Stock-based Compensation

12 Months Ended

Jun. 30, 2022

Share-Based Payment Arrangement [Abstract]

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.

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