SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended AugustMay 29, 20202021

OR

Commission File Number 0-5109

MICROPAC INDUSTRIES, INC.

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

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. Yes [X] ☒ 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 [X] ☒ 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 “largelarge accelerated filer,” “acceleratedaccelerated filer,” “smallersmaller reporting company,” and “emergingemerging growth company” in Rule 12b-2 of the Exchange Act.

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. [  ]☐

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

☒

On OctoberJuly 13, 20202021 there were 2,578,315 shares of Common Stock, $0.10 par value, outstanding.

MICROPAC INDUSTRIES, INC.

FORM 10-Q

AugustMay 29, 20202021

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

Condensed Balance Sheets as of AugustMay 29, 20202021 (unaudited) and November 30, 20192020

Condensed Statements of Operations for the three and ninesix months ended AugustMay 29, 20202021 and August 24, 2019May 30, 2020 (unaudited)

Condensed Statements of Cash Flows for the ninesix months ended AugustMay 29, 20202021 and August 24, 2019May 30, 2020 (unaudited)

Statements of Shareholders’ Equity for the ninethree and six months ended AugustMay 29, 20202021 and August 24, 2019May 30, 2020

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)

See accompanying notes to financial statements.statements

MICROPAC INDUSTRIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands except share data)

(Unaudited)

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE QUARTERS ENDED AUGUSTMAY 29, 20202021 AND AUGUST 24, 2019MAY 30, 2020

(Dollars in thousands)

(Unaudited)

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 (200^o C) products. Additional products include integrated electronics solutions such as power supplies, satellite optical transceiver media converters and lighting systems for satellites.

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 isare 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 438437 shareholders on AugustMay 29, 2020.2021.

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 AugustMay 29, 2020,2021, the results of operations for the three and ninesix months ended AugustMay 29, 20202021 and August 24, 2019,May 30, 2020 and the cash flows for the ninesix months ended AugustMay 29, 20202021 and August 24, 2019 includingMay 30, 2020. Unaudited financial statements are prepared on a basis substantially consistent with those audited for the statement of shareholders equity.year ended November 30, 2020. 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, 20192020 Form 10-K filed with the SEC, including the audited financial statements and the accompanying notes thereto.

Impact of COVID-19 on our Business

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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Note 2 SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The core principle of revenue recognition under GAAPaccounting 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’sCompany'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 (200^o 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 CompanyCompany’s transaction price is the fixed price per unit per each delivery upon shipment.

5.

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 customercustomers and the contractcontracts 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.satisfied.

Disaggregation of Revenue

The following table summarizes the Company’s net salesNet Sales by product line.Product Line.

The following table summarizes the Company’s net salesNet Sales by major market.Major Market.

Receivables, net, Contract Assets and Contract Liabilities

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

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

Revenue recognized in 20202021 that was included in the deferred revenue liability balance at the beginning of the year was $204,000.approximately $2,000.

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 $25,000 for the first six months of 2021 and $23,000 for the first six 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 twenty five months.

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

Short-Term Investments

The Company has nohad 0 short-term investments at AugustMay 29, 2021 or November 30, 2020. Short-term investments consist of certificates of deposits with maturities greater than 90 days. These investments are reported at historical cost, which approximates fair value. All highly liquid investments with maturities of 90 days or less are classified as cash equivalents.

Inventories

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

Income Taxes

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

The Company records a liability for an unrecognized tax benefit for a tax position that is not “more-likely-than-not” to be sustained.  The Company did not record any liability for uncertain tax positions as of August 20, 2020 and May 29, 2021 or November 30, 2019.2020.

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

Facility improvements......................................................................................................................... 8-15

MachinerySchedule of Plant, Property, and equipment................................................................................................................. 5-10Equipment Useful Lives

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.

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.

LeasesUse of Estimates

In February 2016,The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). Under the new standard, lessees will be required to recognize leasereported amounts of assets and liabilities for all leases, with certain exceptions, on their balance sheets. Public business entities are required to adoptand disclosure of contingent assets and liabilities at 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 $36,000 for the first nine months of 2020. The Company used an estimated incremental borrowing rate of 3.25% representativedate of the ratefinancial statements and the reported amounts of interest thatrevenues and expenses during the company would have to pay to borrow on the Company’s line of credit. The remaining lease term is three years.reporting period. Actual results could differ from those estimates.

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

Note 3 NEW ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The ASU requires the use of an “expected loss” model for instruments measured at amortized cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance is 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 no financial assets or liabilities measured at fair value on a recurring basis as of AugustMay 29, 20202021 and November 30, 2019.2020.  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 no nonfinancial assets measured at fair value on a nonrecurring basis at AugustMay 29, 20202021 and November 30, 2019.2020.

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 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 August 29, 2019,March 26, 2021, the Company renewed the Revolving Loan Agreement with a Texas banking institution.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$6,000,000 with a rate equal to prime rate.rate (3.25% at May 29, 2021). The Revolving 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, minuswas originally entered into on January 23, 2013, between the Company’s balance sheet cash on hand“Company” as borrower and Frost as lender.  

Construction Loans.  Subject to the extent in excessterms of $2,000,000the Loan Agreement, Frost will lend 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. Thethe Company hasan aggregate amount not to date, drawnexceed $16,160,000.00.

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 $6,000,000.00, minus amounts available and amounts previously disbursed under outstanding Frost letters of credit. Subject to certain terms and conditions, the revolving line of creditCompany may borrow, repay and is currently in compliance with the financial covenants. The Company has not received any indication that borrowingreborrow under the Loan Agreement may be restricted due to COVID-19 uncertainties. The agreement termination date is April 23, 2021.Agreement.

On April 17, 2020, Micropac Industries, Inc. (the Company) obtained an unsecured $1,924,400 loan underThe interest on the Paycheck Protection Program (the PPP Loan). The Paycheck Protection Program (or PPP) was established under the recently congressionally-approved Coronavirus Aid, Relief,outstanding and Economic Security Act (the CARES Act) and is administered by the U.S. Small Business Administration. The PPP Loanunpaid principal balance shall be computed at a per annum rate equal to the Company is being made through Frost Bank,lesser of (a) a rate equal to the Company s existing lender (the Lender)Prime Rate per annum; provided, however, in no event shall the resulting rate be less than three and one-quarter percent (3.25%).

Based upon updated guidance issued April 23, 2020 by the Federal Government including a presumption that no publicly traded companies with sources of liquidity are eligible for a PPP loan, the Company returned the loan proceeds within the time period imposed under these new guidelines and paid off the loan on May 4, 2020.

Note 6 EARNINGS PER COMMON SHARE

Basic and diluted earnings per share are computed based upon the weighted average number of shares outstanding during the respective periods. Diluted earnings per share gives effect to all dilutive potential common shares. For the three and ninesix months ended AugustMay 29, 20202021 and August 24, 2019,May 30, 2020, the Company had no dilutive potential common stock instruments.

Note 7 SHAREHOLDERS’ EQUITY

On December 11, 2018,8, 2020, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10$0.10 per share special dividend to all shareholders of record as of January 9, 2019.6, 2021. The dividend was paid to shareholders on February 8, 2019.12, 2021.

On December 10, 2019, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10$0.10 per share special dividend to all shareholders of record as of January 8, 2020.2020. The dividend was paid to shareholders on February 14, 2020.2020.

[The remainder of this page intentionally left blank.]

MICROPAC INDUSTRIES, INC.

(Unaudited)

Business

Micropac Industries, Inc. (the “Company”), a Delaware corporation, designs, manufactures and distributes various types of microelectronic circuits including solid state relays and power controllers, optoelectronic components, and sensor and display components and assemblies. The Company’s products are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200^o C) products. Additional products include integrated electronics solutions such as power supplies, satellite optical transceiver media converters and lighting systems for satellites.

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

Results of OperationsCritical Accounting Policies

SalesThe 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 threequarter ended May 29, 2021, describes the significant accounting policies and nine month periods ended August 29, 2020 totaled $4,926,000 and $16,760,000, respectively. Salesmethods 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 third quarter decreased $2,326,000 from the same period of 2019, while sales for the first nine months of 2020 decreased $1,206,000 from the first nine months of 2019. 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 salesdemand 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 third quarter were due to timing of shipments of $8,268,000 of backlog from customers on custom sensor products and a decrease in sales of space level solid state relays comparedfuture, an adjustment to the third quarter of 2019. Sales were 7% in the commercial market, 13% in the medical market, 67% in the military market, and 13% in the space marketdeferred tax asset would be necessary which would reduce our net income for the nine months ended August 29, 2020 compared to 10% in the commercial market, 17% inthat 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

Results of Operations

Sales for the three and six month periods ended May 29, 2021 totaled $7,635,000 and $11,685,000, respectively. Sales for the second quarter increased $1,758,000 from the same period of 2020 while sales for the first six months of 2021 decreased $149,000 from the first six months of 2020. The majority of the increase in the three month period is related to the additional shipments that were delayed due a shut down for a week in February due to the Texas winter storm resulting in a week of lost production and associated shipments. Sales were 6% in the commercial market, 15% in the medical market, 57%64% in the military market, and 16%15% in the space market for the ninesix months ended August 24, 2019.May 29, 2021 compared to 7% in the commercial market, 15% in the medical market, 63% in the military market, and 15% in the space market for the six months ended May 30, 2020.

One customer accounted for 20% and 19% of the Company’s sales for the three months and six months ended May 29, 2021 while one customer accounted for 25% of the Company’s sales for the three months ended August 29,May 30, 2020, and two customers accounted for 13%23% and 10%11% of the Company’s sales for the ninesix months ended August 29, 2020, while one customer accounted for 20% of the Company’s sales for the three months ended August 24, 2019, and the same customer accounted for 20% of the Company’s sales for the nine months ended August 24, 2019.May 30, 2020.

Cost of goods sold for the third quartersecond quarters of 2021 and 2020 totaled 54.3% and 2019 totaled 63.0% and 55.7%60.3% of net sales, respectively, while cost of goods sold for the ninesix months ended AugustMay 29, 2021 and May 30, 2020 totaled 58.5% and August 24, 2019 totaled 59.6% and 56.4%58.0% of net sales, respectively. In actual dollars, cost of goods sold decreased $927,000increased $598,000 in the thirdsecond quarter of 20202021 compared to the same period of 2019.2020. Year to date cost of goods sold decreased $156,000$37,000 for the first ninesix months of 20202021 as compared to the same period in 2019.2020. The delaymajority of the increase in shipments of custom products, lower sales of space level solid state relays with traditional higher margins, and approximately $250,000the second quarter is associated with COVID-19 production down time resultedthe increase cost of goods sold with the increase in lower overall gross margin.sales compared to second quarter of 2020.

Research and development expense decreased $122,000$10,000 for the thirdsecond quarter of 20202021 versus 20192020 and decreased $68,000$143,000 for the first ninesix months of 20202021 compared to the same period of 2019.2020. 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 thirdsecond quarter and first ninesix months of 20202021 totaled 27.2%20.8% and 24.3%25.5% respectively of net sales compared to 19.9%23.1% and 22.5%23.1% for the same periods in 2019.2020. In actual dollars, selling, general and administrative expense decreased $98,000increased $232,000 for the thirdsecond quarter and increased $31,000 $246,000

for the first ninesix months of 20202021 compared to the same periods in 2019.2020. The majority of the increase for the first ninesix months resulted from an increase in commission expense in 2021 and the addition onof business development staff at the end of 2019.staff.

Provisions for taxes decreased $158,000increased $130,000 for the thirdsecond quarter of 20202021 and increased $128,000decreased $31,000 for the first ninesix months of 20202021 compared to the same period in 2019.2020. The estimated effective tax rate was 14% for 20202021 and for 2019.2020.

Net income decreased $1,059,000increased $804,000 for the thirdsecond quarter of 20202021 versus 20192020 and decreased $935,000$190,000 for the first ninesix months of 20202021 compared to the same period of 2019.2020. The increase for the second quarter was associated to the increase in sales in the second quarter and the associated improvement in gross margins. The decrease for the first six month was associated with shipments that were delayed due a shut down for a week in February due to the Texas winter storm resulting in a week of lost production.

Liquidity and Capital Resources

The Company will use a combination of cash and 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 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.

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 $14,342,000$13,053,000 as of AugustMay 29, 20202021 compared to $13,890,000$14,619,000 on November 30, 2019, an increase2020, a decrease of $452,000.$1,566,000. The increasedecrease in cash and cash equivalents is primarily attributable to a net use of cash flow from operations of $984,000, and$337,000, payment of a cash dividend of $258,000, and offset by proceeds for the sales of investments of $2,089,000 and $395,000$970,000 invested in equipment.the construction of the new manufacturing center.

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 20202021 totaled $23,930,000$13,105,000 compared to $20,857,000$10,732,000 for 2019.2020. The increase resulted from timing of new orders for the Company’s standards solid state relays and custom sensor products.

Backlog totaled $29,237,000$31,517,000 on AugustMay 29, 20202021 compared to $20,241,000$18,903,000 as of August 24, 2019May 30, 2020 and $22,021,000 on November 30, 2019.2020. The backlog represents a good mix of the company’s products and technologies with 11% in the commercial market, 11% in the medical market, 66% in the military market, and 12% in the space market compared to 15% in the commercial market, 9% in the medical market, 64% in the military market, and 12% in the space market compared to 8% in the commercial market, 7% in the medical market, 74% in the military market, and 11% in the space market on August 24, 2019.May 30, 2020.