The following table summarizes the Company’s net sales by major market.

Receivables, net, Contract Assets and Contract Liabilities

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. 

Receivables, net, contract assets and contract liabilities were as follows:

Revenue recognized in 2020 that was included in the deferred revenue liability balance at the beginning of the year was $147,000.$128,000.

Contract costs

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

Short-Term Investments

The Company has no short-term investments at February 29,May 30, 2020. Short-term investments consist of certificates of deposits with maturities greater than 90 days. These investments are reported at historical cost, which approximates fair value. All highly liquid investments with maturities of 90 days or less are classified as cash equivalents.

Inventories

Inventories are stated at lower of cost or net realizable value and include material, labor and manufacturing overhead. All inventories are valued using the FIFO (first-in, first-out) method of inventory valuation. The Company determines the need to write inventory down to the lower of cost or net realizable value via an analysis based on the usage of inventory over a three year period and projected usage based on current backlog.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method the Company records deferred income taxes for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The resulting deferred tax liabilities and assets are adjusted to reflect changes in tax law or rates in the period that includes the enactment date.

The Company records a liability for an unrecognized tax benefit for a tax position that is not “more-likely-than-not” to be sustained.  The Company did not record any liability for uncertain tax positions as of November 30, 2019.

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 impairment in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) ASC 360-10-35,Property, Plant and Equipment – Subsequent Measurement. When events or circumstances indicate that an asset may be impaired, an assessment is performed. The estimated future undiscounted cash flows associated with the asset are compared to the asset’s net book value to determine if a write down to market value less cost to sell is required.

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

Research and Development Costs

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

Leases

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02,Leases (Topic 842). Under the new standard, lessees will be required to recognize lease assets and liabilities for all leases, with certain exceptions, on their balance sheets. Public business entities are required to adopt the standard for reporting periods beginning after December 15, 2018. The Company adopted in the first quarter of 2020 and had no material impact on its consolidated financial statements. The Company adopted ASC 842 using the modified retrospective transition method; and therefore, the comparative information has not been adjusted for the threesix months ended February 23,May 25, 2019 or as of November 30, 2019. Upon transition to the new standard, the Company elected the package of practical expedients, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

In the first quarter of 2020, the Company entered into a three (3) year lease extension on the property that has been leased on a year to year basis. As a result, we recognized $ 165,000 for operating lease liabilities and right-of-use assets upon adoption of ASC 842. The Company had an operating lease expense of $12,000$23,000 in the first quarterhalf of 2020. The Company used an estimated incremental borrowing rate of 3.25% representative of the rate of interest that the company would have to pay to borrow on the Company’s line of credit. The remaining lease term is three years.

The undiscounted future minimum lease payments consist of the following at:

Note 3 NEW ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The ASU requires the use of an “expected loss” model for instruments measured at amortized cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial

asset. The new guidance is effectivefor fiscal years beginning after December 15, 2022 for Smaller Reporting Companies, including interim periods within those fiscal years and requires a modified-retrospective approach to adoption. The Company believes that adopting ASU 2016-13 will have no material impact on the financial statements and related disclosures.

Note 4 FAIR VALUE MEASUREMENT

The Company had no financial assets or liabilities measured at fair value on a recurring basis as of February 29,May 30, 2020 and November 30, 2018.2019.  The fair value of financial instruments such as cash and cash equivalents, short term investments, accounts receivable, and accounts payable approximate their carrying amount based on the short maturity of these instruments.  There were no nonfinancial assets measured at fair value on a nonrecurring basis at February 29,May 30, 2020 and November 30, 2018.2019.

Note 5 COMMITMENTS

On 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 with a rate equal to prime rate. 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. The Company has not received any indication that borrowing under the Loan Agreement may be restricted due to COVID-19 uncertainties. The agreement termination date is April 23, 2021.

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 to the Company is being made through Frost Bank, the Company s existing lender (the Lender).

Based upon updated guidance issued April 23, 2020 by the Federal Government including a presumption that no publicly traded companies with sources 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.

Note 6 EARNINGS PER COMMON SHARE

Basic and diluted earnings per share are computed based upon the weighted average number of shares outstanding during the respective periods. Diluted earnings per share gives effect to all dilutive potential common shares. For the three and six months ended February 29,May 30, 2020 and February 23,May 25, 2019, the Company had no dilutive potential common stock instruments.

Note 7 SHAREHOLDERS’ EQUITY

On December 11, 2018, 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 9, 2019. The dividend was paid to shareholders on February 8, 2019.

On December 10, 2019, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 8, 2020. The dividend was paid to shareholders on February 14, 2020.

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MICROPAC INDUSTRIES, INC.

(Unaudited)

Business

Micropac Industries, Inc. (the “Company”), a Delaware corporation, designs, manufactures and distributes various types of microelectronic circuits including solid state relays and power controllers, optoelectronic components, and sensor and display components and assemblies. The Company’s products are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (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 emitting diodes and silicon phototransistors, and electronic integration used in the Company’s optoelectronic components and assemblies.

Results of Operations

Sales for the first quarterthree and six month periods ended February 29,May 30, 2020 totaled $5,957,000.$5,877,000 and $11,834,000, respectively. Sales for the firstsecond quarter increased 57% or $2,152,000 abovedecreased $1,031,000 from the same period of 2019, while sales for the first quartersix months of 2020 increased $1,120,000 from the first six months of 2019. The majority of the increase is related to an increase in sales for two custom sensor products. Sales were across all product lines with a stronger backlog at7% in the end ofcommercial market, 15% in the medical market, 63% in the military market, and 15% in the space market for the six months ended May 30, 2020 compared to 10% in the commercial market, 17% in the medical market, 57% in the military market, and 16% in the space market for the six months ended May 25, 2019.

TwoOne customer accounted for 25% of the Company’s sales for the three months ended May 30, 2020 and two customers accounted for 27%23% and 11% of the Company’s sales for the first quarter ofsix months ended May 30, 2020, andwhile three customers accounted for 17%14%, 13% and 11% of the Company’s sales for the three months ended May 25, 2019, and two customers accounted for 15% and 10% of the Company’s sales for the first quarter ofsix months ended May 25, 2019. Two of the customers are distributors that sell to multiple customers.

Cost of goods sold for the first quartersecond quarters of 2020 and 2019 totaled 55.8%60.3% and 61.7%54.3% of net sales, respectively, while cost of goods sold for the six months ended May 30, 2020 and May 25, 2019 totaled 58.0% and 56.9% of net sales, respectively. CostIn actual dollars, cost of salesgoods sold decreased $205,000 in the second quarter of 2020 compared to the same period of 2019. Year to date cost of goods sold increased $978,000 or 42%$772,000 for the first quartersix months of 2020 as compared to the first quartersame period in 2019. The majority of 2019.

resulting in higher margins fromthe increase is associated with the increase in overall sales and ana decrease in overall improvement ofgross margin with higher cost of goods sold as a percent of sales.in the second quarter due to product mix and approximately $200,000 associated with COVID-19 production down time.

Research and development costexpense decreased $33,000 for the second quarter of 2020 versus 2019 and increased $88,000$54,000 for the first quartersix months of 2020 compared to the same period of 2019. The research and development expenditures were associated with the continued development of several power management products, sensorfiber optic transceivers and high voltage optocouplers. The Company will continue to invest in research and development of these products and process automation improvements.other new opportunities.

Selling, general and administrative expensesexpense for the second quarter and first quartersix months of 2020 totaled 23.1% and 23.1% respectively of net sales compared to 34.6%18.7% and 24.3% for the same periodperiods in 2019. Selling,In actual dollars, selling, general and administrative expensesexpense increased $59,000 in$69,000 for the second quarter and increased $128,000 for the first quartersix months of 2020 as compared to the same periods in 2019. The majority of the dollar increase was associated withfor the first six months resulted from an increase in outside sales engineering support.commission expense in 2020 and the addition on business development staff at the end of 2019.

Provisions for taxes decreased $124,000 for the second quarter of 2020 and increased $144,000$20,000 for the first quartersix months of 2020 compared to the same period in 2019. The estimated effective tax rate was 14% for 2020 and for 2019.

Net income decreased $762,000 for the firstsecond quarter of 2020 versus 2019 and the first quarter of 2019.

Incomeincreased $124,000 for the first quartersix months of 2020 was a $692,000 compared to a net lossthe same period of $194,000 in the first quarter of 2019.2019

Liquidity and Capital Resources

Cash and cash equivalents totaled $14,706,000$15,320,000 as of February 29,May 30, 2020 compared to $13,890,000 on November 30, 2019, an increase of $816,000.$1,430,000. The increase in cash and cash equivalents is primarily attributable to $998,000a net use of cash used inflow from operations aof $279,000, and payment of a cash dividend of $258,000, $17,000and offset by proceeds for the sales of investments of $2,089,000 and $122,000 invested in equipment, coupled with proceeds from the maturity of short term investments of $2,090,000.equipment.

In addition to cash on hand, the Company also has the ability to borrow under a loan agreement as discussed in Note 5 to the condensed financial statements.

Outlook

New orders for the first quarter ofyear-to-date 2020 totaled $5,597,000$10,732,000 compared to $6,958,000$12,386,000 for 2019. The decrease resulted from timing of new orders for the comparable period of 2019. Company’s standards solid state relays and custom sensor products.

Backlog totaled $21,889,000$20,996,000 on February 29,May 30, 2020 compared to $20,325,000$18,903,000 as of February 23,May 25, 2019 and $22,021,000 on November 30, 2019. The backlog represents a good mix of the company’s products and technologies with 15% in the commercial market, 9% in the medical market, 64% in the military market, and 12% in the space market compared to 8% in the commercial market, 7% in the medical market, 74% in the military market, and 11% in the space market on May 25, 2019.

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.

Impact of COVID-19 on our Business

The spread of the COVID-19 virus during the first quarterhalf 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. As of April 14,May 30, 2020, the Company’s operations have been impacted due to the practices described below, but the Company has not experienced significant financial impact directly related to the pandemic.below. The Company cannot at this time predict the impact that

the COVID-19 pandemic will have on its financial condition and operations, although we are continuing to monitor our supply chain and orders from customers for COVID-19 pandemic related changes. In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking every precautionprecautions 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. 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 one confirmed case of COVID-19, which caused us to shut down our Garland facility for a few days to thoroughly clean the facility and address employee concerns. Production in the Garland facility has been impacted, although we are not able to quantify the impact at this time. Our maquiladora contractor in Mexico was shut down during April and May but reopened as of mid-June at limited capacity due to local restrictions in that area. We have relocated some of that production to our Garland facility. We are working with our customers to meet their current requirements and believe that our customers have not incurred any major impact related to our position in their supply chain as of the date of this filing. The combined impact of reduced production in the Garland facility as well as stopped production from Mexico has impacted our cost of production by an estimated 2% to 4% in the second quarter of 2020 due to overhead cost that could not be allocated to work in process. While the current impacts of COVID-19 are reflected in our results of operations, we cannot at this time separate the direct COVID-19 impacts from other factors that cause our performance to vary from year to year.

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, 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.

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: 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 does not intend 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 February 29,May 30, 2020 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 February 29,May 30, 2020.

PART II - OTHER INFORMATION

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

The following risk is in addition to those risks set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended November 30, 2019.

Impact of COVID-19 pandemic on our Business

The COVID-19 pandemic presents increased risk to Micropac, its suppliers, and its customers. We are not able to predict the impact of this risk at this time, as 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, 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.

None

None

Not Applicable

On March 12, 2020, Micropac Industries, Inc. held its Annual Meeting. Of the 2,578,315 shares of common stock outstanding and entitled to vote, 2,226,113 shares, or 86.3%, were represented at the meeting in person or by proxy, and therefore a quorum was present. The final results for each of the matters submitted to a vote of stockholders at the Annual Meeting are as follows:None

Proposal One: To elect seven directors to serve until the next annual meeting of stockholders or until their respective successors are elected and qualified;

Proposal Two: The “Say on Pay” non-binding advisory vote on the compensation of the named executive officers of the Company received the following votes:

The advisory vote approved the compensation of the named executive officers.

Proposal Three: The non-binding advisory vote on the frequency of the advisory vote on Say on Pay in future years received the following votes:

The Company considered the outcome of this advisory vote and determined that the Company will hold an advisory vote every three years on the compensation of the named executive officers.

(a)        Exhibits

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.