UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2021

OR

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

Commission File number:                0-10004                     

NAPCO SECURITY TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

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

(631) 842-9400

(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year if

changed from last report)

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

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

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

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

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

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of: November 5, 2021

COMMON STOCK, $.01 PAR VALUE PER SHARE     18,356,084

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

			Page
PART I:  FINANCIAL INFORMATION
	ITEM 1.	Financial Statements	3
		NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX –SEPTEMBER 30, 2021
		Condensed Consolidated Balance Sheets September 30, 2021 (unaudited) and June 30, 2021	3
		Condensed Consolidated Statements of Income for the Three Months ended September 30, 2021 and 2020 (unaudited)	4
		Condensed Consolidated Statements of Stockholders Equity for the Three Months Ended September 30, 2021 and 2020 (unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2021 and 2020 (unaudited)	6
		Notes to Condensed Consolidated Financial Statements (unaudited)	7
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	27
	ITEM 4.	Controls and Procedures	27
PART II:  OTHER INFORMATION
	ITEM 1A.	Risk Factors	27
	ITEM 6.	Exhibits	28
SIGNATURE PAGE			29

2

PART I:           FINANCIAL INFORMATION

Item 1.  Financial Statements

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2021
	(unaudited)		June 30, 2021
	(in thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents	$	37,744	$	34,806
Marketable securities		5,435		5,413
Accounts receivable, net of allowance for doubtful accounts of $226 at September 30, 2021 and June 30, 2021, and other reserves		25,343		28,081
Inventories, net		26,916		25,278
Income tax receivable		213		—
Prepaid expenses and other current assets		1,868		2,408
Total Current Assets		97,519		95,986
Inventories - non-current, net		7,350		7,164
Property, plant and equipment, net		8,018		7,836
Intangible assets, net		4,593		4,691
Operating lease asset		7,367		7,373
Other assets		331		243
TOTAL ASSETS	$	125,178	$	123,293
CURRENT LIABILITIES
Accounts payable	$	6,217	$	6,095
Accrued expenses		6,169		6,582
Accrued salaries and wages		3,315		3,478
Current portion of long-term debt		—		2,386
Accrued income taxes		—		1,635
Total Current Liabilities		15,701		20,176
Long term debt, net of current portion		—		1,518
Deferred income taxes		368		347
Accrued income taxes		930		925
Long term operating lease liabilities		7,085		7,090
Total Liabilities		24,084		30,056
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ EQUITY
Common Stock, par value $0.01 per share; 40,000,000 shares authorized; 21,247,299 and 21,244,799 shares issued; and 18,353,584 and 18,351,084 shares outstanding, respectively		212		212
Additional paid-in capital		18,306		18,201
Retained earnings		102,097		94,345
Less: Treasury Stock, at cost (2,893,715 shares)		(19,521)		(19,521)
TOTAL STOCKHOLDERS’ EQUITY		101,094		93,237
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	125,178	$	123,293

See accompanying notes to condensed consolidated financial statements.

3

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months ended September 30,
	2021		2020
	(in thousands, except for share and per share data)
Net sales:
Equipment revenues	$	20,827	$	15,898
Service revenues		10,224		7,275
		31,051		23,173
Cost of sales:
Equipment related expenses		16,172		11,307
Service-related expenses		1,423		1,174
		17,595		12,481
Gross Profit		13,456		10,692
Operating expenses:
Research and development		1,931		1,889
Selling, general, and administrative expenses		7,346		6,149
Total Operating Expenses		9,277		8,038
Operating Income		4,179		2,654
Other income (expense):
Interest and other income (expense), net		17		(6)
Gain on extinguishment of debt		3,904		—
Income before Provision for Income Taxes		8,100		2,648
Provision for Income Taxes		348		329
Net Income	$	7,752	$	2,319
Income per share:
Basic	$	0.42	$	0.13
Diluted	$	0.42	$	0.13
Weighted average number of shares outstanding:
Basic		18,350,000		18,347,000
Diluted		18,422,000		18,392,000

See accompanying notes to condensed consolidated financial statements.

4

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)

	Three months ended September 30, 2021 (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	21,244,799	$	212	$	18,201	(2,893,715)	$	(19,521)	$	94,345	$	93,237
Net income	—		—		—	—		—		7,752		7,752
Stock-based compensation expense	—		—		89	—		—		—		89
Stock options exercised	2,500		—		16	—		—		—		16
Balances at September 30, 2021	21,247,299	$	212	$	18,306	(2,893,715)	$	(19,521)	$	102,097	$	101,094

	Three months ended September 30, 2020 (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	21,241,066	$	212	$	17,766	(2,893,715)	$	(19,521)	$	79,444	$	77,901
Net income	—		—		—	—		—		2,319		2,319
Stock-based compensation expense	—		—		104	—		—		—		104
Balances at September 30, 2020	21,241,066	$	212	$	17,870	(2,893,715)	$	(19,521)	$	81,763	$	80,324

See accompanying notes to condensed consolidated financial statements.

5

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Three Months ended September 30,
	2021		2020
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	7,752	$	2,319
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		438		427
Gain on marketable securities		(3)		—
Deferred income taxes		21		(90)
Stock based compensation expense		89		104
Gain on extinguishment of debt		(3,904)		—
Changes in operating assets and liabilities:
Accounts receivable		2,738		3,726
Inventories		(1,824)		(688)
Prepaid expenses and other current assets		540		104
Other assets		(89)		—
Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes		(2,295)		(2,137)
Net Cash Provided by Operating Activities		3,463		3,765
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment		(522)		(143)
Purchases of marketable securities		(19)		—
Net Cash Used in Investing Activities		(541)		(143)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock option exercises		16		—
Net Cash Provided by Financing Activities		16		—
Net increase in Cash and Cash Equivalents		2,938		3,622
CASH AND CASH EQUIVALENTS - Beginning		34,806		18,248
CASH AND CASH EQUIVALENTS - Ending	$	37,744	$	21,870
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	4	$	6
Income taxes paid	$	2,169	$	643

See accompanying notes to condensed consolidated financial statements.

6

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

SEPTEMBER 30, 2021

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, 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 quarter of fiscal 2022 reflected the increase in customer demand after the creation of 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.

Accounting Estimates

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

Fair Value of Financial Instruments

The methods and assumptions used to estimate the fair value of the following classes of financial instruments were: Current Assets and Current Liabilities - The carrying amount of cash and cash equivalents, certificates of deposits, current receivables and payables and certain other short-term financial instruments approximate their fair value as of September 30, 2021 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 for each of the periods ended September 30, 2021 and June 30, 2021. The Company considers all highly liquid investments with original maturities of three months or less to be cash

7

equivalents. The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of September 30, 2021 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 evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value had been below cost basis, the financial condition of the issuer and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery of market value. The Company records an impairment charge to the extent that 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 months ended September 30, 2021, 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 September 30, 2021 and June 30, 2021, respectively. Our reserves for doubtful accounts are subjective critical estimates that have a direct impact on reported net earnings. These reserves are based upon the evaluation of our accounts receivable aging, specific exposures, sales levels and historical trends.

Inventories

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

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

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

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major renewals and improvements are capitalized. At the time property and equipment are retired or

8

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):

	September 30, 2021						June 30, 2021
	Carrying		Accumulated		Net book		Carrying		Accumulated		Net book
	value		amortization		value		value		amortization		value
Customer relationships	$	9,800		(9,002)	$	798	$	9,800	$	(8,955)	$	845
Trade name		4,048		(253)		3,795		4,048		(202)		3,846
	$	13,848	$	(9,255)	$	4,593	$	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 September 30, 2021 and 2020, 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 16.7 years and 16.9 years at September 30, 2021 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.

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

9

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 September 30, 2021 and 2020 was $1,086,000 and $343,000, respectively.

Research and Development Costs

Research and development (“R&D”) costs incurred by the Company are charged to expense as incurred and are included in operating expenses in the consolidated statements of income. Company-sponsored R&D expense for the three months ended September 30, 2021 and 2020 was $1,931,000 and $1,889,000, respectively.

Income Taxes

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

Net Income per Share

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

The following provides a reconciliation of information used in calculating the per share amounts for the three months ended September 30, 2021 and 2020 (in thousands, except share and per share data):

	Net Income				Weighted Average Shares		Net Income per Share
	2021		2020		2021	2020	2021		2020
Basic EPS	$	7,752	$	2,319	18,350	18,347	$	0.42	$	0.13
Effect of Dilutive Securities:
Stock Options		—		—	72	45		—		—
Diluted EPS	$	7,752	$	2,319	18,422	18,392	$	0.42	$	0.13

Options to purchase 40,000 shares of common stock were excluded for the three months ended September 30, 2020, 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. There were no anti-dilutive common share equivalents for the three months ended September 30, 2021.

10

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 $89,000 and $104,000 were recognized for the three months ended September 30, 2021 and 2020, respectively.

Foreign Currency

The Company has determined the functional currency of all foreign subsidiaries is the U.S. Dollar. All foreign operations are considered a direct and integral part or extension of the Company’s operations. The day-to-day operations of all foreign subsidiaries are dependent on the economic environment of the U.S. Dollar. Therefore, no realized and unrealized gains and losses associated with foreign currency translation are recorded for the three months ended September 30, 2021 or 2020.

Comprehensive Income

For the three months ended September 30, 2021 and 2020, the Company’s operations did not give rise to material items includable in comprehensive income, which were not already included in net income. Accordingly, the Company’s comprehensive income approximates its net income for all periods presented.

Segment Reporting

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

Shipping and Handling Sales and Costs

The Company records the amount billed to customers for shipping and handling in net sales ($106,000 in each of the three months ended September 30, 2021 and 2020) and classifies the costs associated with these sales in cost of sales ($333,000 and $221,000 in the three months ended September 30, 2021 and 2020, 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

11

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 is currently assessing the impact of applying this guidance on its existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance.

NOTE 2 – Revenue Recognition and Contracts with Customers

The Company is engaged in one major line of business: the development, manufacture, and distribution of security products, encompassing access control systems, door security products, intrusion and fire alarm systems, alarm communication services, and video surveillance products for commercial and residential use. The Company also provides wireless communication service for intrusion and fire alarm systems on a monthly basis. All of these products 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.

As of September 30, 2021 and June 30, 2021, the Company included refund liabilities of approximately $3,846,000 and $4,277,000, respectively, in current liabilities. As of September 30, 2021 and June 30, 2021, the Company included return-related assets of approximately $911,000 and $890,000, respectively, in other current assets.

As a percentage of gross sales, sales returns, rebates and allowances were 8% and 9% for the three months ended September 30, 2021 and 2020, respectively.

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

	Three months ended September 30,
	2021		2020
Major Product Lines:
Intrusion and access alarm products	$	9,796	$	7,325
Door locking devices		11,031		8,573
Services		10,224		7,275
Total Revenues	$	31,051	$	23,173

12

NOTE 3 – Business and Credit Concentrations

An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company had one customer with an accounts receivable balance that comprised 12% and 12% of the Company’s accounts receivable at September 30, 2021 and June 30. 2021, respectively. Sales to this customer did not exceed 10%of net sales during the three months ended September 30, 2021 and 2020, respectively. The Company had another customer with an accounts receivable balance that comprised 11% of the Company’s accounts receivable at each September 30, 2021 and June 30, 2021. Sales to this customer did not exceed 10% of net sales during the three months ended September 30, 2021 and 2020, respectively. The Company had another customer with an accounts receivable balance that comprised 23% and 19% of the Company’s accounts receivable at September 30, 2021 and June 30, 2021. Sales to this customer were 14% of net sales during the three months ended September 30, 2021. Sales to this customer did not exceed 10% of net sales during the three months ended September 30, 2020.

NOTE 4 – Marketable Securities

Marketable securities include investments in fixed income mutual funds, which are reported at their fair values. There were no realized or unrealized gains and losses for the three months ended September 30, 2020. The disaggregated net gains and losses on the marketable securities recognized within the accompanying condensed consolidated statements of income for the three months ended September 30, 2021, are as follows (in thousands):

	September 30, 2021
Net gains recognized during the period on marketable securities	$	—
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		3
	$	3

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

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

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

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

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

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

	September 30, 2021						June 30, 2021
					Unrealized						Unrealized
	Cost		Fair Value		Gain (Loss)		Cost		Fair Value		Gain (Loss)
Marketable Securities	$	5,441	$	5,435	$	(6)	$	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.

13

NOTE 5 - Inventories

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

	September 30,		June 30,
	2021		2021
Component parts	$	18,937	$	17,929
Work-in-process		6,504		6,158
Finished product		8,825		8,355
	$	34,266	$	32,442
Classification of inventories, net of reserves:
Current	$	26,916	$	25,278
Non-current		7,350		7,164
	$	34,266	$	32,442

NOTE 6 – Property, Plant, and Equipment

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

	September 30, 2021		June 30, 2021		Useful Life in Years
Land	$	904	$	904	N/A
Buildings		8,911		8,911	30 to 40
Molds and dies		7,463		7,416	3 to 5
Furniture and fixtures		2,822		2,813	5 to 10
Machinery and equipment		26,006		25,548	7 to 10
Building improvements		2,418		2,409	Shorter of the lease term or life of asset
		48,524		48,001
Less: accumulated depreciation and amortization		(40,506)		(40,165)
	$	8,018	$	7,836

Depreciation and amortization expense on property, plant, and equipment was approximately $340,000 and $317,000 in the three months ended September 30, 2021 and 2020, 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 months ended September 30, 2021, the Company recognized net income tax expense of $348,000. During the three months ended September 30, 2021, 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 September 30, 2021, the Company had accrued interest totaling $69,000, as well as $679,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. For the three months ended September 30, 2021, 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.

14

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 September 30, 2021, 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. In July 2019, the Company received a Form 4549-A, Income Tax Examination Changes from the IRS proposing an adjustment to income for the fiscal 2016 tax year regarding deemed dividends based on its interpretation under Internal Revenue Code (“IRC”) Section 956 arising from the intercompany balances on the books of the Company. In August 2019, the Company filed a formal protest with the IRS requesting an opportunity to appeal the examination findings to the Appeals Office. During fiscal year 2020, the Company settled the issue at Appeals and recorded a provision for the federal and state impact of $762,000 and $70,000 respectively. 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. The Company received Form 4549-A, Income Tax Examination Changes from the IRS proposing an adjustment to income for the fiscal 2017 tax year regarding deemed dividends based on its interpretation under IRC Section 956 arising from the intercompany balances on the books of the Company. 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. Subsequent to the quarter end, 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.

NOTE 8 - Long-Term Debt

As of September 30, 2021 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.

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

	September 30, 2021				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 the proceeds of promissory notes dated between April 17, 2020 and May 7, 2020 with an aggregate principal amount of $3,904,000 (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.

15

Pursuant to the CARES Act, the loans may be forgiven by the SBA. During the three months ended September 30, 2021, the PPP Loans were legally 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. The SBA reserves the right to audit PPP forgiveness applications for a period of six years from the date of forgiveness. It has indicated that it will audit all of those that are in excess of $2 million.

NOTE 9 - Stock Option

The Company follows ASC 718 (“Share-Based Payment”), which requires that all share-based payments to employees, including stock options, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period. For the three months ended September 30, 2021 and 2020, the Company recorded non-cash compensation expense of $89,000 ($0.00 per basic and diluted share) and $104,000 ($0.01 per basic and diluted share), respectively, relating to stock-based compensation.

2012 Employee Stock Option Plan

In December 2012, the stockholders approved the 2012 Employee Stock Option Plan (the 2012 Employee Plan). The 2012 Employee Plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 950,000 shares of the Company’s common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options (ISOs), to valued employees. Any plan participant who is granted ISOs and possesses more than 10% of the voting rights of the Company’s outstanding common stock must be granted an option with a price of at least 110% of the fair market value on the date of grant.

Under the 2012 Employee Plan, stock options may be granted to valued employees with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable, in whole or in part, at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At September 30, 2021, 104,540 stock options were outstanding, 48,988 stock options were exercisable and 738,460 stock options were available for grant under this plan. During the quarter ended September 30, 2021, certain employees exercised options totaling 2,500 shares. No options were granted under this plan during the quarter ended September 30, 2021 and 2020, 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:

	2021		2020
Risk-free interest rates	n/a	%	n/a	%
Expected lives	n/a		n/a
Expected volatility	n/a	%	n/a	%
Expected dividend yields	n/a	%	n/a	%

16

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

	2021				2020
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		107,040	$	19.18		117,840	$	18.84
Granted		—		—		—		—
Forfeited/Lapsed		—		—		—		—
Exercised		(2,500)	$	6.31		—		—
Outstanding, end of period		104,540	$	19.48		117,840	$	18.84
Exercisable, end of period		48,988	$	16.95		37,400	$	13.73
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised	$	94,000				n/a
Total intrinsic value of options outstanding	$	2,467,000			$	706,000
Total intrinsic value of options exercisable	$	1,280,000			$	399,000

2,500 stock options were exercised during the three months ended September 31, 2021. There were no stock options exercised during the quarter ended September 30, 2020. $16,000 cash was received from option exercises during the three months ended September 30, 2021, and the actual tax benefit realized for the tax deductions from option exercises was $0.

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at September 30, 2021:

	Options outstanding				Options exercisable
		Weighted average
	Number	remaining	Weighted average		Number	Weighted average
Range of exercise prices	outstanding	contractual life	exercise price		exercisable	exercise price
$4.37 ‑ $33.59	104,540	7.31	$	19.48	48,988	$	16.95
	104,540	7.31	$	19.48	48,988	$	16.95

As of September 30, 2021, there was $499,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. There were no grants of options in either quarter ended September 30, 2021 and 2020, respectively. 2,400 options vested during the three months ended September 30, 2021 and 2020, respectively. The total fair value of the options vesting during the three months ended September 30, 2021 and 2020 under this plan was $29,000 and $29,000, respectively.

2012 Non-Employee Stock Option Plan

In December 2012, the stockholders approved the 2012 Non-Employee Stock Option Plan (the 2012 Non-Employee Plan). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 50,000 shares of the Company’s common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.

Under the 2012 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At September 30, 2021, 6,000 stock options were outstanding, 3,120 stock options were exercisable and 4,800 stock options were available for grant under this plan. There were no exercises during the three months ended September 30, 2021. No options were granted under this plan during the three months ended September 30, 2021 and 2020, respectively.

17

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:

	2021		2020
Risk-free interest rates	n/a	%	n/a	%
Expected lives	n/a		n/a
Expected volatility	n/a	%	n/a	%
Expected dividend yields	n/a	%	n/a	%

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

	2021				2020
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		6,000	$	13.10		12,000	$	10.29
Granted		—		—		—		—
Forfeited/Lapsed		—		—		—		—
Exercised		—		—		—		—
Outstanding, end of period		6,000	$	13.10		12,000	$	10.29
Exercisable, end of period		3,120	$	12.08		5,760	$	8.35
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	180,000			$	159,000
Total intrinsic value of options exercisable	$	97,000			$	87,000

No stock options were exercised during the three months ended September 30, 2021 or 2020. No cash was received from option exercises during either of the three months ended September 30, 2021 or 2020 and the actual tax benefit realized for the tax deductions from option exercises was $0 for both periods.

The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at September 30, 2021:

	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
$8.70 - $23.35	6,000	6.85	$	13.10	3,120	$	12.08
	6,000	6.85	$	13.10	3,120	$	12.08

As of September 30, 2021, there was $10,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. No options were granted during the three months ended September 30, 2021 or 2020. No options vested during the three months ended September 30, 2021 or 2020.

2018 Non-Employee Stock Option Plan

In December 2018, the stockholders approved the 2018 Non-Employee Stock Option Plan (the “2018 Non-Employee Plan”). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.

Under the 2018 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At September 30, 2021, 35,050 stock options were outstanding, 14,980 stock options were exercisable and 11,750 stock options were available for grant under this plan. No

18

options were exercised under this plan for the three months ended September 30, 2021. No options were granted under this plan during the three months ended September 30, 2021 and 2020, 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:

	2021		2020
Risk-free interest rates	n/a	%	n/a	%
Expected lives	n/a		n/a
Expected volatility	n/a	%	n/a	%
Expected dividend yields	n/a	%	n/a	%

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

	2021				2020
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		35,050	$	23.85		48,400	$	23.48
Granted		—		—		—		—
Forfeited/Lapsed		—		—		—		—
Exercised		—		—		—		—
Outstanding, end of period		35,050	$	23.85		48,400	$	23.48
Exercisable, end of period		14,980	$	23.36		12,240	$	21.96
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	674,000			$	114,000
Total intrinsic value of options exercisable	$	295,000			$	41,000

No stock options were exercised during the three months ended September 30, 2021 or 2020. No cash was received from option exercises during either of the three months ended September 30, 2021 or 2020 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 2018 Non-Employee Plan at September 30, 2021:

	Options outstanding				Options exercisable
		Weighted average	Weighted			Weighted
	Number	remaining	average exercise		Number	average exercise
Range of exercise prices	outstanding	contractual life	price		exercisable	price
$16.20 - $30.54	35,050	7.95	$	23.85	14,980	$	23.36
	35,050	7.95	$	23.85	14,980	$	23.36

As of September 30, 2021, there was $186,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2018 Non-Employee Plan. No options were granted during the three months ended September 30, 2021 or 2020. No options vested during the three months ended September 30, 2021 or 2020.

2020 Non-Employee Stock Option Plan

In May 2020, the stockholders approved the 2020 Non-Employee Stock Option Plan (the “2020 Non-Employee Plan”). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 50,000 shares of the Company's common

19

stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.

Under the 2020 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At September 30, 2021, 5,000 stock options were outstanding, 2,000 stock options were exercisable and 45,000 stock options were available for grant under this plan. There were no grants for the three months ended September 30, 2021.

The fair value of each option granted during the three months year ended September 30, 2021 and 2020 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2021		2020
Risk-free interest rates	n/a	%	0.62	%
Expected lives	n/a		10
Expected volatility	n/a	%	45	%
Expected dividend yields	n/a	%	0	%

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

	2021				2020
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		5,000	$	22.80		—		—
Granted		—		—		5,000	$	22.80
Forfeited/Lapsed		—		—		—		—
Exercised		—		—		—		—
Outstanding, end of period		5,000	$	22.80		5,000	$	22.80
Exercisable, end of period		2,000	$	22.80		1,000	$	22.80
Weighted average fair value at grant date of options granted		n/a			$	12.20
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	101,000			$	4,000
Total intrinsic value of options exercisable	$	41,000			$	1,000

No stock options were exercised during the three months ended September 30, 2021 or 2020. No cash was received from option exercises during either of the three months ended September 30, 2021 or 2020 and the actual tax benefit realized for the tax deductions from option exercises was $0 for both periods.

The following table summarizes information about stock options outstanding under the 2020 Non-Employee Plan at September 30, 2021:

	Options outstanding				Options exercisable
		Weighted average
	Number	remaining	Weighted average		Number	Weighted average
Range of exercise prices	outstanding	contractual life	exercise price		exercisable	exercise price
$22.80	5,000	8.93	$	22.80	2,000	$	22.80
	5,000	8.93	$	22.80	2,000	$	22.80

As of September 30, 2021, there was $34,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan. There were no grants of options in the three months ended September 30, 2021. There were 5,000 options granted during the three months ended September 30, 2020. 1,000 options vested during the three months ended September 30, 2021 and 2020, respectively. The total fair value of the options vesting during the three months ended September 30, 2021 and 2020 under this plan was $12,000 and $12,000, respectively.

20

NOTE 10 – Stockholders’ Equity Transactions

On September 16, 2014, the Company’s board of directors authorized the repurchase of up to 1 million of the approximately 19.4 million shares of the Company’s common stock then outstanding. Such repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions and the market price of the common stock. Relative to the loan agreement described in Note 8, the Company’s lender gave its consent to this stock repurchase plan. During the three months ended September 30, 2021, and the fiscal year ended June 30, 2021, the Company did not repurchase any shares of its outstanding common stock. Pursuant to the PPP Loan Agreement 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.

During the three months ended September 30, 2021, an employee exercised stock options under the Company's 2012 Employee Stock Option Plan totaling 2,500 shares. This exercises was completed as a cash exercises as allowed for under the Plan. $16,000 was received in exchange for 2,500 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 7,100 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 3,367 and was based upon the per share price on the effective date of the option exercise.

NOTE 11 – Related Party Transaction

On December 15, 2020, 2,333,071 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 334,961 shares of common stock at the secondary offering price of $26.00 per share ("Greenshoe"), less underwriting discounts and commissions, which consists solely of shares sold by the Company's President and Chairman. The Company received no 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 $36,000 and $32,000 for the three months ended September 30, 2021 and 2020, 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 four acres of land in the Dominican Republic on which the Company’s principal production facility is located. The lease, which commenced on April 26, 1993 and expires in 2092, 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 months ended September 30, 2021 and 2020, cash payments against operating lease liabilities totaled $72,000 respectively.

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

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

21

The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2021 (in thousands):

Year Ending June 30,	Amount
2022	$	213
2023		275
2024		265
2025		256
2026		247
Thereafter		6,111
Total	$	7,367

Operating lease expense totaled approximately $80,000 and $79,000, for the three months ended September 30, 2021 and 2020, 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 September 30, 2021, the Company was obligated under two employment agreements and one severance agreement. The employment agreements are with the Company’s CEO and the Senior Vice President of Engineering (“the SVP of Engineering”). The employment agreement with the CEO provides for an annual salary of $838,000, 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 $347,000, 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 Senior Vice President of Operations and Finance and provides for, if terminated by the Company without cause or within three months of a change in corporate control of the Company, severance of nine month’s salary, continued company-sponsored health insurance for six months from the date of termination and certain non-compete and other restrictive provisions.

22

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 September 30,
	2021		2020
Sales to external customers (1):
Domestic	$	30,782	$	22,889
Foreign		269		284
Total Net Sales	$	31,051	$	23,173

	September 30, 2021		June 30, 2021
Identifiable assets:
United States	$	91,675	$	91,375
Dominican Republic (2)		33,503		31,918
Total Identifiable Assets	$	125,178	$	123,293

(1) All of the Company’s sales originate in the United States and are shipped primarily from the Company’s facilities in the United States. There were no sales into any one foreign country in excess of 10% of total Net Sales.

(2) Consists primarily of inventories (September 30, 2021 = $22,481; June 30, 2021 = $21,020), operating lease assets (September 30, 2021 = $7,367; June 30, 2021 = $7,373) and fixed assets (September 30, 2021 = $3,248; 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.

23

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.

24

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. 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 quarter of fiscal 2022 reflected the increase in customer demand after the creation of 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 September 30,
	(dollars in thousands)
							% Increase/
	2021			2020			(decrease)
Net sales: equipment revenues	$	20,827		$	15,898		31.0	%
service revenues		10,224			7,275		40.5	%
		31,051			23,173		34.0	%
Gross profit: equipment		4,655			4,591		1.4	%
services		8,801			6,101		44.3	%
		13,456			10,692		25.9	%
Gross profit as a % of net sales:		43.3	%		46.1	%	(6.1)	%
equipment		22.4	%		28.9	%	(22.6)	%
services		86.1	%		83.9	%	2.6	%
Research and development		1,931			1,889		2.2	%
Selling, general and administrative		7,346			6,149		19.5	%
Selling, general and administrative as a percentage of net sales		23.7	%		26.5	%	(10.6)	%
Operating income		4,179			2,654		57.5	%
Interest and other income (expense), net		17			(6)		(383.3)	%
Gain on extinguishment of debt		3,904			—		—	%
Provision for income taxes		348			329		5.8	%
Net income		7,752			2,319		234.3	%

Results of Operations

Sales for the three months ended September 30, 2021 increased by $7,878,000, or 34.0%, to $31,051,000 as compared to $23,173,000 for the same period a year ago. The increase in sales for the three months ended September 30, 2021 was due primarily to increased recurring communication service revenues ($2,949,000) and sales of intrusion and access products ($2,471,000) and door-locking products ($2,458,000).

Gross profit for the three months ended September 30, 2021 increased to $13,456,000 or 43.3% of sales as compared to $10,692,000 or 46.1% of sales for the same period a year ago. While gross profit on equipment sales for the three months ended September 30, 2021 increased to $4,655,000 or 22.4% of equipment sales as compared to $4,591,000 or 28.9% of equipment sales for the same period a year ago, the decrease in gross profit as a percentage of equipment sales for the three months was primarily due to increased freight and

25

component part costs relating to the current, world-wide supply chain problems, an unfavorable shift in product mix from door-locking products to intrusion products (which include the Company’s Starlink radio products which lead to the more profitable recurring service revenues) as well as aggressive promotional pricing of these radios. The increase in gross profit of equipment sales for the three months was due to the increase in net sales of equipment. Gross profit on sales of services for the three months ended September 30, 2021 increased to $8,801,000 or 86.1% of service sales as compared to $6,101,000 or 83.9% of service sales for the same period a year ago. The increase in gross profit on service revenues was due primarily to the 40.5% increase in sales of these services.

Research and development expenses for the three months ended September 30, 2021 increased $42,000 to $1,931,000, or 6.2% of net sales, as compared to $1,889,000, or 8.2% 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 September 30, 2021 increased 19.5% to $7,346,000 from $6,149,000 for the same period a year ago. Selling, general and administrative expenses as a percentage of net sales decreased to 23.7% for the three months ended September 30, 2021 as compared to 26.5% for the same period a year ago. The increase in selling, general and administrative expenses was due primarily to tradeshow and advertising expenses, which were curtailed during the COVID-19 pandemic, as well as increased sales incentives relating to the increase in net sales as discussed above. The decrease in selling, general and administrative expenses as a percentage of net sales was due primarily to the increase in net sales as partially offset by the increase in expenses.

Other income (expense) for the three months ended September 30, 2021 increased $3,927,000 to income of $3,921,000 as compared to expense of $6,000 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 three months ended September 30, 2021.

The Company’s provision for income taxes for the three months ended September 30, 2021 increased by $19,000 to $348,000 as compared to $329,000 for the same period a year ago. The increase in the provision for income taxes for the three months was primarily due to higher taxable income in the U.S, as compared to income in the DR. The Company’s effective rate for income tax was 4.3% and 12% for the three months ended September 30, 2021 and 2020, respectively. The decrease in the Company’s effective rate for the three months ended September 30, 2021 was due primarily to the income recognized as a result of the PPP loan forgiveness being non-taxable.

Net income for the three months ended September 30, 2021 increased by $5,433,000 to $7,752,000 or $0.42 per diluted share as compared to $2,319,000 or $0.13 per diluted share for the same period a year ago. The increase in net income for the three months ended September 30, 2021 was primarily due to the items described above.

Liquidity and Capital Resources

During the three months ended September 30, 2021, the Company utilized a portion of its cash generated from operations ($541,000 of $3,463,000) to purchase property, plant and equipment ($522,000) and marketable securities ($19,000). The Company believes its current working capital, cash flows from operations and its revolving credit agreement will be sufficient to fund the Company’s operations through the next twelve months.

Accounts receivable at September 30, 2021 decreased by $2,738,000 to $25,343,000 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 September 30, 2021.

Inventories at September 30, 2021 increased by $1,824,000 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 increasing 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 decreased by $454,000 as of September 30, 2021, as compared to June 30, 2021. This decrease was due primarily to the decrease in the accrued refund liability caused by lower equipment sales for the three months ended September 30, 2021, as compared to equipment sales for the three months ended June 30, 2021, which is typically the Company’s highest.

26

As of September 30, 2021, the Company maintained a revolving credit facility of $11,000,000 which expires in June 2024. As of September 30, 2021, 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 September 30, 2021 the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

All foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto its foreign customers. As a result, if exchange rates move against foreign customers, the Company could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company’s business, financial condition and results of operations. We are also exposed to foreign currency risk relative to expenses incurred in Dominican Pesos (“RD$”), the local currency of the Company’s production facility in the Dominican Republic. The result of a 10% strengthening or weakening in the U.S. dollar to the RD$ would result in an annual increase or decrease in income from operations of approximately $700,000.

ITEM 4: Controls and Procedures

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

At the conclusion of the period ended September 30, 2021, 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 September 30, 2021.

During the three months ended September 30, 2021, 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 months ended September 30, 2021, except for the following:  The Company’s Accounts receivable has a high degree of concentration in a small number of customers (43% among three customers as of September 30, 2021). 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.

27

Item 6. Exhibits

31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Richard L. Soloway, Chairman of the Board and President
31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Kevin S. Buchel, Senior Vice President of Operations and Finance
32.1	Section 1350 Certifications
101.INS	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)

28

SIGNATURES

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

November 8, 2021

NAPCO SECURITY TECHNOLOGIES, INC.

(Registrant)

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

29