SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
| (State of Incorporation) | (IRS Employer Identification No.) | |
| (Address of Principal Executive Office) | (Zip Code) |
Registrant’s Telephone Number, including Area Code:
Securities Registered Pursuant to Section 12(g) of the Act: common stock, par value $0.10.
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.
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).
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 | o | Emerging growth company | |
|
Accelerated filer |
o |
Smaller reporting company |
|
| |
o |
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 o
On October 10, 2023, there were shares of Common Stock, $0.10 par value, outstanding.
| 1 |
MICROPAC INDUSTRIES, INC.
FORM 10-Q
August 26, 2023
INDEX
| PART I - FINANCIAL INFORMATION | ||||
| ITEM 1 - FINANCIAL STATEMENTS | 3 | |||
| Condensed Balance Sheets as of August 26, 2023 (unaudited) and November 30, 2022 | 3 | |||
| Condensed Statements of Operations for the three and nine months ended August 26, 2023 and August 27, 2022 (unaudited) | 4 | |||
| Condensed Statements of Cash Flows for the nine months ended August 26, 2023 and August 27, 2022 (unaudited) | 5 | |||
| Statements of Shareholders’ Equity for the three and nine months ended August 26, 2023 and August 27, 2022 (unaudited) | 6 | |||
| Notes to Condensed Financial Statements (unaudited) | 7 | |||
| ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 14 | |||
| ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 17 | |||
| ITEM 4 - CONTROLS AND PROCEDURES | 17 | |||
| PART II - OTHER INFORMATION | ||||
| ITEM 1 - LEGAL PROCEEDINGS | 17 | |||
| ITEM 1A - RISK FACTORS | 17 | |||
| ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 17 | |||
| ITEM 3 - DEFAULTS UPON SENIOR SECURITIES | 17 | |||
| ITEM 4 - MINE SAFETY DISCLOSURE | 17 | |||
| ITEM 5 - OTHER INFORMATION | 17 | |||
| ITEM 6 - EXHIBITS | 18 | |||
| SIGNATURES | 18 | |||
| 2 |
PART I - FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
MICROPAC INDUSTRIES, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
| CURRENT ASSETS | August 26, 2023 | November 30, 2022 | ||||||
| (Unaudited) | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Receivables, net of allowance for doubtful accounts of $0 at August 26, 2023 and November 30 2022 | ||||||||
| Other receivables | ||||||||
| Contract assets | ||||||||
| Inventories: | ||||||||
| Raw materials and supplies | ||||||||
| Work in process | ||||||||
| Total inventories | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total current assets | ||||||||
| PROPERTY, PLANT AND EQUIPMENT, at cost: | ||||||||
| Land | ||||||||
| Buildings | ||||||||
| Facility improvements | ||||||||
| Furniture and fixtures | ||||||||
| Construction in process | ||||||||
| Machinery and equipment | ||||||||
| Total property, plant, and equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Net property, plant, and equipment | ||||||||
| Operating lease right to use asset | ||||||||
| Deferred income taxes, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Deferred revenue | ||||||||
| Property taxes payable | ||||||||
| Income tax payable | ||||||||
| Short term debt | ||||||||
| Other accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Long Term Debt, net of debt issuance costs | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value, authorized shares, issued and outstanding at August 26, 2023 November 30, 2022 | ||||||||
| Additional paid-in-capital | ||||||||
| Treasury stock, shares, at cost | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to financial statements.
| 3 |
MICROPAC INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands except share data)
(Unaudited)
| Three months ended | Nine Months Ended | |||||||||||||||
| August 26, 2023 | August 27, 2022 | August 26, 2023 | August 27, 2022 | |||||||||||||
| NET SALES | $ | $ | $ | $ | ||||||||||||
| COST AND EXPENSES: | ||||||||||||||||
| Cost of goods sold | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Research and development | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Selling, general & administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total cost and expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OPERATING INCOME (LOSS) | ( | ) | ( | ) | ||||||||||||
| Interest and other income, net | ||||||||||||||||
| INCOME (LOSS) BEFORE TAXES | ( | ) | ( | ) | ||||||||||||
| (Provision) benefit for taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED | $ | ) | $ | $ | ) | $ | ||||||||||
| DIVIDENDS PER SHARE | $ | $ | $ | $ | ||||||||||||
| WEIGHTED AVERAGE OF SHARES, basic and diluted | ||||||||||||||||
See accompanying notes to financial statements.
| 4 |
MICROPAC INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Nine months ended | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | August 26, 2023 | August 27, 2022 | ||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation | ||||||||
| Stock-based compensation | ||||||||
| Amortization of debt issuance cost | ||||||||
| Deferred tax expense (benefit) | ( | ) | ||||||
| Amortization of right of use assets | ||||||||
| Changes in certain current assets and liabilities: | ||||||||
| Decrease in accounts receivable | ||||||||
| Increase in contract assets | ( | ) | ( | ) | ||||
| Increase in inventories | ( | ) | ( | ) | ||||
| Increase (decrease) in prepaid expenses | ( | ) | ||||||
| Decrease in deferred revenue | ( | ) | ( | ) | ||||
| Increase in accounts payable | ||||||||
| Decrease in accrued compensation | ( | ) | ( | ) | ||||
| (Decrease) increase in income taxes payable | ( | ) | ||||||
| Decrease in lease liabilities | ( | ) | ( | ) | ||||
| (Decrease) increase in all other accrued liabilities | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Additions to property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Cash dividend | ( | ) | ( | ) | ||||
| Proceeds from long term debt | ||||||||
| Payment on long term debt | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental Cash Flow Disclosure: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental Non-Cash Flow Disclosure: | ||||||||
| Changes in accrued property, plant, and equipment | $ | $ | ||||||
See accompanying notes to financial statements.
| 5 |
MICROPAC INDUSTRIES, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE QUARTERS ENDED AUGUST 26, 2023 AND AUGUST 27, 2022
(Dollars in thousands)
(Unaudited)
| Common | Additional | Treasury | Retained | |||||||||||||||||
| Stock | paid-in-capital | Stock | Earnings | Total | ||||||||||||||||
| BALANCE, November 30, 2021 | $ | $ | ($ | ) | $ | $ | ||||||||||||||
| Dividend | ( | ) | ( | ) | ||||||||||||||||
| Net income | ||||||||||||||||||||
| BALANCE, February 26, 2022 | $ | $ | ($ | ) | $ | $ | ||||||||||||||
| Net income | ||||||||||||||||||||
| BALANCE, May 28, 2022 | $ | $ | ($ | ) | $ | $ | ||||||||||||||
| Net income | ||||||||||||||||||||
| BALANCE, August 27, 2022 | $ | $ | ($ | ) | $ | $ | ||||||||||||||
| Common | Additional | Treasury | Retained | |||||||||||||||||
| Stock | paid-in-capital | Stock | Earnings | Total | ||||||||||||||||
| BALANCE, November 30, 2022 | $ | $ | ($ | ) | $ | $ | ||||||||||||||
| Dividend | ( | ) | ( | ) | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| BALANCE, February 26, 2023 | $ | $ | ($ | ) | $ | $ | ||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| BALANCE, May 27, 2023 | $ | $ | ($ | ) | $ | $ | ||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| BALANCE, August 26, 2023 | $ | $ | ($ | ) | $ | $ | ||||||||||||||
See accompanying notes to financial statements.
| 6 |
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, 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.
The Company’s facilities are certified and qualified by the Defense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS (space level) and are certified to ISO 9001:2015 and AS 9100D. Micropac is a National Aeronautics and Space Administration (NASA) core supplier and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has Underwriters Laboratories (UL) approval on our industrial power controllers.
The Company’s core technologies 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 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 434 shareholders on August 26, 2023.
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 26, 2023, the results of operations for the three and nine months ended August 26, 2023 and August 27, 2022 and the cash flows for the three and nine months ended August 26, 2023 and August 27, 2022, including the statement of shareholders equity. Unaudited financial statements are prepared on a basis substantially consistent with those audited for the year ended November 30, 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission. The Company’s fiscal year ends on the last day of November. The quarterly results end on the last Saturday of the quarter.
It is suggested that these financial statements be read in conjunction with the November 30, 2022 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 is 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.
| 7 |
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.
| 8/26/2023 | 8/27/2022 | |||||||
| Microcircuits | $ | $ | ||||||
| Optoeletronics | ||||||||
| Sensors and Displays | ||||||||
| $ | $ | |||||||
| Timing of revenue recognition: | ||||||||
| Transferred at a point in time | $ | $ | ||||||
| Transferred over time | ||||||||
| Total Revenue | $ | $ | ||||||
The following table summarizes the Company’s net sales by major market.
2023 Third Quarter Sales by Major Market
| Military | Space | Medical | Commercial | Total | ||||||||||||||||
| Domestic Direct | $ | $ | $ | $ | $ | |||||||||||||||
| Domestic Distribution | ||||||||||||||||||||
| International | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| 8 |
2022 Third Quarter Sales by Major Market
| Military | Space | Medical | Commercial | Total | ||||||||||||||||
| Domestic Direct | $ | $ | $ | $ | $ | |||||||||||||||
| Domestic Distribution | ||||||||||||||||||||
| International | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
2023 Nine Months Sales by Major Market
| Military | Space | Medical | Commercial | Total | ||||||||||||||||
| Domestic Direct | $ | $ | $ | $ | $ | |||||||||||||||
| Domestic Distribution | ||||||||||||||||||||
| International | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
2022 Nine Months Sales by Major Market
| Military | Space | Medical | Commercial | Total | ||||||||||||||||
| Domestic Direct | $ | $ | $ | $ | $ | |||||||||||||||
| Domestic Distribution | ||||||||||||||||||||
| International | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
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 Sheets.
Receivables, net, contract assets and contract liabilities were as follows:
Receivables, net, Contract Assets and Contract Liabilities
(Dollars in thousands)
| August 26, 2023 | November 30, 2022 | December 1, 2021 | ||||||||||
| Receivables, net | $ | $ | $ | |||||||||
| Contract assets | $ | $ | $ | |||||||||
| Deferred revenue | $ | $ | $ | |||||||||
There was $
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 $
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.
| 9 |
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
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 | |
| Facility improvements | |
| Machinery and equipment | |
| Furniture and fixtures |
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 year ended November 30, 2022 and the nine months ended August 26, 2023, 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. In March 2023, the new manufacturing facility was completed and placed in service.
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 are computed based upon the weighted average number of shares outstanding during the respective periods.
The following is a reconciliation of the number of shares used in the calculation of the basic and diluted earnings per share for the three and nine months ended August 26, 2023 and August 27, 2022:
| Three months ended | Nine Months Ended | |||||||||||||||
| August 26, 2023 | August 27, 2022 | August 26, 2023 | August 27, 2022 | |||||||||||||
| Weighted average of shares, basic | ||||||||||||||||
| Restricted stock units | ||||||||||||||||
| Weighted average of shares, diluted | ||||||||||||||||
Due to the current loss position, the Company has not included the 35,650 restricted stock units due to being anti-dilutive in nature.
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.
| 10 |
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 1, 2023 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
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 August 26, 2023 and November 30, 2022.
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 $
On March 26, 2021, the
Company renewed the Revolving Loan Agreement with Frost through the “Sixth Amendment to Loan Agreement.”. The Revolving Loan
Agreement provides for revolving credit loans, in amounts not to exceed a total principal balance of $
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 includes 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. There are
| 11 |
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 borrowed
$
Debt August 26, 2023 | ||||
| Notes payable | $ | |||
| Less unamortized debt issuance costs | ||||
| Net Debt | ||||
| Less—Current portion | ||||
| Total long-term debt | $ | |||
Estimated maturities of our long-term debt over the next 5 years are as follows:
| 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | ||||||||||||||||||||||
| Frost Bank | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Basic and diluted earnings per share are computed based upon the weighted average number of shares outstanding during the respective periods. Diluted earnings per share gives effect to all dilutive potential common shares. For the three and nine months ended August 26, 2023, the Company has dilutive potential common stock instruments with the restricted stock units.
Note 7 SHAREHOLDERS’ EQUITY
On
On
We have issued restricted stock units ("RSUs") stock-based compensation awards as part of Micropac Industries Inc.’s 2023 Equity Incentive Plan. Our 2023 annual grant of RSUs occurred in the second quarter. The weighted -average grant-date fair value of each unit granted in 2023 was $13.13. All the RSUs granted in 2023 vest over a three-year period.
The following is a summary of our RSUs activity for nine months ended August 26, 2023 and August 27, 2022:
| 2023 | 2022 | |||||||||||||||
| (shares in thousands) | Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | ||||||||||||
| Unvested at beginning of period | ||||||||||||||||
| Granted | $ | |||||||||||||||
| Vested | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Unvested at end of the period | $ | |||||||||||||||
| 12 |
The following table sets forth the stock-based compensation expense recorded in selling, general and administrative ("SG&A") expense (in thousands):
| August 26, 2023 and August 27, 2022 | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock-based compensation expense | $ | $ | ||||||||||||||
The following table sets forth the stock-based unvested compensation expense by year to be recognized (in thousands):
| 2023 | 2024 | 2025 | Total | |||||||||||||
| Stock-based unvested compensation expense | ||||||||||||||||
| 13 |
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 26, 2023, describes the significant accounting policies and methods used in the preparation of the Financial Statements. 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.
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
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Results of Operations
| Three months ended | Nine months ended | |||||||||||||||
| 8/26/2023 | 8/27/2022 | 8/26/2023 | 8/27/2022 | |||||||||||||
| NET SALES | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| COST AND EXPENSES: | ||||||||||||||||
| Cost of Goods Sold | 70.8 | % | 52.9 | % | 65.2 | % | 55.4 | % | ||||||||
| Research and development | 7.0 | % | 8.2 | % | 8.6 | % | 7.6 | % | ||||||||
| Selling, general & administrative expenses | 31.2 | % | 32.1 | % | 29.0 | % | 29.0 | % | ||||||||
| Total cost and expenses | 109.0 | % | 93.2 | % | 102.8 | % | 92.0 | % | ||||||||
| OPERATING INCOME (LOSS) | (9.0 | %) | 6.8 | % | (2.8 | %) | 8.0 | % | ||||||||
| Interest and other income, net | 0.7 | % | 13.9 | % | 1.0 | % | 4.8 | % | ||||||||
| INCOME (LOSS) BEFORE TAXES | (8.3 | %) | 20.7 | % | (1.8 | %) | 12.8 | % | ||||||||
| (Provision) benefit for taxes | 0.2 | % | (4.7 | %) | (0 | %) | (2.6 | %) | ||||||||
| NET INCOME (LOSS) | (8.1 | %) | 16.0 | % | (1.8 | %) | 10.2 | % | ||||||||
Sales for the three and nine month periods ended August 26, 2023 totaled $6,458,000 and $20,091,000, respectively. Sales for the third quarter decreased $482,000 from the same period of 2022 while sales for the first nine months of 2023 decreased $103,000 from the first nine months of 2022. The majority of the decrease for the three months ended August 26, 2023 is related to timing of shipments of customer orders of standard solid state relays products. Sales were 18% in the commercial market, 11% in the medical market, 61% in the military market, and 10% in the space market for the nine months ended August 26, 2023 compared to 9% in the commercial market, 10% in the medical market, 69% in the military market, and 12% in the space market for the nine months ended August 27, 2022.
Three customers accounted for 13%, 11%, and 10% of the Company’s sales for the three months ended August 26, 2023, and two customers accounted for 12% and 10% for the nine months ended August 26, 2023, while one customer accounted for 18% of the Company’s sales for the three months ended August 27, 2022, and two customers accounted for 17% and 10% for the nine months ended August 27, 2022.
Cost of goods sold for the third quarters of 2023 and 2022 totaled 70.8% and 52.9% of net sales, respectively, while cost of goods sold for the nine months ended August 26, 2023 and August 27, 2022 totaled 65.2% and 55.4% of net sales, respectively. In actual dollars, cost of goods sold increased $909,000 in the third quarter of 2023 compared to the same period of 2022. Year to date cost of goods sold increased $1,910,000 for the first nine months of 2023 as compared to the same period in 2022. Most of the increase in cost of goods sold was an increase in material cost on a custom product for a customer during the engineering and first production builds resulting in lower gross margins. The contract with the customer on the custom product has been completed. In addition, depreciation expense increased associated with the new facility being placed into service.
Research and development expense decreased $114,000 for the third quarter of 2023 versus 2022 and increased $197,000 for the first nine months of 2023 compared to the same period of 2022. The research and development expenditures were associated with continued development of several power management products and fiber optic transceivers. 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 2023 totaled 31.2% and 29.0% respectively of net sales compared to 32.1% and 29.0% for the same periods in 2022. In actual dollars, selling, general and administrative expense decreased $214,000 for the third quarter and decreased $16,000 for the first nine months of 2023 compared to the same periods in 2022. The majority of the decrease for the three months ended August 26, 2023 resulted from an decrease in consultant fees.
| 15 |
Provisions for taxes decreased $350,000 for the third quarter of 2023 and decreased $512,000 for the first nine months of 2023 compared to the same period in 2022.
Net income decreased $1,635,000 for the third quarter of 2023 versus 2022 and decreased $2,431,000 for the first nine months of 2023 compared to the same period of 2022.
Liquidity and Capital Resources
The Company used a combination of cash and a commercial real estate construction loan for the construction of a the new 76,000 square foot manufacturing center on the 9.2 acres of land in Garland, Texas the Company purchased. On March 26, 2021, the Company (acting as borrower) entered into a Construction Loan Agreement with Frost Bank (“Frost”), (acting as lender). The Construction Loan Agreement provides for a construction loan as discussed in Note 5 to the condensed financial statements.
As of August 26, 2023, the Company has $15,987,000 in notes payable on the construction loan. In addition, the Company has unamortized loan fees on the construction loan in the amount of $141,000.
In addition, the Company continues on-going investigations for the use of cumulative cash for business expansion and improvements, such as operational improvements and new product expansion.
Cash and cash equivalents totaled $11,449,000 as of August 26, 2023 compared to $15,375,000 on November 30, 2022, an decrease of $3,926,000. The decrease in cash and cash equivalents is attributable to $2,249,000 cash used in operations, the payment of a cash dividend of $258,000, $223,000 in cash for additional manufacturing equipment and $2,283,000 for construction of the new facility offset by $1,087,000 net proceeds from the financing
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.
The Company has no significant off-balance sheet arrangements.
Outlook
New orders for year-to-date 2023 totaled $29,349,000 compared to $19,792,000 for 2022. The increase resulted from timing of new orders for $8,432,000 in space level solid state relays.
Backlog totaled $42,718,000 on August 26, 2023 compared to $36,421,000 as of August 27, 2022 and $32,686,000 on November 30, 2022 and represents a good mix of the company’s products and technologies.
| 2023 Current Backlog by Major Market | ||||||||||||||||||||
| Military | Space | Medical | Commercial | Total | ||||||||||||||||
| Domestic Direct | $ | 19,962 | $ | 841 | $ | 2,259 | $ | 1,364 | $ | 24,426 | ||||||||||
| Domestic Distribution | 13,886 | 1,829 | - | 1,056 | 16,771 | |||||||||||||||
| International | 372 | 706 | - | 443 | 1,521 | |||||||||||||||
| $ | 34,220 | $ | 3,376 | $ | 2,259 | $ | 2,863 | $ | 42,718 | |||||||||||
| 2023 Current Backlog by Product Line | ||||
| Microelectronics | $ | 22,195 | ||
| Optoelectronics | 5,745 | |||
| Sensors and Displays | 14,778 | |||
| $ | 42,718 | |||
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
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. 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. We have established and implemented a work from home provision where possible.
| 16 |
To date, we have not experienced significant raw material shortages; however, supply-chain disruptions could potentially delay or prevent us from fulfilling customer orders.
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 26, 2023 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 nine month period ended August 26, 2023.
PART II - OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
The Company is not involved in any material current or pending legal proceedings.
| ITEM 1A | RISK FACTORS |
Information about risk factors for the three and nine months ended August 26, 2023 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, 2022
| 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
| 17 |
| ITEM 6. | EXHIBITS |
(a) Exhibits
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 10, 2023 | /s/ Mark King | |
| Date | Mark King | |
| Chief Executive Officer | ||
| October 10, 2023 | /s/ Patrick Cefalu | |
| Date | Patrick Cefalu | |
| Chief Financial Officer |
18