Quarterly Report for Quarter Ending December 31, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

You should read the following discussion and analysis of our financial condition and results of operations together with (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and (2) the audited consolidated financial statements and the related notes and management's discussion and analysis of financial condition and results of operations for the fiscal year ended June 30, 2025 included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2025 filed on August 25, 2025, or Annual Report, with the Securities and Exchange Commission, or SEC.

This Quarterly Report on Form 10-Q (the "Quarterly Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words "believes," "anticipates," "plans," "expects," "intends," "could," "may," "will," and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, and market position of our products and technology. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in "Part II-Item 1A-Risk Factors" and "Liquidity and Capital Resources" below.

All forward-looking statements in this document are based on information available to us as of the date hereof, such information may be limited or incomplete, and we assume no obligation to update any such forward-looking statements. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report. Unless expressly stated or the context otherwise requires, the terms "we," "our," "us," the "Company," and "Napco" refer to Napco Security Technologies, Inc. and our subsidiaries.

Overview

NAPCO is one of the leading manufacturers and designers of high-tech electronic security devices, cellular communication services for intrusion and fire alarm systems as well as a leading provider of school safety solutions. We offer a diversified array of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products. These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold principally to independent distributors, dealers and installers of security equipment. We have established a national network of trusted independent security dealers and integrators that are experts at selling, installing and supporting our various technologies. These dealers are dependent on our platform for communication services to our radio communicators and smart security devices, and they pay us a monthly fee for these services.

Since 1969, NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high-quality security solutions, building many of the industry's widely recognized brands, such as NAPCO Security Systems, Alarm Lock, NAPCO Access Pro, Marks USA, and other popular product lines. We are dedicated to developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks.

Highlights from the three and six months ended December 31, 2025 compared with the comparable period included:

Industry Landscape

Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. Napco continually innovates through a broad range of research and development activities that seek to identify and address the changing demands of customers, industry trends, and competitive forces.

Economic Conditions and Other Factors

We are subject to the effects of general macroeconomic and market conditions.

The U.S. government implemented new tariff measures affecting a broad range of imported materials. Certain countries have responded to the U.S. tariffs by imposing or threatening retaliatory tariffs. While we are actively monitoring the changes in global trade policy and the effects they may have on our business and broader macroeconomic environment, we have not experienced a material impact on our financial position to date and do not expect them to have a material detrimental impact on our business operations in the near term. However, given the uncertainty surrounding global markets as a result of the new U.S. tariff policy, we do not have clarity at this point over the potential medium to long term impacts our business may face. The availability of certain goods could be affected if foreign suppliers choose to limit their exposure to U.S. markets in response to unfavorable trade policies, which could negatively impact our suppliers ability to deliver materials or manufacture equipment for us and, therefore, delay or impede our product deliveries. Furthermore, rising inflation, slower economic growth and increases in unemployment that may result from global trade disruptions could further deflate consumer demand and impact the demand for our products.

The universal baseline tariff of 10% includes imports from the Dominican Republic where we manufacture most of our products. The imposition of the baseline 10% tariff increased the cost of our products and could impact future product margins. The uncertainty could also cause disturbances in ocean shipping capacity that could affect our ability to secure ocean freight containers for our products, and create inflationary effects on our costs, in addition to the direct impact of tariffs.

The markets for security devices and services are dynamic and highly competitive. Our competitors are continually developing new products and solutions for consumers and businesses. We must continue to evolve and adapt to respond to customer and user preferences over an extended time in pace with this changing environment.

Critical Accounting Policies and Estimates

The Company's significant accounting policies are fully described in Note 1 to the Company's consolidated financial statements included in its 2025 Annual Report on Form 10-K.

Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Critical estimates include management's judgments associated with reserves for sales returns and allowances, allowance for credit losses, overhead expenses applied to inventory, inventory reserves, valuation of intangible assets, share based compensation and income taxes. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates.

Results of Operations

Revenue

Revenue by major product lines is as follows:

Three Months Ended December 31, 2025:

Total Revenue for the three months ended December 31, 2025, increased $5,239,000 (12.2%) to $48,172,000 as compared to $42,993,000 in the comparable period.

Net equipment revenues for the three months ended December 31, 2025, increased $2,598,000 (12.0%) to $24,323,000 as compared to $21,725,000 in the comparable period. The increase in net equipment revenue was attributable to increases in sales of door locking products of $1,781,000 (12.6%) and intrusion and access products of $817,000 (10.8%). The increased revenue in our door locking products was primarily a result of the impact of pricing increases (approximately 7%) that went into effect in Fiscal 2026 in addition to general increase in sales volume (approximately 5.6%). The increased revenue in our intrusion and access alarm products was primarily a result of the impact of pricing increases that went into effect in Fiscal 2026.

Net service revenues for the three months ended December 31, 2025, increased $2,641,000 (12.5%) to $23,849,000 as compared to $21,208,000 in the comparable period. The increase in net service revenues was due to an increase in the number of our cellular (radio) communication devices put into service and activated.

Six Months Ended December 31, 2025:

Revenue for the six months ended December 31, 2025, increased $10,404,000 (12.0%) to $97,340,000 as compared to $86,936,000 in the comparable period.

Net equipment revenues for the six months ended December 31, 2025, increased $5,420,000 (12.1%) to $50,062,000 as compared to $44,642,000 in the comparable period. The increase in net equipment revenue was attributable to increases in the sales of door locking products of $5,011,000 (17.9%) and intrusion and access products of $409,000 (2.5%). The increased revenue in our door locking products was primarily a result of the impact of pricing increases (approximately 7%) that went into effect in Fiscal 2026 in addition to general increase in sales volume (approximately 10.0%). The increased revenue in our intrusion and access alarm products was primarily a result of the impact of pricing increases that went into effect in Fiscal 2026, offset by reductions in the sales of certain access control products.

Net service revenues for the six months ended December 31, 2025, increased $4,984,000 (11.8%) to $47,278,000 as compared to $42,294,000 in the comparable period. The increase in net service revenues was due to an increase in the number of our cellular (radio) communication devices put into service and activated.

Gross Profit

Three Months Ended December 31, 2025

Overall gross profit for the three months ended December 31, 2025, increased $3,749,000 to $28,238,000, or 58.6% of net revenue, as compared to $24,489,000, or 57.0% of net revenue, for the comparable period.

Gross profit from equipment revenue was $6,716,000, or 27.6% of equipment revenue, as compared to $5,119,000, or 23.6% of equipment revenue, for the comparable period. The increase in gross profit percentage from equipment revenue was primarily a result of product mix, increased volume which improved the absorption rate of our fixed overhead costs, price increases that went into effect during Fiscal 20206 and reductions in sales discounts during the period.

Gross profit on service revenues was $21,522,000, or 90.2% of net service revenues, as compared to $19,370,000, or 91.3% of net service revenues, for the comparable period a year ago. The decrease in gross profit percentage was a result of increased royalty costs due to certain one-time credits received in the comparable period and increased data costs to run our network operations center.

Six Months Ended December 31, 2025

Overall gross profit for the six months ended December 31, 2025, increased $6,979,000 to $56,084,000, or 57.6% of net revenue, as compared to $49,105,000, or 56.5% of net revenue, for the comparable period.

Gross profit from equipment revenue was $13,409,000, or 26.8% of equipment revenue, as compared to $10,526,000, or 23.6% of equipment revenue, for the comparable period. The increase in gross profit percentage from equipment revenue was primarily a result of product mix, increased volume which improved the absorption rate of our fixed overhead costs, certain price increases that went into effect during the previous quarter and reductions in sales discounts during the period.

Gross profit on service revenues was $42,675,000, or 90.3% of net service revenues, as compared to $38,579,000, or 91.2% of net service revenues, for the comparable period a year ago. The decrease in gross profit percentage was a result of increased royalty costs due to certain one-time credits received in the comparable period and increased data costs to run our network operations center.

Research and Development

Research and development expenses for the three months ended December 31, 2025, increased by $366,000 to $3,473,000, or 7.2% of net revenue, as compared to $3,107,000, or 7.2% of net revenue, for the comparable period. The increase in research and development expenses was primarily a result of increased labor and benefit costs ($366,000).

Research and development expenses for the six months ended December 31, 2025, increased by $549,000 to $6,713,000, or 6.9% of net revenue, as compared to $6,164,000, or 7.1% of net revenue, for the comparable period. The increase in research and development expenses was primarily a result of increased labor and benefit costs ($560,000) offset by a reduction in consulting charges ($41,000).

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses for the three months ended December 31, 2025, decreased by $199,000 to $10,012,000 as compared to $10,211,000 for the comparable period. The decrease in SG&A expenses was primarily attributable to decreases in legal fees (net of insurance reimbursements) related to the litigation discussed in Note 13 ($307,000), accounting expenses ($212,000) and stock-based compensation ($202,000), offset by increases in wages, bonus compensation and benefits ($275,000), commission related expenses ($147,000) and insurance expense ($50,000).

SG&A expenses for the six months ended December 31, 2025, increased by $1,061,000 to $20,975,000 as compared to $19,914,000 for the comparable period. The increase in SG&A expenses was primarily attributable to increases in legal fees related to the litigation discussed in Note 13 ($637,000), commission expense ($501,000), wages, bonus compensation and benefits ($192,000) and insurance ($92,000) offset by decreases in accounting expenses ($464,000) and stock-based compensation $(263,000).

Interest and Other Income (Expense)

**Percentage change not meaningful.

Interest income decreased for the three and six months ended December 31, 2025, as compared to the comparable period, primarily due to lower interest rates.

Income Taxes

The Company's provision for income taxes for the three months ended December 31, 2025 increased by $611,000 to $2,236,000 as compared to $1,625,000 for the same period a year ago. The Company's effective rate for income tax was 14.2% and 13.4% for the three months ended December 31, 2025 and 2024 respectively. The Company's provision for income taxes for the six months ended December 31, 2025 increased by $1,266,000 to $4,706,000 as compared to $3,440,000 for the same period a year ago. The Company's effective rate for income tax was 15.5% and 13.7% for the six months ended December 31, 2025 and 2024 respectively. The Company's effective tax rate for the three and six months ended December 31, 2025 increased as a result of a larger portion of the Company's taxable income being attributable to United States operations, and the remeasurement of certain deferred tax liabilities due to tax rate changes enacted in the One Big Beautiful Bill Act ("OBBBA") in the current period.

Liquidity and Capital Resources

We believe that our projected cash flow from operations, combined with our cash and short-term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months. We continue to monitor, evaluate, and manage our operating plans, forecasts, and liquidity considering the most recent developments driven by macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, tariffs, bans, or other measures or

events that increase the effective price of products. We believe that there is minimal credit risk associated with the investments in cash equivalents and short-term investments due to the types of investment entered.

Our cash and cash equivalents increased by $21,838,000 during the six months ended December 31, 2025, and our cash and cash equivalents and short-term investments were $104,919,000 as of December 31, 2025. We believe that there is minimal credit risk associated with the investments in cash equivalents and short-term investments due to the types of investment entered.

As of December 31, 2025, the Company's available revolving credit line was $20,000,000, which expires in February 2029, there were no outstanding borrowings on the line as of December 31, 2025.

A summary of the cash flow activity for the six months ended December 31, 2025 and 2024 is as follows:

Cash Flows from Operating Activities

Net cash provided by operating activities was $26.7 million for the six months ended December 31, 2025 and was due to net income of $25.7 million and increase in adjustments for non-cash items of $4.3 million offset by cash outflow from changes in operating assets and liabilities of $3.2 million. The changes in operating assets and liabilities were largely attributable to increases in inventories and income tax receivables and decreases in accounts payable and accrued expenses partially offset by decreases in accounts receivables.

Net cash provided by operating activities was $25.5 million for the six months ended December 31, 2024 and was due to net income of $21.7 million and increase in cash flow from changes in operating assets and liabilities of $4.0 million, partially offset by adjustments for non-cash items of $.2 million. The changes in operating assets and liabilities were largely attributable to increases in accounts receivables and decreases in inventories and accounts payable and accrued expenses.

Cash Flows from Investing Activities

The net cash provided by investing activities of $5.1 million during the six months ended December 31, 2025 was primarily attributable to the redemption of marketable securities of $11.1 million partially offset by expenditures used for capital expenditures of $.8 million and purchase of marketable securities of $5.2 million. The cash provided by investing activities of $17.7 million during the six months ended December 31, 2025, was primarily attributable to redemption of other investments of $27.3 million partially offset by expenditures used for capital expenditures of $1.8 million and purchase of investments of $7.6 million. The change in use of cash for investing activities from 2024 to 2025 was a increase in the redemption of investments in term deposits (other investments).

Cash Flows from Financing Activities

The cash used in financing activities of $10.0 million for the six months ended December 31, 2025 was primarily related to the payment of stockholder dividends. The cash used in financing activities of $22.6 million for the six months ended December 31, 2024 was primarily related to the repurchase of treasury shares of $18.0 million and the payment of stockholder dividends of $4.6 million.

Contractual Obligations and Commitments

As of December 31, 2025, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business. On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, on which the Company's principal manufacturing facility is located, at an annual base rent of approximately $235,000 and $105,000 in annual service charges. The service charges increase 2% annually over the remaining life of the lease.