| EMPLOYEE RETENTION CREDIT UNDER THE CARES ACT | Note 8 EMPLOYEE RETENTION CREDIT UNDER THE CARES ACT The CARES Act, passed by Congress on March 27, 2020, contained the employee
retention credit (ERC), a refundable payroll tax credit to employers that have experienced hardship in their operations due to COVID-19.
The CARES Act was amended and extended on December 27, 2020 by the Consolidated Appropriations Act, 2021 (the “CAA”) and in
March 2021, the Internal Revenue Code was amended by the American Rescue Plan Act of 2021 to provide new employee retention credit provisions
designed to promote employee retention and hiring. This ERC is a fully refundable tax credit for employers equal to 70 percent
of qualified wages that eligible employers pay their employees. This ERC applies to qualified wages paid after December 2020 and before
January 1, 2022. As a result, the Company has determined that it qualified for
a $ 920,299 MICROPAC INDUSTRIES, INC. (Unaudited)
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 (200 o 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 27, 2022, 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 Results of Operations
Three months ended Nine months ended
8/27/2022 8/28/2021 8/27/2022 8/28/2021
NET SALES 100.0 % 100.0 % 100.0 % 100.0 %
COST AND EXPENSES:
Cost of Goods Sold 52.9 % 53.9 % 55.4 % 56.6 %
Research and development 8.2 % 6.2 % 7.6 % 6.3 %
Selling, general & administrative expenses 32.1 % 20.2 % 29.0 % 23.3 %
Total cost and expenses 93.2 % 80.3 % 92.0 % 86.2 %
OPERATING INCOME BEFORE INTEREST AND INCOME TAXES 6.8 % 19.7 % 8.0 % 13.8 %
Interest and other income 13.9 % (2.6 %) 4.8 % (0.9 %)
INCOME BEFORE TAXES 20.7 % 17.2 % 12.8 % 12.9 %
Provision for taxes 4.7 % 3.9 % 2.6 % 2.4 %
NET INCOME 16.0 % 13.3 % 10.2 % 10.5 % Sales for the three and nine month periods ended August
27, 2022 totaled $6,940,000 and $20,194,000, respectively. Sales for the third quarter decreased $1,240,000 from the same period of 2021
while sales for the first nine months of 2022 increased $329,000 from the first nine months of 2021. The majority of the decrease for
the three months ended August 27, 2022 is related to timing of shipments of customer orders of custom sensor products. Sales were 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 compared to 5% in the commercial market, 14% in the medical market, 66% in the military market, and 15% in the space market for
the nine months ended August 28, 2021. 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,
while one customer accounted for 21% and 20% of the Company’s sales for the three months and nine months ended August 28, 2021. Cost of goods sold for the third quarters of 2022 and
2021 totaled 52.9% and 53.9% of net sales, respectively, while cost of goods sold for the nine months ended August 27, 2022 and August
28, 2021 totaled 55.4% and 56.6% of net sales, respectively. In actual dollars, cost of goods sold decreased $740,000 in the third quarter
of 2022 compared to the same period of 2021. Year to date cost of goods sold decreased $49,000 for the first nine months of 2022 as compared
to the same period in 2021. Research and development expense increased $58,000 for
the third quarter of 2022 versus 2021 and increased $281,000 for the first nine months of 2022 compared to the same period of 2021. 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
third quarter and first nine months of 2022 totaled 32.1% and 29.0% respectively of net sales compared to 20.2% and 23.3% for the same
periods in 2021. In actual dollars, selling, general and administrative expense increased $582,000 for the third quarter and increased
$1,221,000 for the first nine months of 2022 compared to the same periods in 2021. The majority of the increase for the first nine months resulted from an
increase in commission expense in 2022, property tax on the new building and consultant fees. Provisions for taxes increased $19,000 for the third
quarter of 2022 and increased $53,000 for the first nine months of 2022 compared to the same period in 2021. The estimated effective tax
rate was 20% for 2022 and 18% for 2021. Net income increased $17,000 for the third quarter of
2022 versus 2021 and decreased $20,000 for the first nine months of 2022 compared to the same period of 2021. 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. As of August 27, 2022, the Company has $18,616,000
in construction in process on the new facility and has $14,538,000 in notes payable on the construction loan, outstanding draw request
of $128,000 in account payables and has used $2,515,000 of the Company’s cash. In addition, the Company has unamortized loan fees
on the construction loan in the amount of $179,000. 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 $15,602,000 as of
August 27, 2022 compared to $15,252,000 on November 30, 2021, an increase of $350,000. The increase in cash and cash equivalents is attributable
to $1,549,000 cash provided by operations, $10,990,000 proceeds from the construction loan, offset by the payment of a cash dividend of
$258,000, $504,000 in cash for additional manufacturing equipment and $11,427,000 for construction in process on the new facility. 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 2021 totaled $19,792,000
compared to $23,568,000 for 2022. The increase resulted from timing of new orders for several custom products. Backlog totaled $36,421,000 on August 27, 2022 compared
to $29,943,000 as of August 28, 2021 and $32,635,000 on November 30, 2021 and represents a good mix of the company’s products and
technologies.
2022 Current Backlog by Major Market
Military Space Medical Commercial Total
Domestic Direct $ 15,351 $ 2,595 $ 6,381 $ 1,853 $ 26,180
Domestic Distribution 8,113 703 — 448 9,264
International 277 120 — 580 977
$ 23,741 $ 3,418 $ 6,381 $ 2,881 $ 36,421
2022 Current Backlog by Product Line
Microelectronics $ 12,449
Optoelectronics 5,658
Sensors and Displays 18,314
$ 36,421 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. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable
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 27, 2022 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 three month period ended August 27, 2022.
LEGAL PROCEEDINGS The Company is not involved
in any material current or pending legal proceedings.
RISK FACTORS Information about risk factors
for the three and nine months ended August 27, 2022 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, 2021
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None
DEFAULTS UPON SENIOR SECURITIES None
MINE SAFETY DISCLOSURE Not Applicable
OTHER INFORMATION None
EXHIBITS (a) Exhibits
31.1
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.
32.2
Certification of Chief Accounting Officer pursuant to 18 U. S. C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.
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 11, 2022 /s/ Mark King
Date Mark King
Chief Executive Officer
October 11, 2022 /s/ Patrick Cefalu
Date Patrick Cefalu
Chief Financial Officer |
