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United States Securities and Exchange Commission
WASHINGTON, D.C.20549
FORM 10-K
x Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended November 30, 2022
or
¨ Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ___________to
___________
Commission file number 000-5109
Micropac Industries, Inc.
(Exact name of registrant as specified in charter)
Delaware |
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75-1225149 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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905 E. Walnut Street, Garland, TX |
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75040 |
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972/272-3571 |
(Address of principal executive offices) |
|
(Zip Code) |
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(Telephone No.) |
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Securities Registered Pursuant to Section 12(b) of the Act: |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, $0.10 par value per share |
MPAD |
NONE |
Securities registered pursuant to Section 12(g)
of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
No þ
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. Yes þ No¨
Indicate by check mark whether the registrant has filed
a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report). Yes þ No¨
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes þ No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
"emerging growth company" in Rule 12b-2 of the Exchange Act. and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer ¨ |
Accelerated filer ¨ |
Non-accelerated filer ¨ |
Smaller
reporting company x
Emerging
growth company ¨
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate
by Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨
No þ
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of May 27, 2022 representing the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $9,137,070, The number of shares of the registrant’s common stock, $0.10 par
value, outstanding as of February 9, 2023 was 2,578,315.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement to be filed with
the Securities and Exchange Commission relating to the registrant’s Annual Meeting of Shareholders, to be held March 9, 2023 is
incorporated by reference in Part III to the extent described therein.
Table of Contents
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Page |
Part I |
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Item 1. |
Business |
3 |
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Item 1A. |
Risk Factors |
6 |
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Item 1B. |
Unresolved Staff Comments |
9 |
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Item 2. |
Properties |
9 |
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Item 3. |
Legal Proceedings |
10 |
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Item 4. |
Mine Safety Disclosure |
10 |
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Part II |
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Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
10 |
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Item 6. |
[Reserved] |
11 |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 |
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Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
15 |
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Item 8. |
Financial Statements and Supplementary Data |
15
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
27 |
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Item 9A. |
Controls and Procedures |
29 |
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Item 9B. |
Other Information |
26 |
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Part III |
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Item 10. |
Directors, Executive Officers and Corporate Governance |
30 |
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Item 11. |
Executive Compensation |
33 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
35 |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
36 |
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Item 14. |
Principal Accountant Fees and Services |
36 |
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Part IV |
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Item 15. |
Exhibits, Financial Statement Schedules |
37
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Item 16. |
Form 10K Summary |
37
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Signatures |
38 |
PART I
GENERAL
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, medical and commercial 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 9001:2015 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 technologies 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 435 shareholders on November 30, 2022.
PRODUCTS AND TECHNOLOGIES
The Company’s products are either custom
(being application-specific circuits designed and manufactured to meet the particular requirements of a single customer) or standard proprietary
components. Custom-designed components and assemblies accounted for approximately 29% of the Company’s sales for the fiscal year
ended November 30, 2022 and were 30% for fiscal 2021. Standard components and assemblies accounted for approximately 71% of the Company’s
sales for the fiscal year ended November 30, 2022 and were 70% for fiscal 2021.
The Company provides microelectronics, sensors
and displays, and optoelectronics products, to include components and assemblies that offer a wide range of products sold to the industrial,
medical, military, aerospace and space markets.
The microelectronic technologies, including custom
microcircuits, solid state relays, power operational amplifiers, and regulators accounted for 29% of the Company’s business in 2022
compared to 29% in 2021. Sensors and displays accounted for 43% of the Company’s business and the optocouplers product accounted
for 28% of the Company’s business in 2022, compared to 45% and 26% in 2021, respectively.
The Company’s basic products and technologies
include:
| · | Custom design hybrid microelectronic circuits |
| · | Solid state relays and power controllers |
| · | Custom optoelectronic assemblies and components |
| · | Power operational amplifiers |
| · | Fiber optic components and assemblies |
| · | High-temperature (200º C) products |
| · | Radiation tolerant electronics |
Micropac’s products are primarily sold to original equipment
manufacturers (OEM’s) who serve the following major markets:
| · | Military/Aerospace – aircraft instrumentation, guidance and navigation
systems, control circuitry, power supplies, laser positioning |
| · | Medical – optoelectronic sensors and electronics |
| · | Space – control circuitry, power monitoring and sensing |
| · | Industrial – power control equipment and robotics |
The Company has two patents.
On July 11, 2017, the Company received its patent for the “Power Controller”, which
expires on July 10, 2031. On January 6, 2018, the Company received its patent for the “Voltage bus protection and isolation devices”,
which expires on January 5, 2032.
The Company has no licenses, franchises, or labor
contracts. The Company’s has two trademarks registered with the U.S. Patent and Trademark Office.
Sales of our products internationally are subject
to government regulations, including export control regulations of the U.S. Department of State and Department of Commerce. Violation
of these regulations by the Company could result in monetary penalties and denial of export privileges. The Company is not aware of any
violations of export control regulations or similar applicable government regulations.
Five of the Company’s principal product
families require government approval. Further, a significant portion of our business is military and is dependent on maintaining our facility
certifications to MIL-PRF-38534 and MIL-PRF-19500. In addition, several customers require the Company maintain AS 9100 certifications.
We expect to maintain these certifications and qualifications; however, the loss of any of these certifications would have a significant
negative impact on our business.
Government regulations impose certain controls
on chemicals used in electronics and semiconductor manufacturing. Micropac has obtained appropriate environmental permits, and routinely
monitors and reports the wastewater stream results to the local governing agency. Micropac is classified as a small generator of hazardous
waste, and the annual cost of complying with the regulations is minimal.
In 2022, the Company’s investment in technology
through research and development, which was expensed, totaled approximately $2,191,000 ($1,739,000 in 2021). The Company’s research
and development expenditures were directed primarily toward standard proprietary microelectronic products, including industrial power
controllers and DC-DC converters, fiber optic transceivers, high voltage optocouplers and continued product development and improvement
associated with the Company’s space level and other high reliability products.
In addition to the Company’s investment
in research and development, various customers paid the Company approximately $1,620,000 in non-recurring engineering revenue with $1,348,000
recorded within cost of goods sold associated with the development of custom products for specific applications.
The Company provides a one-year warranty from
the date of shipment to the original purchaser. The Company is obligated under this warranty to either replace or repair defective goods
or refund the purchase price paid by the buyer.
CUSTOMERS
The Company’s products are marketed throughout
the United States and in Western Europe, through a direct technical sales staff, independent representatives, and independent stocking
distributors. Approximately 4% of the sales for fiscal year 2022 (4% in 2021) were to international customers. Sales to Western European
customers are made by independent representatives under the coordination of the Company’s office in Bremen, Germany.
Sales through the Company’s distribution
channels were $10,330,000 in 2022 compared to $9,449,000 in 2021, or 37% and 35% of sales, respectively.
The Company’s major customers include contractors
to the United States government. Sales to these customers for the Department of Defense (DOD) and NASA contracts accounted for approximately
77% of the Company’s revenues in 2022 compared to 67% in 2021.
The Company’s major customers are Lockheed
Martin, Northrop Grumman, United Technologies, BAE, and Boeing. Two customers accounted for 18% and 10% of the Company’s sales during
2022 and one customer accounted for 20% of the Company’s sales during 2021.
BACKLOG
At November 30, 2022, the Company had a backlog
of unfilled orders totaling approximately $32,686,000 compared to approximately $32,635,000 at November 30, 2021.
New orders for 2022 totaled $27,961,000 compared
to $31,387,000 for 2021.
The backlog represents a good mix of the company’s
products and technologies with 9% in the commercial market, 16% in the medical market, 64% in the military market, and 11% in the space
market on November 30, 2022.
2022 Current Backlog by Major Market |
| |
Military | | |
Space | | |
Medical | | |
Commercial | | |
Total | |
Domestic Direct | |
$ | 14,385 | | |
$ | 3,071 | | |
$ | 5,322 | | |
$ | 2,065 | | |
$ | 24,843 | |
Domestic Distribution | |
| 6,201 | | |
| 530 | | |
| - | | |
| 278 | | |
| 7,009 | |
International | |
| 206 | | |
| 47 | | |
| - | | |
| 581 | | |
| 834 | |
| |
$ | 20,792 | | |
$ | 3,648 | | |
$ | 5,322 | | |
$ | 2,924 | | |
$ | 32,686 | |
2022 Current Backlog by Product Line |
Microelectronics | |
$ | 10,665 | |
Optoelectronics | |
| 5,417 | |
Sensors and Displays | |
| 16,604 | |
| |
$ | 32,686 | |
HUMAN CAPITAL
Micropac Industries,
Inc., is committed to attracting and retaining the brightest and best talent. Therefore, investing, developing, and maintaining human
capital is critical to our success.
We are committed to advancing
Diversity, Equity, and Inclusion (DE&I) across the entire Company and the future success of the Company is our ability to attract
and retain a diverse workforce. DE&I are and have long been, critical to our culture and our Company’s success and our performance
depends on attracting, developing, motivating, and retaining a highly skilled workforce, including engineering, manufacturing, business
development and strategy and management.
At November 30, 2022, the Company had 147 full-time
employees (compared to 153 at November 30, 2021), of which 14 were executive and managerial employees, 37 were engineers and quality-control
personnel, 17 were clerical and administrative employees, and 79 were production personnel. None of the Company’s employees
are covered by collective bargaining agreements.
The Company
is an equal opportunity employer. It is the Company’s policy to recruit, hire, train and promote personnel in all job classifications,
without regard to race, religion, color, national origin, sex or age. Above and beyond non-discrimination, we are committed to an
Affirmative Action Program, dedicated to the hiring, training, and advancement within the Company of minority group members, women, veterans,
and handicapped individuals.
Our values
are also integral to our commitment to long-term sustainability, with environmental, social and governance (ESG) across our Company. With
the construction of our new manufacturing center, discussed below, the Company has included in the design and construction significant
improvements in support of our commitment to ESG.
COMPETITION
The Company competes with two or more companies
with respect to each of its major products. Some of these competitors are larger and have greater capital resources than the Company.
Management believes the Company’s competitive position is favorable with regard to our product reliability and integrity, past performance,
customer service and responsiveness, timely delivery and pricing; however, no assurance can be given that the Company can compete successfully
in the future.
There are approximately 35 independent manufacturing
companies who are certified to supply microcircuits to MIL-PRF-38534 or supply semiconductors to MIL-PRF-19500, in addition to OEM’s,
who manufacture hybrid microcircuits for their internal needs. Micropac may compete with all of these for hybrid microcircuit, power management
and optoelectronics business. Some of the Company’s primary competitors are TTM Technologies, Cobham Advanced Electronic Solutions,
TT Electronics, and Infineon Technologies.
SUPPLY CHAIN
The parts and raw materials for the Company’s
products are generally available from more than one source. Except for certain optoelectronic products, the Company does not manufacture
the basic parts or materials used in production of its products. From time to time, the Company has experienced difficulty in obtaining
certain materials when needed. The Company’s inability to secure materials for any reason could have adverse effects on the Company’s
ability to deliver products on a timely basis and could result in loss of customers or sales. However, the Company has not been materially
affected by such shortages. The Company uses capacitors, active semiconductor devices (primarily in chip form), hermetic packages, ceramic
substrates, resistor inks, conductor pastes, precious metals and other materials in its manufacturing operations. The Company’s
delivery commitments to customers allow for adequate lead times for production of the products including lead time for order and receipt
from the supply chain.
Some of the Company’s primary suppliers
are NTK Technologies, W. L Gore, Hughes Circuits, Semi-Dice and TTI.
| Item 1A. | Material Risk Factors |
This annual report on Form 10-K contains forward-looking
statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results
could differ materially. Investors are warned that forward-looking statements involve risks and unknown factors including, but not limited
to: our expectations regarding the potential impacts on our operations of the COVID-19 pandemic; our expectations regarding the potential
impacts on our supply chain and on our customers of the COVID-19 pandemic; overall changes in governmental spending for military and space
programs; customer cancellation or rescheduling of orders, problems affecting delivery of vendor-supplied raw materials and components,
unanticipated manufacturing problems and availability of direct labor resources.
The Company disclaims any responsibility to update
the forward-looking statements contained herein, except as may be required by law.
Concentration Related Risk Factors
The Company is heavily dependent on a few major
customers
The Company’s major customers include contractors
to the United States government. Sales to these customers for DOD and NASA contracts accounted for approximately 77% of the Company’s
revenues in 2022 compared to 67% in 2021. The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies,
BAE, and Boeing. Two customers accounted for 18% and 10% of the Company’s sales during 2022 and one customer accounted for 20% during
2021. The contracts of our customers with the United States government may be subject to renegotiation of profits or termination of contracts
or subcontracts at the election of the government, which would in turn might materially affect the Company’s sales. The loss of
any one of these customers or a significant reduction in their purchases would be likely to adversely affect our business.
In addition, the Company has several custom commercial
and medical products with a current backlog of $5,321,000. The loss of these custom products or a significant reduction in their purchases
would be likely to adversely affect our business.
Financing Related Risk Factors
We experience pricing pressures from customers
for reduction in selling prices
The Company continues to experience pricing pressures
from some of its OEM customers. In some cases, the Company’s customers request the review of pricing for possible reduction in selling
price on future orders. This requires the Company to improve its productivity and to request similar price reductions from its supplier
chain. If one or both of the approaches by the Company does not succeed, the Company could be required to reduce the selling price on
future orders, reducing the product gross margins and affecting the Company’s net earnings in order to receive future orders from
the customer. However, the Company has no agreement that requires a reduction in the selling price on any current customer order. All
contracts are firm fixed pricing.
The Company has potential warranty obligations
The Company provides a one-year warranty from
the date of shipment to the original purchaser. The Company is obligated under this warranty to either replace or repair defective goods
or refund the purchase price paid by the buyer. An unexpected number of warranty claims could negatively impact the profitability of the
Company.
Inflation and rising costs
The cost to manufacture the Company’s products
is influenced by the cost of raw materials and labor. The Company has recently experienced higher costs with increasing cost of labor
and cost of raw materials with inflation. The Company may, from time to time, offset these cost increases by increasing the prices of
its products on new contracts.
Operations Related Risk Factors
Fabrication efforts may not be successful
The Company produces silicon phototransistors
and light-emitting diode die for use in certain military, standard and custom products. Fabrication efforts sometimes may not result in
successful results, limiting the availability of these components. Competitors offer commercial level alternatives, and our customers
may purchase our competitors’ products if the Company is not able to manufacture the products using these technologies to meet the
customer demands.
Component shortages from suppliers could affect
ability to manufacture products or delay shipments to customers
The Company relies on suppliers to deliver quality
raw materials in a timely and cost-effective manner. Most of the materials and components are generally available from multiple sources;
however, from time-to-time vendors do not deliver the product as needed due to manufacturing problems or a decision to discontinue that
product. Such interruption of supply or price increases could have a material adverse effect on the Company’s operations; however,
the Company is not currently impacted by material shortages.
We must maintain the ability to enhance our
products and develop new products for the military, space or aerospace markets
The Company’s base products and technologies
generally have long life cycles. The Company’s products are primarily used in military, space or aerospace applications, which also
have long life cycles. Our future success may, however, depend in part on our ability to enhance the functionality of our existing products
in a timely and cost-effective manner, our ability to continue close working relationships with major customers for the design of their
new products, and our ability to develop new products and technologies for existing and emerging markets. We must also continue to make
significant investments in research and development efforts in order to meet customer specifications for specially fabricated products.
We may not be able to retain or obtain engineers, or other technical support staff, to conduct our research and development efforts as
needed. There can be no assurance that the Company will be able to design, develop and market new products and technologies on a timely
and cost-effective basis. Failure to respond to our customers’ requirements and to our competitors’ progress in technological
changes could have a material adverse effect on the Company’s business.
Regulatory Related Risk Factors
We are significantly affected by government
policy
The Company could be adversely affected by changes
in laws and regulations made by U.S. and non-U.S. governments and agencies dealing with foreign shipments. Changes in trade agreements
or taxes on imports or exports could adversely affect our operations or financial condition.
Sales of our products internationally are subject
to government regulations, including export control regulations of the U.S. Department of State and Department of Commerce. Changes in
these regulations could adversely affect our business. Violation of these regulations by the Company could result in monetary penalties
and denial of export privileges.
The Company is subject to the Foreign Corrupt
Practices Act (FCPA), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials
for the purpose of obtaining or retaining business. Any violation of the FCPA or similar laws and regulations could result in significant
expenses, divert management attention, have a material adverse effect on our business, our financial condition and our results of operations
and otherwise have a negative impact on the Company and its reputation.
Reductions or changes in U.S. government spending
The loss or significant reduction of a U.S. government
or NASA program in which our major customers participate could adversely affect our business. U.S. government contracts generally are
conditioned on the continuing availability of Congressional appropriations. Congress usually appropriates funds for on-going programs
on a fiscal year basis even though contract performance may extend over many years. At the beginning of a major program, the contract
is often only partially funded, and additional monies are committed only as Congress makes appropriations in future fiscal years. In addition,
most U.S. government contracts are subject to modification if funding is changed. Key programs in which our customers participate must
compete with other programs for consideration during the federal budgeting and appropriation process, and support and funding for any
U.S. government program may be influenced by general economic conditions, political considerations, and other factors. A decline in support
and funding for programs in which our customers participate could result in contract terminations, delays in contract awards, failure
to extend contracts, cancellation of planned procurements and fewer new business opportunities for our customers. Our business may be
adversely affected as a result of changes or reductions in U.S. government or NASA spending.
Market Related Risk Factors
Majority shareholder ability to control the
election of the Board of Directors
The Company’s majority shareholder, Mr.
Heinz-Werner Hempel, established a partnership organized under the laws of Germany, which owns 1,952,577 shares or 75.7% of the outstanding
voting shares. Mr. Hempel, through the partnership, has the ability to control the election of the Company’s Board of Directors
and elect individuals who may be more attuned to such majority shareholder’s vision for the Company and not necessarily to those
of minority shareholders as to the policies and directions of the Company. However, the ability to control the election of the Board of
Directors does not modify the fiduciary duties of the Board of Directors to represent the interests of all shareholders.
There are limited shares for purchase and sale
A small number of shares are available for public
purchase and sale. The Company’s reported share price may be subject to extreme fluctuations, or one or a few trades may determine
the reported market price, due in part to the small number of shares traded at any time.
General Risk Factors
Impact of COVID-19 on our Business
In March 2020 the World Health Organization declared
the spread of the COVID-19 virus a pandemic. The Company continues to monitor our supply chain and orders from customers for COVID-19
pandemic related changes. We are continuing to serve our customers while taking precautions to provide a safe work environment for our
employees and customers. We have been staggering some shifts and otherwise adjusting work schedules to maximize our capacity while adhering
to recommended precautions. We have established and implemented a work from home provision where possible.
To date, we have not experienced significant raw
material shortages; however, supply-chain disruptions could potentially delay or prevent us from fulfilling customer orders.
We are subject to cybersecurity risks
Cybersecurity risks and attacks continue to grow.
Cybersecurity attacks are evolving and not always predictable. Attacks include malicious software, threats to information technology infrastructure,
denial-of-service attacks on websites, attempts to gain unauthorized access to data, ransomware attacks, and other breaches. Data breaches
can originate with authorized or unauthorized persons. Authorized persons could inadvertently or intentionally release confidential or
proprietary information, and recipients could misuse data. Such events could lead to interruption of our operations or business, unauthorized
release or use of information, compromise of data, damage to our reputation, damage to our customers or vendors, and increased costs to
prevent, respond to or mitigate any events.
Insurance coverage and exposure to substantial
claims or liabilities
The Company operates manufacturing facilities
in Garland, Texas and subcontracts portions of the Company’s manufacturing to a contract manufacturer in Juarez, Mexico. These facilities
use industrial machines and chemicals that could provide risks of personal injury and/or property damage. There is no assurance that accidents
will not occur. If accidents do occur, the Company could be exposed to substantial liability. The Company maintains worker’s compensation
insurance and general liability insurance for protection of its employees and for protection of the Company’s assets in Garland,
Texas and for equipment and inventory located at the contract manufacturer in Juarez, Mexico. In addition to the basic policies mentioned,
the Company maintains an umbrella insurance policy. The Company reviews all insurance coverage on an annual basis, and makes any necessary
adjustments based on risk assessment and changes in its business. In the opinion of the Company’s management, and its insurance
advisors, the Company is adequately insured; however, the Company’s financial position could be materially affected by claims not
covered or exceeding coverage currently carried by the Company.
Environmental regulations
The Company is subject to increasingly stringent
environmental laws and regulations, including those relating to air emissions, wastewater discharges, chemical and hazardous waste management
and disposal. Some of these environmental laws hold owners or operators of land or businesses liable for their own and for previous owners’
or operators’ releases of hazardous or toxic substances or wastes. Other environmental laws and regulations require that we obtain
and comply with environmental permits. To date, costs of complying with environmental requirements have not been material. Future events,
including those relating to climate change or greenhouse gas emissions, could require the Company to incur expenses related to installation
of pollution control equipment, or investigation and cleanup of contaminated sites. If the Company fails to comply with environmental
laws and regulations, the Company could be subject to significant liabilities or be required to curtail or cease its manufacturing activities.
Changes in environmental laws or regulations could affect the cost of the Company’s products and make it hard for the Company to
be competitive with larger companies.
We may default on its line of credit or construction
loan
The Company currently has an existing line of
credit and a construction loan with a Texas banking institution. In connection therewith, the Company is obligated to maintain certain
minimum financial requirements in order to receive advances therefrom. The Company is currently in compliance with such financial requirements,
but there is no guarantee that the Company will remain in compliance. If the Company does not maintain compliance with each of the requirements,
its ability to receive advances from the line of credit or construction loan will be impaired.
We may incur product liability claims
The use of the Company’s products in commercial
or government applications may subject the Company to product liability claims. Although the Company has not experienced any significant
product liability claims, the risk of such claims continues. Product liability claims brought against the Company could have a material
adverse effect on the Company’s operating results and financial condition.
Our products may have errors or defects that
we find only after deployment
Our products are complex, designed to be incorporated
in sophisticated applications, and may contain undetected defects, errors, or failures. Although our products are generally tested during
manufacturing, prior to shipping, they may contain defects that are discovered only after the products are incorporated in customer applications.
The occurrence of any defects, errors, or failures could result in installation delays, product returns, termination of contracts with
our customers, diversion of our resources, increased service and warranty costs, and other losses to our customers, their end users, or
to us. Any of these occurrences could also result in the loss of customers, and could damage our reputation, which could reduce our sales.
In addition to the risk of unanticipated warranty or recall expenses, our customer contracts may contain provisions that could cause us
to incur penalties, be liable for damages, or incur other expenses, if we experience difficulties with respect to the functionality, deployment,
operation, and availability of our products and services.
| Item 1B. | Unresolved Staff Comments |
None.
The Company occupies approximately 37,000 square
feet of manufacturing, engineering and office space in Garland, Texas. The Company owns 32,200 square feet of that space and leases an
additional 4,800 square feet. The Company considers its facilities adequate for its current level of operations.
In addition, the Company purchased 9.2 acres of
land in Garland, Texas for $1,438,000 in 2017. With the purchase of this tract of land, the Company has completed construction of the
new 76,000 square feet manufacturing center and corporate office. The Company is in the process of relocating the manufacturing and offices
of the three existing buildings into a new manufacturing center.
The Company also subcontracts some manufacturing
to Inmobiliaria San Jose De Ciuddad Juarez S.A. DE C.V., a maquila contract manufacturer in Juarez, Mexico. The Company owns all equipment
and inventory with temporary importation into Mexico under the maquila rules of Mexico. The Company does not lease or own any real property
in Mexico.
The Company employs a sales team in Bremen, Germany
who coordinates sales to Western European customers made by independent representatives. The sales manager maintains an office in a private
residence. The Company does not lease or own any real property in Germany, or any other foreign country.
The Company is not involved in any material current
or pending legal proceedings.
| Item 4. | Mine Safety Disclosure |
None.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information, Holders and Dividends
On February 9, 2023 there were 435 shareholders
of record of the Company’s common stock. The stock of the Company is closely held; and, therefore, certain shareholders have the
ability to significantly influence decisions. The Company’s common stock is quoted on the OTC Market Pink Sheets under the symbol
“MPAD.OB”. The following sets forth the high and low sell price for each quarter during the last two fiscal years:
| |
HIGH | | |
LOW | |
Fiscal Year Ended November 30, 2022 | |
PRICE | | |
PRICE | |
Fourth Quarter | |
$ | 14.95 | | |
$ | 12.25 | |
Third Quarter | |
$ | 16.40 | | |
$ | 14.19 | |
Second Quarter | |
$ | 17.50 | | |
$ | 15.00 | |
First Quarter | |
$ | 17.00 | | |
$ | 14.30 | |
| |
| | | |
| | |
Fiscal Year Ended November 30, 2021 | |
| | | |
| | |
Fourth Quarter | |
$ | 17.31 | | |
$ | 14.25 | |
Third Quarter | |
$ | 15.20 | | |
$ | 12.55 | |
Second Quarter | |
$ | 16.20 | | |
$ | 12.00 | |
First Quarter | |
$ | 12.70 | | |
$ | 11.50 | |
The market price of a share of the common stock
as of February 6, 2023, the latest practical date, was $13.95.
During the three month period ended November 30,
2022, approximately 24,200 shares of the Company’s common stock were traded in the over-the-counter market at a price range of $12.25
to $14.95 per share. For the two year period ending November 30, 2022, approximately 357,600 shares of the Company’s common stock
were traded in the over-the-counter market at prices ranging from a low of $11.50 to a high of $17.50. The Company’s reported share
price may be subject to extreme fluctuations, or one or a few trades may determine the reported market price, due in part to the small
number of shares traded at any time.
On December 7, 2021, 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 11, 2022.
The dividend was paid to shareholders on February 10, 2022.
On December 7, 2022, 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 11, 2023.
The dividend will be paid to shareholders on or about February 10, 2023.
Securities Issued under Equity Compensation
Plan
None.
Purchases of equity securities by the issuer
and affiliated purchasers.
None
| Item 7. | Management’s Discussion and Analysis of Financial Condition and
Results of Operations |
| |
Twelve Months Ended | |
| |
November 30, 2022 | | |
November 30, 2021 | |
| |
| | |
| |
Net Sales | |
| 100.0 | % | |
| 100.0 | % |
| |
| | | |
| | |
Cost of goods sold | |
| 55.7 | % | |
| 55.7 | % |
Research and Development | |
| 7.9 | % | |
| 6.4 | % |
Selling, General, and Administrative | |
| 27.8 | % | |
| 23.7 | % |
Cost & Expenses | |
| 91.4 | % | |
| 85.8 | % |
| |
| | | |
| | |
Operating Income | |
| 8.6 | % | |
| 14.2 | % |
| |
| | | |
| | |
Other income (expense), net | |
| 4.0 | % | |
| (0.5 | )% |
| |
| | | |
| | |
Income before Income Taxes | |
| 12.6 | % | |
| 13.7 | % |
| |
| | | |
| | |
Provision for taxes | |
| 2.6 | % | |
| 2.5 | % |
| |
| | | |
| | |
Net Income | |
| 10.0 | % | |
| 11.2 | % |
The Company 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,
medical 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.
Company sales totaled $27,785,000 resulting in
an increase of $493,000 from 2021. The majority of the increase in sales were due to an increase in shipments of various custom products
compared to 2021.
At November 30, 2022, the Company had a backlog
of unfilled orders totaling approximately $32,686,000 compared to approximately $32,635,000 at November 30, 2021.
New orders for 2022 totaled $27,961,000 compared
to $31,387,000 for 2021.
Approximately $6,624,000 of the new orders received
in 2022 were delivered to customers in 2022, along with approximately $21,161,000 of the Company’s 2021 backlog of orders at November
30, 2021 resulting in revenue of $27,785,000.
The backlog represents a good mix of the company’s
products and technologies with 9% in the commercial market, 16% in the medical market, 64% in the military market, and 11% in the space
market on November 30, 2022.
2022 Current Backlog by Major Market |
| |
Military | | |
Space | | |
Medical | | |
Commercial | | |
Total | |
Domestic Direct | |
$ | 14,385 | | |
$ | 3,071 | | |
$ | 5,322 | | |
$ | 2,065 | | |
$ | 24,843 | |
Domestic Distribution | |
| 6,201 | | |
| 530 | | |
| - | | |
| 278 | | |
| 7,009 | |
International | |
| 206 | | |
| 47 | | |
| - | | |
| 581 | | |
| 834 | |
| |
$ | 20,792 | | |
$ | 3,648 | | |
$ | 5,322 | | |
$ | 2,924 | | |
$ | 32,686 | |
2022 Current Backlog by Product Line |
Microelectronics | |
$ | 10,665 | |
Optoelectronics | |
| 5,417 | |
Sensors and Displays | |
| 16,604 | |
| |
$ | 32,686 | |
Cost of goods sold, as a percentage of net sales,
was 55.7% in 2022 and 2021. In actual dollars, cost of sales increased $262,000 which was $15,473,000 in 2022 versus $15,211,000 in 2021.
In 2022, the Company’s investment in technology
through research and development, which was expensed, totaled approximately $2,191,000 ($1,739,000 in 2021). The Company’s research
and development expenditures were directed primarily toward standard proprietary microelectronic products, including industrial power
controllers and DC-DC converters, fiber optic transceivers, high voltage optocouplers and continued product development and improvement
associated with the Company’s space level and other high reliability products.
In addition to the Company’s investment
in research and development, various customers paid the Company approximately $1,620,000 in non-recurring engineering revenue with $1,348,000
recorded within cost of goods sold associated with the development of custom products for specific applications.
Selling, general, and administrative expenses
totaled 27.8% of net sales in 2022 compared to 23.7% in 2021. In dollars expensed, selling, general and administrative expenses totaled
$7,734,000 in 2022 as compared to $6,456,000 in 2021, an increase or $1,278,000. The majority of the increase was an increase in property
tax on the new building and increase in consulting fees.
Other income (expense) and net interest income
for fiscal 2022 totaled $1,112,000 compared to $(152,000) for fiscal 2021.The major increase in other income was $920,000 in employee
retention credits during the first quarter of 2021, which the Company recognized as other income and recorded in other receivables for
the refund claimed in the third quarter of 2022.
Income before taxes for fiscal 2022 was approximately
$3,499,000, or 12.6% of net sales, compared to $3,734,000, or 13.7% of net sales in fiscal 2021.
Provisions for income tax for fiscal 2022 totaled
$712,000 compared $676,000 for fiscal 2021. The Company’s effective income tax rate was 20.3% for the year ended November 30, 2022
and 18.1% for the year ended November 30, 2021.
Net income totaled approximately $2,787,000 or
$1.08 per share in 2022 versus 2021 net income of $3,058,000 or $1.19 per share.
Impact of COVID-19 on our Business
In March 2020 the World Health Organization declared
the spread of the COVID-19 virus a pandemic. The Company continues to monitor our supply chain and orders from customers for COVID-19
pandemic related changes. We are continuing to serve our customers while taking precautions to provide a safe work environment for our
employees and customers. We have been staggering some shifts and otherwise adjusting work schedules to maximize our capacity while adhering
to recommended precautions. We have established and implemented a work from home provision where possible.
To date, we have not experienced significant raw
material shortages; however, supply-chain disruptions could potentially delay or prevent us from fulfilling customer orders.
Liquidity and Capital Resources
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 (the “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.” (See Exhibit 10.13).
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 with a floor of 3.25%. 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.
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 includes 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 Revolving Loan Agreement, Frost will lend to the Company, on a revolving basis, amounts not to exceed a total principal
balance of $6,000,000, minus amounts available and amounts previously disbursed under outstanding revolving letters of credit. Subject
to certain terms and conditions, the Company may borrow, repay and reborrow under the Loan Agreement. The loan has a maturity date of
April 23, 2023. The loan shall be secured by a Security Agreement dated as of January 23, 2013, and is given by Borrower in favor of Lender
with collateral of all personal property.
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%).
In addition, the Company continues on-going investigations
for the use of cumulative cash for business expansion and improvements, such as operational improvements and new product expansion.
Cash and cash equivalents totaled $15,375,000 as of November 30, 2022
compared to $15,252,000 on November 30, 2021, an increase of $123,000. The increase in cash and cash equivalents is attributable to $2,204,000
cash provided by operations, $11,390,000 proceeds from the construction loan, offset by the payment of a cash dividend of $258,000, $563,000
in cash for additional manufacturing equipment and $12,650,000 for construction in process on the new facility.
In addition to cash on hand, the Company also
has the ability to borrow under a loan agreement as discussed in Note 5 to the condensed financial statements.
The Company is working with a local contractor
on the design and building of the new facility estimated at a cost of $18,353,000. The Company groundbreaking for the new manufacturing
facility was June 17, 2021. As of November 30, 2022, the Company has $18,280,000 in construction in process on the new facility and has
$14,938,000 in notes payable on the construction loan, outstanding draw request of $44,000 in account payables and has used $2,515,000
of the Company’s cash. In addition, the Company has unamortized loan fees on the construction loan in the amount of $179,000.
Per the loan covenant, the Company must maintain
a ratio of Free Cash Flow to Debt Service of not less than 1.20 to 1.00. As of November 30, 2022, the Company is in compliance.
Company management believes it will meet its 2023
capital requirements through the use of cash derived from operations for the year and/or usage of the Company’s cash and cash equivalents.
There were no significant outstanding commitments for equipment purchases or improvements at November 30, 2022.
The Company has no significant off-balance sheet
arrangements.
Critical Accounting Policies
The preparation
of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our
estimates on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances.
Note 2 to the Financial Statements in the Annual Report on Form 10-K for the year ended November 30, 2022,
describes the significant accounting policies and methods used in the preparation of the Financial Statements. liabilities. Actual results
could differ from these estimates.
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. The application of GAAP related to the measurement and recognition
of revenue requires us to make judgments and estimates. Specifically, the determination of whether revenues related to our revenue contracts
should be recognized over time or at a point in time, as these determinations impact the timing and amount of our reported revenues and
net income. Other significant judgments include the estimation of the point in the manufacturing process at which we are entitled to receive
payment, as well as the progress of the job order to completion to determine the amount of consideration earned for contractual revenue
recognized over time.
The allowance for doubtful accounts is based on
our assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there is a deterioration
of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability
of amounts due us could be adversely affected.
Inventory purchases and commitments are based
upon future demand. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence
because of changing customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely
affected.
The Company recognizes deferred tax assets and
liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and
laws that are expected to be in effect when the differences are expected to be recovered. If we were to determine we would not be able
to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset would be necessary which would
reduce our net income for that period.
Depreciable and useful lives estimated for property
and equipment are based on initial expectations of the period of time these assets will provide benefit. Changes in circumstances related
to a change in our business or other factors could result in these assets becoming impaired, which could adversely affect the value of
these assets.
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.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
| Item 8. | Financial Statements and Supplementary Data |
Page No. |
|
|
|
16 |
Report of Independent Registered Public Accounting Firm - Whitley Penn LLP (PCAOB ID 726) |
|
|
18 |
Balance Sheets as of November 30, 2022 and 2021 |
|
|
19 |
Statements of Income for the years ended November 30, 2022 and 2021 |
|
|
20 |
Statements of Shareholders’ Equity for the years ended November 30, 2022 and 2021 |
|
|
21 |
Statements of Cash Flows for the years ended November 30, 2022 and 2021 |
|
|
22-29 |
Notes to Financial Statements as of and for the years ended November 30, 2022 and 2021 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders and Board of Directors of
Micropac Industries, Inc.
Opinion on the Financial Statements
We have audited
the accompanying balance sheets of Micropac Industries, Inc. (the “Company”) as of November 30, 2022 and 2021, and the related
statements of income, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred
to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of November 30, 2022 and 2021, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are
a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is
a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the
audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and
(2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter
in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Margin Estimates for Long-Term Contracts
and Related Revenue Recognition
Critical Audit Matter Description
As disclosed in Note 2 to the financial statements,
the Company produces certain products with no alternative use and for which the Company has an enforceable right to payment during the
production cycle. For these contracts, the Company recognizes revenue over time as control over these products transfers to the customer.
Thus, the Company records contract assets for work in process contracts at the end of each reporting period. The Company uses costs incurred
to date as the method for determining progress, and revenue is recognized based on costs incurred to date plus an estimate of margin at
completion. The process of estimating final margin involves estimating the costs to complete production of goods and comparing those costs
to the total transaction price. These contracts are inherently uncertain in that revenue is fixed while the estimates of costs required
to complete these contracts are subject to variability. Due to the technical performance requirements in many of these contracts, changes
to cost estimates could occur, resulting in higher or lower margins when the contracts are completed.
We identified revenue associated with work in
process contracts recognized over time as a critical audit matter. The process of estimating final margin is subjective in nature that
and resulted in a higher degree of audit effort and judgment. Changes in estimates of final margin could have a significant impact on
the timing of revenue recognition.
How We Addressed the Matter
We obtained an understanding of the design of
internal controls that address the risks of material misstatement relating to recording revenue from contracts with customers where revenue
is recognized over time. We evaluated the reasonableness of judgements made and assumptions used by management relating to key estimates
which include estimated total costs to complete and estimated final margins. We reviewed executed contracts to understand the contract
terms, reperformed management’s process of assigning the appropriate timing of revenue recognition and tested the mathematical accuracy
of revenue recognized over time based on costs incurred to date relative to total estimated margin. We tested the accuracy and completeness
of the data used in developing key estimates, including materials, labor, and overhead costs. We performed a review of audit evidence
from transactions completed after the measurement date related to the final gross margins for comparison to the Company’s initial
gross margin estimates.
We evaluated management’s ability to estimate
total inputs accurately by comparing actual inputs to management’s historical estimates for contracts that have been fulfilled.
/s/ Whitley Penn LLP
We have served as the Company's auditor since
2016.
726
Plano, Texas
February 9, 2023
MICROPAC INDUSTRIES, INC.
BALANCE SHEETS
NOVEMBER 30, 2022 AND 2021
(Dollars in thousands except share and per share
data)
| |
| | |
| |
CURRENT ASSETS | |
2022 | | |
2021 | |
| |
| | |
| |
Cash and cash equivalents | |
$ | 15,375 | | |
$ | 15,252 | |
Receivables, net of allowance for doubtful accounts of $0 at November 30, 2022 and 2021 | |
| 3,644 | | |
| 4,974 | |
Other receivable | |
| 920 | | |
| - | |
Contract assets | |
| 408 | | |
| 603 | |
Inventories: | |
| | | |
| | |
Raw materials and supplies | |
| 6,715 | | |
| 5,738 | |
Work in process | |
| 3,573 | | |
| 2,946 | |
Total inventories | |
| 10,288 | | |
| 8,684 | |
Prepaid expenses and other assets | |
| 564 | | |
| 341 | |
Total current assets | |
| 31,199 | | |
| 29,854 | |
| |
| | | |
| | |
PROPERTY, PLANT AND EQUIPMENT, at cost: | |
| | | |
| | |
Land | |
| 1,518 | | |
| 1,518 | |
Buildings | |
| 498 | | |
| 498 | |
Facility improvements | |
| 1,126 | | |
| 1,126 | |
Furniture and fixtures | |
| 1,036 | | |
| 1,025 | |
Construction in process equipment | |
| 19,415 | | |
| 8,019 | |
Machinery and equipment | |
| 9,952 | | |
| 9,390 | |
Total property, plant, and equipment | |
| 33,545 | | |
| 21,576 | |
Less accumulated depreciation | |
| (11,082 | ) | |
| (10,739 | ) |
Net property, plant, and equipment | |
| 22,463 | | |
| 10,837 | |
Operating lease right to use asset | |
| 14 | | |
| 67 | |
Deferred income taxes, net | |
| 86 | | |
| - | |
Total assets | |
$ | 53,762 | | |
$ | 40,758 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 1,173 | | |
$ | 1,963 | |
Accrued compensation | |
| 1,086 | | |
| 1,295 | |
Deferred revenue | |
| 1,192 | | |
| 1,258 | |
Property taxes | |
| 560 | | |
| 318 | |
Income tax | |
| 149 | | |
| 180 | |
Short term debt | |
| 224 | | |
| - | |
Other accrued liabilities | |
| 47 | | |
| 78 | |
Total current liabilities | |
| 4,431 | | |
| 5,092 | |
| |
| | | |
| | |
Operating lease liabilities less current portion | |
| - | | |
| 14 | |
Long term debt, net of debt issuance costs | |
| 14,535 | | |
| 3,369 | |
Deferred income taxes, net | |
| - | | |
| 16 | |
Total liabilities | |
| 18,966 | | |
| 8,491 | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
SHAREHOLDERS’ EQUITY | |
| | | |
| | |
Common stock, $.10 par value, authorized 10,000,000 shares, 3,078,315 issued and 2,578,315 outstanding at November 30, 2022 and 2021 | |
| 308 | | |
| 308 | |
Additional paid-in-capital | |
| 885 | | |
| 885 | |
Treasury stock, 500,000 shares, at cost | |
| (1,250 | ) | |
| (1,250 | ) |
Retained earnings | |
| 34,853 | | |
| 32,324 | |
Total shareholders’ equity | |
| 34,796 | | |
| 32,267 | |
Total liabilities and shareholders’ equity | |
$ | 53,762 | | |
$ | 40,758 | |
See accompanying notes to financial statements.
MICROPAC INDUSTRIES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 2022 AND
2021
(Dollars in thousands except share and per share
data)
| |
| | | |
| | |
| |
2022 | | |
2021 | |
NET SALES | |
$ | 27,785 | | |
$ | 27,292 | |
| |
| | | |
| | |
COST AND EXPENSES: | |
| | | |
| | |
Cost of goods sold | |
| 15,473 | | |
| 15,211 | |
Research and development | |
| 2,191 | | |
| 1,739 | |
Selling, general and administrative expenses | |
| 7,734 | | |
| 6,456 | |
| |
| | | |
| | |
Total cost and expenses | |
| 25,398 | | |
| 23,406 | |
| |
| | | |
| | |
OPERATING INCOME | |
| 2,387 | | |
| 3,886 | |
| |
| | | |
| | |
Other income (expense), net | |
| 972 | | |
| (171 | ) |
Interest income, net | |
| 140 | | |
| 19 | |
| |
| | | |
| | |
| |
| | | |
| | |
PROVISION FOR INCOME TAXES | |
| | | |
| | |
Current | |
| 814 | | |
| 633 | |
Deferred | |
| (102 | ) | |
| 43 | |
Total tax expense provision | |
| 712 | | |
| 676 | |
| |
| | | |
| | |
NET INCOME | |
$ | 2,787 | | |
$ | 3,058 | |
| |
| | | |
| | |
NET INCOME PER SHARE, BASIC AND DILUTED | |
$ | 1.08 | | |
$ | 1.19 | |
| |
| | | |
| | |
WEIGHTED AVERAGE OF SHARES, basic and diluted | |
| 2,578,315 | | |
| 2,578,315 | |
| |
| | | |
| | |
DIVIDENDS PER SHARE | |
$ | 0.10 | | |
$ | 0.10 | |
See accompanying notes to financial statements.
MICROPAC INDUSTRIES, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 2022 AND
2021
(Dollars in thousands)
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Common
Stock | | |
Additional
paid-in-capital | | |
Treasury
Stock | | |
Retained
Earnings | | |
Total | |
BALANCE, November 30, 2020 | |
$ | 308 | | |
$ | 885 | | |
$ | (1,250 | ) | |
$ | 29,524 | | |
$ | 29,467 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Dividend | |
| - | | |
| - | | |
| - | | |
| (258 | ) | |
| (258 | ) |
Net income | |
| - | | |
| - | | |
| - | | |
| 3,058 | | |
| 3,058 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE, November 30, 2021 | |
| 308 | | |
| 885 | | |
| (1,250 | ) | |
| 32,324 | | |
| 32,267 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Dividend | |
| - | | |
| - | | |
| - | | |
| (258 | ) | |
| (258 | ) |
Net income | |
| - | | |
| - | | |
| - | | |
| 2,787 | | |
| 2,787 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE, November 30, 2022 | |
$ | 308 | | |
$ | 885 | | |
$ | (1,250 | ) | |
$ | 34,853 | | |
$ | 34,796 | |
See accompanying notes to financial statements.
MICROPAC INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 2022 AND
2021
(Dollars in thousands)
| |
| | | |
| | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
2022 | | |
2021 | |
Net income | |
$ | 2,787 | | |
$ | 3,058 | |
Adjustments to reconcile net income to
net cash provided by operating activities: | |
| | | |
| | |
Depreciation | |
| 394 | | |
| 384 | |
Deferred income tax (benefit) expense | |
| (102 | ) | |
| 43 | |
Loss on disposal of equipment | |
| - | | |
| 245 | |
Change in right of use of asset | |
| 53 | | |
| 50 | |
Changes in certain current assets and liabilities: | |
| | | |
| | |
(Increase) decrease in accounts receivable | |
| 1,330 | | |
| (2,334 | ) |
Increase in employee retention credits receivable | |
| (920 | ) | |
| - | |
(Increase) decrease in contract assets | |
| 195 | | |
| (91 | ) |
Decrease (increase) in inventories | |
| (1,604 | ) | |
| 452 | |
Decrease (increase) in prepaid expenses and other assets | |
| (223 | ) | |
| 174 | |
Decrease in prepaid income taxes | |
| - | | |
| 223 | |
Increase (decrease) in deferred revenue | |
| (66 | ) | |
| 1,146 | |
Increase (decrease) in accounts payable | |
| 403 | | |
| (101 | ) |
Increase (decrease) in accrued compensation | |
| (209 | ) | |
| 314 | |
Increase (decrease) in income taxes payable | |
| (30 | ) | |
| 156 | |
Decrease in lease liabilities | |
| (53 | ) | |
| (50 | ) |
Increase in all other accrued liabilities | |
| 249 | | |
| 162 | |
| |
| | | |
| | |
Net cash provided by operating activities | |
| 2,204 | | |
| 3,831 | |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Additions to property, plant and equipment | |
| (13,213 | ) | |
| (6,309 | ) |
| |
| | | |
| | |
Net cash used in investing activities | |
| (13,213 | ) | |
| (6,309 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Cash dividend | |
| (258 | ) | |
| (258 | ) |
Proceeds from long term debt | |
| 11,390 | | |
| 3,548 | |
Payment of debt issuance costs | |
| - | | |
| (179 | ) |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 11,132 | | |
| 3,111 | |
| |
| | | |
| | |
Net increase in cash and cash equivalents | |
| 123 | | |
| 633 | |
| |
| | | |
| | |
Cash and cash equivalents at beginning of period | |
| 15,252 | | |
| 14,619 | |
| |
| | | |
| | |
Cash and cash equivalents at end of period | |
$ | 15,375 | | |
$ | 15,252 | |
| |
| | | |
| | |
Supplemental Cash Flow Disclosure: | |
| | | |
| | |
Cash paid for income taxes | |
$ | 845 | | |
$ | 472 | |
Supplemental Non-Cash Flow Disclosure: | |
| | | |
| | |
Accrued additions to property, plant and equipment | |
$ | 44 | | |
$ | 1,221 | |
See accompanying notes to financial statements.
MICROPAC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2022 AND 2021
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, medical and commercial systems, including aircraft instrumentation and
navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o
C) products.
| 2. | SUMMARY OF 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, medical 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.
Schedule of net sales by product line | |
| | | |
| | |
| |
Nov. 30, 2022 | | |
Nov. 30, 2021 | |
Microelectronics | |
$ | 7,998 | | |
$ | 7,803 | |
Optoelectronics | |
| 7,913 | | |
| 7,124 | |
Sensors and Displays | |
| 11,874 | | |
| 12,365 | |
| |
$ | 27,785 | | |
$ | 27,292 | |
| |
| | | |
| | |
Timing of revenue recognition | |
| | | |
| | |
Recognized at a point in time | |
$ | 23,678 | | |
$ | 23,555 | |
Recognized over time | |
| 4,107 | | |
| 3,737 | |
Total Revenue | |
$ | 27,785 | | |
$ | 27,292 | |
The following table summarizes the Company’s net sales by major
market.
Schedule of net sales by major market | |
| | | |
| | | |
| | | |
| | | |
| | |
2022 Sales by Major Market |
| |
Military | | |
Space | | |
Medical | | |
Commercial | | |
Total | |
Domestic Direct | |
$ | 10,669 | | |
$ | 1,148 | | |
$ | 3,213 | | |
$ | 1,403 | | |
$ | 16,433 | |
Domestic Distribution | |
| 7,993 | | |
| 1,508 | | |
| - | | |
| 829 | | |
| 10,330 | |
International | |
| 233 | | |
| 351 | | |
| - | | |
| 438 | | |
| 1,022 | |
| |
$ | 18,895 | | |
$ | 3,007 | | |
$ | 3,213 | | |
$ | 2,670 | | |
$ | 27,785 | |
2021 Sales by Major Market |
| |
Military | | |
Space | | |
Medical | | |
Commercial | | |
Total | |
Domestic Direct | |
$ | 10,157 | | |
$ | 2,364 | | |
$ | 3,621 | | |
$ | 498 | | |
$ | 16,640 | |
Domestic Distribution | |
| 7,945 | | |
| 861 | | |
| - | | |
| 644 | | |
| 9,450 | |
International | |
| 222 | | |
| 751 | | |
| - | | |
| 229 | | |
| 1,202 | |
| |
$ | 18,324 | | |
$ | 3,976 | | |
$ | 3,621 | | |
$ | 1,371 | | |
$ | 27,292 | |
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:
Schedule of Receivables, net, contract assets and contract liabilities | |
| | | |
| | | |
| | |
| |
November
30, 2022 | | |
November
30, 2021 | | |
December
1, 2020 | |
Receivables, net | |
$ | 3,644 | | |
$ | 4,974 | | |
$ | 2,639 | |
Contract assets | |
$ | 408 | | |
$ | 603 | | |
$ | 512 | |
Deferred Revenue | |
$ | 1,192 | | |
$ | 1,258 | | |
$ | 111 | |
Revenue recognized in 2022 that was included in the deferred
revenue liability balance at the beginning of the year was $103,000.
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.
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 November 30, 2022 or November 30, 2021.
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 Property Plant 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.
Construction in progress relates to multiple capital
projects ongoing during the years ended November 30, 2022 and 2021, including the construction of the new manufacturing facility. Construction
in progress also includes interest and fees on debt that are directly related to the financing of the Company’s capital projects.
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.
Basic and Diluted Earnings Per Share
Basic and diluted earnings per share are computed
based upon the weighted average number of shares outstanding during the year. Diluted earnings per share gives effect to all dilutive
potential common shares. During 2022 and 2021, the Company had no potential dilutive common stock.
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.
| 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.
| 4. | FAIR VALUE MEASUREMENT: |
The Company had no financial assets and liabilities
measured at fair value on a recurring basis as of November 30, 2022 and 2021. The fair value of financial instruments such as cash
and cash equivalents, accounts receivable, and accounts payable approximate their carrying amount based on the short maturity of these
instruments.
The Company measures its long-term debt at fair
value which approximates book value as the long-term debt bears market rates of interest.
There were no nonfinancial assets measured at
fair value on a nonrecurring basis at November 30, 2022 or 2021.
| 5. | NOTES PAYABLE TO BANKS: |
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 (the “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.” (See Exhibit 10.13).
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 with a floor of 3.25%. 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.
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, 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 loan has a maturity date of April 23, 2023.
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%).
The Company has borrowed
$14,938,000 against the construction loan as of November 30, 2022.
Schedule of Debt | |
| | |
Debt November 30, 2022 | |
| |
Notes payable | |
$ | 14,938 | |
Less unamortized debt issuance costs | |
| 179 | |
Net Debt | |
| 14,759 | |
Less—Current portion | |
| 224 | |
Total long-term debt | |
$ | 14,535 | |
Estimated maturities of our long-term debt over
the next 5 years are as follows:
Schedule of maturities of long-term debt | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
2027 | | |
Thereafter | | |
Total | |
Frost Bank | |
$ | 224 | | |
$ | 395 | | |
$ | 407 | | |
$ | 421 | | |
$ | 436 | | |
$ | 13,057 | | |
$ | 14,938 | |
In general, the Company warrants that its products,
when delivered, will be free from defects in material workmanship under normal use and service. The obligations are limited to replacing,
repairing or giving credit for, at the option of the Company, any products that are returned within one year after the date of shipment.
The Company does not provide extended warranties.
The Company reserves for potential warranty costs
based on historical warranty claims experience. While management considers the process to be adequate to effectively quantify its exposure
to warranty claims based on historical performance, changes in warranty claims on a specific or cumulative basis may require management
to adjust its reserve for potential warranty costs.
Warranty expense was approximately $114,000 and
$185,000 in 2022 and 2021, respectively.
The following table summarizes product warranty
activity recorded during the years ended November 30, 2022 and 2021 recorded in other accrued liabilities.
Schedule of product warranty activity | |
| | | |
| | |
| |
2022 | | |
2021 | |
Beginning balance | |
$ | 25 | | |
$ | 60 | |
Additions for current year provision | |
| 114 | | |
| 56 | |
Payments for current year | |
| (114 | ) | |
| (91 | ) |
Ending balance | |
$ | 25 | | |
$ | 25 | |
Rent expense for each of the years ended November
30, 2022 and 2021 was $55,000 and $52,000 respectively.
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. 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 $55,000
for 2022. 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 months.
The undiscounted future minimum lease payments consist of the following
at November 30, 2022:
Schedule of undiscounted future minimum lease payments | | |
| | |
2023 | | |
$ | 14 | |
Total lease payments | | |
| 14 | |
Interest | | |
| - | |
Present value of lease liabilities | | |
$ | 14 | |
The Company sponsors an Employees’ Profit
Sharing Plan and Trust (the “Plan”). Pursuant to section 401(k) of the Internal Revenue Code, the Plan is available to substantially
all employees of the Company. Employee contributions to the Plan are matched by the Company at amounts up to 6% of the participant’s
salary. Contributions made by the Company were expensed and totaled approximately $476,000 in 2022 and $421,000 in 2021. Employees become
vested in Company contributions in 20% increments in years two through six of employment. If the employee leaves the Company prior to
being fully vested, the unvested portion of the Company contributions are forfeited and such forfeitures are used to lower future Company
contributions. The Company does not offer other post-retirement benefits to its employees at this time.
The income tax provision consisted of the following
for the years ended November 30:
Schedule of income tax provision | |
| | | |
| | |
| |
2022 | | |
2021 | |
Current Provision: | |
$ | 744 | | |
$ | 574 | |
Federal | |
| 700 | | |
| 59 | |
State | |
| 814 | | |
| 633 | |
| |
| | | |
| | |
Deferred federal tax expense (benefit) | |
| (102 | ) | |
| 43 | |
Total | |
$ | 712 | | |
$ | 676 | |
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows for the years ended November 30,
Schedule of effective income tax rate reconciliation | |
| | | |
| | |
| |
2022 | | |
2021 | |
Tax at statutory rate | |
$ | 734 | | |
$ | 784 | |
State income taxes, net of federal benefit | |
| 55 | | |
| 46 | |
Research and Development Tax Credit | |
| (156 | ) | |
| (197 | ) |
Permanent differences and other | |
| 79 | | |
| 43 | |
| |
| | | |
| | |
Income tax provision | |
$ | 712 | | |
$ | 676 | |
The components of deferred tax assets and liabilities were as follows
at November 30,
Schedule of components of deferred tax assets and liabilities | |
| | | |
| | |
| |
2022 | | |
2021 | |
Deferred tax assets (liabilities) | |
| | | |
| | |
Inventory | |
$ | 265 | | |
$ | 169 | |
Deferred revenue, sales returns and warranty | |
| 5 | | |
| 5 | |
Other accrued liabilities | |
| 83 | | |
| 52 | |
Depreciation | |
| (267 | ) | |
| (242 | ) |
Net deferred tax assets (liabilities) | |
$ | 86 | | |
$ | (16 | ) |
In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets, projected future
taxable income, and tax-planning strategies in making this assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than
not that the Company will realize the benefits of these deductible differences.
| 10 | SIGNIFICANT CUSTOMER INFORMATION: |
The Company’s major customers include contractors
to the United States government. Sales to these customers for DOD and NASA contracts accounted for approximately 77% of the Company’s
revenues in 2022 compared to 67% in 2021. The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies,
BAE, and Boeing. Two customers accounted for 18% and 10% of the Company’s sales during 2022 and one customer accounted for 20% of
the Company’s sales during 2021. The contracts of our customers with the United States government may be subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the government, which would in turn might materially affect
the Company’s sales. The loss of any one of these customers or a significant reduction in their purchases would be likely to adversely
affect our business.
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 7, 2021, 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 11, 2022.
The dividend was paid to shareholders on February 10, 2022.
12. EMPLOYEE
RETENTION CREDIT UNDER THE CARES ACT
The CARES Act, passed by Congress on March 27, 2020, contained the
employee retention credit (ERC), a refundable payroll tax credit to employers that have experienced hardship in their operations due to
COVID-19. The CARES Act was amended and extended on December 27, 2020 by the Consolidated Appropriations Act, 2021 (the “CAA”)
and in March 2021, the Internal Revenue Code was amended by the American Rescue Plan Act of 2021 to provide new employee retention credit
provisions designed to promote employee retention and hiring.
This ERC is a fully refundable tax credit for employers equal to 70
percent of qualified wages that eligible employers pay their employees. This ERC applies to qualified wages paid after December 2020 and
before January 1, 2022.
As a result, the Company has determined that it qualified for a approximately
$920,000 in employee retention credits during the first quarter of 2021, which the Company recognized as other income and recorded in
other receivable for the refund claimed in the third quarter of 2022. The ERC impact was included in the Company’s fiscal year 2021
tax return.
On December 7, 2022, 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 11, 2023.
The dividend will be paid to shareholders on or about February 10, 2023.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and
Chief Financial Officer (the Certifying Officers) are responsible for establishing and maintaining disclosure controls and procedures
for the Company. The Certifying Officers have designed such disclosure controls and procedures to ensure that material information is
made known to them, particularly during the period in which this report was prepared. The Certifying Officers have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the Rules)
under the Securities Exchange Act of 1934 (or Exchange Act)) and determined that as of November 30, 2022, the Company's disclosure controls
and procedures were effective.
Management’s Annual Report on Internal
Control Over Financial Reporting
Management of Micropac is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (principal executive
officer) and the Chief Financial Officer (principal financial officer), the Company’s management conducted an evaluation of the
effectiveness of its internal control over financial reporting as of November 30, 2022 as required by the Securities Exchange Act of 1934
Rule13a-15(c). In making this assessment, the Company’s management used the criteria set forth in the framework in “Internal
Control – Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on the evaluation conducted under the framework in “Internal Control – Integrated Framework” (2013), management concluded
that the Company’s internal control over financial reporting was effective as of November 30, 2022.
During our most recent
fiscal quarter, there has not occurred any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
This annual report does
not include an attestation report of our registered independent public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered independent public accounting firm pursuant to rules of the
Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
| Item 9B. | Other Information |
None.
PART III
In accordance with General Instruction G(3) of
Form 10-K, the information required by this Part III is incorporated by reference to Micropac Industries, Inc.’s definitive proxy
statement relating to its 2023 Annual Meeting of Stockholders, as set forth below. The 2023 Proxy Statement will be filed with the Securities
and Exchange Commission on or about February 9, 2023.
| Item 10. | Directors, Executive Officers and Corporate Governance |
Name |
|
Age |
|
Position with the Company |
|
Director Since |
|
|
|
|
|
|
|
Mark King |
|
68 |
|
CEO, President and Member of Audit Committee and Chairman of the Board |
|
October 2005 |
|
|
|
|
|
|
|
Heinz-Werner Hempel |
|
94 |
|
Director and Member of Audit Committee |
|
February 1997 |
|
|
|
|
|
|
|
Christine B. Dittrich |
|
70 |
|
Director and Member of Audit Committee |
|
October 2015 |
|
|
|
|
|
|
|
Gerald Tobey |
|
69 |
|
Director and Member of Audit Committee |
|
June 2017 |
|
|
|
|
|
|
|
Donald Robinson |
|
57 |
|
Director and Member of Audit Committee |
|
December 2019 |
|
|
|
|
|
|
|
Shaunna Black |
|
68 |
|
Director and Member of Audit Committee |
|
December 2019 |
|
|
|
|
|
|
|
Patrick S. Cefalu |
|
65 |
|
CFO, Executive Vice President |
|
N/A |
Mr. King is the current President and Chief Executive
of the Company. Prior to November 2002, Mr. King was the President and Chief Operating Officer of Lucas Benning Power Electronics. Mr.
King joined the Company in November of 2002, and was elected Chief Executive Officer, President and Director in October 2005.
Mr. Hempel has served as the Chief Operating Officer
of Hanseatische Waren-Gesellschaft MBH & Co, KG, Bremen, Germany for over 25 years.
Ms. Dittrich was an Executive Vice President of
Raytheon Systems Company and the General Manager of the Sensor and Electronic Systems segment. Before working for Raytheon, Ms. Dittrich
was a Senior Vice President of Texas Instruments (TI) Systems Group, a Malcolm Baldrige Quality Award winner, and the General Manager
of the Electronic Systems Division. Her prior assignments include TI Systems Group Vice President and Engineering Manager, Software Engineering
Director for the defense business, and Senior Member of Technical Staff. She has had senior executive responsibility for product engineering
efforts that involve large scale software and hardware development and integration. Ms. Dittrich provided consulting services with a focus
on business strategy and operational performance to various technology companies after leaving Raytheon. She became a Visiting Scientist
at the Carnegie Mellon University Software Engineering Institute (SEI), a Federally Funded Research and Development Center and chaired
the SEI Board of Advisors for over 10 years. She was a Fellow of the Cutter Business Technical Council and a senior consultant for Cutter
Consortium. In addition, she has held membership positions on the Army Science Board, the Department of Defense Software Best Practices
- Airlie Software Council and other advisory boards.
Mr. Tobey was a Vice President of Business Development
at Raytheon Missile Systems Company retiring in 2016 following a 38 year career in the defense, aerospace, and civil security sectors.
He also served as Vice President of International Business Development for both Raytheon's Missile Systems and Network Centric Systems
businesses. Until 1997, when Texas Instruments' Defense Systems and Electronics Group was acquired by Raytheon, Mr. Tobey served as that
company's Vice President of International Business Development and Managing Director of Texas Instruments UK, Ltd. (a wholly owned TI
subsidiary). During Mr. Tobey's career, he has served in various business creation and capture, strategy, program and manufacturing management
positions both in the U.S. and abroad. Mr. Tobey holds a Bachelor of Science and a Masters of Business Administration degree from Utah
State University. He is a graduate of the U.S. Defense Department's Defense Acquisition University, and has completed Executive Study
at the Anderson School of Management at UCLA.
Mr. Robinson is a practical, executive-level leader
interested in making a difference within organizations and maximizing the potential collective impact of people. He has deep experience
in corporate strategy, structuring and executing successful complex corporate initiatives, manufacturing, and mergers and acquisitions.
As a partner-level consultant, Mr. Robinson has led engagements in strategy development, M&A integration and executing complex corporate
initiatives. His industry experience includes time as an Industrial Engineer with Texas Instruments’ Defense Systems Group and as
an executive over industrial engineering, safety and quality systems with Decibel Products, a $35M in annual revenue manufacturer which
grew into Allen Telecom. He served on the Chicago and North Texas chapter boards of the National Association of Corporate Directors
(NACD), a national organization focused on providing information and education to corporate directors. Mr. Robinson served as a
Business Leadership Center Instructor at the SMU Cox School of Business in Dallas, TX and is a two-time recipient of the Teaching Excellence
Award. He holds an MBA from the University of Dallas and a B.S. in Industrial Engineering from Texas A&M University.
Ms. Shaunna Black is President of Shaunna Black
and Associates. Ms. Black advises companies on global operations, provides experienced executive talent, and coaches leadership teams.
The focus of her company is start-ups, business turnarounds and growth, strategy, organization and systems design, and leadership development.
Ms. Black is an innovative and highly accomplished operations/manufacturing executive, who enables leaders to rapidly solve complicated
problems. She has managed operations internationally in 25 countries. Ms. Black’s methodology delivers extraordinary performance
utilizing the power of diverse, multi-generational teams, creating high performance cultures and metrics-driven systems. She has expertise
in leadership and team development, technical and systems design, and production methodology in the technology, industrial, manufacturing
and hospitality sectors. Her executive career has provided significant experience in strategy, global operations, technology, risk management
and sustainability. Ms. Black has served on Audit, Governance, Safety/Risk and M&A Committees. Her industry experience includes Texas
Instruments Vice President, (24 years) Dallas/Fort Worth Area including Vice President, Worldwide Facilities - responsible for the design,
construction and operation of TI facilities, environmental, safety and health programs, global real estate, worldwide security, and TI's
sustainability strategy; Vice President, Dallas Fabrication - Manager for semiconductor manufacturing in one of TI's premier analog wafer
fabrication facilities; and Vice President, Worldwide Facilities and Worldwide Environmental, Safety and Health.
Mr. Cefalu has over 44 years of experience in
management, manufacturing and financial operations in a variety of industries. Mr. Cefalu has been the Chief Financial Officer and Executive
Vice President of the Company since September 2001.
Board Meetings and Committees
The Board of Directors held five (5) board meetings
during the year ended November 2022. Directors received a fee of $1,500 (other than Mr. King) for each meeting attended during the year
ended November 2022. In addition, the Board agreed to pay an annual retainer of $10,000 to Mr. Donald Robinson, Ms. Dittrich, Ms. Shaunna
Black and Mr. Gerald Tobey.
The Audit Committee held four (4) meetings during
the year ended November 30, 2022. Members of the Audit Committee received a fee of $750 for each meeting attended during the year ended
November 2022. Mr. King did not receive any payments for attending meetings of the Audit Committee.
Director Compensation 2022
| |
Director | | |
Audit Committee | | |
Other fees | | |
Total Fees | |
| |
| | | |
| | | |
| | | |
| | |
Shaunna Black | |
$ | 17,500 | | |
$ | 3,000 | | |
| - | | |
$ | 20,500 | |
Donald Robinson | |
$ | 17,500 | | |
$ | 3,000 | | |
| - | | |
$ | 20,500 | |
Christine Dittrich | |
$ | 17,500 | | |
$ | 3,000 | | |
| - | | |
$ | 20,500 | |
Gerald Tobey | |
$ | 17,500 | | |
$ | 3,000 | | |
| - | | |
$ | 20,500 | |
Mr. King does not receive any additional compensation
for serving as a Director and as a member of the Audit Committee.
Audit Committee
The Board of Directors
formed an Audit Committee on May 13, 2002. The members of the Audit Committee operate pursuant to a charter developed by the Board of
Directors. The Board has determined that all Audit Committee members qualify as an “audit committee financial expert” for
purposes of the rules and regulations of the SEC and that each of these members is sufficiently proficient in reading and understanding
our financial statements to serve on the Audit Committee.
With the exception of Mr. King and Mr. Hempel,
members of the Audit Committee are considered independent members under the Securities and Exchange Act rules and regulations.
The Audit Committee has reviewed with management
and the independent auditors the quality and adequacy of the Company's significant accounting policies. The Audit Committee has considered
and reviewed with the independent auditors their audit plans, the scope of the audit, and the identification of audit risks. The Audit
Committee has reviewed and discussed the audited financial statements with management and has discussed such financial statements with
the independent auditors.
The Audit Committee has received the written disclosures
and the report from the independent accountant required by the applicable requirements of the Public Company Accounting Oversight Board
(United States) regarding the independent accountant’s communications with the Audit Committee concerning independence and has discussed
with the independent accountants the independent accountant’s independence. Based upon the review and discussions referred to above,
the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s annual
report on Form 10-K for the fiscal year ended November 30, 2022, for filing with the Securities and Exchange Commission.
Management has the responsibility
for the preparation and integrity of the Company's financial statements and the independent registered public accounting firm have the
responsibility for the audit of those statements. It is not the duty of the Audit Committee to conduct audits to determine that the Company’s
financial statements are complete and accurate and are in accordance with accounting principles generally accepted in the United States.
In giving its recommendations, the Audit Committee considered (a) management's representation that such financial statements have been
prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States of America,
and (b) the report of the Company’s independent auditors with respect to such financial
statements.
Nominating, Compensation
and Corporate Governance
The Board of Directors does not have a nominating,
compensation committee or corporate governance committee or committees performing similar functions.
The Directors of the Company are responsible for
developing and recommending corporate governance guidelines, identifying qualified individuals to become directors, recommending selected
nominees to serve on the Board, and overseeing the evaluation of the Board.
In addition, the independent Directors are responsible
for considering and recommending the compensation arrangements for senior management. As part of its other responsibilities, they provide
general oversight of our compensation structure, and, if deemed, necessary, retains and approves compensation consultants and other compensation
experts. Other specific duties and responsibilities of reviewing the performance of executive officers; reviewing and approving objectives
relevant to executive officer compensation; recommending incentive compensation plans; and recommending compensation policies and practices
for service on our Board of Directors.
Board Leadership Structure
Our Board of Directors does
not have a policy on whether the roles of Chief Executive Officer and Chairman of the Board of Directors should be separate and, if they
are to be separate, whether the Chairman of the Board should be selected from the non-employee directors or be an employee. Our Board
of Directors believes that it should be free to make a choice from time to time in any manner that is in the best interest of us and our
stockholders.
The Board of Directors believes that Mr. King’s
service as both Chief Executive Officer and Chairman of the Board is in the best interest of us and our stockholders. Mr. King possesses
detailed and in-depth knowledge of the issues, opportunities and challenges we face and is thus best positioned to develop agendas, to
ensure that the Board’s time and attention are focused on the most critical matters. His combined role enables decisive leadership,
ensures clear accountability, and enhances our ability to communicate our message and strategy clearly and consistently to our stockholders,
employees, and customers and suppliers.
Our Board of Directors believes that the independent
directors provide effective oversight of management.
Board of Directors’ Role in the Oversight
of Risk Management
The Board of Directors has designated the Audit
Committee to take the lead in overseeing risk management at the Board of Directors level. Accordingly, the Audit Committee schedules time
for periodic review of risk management, in addition to its other duties. In this role, the Audit Committee receives reports from management,
independent registered public accounting firm, outside legal counsel, and other advisors, and strives to generate serious and thoughtful
attention to our risk management process and system, the nature of the material risks we face, and the adequacy of our policies and procedures
designed to respond to and mitigate these risks.
In addition to the formal compliance program,
our Board of Directors encourage management to promote a corporate culture that understands risk management and incorporates it into our
overall corporate strategy and day-to-day business operations.
Employee, Officer and
Director Hedging
None
Section 16(a) Beneficial Owner Reporting
Compliance
Section 16(a) of the Exchange Act requires the
Company's directors, executive officers, and 10% stockholders to file reports of ownership and reports of change in ownership of the Company's
equity securities with the Securities and Exchange Commission. Directors, executive officers, and 10% stockholders are required to furnish
the Company with copies of all Section16(a) forms they file. Based on information provided by such persons and a review of the copies
of such reports furnished, the Company believes that during the fiscal year ended November 30, 2022, the Company's directors, executive
officers, and 10% stockholders filed on a timely basis all reports required by Section 16(a) of the Exchange Act.
Code of Ethics
The Company has adopted a code of ethics that
applies to the Company’s principal executive officer and principal financial officer. In addition, the Company has a code of conduct
for all employees, officers and directors of the Company.
| Item 11. | Executive Compensation |
The information set forth in the 2023 Proxy Statement
under the heading “Management Remuneration and Transactions” is incorporated herein.
The following table shows as of November 30, 2022,
all cash compensation paid to, or accrued and vested for the account of Mr. Mark King, President and Chief Executive Officer and Mr. Patrick
Cefalu, Vice President and Chief Financial Officer. Mr. King and Mr. Cefalu received no non-cash compensation during 2022.
Annual Compensation
Name and Principal Position | |
Year | | |
Annual Salary | | |
Bonus | | |
All Other Compensation
| | |
Total | |
| |
| | |
| | |
| | |
(a) | | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Mark King, | |
| 2022 | | |
$ | 309,936 | | |
$ | 39,500 | | |
$ | 42,696 | | |
$ | 392,132 | |
President and | |
| 2021 | | |
$ | 301,924 | | |
$ | 13,400 | | |
$ | 42,672 | | |
$ | 357,996 | |
Chief Executive Officer (1) | |
| 2020 | | |
$ | 300,391 | | |
$ | 36,000 | | |
$ | 41,280 | | |
$ | 377,671 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Patrick Cefalu, | |
| 2022 | | |
$ | 192,856 | | |
$ | 39,500 | | |
$ | 34,809 | | |
$ | 267,165 | |
Vice President and | |
| 2021 | | |
$ | 187,873 | | |
$ | 13,400 | | |
$ | 32,918 | | |
$ | 234,191 | |
Chief Financial Officer (2) | |
| 2020 | | |
$ | 186,889 | | |
$ | 36,000 | | |
$ | 33,065 | | |
$ | 255,954 | |
| (a) | Reflects amounts contributed by Micropac Industries, Inc., under Micropac’s 401(k) profit sharing
plan; unused vacation pay; life insurance premiums paid; and reimbursement for medical expenses under Micropac’s Family Medical
Reimbursement Plan. |
(1) Effective November 2005, Mr. King’s
existing employment agreement was revised to provide that Mr. King would serve as the Company’s President and Chief Executive Officer,
and a member on the Board of Directors and Audit Committee at a base salary of $186,400 for a term of three (3) years. In December 2005,
the Company and Mr. King amended his employment agreement to increase his annual base salary to $225,000. In June 2009, the Company and
Mr. King amended his employment agreement to increase his annual base salary to $247,104 for renewable terms of three (3) years with annual
increases based on consumer price index with additional increases to be determined by the Board of Directors. The June 2009 amendment
also provides under certain events, either the Company or Mr. King can terminate the agreement upon a payment to Mr. King of 18 or 36
months’ salary as severance payments.
(2) Effective February 2004, Mr. Cefalu entered
into an employment agreement that Mr. Cefalu would serve as Executive Vice President and Chief Financial Officer for a term of two (2)
years. On April 6, 2020, the employment agreement was amended to extend the term for three (3) years and the remaining terms and conditions
of the Employment Agreement shall remain if full force and effect.
The Board of Directors reviews and approves the
Company’s annual bonus payment’s structure. In 2022 Mr. King and Mr. Cefalu received a bonus payment of $39,500 in December
2021
Amount included in all other compensation relating
to employee benefit plans
The Company maintains a Family Medical Reimbursement
Plan for the benefit of its executive officers and their dependents. The Plan is funded through a group insurance policy issued by an
independent carrier and provides for reimbursement of 100% of all bona fide medical and dental expenses that are not covered by other
medical insurance plans capped at an annual family maximum. During the fiscal year ended November 30, 2022, the Company paid $14,328 in
premiums each for Mr. King and Mr. Cefalu which amounts are included in the "All Other Compensation" column shown in the preceding
remuneration table.
In July 1984, the Company adopted a Salary Reduction
Plan pursuant to Section 401(k) of the Internal Revenue Code. The Plan's benefits are available to all Company employees who are at least
18 years of age and have completed at least six months of service to the Company as of the beginning of a Plan year. Plan participants
may elect to defer up to 15% of their total compensation as their contributions, subject to the maximum allowed by the Internal Revenue
code 401(k), and the Company matches their contributions up to a maximum of 6% of their total compensation. A participant's benefits vest
to the extent of 20% after two years of eligible service and become fully vested at the end of six years. During the fiscal year ended
November 30, 2022, the Company made contributions to the Plan for Mr. King in the amount of $17,400 and for Mr. Cefalu in the amount of
$13,941 which amount is included in the "All Other Compensation" column shown in the preceding remuneration table.
Employment agreements of the Company’s officers
provide that they may elect to carry over any unused vacation time to subsequent periods or elect to be paid for such unused vacation
time. Mr. King and Mr. Cefalu did not receive any unused vacation pay in 2022.
During the fiscal year ended November 30, 2022,
the Company paid life insurance premiums for the benefit of Mr. King and Mr. Cefalu valued at $10,968 and $6,540, respectively.
PROPOSAL 2- ADVISORY
VOTE ON COMPENSATION OF OUR NAMED EXECUTIVES
As required pursuant
to Section 14A of the Securities Exchange Act of 1934 (Exchange Act), we are asking stockholders to approve the compensation paid to the
company’s named executives, Messrs. King and Cefalu, as disclosed in this proxy statement on pages 6 to 7, in an advisory vote.
In the annual meeting held in March 2014, our shareholders approved a proposal to hold the advisory vote on executive compensation every
three years. The last advisory vote on executive compensation was taken in connection with the annual meeting in March 2017, at which
time our executive compensation was approved.
This advisory proposal,
commonly referred to as a “say-on-pay” proposal, is not binding on the Board of Directors. Although the voting results are
not binding, the Board will review and consider them when evaluating our executive compensation program.
The Board recommends
a vote FOR this proposal because it believes that our compensation policies and practices are effective in achieving the Company’s
goals.
PROPOSAL 3 - ADVISORY VOTE ON THE FREQUENCY
OF
FUTURE ADVISORY VOTES ON EXECUTIVE COMPENSATION
In Proposal Number 2
above, we are asking stockholders to vote on an advisory resolution on executive compensation. As required pursuant to Section 14A
of the Exchange Act, in this Proposal Number 3, we are asking stockholders to vote on whether future advisory votes on executive compensation
should occur every year, every two years or every three years. Stockholders will be able to specify one of four choices for this proposal
on the proxy card: one year, two years, three years, or abstain. This vote on the frequency of future advisory votes on executive compensation
is non-binding on the Board, although the Board will review and consider the results of this vote when establishing the timing for future
advisory votes such as the one in Proposal Number 2.
This is the second such
advisory vote on the frequency of future advisory votes on the compensation we pay our executives. We intend to hold advisory votes on
the frequency of the “say-on-pay” advisory votes every six years, as required under the Exchange Act. We believe, given the
levels of compensation provided our executives and the lack of any current stock option plan or other incentive compensation other than
a bonus, that an advisory vote every six years on the frequency of the “say-on-pay” advisory vote is sufficient.
The Board of Directors
recommends that stockholders vote for holding the advisory vote on executive compensation EVERY THREE YEARS.
PROPOSAL 4 - THE ADOPTION OF THE MICROPAC INDUSTRIES, INC. 2023
EQUITY INCENTIVE PLAN
On February 8, 2023, the Board of Directors of Micropac has approved
the Micropac Industries Inc. 2023 Equity Incentive Plan (“Plan”), which provides for the award of Performance-Based
and Time-Vested Restricted Stock Units (“RSU”).
The complete text of the Plan is attached as Exhibit A to this Proxy
Statement.
If approved by the shareholders, the Plan will be effective December
1, 2022. The Management of the Company believes that the Plan will promote the best interest of Micropac by:
(1) encourage continuity of management,
(2) increase personal interest in Micropac’s welfare
by those who are primarily responsible for shaping and carrying out Micropac’s long-range plans and securing Micropac's continued
growth and financial success; and
(3) help in attracting and retaining key personnel of outstanding
ability and provide an added incentive for them to continue their association with Micropac.
The Board recommends
a vote FOR this proposal because it believes that our compensation policies and practices are effective in achieving the Company’s
goals.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
The following table shows the number and percentage
of shares of the Company's common stock beneficially owned (a) by each person known by the Company to own 5% or more of the outstanding
common stock, (b) by each director and nominee, and (c) by all present officers and directors as a group.
Name and Address
of Beneficial Owner(1) |
|
Number of Shares
Beneficially Owned |
|
Percent
of Class(1) |
|
|
|
|
|
Jeff Capital, LP |
|
137,438 |
|
5.3% |
|
|
|
|
|
Heinz-Werner Hempel(2) (3) (4) |
|
1,952,577 |
|
75.7% |
|
|
|
|
|
Shaunna Black (3) |
|
0 |
|
0% |
|
|
|
|
|
Patrick Cefalu |
|
0 |
|
0% |
|
|
|
|
|
Christine Dittrich (3) |
|
0 |
|
0% |
|
|
|
|
|
Mark King (3) |
|
16,600 |
|
Less than 0.6% |
|
|
|
|
|
Donald Robinson (3) |
|
0 |
|
0% |
|
|
|
|
|
Gerald Tobey (3) |
|
0 |
|
0% |
|
|
|
|
|
All officers and directors
as a group (7 Persons) |
|
1,969,177 |
|
76.4% |
| (1) | Calculated on the basis of the 2,578,315 outstanding shares. There are no options,
warrants, or convertible securities outstanding. The address of each person listed is 905 East Walnut Street, Garland, Texas 75040. |
| (2) | The Company and Mr. Heinz-Werner Hempel are parties to an Ancillary Agreement entered
into in March 1987. The Ancillary Agreement primarily obligates the Company to register Mr. Hempel’s stock and allows Mr. Hempel
to participate in any sale of stock by the Company. |
| (3) | A director of the Company. Each incumbent director has been nominated for re-election
at the Annual Meeting. |
| (4) | Effective October 10, 2007, Mr. Hempel transferred all of the shares of the Company’s
common stock owned by him and consisting of 1,952,577 shares, to a partnership organized under the laws of Germany. This partnership is
composed of Mr. Hempel, his son, and his daughter. As the consideration for this transfer, Mr. Hempel received a 99.98% share in this
partnership and received the sole voting and management control. His son and daughter each own a 0.01% ownership interest in this partnership. |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
None.
| Item 14. | Principal Accountant Fees and Services |
Whitley Penn LLP was selected as the Company’s
independent registered public accounting firm in 2016 and has been responsible for the Company's financial audit for the fiscal years
ended November 30, 2016 through November 30, 2022.
Management anticipates that a representative from
Whitley Penn LLP will be present at the Annual Meeting and will be given the opportunity to make a statement if he or she desires to do
so. It is also anticipated that such representative will be available to respond to appropriate questions from stockholders.
AUDIT FEES
The fees for professional services rendered for
the audit of our annual financial statements for each of the fiscal years ended November 30, 2022 and November 30, 2021, and the reviews
of the financial statements included in our Quarterly Reports on Form 10-Q during those periods were $145,000 and $145,000, respectively.
TAX FEES
Whitley Penn LLP fees for tax return preparation
services were $29,500 in 2022, and $26,500 in 2021, respectively.
ALL OTHER FEES
Whitley Penn LLP fees for audit of the Company’s
401K plan was $11,000 in 2022 and $10,000 2021, respectively.
The Audit Committee requests that the Principal
Accounting Firm provide the committee with the anticipated charges of all accounting and tax related services to be performed in advance
of performing such services. The Audit Committee approves all services in advance of the performance of such services.
Part IV
| Item 15. | Exhibits, Financial Statement Schedules |
31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
Certification of 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 Chief Accounting Officer pursuant to 18 U. S. C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.
|
|
|
3.1 |
Bylaws – In the form of Exhibit 3.1 to the Form 8-K filed March 3, 2011 which is incorporated herein. |
|
|
4.1 |
Certificate of Incorporation – In the form of Exhibit 4.1 to the Form S-8 filed August 15, 2001 which is incorporated herein. |
|
|
10.1 |
Loan Agreement dated as of January 23, 2013 by and among Frost Bank and Micropac Industries, Inc. which is filed as Exhibit 10.1 to the Form 8K filed January 29, 2013 which is incorporated by reference herein.
|
|
|
10.4 |
Employment Agreement with Patrick Cefalu dated April 6, 2020 – In the form attached as Exhibit 10.4 to the Form 10KSB filed August 23, 2004 which is incorporated herein. |
|
|
10.7 |
Code of Ethics – In the form attached as Exhibit 10.7 to the Form 10KSB filed August 23, 2005 which is incorporated herein. |
|
|
10.11 |
Restated and Amended Employment Agreement with Mark W. King dated June 1, 2009 – In the form attached as Exhibit 10.11 to the Form 10K filed February 10, 2021 which is incorporated herein.
|
|
|
10.12 |
Amended Employment Agreement with Patrick Cefalu dated April 6, 2020 – In the form attached as Exhibit 10.12 to the Form 10K filed February 10, 2021 which is incorporated herein.
|
|
|
10.13 |
“Sixth Amendment to Loan Agreement” dated March 26, 2021 between Micropac Industries, Inc. as borrower and Frost Bank attached as Exhibit 10.13 to Form 8K filed March 30, 2021 which is incorporated herein.
|
|
|
10.14 |
“Construction Loan Agreement dated March 26, 2021 between Micropac Industries, Inc. as borrower and Frost Bank attached as Exhibit 10.14 to Form 8K filed March 30, 2021 which is incorporated herein. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) 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.
|
MICROPAC INDUSTRIES, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
By: |
/s/ Mark King |
|
|
Mark King |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
By: |
/s/ Patrick Cefalu |
|
|
Patrick Cefalu |
|
|
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer) |
Dated: February 9, 2023
Pursuant to the requirements of the Securities
and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
indicated on February 9, 2023.
/s/ Mark King |
/s/ Heinz-Werner Hempel |
Mark King, Director |
Heinz-Werner Hempel, Director |
|
|
|
|
|
|
|
|
/s/ Donald Robinson |
/s/ Gerald Tobey |
Donald Robinson, Director |
Gerald Tobey, Director |
|
|
|
|
|
|
|
|
/s/ Christine Dittrich |
/s/ Shaunna Black |
Christine Dittrich, Director |
Shaunna Black, Director |
DIRECTORS AND OFFICERS
NOVEMBER 30, 2022
MARK KING
President and Chief Executive Officer
Chairman of the Board
Micropac Industries, Inc.
HEINZ-WERNER HEMPEL
Chief Operating Officer
Hanseatishe Waren Handelsgesellschaft MBH &
Co. KG, Bremen, Germany
DONALD ROBINSON
Managing Partner
Metre22, Inc
CHRISTINE DITTRICH
Retired
GERALD TOBEY
Retired
SHAUNNA BLACK
Retired
PATRICK CEFALU
Executive Vice President
Chief Financial Officer
Micropac Industries, Inc.
LEGAL COUNSEL |
TRANSFER AGENT & REGISTRAR |
Whitaker Chalk Swindle & Schwartz PLLC |
Securities Transfer |
Fort Worth, Texas |
Plano, Texas |
39
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