What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-09-08 compared with 2022-08-29 · 249 added, 570 removed, 825 unchanged (50% of the section changed)

24 unchanged sentences

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, 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.

Based on this assessment, management determined that as of June 30, 2023, the Company identified three material weaknesses in internal control.

Controls and Procedures

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.

1 unchanged sentence

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.

In addition to the foregoing, during the Company’s closing of its books for the period ended June 30, 2023, management identified a third material weakness related to the Company’s Cost of Goods Sold (“COGS”) and Inventory during the first three quarters of fiscal 2023.

COGS reflected in the Company’s Original Form 10-Q was 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, income before the provision for income taxes and net income for the first three quarters of fiscal 2023.

While the Company has begun the process 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.

Management is currently designing and implementing additional controls and procedures to remediate these items and expects to complete these actions during fiscal 2024.

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

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

During the three months ended June 30, 2023, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting except as described above.

The effectiveness of our internal control over financial reporting as of June 30, 2023 has been audited by Baker Tilly US, LLP , an independent registered public accounting firm, as stated in their report included herein.

8 unchanged sentences

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America.

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.

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, 2023, 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.

4 unchanged sentences

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.

There were ineffectively designed control activities over the proper costing of inventory at interim dates to ensure that inventory is presented on a first-in first-out (FIFO) basis and at net realizable value.

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

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Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

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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 excess and slow-moving inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory.

As described in Notes 1 and 5 to the consolidated financial statements, 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.

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Uniondale, New York

August 29, 2022

September 8, 2023

NAPCO SECURITY TECHNOLOGIES, INC.

6 unchanged sentences

Cash and cash equivalents

Investments - other

Marketable securities

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

Accounts receivable, net of allowance for credit losses of $ 131 and $ 243 as of June 30, 2023 and June 30, 2022, respectively

Inventories, net

Income tax receivable

Prepaid expenses and other current assets

3 unchanged sentences

Intangible assets, net

Deferred income taxes

Operating lease asset

3 unchanged sentences

Accrued salaries and wages

Current portion of long-term debt

Accrued income taxes

Total Current Liabilities

Long term debt, net of current portion

Deferred income taxes

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Common Stock, par value $ 0.01 per share;

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

100,000,000 shares authorized as of June 30, 2023 and June 30, 2022;

39,663,812 and 39,628,197 shares issued;

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Selling, general, and administrative expenses

Impairment of intangible asset

Total Operating Expenses

Operating Income

Other (expense) income:

Interest and other (expense), net

Other income (expense):

Interest and other income (expense), net

Gain on extinguishment of debt

12 unchanged sentences

( 2,893,715 )

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

Stock options exercised

8 unchanged sentences

Stock-based compensation expense

Cash dividend

Balances at June 30, 2023

9 unchanged sentences

Depreciation and amortization

Impairment of intangible asset

Unrealized loss on marketable securities

Provision for (recovery of) doubtful accounts

Gain on disposal of fixed asset

Interest income on other investments

Unrealized loss (gain) on marketable securities

(Recovery) reserve of credit losses

Change to inventory reserve

5 unchanged sentences

Prepaid expenses and other current assets

Income tax receivable

Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes

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Purchases of property, plant, and equipment

Proceeds from disposal of fixed asset

Purchases of marketable securities

Purchases of other investments

Redemption of other investments

Net Cash Used in Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from long-term debt

Proceeds from stock option exercises

Cash paid for purchase of treasury stock

Net Cash Provided by Financing Activities

Net increase in Cash and Cash Equivalents

Cash paid for dividend

Net Cash (Used in) Provided by Financing Activities

Net (decrease) increase in Cash and Cash Equivalents

CASH AND CASH EQUIVALENTS - Beginning

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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.

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.

Significant future deterioration of the current economic conditions may also affect this trend.

The monthly recurring revenue, which is less susceptible 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.

Significant Accounting Policies :

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

Critical estimates include management’s judgments associated with reserves for sales returns and allowances, allowance for credit losses, overhead expenses applied to inventory, inventory reserves, valuation of intangible assets, share based compensation and income taxes.

Actual results could differ from those estimates.

4 unchanged sentences

Cash and Cash Equivalents

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.

Cash and cash equivalents include approximately $ 15,242,000 of short-term time deposits, consisting of several certificates of deposit totaling $ 15,179,000 and $ 63,000 in a money market fund as of June 30, 2023.

Cash and cash equivalents include approximately $ 63,000 of short-term time deposits, consisting of $ 63,000 in a money market fund as of June 30, 2022.

The Company classifies these highly liquid investments with original maturities of three months or less as cash equivalents.

Certificates of deposit with an original maturity greater than three months are classified as Investments – other.

Cash and cash equivalents consists of the following as of (in thousands):

June 30, 2023

June 30, 2022

Money Market Fund

Certificates of Deposit

Investments-other consists of the following as of (in thousands):

June 30, 2023

June 30, 2022

Certificates of Deposit

Certificates of deposit are recorded at the original cost plus accrued interest.

The Company’s Certificates of Deposit consist of the following as of (in thousands):

June 30, 2023

Balance Sheet Classification

Interest Rate

Maturity Date

Carrying Value

Cash and Cash Equivalents

4.59 % - 5.00 %

7/30/2023 - 8/29/2023

Investments - other

4.80 % - 5.15 %

7/24/2023 - 10/24/2023

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, 2023 and 2022.

8 unchanged sentences

Accounts Receivable

Accounts receivable is stated net of the reserves for doubtful accounts of $ 243,000 and $ 226,000 as of June 30, 2022 and 2021, respectively.

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

Accounts receivable is stated net of the reserves for credit losses of $ 131,000 and $ 243,000 as of June 30, 2023 and 2022, respectively.

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

These reserves are based upon the evaluation of our accounts receivable aging, specific exposures, sales levels and historical trends.

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 any excess of the cost of the inventory over its estimated realizable value.

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.

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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.

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

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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 or in 30 days for customers with an open account.

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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Stock-Based Compensation

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

The Company has established five 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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The Company records the amount billed to customers for shipping and handling in net sales ($ 450,000 , $ 428,000 and $ 395,000 in the fiscal years ended June 30, 2023, 2022 and 2021, respectively) and classifies the costs associated with these sales in cost of sales ($ 1,697,000 , $ 1,425,000 and $ 1,058,000 in the fiscal years ended June 30, 2023, 2022 and 2021, respectively).

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

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.

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) as described under ASU No.

2016-02, Leases (Topic 842) .

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 transition disclosures.

Recently Adopted Accounting Standards

On July 1, 2019, we adopted Accounting Standards Update No.

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.

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

For information regarding the impact of Topic 842 adoption, see Significant Accounting Policies - Leases and Note 13- Leases.

Leases for additional accounting policies and disclosures.

Recently Issued Accounting Standards

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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.

The amendments clarify that for all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in ASC Topic 848.

Effective for the Company – This guidance can be applied for a limited time through December 31, 2022.

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 leases and other arrangements, as well as when to adopt this guidance.

The Company’s bank has notified the Company that its LIBOR option will continue to be available to it through June 30, 2023, at which time the option will shift to the Benchmark Replacement as defined in the agreement with the bank (see Note 8).

The Company does not believe that this transition will have a material impact on its financial condition.

NOTE 2 – Revenue Recognition and Contracts with Customers

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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.

5 unchanged sentences

Total Revenues

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

The following table represents the allowance for credit losses accounts as of the respective years ending June 30 (in thousands):

Balance at beginning of period

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For the Year Ended June 30, 2021:

Allowance for doubtful accounts

Allowance for credit losses

For the Year Ended June 30, 2022:

Allowance for doubtful accounts

Allowance for credit losses

For the Year Ended June 30, 2023:

Allowance for doubtful accounts

Allowance for credit losses

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 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.

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.

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 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.

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 Company had one customer with an accounts receivable balance that comprised 19 % , 22 % and 19 % of the Company’s overall accounts receivable at June 30, 2023, 2022 and 2021, respectively.

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

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

This customers’ accounts receivable balance did not exceed 10% of the Company’s overall accounts receivable at June 30, 2022.

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

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

This customers’ accounts receivable balance did not exceed 10% of the Company’s overall accounts receivable at June 30, 2023.

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

NOTE 4 – Marketable Securities

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, 2022 and 2021, are as follows (in thousands):

The disaggregated net gains and losses on the marketable securities recognize in the income statement for the years ended June 30, 2023, 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) recognized during the reporting year on marketable securities still held at the reporting date

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

Unrealized gains (losses) recognized during the reporting period 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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June 30, 2022

Marketable Securities

Mutual Funds - Level 1

Investment income is recognized when earned and consists principally of interest income from fixed income mutual funds.

8 unchanged sentences

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:

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

Balance at beginning of period

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Current income taxes:

Deferred income tax provision

Deferred income taxes:

Provision for income taxes

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State income taxes, net of Federal income tax benefit

Foreign source income not subject to tax

Global intangible low-taxed income

Foreign withholding tax

Foreign Source income not subject to Tax

Non-taxable debt extinguishment

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Stock based compensation expense

Property, plant and equipment

Revenue reserves

Unrealized loss (gain) on marketable securities

Other deferred tax liabilities

Capitalized research and development cost

Total Deferred Tax Assets

Valuation allowance

Net deferred tax liabilities

Deferred income tax assets, net of valuation allowance

Property, plant and equipment

Other deferred tax liabilities

Total Deferred Tax Liability

Net Deferred Tax Asset/(Liability)

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

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

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

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

During fiscal year 2020, the Company settled the issue.

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

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

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

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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.

In December 2022, the Company received a letter from the IRS (“IRS”) notifying it that the IRS has closed its examination of the Company’s income tax return for fiscal year ended June 30, 2020.

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

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, 2023, the Company increased its reserve for uncertain income tax positions by $ 22,000 .

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

As of June 30, 2022, the Company had accrued interest totaling $ 88,000 and $ 678,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

As of June 30, 2023, the Company had accrued interest totaling $ 139,000 , penalties totaling $ 5,000 , and $ 700,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

The Company does not expect that its unrecognized tax benefits will significantly change within the next twelve months.

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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 June 30, 2019

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

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

Balance of gross unrecognized tax benefits as of June 30, 2020

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

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

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.

The Company has accrued $ 613,000 for withholding taxes on undistributed earnings that are not permanently reinvested.

As of June 30, 2022, the Company had approximately $ 71.6 million of undistributed earnings of foreign subsidiaries.

NOTE 8 - Long-Term Debt

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):

June 30, 2022

June 30, 2021

Interest Rate

Revolving line of credit

current maturities

Long-term debt

Balance of gross unrecognized tax benefits as of Beginning of Year

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

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

Increase (Decrease) to unrecognized tax benefits resulting from a state filing tax position

Balance of gross unrecognized tax benefits as of End of Year

NOTE 8 - Debt

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.

The Revolver Agreement also provides for a LIBOR-based interest rate option of LIBOR plus 1.15 % to 2.00 %, depending on the ratio of outstanding debt to EBITDA, which is to be measured and adjusted quarterly, a prime rate-based option of the prime rate plus 0.25 % and other terms and conditions as more fully described in the Revolver Agreement.

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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.

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

Pursuant to the 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”.

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

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

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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, 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.

For the fiscal years ended June 30, 2023, 2022 and 2021, the Company recorded non-cash compensation expense of $ 1,464,000 ($ .04 per basic and diluted share), $ 1,649,000 ($ .04 per basic and diluted share) and $ 435,000 ($ .01 per basic and diluted share), respectively, relating to stock-based compensation.

2012 Employee Stock Option Plan

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

At 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.

At June 30, 2023, 521,580 stock options were outstanding, 247,628 stock options were exercisable and no further stock options were available for grant under this plan.

37,500 options were granted under this plan during the year ended June 30, 2023.

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Total intrinsic value of options exercisable

37,500 , 338,000 and 0 options were granted during the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

39,000 , 29,000 and 8,600 options were exercised during the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

29,600 of the 39,000 stock options exercised during the fiscal year ended June 30, 2023, were settled by exchanging 10,150 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.

$ 84,000 , $ 155,000 and $ 0 was received from the remaining option exercises for the fiscal years ended June 30, 2023, 2022 and 2021, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $ 0 for each of these periods.

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at June 30, 2023:

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$ 3.15 ‑ $ 26.94

As of June 30, 2022, there was $ 2,489,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan.

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

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.

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.

As of June 30, 2023 and 2022, there was $ 1,971,000 and $ 2,489,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan, respectively.

109,876 , 107,576 and 44,776 options vested during the years June 30, 2023, 2022 and 2021, respectively.

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 $ 981,000 , $ 1,040,000 and $ 244,000 , respectively.

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At June 30, 2023, 20,400 stock options were outstanding, 13,920 stock options were exercisable and 0 stock options were available for grant under this plan.

9,600 options were granted under this plan during the year ended June 30, 2022.

No stock options were granted under this plan during the year ended June 30, 2023.

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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Total intrinsic value of options exercisable

0 , 9,600 and 0 options were granted during the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

0 , 1,200 and 2,400 options were exercised during the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

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.

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.

$ 0 was received from the remaining option exercises for each of the fiscal years ended June 30, 2023, 2022 and 2021, and the actual tax benefit realized for the tax deductions from option exercises was $ 0 , $ 4,000 and $ 6,000 in fiscal 2023, 2022 and 2021 respectively.

The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at June 30, 2023:

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$ 4.35 - $ 22.93

As of June 30, 2022, there was $ 70,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan.

9,600 , 0 and 3,600 options were granted during the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

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 $ 4,000 , $ 6,000 and $ 0 in fiscal 2022, 2021 and 2020 respectively.

As of June 30, 2023 and 2022, there was $ 46,000 and $ 70,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan, respectively.

2,640 , 6,240 and 5,520 options vested during the years June 30, 2023, 2022 and 2021, 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 $ 24,000 , $ 39,000 and $ 18,000 , respectively.

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At June 30, 2023, 75,000 stock options were outstanding, 50,720 stock options were exercisable and 0 stock options were available for grant under this plan.

23,500 options were granted under this plan during the year ended June 30, 2022.

No stock options were granted under this plan during the year ended June 30, 2023.

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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Total intrinsic value of options exercisable

0 , 23,500 and 0 options were granted during the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

14,000 , 4,600 and 3,200 options were exercised during the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

14,000 stock options exercised during the fiscal year ended June 30, 2023 were settled by exchanging 7,235 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.

$ 0 was received from the remaining option exercises for each of the fiscal years ended June 30, 2023, 2022 and 2021, and the actual tax benefit realized for the tax deductions from option exercises was $ 44,000 , $ 12,000 and $ 6,000 in fiscal 2023, 2022 and 2021, respectively.

The following table summarizes information about stock options outstanding under the 2018 Non- Employee Plan at June 30, 2023:

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$ 8.10 - $ 22.93

As of June 30, 2022, there was $ 265,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2018 Non-Employee Plan.

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

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 $ 12,000 , $ 6,000 and $ 0 in fiscal 2022, 2021 and 2020, respectively.

As of June 30, 2023 and 2022, there was $ 135,000 and $ 265,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2018 Non-Employee Plan, respectively.

19,680 options vested during each of the years June 30, 2023, 2022 and 2021, respectively.

The total grant date fair value of the options vesting during the fiscal year ended June 30, 2023, 2022 and 2021 under this plan was $ 149,000 , $ 160,000 and $ 133,000 , respectively.

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Expected lives

7.23 - 7.27 Years

Expected volatility

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Weighted average

exercise price

Outstanding, beginning of year

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Total intrinsic value of options exercisable

30,000 , 16,900 and 10,000 options were granted during the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

No options were exercised during the fiscal years ended June 30, 2023, 2022 and 2021.

The following table summarizes information about stock options outstanding under the 2020 Non- Employee Plan at June 30, 2023:

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$ 11.40 - $ 30.71

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.

As of June 30, 2023 and 2022, there was $ 344,000 and $ 135,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan, respectively.

11,380 , 5,380 and 2,000 options vested during

the years June 30, 2023, 2022 and 2021, respectively.

The total grant date fair value of the options vesting during the fiscal year ended June 30, 2023, 2022 and 2021 under this plan was $ 129,000 , $ 55,000 and $ 12,000 , respectively.

2022 Employee Stock Option Plan

In December 2022, the stockholders approved the 2022 Employee Stock Option Plan (the “2022 Employee Plan”).

The plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 950,000 shares of the Company’s common stock to be acquired by the holders of such awards.

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

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

Under the 2022 Employee Plan, stock options may be granted to valued employees with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable, in whole or in part, at 20 % per year beginning on the date of grant.

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

At June 30, 2023, 5,000 stock options were outstanding, 1,000 stock options were exercisable and 945,000 stock options were available for grant under this plan.

5,000 options were granted under this plan during the year ended June 30, 2023.

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

Expected lives

Expected volatility

Expected dividend yields

The following table reflects activity under the 2022 Employee plan for the fiscal year ended June 30,:

Weighted average

exercise price

Outstanding, beginning of year

Forfeited/Lapsed

Outstanding, end of period

Exercisable, end of period

Weighted average fair value at grant date of options granted

Total intrinsic value of options exercised

Total intrinsic value of options outstanding

Total intrinsic value of options exercisable

5,000 options were granted during the fiscal year ended June 30, 2023.

No options were exercised during the fiscal year ended June 30, 2023.

The following table summarizes information about stock options outstanding under the 2022 Employee Plan at June 30, 2023:

Options outstanding

Options exercisable

Weighted average

Range of exercise prices

contractual life

exercise price

As of June 30, 2023, there was $ 74,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan.

1,000 options vested during the year ended June 30, 2023.

The total grant date fair value of the options vesting during the fiscal year ended June 30, 2023 under this plan was $ 20,000 .

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.

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

During the fiscal year ended June 30, 2023, 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, 2023 are included in the Company’s Treasury Stock as of June 30, 2023, 2022 and 2021.

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.

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

On May 5, 2023, the Company’s Board of Directors declared a cash dividend of $ .0625 per share payable on June 12, 2023 to stockholders of record on May 22, 2023.

The cash dividend resulted in approximately $ 2,298,000 of cash paid to stockholders.

During fiscal 2023, certain employees and directors exercised stock options under the Company's 2012 Employee and 2018 Non-Employee Stock Option Plans totaling 53,000 shares.

43,600 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 17,385 and was based upon the per share price on the effective date of the option exercise.

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.

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

During fiscal 2020, certain employees and Directors exercised stock options under the Company's 2012 Employee and Non-Employee Stock Option Plans totaling 31,200 shares.

7,200 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 3,256 and was based upon the per share price on the effective date of the option exercise.

NOTE 11 – Related Party Transaction

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.

On February 13, 2023, the Company's President and Chairman and the Company’s Executive Vice President and Chief Financial Officer sold 2,012,500 and 87,500 shares of our common stock, respectively, as selling stockholders in an underwritten secondary public offering at a public offering price of $ 31.50 per share.

In connection with such offering, the selling stockholders granted the underwriters an option to purchase additional shares (the “Greenshoe Option”).

On February 15, 2023, the underwriters exercised in full the Greenshoe Option, pursuant to which the selling stockholders sold a total of 300,000 additional shares of common stock at the same public offering price.

The Company did not sell any shares in the offering and received no proceeds from the offerings, but the Company incurred $ 509,000 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

The Company maintains a 401(k) plan (“the Plan”) that covers all U.S.

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

The Company maintains a 401(k) plan (“the Plan”) that is available to all U.S.

non-union employees and is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code.

Company contributions to this plan are discretionary and totaled $ 251,000 , $ 191,000 and $ 138,000 for the years ended June 30, 2023, 2022 and 2021, respectively.

NOTE 13 - Commitments and Contingencies

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.

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.

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.

Our lease obligation consists of a 99-year lease, entered into by one of the Company’s foreign subsidiaries, for approximately four acres of land in the Dominican Republic on which the Company’s principal production facility is located.

The lease, which commenced on April 26, 1993 and expires in 2092, initially had an annual base rent of approximately $ 235,000 plus $ 53,000 in annual service charges.

On September 14, 2022, a lease modification was executed which provides for an annual base rent of $ 235,000 plus $ 105,000 in annual service charges.

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

The modification resulted in a remeasurement of the operating lease asset and liability, and the effect was a reduction to the asset and liability of $ 1.3 million.

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, 2022 and 2021, cash payments against operating lease liabilities totaled $ 288,000 each year.

For the fiscal year ended June 30, 2023 and 2022, cash payments against operating lease liabilities totaled $ 335,000 and $ 288,000 , respectively.

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

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Employment Agreements

As of June 30, 2022, the Company was obligated under two employment agreements and one severance agreement.

As of September 30, 2022, the Company was obligated under two employment agreements and one severance agreement.

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

The severance agreement is with the Company’s CFO.

The employment agreement with the CEO provides for an annual salary of $ 872,000 , as adjusted for inflation;

incentive compensation as may be approved by the Board of Directors from time to time and a termination payment in an amount up to 299 % of the average of the prior five calendar year’s compensation, subject to certain limitations, as defined in the agreement.

incentive compensation as may be approved by the Board of Directors from time to time;

and a termination payment in an amount up to 299 % of the average of the prior five calendar years’ compensation, subject to certain limitations, as defined in the agreement.

The employment agreement renews annually in August unless either party gives the other notice of non-renewal at least six months prior to the end of the applicable term.

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 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.

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 months’ salary and continued company-sponsored health insurance for six months from the date of termination.

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 months’ 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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The Company has customers worldwide with major concentrations in North America.

Financial Information Relating to Domestic and Foreign Operations

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

Fiscal Year ended June 30,

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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.

On August 18, 2023, the Company’s Board of Directors declared a cash dividend of $ .08 per share payable on September 22, 2023 to stockholders of record on September 1, 2023.

On August 29, 2023, a purported class action was filed in the United States District Court for the Eastern District of New York against the Company, its Chairman and Chief Executive Officer, and its Chief Financial Officer, alleging violations of the Securities Exchange Act of 1934 in connection with statements made in the Company’s quarterly reports on Form 10-Q for the quarters ended September 30, 2022, December 31, 2022 and March 31, 2023 (the “10-Q’s”).

The Company previously announced that it was going to restate the financial statements contained in the 10-Qs.

The Company intends to vigorously defend against the action.

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

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Changes in Internal Control over Financial Reporting .

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that has materially affected or is likely to materially affect our internal controls over financial reporting.

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected or is likely to materially affect our internal controls over financial reporting.

OTHER INFORMATION

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

The information about our directors appearing in the Company’s Definitive Proxy Statement for the 2023 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.

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 – Corporate Governance” caption.

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

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

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.

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.

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.

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.

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, 2023 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

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.

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.

PRINCIPAL ACCOUNTING FEES AND SERVICES

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.

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.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

72 unchanged sentences

Two (2) Year Extension, dated October 21, 2021, of Employment Agreement between the Registrant and Michael Carrieri

Exhibit 10.M to Report on Form 10-K (Commission file No.

0-10004) for fiscal year ended June 30, 2020

Form of Indemnification Agreement adopted September 3, 2020

5 unchanged sentences

Compensation Agreement between the Registrant and Stephen Spinelli dated April 6, 2020

Exhibit 10.P to Report on Form 10-K (Commission file No.

0-10004) dated September 13, 2021

Code of Ethics

15 unchanged sentences

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.

August 29, 2022

September 8, 2023

NAPCO SECURITY TECHNOLOGIES, INC.

7 unchanged sentences

Chairman of the Board of Directors,

August 29, 2022

September 8, 2023

Richard Soloway

2 unchanged sentences

Executive Vice President

August 29, 2022

September 8, 2023

and Chief Financial Officer

1 unchanged sentence

/s/ PAUL STEPHEN BEEBER

August 29, 2022

September 8, 2023

Paul Stephen Beeber

/s/ RICK LAZIO

August 29, 2022

September 8, 2023

/s/ DONNA SOLOWAY

August 29, 2022

September 8, 2023

Donna Soloway

/s/ ROBERT UNGAR

August 29, 2022

September 8, 2023

/s/ ANDREW J.

August 29, 2022

September 8, 2023

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