Form 10-Q - Quarterly report [Sections 13 or 15(d)]

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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, 2024


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


Commission File number: 0-10004

NAPCO SECURITY TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

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

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

(631) 842-9400

(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year if

changed from last report)

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

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

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

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

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

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

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of: November 1, 2024

COMMON STOCK, $.01 PAR VALUE PER SHARE 36,684,068

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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, 2024
	Condensed Consolidated Balance Sheets as of September 30, 2024 and June 30, 2024 (unaudited)	3
	Condensed Consolidated Statements of Income for the Three Months ended September 30, 2024 and 2023 (unaudited)	4
	Condensed Consolidated Statements of Stockholders Equity for the Three Months Ended September 30, 2024 and 2023 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2024 and 2023 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	31
ITEM 4.	Controls and Procedures	32
PART II: OTHER INFORMATION
ITEM 1.	Legal Proceedings	33
ITEM 1A.	Risk Factors	33
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
ITEM 3.	Defaults Upon Senior Securities	33
ITEM 4.	Mine Safety Disclosures	33
ITEM 5.	Other Information	33
ITEM 6.	Exhibits	34
SIGNATURE PAGE		35

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



	September 30, 2024		June 30, 2024

	(in thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents	$	85,596	$	65,341
Investments - other		10,926		26,980
Marketable securities		5,666		5,398
Accounts receivable, net of allowance for credit losses of $23 and $32 as of September 30, 2024 and June 30, 2024, respectively		28,236		31,898
Inventories		36,395		34,804
Income tax receivable		144		73
Prepaid expenses and other current assets		4,466		4,269
Total Current Assets		171,429		168,763
Inventories - non-current		13,782		15,109
Property, plant and equipment, net		9,287		9,077
Intangible assets, net		3,523		3,602
Deferred income taxes		6,177		5,428
Operating lease - Right-of-use asset		5,410		5,487
Other assets		283		286
TOTAL ASSETS	$	209,891	$	207,752

CURRENT LIABILITIES
Accounts payable	$	5,936	$	7,977
Accrued expenses		9,446		10,345
Accrued salaries and wages		4,694		3,907
Dividend payable		4,610		—
Total Current Liabilities		24,686		22,229
Accrued income taxes		1,136		1,122
Operating lease liability		5,460		5,512
TOTAL LIABILITIES		31,282		28,863
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ EQUITY
Common Stock, par value $0.01 per share; 100,000,000 shares authorized as of September 30, 2024 and June 30, 2024; 39,771,035 and 39,768,186 shares issued; and 36,684,068 and 36,874,471 shares outstanding, respectively.		398		398
Additional paid-in capital		24,137		23,712
Retained earnings		180,875		174,300
Less: Treasury Stock, at cost (3,086,967 and 2,893,715 shares as of September 30, 2024 and June 30, 2024, respectively)		(26,801)		(19,521)
TOTAL STOCKHOLDERS’ EQUITY		178,609		178,889
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	209,891	$	207,752

See accompanying notes to condensed consolidated financial statements.

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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)


	Three Months Ended September 30,
	2024		2023

	(in thousands, except for share and per share data)
Net sales:
Equipment revenues	$	22,917	$	24,391
Service revenues		21,086		17,285
		44,003		41,676
Cost of sales:
Equipment-related expenses		17,510		17,497
Service-related expenses		1,877		1,766
		19,387		19,263

Gross Profit		24,616		22,413

Operating expenses:
Research and development		3,057		2,437
Selling, general, and administrative expenses		9,703		8,421
Total Operating Expenses		12,760		10,858

Operating Income		11,856		11,555

Other income:
Interest and other income (expense), net		1,144		440
Income before Provision for Income Taxes		13,000		11,995
Provision for Income Taxes		1,815		1,517
Net Income	$	11,185	$	10,478

Income per share:
Basic	$	0.30	$	0.28
Diluted	$	0.30	$	0.28

Weighted average number of shares outstanding:
Basic		36,865,000		36,827,000
Diluted		37,180,000		37,076,000

See accompanying notes to condensed consolidated financial statements.

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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)


	Three months ended September 30, 2024 (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, 2024	39,768,186	$	398	$	23,712	(2,893,715)	$	(19,521)	$	174,300	$	178,889
Net income	—		—		—	—		—		11,185		11,185
Stock-based compensation expense	—		—		371	—		—		—		371
Stock options exercised	2,849		—		54	—		—		—		54
Purchase of treasury shares	—		—		—	(193,252)		(7,280)		—		(7,280)
Cash dividend ($.125 per share)	—		—		—	—		—		(4,610)		(4,610)
Balances at September 30, 2024	39,771,035	$	398	$	24,137	(3,086,967)	$	(26,801)	$	180,875	$	178,609


	Three months ended September 30, 2023 (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, 2023	39,663,812	$	397	$	21,553	(2,893,715)	$	(19,521)	$	137,740	$	140,169
Net income	—		—		—	—		—		10,478		10,478
Stock-based compensation expense	—		—		307	—		—		—		307
Cash dividend ($.08 per share)	—		—		—	—		—		(2,942)		(2,942)
Balances at September 30, 2023	39,663,812	$	397	$	21,860	(2,893,715)	$	(19,521)	$	145,276	$	148,012

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)


	Three Months ended September 30,
	2024		2023

	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	11,185	$	10,478
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		549		537
Interest (income) expense on other investments		(193)		76
Unrealized (gain) loss on marketable securities		(157)		57
(Recovery of) credit losses		(9)		(24)
Change to inventory reserve		(235)		822
Deferred income taxes		(749)		(80)
Stock based compensation expense		371		307
Changes in operating assets and liabilities:
Accounts receivable		3,671		3,172
Inventories		(30)		(6,620)
Prepaid expenses and other current assets		(197)		330
Income tax receivable		(71)		(130)
Other assets		3		17
Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes		(2,113)		2,267
Net Cash Provided by Operating Activities		12,025		11,209
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment		(680)		(256)
Purchases of marketable securities		(111)		(42)
Purchases of other investments		(46)		(347)
Redemption of other investments		16,293		—
Net Cash Provided by (Used in) Investing Activities		15,456		(645)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock option exercises		54		—
Cash paid for dividend		—		(2,942)
Cash paid for purchase of treasury shares		(7,280)		—
Net Cash Used in Financing Activities		(7,226)		(2,942)

Net increase in Cash and Cash Equivalents		20,255		7,622
CASH AND CASH EQUIVALENTS - Beginning		65,341		35,955
CASH AND CASH EQUIVALENTS - Ending	$	85,596	$	43,577
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	8	$	—
Income taxes paid	$	2,620	$	1,703
Non-Cash Investing and Financing Transactions
Cash dividends declared and not paid	$	4,610	$	—

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)

September 30, 2024

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

Nature of Business:

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

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. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Critical estimates include management’s judgments associated with reserves for sales returns and allowances, allowance for credit losses, overhead expenses applied to inventory, inventory reserves, valuation of intangible assets, share based compensation and income taxes. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these 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, marketable securities, current receivables and payables and certain other short-term financial instruments approximate their fair value as of September 30, 2024 and June 30, 2024 due to their short-term maturities.

Cash and Cash Equivalents and Investments – other

All financial instruments purchased with an original maturity of three months or less at the time of purchase are considered cash equivalents. Such items may include liquid money market funds, certificate of deposit and time deposit accounts. Investments that are classified as cash equivalents are carried at cost, which approximates fair value. Certificate of deposits with an original maturity greater than three months are classified as Investments – other.

Cash and cash equivalents include approximately $73,055,000 of short-term time deposits in money market funds as of September 30, 2024. Cash and cash equivalents include approximately $46,518,000 of short-term time deposits, consisting of several certificates of deposit totaling $5,402,000 and $41,116,000 in a money market fund as of June 30, 2024. The Company classifies these highly liquid

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investments with original maturities of three months or less as cash equivalents. Certificates of deposit with an original maturity greater than three months are classified as Investments-other.

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


	September 30, 2024		June 30, 2024

Cash	$	12,541	$	18,823
Money Market Fund		73,055		41,116
Certificate of Deposits		—		5,402
	$	85,596	$	65,341

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


	September 30, 2024		June 30, 2024

Certificate of Deposits	$	10,926	$	26,980
	$	10,926	$	26,980

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

September 30, 2024

Balance Sheet Classification

Interest Rate

Maturity Date

Cost

Carrying Value

Cash and Cash Equivalents

n/a

Investments - other

4.60% - 4.75%

10/24/2024

10,747

10,926


June 30, 2024

Balance Sheet Classification	Interest Rate		Maturity Date		Cost		Carrying Value
Cash and Cash Equivalents		4.70%		8/22/2024	$	5,374	$	5,402
Investments - other		4.55% - 4.75%		7/25/2024 - 10/24/2024		26,709		26,980

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, 2024 and June 30, 2024. 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 income (expense). 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 2024 and 2023, 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.

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Accounts Receivable

Accounts receivable is stated net of the reserves for credit losses of $23,000 and $32,000 as of September 30, 2024 and June 30, 2024, respectively. In accordance with ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), the Company recognizes an allowance for credit losses for trade receivables to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset which includes consideration of past events and historical loss experience, current events and also future events based on our expectation as of the balance sheet date. Receivables are written off when the Company determined that such receivables are deemed uncollectible. The Company pools its receivables based on similar risk characteristics in estimating its expected credit losses. In situations where a receivable does not share the same risk characteristics with other receivables, the Company measures those receivables individually. The Company also continuously evaluates such pooling decisions and adjusts as needed from period to period as risk characteristics change.

The Company utilizes the loss rate method in determining its lifetime expected credit losses on its receivables. This method is used for calculating an estimate of losses based primarily on the Company’s historical loss experience. In determining its loss rates, the Company evaluates information related to its historical losses, adjusted for current conditions and further adjusted for the period of time that can be reasonably forecasted. Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider all the following: past due receivables, the customer creditworthiness, changes in the terms of receivables, effect of other external forces such as competition, and legal and regulatory requirements on the level of estimated credit losses in the existing receivables.

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.

The Company records a reserve for excess and slow-moving inventory, which represents any excess of the cost of the inventory over its estimated realizable value. This reserve is calculated using an estimated excess and slow-moving percentage applied to the inventory based on age, historical trends, product life cycle, requirements to support forecasted sales, and the ability to find alternate applications of its raw materials and to convert finished product into alternate versions of the same product to better match customer demand. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. There is inherent professional judgment and subjectivity made by both production and engineering members of management in determining the estimated excess and slow-moving percentage (See Note 6).

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.

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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 consisted of the follows (in thousands):


	September 30, 2024						June 30, 2024
	Carrying		Accumulated		Net book		Carrying		Accumulated		Net book
	value		amortization		value		value		amortization		value
Customer relationships	$	9,800	$	(9,465)	$	335	$	9,800	$	(9,436)	$	364
Trade name		4,048		(860)		3,188		4,048		(810)		3,238
	$	13,848	$	(10,325)	$	3,523	$	13,848	$	(10,246)	$	3,602

Amortization expense for intangible assets subject to amortization was approximately $79,000 and $84,000 for the three months ended September 30, 2024 and 2023, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2026 - $297,000; 2027 - $283,000; 2028 - $269,000; 2029 - $210,000; and 2030 - $202,000. The weighted average remaining amortization period for intangible assets was 14.6 years and 14.8 years at September 30, 2024 and June 30, 2024, 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.

Equipment Revenue

Equipment revenue, which includes shipping and handling costs, is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single performance obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer, which is typically the date of shipment of the related equipment when the product is picked up by the carrier or customer. A provision for product returns, credits and rebates is recorded as a reduction of equipment revenue in the same period the revenue is recognized.

The Company provides limited standard warranty for defective products, usually for a period of 24 to 36 months, and 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. Reserves are established for the estimated returns, rebates and credits and such variable consideration is measured based on the expected value method.

The Company analyzes product sales returns and is able to make reasonable and reliable estimates of product returns based on several factors including actual returns and expected return data communicated to the Company by its customers.

Service Revenue

Service revenue is primarily generated from the sale of monthly cellular communication services to customers. Those sales predominantly contain a single performance obligation and revenue is recognized ratably with the delivery of cellular communication service over the related monthly period, and when ownership, risks and rewards transfer to the customer.

The services are billed monthly, and customers have the right to cancel the cellular communication services at any time, however the contract with the customer does not provide for a refund.

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Cost of Sales

Equipment Cost of Sales

Equipment cost of sales is primarily comprised of direct materials and supplies consumed in the manufacturing of products, as well as manufacturing labor, depreciation expense and direct and indirect overhead expenses necessary to acquire and convert the purchased materials and supplies into finished products.

Service Cost of Sales

Service cost of sales includes the cost of operating our network operations center to manage and deliver telecommunication services.

Shipping and Handling Sales and Costs

The Company records the amount billed to customers for shipping and handling in net sales ($89,000 and $83,000 in the three months ended September 30, 2024 and 2023, respectively); and classifies the costs associated with these sales in cost of sales ($390,000 and $371,000 in the three months ended September 30, 2024 and 2023).

Advertising and Promotional Costs

Advertising and promotional costs are included in "Selling, General and Administrative" (“SG&A”) expenses in the consolidated statements of income and are expensed as incurred. Advertising expense for the three months ended September 30, 2024 and 2023 was $890,000 and $761,000, 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, 2024 and 2023 was $3,057,000 and $2,437,000, 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.

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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, 2024 and 2023 (in thousands, except share and per share data):


							Net Income per
	Net Income				Weighted Average Shares		Share
	2024		2023		2024	2023	2024		2023
Basic EPS	$	11,185	$	10,478	36,865	36,827	$	0.30	$	0.28
Effect of Dilutive Securities:
Stock Options		—		—	315	249		—		—
Diluted EPS	$	11,185	$	10,478	37,180	37,076	$	0.30	$	0.28

Options to purchase 20,000 and 5,000 shares of common stock were excluded for the nine months ended September 30, 2024 and 2023, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.

Stock-Based Compensation

The Company has established five share incentive programs as discussed in Note 10.

Stock-based awards exchanged for services are accounted for under the fair value method. Accordingly, stock-based compensation cost is measured at the grant date based on the estimated fair value of the award. The expense for awards is recognized over the requisite service period (generally the vesting period of the award). The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.

Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility, among other factors.

Stock-based compensation costs of $371,000 and $307,000 were recognized for the three months ended September 30, 2024 and 2023, 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, 2024 or 2023.

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Comprehensive Income

For the three months ended September 30, 2024 and 2023, 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 operates and measures its results in one operating segment and therefore has one reportable segment: the development, manufacture and sales of high-tech security devices and related cellular communication services for the devices. The Company’s Chief Operating Decision Maker, (the President, Chief Operating Officer, and Chief Financial Officer) evaluates performance of the Company and makes decisions regarding the allocation of resources based on total Company results. The Company has presented required geographical data in Note 14.

Leases

The Company determines at contract inception if an arrangement is a lease, or contains a lease, of an identified asset for which the Company has the right to obtain substantially all of the economic benefits from its use and the right to direct its use. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, while lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The implicit discount rate in the Company’s leases generally cannot readily be determined, and therefore the Company uses its incremental borrowing rate based on information available at lease commencement date in determining the present value of future payments. If the Company has options to renew or terminate certain leases, those options are included in the determination of lease term when it is reasonably certain that the Company will exercise such options. The Company does not separate lease and non-lease components in determining ROU assets or lease liabilities for real estate leases. Additionally, the Company does not recognize ROU assets or lease liabilities for leases with original terms or renewals of one year or less. See Note 13 – Commitments and Contingencies; Leases for additional accounting policies and disclosures.

Legal and Other Contingencies

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired, or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The update expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss. It further requires disclosure of the amount and description of its composition for other segment items, and interim disclosures of both a reportable segment’s profit or loss and assets. The guidance requires disclosure of the title and position of the chief operating decision maker and how reported measures of segment profit or loss are used to assess performance and allocate resources. This pronouncement is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires public entities to disclose consistent categories and greater disaggregation of information in the rate reconciliation and for income taxes paid. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

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The Company is evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on our consolidated financial statements.

NOTE 2 – Revenue Recognition and Contracts with Customers

The Company is engaged in 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. These products and services are used for commercial, residential, institutional, industrial and governmental applications, and are sold primarily to independent distributors, dealers and installers of security equipment. Sales to unaffiliated customers are primarily shipped from the United States.

As of September 30, 2024 and June 30, 2024, the Company included refund liabilities of approximately $6,066,000 and $6,295,000, respectively, in current liabilities. As of September 30, 2024 and June 30, 2024, the Company included return-related assets of approximately $1,557,000 and $1,586,000, respectively, in other current assets.

As a percentage of gross sales, returns, rebates and allowances were 9% and 4% for the three months ended September 30, 2024 and 2023, 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,
	2024		2023
Major Product Lines:
Intrusion and access alarm products	$	9,063	$	9,297
Door locking devices		13,854		15,094
Services		21,086		17,285
Total Revenues	$	44,003	$	41,676

NOTE 3 – Business and Credit Concentrations

An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company had one customer with an accounts receivable balance that comprised of 15% and 17% as of September 30, 2024 and June 30, 2024. The Company had one additional customer with an accounts receivable balance that comprised of 15% as of September 30, 2024. The Company had another additional customer with an accounts receivable balance that comprised of 12% as of June 30, 2024. Sales to any of these customers did not exceed 10% of net sales during the three months ended September 30, 2024 and 2023, respectively.

NOTE 4 – Fair Value Measurement

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy:

●

Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

●

Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

●

Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

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A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.

The following table presents the Company’s assets that were measured at fair value on a recurring basis at September 30, 2024 and June 30, 2024, respectively:


	Level 1	Level 2	Level 3	Total
September 30, 2024
Cash equivalents
Certificate of deposits	-	-	-	-
Money market funds	73,055,000	-	-	73,055,000
Total	73,055,000	-	-	73,055,000
Short-term investments
Certificate of deposits	10,926,000	-	-	10,926,000
Total	10,926,000	-	-	10,926,000
Marketable securities
Mutual funds	5,666,000	-	-	5,666,000
Total	5,666,000	-	-	5,666,000

June 30, 2024
Cash equivalents
Certificate of deposits	5,402,000	-	-	5,402,000
Money market funds	41,116,000	-	-	41,116,000
Total	46,518,000	-	-	46,518,000
Short-term investments
Certificate of deposits	26,980,000	-	-	26,980,000
Total	26,980,000	-	-	26,980,000
Marketable securities
Mutual funds	5,398,000	-	-	5,398,000
Total	5,398,000	-	-	5,398,000

The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets, as well as certificates of deposits and time deposits that are classified as Level 1 due to their short-term nature.

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For the years ended June 30, 2024 and 2023, there were no transfers between Levels 1 and 2 investments and no transfers in or out of Level 3.

NOTE 5 – Marketable Securities

The Company’s marketable securities include investments in fixed income mutual funds, which 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 months ended September 30, 2024 and 2023, are as follows (in thousands):


	Three months ended September 30,
	2024		2023

Net gains recognized during the period on marketable securities	$	111	$	42
Less: Net (losses) recognized during the period on marketable securities sold during the period		—		—
Unrealized gains (losses) recognized during the reporting period on marketable securities still held at the reporting date		157		(57)
	$	268	$	(15)

The following tables summarize the Company’s investments at September 30, 2024 and June 30, 2024, respectively (in thousands):


	September 30, 2024						June 30, 2024
					Unrealized						Unrealized
	Cost		Fair Value		Gain (Loss)		Cost		Fair Value		Gain (Loss)
Mutual Funds	$	5,842		5,666	$	(176)	$	5,857	$	5,398	$	(459)

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.

Available-for-sale securities in a loss position at September 30, 2024 and June 30, 2024 were as follows:


	Continuous Loss Position for Less than 12 Months		Continuous Loss Position for 12 Months or More
	Estimated Fair Value	Gross Unrealized Losses	Estimated Fair Value	Gross Unrealized Losses
September 30, 2024
Mutual funds	-	-	4,152,000	218,000
Total	-	-	4,152,000	218,000

June 30, 2024
Mutual funds	-	-	4,677,000	486,000
Total	-	-	4,677,000	486,000

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NOTE 6 - 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,
	2024		2024
Component parts	$	34,064	$	32,283
Work-in-process		7,213		7,509
Finished product		8,900		10,121
	$	50,177	$	49,913

Classification of inventories:
Current	$	36,395	$	34,804
Non-current		13,782		15,109
	$	50,177	$	49,913

The reserve for excess and slow-moving inventory, which reduces inventory in our consolidated balance sheets were $4,820,000 and $5,026,000 as of September 30, 2024 and June 30, 2024, respectively.

NOTE 7 – Property, Plant, and Equipment

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


	September 30, 2024		June 30, 2024		Useful Life in Years

Land	$	904	$	904	N/A
Buildings		8,911		8,911	30 to 40
Molds and dies		7,539		7,539	3 to

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