See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 BASIS OF PRESENTATION
Business Description
Micropac Industries, Inc. (the “Company”),
a Delaware corporation, designs, manufactures and distributes various types of microelectronic circuits including solid state relays and
power controllers, optoelectronic components, and sensor and display components and assemblies. The Company’s products are used
as components and assemblies in a broad range of military, space, 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 February 25, 2023.
In the opinion of management, the unaudited financial
statements include all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial position
as of February 25, 2023, the results of operations and cash flows for the three months ended February 25, 2023 and February 26, 2022.
Unaudited financial statements are prepared on a basis substantially consistent with those audited for the year ended November 30, 2022.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles in the United States (GAAP) have been condensed or omitted pursuant to the rules and regulations promulgated by
the Securities and Exchange Commission. The Company’s fiscal year ends on the last day of November. The quarterly results end on
the last Saturday of the quarter.
It is suggested that these financial statements
be read in conjunction with the November 30, 2022 Form 10-K filed with the SEC, including the audited financial statements and the accompanying
notes thereto.
Note 2 SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The core principle of revenue recognition under
accounting principles generally accepted in the Unites States of America (GAAP) is that the Company should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services.
The Company's revenue on the majority of its customer
contracts is 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 | |
| | | |
| | |
| |
Net Sales by Product Line | |
| |
(Dollars in thousands) | |
| |
| |
| |
Feb. 25, 2023 | | |
Feb. 26, 2022 | |
Microelectronics | |
$ | 1,020 | | |
$ | 1,541 | |
Optoelectronics | |
| 1,857 | | |
| 2,205 | |
Sensors and Displays | |
| 3,313 | | |
| 2,320 | |
| |
$ | 6,190 | | |
$ | 6,066 | |
Timing of revenue recognition: | |
| | | |
| | |
Recognized at a point in time | |
$ | 5,112 | | |
$ | 5,351 | |
Recognized over time | |
| 1,078 | | |
| 715 | |
Total Revenue | |
$ | 6,190 | | |
$ | 6,066 | |
The following table summarizes the Company’s net sales by major
market.
Schedule of net sales by major market | |
| | | |
| | | |
| | | |
| | | |
| | |
2023 First Quarter Sales by Major Market (Dollars in thousands) |
| |
Military | | |
Space | | |
Medical | | |
Commercial | | |
Total | |
Domestic Direct | |
$ | 1,310 | | |
$ | 52 | | |
$ | 950 | | |
$ | 1,306 | | |
$ | 3,618 | |
Domestic Distribution | |
| 1,736 | | |
| 410 | | |
| - | | |
| 150 | | |
| 2,296 | |
International | |
| 28 | | |
| 2 | | |
| - | | |
| 246 | | |
| 276 | |
| |
$ | 3,074 | | |
$ | 464 | | |
$ | 950 | | |
$ | 1,702 | | |
$ | 6,190 | |
2022 First Quarter
Sales by Major Market (Dollars in thousands) |
| |
| Military
| | |
| Space
| | |
| Medical
| | |
| Commercial
| | |
| Total
| |
Domestic Direct | |
$ | 2,505 | | |
$ | 603 | | |
$ | 555 | | |
$ | 189 | | |
$ | 3,852 | |
Domestic Distribution | |
| 1,793 | | |
| 146 | | |
| - | | |
| 139 | | |
| 2,078 | |
International | |
| 71 | | |
| 22 | | |
| - | | |
| 43 | | |
| 136 | |
| |
$ | 4,369 | | |
$ | 771 | | |
$ | 555 | | |
$ | 371 | | |
$ | 6,066 | |
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 (deferred revenue) on the
Condensed Balance Sheets.
Receivables, net, contract assets
and contract liabilities were as follows:
Receivables, net, Contract Assets and Contract
Liabilities
(Dollars in thousands)
Schedule of receivables, net, contract assets and contract liabilities | |
| | | |
| | | |
| | |
| |
February 25, 2023 | | |
November 30, 2022 | | |
December 1, 2021 | |
Receivables, net | |
$ | 2,810 | | |
$ | 3,644 | | |
$ | 4,974 | |
Contract assets | |
$ | 722 | | |
$ | 408 | | |
$ | 603 | |
Deferred revenue | |
$ | 646 | | |
$ | 1,192 | | |
$ | 1,258 | |
There was $546,000 of revenue recognized in fiscal year 2023 that
was included in the deferred revenue liability balance at the beginning of the fiscal year.
Contract costs
The Company does not have material incremental costs to obtain a contract in
the form of sales commissions or bonuses. The Company incurs other immaterial costs to obtain and fulfill a contract; however, the Company
has elected the practical expedient under ASC 340-40-24-4 to recognize all incremental costs to obtain a contract as an expense when incurred
if the amortization period is one year or less.
Leases
In the first quarter of 2020, the Company entered into a three (3)
year lease extension on the property that has been leased on a year to year basis. The Company had an operating lease expense of $14,000
for the first three months of 2023 and $13,000 for the first three months of 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 month to month.
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 February 25, 2023 or November
30, 2022.
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 |
15-30 |
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 year ended November 30, 2022 and the three months ended February 25, 2023, 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 respective periods. Diluted earnings per share gives effect to
all dilutive potential common shares. For the three months ended February 25, 2023 and February 26, 2022, the Company had no dilutive
potential common stock instruments.
Use of Estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Note 3 NEW ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment
model for most financial assets. The ASU requires the use of an “expected loss” model for instruments measured at amortized
cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized
cost basis, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance is effective
for fiscal years beginning after December 15, 2022 for Smaller Reporting Companies, including interim periods within those fiscal years
and requires a modified-retrospective approach to adoption. The Company believes that adopting ASU 2016-13 will have no material impact
on the financial statements and related disclosures.
Note 4 FAIR VALUE MEASUREMENT
The Company had no financial assets or liabilities
measured at fair value on a recurring basis as of February 25, 2023 or November 30, 2022. 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 February 25, 2023 and November 30, 2022.
Note 5 COMMITMENTS
The Company obtained
a commercial real estate construction loan for the construction of a new 76,000 square foot manufacturing center on the 9.2 acres of land
in Garland, Texas that the Company has purchased. On March 26, 2021, the Company (acting as borrower) entered into a Construction Loan
Agreement (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.”. 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
$15,010,000 against the construction loan as of February 25, 2023.
Schedule of long-term
debt | |
| |
Debt February 25, 2023 | |
| |
Notes payable | |
$ | 15,010,000 | |
Less unamortized debt issuance costs | |
| 151,000 | |
Net Debt | |
| 14,859,000 | |
Less—Current portion | |
| 225,000 | |
Total long-term debt | |
$ | 14,634,000 | |
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 | |
$ | 225 | | |
$ | 396 | | |
$ | 409 | | |
$ | 423 | | |
$ | 438 | | |
$ | 13,119 | | |
$ | 15,010 | |
Note 6 EARNINGS PER COMMON SHARE
Basic and diluted earnings per share are computed
based upon the weighted average number of shares outstanding during the respective periods. Diluted earnings per share gives effect to
all dilutive potential common shares. For the three months ended February 25, 2023 and February 26, 2022, the Company had no dilutive
potential common stock instruments.
Note 7 SHAREHOLDERS’ EQUITY
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 was paid to shareholders on February 10, 2023.
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.