What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-08-29 compared with 2021-09-13 · 578 added, 150 removed, 817 unchanged (47% of the section changed)

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Management Report on Internal Control

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 23 )

Consolidated Financial Statements:

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Management conducted an assessment of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this assessment, management determined that as of June 30, 2021, the Company did maintain effective internal control over financial reporting.

Based on this assessment, management determined that as of June 30, 2022, the Company identified two material weaknesses in internal control.

One material weakness in internal control related to ineffective information technology general controls (ITGCs) in the area of user access and lack of effective program change-management over certain information technology (IT) systems that support the

Company’s financial reporting processes.

Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.

We believe that these control deficiencies were a result of:

IT control processes lacking sufficient documentation and risk-assessment procedures to assess changes in the IT environment and program change management of personnel that could impact internal controls over financial reporting.

The material weakness did not result in any identified misstatements to the financial statements and there were no changes to the previously released financial results.

Based on this material weaknesses, the Company’s management concluded that at June 30, 2022 the Company’s internal controls over financial reporting were not effective.

The second material weakness in internal control related to the reserve for excess and slow-moving inventory.

This control deficiency was a result of a lack of effective review and reconciliation controls over the forecasted sales and usage data.

The material weakness did not result in a material misstatement to the financial statements.

There were no changes to the previously released financial results.

Based on these two material weaknesses, the Company’s management concluded that, at June 30, 2022, the Company’s internal controls over financial reporting were not effective.

The effectiveness of our internal control over financial reporting as of June 30, 2022 has been audited by Baker Tilly US, LLP , an independent registered public accounting firm, as stated in their report included herein.

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In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by COSO.

Also in our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company did not maintain, in all material respects, effective internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis.

The following material weaknesses have been identified and included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing on page FS-1 and under Item 9A:

There were ineffective information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes.

As a result, business process automated and manual controls that were dependent on the affected ITGCs were ineffective because they could have been adversely impacted.

This control deficiency was a result of IT control processes that lacked sufficient documentation and risk-assessment processes inadequate to identify and assess changes in IT environments and personnel that could impact internal control over financial reporting.

There were ineffectively designed control activities over the reserve for excess and slow-moving inventory, including the lack of effective review and reconciliation controls over forecasted sales and usage data.

The material weaknesses referred to above are described in Management's Report on Internal Control Over Financial Reporting.

We considered the material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Basis for Opinions

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Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audit of internal control

over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

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(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding

prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Obsolete Inventory Reserve

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Excess and Slow-Moving Inventory Reserve

Critical Audit Matter Description

As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated net inventory and inventory reserves as of June 30, 2022 were approximately $49,786,000 and $4,021,000, respectively.

Management establishes its reserve for obsolete inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory.

Management establishes its reserve for excess and slow-moving inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory.

The estimated reserve percentages consider future inventory requirements to support forecasted sales based on historical usage, known trends, market conditions, and the ability to find alternate applications of its raw materials into finished goods to better match customer demand.

We identified the reserve for inventory obsolescence as a critical audit matter because of the significant estimates and assumptions management makes to determine the reserve, specifically the future inventory requirements and related forecasted sales and usage.

We identified the reserve for excess and slow-moving inventory as a critical audit matter because of the significant estimates and assumptions management makes to determine the reserve, specifically the future inventory requirements and related forecasted sales and usage.

Performing audit procedures to evaluate the reasonableness of these estimates, including the estimated reserve percentages, and assumptions is subjective and requires a high degree of auditor judgment.

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The primary procedures we performed to address this critical audit matter included:

● We tested the design and operating effectiveness of the controls over management’s evaluation of the key estimates and assumptions used in the determination of the inventory reserve on the Company's books at year-end.

● We tested management’s process in developing the estimate for reserve for obsolete inventory.

including performing a retrospective review of management’s estimates in order to determine management’s ability to make such estimates.

● We evaluated the appropriateness of management’s approach and estimates and whether the assumptions were consistent with evidence obtained in other audit areas.

● We tested the completeness and accuracy of underlying data used in the approach, including historical usage, inventory age, and subsequent sales of the Company’s products.

● We tested the completeness and accuracy of underlying data used in the approach, including historical sales and usage of the Company’s products and age of the inventory.

● We developed an independent expectation of the excess and slow-moving inventory reserve using historic inventory activity and compared our independent expectation to the amount recorded in the financial statements.

● We evaluated the reasonableness of the estimated reserve percentages used by management to determine the obsolete inventory reserve and tested the clerical accuracy of the model.

Impact on Financial Statements of Material Weakness in Internal Control Over Financial Reporting – Refer to Management’s Report on Internal Control Over Financial Reporting appearing on page FS-1 and under Item 9A.

Critical Audit Matter Description

As discussed above and in Management’s Report on Internal Control Over Financial Reporting , the Company identified a material weakness in their internal control over financial reporting associated with user access and program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes, and related material weakness in the components of Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

This material weakness impacts the Company’s controls over IT systems and business processes and affects substantially all financial statement account balances and disclosures.

Due to the ineffective ITGCs, the information in system generated reports produced by those financial reporting systems could not be relied upon without further testing.

We determined it necessary to perform incremental audit procedures over the completeness and accuracy of financial information utilizing the impacted IT systems as a critical audit matter.

Significant auditor judgment was required to design and execute the incremental audit procedures and to assess the sufficiency of the procedures performed and evidence obtained due to ineffective controls and the complexity of the Company’s IT environment.

How We Addressed the Matter in Our Audit

As a result of the material weakness, in performing our audit procedures we lowered the threshold for investigating differences between recorded amounts and independent expectations developed by us that we would have otherwise used, and increased the number of tested transactions we would have otherwise made if the Company’s controls were designed and operating effectively.

In addition, we utilized original source documents for audit evidence, rather than system reports or other information generated by the Company’s IT systems.

For any reports obtained from the IT system, the engagement team designed specific audit procedures to audit the completeness and accuracy of such reports.

We have served as the Company's auditor since 2008.

/s/ BAKER TILLY US, LLP

Melville, New York

September 13, 2021

Uniondale, New York

August 29, 2022

NAPCO SECURITY TECHNOLOGIES, INC.

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Marketable securities

Accounts receivable, net of allowance for doubtful accounts of $ 226 and $ 326 at June 30, 2021 and June 30, 2020, respectively, and other reserves

Accounts receivable, net of allowance for doubtful accounts of $ 243 and $ 226 as of June 30, 2022 and June 30, 2021, respectively

Inventories, net

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Common Stock, par value $ 0.01 per share;

40,000,000 shares authorized;

100,000,000 shares authorized as of June 30, 2022 (Note 10) and 80,000,000 shares authorized as of June 30, 2021;

39,628,197 and 39,595,883 shares issued;

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Impairment of intangible asset

Total Operating Expenses

Operating Income

Other expense:

Other (expense) income:

Interest and other (expense), net

Gain on extinguishment of debt

Income before Provision for Income Taxes

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( 2,749,310 )

Implementation of ASC 606

Retrospective effect of 2 :1 stock split declared on December 20, 2021

Balance at June 30, 2019, retrospectively stated

( 2,749,310 )

Repurchase of treasury shares

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( 2,893,715 )

Repurchase of treasury shares

Stock options exercised

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Impairment of intangible asset

Loss on marketable securities

(Recovery of) provision for doubtful accounts

Change to inventory obsolescence reserve

Unrealized loss on marketable securities

Provision for (recovery of) doubtful accounts

Change to inventory reserve

Deferred income taxes

Stock based compensation expense

Gain on extinguishment of debt

Changes in operating assets and liabilities:

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Cash paid for purchase of treasury stock

Net Cash Provided by (Used in) Financing Activities

Net Cash Provided by Financing Activities

Net increase in Cash and Cash Equivalents

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Income taxes paid

Surrender of Common Shares

See accompanying notes to consolidated financial statements.

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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, cellular communication services for intrusion and fire alarm systems as well as a leading provider of school safety solutions.

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

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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 hardware products want to install these products prior to the summer;

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

In addition, demand for all of our products may be affected by the housing and construction markets.

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

Our results for fiscal 2021 reflects the increase in customer demand after the creation of the challenging business environment resulting from the COVID-19 pandemic.

The monthly recurring revenue, which is less susceptable to these fluctuations, allows us to generate a more consistent and predictable stream of income and mitigates the risk of fluctuation in market demand for our equipment products.

Our results for fiscal 2021 and 2022 reflect the increase in customer demand after the decrease in demand in fiscal 2020 resulting from the economic slowdown associated with this pandemic.

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

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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 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, overhead expenses applied to inventory, inventory reserves, valuation of intangible assets, share based compensation and income taxes.

Actual results could differ from those estimates.

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Cash and Cash Equivalents

Cash and cash equivalents include approximately $ 63,000 and $ 460,000 of short-term time deposits at June 30, 2021 and 2020, respectively.

Cash and cash equivalents include approximately $ 63,000 of short-term time deposits at both June 30, 2022 and 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 June 30, 2021 and 2020.

The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of June 30, 2022 and 2021.

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

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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 year ended June 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.

During the years ended June 30, 2022 and 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

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These proportions, the method of their application, and the resulting overhead included in ending inventory, are based in part on subjective estimates and actual results could differ from those estimates.

In addition, the Company records an inventory obsolescence reserve, which represents any excess of the cost of the inventory over its estimated realizable value, based on various product sales projections.

This reserve is calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends, requirements to support forecasted sales, and the ability to find alternate applications of its raw materials and to convert finished product into alternate versions of the same product to better match customer demand.

In addition, the Company records an inventory obsolescence reserve, which represents any excess of the cost of the inventory over its estimated realizable value.

This reserve is calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends, product life cycle, requirements to support forecasted sales, and the ability to find alternate applications of its raw materials and to convert finished product into alternate versions of the same product to better match customer demand.

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

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For product sales, the Company typically transfers control at a point in time upon shipment or delivery of the product.

For monthly communication services the Company satisfies its performance obligation as the services are rendered and therefore recognizes revenue over the monthly period.

For monthly communication services the Company satisfies its performance obligation as the services are rendered over the course of the month 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.

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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.

Payment for monthly

communication services is billed on a monthly basis and is typically due at the beginning of the month of service or in 30 days for customers with an open account.

The Company provides limited standard warranty for defective products, usually for a period of 24 to 36 months .

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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.

The Company analyzes product 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.

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Stock Options

Options to purchase 20,000 , 38,819 and 2,957 shares of common stock were excluded for the fiscal years ended June 30, 2021, 2020 and 2019, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive.

Options to purchase 214,109 , 40,000 and 77,638 shares of common stock for the fiscal years ended June 30, 2022, 2021 and 2020, respectively, 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 respective periods.

Stock-Based Compensation

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

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

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the vesting period.

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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.

See Note 13 – Commitments and Contingencies;

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2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.

We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating

comparative periods.

We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods.

The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

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Reference Rate Reform (ASC Topic 848)

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

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

In January 2021, the FASB issued authoritative guidance that makes amendments to the new rules on accounting for reference rate reform.

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The guidance will no longer be available to apply after December 31, 2022.

Impact on consolidated financial statements – The Company is currently assessing the impact of applying this guidance on its existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance.

Impact on consolidated financial statements – The Company is currently assessing the impact of applying this guidance on its existing leases and other arrangements, as well as when to adopt this guidance.

NOTE 2 – Revenue Recognition and Contracts with Customers

On July 1, 2018 the Company adopted new guidance on revenue from contracts with customers using the modified retrospective method applied to contracts that were not completed as of July 1, 2018.

Results for reporting periods beginning after July 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

The Company recorded a net decrease to opening retained earnings of approximately $ 719,000 (net of tax benefit of $ 191,000 ) as of July 1, 2018, for the cumulative impact of adopting the new guidance.

The impact primarily related to the change in the recognition and measurement of certain types of variable considerations, which resulted in the increase in sales allowance reserves (i.e.

refund liabilities) by a net of $ 1,627,000 and increased other assets (i.e.

return related assets) by approximately $ 716,000 .

The Company is engaged in one major line of business:

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

The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and

uncertainty of revenue and cash flows are affected by economic factors.

The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

As noted in the accounting policy footnote, the Company’s business consists of one operating segment.

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

Year ended June 30,

Fiscal year ended June 30,

Major Product Lines:

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Total Revenues

NOTE 3 – 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 following table represents the allowance for doubtful accounts as of the respective years ending June 30:

Balance at beginning of period

Charged to costs and expenses

Deductions/ (recoveries)

Balance at end of period

For the Year Ended June 30, 2020:

Allowance for doubtful accounts

For the Year Ended June 30, 2021:

Allowance for doubtful accounts

For the Year Ended June 30, 2022:

Allowance for doubtful accounts

NOTE 3 – Business and Credit Concentrations

An entity may be 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 22 %, 19 % and 24 % of the Company’s accounts receivable at June 30, 2022, 2021 and 2020, respectively.

Sales to this customer did not exceed 10% of net sales during fiscal year ended June 30, 2020.

Sales to this customer comprised 10 % of net sales during fiscal year ended June 30, 2021 and 2019.

Sales to this customer did not exceed 10% of net sales during fiscal years ended June 30, 2022, 2021 and 2020.

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

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Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2022, 2021 and 2020, 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.

The Company had another customer with an accounts receivable balance that comprised 16 % and 12 % of the Company’s accounts receivable at June 30, 2022 and 2021.

Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2022, 2021 and 2020.

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

The disaggregated net gains and losses on the marketable securities recognize in the income statement for the year ended June 30, 2021, are as follows:

The disaggregated net gains and losses on the marketable securities recognize in the income statement for the year ended June 30, 2022 and 2021, are as follows (in thousands):

Year ended June 30,

Net gains recognized during the period on marketable securities

Net gains recognized during the year on marketable securities sold during the period

Unrealized (losses) gains recognized during the reporting year on marketable securities still held at the reporting date

Unrealized (losses) recognized during the reporting year on marketable securities still held at the reporting date

The fair values of the Company’s marketable securities are determined as being the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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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:

The following tables summarize the Company’s investments (in thousands):

June 30, 2022

June 30, 2021

Marketable Securities

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Realized gains and losses on sales of investments are determined on a specific identification basis.

For the year ended June 30, 2021, there were no transfers between Levels 1 and 2 investments and no transfers in or out of Level 3.

For the years ended June 30, 2022 and 2021, there were no transfers between Levels 1 and 2 investments and no transfers in or out of Level 3.

NOTE 5 - Inventories

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

Inventories, net of reserves consist of the following as of June 30, (in thousands):

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

Component parts

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Classification of inventories, net of reserves:

The following table represents the Inventory obsolescence and net realizable value inventory reserves as of the respective years ending June 30:

Balance at beginning of period

Charged to costs and expenses

Deductions/ (recoveries)

Balance at end of period

For the Year Ended June 30, 2020:

Inventory obsolescence and net realizable value reserve

For the Year Ended June 30, 2021:

Inventory obsolescence and net realizable value reserve

For the Year Ended June 30, 2022:

Inventory obsolescence and net realizable value reserve

NOTE 6 - Property, Plant, and Equipment

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Foreign withholding tax

Release of accrued tax reserves

Non-taxable debt extinguishment

Uncertain Tax Positions

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Revenue reserves

Unrealized loss (gain) on marketable securities

Other deferred tax liabilities

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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.

During fiscal year 2020, the Company settled the issue.

There was a provision recorded for the federal and state impact of $ 762,000 and $ 70,000 , respectively.

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

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

None of the payments were recorded to expense in 2021, since liabilities had previously been established.

The IRS is currently auditing the Company’s Federal income tax return for the tax year ended June 30, 2020.

As of June 30, 2022, the IRS has not communicated any material changes to the Company’s previously reported income tax returns and the Company has not established any reserves to uncertain matters as a result of the audit.

The provision for income taxes represents Federal, foreign, and state and local income taxes.

The effective rate differs from statutory rates due to the effect of tax rates in foreign jurisdictions, state and local income taxes, tax benefit of R&D credits, certain nondeductible expenses, uncertain tax positions, audit settlements and global intangible low-taxed income ("GILTI").

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

During the year ending June 30, 2022, the Company increased its reserve for uncertain income tax positions by $ 25,000 .

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

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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance of gross unrecognized tax benefits as of July 1, 2018

Decrease to unrecognized tax benefits resulting from release of R&D credits due to the IRS audit

Increases to unrecognized tax benefits resulting from the generation of additional R&D credits

Balance of gross unrecognized tax benefits as of June 30, 2019

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Balance of gross unrecognized tax benefits as of June 30, 2021

Increase to unrecognized tax benefits from deemed dividends for investments in US property

Balance of gross unrecognized tax benefits as of June 30, 2022

The Company plans to permanently reinvest a substantial portion of its foreign earnings and as such has not provided withholding tax on the permanently reinvested earnings.

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NOTE 8 - Long-Term Debt

As of June 30, 2021 and 2020, long-term debt consisted of a revolving line of credit of $ 11,000,000 (“Revolver Agreement”) which expires in June 2024 and term loans from the U.S.

As of June 30, 2022 and 2021, long-term debt consisted of a revolving line of credit of $ 11,000,000 (“Revolver Agreement”) which expires in June 2024.

Additionally, as of June 30, 2021,the Company had term loans from the U.S.

Small Business Administration totaling $ 3,904,000 through its Payroll Protection Program.

The Payroll Protection Program Loans were entirely forgiven during first quarter of the fiscal year ending June 30, 2022.

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

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Pursuant to the PPP Loan Agreement, the Lender made loans to the Company with an aggregate principal amount of $ 3,904,000 (the "PPP Loan").

The PPP Loan and related extinguishement was accounted for in accordance with ASC 470 “Debt”.

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.

During the year ended June 30, 2022, the PPP Loans were forgiven, in their entirety, in accordance with guidelines set forth in the PPP loan documents.

The Company recognized a gain on the extinguishment of debt during the fiscal year ended June 30, 2022 in the amount of $ 3,904,000 within the other (expense) income section in the accompanying condensed consolidated statements of income.

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

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

NOTE 9 - Stock Options

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 fiscal years ended June 30, 2021, 2020 and 2019, the Company recorded non-cash compensation expense of $ 435,000 ($ 0.02 per basic and diluted share), $ 583,000 ($ 0.03 per basic and diluted share) and $ 160,000 ($ 0.01 per basic and diluted share), respectively, relating to stock-based compensation.

For the fiscal years ended June 30, 2022, 2021 and 2020, the Company recorded non-cash compensation expense of $ 1,649,000 , $ 435,000 and $ 583,000 , respectively, relating to stock-based compensation.

2012 Employee Stock Option Plan

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At June 30, 2022, 523,080 stock options were outstanding, 176,752 stock options were exercisable and 1,138,920 stock options were available for grant under this plan.

No options were granted under this plan during the year ended June 30, 2021.

338,000 options were granted under this plan during the year ended June 30, 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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Outstanding, beginning of year

Forfeited/Lapsed

Outstanding, end of period

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338,000 , 0 and 141,880 options were granted during the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

4,300 stock options exercised during the fiscal year ended June 30, 2021, were settled by exchanging 2,302 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.

1,000 of the 29,000 stock options exercised during the fiscal year ended June 30, 2022, were settled by exchanging 153 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.

8,600 stock options exercised during the fiscal year ended June 30, 2021 were settled by exchanging 4,604 shares of the Company's common stock which were retired and returned to unissued status upon receipt.

7,200 of the 31,200 stock options exercised during the fiscal year ended June 30, 2020 were settled by exchanging 3,256 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.

$ 155,000 , $ 0 and $ 79,000 was received from the remaining option exercises for the fiscal years ended June 30, 2022, 2021 and 2020, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $ 0 for each of these periods.

The total grant date fair value of the options vesting during the fiscal years ended June 30, 2022, 2021 and 2020 under this plan was $ 1,040,000 , $ 244,000 and $ 197,000 , respectively.

$ 0 , $ 79,000 and $ 31,000 was received from option exercises for the fiscal years ended June 30, 2021, 2020 and 2019, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $ 0 for each of these periods.

2012 Non-Employee Stock Option Plan

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At June 30, 2022, 20,400 stock options were outstanding, 11,280 stock options were exercisable and 0 stock options were available for grant under this plan.

No options were granted under this plan during the year ended June 30, 2021.

9,600 options were granted under this plan during the year ended June 30, 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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Outstanding, beginning of year

Forfeited/Lapsed

Outstanding, end of period

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1,200 stock options exercised during the fiscal year ended June 30, 2022 were settled by exchanging 258 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.

14,600 of the 15,800 stock options exercised during the fiscal year ended June 30, 2019 were settled by exchanging 4,832 shares of the Company common stock which were retired and returned to unissued status upon receipt.

2,400 options exercised during the fiscal year ended June 30, 2021 were settled by exchanging 612 shares of the Company common stock which were retired and returned to unissued status upon receipt.

No options were exercised during the fiscal year ended June 30, 2020.

The actual tax benefit realized for the tax deductions from option exercises was $ 6,000 , $ 0 and $ 35,000 in fiscal 2021, 2020 and 2019, respectively.The total grant date fair value of the options vesting during each of the fiscal years ended June 30, 2021, 2020 and 2019 under this plan was $ 18,000 , $ 18,000 and $ 22,000 , respectively.

The actual tax benefit realized for the tax deductions from option exercises was $ 4,000 , $ 6,000 and $ 0 in fiscal 2022, 2021 and 2020 respectively.

The total grant date fair value of the options vesting during each of the fiscal years ended June 30, 2022, 2021 and 2020 under this plan was $ 39,000 , $ 18,000 and $ 18,000 , respectively.

2018 Non-Employee Stock Option Plan

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At June 30, 2022, 89,000 stock options were outstanding, 45,040 stock options were exercisable and 0 stock options were available for grant under this plan.

No options were granted under this plan during the year ended June 30, 2021.

23,500 options were granted under this plan during the year ended June 30, 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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23,500 , 0 and 66,400 options were granted during the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

1,600 of the stock options exercised during the fiscal year ended June 30, 2021 were settled by exchanging 759 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.

800 of the 1,600 stock options exercised during the fiscal year ended June 30, 2019 were settled by exchanging 395 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.

4,600 stock options exercised during the fiscal year ended June 30, 2022 were settled by exchanging 2,075 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.

3,200 stock options exercised during the fiscal year ended June 30, 2021 were settled by exchanging 1,518 shares of the Company’s common stock which were retired and returned to unissued status upon receipt.

There were no options exercised during the fiscal year ended June 30, 2020.

The actual tax benefit realized for the tax deductions from option exercises was $ 6,000 , $ 0 $ 3,000 in fiscal 2021, 2020 and 2019, respectively.

The actual tax benefit realized for the tax deductions from option exercises was $ 12,000 , $ 6,000 and $ 0 in fiscal 2022, 2021 and 2020, respectively.

The total grant date fair value of the options vesting during the fiscal year ended June 30, 2022, 2021 and 2020 under this plan was $ 160,000 , $ 133,000 and $ 133,000 , respectively.

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At June 30, 2022, 26,900 stock options were outstanding, 7,380 stock options were exercisable and 73,100 stock options were available for grant under this plan.

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

16,900 options were granted under this plan during the year ended June 30, 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:

Risk-free interest rates

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Weighted average

exercise price

Outstanding, beginning of year

Forfeited/Lapsed

Outstanding, end of period

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exercise price

$ 11.40 - $ 22.93

As of June 30, 2022, there was $ 135,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan.

16,900 , 10,000 and 0 options were granted during the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

No options were exercised during the fiscal years ended June 30, 2022, 2021 and 2020.

The total grant date fair value of the options vesting during the fiscal year ended June 30, 2022, 2021 and 2020 under this plan was $ 55,000 , $ 12,000 and $ 0 , respectively.

There were no options exercised in either of the fiscal years ended June 30, 2021 and 2020.

NOTE 10 – Stockholders’ Equity Transactions

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Such repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions and the market price of the common stock.

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

During the fiscal year ended June 30, 2021 the Company did not repurchase any shares of its outstanding common stock.

During the fiscal year ended June 30,

2020 the Company repurchased 144,405 shares of its outstanding common stock at a weighted average price of $ 16.99 .

Relative to the

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

During the fiscal year ended June 30, 2022 and 2021, the Company did no t repurchase any shares of its outstanding common stock.

During the fiscal years ended June 30, 2020, the Company repurchased 144,405 shares of its outstanding common stock at a weighted average price of $ 17.00 .

Shares repurchased through June 30, 2022 are included in the Company’s Treasury Stock as of June 30, 2022, 2021 and 2020.

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.

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 a $ .01 par value per share.

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

During fiscal 2022, certain employees and Directors exercised stock options under the Company's 2012 Employee and Non-Employee and 2018 Non-employee Stock Option Plans totaling 34,800 shares.

6,800 of these exercises were completed as cashless exercises as allowed for under the Plans, where the exercise shares are issued by the Company in exchange for shares of the Company's common stock that are owned by the optionees.

The number of shares surrendered by the optionees was 2,486 and was based upon the per share price on the effective date of the option exercise.

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

All of these exercises were completed as cashless exercises as allowed for under the Plans, where the exercise shares are issued by the Company in exchange for shares of the Company's common stock that are owned by the optionees.

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The number of shares surrendered by the optionees was 3,256 and was based upon the per share price on the effective date of the option exercise.

During fiscal 2019, certain employees and Directors exercised stock options under the Company’s 2012 Employee and Non-Employee Stock Option Plans and the Company’s 2002 Employee Stock Option Plan totaling 31,100 shares.

23,600 of these exercises were completed as cashless exercises as allowed for under the Plans, where the exercise shares are issued by the Company in exchange for shares of the Company’s common stock that are owned by the optionees.

The number of shares surrendered by the optionees was 8,333 and was based upon the per share price on the effective date of the option exercise.

NOTE 11 – Related Party Transaction

On December 15, 2020, 2,333,071 shares of common stock were sold in a secondary offering by the Company's President and Chairman.

On December 21, 2020, the underwriters of the secondary offering fully exercised the option granted at the time of the secondary offering to purchase an additional 334,961 shares of common stock at the secondary offering price of $ 26.00 per share ("Greenshoe"), less underwriting discounts and commissions, which consists solely of shares sold by the Company's President and Chairman.

The Company received no proceeds from the secondary offering or the Greenshoe, but incurred $ 289,000 in offering expenses, which are recorded in selling, general, and administrative expenses in the accompanying condensed consolidated statements of income.

In December 2020, 5,333,064 shares of common stock were sold by the Company's President and Chairman in an underwritten secondary offering at the offering price of $ 13.00 per share, less underwriting discounts and commissions.

The Company received no proceeds from the offering, but incurred $ 289,000 in offering expenses, which are recorded in selling, general, and administrative expenses in the accompanying condensed consolidated statements of income.

NOTE 12 - 401(k) Plan

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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.

Our lease obligation consists of a 99 year lease which commenced on April 26, 1993 with one of the Company’s foreign subsidiaries, expiring in 2092, for approximately four acres of land in the Dominican Republic at an annual cost of $ 288,000 , on which the Company’s principal production facility is located.

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 fiscal year ended June 30, 2021 and 2020, cash payments against operating lease liabilities totaled $ 288,000 and $ 240,000 respectively.

For the fiscal year ended June 30, 2022 and 2021, cash payments against operating lease liabilities totaled $ 288,000 each year.

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

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The employment agreement with the SVP of Engineering expires in August 2024 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

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Financial Information Relating to Domestic and Foreign Operations

Year ended June 30,

Fiscal Year ended June 30,

Sales to external customers (1):

Total Net Sales

June 30, 2021

June 30, 2020

Identifiable assets:

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The Company has evaluated subsequent events occurring after the date of the consolidated financial statements for events requiring recording or disclosure in the consolidated financial statements.

During the fourth quarter of fiscal 2020, the Company received the proceeds of promissory notes dated between April 17, 2020 and May 7, 2020 (the "PPP Loan Agreement"), entered into between the Company and HSBC Bank USA N.A., as lender (the "Lender).

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 PPP Loan Agreement, the Lender made loans to the Company with an aggregate principal amount of $ 3,904,000 (the "PPP Loan").

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

Subsequent to June 30, 2021, the Company received notice from the SBA that its loans had been forgiven in full.

Based on the guidance in FASB ASC 405-20-40-1, the proceeds from the loan will remain recorded as a liability until either (1) the loan is, in part or wholly, forgiven and the debtor has been “legally released” or (2) the debtor pays off the loan to the creditor.

Accordingly, the Company will eliminate the liability and record a gain of $ 3,904,000 on the extinguishment of this debt in its fiscal quarter ended September 30, 2021 .

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

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At the conclusion of the period ended June 30, 2022, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2021.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2022.

Management’s Annual Report on Internal Control over Financial Reporting.

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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information about our directors appearing in the Company’s Definitive Proxy Statement for the 2021 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K (“Proxy Statement”) under the heading “Election of Directors”, is incorporated herein by reference.

The Board of Directors is divided into three classes, the terms of which expire at the Annual Meetings of Stockholders after the fiscal years 2022, 2023 and 2024.

The names of, and certain information concerning, the Company’s directors are set forth below.

Also set forth below is a description of the experience, qualifications, attributes or skills that caused the Nominating Committee and Board of Directors to determine that the person should serve as one of our directors.

Principal Occupation

Directors to serve until Annual Meeting of Stockholders following Fiscal Year 2022:

Chairman of the Board of Directors, CEO, President and Secretary of the Company.

Executive Vice President of Operations, CFO, and Treasurer of the Company.

Directors to serve until Annual Meeting of Stockholders following Fiscal Year 2023:

Certified Public Accountant.

Partner of GR Reid Associates LLP, independent certified public accountants.

President of Robert A.

Ungar Associates, Inc., lobbying, media and public relations services in public-sector areas including fire service, EMS and Public Safety

Directors to serve until Annual Meeting of Stockholders following Fiscal Year 2024:

Paul Stephen Beeber

Licensed Attorney in New York State.

Licensed Attorney.

Senior Vice President of alliantgroup, LP since 2011, an international provider of specialty tax consulting services.

Since 2019, Senior Vice President of Alliant Cybersecurity, a subsidiary of alliantgroup LP, that provides advisory services to businesses to protect against cyberattacks.

Since 2012, Special Counsel to Jones Walker, LLP, a law firm of nearly 400 attorneys with offices throughout the United States.

Former member of the United States House of Representatives from New York.

Soloway has been a columnist for several security industry publications since 1992 including Security Dealer and Security Distribution and Marketing (SDM).

She also has served on the Board of Directors for the Security Industry Association (SIA) and several of its committees including the Show Planning Committee, the Awards Committee and the SAINTS Committee (Safety, Awareness and Independence through Security).

She is also a Board member of the Alliance of the Guardian Angels, an international organization of crime prevention.

Soloway is the wife of Richard L.

Soloway, the Chairman and President of the Company.

Beeber has been a Licensed Attorney in New York State since 1970, focusing on elder law, estate planning and real estate.

The Company believes Mr.

Beeber provides practical and legal guidance, insight and perspective with regard to the operations and strategies of the Company and has a deep understanding of the Company as well as of its customer and supplier agreements.

Lazio is a licensed attorney.

From 2011 to the present, Mr.

Lazio has been a senior Vice President of alliantgroup, LP, an international provider of specialty tax consulting services.

He has also served since January 2019 as Senior Vice President of Alliant Cybersecurity, a subsidiary of alliantgroup LP, which provides advisory services to protect businesses from the risks associated with cyberattacks.

Lazio has also been Special Counsel to Jones Walker, LLP, a law firm with nearly 400 attorneys in 20 offices throughout the United States.

The Company believes that Mr.

Lazio’s qualifications to serve as a director include his diverse background including his eight years in the US House of Representatives, where he served on the Budget, Banking and Commerce Committees and had joint jurisdiction over all financial services issues.

In addition, Mr.

Lazio, as the Senior VP of alliantgroup LLP, provides expertise in specialty tax consulting as well as consulting with regard to Cybersecurity.

Soloway has been a columnist for several security industry publications since 1992 including Security Dealer and Security Distribution and Marketing (SDM).

She is currently a board member of Lifeline as well as the Alliance of the Guardian Angels.

The Company believes Ms.

Soloway brings significant experience and knowledge of the security industry, specifically in the areas of customer relations, marketing and sales management.

Soloway has been the Company’s Chairman of the Board of Directors since October 1981, President and CEO since 1998, and Secretary since 1975.

The Company believes Mr.

Soloway’s qualifications to serve as a director include his over forty years’ experience in the security industry and his broad knowledge and understanding of the Company and its operations derived from his forty-year service as its Chairman and twenty-two year service as its President and CEO.

Buchel has been Executive Vice President of Operations since October 2021, Senior Vice President of Operations and Finance from April 1995 to October 2021, CFO since April 1995 and Treasurer since May 1998.

The Company believes Mr.

Buchel’s qualifications to serve as a director include his understanding of the Company and its operations derived from twenty-six years as our CFO and Senior Vice President of Operations and Finance and twenty-three years as Treasurer.

Wilder has been a partner of GR Reid Associates, LLP and its predecessor firm, independent certified public accountants, since 1990.

The Company believes Mr.

Wilder’s qualifications to serve as a director include extensive experience in finance and financial reporting and his corporate governance experience.

Our Board of Directors has determined that Mr.

Wilder is an audit committee financial expert.

Ungar is the President of Robert A.

Ungar Associates, Inc., Lobbying, Media and Public Relations Services.

The Company believes that Mr.

Ungar’s qualifications to serve as a director include his diverse experience as an entrepreneur, his experience with various government departments, his experience as a lawyer, as well as his experience with the fire service industry.

Other Directorships

During the past five years, none of the directors has been a director of any company (other than the Company) which is subject to the reporting requirements of the Securities Exchange Act of 1934 or which is a registered investment company under the Investment Company Act of 1940.

DELINQUENT SECTION 16(a) REPORTS

Based solely on a review of the Forms 3, 4 and 5 furnished to the Company with respect to the most recent fiscal year and written representations of the reporting person (as defined below), no person, who at any time during such fiscal year, was an officer, director, beneficial owner of more than ten (10%) percent of any class of equity securities of the Company or any other person subject to Section 16 of the Securities Exchange Act of 1934 (“reporting person”), failed to file on a timely basis one or more reports during such fiscal year except as follows :

Kevin Buchel, an officer, filed one late Form 4 reporting the award of options to purchase 100,000 shares of Common Stock of the Company.

Richard Soloway, an officer, filed one late Form 4 reporting the award of options to purchase 100,000 shares of Common Stock of the Company.

Michael Carrieri, an officer, filed one late Form 4 reporting the award of options to purchase 50,000 shares of Common Stock of the Company.

Andrew Wilder, a director, filed one late Form 4 reporting the award of options to purchase 10,000 shares of Common Stock of the Company.

Rick Lazio, a director, filed one late Form 4 reporting the award of options to purchase 10,000 shares of Common Stock of the Company.

Robert Ungar, a director, filed one late Form 4 reporting the award of options to purchase 10,000 shares of Common Stock of the Company.

Pauil Beeber, a director, filed three late Form 4’s.

One reporting the award of options to purchase 10,000 shares of Common Stock of the Company, a second reporting an exercise of 3,000 shares of common stock of the Company and a third reporting an exercise of 1,600 shares of Common Stock of the Company.

INFORMATION CONCERNING EXECUTIVE OFFICERS

Each executive officer of the Company holds office until the annual meeting of the Board of Directors and his successor is elected and qualified, or until his earlier death, resignation, or removal by the Board.

The Company has adopted a Code of Ethics for directors and employees, including its executive officers.

There are no family relationships between any director or officer of the Company, except Richard L.

Soloway and Donna A.

Soloway, his wife.

The following table sets forth as of the date hereof the names and ages of all executive officers of the Company, all positions and offices with the Company held by them, and the period during which they have served in these positions.

Position and Office with the Company, Term of Office

and Five-Year Employment History

Chairman of the Board of Directors since October 1981;

President and CEO since 1998;

and Secretary since 1975.

Executive Vice President of Operations since October 2021;

Senior Vice President of Operations and Finance from April 1995 to October 2021;

CFO since April 1995;

Treasurer since May 1998.

Michael Carrieri

Senior Vice President of Engineering Development since May 2000;

Vice President of Engineering Development from September 1999 to May 2000.

Senior Vice President of Sales since April 2020;

from January 2015 to April 2020, a director of sales for Nortek Security and Control, LLC (formerly Linear, LLC).

COMPENSATION DISCUSSION & ANALYSIS

This Compensation Discussion and Analysis explains the objectives, strategy and features of our executive compensation program and it describes how the compensation of our executive officers aligns with our corporate objectives and shareholder interests.

Compensation Program Objective

The objective of our executive compensation program is to allow us to successfully retain and motivate executives who enable us to achieve short-term and long-term growth and operational excellence.

Oversight of Our Executive Compensation Program

The Compensation Committee of the Board of Directors (the “Committee”) assists the Board in discharging its responsibilities relating to compensation of the Chief Executive Officer and other executive officers and oversees the executive compensation program.

All of the members of the Compensation Committee have been determined to be independent under applicable NASDAQ and SEC rules.

The Committee’s responsibilities are detailed in its charter, which can be found at www.napcosecurity.com

The Company’s CEO participates in the Compensation Committee’s meetings and provides input into compensation decisions at the Compensation Committee’s request.

In particular, the Company’s CEO participates by making recommendations on NEO compensation and input on objectives (other than for himself).

The CEO’s compensation is determined solely by the Compensation Committee.

The Committee’s process includes executive sessions where the Committee meets alone, without the presence of management.

The Use of Compensation Survey Data and Peer Companies

During fiscal year 2022, the Compensation Committee did not conduct any formal competitive pay benchmarking.

Instead, the competitiveness of the pay offered to the executive officer was based on existing employment agreements and compensation packages, the recommendations of the Chief Executive Officer, and the business experience of members of the Compensation Committee.

Components of the Executive Compensation Program-Description of Elements and Evaluation Process

The named executive officers, including our Chief Executive Officer, have a compensation program that includes the following components:

◾ Base salary

◾ Annual incentives

◾ Long-term incentives in the form of stock options awards

◾ Employee benefits

◾ Perquisites

Compensation Mix.

We do not have policies that define specific percentage allocations for fixed and variable compensation, or cash and non-cash compensation.

We do, however, intend to deliver a portion of total compensation in the form of performance-based cash incentives and in awards of stock options, to achieve our objective of offering rewards for successful business results and shareholder value creation.

The following describes the general purpose of each element of compensation and how the Committee made fiscal year 2022 pay decisions from such element.

Base Salaries .

Base salaries are used to compensate each of our executives for their positions and levels of responsibility.

Each of Messrs.

Soloway and Carrieri have employment agreements, which provide for a minimum base salary and, in the case of Mr.

Soloway, a minimum annual cost-of-living adjustment.

For fiscal year 2022, Messrs.

Soloway and Carrieri’s salaries were determined pursuant to such Employment Agreements.

Soloway recommended to the Committee the base salary for Mr.

Buchel’s and Mr.

Spinelli’s salary for the 2022 fiscal year was in an amount recommended by the CEO.

The considerations entering into the determination by the CEO of the salary recommendation for each of Mr.

Buchel and Mr.

Spinelli were

the CEO’s subjective evaluations of the ability and past performance of Mr.

Buchel and the CEO’s judgment of their potential for enhancing the Company’s profitability.

With respect to Mr.

Buchel, his base salary was increased to reflect the increase in executive duties he assumed.

Annual Cash Incentives .

The Committee’s policy is that named executive officers, other than the CEO, should receive short term incentive compensation in the form of bonuses based on recommendations by the CEO who may base such determinations on targets established for the named executive officers.

For fiscal year 2022, based on the CEO’s recommendation, each named executive officer (including the CEO) received a cash bonus that was not based on attaining any targets but was based, in part, on the Company’s increase in revenues and profitability.

Long-term Incentive Awards .

The purpose of the granting of stock options is to retain the services of the named executive officers and our key employees and encourage them to improve our operating results and to become shareholders of the Company, all of which is intended to result in increased shareholder value.

The Committee’s policy is generally to grant options to the named executive officers other than the CEO under the Company’s Stock Option Plans after consideration of the amounts recommended periodically by the CEO.

The recommendations of the CEO for option grants reflect the subjective judgment of the CEO of the performance of such executives and the potential benefit to the Company from the grant of this form of incentive compensation.

388,000 stock options were granted during fiscal year 2022.

Employee Benefits, Perquisites and Other Personal Benefits.

As a general rule, we do not provide special benefits to senior executives and the named executive officers participate in the same plans – including term life insurance, health and disability insurance – available to all salaried employees.

We do, however, pay the premiums on life insurance policies for the benefit of each of the named executive officers and on health insurance policies for the benefit of Mr.

See footnote to the Summary Compensation Table.

We offer one retirement plan, a qualified profit sharing 401(k) plan to all employees, including the named executive officers that matches 50% of an employee’s contribution up to the first 3% of the employee’s salary subject to an overall dollar cap.

We have provided certain perquisites to the named executive officers, as summarized in footnotes 2 and 3 to the “Summary Compensation Table.”

IRC Section 162(m) .

Under Section 162(m) of the Internal Revenue Code ("Section 162(m)"), compensation paid to each of the Company’s "covered employees"

that exceeds $1 million per taxable year is generally non-deductible unless the compensation qualifies for certain exceptions that are not applicable to the Company.

Although the Compensation Committee will continue to consider tax implications as one factor in determining executive compensation, the Compensation Committee also looks at other factors in making its decisions and retains the flexibility to provide compensation for our named executive officers in a manner consistent with the goals of our executive compensation program and the best interests of our Company and our stockholders, which may include providing for compensation that is not deductible by us due to the deduction limit under Section 162(m).

Employment Agreements

Change in Control, Severance Agreements.

Soloway’s Employment Agreement, if during its term there should be a change in control, then Mr.

Soloway is entitled to terminate his employment and is entitled to receive a termination payment equal to 299% of the average of the prior five calendar years’ compensation, subject to certain limitations.

If the Company terminates Mr.

Soloway’s employment other than for Cause, as defined, or if Mr.

Soloway terminates his employment with the Company for Good Reason, as defined, the Company shall pay a lump sum payment equal to (i) Mr.

Soloway’s annual base salary plus the bonus paid for the prior fiscal year multiplied by (ii) the greater of the number of years or portion thereof remaining in the term of the Agreement or three years.

The agreement with Mr.

Carrieri provides for payment equal to nine months of salary and six months of health insurance in the event of a non-voluntary termination of employment of the officer without cause.

In addition, the Company has a severance agreement with Kevin S.

Buchel providing for payments equal to nine months of salary and six months of health insurance in the event of a non-voluntary termination of employment without cause.

We believe these changes in control and severance arrangements help to retain these executive talents by providing them with a sense of commitment by the Company to them.

Code of Ethics

We have adopted a Code of Ethics which applies to our senior executive and financial officers, among others.

The Code is posted on our website, www.napcosecurity.com , under the “Investors – Other” caption.

The Code is posted on our website, www.napcosecurity.com , under the “Investors – Corporate Governance” caption.

We intend to make all required disclosures regarding any amendment to, or waiver of, a provision of the Code of Ethics for senior executive and financial officers by posting such information on our website.

The information appearing in the Proxy Statement relating to the members of the Audit Committee and the Audit Committee financial expert under the headings “Corporate Governance and Board Matters – Board Structure and Committee Composition” and “Corporate Governance and Board Matters – Board Structure and Committee Composition – Audit Committee” and the information appearing in

the Proxy Statement under the heading “Delinquent Section 16(c) Beneficial Ownership Reporting Compliance” is incorporated herein by this reference.

The information set forth in the Proxy Statement under the heading “Information Concerning Executive Officers” is incorporated herein by reference.

Audit Committee

The Company has a standing Audit Committee.

It is responsible for retaining, evaluating and, if appropriate, recommending the termination of the Company’s independent auditors.

The Audit Committee assists the Board in oversight of (1) the integrity of the Company’s financial statements, (2) the Company’s independent auditor’s qualifications and independence, and (3) the performance of the Company’s internal audit function and independent auditors.

In addition, the Committee renders its report for inclusion in the Company’s annual proxy statement.

The Audit Committee has the authority to obtain advice and assistance from outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties.

The Audit Committee held six meetings in fiscal year 2022.

The Audit Committee is vested with authority to approve any related party transaction.

The current members of the Audit Committee are Andrew J.

Wilder (Chairman), Paul Stephen Beeber and Robert A.

Ungar, each of whom meets the NASDAQ Listing Standards for the independence of audit committee members.

The Board has determined that Andrew Wilder is an audit committee financial expert.

The committee charter of the Audit Committee is set forth in the “Investors” section of the Company’s website, www.napcosecurity.com.

EXECUTIVE COMPENSATION

The information appearing in the Proxy Statement under the heading “Executive Compensation” and the information appearing in the Proxy Statement relating to the compensation of directors under the caption “Compensation of Directors” are incorporated herein by this reference.

COMPENSATION OF DIRECTORS

The total fiscal year 2022 compensation of non-employee Directors is shown in the following table.

Director Compensation

Fees Earned or

Paul Stephen Beeber

(1) Each director who is not an employee receives a fee for each Board of Directors meeting.

Wilder, as Chairman of the Audit Committee, receives $11,000 for each meeting.

Soloway is not a member of any committee and receives $9,000 for each meeting.

All other directors, as members of the various committees, receive $10,000 for each meeting.

(2) Amounts reflect the share-based compensation expense recognized by the Company in the year ended June 30, 2022, in accordance with FASB ASC Topic 718.

Assumptions used in the calculation of these amounts are included in footnote 8 to the Notes to Consolidated Financial Statements contained in the Company’s Form 10-K for the year ended June 30, 2022.

(3) At June 30, 2022, each of Ms.

Soloway and Mr.

Wilder held outstanding options to purchase 37,100 shares of Common Stock of the Company, of which 21,300 were vested at June 30, 2022;

Beeber held outstanding options to purchase 24,100 shares of Common Stock of the Company, of which 8,300 were vested at June 30, 2022;

Ungar held outstanding options to purchase 18,000 shares of common stock of which 6,800 were vested;

Lazio held outstanding options to purchase 20,000 shares of common stock of which 6,000 were vested.

EXECUTIVE COMPENSATION

Compensation Committee

The Compensation Committee assists the Board in discharging its responsibilities relating to compensation of the Company’s executive officers.

The Compensation Committee determines the compensation of the Company’s Chief Executive Officer and the other named executive officers.

The Chief Executive Officer makes recommendations on our executive compensation program and the compensation of our named executive officers.

In addition, the Committee determines individuals to be granted options under the 2012 Employee Stock Option Plan, the number of options awarded and the term of the options and interprets provisions of such plan.

The current members of the Compensation Committee are Paul Beeber (Chairman), Andrew J.

Wilder, and Rick Lazio, each of whom meets the NASDAQ Listing Standards for independence for Compensation Committee members

The Compensation Committee held 2 meetings in fiscal year 2022.

The Chief Executive Officer typically attends meetings of the Committee.

The Committee’s process includes executive sessions where the Committee meets without the presence of the Chief Executive Officer.

Neither the Committee nor the Company has engaged a compensation consultant.

Compensation Committee Interlocks and Insider Participation

During fiscal year 2022, Messrs.

Beeber (since August 2020), Wilder and, Lazio (since 2020) served as members of our Compensation Committee.

No member of the Compensation Committee was an employee or officer of the Company during fiscal year 2022, a former officer of the Company, or had any other relationship with us requiring disclosure herein.

During the fiscal year 2022, none of our executive officers served as a member of the Board of Directors or committee thereof of any other entity.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of Directors hereby reports as follows:

The Compensation Committee has reviewed, and discussed with management, the Company’s Compensation Discussion & Analysis (“CD&A”) appearing above.

Based on the review and discussions referred to in paragraph 1 above, the Compensation Committee recommended to the Board of Directors that the CD&A be included in this Annual Report on Form 10-K for the fiscal year ended June 30, 2022 to be filed with the Securities and Exchange Commission.

The Compensation Committee:

Paul Beeber (Chairman)

The foregoing report of the Compensation Committee shall not be deemed to be soliciting material, to be filed with the SEC or to be incorporated by reference into any of our previous or future filings with the SEC, except as otherwise explicitly specified by us in any such filing.

The Summary Compensation Table below sets forth compensation information for our Chief Executive Officer and our three most highly compensated executive officers during fiscal years 2022, 2021 and 2020 of the Company.

Summary Compensation Table

Principal Position

Compensation ($)

Chairman of the Board of

Directors, CEO, President

and Secretary

Executive Vice President

of Operations , CFO and

Michael Carrieri,

Senior Vice President of

Stephen Spinelli, Senior

Vice President of Sales

(1) Amounts reflect compensation granted under discretionary bonus arrangements with each officer based on year over year increases in net sales for each of the fiscal years shown.

(2) Amounts reflect the share-based compensation expense recognized by the Company in the fiscal years ended June 30, 2022, June 30, 2021, and June 30, 2020, in accordance with FASB ASC Topic 718.

(3) All other compensation for Mr.

Soloway for fiscal 2022 included payment of health and life insurance premiums of $36,146 and automobile expenses of $21,644.

All other compensation for Mr.

Soloway for fiscal 2021 included payment of health and life insurance premiums of $35,148 and automobile expenses of $25,569.

All other compensation for Mr.

Soloway for fiscal 2020 includes payment of health and life insurance premiums of $33,626 and automobile expenses of $29,897.

(4) All other compensation for Messrs.

Buchel, Carrieri and Spinelli includes payment of life insurance premiums and automobile expenses.

Outstanding Equity Awards at Fiscal Year-End

Option Awards

Securities Underlying

Unexercised Options

Un-exercisable

Michael Carrieri

Stephen Spinelli

(1) Options as to 3,200 shares vest on December 15, 2022.

(2) Options as to 1,600 shares vest on October 2, 2022.

(3) Options as to 3,200 shares vest on October 28 in each of 2022 and 2023.

(4) Options as to 1,600 shares vest on October 28 in each of 2022 and 2023.

(5) Options as to 4,000 shares vest on February 12 in each of 2023 and 2024.

(6) Options as to 20,000 shares vest on October 19 in each of 2022, 2023, 2024 and 2025.

(7) Options as to 10,000 shares vest on October 19 in each of 2022, 2023, 2024 and 2025.

(8) Options as to 11,976 shares vest on April 30 in each of 2023, 2024 and 2025.

Employment Agreements and Potential Payments Upon Termination or Change in Control

The Company has an employment agreement with each of Richard L.

Soloway and Michael Carrieri.

The agreement with Mr.

Soloway, entered into on June 26, 2003, is for a five-year period, and then year to year unless notice of termination is given at least six months prior to the end of the then applicable term.

The Agreement provides for a minimum annual salary to be adjusted for inflation and discretionary annual incentive compensation.

Soloway’s agreement contains non-compete restrictions during his employment and for one year after termination for any reason.

The agreement also provides for termination payments to Mr.

Soloway upon death, disability, termination by the Company other than for Cause, as defined, termination by Mr.

Soloway for Good Reason, as defined, and termination by Mr.

Soloway within twelve months of a change in control.

In the event of death, the termination payment equals one year’s salary payable over one year plus a bonus calculated on a pro rata basis through the end of the fiscal quarter immediately preceding death.

In the event of disability, the Company must pay Mr.

Soloway an amount equal to 60% of his annual salary through the term of the agreement plus his bonus on a pro rata basis through the end of the fiscal quarter preceding the sixth month of his disability.

In the event the Company terminates Mr.

Soloway other than for Cause or if Mr.

Soloway terminates for

Good Reason, the Company must pay Mr.

Soloway, in a lump sum, an amount equal to three times his annual salary plus the bonus paid to him for the year prior to his termination.

If during the term there should be a change in control, then Mr.

Soloway is entitled to terminate his employment, and the Company is required to pay him, an amount equal to 299% of the average of the prior five calendar years’ total compensation, subject to certain limitations.

The Company’s option plans provide for the accelerated vesting of unvested options upon a change in control.

Under such agreement, had Mr.

Soloway’s employment terminated on June 30, 2022 on account of (i) death, (ii) disability or (iii) by the Company other than for Cause, or by Mr.

Soloway for Good Reason, the Company would have been required to pay him $1,306,613, $511,934 and $3,919,840, respectively.

Soloway’s employment terminated on June 30, 2021 after a change of control, the Company would have been required to pay him $3,777,112 pursuant to his employment agreement.

In addition, assuming a change of control on June 30, 2022, vesting of options to purchase 89,600 shares of Common Stock of the Company would have been accelerated.

The value of such accelerated options would have been $64,320 based upon the closing price per share of $20.59 of the Company’s Common Stock on the NASDAQ Global Market on June 30, 2022.

Carrieri’s agreement, as amended, terminates in August 2024 and provides for an annual salary of $361,000.

Carrieri’s agreement, as amended, provides for payment equal to nine months of salary and six months of health insurance in the event of a non-voluntary termination of employment without cause or for any reason within three months of a change in control of the Company.

Had either of such events occurred on June 30, 2022, the Company would have been required to pay him $267,173.

In addition, the Company has a severance agreement with Kevin S.

Buchel providing for payments equal to nine months of salary and six months of health insurance in the event of a non-voluntary termination of employment without cause or for any reason upon a change of control of the Company.

Buchel’s employment been terminated on June 30, 2022 non-voluntarily without cause, the Company would have been required to pay him $349,666 pursuant to such severance agreement.

In the event of a change of control on June 30, 2022, vesting of options to purchase 92,800 and 44,800 shares of Common Stock of the Company would have accelerated for Messrs.

Buchel and Carrieri, respectively.

The value of such accelerated options would have been $109,536 and $38,216 for Messrs.

Buchel and Carrieri, respectively, based on a closing price of $20.59 per share of the Company’s Common Stock on the NASDAQ Global Market on June 30, 2022.

Each of the agreements with Mr.

Carrieri and Mr.

Buchel contains non-compete restrictions for three years after the employee’s termination of employment.

CEO Pay Ratio - 2022

The 2022 annual total compensation of our CEO was $1,736,460, the 2022 annual total compensation of our median compensated employee was $2,566 and the ratio of these amounts is 639 to 1.

We determined our median compensated employee by using base salary, bonuses, commissions, and grant date fair value of equity awards granted to employees in fiscal 2022.

We applied this measure to our global employee population as of June 30, 2022, the last day of our 2022 fiscal year, and annualized base salaries for permanent full-time and part-time employees that did not work the full year.

The global employee population utilized to identify the median employee used in the calculation includes the Company’s employees in the Dominican Republic, which make up a majority of employees of the Company and typically have lower compensation than those employees located in the United States.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information appearing in the Proxy Statement under the heading “Beneficial Ownership of Common Stock” is incorporated herein by this reference.

Information regarding Equity Compensation Plan Information as of June 30, 2022 is included in Item 5.

BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table, together with the accompanying footnotes, sets forth information as of August 22, 2022, regarding the beneficial ownership (as defined by the Securities and Exchange Commission) of Common Stock of the Company of (a) each person known by

the Company to own more than five percent of the Company’s outstanding Common Stock, (b) each director of the Company (c) each executive officer named in the Summary Compensation Table, and (d) all executive officers and directors of the Company as a group.

Amount and Nature of

Beneficial Owner

Beneficial Ownership (1)

Common Stock (2)

c/o the Company

333 Bayview Avenue

Amityville, NY 11701

Michael Carrieri

Stephen Spinelli

Paul Stephen Beeber

All named executive officers and directors as a group (10 in number) (3)

* Less than 1%

(1) This number includes the number of shares that a person has a right to acquire within sixty (60) days (R.

Soloway – 73,600, Buchel – 63,040, Wilder – 23,300 Carrieri – 27,840, D.

Soloway – 23,300, Spinelli – 24,952, Beeber – 10,300, Lazio – 10,000 and Ungar – 8,800).

(2) Percentages for each person or the group are computed on the basis of 36,734,482 shares of Common Stock outstanding on June 30, 2022, plus the number of shares that such person or group has the right to acquire within sixty (60) days.

Except as otherwise noted, persons named in the table and footnotes have sole voting and investment power with respect to all shares of Common Stock reported as beneficially owned by them.

(3) This number of shares includes (i) 7,615,023 shares as to which officers and directors have sole voting and investment power, and (ii) 265,132 shares that officers and directors have the right to acquire within sixty (60) days.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information appearing in the Proxy Statement under the headings “Corporate Governance and Board Matters – Independence of Directors,” “Corporate Governance and Board Matters – Board Structure and Committee Composition,” “Corporate Governance – Policy with Respect to Related Person Transactions,” and “Executive Compensation – Certain Transactions” is incorporated herein by this reference.

Independence of Directors

The Board currently consists of seven directors, four of whom the Board has affirmatively determined have no relationship with the Company or its subsidiaries which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and are independent as defined by the applicable NASDAQ Listing Standards.

The four independent directors are Paul Stephen Beeber, Rick Lazio, Robert A.

Ungar and Andrew J.

Board Leadership Structure

The Board does not have a policy as to whether or not the roles of Chief Executive Officer and Chairman of the Board should be separate.

The Board believes that it should be free to make a choice on the leadership structure of the Board from time to time in any manner that is in the best interests of the Company and its stockholders.

Currently, and since 1998, Mr.

Soloway has served as the Chairman of the Board, CEO and President.

The Board of Directors has not elected a Lead Independent Director.

Board Oversight of Risk

The Company faces a variety of risks including strategic and operational risks, financial and liquidity risks, compliance risks and financial reporting risks.

The Board exercises its oversight of the Company’s risks through regular reports to the Board from the Chief

Executive Officer, and other members of management on areas of material risk, actions and strategies to mitigate those risks and the effectiveness of those actions and strategies.

In addition, the Board oversees risk through oversight by the Audit Committee.

The Audit Committee discusses with management the Company’s policies with respect to risk assessment and risk management, including the Company’s financial risk exposures and the steps management has taken to monitor and control its risks.

Board Structure and Committee Composition

The Board maintains three standing committees:

Audit, Compensation, and Nominating.

Each Committee is composed entirely of independent directors as defined in the applicable NASDAQ Listing Standards.

Members of the Audit and Compensation Committees were identified earlier.

The Nominating Committee consists of Robert Ungar, Rick Lazio and Andrew Wilder.

During fiscal 2022, the Board held 8 meetings.

Each director attended at least 75% of all Board meetings and meetings of committees of which such director was a member.

NAPCO maintains an “Investors” section on its website, www.napcosecurity.com , setting forth the Company’s committee charters for the Audit, Compensation and Nominating Committees.

Policy With Respect to Related Person Transactions

It is the Company’s policy, set forth in writing, not to permit any transaction in which the Company is a party and in which executive officers or directors, their immediate family members, or 5% shareholders have or will have a direct or indirect material interest unless approved by the Audit Committee of the Board of Directors, other than

transactions available to all employees;

transactions involving compensation or business expense reimbursement approved by the Compensation Committee or by disinterested members of the Board of Directors;

transactions involving less than $120,000 when aggregated with all similar transactions.

Any issues as to the application of this policy shall be resolved by the Audit Committee of the Board of Directors.

A copy of our Statement of Policy with Respect to Related Person Transactions is available at the Company’s website, www.napcosecurity.com , under the “Investors” caption.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Information appearing in the Proxy Statement under the headings “Principal Accountant Fees” and “Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors” is incorporated herein by this reference.

Principal Accountant Fees

The fees billed for professional services for fiscal years 2022, 2021 and 2020 by Baker Tilly, the Company’s independent registered public accountants, for professional services were as follows:

Fiscal Year 2022

Fiscal Year 2021

Fiscal Year 2020

Audit Fees (1)

Audit Related Fees

All Other Fees (2)

(1) Includes audit of financial statements, SAS 100 reviews and consultations for 2022, 2021 and 2020, respectively and audit of internal controls for 2021, 2020 and 2019.

(2) Includes services related to the audit of the Company’s employee benefit plan for the plan years ended December 31, 2022, 2021 and 2020, respectively.

The Audit Committee has considered whether the provision of the services described above under the headings “All Other Fees” is compatible with maintaining the auditor’s independence and determined that it is.

In fiscal years 2022, 2021 and 2020, 100% of “All Other Fees” were approved by the Audit Committee.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

The Audit Committee specifically pre-approves all audit and permissible non-audit services provided by the independent auditors.

These services may include audit services, audit-related services, tax services and other services.

Pre-approval may be provided for up to one year.

Each pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget.

The independent auditors and management are required to periodically report to the Audit Committee regarding the services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

3 unchanged sentences

Management Report on Internal Control

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 23)

Consolidated Financial Statements:

16 unchanged sentences

Second Amended and Restated By-Laws

Exhibit 3.(ii) to Report on Form 18-K (Commission file No.

Exhibit 10.3 to Report on Form 8-K (Commission file No.

0-10004) filed on September 8, 2020

Amendment to the Amended and Restated Certificate of Incorporation

Exhibit 3.(iv) to Report on Form 8-K (Commission file No.

0-10004) filed on December 7, 2021

Third Amended and Restated Credit Agreement dated June 29, 2012.

36 unchanged sentences

2018 Non-Employee Stock Option Plan

Appendix A to Proxy Statement dated October 29, 2018 for Annual Meeting of

Stockholders to be held on December 11, 2018

Appendix A to Proxy Statement dated October 29, 2018 for Annual Meeting of Stockholders to be held on December 11, 2018

2020 Non-Employee Stock Option Plan

22 unchanged sentences

Certification of Chief Financial Officer Pursuant to 18 USC Section 1350 and Section 906 of Sarbanes - Oxley Act of 2002

XBRL Instance Document **

XBRL Taxonomy Extension Schema Document**

XBRL Taxonomy Extension Calculation Linkbase Document**

XBRL Taxonomy Extension Label Linkbase Document**

XBRL Taxonomy Extension Presentation Linkbase Document**

XBRL Taxonomy Extension Definition Linkbase Document**

Inline XBRL Instance Document **

Inline XBRL Taxonomy Extension Schema Document**

Inline XBRL Taxonomy Extension Calculation Linkbase Document**

Inline XBRL Taxonomy Extension Label Linkbase Document**

Inline XBRL Taxonomy Extension Presentation Linkbase Document**

Inline XBRL Taxonomy Extension Definition Linkbase Document**

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

September 13, 2021

August 29, 2022

NAPCO SECURITY TECHNOLOGIES, INC.

7 unchanged sentences

Chairman of the Board of Directors,

September 13, 2021

August 29, 2022

Richard Soloway

1 unchanged sentence

(Principal Executive Officer)

Senior Vice President of Operations

September 13, 2021

and Finance and Treasurer and Director

Executive Vice President

August 29, 2022

and Chief Financial Officer

(Principal Financial and Accounting Officer)

/s/ PAUL STEPHEN BEEBER

September 13, 2021

August 29, 2022

Paul Stephen Beeber

/s/ RICK LAZIO

September 13, 2021

August 29, 2022

/s/ DONNA SOLOWAY

September 13, 2021

August 29, 2022

Donna Soloway

/s/ ROBERT UNGAR

September 13, 2021

August 29, 2022

/s/ ANDREW J.

September 13, 2021

August 29, 2022

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 8. Financial Statements and Supplementary Data