What changed in NAPCO SECURITY TECHNOLOGIES, INC's 2023 10-K compared to 2022?

Across the narrative sections we track, NAPCO SECURITY TECHNOLOGIES, INC (NSSC) added 140 paragraphs, removed 142, and edited 103 between the 2022 and 2023 10-K filings. The biggest movers are Item 7. Management's Discussion & Analysis (+58/−63), Item 1A. Risk Factors (+43/−41), Item 1. Business (+27/−29).

Did NAPCO SECURITY TECHNOLOGIES, INC add new Risk Factors in the 2023 10-K?

Yes — Item 1A Risk Factors shows 43 new/edited paragraphs and 41 removed paragraphs versus the 2022 10-K.

What changed in NAPCO SECURITY TECHNOLOGIES, INC's MD&A (Item 7) in 2023?

Item 7 Management's Discussion & Analysis shows 58 new/edited paragraphs and 63 removed paragraphs year-over-year. Read the side-by-side diff to see exactly which revenue, margin, and outlook commentary was rewritten.

Did NAPCO SECURITY TECHNOLOGIES, INC's Legal Proceedings (Item 3) change in 2023?

Item 3 shows 2 added/edited paragraphs and 2 removed paragraphs — usually indicating new litigation disclosed or settled cases removed.

Where does this NSSC 10-K diff come from?

The source filings are NAPCO SECURITY TECHNOLOGIES, INC's official 2022 and 2023 Form 10-K annual reports from SEC EDGAR. 10q10k.net parses each filing, aligns paragraphs by section (Item 1, 1A, 1C, 2, 3, 7, 7A), and highlights every added, removed and edited sentence side-by-side.

What changed in NAPCO SECURITY TECHNOLOGIES, INC's 10-K — 2022 vs 2023

Paragraph-level year-over-year comparison of NAPCO SECURITY TECHNOLOGIES, INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+140 added−142 removedSource: 10-K (2023-09-08) vs 10-K (2022-08-29)

Top changes in NAPCO SECURITY TECHNOLOGIES, INC's 2023 10-K

140 paragraphs added · 142 removed · 103 edited across 8 sections

Item 7. Management's Discussion & Analysis+58 / −63 · 44 edited
Item 1A. Risk Factors+43 / −41 · 25 edited
Item 1. Business+27 / −29 · 26 edited
Item 5. Market for Registrant's Common Equity+4 / −2 · 2 edited
Item 2. Properties+3 / −2 · 2 edited

Item 1. Business

Business — how the company describes what it does

26 edited+1 added−3 removed58 unchanged

2022 filing

2023 filing

Biggest changeVideo surveillance systems typically consist of one or more video cameras, a control panel and a video monitor or PC. More advanced systems can also include a recording device and some type of remote communication device such as an internet connection to a PC or browser-enabled cell phone.

Biggest changeMore advanced systems can also include a recording device and some type of remote communication device such as an internet connection to a PC or browser-enabled cell phone. The system allows the user to monitor various locations at once while recorders save the video images for future use.

Depending on the needs of the school and their budget, we offer (i) Standalone LocDown locks which can be operated by a teacher, (ii) a series of Networx standalone wireless locks which communicate with central controls, or (iii) enterprise-class access control with cellular connectivity, which allows the head of security to lock down all or part of the campus, including dorm rooms, classrooms and administrative offices, from a centralized office.

Depending on the needs of the school and their budget, we offer (i) Standalone LocDown Table of Contents locks which can be operated by a teacher, (ii) a series of Networx standalone wireless locks which communicate with central controls, or (iii) enterprise-class access control with cellular connectivity, which allows the head of security to lock down all or part of the campus, including dorm rooms, classrooms and administrative offices, from a centralized office.

We also engage consultants from time to time. Management considers its relationship with its employees to be very good. Hiring, motivating and retaining talented employees is an ongoing priority to Napco. Maintaining a talented workforce at all levels is critical to our ability to delver high quality products and services to our customers as well as maintain shareholder value.

We also engage consultants from time to time. Management considers its relationship with its employees to be very good. Hiring, motivating and retaining talented employees is an ongoing priority to Napco. Maintaining a talented workforce at all levels is critical to our ability to deliver high quality products and services to our customers as well as maintain shareholder value.

Our Products and Services The Company’s products and services are comprised of the following: ● Alarm Lock standalone and networked digital door locks ● Marks USA standard and custom Locksets, Panic Devices and Door Closers ● NAPCO Gemini intrusion alarm equipment ● NAPCO StarLink and FireLink cellular communication devices and services ● NAPCO iSecure integrated cellular intrusion alarm systems ● Continental Access door controllers and hosted services for access control Table of Contents Door Security Products .

School Security and Public Safety We have developed products to help address security concerns arising from the significant need for increased security in schools and other public spaces. In the U.S., there are over 100,000 K-12 schools, over 5,000 colleges and universities and over 350,000 houses of Table of Contents worship.

We have built a strong competitive position by developing a wide range of software capabilities from embedded micro-coding to enterprise system software, database design, mobile applications development, user portal design, mechanical and electronic mechanisms and telecommunications, featuring our significant radio and cellular communications expertise.

We have built a strong Table of Contents competitive position by developing a wide range of software capabilities from embedded micro-coding to enterprise system software, database design, mobile applications development, user portal design, mechanical and electronic mechanisms and telecommunications, featuring our significant radio and cellular communications expertise.

These devices may control a single door or, in the case of some of the Company’s microprocessor-based door locks, may be networked with the Company’s access control systems and controlled remotely. Intrusion and Fire Alarm Systems . Alarm systems usually consist of various detectors, a control panel, a digital keypad and signaling equipment.

These devices may control a single door or, in the case of some of the Company’s microprocessor-based door locks, may be networked with the Company’s access control systems and controlled remotely. Table of Contents Intrusion and Fire Alarm Systems . Alarm systems usually consist of various detectors, a control panel, a digital keypad and signaling equipment.

In addition, the Company competes on the basis of its expertise, its proven products, its reputation and its ability to provide Table of Contents products to customers on a timely basis. The inability of the Company to compete with respect to any one or more of the aforementioned factors could have an adverse impact on the Company's business.

In addition, the Company competes on the basis of its expertise, its proven products, its reputation and its ability to provide products to customers on a timely basis. The inability of the Company to compete with respect to any one or more of the aforementioned factors could have an adverse impact on the Company's business.

The sales of fire radio products have contributed positively to our gross margin during the fiscal year ended June 30, 2022. We expect that fire radio products will continue to be an increasing portion of the overall mix of our recurring revenue and positively impact our gross margin.

The sales of fire radio products have contributed positively to our gross margin during the fiscal year ended June 30, 2023. We expect that fire radio products will continue to be an increasing portion of the overall mix of our recurring revenue and positively impact our gross margin.

The monthly recurring revenue, which is less susceptable to these fluctuations, allows us to generate a more consistent and predictable stream of income and mitigates the risk of fluctuation in market demand for our equipment products.

The monthly recurring revenue, which is less susceptible to these fluctuations, allows us to generate a more consistent and predictable stream of income and mitigates the risk of fluctuation in market demand for our equipment products.

Marketing The Company's staff of approximately 60 sales and marketing support employees located at the Company's Amityville offices sells and markets our products primarily to independent distributors, wholesalers and dealers of security alarm and security hardware equipment.

Marketing The Company's staff of approximately 59 sales and marketing support employees located at the Company's Amityville offices sells and markets our products primarily to independent distributors, wholesalers and dealers of security alarm and security hardware equipment.

We intend to continue pursuing recurring revenue opportunities by developing new and innovative products and continuing our aggressive sales and marketing efforts. For the fiscal year ended June 30, 2022, our recurring revenue constituted approximately 32% of our total revenue.

We intend to continue pursuing recurring revenue opportunities by developing new and innovative products and continuing our aggressive sales and marketing efforts. For the fiscal year ended June 30, 2023, our recurring revenue constituted approximately 35% of our total revenue.

During the fiscal years ended June 30, 2022, 2021 and 2020, the Company expended approximately $8,024,000, $7,620,000 and $7,257,000, respectively, on research and development activities conducted primarily by its engineering department to develop and improve the products.

During the fiscal years ended June 30, 2023, 2022 and 2021, the Company expended approximately $9,328,000, $8,024,000 and $7,620,000, respectively, on research and development activities conducted primarily by its engineering department to develop and improve the products.

The Company intends to continue to conduct a significant portion of its future research and development activities internally. Our Human Capital Resources As of June 30, 2022, the Company had 1,149 full-time employees. 258 of these were located in the United States (“U.S.”) and 891 were located at our manufacturing facility in the Dominican Republic (“DR”). 42 of our U.S. employees are covered by a collective bargaining agreement.

The Company intends to continue to conduct a significant portion of its future research and development activities internally. Our Human Capital Resources As of June 30, 2023, the Company had 1,150 full-time employees. 257 of these were located in the United States (“U.S.”) and 893 were located at our manufacturing facility in the Dominican Republic (“DR”). 38 of our U.S. employees are covered by a collective bargaining agreement.

These services are provided and invoiced to the Company’s service customers on a month to month basis. Revenues from these services have grown significantly over the past several years, increasing 91% from fiscal 2020 to fiscal 2022.

Our net sales were $143.6 million, $114.0 million and $101.4 million for the fiscal years ended June 30, 2022, 2021 and 2020, respectively. The change in our net sales was driven primarily by increased sales of our recurring services ($12.1 million) and sales of equipment ($17.5 million) as compared to the same period a year ago.

Our net sales were $170.0 million, $143.6 million and $114.0 million for the fiscal years ended June 30, 2023, 2022 and 2021, respectively. The change in our net sales was driven primarily from increased sales of our recurring services ($14.0 million) and sales of equipment ($12.5 million) as compared to the same period a year ago.

When an identification card or other identifying information is entered into the reader, the information is transmitted to the control panel/PC, which then validates the data and determines whether or not to grant access by electronically deactivating the door locking device. An electronic log is kept which records various types of data regarding access activity. Video Surveillance Systems.

Since then, we have continued to introduce additional products generating recurring revenues, primarily in the cellular communication devices such as our StarLink, iBridge, and more recently the iSecure product lines.

Our Growth Drivers Recurring Revenue Business In 2012, we began to generate recurring revenue by developing our cellular radio technology. Since then, we have continued to introduce additional products generating recurring revenues, primarily in the cellular communication devices such as our StarLink, iBridge, and more recently the iSecure product lines.

It also buys and resells various video cameras, PC-based computers and peripheral equipment for video surveillance systems. The Company designs, engineers, manufactures and markets the software and control panels discussed above. It also buys and resells various identification readers, PC-based computers and various peripheral equipment for access control systems.

The Company designs, engineers, manufactures and markets the software and control panels discussed above. It also buys and resells various identification readers, PC-based computers and various peripheral equipment for access control systems. Peripheral Equipment The Company also markets peripheral equipment manufactured by other companies. Revenues from peripheral equipment have not been significant.

The increases in net income during this period were due primarily to the recovery from the COVID-19 impact described above, as well as by the growth of our cellular products and the associated recurring service revenues which generated a gross margin of 87% in fiscal 2022.

The increases in net income during this period were due primarily to the growth of our cellular products and the associated recurring service revenues which generated a gross margin of 89% in fiscal 2023.

These Table of Contents sales representatives, together with the Company's technical personnel, provide training and other services to wholesalers and distributors so that they can better service the needs of their customers. In addition to direct sales efforts, the Company advertises in technical trade publications and participates in trade shows in major United States cities.

These sales representatives, together with the Company's technical personnel, provide training and other services to wholesalers and distributors so that they can better service the needs of their customers.

The Company’s long-term goal is to have recurring revenues from these services represent at least 50% of total revenue. Table of Contents Access Control Systems . Access control systems consist of one or more of the following: various types of identification readers (e.g. card readers, hand scanners), a control panel, a PC-based computer and electronically activated door-locking devices.

Access control systems consist of one or more of the following: various types of identification readers (e.g. card readers, hand scanners), a control panel, a PC-based computer and electronically activated door-locking devices.

The system allows the user to monitor various locations at once while recorders save the video images for future use. Remote communication devices can allow the user to view and control the system from a remote location. The Company designs, engineers, and markets the software and control panels discussed above.

Remote communication devices can allow the user to view and control the system from a remote location. The Company designs, engineers, and markets the software and control panels discussed above. It also buys and resells various video cameras, PC-based computers and peripheral equipment for video surveillance systems.

In addition, fiscal 2022 net sales increased due, in part, to an increase in sales of the Company’s 4G and 5G cellular radio products as the major cellular providers sunset their 3G networks. Our net income was $19.6 million, $15.4 million and $7.8 million for the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

The increase in equipment sales was due primarily to the increased demand for the Company’s door-locking products. Our net income was $27.1 million, $19.6 million and $15.4 million for the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

These revenues, which currently have a gross margin of approximately 87% for the fiscal year ended June 30, 2022, represent approximately 32% of our total revenue for the fiscal year ended of June 30, 2022.

These revenues, which currently have a gross margin of approximately 89% for the fiscal year ended June 30, 2023, represent approximately 35% of our total revenue for the fiscal year ended of June 30, 2023. The Company’s long-term goal is to have recurring revenues from these services represent at least 50% of total revenue. Access Control Systems .

Seasonality The Company's fiscal year begins on July 1 and ends on June 30.

In addition to direct sales efforts, the Company advertises in technical trade publications and participates in trade shows in major United States cities. Table of Contents Seasonality The Company's fiscal year begins on July 1 and ends on June 30.

Removed

While recurring service revenues have continued to increase during the COVID-19 pandemic, equipment sales for fiscal 2020 were negatively impacted by the economic slowdown associated with this pandemic.

Added

An electronic log is kept which records various types of data regarding access activity. Table of Contents Video Surveillance Systems. Video surveillance systems typically consist of one or more video cameras, a control panel and a video monitor or PC.

Removed

The increase in equipment sales was due primarily to the recovery from the economic effects of the COVID-19 pandemic and the elimination of most of the closures mandated by federal, state and local governments during the early and peak stages of the pandemic. As these closures abated and economic conditions improved, our equipment sales increased.

Removed

Peripheral Equipment The Company also markets peripheral equipment manufactured by other companies. Revenues from peripheral equipment have not been significant. Our Growth Drivers Recurring Revenue Business In 2012, we began to generate recurring revenue by developing our cellular radio technology.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

25 edited+18 added−16 removed82 unchanged

2022 filing

2023 filing

Biggest changeA material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Table of Contents With the oversight of our audit committee, we are working to remedy the ineffectiveness of our internal control over financial reporting and disclosure controls and procedures, but there can be no assurance as to when the remediation plan will be fully developed and implemented.

Biggest changeWith the oversight of our audit committee, we are working to remedy the ineffectiveness of our internal control over financial reporting and disclosure controls and procedures, but there can be no assurance as to when the remediation plan will be fully developed and implemented.

As we are Table of Contents increasingly dependent on recurring revenue products as a driver for growth, our failure to execute our strategy for this business line will materially adversely affect our financial conditions and prospects. We may not be able to sustain and continue the growth of school security products.

As we are increasingly dependent on recurring revenue products as a driver for growth, our failure to execute our strategy for this business line will materially adversely affect our financial conditions and prospects. Table of Contents We may not be able to sustain and continue the growth of school security products.

We have historically invested approximately 6% to 8% of annual revenues on R&D to mitigate this risk. However, many of our competitors have dedicated more resources and capabilities to R&D, including committing more engineers and capital expenditures, to develop and design new product that may enter the markets sooner or with more penetration.

We have historically invested approximately 5% to 8% of annual revenues on R&D to mitigate this risk. However, many of our competitors have dedicated more resources and capabilities to R&D, including committing more engineers and capital expenditures, to develop and design new product that may enter the markets sooner or with more penetration.

If any one of these risks materializes, our business, financial condition, cash flows or results of operations could be materially and adversely affected. We rely on the effort and service of Richard L. Soloway (age 76), our founder, Chief Executive Officer and major stockholder. The success of the Company is largely dependent on the effort and service of Richard L.

If any one of these risks materializes, our business, financial condition, cash flows or results of operations could be materially and adversely affected. We rely on the effort and service of Richard L. Soloway (age 77), our founder, Chief Executive Officer and major stockholder. The success of the Company is largely dependent on the effort and service of Richard L.

In the fourth fiscal quarter of 2021, the Company received $3.9 in loan proceeds (the “PPP Loan”) pursuant to the Paycheck Protection Program (the "PPP") created the CARES Act During the first fiscal quarter of 2021, the PPP Loans were forgiven, in their entirety, in accordance with guidelines set forth in the PPP.

In the fourth fiscal quarter of 2021, the Company received $3.9 in loan proceeds (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) created the by the CARES Act During the first fiscal quarter of 2021, the PPP Loans were forgiven, in their entirety, in accordance with guidelines set forth in the PPP.

If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline. Mr.

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

Soloway, members of management and certain directors own a significant portion of our outstanding voting stock and exert significant influence over our business and affairs. Richard L. Soloway, our Chief Executive Officer, members of management and our board of directors (“Board”) beneficially own approximately 21% of our common stock.

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

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

While the economic recovery from this pandemic has resulted in increased demand for our products beginning in fiscal 2021, re-institution of a prolonged stay-at-home order, or any other continued decrease in economic activity as a result of COVID-19 pandemic, could have a negative adverse impact on our customers and their financial condition, which could Table of Contents impact their ability to meet their financial obligations and could result in elevated levels of delinquencies and bad debt losses.

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

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

As of June 30, 2022, the Company identified two material weaknesses in internal control. One material weakness in internal control related to ineffective information technology general controls (ITGCs) in the area of user access and lack of effective program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes.

One material weakness in internal controls related to ineffective information technology general controls (ITGCs) in the area of user access and lack of effective program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes.

We believe that these control deficiencies were a result of: IT Control processes lacking sufficient documentation and risk-assessment procedures to assess changes in the IT environment and program change management of personnel that could impact internal controls over financial reporting.

Failure to remediate any material weakness in our internal control over financial reporting, or to maintain other effective control systems required of public companies, could also restrict our future access to the capital markets. In May 2022, we identified material weakness in our internal control over financial reporting relating to the manner in which we calculated our inventory obsolescence reserve.

In addition, there is an increased risk during these periods that an increased percentage of independent distributors, dealers and installers of security equipment will file for bankruptcy protection, which may harm our reputation, revenue, profitability and results of operations. Table of Contents The markets we serve are highly competitive and we may be unable to compete effectively.

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

If we are unable to cost-effectively maintain and increase awareness of our brand, our business, financial condition, cash flows and results of operations could be harmed. Table of Contents Our financial results could be materially adversely affected as a result of offering extended payment terms to customers or if we are not able to collect our accounts receivables on a timely basis from major customers.

During fiscal 2021 and 2022, the impact of the COVID-19 pandemic on the Company’s operations lessened. However, the future impact of the ongoing COVID-19 pandemic remains uncertain and subject to change.

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

These risks could cause actual results to differ materially from historical results and from any results predicted by any forward-looking statements related to conditions or events that may occur in the future. Table of Contents Our business operation and financial performance may again be adversely affected by the COVID-19 pandemic and related events.

ITEM 1A: RISK FACTORS The risks described below are among those that could materially and adversely affect the Company’s business, financial condition or results of operations. These risks could cause actual results to differ materially from historical results and from any results predicted by any forward-looking statements related to conditions or events that may occur in the future.

This control deficiency was a result of a lack of effective review and reconciliation controls over the forecasted sales and usage data. The material weakness did not result in a material misstatement to the financial statements. There were no changes to the previously released financial results.

This control deficiency was a result of a lack of effective review and reconciliation controls over the forecasted sales and usage data.

We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of COVID-19 pandemic in areas where we operate. We manufacture substantially all of hardware products in our factory in Dominican Republic, which are then shipped to us in the United States for further distribution.

We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of COVID-19 pandemic in areas where we operate. Beginning in fiscal 2021, the impact of the COVID-19 pandemic on the Company’s operations lessened.

Failure to remediate any material weakness in our internal control over financial reporting, or to maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.Risks Related to Ownership of Our Common Stock If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

Risks Related to Ownership of Our Common Stock If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

Based on these material weaknesses, the Company’s management concluded that at June 30, 2022 the Company’s internal controls over financial reporting were not effective.

Until the Company’s remediation plan is fully implemented and effective, the Company will continue to devote time, attention and financial resources to these efforts. Based on these material weaknesses, the Company’s management has concluded that at June 30, 2023 the Company’s internal controls over financial reporting were not effective.

We have identified material weaknesses in our system of internal controls and are in the process of remediation. If not remediated, these material weaknesses could result in material misstatements in our financial statements. We may be unable to develop, implement and maintain appropriate controls in future periods.

Furthermore, the implementation of those measures may result in an ongoing increase in administrative expenses which may adversely affect the Company’s profitability. Table of Contents We have identified material weaknesses in our system of internal controls and are in the process of remediation. If not remediated, these material weaknesses could result in material misstatements in our financial statements.

Our efforts in developing our brand may be hindered by the marketing efforts of our competitors and our reliance on our third parties to promote our brand. If we are unable to Table of Contents cost-effectively maintain and increase awareness of our brand, our business, financial condition, cash flows and results of operations could be harmed.

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

If it is subsequently determined that the PPP Loans must be repaid, such repayment could adversely impact our financial results for the period in which such repayment occurs. Table of Contents We are obligated to develop and maintain a system of effective internal controls over financial reporting.

If it is subsequently determined that the PPP Loans must be repaid, such repayment could adversely impact our financial results for the period in which such repayment occurs. The Company faces risks related to the restatement of its previously issued condensed financial statements with respect to the first three quarters of fiscal year ended June 30, 2023 (the “Affected Periods”).

Removed

ITEM 1A: RISK FACTORS The risks described below are among those that could materially and adversely affect the Company’s business, financial condition or results of operations.

Added

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

Removed

We are subject to risks related to the global pandemic associated with the COVID-19 disease, which has spread globally to the U.S. and other countries where we have operations, including the Dominican Republic. Numerous federal and state governmental jurisdictions have imposed “stay-at-home” orders, quarantines, travel bans and similar governmental orders and restrictions to control the spread of COVID-19.

Added

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

Removed

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

Added

As a result, we have become subject to a number of additional risks and uncertainties, which may affect investor confidence in the accuracy of our financial disclosures, including the following: • We will face litigation under the federal and state securities laws and other claims arising from the restatement.

Removed

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

Added

One such case has already been filed and we will likely face additional complaints. See Note 15-Subsequent Events.

Removed

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

Added

The cost of defending against those claims, the adequacy of our directors’ and officers’ liability insurance and the ultimate outcome of any such litigation cannot be predicted at this time • The processes undertaken to effect the restatement may not be adequate to identify and correct all errors in our historical financial statements, and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement. • The restatement has demonstrated an additional material weakness in our internal controls over financial reporting.

Removed

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

Added

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

Removed

If economic conditions in the U.S. decline due to the pandemic it may reduce revenues associated with our intangible assets, including assets acquired in our prior acquisitions, and result in a reduction of future expected cash flows. Such a reduction could result in significant impairment charges to adjust the carrying value of the intangible assets.

Added

Furthermore, the implementation of those measures may result in an ongoing increase in administrative expenses which may adversely affect the Company’s profitability. The markets we serve are highly competitive and we may be unable to compete effectively.

Removed

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

Added

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

Removed

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

Added

Removed

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

Added

One such case has already been filed and we will likely face additional complaints. See Note 15-Subsequent Events.

Removed

While we have established certain procedures and control over our financial reporting processes, we cannot assure you that these efforts will prevent restatements of our financial statements in the future. Our independent registered public accounting firm is also required, pursuant to Section 404 of the Sarbanes-Oxley Act, to report on the effectiveness of our internal control over financial reporting.

Added

Removed

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

Added

Removed

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

Added

We may be unable to develop, implement and maintain appropriate controls in future periods. As of June 30, 2023, the Company identified three material weaknesses in internal control.

Removed

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

Added

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

Removed

We revised the methodology which resulted in the restatement of previously audited financial statements for the years ended June 30, 2021, June 30, 2020, and June 30, 2019. The effect of such restatement is described on a Form 8-k that we filed with the SEC on May 17, 2022.

Added

The COGS figures reflected in the Company’s original Form 10-Qs were based on inventory costing as of June 30, 2022. However, in the period following June 30, 2022, substantial fluctuations occurred in certain material costs.

Removed

The material weakness did not result in any identified misstatements to the financial statements and there were no changes to the previously released financial results. The second material weakness in internal controls related to the reserve for excess and slow-moving inventory.

Added

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

Added

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

Added

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe Company's foreign subsidiary located in the Dominican Republic, Napco DR, S.A., owns a building of approximately 180,000 square feet of production and warehousing space in the Dominican Republic. That subsidiary also leases the land associated with this building under a 99-year lease expiring in the year 2092 at an annual cost of approximately $288,000.

Biggest changeThe Company’s foreign subsidiary located in the Dominican Republic, Napco DR, S.A., owns a building of approximately 180,000 square feet of production and warehousing space in the Dominican Republic.

As of June 30, 2022, a majority of the Company's products were manufactured at this facility, utilizing U.S. quality control standards. Management believes that these facilities are more than adequate to meet the needs of the Company in the foreseeable future.

As of June 30, 2023, a majority of the Company’s products were manufactured at this facility, utilizing U.S. quality control standards. Management believes that these facilities are more than adequate to meet the needs of the Company in the foreseeable future.

Added

That subsidiary also leases the land associated with this building under a 99-year lease expiring in the year 2092 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. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeManagement believes that the settlement of such claims and/or litigation, considered in the aggregate, will not have a material adverse effect on the Company's financial position and results of operations.

Biggest changeManagement believes that the settlement of such claims and/or litigation, considered in the aggregate, will not have a material adverse effect on the Company’s financial position and results of operations. ITEM 4: MINE SAFETY DISCLOSURE. Not Applicable. Table of Contents PART II

ITEM 3: LEGAL PROCEEDINGS. There are no pending or threatened material legal proceedings to which NAPCO or its subsidiaries or any of their property is subject. Table of Contents In the normal course of business, the Company is a party to claims and/or litigation.

ITEM 3: LEGAL PROCEEDINGS. There are no pending or threatened material legal proceedings to which NAPCO or its subsidiaries or any of their property is subject. In the normal course of business, the Company is a party to claims and/or litigation.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changePrincipal Market NAPCO's Common Stock is traded on the NASDAQ Stock Market, Global Market System, under the symbol NSSC. Approximate Number of Security Holders The number of holders of record of NAPCO's Common Stock as of August 26, 2022 was 63 (such number does not include beneficial owners of stock held in nominee name). Dividend Information NAPCO has never declared or paid a cash dividend with respect to its Common Stock.

Biggest changePrincipal Market NAPCO’s Common Stock is traded on the NASDAQ Stock Market, Global Market System, under the symbol NSSC. Approximate Number of Security Holders The number of holders of record of NAPCO’s Common Stock as of September 7, 2023 was 59 (such number does not include beneficial owners of stock held in nominee name). Dividend Information On May 5, 2023, the Company’s Board of Directors declared a cash dividend of $.0625 per share payable on June 12, 2023 to stockholders of record on May 22, 2023.

Equity Compensation Plan Information as of June 30, 2022 NUMBER OF SECURITIES NUMBER OF SECURITIES WEIGHTED AVERAGE REMAINING AVAILABLE FOR TO BE ISSUED UPON EXERCISE PRICE OF FUTURE ISSUANCE (EXCLUDING EXERCISE OF OUTSTANDING SECURITIES REFLECTED IN OUTSTANDING OPTIONS OPTIONS COLUMN (a) PLAN CATEGORY (a) (b) (c) Equity compensation plans approved by security holders (1): 659,380 $ 17.97 1,212,020 Equity compensation plans not approved by security holders: — — — Total 659,380 $ 17.97 1,212,020 (1) In May 2020, the stockholders approved the 2020 Non-Employee Stock Option Plan which 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.

Equity Compensation Plan Information as of June 30, 2023 NUMBER OF SECURITIES NUMBER OF SECURITIES WEIGHTED AVERAGE REMAINING AVAILABLE FOR TO BE ISSUED UPON EXERCISE PRICE OF FUTURE ISSUANCE (EXCLUDING EXERCISE OF OUTSTANDING SECURITIES REFLECTED IN OUTSTANDING OPTIONS OPTIONS COLUMN (a) PLAN CATEGORY (a) (b) Equity compensation plans approved by security holders (1): 678,880 $ 19.21 988,100 Equity compensation plans not approved by security holders: — — — Total 678,880 $ 19.21 988,100 (1) In August 2022, the stockholders approved the 2022 Employee Stock Option Plan which 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.

Added

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

Added

In May 2020, the stockholders approved the 2020 Non-Employee Stock Option Plan which 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.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeFor further information, refer to the audited consolidated financial statements and the notes thereto beginning on page FS-1 of this report. Fiscal Year Ended and at June 30, (In thousands, except share and per share data) 2022 2021 2020 Statement of earnings data: Net Sales $ 143,593 $ 114,035 $ 101,359 Gross Profit 59,156 50,748 42,844 Operating Income 18,225 17,932 10,065 Net Income 19,599 15,413 7,795 Cash Flow Data: Net cash flows provided by operating activities 8,332 22,987 10,305 Net cash flows used in investing activities (1,563) (6,429) (1,615) Net cash flows provided by (used in) financing activities 155 — 1,530 Per Share Data: Net earnings per common share: Basic $ 0.53 $ 0.42 $ 0.21 Diluted $ 0.53 $ 0.42 $ 0.21 Weighted average common shares outstanding: Basic 36,725,000 36,696,000 36,888,000 Diluted 36,867,000 36,808,000 36,986,000 Cash Dividends declared per common share (1) $ — $ — $ — Balance sheet data: Working capital (2) $ 93,142 $ 75,391 $ 60,452 Total assets 148,576 122,551 104,498 Long-term debt — 1,518 2,110 Stockholders' equity 113,791 92,388 76,540 (1) The Company has never paid a cash dividend on its common stock.

Biggest changeFor further information, refer to the audited consolidated financial statements and the notes thereto beginning on page FS-1 of this report. Fiscal Year Ended and at June 30, (In thousands, except share and per share data) 2023 2022 2021 Statement of earnings data: Net Sales $ 169,997 $ 143,593 $ 114,035 Gross Profit 73,233 59,156 50,748 Operating Income 30,325 18,225 17,932 Net Income 27,127 19,599 15,413 Cash Flow Data: Net cash flows provided by operating activities 24,700 8,332 22,987 Net cash flows used in investing activities (28,262) (1,563) (6,429) Net cash flows (used in) provided by financing activities (2,213) 155 — Per Share Data: Net earnings per common share: Basic $ 0.74 $ 0.53 $ 0.42 Diluted $ 0.73 $ 0.53 $ 0.42 Weighted average common shares outstanding: Basic 36,741,000 36,725,000 36,696,000 Diluted 37,005,000 36,867,000 36,808,000 Cash Dividends declared per common share (2) $ 0.0625 $ — $ — Balance sheet data: Working capital (1) $ 111,673 $ 93,142 $ 75,391 Total assets 166,654 148,576 122,551 Long-term debt — — 1,518 Stockholders' equity 140,169 113,791 92,388 (1) Working capital is calculated by deducting Current Liabilities from Current Assets.

Removed

(2) Working capital is calculated by deducting Current Liabilities from Current Assets.

Added

(2) The Company announced the initiation of a quarterly dividend program with the first dividend of $.0625 per share to be paid on June 12, 2023, to shareholders of Record on May 22, 2023.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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2023 filing

Biggest changeResults of Operations Fiscal 2021 Compared to Fiscal 2020 Fiscal year ended June 30, (dollars in thousands) % Increase/ 2021 2020 (decrease) Net sales: equipment revenues $ 80,131 77,314 3.6 % service revenues 33,904 24,045 41.0 % 114,035 $ 101,359 12.5 % Gross Profit: equipment 21,730 23,132 (6.1) % services 29,018 19,712 47.2 % 50,748 42,844 18.4 % Gross profit as a % of net sales 44.5 % 42.3 % 5.2 % equipment 27.1 % 29.9 % (9.4) % services 85.6 % 82.0 % 4.4 % Research and development 7,620 7,257 5.0 % Selling, general and administrative 25,196 23,670 6.4 % Selling, general and administrative as a % of net sales 22.1 % 23.4 % (5.6) % Impairment of intangible asset — 1,852 (100.0) % Operating Income 17,932 10,065 78.2 % Interest expense, net 5 9 (44.4) % Gain on extinguishment of debt — — — % Provision for income taxes 2,514 2,261 11.2 % Net income 15,413 7,795 97.7 % Net sales in fiscal 2021 increased by $12,676,000 to $114,035,000 as compared to $101,359,000 in fiscal 2020.

Biggest changeOff-Balance Sheet Arrangements The Company does not maintain any off-balance sheet arrangements. Table of Contents Results of Operations Fiscal 2023 Compared to Fiscal 2022 Fiscal year ended June 30, (dollars in thousands) % Increase/ 2023 2022 (decrease) Net sales: equipment revenues $ 110,062 $ 97,612 12.8 % service revenues 59,935 45,981 30.3 % 169,997 143,593 18.4 % Gross Profit: equipment 19,865 19,141 3.8 % services 53,368 40,015 33.4 % 73,233 59,156 23.8 % Gross profit as a % of net sales 43.1 % 41.2 % 4.6 % equipment 18.0 % 19.6 % (8.2) % services 89.0 % 87.0 % 2.3 % Research and development 9,328 8,024 16.3 % Selling, general and administrative 33,580 32,907 2.0 % Selling, general and administrative as a % of net sales 19.8 % 22.9 % (13.5) % Operating Income 30,325 18,225 66.4 % Interest Income (expense), net 822 (16) (5,237.5) % Other Income (expense), net 81 (266) (130.8) % Gain on extinguishment of debt — 3,904 100.0 % Provision for income taxes 4,101 2,247 82.5 % Net income 27,127 19,599 38.4 % Net sales in fiscal 2023 increased by $26,404,000 to $169,997,000 as compared to $143,593,000 in fiscal 2022.

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

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

These proportions, the method of their application, and the resulting overhead included in ending inventory, are based in part on subjective estimates and actual results could differ from those estimates. In addition, the Company records an inventory obsolescence reserve, which represents the difference between the cost of the inventory and its estimated realizable value.

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

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

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

For product sales, the Company typically transfers control at a point in time upon shipment or delivery of the product. For monthly communication services, the Company satisfies its performance obligation as the services are rendered overt the course of the month and therefore recognizes revenue over the monthly period.

For product sales, the Company typically transfers control at a point in time upon shipment or delivery of the product. For monthly communication services, the Company satisfies its performance obligation as the services are rendered over the course of the month and therefore recognizes revenue over the monthly period.

In addition, demand for all of our products may be affected by the housing and construction markets. Deterioration of the current economic conditions may also affect this trend. 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 2022 Annual Report on Form 10-K.

The Table of Contents decrease in the Company’s fiscal 2022 effective tax rate is primarily due to the $3,904,000 in non-taxable income from extinguishment of debt. Net income for fiscal 2022 increased by $4,186,000 to $19,599,000 as compared to $15,413,000 in fiscal 2021. This resulted primarily from the items discussed above.

The decrease in the Company’s fiscal 2022 effective tax rate is primarily due to the $3,904,000 in non-taxable income from extinguishment of debt. Net income for fiscal 2022 increased by $4,186,000 to $19,599,000 as compared to $15,413,000 in fiscal 2021. This resulted primarily from the items discussed above.

This increase was due primarily to salary increases and additional staff. Selling, general and administrative expenses for fiscal 2022 increased by $7,711,000 to $32,907,000 as compared to $25,196,000 in fiscal 2021. Selling, general and administrative expenses as a percentage of net sales increased to 22.9% in fiscal 2022 from 22.1% in fiscal 2021.

This increase was due primarily to salary increases and additional staff. Table of Contents Selling, general and administrative expenses for fiscal 2022 increased by $7,711,000 to $32,907,000 as compared to $25,196,000 in fiscal 2021. Selling, general and administrative expenses as a percentage of net sales increased to 22.9% in fiscal 2022 from 22.1% in fiscal 2021.

The Company establishes reserves for the estimated returns, rebates and credits and measures such variable consideration based on the expected Table of Contents value method using an analysis of historical data. Changes to the estimated variable consideration in subsequent periods are not material.

The Company establishes reserves for the estimated returns, rebates and credits and measures such variable consideration based on the expected value method using an analysis of historical data. Changes to the estimated variable consideration in subsequent periods are not material.

Our reserve for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the evaluation of accounts receivable agings, specific exposures and historical or anticipated events. Inventories Inventories are valued at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (FIFO) method.

Our reserve for credit losses is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the evaluation of accounts receivable agings, specific exposures and historical or anticipated events. Inventories 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 Company had one customer with an accounts receivable balance that comprised 22%, 19% and 24% of the Company’s accounts receivable at June 30, 2022, 2021 and 2020, respectively. Sales to this customer did not exceed 10% of net sales during fiscal years ended June 30, 2022, 2021 and 2020.

The Company had one customer with an accounts receivable balance that comprised 19%, 22% and 19% of the Company’s accounts receivable at June 30, 2023, 2022 and 2021, respectively. Sales to this customer did not exceed 10% of net sales during fiscal years ended June 30, 2023, 2022 and 2021.

The Company believes its current working capital, cash flows from operations and its revolving credit agreement will be sufficient to fund the Company’s operations through the next twelve months. As of June 30, 2022 and 2021, long-term debt consisted of a revolving line of credit of $11,000,000 (“Revolver Agreement”), with no amounts outstanding, which expires in June 2024.

The Company believes its current working capital, cash flows from operations and its revolving credit agreement will be sufficient to fund the Company’s operations through the next twelve months. As of June 30, 2023 and 2022, debt consisted of a revolving line of credit of $11,000,000 (“Revolver Agreement”), with no amounts outstanding, which expires in June 2024.

The Company analyzes product sales returns and is able to make reasonable and reliable estimates of product returns based on the Company’s past history. Estimates for sales returns are based on several factors including actual returns and based on expected return data communicated to it by its customers.

The Company analyzes equipment sales returns and is able to make reasonable and reliable estimates of product returns based on the Company’s past history. Estimates for sales returns are based on several factors including actual returns and based on Table of Contents expected return data communicated to it by its customers.

Accordingly, the Company believes that its historical returns analysis is an accurate basis for its allowance for sales returns. Actual results could differ from those estimates. As a percentage of gross sales, sales returns, rebates and allowances were 10%, 10% and 9% for the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

Accordingly, the Company believes that its historical returns analysis is an accurate basis for its allowance for sales returns. Actual results could differ from those estimates. As a percentage of gross sales, sales returns, rebates and allowances were 7%, 10% and 10% for the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

Reserve for Doubtful Accounts 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.

Reserve for Credit Losses An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers.

Today, millions of businesses, institutions, homes, and people around the globe are protected by products from the NAPCO Group of Companies. Table of Contents Our net sales were $143.6 million, $114.0 million and $101.4 million for the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

Today, millions of businesses, institutions, homes, and people around the globe are protected by products from the NAPCO Group of Companies. Table of Contents Our net sales were $170.0 million, $143.6 million and $114.0 million for the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

During the year ending June 30, 2022, the Company increased its reserve for uncertain income tax positions by $25,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes.

During the year ending June 30, 2023, the Company increased its reserve for uncertain income tax positions by $22,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes.

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

As of June 30, 2022, the Company had accrued interest totaling $88,000 and $678,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company claims research and development (“R&D”) tax credits on eligible research and development expenditures.

As of June 30, 2023, the Company had accrued interest totaling $139,000 and $700,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company claims research and development (“R&D”) tax credits on eligible research and development expenditures.

Off-Balance Sheet Arrangements The Company does not maintain any off-balance sheet arrangements. Table of Contents Results of Operations Fiscal 2022 Compared to Fiscal 2021 Fiscal year ended June 30, (dollars in thousands) % Increase/ 2022 2021 (decrease) Net sales: equipment revenues $ 97,612 $ 80,131 21.8 % service revenues 45,981 33,904 35.6 % 143,593 114,035 25.9 % Gross Profit: equipment 19,141 21,730 (11.9) % services 40,015 29,018 37.9 % 59,156 50,748 16.6 % Gross profit as a % of net sales 41.2 % 44.5 % (7.4) % equipment 19.6 % 27.1 % (27.7) % services 87.0 % 85.6 % 1.7 % Research and development 8,024 7,620 5.3 % Selling, general and administrative 32,907 25,196 30.6 % Selling, general and administrative as a % of net sales 22.9 % 22.1 % 3.7 % Operating Income 18,225 17,932 1.6 % Interest expense, net 16 5 220.0 % Gain on extinguishment of debt 3,904 — 100.0 % Provision for income taxes 2,247 2,514 (10.6) % Net income 19,599 15,413 27.2 % Net sales in fiscal 2022 increased by $29,558,000 to $143,593,000 as compared to $114,035,000 in fiscal 2021.

Results of Operations Fiscal 2022 Compared to Fiscal 2021 Fiscal year ended June 30, (dollars in thousands) % Increase/ 2022 2021 (decrease) Net sales: equipment revenues $ 97,612 80,131 21.8 % service revenues 45,981 33,904 35.6 % 143,593 $ 114,035 25.9 % Gross Profit: equipment 19,141 21,730 (11.9) % services 40,015 29,018 37.9 % 59,156 50,748 16.6 % Gross profit as a % of net sales 41.2 % 44.5 % (7.4) % equipment 19.6 % 27.1 % (27.7) % services 87.0 % 85.6 % 1.7 % Research and development 8,024 7,620 5.3 % Selling, general and administrative 32,907 25,196 30.6 % Selling, general and administrative as a % of net sales 22.9 % 22.1 % 3.7 % Operating Income 18,225 17,932 1.6 % Interest expense, net (16) (18) (11.1) % Other Income (expense), net (266) 13 (2,146.2) % Gain on extinguishment of debt 3,904 — — % Provision for income taxes 2,247 2,514 (10.6) % Net income 19,599 15,413 27.2 % Net sales in fiscal 2022 increased by $29,558,000 to $143,593,000 as compared to $114,035,000 in fiscal 2021.

The Company had another customer with an accounts receivable balance that comprised 10% of the Company’s accounts receivable at June 30, 2020. Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2023, 2022 and 2021, respectively. The Company had a third customer with an accounts receivable balance that comprised 16% and 12% of the Company’s accounts receivable at June 30, 2022 and 2021.

Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2022, 2021 and 2020. In the ordinary course of business, we have established a reserve for doubtful accounts and customer deductions in the amount of $243,000 and $226,000 as of June 30, 2022 and 2021, respectively.

Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2023, 2022 and 2021. In the ordinary course of business, we have established a reserve for credit losses and customer deductions in the amount of $131,000 and $243,000 as of June 30, 2023 and 2022, respectively.

The Company’s long-term debt is described more fully in Note 8 to the condensed consolidated financial statements. Table of Contents The Company believes its current working capital, anticipated cash flows from operations and its Revolving Credit Agreement will be sufficient to fund the Company’s operations through at least the next twelve months. The Company takes into consideration several factors in measuring its liquidity, including the ratios set forth below: As of June 30, 2022 2021 2020 Current Ratio 4.5 to 1 4.7 to 1 4.5 to 1 Sales to Receivables 4.9 to 1 4.1 to 1 4.4 to 1 Total debt to equity 0.0 to 1 0.0 to 1 0.1 to 1 As of June 30, 2022, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

The Company believes its current working capital, anticipated cash flows from operations and its Revolving Credit Agreement will be sufficient to fund the Company’s operations through at least the next twelve months. The Company takes into consideration several factors in measuring its liquidity, including the ratios set forth below: As of June 30, 2023 2022 2021 Current Ratio 6.7 to 1 4.5 to 1 4.7 to 1 Sales to Receivables 6.5 to 1 4.9 to 1 4.1 to 1 Total debt to equity 0.0 to 1 0.0 to 1 0.0 to 1 As of June 30, 2022, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

The increase in Accounts Receivable was due primarily to an increase in net sales for the quarter ended June 30, 2022 as compared to the same quarter a year ago. Accounts Receivable increased by $5,149,000 to $28,081,000 at June 30, 2021 as compared to $22,932,000 at June 30, 2020.

Accounts Receivable increased by $1,137,000 to $29,218,000 at June 30, 2022 as compared to $28,081,000 at June 30, 2021. The increase in Accounts Receivable was due primarily to an increase in net sales for the quarter ended June 30, 2022 as compared to the same period a year ago. Inventories.

Fiscal year 2018 and forward years are still open for examination. In addition, the Company has a wholly-owned subsidiary which operates in a Free Zone in the Dominican Republic (“DR”) and is exempt from DR income tax. For the year ended June 30, 2022, the Company recognized a net income tax expense of $2,247,000.

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. For the year ended June 30, 2023, the Company recognized a net income tax expense of $4,101,000.

The change in our net sales was driven primarily by increased sales of our recurring services ($12.1 million) and sales of equipment ($17.5 million) as compared to the same period a year ago.

The change in our net sales was driven primarily by increased sales of our recurring services ($14.0 million) and sales of equipment ($12.5 million) as compared to the same period a year ago. The increase in equipment sales was due primarily to the increased demand for the Company’s door-locking products.

Additionally, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to us. If such events do occur, they may result in our fixed and semi-variable expenses becoming too high in relation to our revenues and cash flows. Seasonality The Company's fiscal year begins on July 1 and ends on June 30.

If such events do occur, they may result in our fixed and semi-variable expenses becoming too high in relation to our revenues and cash flows. Seasonality The Company's fiscal year begins on July 1 and ends on June 30.

The Company had another customer with an accounts receivable balance that comprised 11% of the Company’s accounts receivable at June 30, 2021. Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

The Company had another customer with an accounts receivable balance that comprised 14% and 11% of the Company’s accounts receivable at June 30, 2023 and 2021, respectively. The customer accounts receivable balance did not exceed 10% at June 30, 2022.

The revolving credit facility contains various restrictions and covenants including, among others, restrictions on borrowings and compliance with certain financial ratios, as defined in the agreement. The Company’s debt is described more fully in Note 8 to the condensed consolidated financial statements.

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

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

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.

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

On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, on which the Company’s principle manufacturing facility is located, at an annual rent of approximately $288,000. Working Capital. Working capital increased by $17,751,000 to $93,142,000 at June 30, 2022 from $75,391,000 at June 30, 2021.

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

If the U.S. or international economic conditions deteriorate, our revenue, profit and cash-flow levels could be materially adversely affected in future periods. In the event of such deterioration, many of our current or potential future customers may experience serious cash flow problems and as a result may, modify, delay or cancel purchases of our products.

In the event of such deterioration, many of our current or potential future customers may experience serious cash flow problems and as a result may modify, delay or cancel purchases of our products. Additionally, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to us.

Interest and other expense, net for fiscal 2021 remained relatively constant at $5,000 as compared to $9,000 for the same period a year ago. The Company’s provision for income taxes for fiscal 2021 increased by $253,000 to $2,514,000 as compared to $2,261,000 for the same period a year ago.

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

In addition, fiscal 2022 net sales increased due, in part, to an increase in sales of the Company’s cellular radio products as the major cellular providers sunset their 3G networks. Our net income was $19.6 million, $15.4 million and $7.8 million for the fiscal years ended June 30, 2022, 2021 and 2020, respectively.

Our net income was $27.1 million, $19.6 million and $15.4 million for the fiscal years ended June 30, 2022, 2021 and 2020, respectively. The increases in net income during this period were due primarily to the growth of our cellular products and the associated recurring revenue business.

The increase in Accounts Receivable was due primarily to an increase in net sales for the quarter ended June 30, 2022 as compared to the same quarter a year ago. Inventories. Inventories, which include both current and non-current portions, increased by $18,086,000 to $49,786,000 at June 30, 2022 as compared to $31,700,000 at June 30, 2021.

Accounts Receivable. Accounts Receivable decreased by $3,149,000 to $26,069,000 at June 30, 2023 as compared to $29,218,000 at June 30, 2022. The decrease in Accounts Receivable was due primarily to a decrease in net sales of hardware for the quarter ended June 30, 2023 as compared to the same period a year ago.

Gross profit on service revenues was $29,018,000 or 85.6% of net service revenues in fiscal 2021 and $19,712,000 or 82.0% of net service revenues, in fiscal 2020.

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

This increase was due primarily to salary increases and additional staff. Selling, general and administrative expenses for fiscal 2021 increased by $1,526,000 to $25,196,000 as compared to $23,670,000 in fiscal 2020. Selling, general and administrative expenses as a percentage of net sales decreased to 22.1% in fiscal 2021 from 23.4% in fiscal 2020.

Research and Development expenses increased by $1,304,000 to $9,328,000 in fiscal 2023 as compared to $8,024,000 in fiscal 2022. This increase was due primarily to salary increases and additional staff. Selling, general and administrative expenses for fiscal 2023 increased by $673,000 to $33,580,000 as compared to $32,907,000 in fiscal 2022.

The Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis. Leases Effective July 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective transition option of applying the new standard at the adoption date.

The Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis. Leases The Company records lease assets and corresponding lease liabilities for the operating lease on our Consolidated Balance Sheets, excluding short-term leases (leases with terms of 12 months or less).

Financial positions for reporting periods beginning on or after July 1, 2019 are presented under new guidance. Liquidity and Capital Resources During the year ended June 30, 2022, the Company utilized a portion of its cash generated from operations ($1,563,000 of $8,332,000) to purchase property, plant and equipment ($1,482,000) and marketable securities ($81,000).

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

Net income for fiscal 2021 increased by $7,618,000 to $15,413,000 as compared to $7,795,000 in fiscal 2020. This resulted primarily from the items discussed above.

The increase in the Company’s fiscal 2023 effective tax rate is primarily due to the $3,904,000 in non-taxable income from a one-time extinguishment of debt included in fiscal 2022. Net income for fiscal 2023 increased by $7,528,000 to $27,127,000 as compared to $19,599,000 in fiscal 2022. This resulted primarily from the items discussed above.

The Company’s gross profit increased by $7,904,000 to $50,748,000 or 44.5% of net sales in fiscal 2021 as compared to $42,844,000 or 42.3% of net sales in fiscal 2020. Gross profit on equipment sales was $21,730,000 or 27.1% of net equipment sales in fiscal 2021 and $23,132,000 or 29.9% of net equipment sales, in fiscal 2020.

The Company's gross profit increased by $14,077,000 to $73,233,000 or 43.1% of net sales in fiscal 2023 as compared to $59,156,000 or 41.2% of net sales in fiscal 2022. Gross profit on equipment sales was $19,865,000 or 18.0% of net equipment sales in fiscal 2023 and $19,141,000 or 19.6% of net equipment sales, in fiscal 2022.

Working Capital increased by $14,939,000 to $75,391,000 at June 30, 2021 from $60,452,000 at June 30, 2020.Working capital is calculated by deducting Current Liabilities from Current Assets. Accounts Receivable. Accounts Receivable increased by $1,137,000 to $29,218,000 at June 30, 2022 as compared to $28,081,000 at June 30, 2021.

The service charges increase 2% annually over the remaining life of the lease. Working Capital. Working capital increased by $18,531,000 to $111,673,000 at June 30, 2023 from $93,142,000 at June 30, 2022. Working Capital increased by $17,751,000 to $93,142,000 at June 30, 2022 from $75,391,000 at June 30, 2021.Working capital is calculated by deducting Current Liabilities from Current Assets.

Inventories, which include both current and non-current portions, decreased by $8,715,000 to $31,700,000 at June 30, 2021 as compared to $40,415,000 at June 30, 2020. The decrease was due, in part, to the Company completing the rollout of several new productes that were introduced during fiscal 2020.

The decrease was due primarily to lower costs of certain component part as well as lower freight costs in fiscal 2023, both of which had increased in price due to the supply chain shortages in fiscal 2022. Inventories increased by $18,086,000 to $49,786,000 at June 30, 2022 as compared to $31,700,000 at June 30, 2021.

Removed

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

Added

Economic and Other Factors We are subject to the effects of general economic and market conditions. If the U.S. or international economic conditions deteriorate, our revenue, profit and cash-flow levels could be materially adversely affected in future periods.

Removed

The increases in net income during this period were due primarily to the recovery from the COVID-19 impact described above, as well as by the growth of our cellular products and the associated recurring revenue business. Economic and Other Factors We are subject to the effects of general economic and market conditions.

Added

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

Removed

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

Added

Income Taxes The Company has identified the United States and New York State as its major tax jurisdictions. Fiscal year 2018 and forward years are still open for examination.

Removed

Intangible assets determined to have indefinite lives were not amortized but were tested for impairment at least annually. Table of Contents The Company’s acquisition of substantially all of the assets and certain liabilities of G. Marks Hardware, Inc. (“Marks”) in August 2008 included intangible assets recorded at fair value on the date of acquisition.

Added

In December 2022, the Company received a letter from the Internal Revenue Service (“IRS”) notifying the Company that the IRS has closed its examination of the Company’s income tax return for fiscal year ended June 30, Table of Contents 2020. There has been no changes proposed in relation to this examination.

Removed

The customer relationships are amortized over their estimated useful lives of twenty years. At the acquisition date, the Marks trade name was deemed to have an indefinite life. During the 4th quarter of fiscal 2020, the Company determined that the trade-name was impaired.

Added

Lease payments are discounted using a third-party secured incremental borrowing rate based on information available at lease commencement. The Company analyzes whether or not amendments to existing leases classify as a Lease Modification or a full or partial termination of the existing lease. See Note 13 – Commitments and Contingencies; Leases for additional accounting policies and disclosures.

Removed

Accordingly, the Company recorded an impairment charge of $1,852,000 and reclassified the remaining balance of the underlying asset from indefinite-lived to a long-lived asset with a remaining useful life of 20 years as of June 30, 2020. Income Taxes The Company has identified the United States and New York State as its major tax jurisdictions.

Added

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

Removed

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

Added

Accounts payable and accrued expenses, not including income taxes payable, decreased by $4,939,000 to $19,686,000 as of June 30, 2023 as compared to $24,625,000 at June 30, 2022. This decrease was primarily due to decreased purchases of component parts during the quarter ended June 30, 2023 as compared to the same period a year ago.

Removed

Adoption of the new standard resulted in the recording of an operating ROU asset and lease liabilities of approximately $7.7 million. Given the length of the lease term, the right-of-use asset and corresponding liability assume a weighted discount rate as disclosed below. A change in the rate utilized could have a material effect on the amounts reported.

Added

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

Removed

Inventories of these items were built up during fiscal 2020 in anticipation of initial sotcking orders from the Company’s customers. The decrease in inventory was also due to the Company’s efforts to move closer to “just in time” procurement and production cycles where component parts and finished goods are scheduled for delivery closer to the expected requirement date.

Added

In addition, fiscal 2022 net sales of the Company’s cellular radio products benefited from dealers needing to replace their existing 3G radios with 4G or 5G models as the major cellular providers sunset their 3G networks. Fiscal 2023 returned to more normal sales levels.

Removed

Accounts payable and accrued expenses, not including income taxes payable, increased by $1,684,000 to $16,155,000 as of June 30, 2021 as compared to $14,471,000 at June 30, 2020.

Added

The increase in Gross profit on equipment sales was primarily the result of the higher equipment sales, which increased overhead absorption, as partially offset by increased labor costs in both the U.S. and Dominican Republic as well as higher prices of certain component parts.

Removed

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

Added

The Company purchased these higher-priced components at a significant premium during the supply chain interruptions during the latter part of fiscal 2022 in order to continue to supply the Company’s communication devices that led to the creation of recurring service revenues for the Company. The prices of these components began decreasing during fiscal 2023.

Removed

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

Added

Selling, general and administrative expenses as a percentage of net sales increased to 19.8% in fiscal 2023 from 22.9% in fiscal 2022. The increases in dollars resulted primarily from costs associated with the Company’s Form S-3 filing as well as increased credit card processing fees, as partially offset by lower legal and employee compensation costs.

Removed

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

Added

This increase was due primarily to the Company investing more of its cash into short term investments as described more fully in Note 1 and Note 4 to the consolidated financial statements. Table of Contents Gain on extinguishment of debt resulted from a one-time gain in fiscal 2022 which resulted from the forgiveness of the Company’s PPP loans as described in the Liquidity and Capital Resources section and Note 8 to the condensed consolidated financial statements.

Removed

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

Added

The Company’s provision for income taxes for fiscal 2023 increased by $1,854,000 to $4,101,000 as compared to $2,247,000 for the same period a year ago. The Company’s effective tax rate for fiscal 2023 increased to 13% as compared to 10% for fiscal 2022.

Removed

Gross profit on equipment sales was also affected by the Company’s reduction in its production and inventories which impacted it’s overhead absorption rate as well as a decrease in the Company’s reserve for obsolete inventory. Research and Development expenses increased by $363,000 to $7,620,000 in fiscal 2021 as compared to $7,257,000 in fiscal 2020.

Removed

The increase in dollars resulted primarily from increases in employee compensation. The decrease as a percentage of sales Table of Contents was primarily the result of the increase in net sales as described above, as partially offset by the aforementioned increase in employee compensation expenses.

Removed

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

Removed

Accordingly, the Company recorded an impairment charge of $1,852,000 and reclassified the remaining balance of the underlying asset from indefinite-lived to a long-lived asset with a remaining useful life of 20 years as of June 30, 2020. There was no impairment charge for the year ended June 30, 2021.

Removed

The Company’s effective tax rate decreased to 14% for fiscal 2021 as compared to 21% for fiscal 2020. The decrease in the Company’s fiscal 2021 effective tax rate is a direct result of additional tax expense recorded in fiscal 2020 for the Internal Revenue Service (“IRS”) audit of the Company’s 2016 fiscal year.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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2022 filing

2023 filing

Biggest changeThe 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 $855,000. Table of Contents

Top changes in NAPCO SECURITY TECHNOLOGIES, INC's 2023 10-K

Item 1. Business

Item 1A. Risk Factors

Item 2. Properties

Item 3. Legal Proceedings

Item 5. Market for Registrant's Common Equity

Item 6. [Reserved]

Item 7. Management's Discussion & Analysis

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Other NSSC 10-K year-over-year comparisons