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MPAD Micropac Industries

Filed: 12 Oct 21, 1:43pm
 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

   
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 28, 2021

OR

   
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-5109

 

MICROPAC INDUSTRIES, INC.

 

 

Delaware 75-1225149
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   

 

905 E. Walnut, Garland, Texas

 75040
(Address of Principal Executive Offices) (Zip Code)

 

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

 

Securities Registered Pursuant to Section 12(g) of the Act:

 

Title of each classTrading
Symbol(s)
  Name of each exchange on which registered
Common Stock, $0.10 par value per shareMPAD NONE

 

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 ☐

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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.

 

Large accelerated filer   oEmerging growth company     o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company x

 

 

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. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

On October 12, 2021 there were 2,578,315 shares of Common Stock, $0.10 par value, outstanding.

 

 

MICROPAC INDUSTRIES, INC.

 

FORM 10-Q

 

August 28, 2021

 

INDEX

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

Condensed Balance Sheets as of August 28, 2021 (unaudited) and November 30, 2020

Condensed Statements of Operations for the three and nine months ended August 28, 2021 and August 29, 2020 (unaudited)

Condensed Statements of Cash Flows for the nine months ended August 28, 2021 and August 29, 2020 (unaudited)

Statements of Shareholders’ Equity for the nine months ended August 28, 2021 and
August 29, 2020 (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)

  08/28/2021 11/30/2021
  (Unaudited)  
CURRENT ASSETS        
Cash and cash equivalents $14,376  $14,619 
Receivables, net of allowance for doubtful accounts of
$0 at August 28, 2021 and November 30, 2020
  3,288   2,639 
Income tax receivable  0     200 
Contract assets  826   512 
Inventories:        
Raw materials and supplies  5,544   5,792 
Work-in process  3,341   3,345 
Total inventories  8,885   9,137 
Prepaid expenses and other assets  439   515 
Total current assets  27,814   27,622 
PROPERTY, PLANT AND EQUIPMENT, at cost:        
Land  1,518   1,518 
Buildings  498   498 
Facility improvements  1,109   1,109 
Furniture and fixtures  1,018   1,015 
Construction in process  3,970   1,044 
Machinery and equipment  9,333   9,169 
Total property, plant, and equipment  17,446   14,353 
Less accumulated depreciation  (10,669)  (10,418)
Net property, plant, and equipment  6,777   3,935 
Operating lease right to use asset  80   117 
Deferred income taxes, net  19   27 
Total assets $34,690  $31,701 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
CURRENT LIABILITIES:        
Accounts payable $1,507  $843 
Accrued compensation  1,087   981 
Deferred revenue  143   111 
Property taxes  219   129 
Income tax payable  225   0   
Other accrued liabilities  82   53 
Total current liabilities  3,263   2,117 
Operating lease liabilities  67   117 
Long Term Debt  71   0   
Total liabilities  3,401   2,234 
Commitments and contingencies        
SHAREHOLDERS’ EQUITY        
Common stock, $.10 par value, authorized 10,000,000
shares, 3,078,315 issued and 2,578,315 outstanding at
August 28, 2021 and November 30, 2020
  308   308 
Additional paid-in-capital  885   885 
Treasury stock, 500,000 shares, at cost  (1,250)  (1,250)
Retained earnings  31,346   29,524 
Total shareholders’ equity  31,289   29,467 
Total liabilities and shareholders’ equity $34,690  $31,701 

See accompanying notes to financial statements.

 

MICROPAC INDUSTRIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands except share data)

(Unaudited)

                 
  Three months ended Nine months ended
   08/28/2021   08/29/2020   08/28/2021   08/29/2020 
                 
                 
NET SALES $8,180  $4,926  $19,865  $16,760 
                 
COST AND EXPENSES:                
                 
Cost of goods sold  (4,407)  (3,115)  (11,237)  (9,982)
                 
Research and development  (510)  (306)  (1,253)  (1,192)
                 
Selling, general and administrative expenses  (1,649)  (1,342)  (4,628)  (4,076)
                 
Total cost and expenses  (6,566)  (4,763)  (17,118)  (15,250)
                 
OPERATING INCOME  1,614   163   2,747   1,510 
                 
Other income (loss), net  (210)  1   (190)  27 
                 
INCOME BEFORE TAXES  1,404   164   2,557   1,537 
                 
Provision for taxes  316   35   477   227 
                 
NET INCOME $1,088  $129  $2,080  $1,310 
NET INCOME PER SHARE, BASIC AND DILUTED $0.42  $0.05  $0.81  $0.51 
                 
DIVIDENDS PER SHARE $0    $0    $0.10  $0.10 
                 
WEIGHTED AVERAGE OF SHARES, basic and diluted  2,578,315   2,578,315   2,578,315   2,578,315 
                 

See accompanying notes to financial statements.

 

 

 

MICROPAC INDUSTRIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

          
   Nine months ended 
CASH FLOWS FROM OPERATING ACTIVITES:  8/28/2021   8/29/2020 
Net income $2,080  $1,310 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Depreciation  290   285 
Loss on disposal of equipment  232   23 
Change in right of use of asset  23   24 
Deferred tax  8   (5)
Changes in certain current assets and liabilities        
Accounts receivable  (648)  (79)
Contract assets  (314)  (87)
Inventories  251   (1,939)
Prepaid expense and other assets  75   183 
Prepaid income taxes  223   (223)
Accounts payable  664   133 
Accrued compensation  107   (417)
Deferred revenue  32   (204)
Income taxes  202   19 
Lease liabilities  (23)  (24)
Other accrued liabilities  82   (7)
Net cash provided by (used in) operating activities  3,307   (984)
CASH FLOWS FROM INVESTING ACTIVITIES:        
Sale of short term investments  0     2,089 
Additions to property, plant and equipment  (3,363)  (395)
Net cash (used in) provided by investing activities  (3,363)  1,694 
CASH FLOWS FROM FINANCING ACTIVITIES        
Cash dividend  (258)  (258)
Proceeds from long term debt  71   0   
Proceeds from short term debt  0     1,924 
Repayment of short term debt  0     (1,924)
Net cash used in financing activities  (187)  (258)
Net change in cash and cash equivalents  (243)  452 
Cash and cash equivalents at beginning of period  14,619   13,890 
Cash and cash equivalents at end of period $14,376  $14,342 
Supplemental Cash Flow Disclosure:        
Cash paid for income taxes $247  $436 
Supplemental Non-Cash Flow Disclosure:        
Accrued additions to property, plant and equipment $624  $0   

See accompanying notes to financial statements.

 

MICROPAC INDUSTRIES, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE QUARTERS ENDED AUGUST 28, 2021 AND AUGUST 29, 2020

(Dollars in thousands)

(Unaudited)

  Common Additional Treasury Retained  
  Stock paid-in-capital Stock Earnings Total
           
BALANCE, November 30, 2019 $308  $885  ($1,250) $28,310  $28,253 
                     
Dividend  0     0     0     (258)  (258)
Net income  0     0     0     692   692 
                     
BALANCE, February 29, 2020 $308  $885  ($1,250) $28,744  $28,687 
                     
Dividend  0     0     0     0     0   
Net income  0     0     0     489   489 
                     
BALANCE, May 30, 2020 $308  $885  ($1,250) $29,233  $29,176 
                     
Dividend  0     0     0     0     0   
Net income  0     0     0     129   129 
                     
BALANCE, August 29, 2020 $308  $885  ($1,250) $29,362  $29,305 
                     
                     
BALANCE, November 30, 2020 $308  $885  ($1,250) $29,524  $29,467 
                     
Dividend  0     0     0     (258)  (258)
Net loss  0     0     0     (301)  (301)
                     
BALANCE, February 27, 2021 $308  $885  ($1,250) $28,965  $28,908 
                     
Dividend  0     0     0     0     0   
Net income  0     0     0     1,293   1,293 
                     
BALANCE, May 29, 2021 $308  $885  ($1,250) $30,258  $30,201 
                     
Dividend  0     0     0     0     0   
Net income  0     0     0     1,088   1,088 
                     
BALANCE, August 28, 2021 $308  $885  ($1,250) $31,346  $31,289 

See accompanying notes to financial statements.

 

 

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 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 (200o C) products.

 

The Company’s facilities are certified and qualified by the Defense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS (space level) and are certified to ISO 9001:2008 and AS 9100D. Micropac is a National Aeronautics and Space Administration (NASA) core supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has Underwriters Laboratories (UL) approval on our industrial power controllers.

 

The Company’s core technology are microelectronic and optoelectronic designs to include the packaging and interconnecting of multi-chip microelectronics modules. Other technologies include light emitting and light sensitive materials and products, including light emitting diodes and silicon phototransistors, and electronic integration used in the Company’s optoelectronic components and assemblies.

 

The business of the Company was started in 1963 as a sole proprietorship. On March 3, 1969, the Company was incorporated under the name of “Micropac Industries, Inc.” in the state of Delaware. The stock was publicly held by 438 shareholders on August 28, 2021.

 

In the opinion of management, the unaudited financial statements include all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial position as of August 28, 2021, the results of operations for the three and nine months ended August 28, 2021 and August 29, 2020, and the cash flows for the nine months ended August 28, 2021 and August 29, 2020 including the statements of shareholders equity. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission. The Company’s fiscal year ends on the last day of November. The quarterly results end on the last Saturday of the quarter.

 

It is suggested that these financial statements be read in conjunction with the November 30, 2020 Form 10-K filed with the SEC, including the audited financial statements and the accompanying notes thereto.

 

Note 2 SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

 

The core principle of revenue recognition under accounting principles generally accepted in the Unites States of America (GAAP) is that the Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

The Company's revenue on the majority of its customer contracts are recognized at a point in time, generally upon shipment of products.

 

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

 

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

 

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

 

The Company’s revenues are from purchase orders and/or contracts with customers associated with manufacture of products. We account for a contract when it has approval and commitment from both parties,

 

the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

2.Identify the performance obligations in the contract.

 

The majority of the Company’s purchase orders or contracts with customers contain a single performance obligation, the shipment of products.

 

3.Determine the transaction price.

 

The transaction price reflects the Company’s expectations about the consideration it will be entitled to receive from the customer at a fixed price per unit shipped based on the terms of the contract or purchase order with the customer. To the extent our actual costs vary from the fixed price that was negotiated, we will generate more or less profit or could incur a loss.

 

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

 

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

 

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

 

This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. The Company receives purchase orders for products to be delivered over multiple dates that may extend across reporting periods. The Company accounting policy treats shipping and handling activities as a fulfillment cost. The Company invoices for each delivery upon shipment and recognizes revenues at the fixed price for each distinct product delivered when transfer of control has occurred, which is generally upon shipment.

 

For certain contracts under which the Company produces products with no alternative use and for which the Company has an enforceable right to payment during the production cycle, the Company recognizes revenue for the cost incurred of work in process plus a margin at the end of each period and records a contract asset (unbilled receivable). The majority of these products are shipped weekly and monthly to the customers and the contracts require us to manage and limit the level of work in process to meet the scheduled delivery dates.

 

In addition, the Company may have a contract or purchase order to provide a non-recurring engineering service to a customer. These contracts are reviewed and performance obligations are determined and we recognize revenue at the point in time in which each performance obligation is fully satisfied.

 

Disaggregation of Revenue

The following table summarizes the Company’s Net Sales by Product Line.

  8/28/2021 8/29/2020
Microcircuits $5,132  $5,488 
Optoelectronics  5,144   4,222 
Sensors and Displays  9,589   7,050 
  $19,865  $16,760 
         
Timing of revenue recognition        
Transferred at a point in time $19,039  $16,154 
Transferred over time  826   606 
    Total Revenue $19,865  $16,760 

 

 

The following table summarizes the Company’s Net Sales by Major Market.

                   
2021 Third Quarter Sales by Major Market
   Military   Space   Medical   Commercial   Total 
Domestic Direct $3,052  $971  $1,069  $149  $5,241 
Domestic Distribution  2,427   139        152  $2,718 
International  25   120        76  $221 
  $5,504  $1,230  $1,069  $377  $8,180 
                     
2020 Third Quarter Sales by Major Market
   Military   Space   Medical   Commercial   Total 
Domestic Direct $2,789  $261  $404  $148  $3,602 
Domestic Distribution  881   2   15   131  $1,109 
International  72   123        20  $215 
  $3,742  $466  $419  $299  $4,926 
                     
2021 Nine Months Sales by Major Market
   Military   Space   Medical   Commercial   Total 
Domestic Direct $7,063  $2,141  $2,777  $437  $12,418 
Domestic Distribution  5,762   675        449  $6,886 
International  152   255        154  $561 
  $12,977  $3,071  $2,777  $1,040  $19,865 
                     
2020 Nine Months Sales by Major Market
   Military   Space   Medical   Commercial   Total 
Domestic Direct $5,412  $1,509  $2,218  $641  $9,780 
Domestic Distribution  5,444   84   28   409  $5,965 
International  377   581        57  $1,015 
  $11,233  $2,174  $2,246  $1,107  $16,670 

 

 

Receivables, net, Contract Assets and Contract Liabilities

 

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

 

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

 

  August 28, 2021 November 30, 2020
Receivables, net $3,288  $2,639 
Contract assets $826  $512 
Deferred revenue $143  $111 

 

Revenue recognized in 2021 that was included in the deferred revenue liability balance at the beginning of the year was approximately $88,000.

 

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.

 

Leases

 

In the first quarter of 2020, the Company entered into a three (3) year lease extension on the property that has been leased on a year to year basis. As a result, we recognized $165,000 for operating lease liabilities and right-of-use assets in accordance with ASC 842. The Company had an operating lease expense of $13,000 for the third quarter of 2021 and $12,000 for the third quarter of 2020 and $37,000 for the first nine months of 2021 and $36,000 for the first nine months 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 18 months.

 

 

The Undiscounted Future Minimum Lease Payments consist of the following at:

  8/28/2021
2021  $13,000 
2022   55,000 
2023   14,000 
Total lease payments   82,000 
Interest   2,000 
Present value of lease liabilities  $80,000 

 

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 August 28, 2021 or November 30, 2020.

 

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.........................................................................................................................................................1540
Facility improvements.........................................................................................................................................................815
Machinery and equipment.........................................................................................................................................................510
Furniture and fixtures.........................................................................................................................................................58

 

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.

 

The cost of all projects for construction of buildings, other improvements, and equipment assets that are in progress (under way) at a particular point in time are reported as construction in process until such time as the project is complete. Depreciation is not applicable while assets are accounted for as construction in process. Once the asset is placed into service into the appropriate category of fixed assets, it will be depreciated over the applicable useful life

 

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

 

Research and Development Costs

 

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

 

Basic and Diluted Earnings Per Share

 

Basic and diluted earnings per share are computed based upon the weighted average number of shares outstanding during the respective periods. Diluted earnings per share gives effect to all dilutive potential common shares. For the three and nine months ended August 28, 2021 and August 29, 2020 the Company had 0 dilutive potential common stock instruments.

 

 

10 
 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Note 3 NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The ASU requires the use of an “expected loss” model for instruments measured at amortized cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance is effective for fiscal years beginning after December 15, 2022 for Smaller Reporting Companies, including interim periods within those fiscal years and requires a modified-retrospective approach to adoption. The Company believes that adopting ASU 2016-13 will have no material impact on the financial statements and related disclosures.

 

Note 4 FAIR VALUE MEASUREMENT

 

The Company had 0 financial assets or liabilities measured at fair value on a recurring basis as of August 28, 2021 and November 30, 2020.  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 0 nonfinancial assets measured at fair value on a nonrecurring basis at August 28, 2021 and November 30, 2020.

 

Note 5 COMMITMENTS

 

The Company obtained a commercial real estate construction loan for the construction of a new 76,000 square foot manufacturing center on the 9.2 acres of land in Garland, Texas that the Company has purchased. On March 26, 2021, the Company (acting as borrower) entered into a Construction Loan Agreement (the “loan agreement” with Frost Bank (“Frost”), (acting as lender). The Construction Loan Agreement provides for a construction loan, in amounts not to exceed a total principal balance of $16,160,000 with an interest rate of (3.40%) per annum.

 

On March 26, 2021, the Company renewed the Revolving Loan Agreement with Frost through the “Sixth Amendment to Loan Agreement.” (Attached as Exhibit 10.2 hereto). 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. The Revolving Loan Agreement was originally entered into on January 23, 2013, between the “Company” as borrower and Frost as lender.  

 

Construction Loans.  Subject to the terms of the Loan Agreement, Frost will lend to the Company an aggregate amount not to exceed $16,160,000.

 

Principal and interest shall be due and payable monthly in an amounts determined by Lender required to fully amortize the outstanding principal balance of this Note over a period of twenty-five (25) years, payable on the twenty-sixth (26th) day of each and every calendar month, beginning April 26, 2023, and continuing regularly thereafter until March 26, 2031, when the entire amount hereof, principal and accrued interest then remaining unpaid, shall be then due and payable; interest being calculated on the unpaid principal each day principal is outstanding and all payments made credited to any collection costs and late charges, to the discharge of the interest accrued and to the reduction of the principal, in such order as Lender shall determine.

 

The interest rate of (3.40%) per annum including an Interest-Only Period. Interest only shall be due and payable monthly as it accrues on the twenty-sixth (26th) day of each and every calendar month, beginning April 26, 2021, and continuing regularly and monthly thereafter until March 26, 2023; interest being calculated on the unpaid principal each day principal is outstanding and all payments made credited to any collection costs and late charges, to the discharge of the interest accrued and to the reduction of the principal, in such order as Lender shall determine.

 

The loan shall be secured by a “Deed of Trust, Security Agreement – Financing Statement” covering the 9.2 acre tract in Garland, Texas and the improvements made on it.

 

Revolving Credit Loans.  Subject to the terms of the, Loan Agreement, Frost will lend to the Company, on a revolving basis, amounts not to exceed a total principal balance of $6,000,000, minus amounts available and amounts previously disbursed under outstanding Frost letters of credit. Subject to certain terms and conditions,

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the Company may borrow, repay and reborrow under the Loan Agreement. The loan has a maturity date of April 23, 2023.

 

The interest on the outstanding and unpaid principal balance shall be computed at a per annum rate equal to the lesser of (a) a rate equal to the Prime Rate per annum; provided, however, in no event shall the resulting rate be less than three and one-quarter percent (3.25%).

 

Note 6 EARNINGS PER COMMON SHARE

 

On December 8, 2020, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 6, 2021. The dividend was paid to shareholders on February 12, 2021.

 

On December 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)

 

 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 (200o C) products.

 

The Company’s facilities are certified and qualified by the Defense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS (space level) and are certified to ISO 9001:2008 and AS 9100D. Micropac is a National Aeronautics and Space Administration (NASA) core supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has Underwriters Laboratories (UL) approval on our industrial power controllers.

 

The Company’s core technology are microelectronic and optoelectronic designs to include the packaging and interconnecting of multi-chip microelectronics modules. Other technologies include light emitting and light sensitive materials and products, including light emitting diodes and silicon phototransistors, and electronic integration used in the Company’s optoelectronic components and assemblies.

 

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 Quarterly Report Form 10-Q for the quarter ended August 28, 2021, 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 in order 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.

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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.

 

Results of Operations

  Three months ended Nine months ended
   8/28/2021   8/29/2020   8/28/2021   8/29/2020 
NET SALES  100.0%  100.0%  100.0%  100.0%
                 
COST AND EXPENSES:                
    Cost of goods sold  53.9%  63.2%  56.6%  59.6%
    Research and development  6.2%  6.2%  6.3%  7.1%
    Selling, general and administrative expenses  20.2%  27.2%  23.3%  24.3%
                                    Total cost and expenses  80.3%  96.6%  86.2%  91.0%
                 
OPERATING INCOME BEFORE INTEREST  19.7%  3.4%  13.8%  9.0%
           AND INCOME TAXES                
                 
    Other income (loss), net  (2.6%)  0.0%  (0.9%)  0.2%
                 
INCOME BEFORE TAXES  17.2%  3.4%  12.9%  9.2%
                 
    Provision for taxes  3.9%  .7%  2.4%  1.4%
                 
NET INCOME  13.3%  2.7%  10.5%  7.8%

 

Sales for the three and nine month periods ended August 28, 2021 totaled $8,180,000 and $19,865,000, respectively. Sales for the third quarter increased $3,254,000 from the same period of 2020, while sales for the first nine months of 2021 increased $3,105,000 from the first nine months of 2020. The majority of the increase in sales in the third quarter and nine months ended August 28, 2021 were due to an increase in shipments of standard solid state relays and non-recurring engineering funded by customers on several custom products compared to the third quarter of 2020. Sales were 5% in the commercial market, 14% in the medical market, 66% in the military market, and 15% in the space market for the nine months ended August 28, 2021 compared to 7% in the commercial market, 13% in the medical market, 67% in the military market, and 13% in the space market for the nine months ended August 29, 2020.

 

One customer accounted for 21% of the Company’s sales for the three months ended August 28, 2021 and one customers accounted for 20% of the Company’s sales for the nine months ended August 28, 2021, while one customer accounted for 20% of the Company’s sales for the three months ended August 29, 2020, and two customer accounted for 13% and 10%of the Company’s sales for the nine months ended August 29, 2020.

 

Cost of goods sold for the third quarter of 2021 and 2020 totaled 53.9% and 63.2% of net sales, respectively, while cost of goods sold for the nine months ended August 28, 2021 and August 29, 2020 totaled 56.6% and 59.6% of net sales, respectively. In actual dollars, cost of goods sold increased $1,292,000 in the third quarter of 2021 compared to the same period of 2020. Year to date cost of goods sold increased $1,255,000 for the first nine months of 2021 as compared to the same period in 2020. The increase in cost of goods sold were due to the overall increase in sales during 2021 compared to 2020.

 

Research and development expense increased $204,000 for the third quarter of 2021 versus 2020 and increased $61,000 for the first nine months of 2021 compared to the same period of 2020. The increase in the third quarter of 2021 was associated with outside consultant services on a new internal development project. 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.

 

Selling, general and administrative expense for the third quarter and first nine months of 2021 totaled 20.2% and 23.3% respectively of net sales compared to 27.2% and 24.3% for the same periods in 2020. In actual dollars,

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selling, general and administrative expense increased $307,000 for the third quarter and increased $552,000 for the first nine months of 2021 compared to the same periods in 2020. The majority of the dollar increase for the first nine months resulted from the additional commission expense associated with higher sales.

 

Provisions for taxes increased $181,000 for the third quarter of 2021 and increased $250,000 for the first nine months of 2021 compared to the same period in 2020. The estimated effective tax rate was 18% for 2021 and 14% for 2020.The increase in the effective rate is associated with higher profit before taxes and a decrease in the research and development credits.

 

Net income increased $959,000 for the third quarter of 2021 versus 2020 and increased $770,000 for the first nine months of 2021 compared to the same period of 2020 associated with higher overall sales.

 

Liquidity and Capital Resources

 

Cash and cash equivalents totaled $14,376,000 as of August 28, 2021 compared to $14,619,000 on November 30, 2019, a decrease of $243,000. The decrease in cash and cash equivalents is primarily attributable to net cash provided by operations of $3,307,000, payment of a cash dividend of $258,000, and $3,175,000 invested in construction of new facility and $188,000 in 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 year-to-date 2021 totaled $19,792,000 compared to $23,930,000 for 2020. The decrease resulted from timing of new orders for the Company’s standards solid state relays and custom sensor products.

 

Backlog totaled $29,943,000 on August 28, 2021, compared to $29,237,000 as of August 29, 2020, and $29,793,000 on November 30, 2020. The backlog represents a good mix of the company’s products and technologies with 9% in the commercial market, 4% in the medical market, 77% in the military market, and 10% in the space market compared to 11% in the commercial market, 11% in the medical market, 66% in the military market, and 12% in the space market on August 29, 2020.

 

2021 Current Backlog by Major Market
  Military Space Medical Commercial Total
Domestic Direct $13,884  $1,699  $1,313  $2,169  $19,065 
Domestic Distribution  8,916   801   —     283   10,000 
International  140   597   —     141   878 
  $22,940  $3,097  $1,313  $2,593  $29,943 

 

2021 Current Backlog by Product Line
Microelectronics $9,868 
Optoelectronics  8,343 
Sensors and Displays  11,732 
  $29,943 

 

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 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 as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking precautions to provide a safe work environment for our employees and customers. We have been staggering some shifts and otherwise adjusting work schedules to maximize our capacity while adhering to recommended precautions 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.

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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. 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 of 2020 but reopened as of mid-June at limited capacity due to local restrictions in that area.

 

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.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

ITEM 4.CONTROLS AND PROCEDURES

 

(a)Evaluation of disclosure controls and procedures.

 

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 28, 2021 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.

 

(b)Changes in internal controls.

 

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 28, 2021.

 

 

PART II - OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

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

 

ITEM 1ARISK FACTORS

 

Information about risk factors for the three months ended August 28, 2021 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 November 30, 2020

 

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

 

None

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4.MINE SAFETY DISCLOSURE

 

Not Applicable

 

ITEM 5.OTHER INFORMATION

 

None

 

ITEM 6.EXHIBITS

 

(a)        Exhibits

 

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.

32.2

Certification of Chief Accounting Officer pursuant to 18 U. S. C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.

 

 

 

 

 

 

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SIGNATURES

 

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.

 

 

 

 

October 12, 2021 /s/ Mark King
Date Mark King
  Chief Executive Officer

 

October 12, 2021 /s/ Patrick Cefalu
Date Patrick Cefalu
  Chief Financial Officer