ESPEY MFG & ELECTRONICS CORP 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID 317 ) Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Espey Mfg. & Electronics Corp. Opinion on the Financial Statements We have audited the accompanying balance sheets of Espey Mfg. & Electronics Corp. (the Company) as of June 30, 2022 and 2021, the related statements of comprehensive income (loss), 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, 2022 and 2021, 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 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. 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. 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 that: (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 in Process As discussed in Notes 2 and 5 to the financial statements, inventory relating to contracts in process and work in process is valued at cost, including factory overhead incurred to date. 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 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. 11 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 following: • 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, including:   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; and o Performing a retrospective review of the prior-year estimates used to identify potential bias of management judgements. /s/ Freed Maxick CPAs, P.C. We have served as the Company's auditor since 2014. Buffalo, New York September 22, 2022 12 Espey Mfg. & Electronics Corp. Balance Sheets June 30, 2022 and 2021 2022 2021 ASSETS Cash and cash equivalents $ 8,104,060 $ 6,802,712 Investment securities 3,708,779 3,092,000 Trade accounts receivable, net of allowance of $ 3,000 5,733,174 5,353,781 Income tax receivable — 249,602   Inventories: Raw materials 2,037,483 2,111,058 Work-in-process 315,547 326,198 Costs related to contracts in process 16,207,419 16,354,636 Total inventories 18,560,449 18,791,892   Prepaid expenses and other current assets 992,774 700,297 Total current assets 37,099,236 34,990,284   Property, plant and equipment, net 2,797,993 2,990,519 Total assets $ 39,897,229 $ 37,980,803   LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 2,079,177 $ 2,718,173 Accrued expenses: Salaries and wages 627,187 475,667 Vacation 666,380 672,611 Other 752,554 126,014 Payroll and other taxes withheld 55,292 409,881 Contract liabilities 3,384,474 3,077,605 Income taxes payable 54,722 — Total current liabilities 7,619,786 7,479,951   Deferred tax liabilities 177,829 168,557 Total liabilities 7,797,615 7,648,508    Commitments and Contingencies (See Note 14)   Common stock, par value $ .33-1/3 per share Authorized 10,000,000 shares; Issued 3,129,874 shares as of June 30, 2022 and 2021. Outstanding 2,702,633 as of June 30, 2022 and 2021 (includes 256,293 and 279,429 Unearned ESOP Shares, respectively) 1,043,291 1,043,291 Capital in excess of par value 23,104,693 23,026,096 Accumulated other comprehensive loss ( 1,932 ) ( 2,361 ) Retained earnings 18,679,857 17,414,730 42,825,909 41,481,756   Less: Unearned ESOP shares ( 4,687,604 ) ( 5,110,770 ) Cost of 427,241 shares of common stock in treasury as of June 30, 2022 and 2021 ( 6,038,691 ) ( 6,038,691 ) Total stockholders' equity 32,099,614 30,332,295   Total liabilities and stockholders' equity $ 39,897,229 $ 37,980,803 The accompanying notes are an integral part of the financial statements. 13 Espey Mfg. & Electronics Corp. Statements of Comprehensive Income (Loss) Years Ended June 30, 2022 and 2021 2022 2021   Net sales $ 32,104,774 $ 27,734,598 Cost of sales 26,632,616 24,374,991 Gross profit 5,472,158 3,359,607   Selling, general and administrative expenses 3,942,991 3,785,746 Operating income (loss) 1,529,167 ( 426,139 )   Other income Interest income 12,153 21,376 Other 51,761 36,566    Total other income 63,914 57,942   Income (loss) before provision (benefit) for income taxes 1,593,081 ( 368,197 )   Provision (benefit) for income taxes 327,954 ( 186,654 )       Net income (loss) $ 1,265,127 $ ( 181,543 )   Other comprehensive income (loss), net of tax: Unrealized gain on investment securities 429 746       Total comprehensive income (loss) $ 1,265,556 $ ( 180,797 )   Net income (loss) per share: Basic $ 0.52 $ ( 0.08 ) Diluted $ 0.52 $ ( 0.08 )   Weighted average number of shares outstanding: Basic 2,431,904 2,406,345 Diluted 2,431,904 2,406,345 The accompanying notes are an integral part of the financial statements. 14 Espey Mfg. & Electronics Corp. Statements of Changes in Stockholders' Equity Years Ended June 30, 2022 and 2021       Accumulated               Capital in   Other         Unearned   Total Outstanding   Common   Excess of   Comprehensive   Retained   Treasury Treasury   ESOP   Stockholders’ Shares   Amount   Par Value   (Loss) Income   Earnings   Shares   Amount   Shares   Equity Balance as of June 30, 2020 2,402,633   $ 1,009,958   $ 19,073,213   $ ( 3,107 )   $ 18,797,589   627,241   $ ( 7,650,805 )   $ —   $ 31,226,848 Comprehensive loss:                 Net loss         ( 181,543 )         ( 181,543 ) Other comprehensive income,    net of tax of $ 198       746           746 Total comprehensive loss                 ( 180,797 ) Stock-based compensation     133,663             133,663 Dividends paid on common    stock $ 0.50 per share ( 1,201,316 ) ( 1,201,316 ) Sale of stock to ESOP 300,000 33,333 3,841,553 ( 200,000 ) 1,612,114 ( 5,487,000 ) — Reduction of unearned ESOP    shares     ( 22,333 )           376,230   353,897 Balance as of June 30, 2021 2,702,633   $ 1,043,291   $ 23,026,096   $ ( 2,361 )   $ 17,414,730   427,241   $ ( 6,038,691 )   $ ( 5,110,770 )   $ 30,332,295 The accompanying notes are an integral part of the financial statements. 15 Espey Mfg. & Electronics Corp. Statements of Changes in Stockholders' Equity Years Ended June 30, 2022 and 2021             Accumulated                             Capital in     Other                 Unearned     Total Outstanding     Common     Excess of     Comprehensive     Retained     Treasury Treasury     ESOP     Stockholders’ Shares     Amount     Par Value     (Loss) Income     Earnings     Shares     Amount     Shares     Equity Balance as of June 30, 2021 2,702,633   $ 1,043,291   23,026,096   $ ( 2,361 )   $ 17,414,730   427,241   $ ( 6,038,691 )   $ ( 5,110,770 )   $ 30,332,295 Comprehensive income:                 Net income         1,265,127         1,265,127 Other comprehensive income,    net of tax of $ 90 429 429 Total comprehensive income 1,265,556 Stock-based compensation     176,696             176,696 Reduction of unearned ESOP    shares     ( 98,099 )           423,166   325,067 Balance as of June 30, 2022 2,702,633   $ 1,043,291   $ 23,104,693   $ ( 1,932 )   $ 18,679,857   427,241   $ ( 6,038,691 )   $ ( 4,687,604 )   $ 32,099,614 The accompanying notes are an integral part of the financial statements. 16 Espey Mfg. & Electronics Corp. Statements of Cash Flows Years Ended June 30, 2022 and 2021 2022 2021 Cash Flows from Operating Activities: Net income (loss) $ 1,265,127 $ ( 181,543 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Stock-based compensation 176,696 133,663 Depreciation 494,635 519,813 ESOP compensation expense 325,067 353,897 Gain on disposal of assets ( 119 ) — Loss on inventory reduction due to contract cancellation — 710,207 Deferred income tax expense (benefit) 9,271 ( 64,396 ) Changes in assets and liabilities: (Increase) decrease in trade accounts receivables ( 379,393 ) 3,659,624 Decrease (increase) in income tax receivable 249,602 ( 249,602 ) Decrease (increase) in inventories 231,443 ( 4,714,044 ) Increase in prepaid expenses and other current assets ( 292,477 ) ( 303,411 ) Decrease in accounts payable ( 638,996 ) ( 143,523 ) Increase in accrued salaries and wages 151,520 6,466 Decrease in vacation accrual ( 6,231 ) ( 17,223 ) Increase (decrease) in other accrued expenses 626,540 ( 192,308 ) (Decrease) increase in payroll and other taxes withheld ( 354,589 ) 222,911 Increase in contract liabilities 306,869 902,370 Increase (decrease) in income taxes payable 54,722 ( 47,905 )     Net cash provided by operating activities $ 2,219,687 $ 594,996   Cash Flows from Investing Activities: Additions to property, plant and equipment ( 303,561 ) ( 43,554 ) Proceeds from sale of fixed assets 2,000 — Purchase of investment securities ( 4,237,778 ) ( 5,436,056 ) Proceeds from sale/maturity of investment securities 3,621,000 7,486,520     Net cash (used in) provided by investing activities ( 918,339 ) 2,006,910   Cash Flows from Financing Activities: Dividends paid on common stock — ( 1,201,316 )     Net cash used in financing activities — ( 1,201,316 )   Increase in cash and cash equivalents 1,301,348 1,400,590 Cash and cash equivalents, beginning of the year 6,802,712 5,402,122 Cash and cash equivalents, end of the year $ 8,104,060 $ 6,802,712   Supplemental Schedule of Cash Flow Information: Income taxes paid net of refunds $ 14,365 $ 175,250 The accompanying notes are an integral part of the financial statements. 17 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 1. Nature of Operations Espey Mfg. & Electronics Corp. (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. Note 2. Summary of Significant Accounting Policies Revenue 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. 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 with a customer 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 collection of substantially all of the amount to which the entity will be entitled in exchange for the good or services that will be transferred to the customer 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 obligation. 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. Inventory 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. Inventory relating to contracts in process and work in process is valued at 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 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, the change is reflected in current period earnings. 18 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies, Continued Contract Liabilities Contract liabilities include advance payments and billings in excess of revenue recognized. Depreciation 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 10 – 50 years Machinery and equipment 3 – 20 years Furniture and fixtures 7 – 10 years 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 tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred 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. Investment Securities The Company accounts for its investments in debt securities in accordance with ASC 320-10-25, “Accounting for Certain Investments in Debt and Equity Securities.” Investments in debt securities at June 30, 2022 consists of certificates of deposit and municipal bonds, and at June 30, 2021, consisted of certificates of deposit. The Company classifies investments in debt securities as available-for-sale. Unrealized holding gains and losses, net of related tax effect, on available-for-sale debt securities are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. Realized gains and losses for debt securities classified as available-for-sale are included in earnings and are determined using the specific identification method. 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 value. The standard describes three levels of inputs that may be used to measure fair value: ▪ Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. ▪ Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. 19 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies, Continued   ▪ Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. 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, 2022 and 2021 because of the immediate or short-term maturity of these financial instruments. Accounts Receivable and Allowance for Doubtful Accounts 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. 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, 2022 and 2021. 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 (EPS)” requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share, as defined. 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 (Loss) Comprehensive income (loss) consists of net income (loss) and other comprehensive income. Other comprehensive income for fiscal years ended June 30, 2022 and 2021 consists of unrealized holding gains on available-for-sale debt 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. Recently Issued Accounting Standards In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 amends ASC 740 to simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations and interim calculations, and adding guidance to reduce complexity in the accounting standard under the FASB’s simplification initiative. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020. Upon adoption, the amendments in ASU 2019-12 should be applied on a prospective basis to all periods presented. The Company adopted the new guidance under ASU 2019-12 in the first quarter of fiscal year 2022 and removed the exception for intraperiod allocations from its interim period tax provision calculation, accordingly. The removal of the exception for intraperiod allocations did not have a material impact on the Company. 20 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies, Continued Recent Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected, with further clarifications made more recently. For trade receivables, loans and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities are required to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the amendments in ASU 2016-13 should be applied on a prospective basis to all periods presented relating to available-for-sale debt securities. For all other financial instruments the Company upon adoption will apply the amendments on a modified-retrospective approach. The Company is expected to adopt the new guidance under ASU 2016-13 in the first quarter of fiscal year 2024 and is currently evaluating the impact of the adoption on its financial statements. 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. There were no impairments of long-lived assets in fiscal years 2022 and 2021. 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. 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. Note 3. Revenue 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. 21 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 3. 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, 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, 2022 based on units delivered totaled $ 26,931,949 compared to $ 22,973,507 for the same periods in fiscal year 2021. Total revenue recognized for the twelve months ended June 30, 2022 based on milestones achieved totaled $ 5,172,825 compared to $ 4,761,091 for the same periods in fiscal year 2021. 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 result in the adjustment of the transaction price as of June 30, 2022. Our payment terms are generally 30-60 days. Contract liabilities were $ 3,384,474 and $ 3,077,605 as of June 30, 2022 and 2021, respectively. The increase in contract liabilities is primarily due to the advance collection of cash on specific contracts, offset in part, by revenue recognized. Revenue recognized, that was in contract liabilities in the beginning of the fiscal year, approximated $ 1,160,000 for the twelve months ended June 30, 2022. 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, 2022 totaling $ 76.8 million is expected, based on expected due dates, to be recognized in the following fiscal years: 46 % in 2023; 43 % in 2024, and 11 % in 2025. Note 4. Investment Securities Investment securities at June 30, 2022 consist of certificates of deposit and municipal bonds, and at June 30, 2021, consist of certificates of deposit, which are classified as available-for-sale debt 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 debt securities by major security type at June 30, 2022 and June 30, 2021 are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value 2022 Certificates of deposit $ 3,639,000 $ — $ — $ 3,639,000 Municipal bonds 72,225 — ( 2,446 ) 69,779 2022 Total investment securities $ 3,711,225 $ — $ ( 2,446 ) $ 3,708,779     2021 Certificates of deposit $ 3,092,000 $ — $ — $ 3,092,000 Municipal bonds — — — — 2021 Total investment securities $ 3,092,000 $ — $ — $ 3,092,000 22 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 4. Investment Securities, Continued The portfolio is diversified and highly liquid and primarily consists of investment grade fixed income instruments. At June 30, 2022, 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, 2022 and 2021, the remaining contractual maturities of available-for-sale debt securities were as follows: Years to Maturity Less than One to One Year Five Years Total   2022 Available-for-sale $ 3,639,000 $ 69,779 $ 3,708,779 2021 Available-for-sale $ 3,092,000 $ — $ 3,092,000 Note 5. Contracts in Process Contracts in process at June 30, 2022 and 2021 are as follows: 2022 2021 Unrecognized gross contract value $ 76,782,028 $ 65,647,715 Costs related to contracts in process $ 16,207,419 $ 16,354,636 Included in costs relating to contracts in process at June 30, 2022 and 2021 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. Note 6. Property, Plant and Equipment Property, plant and equipment at June 30, 2022 and 2021 is as follows: 2022 2021 Land $ 45,000 $ 45,000 Building and improvements 4,450,399 4,387,113 Machinery and equipment 11,287,648 11,121,960 Furniture and fixtures 164,200 164,200 15,947,247 15,718,273 Accumulated depreciation ( 13,149,254 ) ( 12,727,754 ) Property, plant and equipment, net $ 2,797,993 $ 2,990,519 Depreciation expense was $ 494,635 and $ 519,813 for the years ended June 30, 2022 and 2021, respectively. 23 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 7. Pension Expense Under terms of a negotiated union contract which expired on June 30, 2022, the Company was 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 $ 110,378 in fiscal year 2022 and $ 112,997 in fiscal year 2021. These contributions represent more than five percent of the total contributions made into the Plan. For the years beginning January 1, 2022 and 2021, 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,” called for an increase in contributions starting January 1, 2016 of $ 0.04 per hour for each year for five years thereafter. The increases did not and will not have a material impact on the Company’s financial statements. The union contract was renewed for an additional three-year term effective July 1, 2022 which resulted in no changes to the factors used in calculating obligated contributions. In addition, a Memorandum of Understanding (MOU) between the Company and Union which was effective July 1, 2021, the Company agreed and became obligated to make contributions to the National Electrical Benefit Fund (NEBF) (Plan identifying number is 53-0181657). The Plan is a defined pension benefit plan covering eligible union employees. Such contributions and expenses amounted to $ 73,771 in fiscal year 2022. The contribution did not and will not in the future have a material impact on the Company’s financial statements. 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 $ 53,836 and $ 49,218 , for fiscal years 2022 and 2021, respectively. Note 8. Provision (Benefit) for Income Taxes A summary of the components of the provision (benefit) for income taxes for the years ended June 30, 2022 and 2021 is as follows: 2022 2021 Current tax expense (benefit) - federal $ 313,705 $ ( 122,221 ) Current tax expense (benefit) - state 4,978 ( 37 ) Deferred tax expense (benefit) 9,271 ( 64,396 ) Provision (benefit) for income taxes $ 327,954 $ ( 186,654 ) 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" are determined in accordance with ASC 740-10. The combined U.S. federal and state effective income tax rates of 20.6 % and 50.7 %, for 2022 and 2021 respectively, differed from the statutory U.S. federal income tax rate for the following reasons: 2022 2021 U.S. federal statutory income tax rate 21.0 % 21.0 % Increase (reduction) in rate resulting from: State franchise tax, net of federal income tax benefit 0.3 0.1 ESOP cost versus Fair Market Value ( 1.3 ) 1.3 Dividend on allocated ESOP shares ( 3.1 ) 25.9 Stock-based compensation 4.0 ( 6.7 ) Foreign Derived Intangible Income Deduction — — Rate Differential on Net Operating Loss Carryback ( 0.1 ) 10.5 Other ( 0.2 ) ( 1.4 ) Effective tax rate 20.6 % 50.7 % 24 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 8. Provision (Benefit) for Income Taxes, Continued For the years ended June 30, 2022 and 2021 deferred income tax expense (benefit) of $ 9,271 and ($ 64,396 ), 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, 2022 and 2021 are presented as follows: 2022 2021 Deferred tax assets: Accrued expenses $ 204,774 $ 186,339 ESOP 14,237 2,190 Stock-based compensation 33,719 59,659 Inventory - effect of uniform capitalization — 46,197 Total deferred tax assets $ 252,730 $ 294,385 Deferred tax liability: Property, plant and equipment - principally due to differences in depreciation methods $ 374,566 $ 422,771 Inventory - effect of uniform capitalization 19,276 —  Prepaid expenses 36,716 40,171 Total deferred tax liability $ 430,558 $ 462,942   Net deferred tax liability $ ( 177,828 ) $ ( 168,557 ) 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. 109, the Company recognized no material adjustments to unrecognized tax benefits. As of June 30, 2022 and 2021, the Company has no unrecognized tax benefits. The Company recognizes interest and penalties in general and administrative expense. As of June 30, 2022 and 2021, 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. 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, 2022, 2021, and 2020 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. The actual benefit received totaled $ 125,635 . The Company will continue to monitor additional guidance issued and assess the impact that various provisions will have on its business. 25 Note 9. 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 customers. Sales to four domestic customers accounted for 57 % of total sales in 2022. Sales to four domestic customers accounted for 59 % of total sales in 2021. The related accounts receivable balance, as a percentage of the Company’s total trade accounts receivable balance, was 74 % represented by four customers at June 30, 2022 and 76 % represented by four customers at June 30, 2021. Export sales in fiscal years 2022 and 2021 were approximately $ 1,644,000 and $ 2,019,000 , respectively. Note 10. Employee 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. 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 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 balance sheets and the statements of changes in stockholders’ equity. 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 $ 325,067 and $ 353,897 for the years ended June 30, 2022 and 2021, respectively. The ESOP shares as of June 30, 2022 and 2021 were as follows: 2022 2021 Allocated shares 496,091 487,220 Unreleased shares 256,293 279,429 Total shares held by the ESOP 752,384 766,649 Fair value of unreleased shares $ 3,649,612 $ 4,141,138 26 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 10. Employee Stock Ownership Plan, Continued 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, 2022 and 2021, the Company did not repurchase shares previously held by the ESOP. 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, 2022 and 2021 totaled 14,265 shares and 2,470 shares, respectively. Note 11. 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. Included as a reduction to the cost recognized for share-based payments is an estimate for option forfeitures. It is the Company’s policy to estimate expected option forfeitures based on historical experience. Actual forfeitures are adjusted prior to the vesting date if the impact is material. Total stock-based compensation expense recognized in the statements of comprehensive income (loss) for the fiscal years ended June 30, 2022 and 2021, was $ 176,696 and $ 133,663 , respectively, 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, 2022 and 2021, was $ 29,287 and $ 32,863 , respectively. The deferred tax benefit related to the NQSO’s as of June 30, 2022 and 2021 was approximately $ 6,150 and $ 6,901 , 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, 2022, there was approximately $ 130,093 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the next 2 years, of which $ 103,355 relates to ISO’s and $ 26,738 relates to NQSO’s. The total deferred tax benefit related the NQSO’s in future years will be $ 5,615 . 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. 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. As of June 30, 2022, options covering 307,904 shares have been granted, of which 195,523 are outstanding, and 112,381 shares have been cancelled. As of June 30, 20022, option covering 204,477 shares remain available for grant, after factoring the cancelled shares, which are eligible to be re-granted. While no further grants of options may be made under the Company’s 2007 Stock Option and Restricted Stock Plan, as of June 30, 2022, 50,750 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. 27 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 11. Stock-based Compensation, Continued 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, 2022 and 2021. 2022 2021 Dividend yield - 5.54 % Expected stock price volatility 25.60 % 23.41 % Risk-free interest rate 0.99 % 0.36 % Expected option life (in years) 5.4 yrs 5.4 yrs Weighted average fair value per share of options granted during the period $ 3.74 $ 1.59 Effective March 9, 2021, the Company suspended the payment of regular quarterly dividends. The Company paid no cash dividends for the fiscal year ended June 30, 2022 and paid regular cash dividends on common stock of $ 0.50 per share for the fiscal year ended June 30, 2021. 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, 2022: Employee Stock Options Plan Weighted Number of Weighted Average Shares Average Remaining Aggregate Subject Exercise Contractual Intrinsic to Option Price Term Value Balance at July 1, 2021 304,662 $ 23.37 6.06 Granted 81,550 $ 14.75 9.08 Exercised — — — Forfeited or expired ( 139,939 ) $ 22.70 — Outstanding at June 30, 2022 246,273 $ 20.89 6.73 $ 2,392 Vested or expected to vest at June 30, 2022 228,074 $ 21.28 6.56 $ 2,294 Exercisable at June 30, 2022 142,098 $ 24.48 5.20 $ 0 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, 2022 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, 2022. 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, 2022 and 2021 was $ 0 . The following table summarizes changes in non-vested stock options during the twelve months ended June 30, 2022: Weighted Number of Average Shares Grant Date Subject Fair Value to Option (per Option) Non-Vested at July 1, 2021 103,450 $ 2.22 Granted 81,550 3.74 Vested ( 43,025 ) 3.03 Forfeited or expired ( 37,800 ) 2.65 Non-Vested at June 30, 2022 104,175 $ 2.92 28 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 12. 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 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. and foreign governments and certain industrial customers. The related accounts receivable balance, as a percentage of the Company's total trade accounts receivable balance, was 74 % represented by four customers at June 30, 2022 and 76.3 % represented by four customers at June 30, 2021. 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. Note 13. 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 1, 2016. The Trustees’ rights 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 the ESOP. 29 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 14. 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, 2022 and 2021. The Company, as a U.S. 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. Failure to comply with applicable U.S. 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 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. 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. Note 15. Stockholders' Equity Reservation of Shares The Company has reserved common shares for future issuance as follows as of June 30, 2022: Stock options outstanding 246,273 Stock options available for issuance 204,477 Number of common shares reserved 450,750 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: 2022 2021 Numerator: Net income (loss) $ 1,265,127 $ ( 181,543 ) Denominator:   Basic EPS: Common shares outstanding, beginning of period 2,702,633 2,402,633 Common shares issued to ESOP during the period — 300,000 Unearned ESOP shares ( 279,429 ) ( 300,000 ) Weighted average common shares issued during the period — — Weighted average common shares purchased during the period — — Weighted average ESOP shares earned during the period 8,700 3,712 Denominator for basic earnings per common shares –Weighted average common shares 2,431,904 2,406,345 Diluted EPS: Common shares outstanding, beginning of period 2,702,633 2,402,633 Common shares issued to ESOP during the period — 300,000 Unearned ESOP shares ( 279,429 ) ( 300,000 ) Weighted average common shares issued during the period — — Weighted average common shares purchased during the period — — Weighted average ESOP shares earned during the period 8,700 3,712 Weighted average dilutive effect of stock options — — Denominator for diluted earnings per common shares –Weighted average common shares 2,431,904 2,406,345 30 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 15. Stockholders’ Equity, Continued Not included in this computation of earnings per share for the year ended June 30, 2022 and 2021 were options to purchase 246,273 and 304,662 shares, respectively, of the Company’s 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. Effective March 9, 2021, the Company suspended the payment of quarterly dividends. The Company paid no cash dividends for the fiscal year ended June 30, 2022 and paid cash dividends on common stock of $ 0.50 per share for the fiscal year ended June 30, 2021. Our Board of Directors assesses the Company’s dividend policy periodically. Note 16. Line of Credit At June 30, 2022, 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 BSBY Daily Floating Rate plus 2 percentage points. Any borrowing under the line of credit will be collateralized by accounts receivable. The line will be reviewed annually for renewal. All outstanding balances are payable no later than the expiration date of the agreement, unless other terms are agreed to by the lender. Note 17. Quarterly Financial Information (Unaudited) First Second Third Fourth 2022 Quarter Quarter Quarter Quarter Net sales $ 7,545,432 $ 7,458,050 $ 8,620,049 $ 8,481,243 Gross profit 1,353,098 1,206,817 1,734,880 1,177,363 Net income 306,061 21,201 661,359 276,506 Net income per share - Basic 0.13 0.01 0.27 0.11 Diluted 0.13 0.01 0.27 0.11   2021 Net sales $ 7,265,515 $ 6,962,065 $ 4,205,068 $ 9,301,950 Gross profit (loss) 1,127,374 713,461 ( 187,154 ) 1,705,926 Net income (loss) 189,824 ( 181,006 ) ( 1,070,114 ) 879,753 Net income (loss) per share - Basic 0.08 ( 0.08 ) ( 0.44 ) 0.36 Diluted 0.08 ( 0.08 ) ( 0.44 ) 0.36 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None