NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 BASIS OF PRESENTATION
Business Description
Micropac Industries, Inc. (the “Company”),
a Delaware corporation, designs, manufactures and distributes various types of microelectronic circuits including solid state relays
and power controllers, optoelectronic components, and sensor and display components and assemblies. The Company’s products
are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation
and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature
(200o C) products.
The Company’s facilities are certified
and qualified by the Defense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS (space level)
and are certified to ISO 9001:2008 and AS 9100D. Micropac is a National Aeronautics and Space Administration (NASA) core supplier,
and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has Underwriters Laboratories (UL)
approval on our industrial power controllers.
The Company’s core technology is microelectronic
and optoelectronic designs to include the packaging and interconnecting of multi-chip microelectronics modules. Other technologies
include light emitting and light sensitive materials and products, including light emitting diodes and silicon phototransistors,
and electronic integration used in the Company’s optoelectronic components and assemblies.
The business of the Company was started in 1963
as a sole proprietorship. On March 3, 1969, the Company was incorporated under the name of “Micropac Industries, Inc.”
in the state of Delaware. The stock was publicly held by 438 shareholders on August 29, 2020.
In the opinion of management, the unaudited financial
statements include all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial
position as of August 29, 2020, the results of operations for the three and nine months ended August 29, 2020 and August 24, 2019,
and the cash flows for the nine months ended August 29, 2020 and August 24, 2019 including the statement of shareholders equity.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles in the United States (GAAP) have been condensed or omitted pursuant to the rules and regulations promulgated
by the Securities and Exchange Commission. The Company’s fiscal year ends on the last day of November. The quarterly results
end on the last Saturday of the quarter.
It is suggested that these financial statements
be read in conjunction with the November 30, 2019 Form 10-K filed with the SEC, including the audited financial statements and
the accompanying notes thereto.
Impact of COVID-19 on our Business
The impact of the COVID-19 pandemic continues
to unfold. The extent of the pandemic’s effect on our operational and financial performance will depend in large part on
future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and
severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets,
the development of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty
of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19
pandemic on our future operations. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Note 2 SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The core principle of revenue recognition under
GAAP is that the Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company’s revenue on the majority of
its customer contracts are recognized at a point in time, generally upon shipment of products.
To achieve that core principle, the Company applies
the following steps:
1. Identify the contract(s) with a customer.
The Company designs, manufactures and distributes
various types of microelectronic circuits, optoelectronics, and sensors and displays. The Company’s products are used as
components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation
systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o
C) products.
The Company’s revenues are from purchase
orders and/or contracts with customers associated with manufacture of products. We account for a contract when it has approval
and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial
substance and collectability of consideration is probable.
2. Identify the performance obligations in the
contract.
The majority of the Company’s purchase
orders or contracts with customers contain a single performance obligation, the shipment of products.
3. Determine the transaction price.
The transaction price reflects the Company’s
expectations about the consideration it will be entitled to receive from the customer at a fixed price per unit shipped based on
the terms of the contract or purchase order with the customer. To the extent our actual costs vary
from the fixed price that was negotiated, we will generate more or less profit or could incur a loss.
4. Allocate the transaction price to the performance
obligations in the contract.
The Company transaction price is the fixed price
per unit per each delivery upon shipment.
5. Recognize revenue when (or as) the Company
satisfies a performance obligation.
This performance obligation is satisfied when
control of the product is transferred to the customer, which occurs upon shipment or delivery. The Company receives purchase orders
for products to be delivered over multiple dates that may extend across reporting periods. The Company accounting policy treats
shipping and handling activities as a fulfillment cost. The Company invoices for each delivery upon shipment and recognizes revenues
at the fixed price for each distinct product delivered when transfer of control has occurred, which is generally upon shipment.
For certain contracts under which the Company
produces products with no alternative use and for which the Company has an enforceable right to payment during the production cycle,
the Company recognizes revenue for the cost incurred of work in process plus a margin at the end of each period and records a contract
asset (unbilled receivable). The majority of these products are shipped weekly and monthly to the customer and the contract require
us to manage and limit the level of work in process to meet the scheduled delivery dates.
In addition, the Company may have a contract
or purchase order to provide a non-recurring engineering service to a customer. These contracts are reviewed and performance obligations
are determined and we recognize revenue at the point in time in which each performance obligation
is fully satisfied.
Disaggregation of Revenue
The following table summarizes the Company’s net
sales by product line.
|
|
8/29/2020
|
|
8/24/2019
|
Microcircuits
|
|
$
|
5,488
|
|
|
$
|
5,660
|
|
Optoelectronics
|
|
|
4,222
|
|
|
|
4,730
|
|
Sensors and Displays
|
|
|
7,050
|
|
|
|
7,576
|
|
|
|
$
|
16,760
|
|
|
$
|
17,966
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
Transferred at a point in time
|
|
$
|
16,154
|
|
|
$
|
17,414
|
|
Transferred over time
|
|
|
606
|
|
|
|
552
|
|
Total Revenue
|
|
$
|
16,760
|
|
|
$
|
17,966
|
|
The following table summarizes the Company’s net
sales by major market.
2020 Third Quarter Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
2,789
|
|
|
$
|
261
|
|
|
$
|
404
|
|
|
$
|
148
|
|
|
$
|
3,602
|
|
Domestic Distribution
|
|
|
881
|
|
|
|
2
|
|
|
|
15
|
|
|
|
131
|
|
|
$
|
1,109
|
|
International
|
|
|
72
|
|
|
|
123
|
|
|
|
0
|
|
|
|
20
|
|
|
$
|
215
|
|
|
|
$
|
3,742
|
|
|
$
|
466
|
|
|
$
|
419
|
|
|
$
|
299
|
|
|
$
|
4,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Third Quarter Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
1,810
|
|
|
$
|
727
|
|
|
$
|
1,067
|
|
|
$
|
552
|
|
|
$
|
4,156
|
|
Domestic Distribution
|
|
|
2,240
|
|
|
|
5
|
|
|
|
0
|
|
|
|
113
|
|
|
$
|
2,358
|
|
International
|
|
|
87
|
|
|
|
596
|
|
|
|
0
|
|
|
|
55
|
|
|
$
|
738
|
|
|
|
$
|
4,136
|
|
|
$
|
1,328
|
|
|
$
|
1,067
|
|
|
$
|
720
|
|
|
$
|
7,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Nine months Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
5,411
|
|
|
$
|
1,509
|
|
|
$
|
2,216
|
|
|
$
|
641
|
|
|
$
|
9,780
|
|
Domestic Distribution
|
|
|
5,444
|
|
|
|
84
|
|
|
|
28
|
|
|
|
409
|
|
|
$
|
5,965
|
|
International
|
|
|
377
|
|
|
|
581
|
|
|
|
—
|
|
|
|
57
|
|
|
$
|
1,015
|
|
|
|
$
|
11,233
|
|
|
$
|
2,174
|
|
|
$
|
2,246
|
|
|
$
|
1,107
|
|
|
$
|
16,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Nine months Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
4,789
|
|
|
$
|
1,291
|
|
|
$
|
2,842
|
|
|
$
|
1,228
|
|
|
$
|
10,150
|
|
Domestic Distribution
|
|
|
5,156
|
|
|
|
134
|
|
|
|
—
|
|
|
|
366
|
|
|
$
|
5,656
|
|
International
|
|
|
290
|
|
|
|
1,668
|
|
|
|
—
|
|
|
|
202
|
|
|
$
|
2,160
|
|
|
|
$
|
10,235
|
|
|
$
|
3,093
|
|
|
$
|
2,842
|
|
|
$
|
1,795
|
|
|
$
|
17,966
|
|
Receivables, net, Contract
Assets and Contract Liabilities
The timing of revenue recognition, billings and cash collections results
in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities)
on the Consolidated Balance Sheets.
Receivables, net, contract assets
and contract liabilities were as follows:
|
|
August 29, 2020
|
|
November 30, 2019
|
Receivables, net
|
|
$
|
3,461
|
|
|
$
|
3,382
|
|
Contract assets
|
|
$
|
606
|
|
|
$
|
519
|
|
Deferred Revenue
|
|
$
|
186
|
|
|
$
|
390
|
|
Revenue recognized in 2020 that was included in the deferred
revenue liability balance at the beginning of the year was $204,000.
Contract costs
The Company does not have material incremental costs to obtain a contract in
the form of sales commissions or bonuses. The Company incurs other immaterial costs to obtain and fulfill a contract; however,
the Company has elected the practical expedient under ASC 340-40-24-4 to recognize all incremental costs to obtain a contract as
an expense when incurred if the amortization period is one year or less.
Short-Term Investments
The Company has no short-term investments at
August 29, 2020. Short-term investments consist of certificates of deposits with maturities greater than 90 days. These investments
are reported at historical cost, which approximates fair value. All highly liquid investments with maturities of 90 days or less
are classified as cash equivalents.
Inventories
Inventories are stated at lower of cost or net
realizable value and include material, labor and manufacturing overhead. All inventories are valued using the FIFO (first-in, first-out)
method of inventory valuation. The Company determines the need to write inventory down to the lower of cost or net realizable value
via an analysis based on the usage of inventory over a three year period and projected usage based on current backlog.
Income Taxes
The Company accounts for income taxes using the
asset and liability method. Under this method the Company records deferred income taxes for the temporary differences between the
financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts
are realized or settled. The resulting deferred tax liabilities and assets are adjusted to reflect changes in tax law or rates
in the period that includes the enactment date.
The Company records a liability for an unrecognized
tax benefit for a tax position that is not “more-likely-than-not” to be sustained. The Company did not record
any liability for uncertain tax positions as of August 20, 2020 and November 30, 2019.
Property, Plant, and Equipment
Property, plant, and equipment are carried at
cost, and depreciation is provided using the straight-line method at rates based upon the following estimated useful lives (in
years) of the assets:
Buildings....................................................................................................................................................15
Facility improvements......................................................................................................................... 8-15
Machinery and equipment................................................................................................................. 5-10
Furniture and fixtures ...........................................................................................................................5-8
The Company assesses long-lived assets for impairment
in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) ASC 360-10-35, Property,
Plant and Equipment – Subsequent Measurement. When events or circumstances indicate that an asset may be impaired, an
assessment is performed. The estimated future undiscounted cash flows associated with the asset are compared to the asset’s
net book value to determine if a write down to market value less cost to sell is required.
Repairs and maintenance are expensed as incurred.
Improvements which extend the useful lives of property, plant, and equipment are capitalized.
Research and Development Costs
Costs for the design and development of new products
are expensed as incurred.
Leases
In February 2016, the FASB issued Accounting Standards Update (ASU)
2016-02, Leases (Topic 842). Under the new standard, lessees will be required to recognize lease assets and liabilities
for all leases, with certain exceptions, on their balance sheets. Public business entities are required to adopt the standard for
reporting periods beginning after December 15, 2018. The Company adopted in the first quarter of 2020 and had no material impact
on its consolidated financial statements. The Company adopted ASC 842 using the modified retrospective transition method; and therefore,
the comparative information has not been adjusted for the nine months ended August 24, 2019 or as of November 30, 2019. Upon transition
to the new standard, the Company elected the package of practical expedients, which permitted the Company not to reassess under
the new standard its prior conclusions about lease identification, lease classification and initial direct costs.
In the first quarter of 2020, the Company entered into a three (3)
year lease extension on the property that has been leased on a year to year basis. As a result, we recognized $165,000 for operating
lease liabilities and right-of-use assets upon adoption of ASC 842. The Company had an operating lease expense of $36,000 for the
first nine months of 2020. The Company used an estimated incremental borrowing rate of 3.25% representative of the rate of interest
that the company would have to pay to borrow on the Company’s line of credit. The remaining lease term is three years.
The undiscounted future minimum lease payments consist
of the following at:
|
|
8/29/2020
|
|
|
2020
|
|
|
$
|
12,000
|
|
|
|
2021
|
|
|
|
53,000
|
|
|
|
2022
|
|
|
|
55,000
|
|
|
|
2023
|
|
|
|
14,000
|
|
|
|
Total lease payments
|
|
|
|
134,000
|
|
|
|
Interest
|
|
|
|
5,000
|
|
|
|
Present value of lease liabilities
|
|
|
$
|
129,000
|
|
|
Note 3 NEW ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model
for most financial assets. The ASU requires the use of an “expected loss” model for instruments measured at amortized
cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized
cost basis, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance is
effective for fiscal years beginning after December 15, 2022 for Smaller Reporting Companies, including interim periods within
those fiscal years and requires a modified-retrospective approach to adoption. The Company believes that adopting ASU 2016-13 will
have no material impact on the financial statements and related disclosures.
Note 4 FAIR VALUE MEASUREMENT
The Company had no financial assets or liabilities
measured at fair value on a recurring basis as of August 29, 2020 and November 30, 2019. The fair value of financial instruments
such as cash and cash equivalents, short term investments, accounts receivable, and accounts payable approximate their carrying
amount based on the short maturity of these instruments. There were no nonfinancial assets measured at fair value on a nonrecurring
basis at August 29, 2020 and November 30, 2019.
Note 5 COMMITMENTS
On August 29, 2019, the Company renewed the Loan
Agreement with a Texas banking institution. The Loan Agreement provides for revolving credit loans, in amounts not to exceed a
total principal balance of $6,000,000 with a rate equal to prime rate. The Loan Agreement also contains financial covenants to
maintain at all times including (i) minimum working capital of not less than $4,000,000, (ii) a ratio of senior funded debt, minus
the Company’s balance sheet cash on hand to the extent in excess of $2,000,000 to EBITDA of not more than 3.0 to 1.0, and
(iii) a ratio of free cash flow to debt service of not less than 1.2 to 1.0. The Company has not, to date, drawn any amounts under
the revolving line of credit and is currently in compliance with the financial covenants. The Company has not received any indication
that borrowing under the Loan Agreement may be restricted due to COVID-19 uncertainties. The agreement termination date is April
23, 2021.
On April 17, 2020, Micropac Industries, Inc.
(the Company) obtained an unsecured $1,924,400 loan under the Paycheck Protection Program (the PPP Loan). The Paycheck Protection
Program (or PPP) was established under the recently congressionally-approved Coronavirus Aid, Relief, and Economic Security Act
(the CARES Act) and is administered by the U.S. Small Business Administration. The PPP Loan to the Company is being made through
Frost Bank, the Company s existing lender (the Lender).
Based upon updated guidance issued April 23,
2020 by the Federal Government including a presumption that no publicly traded companies with sources of liquidity are eligible
for a PPP loan, the Company returned the loan proceeds within the time period imposed under these new guidelines and paid off
the loan on May 4, 2020.
Note 6 EARNINGS PER COMMON SHARE
Basic and diluted earnings per share are computed
based upon the weighted average number of shares outstanding during the respective periods. Diluted earnings per share gives effect
to all dilutive potential common shares. For the three and nine months ended August 29, 2020 and August 24, 2019, the Company
had no dilutive potential common stock instruments.
Note 7 SHAREHOLDERS’ EQUITY
On December 11, 2018, the Board of Directors
of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January
9, 2019. The dividend was paid to shareholders on February 8, 2019.
On December 10, 2019, the Board of Directors
of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January
8, 2020. The dividend was paid to shareholders on February 14, 2020.
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MICROPAC INDUSTRIES, INC.
(Unaudited)