SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended August 26, 201724, 2019

OR

Commission File Number 0-5109

MICROPAC INDUSTRIES, INC.

Registrant’s Telephone Number, including Area Code(972) 272-3571

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 ☒ No ☐[X] No[  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐[X] No[  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

(DoIf an emerging growth company, indicate by check mark if the registrant has elected not check if a smaller reporting company)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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o[  ] No x[X]

On October 10, 20177, 2019 there were 2,578,315 shares of Common Stock, $0.10 par value outstanding.

MICROPAC INDUSTRIES, INC.

FORM 10-Q

August 26, 201724, 2019

INDEX

PART I -FINANCIAL INFORMATION

ITEM 1 -FINANCIAL STATEMENTS

Condensed Balance Sheets as of August 24, 2019 (unaudited) and November 30, 2018

Condensed Statements of Operations for the three and nine months ended August 24, 2019 and

August 25, 2018 (unaudited)

Condensed Statements of Cash Flows for the six months ended August 24, 2019 and

August 25, 2018 (unaudited)

Statements of Shareholders’ Equity for the six months ended August 24, 2019 and

August 25, 2018 (unaudited)

Notes to Condensed Financial Statements (unaudited)

ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

ITEM 3 -QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4 -CONTROLS AND PROCEDURES

PART II -OTHER INFORMATION

ITEM 1 -LEGAL PROCEEDINGS

ITEM 1A -RISK FACTORS

ITEM 2 -UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3 -DEFAULTS UPON SENIOR SECURITIES

ITEM 4 -MINE SAFETY DISCLOSURE

ITEM 5 -OTHER INFORMATION

ITEM 6 -EXHIBITS

SIGNATURES

PART I - FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

MICROPAC INDUSTRIES, INC.

CONDENSED BALANCE SHEETS

(Dollars in thousands)

ASSETS

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands except share data)

ASSETS (Unaudited)

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands except share data)

(Unaudited)

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

See accompanying notes to financial statements.

STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE PERIODS ENDED AUGUST 24, 2019 AND AUGUST 25, 2018

(Dollars in thousands)

(Unaudited)

MICROPAC INDUSTRIES, INC.

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 hybrid microelectronic circuits, solid state relays, power controllers, and optoelectronic components and assemblies. The Company’s products are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (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 9001:2015 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 technology is microelectronic and optoelectronic designs to include the packaging and interconnecting of multi-chip microelectronics modules. Other technologies include light emitting and light sensitive materials and products, including light emitting diodes and silicon phototransistors, and electronic integration used in the Company’s optoelectronic components and assemblies.

The business of the Company was started in 1963 as a sole proprietorship. On March 3, 1969, the Company was incorporated under the name of “Micropac Industries, Inc.” in the state of Delaware. The stock was publicly held by 442 shareholders on August 24, 2019.

In the opinion of management, the unaudited condensed financial statements include all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial position as of August 26, 2017,24, 2019, the results of operations for the three months and nine months ended August 26, 201724, 2019 and August 27, 2016,25, 2018, and the cash flows for the nine months ended August 26, 201724, 2019 and August 27, 2016. The unaudited condensed25, 2018 including the statement of shareholders equity. Unaudited financial statements are prepared on a basis substantially consistent with those audited for the year ended November 30, 2016.2018. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States 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, 20162018 Form 10-K filed with the SEC, including the audited financial statements and the accompanying notes thereto.

Note 2 SIGNIFICANT ACCOUNTING POLICIES

UseRevenue Recognition

On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09,Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of Estimatesrevenue to which it expects to be entitled for the transfer of promised goods and services to customers. The ASU replaces most existing revenue recognition guidance in the United States. The standard permits the use of either the full retrospective or modified retrospective transition method.

Based on a review of its customer contracts, the Company has determined that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with the Company’s historical revenue recognition model. 

The core principle of the guidance in Topic 606 is that an entity 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.

To achieve that core principle, the Company applied the following steps:

1. Identify the contract(s) with a customer.

The Company designs, manufactures and distributes various types of microelectronic circuits, optoelectronics, and sensors and displays. The Company’s products are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200^o C) products.

The preparationCompany’s revenues are from purchase orders associated with manufacture of financial statements in conformityproducts and/or contracts with U.S. generally accepted accounting principles requires management to make estimatescustomers. We account for a contract when it has approval and assumptions that affectcommitment from both parties, the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the daterights of the financial statementsparties are identified, payment terms are identified, the contract has commercial substance and the reported amountscollectability of sales and expenses during the reporting period. Actual results could differ from those estimates.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 sale of products. 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. This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery.Revenue RecognitionThe Company accounting policy treats shipping and handling activities as a fulfillment cost.

Sales are recorded as shipments are made based upon contract prices. Any losses anticipated on3. 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 contracts are provided for currently. Sales are recorded netper unit shipped based on the terms of sales returns, allowances and discounts.the contract or purchase order with the customer.

4. Allocate the transaction price to the performance obligations in the contract.

The Company transaction price is the fixed price per unit per each delivery upon shipment.

5. Recognize revenue when (or as) the Company satisfies a performance obligation.

The Company invoices for each delivery upon shipment and recognizes salesrevenues at the fixed price for each distinct product delivered when four basic criteria are met: (1) persuasive evidencetransfer of an arrangement exists; (2) shipmentcontrol 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, Topic 606 requires the Company to recognize revenue using an over-time recognition model as opposed to recognizing revenue at the time of shipment. The Company recognizes this revenue at work in process cost plus a margin at the end of each period and records a contract asset (unbilled receivable). The majority of these products are shipped weekly and monthly to the customer.

In addition, the Company may have a contract or services have been rendered; (3)purchase order to provide a non-recurring engineering service to a customer. These contracts are reviewed and performance obligations are determined and revenue recognized upon terms and conditions of the feecontract from the customer.

Effective as of the beginning of the first quarter of fiscal 2019, we adopted Topic 606 using the modified retrospective method and recognized a cumulative effect adjustment to retained earnings based on any open contracts at that time for which revenue recognition has changed from a point-in-time recognition model to an over-time recognition model. While the impact to net sales and net income was not material to our results of operations, the future impact of Topic 606 is fixeddependent on the mix and determinable;nature of specific customer contracts.

Upon adoption, we recognized an increase in retained earnings of $55,000. The details of the adjustment to retained earnings upon adoption as well as the effects of the balance sheet are as follows:

The following table summarize the effects of the new standard on selected unaudited line items within the Company’s Condensed Statement of Operations for three and (4) collectability is reasonably assured.nine months ended August 24, 2019.

Three months ended August 24, 2019

Nine months ended August 24, 2019

Disaggregation of Revenue

The following table summarizes the Company’s net sales by product line.

Deferred revenueRevenue represents prepaymentsadvance payments from customers and will be recognized as salesrevenue when the productsperformance obligations are shipped permet based on the terms of the contract.

Contract costs

The Company does not have material incremental costs to obtain a contract in the form of sales commissions or bonuses. The Company incurs other immaterial costs to obtain and fulfill a contract; however, the Company has elected the practical expedient under ASC 340-40-24-4 to recognize all incremental costs to obtain a contract as an expense when incurred if the amortization period is one year or less

Short-Term Investments

The Company has $2,025,000$2,081,000 in short termshort-term investments at August 26, 2017.24, 2019. Short-term investments consist of certificates of deposits with initial maturities greater than 90 days. These investments are reported at historical cost, which approximates fair value. All highly liquid investments with initial maturities of 90 days or less are classified as cash equivalents. All short-term investments are securities which the Company has the ability and intent to hold to maturity and mature within one year.

Inventories

Inventories are stated at lower of cost or marketnet 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 below itsto 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 follows the guidance of Accounting Standards Codification ("ASC") Topic 740, Accountingrecords a liability for Uncertainty in Income Taxes. ASC Topic 740 prescribesan unrecognized tax benefit for a more-likely-than-not measurement methodologytax position that is not “more-likely-than-not” to reflect the financial statement impact ofbe sustained.  The Company did not record any liability for uncertain tax positions taken or expectedas of August 24, 2019.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into United States tax law, which among other provisions lowered the corporate tax rate to 21%.

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 118 to provide guidance for companies that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts under ASC 740. In accordance with SAB 118, a company must reflect the income tax effect of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, the company must record a provisional estimate in the financial statements.

ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be takenrecognized in the period in which the legislation is enacted. Consequently, as of the date of enactment, and during the twelve months ended November 30, 2018, we revalued all deferred tax assets and liabilities at the newly enacted Federal corporate US income tax rate.  This revaluation as of enactment resulted in a non-cash provisional estimate of $77,000 to income tax return.expense and a corresponding reduction in the net deferred tax asset.

Income tax expense attributable to income from operations for 2017 differed from the amount computed by applying the U.S. federal income tax rate of 34% to income before income taxes primarily as a result of federal R&D tax credits.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost, and depreciation is provided using the straight-line method at rates based upon the following estimated useful lives (in years) of the assets:

Buildings....................................................................................................................................................15

Facility improvements......................................................................................................................... 8-15

Machinery and equipment................................................................................................................. 5-10

Furniture and fixtures ...........................................................................................................................5-8

The Company assesses long-lived assets for whenimpairment 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.impaired, an assessment is performed. The estimated future undiscounted cash flows associated with the asset are compared to the asset’s net book value to determine if a write down to market value less cost to sell is required.

Repairs and maintenance are expensed as incurred. Improvements which extend the useful lifelives of property, plant, and equipment are capitalized.

Research and Development Costs

Costs for the design and development of new products and processes are expensed as incurred.

Note 3 NEW ACCOUNTING PRONOUNCEMENTS

On May 28, 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. On July 9, 2015, the FASB agreed to defer the effective date to annual reporting periods beginning after December 15, 2017 and the interim periods within that year. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. The standard will be effective for the Company for fiscal year November 30, 2019.

In November 2015, the FASB issued ASU No. 2015-17,Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The ASU requires entities to classify deferred tax liabilities and assets as noncurrent in a classified statement of financial position. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. We early adopted this guidance as of December 1, 2016. Our adoption of this guidance did not have a material impact on our consolidated financial statements. We reclassified $417 thousand of noncurrent deferred tax liability from noncurrent liability to reduce the carrying value of deferred tax assets as of November 30, 2016 to conform to current financial statement presentation.

In July 2015, the FASB issued ASU No. 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU eliminates from GAAP the requirement to measure inventory at the lower of cost or market. Market under the previous requirement could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. Entities within scope of this update will now be required to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory using LIFO or the retail inventory method. The amendments in this update are effective for fiscal years beginning after December 15, 2016, with early adoption permitted, and should be applied prospectively. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02,Leases (Topic 842). Under the new standard, lessees will be required to recognize lease assets and liabilities for all leases, with certain exceptions, on their balance sheets. Public business entities are required to adopt the standard for reporting periods beginning after December 15, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Note 4 FAIR VALUE MEASUREMENT

The Company had no financial assets or liabilities measured at fair value on a recurring basis as of August 24, 2019 and November 30, 2018.  The fair value of financial instruments such as cash and cash equivalents, short term investments, accounts receivable, and accounts payable approximate their carrying amount based on the short maturity of these instruments.  There were no other financial assets and nonfinancial assets measured at fair value on a nonrecurring basis at August 26, 201724, 2019 and November 30, 2016.2018.

Note 5 COMMITMENTS

On April 23, 2016,May 30, 2019, the Company renewed the Loan Agreement with a Texas banking institution. The Loan Agreement provides for revolving credit loans, in amounts not to exceed a total principal balance of $6,000,000. The Loan Agreement also contains financial covenants to maintain at all times including (i) minimum working capital of not less than $4,000,000, (ii) a ratio of senior funded debt, minus the Company’s balance sheet cash on hand to the extent in excess of $2,000,000 to EBITDA of not more than 3.0 to 1.0, and (iii) a ratio of free cash flow to debt service of not less than 1.2 to 1.0. The Company has not, to date, drawn any amounts under the revolving line of credit and is currently in compliance with the financial covenants.

Note 6 EARNINGS PER COMMON SHARE

Basic and diluted earnings per share are computed based upon the weighted average number of shares outstanding during the respective periods. Diluted earnings per share gives effect to all dilutive potential common shares. For the three and nine months ended August 26, 201724, 2019 and August 27, 2016,February 24, 2018, the Company had no dilutive potential common stock.stock instruments.

Note 7 SHAREHOLDERS’ EQUITY

On December 15, 2015,12, 2017, the Board of Directors of Micropac Industries, Inc. approved the payment of a special dividend of $0.10 per share forspecial dividend to all shareholders of record as of January 12, 2016.10, 2018. The dividend was paid to shareholders on February 11, 2016.8, 2018.

On December 13, 2016,11, 2018, the Board of Directors of Micropac Industries, Inc. approved the payment of a special dividend of $0.10 per share forspecial dividend to all shareholders of record as of January 10, 2017.9, 2019. The dividend was paid to shareholders on February 9, 2017.8, 2019.

Note 7 SUBSEQUENT EVENT

On August 30, 2017, Micropac Industries, Inc., announced that the Company has purchased land in Garland, Texas for approximately $1.4 million.

Micropac Industries, Inc. has been a long-standing business located in Garland, Texas for over 50 years and is located in three existing buildings. With the purchase of this tract of land, it is the intent of the Company to consolidate the three existing buildings into a new manufacturing center in the future.

MICROPAC INDUSTRIES, INC.

(Unaudited)

Business

Micropac Industries, Inc. (the “Company”), a Delaware corporation, designs, manufactures and distributes various types of hybrid microelectronic circuits, solid state relays, power controllers, and optoelectronic components and assemblies. The Company’s products are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200^o C) products. 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 such as catalog items.

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 MIL-PRF-28750 (class K-space level) and isare certified to ISO 9001-2002.9001:2015 and AS 9100D. Micropac is a NASANational Aeronautics and Space Administration (NASA) core supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has ULUnderwriters Laboratories (UL) approval on the new isolated solid stateour industrial power controllers.

The Company’s core technology is microelectronic and optoelectronic designs to include the packaging and interconnecting of miniature electronic components, utilizing thick film substrates, formingmulti-chip microelectronics circuits.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 assembliesassemblies.

Results of Operations

Sales for the three and nine month periods ended August 26, 201724, 2019 totaled $4,717,000$7,252,000 and $13,591,000,$17,966,000, respectively. Sales for the third quarter increased 24%45% or $913,000$2,250,000 above sales for the same period of 2016,2018, while sales for the first nine months of 20172019 increased $471,00030% or $4,124,000 above the first nine months of 2016 with an increase in2018. Sales of various power managementsolid state relays increased by $2,539,000 and sales of various custom products and a reduction in one custom sensor product. Sales were 10% in the commercial market, 65% in the military market, and 25% in the space market for the nine months ended August 26, 2017 compared to 16% in the commercial market, 56% in the military market, and 28% in the space market for the nine months ended August 27, 2016.increased by $1,585,000.

Three customersOne customer accounted for 17%, 15% and 13%20% of the Company’s sales for the three months ended August 26, 201724, 2019 and three customersthe same customer accounted for 17%, 13% and 12%20% of the Company’s sales for the nine months ended August 26, 2017,24, 2019, while one customertwo customers accounted for 15%14% and 10% of the Company’s sales for the three months ended August 27, 2016,25, 2018 and the same two customers accounted for 20%12% and 12%11% of the Company’s sales for the nine months ended August 27, 2016.25, 2018.

Cost of goods sold for the third quarters of 20172019 and 20162018 totaled 62.6%55.7% and 70.9%56.4% of net sales, respectively, while cost of goods sold for the nine months ended August 26, 201724, 2019 and August 27, 201625, 2018 totaled 62.7%56.9% and 66.9%62.2% of net sales, respectively. In actual dollars, cost of goods sold increased $255,000$770,000 in the third quarter of 20172019 compared to the same period of 2016.2018. Year to date cost of goods sold decreased $253,000increased $1,527,000 for the first nine months of 20172019 as compared to the same periods in 2016.2018. The decreaseincrease is associated with a reductionthe increase in non-recurring engineering cost supporting a customer funded project.overall sales.

Research and development expense increased $54,000$114,000 for the third quarter of 20172019 versus 20162018 and increased $399,000$297,000 for the first nine months of 20172019 compared to the same period of 2016.2018. The increase in research and development expense is associated with an increase in internal development cost with a reduction in non-recurring engineering customer funded projects from 2016.during 2019. The research and development expenditures were associated with continued development of several power management products, fiber optic transceivers and high voltage optocouplers. The Company will continue to invest in research and development of these products and other new opportunities. The Company had non-recurring customer funded sales of $1,046,000 and cost of goods sold of $1,160,000 for the first nine months of 2019 compared to sales of $1,141,000 and cost of goods sold of $751,000 for the same period on 2018.

Selling, general and administrative expense for the third quarter and first nine months of 20172019 totaled 21.9%19.9% and 22.1%22.5% respectively of net sales compared to 25.5%26.0% and 23.3%27.1% for the same periods in 2016.2018. In actual dollars, selling, general and administrative expense increased $64,000$137,000 for the third quarter and decreased $54,000increased $295,000 for the first nine months of 20172019 compared to the same periods in 2016.2018. The increase is associated with additional commission expenses and additional sales and marketing expenses following the addition of outside sales staff.

Provisions for taxes benefit decreased $34,000increased $306,000 for the third quarter of 20172019 and the provision for tax expense decreased $18,000increased $528,000 for the first nine months of 20172019 compared to the same period in 2016.2018. The estimated effective tax rate was 14% for 20172019 and 32%(28)% for 2016.2018. During 2017, the Company had a Research and Development tax credit study performed for fiscal 2013, 2014, 2015, and 2016 by a third party with tax yearyears 2012 and 2015 completed in the third quarter of 2017. The Company filed an amended tax return for 2012 reflecting a R&D tax creditscredit of approximately $77,000. In addition, the Company had a $66,000 R&D tax credit on the tax return for 2015 (fiscal year 2016) filed in 2017. The Company filed an amended tax return for 2013 and 2014 reflecting R&D tax credits of $222,963 in 2018.

Net income increased $518,000$924,000 for the third quarter of 20172019 versus 20162018 and increased $410,000$1,492,000 for the first nine months of 20172019 compared to the same period of 2016.2018.

Liquidity and Capital Resources

Cash and cash equivalents totaled $10,397,000$12,457,000 as of August 26, 201724, 2019 compared to $10,012,000$10,483,000 on November 30, 2016, a2018, an increase of $385,000.$1,974,000. The increase in cash and cash equivalents is primarily attributable to a cash flow from operations of $1,061,000$2,466,000 offset by the payment of a cash dividend of $258,000 and the investment of $228,000$211,000 in equipment and $179,000 in a new ERP system.equipment.

TheIn addition to cash on hand, the Company expectsalso has the ability to continueborrow under a loan agreement as discussed in Note 5 to generate adequate amounts of cash to meet its liquidity needs from the sale of products and services and the collection thereof for at least the next twelve months.condensed financial statements.

The one year specific advance loan for acquisitions with an aggregate amount not to exceed $7,500,000 in a single advance or in multiple advances was not renewed on April 22, 2017. The revolving credit loan in amounts not to exceed a total principal balance of $6,000,000 was renewed on April 23, 2016 for a two year term.

Outlook

New orders for year-to-date 20172019 totaled $8,412,000$20,951,000 compared to $11,961,000$17,552,000 for 2016.2018. The decreaseincrease resulted from lowerhigher orders on various standard solid state relay products and a delay in one custom sensor order. The decrease was primarily due to the de-booking of one large international order for solid state power products. This order was originally booked in November 2015 for $2,836,550. This order was removed from the backlog as a result of not receiving the down payment required to start the fabrication along with the uncertainties of the international market. As a result, no cost were incurred for this order.relays.

Backlog totaled $11,924,000$20,241,000 on August 26, 201724, 2019 compared to $17,765,000$16,575,000 as of August 27, 201625, 2018 and $17,102,000$17,132,000 on November 30, 2016.2018. The backlog represents a good mix of the company’s products and technologies with 17%22% in the commercial market, 54%68% in the military market, and 29%10% in the space market compared to 13%18% in the commercial market, 44%65% in the military market, and 43%17% in the space market on August 27, 2016.

25, 2018.

The Company cannot assure that the results of operations for the interim period presented are indicative of total results for the entire year due to fluctuations in customer delivery schedules, or other factors over which the Company has no control.

Cautionary Statement

This Form 10-Q 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, 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 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. Approximately $1,800,000 of the Company’s backlog is dependent on these semiconductors.

The Company disclaims any responsibility to update the forward-looking statements contained herein, except as may be required by law.

Not applicable

The Chief Executive Officer and Chief Financial Officer of the Company evaluated the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of August 26, 201724, 2019 and, based on this evaluation, concluded that the Company’s disclosure controls and procedures are functioning in an effective manner to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

There has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting during the three month period ended August 26, 2017.24, 2019.

PART II - OTHER INFORMATION

The Company is not involved in any material current or pending legal proceedings.

Information about risk factors for the three months and nine months ended August 26, 201724, 2019 does not differ materially from that set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended NovemeberNovember 30, 2016.2018.

None

None

Not Applicable

None

(a)        Exhibits

101     Interactive data files pursuant to Rule 405 of Regulation S-T.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.

MICROPAC INDUSTRIES, INC.