| SIGNIFICANT ACCOUNTING POLICIES | Note 2 SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition On May 28, 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) Based on a review of its customer
contracts, the Company has determined that revenue on the majority of its customer contracts will continue to be recognized at
a point in time, generally upon shipment of products, consistent with the Company’s historical revenue recognition model. The core principle of the guidance in Topic 606
is that an entity 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. To achieve that core principle, the Company applied
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 The Company’s revenues are from contracts
and/or purchase orders associated with manufacture of products with customers. 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 sale of products. 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. This performance obligation is satisfied
when control of the product is transferred to the customer, which occurs upon shipment or delivery. The
Company accounting policy treats shipping and handling activities as a fulfillment cost. 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. 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. 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. 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, ASU No. 2014-09 will require the Company to recognize revenue using an over-time recognition model as opposed
to recognizing revenue at the time of shipment. The Company recognizes this revenue at work in process cost 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. 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 obligation is determined and revenue recognized upon terms and conditions
of the contract from the customer. Effective as of the beginning of the
first quarter of fiscal 2019, we adopted ASU No. 2014-09 using the modified retrospective method and recognized a cumulative effect
adjustment to retained earnings based on any open contracts at that time for which revenue recognition has changed from a point-in-time
recognition model to an over-time recognition model. While the impact to net sales and net income was not material to our results
of operations, the future impact of ASU No. 2014-09 is dependent on the mix and nature of specific customer contracts. Upon adoption, we recognized an increase
in retained earnings of $55,000. The details of the adjustment to retained earnings upon adoption as well as the effects of the
balance sheet are as follows:
Balance at Balance at
Assets November 30, 2018 Adjustment due to Topic 606 December 1, 2018
Contract assets $0 $242 $242
Work in process $1,985 ($173) $1,812
Deferred income tax net $57 ($15) $42
Shareholder equity
Retained Earnings $24,800 $55 $24,855
The following table summarize the effects of the new standard
on selected unaudited line items within the Company’s Condensed Statement of Operations for the 13-week period ended February
23, 2019.
As Reported
Balance without adoption of Topic 606 Effect of change
Net sales $3,805 $3,522 ($283)
Cost of goods sold ($2,347) ($2,128) $219
(Loss) Income before taxes ($226) ($290) ($64)
Income tax $32 $44 ($12)
Net Income (loss) ($194) ($246) $52 Disaggregation of Revenue The following table summarizes the Company’s net
sales by product line.
2/23/2019 2/24/2018
Microcircuits $882 $865
Optoeletronics 1,249 1,167
Sensors and Displays 1,674 1,819
$3,805 $3,851
Timing of revenue recognition
Transferred at a point in time $3,522 $3,851
Transferred over time 283 0
Total Revenue $3,805 $3,851 Deferred Revenue represents advance
payments from customers and will be recognized as revenue when the performance obligations are met per the terms of the contract. Contract costs The Company does not have 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 has $2,065,000 in short-term investments
at February 23, 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 February 23, 2018. On December 22, 2017, the Tax Cuts and Jobs Act
(the “Tax Act”) was signed into United States tax law, which among other provisions lowered the corporate tax rate
to 21%. In December 2017, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") 118 to provide guidance for companies that allows for a measurement period of up to
one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts under ASC 740. In accordance
with SAB 118, a company must reflect the income tax effect of those aspects of the Tax Act for which the accounting under ASC 740
is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able
to determine a reasonable estimate, the company must record a provisional estimate in the financial statements. ASC 740 requires the effects of changes in tax
rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, as of
the date of enactment, and during the twelve months ended November 30, 2018, we revalued all deferred tax assets and liabilities
at the newly enacted Federal corporate US income tax rate. This revaluation as of enactment resulted in a non-cash provisional
estimate of $52,000 to income tax expense and a corresponding reduction in the net deferred tax asset. 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 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. Note 3 NEW ACCOUNTING PRONOUNCEMENTS In February 2016, the FASB issued Accounting
Standards Update (ASU) 2016-02, Leases (Topic 842) Note 4 FAIR VALUE MEASUREMENT The Company had no financial assets or liabilities
measured at fair value on a recurring basis as of February 23, 2019 and November 30, 2018. 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 February 23, 2019 and November 30, 2018. Note 5 COMMITMENTS On April 23, 2018, 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. 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 months ended February 23, 2019 and February 24, 2018, the Company had no
dilutive potential common stock instruments. Note 7 SHAREHOLDERS’ EQUITY On December 12, 2017, 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
10, 2018. The dividend was paid to shareholders on February 8, 2018. 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. |
