QUARTERLY Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

At February 12, ~~2020,~~2021, there were ~~2,401,033~~2,702,633 shares outstanding of the registrant's Common stock, $.33-1/3 par value.

	December 31, 2019			June 30, 2019			December 31, 2020			June 30, 2020
ASSETS:
Cash and cash equivalents	$	6,110,846		$	1,462,761		$	9,040,393		$	5,402,122
Investment securities		5,667,851			5,684,240			3,203,113			5,141,520
Trade accounts receivable, net of allowance of $3,000		4,421,611			10,995,783			4,207,602			9,013,405
Income tax receivable		43,903			—			86,274			—

ESOP receivable due to dividends on unallocated shares								18,726			—
Inventories:
Raw materials		2,006,733			1,747,449			2,076,391			2,057,778
Work-in-process		680,322			408,130			362,494			614,521
Costs related to contracts in process		12,901,196			11,069,558			14,055,905			12,115,756
Total inventories		15,588,251			13,225,137			16,494,790			14,788,055

Prepaid expenses and other current assets		1,006,848			494,181			506,501			396,886
Total current assets		32,839,310			31,862,102			33,557,399			34,741,988

Property, plant and equipment, net		3,716,688			3,825,411			3,224,610			3,466,778

Total assets	$	36,555,998		$	35,687,513		$	36,782,009		$	38,208,766

LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable	$	1,913,449		$	2,160,433		$	3,253,983		$	2,861,696
Accrued expenses:
Salaries and wages		384,139			329,890			344,141			469,201
Vacation		714,709			786,870			666,160			689,834
ESOP Payable		158,736			—
Other		185,756			109,755			90,186			318,322
Payroll and other taxes withheld		510			61,451			463,285			186,970
Contract liabilities		1,803,340			6,054			1,650,288			2,175,235
Income taxes payable		—			30,481			—			47,707
Total current liabilities		5,160,639			3,484,934			6,468,043			6,748,965
Deferred tax liabilities		258,472			277,075			197,705			232,953
Total liabilities		5,419,111			3,762,009			6,665,748			6,981,918
Commitments and contingencies (See Note 5)
Common stock, par value $.33-1/3 per share
Authorized 10,000,000 shares; Issued 3,029,874 shares
as of December 31, 2019 and June 30, 2019. Outstanding
2,401,033 and 2,401,213 as of December 31, 2019 and
June 30, 2019, respectively (includes 7,083 and 14,166
Authorized 10,000,000 shares; Issued 3,129,874 and 3,029,874
shares as of December 31, 2020 and June 30, 2020, respectively.
Outstanding 2,702,633 and 2,402,633 as of December 31, 2020
And June 30, 2020, respectively (includes 297,061 and 0
Unearned ESOP shares, respectively)		1,009,958			1,009,958			1,043,291			1,009,958
Capital in excess of par value		18,858,202			18,731,975			22,995,640			19,073,213
Accumulated other comprehensive loss		(1,457	)		(1,299	)		(2,069	)		(3,107	)
Retained earnings		19,138,895			20,022,132			17,605,090			18,797,589
		39,005,598			39,762,766			41,641,952			38,877,653
Less: Unearned ESOP shares		(204,706	)		(204,706	)		(5,487,000	)		—
Cost of 628,841 and 628,661 shares of common stock
in treasury as of December 31, 2019 and June 30, 2019,
Cost of 427,241 and 627,241 shares of common stock
in treasury as of December 31, 2020 and June 30, 2020,
respectively		(7,664,005	)		(7,632,556	)		(6,038,691	)		(7,650,805	)
Total stockholders’ equity		31,136,887			31,925,504			30,116,261			31,226,848

Total liabilities and stockholders' equity	$	36,555,998		$	35,687,513		$	36,782,009		$	38,208,766

	Three Months Ended					Six Months Ended					Three Months Ended						Six Months Ended
	December 31,					December 31,					December 31,						December 31,
	2019			2018		2019			2018		2020			2019			2020			2019

Net sales	$	7,286,674		$	7,303,109	$	13,210,493		$	15,640,508	$	6,962,065		$	7,286,674		$	14,227,580		$	13,210,493
Cost of sales		5,806,526			5,786,874		10,593,997			13,131,339		6,248,604			5,806,526			12,386,745			10,593,997
Gross profit		1,480,148			1,516,235		2,616,496			2,509,169		713,461			1,480,148			1,840,835			2,616,496

Selling, general and administrative expenses		1,249,742			1,295,687		2,333,954			2,305,231		945,478			1,249,742			1,860,104			2,333,954
Operating income		230,406			220,548		282,542			203,938
Operating (loss) income												(232,017	)		230,406			(19,269	)		282,542

Other income
Interest income		33,915			42,376		66,076			94,775		1,753			33,915			16,970			66,076
Other		4,849			10,985		20,177			34,657		13,734			4,849			16,861			20,177
Total other income		38,764			53,361		86,253			129,432		15,487			38,764			33,831			86,253

Income before provision for income taxes		269,170			273,909		368,795			333,370
(Loss) income before provision for income taxes												(216,530	)		269,170			14,562			368,795

Provision for income taxes		40,206			56,151		58,055			53,940
(Benefit) provision for income taxes												(35,524	)		40,206			5,745			58,055

Net income	$	228,964		$	217,758	$	310,740		$	279,430
Net (loss) income											$	(181,006	)	$	228,964		$	8,817		$	310,740

Other comprehensive income, net of tax:
Unrealized (loss) gain on investment securities		(355	)		907		(158	)		2,254
Other comprehensive (loss) income, net of tax:
Unrealized gain (loss) on investment securities												2,712			(355	)		1,038			(158	)

Total comprehensive income	$	228,609		$	218,665	$	310,582		$	281,684
Total comprehensive (loss) income											$	(178,294	)	$	228,609		$	9,855		$	310,582


Net income per share:
Net (loss) income per share:

Basic	$	0.10		$	0.09	$	0.13		$	0.12	$	(0.08	)	$	0.10		$	0.00		$	0.13
Diluted	$	0.10		$	0.09	$	0.13		$	0.12	$	(0.08	)	$	0.10		$	0.00		$	0.13

Weighted average number of shares outstanding:

Basic		2,391,643			2,370,948		2,389,526			2,365,220		2,402,665			2,391,643			2,402,649			2,389,526
Diluted		2,395,020			2,393,933		2,395,638			2,388,002		2,402,665			2,395,020			2,404,043			2,395,638

Dividends per share:	$	0.25		$	0.25	$	0.50		$	1.50	$	0.25		$	0.25		$	0.50		$	0.50

							Accumulated																									Accumulated
					Capital in		Other												Unearned			Total								Capital in		Other												Unearned			Total
	Outstanding		Common		Excess of		Comprehensive			Retained			Treasury Stock						ESOP			Stockholders’			Outstanding			Common		Excess of		Comprehensive			Retained			Treasury Stock						ESOP			Stockholders’
	Shares		Amount		Par Value		Income (Loss)			Earnings			Shares			Amount			Shares			Equity			Shares			Amount		Par Value		(Loss) Income			Earnings			Shares			Amount			Shares			Equity
Balance as of June 30, 2018		2,387,124	$	1,009,958	$	18,201,691	$	(6,349	)	$	22,416,400			642,750		$	(7,718,835	)	$	(421,453	)	$	33,481,412
Balance as of June 30, 2019																										2,401,213		$	1,009,958	$	18,731,975	$	(1,299	)	$	20,022,132			628,661		$	(7,632,556	)	$	(204,706	)	$	31,925,504

Comprehensive income:

Net income											279,430												279,430													310,740												310,740

Other comprehensive income,
net of tax of $ 599								2,254															2,254
Other comprehensive loss,
net of tax of $ (42)																																	(158	)														(158	)

Total comprehensive income																							281,684																									310,582

Stock options exercised		9,199				124,231								(9,199	)		75,892						200,123			2,000					33,780								(2,000	)		16,500						50,280

Stock-based compensation						77,876																	77,876								92,447																	92,447

Dividends paid on common stock
$1.50 per share											(3,550,735	)											(3,550,735	)
$0.50 per share																																				(1,193,977	)											(1,193,977	)

Balance as of December 31, 2018		2,396,323	$	1,009,958	$	18,403,798		(4,095	)	$	19,145,095			633,551		$	(7,642,943	)	$	(421,453	)	$	30,490,360
Purchase of treasury stock																										(2,180	)												2,180			(47,949	)					(47,949	)

Balance as of December 31, 2019																										2,401,033		$	1,009,958	$	18,858,202	$	(1,457	)	$	19,138,895			628,841		$	(7,664,005	)	$	(204,706	)	$	31,136,887

	December 31, 2019			December 31, 2018			December 31, 2020			December 31, 2019
Cash Flows from Operating Activities:
Net income	$	310,740		$	279,430		$	8,817		$	310,740

Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense		—			69,010
provided by operating activities:
Stock-based compensation		92,447			77,876			80,874			92,447
Depreciation		286,549			256,186			271,341			286,549
ESOP compensation expense		165,820			203,809			56,274			165,820
Deferred income tax (benefit) expense		(18,561	)		91,220
Deferred income tax benefit								(35,524	)		(18,561	)
Changes in assets and liabilities:
Decrease (increase) in trade receivable, net		6,574,172			(1,339,155	)
Decrease in trade accounts receivable								4,805,803			6,574,172
Increase in income taxes receivable		(43,903	)		(116,081	)		(86,274	)		(43,903	)
Increase in inventories, net		(2,363,114	)		(4,326,042	)
(Increase) decrease in prepaid expenses and other current assets		(512,667	)		1,122,186
(Decrease) increase in accounts payable		(246,984	)		784,204
Increase (decrease) in accrued salaries and wages		54,249			(35,294	)
(Decrease) increase in vacation accrual		(72,161	)		8,079
Decrease in ESOP payable		(7,084	)		(43,749	)
Increase in other accrued expenses		76,001			48,208
(Decrease) increase in payroll and other taxes withheld		(60,941	)		1,372
Increase (decrease) in contract liabilities		1,797,286			(96,870	)
Decrease in income tax payable		(30,481	)		—
Net cash provided by (used in) operating activities		6,001,368			(3,015,611	)
Increase in ESOP receivable due to dividends on unallocated shares								(18,726	)		—
Increase in inventories								(1,706,735	)		(2,363,114	)
Increase in prepaid expenses and other current assets								(109,615	)		(512,667	)
Increase (decrease) increase in accounts payable								392,287			(246,984	)
(Decrease) increase in accrued salaries and wages								(125,060	)		54,249
Decrease in vacation accrual								(23,674	)		(72,161	)
Decrease in ESOP Payable								(56,274	)		(7,084	)
(Decrease) increase in other accrued expenses								(228,136	)		76,001
Increase (decrease) in payroll and other taxes withheld								276,315			(60,941	)
(Decrease) increase in contract liabilities								(524,947	)		1,797,286
Decrease in income taxes payable								(47,707	)		(30,481	)
Net cash provided by operating activities								2,929,039			6,001,368

Cash Flows from Investing Activities:
Additions to property, plant and equipment		(177,826	)		(354,933	)		(29,173	)		(177,826	)
Purchase of investment securities		(6,063,558	)		(3,103,004	)		(2,391,686	)		(6,063,558	)
Proceeds from sale/maturity of investment securities		6,079,747			8,837,220			4,331,407			6,079,747
Net cash (used in) provided by investing activities		(161,637	)		5,379,283
Net cash provided by (used in) investing activities								1,910,548			(161,637	)

Cash Flows from Financing Activities:
Dividends on common stock		(1,193,977	)		(3,550,735	)		(1,201,316	)		(1,193,977	)
Purchase of treasury stock		(47,949	)		—			—			(47,949	)
Proceeds from exercise of stock options		50,280			200,123			—			50,280
Net cash used in financing activities		(1,191,646	)		(3,350,612	)		(1,201,316	)		(1,191,646	)

Increase (decrease) in cash and cash equivalents		4,648,085			(986,940	)
Increase in cash and cash equivalents								3,638,271			4,648,085
Cash and cash equivalents, beginning of period		1,462,761			4,298,796			5,402,122			1,462,761
Cash and cash equivalents, end of period	$	6,110,846		$	3,311,856		$	9,040,393		$	6,110,846

Supplemental Schedule of Cash Flow Information:
Income taxes paid	$	151,000		$	80,000		$	175,250		$	151,000

In the opinion of management the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for such periods. The results for any interim period are not necessarily indicative of the results to be expected for the full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, income taxes, and stock-based compensation. Specific to inventories, including work-in-process and contracts in process, management evaluates, quarterly, those estimates used in determining the cost to complete for each contract on Espey Mfg. & Electronics Corp. (the Company's) sales backlog. During the quarter ended December 31, 2020 the Company, related to the pandemic, received notice from a customer to cancel an in-process contract. The Company recorded a write-off of inventory to cost of sales to the net realizable value of the inventory based on the terms of the contract. The change in estimates may affect the reported amount of inventories and gross profit in the current or a future period. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. These financial statements should be read in conjunction with the Company's most recent audited financial statements included in its report on Form 10-K for the year ended June 30, ~~2019.~~2020. Certain reclassifications may have been made to the prior year financial statements to conform to the current year presentation.

~~ASC~~Accounting Standards Codification (“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:

The carrying amounts of financial instruments, including cash and cash equivalents, short term investment securities, accounts receivable, accounts payable and accrued expenses, approximated fair value as of December 31, ~~2019~~2020 and June 30, ~~2019~~2020 because of the immediate or short-term maturity of these financial instruments.

Investment securities at December 31, ~~2019~~2020 and June 30, ~~2019~~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 December 31, ~~2019~~2020 and June 30, ~~2019~~2020 are as follows:

The portfolio is diversified and highly ~~liquid and primarily consists of investment grade fixed income instruments.~~liquid. At December 31, ~~2019,~~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.

As of December 31, ~~2019~~2020 and June 30, ~~2019,~~2020, the remaining contractual maturities of available-for-sale securities were as follows:

	Years to Maturity						Years to Maturity
	Less than		One to				Less than		One to
	One Year		Five Years		Total		One Year		Five Years		Total
December 31, 2019
December 31, 2020
Available-for-sale	$	5,512,298	$	155,553	$	5,667,851	$	3,203,113	$	—	$	3,203,113

June 30, 2019
June 30, 2020
Available-for-sale	$	5,549,460	$	134,780	$	5,684,240	$	5,141,520	$	—	$	5,141,520

Basic net (loss) income per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. The computation of ~~weighted-average common shares outstanding, assuming dilution,~~diluted net (loss) income per share, excluded options to purchase ~~184,342~~315,337 and ~~2,500~~253,312 shares for the three and six months ended December 31, 2020 and 184,342 shares of our common stock for the three and six months ended December 31, 2019, ~~and 2018, respectively,~~ as the effect of including them would be anti-dilutive. As unearned ESOP shares are released or committed-to-be-released the shares become outstanding for earnings-per-share computations.

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.

Total stock-based compensation expense recognized in the statements of comprehensive income (loss) for the three-month periods ended December 31, 2020 and 2019 was $33,707 and ~~2018 was~~ $45,271, ~~and $40,504,~~ respectively, before income taxes. The related total deferred tax benefits were ~~$2,483~~$1,080 and ~~$2,246~~$2,483 for the same periods. Total stock-based compensation expense recognized in the statements of comprehensive income (loss) for the six-month periods ended December 31, 2020 and 2019, was $80,874 and ~~2018, was~~ $92,447, ~~and $77,876,~~ respectively, before income taxes. The related total deferred tax benefits were ~~$5,061~~$3,808 and ~~$4,280~~$5,061 for the same periods.

As of December 31, ~~2019,~~2020, there was ~~$244,525~~$139,818 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the next 2 years. The total deferred tax benefit related to these awards is expected to be ~~$14,059.~~$ 7,712.

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"). 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, of which ~~164,329~~226,354 have been granted as of December 31, ~~2019.~~2020. While no further grants of options may be made under the Company’s 2007 Stock Option and Restricted Stock Plan, as of December 31, ~~2019, 146,550~~2020, 119,750 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 dividend yield, 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 six months ended December 31, ~~2019~~2020 and ~~2018.~~2019.

	December 31, 2019		December 31, 2018		December 31, 2020	December 31, 2019

Dividend yield		4.88%		3.68%	5.54 %	4.88%
Company’s expected volatility		27.81%		27.63%	23.41%	27.81%
Risk-free interest rate		1.67%		2.70%	0.36 %	1.67%
Expected term		5.3 yrs		5.2 yrs	5.4 yrs	5.3 yrs
Weighted average fair value per share
of options granted during the period	$	3.03	$	5.14	$1.59	$3.03

The Company declares regular dividends quarterly and declared and paid a regular cash dividends of $0.50 per share for the six months ended December 31, ~~2019.~~2020. The Company declared regular cash dividends of $0.50 per share ~~and a special cash dividend of $1.00 per share~~ for the six months ended December 31, ~~2018.~~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 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 six months ended December 31, ~~2019:~~2020:

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 December 31, ~~2019~~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 December 31, ~~2019.~~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 six months ended December 31, 2020 and 2019 were $0 and ~~2018 were~~ $263, ~~and $64,420,~~ respectively.

The following table summarizes changes in non-vested stock options during the six months ended December 31, ~~2019:~~2020:

	Weighted Number			Average		Weighted Number			Average
	of Shares			Grant Date		of Shares			Grant Date
	Subject to Option			Fair Value (per Option)		Subject			Fair Value
Non-vested at July 1, 2019		104,214		$	4.077
						to Option			(per Option)
Non-vested at July 1, 2020							97,192		$	4.034
Granted		54,025		$	3.030		62,025		$	1.590
Vested		(43,220	)	$	2.790		(44,667	)	$	5.140
Forfeited or expired		(9,202	)	$	4.194		(4,400	)	$	3.797
Non-vested at December 31, 2019		105,817		$	4.058
Non-vested at December 31, 2020							110,150		$	2.219

The Company from time to time, 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 December 31, ~~2019~~2020 and June 30, ~~2019.~~2020. 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.

~~Effective July 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)~~The company follows ASC 606 “Revenue from Contracts with Customers”~~, which~~ 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. 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 $1,803,340 and $6,054 as of December 31, 2019 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.

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. 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 three and six months ended December 31, ~~2019~~2020 based on units delivered totaled ~~$5,702,565~~$5,865,878 and ~~$10,820,879,~~$11,724,584, respectively, compared to ~~$6,020,415~~$5,702,565 and ~~$12,873,185~~$10,820,879 for the same periods in fiscal year ~~2019.~~2020. Total revenue recognized for the three and six months ended December 31, ~~2019~~2020 based on milestones achieved totaled ~~$1,584,109~~$1,096,187 and ~~$2,389,614,~~$2,502,996, respectively, compared to ~~$1,282,694~~$1,584,109 and ~~$2,767,323~~$2,389,614 for the same periods in fiscal year ~~2019.~~2020.

The Company offers a standard one-year product warranty. Product warranties offered by the ~~company~~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 December 31, ~~2019.~~2020. Our payment terms are generally 30-60 days.

Contract liabilities were $1,650,288 and $2,175,235 as of December 31, 2020 and June 30, 2020, respectively. The decrease in contract liabilities is primarily due to revenue recognized, offset, in part, by the advance collection of cash on 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.

The Company’s backlog at December 31, ~~2019~~2020 totaling ~~$58.4~~$60.1 million is expected, based on expected due dates, to be recognized in the following fiscal years: ~~40% in 2020; 34%~~27% in 2021; ~~19%~~51% in ~~2022,~~2022; 12% in 2023, and 7%10% thereafter.

In February 2018, the FASB issued ASU No. 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”). This update 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.

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. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU is part of the FASB’s larger disclosure framework project intended to improve the effectiveness of financial statement footnote disclosure. ASU 2018-13 modifies required fair value disclosures related primarily to level 3 investments. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The adoption of ASU 2018-13 isdoes not ~~expected to~~ have a material effect on the Company’s financial position, results of operations, and cash ~~flows.~~flows as our investments are currently Level 1. We will, however, continue to evaluate going forward should we obtain any Level 3 investments.

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. 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. 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 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 ~~$77,987~~$56,274 and ~~$102,448~~$77,987 for the three-month periods ended December 31, ~~2019~~2020 and ~~2018,~~2019, respectively. ESOP compensation expense was ~~$165,820~~$56,274 and ~~$203,809~~$165,820 for the six-month periods ended December 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

The ESOP shares as of December 31, ~~2019~~2020 and ~~2018~~2019 were as follows:

	December 31, 2019		December 31, 2018		December 31, 2020		December 31, 2019
Allocated shares		452,763		441,753		468,663		452,763
Committed-to-be-released shares		7,083		7,500		2,939		7,083
Unreleased shares		7,083		21,666		297,061		7,083

Total shares held by the ESOP		466,929		470,919		768,663		466,929

Fair value of unreleased shares	$	152,993	$	539,917	$	5,620,394	$	152,993

The Company may at times be required to repurchase shares at the ESOP participants’ request at the fair market value. During the three and six months ended December 31, 2020 the Company did not repurchase shares previously held by the ESOP. During the three and six months ended December 31, 2019 the Company repurchased 1,847 and 2,180 shares previously held by the ESOP for $39,658 and $47,949, respectively. ~~During the three and six months ended December 31, 2018 the Company did not repurchase any shares 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 six months ended December 31, 2020 and 2019 totaled 456 and ~~2018 totaled~~ 2,180, ~~and 17,279,~~ respectively.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Espey Mfg. & Electronics Corp. (“Espey”) is a power electronics design and original equipment manufacturing (OEM) company with a long history of developing and delivering highly reliable products for use in military and severe environment applications. Design, manufacturing, and testing is performed in our 150,000+ square foot facility located at 233 Ballston Ave, Saratoga Springs, New York. Espey is classified as a “smaller reporting company” for purposes of the reporting requirements under the Securities Exchange Act of 1934, as amended. Espey’s common stock is publicly-traded on the NYSE American under the symbol “ESP.”

Espey began operations after incorporation in New York in 1928. We strive to remain competitive as a leader in high power energy conversion and transformer solutions through the design and manufacture of new and improved products by using advanced and “cutting edge” electronics technologies.

Espey is ISO 9001:2015 and AS9100:2016 certified. Our primary products are power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, UPS systems, antennas and high power radar systems. The applications of these products include AC and DC locomotives, shipboard power, shipboard radar, airborne power, ground-based radar, and ground mobile power.

Espey services include design and development to specification, build to print, design services, design studies, environmental testing services, metal fabrication, painting services, and development of automatic testing equipment. Espey is vertically integrated, meaning that the Company produces individual components (including inductors), populates printed circuit boards, fabricates metalwork, paints, wires, qualifies, and fully tests items, mechanically, electrically and environmentally, in house. Portions of the manufacturing and testing process are subcontracted to vendors from time to time.

The Company markets its products primarily through its own direct sales organization and through outside sales representatives. Business is solicited from large industrial manufacturers and defense companies, the government of the United States, foreign governments and major foreign electronic equipment companies. Espey is also on the eligible list of contractors with the United States Department of Defense. We pursue opportunities for prime contracts directly with the Department of Defense and are generally automatically solicited by Department of Defense procurement agencies for their needs falling within the major classes of products produced by the Company. Espey contracts with the Federal Government under cage code 20950 as Espey Mfg. & Electronics Corp.

There is competition in all classes of products manufactured by the Company, ranging from divisions of the largest electronic companies, to many small companies. The Company's sales do not represent a significant share of the industry's market for any class of its products. The principal methods of competition for electronic products of both a military and industrial nature include, among other factors, price, product performance, the experience of the particular company and history of its dealings in such products.

Our business is not seasonal. However, the concentration of our business in the rail industry, and in equipment for military applications and industrial applications, and our customer concentrations expose us to on-going associated risks. These risks include, without limitation, fluctuating requirements for power supplies in the rail industry, dependence on appropriations from the United States Government and the governments of foreign nations, program allocations, the potential of governmental termination of orders for convenience, and the general strength of the industry sectors in which our customers transact business.

In order to compete effectively for new business, in some cases we have invested in upfront design costs, thereby reducing initial profitability as a means of procuring new long-term programs. As part of our strategy, we adjust our pricing in order to achieve a balance which enables us both to retain repeat programs while being more competitive in bidding on new programs.

~~In order to maintain a balanced business, we are continuing~~We continue to place an emphasis on securing “build to print” opportunities, which will allow production work to go directly to the manufacturing floor, limiting the impact on our engineering staff. This ~~effort will~~allows us to keep our manufacturing team busy while ~~engineering development designs transition~~the products are being developed in-house to production.

The total backlog at December 31, ~~2019~~2020 was approximately $60.1 million, which included $26.5 million from three significant customers, compared to $58.4 million at December 31, 2019, which included $30 million from four ~~significant customers, compared to $45.8 million at December 31, 2018, which included $24.0 million from three~~ significant customers. The Company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of this backlog at December 31, ~~2019~~2020 is approximately ~~$55.7~~$57.7 million. This includes items that have been authorized and appropriated by Congress and/or funded by the customer. The unfunded backlog at December 31, ~~2019~~2020 is approximately ~~$2.7~~$2.4 million and represents atwo firm multi-year ~~order~~orders from a single customer for which funding has not yet been appropriated by Congress or funded by our customer. While there is no guarantee that future budgets and appropriations will provide funding for individual programs, management has included in unfunded backlog only those programs that it believes are likely to receive funding based on discussions with customers and program status. The unfunded backlog at December 31, ~~2018~~2019 was ~~$2.9~~$2.7 million, comprised of one of the same multi-year ~~order~~orders from a single customer. AsContracts 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 ~~January 31, 2020, the customer has funded an additional $1.5 million of their unfunded balance at December 31, 2019.~~any scope modifications and will adjust reserves as information is known and estimable.

Successful conversion of engineering program backlog into sales is largely dependent on the execution and completion of our engineering design efforts. It is not uncommon to experience technical or scheduling delays which arise from time to time as a result of, among other reasons, design complexity, the availability of personnel with the requisite expertise, and the requirements to obtain customer approval at various milestones. Cost overruns which may arise from technical and schedule delays could negatively impact the timing of the conversion of backlog into sales, or the profitability of such sales. We continue to experience technical and schedule delays with our major development programs. However, these delays are being resolved as they arise and we do not expect any negative impact on our customer order fulfillment projections for fiscal year ~~2020.~~2021. Engineering programs in both the funded and unfunded portions of the current backlog aggregate $5$5.7 million.

The global outbreak of the novel strain of coronavirus COVID-19 disease was declared a pandemic by The World Health Organization (WHO) during March 2020. This resulted in initial country and state-wide mandated closures of non-essential businesses lasting various durations as determined by local jurisdictions. In most instances, businesses have since re-opened, some with limited or reduced capacity due to adherence and compliance with reopening and mitigation guidelines set in place to help prevent workplace exposures. Deemed an essential business, authorized by the Department of Homeland Security, we remained open and continue to be fully operational. Global supply chain disruptions from closures has had an impact on our ability to ship product during the first half of fiscal year 2021. As the effects of the pandemic continue world-wide, we believe it is likely we will continue to experience some trickle-down effects to our direct supply base which may impact our ability to ship some scheduled deliveries for the foreseeable future. Presently, we expect these disruptions to be minimal in nature and could result in our suppliers extending lead times for materials or, in some rare instances, require us to procure materials from an alternate supplier in order to meet contractual dates which could impact our anticipated material costs.

The pandemic has had a direct effect on at least one key customer of the Company with resulting significant impact on the Company. Subsequent to fiscal year ended June 30, 2020, the Company received a request from a customer to stop work temporarily on a design and production contract for a product to be used in the airline industry for a minimum of 120 days. As of December 31, 2020, the contract was cancelled by the customer and as a result the Company has reduced the contract value from $1.7 million to approximately $0.4 million to cover the carrying value of inventory and selling, general and administrative expenses. The current impact to the financial statements for this reduction is discussed in Results of Operations, below. The Company is reviewing legal options and will continue to evaluate the financial statement impact.

Management ~~continues to expect~~expects revenues in fiscal year ~~2020~~2021 to approximate revenues during fiscal year ~~2019. However, based on updated forecasts of~~2020 but expects the product mix for the expected shipments during the second half of the year and the incurrance of higher than expected job costs realized through the second quarter of fiscal 2020, primarily on engineering design contracts, we now believe the gross profit margin will approximate results reportednet income per share to be lower in fiscal year ~~2019.~~2021 than the net income per share during fiscal year 2020. These expectations are driven by orders already in our sales backlog. Net income per share has been lowered due to a lower sales expectation and an adjustment made to gross profit in the current quarter related to an inventory write-off discussed in greater detail in Results of Operations.

The Company currently expects new orders in fiscal 2021 to approximate the $40.9 million in new orders received in fiscal year 2020. As market factors ~~such as engineering delays,~~including competition and product costs impact gross profit margins, management will continue to evaluate our sales strategy, employment levels, and facility costs.

New orders received in the first six months of fiscal year ~~2020~~2021 were ~~$26~~$19.4 million as compared to ~~approximately $13.4~~$26 million of new orders received in the first six months of fiscal ~~2019.~~2020. It is presently anticipated that a minimum of ~~$23.3~~$16.3 million of orders comprising the December 31, ~~2019~~2020 backlog will be filled during the fiscal year ending June 30, ~~2020.~~2021. The minimum of ~~$23.3~~$16.3 million does not include any shipments, which may be made against orders subsequently received during the fiscal year ending June 30, ~~2020.~~2021. The estimate of the December 31, ~~2019~~2020 backlog to be shipped in fiscal year ~~2020~~2021 is subject to future events, which may cause the amount of the backlog actually shipped to differ from such estimate.

In addition to the backlog, the Company currently has outstanding opportunities representing approximately ~~$85.6~~$80.8 million in the aggregate as of February 5, ~~2020~~2021 for both repeat and new programs.The outstanding quotations encompass various new and previously manufactured power supplies, transformers, and subassemblies. However, there can be no assurance that the Company will acquire any of the anticipated orders described above, many of which are subject to allocations of the United States defense spending and factors affecting the defense industry.

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. Net sales to three significant customers represented 47% of the Company’s total sales for the three-month period ended December 31, 2020. Net sales to three significant customers represented 42% of the Company’s total sales for the three-month period ended December 31, 2019. Net sales to ~~two~~four significant ~~customers~~customer represented ~~49.4%~~58% of the Company’s total sales for the ~~three-month~~six-month period ended December 31, ~~2018.~~2020. Net sales to one significant customer represented 25.2% of the Company’s total sales for the six-month period ended December 31, 2019. ~~Net sales to two significant customers represented 54.4% of the Company’s total sales for the six-month period ended December 31, 2018.~~ This high concentration level with these customers presents significant risk. A loss of one of these customers or programs related to these customers could significantly impact the Company. Historically, a small number of customers have accounted for a large percentage of the Company’s total sales in any given fiscal year.

Management believes our most critical accounting policies include revenue recognition and cost estimation on our contracts.

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 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 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.

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 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.

Contract liabilities include advance payments and billings in excess of revenue recognized.

Net sales decreased for the three months ended December 31, ~~2019~~2020 to ~~$7,286,674~~$6,962,065 as compared to ~~$7,303,109~~$7,286,674 for the same period in ~~2018.~~2019. Net sales for the six months ended December 31, ~~2019 decreased~~2020 increased to ~~$13,210,493~~$14,227,580 as compared to ~~$15,640,508~~$13,210,493 for the same period in ~~2018.~~2019. For the three months ended December 31, ~~2019,~~2020, sales ~~declined slightly~~decreased due to a decline in ~~power supplies offset, in part, by an increase in~~ magnetic ~~shipments. For the six months ended December 31, 2019, the decrease in net sales is primarily due to a decrease in build to print~~ and power supply sales offset, in part, by an increase in ~~magnetic~~build to print shipments. For the six months ended December 31, 2020, the increase in net sales is primarily due to an increase in build to print sales, offset in part, by a decline in power supply shipments. Magnetic sales decreased in the current three month period primarily from product mix. Several programs which had reached completion, provided little or no sales in the current period when compared to the same period last year offset, in part, by shipments in the current period on one existing significant design and production contract in which there were no sales in the same period last year. Magnetic sales were also negatively impacted in the current three month period from fewer sales on one specific contract due to the timing of contractual delivery dates. Power supply sales decreased modestly in the three month period and decreased more significantly in the six month period when compared to the same periods last year. The decline in sales in both periods resulted primarily from two specific programs which had reached completion, providing little or no sales in the current periods when compared to the same periods last year. These decreases were offset, in part, by shipments on a larger contract which had minimal sales in the comparative periods last year. Build to print sales increased in both the three and six month periods from multiple contracts of varying size, scope and duration with the largest concentration of sales in both periods related to one significant contract.

~~Our ability to ship product or to meet contractual milestones continues~~We continued to be constrained by engineering design changes required to meet customer requirements, certain supplier product non-conformances, obtaining timely resolutions on issues encompassing build to print customer-owned drawings and an increase in lead times for many parts, including certain electronic components due to industry shortages and volatility within the power electronics industry. We are ~~currently~~also experiencing an increase in delays with certain supplier deliveries resulting from COVID. Engineering, program management, and supply chain personnel are working closely with our customers and suppliers to execute on our past due deliveries and we do not expect this situation to affect future business opportunities. We anticipate that many of these issues will be resolved during fiscal 2021. However, COVID has had a direct impact ~~future business.~~on the airline industry and, as noted above, a resulting impact on the Company contract which has been cancelled by the customer.

Gross profits for the three months ended December 31, 2020 and 2019 were $713,461 and ~~2018 were~~ $1,480,148, ~~and $1,516,235,~~ respectively. Gross profit as a percentage of sales was ~~20.3%~~10.2% and ~~20.8%~~20.3%, for the same periods, respectively. For the six months ended December 31, ~~2019~~2020 and ~~2018,~~2019, gross profits were ~~$2,616,496~~$1,840,835 and ~~$2,509,169,~~$2,616,496, respectively. Gross profit as a percentage of sales was ~~19.8%~~12.9% and ~~16.0%~~19.8%, for the same periods, respectively. The primary factors in determining the change in gross profit and net income are overall sales levels and product mix. The gross profits on mature products and build to print contracts are typically higher as compared to products which are still in the engineering development stage or in early stages of production. In the case of the latter, the Company can incur what it refers to as “loss contracts,” primarily on engineering design contracts in which the Company invests with the objective of developing future product sales. In any given accounting period the mix of product shipments between higher margin programs and less mature programs, and expenditures associated with loss contracts, has a significant impact on gross profit and net income.

Several factors contributed to a decrease in the gross profit percentage in the three months ended December 31, 2020 as compared to the same period in 2019. First, the Company wrote down the value of inventory by $335,000, equivalent to approximately fifty percent of the inventory balance, pertaining to a certain design and production contract serving the airline industry which was cancelled by the customer during the fiscal quarter. We made the adjustment to the cost of sales after the customer rejected our initial proposal for a contract settlement. Discussions with this customer continue and the Company is reviewing its legal options. Collections in respect of this contract which may be received in the future will be recognized in income, if and when received. Second, build to print shipments, including on one contract which yielded no gross profit, in the aggregate yielded lower margins on a higher sales base when compared to the same period last year. There had been no sales on the specific contract during the prior year. Third, the gross profit percentage was negatively impacted by a reduction of shipments during the fiscal quarter of magnetic products which had represented robust sales and margins during the same quarter last year. The gross profit percentage decreased in the ~~three~~six months ended December 31, ~~2019~~2020 as compared to the same period in ~~2018~~2019 primarily ~~resulting~~ from product mix, ~~offset, in part, by an improved gross profit percentage related~~specifically on build to print shipments which yielded lower margins on a ~~specific engineering design contract~~higher sales base when compared to the same period last year. This is largely attributed to a specific contract which had no comparable sales in ~~2018. This improvement resulted from reduced spending on~~ the ~~program and from additional anticipated funding for required testing. The~~prior period. In addition, the gross profit percentage ~~increased in~~was negatively impacted by the ~~six months ended December 31, 2019 compared~~inventory adjustment made to ~~the same period in 2018 resulting primarily from an improved gross profit percentage on~~ a specific ~~engineering design~~ contract when compared to the same period in 2018, resulting from reduced spending on the program and from additional anticipated funding for required testing. The gross profit percentage improvement was offset, in part, by a reduction resulting from product mix and when compared to the same period in 2018.discussed above.

Selling, general and administrative expenses were ~~$1,249,742~~$945,478 for the three months ended December 31, ~~2019,~~2020, a decrease of ~~$45,945,~~$304,264, compared to the three months ended December 31, ~~2018.~~2019. Selling, general and administrative expenses were ~~$2,333,954~~$1,860,104 for the six months ended December 31, ~~2019, an increase~~2020, a decrease of ~~$28,723~~$473,850 compared to the six months ended December 31, ~~2018.~~2019. The decrease for the three months ended December 31, ~~2019~~2020 as compared to the same period in ~~2018~~2019 relates primarily to the decrease in ~~bad debt expense~~employee compensation, travel, and board of director’s fees resulting from ~~an expense taken in the prior fiscal year related to~~ a ~~specific customer account, a~~reduction of one director. The decrease in professional services, and the decrease in expenditures for conferences and training. These decreases were offset, in part, by an increase in employee compensation costs, an increase in travel and entertainment incurred, and an increase in costs associated with Director fees. The increase for the six months ended December 31, ~~2019~~2020 as compared to the same period in ~~2018~~2019 relates primarily to ~~an increase in compensation costs, and increase in travel and entertainment costs, and the cost associated with Director fees offset, in part by~~ the decrease in ~~bad debt expense, conferences~~employee compensation, travel, conference and training expenditures, audit fees due to the timing of progress billings, reduction in outside services supporting sales leads, and ~~professional services.~~a decrease in board of director’s fees due to a reduction of one director. For both periods, employee compensation decreased due to a reduction in workforce and cost reduction measures implemented that included forgoing cost of living increases and the payment of bonuses during the current fiscal year.

Other income for the three months ended December 31, 2020 and 2019 was $15,487 and ~~2018 was~~ $38,764, ~~and $53,361,~~ respectively. Other income for the six months ended December 31, 2020 and 2019 was $33,831 and ~~2018 was~~ $86,253, ~~and $129,432,~~ respectively. The decrease for the three and six months ended is primarily due to the reduction in investment securities ~~offset, in part, by the gradual increase in the current yield percentages earned on the investment securities.~~and interest rate reductions. Interest income is a function of the level of investments and investment strategies which generally tend to be conservative.

The Company’s effective tax rates for the three and six months ended December 31, ~~2019,~~2020, were ~~14.9%~~16.4% and ~~15.7%~~39.5%, respectively, compared to ~~20.5%~~14.9% and ~~16.2%~~15.7% for the three and six months ended December ~~31, 2018,~~30, 2019, respectively. The effective tax rate in fiscal ~~2020~~2021 and ~~2019~~2020 is less than the statutory tax rate mainly due to the benefit derived from the ESOP dividends paid on allocated shares. The increase in the effective tax rate between periods resulted from discreet tax adjustments relative to income before taxes.

Net ~~income~~loss for the three months ended December 31, ~~2019,~~2020, was ~~$228,964~~$(181,006) or ~~$0.10~~$(0.08) per share, basic and diluted, compared to ~~$217,758~~net income of $228,964 or ~~$0.09~~$0.10 per share, basic and diluted, for the three months ended December 31, ~~2018.~~2019. Net income for the six months ended December 31, ~~2019,~~2020, was ~~$310,740~~$8,817 or ~~$0.13~~$0.00 per share, basic and diluted, compared to ~~$279,430~~$310,740 or ~~$0.12~~$0.13 per share, basic and diluted, for the six months ended December 31, ~~2018.~~2019. The ~~increase~~decrease in net income in the ~~current quarter~~three and six months ended resulted from the decrease in gross profit and lower other income offset, in part, by the decrease in selling, general and administrative, expenses and the benefit incurred from a lower effective tax rate offset, in part, by a decrease in gross profit and other income, all discussed above. The increase in net income in the six months ended December 31, 2019 compared to the same period in 2018 is primarily attributable to an increase in gross profit and the benefit derived from the decrease in the effective tax rate offset, in part, by an increase in selling, general and administrative expenses and a decrease in other income, all discussed above.

The Company's working capital is an appropriate indicator of the liquidity of its business, and during the past two fiscal years, the Company, when possible, has funded all of its operations with cash flows resulting from operating activities and when necessary from its existing cash and investments. The Company did not borrow any funds during the last two fiscal years. Management has available a $3,000,000 line of credit to help fund further growth or working capital needs, if necessary, but does not anticipate the need for any borrowed funds in the foreseeable future. Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at December 31, ~~2019~~2020 and ~~2018.~~2019. The line of credit is reviewed annually in November for renewal by December 1^st.

The Company's working capital as of December 31, ~~2019~~2020 and ~~2018~~2019 was approximately ~~$27.7~~$27.1 million and ~~$26.7~~$27.7 million, respectively. The Company may at times be required to repurchase shares at the ESOP participants’ request at the fair market value. During the three and six months ended December 31, 2020 the Company did not repurchase any shares held by the ESOP. During the three and six months ended December 31, 2019 the Company repurchased 1,847 and 2,180 shares previously held by the ESOP for $39,658 and $47,949, respectively. ~~During the three and six months ended December 31, 2018 the Company did not repurchase any shares held by the ESOP.~~ Under existing authorizations from the Company's Board of Directors, as of December 31, ~~2019,~~2020, management is authorized to purchase an additional $783,460 of Company stock.

The table below presents the summary of cash flow information for the fiscal years indicated:

Net cash provided by operating activities fluctuates between periods primarily as a result of differences in sales and net income, provision for income taxes, the timing of the collection of accounts receivable, purchase of inventory, and payment of accounts payable. The ~~increase~~decrease in cash provided by operating activities compared to the prior year primarily relates to the ~~collection of trade receivables, the reduction~~decrease in ~~inventory purchases and the increase~~cash collected from customers as advances in contract liabilities, ~~for~~a decrease in trade accounts receivables collected, and the ~~collection of customer advances~~decrease in net income, offset, in part, by a decrease in spending on accounts payable, inventory purchases and ~~an increase prepaids and other current assets.~~prepaid expenses. Net cash provided by investing activities ~~decreased~~increased in the six months ended December 31, ~~2019~~2020 as compared to the same period in ~~2018~~2019 primarily due to ~~the reinvestment of~~ maturing investments that were not reinvested during this period when compared to the same period ~~in 2018. In the prior period, cash received from maturing investments was used, in part, for the payment of the special dividend. The decrease in cash~~last year. Cash used in financing activities inincreased minimally during the current ~~period when compared to the prior period~~period. The increase is primarily due to the ~~fact that a special dividend totaling $1.00 per share was declared and paid~~decrease in cash proceeds collected from the exercise of stock options offset by the decrease in the ~~prior period.~~purchase of treasury stock as compared to the same period last year.

The Company currently believes that the cash flow generated from operations and when necessary, from cash and cash equivalents will be sufficient to meet its long-term funding requirements for the foreseeable future.

During the six months ended December 31, ~~2019~~2020 and ~~2018,~~2019, the Company expended ~~$177,826~~$29,173 and ~~$354,933,~~$177,826, respectively, for plant improvements and new equipment. The Company has budgeted approximately ~~$300,000~~$200,000 for new equipment and plant improvements in fiscal year ~~2020.~~2021. Management anticipates that the funds required will be available from current operations.

~~Management believes that the Company's reserve for bad debts of $3,000 is adequate given the customers with whom the Company does business. Historically, bad debt expense has been minimal.~~

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE

This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The terms "believe," "anticipate," "intend," "goal," "expect," and similar expressions may identify forward-looking statements. These forward-looking statements represent the Company's current expectations or beliefs concerning future events. The matters covered by these statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including the Company's dependence on timely development, introduction and customer acceptance of new products, the impact of competition and price erosion, supply and manufacturing constraints, potential new orders from customers, the impact of cyber or other security threats or other disruptions to our business, the impact of the COVID-19 pandemic on the United States economy and our operations and other risks and uncertainties. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

The Company is a smaller reporting company as defined under Securities and Exchange Commission Rule 12b-2. Pursuant to the exemption available to smaller reporting company issuers under Item 305 of Regulation S-K, quantitative and qualitative disclosures about market risk, the Company is not required to provide the information for this item.

(a) The Company's management, with the participation of the Company's chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) There have been no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NEW YORK	Trading Symbol	14-1387171
(State of incorporation)	ESP	(I.R.S. Employer's Identification No.)

PART I	FINANCIAL INFORMATION		PAGE

	Item 1	Financial Statements:

		Balance Sheets - December 31, ~~2019~~2020 (Unaudited) and June 30, ~~2019~~2020	1

		Statements of Comprehensive Income (Loss) (Unaudited) - Three and Six Months Ended December 31, ~~2019~~2020 and ~~2018~~2019	2

		Statements of Changes in Stockholders’ Equity (Unaudited) – Three and Six Months Ended December 31, ~~2019~~2020 and ~~2018~~2019	3

		Statements of Cash Flows (Unaudited) - Six Months Ended December 31, ~~2019~~2020 and ~~2018~~2019	7

		Notes to Financial Statements (Unaudited)	8

	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	14

	Item 3	Quantitative and Qualitative Disclosures about Market Risk	20

	Item 4	Controls and Procedures	20

PART II	OTHER INFORMATION		21

	Item 1	Legal Proceedings	21

	Item 2	Unregistered Sales of Equity Securities	21

	Item 3	Defaults Upon Senior Securities	21

	Item 4	Mine Safety Disclosures	21

	Item 5	Other Information	21

	Item 6	Exhibits	21

	SIGNATURES		22

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2019
Certificates of deposit	$	5,034,847	$		$			$	5,034,847
Municipal bonds		631,860		1,449		(305	)		633,004
Total investment securities	$	5,666,707	$	1,449	$	(305	)	$	5,667,851
June 30, 2019
Certificates of deposit	$	5,046,627	$	—	$	—		$	5,046,627
Municipal bonds		636,269		1,576		(232	)		637,613
Total investment securities	$	5,682,896	$	1,576	$	(232	)	$	5,684,240

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2020
Certificates of deposit	$	3,132,000	$	—	$	—		$	3,132,000
Municipal bonds		70,744		369		—			71,113
Total investment securities	$	3,202,744	$	369	$	—		$	3,203,113
June 30, 2020
Certificates of deposit	$	4,679,847	$	—	$	—		$	4,679,847
Municipal bonds		462,618		1,243		(2,188	)		461,673
Total investment securities	$	5,142,465	$	1,243	$	(2,188	)	$	5,141,520

	Employee Stock Options Plan
						Weighted
	Number of			Weighted		Average
	Shares			Average		Remaining		Aggregate
	Subject			Exercise		Contractual		Intrinsic
	To Options			Price		Term		Value
Balance at July 1, 2019		259,164		$	25.16		6.37
Granted		54,025		$	20.50		9.94
Exercised		(2,000	)	$	25.14		—
Forfeited or expired		(15,602	)	$	25.59		—
Outstanding at December 31, 2019		295,587		$	24.28		6.56	$	93,028
Vested or expected to vest at December 31, 2019		278,798		$	24.32		6.38	$	83,334
Exercisable at December 31, 2019		189,770		$	24.56		4.95	$	33,600

	Six months Ended December 31,
	2019			2018
Net cash provided by (used in) operating activities	$	6,001,368		$	(3,015,611	)
Net cash (used in) provided by investing activities		(161,637	)		5,379,283
Net cash used in financing activities		(1,191,646	)		(3,350,612	)

Purchases of Equity Securities
			Total Number	Maximum Number
			of Shares	(or Approximate
			Purchased	Dollar Value)
			as Part of	of Shares
	Total	Average	Publicly	that May Yet
	Number	Price	Announced	Be Purchased
	of Shares	Paid	Plan or	Under the Plan
Period	Purchased	per Share	Program	or Program (1)
October 1 – October 31, 2020				$783,460
November 1 – November 30, 2020				$783,460
December 1 – December 31, 2020				$783,460


	31.2	Certification of the Principal Financial Officer and Executive Vice President pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


	32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	32.2	Certification of the Principal Financial Officer and Executive Vice President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	ESPEY MFG. & ELECTRONICS CORP.


	/s/ Patrick Enright Jr.
	Patrick Enright Jr.
	President and Chief Executive Officer

	/s/David O’Neil
	David O’Neil
	Principal Financial Officer and Executive Vice President