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. Additional products include integrated electronics solutions such as power supplies, satellite optical transceiver media converters
and lighting systems for satellites.
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 are 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 437 shareholders on May 29, 2021.
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 May 29, 2021, the results of operations for the three and six months ended May 29, 2021 and May 30, 2020 and the cash flows for
the six months ended May 29, 2021 and May 30, 2020. Unaudited financial statements are prepared on a basis substantially consistent with
those audited for the year ended November 30, 2020. 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, 2020 Form 10-K filed with the SEC, including the audited financial statements and the accompanying
notes thereto.
Note 2 SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The core principle of revenue recognition
under accounting principles generally accepted in the Unites States of America (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’s 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 customers and the contracts 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.
|
|
5/29/2021
|
|
5/30/2020
|
Microcircuits
|
|
$
|
2,741
|
|
|
$
|
3,526
|
|
Optoelectronics
|
|
|
3,774
|
|
|
|
3,000
|
|
Sensors and Displays
|
|
|
5,170
|
|
|
|
5,308
|
|
Total Sales of Products
|
|
$
|
11,685
|
|
|
$
|
11,834
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
Transferred at a point in time
|
|
$
|
10,779
|
|
|
$
|
11,168
|
|
Transferred over time
|
|
|
906
|
|
|
|
666
|
|
Total Revenue
|
|
$
|
11,685
|
|
|
$
|
11,834
|
|
The following table summarizes the Company’s Net Sales by
Major Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 Second Quarter Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
2,588
|
|
|
$
|
951
|
|
|
$
|
1,158
|
|
|
$
|
140
|
|
|
$
|
4,836
|
|
Domestic Distribution
|
|
|
2,308
|
|
|
|
172
|
|
|
|
—
|
|
|
|
178
|
|
|
|
2,658
|
|
International
|
|
|
64
|
|
|
|
9
|
|
|
|
—
|
|
|
|
68
|
|
|
|
141
|
|
Total Net Distributions
|
|
$
|
4,960
|
|
|
$
|
1,131
|
|
|
$
|
1,158
|
|
|
$
|
386
|
|
|
$
|
7,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Second Quarter Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
1,481
|
|
|
$
|
563
|
|
|
$
|
1,057
|
|
|
$
|
98
|
|
|
$
|
3,199
|
|
Domestic Distribution
|
|
|
2,071
|
|
|
|
2
|
|
|
|
8
|
|
|
|
168
|
|
|
$
|
2,249
|
|
International
|
|
|
137
|
|
|
|
287
|
|
|
|
—
|
|
|
|
5
|
|
|
$
|
429
|
|
Total Net Distributions
|
|
$
|
3,689
|
|
|
$
|
852
|
|
|
$
|
1,065
|
|
|
$
|
271
|
|
|
$
|
5,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 Six Months Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
4,011
|
|
|
$
|
1,170
|
|
|
$
|
1,708
|
|
|
$
|
298
|
|
|
$
|
7,176
|
|
Domestic Distribution
|
|
|
3,335
|
|
|
|
536
|
|
|
|
—
|
|
|
|
297
|
|
|
|
4,168
|
|
International
|
|
|
127
|
|
|
|
136
|
|
|
|
—
|
|
|
|
78
|
|
|
|
341
|
|
Total Net Distributions
|
|
$
|
7,473
|
|
|
$
|
1,841
|
|
|
$
|
1,708
|
|
|
$
|
663
|
|
|
$
|
11,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Six Months Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
2,623
|
|
|
$
|
1,248
|
|
|
$
|
1,814
|
|
|
$
|
493
|
|
|
$
|
6,178
|
|
Domestic Distribution
|
|
|
4,563
|
|
|
|
2
|
|
|
|
13
|
|
|
|
278
|
|
|
$
|
4,856
|
|
International
|
|
|
305
|
|
|
|
458
|
|
|
|
—
|
|
|
|
37
|
|
|
$
|
800
|
|
Total Net Distributions
|
|
$
|
7,491
|
|
|
$
|
1,708
|
|
|
$
|
1,827
|
|
|
$
|
808
|
|
|
$
|
11,834
|
|
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 Sheet.
Receivables, net, contract assets and
contract liabilities were as follows:
|
|
May 29, 2021
|
|
November 30, 2020
|
Receivables, net
|
|
$
|
3,719
|
|
|
$
|
2,639
|
|
Contract assets
|
|
$
|
906
|
|
|
$
|
512
|
|
Contract liabilities
|
|
$
|
217
|
|
|
$
|
111
|
|
Revenue recognized in 2021 that was included in the deferred revenue liability
balance at the beginning of the year was approximately $2,000.
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.
Leases
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 in accordance with ASC 842. The Company had an operating lease expense of $25,000 for the first six months of
2021 and $23,000 for the first six 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 twenty
five months.
The Undiscounted Future Minimum Lease Payments consist of the
following at:
|
|
5/29/2021
|
2021
|
|
|
$
|
27,000
|
|
2022
|
|
|
|
55,000
|
|
2023
|
|
|
|
14,000
|
|
Total lease payments
|
|
|
|
96,000
|
|
Interest
|
|
|
|
3,000
|
|
Present value of lease liabilities
|
|
|
$
|
93,000
|
|
Short-Term Investments
The Company had no short-term investments at May
29, 2021 or November 30, 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 May 29, 2021 or November 30,
2020.
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:
Schedule of Plant, Property, and Equipment Useful Lives
|
|
|
|
Buildings
|
.........................................................................................................................................................
|
15
|
40
|
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.
The cost of all projects for construction
of buildings, other improvements, and equipment assets that are in progress (under way) at a particular point in time are reported as
construction in process until such time as the project is complete. Depreciation is not applicable while assets are accounted for as construction
in process. Once the asset is placed into service into the appropriate category of fixed assets, it will be depreciated over the applicable
useful life.
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.
Use of Estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
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 May 29, 2021 and November 30, 2020. 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 May 29,
2021 and November 30, 2020.
Note 5 COMMITMENTS
The Company obtained a commercial real estate construction
loan for the construction of a new 76,000 square foot manufacturing center on the 9.2 acres of land in Garland, Texas that the Company
has purchased. On March 26, 2021, the Company (acting as borrower) entered into a Construction Loan Agreement with Frost Bank (“Frost”),
(acting as lender). The Construction Loan Agreement provides for a construction loan, in amounts not to exceed a total principal balance
of $16,160,000 with an interest rate of (3.40%) per annum.
On March 26, 2021, the Company renewed the Revolving
Loan Agreement with Frost through the “Sixth Amendment to Loan Agreement.” (Attached as Exhibit 10.2 hereto). The Revolving
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 (3.25% at May 29, 2021). The Revolving Loan Agreement was originally entered into on January 23, 2013, between the “Company”
as borrower and Frost as lender.
Construction Loans. Subject to the
terms of the Loan Agreement, Frost will lend to the Company an aggregate amount not to exceed $16,160,000.00.
Principal and interest shall be due and payable monthly
in an amounts determined by Lender required to fully amortize the outstanding principal balance of this Note over a period of twenty-five
(25) years, payable on the twenty-sixth (26th) day of each and every calendar month, beginning April 26, 2023, and continuing regularly
thereafter until March 26, 2031, when the entire amount hereof, principal and accrued interest then remaining unpaid, shall be then due
and payable; interest being calculated on the unpaid principal each day principal is outstanding and all payments made credited to any
collection costs and late charges, to the discharge of the interest accrued and to the reduction of the principal, in such order as Lender
shall determine.
The interest rate of (3.40%) per annum including an
Interest-Only Period. Interest only shall be due and payable monthly as it accrues on the twenty-sixth (26th) day of each and every calendar
month, beginning April 26, 2021, and continuing regularly and monthly thereafter until March 26, 2023; interest being calculated on the
unpaid principal each day principal is outstanding and all payments made credited to any collection costs and late charges, to the discharge
of the interest accrued and to the reduction of the principal, in such order as Lender shall determine.
The loan shall be secured by a “Deed of Trust,
Security Agreement – Financing Statement” covering the 9.2 acre tract in Garland, Texas and the improvements made on it.
Revolving Credit Loans. Subject to
the terms of the, Loan Agreement, Frost will lend to the Company, on a revolving basis, amounts not to exceed a total principal balance
of $6,000,000.00, minus amounts available and amounts previously disbursed under outstanding Frost letters of credit. Subject to certain
terms and conditions, the Company may borrow, repay and reborrow under the Loan Agreement.
The interest on the outstanding and unpaid principal
balance shall be computed at a per annum rate equal to the lesser of (a) a rate equal to the Prime Rate per annum; provided, however,
in no event shall the resulting rate be less than three and one-quarter percent (3.25%).
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 six months ended May 29, 2021 and May 30, 2020, the Company had no dilutive potential common
stock instruments.
Note 7 SHAREHOLDERS’ EQUITY
On December 8, 2020, 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 6, 2021. The dividend
was paid to shareholders on February 12, 2021.
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.
[The remainder of this page intentionally left blank.]
MICROPAC INDUSTRIES, INC.
(Unaudited)