NAPCO Security Technologies(NSSC) - 2021 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents NAPCO Security Technologies, Inc.'s unaudited condensed consolidated financial statements for the period ended December 31, 2020, including balance sheets, income statements, equity, and cash flows, with detailed notes on accounting policies, revenue, debt, and commitments Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity as of December 31, 2020, and June 30, 2020 Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2020 | Jun 30, 2020 | Change | | :-------------------------- | :----------- | :----------- | :------- | | Total Current Assets | $79,262 | $78,460 | +$802 | | Total Assets | $108,293 | $105,838 | +$2,455 | | Total Current Liabilities | $13,479 | $17,414 | -$3,935 | | Total Liabilities | $24,688 | $27,937 | -$3,249 | | Total Stockholders' Equity | $83,605 | $77,901 | +$5,704 | - Cash and cash equivalents increased by $8.548 million from $18.248 million to $26.796 million[4] - Accounts receivable, net, decreased by $1.709 million from $22.932 million to $21.223 million[4] - Inventories, net, decreased by $5.848 million (current) and increased by $2.129 million (non-current) from June 30, 2020[4] Condensed Consolidated Statements of Income This section presents the company's financial performance, detailing net sales, gross profit, operating income, and net income for the three and six months ended December 31, 2020 and 2019 Three Months Ended December 31 (in thousands, except per share data) | Metric | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :---------------------------------- | :----- | :----- | :----------- | :------------- | | Net sales | $27,205 | $25,829 | +$1,376 | +5.33% | | Equipment revenues | $19,016 | $20,045 | -$1,029 | -5.13% | | Service revenues | $8,189 | $5,784 | +$2,405 | +41.58% | | Gross Profit | $11,403 | $12,127 | -$724 | -5.97% | | Operating Income | $3,669 | $3,994 | -$325 | -8.14% | | Net Income | $3,197 | $3,572 | -$375 | -10.50% | | Basic EPS | $0.17 | $0.19 | -$0.02 | -10.53% | | Diluted EPS | $0.17 | $0.19 | -$0.02 | -10.53% | Six Months Ended December 31 (in thousands, except per share data) | Metric | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :---------------------------------- | :----- | :----- | :----------- | :------------- | | Net sales | $50,378 | $52,114 | -$1,736 | -3.33% | | Equipment revenues | $34,914 | $40,966 | -$6,052 | -14.77% | | Service revenues | $15,464 | $11,148 | +$4,316 | +38.72% | | Gross Profit | $22,095 | $23,645 | -$1,550 | -6.56% | | Operating Income | $6,323 | $7,603 | -$1,280 | -16.84% | | Net Income | $5,516 | $6,805 | -$1,289 | -18.94% | | Basic EPS | $0.30 | $0.37 | -$0.07 | -18.92% | | Diluted EPS | $0.30 | $0.37 | -$0.07 | -18.92% | - Gross profit as a percentage of net sales decreased to 41.92% for the three months ended December 31, 2020 (from 46.95% in 2019) and to 43.86% for the six months ended December 31, 2020 (from 45.37% in 2019)[117] - The decrease in gross profit and gross profit as a percentage of equipment sales was primarily due to lower net sales of equipment, an unfavorable shift in product mix from door-locking to intrusion products, and lower overhead absorption[118] - The increase in gross profit and gross profit as a percentage of service sales was primarily due to increased service revenues and a favorable shift to higher margin service plans[118] Condensed Consolidated Statements of Stockholders Equity This section outlines changes in the company's stockholders' equity, including retained earnings and additional paid-in capital, for the six months ended December 31, 2020 Stockholders' Equity (in thousands) | Metric | Dec 31, 2020 | Jun 30, 2020 | | :---------------------- | :----------- | :----------- | | Total Stockholders' Equity | $83,605 | $77,901 | | Retained Earnings | $84,960 | $79,444 | | Additional Paid-in Capital | $17,954 | $17,766 | - Net income contributed $5.516 million to retained earnings for the six months ended December 31, 2020[9] - Stock-based compensation expense added $188 thousand to additional paid-in capital for the six months ended December 31, 2020[9] Condensed Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended December 31, 2020 and 2019 Cash Flow Summary (Six Months Ended December 31, in thousands) | Activity | 2020 | 2019 | Change (YoY) | | :---------------------------------- | :----- | :----- | :----------- | | Net Cash Provided by Operating Activities | $8,937 | $4,813 | +$4,124 | | Net Cash Used in Investing Activities | $(389) | $(1,063) | +$674 | | Net Change in Cash and Cash Equivalents | $8,548 | $3,750 | +$4,798 | | Cash and Cash Equivalents - Ending | $26,796 | $11,778 | +$15,018 | - Operating activities provided $8.937 million in cash for the six months ended December 31, 2020, an increase of $4.124 million from the prior year[11] - Purchases of property, plant, and equipment decreased to $389 thousand for the six months ended December 31, 2020, from $1.063 million in the prior year[11] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations for the financial statements, covering business nature, accounting policies, revenue, concentrations, inventory, assets, taxes, debt, stock options, equity, related parties, 401(k), commitments, geographical data, and subsequent events NOTE 1 - Nature of Business and Summary of Significant Accounting Policies This note describes NAPCO's core business as a leading manufacturer and designer of high-tech electronic security devices and wireless communication services, including school safety solutions. It outlines the impact of the COVID-19 pandemic on equipment sales and highlights the company's significant accounting policies, such as consolidation, estimates, fair value, inventory valuation, intangible assets, revenue recognition, and stock-based compensation - NAPCO is a leading manufacturer and designer of high-tech electronic security devices, wireless communication services for intrusion and fire alarm systems, and school safety solutions[13][110] - Significant growth has been driven by fast-growing recurring service revenues from wireless communication services and school security products[13][110] - Equipment sales were negatively impacted by the COVID-19 pandemic due to economic slowdown and difficulties accessing installation sites, while recurring service revenues continued to increase[13][15][110] - The Marks trade name was impaired at the end of fiscal 2020, resulting in an impairment charge of $1.852 million and reclassification to a long-lived asset with a 20-year remaining useful life[27] - Research and development expenses increased by 3.35% to $1.884 million for the three months and by 5.63% to $3.773 million for the six months ended December 31, 2020, primarily due to increased payroll[32][119] NOTE 2 – Revenue Recognition and Contracts with Customers This note details the company's revenue recognition policies, stating that revenue is recognized when control of products or services is transferred to customers. It differentiates between product sales (point-in-time recognition) and monthly communication services (over-time recognition). The note also provides a disaggregation of revenues by major product lines - Revenue is recognized upon transfer of control of products or services to customers; product sales are recognized at shipment/delivery, and monthly communication services are recognized as rendered[45][46] - Refund liabilities were approximately $3.798 million as of December 31, 2020, an increase from $3.331 million at June 30, 2020[49] - Sales returns, rebates, and allowances as a percentage of gross sales were 13% for the three months ended December 31, 2020 (up from 11% in 2019) and 11% for the six months ended December 31, 2020 (up from 9% in 2019)[50] Disaggregated Revenues by Major Product Lines (in thousands) | Product Line | 3 Months Ended Dec 31, 2020 | 3 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2019 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Intrusion and access alarm products | $8,235 | $7,772 | $15,560 | $15,786 | | Door locking devices | $10,781 | $12,273 | $19,354 | $25,180 | | Services | $8,189 | $5,784 | $15,464 | $11,148 | | Total Revenues | $27,205 | $25,829 | $50,378 | $52,114 | NOTE 3 - Business and Credit Concentrations This note highlights the company's exposure to credit risk due to customer concentrations. As of December 31, 2020, one customer accounted for 18% of accounts receivable and 14% of net sales for the three months ended December 31, 2020, with two other customers also having significant accounts receivable balances - One customer's accounts receivable balance comprised 18% of total accounts receivable at December 31, 2020, and sales to this customer comprised 14% of net sales for the three months ended December 31, 2020[52] - Two other customers had accounts receivable balances comprising 12% and 11% of total accounts receivable at December 31, 2020[52] NOTE 4 - Inventories This note details the valuation and composition of the company's inventories, which are valued at the lower of cost or net realizable value using the FIFO method. It also provides a breakdown of inventory by component parts, work-in-process, and finished product, and their classification as current or non-current - Inventories are valued at the lower of cost (first-in, first-out method) or net realizable value, with provisions for excess or obsolete inventories[53] Inventories, net of reserves (in thousands) | Category | Dec 31, 2020 | Jun 30, 2020 | | :--------------- | :----------- | :----------- | | Component parts | $20,839 | $22,877 | | Work-in-process | $6,628 | $7,276 | | Finished product | $10,569 | $11,602 | | Total | $38,036 | $41,755 | Classification of Inventories, net of reserves (in thousands) | Classification | Dec 31, 2020 | Jun 30, 2020 | | :------------- | :----------- | :----------- | | Current | $29,383 | $35,231 | | Non-current | $8,653 | $6,524 | | Total | $38,036 | $41,755 | - The non-current portion of inventory increased by $2.129 million, primarily due to reduced production planning in response to decreased demand during the COVID pandemic[126] NOTE 5 – Property, Plant, and Equipment This note provides a breakdown of the company's property, plant, and equipment, carried at cost less accumulated depreciation. It also details the depreciation and amortization expenses for these assets Property, Plant, and Equipment (in thousands) | Category | Dec 31, 2020 | Jun 30, 2020 | | :-------------------------- | :----------- | :----------- | | Land | $904 | $904 | | Buildings | $8,911 | $8,911 | | Molds and dies | $7,352 | $7,337 | | Furniture and fixtures | $2,792 | $2,792 | | Machinery and equipment | $25,253 | $24,878 | | Building improvements | $2,173 | $2,173 | | Total Cost | $47,385 | $46,995 | | Less: accumulated depreciation | $(39,543) | $(38,907) | | Net Book Value | $7,842 | $8,088 | - Depreciation and amortization expense on property, plant, and equipment was approximately $319 thousand for the three months ended December 31, 2020 (up from $311 thousand in 2019) and $637 thousand for the six months ended December 31, 2020 (up from $606 thousand in 2019)[56] NOTE 6 - Income Taxes This note outlines the company's income tax provision, effective tax rate, and details regarding uncertain tax positions and ongoing IRS audits. It highlights the recognition of R&D tax credits and accrued interest and penalties related to tax matters - The company recognized net income tax expense of $798 thousand for the six months ended December 31, 2020[58] - The effective tax rate was 13% for the three months ended December 31, 2020 (up from 11% in 2019) and 11% for the six months ended December 31, 2020 (consistent with 2019)[122] - The company increased its reserve for uncertain income tax positions by $69 thousand and had accrued interest totaling $100 thousand and $918 thousand of unrecognized net tax benefits as of December 31, 2020[58] - The company settled an IRS audit for fiscal year 2016, recording a provision of $762 thousand (federal) and $70 thousand (state) for tax liability, plus an additional $15 thousand for interest during the six months ended December 31, 2020[60] - For the ongoing fiscal year 2017 audit, the company recorded a provision of $657 thousand for incremental tax liability and $66 thousand for interest for fiscal years 2017 and 2018, with an additional $12 thousand interest accrued for the six months ended December 31, 2020[61] NOTE 7 - Long-Term Debt This note details the company's long-term debt, consisting of a revolving line of credit and term loans from the U.S. Small Business Administration's Paycheck Protection Program (PPP). It outlines the terms, covenants, and forgiveness potential of the PPP loan Long-Term Debt Composition (Dec 31, 2020, in thousands) | Debt Type | Outstanding | Interest Rate | | :-------------------- | :---------- | :------------ | | Revolving line of credit | $0 | n/a | | Term loans (PPP) | $3,904 | 1% | | Total | $3,904 | | | Less: current maturities | $(1,084) | | | Long-term debt | $2,820 | | - The company has an $11.000 million revolving credit facility expiring in June 2024, with no outstanding borrowings as of December 31, 2020[63][64][128] - The company received $3.904 million in PPP loans, bearing 1% interest, with payments deferred. The company anticipates applying for forgiveness in fiscal 2021, but forgiveness is subject to SBA approval[65][66][67] - The PPP loan is accounted for as debt, and the liability will remain until the loan is forgiven and the company is legally released or the debt is paid off[71][73] NOTE 8 - Stock Options This note provides detailed information on the company's four share incentive programs: the 2012 Employee Stock Option Plan, 2012 Non-Employee Stock Option Plan, 2018 Non-Employee Stock Option Plan, and 2020 Non-Employee Stock Option Plan. It includes activity summaries, outstanding options, exercisable options, and unearned stock-based compensation costs for each plan - Stock-based compensation expense was $84 thousand for the three months ended December 31, 2020 (down from $308 thousand in 2019) and $188 thousand for the six months ended December 31, 2020 (down from $325 thousand in 2019)[38][74] - As of December 31, 2020, under the 2012 Employee Stock Option Plan, 117,840 options were outstanding (weighted average exercise price $18.84) and 47,800 were exercisable (weighted average exercise price $14.66), with $748 thousand of unearned compensation cost[78][80] - As of December 31, 2020, under the 2012 Non-Employee Stock Option Plan, 12,000 options were outstanding (weighted average exercise price $10.29) and 8,520 were exercisable (weighted average exercise price $9.08), with $24 thousand of unearned compensation cost[84][85] - As of December 31, 2020, under the 2018 Non-Employee Stock Option Plan, 48,400 options were outstanding (weighted average exercise price $23.48) and 12,240 were exercisable (weighted average exercise price $22.44), with $344 thousand of unearned compensation cost[90] - Under the 2020 Non-Employee Stock Option Plan, 5,000 options were granted during the six months ended December 31, 2020, with 1,000 exercisable and $43 thousand of unearned compensation cost as of December 31, 2020[93][94] NOTE 9 – Stockholders' Equity Transactions This note discusses transactions affecting stockholders' equity, specifically share repurchases and stock option exercises. It highlights a temporary restriction on share repurchases due to the PPP Loan Agreement - No shares were repurchased during the six months ended December 31, 2020, due to a restriction under the PPP Loan Agreement preventing repurchases until 12 months after the termination of the term loans[95] - During fiscal 2020, 15,600 shares were exercised under employee and non-employee stock option plans, including 3,600 cashless exercises[96] NOTE 10 – Related Party Transaction This note discloses a secondary offering of common stock by the company's President and Chairman, from which the company received no proceeds but incurred offering expenses - The company's President and Chairman sold 2,333,071 shares of common stock in a secondary offering on December 15, 2020, with an additional 334,961 shares sold via the Greenshoe option[97] - The company received no proceeds from the secondary offering but incurred $289 thousand in offering expenses, recorded in selling, general, and administrative expenses[97] NOTE 11 - 401(k) Plan This note provides information on the company's 401(k) plan for U.S. non-union employees, including discretionary company contributions - Company contributions to the 401(k) plan were $36 thousand for the three months ended December 31, 2020 (up from $34 thousand in 2019) and $68 thousand for the six months ended December 31, 2020 (up from $64 thousand in 2019)[98] NOTE 12 - Commitments and Contingencies This note details the company's commitments and contingencies, primarily focusing on lease obligations, including a significant 99-year operating lease for its principal production facility in the Dominican Republic, and information on litigation and employment agreements Leases This section details the company's lease obligations, including a significant 99-year operating lease for its principal production facility in the Dominican Republic - The company adopted the new lease accounting standard (ASC 842) effective July 1, 2019, resulting in the recording of an operating ROU asset and lease liabilities of approximately $7.7 million[99] - A significant lease obligation is a 99-year operating lease for approximately four acres of land in the Dominican Republic, expiring in 2092, at an annual cost of $288 thousand, where the principal production facility is located[100] Maturities of Lease Liabilities as of December 31, 2020 (in thousands) | Year Ending June 30, | Amount | | :------------------- | :----- | | 2021 | $143 | | 2022 | $277 | | 2023 | $268 | | 2024 | $258 | | 2025 | $249 | | Thereafter | $6,189 | | Total | $7,384 | Litigation This section addresses the company's involvement in claims and litigation in the normal course of business, with management believing no material adverse effect on financials - The company is a party to claims and/or litigation in the normal course of business[103] - Management believes that the settlement of such claims will not have a material adverse effect on the company's financial position and results of operations[103] Employment Agreements This section outlines key employment agreements for the CEO, SVP of Engineering, and SVP of Operations and Finance, detailing salaries and severance provisions - The CEO's employment agreement provides for an annual salary of $752 thousand (adjusted for inflation), incentive compensation, and a termination payment up to 299% of prior five-year average compensation[104] - The SVP of Engineering's agreement (expires August 2022) includes an annual salary of $333,798 and severance benefits if terminated without cause[104] - The SVP of Operations and Finance has a severance agreement providing nine months' salary and six months of health insurance if terminated without cause or within three months of a change in corporate control[104] NOTE 13 – Geographical Data This note provides financial information disaggregated by geographical location, showing domestic and foreign sales to external customers and identifiable assets in the United States and the Dominican Republic Sales to External Customers (in thousands) | Region | 3 Months Ended Dec 31, 2020 | 3 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2019 | | :------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Domestic | $26,793 | $25,236 | $49,682 | $51,055 | | Foreign | $412 | $593 | $696 | $1,059 | | Total Net Sales | $27,205 | $25,829 | $50,378 | $52,114 | Identifiable Assets (in thousands) | Region | Dec 31, 2020 | Jun 30, 2020 | | :-------------------- | :----------- | :----------- | | United States | $73,635 | $69,436 | | Dominican Republic | $34,658 | $36,402 | | Total Identifiable Assets | $108,293 | $105,838 | - Identifiable assets in the Dominican Republic primarily consist of inventories ($23.648 million), operating lease assets ($7.384 million), and fixed assets ($3.276 million) as of December 31, 2020[107] NOTE 14 - Subsequent Events This note states that the company has evaluated subsequent events after the financial statement date and found no events requiring recording or disclosure - No subsequent events requiring recording or disclosure in the consolidated financial statements were identified after December 31, 2020[108] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition and results of operations, covering business overview, economic factors, seasonality, critical accounting policies, and detailed analysis of performance, liquidity, and capital resources Overview This section provides an overview of NAPCO's business, highlighting its role as a leading manufacturer of security devices and the impact of recurring service revenues and the COVID-19 pandemic - NAPCO is a leading manufacturer and designer of high-tech electronic security devices, wireless communication services for intrusion and fire alarm systems, and school safety solutions[110] - The company has experienced significant growth driven by fast-growing recurring service revenues and school security products[110] - Recurring service revenues continued to increase during the COVID-19 pandemic, while equipment sales were negatively impacted by the associated economic slowdown[110] - NAPCO has established well-known brands such as NAPCO Security Systems, Alarm Lock, Continental Access, Marks USA, and innovative product lines like StarLink, iBridge, and iSecure[111] Economic and Other Factors This section discusses how general economic and market conditions, including potential downturns, can impact the company's revenue, profit, and cash flow - The company's revenue, profit, and cash flow are subject to general economic and market conditions, with potential adverse effects from economic deterioration[112] - Economic downturns may lead customers to modify, delay, or cancel purchases, or delay payments, potentially causing fixed and semi-variable expenses to become too high relative to revenues[112] Seasonality This section describes the historical seasonality of sales, with peaks in the fiscal fourth quarter, and the impact of housing markets and the COVID-19 pandemic on demand - Sales historically peak in the fiscal fourth quarter (April 1 through June 30) due to end-users installing products prior to summer, and are reduced in the fiscal first quarter (July 1 through September 30)[114] - Demand for products is affected by the housing and construction markets[114] - The COVID-19 pandemic created a challenging business environment in Q4 fiscal 2020 and Q1/Q2 fiscal 2021, impacting access to installation sites, though strong sell-through statistics indicate increasing access[115] Critical Accounting Policies and Estimates This section refers to the detailed descriptions of the company's significant accounting policies and critical estimates provided in Note 1 of its 2020 Annual Report on Form 10-K - The company's significant accounting policies, which involve critical judgments and estimates, are fully described in Note 1 to the consolidated financial statements in its 2020 Annual Report on Form 10-K[116] Results of Operations This section provides a detailed comparative analysis of the company's net sales, gross profit, operating income, and net income for the three and six months ended December 31, 2020 and 2019 Results of Operations (Three Months Ended December 31, in thousands, except per share data) | Metric | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :---------------------------------- | :----- | :----- | :----------- | :------------- | | Net sales | $27,205 | $25,829 | +$1,376 | +5.33% | | Equipment revenues | $19,016 | $20,045 | -$1,029 | -5.13% | | Service revenues | $8,189 | $5,784 | +$2,405 | +41.58% | | Gross Profit | $11,403 | $12,127 | -$724 | -5.97% | | Operating Income | $3,669 | $3,994 | -$325 | -8.14% | | Net Income | $3,197 | $3,572 | -$375 | -10.50% | | Diluted EPS | $0.17 | $0.19 | -$0.02 | -10.53% | Results of Operations (Six Months Ended December 31, in thousands, except per share data) | Metric | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :---------------------------------- | :----- | :----- | :----------- | :------------- | | Net sales | $50,378 | $52,114 | -$1,736 | -3.33% | | Equipment revenues | $34,914 | $40,966 | -$6,052 | -14.77% | | Service revenues | $15,464 | $11,148 | +$4,316 | +38.72% | | Gross Profit | $22,095 | $23,645 | -$1,550 | -6.56% | | Operating Income | $6,323 | $7,603 | -$1,280 | -16.84% | | Net Income | $5,516 | $6,805 | -$1,289 | -18.94% | | Diluted EPS | $0.30 | $0.37 | -$0.07 | -18.92% | - The three-month sales increase was driven by higher recurring communication service revenues (+$2.405 million) and intrusion/access products (+$463 thousand), partially offset by decreased door-locking products (-$1.492 million) due to the COVID-19 pandemic[118] - Gross profit on equipment sales decreased significantly due to lower net sales, an unfavorable product mix, and lower overhead absorption, while gross profit on service sales increased due to higher revenues and a favorable shift to higher-margin service plans[118] - Selling, general and administrative expenses decreased by 7.3% for the three months and 3.8% for the six months ended December 31, 2020, primarily due to reduced travel, tradeshow, and stock option expenses[120] Liquidity and Capital Resources This section assesses the company's ability to meet its financial obligations, discussing working capital, cash flows, credit facilities, and changes in accounts receivable and inventory - The company believes its current working capital, cash flows from operations, and revolving credit agreement will be sufficient to fund operations through the next twelve months[124] - Accounts receivable decreased by $1.709 million from June 30, 2020, due to higher sales volume in the prior quarter and extended payment terms for some customers during the COVID-19 slowdown[125] - Inventories decreased by $3.719 million from June 30, 2020, as the company utilized built-up inventory and reduced production planning in response to decreased demand; non-current inventory increased by $2.391 million[126] - Accounts payable and accrued expenses decreased by $2.683 million from June 30, 2020, reflecting efforts to reduce inventory levels and component purchases[127] - As of December 31, 2020, the company had an $11.000 million revolving credit facility with no outstanding borrowings and $3.904 million outstanding under PPP term loans[128] Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, specifically foreign currency risk related to sales and expenses in different currencies - All foreign sales transactions are denominated in U.S. dollars, shifting foreign currency exposure to foreign customers, which could impact collections, order cancellations, or future orders if exchange rates move adversely[130] - The company is exposed to foreign currency risk for expenses incurred in Dominican Pesos (RD$); a 10% strengthening or weakening of the U.S. dollar against the RD$ would result in an annual increase or decrease in income from operations of approximately $700 thousand[130] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This section addresses the company's exposure to market risks, primarily foreign currency risk from U.S. dollar-denominated sales and Dominican Peso-incurred expenses - Foreign sales are denominated in U.S. dollars, transferring foreign currency risk to customers, which could adversely affect collections, order cancellations, or future orders[130] - A 10% fluctuation in the U.S. dollar against the Dominican Peso could result in an annual change of approximately $700 thousand in income from operations[130] ITEM 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of December 31, 2020, and reports no material changes in internal controls over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[133] - There were no material changes in the company's internal controls over financial reporting during the three months ended December 31, 2020[134] PART II: OTHER INFORMATION ITEM 1A. Risk Factors This section refers to the risk factors detailed in the company's Annual Report on Form 10-K for June 30, 2020, confirming no material changes during the current reporting period - Information regarding the company's risk factors is set forth in its Annual Report on Form 10-K for the year ended June 30, 2020[135] - There has been no material change in the risk factors previously disclosed for the three months ended December 31, 2020[135] ITEM 6. Exhibits This section lists the exhibits filed with the quarterly report, including CEO and CFO certifications and XBRL taxonomy extension documents - Exhibits include certifications pursuant to Rule 13a-14(a)/15d-14(a) from Richard L. Soloway (Chairman, President, CEO) and Kevin S. Buchel (SVP of Operations and Finance, Treasurer), Section 1350 Certifications, and various XBRL Taxonomy Extension Documents[139] SIGNATURE PAGE This page contains the official signatures of the company's authorized officers, affirming the report's submission - The report was signed on February 9, 2021, by Richard L. Soloway (Chairman of the Board of Directors, President and Secretary, Chief Executive Officer) and Kevin S. Buchel (Senior Vice President of Operations and Finance and Treasurer, Principal Financial and Accounting Officer)[142]