What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-09-13 compared with 2020-09-15 · 203 added, 383 removed, 32 unchanged (95% of the section changed)

MANAGEMENT'S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

NAPCO 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.

Since 1969, NAPCO has established a heritage and proven record

in the professional security community for reliably delivering both advanced technology and high quality security solutions, building

many of the industry’s best-known brands, such as NAPCO Security Systems, Alarm Lock, Continental Access, Marks USA, and

other popular product lines:

including Gemini and F64-Series hardwire/wireless intrusion systems and iSee Video internet video

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

Today, millions of businesses, institutions, homes, and people around the globe are protected by products from the NAPCO

Group of Companies.

Our net sales were $101.4 million and $102.9 million for the

fiscal years ended June 30, 2020 and 2019, respectively.

The changes of our net sales during these periods were driven primarily

by increased sales of our products in the recurring revenue business as offset by a 34% decrease in sales of hardware in the fourth

quarter of fiscal 2020 as compared to the same period a year ago.

This decrease was due primarily to the economic effects of the

COVID-19 pandemic and the related closures mandated by federal and state governments.

Our net income was $8.5 million and

$12.2 million for the fiscal years ended June 30, 2020 and 2019, respectively.

The decrease in net income during this period was

due primarily to the COVID-19 impact described above as partially offset by the growth of our recurring revenue business, implementation

of cost-reduction measures.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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.

Our net sales were $114.0 million, $101.4 million and $102.9 million for the fiscal years ended June 30, 2021, 2020 and 2019, respectively.

The change in our net sales from fiscal 2020 to 2021 was driven primarily by increased sales of our products in the recurring revenue business ($9.9 million) and sales of equipment ($2.7 million) as compared to the same period a year ago.

This increase was due primarily to the recovery from the economic effects of the COVID-19 pandemic and the related closures mandated by federal and state governments.

The change in our net sales from fiscal 2019 to 2020 was driven primarily by increased sales of our products in the recurring revenue business as offset by a 34% decrease in sales of equipment in the fourth quarter of fiscal 2020 as compared to the same period a year ago.

This decrease was due primarily to the economic effects of the COVID-19 pandemic and the related closures mandated by federal and state governments.

Our net income was $14.9 million, $8.5 million and $12.2 million for the fiscal years ended June 30, 2021, 2020 and 2019, respectively.

The changes in net income during this period was due primarily to the COVID-19 impact and subsequent recovery described above, as well as by the growth of our recurring revenue business.

Economic and Other Factors

We are subject to the effects of general

economic and market conditions.

In the event that the U.S.

or international economic conditions deteriorate, our revenue, profit

and cash-flow levels could be materially adversely affected in future periods.

In the event of such deterioration, many of our

current or potential future customers may experience serious cash flow problems and as a result may, modify, delay or cancel purchases

of our products.

Additionally, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to

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.

We are subject to the effects of general economic and market conditions.

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.

The Company's fiscal year begins on July 1 and ends on June 30.

Historically, the end users of the Company’s products want to install its products prior to the summer;

therefore sales

of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced

in the period July 1 through September 30, the Company's fiscal first quarter.

In addition, demand for our products is affected

by the housing and construction markets.

Historically, the end users of the Company’s products want to install its products prior to the summer;

therefore, sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company's fiscal first quarter.

In addition, demand for our products is affected by the housing and construction markets.

Deterioration of the current economic conditions may also affect this trend.

Our fourth quarter of fiscal 2020 reflects the challenging

business environment resulting from the COVID-19 pandemic.

The COVID-19 pandemic has caused difficulties for security equipment

professionals getting access to both commercial and residential installation sites.

The Company believes this access issue is

an industry-wide issue related to COVID-19 and not reflective of the loss of any market share unique to the Company or any long-term

negative reflection of the post-pandemic vibrancy of the security industry as a whole.

Our fourth quarter of fiscal 2020 and fiscal 2021 reflected the challenging business environment resulting from the COVID-19 pandemic.

The COVID-19 pandemic had caused difficulties for security equipment professionals getting access to both commercial and residential installation sites.

We sell our products primarily through distribution to dealers and we are now seeing strong sell-through statistics from several of our largest distributors.

Increased sell-through of our products from our distributors to the alarm and locking dealers during the third and fourth quarters of fiscal 2021, as compared to the three quarters preceding them, indicates that security equipment professionals are getting increased access to both commercial and residential installation sites and using more and more of our products.

Critical Accounting Policies and Estimates

The Company's significant accounting policies

are fully described in Note 1 to the Company's consolidated financial statements included in its 2020 Annual Report on Form 10-K.

believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in

the preparation of its consolidated financial statements.

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

The Company also provides wireless communication service for intrusion and fire alarm systems on a monthly basis.

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.

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.

the Company typically records a receivable when revenue is recognized.

The contract with the customer states the final

terms of the sale, including the description, quantity, and price of each product purchased.

Payment for product sales is typically

due within 30 and 180 days of the delivery date.

Payment for monthly communication services is billed on a monthly basis and is

typically due at the beginning of the month of service.

The Company provides limited standard warranty for

defective products, usually for a period of 24 to 36 months.

The Company accepts returns for such defective products as well as

for other limited circumstances.

The Company also provides rebates to customers for meeting specified purchasing targets and other

coupons or credits in limited circumstances.

The Company establishes reserves for the estimated returns, rebates and credits and

measures such variable consideration based on the expected value method using an analysis of historical data.

Changes to the estimated

variable consideration in subsequent periods are not material.

The Company analyzes sales returns

and is able to make reasonable and reliable estimates of product returns based on the Company’s past history.

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.

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.

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 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.The Company analyzes sales returns and is able to make reasonable and reliable estimates of product returns based on the Company’s past history.

Estimates for sales returns are based on several factors including actual returns and based on expected return data communicated to it by its customers.

Accordingly, the Company believes that its historical returns analysis is an accurate basis for its allowance for sales returns.

Actual results could differ from those estimates.

As a percentage of gross sales, sales returns, rebates and allowances

were 9% and 8% for the fiscal years ended June 30, 2020 and 2019, respectively.

Concentration of Credit Risk

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 24% and 19% of the Company’s

accounts receivable at June 30, 2020 and 2019, respectively.

Sales to this customer did not exceed 10% of net sales during fiscal

year ended June 30, 2020.

As a percentage of gross sales, sales returns, rebates and allowances were 10% and 9% for the fiscal years ended June 30, 2021 and 2020, respectively.

Reserve for Doubtful Accounts

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.

The Company had one customer with an accounts receivable balance that comprised 19%, 24% and 19% of the Company’s accounts receivable at June 30, 2021, 2020 and 2019, respectively.

Sales to this customer did not exceed 10% of net sales in either of the fiscal years ended June 30, 2021 or 2020.

Sales to this customer comprised 10% of net sales during fiscal year ended June 30, 2019.

had another customer with an accounts receivable balance that comprised 10% of the Company’s accounts receivable at June

Sales to this customer did not exceed 10% of net sales in either of the fiscal years ended June 30, 2020 and 2019.

Company had another customer with an accounts receivable balance that comprised 10% of the Company’s accounts receivable

at June 30, 2019.

Sales to this customer did not exceed 10% of net sales in either of the fiscal years ended June 30, 2020 and

In the ordinary course of business,

we have established a reserve for doubtful accounts and customer deductions in the amount of $326,000 and $88,000 as of June 30,

2020 and 2019, respectively.

Our reserve for doubtful accounts is a subjective critical estimate that has a direct impact on reported

net earnings.

This reserve is based upon the evaluation of accounts receivable agings, specific exposures and historical or anticipated

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.

The Company had another customer with an accounts receivable balance that comprised 10% of the Company’s accounts receivable at June 30, 2021.

Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2021, 2020 and 2019, respectively.

The Company had another customer with an accounts receivable balance that comprised 10% of the Company’s accounts receivable at June 30, 2020.

Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2021, 2020 and 2019, respectively.

The Company had another customer with an accounts receivable balance that comprised 10% of the Company’s accounts receivable at June 30, 2021 and 2019.

Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2021, 2020 and 2019.

In the ordinary course of business, we have established a reserve for doubtful accounts and customer deductions in the amount of $226,000 and $326,000 as of June 30, 2021 and 2020, respectively.

Our reserve for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings.

This reserve is based upon the evaluation of accounts receivable agings, specific exposures and historical or anticipated events.

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 the difference between the cost of the inventory and 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.

There is inherent professional judgment and subjectivity made by both production and engineering members of management

in determining the estimated obsolescence percentage.

In addition, and as necessary, the Company may establish specific reserves

for future known or anticipated events.

The Company also regularly reviews the period over which its inventories will be converted

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 the difference between the cost of the inventory and 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.

There is inherent professional judgment and subjectivity made by both production and engineering members of management in determining the estimated obsolescence percentage.

In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events.

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.

Intangible Assets

of Long-lived Assets –

The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever

events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets

to be held and used is measured by a comparison of the carrying amount of an asset group to future net undiscounted cash flows

expected to be generated by the asset group.

If such assets are considered to be impaired, the impairment to be recognized is

measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed

of are reported at the lower of the carrying amount or fair value less costs to sell.

As of June 30, 2020 and 2019, the Company

has determined that no impairment of long-lived assets exists.

The Company evaluates its indefinite-lived

intangible assets for impairment at least on an annual basis and will evaluate them earlier if there are indicators of a potential

Those intangible assets that are classified as other intangibles with indefinite lives are not amortized.

testing is performed in two steps:

(i) the Company determines if there is impairment by comparing the fair value of a reporting

unit with its carrying value, and (ii) if there is impairment, the Company measures the amount of impairment loss by comparing

the implied fair value of intangible assets with the carrying amount of the intangible assets .

The Company has concluded that no impairment of intangible assets occurred during the year

ended June 30, 2019.

During the 4 th quarter of fiscal 2020, the Company determined that its indefinite-lived

intangible asset relating to its Marks USA I subsidiary trade-name was impaired.

Accordingly, the Company recorded an impairment

charge of $1,852,000 and as a result concluded that the asset no longer was considered to have an indefinite-life 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.

The Company has identified the

United States and New York State as its major tax jurisdictions.

Fiscal year 2017 is currently under audit by the Internal Revenue

Service (“IRS”).

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.

The Company has identified the United States and New York State as its major tax jurisdictions.

Fiscal year 2018 and forward years are still open for examination.

In addition, the Company has a

wholly-owned subsidiary which operates in a Free Zone in the Dominican Republic (“DR”) and is exempt from DR income

The Company was audited by the

IRS for the fiscal year 2016.

In July 2019, the Company received 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 of 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.

fiscal year 2020, the Company settled the issue at Appeals.

There is a provision booked for the federal and state impact of $762,000

and $70,000, respectively.

The Company is currently under

audit for the fiscal year 2017.

The IRS has raised the IRC Section 956 issue that was settled during the fiscal year 2016 audit.

The Company strongly believes that the position of the IRS with regard to this matter is inconsistent with the provisions of IRC

Section 956 and that the Company is willing to go to court, if necessary to argue its position.

During fiscal 2020, a provision

for the incremental tax liability of $657,000 and interest of 66,000 was recorded for the 2017 and 2018 fiscal years.

For the year ended June 30, 2020,

the Company recognized a net income tax expense of $2,284,000.

During the year ending June 30, 2020 the Company increased its

reserve for uncertain income tax positions by $824,000.

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 June 30, 2020, the Company had accrued interest totaling

$83,000 and $866,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective

income tax rate in any future period.

The Company claims research and development (“R&D”) tax credits on eligible

research and development expenditures.

In addition, the Company has a wholly-owned subsidiary which operates in a Free Zone in the Dominican Republic (“DR”) and is exempt from DR income tax.

For the year ended June 30, 2021, the Company recognized a net income tax expense of $2,429,000.

During the year ending June 30, 2021, the Company decreased its reserve for uncertain income tax positions by $208,000.

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 June 30, 2021, the Company had accrued interest totaling $63,000 and $678,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

The Company claims research and development (“R&D”) tax credits on eligible research and development expenditures.

The R&D tax credits are recognized as a reduction to income tax expense.

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

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.

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

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.

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.

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.

positions for reporting periods beginning on or after July 1, 2019 are presented under new guidance, while prior period amounts

are not adjusted and continue to be reported in accordance with previous guidance.

Financial positions for reporting periods beginning on or after July 1, 2019 are presented under new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

Liquidity and Capital Resources

The Company's cash on hand as of June 30,

2020 combined with proceeds from operating activities during fiscal 2020 were adequate to meet the Company's capital expenditure

and financing needs during fiscal 2020.

The Company's primary internal source of liquidity is the cash flow generated from operations.

The primary source of external financing is a revolving credit facility of $11,000,000 (the “Revolving Credit Facility”)

which expires in June 2021.

As of June 30, 2020, $0 was outstanding under this revolving line of credit.

The Company has not drawn

on this line of credit since June of 2018.

In the fourth quarter of fiscal 2020 the Company applied for and received a loan of

$3,904,000 under the Federal government’s Payroll Protection Program (“PPP”) administered by the U.S.

Business Administration (“SBA”).

Pursuant to the CARES Act, the loan may be forgiven by the SBA.

The Company anticipates

applying for forgiveness of these loans during fiscal 2021.

The amount of loan forgiveness is determined by and is subject to

the sole approval of the SBA.

As of June 30, 2020, the Company's unused sources of funds consisted principally of $18,248,000

in cash and cash equivalents and $11,000,000 unused balance available under its revolving line of credit.

The Revolving Credit Facility 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 restated agreement.

During the year ended June 30, 2020, the

Company utilized a portion of its cash on hand at June 30, 2019 ($4,069,000 of $8,028,000) to repurchase outstanding shares of

its stock ($2,454,000) and purchase property, plant and equipment ($1,615,000).

As of June 30, 2020, the Company’s

primary outside source of financing consisted of the Revolving Credit Facility of $11,000,000 which expires in June 2021 and the

PPP loans which expire in April and May of 2022.

As of June 30, 2020 and 2019, there were no outstanding balances under the Revolving

Credit Facility and $3,904,000 was outstanding under the PPP loans.

These facilities are described more fully in Note 7 to the

consolidated financial statements.

The Company believes its current working

capital, anticipated cash flows from operations and its Revolving Credit Agreement will be sufficient to fund the Company’s

operations through at least the next twelve months.

The Company takes into consideration several

factors in measuring its liquidity, including the ratios set forth below:

During the year ended June 30, 2021 the Company utilized a portion of its cash generated from operations ($6,429,000 of $22,987,000) to purchase property, plant and equipment ($1,007,000) and marketable securities ($5,422,000).

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.

As of June 30, 2021, the Company maintained a revolving credit facility of $11,000,000 which expires in June 2024 and term loans from the U.S.

Small Business Administration totaling $3,904,000 through its Payroll Protection Program (“PPP”).

As of June 30, 2021, the Company had no outstanding borrowings and $11,000,000 in availability under the revolving credit facility and $3,904,000 outstanding under the PPP term loans.

Pursuant to the CARES Act, the loans may be forgiven by the SBA.

The Company has applied to have the balance of the Loan forgiven.

Following year-end, $2,850,000 of the PPP Loan was forgiven in accordance with guidelines set for in the PPP.

The Company will recognize debt forgiveness in the first quarter of 2022 in the amount of $2,850,000 and will recognize further forgiveness income in the quarter that the remaing forgiveness application may be granted.

While the Company believes that it meets to requirements for forgiveness, there can be no assurance that its remaining application will be granted.

The revolving credit facility contains various restrictions and covenants including, among others, restrictions on borrowings and compliance with certain financial ratios, as defined in the agreement.

The Company’s long-term debt is described more fully in Note 8 to the condensed consolidated financial statements.

The Company believes its current working capital, anticipated cash flows from operations and its Revolving Credit Agreement will be sufficient to fund the Company’s operations through at least the next twelve months.

The Company takes into consideration several factors in measuring its liquidity, including the ratios set forth below:

As of June 30,

Current Ratio

1 unchanged sentence

Total debt to equity

As of June 30, 2020, the Company had no material

commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the

Dominican Republic, on which the Company’s principle manufacturing facility is located, at an annual rent of approximately

As of June 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.

On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, on which the Company’s principle manufacturing facility is located, at an annual rent of approximately $288,000.

Working Capital.

Working capital increased

by $19,963,000 to $61,046,000 at June 30, 2020 from $51,083,000 at June 30, 2019.

Working capital is calculated by deducting Current

Liabilities from Current Assets.

Accounts Receivable.

Working capital increased by $14,764,000 to $75,810,000 at June 30, 2021 from $61,046,000 at June 30, 2020.

Working capital is calculated by deducting Current Liabilities from Current Assets.

Accounts Receivable.

decreased by $3,038,000 to $22,932,000 at June 30, 2020 as compared to $25,970,000 at June 30, 2019.

The decrease in Accounts

Receivable was due primarily to a decrease in hardware sales for the quarter ended June 30, 2020 as compared to the same quarter

Inventories, which include

both current and non-current portions, increased by $6,917,000 to $41,755,000 at June 30, 2020 as compared to $34,838,000 at June

The increase was due primarily to the Company building up levels of its recently introduced and soon to be introduced

new products.

Accounts Receivable increased by $5,149,000 to $28,081,000 at June 30, 2021 as compared to $22,932,000 at June 30, 2020.

The increase in Accounts Receivable was due primarily to an increase in net sales for the quarter ended June 30, 2021 as compared to the same quarter a year ago.

Inventories, which include both current and non-current portions, decreased by $9,313,000 to $32,442,000 at June 30, 2021 as compared to $41,755,000 at June 30, 2020.

The decrease was due, in part, to the Company completing the rollout of several new products that were introduced during fiscal 2020.

Inventories of these items were built up during fiscal 2020 in anticipation of initial stocking orders from the Company’s customers.

The decrease in inventory was also due to the Company’s efforts to move closer to “just in time” procurement and production cycles where component parts and finished goods are scheduled for delivery closer to the expected requirement date.

Accounts Payable and Accrued Expenses.

Accounts payable and accrued expenses, not including income taxes payable, increased by $648,000 to $14,472,000 as of June

30, 2020 as compared to $13,824,000 at June 30, 2019.

This increase is primarily due to the increase in inventory as described

Accounts payable and accrued expenses, not including income taxes payable, increased by $1,683,000 to $16,155,000 as of June 30, 2021 as compared to $14,472,000 at June 30, 2020.

This increase is primarily due to an increase in the Company’s accrued refund liability, which is explained in Note 2 to the Notes to the Company’s Consolidated Financial Statements, as well as higher accrued incentive compensation as of June 30, 2021 as compared to June 30, 2020.

Off-Balance Sheet Arrangements

The Company does not maintain any off-balance

sheet arrangements.

The Company does not maintain any off-balance sheet arrangements.

Results of Operations

Fiscal 2021 Compared to Fiscal 2020

year ended June 30, (dollars in thousands)

Fiscal year ended June 30, (dollars in thousands)

Gross profit as a % of net sales

6 unchanged sentences

Provision for income taxes

Net sales in fiscal 2020 decreased by $1,573,000

to $101,359,000 as compared to $102,932,000 in fiscal 2019.

The decrease in net sales was primarily due to decreased sales of

the Company’s Alarm Lock brand door-locking products ($2,565,000), Marks brand door-locking products ($5,258,000), and Continental

brand access control products ($542,000) as partially offset by increased sales of the Company’s recurring alarm communication

services ($6,608,000) and Napco brand intrusion products ($200,000).

The Company’s hardware sales were negatively impacted

by the COVID-19 pandemic, which has caused difficulties for security equipment professionals getting access to both commercial

and residential installation sites.

The Company believes this access issue is an industry-wide issue related to COVID-19 and not

reflective of the loss of any market share unique to the Company or any long-term negative reflection of the post-pandemic vibrancy

of the security industry as a whole.

The Company's gross profit decreased by $298,000

to $43,592,000 or 43.0% of net sales in fiscal 2020 as compared to $43,890,000 or 42.6% of net sales in fiscal 2019.

on hardware sales was $23,380,000 or 30.1% of net hardware sales in fiscal 2020 and $30,265,000 or 35.4% of net hardware sales,

in fiscal 2019.

Gross profit on service revenues was $19,712,000 or 82.0% of net service revenues in fiscal 2020 and $13,625,000

or 78.2% of net service revenues, in fiscal 2019.

Gross profit was primarily affected by the decrease in hardware sales as discussed

above as partially offset by increased service revenues.

Research and Development expenses remained

relatively constant at $7,257,000 in fiscal 2020 as compared to $7,212,000 in fiscal 2019.

Selling, general and administrative expenses

for fiscal 2020 increased by $458,000 to $23,670,000 as compared to $23,212,000 in fiscal 2019.

Net sales in fiscal 2021 increased by $12,676,000 to $114,035,000 as compared to $101,359,000 in fiscal 2020.

The increase in net sales was primarily due to increased sales of the Company’s recurring alarm communication services ($9,859,000), Napco brand intrusion products ($5,972,000) and Marks brand door-locking products ($2,051,000), as partially offset by decreased sales of the Company’s Alarm Lock brand door-locking products ($4,720,000) and Continental brand access control products ($191,000).

The Company’s increase in equipment sales was primarily due to customer demand returning after the decline during the COVID-19 pandemic and the related closures throughout the United States.

This was partially offset by a decrease in the Company’s Alarm Lock products, which was due primarily to school districts and other institutions postponing their capital projects in the latter portion of the Company’s 2020 fiscal year and throughout fiscal 2021.

The Company's gross profit increased by $6,559,000 to $50,151,000 or 44.0% of net sales in fiscal 2021 as compared to $43,592,000 or 43.0% of net sales in fiscal 2020.

Gross profit on equipment sales was $21,133,000 or 26.4% of net equipment sales in fiscal 2021 and $23,880,000 or 30.9% of net equipment sales, in fiscal 2020.

Gross profit on service revenues was $29,018,000 or 85.6% of net service revenues in fiscal 2021 and $19,712,000 or 82.0% of net service revenues, in fiscal 2020.

Gross profit on equipment sales was primarily affected by the shift in sales to the Company’s Starlink radio products, which typically have lower margins but result in recurring service revenues, and from the Company’s Alarm Lock products as discussed above.

The Alarm Lock products are among the Company’s highest margin equipment products.

Gross profit on equipment sales was also affected by the Company’s reduction in it’s production and inventories which impacted it’s overhead absorption rate.

Research and Development expenses increased by $363,000 to $7,620,000 in fiscal 2021 as compared to $7,257,000 in fiscal 2020.

This increase was due primarily to salary increases and additional staff.

Selling, general and administrative expenses for fiscal 2021 increased by $1,526,000 to $25,196,000 as compared to $23,670,000 in fiscal 2020.

Selling, general and administrative expenses as a percentage of net sales decreased to 22.1% in fiscal 2021 from 23.4% in fiscal 2020.

The increase in dollars resulted primarily from increases in employee compensation.

The decrease as a percentage of sales was primarily the result of the increase in net sales as described above, as partially offset by the aforementioned increase in employee compensation expenses.

During the 4th quarter of fiscal 2020, the Company determined that its indefinite-lived intangible asset relating to its Marks USA I subsidiary 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.

There was no impairment charge for the year ended June 30, 2021.

Interest and other expense, net for fiscal 2021 remained relatively constant at $5,000 as compared to $9,000 for the same period a year ago.

The Company’s provision for income taxes for fiscal 2021 increased by $145,000 to $2,429,000 as compared to $2,284,000 for the same period a year ago.

The Company’s effective tax rate decreased to 14% for fiscal 2021 as compared to 21% for fiscal 2020.

The decrease in the Company’s fiscal 2021 effective tax rate is a direct result of additional tax expense recorded in fiscal 2020 for the IRS audit of the Company’s 2016 fiscal year.

Net income for fiscal 2021 increased by $7,448,000 to $15,968,000 as compared to $8,520,000 in fiscal 2020.

This resulted primarily from the items discussed above.

Results of Operations

Fiscal 2020 Compared to Fiscal 2019

Fiscal year ended June 30, (dollars in thousands)

Gross profit as a % of net sales

Research and development

Selling, general and administrative

expenses as a percentage of net sales increased to 23.4% in fiscal 2020 from 22.6% in fiscal 2019.

The increase in dollars resulted

primarily from increases in employee compensation.

The increase as a percentage of sales was primarily the result of the decrease

in net sales as described above and the increased employee compensation expenses.

At the conclusion of fiscal 2020, the Company

determined that its indefinite-lived intangible asset relating to its Marks USA I subsidiary trade-name was impaired.

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.

There was no impairment charge for the year

ended June 30, 2019.

Interest expense for fiscal 2020 remained

relatively constant at $9,000 as compared to $21,000 for the same period a year ago.

The Company’s provision for income

taxes for fiscal 2020 increased by $1,062,000 to $2,284,000 as compared to $1,222,000 for the same period a year ago.

The Company’s

effective tax rate increased to 21% for fiscal 2020 as compared to 9% for fiscal 2019.

The increase in the Company’s effective

tax rate resulted from the resolution of an IRS audit of the Company’s 2016 fiscal year, resulting in an additional provision

of $1,555,000.

Net income for fiscal 2020 decreased by $3,703,000

to $8,520,000 as compared to $12,223,000 in fiscal 2019.

Selling, general and administrative as a % of net sales

Impairment of intangible asset

Income from operations

Interest expense, net

Provision for income taxes

Net sales in fiscal 2020 decreased by $1,573,000 to $101,359,000 as compared to $102,932,000 in fiscal 2019.

The decrease in net sales was primarily due to decreased sales of the Company’s Alarm Lock brand door-locking products ($2,565,000), Marks brand door-locking products ($5,258,000), and Continental brand access control products ($542,000) as partially offset by increased sales of the Company’s recurring alarm communication services ($6,608,000) and Napco brand intrusion products ($200,000).

The Company’s equipment sales were negatively impacted by the COVID-19 pandemic, which has caused difficulties for security equipment professionals getting access to both commercial and residential installation sites.

The Company believes this access issue is an industry-wide issue related to COVID-19 and not reflective of the loss of any market share unique to the Company or any long-term negative reflection of the post-pandemic vibrancy of the security industry as a whole.

The Company's gross profit decreased by $298,000 to $43,592,000 or 43.0% of net sales in fiscal 2020 as compared to $43,890,000 or 42.6% of net sales in fiscal 2019.

Gross profit on equipment sales was $23,380,000 or 30.1% of net equipment sales in fiscal 2020 and $30,265,000 or 35.4% of net equipment sales, in fiscal 2019.

Gross profit on service revenues was $19,712,000 or 82.0% of net service revenues in fiscal 2020 and $13,625,000 or 78.2% of net service revenues, in fiscal 2019.

Gross profit was primarily affected by the decrease in equipment sales as discussed above as partially offset by increased service revenues.

Research and Development expenses remained relatively constant at $7,257,000 in fiscal 2020 as compared to $7,212,000 in fiscal 2019.

Selling, general and administrative expenses for fiscal 2020 increased by $458,000 to $23,670,000 as compared to $23,212,000 in fiscal 2019.

Selling, general and administrative expenses as a percentage of net sales increased to 23.4% in fiscal 2020 from 22.6% in fiscal 2019.

The increase in dollars resulted primarily from increases in employee compensation.

The increase as a percentage of sales was primarily the result of the decrease in net sales as described above and the increased employee compensation expenses.

During the 4th quarter of fiscal 2020, the Company determined that its indefinite-lived intangible asset relating to its Marks USA I subsidiary trade-name was impaired.

There was no impairment charge for the year ended June 30, 2019.

Interest expense for fiscal 2020 remained relatively constant at $9,000 as compared to $21,000 for the same period a year ago.

The Company’s provision for income taxes for fiscal 2020 increased by $1,062,000 to $2,284,000 as compared to $1,222,000 for the same period a year ago.

The Company’s effective tax rate increased to 21% for fiscal 2020 as compared to 9% for fiscal 2019.

The increase in the Company’s effective tax rate resulted from the resolution of an IRS audit of the Company’s 2016 fiscal year, resulting in an additional provision of $1,555,000.

Net income for fiscal 2020 decreased by $3,703,000 to $8,520,000 as compared to $12,223,000 in fiscal 2019.

This resulted primarily from the items discussed above.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the documents we incorporate

by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or

the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

All statements, other

than statements of historical fact, included or incorporated in this prospectus regarding our strategy, future operations, clinical

trials, collaborations, intellectual property, cash resources, financial position, future revenues, projected costs, prospects,

plans, and objectives of management are forward-looking statements.

The words “believes,”

“anticipates,”

“estimates,”

“plans,”

“expects,”

“intends,”

“may,”

“could,”

“should,”

“potential,”

“likely,”

“projects,”

“continue,”

“will,”

“schedule,”

“would,”

and similar expressions are intended to identify forward-looking statements, although

not all forward-looking statements contain these identifying words.

We cannot guarantee that we actually will achieve the plans,

intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking

These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond

our control, and which may cause our actual results, performance, or achievements to be materially different from future results,

performance, or achievements expressed or implied by such forward-looking statements.

There are a number of important factors

that could cause our actual results to differ materially from those indicated or implied by forward-looking statements.

See “Risk

Factors”

in our Annual Report on Form 10-K for the year ended June 30, 2020 for more information.

These factors and the

other cautionary statements made in this prospectus and the documents we incorporate by reference should be read as being applicable

to all related forward-looking statements whenever they appear in this prospectus and the documents we incorporate by reference.

In addition, any forward-looking statements represent our estimates only as of the date that this prospectus is filed with the

SEC and should not be relied upon as representing our estimates as of any subsequent date.

We do not assume any obligation to

update any forward-looking statements.

We disclaim any intention or obligation to update or revise any forward-looking statement,

whether as a result of new information, future events or otherwise, except as may be required by law.

This Annual Report on Form 10-K and the documents we incorporate by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

All statements, other than statements of historical fact, included or incorporated in this prospectus regarding our strategy, future operations, clinical trials, collaborations, intellectual property, cash resources, financial position, future revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements.

The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “could,” “should,” “potential,” “likely,” “projects,” “continue,” “will,” “schedule,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements.

See “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis