What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-09-24 compared with 2020-09-21 · 620 added, 585 removed, 288 unchanged (81% of the section changed)

4 unchanged sentences

& Electronics Corp.

the Financial Statements

We have audited the accompanying balance sheets

of Espey Mfg.

& Electronics Corp (the Company) as of June 30, 2020 and 2019, the related

statements of comprehensive income, changes in stockholders' equity and cash flows for the years then ended, and the related notes

to the financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly,

in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations

and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based

on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight

Board (United States) ( PCAOB ) and are required to be independent with respect to the Company

in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission

and the PCAOB.

We conducted our audits in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have,

nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required

to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the

effectiveness of the Company's internal control over financial reporting.

Opinion on the Financial

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Espey Mfg.

& Electronics

(the Company) as of June 30, 2021 and 2020, the related statements of comprehensive (loss) income, changes in stockholders’

equity and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30,

2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles

generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public

accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent

with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities

and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free

of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit

of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control

over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control

over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to

assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures

in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made

by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a

reasonable basis for our opinion.

Our audits included performing procedures to assess the risks of material

misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures

included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included

evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation

of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from

the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,

subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements,

taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit

matters or on the accounts or disclosures to which they relate.

Valuation of Inventory Costs Related to Contracts in Process and Work

As discussed in Notes 2 and 5 to the financial statements, inventoried

work relating to contracts in process and work in process is valued at actual production cost, including factory overhead incurred to

Contract costs include material, subcontract costs, labor, and an allocation of overhead costs.

The costs attributed to units delivered

under contracts are based on the estimated average cost of all units expected to be produced.

Certain contracts are expected to extend

beyond twelve months.

The estimation of total cost at completion of a contract is subject to

numerous variables involving contract costs and estimates as to the length of time to complete the contract.

Given the significance of

the estimation processes and judgments described above, it is possible that materially different amounts of expected sales and contract

costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process.

When a change

in expected sales value or estimated cost is determined, changes are reflected in current period earnings.

Due to the magnitude of the

inventory, and the subjectivity involved in estimating the total cost at completion we identified the evaluation of the estimate to complete

as a critical audit matter, which required a high degree of auditor judgment.

Addressing the matter involved performing subjective procedures and evaluating

audit evidence in connection with forming our overall opinion on the financial statements.

The primary procedures performed included the

We obtained an understanding of the process and assumptions used by management to develop estimates to complete including labor, overhead

and materials.

We tested total cost at completion of a contract by using process employed by management:

o Testing the completeness and accuracy of the source information used;

o Testing the mathematical accuracy of management’s calculations;

o Reviewing expected gross margin on contracts;

o Evaluating the reasonableness and consistency of methodology and assumptions applied by management;

o Performing a retrospective review of the prior-year estimates used to identify potential bias of management judgements.

/s/ Freed Maxick CPAs, P.C.

8 unchanged sentences

Trade accounts receivable, net of allowance of $3,000

Income tax receivable

Raw materials

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Authorized 10,000,000 shares;

Issued 3,029,874 shares as

of June 30, 2020 and 2019.

Outstanding 2,402,633 and

2,401,213 as of June 30, 2020 and 2019, respectively

Issued 3,129,874 and 3,029,874

shares as of June 30, 2021 and 2020, respectively.

Outstanding 2,702,633

and 2,402,633 as of June 30, 2021 and 2020, respectively

(includes 279,429 and 0 Unearned ESOP Shares,

10 unchanged sentences

& Electronics Corp.

Statements of Comprehensive Income

Statements of Comprehensive (Loss) Income

Ended June 30, 2021 and 2020

1 unchanged sentence

Selling, general and administrative expenses

Operating income

Operating (loss) income

Interest income

Total other income

Income before provision for income taxes

Provision for income taxes

Other comprehensive income, net of tax:

Unrealized (loss) gain on investment securities

Total comprehensive income

Net income per share:

(Loss) income before (benefit) provision for income taxes

(Benefit) provision for income taxes

Net (loss) income

Other comprehensive (loss) income, net of tax:

Unrealized gain (loss) on investment securities

Total comprehensive (loss) income

Net (loss) income per share:

Weighted average number of shares outstanding:

2 unchanged sentences

Statements of Changes in Stockholders' Equity

Years Ended June 30, 2020

Years Ended June 30, 2021 and 2020

Comprehensive

1 unchanged sentence

Stockholders’

Income (Loss)

Balance as of June 30, 2019

1 unchanged sentence

Comprehensive income:

Other comprehensive income,

Other comprehensive loss,

net of tax of $ (481)

11 unchanged sentences

Statements of Changes in Stockholders' Equity

Years Ended June 30, 2020

Years Ended June 30, 2021 and 2020

Comprehensive

1 unchanged sentence

Stockholders’

(Loss) Income

Balance as of June 30, 2020

$ (7,650,805 )

Comprehensive income:

Other comprehensive loss,

Comprehensive loss:

Other comprehensive income,

net of tax of $198

Total comprehensive income

Stock options exercised

Total comprehensive loss

Stock-based compensation

1 unchanged sentence

$0.50 per share

Purchase of treasury stock

Sale of stock to ESOP

Reduction of unearned ESOP shares

1 unchanged sentence

$ (6,038,691 )

$ (5,110,770 )

The accompanying notes are an integral part of the financial statements.

3 unchanged sentences

Cash Flows from Operating Activities:

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

Bad debt expense

Net (loss) income

Adjustments to reconcile net (loss) income to net cash

provided by operating activities:

Stock-based compensation

1 unchanged sentence

Loss on disposal of assets

Deferred income tax (benefit) expense

Loss on inventory reduction due to contract cancellation

Deferred income tax benefit

Changes in assets and liabilities:

Decrease (increase) in trade receivables

Decrease in income tax receivable

Decrease in trade receivables

Increase in income tax receivable

Increase in inventories

Decrease in prepaid expenses and other current assets

Increase in accounts payable

Increase (decrease) in accrued salaries and wages

(Decrease) increase in vacation accrual

Increase in other accrued expenses

(Increase) decrease in prepaid expenses and other current assets

(Decrease) increase in accounts payable

Increase in accrued salaries and wages

Decrease in vacation accrual

(Decrease) increase in other accrued expenses

Increase in payroll and other taxes withheld

Increase (decrease) in contract liabilities

Increase in income taxes payable

Net cash provided by (used in) operating activities

$ (3,604,406 )

Increase in contract liabilities

(Decrease) increase in income taxes payable

Net cash provided by operating activities

Cash Flows from Investing Activities:

8 unchanged sentences

Net cash used in financing activities

Increase (decrease) in cash and cash equivalents

Increase in cash and cash equivalents

Cash and cash equivalents, beginning of the year

4 unchanged sentences

& Electronics Corp.

Notes to Financial Statements

Nature of Operations

to Financial Statements

of Operations

& Electronics Corp.

Company) is a manufacturer of electronic equipment used primarily in military and industrial applications.

The principal markets

for the Company's products are companies that provide electronic support to both military and industrial applications across the

United States and at some international locations.

(the Company)

is a manufacturer of electronic equipment used primarily in military and industrial applications.

The principal markets for the Company's

products are companies that provide electronic support to both military and industrial applications across the United States and at some

international locations.

Summary of Significant Accounting Policies

The majority of our net sales is generated

from contracts with industrial manufacturers and defense companies, the Department of Defense, other agencies of the government

of the United States and foreign governments for the design, development and/or manufacture of products.

Contracts may be long-term

We provide our products and design and development services under fixed-price contracts.

Under fixed-price contracts

we agree to perform the specified work for a pre-determined price.

To the extent our actual costs vary from the estimates upon

which the price was negotiated, we will generate more or less profit or could incur a loss.

We account for a contract after it has been

approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract

has commercial substance, and collectability of consideration is probable.

We assess each contract at its inception to determine

whether it should be combined with other contracts.

When making this determination, we consider factors such as whether two or

more contracts were negotiated and executed at or near the same time, or were negotiated with an overall profit objective.

We evaluate the products or services promised

in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations.

Significant judgment is required in determining performance obligations.

We determine the transaction price for each contract based

on the consideration we expect to receive for the products or services being provided under the contract.

The transaction price

for each performance obligation is based on the estimated standalone selling price of the product or service underlying each performance

Transaction prices on our contracts subject to the Federal Acquisition Regulations (FAR) are typically based on estimated

costs plus a reasonable profit margin.

We recognize revenue using the output method

based on the appraisal of results achieved and milestones reached or units delivered based on contractual shipment terms, typically

shipping point.

Raw materials are valued at the lower of cost

(average cost) or net realizable value.

Balances for slow-moving and obsolete inventory are reviewed on a regular basis by analyzing

estimated demand, inventory on hand, sales levels, market conditions, and other information and reduce inventory balances based

on this analysis.

Inventoried work relating to contracts

in process and work in process is valued at actual production cost, including factory overhead incurred to date.

Contract costs

include material, subcontract costs, labor, and an allocation of overhead costs.

Work in process represents spare units and parts

and other inventory items acquired or produced to service units previously sold or to meet anticipated future orders.

for losses on contracts is made when the existence of such losses becomes probable and estimable.

The provision for losses

on contracts is included in other accrued expenses on the Company’s balance sheet.

Contracts are subject to modification,

change or cancellation, and the Company accounts for these changes as they are probable and estimable.

The Company evaluates

the impact of any scope modifications and will adjust reserves as information is known and estimable.

Subsequent to

year end, the Company received a request from a customer to temporarily stop work on a contract for a minimum of 120 days.

The Company has determined that there is no immediate impact for the request, however the Company will continue to evaluate any

impact on the financial statements.

The costs attributed to units delivered under contracts are based on the estimated average

cost of all units expected to be produced.

The majority of our net sales is generated from contracts

with industrial manufacturers and defense companies, the Department of Defense, other agencies of the government of the United States

and foreign governments for the design, development and/or manufacture of products.

We provide our products and design and development

services under fixed-price contracts.

Under fixed-price contracts we agree to perform the specified work for a pre-determined price.

the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could

incur a loss.

We account for a contract after it has been approved

by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial

substance, and collectability of consideration is probable.

We assess each contract at its inception to determine whether it should be

combined with other contracts.

When making this determination, we consider factors such as whether two or more contracts were negotiated

and executed at or near the same time, or were negotiated with an overall profit objective.

We evaluate the products or services promised in each

contract at inception to determine whether the contract should be accounted for as having one or more performance obligations.

judgment is required in determining performance obligations.

We determine the transaction price for each contract based on the consideration

we expect to receive for the products or services being provided under the contract.

The transaction price for each performance obligation

is based on the estimated standalone selling price of the product or service underlying each performance obligation.

Transaction prices

on our contracts subject to the Federal Acquisition Regulations (FAR) are typically based on estimated costs plus a reasonable profit

We recognize revenue using the output method based

on the appraisal of results achieved and milestones reached or units delivered based on contractual shipment terms, typically shipping

Raw materials are valued at the lower of cost (average

cost) or net realizable value.

Balances for slow-moving and obsolete inventory are reviewed on a regular basis by analyzing estimated

demand, inventory on hand, sales levels, market conditions, and other information and reduce inventory balances based on this analysis.

Inventoried work relating to contracts in process

and work in process is valued at actual production cost, including factory overhead incurred to date.

Contract costs include material,

subcontract costs, labor, and an allocation of overhead costs.

Work in process represents spare units and parts and other inventory items

acquired or produced to service units previously sold or to meet anticipated future orders.

Provision for losses on contracts is made

when the existence of such losses becomes probable and estimable.

The provision for losses on contracts is included in other accrued

expenses on the Company’s balance sheet.

The costs attributed to units delivered under contracts are based on the estimated

average cost of all units expected to be produced.

Certain contracts are expected to extend beyond twelve months.

The estimation of total cost at completion

of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the

Given the significance of the estimation processes and judgments described above, it is possible that materially

different amounts of expected sales and contract costs could be recorded if different assumptions were used,

based on changes in circumstances, in the estimation process.

When a change in expected sales value or estimated cost is

determined, changes are reflected in current period earnings.

The estimation of total cost at completion of a contract is subject to

numerous variables involving contract costs and estimates as to the length of time to complete the contract.

Given the significance

of the estimation processes and judgments described above, it is possible that materially different amounts of expected sales and contract

costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process.

change in expected sales value or estimated cost is determined, the change is reflected in current period earnings.

& Electronics Corp.

Notes to Financial Statements

Summary of Significant Accounting Policies, Continued

to Financial Statements

Summary of Significant Accounting Policies,

Contract Liabilities

Contract liabilities include advance payments

and billings in excess of revenue recognized.

Depreciation of plant and equipment is

computed on a straight-line basis over the estimated useful lives of the assets.

Estimated useful lives of depreciable

assets are as follows:

Contract liabilities include advance payments and

billings in excess of revenue recognized.

Depreciation of plant and equipment is computed

on a straight-line basis over the estimated useful lives of the assets.

Estimated useful lives of depreciable assets

are as follows:

Buildings and improvements

1 unchanged sentence

Furniture and fixtures

The Company follows the provisions of

Accounting Standards Codification (“ASC”) Topic 740-10, "Accounting for Income Taxes."

The Company follows the provisions of Accounting

Standards Codification (“ASC”) Topic 740-10, "Accounting for Income Taxes."

Under the provisions of ASC 740-10, deferred

1 unchanged sentence

carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are

measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected

to be recovered or settled.

The effect on deferred taxes and liabilities of a change in tax rates is recognized in earnings

in the period that includes the enactment date.

Deferred tax assets and liabilities are measured

using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered

The effect on deferred taxes and liabilities of a change in tax rates is recognized in earnings in the period that includes

the enactment date.

Cash and Cash Equivalents

Cash and cash equivalents consist of

cash and money market funds.

The Company considers all highly liquid investments with original maturities of three months

or less to be cash equivalents.

Cash and cash equivalents consist of cash and

money market funds.

The Company considers all highly liquid investments with original maturities of three months or less to be cash

Investment Securities

The Company accounts for its

investment securities in accordance with ASC 320-10-25, “Accounting for Certain Investments in Debt and Equity

Securities.”

Investment securities at June 30, 2020 and 2019 consist of certificates of deposit and municipal

The Company accounts for its investment

securities in accordance with ASC 320-10-25, “Accounting for Certain Investments in Debt and Equity Securities.”

Investment securities at June 30, 2021 consists of certificates of deposit and at June 30, 2020 consisted of certificates of deposit

and municipal bonds.

The Company classifies investment securities as available-for-sale.

Unrealized holding gains and losses,

net of related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate

Unrealized holding gains and

losses, net of related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate

component of stockholders’

2 unchanged sentences

available-for-sale are included in earnings and are determined using the specific identification method.

income is recognized when earned.

Fair values are based on quoted market prices available as of the balance sheet date,

and are therefore considered a Level 1 valuation.

Interest income is

recognized when earned.

Fair values are based on quoted market prices available as of the balance sheet date, and are

therefore considered a Level 1 valuation.

Fair Value of Financial Instruments

ASC 820 establishes a fair value hierarchy

which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair

ASC 820 establishes a fair value hierarchy which

requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as

of the measurement date.

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the

measurement date.

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;

prices in markets that are not active;

quoted prices

in markets that are not active;

or other inputs that are observable or can be corroborated by observable market data.

& Electronics Corp.

Notes to Financial Statements

Summary of Significant Accounting Policies, Continued

to Financial Statements

Summary of Significant Accounting Policies,

Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants

1 unchanged sentence

The carrying amounts of financial instruments,

including cash and cash equivalents, short term investments, accounts receivable, accounts payable, accrued expenses and contract

liabilities, approximated fair value as of June 30, 2020 and 2019 because of the immediate or short-term maturity of these financial

Accounts Receivable and Allowance for

Doubtful Accounts

including cash and cash equivalents, short term investments, accounts receivable, accounts payable, accrued expenses and contract liabilities,

approximated fair value as of June 30, 2021 and 2020 because of the immediate or short-term maturity of these financial instruments.

Accounts Receivable and Allowance for Doubtful

The Company extends credit to its customers

in the normal course of business and collateral is generally not required for trade receivables.

Exposure to credit risk

is controlled through the use of credit approvals, credit limits, and monitoring procedures.

Accounts receivable are reported

net of an allowance for doubtful accounts.

Exposure to credit risk is controlled

through the use of credit approvals, credit limits, and monitoring procedures.

Accounts receivable are reported net of an allowance

for doubtful accounts.

The Company estimates the allowance based on its analysis of specific balances.

Interest is not charged on past due balances.

Based on these factors, there was an allowance for doubtful accounts of $3,000

at June 30, 2020 and 2019.

Changes to the allowance for doubtful accounts are charged to expense and reduced by charge-offs,

net of recoveries.

Interest is not charged on

past due balances.

Based on these factors, there was an allowance for doubtful accounts of $3,000 at June 30, 2021 and 2020.

Changes to the allowance for doubtful accounts are charged to expense and reduced by charge-offs, net of recoveries.

Per Share Amounts

ASC 260-10 “Earnings Per Share

requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share,

Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares

outstanding for the period.

Diluted EPS reflects the potential dilution that could occur if securities or other contracts

to issue common stock were exercised or converted into common stock.

The dilutive effect of outstanding options issued by

the Company are reflected in diluted EPS using the treasury stock method.

Under the treasury stock method, options will only

have a dilutive effect when the average market price of common stock during the period exceeds the exercise price of the options.

Comprehensive Income

Comprehensive income consists of net income

and other comprehensive income.

Other comprehensive income for fiscal years ended June 30, 2020 and 2019 consists of unrealized

holding gains and losses on available-for-sale securities.

ASC 260-10 “Earnings Per Share (EPS)”

requires the Company to calculate net (loss) income per share based on basic and diluted net (loss) income per share, as defined.

Basic EPS excludes dilution and is computed by dividing net (loss) income by the weighted average number of shares outstanding for the

Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were

exercised or converted into common stock.

The dilutive effect of outstanding options issued by the Company are reflected in diluted

EPS using the treasury stock method.

Under the treasury stock method, options will only have a dilutive effect when the average

market price of common stock during the period exceeds the exercise price of the options.

Comprehensive (Loss) Income

Comprehensive (loss) income consists of net (loss)

income and other comprehensive (loss) income.

Other comprehensive (loss) income for fiscal years ended June 30, 2021 and 2020 consists

of unrealized holding gains and losses on available-for-sale securities.

Use of Estimates

The preparation of financial statements in

conformity with accounting principles generally accepted in the United States of America requires management to make estimates

and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at

the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results

could differ from those estimates.

The preparation of financial statements in conformity

with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that

affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial

statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

Reclassifications

Certain reclassifications may have been made

to the prior year financial statements to conform to the current year presentation.

Certain reclassifications may have been made to the

prior year financial statements to conform to the current year presentation.

Recently Issued Accounting Standards

In February 2018, the FASB issued ASU

2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects

from Accumulated Other Comprehensive Income”.

Under current accounting guidance, the income tax effects for changes in income

tax rates and certain other transactions are recognized in income from continuing operations resulting in income tax effects recognized

in Accumulated Other Comprehensive Income that do not reflect the current tax rate of the entity (“stranded tax effects”).

The new guidance allows the Company the option to reclassify these stranded tax effects to retained earnings that relate to the

change in the federal tax rate resulting from the passage of the Tax Cuts and Jobs Act (the “Tax Act”).

is effective for fiscal years beginning after December 15, 2018, including interim periods therein, and early adoption is permitted.

The adoption did not have a material effect on the Company’s financial statements.

& Electronics Corp.

Notes to Financial Statements

Summary of Significant Accounting Policies, Continued

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued guidance

(ASU 2019-12) intended to simplify the accounting for income taxes.

The amendments in this guidance are effective for fiscal years,

and interim periods within those fiscal years, beginning after December 15, 2020 (the Company’s fiscal 2021), with early

adoption permitted.

The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.

In August 2018, the FASB issued ASU No.

“Fair Value Measurement (Topic 820):

2018-13, “Fair

Value Measurement (Topic 820):

Disclosure Framework –

Changes to the Disclosure Requirements for Fair Value Measurement.”

ASU is part of the FASB’s larger disclosure framework project intended to improve the effectiveness of financial statement

footnote disclosure.

ASU is part of the FASB’s larger disclosure framework project intended to improve the effectiveness of financial statement footnote

ASU 2018-13 modifies required fair value disclosures related primarily to level 3 investments.

ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods.

adoption of ASU 2018-13 is not expected to have a material effect on the Company’s financial position, results of operations,

and cash flows.

adoption of ASU 2018-13 does not have a material effect on the Company’s financial position, results of operations, and cash flows

as our investments are currently Level 1.

We will, however, continue to evaluate going forward should we obtain any Level 3 investments.

& Electronics Corp.

to Financial Statements

Summary of Significant Accounting Policies,

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued guidance (ASU 2019-12)

intended to simplify the accounting for income taxes.

The amendments in this guidance are effective for fiscal years, and interim periods

within those fiscal years, beginning after December 15, 2020 (the Company’s fiscal year beginning July 1, 2021).

The Company did

not elect early adoption of this guidance and is not expected to have an impact on the Company’s disclosures.

Impairment of Long-Lived Assets

Long-lived assets, including property, plant,

and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an

asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount

of an asset to estimated undiscounted future cash flows expected to be generated by the asset.

If the carrying amount of

an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount

of the asset exceeds the fair value of the asset.

Long-lived assets, including property, plant, and

equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not

be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated

undiscounted future cash flows expected to be generated by the asset.

If the carrying amount of an asset exceeds its estimated future

cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

There were no impairments of long-lived assets in fiscal years 2021 and 2020.

Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount

or fair value less costs to sell, and no longer depreciated.

The assets and liabilities of a disposed group classified as

held for sale are presented separately in the appropriate asset and liability sections of the balance sheet, if applicable.

Assets to be disposed of are separately presented

in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated.

The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability

sections of the balance sheet, if applicable.

Concentrations of Risk

The market for our defense electronics

products is largely dependent on the availability of new contracts from the United States and foreign governments to prime contractors

to which we provide components.

Any decline in expenditures by the United States or foreign governments may have an adverse

effect on our financial performance.

The market for our defense electronics products

is largely dependent on the availability of new contracts from the United States and foreign governments to prime contractors to which

we provide components.

Any decline in expenditures by the United States or foreign governments may have an adverse effect on our

financial performance.

Generally, U.S.

Government contracts

are subject to procurement laws and regulations.

Some of the Company’s contracts are governed by the Federal Acquisition

Regulation (FAR), which lays out uniform policies and procedures for acquiring goods and services by the U.S.

Government, and agency-specific

acquisition regulations that implement or supplement the FAR.

For example, the Department of Defense implements the FAR through

the Defense Federal Acquisition Regulation (DFAR).

The FAR also contains guidelines and

regulations for managing a contract after award, including conditions under which contracts may be terminated, in whole or in part,

at the government’s convenience or for default.

If a contract is terminated for the convenience of the government,

a contractor is entitled to receive payments for its allowable costs and, in general, the proportionate share of fees or earnings

for the work done.

If a contract is terminated for default, the government generally pays for only the work it has accepted.

These regulations also subject the Company to financial audits and other reviews by the government of its costs, performance, accounting

and general business practices relating to its contracts, which may result in adjustment of the Company’s contract-related

costs and fees.

Effective July 1, 2018, we adopted Financial

Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC) 606 “Revenue from Contracts

with Customers”, which requires entities to assess the products or services promised in contracts with customers at contract

inception to determine the appropriate unit at which to record revenues.

Revenue is recognized when control of the promised

products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be

entitled to in exchange for those products or services.

We adopted ASC 606 using the

modified retrospective method, which means, using the allowed practical expedient, we applied the new standard to open

contracts at June 30, 2018.

We reviewed remaining obligations as of the effective date and determined no adjustment was

required to the opening balance of retained earnings.

Under the modified retrospective method, prior period revenue is

not restated for comparative periods.

As a result of the adoption, we reclassified customer advance payments from

inventory to contract liabilities.

Contract liabilities were $2,175,235 and $6,054 as of June 30, 2020 and June 30,

2019, respectively.

The increase in contract liabilities is primarily due to cash collected from progress payments

related to specific contracts.

The company used the practical expedient to expense incremental costs incurred to obtain a

contract when the contract term is less than one year.

Government contracts are subject

to procurement laws and regulations.

Some of the Company’s contracts are governed by the Federal Acquisition Regulation (FAR),

which lays out uniform policies and procedures for acquiring goods and services by the U.S.

Government, and agency-specific acquisition

regulations that implement or supplement the FAR.

For example, the Department of Defense implements the FAR through the Defense

Federal Acquisition Regulation (DFAR).

The FAR also contains guidelines and regulations

for managing a contract after award, including conditions under which contracts may be terminated, in whole or in part, at the government’s

convenience or for default.

If a contract is terminated for the convenience of the government, a contractor is entitled to receive

payments for its allowable costs and, in general, the proportionate share of fees or earnings for the work done.

If a contract is

terminated for default, the government generally pays for only the work it has accepted.

These regulations also subject the Company

to financial audits and other reviews by the government of its costs, performance, accounting and general business practices relating

to its contracts, which may result in adjustment of the Company’s contract-related costs and fees.

The Company follows ASC 606 “Revenue from Contracts

with Customers”

to determine the recognition of revenue.

This standard requires entities to assess the products or services promised

in contracts with customers at contract inception to determine the appropriate unit at which to record revenues.

Revenue is recognized

when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the

entity expects to be entitled to in exchange for those products or services.

& Electronics Corp.

Notes to Financial Statements

to Financial Statements

Revenue, Continued

Significant judgment is required in determining

the satisfaction of performance obligations.

Revenues from our performance obligations are satisfied over time using the

output method which considers the appraisal of results achieved and milestones reached or units delivered based on contractual

shipment terms, typically shipping point.

Revenue is recognized when the customer takes control of the product or services.

The output method best depicts the transfer of control to the customer as the output method represents work completed.

is typically transferred to the customer at shipping point as the Company has a present right to payment, the customer has legal

title to the asset, the customer has the significant risks and rewards of ownership of the asset, and in most instances the customer

has accepted the asset.

Total revenue recognized for the twelve months

ended June 30, 2020 based on units delivered totaled $25,739,709 compared to $30,677,077 for the same periods in 2019.

revenue recognized for the twelve months ended June 30, 2020 based on milestones achieved totaled $5,786,522 compared to $5,800,774

for the same periods in 2019.

The Company offers a standard one-year product

Product warranties offered by the Company are classified as assurance-type warranties, which means, the warranty only

guarantees that the good or service functions as promised.

Based on this, the provided warranty is not considered to be a distinct

performance obligation.

The impact of variable consideration has been considered but none identified which would be required

to be allocated to the transaction price as of June 30, 2020.

Significant judgment is required in determining the

satisfaction of performance obligations.

Revenues from our performance obligations are satisfied over time using the output method

which considers the appraisal of results achieved and milestones reached or units delivered based on contractual shipment terms, typically

shipping point.

Revenue is recognized when, or as, the customer takes control of the product or services.

The output method

best depicts the transfer of control to the customer as the output method represents work completed.

Control is typically transferred

to the customer at the shipping point as the Company has a present right to payment, the customer has legal title to the asset, the customer

has the significant risks and rewards of ownership of the asset, and in most instances the customer has accepted the asset.

Total revenue recognized for the twelve months ended

June 30, 2021 based on units delivered totaled $22,973,507 compared to $25,739,709 for the same periods in fiscal year 2020.

revenue recognized for the twelve months ended June 30, 2021 based on milestones achieved totaled $4,761,091 compared to $5,786,522 for

the same periods in fiscal year 2020.

The Company offers a standard one-year product warranty.

Product warranties offered by the Company are classified as assurance-type warranties, which means, the warranty only guarantees that

the good or service functions as promised.

Based on this, the provided warranty is not considered to be a distinct performance obligation.

The impact of variable consideration has been considered but none identified which would be required to be allocated to the transaction

price as of June 30, 2021.

Our payment terms are generally 30-60 days.

The Company’s backlog at June 30, 2020

totaling $54.9 million is expected, based on contractual due dates, to be recognized in the following fiscal years:

Contract liabilities were $3,077,605 and $2,175,235

as of June 30, 2021 and 2020, respectively.

The increase in contract liabilities is primarily due to the advance collection of cash

on specific contracts, offset in part, by revenue recognized.

The company used the practical expedient to expense incremental costs incurred

to obtain a contract when the contract term is less than one year.

The Company’s backlog at June 30, 2021 totaling

$65.6 million is expected, based on expected due dates, to be recognized in the following fiscal years:

in 2024, and 2% thereafter.

Investment Securities

Investment securities at June 30, 2020

and 2019 consist of certificates of deposit and municipal bonds which are classified as available-for-sale securities and have

been determined to be level 1 assets.

The cost, gross unrealized gains, gross unrealized losses and fair value of available-for-sale

securities by major security type at June 30, 2020 and 2019 are as follows:

Investment securities at June 30, 2021 consist of certificates of

deposit and at June 30, 2020 consist of certificates of deposit and municipal bonds, which are classified as

available-for-sale securities and have been determined to be level 1 assets.

The cost, gross unrealized gains, gross

unrealized losses and fair value of available-for-sale securities by major security type at June 30, 2021 and June 30, 2020 are

Certificates of deposit

5 unchanged sentences

& Electronics Corp.

Notes to Financial Statements

to Financial Statements

Investment Securities, Continued

The portfolio is diversified and highly

liquid and primarily consists of investment grade fixed income instruments.

At June 30, 2020, the Company did not have any investments

in individual securities that have been in a continuous loss position considered to be other than temporary.

The portfolio is diversified and highly liquid

and primarily consists of investment grade fixed income instruments.

At June 30, 2021, the Company did not have any investments in individual

securities that have been in a continuous loss position considered to be other than temporary.

As of June 30, 2021 and 2020, the remaining

4 unchanged sentences

Contracts in Process

in process at June 30, 2020 and 2019 are as follows:

Contracts in process

at June 30, 2021 and 2020 are as follows:

Unrecognized gross contract value

Costs related to contracts in process

Included in costs relating to contracts

in process at June 30, 2020 and 2019 are costs of $1,716,176 and $ 2,740,804 ,

respectively, relative to contracts that may not be completed within the ensuing year.

Under the units-of-delivery method, the

related sale and cost of sales will not be reflected in the statements of comprehensive income until the units under contract are

Included in costs relating to contracts in

process at June 30, 2021 and 2020 are costs relative to contracts that may not be completed within the ensuing year as contracts vary

in size, scope and duration.

Under the units-of-delivery method, the related sale and cost of sales will not be reflected in the statements

of comprehensive income until the units under contract are shipped.

Property, Plant and Equipment

8 unchanged sentences

Property, plant and equipment, net

Machinery and equipment includes $39,496

that was not placed in service as of June 30, 2020.

Depreciation expense was $568,528 and $540,978 for the years ended June 30,

2020 and 2019, respectively.

Depreciation expense was $519,813 and $568,528

for the years ended June 30, 2021 and 2020, respectively.

Pension Expense

Under terms of a negotiated union contract

which expires on June 30, 2022, the Company is obligated to make contributions to a union-sponsored International Brotherhood of

Electrical Workers Local 1799 defined benefit pension plan (Plan identifying number is 14-6065199) covering eligible employees.

Such contributions and expenses are based upon hours worked at a specified rate and amounted to $121,273 in fiscal year 2020 and

$129,095 in fiscal year 2019.

These contributions represent more than five percent of the total contributions made into the Plan.

For the years beginning January 1, 2020 and 2019, the Plan was in the “green zone”

which means it is neither endangered

nor critical status.

A Funding Improvement Plan, entered into by Plan Trustees in fiscal year 2013, when the Plan was in “critical

status,”

calls for an increase in contributions starting January 1, 2016 of $0.04 per hour for each year for five years thereafter.

The increase did not and will not have a material impact on the Company’s financial statements.

Under terms of a negotiated union contract which expires

on June 30, 2022, the Company is obligated to make contributions to a union-sponsored International Brotherhood of Electrical Workers

Local 1799 defined benefit pension plan (Plan identifying number is 14-6065199) covering eligible employees.

Such contributions and expenses

are based upon hours worked at a specified rate and amounted to $112,997 in fiscal year 2021 and $121,273 in fiscal year 2020.

These contributions

represent more than five percent of the total contributions made into the Plan.

For the years beginning January 1, 2021 and 2020, the

Plan was in the “green zone”

which means it is neither endangered nor critical status.

A Funding Improvement Plan, entered

into by Plan Trustees in fiscal year 2013, when the Plan was in “critical status,”

calls for an increase in contributions

starting January 1, 2016 of $0.04 per hour for each year for five years thereafter.

The increase did not and will not have a material

impact on the Company’s financial statements.

& Electronics Corp.

Notes to Financial Statements

to Financial Statements

Pension Expense, Continued

The Company sponsors a 401(k) plan for

non-union workers with employee and employer matching contributions.

The employer match is 10% of the employee contribution and

was $58,389 and $57,581, for fiscal years 2020 and 2019, respectively.

Provision for Income Taxes

A summary of the components of the provision

The Company sponsors a 401(k) plan for non-union

workers with employee and employer matching contributions.

The employer match is 10% of the employee contribution and was $49,218 and

$58,389, for fiscal years 2021 and 2020, respectively.

(Benefit) Provision for Income Taxes

A summary of the components of the (benefit) provision

for income taxes for the years ended June 30, 2021 and 2020 is as follows:

Current tax expense - federal

Current tax (benefit) expense - state

Deferred tax (benefit) expense

Provision for income taxes

Deferred income taxes reflect the impact

of "temporary differences"

between the amount of assets and liabilities for financial reporting purposes and such amounts

measured by tax laws and regulations.

Current tax (benefit) expense - federal

Current tax benefit - state

Deferred tax benefit

(Benefit) provision for income taxes

Deferred income taxes reflect the impact of

"temporary differences"

between the amount of assets and liabilities for financial reporting purposes and such amounts measured

by tax laws and regulations.

These "temporary differences"

3 unchanged sentences

income tax rates of 50.7% and 11.1%, for 2021 and 2020 respectively, differed from the statutory U.S.

federal income tax rate for

the following reasons:

federal income tax rate for the

following reasons:

federal statutory income tax rate

5 unchanged sentences

Foreign Derived Intangible Income Deduction

Rate Differential on Net Operating Loss Carryback

Effective tax rate

For the years ended June 30, 2020 and 2019

deferred income tax benefit and expense of $44,122 and $258,040, respectively, results from the changes in temporary differences

for each year.

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of

June 30, 2020 and 2019 are presented as follows:

For the years ended June 30, 2021 and 2020 deferred

income tax benefit of $64,396 and $44,122, respectively, results from the changes in temporary differences for each year.

The tax effects

of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of June 30, 2021 and 2020 are presented

Deferred tax assets:

10 unchanged sentences

& Electronics Corp.

Notes to Financial Statements

Provision for Income Taxes, Continued

In assessing the realization of deferred

tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the

periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities,

projected future taxable income, and tax planning strategies in making this assessment.

Based upon the level of historical taxable

income and projection for future taxable income over the period in which the deferred tax assets are deductible, management believes

it is more likely than not that the Company will realize the benefits of these temporary differences without consideration of a

valuation allowance.

As the result of the implementation of

the FASB interpretation No.

to Financial Statements

(Benefit) Provision for Income Taxes,

In assessing the realization of deferred tax

assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which

those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future

taxable income, and tax planning strategies in making this assessment.

Based upon the level of historical taxable income and projection

for future taxable income over the period in which the deferred tax assets are deductible, management believes it is more likely than

not that the Company will realize the benefits of these temporary differences without consideration of a valuation allowance.

As the result of the implementation of the FASB

interpretation No.

48 (“FIN 48”), Accounting for Uncertainty in Income Taxes –

An Interpretation of

FASB Statement No.

An Interpretation of FASB Statement No.

109, the Company recognized no material adjustments to unrecognized tax benefits.

As of June 30, 2020 and 2019,

the Company has no unrecognized tax benefits.

As of June 30, 2021 and 2020, the Company has no unrecognized

tax benefits.

The Company recognizes interest and penalties

in general and administrative expense.

As of June 30, 2020 and 2019, the Company has not recorded any provision for accrued interest

and penalties.

The Company is subject to taxation in

the United States and various state jurisdictions.

By Federal statute tax returns are subject to audit for three years from date

of filing unless the return was audited within that period.

In general the majority of state statues follow similar guidelines.

As such, the Company’s tax returns for tax years ending June 30, 2020, 2019, 2018, and 2017 remain open to examination by

the respective taxing authorities.

Significant Customers

A significant portion of the Company's business

is the production of military and industrial electronic equipment for use by the U.S.

and foreign governments and certain industrial

Sales to two domestic customers, accounted for approximately 38% of total sales in 2020.

Sales to three domestic customers

accounted for 54% of total sales in 2019.

The related accounts receivable balance, as a percentage of the Company's total trade

accounts receivable balance, was 54% represented by two customers at June 30, 2020 and 51% represented by two customers at June

As of June 30, 2021 and 2020, the Company has not recorded any provision for accrued interest and

The Company is subject to taxation in the United

States and various state jurisdictions.

The federal tax returns are subject to audit for three years from date of filing unless the return

was audited within that period.

In general the majority of state statutes follow similar guidelines.

As such, the Company’s tax

returns for tax years ending June 30, 2021, 2020, and 2019 remain open to examination by the respective taxing authorities.

On March 27, 2020, the Coronavirus Aid, Relief,

and Economic Security Act (“CARES Act”) was enacted in response to the economic uncertainty resulting from the COVID19 pandemic.

The CARES Act includes many measures to assist companies, including temporary changes to income and non-income based laws, some of which

were enacted as part of the Tax Cuts and Jobs Act of 2017 (“TCJA”).

Some of the key changes include eliminating the 80% of

taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019 and 2020, allowing

NOLs originating in 2018, 2019 and 2020 to be carried back five years, enhanced interest deductibility, and retroactively clarifying the

immediate recovery of qualified improvement property costs rather than over a 39-year recovery period.

During the year ended June 30,

2021, the Company recorded an approximate $120,000 benefit relating to the NOL carryback provisions provided for in the CARES Act.

Company will continue to monitor additional guidance issued and assess the impact that various provisions will have on its business.

A significant portion of the Company's business is

the production of military and industrial electronic equipment for use by the U.S.

and foreign governments and certain industrial customers.

Sales to four domestic customers accounted for 59% of total sales in 2021.

Sales to two domestic customers accounted for

38% of total sales in 2020.

The related accounts receivable balance, as a percentage of the Company's total trade accounts receivable

balance, was 76% represented by four customers at June 30, 2021 and 54% represented by two customers at June 30, 2020.

Export sales in fiscal years 2021 and 2020

were approximately $2,019,000 and $2,077,000, respectively.

Employee Stock Ownership Plan

The Company sponsors a leveraged

employee stock ownership plan (the "ESOP") that covers all nonunion employees who work 1,000 or more hours per year and

are employed on June 30.

The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends on

unallocated shares received by the ESOP.

All dividends on unallocated shares received by the ESOP are used to pay debt service.

Dividends on allocated ESOP shares are recorded as a reduction of retained earnings.

As the debt is repaid, shares are released

and allocated to active employees, based on the proportion of debt service paid in the year.

The Company accounts for its ESOP

in accordance with FASB ASC 718-40.

Accordingly, the shares purchased by the ESOP are reported as Unearned ESOP Shares in the statement

of financial position.

As shares are released or committed-to-be-released, the Company reports compensation expense equal to the

current average market price of the shares, and the shares become outstanding for earnings-per-share (EPS) computations.

ESOP compensation

expense was $305,006 and $390,369 for the years ended June 30, 2020 and 2019, respectively.

Stock Ownership Plan

The Company ESOP covers all nonunion employees who

work 1,000 or more hours per year and are employed on June 30.

Prior to December 1, 2020, the ESOP owned 469,119 shares, all of

which were allocated to employees.

On December 1, 2020, pursuant to a Stock Purchase Agreement dated as of such date, the Company,

by selling 300,000 shares of its common stock, par value $0.33 1/3 per share, to the Espey Mfg.

& Electronics Corp.

Employee Stock

Ownership Plan Trust, provided more shares to be allocated to employees for services rendered over the next 15 years.

The ESOP paid

$18.29 per share, for an aggregate purchase price of $5,487,000.

The determination of the purchase price was based on a fairness

opinion obtained by an independent valuation firm.

The ESOP borrowed from the Corporation an amount equal to the purchase price.

The loan will be repaid in fifteen (15) equal annual installments of principal.

The Board of Directors has fixed the interest rate

and the unpaid balance will bear interest at a fixed rate of 3.00% per annum.

The Board of Directors of the Company had approved

a purchase price per share equal to the lesser of the trading value on the day of closing or the lowest price listed in the valuation

established by the independent valuation firm plus $0.25.

The valuation identified a range of $18.04 - $19.43 per share.

In making the sale, the Company relied on the exemption

from registration under Section 4(2) of the Securities Act of 1933, as amended, because the shares sold were offered only to the ESOP.

After giving effect to the transaction, the ESOP owned

769,119 shares of the Company's 2,702,633 outstanding shares of common stock as of December 1, 2020.

& Electronics Corp.

to Financial Statements

Stock Ownership Plan, Continued

The Company makes annual contributions to the

ESOP equal to the ESOP's debt service less dividends on unallocated shares received by the ESOP.

Any dividends on unallocated shares

received by the ESOP are used to pay debt service.

Any dividends on allocated ESOP shares are recorded as a reduction of retained

As the debt is repaid, shares are released and allocated to active employees, based on the proportion of debt service paid

The Company accounts for its ESOP in accordance with FASB ASC 718-40.

Accordingly, the shares purchased by the ESOP are

reported as Unearned ESOP shares in the balance sheets and the statements of changes in stockholders’

As shares are

released or committed-to-be-released, the Company reports compensation expense equal to the current average market price of the

shares, and the shares become outstanding for earnings-per-share (EPS) computations.

ESOP compensation expense was $353,897 and

$305,006 for the years ended June 30, 2021 and 2020, respectively.

The ESOP shares as of June 30, 2021

4 unchanged sentences

Fair value of unreleased shares

The Company may at times be required

to repurchase shares at the ESOP participants’

The Company may at times be required to repurchase

shares at the ESOP participants’

request at the fair market value.

During the twelve months ended June 30,

2020, the Company repurchased 2,180 shares previously held in the ESOP for $47,949.

During the twelve months ended June 30, 2019

the Company repurchased 1,810 shares previously held by the ESOP for $44,888.

& Electronics Corp.

Notes to Financial Statements

Employee Stock Ownership Plan, Continued

The ESOP allows for eligible participants

to take whole share distributions from the plan on specific dates in accordance with the provision of the plan.

Share distributions

from the ESOP during the twelve months ended June 30, 2020 and 2019 totaled 2,180 shares and 17,279 shares, respectively.

It is the Company’s intention

to continue the program with an additional purchase of shares by the ESOP from the Company in fiscal 2021.

During the twelve months ended June 30, 2021, the Company did

not repurchase shares previously held by the ESOP.

During the twelve months ended June 30, 2020 the Company repurchased 2,180 shares previously

held by the ESOP for $47,949.

The ESOP allows for eligible participants to

take whole share distributions from the plan on specific dates in accordance with the provision of the plan.

Share distributions from

the ESOP during the twelve months ended June 30, 2021 and 2020 totaled 2,470 shares and 2,180 shares, respectively.

Stock-based Compensation

The Company follows ASC 718 in establishing

standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, as well

as transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the

entity’s equity instruments or that may be settled by the issuance of those equity instruments.

ASC 718 requires that the

cost resulting from all share-based payment transactions be recognized in the financial statements based on the fair value of the

share-based payment.

ASC 718 establishes fair value as the measurement objective in accounting for share-based payment transactions

with employees, except for equity instruments held by employee share ownership plans.

standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, as well as transactions

in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity

instruments or that may be settled by the issuance of those equity instruments.

ASC 718 requires that the cost resulting from all share-based

payment transactions be recognized in the financial statements based on the fair value of the share-based payment.

ASC 718 establishes

fair value as the measurement objective in accounting for share-based payment transactions with employees, except for equity instruments

held by employee share ownership plans.

Total stock-based compensation expense recognized

1 unchanged sentence

before income taxes.

The amount of this stock-based compensation expense related to non-qualified stock options (“NQSO”)

for the fiscal years ended June 30, 2020 and 2019, was $50,075 and $44,780, respectively.

The deferred tax benefit related to the

NQSO’s as of June 30, 2020 and 2019 was approximately $10,516 and $9,404, respectively.

The remaining stock option expense

in each year related to incentive stock options (“ISO”) which are not deductible by the corporation when exercised,

assuming a qualifying disposition and as such no deferred tax benefit was established related to these amounts.

As of June 30, 2020, there was approximately

$147,324 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the

next 1.5 years, of which $40,970 relates to NQSO’s and $106,354 relates to ISO’s.

The total deferred tax benefit related

the NQSO’s in future years will be approximately $8,604.

The Company has one employee stock option

plan under which options or stock awards may be granted, the 2017 Stock Option and Restricted Stock Plan (the "2017

Plan"), approved by the Company's shareholders at the Company's Annual Meeting on December 1, 2017.

Directors may grant options to acquire shares of common stock to employees and non-employee directors of the Company at the

fair market value of the common stock on the date of grant.

The maximum aggregate number of shares of common stock subject to

options or awards to non-employee directors is 133,000 and the maximum aggregate number of shares of common stock subject to

options or awards granted to non-employee directors during any single fiscal year is the lesser of 13,300 and 33 1/3% of the

total number of shares subject to options or awards granted in such fiscal year.

The maximum number of shares subject to

options or awards granted to any individual employee may not exceed 15,000 in a fiscal year.

Generally, options granted have

a two-year vesting period based on two years of continuous service and have a ten-year contractual life.

Option grants

provide for accelerated vesting if there is a change in control.

Shares issued upon the exercise of options are from those

held in Treasury.

Options covering 400,000 shares are authorized for issuance under the 2017 plan, of which 164,329 have been

granted as of June 30, 2020.

While no further grants of options may be made under the Company’s 2007 Stock Option and

Restricted Stock Plan, as of June 30, 2020, 136,150 options were outstanding under such plan of which all are vested and

ASC 718 requires the use of a valuation

model to calculate the fair value of stock-based awards.

The Company has elected to use the Black-Scholes option valuation model,

which incorporates various assumptions including those for volatility, expected life, and interest rates.

The table below outlines the weighted average

assumptions that the Company used to calculate the fair value of each option award for the year ended June 30, 2020 and 2019.

The amount of this stock-based compensation expense related to non-qualified stock options (“NQSO”) for

the fiscal years ended June 30, 2021 and 2020, was $32,863 and $50,075, respectively.

The deferred tax benefit related to the NQSO’s

as of June 30, 2021 and 2020 was approximately $6,901 and $10,516, respectively.

The remaining stock option expense in each year related

to incentive stock options (“ISO”) which are not deductible by the corporation when exercised, assuming a qualifying disposition

and as such no deferred tax benefit was established related to these amounts.

As of June 30, 2021, there was $84,935

of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the next 1.5 years,

of which $62,941 relates to ISO’s and $21,994 relates to NQSO’s.

The total deferred tax benefit related the NQSO’s in

future years will be $4,619.

& Electronics Corp.

Notes to Financial Statements

to Financial Statements

Stock-based Compensation, Continued

The Company has one employee stock option plan under

which options or stock awards may be granted, the 2017 Stock Option and Restricted Stock Plan (the "2017 Plan"), approved by

the Company's shareholders at the Company's Annual Meeting on December 1, 2017.

The Board of Directors may grant options to acquire shares

of common stock to employees and non-employee directors of the Company at the fair market value of the common stock on the date of grant.

The maximum aggregate number of shares of common stock subject to options or awards to non-employee directors is 133,000 and the maximum

aggregate number of shares of common stock subject to options or awards granted to non-employee directors during any single fiscal year

is the lesser of 13,300 and 33 1/3% of the total number of shares subject to options or awards granted in such fiscal year.

number of shares subject to options or awards granted to any individual employee may not exceed 15,000 in a fiscal year.

Generally, options

granted have a two-year vesting period based on two years of continuous service and have a ten-year contractual life.

Option grants provide

for accelerated vesting if there is a change in control.

Shares issued upon the exercise of options are from those held in Treasury.

covering 400,000 shares are authorized for issuance under the 2017 plan, of which 226,354 have been granted as of June 30, 2021.

no further grants of options may be made under the Company’s 2007 Stock Option and Restricted Stock Plan, as of June 30, 2021, 117,650

options were outstanding under such plan of which all are vested and exercisable.

ASC 718 requires the use of a valuation model

to calculate the fair value of stock-based awards.

The Company has elected to use the Black-Scholes option valuation model, which incorporates

various assumptions including those for volatility, expected life, and interest rates.

The table below outlines the weighted average assumptions

that the Company used to calculate the fair value of each option award for the year ended June 30, 2021 and 2020.

Dividend yield

4 unchanged sentences

of options granted during the period

The Company declares regular dividends quarterly

and declared and paid a regular cash dividends of $1.00 per share for the twelve months ended June 30, 2020.

The Company declared

regular cash dividends of $1.00 per share and a special cash dividend of $1.00 per share for the twelve months ended June 30, 2019.

Expected stock price volatility is based on the historical volatility of the Company’s stock.

The risk-free interest rate

is based on the implied yield available on U.S.

Treasury issues with an equivalent term approximating the expected life of the

The expected option life (in years) represents the estimated period of time until exercise and is based on actual historical

The following table summarizes stock

option activity during the twelve months ended June 30, 2020:

Effective March 9, 2021, the Company suspended

the payment of its regular quarterly dividend.

For the twelve months ended June 30, 2021 and 2020, the Company paid regular cash

dividends of $0.50 and $1.00 per share, respectively.

Expected stock price volatility is based on the historical volatility of the

Company’s stock.

The risk-free interest rate is based on the implied yield available on U.S.

Treasury issues with an

equivalent term approximating the expected life of the options.

The expected option term (in years) represents the estimated period

of time until exercise and is based on actual historical experience.

The following table summarizes stock option

activity during the twelve months ended June 30, 2021:

Employee Stock Options Plan

4 unchanged sentences

Exercisable at June 30, 2021

The aggregate intrinsic value in the

table above represents the total pretax intrinsic value (the difference between the closing sale price of the Company’s

common stock as reported on the NYSE American on June 30, 2020 and the exercise price, multiplied by the number of in-the-money

options) that would have been received by the option holders if all option holders had exercised their options on June 30, 2020.

This amount changes based on the fair market value of the Company’s common stock.

The total intrinsic values of the options

exercised during the twelve months ended June 30, 2020 and 2019 was $263 and $67,328, respectively.

The following table summarizes changes in non-vested stock

options during the twelve months ended June 30, 2020:

& Electronics Corp.

to Financial Statements

Stock-based Compensation, Continued

The aggregate intrinsic value in the table above

represents the total pretax intrinsic value (the difference between the closing sale price of the Company’s common stock as reported

on the NYSE American on June 30, 2021 and the exercise price, multiplied by the number of in-the-money options) that would have been received

by the option holders if all option holders had exercised their options on June 30, 2021.

This amount changes based on the fair market

value of the Company’s common stock.

The total intrinsic values of the options exercised during the twelve months ended June 30,

2021 and 2020 was $0 and $263, respectively.

The following table summarizes changes in non-vested stock options

during the twelve months ended June 30, 2021:

Non-Vested at July 1, 2020

1 unchanged sentence

Non-Vested at June 30, 2021

& Electronics Corp.

Notes to Financial Statements

Concentration of Credit Risk

Financial instruments that potentially subject

the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts

Financial instruments that potentially subject the

Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable.

The Company maintains cash and cash equivalents with various financial institutions.

At times such investments may

be in excess of FDIC insurance limits.

As disclosed in Note 9, a significant portion of the Company's business is the production

of military and industrial electronic equipment for use by the U.S.

At times such investments may be in excess of FDIC

insurance limits.

As disclosed in Note 9, a significant portion of the Company's business is the production of military and industrial

electronic equipment for use by the U.S.

and foreign governments and certain industrial customers.

related accounts receivable balance, as a percentage of the Company's total trade accounts receivable balance, was 53.9% represented

by two customers at June 30, 2020 and 46.2% represented by one customer at June 30, 2019.

Although the Company's exposure to credit

risk associated with nonpayment of these concentrated balances is affected by the conditions or occurrences within the U.S.

foreign governments, the Company believes that its trade accounts receivable credit risk exposure is limited.

The Company performs

ongoing credit evaluations of its customer's financial conditions and requires collateral, such as progress payments, in certain

circumstances.

The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific

customers, historical trends and other information.

The related accounts receivable balance,

as a percentage of the Company's total trade accounts receivable balance, was 76.3% represented by four customers at June 30, 2021 and

53.9% represented by two customers at June 30, 2020.

Although the Company's exposure to credit risk

associated with nonpayment of these concentrated balances is affected by the conditions or occurrences within the U.S.

and foreign governments,

the Company believes that its trade accounts receivable credit risk exposure is limited.

The Company performs ongoing credit evaluations

of its customer's financial conditions and requires collateral, such as progress payments, in certain circumstances.

The Company establishes

an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

Related Parties

The administration of the shares of

common stock held by the ESOP Trust is subject to the Amended and Restated Plan and a Trust Agreement, each effective as of July

The administration of the shares of common stock held by the ESOP

Trust is subject to the Amended and Restated Plan and a Trust Agreement, each effective as of July 1, 2016.

The Trustees’

rights with respect to the disposition of shares are governed by the terms of the Plan and the Trust

As to shares that have been allocated to the accounts of participants in the ESOP Trust, the Plan provides that the

Trustees are required to vote such shares in accordance with instructions received from the participants.

As to unallocated shares

and allocated shares for which voting instructions have not been received from participants, the Plan provides that the Trustees

are required to vote such shares in accordance with the direction of the Board of Directors of the Company under the terms of the

Plan and Trust Agreement.

See Note 10 for additional information regarding the ESOP.

Commitments and Contingencies

The Company at certain times enters into standby

letters of credit agreements with financial institutions primarily relating to the guarantee of future performance on certain contracts.

Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at June 30, 2020 and 2019.

Government contractor, is subject to audits, reviews, and investigations by the U.S.

Government related to its negotiation

and performance of government contracts and its accounting for such contracts.

with respect to the disposition of shares are governed by the terms of the Plan and the Trust Agreement.

As to shares that have been allocated

to the accounts of participants in the ESOP Trust, the Plan provides that the Trustees are required to vote such shares in accordance

with instructions received from the participants.

As to unallocated shares and allocated shares for which voting instructions have not

been received from participants, the Plan provides that the Trustees are required to vote such shares in accordance with the direction

of the Board of Directors of the Company under the terms of the Plan and Trust Agreement.

See Note 10 for additional information regarding

& Electronics Corp.

to Financial Statements

and Contingencies

The Company at certain times enters into standby letters

of credit agreements with financial institutions primarily relating to the guarantee of future performance on certain contracts.

liabilities on outstanding standby letters of credit agreements aggregated to zero at June 30, 2021 and 2020.

The Company, as a U.S.

contractor, is subject to audits, reviews, and investigations by the U.S.

Government related to its negotiation and performance of government

contracts and its accounting for such contracts.

Failure to comply with applicable U.S.

standards by a contractor may result in suspension from eligibility for award of any new government contract and a guilty plea

or conviction may result in debarment from eligibility for awards.

The government may, in certain cases, also terminate existing

contracts, recover damages, and impose other sanctions and penalties.

As a result of contract audits the Company will determine

a range of possible outcomes and in accordance with ASC 450 “Contingencies”

the Company will accrue amounts within

a range that appears to be its best estimate of a possible outcome.

Adjustments are made to accruals, if any, periodically based

on current information.

party to various litigation matters and claims arising from time to time in the ordinary course of business.

the results of such matters cannot be predicted with certainty, we believe that the final outcome of such matters will not

have a material adverse effect on our business, financial condition, results of operations or cash flows.

there are no matters pending.

Government standards by a contractor may result

in suspension from eligibility for award of any new government contract and a guilty plea or conviction may result in debarment from eligibility

The government may, in certain cases, also terminate existing contracts, recover damages, and impose other sanctions and penalties.

As a result of contract audits the Company will determine a range of possible outcomes and in accordance with ASC 450 “Contingencies”

the Company will accrue amounts within a range that appears to be its best estimate of a possible outcome.

Adjustments are made to accruals,

if any, periodically based on current information.

We are party to various litigation matters and claims

arising from time to time in the ordinary course of business.

While the results of such matters cannot be predicted with certainty,

we believe that the final outcome of such matters will not have a material adverse effect on our business, financial condition, results

of operations or cash flows.

Currently, there are no matters pending.

Stockholders' Equity

Reservation of Shares

The Company has reserved common shares

for future issuance as follows as of June 30, 2020:

The Company has reserved common shares for future

issuance as follows as of June 30, 2021:

Stock options outstanding

1 unchanged sentence

Number of common shares reserved

& Electronics Corp.

Notes to Financial Statements

Stockholders’

The following table sets forth the reconciliation

of the numerators and denominators of the basic and diluted earnings per share computations for continuing operations for the years

ended June 30:

of the numerators and denominators of the basic and diluted earnings per share computations for continuing operations for the years ended

Net (loss) income

Common shares outstanding, beginning of period

Common shares issued to ESOP during the period

Unearned ESOP shares

5 unchanged sentences

Common shares outstanding, beginning of period

Common shares issued to ESOP during the period

Unearned ESOP shares

5 unchanged sentences

Weighted average common shares

& Electronics Corp.

to Financial Statements

Stockholders’

Equity, Continued

Not included in this computation of earnings

1 unchanged sentence

common stock.

These options were excluded because their inclusion would have been anti-dilutive due to the average strike price

exceeding the average market price of those shares.

The Company paid regular cash dividends

on common stock of $1.00 per share for the fiscal year ended June 30, 2020 and paid regular cash dividends on common stock of $1.00

per share and a special cash dividend of $1.00 per share for the fiscal year ended June 30, 2019.

The Board of Directors has authorized

the payment of a fiscal year 2021 first quarter regular dividend of $0.25 payable October 14, 2020 to shareholders of record on

October 5, 2020.

Our Board of Directors assesses the Company’s dividend policy periodically.

There is no assurance that the

Board of Directors will maintain the amount of the regular cash dividend or declare a special dividend during any future years.

These options were excluded because their inclusion would have been anti-dilutive due to the average strike price exceeding

the average market price of those shares.

Effective March 9, 2021, the Company suspended

the payment of regular quarterly dividends.

The Company paid regular cash dividends on common stock of $0.50 per share for the fiscal

year ended June 30, 2021 and paid regular cash dividends on common stock of $1.00 per share for the fiscal year ended June 30, 2020.

Board of Directors assesses the Company’s dividend policy periodically.

Line of Credit

At June 30, 2020, the Company has an

uncommitted and unused Line of Credit with a financial institution.

At June 30, 2021, the Company has an uncommitted

and unused Line of Credit with a financial institution.

The agreement provides that the Company may borrow up to $3,000,000.

The line provides for interest payments equal to the LIBOR Daily Floating Rate plus 2.00%.

Any borrowing under the line of credit

will be collateralized by accounts receivable.

provides for interest payments equal to the LIBOR Daily Floating Rate plus 2.30%.

Any borrowing under the line of credit will be collateralized

by accounts receivable.

The line will be reviewed annually in November for renewal on December 1st.

outstanding balances are payable no later than the expiration date of the agreement, unless other terms are agreed to by the lender.

& Electronics Corp.

Notes to Financial Statements

Quarterly Financial Information

All outstanding balances are payable

no later than the expiration date of the agreement, unless other terms are agreed to by the lender.

Quarterly Financial Information (Unaudited)

Gross profit (loss)

Net income (loss)

Net income (loss) per share -

Net income per share -

Net income (loss)

Net income (loss) per share -

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data