NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2021 AND 2020
1. BUSINESS DESCRIPTION:
Micropac Industries, Inc. (the “Company”),
a Delaware corporation, designs, manufactures and distributes various types of microelectronic circuits including solid state relays and
power controllers, optoelectronic components, and sensor and display components and assemblies. The Company’s products are used
as components and assemblies in a broad range of military, space, medical and commercial systems, including aircraft instrumentation and
navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o
C) products.
2. SUMMARY
OF 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, medical and industrial systems, including aircraft instrumentation and navigation
systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o C)
products.
The Company’s revenues are from purchase
orders and/or contracts with customers associated with manufacture of products. We account for a contract when it has approval and commitment
from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability
of consideration is probable.
|
2.
|
Identify the performance obligations
in the contract.
|
The majority of the Company’s purchase
orders or contracts with customers contain a single performance obligation, the shipment of products.
|
3.
|
Determine the transaction price.
|
The transaction price reflects the Company’s
expectations about the consideration it will be entitled to receive from the customer at a fixed price per unit shipped based on the terms
of the contract or purchase order with the customer. To the extent our actual costs vary from the fixed price that was negotiated, we
will generate more or less profit or could incur a loss.
|
4.
|
Allocate the transaction price
to the performance obligations in the contract.
|
The Company’s transaction price is
the fixed price per unit per each delivery upon shipment.
|
5.
|
Recognize revenue when (or as)
the Company satisfies a performance obligation.
|
This performance obligation is satisfied
when control of the product is transferred to the customer, which occurs upon shipment or delivery. The Company receives purchase orders
for products to be delivered over multiple dates that may extend across reporting periods. The Company accounting policy treats shipping
and handling activities as a fulfillment cost. The Company invoices for each delivery upon shipment and recognizes revenues at the fixed
price
for each distinct product delivered when
transfer of control has occurred, which is generally upon shipment.
For certain contracts under which the Company
produces products with no alternative use and for which the Company has an enforceable right to payment during the production cycle, the
Company recognizes revenue for the cost incurred of work in process plus a margin at the end of each period and records a contract asset
(unbilled receivable). The majority of these products are shipped weekly and monthly to the customers and the contracts require us to
manage and limit the level of work in process to meet the scheduled delivery dates.
In addition, the Company may have a contract
or purchase order to provide a non-recurring engineering service to a customer. These contracts are reviewed, and performance obligations
are determined and we recognize revenue at the point in time in which each performance obligation is fully satisfied.
Disaggregation of Revenue
The following table summarizes the Company’s Net Sales by
Product Line.
|
|
Nov. 30, 2021
|
|
Nov. 30, 2020
|
Microelectronics
|
|
$
|
7,803
|
|
|
$
|
7,278
|
|
Optoelectronics
|
|
|
7,124
|
|
|
|
4,984
|
|
Sensors and Displays
|
|
|
12,365
|
|
|
|
10,012
|
|
|
|
$
|
27,292
|
|
|
$
|
22,274
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
23,555
|
|
|
$
|
18,654
|
|
Recognized over time
|
|
|
3,737
|
|
|
|
3,620
|
|
Total Revenue
|
|
$
|
27,292
|
|
|
$
|
22,274
|
|
The following table summarizes the Company’s Net Sales by
Major Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
10,157
|
|
|
$
|
2,364
|
|
|
$
|
3,621
|
|
|
$
|
498
|
|
|
$
|
16,640
|
|
Domestic Distribution
|
|
|
7,945
|
|
|
|
861
|
|
|
|
—
|
|
|
|
644
|
|
|
|
9,450
|
|
International
|
|
|
222
|
|
|
|
751
|
|
|
|
—
|
|
|
|
229
|
|
|
|
1,202
|
|
|
|
$
|
18,324
|
|
|
$
|
3,976
|
|
|
$
|
3,621
|
|
|
$
|
1,371
|
|
|
$
|
27,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
$
|
7,656
|
|
|
$
|
1,809
|
|
|
$
|
2,749
|
|
|
$
|
1,044
|
|
|
$
|
13,258
|
|
Domestic Distribution
|
|
|
7,155
|
|
|
|
143
|
|
|
|
28
|
|
|
|
641
|
|
|
|
7,967
|
|
International
|
|
|
427
|
|
|
|
553
|
|
|
|
—
|
|
|
|
69
|
|
|
|
1,049
|
|
|
|
$
|
15,238
|
|
|
$
|
2,505
|
|
|
$
|
2,777
|
|
|
$
|
1,754
|
|
|
$
|
22,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Sheet.
Receivables, net, contract assets and
contract liabilities were as follows:
|
|
November 30, 2021
|
|
November 30, 2020
|
|
December 1, 2019
|
Receivables, net
|
|
$
|
4,974
|
|
|
$
|
2,639
|
|
|
$
|
3,382
|
|
Contract assets
|
|
$
|
603
|
|
|
$
|
512
|
|
|
$
|
519
|
|
Deferred Revenue
|
|
$
|
1,258
|
|
|
$
|
111
|
|
|
$
|
390
|
|
Revenue recognized in 2021 that was included in the deferred
revenue liability balance at the beginning of the year was $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.
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, 2021 and 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
|
.........................................................................................................................................................
|
15
|
40
|
Facility improvements
|
.........................................................................................................................................................
|
8
|
15
|
Machinery and equipment
|
.........................................................................................................................................................
|
5
|
10
|
Furniture and fixtures
|
.........................................................................................................................................................
|
5
|
8
|
The Company assesses long-lived assets for impairment
in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) ASC 360-10-35, Property, Plant
and Equipment – Subsequent Measurement. When events or circumstances indicate that an asset may be impaired, an assessment is
performed. The estimated future undiscounted cash flows associated with the asset are compared to the asset’s net book value to
determine if a write down to market value less cost to sell is required.
Construction in progress relates to multiple capital
projects ongoing during the years ended November 30, 2021 and 2020, including the construction of the new manufacturing facility. Construction
in progress also includes interest and fees on debt that are directly related to the financing of the Company’s capital projects.
Repairs and maintenance are expensed as incurred. Improvements
which extend the useful lives of property, plant, and equipment are capitalized.
Research and Development Costs
Costs for the design and development of new products
are expensed as incurred.
Basic and Diluted Earnings Per Share
Basic and diluted earnings per share are computed based
upon the weighted average number of shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential
common shares. During 2021 and 2020, the Company had no potential dilutive common stock.
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.
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.
4. FAIR VALUE MEASUREMENT:
The Company had no financial assets and liabilities
measured at fair value on a recurring basis as of November 30, 2021 and 2020. The fair value of financial instruments such as cash
and cash equivalents, short-term investments, accounts receivable, and accounts payable and short-term debt, including current maturities
of long-term debt approximate their carrying amount based on the short maturity of these instruments.
The Company measures its long-term debt at fair value
which approximates book value as the long-term debt bears market rates of interest.
There were no nonfinancial assets measured at fair value
on a nonrecurring basis at November 30, 2021 or 2020.
5. NOTES
PAYABLE TO BANKS:
The Company obtained a commercial
real estate construction loan for the construction of a new 76,000 square foot manufacturing center on the 9.2 acres of land in Garland,
Texas that the Company has purchased. On March 26, 2021, the Company (acting as borrower) entered into a Construction Loan Agreement (the
“loan agreement”) with Frost Bank (“Frost”) (acting as lender). The Construction Loan Agreement provides for a
construction loan, in amounts not to exceed a total principal balance of $16,160,000 with an interest rate of (3.40%) per annum.
On March 26, 2021, the Company
renewed the Revolving Loan Agreement with Frost through the “Sixth Amendment to Loan Agreement.” (See Exhibit 10.13). The
Revolving Loan Agreement provides for revolving credit loans, in amounts not to exceed a total principal balance of $6,000,000 with a
rate equal to prime rate with a floor of 3.25%. The Revolving Loan Agreement was originally entered into on January 23, 2013, between
the Company as borrower and Frost as lender.
Construction Loans. Subject
to the terms of the Loan Agreement, Frost will lend to the Company an aggregate amount not to exceed $16,160,000.
Principal and interest shall
be due and payable monthly in an amounts determined by Lender required to fully amortize the outstanding principal balance of this Note
over a period of twenty-five (25) years, payable on the twenty-sixth (26th) day of each and every calendar month, beginning April 26,
2023, and continuing regularly thereafter until March 26, 2031, when the entire amount hereof, principal and accrued interest then remaining
unpaid, shall be then due and payable; interest being calculated on the unpaid principal each day principal is outstanding and all payments
made
credited to any collection
costs and late charges, to the discharge of the interest accrued and to the reduction of the principal, in such order as Lender shall
determine.
The interest rate of (3.40%)
per annum including an Interest-Only Period. Interest only shall be due and payable monthly as it accrues on the twenty-sixth (26th) day
of each and every calendar month, beginning April 26, 2021, and continuing regularly and monthly thereafter until March 26, 2023; interest
being calculated on the unpaid principal each day principal is outstanding and all payments made credited to any collection costs and
late charges, to the discharge of the interest accrued and to the reduction of the principal, in such order as Lender shall determine.
The loan shall be secured by
a “Deed of Trust, Security Agreement – Financing Statement” covering the 9.2 acre tract in Garland, Texas and the improvements
made on it.
Revolving Credit Loans. Subject
to the terms of the, Loan Agreement, Frost will lend to the Company, on a revolving basis, amounts not to exceed a total principal balance
of $6,000,000, minus amounts available and amounts previously disbursed under outstanding Frost letters of credit. Subject to certain
terms and conditions, the Company may borrow, repay and reborrow under the Loan Agreement. The loan has a maturity date of April 23, 2023.
The interest on the outstanding
and unpaid principal balance shall be computed at a per annum rate equal to the lesser of (a) a rate equal to the Prime Rate per annum;
provided, however, in no event shall the resulting rate be less than three and one-quarter percent (3.25%).
The Company has borrowed $3,548,000
against the construction loan as of November 30, 2021.
Debt
|
|
November 30, 2021
|
Notes payable
|
|
$
|
3,548,000
|
|
Less unamortized debt issuance costs
|
|
|
179,000
|
|
Net Debt
|
|
|
3,369,000
|
|
Less—Current portion
|
|
|
—
|
|
Total long-term debt
|
|
$
|
3,369,000
|
|
6. PRODUCT
WARRANTIES:
In general, the Company warrants that its products,
when delivered, will be free from defects in material workmanship under normal use and service. The obligations are limited to replacing,
repairing or giving credit for, at the option of the Company, any products that are returned within one year after the date of shipment.
The Company does not provide extended warranties.
The Company reserves for potential warranty costs based
on historical warranty claims experience. While management considers the process to be adequate to effectively quantify its exposure to
warranty claims based on historical performance, changes in warranty claims on a specific or cumulative basis may require management to
adjust its reserve for potential warranty costs.
Warranty expense was approximately $56,000 and $185,000
in 2021 and 2020, respectively.
The following table summarizes Product Warranty Activity
recorded during the years ended November 30, 2021 and 2020 recorded in other accrued liabilities.
|
|
2021
|
|
2020
|
Beginning balance
|
|
$
|
60
|
|
|
$
|
25
|
|
Additions for current year provision
|
|
|
56
|
|
|
|
185
|
|
Payments for current year
|
|
|
(91
|
)
|
|
|
(150
|
)
|
Ending balance
|
|
$
|
25
|
|
|
$
|
60
|
|
7. LEASE
COMMITMENTS:
Rent expense for each of the years ended November 30,
2021 and 2020 was $51,000 and $51,000 respectively.
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. 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 $50,000 for
2021. 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 November 30, 2021:
|
|
|
|
|
|
2022
|
|
|
$
|
55,000
|
|
2023
|
|
|
|
14,000
|
|
Total lease payments
|
|
|
|
69,000
|
|
Interest
|
|
|
|
(2,000
|
)
|
Present value of lease liabilities
|
|
|
$
|
67,000
|
|
8. EMPLOYEE
BENEFITS:
The Company sponsors an Employees’ Profit Sharing
Plan and Trust (the “Plan”). Pursuant to section 401(k) of the Internal Revenue Code, the Plan is available to substantially
all employees of the Company. Employee contributions to the Plan are matched by the Company at amounts up to 6% of the participant’s
salary. Contributions made by the Company were expensed and totaled approximately $421,000 in 2021 and $360,000 in 2020. Employees become
vested in Company contributions in 20% increments in years two through six of employment. If the employee leaves the Company prior to
being fully vested, the unvested portion of the Company contributions are forfeited and such forfeitures are used to lower future Company
contributions. The Company does not offer other post-retirement benefits to its employees at this time.
9. INCOME TAXES:
The Income Tax Provision (Benefit) consisted of the
following for the years ended November 30:
The Provision for Income Taxes differs from that computed at the federal
statutory corporate tax rate as follows for the years ended November 30,
The Components of Deferred Tax Assets and Liabilities were as follows at
November 30,
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax-planning strategies in making this assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than
not that the Company will realize the benefits of these deductible differences.
10. SIGNIFICANT CUSTOMER INFORMATION:
The Company’s major customers include contractors
to the United States government. Sales to these customers for DOD and NASA contracts accounted for approximately 67% of the Company’s
revenues in 2021 compared to 66% in 2020. The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies,
BAE, and Boeing. One customer accounted for % of the Company’s sales during 2021 and 2020. The contracts of our customers with
the United States government may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of
the government, which would in turn might materially affect the Company’s sales. The loss of any one of these customers or a significant
reduction in their purchases would be likely to adversely affect our business.
11. SHAREHOLDERS’
EQUITY:
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.
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.
12. SUBSEQUENT
EVENTS:
On December 7, 2021, the Board of Directors of Micropac
Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 11, 2022. The
dividend will be paid to shareholders on or about February 10, 2022.