What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-06 compared with 2022-11-07 · 55 added, 29 removed, 58 unchanged (59% of the section changed)

29 unchanged sentences

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.

The monthly recurring service 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.

Critical Accounting Policies and Estimates

2 unchanged sentences

Results of Operations

Three months ended September 30,

Three months ended December 31,

Six months ended December 31,

(dollars in thousands)

equipment revenues

8 unchanged sentences

Operating income

Interest and other (expense) income, net

Interest and other income (expense), net

Gain on extinguishment of debt

Provision for income taxes

Net Sales for the three months ended September 30, 2022 increased by $8,442,000, or 27.2%, to $39,493,000 as compared to $31,051,000 for the same period a year ago.

The increase in sales for the three months ended September 30, 2022 was due primarily to increased recurring communication service revenues ($3,582,000), Napco brand intrusion products, which include the Company’s cellular radio products ($3,332,000), Alarm Lock brand door-locking products ($1,126,000), and Continental brand access control products ($402,000).

Net Sales for the three months ended December 31, 2022 increased by $8,906,000, or 26.7%, to $42,314,000 as compared to $33,408,000 for the same period a year ago.

The increase in sales for the three months ended December 31, 2022 was due primarily to increased recurring communication service revenues ($3,852,000), Alarm Lock brand door-locking products ($3,191,000), Marks brand door-locking products ($1,288,000), and Continental brand access control products ($664,000) partialy offset by Napco brand intrusion products, which include the Company’s cellular radio products which declined ($89,000).

Net Sales for the six months ended December 31, 2022 increased by $17,348,000, or 26.9%, to $81,807,000 as compared to $64,459,000 for the same period a year ago.

The increase in sales for the six months ended December 31, 2022 was due primarily to increased recurring communication service revenues ($7,434,000), Napco brand intrusion products, which include the Company’s cellular radio products ($3,242,000), Alarm Lock brand door-locking products ($4,317,000), Marks brand door-locking products ($1,285,000), and Continental brand access control products ($1,069,000).

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

The Company's gross profit increased by $4,711,000 to $18,167,000, or 46.0% of net sales, for the three months ended September 30, 2022 as compared to $13,456,000, or 43.3% of net sales, for the same period a year ago.

Gross profit on equipment sales was $6,022,000, or 23.4% of net equipment sales, for the three months ended September 30, 2022 and $4,655,000, or 22.4% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $12,145,000, or 88.0% of net service revenues, for the three months ended September 30, 2022 and $8,801,000, or 86.1% of net service revenues, for the same period a year ago.

The increase in gross profit in dollars and as a percentage of net sales on equipment sales and service revenues was was primarily the result of the increase in revenues of each as described above.

The increases in revenues resulted in improved overhead absorption rates.

The Company's gross profit increased by $8,019,000 to $19,462,000, or 46.0% of net sales, for the three months ended December 31, 2022 as compared to $11,443,000, or 34.3% of net sales, for the same period a year ago.

Gross profit on equipment sales was $6,247,000, or 22.8% of net equipment sales, for the three months ended December 31, 2022 and $1,809,000, or 8.1% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $13,215,000, or 88.8% of net service revenues, for the three months ended December 31, 2022 and $9,634,000, or 87.4% of net service revenues, for the same period a year ago.

The increase in gross profit in dollars and as a percentage of net sales on equipment sales and service revenues was was primarily the result of the increase in revenues of each as described above as well as increased availability and lower costs of components and transportation as compared to the same period last year which resulted from improvements within the Company’s supply chain.

The increase in revenues resulted in improved overhead absorption rates.

In addition, the increase in gross margin on service revenues was due, in part, to increased service revenues relating to the Company’s fire radios, which have higher monthly selling prices than the Company’s intrusion radios.

Research and development expenses for the three months ended September 30, 2022 increased $497,000 to $2,428,000, or 6.2% of net sales, as compared to $1,931,000, or 6.2% of net sales, for the same period a year ago.

The Company's gross profit increased by $12,730,000 to $37,629,000, or 46.0% of net sales, for the six months ended December 31, 2022 as compared to $24,899,000, or 38.6% of net sales, for the same period a year ago.

Gross profit on equipment sales was $12,269,000, or 23.1% of net equipment sales, for the six months ended December 31, 2022 and $6,464,000, or 15.0% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $25,360,000, or 88.4% of net service revenues, for the six months ended December 31, 2022 and $18,435,000, or 86.7% of net service revenues, for the same period a year ago.

The increase in revenues resulted in improved overhead absorption rates.

Research and development expenses for the three months ended December 31, 2022 increased $244,000 to $2,222,000, or 5.3% of net sales, as compared to $1,978,000, or 5.9% of net sales, for the same period a year ago.

Research and development expenses for the six months ended December 31, 2022 increased $741,000 to $4,650,000, or 5.7% of net sales, as compared to $3,909,000, or 6.1% of net sales, for the same period a year ago.

The increase in dollars was due primarily to salary increases and additional staff.

Selling, general and administrative expenses for the three months ended September 30, 2022 increased 15.6% to $8,490,000 from $7,346,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales decreased to 21.5% for the three months ended September 30, 2022 as compared to 23.7% for the same period a year ago.

The increase in dollars resulted primarily from increases in sales commissions, stock option expense and legal expenses.

Selling, general and administrative expenses for the three months ended December 31, 2022 decreased by $391,000 or 4.8% to $7,804,000 from $8,195,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales decreased to 18.4% for the three months ended December 31 2022 as compared to 24.5% for the same period a year ago.

The decrease in dollars resulted primarily from higher stock option expense and legal expenses incurred in the three months ended December 31, 2021.

The decrease as a percentage of net sales was due primarily to the increase in net sales as partially offset by the aforementioned increase in expense dollars.

Interest and other (expense) income, net for the three months ended September 30, 2022 decreased by $120,000 to an expense of $103,000 as compared to income of $17,000 for the same period a year ago.

Selling, general and administrative expenses for the six months ended December 31, 2022 increased by 753,000 or 4.8% to $16,294,000 from $15,541,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales decreased to 19.9% for the six months ended December 31 2022 as compared to 24.1% for the same period a year ago.

The increase in dollars resulted primarily from increases in credit card processing fees, insurance expense and commission expenses.

The decrease as a percentage of net sales was due primarily to the increase in net sales as partially offset by the aforementioned increase in expense dollars.

Interest and other income (expense), net for the three months ended December 31, 2022 increased by $129,000 to income of $187,000 as compared to income of $58,000 for the same period a year ago.

Interest and other income (expense), net for the six months ended December 31, 2022 increased by $9,000 to income of $84,000 as compared to income of $75,000 for the same period a year ago.

Gain on extinguishment of debt resulted from a one-time gain in the three months ended September 30, 2021 which resulted from the forgiveness of the Company’s PPP loans as described in Note 8 to the condensed consolidated financial statements.

The Company’s provision for income taxes for the three months ended September 30, 2022 increased by $396,000 to $744,000 as compared to $348,000 for the same period a year ago.

The Company’s provision for income taxes for the three months ended December 31, 2022 increased by $886,000 to $1,177,000 as compared to $291,000 for the same period a year ago.

The increase in the provision for income taxes for the three months was primarily due to higher taxable income in the U.S.

The Company’s effective rate for income tax was 10.4% and 4.3% for the three months ended September 30, 2022 and 2021, respectively.

The effective rate for the three months ended September 30, 2021 was reduced due to the other income of $3.9 million being non-taxable.

Net income for the three months ended September 30, 2022 decreased by $1,350,000 to $6,402,000 or $0.17 per diluted share as compared to $7,752,000 or $0.21 per diluted share for the same period a year ago.

The decrease in net income for the three months ended September 30, 2022 was primarily due to the inclusion of income from the forgiveness of debt in other income in the three months ended September 30, 2021 as well as the other items described above.

Due to the inclusion of $3.9 million of income from the forgiveness of debt net income and diluted earnings per share for the three months ended September 30, 2021 would have been $3.8 million and $0.10, respectively.

The Company’s effective rate for income tax was 12.2% and 21.9% for the three months ended December 31, 2022 and 2021, respectively.

The Company’s provision for income taxes for the six months ended December 31, 2022 increased by $1,282,000 to $1,921,000 as compared to $639,000 for the same period a year ago.

The increase in the provision for income taxes for the six months was primarily due to higher taxable income in the U.S.

The Company’s effective rate for income tax was 11.5% and 6.8% for the six months ended December 31, 2022 and 2021, respectively.

The effective rate for the six months ended December 31, 2021 was reduced due to the other income of $3.9 million being non-taxable.

Net income for the three months ended December 31, 2022 increased by $7,409,000 to $8,446,000 or $0.23 per diluted share as compared to $1,037,000 or $0.03 per diluted share for the same period a year ago.

Net income for the six months ended December 31, 2022 increased by $6,059,000 to $14,848,000 or $0.40 per diluted share as compared to $8,789,000 or $0.24 per diluted share for the same period a year ago.

The increase in net income for the three and six months ended December 31, 2022 was primarily due to the items described above.

Without the inclusion of $3.9 million of income from the forgiveness of debt net income and diluted earnings per share for the six months ended December 31, 2021 would have been $4.9 million and $0.13, respectively

Liquidity and Capital Resources

During the three months ended September 30, 2022, the Company utilized a portion of its cash balance at June 30, 2022 ($12,365,000 of $41,730,000) to fund operations ($1,965,000) and to purchase marketable securities and other investments ($10,028,000) and property, plant and equipment ($372,000).

During the six months ended December 31, 2022, the Company utilized a portion of its cash balance at June 30, 2022 ($10,856,000 of $41,730,000) to purchase marketable securities and other investments ($10,078,000) and property, plant and equipment ($816,000).

During the six months ended December 31, 2022, the Company generated a cash flow from operations of $1,088,000.

The Company believes its current working capital, cash flows from operations and its revolving credit agreement will be sufficient to fund the Company’s operations through the next twelve months.

Accounts receivable at September 30, 2022 decreased by $7,876,000 to $21,342,000 as compared to $29,218,000 at June 30, 2022.

This decrease is primarily the result of the higher sales volume of equipment during the quarter ended June 30, 2022, which is typically the Company’s highest, as compared to the quarter ended September 30, 2022.

Inventories, which include both current and non-current portions, increased by $14,051,000 to $63,837,000 at June 30, 2022 as compared to $49,786,000 at June 30, 2022.

The increase was due primarily to higher costs of component parts and freight-in as well as a build-up of inventory of the Company’s radio products in order to mitigate potential supply chain interuptions of these products..

Accounts receivable at December 31, 2022 decreased by $8,233,000 to $20,985,000 as compared to $29,218,000 at June 30, 2022.

In addition, sales of the Company’s radio communication products were unusually high in the month of June 2022 due to the Company fulfilling backorders of these products which had built up during the world-wide supply chain difficulties.

Sales of these products were at more normal levels in the month of December 2022.

Inventories, which include both current and non-current portions, increased by $14,406,000 to $64,192,000 at December 31, 2022 as compared to $49,786,000 at June 30, 2022.

The increase was due primarily to a build-up of inventory of the Company’s radio products in order to mitigate potential supply chain interuptions of these products.

The increase was also due to the ongoing shortages of certain component parts and the Company purchasing large quantities of these hard to source component parts when they become available.

Accounts payable and accrued expenses, not including income taxes payable, decreased by $645,000 to $23,980,000 as of September 30, 2022 as compared to $24,625,000 as of June 30, 2022.

This decrease is primarily due to a decrease in the Company’s accrued refund liability, which is explained in Note 2 to the Notes to the Company’s Consolidated Financial Statements, and a decrease in accrued annual bonuses and commissions as partially offset by an increase in accounts payable which relates to the increase in invertory discussed above.

As of September 30, 2022 and 2021, long-term debt consisted of a revolving line of credit of $11,000,000 (“Revolver Agreement”), with no amounts outstanding, which expires in June 2024.

As these challenges begin to subside, the Company believes it’s inventory levels will decrease.

Accounts payable and accrued expenses, not including income taxes payable, decreased by $6,917,000 to $17,708,000 as of December 31, 2022 as compared to $24,625,000 as of June 30, 2022.

This decrease is primarily due to a decrease in the Company’s accrued refund liability, which is explained in Note 2 to the Notes to the Company’s Consolidated Financial Statements, and a decrease in accrued salaries, a decrease in accrued annual bonuses and a decrease in accounts payable which relates to the Company reducing purchases of component parts in the latter part of the quarter ended December 31, 2022 after building up it’s inventory in fiscal 2022.

As of December 30, 2022 and 2021, long-term debt consisted of a revolving line of credit of $11,000,000 (“Revolver Agreement”), with no amounts outstanding, which expires in June 2024.

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

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

As of September 30, 2022 the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

As of December 31, 2022, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

In addition, the Company has a refund liability of $4,096,000 as of December 31, 2022 for customer returns and promotional credits as more fully discussed in Note 2 to the Condensed Consolidated Financial Statements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis