What changed in this filing

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Item 1A. Risk Factors

2023-09-08 compared with 2022-08-29 · 42 added, 41 removed, 174 unchanged (32% of the section changed)

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Our business operation and financial performance may again be adversely affected by the COVID-19 pandemic and related events.

We are subject to risks related to the global pandemic associated with the COVID-19 disease, which has spread globally to the U.S.

and other countries where we have operations, including the Dominican Republic.

Numerous federal and state governmental jurisdictions have imposed “stay-at-home” orders, quarantines, travel bans and similar governmental orders and restrictions to control the spread of COVID-19.

Such orders or restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, unprecedented and widespread unemployment, disruptions to ports and other shipping infrastructure, border closures, and other travel or health-related restrictions, thereby negatively impacting our customers, suppliers, distributors, employees, offices, and the industry in which we operate.

As a result of the COVID-19 pandemic and the related economic downturn, we had experienced a decline in the demand for our products, as our distributors and customers reduced orders and adjusted their inventory channel in response to slowdown in spending and demand for security products.

While the economic recovery from this pandemic has resulted in increased demand for our products in fiscal 2022, re-institution of a prolonged stay-at-home order, or any other continued decrease in economic activity as a result of COVID-19 pandemic, could have a negative adverse impact on our customers and their financial condition, which could impact their ability to meet their financial obligations and could result in elevated levels of delinquencies and bad debt losses.

While the economic recovery from this pandemic has resulted in increased demand for our products beginning in fiscal 2021, re-institution of a prolonged stay-at-home order, or any other continued decrease in economic activity as a result of COVID-19 pandemic, could have a negative adverse impact on our customers and their financial condition, which could

impact their ability to meet their financial obligations and could result in elevated levels of delinquencies and bad debt losses.

In addition, we rely upon our third-party vendors to provide parts and materials for us to produce our products.

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We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of COVID-19 pandemic in areas where we operate.

We manufacture substantially all of hardware products in our factory in Dominican Republic, which are then shipped to us in the United States for further distribution.

The government authorities in Dominican Republic have imposed restrictions as a result of the pandemic that impacted activities at the factory, which may reduce our productivity and output.

Additional restrictions and limitations on international travel and transportation, including air travel, may make it more difficult for us to ship and transport products from Dominican Republic to the U.S., which may cause delays and disruptions in our supply chain.

Moreover, if we determine that long-lived assets are not realizable as a result of a significant reduction in the projected future cash flows resulting from the COVID-19 pandemic, we may be required to write down these assets or incur impairment charge under current accounting standards, which would have a negative effect on our consolidated financial statements.

If economic conditions in the U.S.

decline due to the pandemic it may reduce revenues associated with our intangible assets, including assets acquired in our prior acquisitions, and result in a reduction of future expected cash flows.

Such a reduction could result in significant impairment charges to adjust the carrying value of the intangible assets.

During fiscal 2021 and 2022, the impact of the COVID-19 pandemic on the Company’s operations lessened.

Beginning in fiscal 2021, the impact of the COVID-19 pandemic on the Company’s operations lessened.

However, the future impact of the ongoing COVID-19 pandemic remains uncertain and subject to change.

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In addition, there is an increased risk during these periods that an increased percentage of independent distributors, dealers and installers of security equipment will file for bankruptcy protection, which may harm our reputation, revenue, profitability and results of operations.

The Company faces risks related to the restatement of its previously issued condensed financial statements with respect to the first three quarters of fiscal year ended June 30, 2023 (the “Affected Periods”).

We determined to restate certain information in our previously issued condensed financial statements for the Affected Periods.

As a result, we have become subject to a number of additional risks and uncertainties, which may affect investor confidence in the accuracy of our financial disclosures, including the following:

• We will face litigation under the federal and state securities laws and other claims arising from the restatement.

One such case has already been filed and we will likely face additional complaints.

See Note 15-Subsequent Events.

The cost of defending against those claims, the adequacy of our directors’ and officers’ liability insurance and the ultimate outcome of any such litigation cannot be predicted at this time

• The processes undertaken to effect the restatement may not be adequate to identify and correct all errors in our historical financial statements, and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement.

• The restatement has demonstrated an additional material weakness in our internal controls over financial reporting.

The process of remediating that weakness and implementing new procedures and systems to correct the problems that led to the restatement will likely be time consuming and expensive and there can be no assurance how long that process will take or if the corrective measures will be successful.

Furthermore, the implementation of those measures may result in an ongoing increase in administrative expenses which may adversely affect the Company’s profitability.

The markets we serve are highly competitive and we may be unable to compete effectively.

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Most of these companies may have substantially greater financial and other resources than the Company.

The Company competes primarily on the basis of the features, quality, reliability and pricing of, and the incorporation of the latest innovative and technological advances into its products, as well as technical support services to its customers.

The Company competes on the basis of its expertise, its proven products, its reputation and its ability to provide products to customers on a timely basis.

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However, our revenue recurring business is relatively new and we have limited experience in developing, marketing and selling such products.

We also face intense competition where other companies with greater resources and experience have established a wider and more entrenched customer base for similar products and services, making it more difficult for us to penetrate into such market.

In addition, we are required to incur costs to maintain a network operations center to provide customer support and services, and to comply with federal and state regulations governing the operation and communications of these products.

Such costs may reduce our profitability if we are not able to grow and expand the recurring revenue business.

increasingly dependent on recurring revenue products as a driver for growth, our failure to execute our strategy for this business line will materially adversely affect our financial conditions and prospects.

As we are increasingly dependent on recurring revenue products as a driver for growth, our failure to execute our strategy for this business line will materially adversely affect our financial conditions and prospects.

We may not be able to sustain and continue the growth of school security products.

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While our business has benefited from such additional federal and state funding and increased demand, there is no guarantee that such funding and trend will continue.

For example, if school shutdown continues as a result of the COVID-19 pandemic and various stay-at-home orders imposed by state governments, there could be a reduced need for schools to acquire and implement security systems, and state and federal government may also decide to reduce funding or impose additional criteria for funding.

For example, if school shutdowns return as a result of the COVID-19 pandemic and various stay-at-home orders imposed by state governments, there could be a reduced need for schools to acquire and implement security systems, and state and federal government may also decide to reduce funding or impose additional criteria for funding.

These factors may result in a decline of demand for our school security products, which in turn may adversely affect our financial performance.

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Our efforts in developing our brand may be hindered by the marketing efforts of our competitors and our reliance on our third parties to promote our brand.

If we are unable to

cost-effectively maintain and increase awareness of our brand, our business, financial condition, cash flows and results of operations could be harmed.

If we are unable to cost-effectively maintain and increase awareness of our brand, our business, financial condition, cash flows and results of operations could be harmed.

Our financial results could be materially adversely affected as a result of offering extended payment terms to customers or if we are not able to collect our accounts receivables on a timely basis from major customers.

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Our PPP Loans in the amount of $3.9 million were forgiven, but we may still be subject to audit and any resulting adverse audit outcome could result in the repayment of a portion or all of the PPP Loans and may adversely affect our future results of operations.

In the fourth fiscal quarter of 2021, the Company received $3.9 in loan proceeds (the “PPP Loan”) pursuant to the Paycheck Protection Program (the "PPP") created the CARES Act

In the fourth fiscal quarter of 2021, the Company received $3.9 in loan proceeds (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) created the by the CARES Act

During the first fiscal quarter of 2021, the PPP Loans were forgiven, in their entirety, in accordance with guidelines set forth in the PPP.

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If it is subsequently determined that the PPP Loans must be repaid, such repayment could adversely impact our financial results for the period in which such repayment occurs.

We are obligated to develop and maintain a system of effective internal controls over financial reporting.

These internal controls may be determined to be not effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We have been and are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis.

This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective and would be required to disclose any material weaknesses identified in Management’s Report on Internal Control over Financial Reporting.

While we have established certain procedures and control over our financial reporting processes, we cannot assure you that these efforts will prevent restatements of our financial statements in the future.

Our independent registered public accounting firm is also required, pursuant to Section 404 of the Sarbanes-Oxley Act, to report on the effectiveness of our internal control over financial reporting.

For future reporting periods, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and any required remediation in a timely fashion.

If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion that our internal controls over financial reporting are effective, investors could lose confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we could be subject to sanctions or investigations by regulatory authorities, including the SEC and Nasdaq.

Failure to remediate any material weakness in our internal control over financial reporting, or to maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

In May 2022, we identified material weakness in our internal control over financial reporting relating to the manner in which we calculated our inventory obsolescence reserve.

We revised the methodology which resulted in the restatement of previously audited financial statements for the years ended June 30, 2021, June 30, 2020, and June 30, 2019.

The effect of such restatement is described on a Form 8-k that we filed with the SEC on May 17, 2022.

As discussed in the Explanatory Note and in Note 1A to the condensed financial statements in this Form 10-Q/A , we determined to restate certain information in our previously issued condensed financial statements for the Affected Periods.

As a result, we have become subject to a number of additional risks and uncertainties, which may affect investor confidence in the accuracy of our financial disclosures, including the following:

• We will face litigation under the federal and state securities laws and other claims arising from the restatement.

One such case has already been filed and we will likely face additional complaints.

See Note 15-Subsequent Events.

The cost of defending against those claims, the adequacy of our directors’ and officers’ liability insurance and the ultimate outcome of any such litigation cannot be predicted at this time

• The restatement has demonstrated an additional material weakness in our internal controls over financial reporting.

Furthermore, the implementation of those measures may result in an ongoing increase in administrative expenses which may adversely affect the Company’s profitability.

We have identified material weaknesses in our system of internal controls and are in the process of remediation.

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We may be unable to develop, implement and maintain appropriate controls in future periods.

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.

As of June 30, 2023, the Company identified three material weaknesses in internal control.

One material weakness in internal controls 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.

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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.

The second material weakness in internal controls 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 material weaknesses, the Company’s management concluded that at June 30, 2022 the Company’s internal controls over financial reporting were not effective.

During the Company’s closing of its books for the period ended June 30, 2023 Management identified an additional material weakness related to the Company’s Cost of Goods Sold (“COGS”) and Inventory during each of the first three quarters of fiscal 2023.

The COGS figures reflected in the Company’s original Form 10-Qs were based on inventory costing as of June 30, 2022.

However, in the period following June 30, 2022, substantial fluctuations occurred in certain material costs.

Our inventory costing process did not identify these fluctuations in a timely manner resulting in Inventory being overstated and COGS being understated and resulting in an overstated gross profit, operating income and net income for each of the first three quarters of fiscal 2023.

While the Company has begun to take measures which it believes will remediate the underlying causes of this material weakness, there can be no assurance as to when the remediation plan will be fully developed and implemented and whether such measures will be effective.

Until the Company’s remediation plan is fully implemented and effective, the Company will continue to devote time, attention and financial resources to these efforts.

Based on these material weaknesses, the Company’s management has concluded that at June 30, 2023 the Company’s internal controls over financial reporting were not effective.

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 our annual or interim financial statements will not be prevented or detected on a timely basis.

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If we do not adequately complete our remediation in a timely fashion, investors could lose confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we could be subject to sanctions or investigations by regulatory authorities, including the SEC and Nasdaq.

Risks Related to Ownership of Our Common Stock

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

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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 1A. Risk Factors