What changed in this filing

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Item 1. Financial Statements

2022-02-09 compared with 2021-11-08 · 225 added, 142 removed, 507 unchanged (42% of the section changed)

3 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2021

December 31, 2021

June 30, 2021

3 unchanged sentences

Marketable securities

Accounts receivable, net of allowance for doubtful accounts of $ 226 at September 30, 2021 and June 30, 2021, and other reserves

Accounts receivable, net of allowance for doubtful accounts of $ 226 at both December 31, 2021 and June 30, 2021, and other reserves

Inventories, net

Income tax receivable

Prepaid expenses and other current assets

19 unchanged sentences

Common Stock, par value $ 0.01 per share;

40,000,000 shares authorized;

100,000,000 shares authorized as of December 31, 2021 (Note 10) and 80,000,000 shares authorized as of June 30, 2021;

39,625,471 and 39,595,883 shares issued;

9 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Three Months ended September 30,

Three Months ended December 31,

(in thousands, except for share and per share data)

11 unchanged sentences

Interest and other income (expense), net

Income before Provision for Income Taxes

Provision for Income Taxes

Income per share:

Weighted average number of shares outstanding:

See accompanying notes to condensed consolidated financial statements.

NAPCO SECURITY TECHNOLOGIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Six Months Ended December 31,

(in thousands, except for share and per share data)

Equipment revenues

Service revenues

Cost of sales:

Equipment related expenses

Service-related expenses

Operating expenses:

Research and development

Selling, general, and administrative expenses

Total Operating Expenses

Operating Income

Other income (expense):

Interest and other income (expense), net

Gain on extinguishment of debt

7 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)

Three months ended September 30, 2021 (in thousands, except for share data)

Six months ended December 31, 2021 (in thousands, except for share data)

Treasury Stock

1 unchanged sentence

( 2,893,715 )

Retrospective Effects of 2 :1 Stock Split Declared on December 20, 2021

Balances at June 30, 2021, considering Retrospective effect of Stock Split

( 2,893,715 )

Stock-based compensation expense

2 unchanged sentences

( 2,893,715 )

Three months ended September 30, 2020 (in thousands, except share data)

Stock-based compensation expense

Stock options exercised

Balances at December 31, 2021

( 2,893,715 )

Six months ended December 31, 2020 (in thousands, except share data)

Treasury Stock

1 unchanged sentence

( 2,893,715 )

Retrospective Effects of 2 :1 Stock Split Declared on December 20, 2021

Balances at June 30, 2020, considering Retrospective effect of Stock Split

( 2,893,715 )

Stock-based compensation expense

1 unchanged sentence

( 2,893,715 )

Stock-based compensation expense

Balances at December 31, 2020

( 2,893,715 )

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three Months ended September 30,

Six Months ended December 31,

(in thousands)

2 unchanged sentences

Depreciation and amortization

Gain on marketable securities

Loss on marketable securities

(Recovery of) provision for doubtful accounts

Deferred income taxes

23 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

SEPTEMBER 30, 2021

DECEMBER 31, 2021

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

Nature of Business :

Napco Security Technologies, Inc (“NAPCO”, “the Company”, “we”) is one of the leading manufacturers and designers of high-tech electronic security devices, as well as a leading provider of school safety solutions.

Napco Security Technologies, Inc.

(“NAPCO”, “the Company”, “we”) is one of the leading manufacturers and designers of high-tech electronic security devices, wireless recurring communication services for intrusion and fire alarm systems as well as a leading provider of school safety solutions.

We offer a diversified array of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products.

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

Our results for fiscal 2021 and the first quarter of fiscal 2022 reflected the increase in customer demand after the creation of the challenging business environment resulting from the COVID-19 pandemic.

Our results for fiscal 2021 and the first two quarters of fiscal 2022 reflected the increase in customer demand after the challenging business environment resulting from the COVID-19 pandemic.

While the Company believes this recovery will continue, there can be no assurances that it will do so in the event of a return to building and construction restrictions that might result from a return to higher levels of COVID-19 cases.

4 unchanged sentences

All inter-company balances and transactions have been eliminated in consolidation.

In December 2021, the Company's Board of Directors approved a two -for-one stock split in the form of a 100 % stock dividend of the Company’s common stock payable to stockholders of record on December 20, 2021.

The additional shares were distributed on January 4, 2022.

All share and per share amounts (except par value) have been retroactively adjusted to reflect the stock split.

There was no net effect on total stockholders' equity as a result of the stock split.

Upon distribution of the dividend, the total number of shares outstanding increased from 18,365,878 to 36,731,756 .

Accounting Estimates

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

Critical estimates include management’s judgments associated with reserves for sales returns and allowances, allowance for doubtful accounts, inventory reserves, valuation of intangible assets and income taxes.

Critical estimates

include management’s judgments associated with reserves for sales returns and allowances, allowance for doubtful accounts, inventory reserves, valuation of intangible assets and income taxes.

Actual results could differ from those estimates.

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The methods and assumptions used to estimate the fair value of the following classes of financial instruments were:

Current Assets and Current Liabilities - The carrying amount of cash and cash equivalents, certificates of deposits, current receivables and payables and certain other short-term financial instruments approximate their fair value as of September 30, 2021 and June 30, 2021 due to their short-term maturities.

Current Assets and Current Liabilities - The carrying amount of cash and cash equivalents, certificates of deposits, current receivables and payables and certain other short-term financial instruments approximate their fair value as of December 31, 2021 and June 30, 2021 due to their short-term maturities.

Long-term debt and lease liabilities reflect fair value based on prevailing market rates.

Cash and Cash Equivalents

Cash and cash equivalents include approximately $ 63,000 of short-term time deposits for each of the periods ended September 30, 2021 and June 30, 2021.

The Company considers all highly liquid investments with original maturities of three months or less to be cash

The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of September 30, 2021 and June 30, 2021.

Cash and cash equivalents include approximately $ 63,000 of short-term time deposits at both December 31, 2021 and June 30, 2021, respectively.

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of December 31, 2021 and June 30, 2021.

The Company has not historically experienced any credit losses with balances in excess of FDIC limits.

3 unchanged sentences

Realized gains or losses on mutual funds are determined on a specific identification basis.

The Company evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value had been below cost basis, the financial condition of the issuer and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery of market value.

The Company records an impairment charge to the extent that the cost of the available-for-sale securities exceeds the estimated fair value of the securities and the decline in value is determined to be other-than-temporary.

During the three months ended September 30, 2021, the Company did not record an impairment charge regarding its investment in marketable securities because management believes, based on its evaluation of the circumstances, that the decline in fair value below the cost of certain of the Company’s marketable securities is temporary.

The Company would record an impairment charge if the cost of the available-for-sale securities exceeds the estimated fair value of the securities and the decline in value is determined to be other-than-temporary.

During the three and six months ended December 31, 2021, the Company did not record an impairment charge regarding its investment in marketable securities because management believes, based on its evaluation of the circumstances, that the decline in fair value below the cost of certain of the Company’s marketable securities is temporary.

Accounts Receivable

Accounts receivable is stated net of the reserves for doubtful accounts of $ 226,000 as of September 30, 2021 and June 30, 2021, respectively.

Accounts receivable is stated net of the reserves for doubtful accounts of $ 226,000 as of December 31, 2021 and June 30, 2021, respectively.

Our reserves for doubtful accounts are subjective critical estimates that have a direct impact on reported net earnings.

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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.

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.

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

September 30, 2021

December 31, 2021

June 30, 2021

Customer relationships

Amortization expense for intangible assets subject to amortization was approximately $ 98,000 and $ 106,000 for the three months ended September 30, 2021 and 2020, respectively.

Amortization expense for intangible assets subject to amortization was approximately $ 98,000 and $ 107,000 for the three months ended December 31, 2021 and 2020, respectively.

Amortization expense for intangible assets subject to amortization was approximately $ 196,000 and $ 213,000 for the six months ended December 31, 2021 and 2020, respectively.

Amortization expense for each of the next five fiscal years is estimated to be as follows:

4 unchanged sentences

and 2026-$ 297,000 .

The weighted average remaining amortization period for intangible assets was 16.7 years and 16.9 years at September 30, 2021 and June 30, 2021, respectively.

The weighted average remaining amortization period for intangible assets was 16.5 years and 16.9 years at December 31, 2021 and June 30, 2021, respectively.

Revenue Recognition

10 unchanged sentences

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.

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.

6 unchanged sentences

expenses in the consolidated statements of income and are expensed as incurred.

Advertising expense for the three months ended September 30, 2021 and 2020 was $ 1,086,000 and $ 343,000 , respectively.

Advertising expense for the three months ended December 31, 2021 and 2020 was $ 512,000 and $ 347,000 , respectively.

Advertising expense for the six months ended December 31, 2021 and 2020 was $ 1,598,000 and $ 690,000 , respectively

Research and Development Costs

Research and development (“R&D”) costs incurred by the Company are charged to expense as incurred and are included in operating expenses in the consolidated statements of income.

Company-sponsored R&D expense for the three months ended September 30, 2021 and 2020 was $1,931,000 and $ 1,889,000 , respectively.

Company-sponsored R&D expense for the three months ended December 31, 2021 and 2020 was $ 1,978,000 and $ 1,884,000 , respectively.

R&D expense for the six months ended December 31, 2021 and 2020 was $ 3,909,000 and $ 3,773,000 , respectively.

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.

8 unchanged sentences

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

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

The following provides a reconciliation of information used in calculating the per share amounts for the three months ended December 31, 2021 and 2020 (in thousands, except share and per share data):

Weighted Average Shares

2 unchanged sentences

Stock Options

Options to purchase 40,000 shares of common stock were excluded for the three months ended September 30, 2020, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive.

Options to purchase 80,435 and 64,000 shares of common stock were excluded for the three months ended December 31, 2021 and 2020, 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.

There were no anti-dilutive common share equivalents for the three months ended September 30, 2021.

The following provides a reconciliation of information used in calculating the per share amounts for the six months ended December 31, 2021 and 2020 (in thousands, except share and per share data):

Weighted Average

Net Income per

Effect of Dilutive Securities:

Stock Options

Options to purchase 40,217 and 72,000 shares of common stock were excluded for the six months ended December 31, 2021 and 2020, 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

2 unchanged sentences

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

Stock-based compensation costs of $ 89,000 and $ 104,000 were recognized for the three months ended September 30, 2021 and 2020, respectively.

Stock-based compensation costs of $ 1,255,000 and $ 84,000 were recognized for the three months ended December 31, 2021 and 2020, respectively.

Stock-based compensation costs of $ 1,344,000 and $ 188,000 were recognized for the six months ended December 31, 2021 and 2020, respectively.

Foreign Currency

2 unchanged sentences

The day-to-day operations of all foreign subsidiaries are dependent on the economic environment of the U.S.

Therefore, no realized and unrealized gains and losses associated with foreign currency translation are recorded for the three months ended September 30, 2021 or 2020.

Therefore, no realized and unrealized gains and losses associated with foreign currency translation are recorded for the three or six months ended December 31, 2021 or 2020.

Comprehensive Income

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

For the three and six months ended December 31, 2021 and 2020, the Company’s operations did not give rise to material items includable in comprehensive income, which were not already included in net income.

Accordingly, the Company’s comprehensive income approximates its net income for all periods presented.

5 unchanged sentences

Shipping and Handling Sales and Costs

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

The Company records the amount billed to customers for shipping and handling in net sales ($ 106,000 and $ 93,000 in the three months ended December 31, 2021 and 2020, respectively and $ 212,000 and $ 199,000 in the six months ended December 31, 2021 and 2020, respectively);

and classifies the costs associated with these sales in cost of sales ($ 361,000 and $ 230,000 in the three months ended December 31, 2021 and 2020, respectively and $ 694,000 and $ 451,000 in the six months ended December 31, 2021 and 2020, respectively).

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.

3 unchanged sentences

A change in the rate utilized could have a material effect on the amounts reported.

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

with previous guidance.

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.

See Note 13 – Commitments and Contingencies;

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

All of these products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment.

All of these products 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, 2021 and June 30, 2021, the Company included refund liabilities of approximately $ 3,846,000 and $ 4,277,000 , respectively, in current liabilities.

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

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

As of December 31, 2021 and June 30, 2021, the Company included refund liabilities of approximately $ 4,248,000 and $ 4,277,000 , respectively, in current liabilities.

As of December 31, 2021 and June 30, 2021, the Company included return-related assets of approximately $ 1,019,000 and $ 890,000 , respectively, in other current assets.

As a percentage of gross sales, returns, rebates and allowances were 13 %for both the three months ended December 31, 2021 and 2020, respectively.

As a percentage of gross sales, returns, rebates and allowances were 11 % for both the six months ended December 31, 2021 and 2020, respectively.

The Company disaggregates revenue from contracts with customers into major product lines.

2 unchanged sentences

Following is the disaggregation of revenues based on major product lines (in thousands):

Three months ended September 30,

Three months ended December 31,

Six months ended December 31,

Major Product Lines:

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Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance.

The Company had one customer with an accounts receivable balance that comprised 12 % and 12 % of the Company’s accounts receivable at September 30, 2021 and June 30.

The Company had one customer with an accounts receivable balance that comprised 18 % and 12 % of the Company’s accounts receivable at December 31, 2021 and June 30.

2021, respectively.

Sales to this customer did not exceed 10 %of net sales during the three months ended September 30, 2021 and 2020, respectively.

The Company had another customer with an accounts receivable balance that comprised 11 % of the Company’s accounts receivable at each September 30, 2021 and June 30, 2021.

Sales to this customer did not exceed 10 % of net sales during the three months ended September 30, 2021 and 2020, respectively.

The Company had another customer with an accounts receivable balance that comprised 23 % and 19 % of the Company’s accounts receivable at September 30, 2021 and June 30, 2021.

Sales to this customer were 14 % of net sales during the three months ended September 30, 2021.

Sales to this customer did not exceed 10 % of net sales during the three months ended September 30, 2020.

Sales to this customer did not exceed 10 %of net sales during the three months or six months ended December 31, 2021 and 2020, respectively.

The Company had another customer with an accounts receivable balance that comprised 12 % and 11 % of the Company’s accounts receivable at December 31, 2021 and June 30, 2021, respectively.

Sales to this customer did not exceed 10 % of net sales during the three or six months ended December 31 2021 and 2020, respectively.

The Company had another customer with an accounts receivable balance that comprised 12 % and 19 % of the Company’s accounts receivable at December 31, 2021 and June 30, 2021.

Sales to this customer were 10 % of net sales during each the six months ended December 31, 2021 and 2020.

Sales to this customer did not exceed 10 % for the three months ended December 31, 2021.

Sales to this customer were 14 % of net sales during the three months ended December 31, 2020.

NOTE 4 – Marketable Securities

Marketable securities include investments in fixed income mutual funds, which are reported at their fair values.

There were no realized or unrealized gains and losses for the three months ended September 30, 2020.

The disaggregated net gains and losses on the marketable securities recognized within the accompanying condensed consolidated statements of income for the three months ended September 30, 2021, are as follows (in thousands):

September 30, 2021

The Company’s marketable securities include investments in mutual funds, which invest primarily in various government and corporate obligations, stocks and money market funds, and are reported at their fair values.

There were no realized or unrealized gains and losses for the three months or six month ended December 31, 2020.

The disaggregated net gains and losses on the marketable securities

recognized within the accompanying condensed consolidated statements of income for the three and six months ended December 31, 2021, are as follows (in thousands):

Three months ended December 31, 2021

Six months ended December 31, 2021

Net gains recognized during the period on marketable securities

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

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

September 30, 2021

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

December 31, 2021

June 30, 2021

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

September 30,

Component parts

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

September 30, 2021

December 31, 2021

June 30, 2021

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accumulated depreciation and amortization

Depreciation and amortization expense on property, plant, and equipment was approximately $ 340,000 and $ 317,000 in the three months ended September 30, 2021 and 2020, respectively.

Depreciation and amortization expense on property, plant, and equipment was approximately $ 348,000 and $ 319,000 for the three months ended December 31, 2021 and 2020, respectively.

Depreciation and amortization expense on property, plant and equipment was approximately $ 690,000 and $ 637,000 for the six months ended December 31, 2021 and 2020, respectively.

NOTE 7 - Income Taxes

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In addition, changes in judgment from the evaluation of new information resulting in the recognition de-recognition or re-measurement of a tax position taken in a prior annual period is recognized separately in the quarter of the change.

For the three months ended September 30, 2021, the Company recognized net income tax expense of $ 348,000 .

During the three months ended September 30, 2021, the Company’s reserve for uncertain income tax positions increased by $ 6,000 .

For the six months ended December 31, 2021, the Company recognized net income tax expense of $ 639,000 .

During the six months ended December 31, 2021, the Company’s reserve for uncertain income tax positions increased by $ 6,000 .

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes.

As of September 30, 2021, the Company had accrued interest totaling $ 69,000 , as well as $ 679,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

For the three months ended September 30, 2021, additional interest expense was accrued for in the amount of $ 6,000 .

As of December 31, 2021, the Company had accrued interest totaling $ 76,000 , as well as $ 678,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

For the six months ended December 31, 2021, additional interest expense was accrued for in the amount of $ 6,000 .

The Company claims R&D tax credits on eligible R&D expenditures.

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income tax return and tax returns in certain state and local and foreign jurisdictions.

As of September 30, 2021, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes for fiscal years 2018 and thereafter.

As of December 31, 2021, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes for fiscal years 2018 and thereafter.

The Company was audited by the IRS for fiscal year 2016.

In July 2019, the Company received a Form 4549-A, Income Tax Examination Changes from the IRS proposing an adjustment to income for the fiscal 2016 tax year regarding deemed dividends based on its interpretation under Internal Revenue Code (“IRC”) Section 956 arising from the intercompany balances on the books of the Company.

In August 2019, the Company filed a formal protest with the IRS requesting an opportunity to appeal the examination findings to the Appeals Office.

During fiscal year 2020, the Company settled the issue at Appeals and recorded a provision for the federal and state impact of $ 762,000 and $ 70,000 respectively.

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The Company was audited by the IRS for the fiscal year 2017.

The Company received Form 4549-A, Income Tax Examination Changes from the IRS proposing an adjustment to income for the fiscal 2017 tax year regarding deemed dividends based on its interpretation under IRC Section 956 arising from the intercompany balances on the books of the Company.

During the third quarter of fiscal 2021, the Company settled the issue and paid the IRS $ 399,000 .

The Company reported the results of the IRS exam to all the jurisdictions in which it files and paid taxes and interest totaling $ 97,000 .

Subsequent to the quarter end, the Company paid the IRS $ 68,000 for interest.

In fiscal 2021, the Company paid the IRS $ 68,000 for interest.

None of the payments were recorded to expense since adequate liabilities had previously been established.

1 unchanged sentence

Federal income tax return and its State return in New York as its major tax jurisdictions.

In January 2022, the Company received a letter from the IRS (“IRS”) notifying it that the IRS would be examining the Company’s income tax return for fiscal year ended June 30, 2020.

Management believes that its provision for income taxes for this period is adequate.

However, the outcome cannot be predicted with certainty.

NOTE 8 - Long-Term Debt

As of September 30, 2021 and June 30, 2021, the Company had a revolving line of credit of $ 11,000,000 (“Revolver Agreement”) which expires in June 2024.

As of December 31, 2021 and June 30, 2021, the Company had a revolving line of credit of $ 11,000,000 (“Revolver Agreement”) which expires in June 2024.

Also, at June 30, 2021, long-term debt consisted of a term loan from the U.S.

Small Business Administration through its Payroll Protection Program.

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

September 30, 2021

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

December 31, 2021

June 30, 2021

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The Revolver Agreement contains various restrictions and covenants including, among others, restrictions on payment of dividends, restrictions on borrowings and compliance with certain financial ratios, as defined in the Revolver Agreement.

The Company received the proceeds of promissory notes dated between April 17, 2020 and May 7, 2020 with an aggregate principal amount of $ 3,904,000 (the "PPP Loan"), entered into between the Company and HSBC Bank USA N.A., as lender (the "Lender”).

The Company received $ 3,904,000 in loans (the "PPP Loan"), entered into between the Company and HSBC Bank USA N.A., as lender (the "Lender”).

The Lender made the loans pursuant to the Paycheck Protection Program (the "PPP"), created by Section 1102 of the CARES Act and governed by the CARES Act, Section 7(a)(36) of the Small Business Act, any rules or guidance that has been issued by the Small Business Association (“SBA”) implementing the PPP and acting as guarantor, or any other applicable loan program requirements, as defined in 13 CFR § 120.10, as amended from time to time.

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

During the three months ended September 30, 2021, the PPP Loans were legally forgiven, in their entirety, in accordance with guidelines set forth in the PPP.

During the six months ended December 31, 2021, the PPP Loans were forgiven in their entirety, in accordance with guidelines set forth in the PPP.

The Company recognized a gain on the extinguishment of debt in the first quarter of 2022 in the amount of $ 3,904,000 within the other income (expense) section in the accompanying condensed consolidated statements of income.

The SBA reserves the right to audit PPP forgiveness applications for a period of six years from the date of forgiveness.

It has indicated that it will audit all of those that are in excess of $2 million.

Under the PPP, the SBA reserves the right to audit PPP forgiveness applications for a period of six years from the date of forgiveness.

The SBA has indicated that it will audit all of those that are in excess of $2 million.

NOTE 9 - Stock Option

The Company follows ASC 718 (“Share-Based Payment”), which requires that all share-based payments to employees, including stock options, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period.

For the three months ended September 30, 2021 and 2020, the Company recorded non-cash compensation expense of $ 89,000 ($ 0.00 per basic and diluted share) and $ 104,000 ($ 0.01 per basic and diluted share), respectively, relating to stock-based compensation.

For the three months ended December 31, 2021 and 2020, the Company recorded non-cash compensation expense of $ 1,255,000 ($ 0.03 per basic and diluted share) and $ 84,000 ($ 0.00 per basic and diluted share), respectively, relating to stock-based

compensation.

For the six months ended December 31, 2021 and 2020, the Company recorded non-cash compensation expense of $ 1,344,000 ($ 0.04 per basic and diluted share) and $ 188,000 ($ .01 per basic and diluted share).

2012 Employee Stock Option Plan

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The 2012 Employee Plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 1,900,000 shares of the Company’s common stock to be acquired by the holders of such awards.

Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options (ISOs), to valued employees.

Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options (ISOs) or non-incentive stock options, to valued employees.

Any plan participant who is granted ISOs and possesses more than 10 % of the voting rights of the Company’s outstanding common stock must be granted an option with a price of at least 110 % of the fair market value on the date of grant.

1 unchanged sentence

An option granted under this plan shall vest in full upon a “change in control” as defined in the plan.

At September 30, 2021, 104,540 stock options were outstanding, 48,988 stock options were exercisable and 738,460 stock options were available for grant under this plan.

During the quarter ended September 30, 2021, certain employees exercised options totaling 2,500 shares.

No options were granted under this plan during the quarter ended September 30, 2021 and 2020, respectively.

At December 31, 2021, 524,080 stock options were outstanding, 160,576 stock options were exercisable and 1,138,920 stock options were available for grant under this plan.

No options may be granted under this plan after December 2022.

338,000 Options were granted during the three and six months ended December 31, 2021.

There were no options granted during the three or six months ended December 31, 2020.

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

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Expected dividend yields

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

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

Weighted average

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Total intrinsic value of options exercisable

2,500 stock options were exercised during the three months ended September 31, 2021.

There were no stock options exercised during the quarter ended September 30, 2020.

$ 16,000 cash was received from option exercises during the three months ended September 30, 2021, and the actual tax benefit realized for the tax deductions from option exercises was $ 0 .

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

23,000 and 28,000 stock options were exercised during the three and six months ended December 31, 2021, respectively.

There were no stock options exercised during the three or six ended December 31, 2020.

$ 139,000 and $ 155,000 cash was received from option exercises during the three and six months ended December 31, 2021, respectively.

The actual tax benefit realized for the tax deductions from option exercises during the three and six months ended December 31, 2021 was $ 0 for both periods.

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at December 31, 2021:

Options outstanding

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$ 2.19 ‑ $ 24.75

As of September 30, 2021, there was $ 499,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan.

There were no grants of options in either quarter ended September 30, 2021 and 2020, respectively.

2,400 options vested during the three months ended September 30, 2021 and 2020, respectively.

The total fair value of the options vesting during the three months ended September 30, 2021 and 2020 under this plan was $ 29,000 and $ 29,000 , respectively.

As of December 31, 2021, there was $ 3,541,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan.

338,000 options were granted during the three and six months ended December 31, 2021, respectively.

There were no options granted during each of the three and six months ended December 31, 2020.

85,600 and 90,400 options vested during the three and six months ended December 31, 2021, respectively.

20,800 and 25,600 options vested during the three and six months ended December 31, 2020, respectively.

The total grant date fair value of the options vesting during the three months ended December 31, 2021 and 2020 under this plan was $ 913,000 and $ 106,000 , respectively.

The total grant date fair value of the options vesting during the six months ended December 31, 2021 and 2020 under this plan was $ 942,000 and $ 135,000 , respectively.

2012 Non-Employee Stock Option Plan

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An option granted under this plan shall vest in full upon a “change in control” as defined in the plan.

At September 30, 2021, 6,000 stock options were outstanding, 3,120 stock options were exercisable and 4,800 stock options were available for grant under this plan.

There were no exercises during the three months ended September 30, 2021.

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

At December 31, 2021, 21,600 stock options were outstanding, 11,760 stock options were exercisable and no further stock options were available for grant under this plan.

9,600 Options were granted during the three and six months ended December 31, 2021.

There were no options granted during the three or six months ended December 31, 2020.

No options may be granted under this plan after December 2022.

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

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Expected dividend yields

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

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

Weighted average

10 unchanged sentences

Total intrinsic value of options exercisable

No stock options were exercised during the three months ended September 30, 2021 or 2020.

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

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

No stock options were exercised during the three or six months ended December 31, 2021 or 2020.

No cash was received from option exercises during either of the three or six months ended December 31, 2021 or 2020 and the actual tax benefit realized for the tax deductions from option exercises was $ 0 for both periods.

The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at December 31, 2021:

Options outstanding

6 unchanged sentences

$ 4.35 - $ 22.93

As of September 30, 2021, there was $ 10,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan.

No options were granted during the three months ended September 30, 2021 or 2020.

No options vested during the three months ended September 30, 2021 or 2020.

As of December 31, 2021, there was $ 100,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan.

9,600 options were granted during the three and six months ended December 31, 2021.

No options were granted during the three or six months ended December 31, 2020.

5,520 options vested during each of the three and six months ended December 31, 2021 and 2020.

The total grant date fair value of the options vesting during the three and six months ended December 31, 2021 and 2020 under this plan was $ 34,000 and $ 18,000 , respectively.

2018 Non-Employee Stock Option Plan

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Under the 2018 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20 % per year beginning on the date of grant.

An option granted under this plan shall vest in full upon a “change in control” as defined in the plan.

At September 30, 2021, 35,050 stock options were outstanding, 14,980 stock options were exercisable and 11,750 stock options were available for grant under this plan.

options were exercised under this plan for the three months ended September 30, 2021.

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

option granted under this plan shall vest in full upon a “change in control” as defined in the plan.

At December 31, 2021, 90,600 stock options were outstanding, 41,260 stock options were exercisable and no further stock options were available for grant under this plan.

23,500 Options were granted during the three and six months ended December 31, 2021.

There were no options granted during the three or six months ended December 31, 2020.

No options may be granted under this plan after December 2028.

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

3 unchanged sentences

Expected dividend yields

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

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

Weighted average

10 unchanged sentences

Total intrinsic value of options exercisable

No stock options were exercised during the three months ended September 30, 2021 or 2020.

The following table summarizes information about stock options outstanding under the 2018 Non-Employee Plan at September 30, 2021:

3,000 options were exercised during the three months and six months ended December 31, 2021, were settled by exchanging 1,412 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.

For the three and six months ended December 31, 2021, the actual tax benefit realize for the tax deduction from option exercises was $ 8,000 .

No stock options were exercised during the three months and six months ended December 31, 2020.

No cash was received from option exercises during either of the three and six months ended December 30, 2020 and the actual tax benefit realized for the tax deductions from option exercises was $ 0 .

The following table summarizes information about stock options outstanding under the 2018 Non-Employee Plan at December 31, 2021:

Options outstanding

6 unchanged sentences

$ 8.10 - $ 22.93

As of September 30, 2021, there was $ 186,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2018 Non-Employee Plan.

No options were granted during the three months ended September 30, 2021 or 2020.

No options vested during the three months ended September 30, 2021 or 2020.

As of December 31, 2021, there was $ 383,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2018 Non-Employee Plan.

23,500 options were granted during the three and six months ended December 31, 2021.

No options were granted during the three or six months ended December 31, 2020.

14,300 and 12,800 options vested during the three and six months ended December 31, 2021 and 2020, respectively.

The total grant date fair value of the options vesting during the three and six months ended December 31, 2021 and 2020 under this plan was $ 125,000 and $ 88,000 , respectively.

2020 Non-Employee Stock Option Plan

In May 2020, the stockholders approved the 2020 Non-Employee Stock Option Plan (the “2020 Non-Employee Plan”).

This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 50,000 shares of the Company's common

stock to be acquired by the holders of such awards.

This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 100,000 shares of the Company's common stock to be acquired by the holders of such awards.

Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.

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An option granted under this plan shall vest in full upon a “change in control” as defined in the plan.

At September 30, 2021, 5,000 stock options were outstanding, 2,000 stock options were exercisable and 45,000 stock options were available for grant under this plan.

There were no grants for the three months ended September 30, 2021.

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

At December 31, 2021, 26,900 stock options were outstanding, 7,380 stock options were exercisable and 73,100 stock options were available for grant under this plan.

16,900 Options were granted during the three and six months ended December 31, 2021.

There were 0 and 10,000 options granted during the three and six months ended December 31, 2020, respectively.

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

Risk-free interest rates

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Expected dividend yields

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

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

Weighted average

10 unchanged sentences

Total intrinsic value of options exercisable

No stock options were exercised during the three months ended September 30, 2021 or 2020.

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

No stock options were exercised during the three or six months ended December 31, 2021 or 2020.

The following table summarizes information about stock options outstanding under the 2020 Non-Employee Plan at December 31, 2021:

Options outstanding

7 unchanged sentences

exercise price

As of September 30, 2021, there was $ 34,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan.

There were no grants of options in the three months ended September 30, 2021.

There were 5,000 options granted during the three months ended September 30, 2020.

1,000 options vested during the three months ended September 30, 2021 and 2020, respectively.

The total fair value of the options vesting during the three months ended September 30, 2021 and 2020 under this plan was $ 12,000 and $ 12,000 , respectively.

$ 11.40 - $ 22.93

As of December 31, 2021, there was $ 190,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan.

16,900 options were granted during the three and six months ended December 31, 2021.There were 0 and 10,000 options granted during the three months and six months ended December 31, 2020, respectively.

3,380 and 5,380 options vested during the three and six months ended December 31, 2021, respectively.

0 and 2,000 options vested during the three and six months ended December 31, 2020, respectively.

The total grant date fair value of the options vesting during the three and six months ended December 31, 2021 under this plan was $ 43,000 and $ 55,000 , respectively.

The total grant date fair value of the options vesting during the three and six months ended December 31, 2020 under this plan was $ 0 and $ 12,000 , respectively.

NOTE 10 – Stockholders’ Equity Transactions

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Relative to the loan agreement described in Note 8, the Company’s lender gave its consent to this stock repurchase plan.

During the three months ended September 30, 2021, and the fiscal year ended June 30, 2021, the Company did no t repurchase any shares of its outstanding common stock.

Pursuant to the PPP Loan Agreement described in Note 8, the Company may not repurchase any of its shares of common stock until 12 months after the termination of the term loans described therein.

During the three months ended September 30, 2021, an employee exercised stock options under the Company's 2012 Employee Stock Option Plan totaling 2,500 shares.

This exercises was completed as a cash exercises as allowed for under the Plan.

$ 16,000 was received in exchange for 2,500 shares of the Company’s stock.

During the three and six months ended December 31, 2021, and the fiscal year ended June 30, 2021, the Company did no t repurchase any shares of its outstanding common stock.

Pursuant to the PPP described in Note 8, the Company may not repurchase any of its shares of common stock until 12 months after the termination of the term loans described therein.

During the three months ended December 31, 2021, certain employees and Directors exercised stock options under the Company's 2012 Employee and 2018 Non-Employee Stock Option Plan totaling 26,000 shares.

3,000 of these exercises was completed as a cashless exercise as allowed for under the Plan, where the exercise shares are issued by the Company in exchange for shares of the Company’s common stock that are owned by the optionees.

The number of shares surrendered by the optionees was 1,412 and was based upon the per share price on the effective date of the option exercise.

$ 139,000 was received in exchange for the remaining 23,000 shares of the Company’s stock.

During the six months ended December 31, 2021, certain employees and Directors exercised stock options under the Company's 2012 Employee and 2018 Non-Employee Stock Option Plan totaling 31,000 shares.

The number of shares surrendered by the optionees was 1,412 and was based upon the per share price on the effective date of the option exercise.

$ 155,000 was received in exchange for the remaining 28,000 shares of the Company’s stock.

During fiscal 2021, certain employees and Directors exercised stock options under the Company's 2012 Employee and Non-Employee and 2018 Non-employee Stock Option Plans totaling 14,200 shares.

1 unchanged sentence

The number of shares surrendered by the optionees was 6,734 and was based upon the per share price on the effective date of the option exercise.

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

The additional shares were distributed on January 4, 2022.

All share and per share amounts (except par value) have been retroactively adjusted to reflect the stock split.

There was no net effect on total stockholders' equity as a result of the stock split.

NOTE 11 – Related Party Transaction

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non-union employees with one or more years of service and is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code.

Company contributions to this plan are discretionary and totaled $ 36,000 and $ 32,000 for the three months ended September 30, 2021 and 2020, respectively.

Company contributions to this plan are discretionary and totaled $ 37,000 and $ 36,000 for the three months ended December 31, 2021 and 2020, respectively.

Company contributions to this plan are discretionary and totaled $ 73,000 and $ 68,000 for the six months ended December 31, 2021 and 2020, respectively.

NOTE 13 - Commitments and Contingencies

2 unchanged sentences

Operating leases are included in operating lease right-of-use assets, accrued expenses and operating lease liabilities, non-current on our condensed consolidated balance sheets.

For the three months ended September 30, 2021 and 2020, cash payments against operating lease liabilities totaled $ 72,000 respectively.

For the three and six months ended December 31, 2021 and 2020 cash payments against operating lease liabilities totaled $ 72,000 and $ 144,000 respectively.

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

1 unchanged sentence

Weighted-average discount rate

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

The following is a schedule, by years, of maturities of lease liabilities as of December 31, 2021 (in thousands):

Year Ending June 30,

Operating lease expense totaled approximately $ 80,000 and $ 79,000 , for the three months ended September 30, 2021 and 2020, respectively.

Operating lease expense totaled approximately $ 79,000 , for each of the three months ended December 31, 2021 and 2020, respectively.

Operating lease expense totaled approximately $ 158,000 , for each of the six months ended December 31, 2021 and 2020, respectively.

In the normal course of business, the Company is a party to claims and/or litigation.

1 unchanged sentence

Employment Agreements

As of September 30, 2021, the Company was obligated under two employment agreements and one severance agreement.

As of December 31, 2021, the Company was obligated under two employment agreements and one severance agreement.

The employment agreements are with the Company’s CEO and the Senior Vice President of Engineering (“the SVP of Engineering”).

3 unchanged sentences

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

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

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

NOTE 14 – Geographical Data

6 unchanged sentences

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

Three months ended September 30,

Three months ended December 31,

Six months ended December 31,

Sales to external customers (1):

Total Net Sales

September 30, 2021

December 31, 2021

June 30, 2021

5 unchanged sentences

There were no sales into any one foreign country in excess of 10% of total Net Sales.

(2) Consists primarily of inventories (September 30, 2021 = $ 22,481 ;

June 30, 2021 = $ 21,020 ), operating lease assets (September 30, 2021 = $ 7,367 ;

June 30, 2021 = $ 7,373 ) and fixed assets (September 30, 2021 = $ 3,248 ;

(2) Consists primarily of inventories (December 31, 2021 = $ 25,677 ;

June 30, 2021 = $ 21,020 ), operating lease assets (December 31, 2021 = $ 7,362 ;

June 30, 2021 = $ 7,373 ) and fixed assets (December 31, 2021 = $ 3,249 ;

June 30, 2021 = $ 3,208 ) located at the Company’s principal manufacturing facility in the Dominican Republic.

2 unchanged sentences

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-Q

Item 1. Financial Statements