in 2092, has an annual cost of approximately $288,000.

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 nine months ended March 31, 2022 and 2021 cash payments against operating lease liabilities totaled $72,000 and $216,000 respectively.

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

Weighted-average remaining lease term	70 Years
Weighted-average discount rate	3.55	%

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

Year Ending June 30,	Amount
2022	$	72
2023		280
2024		270
2025		261
2026		251
Thereafter		6,222
Total	$	7,356

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Operating lease expense totaled approximately $80,000 and $78,000 for the three months ended March 31, 2022 and 2021, respectively. Operating lease expense totaled approximately $239,000 and $236,000 for the nine months ended March 31, 2022 and 2021, respectively.

Litigation

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

Employment Agreements

As of March 31, 2022, the Company was obligated under 3 employment agreements and 1 severance agreement. The employment agreements are with the Company’s CEO, CFO and the Senior Vice President of Engineering (“the SVP of Engineering”). The employment agreement with the CEO provides for an annual salary of $872,000, as adjusted for inflation; incentive compensation as may be approved by the Board of Directors from time to time and a termination payment in an amount up to 299% of the average of the prior five calendar year’s compensation, subject to certain limitations, as defined in the agreement. The employment agreement renews annually in August unless either party gives the other notice of non-renewal at least six months prior to the end of the applicable term.

The employment agreement with the SVP of Engineering expires in August 2022 and provides for an annual salary of $361,000, and, if terminated by the Company without cause, severance of nine month’s salary and continued company-sponsored health insurance for six months from the date of termination.

The severance agreement is with the Executive Vice President of Operations and Chief Financial Officer and provides for, if terminated by the Company without cause or within three months of a change in corporate control of the Company, severance of nine month’s salary, continued company-sponsored health insurance for six months from the date of termination and certain non-compete and other restrictive provisions.

NOTE 14 – Geographical Data

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

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

	Three months ended March 31,				Nine months ended March 31,
	2022		2021		2022		2021
Sales to external customers (1):
Domestic	$	35,522	$	27,877	$	99,327	$	77,559
Foreign		383		351		1,037		1,047
Total Net Sales	$	35,905	$	28,228	$	100,364	$	78,606

	March 31, 2022		June 30, 2021
Identifiable assets:
United States	$	94,446	$	90,941
Dominican Republic (2)		42,660		31,610
Total Identifiable Assets	$	137,106	$	122,551

(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.

25

(2) Consists primarily of inventories (March 31, 2022 = $31,847; June 30, 2021 = $20,712), operating lease assets (March 31, 2022 = $7,356; June 30, 2021 = $7,373) and fixed assets (March 31, 2022 = $3,297; June 30, 2021 = $3,208) located at the Company’s principal manufacturing facility in the Dominican Republic.

NOTE 15 - 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.

26

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

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

This Quarterly Report on Form 10-Q and the documents we incorporate by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical fact, included or incorporated in this prospectus regarding our strategy, future operations, clinical trials, collaborations, intellectual property, cash resources, financial position, future revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “could,” “should,” “potential,” “likely,” “projects,” “continue,” “will,” “schedule,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. See “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2021 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 widely recognized brands, such as NAPCO Security Systems, Alarm Lock, Continental Access, Marks USA, and other popular product lines: including Gemini and F64-Series hardwire/wireless intrusion systems and iSee Video internet video solutions. We are also dedicated to developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks, including our StarLink, iBridge, and more recently the iSecure product lines. Today, millions of businesses, institutions, homes, and people around the globe are protected by products from the NAPCO Group of Companies.

Economic and Other Factors

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

27

Seasonality

The Company’s fiscal year begins on July 1 and ends on June 30. Historically, the end users of the Company’s equipment products want to install these products prior to the summer; therefore, sales of these products historically peak in the period April 1 through June 30, the Company’s fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company’s fiscal first quarter. Recurring service revenues, which comprise approximately 33.2% of the current fiscal year to date revenues, are not affected by seasonality. In addition, demand for our products is affected by the housing and construction markets. Deterioration of the current economic conditions may also affect this trend.

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

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 2021 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 March 31,								Nine months ended March 31,
	(dollars in thousands)								(dollars in thousands)
							% Increase/								% Increase/
	2022			2021			(decrease)		2022			2021			(decrease)
Net sales: equipment revenues	$	23,873		$	19,335		23.5	%	$	67,080		$	54,249		23.7	%
service revenues		12,032			8,893		35.3	%		33,284			24,357		36.7	%
		35,905			28,228		27.2	%		100,364			78,606		27.7	%
Gross profit: equipment		4,539			5,261		(13.7)	%		11,003			14,269		(22.9)	%
services		10,494			7,649		37.2	%		28,929			20,736		39.5	%
		15,033			12,910		16.4	%		39,932			35,005		14.1	%
Gross profit as a % of net sales:		41.9	%		45.7	%	(8.5)	%		39.8	%		44.5	%	(10.7)	%
equipment		19.0	%		27.2	%	(30.1)	%		16.4	%		26.3	%	(37.6)	%
services		87.2	%		86.0	%	1.4	%		86.9	%		85.1	%	2.1	%
Research and development		2,009			1,902		5.6	%		5,918			5,675		4.3	%
Selling, general and administrative		8,442			5,980		41.2	%		23,983			17,979		33.4	%
Selling, general and administrative as a percentage of net sales		23.5	%		21.2	%	11.0	%		23.9	%		22.9	%	4.5	%
Operating income		4,582			5,028		(8.9)	%		10,031			11,351		(11.6)	%
Interest and other income (expense), net		(177)			(44)		302.3	%		(102)			(53)		92.5	%
Gain on extinguishment of debt		—			—		—	%		3,904			—		100.0	%
Provision for income taxes		1,132			624		81.4	%		1,771			1,422		24.5	%
Net income		3,273			4,360		(24.9)	%		12,062			9,876		22.1	%

28

Net Sales for the three months ended March 31, 2022 increased by $7,677,000, or 27.2%, to $35,905,000 as compared to $28,228,000 for the same period a year ago. Sales for the nine months ended March 31, 2022 increased by $21,758,000, or 27.7% to $100,364,000 as compared to $78,606,000 for the same period a year ago. The increase in sales for the three months ended March 31, 2022 was due primarily to increased recurring communication service revenues ($3,139,000) and sales of intrusion and access products ($3,712,000) and door-locking products ($826,000). The increase in sales for the nine months ended March 31, 2022 was due primarily to increased recurring communication service revenues ($8,927,000) and sales of intrusion and access products ($8,714,000) and door-locking products ($4,117,000). The increase in hardware sales are due, in part, to the increase in customer demand after the decline that resulted from the COVID-19 pandemic.

Overall gross profit for the three months ended March 31, 2022 increased to $15,033,000 or 41.9% of sales as compared to $12,910,000 or 45.7% of sales for the same period a year ago. Gross profit on equipment sales for the three months ended March 31, 2022 decreased to $4,539,000 or 19.0% of equipment sales as compared to $5,261,000 or 27.2% of equipment sales for the same period a year ago.

Overall gross profit for the nine months ended March 31, 2022 increased to $39,932,000 or 39.8% of sales as compared to $35,005,000 or 44.5% of sales for the same period a year ago. Gross profit on equipment sales for the nine months ended March 31, 2022 decreased to $11,003,000 or 16.4% of equipment sales as compared to $14,269,000 or 26.3% of equipment sales for the same period a year ago.

The decrease in gross profit on equipment sales and gross profit as a percentage of equipment sales for the three and nine months was primarily due to continued inflation of freight and component part costs relating to the current, world-wide supply chain problems, an unfavorable shift in product mix to the Company’s Starlink radio products (products which lead to the more profitable recurring service revenues) as well as more aggressive promotional pricing of these radios in order to increase the Company’s market share of these products.

Gross profit on service sales for the three months ended March 31, 2022 increased to $10,494,000 or 87.2% of service sales as compared to $7,649,000 or 86.0% of service sales for the same period a year ago. Gross profit on service sales for the nine months ended March 31, 2022 increased to $28,929,000 or 86.9% of service sales as compared to $20,736,000 or 85.1% of service sales for the same period a year ago. The increase in gross profit on service sales was due primarily to the 35.3% and 36.7% increases in sales of these services for the three and nine months ended March 31, 2022, respectively, as compared to the same periods a year ago as well as the continued shift in mix to the company’s fire radio services, which typically have a higher margin than those for intrusion radio services.

Research and development expenses for the three months ended March 31, 2022 increased $107,000 to $2,009,000, or 5.6% of net sales, as compared to $1,902,000, or 6.7% of net sales, for the same period a year ago. Research and development expenses for the nine months ended March 31, 2022 increased $243,000 to $5,918,000, or 5.9% of net sales, as compared to $5,675,000, or 7.2% of net sales, for the same period a year ago. The increase was due primarily to increased payroll while the decrease as a percentage of net sales was due primarily to the increase in net sales.

Selling, general and administrative expenses for the three months ended March 31, 2022 increased 41.2% to $8,442,000 from $5,980,000 for the same period a year ago. Selling, general and administrative expenses as a percentage of net sales increased to 23.5% for the three months ended March 31, 2022 as compared to 21.2% for the same period a year ago. Selling, general and administrative expenses for the nine months ended March 31, 2022 increased 33.4% to $23,983,000 from $17,979,000 for the same period a year ago. Selling, general and administrative expenses as a percentage of net sales increased to 23.9% for the nine months ended March 31, 2022 as compared to 22.9% for the same period a year ago. The increase in selling, general and administrative expenses was due primarily to increased sales incentive compensation relating to the increase in net sales as discussed above, as well as an increase in tradeshow and non-recurring legal expenses.

Other income (expense) for the three months ended March 31, 2022 decreased $133,000 to expense of $177,000 as compared to expense of $44,000 for the same period a year ago. Other income (expense) for the nine months ended March 31, 2022 increased $3,855,000 to income of $3,802,000 as compared to expense of $53,000 for the same period a year ago. The change in Other income (expense) was due primarily to the gain from the extinguishment of the Company’s $3,904,000 in PPP loans, which were forgiven by the SBA during the first quarter of fiscal 2022.

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The Company’s provision for income taxes for the three months ended March 31, 2022 increased by $508,000 to $1,132,000 as compared to $624,000 for the same period a year ago. The Company’s provision for income taxes for the nine months ended March 31, 2022 increased by $349,000 to $1,771,000 as compared to $1,422,000 for the same period a year ago. The increase in the provision for income taxes for the three and nine months was primarily due to higher taxable income in the U.S, as compared to income in the DR. The Company’s effective rate for income tax was 12.8% and 12.6% for the nine months ended March 31, 2022 and 2021, respectively.

Net income for the three months ended March 31, 2022 decreased by $1,087,000 to $3,273,000 or $0.09 per diluted share as compared to $4,360,000 or $0.12 per diluted share for the same period a year ago. The decrease in net income for the three months ended March 31, 2022 was primarily due to the items described above. Net income for the nine months ended March 31, 2021 increased by $2,186,000 to $12,062,000 or $0.33 per diluted share as compared to $9,876,000 or $0.27 per diluted share for the same period a year ago. The increase in net income for the nine months ended March 31, 2022 was primarily due to the items described above.

Liquidity and Capital Resources

During the nine months ended March 31, 2022, the Company utilized a portion of its cash generated from operations ($1,247,000 of $8,413,000) to purchase property, plant and equipment ($1,189,000) and marketable securities ($58,000). The Company believes its current working capital, cash flows from operations and its revolving credit agreement will be sufficient to fund the Company’s operations through the next twelve months.

Accounts receivable at March 31, 2022 decreased by $3,872,000 to $24,209,000 as compared to $28,081,000 at June 30, 2021. This decrease is primarily the result of the higher sales volume of equipment during the quarter ended June 30, 2021, which is typically the Company’s highest, as compared to the quarter ended March 31, 2022.

Inventories at March 31, 2022 increased by $10,978,000 from June 30, 2021. This increase is primarily the result of the Company level-loading its production output throughout the year, whereas the Company’s sales are typically highest in the fourth quarter as well as the continued increase in component unit costs and increased volume of purchases of certain components that have become difficult to source during the world-wide supply chain problems.

Accounts payable and accrued expenses other than accrued income taxes increased by $5,264,000 as of March 31, 2022, as compared to June 30, 2021. This increase was due primarily to the increase in component part purchases as described above.

As of March 31, 2022, the Company maintained a revolving credit facility of $11,000,000 which expires in June 2024. As of March 31, 2022, the Company had no outstanding borrowings and $11,000,000 in availability under the revolving credit facility which is described more fully in Note 8 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 March 31, 2022 the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

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 $802,000.

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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.

At the conclusion of the period ended March 31, 2022, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at March 31, 2022.

During the three and nine months ended March 31, 2022, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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, 2021. There has been no material change in the risk factors previously disclosed in the Company’s Form 10-K for the three and nine months ended March 31, 2022, except for the following:  The Company’s Accounts receivable has a high degree of concentration in a small number of customers (41% among three customers as of March 31, 2022). A credit loss resulting from one or more of these customers defaulting on their amounts due may negatively impact our financial condition and results of operations.

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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, Executive Vice President and Chief Financial Officer
32.1	Section 1350 Certifications
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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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.

May 17, 2022

NAPCO SECURITY TECHNOLOGIES, INC.

(Registrant)

By:	/s/ RICHARD L. SOLOWAY
	Richard L. Soloway
	Chairman of the Board of Directors, President and Secretary
	(Chief Executive Officer)
By:	/s/ KEVIN S. BUCHEL
	Kevin S. Buchel
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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