Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: December 31, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
Commission File number: 0-10004
NAPCO SECURITY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
11-2277818
(State or other jurisdiction of
(IRS Employer Identification
incorporation of organization)
Number)
333 Bayview Avenue
Amityville, New York
11701
(Address of principal executive offices)
(Zip Code)
(631) 842-9400
(Registrant’s telephone number including area code)
(Former name, former address and former fiscal year if
changed from last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
NSSC
Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ⌧ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧
Number of shares outstanding of each of the issuer’s classes of common stock, as of: January 31, 2025
COMMON STOCK, $.01 PAR VALUE PER SHARE 36,401,421
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
Page
PART I: FINANCIAL INFORMATION
ITEM 1.
Financial Statements
3
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX – December 31, 2024
Condensed Consolidated Balance Sheets as of December 31, 2024 and June 30, 2024 (unaudited)
Condensed Consolidated Statements of Income for the Three Months ended December 31, 2024 and 2023 (unaudited)
4
Condensed Consolidated Statements of Income for the Six Months ended December 31, 2024 and 2023 (unaudited)
5
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months ended December 31, 2024 and 2023 (unaudited)
6
Condensed Consolidated Statements of Stockholders Equity for the Six Months Ended December 31, 2024 and 2023 (unaudited)
7
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2024 and 2023 (unaudited)
8
Notes to Condensed Consolidated Financial Statements (unaudited)
9
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
34
ITEM 4.
Controls and Procedures
35
PART II: OTHER INFORMATION
Legal Proceedings
36
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
37
SIGNATURE PAGE
38
2
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
December 31, 2024
June 30, 2024
(in thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents
$
86,019
65,341
Investments - other
—
26,980
Marketable securities
13,176
5,398
Accounts receivable, net of allowance for credit losses of $20 and $32 as of December 31, 2024 and June 30, 2024, respectively
23,456
31,898
Inventories
37,634
34,804
Income tax receivable
1,195
73
Prepaid expenses and other current assets
3,252
4,269
Total Current Assets
164,732
168,763
Inventories - non-current
12,040
15,109
Property, plant and equipment, net
9,915
9,077
Intangible assets, net
3,445
3,602
Deferred income taxes
7,012
5,428
Operating lease - Right-of-use asset
5,335
5,487
Other assets
205
286
TOTAL ASSETS
202,684
207,752
CURRENT LIABILITIES
Accounts payable
4,551
7,977
Accrued expenses
8,680
10,345
Accrued salaries and wages
4,032
3,907
Dividend payable
4,554
Total Current Liabilities
21,817
22,229
Accrued income taxes
1,223
1,122
Operating lease liability
5,417
5,512
TOTAL LIABILITIES
28,457
28,863
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ EQUITY
Common Stock, par value $0.01 per share; 100,000,000 shares authorized as of December 31, 2024 and June 30, 2024; 39,771,035 and 39,768,186 shares issued; and 36,401,421 and 36,874,471 shares outstanding, respectively.
398
Additional paid-in capital
24,523
23,712
Retained earnings
186,788
174,300
Less: Treasury Stock, at cost (3,369,614 and 2,893,715 shares as of December 31, 2024 and June 30, 2024, respectively)
(37,529)
(19,521)
Accumulated other comprehensive income
47
TOTAL STOCKHOLDERS’ EQUITY
174,227
178,889
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months ended December 31,
2024
2023
(in thousands, except for share and per share data)
Net sales:
Equipment revenues
21,725
29,007
Service revenues
21,208
18,540
42,933
47,547
Cost of sales:
Equipment related expenses
16,606
20,656
Service-related expenses
1,838
1,879
18,444
22,535
Gross Profit
24,489
25,012
Operating expenses:
Research and development
3,107
2,542
Selling, general, and administrative expenses
10,211
8,665
Total Operating Expenses
13,318
11,207
Operating Income
11,171
13,805
Other income:
Interest and other income, net
921
729
Income before Provision for Income Taxes
12,092
14,534
Provision for Income Taxes
1,625
1,924
Net Income
10,467
12,610
Income per share:
Basic
0.29
0.34
Diluted
0.28
Weighted average number of shares outstanding:
36,538,000
36,829,000
36,776,000
37,018,000
Six Months Ended December 31,
44,642
53,398
42,294
35,825
86,936
89,223
Equipment-related expenses
34,116
38,153
3,715
3,645
37,831
41,798
49,105
47,425
6,164
4,979
19,914
17,086
26,078
22,065
23,027
25,360
2,065
1,169
25,092
26,529
3,440
3,441
21,652
23,088
0.59
0.63
0.62
36,706,000
36,743,000
36,983,000
36,962,000
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Other comprehensive income, net of tax
Net change in unrealized gains on available-for-sale debt securities, net of taxes of $7
Comprehensive income
10,514
21,699
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (unaudited)
Six months ended December 31, 2024 (in thousands, except for share data)
Common Stock
Treasury Stock
Number of
Additional
Accumulated
Shares
Paid-in
Retained
Other Comprehensive
Issued
Amount
Capital
Earnings
Income
Total
Balances at June 30, 2024
39,768,186
(2,893,715)
Net income
11,185
Stock-based compensation expense
371
Stock options exercised
2,849
54
Purchase of treasury shares
(193,252)
(7,280)
Cash dividend ($.125 per share)
(4,610)
Balances at September 30, 2024
39,771,035
24,137
(3,086,967)
(26,801)
180,875
178,609
386
(282,647)
(10,728)
(4,554)
Balances at December 31, 2024
(3,369,614)
Six months ended December 31, 2023 (in thousands, except share data)
Balances at June 30, 2023
39,663,812
397
21,553
137,740
140,169
10,478
307
Cash dividend ($.08 per share)
(2,942)
Balances at September 30, 2023
21,860
145,276
148,012
303
11,892
(2,941)
Balances at December 31, 2023
39,675,704
22,163
154,945
157,984
See accompanying notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months ended December 31,
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,133
1,088
Interest (income) expense on other investments
(194)
(17)
Unrealized (gain) loss on marketable securities
(82)
(71)
(Recovery of) credit losses
(12)
(35)
Change to inventory reserve
(184)
720
(1,584)
(1,405)
Stock based compensation expense
757
610
Changes in operating assets and liabilities:
Accounts receivable
8,454
(1,448)
422
(5,005)
1,017
(124)
(1,129)
(292)
81
20
Accounts payable, accrued expenses, accrued salaries and wages, accrued income taxes
(4,807)
1,564
Net Cash Provided by Operating Activities
25,524
18,693
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment
(1,814)
(682)
Purchases of marketable securities
(7,642)
(117)
Purchases of other investments
(78)
(655)
Redemption of other investments
27,252
Net Cash Provided by (Used in) Investing Activities
17,718
(1,454)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock option exercises
Cash paid for dividend
(5,883)
Cash paid for purchase of treasury shares
(18,008)
Net Cash Used in Financing Activities
(22,564)
Net increase in Cash and Cash Equivalents
20,678
11,356
CASH AND CASH EQUIVALENTS - Beginning
35,955
CASH AND CASH EQUIVALENTS - Ending
47,311
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid
15
Income taxes paid
6,051
5,165
Non-Cash Investing and Financing Transactions
Cash dividends declared and not paid
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies
Nature of Business:
Napco Security Technologies, Inc (“NAPCO”, “the Company”, “we”, “our”) is one of the leading manufacturers and designers of high-tech electronic security devices, cellular communication services for intrusion and fire alarm systems as well as a leading provider of school safety solutions. We offer a diversified array of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products. These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment. We have experienced significant growth in recent years, primarily driven by our recurring service revenues generated from wireless communication services for intrusion and fire alarm systems, as well as our school security products that are designed to meet the increasing needs to enhance school security as a result of on-campus shooting and violence in the U.S.
Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Napco Security Technologies, Inc. and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
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. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates.
Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of the following classes of financial instruments were: Current Assets and Current Liabilities - The carrying amount of cash and cash equivalents, certificates of deposits, marketable securities, current receivables and payables and certain other short-term financial instruments approximate their fair value as of December 31, 2024 and June 30, 2024 due to their short-term maturities.
Cash and Cash Equivalents and Investments – other
All financial instruments purchased with an original maturity of three months or less at the time of purchase are considered cash equivalents. Such items may include liquid money market funds, certificate of deposit, U.S. treasury securities and time deposit accounts. Investments that are classified as cash equivalents are carried at cost, which approximates fair value. Certificate of deposits with an original maturity greater than three months are classified as Investments – other.
Cash and cash equivalents include approximately $74,620,000 of short-term time deposits, consisting of money market funds totaling $72,095,000 and $2,525,000 of U.S. treasury securities as of December 31, 2024. Cash and cash equivalents include approximately $46,518,000 of short-term time deposits, consisting of certificates of deposit totaling $5,402,000 and $41,116,000 in a money market
fund as of June 30, 2024. 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 consist of the following as of (in thousands):
Cash
11,399
18,823
Money Market Fund
72,095
41,116
U.S. Treasury Securities
2,525
Certificate of Deposits
5,402
Investments-other consists of the following as of (in thousands):
Certificates of deposit are recorded at the original cost plus accrued interest. There were no certificate of deposits outstanding at December 31, 2024. The Company’s certificates of deposits as of June 30, 2024 consist of the following (in thousands):
Balance Sheet Classification
Interest Rate
Maturity Date
Cost
Carrying Value
Cash and Cash Equivalents
4.70%
8/22/2024
5,374
4.55% - 4.75%
7/25/2024 - 10/24/2024
26,709
The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of December 31, 2024 and June 30, 2024. The Company has not historically experienced any credit losses with balances in excess of FDIC limits.
Marketable Securities
Investments in debt securities are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, a systematic methodology is employed that considers available quantitative and qualitative evidence. In addition, specific adverse conditions are considered related to the financial health of, and business outlook for, the investee. If the Company plans to sell the security or it is more likely than not that the Company will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.
Investments in equity securities with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). The Company performs a qualitative assessment on a periodic basis and
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recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.
Accounts Receivable
Accounts receivable is stated net of the reserves for credit losses of $20,000 and $32,000 as of December 31, 2024 and June 30, 2024, respectively. In accordance with ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), the Company recognizes an allowance for credit losses for trade receivables to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset which includes consideration of past events and historical loss experience, current events and also future events based on our expectation as of the balance sheet date. Receivables are written off when the Company determined that such receivables are deemed uncollectible. The Company pools its receivables based on similar risk characteristics in estimating its expected credit losses. In situations where a receivable does not share the same risk characteristics with other receivables, the Company measures those receivables individually. The Company also continuously evaluates such pooling decisions and adjusts as needed from period to period as risk characteristics change.
The Company utilizes the loss rate method in determining its lifetime expected credit losses on its receivables. This method is used for calculating an estimate of losses based primarily on the Company’s historical loss experience. In determining its loss rates, the Company evaluates information related to its historical losses, adjusted for current conditions and further adjusted for the period of time that can be reasonably forecasted. Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider all the following: past due receivables, the customer creditworthiness, changes in the terms of receivables, effect of other external forces such as competition, and legal and regulatory requirements on the level of estimated credit losses in the existing receivables.
Inventories are valued at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (FIFO) method. The reported net value of inventory includes finished saleable products, work-in-process and raw materials that will be sold or used in future periods. Inventory costs include raw materials, direct labor and overhead. The Company’s overhead expenses are applied based, in part, upon estimates of the proportion of those expenses that are related to procuring and storing raw materials as compared to the manufacture and assembly of finished products. 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.
The Company records a reserve for excess and slow-moving inventory, which represents any excess of the cost of the inventory over its estimated realizable value. This reserve is calculated using an estimated excess and slow-moving percentage applied to the inventory based on age, historical trends, product life cycle, requirements to support forecasted sales, and the ability to find alternate applications of its raw materials and to convert finished product into alternate versions of the same product to better match customer demand. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. There is inherent professional judgment and subjectivity made by both production and engineering members of management in determining the estimated excess and slow-moving percentage (See Note 6).
The Company also regularly reviews the period over which its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from the balance sheet date are classified as non-current.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major renewals and improvements are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition is reflected in income.
Depreciation is recorded over the estimated service lives of the related assets using primarily the straight-line method. Amortization of leasehold improvements is calculated by using the straight-line method over the estimated useful life of the asset or lease term, whichever is shorter.
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Long-Lived and Intangible Assets
Long-lived assets are amortized over their useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets in question may not be recoverable. Impairment would be recorded in circumstances where undiscounted cash flows expected to be generated by an asset are less than the carrying value of that asset.
Intangible assets consisted of the follows (in thousands):
Carrying
Net book
value
amortization
Customer relationships
9,800
(9,492)
308
(9,436)
364
Trade name
4,048
(911)
3,137
(810)
3,238
13,848
(10,403)
(10,246)
Amortization expense for intangible assets subject to amortization was approximately $79,000 and $84,000 for the three months ended December 31, 2024 and 2023, respectively. Amortization expense for intangible assets subject to amortization was approximately $157,000 and $168,000 for the six months ended December 31, 2024 and 2023, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2026 - $297,000; 2027 - $283,000; 2028 - $269,000; 2029 - $210,000; and 2030 - $202,000. The weighted average remaining amortization period for intangible assets was 14.4 years and 14.8 years at December 31, 2024 and June 30, 2024, respectively.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.
Equipment Revenue
Equipment revenue, which includes shipping and handling costs, is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single performance obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer, which is typically the date of shipment of the related equipment when the product is picked up by the carrier or customer. A provision for product returns, credits and rebates is recorded as a reduction of equipment revenue in the same period the revenue is recognized.
The Company provides limited standard warranty for defective products, usually for a period of 24 to 36 months, and accepts returns for such defective products as well as for other limited circumstances. The Company also provides rebates to customers for meeting specified purchasing targets and other coupons or credits in limited circumstances. Reserves are established for the estimated returns, rebates and credits and such variable consideration is measured based on the most likely amount method.
The Company analyzes product sales returns and is able to make reasonable and reliable estimates of product returns based on several factors including actual returns and expected return data communicated to the Company by its customers.
Service Revenue
Service revenue is primarily generated from the sale of monthly cellular communication services to customers. Those sales predominantly contain a single performance obligation and revenue is recognized ratably with the delivery of cellular communication service over the related monthly period, and when ownership, risks and rewards transfer to the customer.
The services are billed monthly, and customers have the right to cancel the cellular communication services at any time, however the contract with the customer does not provide for a refund.
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Cost of Sales
Equipment Cost of Sales
Equipment cost of sales is primarily comprised of direct materials and supplies consumed in the manufacturing of products, as well as manufacturing labor, depreciation expense and direct and indirect overhead expenses necessary to acquire and convert the purchased materials and supplies into finished products.
Service Cost of Sales
Service cost of sales includes the cost of operating our network operations center to manage and deliver telecommunication services.
Shipping and Handling Sales and Costs
The Company records the amount billed to customers for shipping and handling in net sales ($80,000 and $103,000 in the three months ended December 31, 2024 and 2023, respectively, and $170,000 and $186,000 in the six months ended December 31, 2024 and 2023, respectively); and classifies the costs associated with these sales in cost of sales ($353,000 and $389,000 in the three months ended December 31, 2024 and 2023, respectively and $743,000 and $760,000 in the six months ended December 31, 2024 and 2023, respectively).
Advertising and Promotional Costs
Advertising and promotional costs are included in "Selling, General and Administrative" (“SG&A”) expenses in the consolidated statements of income and are expensed as incurred. Advertising expense for the three months ended December 31, 2024 and 2023 was $916,000 and $696,000, respectively. Advertising expense for the six months ended December 31, 2024 and 2023 was $1,806,000 and $1,457,000, respectively.
Research and Development Costs
Research and development (“R&D”) costs incurred by the Company are charged to expense as incurred and are included in operating expenses in the consolidated statements of income.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Treasury stock is accounted for using the cost method and recorded as a reduction to Stockholders’ equity on the Consolidated Balance Sheets. Incremental direct costs to purchase treasury stock are included in the cost of the shares acquired.
To determine the cost of treasury stock that is either sold or re-issued, we use the first in, first out method. When treasury stock is re-issued at a price higher than its cost, the increase is recorded in additional paid-in capital on the Consolidated Balance Sheets. When
13
treasury stock is re-issued at a price lower than its cost, the decrease is recorded in additional paid-in capital to the extent that there are previously recorded increases to offset the decrease. Any decreases in excess of that amount are recorded in retained earnings on the Consolidated Balance Sheets.
Net Income per Share
Basic net income per common share (Basic EPS) is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share (Diluted EPS) is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents and convertible securities then outstanding.
The following provides a reconciliation of information used in calculating the per share amounts for the three months ended December 31, 2024 and 2023 (in thousands, except share and per share data):
Weighted Average Shares
Basic EPS
36,538
36,829
Effect of Dilutive Securities:
Stock Options
238
189
(0.01)
Diluted EPS
36,776
37,018
Options to purchase 120,000 and 67,500 shares of common stock were excluded for the three months ended December 31, 2024 and 2023, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.
The following provides a reconciliation of information used in calculating the per share amounts for the six months ended December 31, 2024 and 2023 (in thousands, except share and per share data):
Net Income per
Share
36,706
36,743
277
219
36,983
36,962
Options to purchase 70,000 and 36,250 shares of common stock were excluded for the six months ended December 31, 2024 and 2023, respectively, and were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the period.
Stock-Based Compensation
The Company has established five share incentive programs as discussed in Note 10.
Stock-based awards exchanged for services are accounted for under the fair value method. Accordingly, stock-based compensation cost is measured at the grant date based on the estimated fair value of the award. The expense for awards is recognized over the requisite service period (generally the vesting period of the award). The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.
Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility, among other factors.
14
Stock-based compensation costs of $386,000 and $303,000 were recognized for the three months ended December 31, 2024 and 2023, respectively. Stock-based compensation costs of $757,000 and $610,000 were recognized for the six months ended December 31, 2024 and 2023, respectively.
Foreign Currency
The Company has determined the functional currency of all foreign subsidiaries is the U.S. Dollar. All foreign operations are considered a direct and integral part or extension of the Company’s operations. The day-to-day operations of all foreign subsidiaries are dependent on the economic environment of the U.S. Dollar. Therefore, no realized and unrealized gains and losses associated with foreign currency translation are recorded for the three and six months ended December 31, 2024 or 2023.
Segment Reporting
The Company operates and measures its results in one operating segment and therefore has one reportable segment: the development, manufacture and sales of high-tech security devices and related cellular communication services for the devices. The Company’s Chief Operating Decision Maker, (the President, Chief Operating Officer, and Chief Financial Officer) evaluates performance of the Company and makes decisions regarding the allocation of resources based on total Company results. The Company has presented required geographical data in Note 14.
Leases
The Company determines at contract inception if an arrangement is a lease, or contains a lease, of an identified asset for which the Company has the right to obtain substantially all of the economic benefits from its use and the right to direct its use. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, while lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The implicit discount rate in the Company’s leases generally cannot readily be determined, and therefore the Company uses its incremental borrowing rate based on information available at lease commencement date in determining the present value of future payments. If the Company has options to renew or terminate certain leases, those options are included in the determination of lease term when it is reasonably certain that the Company will exercise such options. The Company does not separate lease and non-lease components in determining ROU assets or lease liabilities for real estate leases. Additionally, the Company does not recognize ROU assets or lease liabilities for leases with original terms or renewals of one year or less. See Note 13 – Commitments and Contingencies; Leases for additional accounting policies and disclosures.
Legal and Other Contingencies
The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired, or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The update expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss. It further requires disclosure of the amount and description of its composition for other segment items, and interim disclosures of both a reportable segment’s profit or loss and assets. The guidance requires disclosure of the title and position of the chief operating decision maker and how reported measures of segment profit or loss are used to assess performance and allocate resources. This pronouncement is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires public entities to disclose consistent categories and greater disaggregation of information in the rate reconciliation and for income taxes paid. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
The Company is evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on our consolidated financial statements.
NOTE 2 – Revenue Recognition and Contracts with Customers
The Company is engaged in the development, manufacture, and distribution of security products, encompassing access control systems, door security products, intrusion and fire alarm systems, alarm communication services, and video surveillance products for commercial and residential use. The Company also provides wireless communication service for intrusion and fire alarm systems on a monthly basis. These products and services are used for commercial, residential, institutional, industrial and governmental applications, and are sold primarily to independent distributors, dealers and installers of security equipment. Sales to unaffiliated customers are primarily shipped from the United States.
As of December 31, 2024 and June 30, 2024, the Company included refund liabilities of approximately $4,814,000 and $6,295,000, respectively, in current liabilities. As of December 31, 2024 and June 30, 2024, the Company included return-related assets of approximately $1,263,000 and $1,586,000, respectively, in other current assets.
As a percentage of gross sales, returns, rebates and allowances were 4% and 6% for the three months ended December 31, 2024 and 2023, respectively. As a percentage of gross sales, returns, rebates and allowances were 7% and 5% for the six months ended December 31, 2024 and 2023, respectively.
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. As noted in the accounting policy footnote, the Company’s business consists of one operating segment. Following is the disaggregation of revenues based on major product lines (in thousands):
Three months ended December 31,
Six months ended December 31,
Major Product Lines:
Intrusion and access alarm products
7,556
11,258
16,619
20,554
Door locking devices
14,169
17,749
28,023
32,844
Services
Total Revenues
NOTE 3 – Business and Credit Concentrations
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. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company had two customers with an accounts receivable balance that comprised of 11% and 13% as of December 31, 2024. These same two customers had an accounts receivable balance that comprised of 17% and 12% as of June 30, 2024. The Company had one additional customer with an accounts receivable balance that comprised of 13% as of December 31, 2024. Sales to any of these customers did not exceed 10% of net sales during the three or six months ended December 31, 2024 and 2023, respectively.
16
NOTE 4 – Fair Value Measurement
Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy:
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.
The following table presents the Company’s assets that were measured at fair value on a recurring basis at December 31, 2024 and June 30, 2024, respectively:
Level 1
Level 2
Level 3
Cash equivalents
2,525,000
-
Money market funds
72,095,000
74,620,000
7,528,000
Mutual funds
5,648,000
13,176,000
Certificate of deposits
5,402,000
41,116,000
46,518,000
Short-term investments
26,980,000
5,398,000
The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets, as well as certificates of deposits and time deposits that are classified as Level 1 due to their short-term nature.
17
For the three and six months ending December 31, 2024 and 2023, there were no transfers between Levels 1 and 2 investments and no transfers in or out of Level 3.
NOTE 5 – Marketable Securities
A summary of the fair value of the Company’s investment in marketable securities as of December 31, 2024 and June 30, 2024 is as follows:
Equity Securities
5,648
Debt Securities (available-for-sale)
7,528
Investments in Equity Securities
The disaggregated net gains and losses on the equity securities recognized within the accompanying condensed consolidated statements of income for the three and six months ended December 31, 2024 and 2023, are as follows (in thousands):
Net gains recognized during the period on equity securities
57
75
168
117
Less: Net income (losses) recognized during the period on equity securities sold during the period
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date
(76)
128
71
(19)
203
249
188
The following tables summarize the Company’s investments in equity securities at December 31, 2024 and June 30, 2024, respectively (in thousands):
Unrealized
Fair Value
Gain (Loss)
Mutual Funds
5,899
(251)
5,857
(459)
Investment income is recognized when earned and consists principally of dividend income from fixed income mutual funds. Realized gains and losses on sales of investments are determined on a specific identification basis.
Investments in Debt Securities
The Company had no investment in debt securities at June 30, 2024. The following tables summarize the Company’s investments in debt securities at December 31, 2024 (in thousands):
Amortized Cost
Unrealized Gains
Unrealized Losses
Aggregate Fair Value
9,976
53
10,029
Included in Cash and cash equivalents
2,501
Included in Marketable securities
7,475
18
The debt investments all mature within one year or less, and the Company did not recognize any credit or non-credit related losses related to its debt securities during the three and six months ended December 31, 2024.
NOTE 6 - Inventories
Inventories, net of reserves are valued at lower of cost (first-in, first-out method) or net realizable value. Inventories, net of reserves consist of the following (in thousands):
December 31,
June 30,
Component parts
32,203
32,283
Work-in-process
7,607
7,509
Finished product
9,864
10,121
49,674
49,913
Classification of inventories:
Current
Non-current
The reserve for excess and slow-moving inventory, which reduces inventory in our consolidated balance sheets were $4,800,000 and $5,026,000 as of December 31, 2024 and June 30, 2024, respectively.
NOTE 7 – Property, Plant, and Equipment
Property, plant and equipment consist of the following (in thousands):
Useful Life in Years
Land
904
N/A
Buildings
8,911
30 to 40
Molds and dies
7,548
7,539
3 to 5
Furniture and fixtures
3,702
3,613
5 to 10
Machinery and equipment
30,854
29,761
3 to 10
Building improvements
3,657
3,129
Shorter of the lease term or life of asset
55,576
53,857
Less: accumulated depreciation and amortization
(45,661)
(44,780)
Depreciation and amortization expense on property, plant, and equipment was approximately $506,000 and $467,000 for the three months ended December 31, 2024 and 2023, respectively. Depreciation and amortization expense on property, plant, and equipment was approximately $976,000 and $920,000 for the six months ended December 31, 2024 and 2023, respectively.
NOTE 8 - Income Taxes
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 state and local income taxes, tax rates in foreign jurisdictions, global intangible low-taxed income (“GILTI”), tax benefit of R&D credits, and certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, and state and local income taxes. In addition, changes in judgment from the evaluation of new information resulting in the recognition de-recognition or re-measurement of a tax position taken in a prior annual period is recognized separately in the quarter of the change.
19
For the six months ended December 31, 2024 the Company recognized total pre-tax book income of $25,092,000, comprised of $4,306,000 and $20,786,000 of domestic and foreign pre-tax book income, respectively.
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 December 31, 2024, the Company had accrued interest totaling $229,000, as well as $754,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. For the six months ended December 31, 2024, additional tax liability and interest expense were accrued for in the amount of $54,000 and $35,000, respectively.
The company has FIN 48 liabilities accrued due to historic Section 956 positions. These positions would not be reversed until the earlier of when the statute of limitation lapses noting that Section 956 adjustments are subject to a 6-year period under the constructive dividend rules, or the position is effectively settled via an IRS audit. Based on the tax returns filed in April of 2019, the six year statute of limitations would expire during Q4 of June 30, 2025.
We file a consolidated U.S. income tax return and tax returns in certain state and local and foreign jurisdictions. As of December 31, 2024, fiscal years 2021 and forward are still open for examination, in addition to fiscal year 2018, which is subject to a six year statute of limitations. In addition, the Company has a wholly-owned subsidiary which operates in a Free Zone in the Dominican Republic (“DR”) and is exempt from DR income tax.
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 has been no changes proposed in relation to this examination.
NOTE 9 - Long-Term Debt
On February 9, 2024, the Company and its primary bank, HSBC Bank USA National Association (“HSBC”), agreed to amend and restate the existing Third Amended and Restated Credit Agreement (“Agreement”) dated June 29, 2012, as amended, between the Registrant and HSBC with the Fourth Amended and Restated Credit Agreement (“Amended Agreement”). The Amended Agreement extends the term of the Agreement from June 28, 2024, to February 9, 2029. The Amended Agreement also increases the available revolving credit line from $11,000,000 to $20,000,000 and replaces the LIBOR benchmark rate with the Secured Overnight Financing Rate (SOFR) benchmark rate. As of December 31, 2024 and June 30, 2024, the Company has no outstanding debt.
The Amended Agreement provides for a SOFR-based interest rate option of SOFR plus 1.2645% to 1.3645%, depending on the Fixed Charge Coverage Ratio, which is to be measured and adjusted quarterly, a prime rate-based interest rate option of the prime rate, as defined in the Amended Agreement, and other terms and conditions as more fully described in the Amended Agreement. The Company’s obligations under the Amended Agreement continue to be secured by substantially all its domestic assets, including but not limited to, deposit accounts, accounts receivable, inventory, equipment and fixtures and intangible assets. In addition, the Company’s wholly owned subsidiaries, except for the Company’s foreign subsidiaries, have issued guarantees and pledges of all their assets to secure the Company’s obligations under the Amended Agreement. All the outstanding common stock of the Company’s domestic subsidiaries and 65% of the common stock of the Company’s foreign subsidiaries have been pledged to secure the Company’s obligations under the Amended Agreement. The Amended Agreement contains various restrictions and covenants including, but not limited to, compliance with certain financial rations, restrictions on payment of dividends and restrictions on borrowings.
During Fiscal 2020, the Company received the proceeds of promissory notes (the "PPP Loan Agreement"), entered into between the Company and HSBC Bank USA N.A., as lender (the "Lender). The Lender made the loans pursuant to the Paycheck Protection Program (the "PPP"), created by Section 1102 of the CARES Act. 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 extinguishment was accounted for in accordance with ASC 470 “Debt”.
Pursuant to the CARES Act, the loans may be forgiven, and during Fiscal 2022, the PPP Loans were forgiven, in their entirety, in accordance with guidelines set forth in the PPP Loan Agreement. In accordance with the CARES Act, the federal government reserves the right to audit any forgiveness of PPP Loan’s for a period of six years from the date of forgiveness, and it has indicated that it intends to audit loans that were in excess of $2 million.
NOTE 10 - Stock Options
The Company follows ASC 718 (“Share-Based Payment”), which requires that all share-based payments to employees, including stock options, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period. For the three months ended December 31, 2024 and 2023, the Company recorded non-cash compensation expense of $386,000 ($0.01 per basic and diluted share) and $335,000 ($0.01 per basic and diluted share), respectively, relating to stock-based compensation which are included in SG&A in the consolidated statements of income. For the six months ended December 31, 2024 and 2023, the Company recorded non-cash compensation expense of $757,000 ($0.02 per basic and diluted share) and $610,000 ($0.01 per basic and diluted share), respectively, relating to stock-based compensation which are included in SG&A in the consolidated statements of income.
2012 Employee Stock Option Plan
In December 2012, the stockholders approved the 2012 Employee Stock Option Plan (the 2012 Employee Plan). The 2012 Employee Plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 1,900,000 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 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 and a term of 10 years.
Under the 2012 Employee Plan, stock options may be granted to 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 December 31, 2024, 361,036 stock options were outstanding, 265,660 stock options were exercisable and no further stock options were available for grant under this plan after December 2022.
The following table reflects activity under the 2012 Employee Plan for the six months ended December 31:
Weighted average
Options
exercise price
Outstanding, beginning of year
363,036
21.47
521,580
19.37
Forfeited/Lapsed
(11,000)
3.15
Exercised
(2,000)
26.94
(31,600)
22.13
Outstanding, end of period
361,036
21.44
478,980
19.56
Exercisable, end of period
265,660
21.36
289,728
18.58
Weighted average fair value at grant date of options granted
n/a
Total intrinsic value of options exercised
35,000
375,000
Total intrinsic value of options outstanding
5,100,000
7,034,000
Total intrinsic value of options exercisable
3,772,000
4,539,000
A total of 2,000 stock options were exercised during both the six months ended December 31, 2024. There were no stock options exercised during the three months ended December 31, 2024. $54,000 cash was received from the option exercises during the six months ended December 31, 2024. The actual tax benefit realized for the tax deductions from option exercises during both the three and six months ended December 31, 2024 was $0. A total of 31,600 stock options were exercised during both the three and six months ended December 31, 2023. The 31,600 options that were exercised during the three and six months ended December 31, 2023 were settled by the Company withholding 20,567 from the shares issuable on exercise of the options. The withheld shares of common stock had an aggregate fair market value on the date of exercise equal to the purchase price being paid. No cash was received from the option exercises during both the three and six months ended December 31, 2023. The actual tax benefit realized for the tax deductions from option exercises during both the three and six months ended December 31, 2023 was $52,000.
21
The following table summarizes information about stock options outstanding under the 2012 Employee Plan at December 31, 2024:
Options outstanding
Options exercisable
Number
remaining
Range of exercise prices
outstanding
contractual life
exercisable
$10.02 ‑ $26.94
6.65
As of December 31, 2024, there was $677,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 67,600 and 76,700 options vested during the three and six months ended December 31, 2024. The total grant date fair value of the options vesting during the three and six months ended December 31, 2024 was $670,000 and $782,000, respectively. 74,000 and 84,700 options vested during the three and six months ended December 31, 2023. The total grant date fair value of the options vesting during the three and six months ended December 31, 2023 was $724,000 and $849,000, respectively.
2012 Non-Employee Stock Option Plan
In December 2012, the stockholders approved the 2012 Non-Employee Stock Option Plan (the 2012 Non-Employee Plan). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 100,000 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 to non-employee directors and consultants to the Company and its subsidiaries.
Under the 2012 Non-Employee Plan, stock options may be granted 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 December 31, 2024, 20,400 stock options were outstanding, 18,480 stock options were exercisable and no further stock options were available for grant under this plan after December 2022.
The following table reflects activity under the 2012 Non-Employee Plan for the six months ended December 31:
20,400
14.39
18,480
13.50
15,840
12.44
432,000
405,000
408,000
345,000
No stock options were exercised during the three and six months ended December 31, 2024 and 2023, respectively. No cash was received from option exercises during the three and six months ended December 31, 2024 and 2023, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for both periods.
22
The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at December 31, 2024:
Weighted
average exercise
price
$4.35 - $22.93
5.14
As of December 31, 2024, there was $15,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. 1,920 options vested during both the three and six months ended December 31, 2024 and 2023, respectively. The total grant date fair value of the options vesting during both the three and six months ended December 31, 2024 and 2023 was $19,000.
2018 Non-Employee Stock Option Plan
In December 2018, the stockholders approved the 2018 Non-Employee Stock Option Plan (the “2018 Non-Employee Plan”). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 100,000 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 to non-employee directors and consultants to the Company and its subsidiaries.
Under the 2018 Non-Employee Plan, stock options may be granted 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 December 31, 2024, 64,900 stock options were outstanding, 62,200 stock options were exercisable and 4,000 further stock options were available for grant under this plan.
There were no options granted during the six months ended December 31, 2024 and 2023. No options may be granted under this plan after December 2028.
The following table reflects activity under the 2018 Non-Employee Plan for the six months ended December 31:
68,900
14.54
75,000
14.83
Granted
(4,000)
22.93
(1,600)
15.27
64,900
14.02
73,400
14.82
62,200
13.63
58,620
13.81
28,000
1,398,000
1,426,000
1,364,000
1,198,000
No stock options were exercised during both the three and six months ended December 31, 2024. No cash was received from option exercises during both the three and six months ended December 31, 2024, and the actual tax benefit realized for the tax deductions from option exercises was $0. A total of 1,600 stock options were exercised during the three and six months ended December 31, 2023. The 1,600 options that were exercised during the three and six months ended December 31, 2023 were settled by the Company withholding 740 from the shares issuable on exercise of the options. The withheld shares of Common Stock had an aggregate fair market value on the date of exercise equal to the purchase price being paid. No cash was received from the option exercises during the three and six months ended December 31, 2023. The actual tax benefit realized for the tax deductions from option exercises during the three and six months ended December 31, 2023 was $6,000 each period.
23
The following table summarizes information about stock options outstanding under the 2018 Non-Employee Plan at December 31, 2024:
$8.10 - $22.93
5.10
As of December 31, 2024, there was $20,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2018 Non-Employee Plan. 2,700 options vested during both the three and six months ended December 31, 2024. The total grant date fair value of the options vesting during both the three and six months ended December 31, 2024 was $27,000. 9,500 options vested during both the three and six months ended December 31, 2023, respectively. The total grant date fair value of the options vesting during both the three and six months ended December 31, 2023 under this plan was $89,000 for both periods.
2020 Non-Employee Stock Option Plan
In May 2020, the stockholders approved the 2020 Non-Employee Stock Option Plan (the “2020 Non-Employee Plan”). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 100,000 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 to non-employee directors and consultants to the Company and its subsidiaries.
Under the 2020 Non-Employee Plan, stock options may be granted 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 December 31, 2024, 51,900 stock options were outstanding, 37,520 stock options were exercisable and 45,100 stock options were available for grant under this plan.
No options were granted during the six months ended December 31, 2024 and 2023, respectively. No options may be granted under this plan after May 2030.
The following table reflects activity under the 2020 Non-Employee Plan for the six months ended December 31:
56,900
23.35
(3,000)
51,900
23.00
37,520
21.55
29,140
21.41
32,000
652,000
620,000
525,000
374,000
A total of 0 and 3,000 stock options were exercised during the three and six months ended December 31, 2024, respectively. 3,000 stock options exercised during the six months ended December 31, 2024 were settled by the company withholding 2,151 shares from the shares issuable on exercise of the options. The withheld shares of common stock had an aggregate fair market value on the date of exercise equal to the purchase price being paid. The actual tax benefit realized for the tax deductions from option exercises during the three and six months ended December 31, 2024 was $0 and $7,000, respectively. No stock options were exercised during both the three and six months ended December 31, 2023. No cash was received from option exercises during either of the three and six months ended December 31, 2023 and the actual tax benefit realized for the tax deductions from option exercises was $0 for both periods.
24
The following table summarizes information about stock options outstanding under the 2020 Non-Employee Plan at December 31, 2024:
$11.40 - $30.71
7.03
As of December 31, 2024, there was $137,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2020 Non-Employee Plan. 3,380 and 10,380 options vested during both of the three and six months ended December 31, 2024 and 2023, respectively. The total grant date fair value of the options vesting during both the three and six months ended December 31, 2024 and 2023 was $34,000 and $113,000, 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 December 31, 2024, 130,000 stock options were outstanding, 28,000 stock options were exercisable and 820,000 stock options were available for grant under this plan.
No stock options were granted during the six months ended December 31, 2024. There were 10,000 options granted during the three and six months ended December 31, 2023. No options may be granted under this plan after December 2032. 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
4.66
%
Expected lives
5.76 Years
Expected volatility
48.71
Expected dividend yields
1.48
The following table reflects activity under the 2022 Employee Plan for the six months ended December 31:
130,000
41.38
5,000
40.01
10,000
21.60
(5,000)
39.96
2,000
9.75
140,000
127,000
56,000
25,300
25
No options were exercised during both the three and six months ended December 31, 2024 and 2023, respectively. No cash was received from option exercises during both the three and six months ended December 31, 2024 and 2023 and the actual tax benefit realized for the tax deductions from option exercises was $0.
The following table summarizes information about stock options outstanding under the 2022 Employee Plan at December 31, 2024:
$21.60 - $49.39
9.30
As of December 31, 2024, there was $1,816,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2022 Employee Plan. 2,000 options vested during both the three and six months ended December 31, 2024 and 2023, respectively. The total grant date fair value of the options vesting during both the three and six months ended December 31, 2024 and 2023 under this plan was $19,500, respectively.
NOTE 11 – Stockholders’ Equity Transactions
The following tables summarizes information about dividends declared by the Company for the six months ended December 31, 2024 and the fiscal year ended June 30, 2024:
Dividend Declaration Date
Stockholders of Record Date
Dividend Payable Date
Per Share Cash Dividend Amount
November 1, 2024
December 12, 2024
January 3, 2025
$0.125
August 22, 2024
September 12, 2024
October 3, 2024
May 2, 2024
June 3, 2024
June 24, 2024
$ 0.10
February 1, 2024
March 1, 2024
March 22, 2024
November 2, 2023
December 1, 2023
December 22, 2023
$ 0.08
August 18, 2023
September 1, 2023
September 22, 2023
On September 16, 2014 the Company’s board of directors authorized the repurchase of up to 2 million of the approximately 38.8 million shares of the Company’s common stock then outstanding. 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. In December of Fiscal 2018, the board of directors authorized the repurchase of up to an additional 1 million shares. In November of Fiscal 2025, the board authorized the repurchase of up to an additional 1 million shares. During the first quarter of the fiscal year ended June 30, 2025, the Company repurchased 193,252 shares of its outstanding common stock at a weighted average price of $37.67. During the second quarter of the fiscal year ended June 30, 2025, the Company repurchased 282,647 shares of its outstanding common stock at a weighted average price of $37.95. Shares repurchased through the six months ended December 31, 2024, are included in the Company’s Treasury Stock as of December 31, 2024. The Company currently has available 1,104,741 shares that can be repurchased under this authorization.
The following tables summarizes information about shares repurchased by the Company for the six months ended December 31, 2024:
Total Number of
Maximum
Shares Purchased as
Number of Shares
Average
Part of Publicly
that May Yet Be
Price Paid
Announced Plans or
Purchased Under
Period
Purchased
per Share
Programs
Plans or Programs
September 10, 2024 - September 19, 2024
193,252
$ 37.67
1,104,741
November 7, 2024 - December 19, 2024
282,647
$ 37.95
Total for the 6 months ended December 31, 2024
475,899
$ 37.84
26
During the six months ended December 31, 2024, certain employees and directors exercised stock options under the Company's 2012 Employee and 2020 Non-Employee Stock Option Plans totaling 5,000 shares. Of the 5,000 shares exercised, 3,000 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 withheld by the Company was 2,151 and was based upon the aggregate fair market value on the date of exercise equal to the purchase price being paid. There were no stock option exercises from certain employees and directors during the three months ended December 31, 2024.
NOTE 12 - 401(k) Plan
The Company maintains a 401(k) plan (“the Plan”) that covers all U.S. 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 $69,000 and $58,000 for the three months ended December 31, 2024 and 2023, respectively. Company contributions to this plan are discretionary and totaled $138,000 and $119,000 for the six months ended December 31, 2024 and 2023, respectively.
NOTE 13 - Commitments and Contingencies
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 three months ended December 31, 2024 and 2023 cash payments against operating lease liabilities totaled $115,000 and $86,000, respectively. For the six months ended December 31, 2024 and 2023 cash payments against operating lease liabilities totaled $172,000 and $171,000, respectively.
Supplemental balance sheet information related to operating leases was as follows:
Weighted-average remaining lease term
67 Years
Weighted-average discount rate
6.25
The following is a schedule, by years, of maturities of lease liabilities as of December 31, 2024 (in thousands):
Year Ending June 30,
2025
172
2026
346
2027
349
2028
351
2029
353
Thereafter
29,665
Total future minimum lease payments
31,236
Less: Imputed interest
25,901
Operating lease expense totaled approximately $144,000 and $129,000 for the three months ended December 31, 2024 and 2023, respectively. Operating lease expense totaled approximately $239,000 and $253,000 for the six months ended December 31, 2024 and 2023, respectively.
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Litigation
On August 29, 2023, a purported class action, brought on behalf of a putative class who acquired publicly traded NAPCO securities between November 7, 2022 and August 18, 2023, 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. The action, captioned Zornberg v. NAPCO Security Technologies, Inc. et al., asserts securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with statements made in the Company’s quarterly reports and earnings releases during the period of November 7, 2022 through May 8, 2023. A lead plaintiff was appointed in November 2023 and lead plaintiff filed an Amended Complaint on February 16, 2024. The Amended Complaint added claims under Sections 11, 12, and 15 of the Securities Act of 1933 in connection with the secondary public offering in February 2023. These additional claims are brought against the defendants named in the initial complaint, as well as the directors who allegedly signed the offering materials (prospectuses and registration statement in connection with the offering), and the underwriters for the offering. The Company filed a motion to dismiss the Amended Complaint on April 26, 2024. The Company intends to vigorously defend against the action.
On November 26, 2024, a putative derivative lawsuit captioned Minzer v. Soloway, et al., Case No. 2024-1218, was filed in the Court of Chancery in the State of Delaware against the Company’s Chairman and Chief Executive Officer, Chief Financial Officer, and certain current and former directors. The Company is a “Nominal Defendant” in the lawsuit. The complaint alleges, among other things, that the defendants breached their fiduciary duties and aided and abetted breach of fiduciary duties by allowing the Company to remain with ineffective internal controls over financial reporting and inventory and by allowing for the dissemination of false and misleading financial information in public filings. The complaint also brings breach of fiduciary duty and unjust enrichment claims in connection with stock sales by the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer and seeks indemnity and contribution. The Company’s status as a “Nominal Defendant” in the action reflects the fact that the lawsuit is maintained by the named plaintiff on behalf of the Company and that the plaintiff seeks damages on the Company’s behalf. Defendants’ motion to dismiss and/or stay the case is due on February 28, 2025.
With respect to all litigation and related matters, the Company records a liability when the Company believes it is probable that a liability has been incurred and the amount can be reasonably estimated. As of the end of the period covered by this report, the Company has not recorded a liability for the matter disclosed in this note. It is possible that the Company could be required to pay damages, incur other costs or establish accruals in amounts that could not be reasonably estimated as of the end of the period covered by this report.
Employment Agreements
The Company is obligated under three employment agreements and one severance agreement with executive officers of the Company. The employment agreements are with the Company’s CEO, Senior Vice President of Finance and Chief Accounting Officer (“SVP of Finance”) and the Senior Vice President of Engineering and Chief Technology Officer (“the SVP of Engineering”) and the severance agreement is with the Company’s President, Chief Operating Officer and Chief Financial Officer (“CFO”).
The employment agreement with the CEO provides for an annual salary of $971,000, 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. 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 Finance expires in June 2025 and provides for an annual salary of $350,000. Upon the anniversary date, if terminated by the Company without cause, the SVP of Finance is entitled to severance of six months’ salary and continued company-sponsored health insurance for six months from the date of termination.
The employment agreement with the SVP of Engineering expires in August 2026 and provides for an annual salary of $458,000, 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.
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The severance agreement is with the President and CFO and provides for, if terminated by the Company without cause or within three months of a change in corporate control of the Company, severance of nine month’s salary, continued company-sponsored health insurance for six months from the date of termination and certain non-compete and other restrictive provisions.
NOTE 14 – Geographical Data
The Company is engaged in one major line of business: the development, manufacture, and distribution of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products for commercial and residential use. The Company also provides wireless communication service for intrusion and fire alarm systems. These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment. Sales to unaffiliated customers are primarily shipped from the United States. The Company has customers worldwide with major concentrations in North America.
Financial Information Relating to Domestic and Foreign Operations (in thousands):
Sales to external customers (1):
Domestic
42,679
47,291
86,367
88,661
Foreign
254
256
569
562
Total Net Sales
Identifiable assets:
United States
160,536
164,365
Dominican Republic (2)
42,148
43,387
Total Identifiable Assets
NOTE 15 - Subsequent Events
The Company has evaluated subsequent events occurring after the end of the period covered by the condensed consolidated financial statements for events requiring recording or disclosure in the condensed consolidated financial statements.
On January 30, 2025, the Company’s Board of Directors declared a cash dividend of $.125 per share payable on April 3, 2025 to stockholders of record on March 12, 2025.
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q and the documents we incorporate by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical fact, included or incorporated in this prospectus regarding our strategy, future operations, clinical trials, collaborations, intellectual property, cash resources, financial position, future revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “could,” “should,” “potential,” “likely,” “projects,” “continue,” “will,” “schedule,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. See “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2024 for more information. These factors and the other cautionary statements made in this prospectus and the documents we incorporate by reference should be read as being applicable to all related forward-looking statements whenever they appear in this prospectus and the documents we incorporate by reference. In addition, any forward-looking statements represent our estimates only as of the date that this prospectus is filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. We do not assume any obligation to update any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.
Overview
Napco is a leading manufacturer and designer of high-tech electronic security devices, wireless communication services for intrusion and fire alarm systems as well as a provider of school safety solutions. We offer a diversified array of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products, used for commercial, residential, institutional, industrial and governmental applications. We have experienced significant growth in recent years, primarily driven by our recurring service revenues from wireless communication services for intrusion and fire alarm systems.
NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high-quality security solutions. We are dedicated to developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks.
Highlights from the three and six months ended December 31, 2024 compared with the comparable periods in fiscal 2024 included:
Industry Trends
Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. Napco continually innovates through a broad range of research and development activities that seek to identify and address the changing demands of customers, industry trends, and competitive forces.
Economic Conditions and Other Factors
We are subject to the effects of general macroeconomic and market conditions.
The markets for security devices and services are dynamic and highly competitive. Our competitors are continually developing new products and solutions for consumers and businesses. We must continue to evolve and adapt to respond to customer and user preferences over an extended time in pace with this changing environment.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are fully described in Note 1 to the Company’s consolidated financial statements included in its 2024 Annual Report on Form 10-K.
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates.
Results of Operations
(dollars in thousands)
% Increase/
(decrease)
Net sales: equipment revenues
(25.1)
(16.4)
service revenues
14.4
18.1
Total net sales
(9.7)
(2.6)
Gross Profit: equipment
5,119
8,351
(38.7)
10,526
15,245
(31.0)
services
19,370
16,661
16.3
38,579
32,180
19.9
Total gross profit
(2.1)
3.5
Gross profit as a % of net sales:
57.0
52.6
8.4
56.5
53.2
6.2
equipment
23.6
28.8
(18.1)
28.5
(17.2)
91.3
89.9
1.6
91.2
89.8
22.2
23.8
Selling, general and administrative
17.8
16.6
Selling, general and administrative as a percentage of net sales
18.2
30.8
22.9
19.1
Operating income
(19.1)
(9.2)
26.3
76.6
Provision for income taxes
(15.5)
(0.0)
(17.0)
(6.2)
31
Net Sales
Three Months Ended December 31, 2024:
Net sales for the three months ended December 31, 2024 decreased $4,614,000 to $42,933,000 as compared to $47,547,000 in the comparable period. Net equipment revenues for the three months ended December 31, 2024, decreased $7,282,000 to $21,725,000 as compared to $29,007,000 in the comparable period. The decrease in net equipment sales was primarily due to decreases in intrusion and access alarm products of $3,702,000 and door locking devices of $3,580,000. The reduction is attributable to reduced sales by two of the Company’s larger distributors, one of which reduced all purchases to reduce existing inventory levels, and a second distributor who was completing a management restructuring which resulted in reduced purchases. In addition, the timing of project work has impacted sales of custom door locking devices.
Net service revenues for the three months ended December 31, 2024, increased $2,668,000 to $21,208,000 as compared to $18,540,000 in the Comparable period. The increase in net service revenues was due to an increase in the number of our cellular (radio) communication devices put into service and activated.
Six Months Ended December 31, 2024:
Net sales for the six months ended December 31, 2024 decreased $2,287,000 to $86,936,000 as compared to $89,223,000 in the comparable period. Net equipment revenues for the six months ended December 31, 2024, decreased $8,756,000 to $44,642,000 as compared to $53,398,000 in the comparable period. The decrease in net equipment sales was primarily due to decreases in intrusion and access alarm products of $3,936,000 and door locking devices of $4,821,000. The reduction is attributable to reduced sales by two of the Company’s larger distributors, one of which reduced all purchases to reduce existing inventory levels, and a second distributor who was completing a management restructuring which resulted in reduced purchases. In addition, the timing of project work has impacted sales of custom door locking devices.
Net service revenues for the six months ended December 31, 2024, increased $6,469,000 to $42,294,000 as compared to $35,825,000 in the comparable period. The increase in net service revenues was due to an increase in the number of our cellular (radio) communication devices put into service and activated.
Three Months Ended December 31, 2024
Overall gross profit for the three months ended December 31, 2024 decreased $523,000 to $24,489,000, or 57.0% of net sales, as compared to $25,012,000, or 52.6% of net sales, for the comparable period.
Gross profit from equipment sales was $5,119,000, or 23.6% of equipment sales, as compared to $8,351,000, or 28.8% of net equipment sales, for the comparable period. The decrease in gross profit percentage from equipment sales is primarily a result of product mix and lower absorption of fixed overhead costs. In addition, door locking products historically result in higher margin percentages as compared to access alarm products and specifically cellular (radio) communicator devices, which also result in future increases in recurring communication services revenue.
Gross profit on service revenues was $19,370,000, or 91.3% of net service revenues, as compared to $16,661,000, or 89.9% of net service revenues, for the comparable period a year ago. The increase in gross profit percentage was a result of renegotiation of royalty arrangements and volume rebates received from carriers.
Overall gross profit for the six months ended December 31, 2024 increased $1,680,000 to $49,105,000, or 56.5% of net sales, as compared to $47,425,000, or 53.2% of net sales, for the comparable period.
Gross profit from equipment sales was $10,526,000, or 23.6% of equipment sales, as compared to $15,245,000, or 28.5% of equipment sales, for the comparable period. The decrease in gross profit percentage from equipment sales is primarily a result of
32
product mix and lower absorption of fixed overhead costs. In addition, door locking products historically result in higher margin percentages as compared to access alarm products and specifically cellular (radio) communicator devices, which also result in future increases in recurring alarm communication services revenue.
Gross profit on service revenues was $38,579,000, or 91.2% of net service revenues, as compared to $32,180,000, or 89.8% of net service revenues, for the comparable period a year ago. The increase in gross profit percentage was a result of renegotiation of royalty arrangements and volume rebates received from carriers.
Research and Development
Research and development expenses for the three months ended December 31, 2024 increased by $565,000 to $3,107,000, or 7.2% of net sales, as compared to $2,542,000, or 5.3% of net sales, for the comparable period. The increase in research and development expenses was primarily a result of annual compensation increases and hiring of additional resources.
Research and development expenses for the six months ended December 31, 2024 increased by $1,185,000 to $6,164,000, or 7.1% of net sales, as compared to $4,979,000, or 5.6% of net sales, for the comparable period. The increase in research and development expenses was primarily a result of annual compensation increases and hiring of additional resources.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2024 increased by $1,546,000 to $10,211,000 as compared to $8,665,000 for the comparable period. The increase in SG&A expenses was primarily attributable to compensation increases and hiring of additional staff, increases in advertising and insurance costs, partially offset by decreases in professional fees.
Selling, general and administrative (“SG&A”) expenses for the six months ended December 31, 2024 increased by $2,828,000 to $19,914,000 as compared to $17,086,000 for the comparable period. The increase in SG&A expenses was primarily attributable to compensation increases and hiring of additional staff, increases in advertising and insurance costs, partially offset by decreases in professional fees.
Other Income (Expense)
Interest and other income, net for the three months ended December 31, 2024 increased by $192,000 to income of $921,000 as compared to income of $729,000 for the comparable period. The increase in income was primarily due to an increase in interest income on short-term investments as a result of higher interest rates and larger deposit balances.
Interest and other income, net for the six months ended December 31, 2024 increased by $896,000 to income of $2,065,000 as compared to income of $1,169,000 for the comparable period. The increase in income was primarily due to an increase in interest income on short-term investments as a result of higher interest rates and larger deposit balances.
The Company’s provision for income taxes for the three months ended December 31, 2024 decreased by $299,000 to $1,625,000 as compared to $1,924,000 for the same period a year ago. The decrease in the provision for income taxes for the three months was primarily due to lower taxable income in the U.S. The Company’s effective rate for income tax was 13.4% and 13.2% for the three months ended December 31, 2024 and 2023 respectively. The Company’s effective tax rate for the three months ended December 31, 2024 increased as a result of higher non-deductible stock based compensation.
The Company’s provision for income taxes for the six months ended December 31, 2024 of $3,440,000 remained consistent as compared to $3,441,000 for the same period a year ago. The Company’s effective rate for income tax was 13.7% and 13.0% for the six months ended December 31, 2024 and 2023 respectively. The Company’s effective tax rate for the six months ended December 31, 2024 increased as a result of higher non-deductible stock based compensation.
33
Liquidity and Capital Resources
Our cash and cash equivalents increased by $20,678,000 during the six months ended December 31, 2024, and our cash and cash equivalents and short-term investments as of December 31, 2024 was $99,195,000. We believe that our projected cash flow from operations, combined with our cash and short-term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months.
As of December 31, 2024, the Company’s available revolving credit line was $20,000,000, which expires in February 2029, none of which has been drawn. The Company has no outstanding debt.
A summary of the cash flow activity for the six months ended December 31, 2024 and 2023 is as follows:
Cash Flows from Operating Activities
Net cash provided by operating activities was $25.5 million for the six months ended December 31, 2024 and was due to net income of $21.7 million and increase in cash flow from changes in operating assets and liabilities of $4.0 million offset by adjustments for non-cash items of $.2 million. The changes in operating assets and liabilities were largely attributable to decreases in accounts receivables, inventories and prepaid expenses partially offset by increases in income tax receivable and decreases in accounts payable and accrued expenses.
Net cash provided by operating activities was $18.7 million for the six months ended December 31, 2023 and was due to net income of $23.1 million and adjustments for non-cash items of $.9 million, partially offset by a decrease in cash flow from operating activities due to changes in operating assets and liabilities of $5.3 million. The changes in operating assets and liabilities was largely attributable to a decrease in accounts receivable and inventories partially offset by an increase in and accounts payable and accrued expenses.
Cash Flows from Investing Activities
The net cash provided by investing activities of $17.7 million during the six months ended December 31, 2024 was primarily attributable to the redemption of other investments ($27.3 million) partially offset by expenditures used for capital expenditures ($1.8 million) and purchase of investments ($7.6 million). The cash used in investing activities of $1.4 million during the six months ended December 31, 2023, was primarily attributable to expenditures used for capital expenditures and purchase of investments. The change in use of cash for investing activities from 2023 to 2024 was a increase in the redemption of investments in term deposits (other investments).
Cash Flows from Financing Activities
The cash used in financing activities of $22.6 million for the six months ended December 31, 2024 was primarily related to the purchase of treasury shares. The cash used in financing activities of $5.9 million for the six months ended December 31, 2023 was primarily related to the payment of stockholder dividends.
Contractual Obligations and Commitments
As of December 31, 2024, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business. On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, on which the Company’s principle manufacturing facility is located, at an annual base rent of approximately $235,000 and $105,000 in annual service charges. The service charges increase 2% annually over the remaining life of the lease.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates primarily relates to our investment portfolio. We internally manage our investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our investment
portfolio includes equity securities and U.S. treasury securities with a total fair value of approximately $15.7 million at December 31, 2024. These securities are subject to interest rate risk and, based on our investment portfolio at December 31, 2024, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately $314,000. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Income unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.
Currency Exchange Risk
We conduct business with non-U.S. customers, however all foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto its foreign customers.
If changes in exchange rates were to negatively effect these customers, the Company could have trouble collecting unsecured receivables, and or experience the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company's business, financial condition and results of operations.
We are also exposed to foreign currency risk relative to expenses incurred in Dominican Pesos ("RD$"), the local currency of the Company's production facility in the Dominican Republic. The result of a 10% strengthening or weakening in the U.S. dollar to the RD$ would result in an annual increase or decrease in income from operations of approximately $889,000.
ITEM 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure as of December 31, 2024. Management applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2024. Based on that evaluation, management concluded that such disclosure controls and procedures were not effective, at the reasonable assurance level, as of December 31, 2024, as a result of the material weaknesses in internal control over financial reporting discussed below.
Previously Identified Material Weaknesses in Internal Control over Financial Reporting
As disclosed in our Annual Report on Form 10-K for the year ended June 30, 2024, management identified a material weakness in internal control related to inventory costing. The material weakness was a result of ineffective review of information used in the inventory costing process.
Plans for Remediation of Material Weakness
Management, with the oversight of the audit committee of our Board of Directors, has designed and implemented reconciliation procedures to determine that the information used in the costing of inventory is complete and accurate. We expect the steps taken to date will remediate the underlying cause of this material weakness and will improve the effectiveness of our internal control over financial reporting.
The material weakness cannot be considered remediated until applicable controls have operated for a sufficient period of time that would allow management to test and conclude that these controls are operating effectively. Accordingly, we will continue to monitor and evaluate the effectiveness of our internal control over financial reporting in the areas affected by the material weakness, and the Company will continue to devote time, attention and financial resources to this effort.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2024, there were no changes in the Company’s internal controls over financial reporting, except for the remediation efforts described above, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting except as described above.
Item 1. Legal Proceedings
The information called for by this item is incorporated herein by reference to Note 13, Commitments and Contingencies, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Item 1A. Risk Factors
Information regarding the Company’s Risk Factors are set forth in the Company’s Annual Report on Form 10-K for the year ended June 30, 2024 as well as the Form 424(b)(7) Prospectus, filed on March 7, 2024. There has been no material change in the risk factors previously disclosed in the Company’s Form 10-K and Form 424(b)(7) for the three and six months ended December 31, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None
Item 6. Exhibits
31.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Richard L. Soloway, Chairman of the Board and President
31.2
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Kevin S. Buchel, Executive Vice President and Chief Financial Officer
32.1
Section 1350 Certifications
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
February 3, 2025
(Registrant)
By:
/s/ RICHARD L. SOLOWAY
Richard L. Soloway
Chairman of the Board of Directors & Chief Executive Officer
(Chief Executive Officer)
/s/ KEVIN S. BUCHEL
Kevin S. Buchel
President, Chief Operating Officer & Chief Financial Officer
(Principal Financial and Accounting Officer)