What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-09-08 compared with 2022-08-29 · 62 added, 70 removed, 162 unchanged (45% of the section changed)

10 unchanged sentences

The change in our net sales was driven primarily by increased sales of our recurring services ($14.0 million) and sales of equipment ($12.5 million) as compared to the same period a year ago.

The increase in equipment sales was due primarily to the recovery from the economic effects of the COVID-19 pandemic and the elimination of most of the closures mandated by federal and state governments during the early and peak stages of the pandemic.

As these closures abated and economic conditions improved, our equipment sales increased.

In addition, fiscal 2022 net sales increased due, in part, to an increase in sales of the Company’s cellular radio products as the major cellular providers sunset their 3G networks.

The increase in equipment sales was due primarily to the increased demand for the Company’s door-locking products.

Our net income was $27.1 million, $19.6 million and $15.4 million for the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

The increases in net income during this period were due primarily to the recovery from the COVID-19 impact described above, as well as by the growth of our cellular products and the associated recurring revenue business.

The increases in net income during this period were due primarily to the growth of our cellular products and the associated recurring revenue business.

Economic and Other Factors

15 unchanged sentences

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 overt the course of the month 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.

6 unchanged sentences

The Company also provides rebates to customers for meeting specified purchasing targets and other coupons or credits in limited circumstances.

The Company establishes reserves for the estimated returns, rebates and credits and measures such variable consideration based on the expected

value method using an analysis of historical data.

The Company establishes reserves for the estimated returns, rebates and credits and measures such variable consideration based on the expected value method using an analysis of historical data.

Changes to the estimated variable consideration in subsequent periods are not material.

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.

The Company analyzes equipment 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.

1 unchanged sentence

As a percentage of gross sales, sales returns, rebates and allowances were 7%, 10% and 10% for the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

Reserve for Doubtful Accounts

Reserve for Credit Losses

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.

1 unchanged sentence

Sales to this customer did not exceed 10% of net sales during fiscal years ended June 30, 2023, 2022 and 2021.

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

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

The Company had another customer with an accounts receivable balance that comprised 14% and 11% of the Company’s accounts receivable at June 30, 2023 and 2021, respectively.

The customer accounts receivable balance did not exceed 10% at June 30, 2022.

Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

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.

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

The customer accounts receivable balance did not exceed 10% at June 30, 2023.

Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2023, 2022 and 2021.

In the ordinary course of business, we have established a reserve for doubtful accounts and customer deductions in the amount of $243,000 and $226,000 as of June 30, 2022 and 2021, respectively.

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

In the ordinary course of business, we have established a reserve for credit losses and customer deductions in the amount of $131,000 and $243,000 as of June 30, 2023 and 2022, respectively.

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

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

4 unchanged sentences

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

In addition, the Company records an inventory obsolescence reserve, which represents the difference between the cost of the inventory and its estimated realizable value.

The Company records an inventory obsolescence reserve, which represents the difference between the cost of the inventory and 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.

7 unchanged sentences

Intangible assets determined to have indefinite lives were not amortized but were tested for impairment at least annually.

The Company’s acquisition of substantially all of the assets and certain liabilities of G.

Marks Hardware, Inc.

(“Marks”) in August 2008 included intangible assets recorded at fair value on the date of acquisition.

The customer relationships are amortized over their estimated useful lives of twenty years.

At the acquisition date, the Marks trade name was deemed to have an indefinite life.

During the 4th quarter of fiscal 2020, the Company determined that the trade-name was impaired.

Accordingly, the Company recorded an impairment charge of $1,852,000 and reclassified the remaining balance of the underlying asset from indefinite-lived to a long-lived asset with a remaining useful life of 20 years as of June 30, 2020.

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

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

In December 2022, the Company received a letter from the Internal Revenue Service (“IRS”) notifying the Company that the IRS has closed its examination of the Company’s income tax return for fiscal year ended June 30,

There has been no changes proposed in relation to this examination.

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

11 unchanged sentences

The Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis.

Effective July 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective transition option of applying the new standard at the adoption date.

In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases.

Adoption of the new standard resulted in the recording of an operating ROU asset and lease liabilities of approximately $7.7 million.

Given the length of the lease term, the right-of-use asset and corresponding liability assume a weighted discount rate as disclosed below.

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

Financial positions for reporting periods beginning on or after July 1, 2019 are presented under new guidance.

The Company records lease assets and corresponding lease liabilities for the operating lease on our Consolidated Balance Sheets, excluding short-term leases (leases with terms of 12 months or less).

Lease payments are discounted using a third-party secured incremental borrowing rate based on information available at lease commencement.

The Company analyzes whether or not amendments to existing leases classify as a Lease Modification or a full or partial termination of the existing lease.

See Note 13 – Commitments and Contingencies;

Leases for additional accounting policies and disclosures.

Liquidity and Capital Resources

During the year ended June 30, 2022, the Company utilized a portion of its cash generated from operations ($1,563,000 of $8,332,000) to purchase property, plant and equipment ($1,482,000) and marketable securities ($81,000).

During the year ended June 30, 2023, the Company utilized a portion of its cash as of June 30, 2022 ($30,598,000 of $41,730,000) to purchase property, plant and equipment ($2,963,000), marketable securities ($148,000) and other investments ($25,190,000) and to pay a cash dividend ($2,298,000).

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

As of June 30, 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 of June 30, 2023 and 2022, debt consisted of a revolving line of credit of $11,000,000 (“Revolver Agreement”), with no amounts outstanding, which expires in June 2024.

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

2 unchanged sentences

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

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

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

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

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As of June 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.

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

On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease

of approximately 4 acres of land in the Dominican Republic, on which the Company’s principle manufacturing facility is located, at an annual base rent of approximately $235,000 and $105,000 in annual service charges.

The service charges increase 2% annually over the remaining life of the lease.

Working Capital.

2 unchanged sentences

Accounts Receivable.

Accounts Receivable increased by $1,137,000 to $29,218,000 at June 30, 2022 as compared to $28,081,000 at June 30, 2021.

The increase in Accounts Receivable was due primarily to an increase in net sales for the quarter ended June 30, 2022 as compared to the same quarter a year ago.

Accounts Receivable decreased by $3,149,000 to $26,069,000 at June 30, 2023 as compared to $29,218,000 at June 30, 2022.

The decrease in Accounts Receivable was due primarily to a decrease in net sales of hardware for the quarter ended June 30, 2023 as compared to the same period a year ago.

Accounts Receivable increased by $1,137,000 to $29,218,000 at June 30, 2022 as compared to $28,081,000 at June 30, 2021.

The increase in Accounts Receivable was due primarily to an increase in net sales for the quarter ended June 30, 2022 as compared to the same quarter a year ago.

Inventories, which include both current and non-current portions, increased by $18,086,000 to $49,786,000 at June 30, 2022 as compared to $31,700,000 at June 30, 2021.

The increase in Accounts Receivable was due primarily to an increase in net sales for the quarter ended June 30, 2022 as compared to the same period a year ago.

Inventories, which include both current and non-current portions, decreased by $1,437,000 to $48,349,000 at June 30, 2023 as compared to $49,786,000 at June 30, 2022.

The decrease was due primarily to lower costs of certain component part as well as lower freight costs in fiscal 2023, both of which had increased in price due to the supply chain shortages in fiscal 2022.

Inventories increased by $18,086,000 to $49,786,000 at June 30, 2022 as compared to $31,700,000 at June 30, 2021.

The increase was due primarily to higher costs of component parts and freight-in.

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.

Inventories, which include both current and non-current portions, decreased by $8,715,000 to $31,700,000 at June 30, 2021 as compared to $40,415,000 at June 30, 2020.

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

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

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

Accounts Payable and Accrued Expenses.

Accounts payable and accrued expenses, not including income taxes payable, increased by $8,470,000 to $24,625,000 as of June 30, 2022 as compared to $16,155,000 at June 30, 2021.

This increase is primarily due to increased purchases of component parts during the quarter ended June 30, 2022 as compared to the same period a year ago as well as an increase in the Company’s accrued refund liability, which is explained in Note 2 to the Notes to the Company’s Consolidated Financial Statements.

Accounts payable and accrued expenses, not including income taxes payable, decreased by $4,939,000 to $19,686,000 as of June 30, 2023 as compared to $24,625,000 at June 30, 2022.

This decrease was primarily due to decreased purchases of component parts during the quarter ended June 30, 2023 as compared to the same period a year ago.

Accounts payable and accrued expenses, not including income taxes payable, increased by $8,470,000 to $24,625,000 as of June 30, 2022 as compared to $16,155,000 at June 30, 2021.

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

This increase was primarily due to increased purchases of component parts during the quarter ended June 30, 2022 as compared to the same period a year ago as well as an increase in the Company’s accrued refund liability, which is explained in Note 2 to the Notes to the Company’s Consolidated Financial Statements.

Off-Balance Sheet Arrangements

11 unchanged sentences

Operating Income

Interest expense, net

Interest Income (expense), net

Other Income (expense), net

Gain on extinguishment of debt

1 unchanged sentence

Net sales in fiscal 2023 increased by $26,404,000 to $169,997,000 as compared to $143,593,000 in fiscal 2022.

The increase in net sales was primarily due to increased sales of the Company’s recurring alarm communication services ($12,077,000), Napco brand intrusion products ($11,699,000), Alarm Lock brand door-locking products ($3,136,000), Marks brand door-locking products ($1,533,000) and Continental brand access control products ($1,113,000).

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.

In addition, fiscal 2022 net sales increased due, in part, to an increase in sales of the Company’s cellular radio products as the major cellular providers sunset their 3G networks.

The increase in net sales was primarily due to increased sales of the Company’s recurring alarm communication services ($13,954,000), Alarm Lock brand door-locking products ($12,067,000), Marks brand door-locking products ($2,644,000) and Continental brand access control products ($916,000) as partially offset by a decrease in sales of Napco brand intrusion products ($3,178,000).

The Company’s increase in equipment sales was primarily due to increased demand for door locking and access control products in the new construction and retrofit building markets.

In addition, fiscal 2022 net sales of the Company’s cellular radio products benefited from dealers needing to replace their existing 3G radios with 4G or 5G models as the major cellular providers sunset their 3G networks.

Fiscal 2023 returned to more normal sales levels.

The Company's gross profit increased by $14,077,000 to $73,233,000 or 43.1% of net sales in fiscal 2023 as compared to $59,156,000 or 41.2% of net sales in fiscal 2022.

1 unchanged sentence

Gross profit on service revenues was $53,368,000 or 89.0% of net service revenues in fiscal 2023 and $40,015,000 or 87.0% of net service revenues, in fiscal 2022.

Gross profit on equipment sales was primarily affected by increased costs of component parts and freight as well as the shift in sales to the Company’s Starlink radio products, which typically have lower margins but result in recurring service revenues.

The increase in Gross profit on equipment sales was primarily the result of the higher equipment sales, which increased overhead absorption, as partially offset by increased labor costs in both the U.S.

and Dominican Republic as well as higher prices of certain component parts.

The Company purchased these higher-priced components at a significant premium during the supply chain interruptions during the latter part of fiscal 2022 in order to continue to supply the Company’s communication devices that led to the creation of recurring service revenues for the Company.

The prices of these components began decreasing during fiscal 2023.

Research and Development expenses increased by $1,304,000 to $9,328,000 in fiscal 2023 as compared to $8,024,000 in fiscal 2022.

2 unchanged sentences

Selling, general and administrative expenses as a percentage of net sales increased to 19.8% in fiscal 2023 from 22.9% in fiscal 2022.

The increases in dollars and as a percentage of net sales resulted primarily from increases in sales commissions, tradeshow, stock option and legal expenses.

Interest and other expense, net for fiscal 2022 remained relatively constant at $16,000 as compared to $5,000 for the same period a year ago.

The increases in dollars resulted primarily from costs associated with the Company’s Form S-3 filing as well as increased credit card processing fees, as partially offset by lower legal and employee compensation costs.

Interest and other income/(expense), net for fiscal 2023 increased by $1,186,000 to income of $903,000 as compared to an expense of $283,000 for the same period a year ago.

This increase was due primarily to the Company investing more of its cash into short term investments as described more fully in Note 1 and Note 4 to the consolidated financial statements.

Gain on extinguishment of debt resulted from a one-time gain in fiscal 2022 which resulted from the forgiveness of the Company’s PPP loans as described in the Liquidity and Capital Resources section and Note 8 to the condensed consolidated financial statements.

The Company’s provision for income taxes for fiscal 2022 decreased by $267,000 to $2,247,000 as compared to $2,514,000 for the same period a year ago.

The Company’s effective tax rate decreased to 10% for fiscal 2022 as compared to 14% for fiscal 2021.

decrease in the Company’s fiscal 2022 effective tax rate is primarily due to the $3,904,000 in non-taxable income from extinguishment of debt.

The Company’s provision for income taxes for fiscal 2023 increased by $1,854,000 to $4,101,000 as compared to $2,247,000 for the same period a year ago.

The Company’s effective tax rate for fiscal 2023 increased to 13% as compared to 10% for fiscal 2022.

The increase in the Company’s fiscal 2023 effective tax rate is primarily due to the $3,904,000 in non-taxable income from a one-time extinguishment of debt included in fiscal 2022.

Net income for fiscal 2023 increased by $7,528,000 to $27,127,000 as compared to $19,599,000 in fiscal 2022.

10 unchanged sentences

Selling, general and administrative as a % of net sales

Impairment of intangible asset

Operating Income

Interest expense, net

Other Income (expense), net

Gain on extinguishment of debt

1 unchanged sentence

Net sales in fiscal 2022 increased by $29,558,000 to $143,593,000 as compared to $114,035,000 in fiscal 2021.

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

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

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

In addition, fiscal 2022 net sales increased due, in part, to an increase in sales of the Company’s cellular radio products as the major cellular providers sunset their 3G networks.

The Company's gross profit increased by $8,408,000 to $59,156,000 or 41.2% of net sales in fiscal 2022 as compared to $50,748,000 or 44.5% of net sales in fiscal 2021.

1 unchanged sentence

Gross profit on service revenues was $40,015,000 or 87.0% of net service revenues in fiscal 2022 and $29,018,000 or 85.6% of net service revenues, in fiscal 2021.

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

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

Gross profit on equipment sales was also affected by the Company’s reduction in its production and inventories which impacted it’s overhead absorption rate as well as a decrease in the Company’s reserve for obsolete inventory.

Research and Development expenses increased by $404,000 to $8,024,000 in fiscal 2022 as compared to $7,620,000 in fiscal 2021.

1 unchanged sentence

Selling, general and administrative expenses for fiscal 2022 increased by $7,711,000 to $32,907,000 as compared to $25,196,000 in fiscal 2021.

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

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

The decrease as a percentage of sales

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

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

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

Selling, general and administrative expenses as a percentage of net sales increased to 22.9% in fiscal 2022 from 22.1% in fiscal 2021.

The increases in dollars and as a percentage of net sales resulted primarily from increases in sales commissions, tradeshow, stock option and legal expenses.

Interest and other expense, net for fiscal 2022 remained relatively constant at $16,000 as compared to $5,000 for the same period a year ago.

The Company’s provision for income taxes for fiscal 2021 increased by $253,000 to $2,514,000 as compared to $2,261,000 for the same period a year ago.

The Company’s provision for income taxes for fiscal 2022 decreased by $267,000 to $2,247,000 as compared to $2,514,000 for the same period a year ago.

The Company’s effective tax rate decreased to 10% for fiscal 2022 as compared to 14% for fiscal 2021.

The decrease in the Company’s fiscal 2021 effective tax rate is a direct result of additional tax expense recorded in fiscal 2020 for the Internal Revenue Service (“IRS”) audit of the Company’s 2016 fiscal year.

The decrease in the Company’s fiscal 2022 effective tax rate is primarily due to the $3,904,000 in non-taxable income from extinguishment of debt.

Net income for fiscal 2022 increased by $4,186,000 to $19,599,000 as compared to $15,413,000 in fiscal 2021.

13 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis