United States Securities and Exchange Commission

WASHINGTON, D.C. 20549D.C.20549

FORM 10-K

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

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. report). YesþNo¨

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):

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 29, 202127, 2022 representing the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $8,562,0009,137,070, The number of shares of the registrant’s common stock, $0.10 par value, outstanding as of February 9, 20222023 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 11, 20229, 2023 is incorporated by reference in Part III to the extent described therein.

Table of Contents 

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 (200^o 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 9001:20082015 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 technologytechnologies 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 emittinglight-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 436435 shareholders on November 30, 2021.2022.

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 30%29% of the Company’s sales for the fiscal year ended November 30, 20212022 and were 31%30% for fiscal 2020.2021. Standard components and assemblies accounted for approximately 70%71% of the Company’s sales for the fiscal year ended November 30, 20212022 and were 69%70% for fiscal 2020.2021.

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 20212022 compared to 33%29% in 2020.2021. Sensors and displays accounted for 45%43% of the Company’s business and the optocouplers product accounted for 26%28% of the Company’s business in 2021,2022, compared to 45% and 22%26% in 2020,2021, respectively.

The Company’s basic products and technologies include:

Micropac’s products are primarily sold to original equipment manufacturers (OEM’s) who serve the following major markets:

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 2021,2022, the Company’s investment in technology through research and development, which was expensed, totaled approximately $1,739,000$2,191,000 ($1,431,0001,739,000 in 2020)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 $2,341,000$1,620,000 in non-recurring engineering revenue with $2,468,000$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 2021 (5%2022 (4% in 2020)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, compared to $7,966,000 in 2020, or 35%37% and 33%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 67%77% of the Company’s revenues in 20212022 compared to 66%67% in 2020.2021.

The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies, BAE, and Boeing. OneTwo 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 and 2020.2021.

BACKLOG

At November 30, 2021,2022, the Company had a backlog of unfilled orders totaling approximately $32,635,000$32,686,000 compared to

approximately $29,793,000$32,635,000 at November 30, 2020.2021.

New orders for 20212022 totaled $31,387,000$27,961,000 compared to $30,012,000$31,387,000 for 2020.2021.

The backlog represents a good mix of the company’s products and technologies with 8%9% in the commercial market, 11%16% in the medical market, 73%64% in the military market, and 8%11% in the space market on November 30, 2021.2022.

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, 2021,2022, the Company had 153147 full-time employees (compared to 143153 at November 30, 2020)2021), of which 14 were executive and managerial employees, 4637 were engineers and quality-control personnel, 2117 were clerical and administrative employees, and 7279 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) practices 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.

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 67%77% of the Company’s revenues in 20212022 compared to 66%67% in 2020.2021. The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies, BAE, and Boeing. One customerTwo customers accounted for 20%18% and 10% of the Company’s sales during 20212022 and 2020.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 $5,348,000.$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 emittinglight-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.

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 define,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

The impactIn March 2020 the World Health Organization declared the spread of the COVID-19 pandemicvirus a pandemic. The Company continues to unfold. The extent of the pandemic’s effect onmonitor our operationalsupply chain and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, the contagiousness and severity of Coronavirus variants, including Delta and Omicron, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of theorders from customers for COVID-19 pandemic onrelated changes. We are continuing to serve our future operations. See “Management’s Discussioncustomers while taking precautions to provide a safe work environment for our employees and Analysis of Financial Conditioncustomers. We have been staggering some shifts and Results of Operations.”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.

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, it is the intentCompany has completed construction of the new 76,000 square feet manufacturing center and corporate office. The Company to consolidateis in the process of relocating the manufacturing and offices of the three existing buildings into a new manufacturing center. The Company is currently working with a contractor on the design and building of the new facility.

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.

None.

PART IINone.

PART II

Market Information, Holders and Dividends

On February 7, 20229, 2023 there were 436435 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:

The market price of a share of the common stock as of February 7, 20226, 2023, the latest practical date, was $16.00.$13.95.

During the three month period ended November 30, 2021,2022, approximately 14,90024,200 shares of the Company’s common stock were traded in the over-the-counter market at a price range of $14.25$12.25 to $17.31$14.95 per share. For the two year period ending November 30, 2021,2022, approximately 492,100357,600 shares of the Company’s common stock were traded in the over-the-counter market at prices ranging from a low of $10.75$11.50 to a high of $17.31.$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 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 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.

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, 2022.2023.

Securities Issued under Equity Compensation Plan

None.

Purchases of equity securities by the issuer and affiliated purchasers.

None

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 (200^o 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 emittinglight-emitting diodes and silicon phototransistors, and electronic integration used in the Company’s optoelectronic components and assemblies.

Company sales totaled $27,292,000$27,785,000 resulting in an increase of $5,018,000$493,000 from 2020.2021. The majority of the increase in sales were due to an increase in shipments of standard solid state relays and non-recurring engineering funded by customers on severalvarious custom products compared to 2020.2021.

At November 30, 2021,2022, the Company had a backlog of unfilled orders totaling approximately $32,635,000$32,686,000 compared to approximately $29,793,000$32,635,000 at November 30, 2020.2021.

New orders for 20212022 totaled $31,387,000$27,961,000 compared to $30,012,000$31,387,000 for 2020.2021.

Approximately $5,605,000$6,624,000 of the new orders received in 2021 was2022 were delivered to customers in 2021,2022, along with approximately $21,687,000$21,161,000 of the Company’s 20202021 backlog of orders at November 30, 20202021 resulting in revenue of $27,292,000.$27,785,000.

The backlog represents a good mix of the company’s products and technologies with 8%9% in the commercial market, 11%16% in the medical market, 73%64% in the military market, and 8%11% in the space market on November 30, 2021.2022.

Cost of goods sold, as a percentage of net sales, was 55.7% in 2021 compared to 61.4% in 2020 with higher margins from the increase in sales of solid state relay microelectronic products.2022 and 2021. In actual dollars, cost of sales increased $1,536,000 for 2021$262,000 which was $15,473,000 in 2022 versus 2020. The increase$15,211,000 in cost of goods sold were due to the overall increase in sales during 2021 compared to 2020.2021.

In 2021,2022, the Company’s investment in technology through research and development, which was expensed, totaled approximately $1,739,000$2,191,000 ($1,431,0001,739,000 in 2020)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 $2,341,000$1,620,000 in non-recurring engineering revenue with $2,468,000$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 23.6%27.8% of net sales in 20212022 compared to 24.9%23.7% in 2020.2021. In dollars expensed, selling, general and administrative expenses totaled $7,734,000 in 2022 as compared to $6,456,000 in 2021, as compared to $5,543,000 in 2020, an increase or $913,000.$1,278,000. The majority of the increase was in commissions with higher sales, an increase in property taxestax on the new building and increase in consulting fees.

Other income (expense) and net interest income for fiscal 20212022 totaled $(152,000)$1,112,000 compared to $65,000$(152,000) for fiscal 2020.2021.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 20212022 was approximately $3,499,000, or 12.6% of net sales, compared to $3,734,000, or 13.7% of net sales compared to $1,690,000, or 7.6% of net sales in fiscal 2020.2021.

Provisions for income tax for fiscal 20212022 totaled $676,000$712,000 compared $218,000$676,000 for fiscal 2020.2021. 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 and 13.0% for the year ended November 30, 2020.

2021.

Net income totaled approximately $3,058,000$2,787,000 or $1.19$1.08 per share in 20212022 versus 20202021 net income of $1,472,000$3,058,000 or $0.57$1.19 per share.

Impact of COVID-19 on our Business

The spread of the COVID-19 virus during the first half of 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. 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. In this time of uncertainty because of the COVID-19 pandemic, weWe 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 such as social distancing.precautions. We have established and implemented a work from home provision where possible. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

We experienced multiple confirmed case of COVID-19 during 2021 and 2020, which caused us to shut down our Garland facility for a few days to thoroughly clean the facility and address employee concerns. Our maquiladora contractor in Mexico was shut down during April and May of 2020 but reopened as of mid-June 2020.

To date, we have not experienced significant raw material shortages; however, supply-chain disruptions could potentially delay or prevent us from fulfilling customer orders.

The impact of the COVID-19 pandemic continues to unfold. The extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, the contagiousness and severity of Coronavirus variants, including Delta and Omicron, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations.

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“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 includingincludes 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%).

On April 17, 2020, Micropac Industries, Inc. (the Company) obtained an unsecured $1,924,400 loan under the Paycheck Protection Program (the PPP Loan). The Paycheck Protection Program (or PPP) was established under the recently congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and is administered by the U.S. Small Business Administration. The PPP Loan toIn addition, the Company was made through Frost Bank,continues on-going investigations for the Company s existing lender (the Lender).use of cumulative cash for business expansion and improvements, such as operational improvements and new product expansion.

Based upon updated guidance issued April 23, 2020 by the Federal Government including a presumption that no publicly traded companies with sourcesCash and cash equivalents totaled $15,375,000 as of liquidity are eligible for a PPP loan, the Company returned the loan proceeds within the time period imposed under these new guidelines and paid off the loan on May 4, 2020.

The Company provided $3,831,000 of cash from operating activities in 2021November 30, 2022 compared to the $416,000$15,252,000 on November 30, 2021, an increase of cash used by operating activities in 2020.$123,000. The increase in netcash and cash equivalents is attributable to $2,204,000 cash provided by operations, is due to higher revenues in 2021 and an increase in inventory associated with$11,390,000 proceeds from the increase in backlog in 2020. The Company used $583,000construction loan, offset by the payment of a cash dividend of $258,000, $563,000 in cash for investment in additional manufacturing equipment and $5,726,000$12,650,000 for construction in process on the new facility in 2021 compared to $686,000 in 2020.facility.

The Company issued a dividend payment of $0.10 per shareIn addition to all shareholders of record for each of the last two years. The total dividend payment was $258,000 per year.

As of November 30, 2021,cash on hand, the Company had $15,252,000also has the ability to borrow under a loan agreement as discussed in cash and cash equivalents comparedNote 5 to $14,619,000 in cash and cash equivalents on November 30, 2020.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, 2021,2022, the Company has $6,947,000$18,280,000 in construction in process on the new facility and has $3,548,000$14,938,000 in notes payable on the construction loan, outstanding draw request of $1,214,000$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, 2021,2022, the Company is “in compliance”.

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.in compliance.

Company management believes it will meet its 20222023 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, 2021.2022.

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, 2021,2022, 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.

Not applicable.

Page No.

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, 20212022 and 2020,2021, 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, 20212022 and 2020,2021, 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-dateto 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 significant 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 have identified revenue associated with work in process contracts recognized over time as a critical audit matter because estimatesmatter. The process of estimating final margin areis 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 significant 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.Weestimates.

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, 20222023

MICROPAC INDUSTRIES, INC.

BALANCE SHEETS

NOVEMBER 30, 20212022 AND 20202021

(Dollars in thousands except share and per share data)

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.

STATEMENTS OF INCOME

FOR THE YEARS ENDED NOVEMBER 30, 20212022 AND 20202021

(Dollars in thousands except share and per share data)

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED NOVEMBER 30, 20212022 AND 20202021

(Dollars in thousands)