NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2020 AND 2019
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.
|
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:
The core principle of revenue recognition
under 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
(200oC) 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 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 customer
and the contract 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, 2020
|
|
Nov. 30, 2019
|
Microelectronics
|
|
$
|
7,278
|
|
|
$
|
8,037
|
|
Optoelectronics
|
|
|
4,984
|
|
|
|
6,356
|
|
Sensors and Displays
|
|
|
10,012
|
|
|
|
11,057
|
|
|
|
$
|
22,274
|
|
|
$
|
25,450
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
Recognized at a point in time
|
|
$
|
21,762
|
|
|
$
|
24,931
|
|
Recognized over time
|
|
|
512
|
|
|
|
519
|
|
Total Revenue
|
|
$
|
22,274
|
|
|
$
|
25,450
|
|
The following table summarizes the Company’s net
sales by major market.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Sales by Major Market
|
|
|
|
Military
|
|
|
|
Space
|
|
|
|
Medical
|
|
|
|
Commercial
|
|
|
|
Total
|
|
Domestic Direct
|
|
|
6,517
|
|
|
|
1,777
|
|
|
|
4,220
|
|
|
|
1,730
|
|
|
|
14,244
|
|
Domestic Distribution
|
|
|
7,705
|
|
|
|
210
|
|
|
|
121
|
|
|
|
471
|
|
|
|
8,507
|
|
International
|
|
|
358
|
|
|
|
2,003
|
|
|
|
—
|
|
|
|
338
|
|
|
|
2,699
|
|
|
|
|
14,580
|
|
|
|
3,990
|
|
|
|
4,341
|
|
|
|
2,539
|
|
|
|
25,450
|
|
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, 2020
|
|
November 30, 2019
|
Receivables, net
|
|
|
2,639
|
|
|
|
3,382
|
|
Contract assets
|
|
|
512
|
|
|
|
519
|
|
Deferred Revenue
|
|
|
111
|
|
|
|
390
|
|
Revenue recognized in 2020 that was included in the deferred
revenue liability balance at the beginning of the year was $367,000.
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 had $2,089,000 in short-term investments
at November 30, 2019. 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. All short-term investments are securities which the Company has the ability and intent to hold
to maturity and mature within one year.
Inventories
Inventories are stated at lower of cost or 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, 2020 and 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.
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 2020 and 2019, the Company had no dilutive potential 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.
|
FAIR VALUE MEASUREMENT:
|
The Company had no financial assets and liabilities
measured at fair value on a recurring basis as of November 30, 2020 and 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 November 30, 2020 and 2019.
|
4.
|
NOTES
PAYABLE TO BANKS:
|
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. 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.
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 $185,000 and
$117,000 in 2020 and 2019, respectively.
The following table summarizes product warranty
activity recorded during the years ended November 30, 2020 and 2019.
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
25
|
|
|
$
|
25
|
Additions for current year provision
|
|
|
185
|
|
|
|
117
|
|
Payments for current year
|
|
|
(150
|
)
|
|
|
(117
|
)
|
Ending balance
|
|
$
|
60
|
|
|
$
|
25
|
|
Rent expense for each of the years ended November
30, 2020 and 2019 was $51,000 and $50,000 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. 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 nine months ended August 24, 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 $51,000 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 three years.
The undiscounted future minimum lease payments consist
of the following at:
|
|
|
11/30/2020
|
|
2021
|
|
|
|
53,000
|
|
2022
|
|
|
|
55,000
|
|
2023
|
|
|
|
14,000
|
|
Total lease payments
|
|
|
|
122,000
|
|
Interest
|
|
|
|
5,000
|
|
Present value of lease liabilities
|
|
|
$
|
117,000
|
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 $360,000 in 2020 and $363,000 in 2019. 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.
The income tax provision (benefit) consisted
of the following for the years ended November 30:
|
|
2020
|
|
2019
|
Current Provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
219,000
|
|
|
$
|
625,000
|
|
State
|
|
|
41,000
|
|
|
|
38,000
|
|
|
|
|
260,000
|
|
|
|
663,000
|
|
|
|
|
|
|
|
|
|
|
Deferred federal tax expense
|
|
|
(42,000
|
)
|
|
|
63,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
218,000
|
|
|
$
|
726,000
|
|
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
|
|
2020
|
|
2019
|
Tax at statutory rate
|
|
$
|
355,000
|
|
|
$
|
932,000
|
|
State income taxes, net of federal benefit
|
|
|
32,000
|
|
|
|
31,000
|
|
Research and Development Tax Credit
|
|
|
(186,000
|
)
|
|
|
(277,000
|
)
|
Permanent differences and other
|
|
|
17,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$
|
218,000
|
|
|
$
|
726,000
|
|
The components of deferred tax assets and liabilities were as follows:
|
|
2020
|
|
2019
|
Deferred tax assets (liabilities)
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
231,000
|
|
|
$
|
215,000
|
|
Deferred revenue, sales returns and warranty
|
|
|
12,000
|
|
|
|
8,000
|
|
Other accrued liabilities
|
|
|
50,000
|
|
|
|
35,000
|
|
Depreciation
|
|
|
(266,000
|
)
|
|
|
(278,000
|
)
|
Net deferred assets (liabilities)
|
|
$
|
27,000
|
|
|
$
|
(20,000
|
)
|
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.
|
9.
|
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 66% of the Company’s
revenues in 2020 compared to 59% in 2019. The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies,
Raytheon, and Boeing. One customer accounted for 20% of the Company’s sales during 2020 and 2019. 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.
|
10.
|
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.
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 will be paid to shareholders on or about February 12, 2021.