EDGAR 10-K Filing

Company CIK: 65759
Filing Year: 2022
Filename: 65759_10-K_2022_0001010549-22-000029.json

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ITEM 1. BUSINESS
Item 1. Business
GENERAL
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 9001:2008 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.
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 436 shareholders on November 30, 2021.
PRODUCTS AND TECHNOLOGIES
The Company’s products are either custom (being application-specific circuits designed and manufactured to meet the particular requirements of a single customer) or standard proprietary components. Custom-designed components and assemblies accounted for approximately 30% of the Company’s sales for the fiscal year ended November 30, 2021 and were 31% for fiscal 2020. Standard components and assemblies accounted for approximately 70% of the Company’s sales for the fiscal year ended November 30, 2021 and were 69% for fiscal 2020.
The Company provides microelectronics, sensors and displays, and optoelectronics products, to include components and assemblies that offer a wide range of products sold to the industrial, medical, military, aerospace and space markets.
The microelectronic technologies, including custom microcircuits, solid state relays, power operational amplifiers, and regulators accounted for 29% of the Company’s business in 2021 compared to 33% in 2020. Sensors and displays accounted for 45% of the Company’s business and the optocouplers product accounted for 26% of the Company’s business in 2021, compared to 45% and 22% in 2020, respectively.
The Company’s basic products and technologies include:
· Custom design hybrid microelectronic circuits
· Solid state relays and power controllers
· Custom optoelectronic assemblies and components
· Optocouplers
· Light-emitting diodes
· Hall-Effect sensors
· Displays
· Power operational amplifiers
· Fiber optic components and assemblies
· High temperature (200º C) products
· Radiation tolerant electronics
Micropac’s products are primarily sold to original equipment manufacturers (OEM’s) who serve the following major markets:
· Military/Aerospace - aircraft instrumentation, guidance and navigation systems, control circuitry, power supplies, laser positioning
· Medical - optoelectronic sensors and electronics
· Space - control circuitry, power monitoring and sensing
· Industrial - power control equipment and robotics
The Company has two patents. On July 11, 2017, the Company received its patent for the “Power Controller”, which expires on July 10, 2031. On January 6, 2018, the Company received its patent for the “Voltage bus protection and isolation devices”, which expires on January 5, 2032.
The Company has no licenses, franchises, or labor contracts. The Company’s has two trademarks registered with the U.S. Patent and Trademark Office.
Sales of our products internationally are subject to government regulations, including export control regulations of the U.S. Department of State and Department of Commerce. Violation of these regulations by the Company could result in monetary penalties and denial of export privileges. The Company is not aware of any violations of export control regulations or similar applicable government regulations.
Five of the Company’s principal product families require government approval. Further, a significant portion of our business is military and is dependent on maintaining our facility certifications to MIL-PRF-38534 and MIL-PRF-19500. In addition, several customers require the Company maintain AS 9100 certifications. We expect to maintain these certifications and qualifications; however, the loss of any of these certifications would have a significant negative impact on our business.
Government regulations impose certain controls on chemicals used in electronics and semiconductor manufacturing. Micropac has obtained appropriate environmental permits, and routinely monitors and reports the wastewater stream results to the local governing agency. Micropac is classified as a small generator of hazardous waste, and the annual cost of complying with the regulations is minimal.
In 2021, the Company’s investment in technology through research and development, which was expensed, totaled approximately $1,739,000 ($1,431,000 in 2020). The Company’s research and development expenditures were directed primarily toward standard proprietary microelectronic products, including industrial power controllers and DC-DC converters, fiber optic transceivers, high voltage optocouplers and continued product development and improvement associated with the Company’s space level and other high reliability products.
In addition to the Company’s investment in research and development, various customers paid the Company approximately $2,341,000 in non-recurring engineering revenue with $2,468,000 recorded within cost of goods sold associated with the development of custom products for specific applications.
The Company provides a one-year warranty from the date of shipment to the original purchaser. The Company is obligated under this warranty to either replace or repair defective goods or refund the purchase price paid by the buyer.
CUSTOMERS
The Company’s products are marketed throughout the United States and in Western Europe, through a direct technical sales staff, independent representatives, and independent stocking distributors. Approximately 4% of the sales for fiscal year 2021 (5% in 2020) were to international customers. Sales to Western European customers are made by independent representatives under the coordination of the Company’s office in Bremen, Germany.
Sales through the Company’s distribution channels were $9,449,000 in 2021 compared to $7,966,000 in 2020, or 35% and 33% of sales, respectively.
The Company’s major customers include contractors to the United States government. Sales to these customers for the Department of Defense (DOD) and NASA contracts accounted for approximately 67% of the Company’s revenues in 2021 compared to 66% in 2020.
The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies, BAE, and Boeing. One customer accounted for 20% of the Company’s sales during 2021 and 2020.
BACKLOG
At November 30, 2021, the Company had a backlog of unfilled orders totaling approximately $32,635,000 compared to
approximately $29,793,000 at November 30, 2020.
New orders for 2021 totaled $31,387,000 compared to $30,012,000 for 2020.
The backlog represents a good mix of the company’s products and technologies with 8% in the commercial market, 11% in the medical market, 73% in the military market, and 8% in the space market on November 30, 2021.
2021 Current Backlog by Major Market
Military Space Medical Commercial Total
Domestic Direct $ 15,372 $ 1,543 $ 3,430 $ 2,299 $ 22,644
Domestic Distribution 8,512 - 9,547
International -
$ 23,955 $ 2,572 $ 3,430 $ 2,678 $ 32,635
2021 Current Backlog by Product Line
Microelectronics $ 9,528
Optoelectronics 7,170
Sensors and Displays 15,937
$ 32,635
HUMAN CAPITAL
Micropac Industries, Inc., is committed to attracting and retaining the brightest and best talent. Therefore, investing, developing, and maintaining human capital is critical to our success.
We are committed to advancing Diversity, Equity, and Inclusion (DE&I) across the entire Company and the future success of the Company is our ability to attract and retain a diverse workforce. DE&I are and have long been, critical to our culture and our Company’s success and our performance depends on attracting, developing, motivating, and retaining a highly skilled workforce, including engineering, manufacturing, business development and strategy and management.
At November 30, 2021, the Company had 153 full-time employees (compared to 143 at November 30, 2020), of which 14 were executive and managerial employees, 46 were engineers and quality-control personnel, 21 were clerical and administrative employees, and 72 were production personnel. None of the Company’s employees are covered by collective bargaining agreements.
The Company is an equal opportunity employer. It is the Company’s policy to recruit, hire, train and promote personnel in all job classifications, without regard to race, religion, color, national origin, sex or age. Above and beyond non-discrimination, we are committed to an Affirmative Action Program, dedicated to the hiring, training, and advancement within the Company of minority group members, women, veterans, and handicapped individuals.
Our values are also integral to our commitment to long-term sustainability, with environmental, social and governance (ESG) practices across our Company. With the construction of our new manufacturing center, discussed below, the Company has included in the design and construction significant improvements in support of our commitment to ESG.
COMPETITION
The Company competes with two or more companies with respect to each of its major products. Some of these competitors are larger and have greater capital resources than the Company. Management believes the Company’s competitive position is favorable with regard to our product reliability and integrity, past performance, customer service and responsiveness, timely delivery and pricing; however, no assurance can be given that the Company can compete successfully in the future.
There are approximately 35 independent manufacturing companies who are certified to supply microcircuits to MIL-PRF-38534 or supply semiconductors to MIL-PRF-19500, in addition to OEM’s, who manufacture hybrid microcircuits for their internal needs. Micropac may compete with all of these for hybrid microcircuit, power management and optoelectronics business. Some of the Company’s primary competitors are TTM Technologies, Cobham Advanced Electronic Solutions, TT Electronics, and Infineon Technologies.
SUPPLY CHAIN
The parts and raw materials for the Company’s products are generally available from more than one source. Except for certain optoelectronic products, the Company does not manufacture the basic parts or materials used in production of its products. From time to time, the Company has experienced difficulty in obtaining certain materials when needed. The Company’s inability to secure materials for any reason could have adverse effects on the Company’s ability to deliver products on a timely basis and could result in loss of customers or sales. However, the Company has not been materially affected by such shortages. The Company uses capacitors, active semiconductor devices (primarily in chip form), hermetic packages, ceramic substrates, resistor inks, conductor pastes, precious metals and other materials in its manufacturing operations. The Company’s delivery commitments to customers allow for adequate lead times for production of the products including lead time for order and receipt from the supply chain.
Some of the Company’s primary suppliers are NTK Technologies, W. L Gore, Hughes Circuits, Semi-Dice and TTI.

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ITEM 1A. RISK FACTORS
Item 1A. Material Risk Factors
This annual report on Form 10-K 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 disclaims any responsibility to update the forward-looking statements contained herein, except as may be required by law.
Concentration Related Risk Factors
The Company is heavily dependent on a few major customers
The Company’s major customers include contractors to the United States government. Sales to these customers for DOD and NASA contracts accounted for approximately 67% of the Company’s revenues in 2021 compared to 66% in 2020. The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies, BAE, and Boeing. One customer accounted for 20% of the Company’s sales during 2021 and 2020. The contracts of our customers with the United States government may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government, which would in turn might materially affect the Company’s sales. The loss of any one of these customers or a significant reduction in their purchases would be likely to adversely affect our business.
In addition, the Company has several custom commercial and medical products with a current backlog of $5,348,000. The loss of these custom products or a significant reduction in their purchases would be likely to adversely affect our business.
Financing Related Risk Factors
We experience pricing pressures from customers for reduction in selling prices
The Company continues to experience pricing pressures from some of its OEM customers. In some cases, the Company’s customers request the review of pricing for possible reduction in selling price on future orders. This requires the Company to improve its productivity and to request similar price reductions from its supplier chain. If one or both of the approaches by the Company does not succeed, the Company could be required to reduce the selling price on future orders, reducing the product gross margins and affecting the Company’s net earnings in order to receive future orders from the customer. However, the Company has no agreement that requires a reduction in the selling price on any current customer order. All contracts are firm fixed pricing.
The Company has potential warranty obligations
The Company provides a one-year warranty from the date of shipment to the original purchaser. The Company is obligated under this warranty to either replace or repair defective goods or refund the purchase price paid by the buyer. An unexpected number of warranty claims could negatively impact the profitability of the Company.
Inflation and rising costs
The cost to manufacture the Company’s products is influenced by the cost of raw materials and labor. The Company has recently experienced higher costs with increasing cost of labor and cost of raw materials with inflation. The Company may, from time to time, offset these cost increases by increasing the prices of its products on new contracts.
Operations Related Risk Factors
Fabrication efforts may not be successful
The Company produces silicon phototransistors and light emitting diode die for use in certain military, standard and custom products. Fabrication efforts sometimes may not result in successful results, limiting the availability of these components. Competitors offer commercial level alternatives, and our customers may purchase our competitors’ products if the Company is not able to manufacture the products using these technologies to meet the customer demands.
Component shortages from suppliers could affect ability to manufacture products or delay shipments to customers
The Company relies on suppliers to deliver quality raw materials in a timely and cost-effective manner. Most of the materials and components are generally available from multiple sources; however, from time-to-time vendors do not deliver the product as needed due to manufacturing problems or a decision to discontinue that product. Such interruption of supply or price increases could have a material adverse effect on the Company’s operations; however, the Company is not currently impacted by material shortages.
impacted by material shortages.
We must maintain the ability to enhance our products and develop new products for the military, space or aerospace markets
The Company’s base products and technologies generally have long life cycles. The Company’s products are primarily used in military, space or aerospace applications, which also have long life cycles. Our future success may, however, depend in part on our ability to enhance the functionality of our existing products in a timely and cost-effective manner, our ability to continue close working relationships with major customers for the design of their new products, and our ability to develop new products and technologies for existing and emerging markets. We must also continue to make significant investments in research and development efforts in order to meet customer specifications for specially fabricated products. We may not be able to retain or obtain engineers, or other technical support staff, to conduct our research and development efforts as needed. There can be no assurance that the Company will be able to define, develop and market new products and technologies on a timely and cost-effective basis. Failure to respond to our customers’ requirements and to our competitors’ progress in technological changes could have a material adverse effect on the Company’s business.
Regulatory Related Risk Factors
We are significantly affected by government policy
The Company could be adversely affected by changes in laws and regulations made by U.S. and non-U.S. governments and agencies dealing with foreign shipments. Changes in trade agreements or taxes on imports or exports could adversely affect our operations or financial condition.
Sales of our products internationally are subject to government regulations, including export control regulations of the U.S. Department of State and Department of Commerce. Changes in these regulations could adversely affect our business. Violation of these regulations by the Company could result in monetary penalties and denial of export privileges.
The Company is subject to the Foreign Corrupt Practices Act (FCPA), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. Any violation of the FCPA or similar laws and regulations could result in significant expenses, divert management attention, have a material adverse effect on our business, our financial condition and our results of operations and otherwise have a negative impact on the Company and its reputation.
Reductions or changes in U.S. government spending
The loss or significant reduction of a U.S. government or NASA program in which our major customers participate could adversely affect our business. U.S. government contracts generally are conditioned on the continuing availability of Congressional appropriations. Congress usually appropriates funds for on-going programs on a fiscal year basis even though contract performance may extend over many years. At the beginning of a major program, the contract is often only partially funded, and additional monies are committed only as Congress makes appropriations in future fiscal years. In addition, most U.S. government contracts are subject to modification if funding is changed. Key programs in which our customers participate must compete with other programs for consideration during the federal budgeting and appropriation process, and support and funding for any U.S. government program may be influenced by general economic conditions, political considerations, and other factors. A decline in support and funding for programs in which our customers participate could result in contract terminations, delays in contract awards, failure to extend contracts, cancellation of planned procurements and fewer new business opportunities for our customers. Our business may be adversely affected as a result of changes or reductions in U.S. government or NASA spending.
Market Related Risk Factors
Majority shareholder ability to control the election of the Board of Directors
The Company’s majority shareholder, Mr. Heinz-Werner Hempel, established a partnership organized under the laws of Germany, which owns 1,952,577 shares or 75.7% of the outstanding voting shares. Mr. Hempel, through the partnership, has the ability to control the election of the Company’s Board of Directors and elect individuals who may be more attuned to such majority shareholder’s vision for the Company and not necessarily to those of minority shareholders as to the policies and directions of the Company. However, the ability to control the election of the Board of Directors does not modify the fiduciary duties of the Board of Directors to represent the interests of all shareholders.
There are limited shares for purchase and sale
A small number of shares are available for public purchase and sale. The Company’s reported share price may be subject to extreme fluctuations, or one or a few trades may determine the reported market price, due in part to the small number of shares traded at any time.
General Risk Factors
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, the contagiousness and severity of Coronavirus variants, including Delta and Omicron, 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.”
We are subject to cybersecurity risks
Cybersecurity risks and attacks continue to grow. Cybersecurity attacks are evolving and not always predictable. Attacks include malicious software, threats to information technology infrastructure, denial-of-service attacks on websites, attempts to gain unauthorized access to data, ransomware attacks, and other breaches. Data breaches can originate with authorized or unauthorized persons. Authorized persons could inadvertently or intentionally release confidential or proprietary information, and recipients could misuse data. Such events could lead to interruption of our operations or business, unauthorized release or use of information, compromise of data, damage to our reputation, damage to our customers or vendors, and increased costs to prevent, respond to or mitigate any events.
Insurance coverage and exposure to substantial claims or liabilities
The Company operates manufacturing facilities in Garland, Texas and subcontracts portions of the Company’s manufacturing to a contract manufacturer in Juarez, Mexico. These facilities use industrial machines and chemicals that could provide risks of personal injury and/or property damage. There is no assurance that accidents will not occur. If accidents do occur, the Company could be exposed to substantial liability. The Company maintains worker’s compensation insurance and general liability insurance for protection of its employees and for protection of the Company’s assets in Garland, Texas and for equipment and inventory located at the contract manufacturer in Juarez, Mexico. In addition to the basic policies mentioned, the Company maintains an umbrella insurance policy. The
Company reviews all insurance coverage on an annual basis, and makes any necessary adjustments based on risk assessment and changes in its business. In the opinion of the Company’s management, and its insurance advisors, the Company is adequately insured; however, the Company’s financial position could be materially affected by claims not covered or exceeding coverage currently carried by the Company.
Environmental regulations
The Company is subject to increasingly stringent environmental laws and regulations, including those relating to air emissions, wastewater discharges, chemical and hazardous waste management and disposal. Some of these environmental laws hold owners or operators of land or businesses liable for their own and for previous owners’ or operators’ releases of hazardous or toxic substances or wastes. Other environmental laws and regulations require that we obtain and comply with environmental permits. To date, costs of complying with environmental requirements have not been material. Future events, including those relating to climate change or greenhouse gas emissions, could require the Company to incur expenses related to installation of pollution control equipment, or investigation and cleanup of contaminated sites. If the Company fails to comply with environmental laws and regulations, the Company could be subject to significant liabilities or be required to curtail or cease its manufacturing activities. Changes in environmental laws or regulations could affect the cost of the Company’s products and make it hard for the Company to be competitive with larger companies.
We may default on its line of credit or construction loan
The Company currently has an existing line of credit and a construction loan with a Texas banking institution. In connection therewith, the Company is obligated to maintain certain minimum financial requirements in order to receive advances therefrom. The Company is currently in compliance with such financial requirements, but there is no guarantee that the Company will remain in compliance. If the Company does not maintain compliance with each of the requirements, its ability to receive advances from the line of credit or construction loan will be impaired.
We may incur product liability claims
The use of the Company’s products in commercial or government applications may subject the Company to product liability claims. Although the Company has not experienced any significant product liability claims, the risk of such claims continues. Product liability claims brought against the Company could have a material adverse effect on the Company’s operating results and financial condition.
Our products may have errors or defects that we find only after deployment
Our products are complex, designed to be incorporated in sophisticated applications, and may contain undetected defects, errors, or failures. Although our products are generally tested during manufacturing, prior to shipping, they may contain defects that are discovered only after the products are incorporated in customer applications. The occurrence of any defects, errors, or failures could result in installation delays, product returns, termination of contracts with our customers, diversion of our resources, increased service and warranty costs, and other losses to our customers, their end users, or to us. Any of these occurrences could also result in the loss of customers, and could damage our reputation, which could reduce our sales. In addition to the risk of unanticipated warranty or recall expenses, our customer contracts may contain provisions that could cause us to incur penalties, be liable for damages, or incur other expenses, if we experience difficulties with respect to the functionality, deployment, operation, and availability of our products and services.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company occupies approximately 37,000 square feet of manufacturing, engineering and office space in Garland, Texas. The Company owns 32,200 square feet of that space and leases an additional 4,800 square feet. The Company considers its facilities adequate for its current level of operations.
In addition, the Company purchased 9.2 acres of land in Garland, Texas for $1,438,000 in 2017. With the purchase of this tract of land, it is the intent of the Company to consolidate the three existing buildings into a new manufacturing center. The Company is currently working with a contractor on the design and building of the new facility.
The Company also subcontracts some manufacturing to Inmobiliaria San Jose De Ciuddad Juarez S.A. DE C.V., a maquila contract manufacturer in Juarez, Mexico. The Company owns all equipment and inventory with temporary
importation into Mexico under the maquila rules of Mexico. The Company does not lease or own any real property in Mexico.
The Company employs a sales team in Bremen, Germany who coordinates sales to Western European customers made by independent representatives. The sales manager maintains an office in a private residence. The Company does not lease or own any real property in Germany, or any other foreign country.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
The Company is not involved in any material current or pending legal proceedings.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosure
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information, Holders and Dividends
On February 7, 2022 there were 436 shareholders of record of the Company’s common stock. The stock of the Company is closely held; and, therefore, certain shareholders have the ability to significantly influence decisions. The Company’s common stock is quoted on the OTC Market Pink Sheets under the symbol “MPAD.OB”. The following sets forth the high and low sell price for each quarter during the last two fiscal years:
HIGH LOW
Fiscal Year Ended November 30, 2021 PRICE PRICE
Fourth Quarter $ 17.31 $ 14.25
Third Quarter $ 15.20 $ 12.55
Second Quarter $ 16.20 $ 12.00
First Quarter $ 12.70 $ 11.50
Fiscal Year Ended November 30, 2020
Fourth Quarter $ 12.75 $ 10.75
Third Quarter $ 15.00 $ 11.26
Second Quarter $ 15.25 $ 11.95
First Quarter $ 16.99 $ 12.20
The market price of a share of the common stock as of February 7, 2022 the latest practical date, was $16.00.
During the three month period ended November 30, 2021, approximately 14,900 shares of the Company’s common stock were traded in the over-the-counter market at a price range of $14.25 to $17.31 per share. For the two year period ending November 30, 2021, approximately 492,100 shares of the Company’s common stock were traded in the over-the-counter market at prices ranging from a low of $10.75 to a high of $17.31. The Company’s reported share price may be subject to extreme fluctuations, or one or a few trades may determine the reported market price, due in part to the small number of shares traded at any time.
On December 8, 2020, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 6, 2021. The dividend was paid to shareholders February 12, 2021.
On December 7, 2021, 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 11, 2022. The dividend will be paid to shareholders on or about February 10, 2022.
Securities Issued under Equity Compensation Plan
None.
Purchases of equity securities by the issuer and affiliated purchasers.
None

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Twelve Months Ended
November 30, 2021 November 30, 2020
Net Sales 100.0 % 100.0 %
Cost of goods sold 55.7 % 61.4 %
Research and Development 6.4 % 6.4 %
Selling, General, and Administrative 23.6 % 24.9 %
Cost & Expenses 85.7 % 92.7 %
Operating Income 14.3 % 7.3 %
Other income and interest income net (0.6 )% 0.3 %
Income before Income Taxes 13.7 % 7.6 %
Provision for taxes 2.5 % 1.0 %
Net Income 11.2 % 6.6 %
The Company 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 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 is 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.
Company sales totaled $27,292,000 resulting in an increase of $5,018,000 from 2020. The majority of the increase in sales were due to an increase in shipments of standard solid state relays and non-recurring engineering funded by customers on several custom products compared to 2020.
At November 30, 2021, the Company had a backlog of unfilled orders totaling approximately $32,635,000 compared to approximately $29,793,000 at November 30, 2020.
New orders for 2021 totaled $31,387,000 compared to $30,012,000 for 2020.
Approximately $5,605,000 of the new orders received in 2021 was delivered to customers in 2021, along with approximately $21,687,000 of the Company’s 2020 backlog of orders at November 30, 2020 resulting in revenue of $27,292,000.
The backlog represents a good mix of the company’s products and technologies with 8% in the commercial market, 11% in the medical market, 73% in the military market, and 8% in the space market on November 30, 2021.
2021 Current Backlog by Major Market
Military Space Medical Commercial Total
Domestic Direct $ 15,372 $ 1,543 $ 3,430 $ 2,299 $ 22,644
Domestic Distribution 8,512 - 9,547
International -
$ 23,955 $ 2,572 $ 3,430 $ 2,678 $ 32,635
2021 Current Backlog by Product Line
Microelectronics $ 9,528
Optoelectronics 7,170
Sensors and Displays 15,937
$ 32,635
Cost of goods sold, as a percentage of net sales, was 55.7% in 2021 compared to 61.4% in 2020 with higher margins from the increase in sales of solid state relay microelectronic products. In actual dollars, cost of sales increased $1,536,000 for 2021 versus 2020. The increase in cost of goods sold were due to the overall increase in sales during 2021 compared to 2020.
In 2021, the Company’s investment in technology through research and development, which was expensed, totaled approximately $1,739,000 ($1,431,000 in 2020). The Company’s research and development expenditures were directed primarily toward standard proprietary microelectronic products, including industrial power controllers and DC-DC converters, fiber optic transceivers, high voltage optocouplers and continued product development and improvement associated with the Company’s space level and other high reliability products.
In addition to the Company’s investment in research and development, various customers paid the Company approximately $2,341,000 in non-recurring engineering revenue with $2,468,000 recorded within cost of goods sold associated with the development of custom products for specific applications.
Selling, general, and administrative expenses totaled 23.6% of net sales in 2021 compared to 24.9% in 2020. In dollars expensed, selling, general and administrative expenses totaled $6,456,000 in 2021 as compared to $5,543,000 in 2020, an increase or $913,000. The majority of the increase was in commissions with higher sales, an increase in property taxes and increase in consulting fees.
Other income (expense) and net interest income for fiscal 2021 totaled $(152,000) compared to $65,000 for fiscal 2020.
Income before taxes for fiscal 2021 was approximately $3,734,000, or 13.7% of net sales, compared to $1,690,000, or 7.6% of net sales in fiscal 2020.
Provisions for income tax for fiscal 2021 totaled $676,000 compared $218,000 for fiscal 2020. The Company’s effective income tax rate was 18.1% for the year ended November 30, 2021 and 13.0% for the year ended November 30, 2020.
Net income totaled approximately $3,058,000 or $1.19 per share in 2021 versus 2020 net income of $1,472,000 or $0.57 per share.
Impact of COVID-19 on our Business
The spread of the COVID-19 virus during the first half of 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. 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. In this time of uncertainty because of the COVID-19 pandemic, 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 such as social distancing. We have established and implemented a work from home provision where possible. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.
We experienced multiple confirmed case of COVID-19 during 2021 and 2020, which caused us to shut down our Garland facility for a few days to thoroughly clean the facility and address employee concerns. Our maquiladora contractor in Mexico was shut down during April and May of 2020 but reopened as of mid-June 2020.
To date, we have not experienced significant raw material shortages; however, supply-chain disruptions could potentially delay or prevent us from fulfilling customer orders.
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, the contagiousness and severity of Coronavirus variants, including Delta and Omicron, 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.
Liquidity and Capital Resources
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 $16,160,000 with an interest rate of (3.40%) per annum.
On March 26, 2021, the Company renewed the Revolving Loan Agreement with Frost through the “Sixth Amendment to Loan Agreement.” (See Exhibit 10.13). The Revolving Loan Agreement provides for revolving credit loans, in amounts not to exceed a total principal balance of $6,000,000 with a rate equal to prime rate with a floor of 3.25%. The Revolving Loan Agreement was originally entered into on January 23, 2013, between the Company as borrower and Frost as lender.
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 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 Revolving 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 revolving letters of credit. Subject to certain terms and conditions, the Company may borrow, repay and reborrow under the Loan Agreement. The loan has a maturity date of April 23, 2023. The loan shall be secured by a Security Agreement dated as of January 23, 2013, and is given by Borrower in favor of Lender with collateral of all personal property.
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%).
On April 17, 2020, Micropac Industries, Inc. (the Company) obtained an unsecured $1,924,400 loan under the Paycheck Protection Program (the PPP Loan). The Paycheck Protection Program (or PPP) was established under the recently congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and is administered by the U.S. Small Business Administration. The PPP Loan to the Company was made through Frost Bank, the Company s existing lender (the Lender).
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.
The Company provided $3,831,000 of cash from operating activities in 2021 compared to the $416,000 of cash used by operating activities in 2020. The increase in net cash provided by operations is due to higher revenues in 2021 and an increase in inventory associated with the increase in backlog in 2020. The Company used $583,000 in cash for investment in additional manufacturing equipment and $5,726,000 for construction in process on the new facility in 2021 compared to $686,000 in 2020.
The Company issued a dividend payment of $0.10 per share to all shareholders of record for each of the last two years. The total dividend payment was $258,000 per year.
As of November 30, 2021, the Company had $15,252,000 in cash and cash equivalents compared to $14,619,000 in cash and cash equivalents on November 30, 2020.
The Company is working with a local contractor on the design and building of the new facility estimated at a cost of $18,353,000. The Company groundbreaking for the new manufacturing facility was June 17, 2021. As of November 30, 2021, the Company has $6,947,000 in construction in process on the new facility and has $3,548,000 in notes payable on the construction loan, outstanding draw request of $1,214,000 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.
Per the loan covenant, the Company must maintain a ratio of Free Cash Flow to Debt Service of not less than 1.20 to 1.00. As of November 30, 2021, the Company is “in compliance”.
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.
Company management believes it will meet its 2022 capital requirements through the use of cash derived from operations for the year and/or usage of the Company’s cash and cash equivalents. There were no significant outstanding commitments for equipment purchases or improvements at November 30, 2021.
The Company has no significant off-balance sheet arrangements.
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 Annual Report on Form 10-K for the year ended November 30, 2021, describes the significant accounting policies and methods used in the preparation of the Financial Statements. liabilities. 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 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.
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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Page No.
16 Report of Independent Registered Public Accounting Firm - Whitley Penn LLP
18 Balance Sheets as of November 30, 2021 and 2020
19 Statements of Income for the years ended November 30, 2021 and 2020
20 Statements of Shareholders’ Equity for the years ended November 30, 2021 and 2020
21 Statements of Cash Flows for the years ended November 30, 2021 and 2020
22-29 Notes to Financial Statements as of and for the years ended November 30, 2021 and 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Micropac Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Micropac Industries, Inc. (the “Company”) as of November 30, 2021 and 2020, and the related statements of income, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of November 30, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Margin Estimates for Long-Term Contracts and Related Revenue Recognition
Critical Audit Matter Description
As disclosed in Note 2 to the financial statements, the Company produces certain products with no alternative use and for which the Company has an enforceable right to payment during the production cycle. For these contracts, the Company recognizes revenue over time as control over these products transfers to the customer. Thus, the Company records contract assets for work in process contracts at the end of each reporting period. The Company uses costs incurred to-date as the method for determining progress, and revenue is recognized based on costs incurred to date plus an estimate of margin at completion. The process of estimating final margin involves estimating the costs to complete production of goods and comparing those costs to the total transaction price. These contracts are inherently uncertain in that revenue is fixed while the estimates of costs required to complete these contracts are subject to significant variability. Due to the technical performance requirements in many of these contracts, changes to cost estimates could occur, resulting in higher or lower margins when the contracts are completed.
We have identified revenue associated with work in process contracts recognized over time as a critical audit matter because estimates of final margin are subjective in nature that resulted in a higher degree of audit effort and judgment. Changes in estimates of final margin could have a significant impact on the timing of revenue recognition.
How We Addressed the Matter
We obtained an understanding of the design of internal controls that address the risks of material misstatement relating to recording revenue from contracts with customers where revenue is recognized over time. We evaluated the reasonableness of judgements made and significant assumptions used by management relating to key estimates which include estimated total costs to complete and estimated final margins. We reviewed executed contracts to understand the contract terms, reperformed management’s process of assigning the appropriate timing of revenue recognition and tested the mathematical accuracy of revenue recognized over time based on costs incurred to date relative to total estimated margin. We tested the accuracy and completeness of the data used in developing key estimates, including materials, labor, and overhead costs.
We performed a review of audit evidence from transactions completed after the measurement date related to the final gross margins for comparison to the Company’s initial gross margin estimates.We evaluated management’s ability to estimate total inputs accurately by comparing actual inputs to management’s historical estimates for contracts that have been fulfilled.
/s/ Whitley Penn LLP
We have served as the Company's auditor since 2016.
Plano, Texas
February 9, 2022
MICROPAC INDUSTRIES, INC.
BALANCE SHEETS
NOVEMBER 30, 2021 AND 2020
(Dollars in thousands except share and per share data)
CURRENT ASSETS
Cash and cash equivalents $ 15,252 $ 14,619
Receivables, net of allowance for doubtful accounts of
$0 at November 30, 2021 and 2020 4,974 2,639
Income tax receivable -
Contract assets
Inventories:
Raw materials and supplies 5,738 5,792
Work in process 2,946 3,345
Total inventories 8,684 9,137
Prepaid expenses and other assets
Total current assets 29,854 27,622
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 1,518 1,518
Buildings
Facility improvements 1,126 1,109
Furniture and fixtures 1,025 1,015
Construction in process equipment 8,019 1,044
Machinery and equipment 9,390 9,169
Total property, plant, and equipment 21,576 14,353
Less accumulated depreciation (10,739 ) (10,418 )
Net property, plant, and equipment 10,837 3,935
Operating lease right to use asset
Deferred income taxes, net -
Total assets $ 40,758 $ 31,701
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,963 $ 843
Accrued compensation 1,295
Deferred revenue 1,258
Property taxes
Income tax -
Operating lease liabilities, current portion
Other accrued liabilities
Total current liabilities 5,092 2,167
Operating lease liabilities less current portion
Long Term Debt, net of debt issuance costs 3,369 -
Deferred income taxes, net -
Total liabilities 8,491 2,234
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Common stock, $.10 par value, authorized 10,000,000
shares, 3,078,315 issued and 2,578,315 outstanding at
November 30 2021 and 2020
Additional paid-in-capital
Treasury stock, 500,000 shares, at cost (1,250 ) (1,250 )
Retained earnings 32,324 29,524
Total shareholders’ equity 32,267 29,467
Total liabilities and shareholders’ equity $ 40,758 $ 31,701
See accompanying notes to financial statements.
MICROPAC INDUSTRIES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 2021 AND 2020
(Dollars in thousands except share and per share data)
NET SALES $ 27,292 $ 22,274
COST AND EXPENSES:
Cost of goods sold 15,211 13,675
Research and development 1,739 1,431
Selling, general & administrative expenses 6,456 5,543
Total cost and expenses 23,406 20,649
OPERATING INCOME 3,886 1,625
Other (expense) income (171 )
Interest income, net
INCOME BEFORE INCOME TAXES 3,734 1,690
PROVISION (BENEFIT) FOR INCOME TAXES
Current
Deferred (42 )
Total tax expense provision
NET INCOME $ 3,058 $ 1,472
NET INCOME PER SHARE, BASIC AND DILUTED $ 1.19 $ 0.57
WEIGHTED AVERAGE OF SHARES, basic and diluted 2,578,315 2,578,315
DIVIDENDS PER SHARE $ 0.10 $ 0.10
See accompanying notes to financial statements.
MICROPAC INDUSTRIES, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 2021 AND 2020
(Dollars in thousands)
Common Additional Treasury Retained
Stock paid-in-capital Stock Earnings Total
Balance, November 30, 2019 $ 308 $ 885 $ (1,250 ) $ 28,310 $ 28,253
Dividend - - - (258 ) (258 )
Net Income - - - 1,472 1,472
Balance, November 30, 2020 (1,250 ) 29,524 29,467
Dividend - - - (258 ) (258 )
Net Income - - - 3,058 3,058
Balance, November 30, 2021 $ 308 $ 885 $ (1,250 ) $ 32,324 $ 32,267
See accompanying notes to financial statements.
MICROPAC INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 2021 AND 2020
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,058 $ 1,472
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation
Deferred tax expense (42 )
Loss on disposal of equipment
Change in right of use of asset
Changes in certain current assets and liabilities:
(Increase) decrease in accounts receivable (2,334 )
Increase in tax receivable - (200 )
(Increase) decrease in contract assets (91 )
Decrease (increase) in inventories (2,094 )
Decrease in prepaid expenses and other assets
Decrease in prepaid income taxes -
Increase (decrease) in deferred revenue 1,146 (279 )
Increase (decrease) in accounts payable (101 ) (8 )
Increase (decrease) in accrued compensation (306 )
Increase (decrease) in income taxes payable (213 )
Decrease in lease liabilities (50 ) (36 )
Increase in all other accrued liabilities
Net cash provided by (used in) operating activities 3,831 (416 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of short-term investments - 2,089
Additions to property, plant and equipment (6,309 ) (686 )
Net cash provided by (used) in investing activities (6,309 ) 1,403
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividend (258 ) (258 )
Proceeds from long term debt 3,548 -
Proceeds from short term debt - 1,942
Repayment of short term debt - (1,942 )
Payment of debt issuance costs (179 ) (1,942 )
Net cash provided by (used in) financing activities 3,111 (258 )
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period 14,619 13,890
Cash and cash equivalents at end of period $ 15,252 $ 14,619
Supplemental Cash Flow Disclosure:
Cash paid for income taxes $ 472 $ 630
Supplemental Non-Cash Flow Disclosure:
Accrued additions to property, plant and equipment $ 1,221 $ -
See accompanying notes to financial statements.
MICROPAC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2021 AND 2020
1. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
The core principle of revenue recognition under accounting principles generally accepted in the Unites States of America (GAAP) is that the Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company's revenue on the majority of its customer contracts are recognized at a point in time, generally upon shipment of products.
To achieve that core principle, the Company applies the following steps:
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.
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.
Nov. 30, 2021 Nov. 30, 2020
Microelectronics $ 7,803 $ 7,278
Optoelectronics 7,124 4,984
Sensors and Displays 12,365 10,012
$ 27,292 $ 22,274
Timing of revenue recognition
Recognized at a point in time $ 23,555 $ 18,654
Recognized over time 3,737 3,620
Total Revenue $ 27,292 $ 22,274
The following table summarizes the Company’s Net Sales by Major Market.
2021 Sales by Major Market
Military
Space
Medical
Commercial
Total
Domestic Direct $ 10,157 $ 2,364 $ 3,621 $ 498 $ 16,640
Domestic Distribution 7,945 - 9,450
International - 1,202
$ 18,324 $ 3,976 $ 3,621 $ 1,371 $ 27,292
2020 Sales by Major Market
Military
Space
Medical
Commercial
Total
Domestic Direct $ 7,656 $ 1,809 $ 2,749 $ 1,044 $ 13,258
Domestic Distribution 7,155 7,967
International - 1,049
$ 15,238 $ 2,505 $ 2,777 $ 1,754 $ 22,274
Receivables, net, Contract Assets and Contract Liabilities
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet.
Receivables, net, contract assets and contract liabilities were as follows:
November 30, 2021 November 30, 2020 December 1, 2019
Receivables, net $ 4,974 $ 2,639 $ 3,382
Contract assets $ 603 $ 512 $ 519
Deferred Revenue $ 1,258 $ 111 $ 390
Revenue recognized in 2021 that was included in the deferred revenue liability balance at the beginning of the year was $88,000.
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.
Inventories
Inventories are stated at lower of cost or net realizable value and include material, labor and manufacturing overhead. All inventories are valued using the FIFO (first-in, first-out) method of inventory valuation. The Company determines the need to write inventory down to the lower of cost or net realizable value via an analysis based on the usage of inventory over a three year period and projected usage based on current backlog.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method the Company records deferred income taxes for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The resulting deferred tax liabilities and assets are adjusted to reflect changes in tax law or rates in the period that includes the enactment date.
The Company records a liability for an unrecognized tax benefit for a tax position that is not “more-likely-than-not” to be sustained. The Company did not record any liability for uncertain tax positions as of November 30, 2021 and November 30, 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 .........................................................................................................................................................
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 years ended November 30, 2021 and 2020, 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.
Repairs and maintenance are expensed as incurred. Improvements which extend the useful lives of property, plant, and equipment are capitalized.
Research and Development Costs
Costs for the design and development of new products are expensed as incurred.
Basic and Diluted Earnings Per Share
Basic and diluted earnings per share are computed based upon the weighted average number of shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares. During 2021 and 2020, the Company had no potential dilutive common stock.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. 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.
4. FAIR VALUE MEASUREMENT:
The Company had no financial assets and liabilities measured at fair value on a recurring basis as of November 30, 2021 and 2020. The fair value of financial instruments such as cash and cash equivalents, short-term investments, accounts receivable, and accounts payable and short-term debt, including current maturities of long-term debt approximate their carrying amount based on the short maturity of these instruments.
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 at November 30, 2021 or 2020.
5. NOTES PAYABLE TO BANKS:
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 $16,160,000 with an interest rate of (3.40%) per annum.
On March 26, 2021, the Company renewed the Revolving Loan Agreement with Frost through the “Sixth Amendment to Loan Agreement.” (See Exhibit 10.13). The Revolving Loan Agreement provides for revolving credit loans, in amounts not to exceed a total principal balance of $6,000,000 with a rate equal to prime rate with a floor of 3.25%. The Revolving Loan Agreement was originally entered into on January 23, 2013, between the Company as borrower and Frost as lender.
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 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, 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. The loan has a maturity date of April 23, 2023.
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 has borrowed $3,548,000 against the construction loan as of November 30, 2021.
Debt November 30, 2021
Notes payable $ 3,548,000
Less unamortized debt issuance costs 179,000
Net Debt 3,369,000
Less-Current portion -
Total long-term debt $ 3,369,000
6. PRODUCT WARRANTIES:
In general, the Company warrants that its products, when delivered, will be free from defects in material workmanship under normal use and service. The obligations are limited to replacing, repairing or giving credit for, at the option of the Company, any products that are returned within one year after the date of shipment. The Company does not provide extended warranties.
The Company reserves for potential warranty costs based on historical warranty claims experience. While management considers the process to be adequate to effectively quantify its exposure to warranty claims based on historical performance, changes in warranty claims on a specific or cumulative basis may require management to adjust its reserve for potential warranty costs.
Warranty expense was approximately $56,000 and $185,000 in 2021 and 2020, respectively.
The following table summarizes Product Warranty Activity recorded during the years ended November 30, 2021 and 2020 recorded in other accrued liabilities.
Beginning balance $ 60 $ 25
Additions for current year provision
Payments for current year (91 ) (150 )
Ending balance $ 25 $ 60
7. LEASE COMMITMENTS:
Rent expense for each of the years ended November 30, 2021 and 2020 was $51,000 and $51,000 respectively.
Leases
In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). Under the new standard, lessees will be required to recognize lease assets and liabilities for all leases, with certain exceptions, on their balance sheets. Public business entities are required to adopt the standard for reporting periods beginning after December 15, 2018. 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 $50,000 for 2021. The Company used an estimated incremental borrowing rate of 3.25% representative of the rate of interest that the Company would have to pay to borrow on the Company’s line of credit. The remaining lease term is three years.
The Undiscounted Future Minimum Lease Payments consist of the following at November 30, 2021:
$ 55,000
14,000
Total lease payments 69,000
Interest (2,000 )
Present value of lease liabilities $ 67,000
8. EMPLOYEE BENEFITS:
The Company sponsors an Employees’ Profit Sharing Plan and Trust (the “Plan”). Pursuant to section 401(k) of the Internal Revenue Code, the Plan is available to substantially all employees of the Company. Employee contributions to the Plan are matched by the Company at amounts up to 6% of the participant’s salary. Contributions made by the Company were expensed and totaled approximately $421,000 in 2021 and $360,000 in 2020. Employees become vested in Company contributions in 20% increments in years two through six of employment. If the employee leaves the Company prior to being fully vested, the unvested portion of the Company contributions are forfeited and such forfeitures are used to lower future Company contributions. The Company does not offer other post-retirement benefits to its employees at this time.
9. INCOME TAXES:
The Income Tax Provision (Benefit) consisted of the following for the years ended November 30:
Current Provision:
Federal $ 574,000 $ 219,000
State 59,000 41,000
633,000 260,000
Deferred federal tax expense 43,000 (42,000 )
Total $ 676,000 $ 218,000
The Provision for Income Taxes differs from that computed at the federal statutory corporate tax rate as follows for the years ended November 30,
Tax at statutory rate $ 784,000 $ 355,000
State income taxes, net of federal benefit 46,000 32,000
Research and Development Tax Credit (197,000 ) (186,000 )
Permanent differences and other 43,000 17,000
Income tax provision $ 676,000 $ 218,000
The Components of Deferred Tax Assets and Liabilities were as follows at November 30,
Deferred tax assets (liabilities)
Inventory $ 169,000 $ 231,000
Deferred revenue, sales returns and warranty 5,000 12,000
Other accrued liabilities 52,000 50,000
Depreciation (242,000 ) (266,000 )
Net deferred assets (liabilities) $ (16,000 ) $ 27,000
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax-planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.
10. SIGNIFICANT CUSTOMER INFORMATION:
The Company’s major customers include contractors to the United States government. Sales to these customers for DOD and NASA contracts accounted for approximately 67% of the Company’s revenues in 2021 compared to 66% in 2020. The Company’s major customers are Lockheed Martin, Northrop Grumman, United Technologies, BAE, and Boeing. One customer accounted for 20% of the Company’s sales during 2021 and 2020. The contracts of our customers with the United States government may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government, which would in turn might materially affect the Company’s sales. The loss of any one of these customers or a significant reduction in their purchases would be likely to adversely affect our business.
11. SHAREHOLDERS’ EQUITY:
On December 10, 2019, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 8, 2020. The dividend was paid to shareholders on February 14, 2020.
On December 8, 2020, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 6, 2021. The dividend was paid to shareholders on February 12, 2021.
12. SUBSEQUENT EVENTS:
On December 7, 2021, 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 11, 2022. The dividend will be paid to shareholders on or about February 10, 2022.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer (the Certifying Officers) are responsible for establishing and maintaining disclosure controls and procedures for the Company. The Certifying Officers have designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared. The Certifying Officers have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the Rules) under the Securities Exchange Act of 1934 (or Exchange Act)) and determined that as of November 30, 2021, the Company's disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Micropac is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of the Company’s management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), the Company’s management conducted an evaluation of the effectiveness of its internal control over financial reporting as of November 30, 2021 as required by the Securities Exchange Act of 1934 Rule13a-15(c). In making this assessment, the Company’s management used the criteria set forth in the framework in “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation conducted under the framework in “Internal Control - Integrated Framework” (2013), management concluded that the Company’s internal control over financial reporting was effective as of November 30, 2021.
During our most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of our registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III
In accordance with General Instruction G(3) of Form 10-K, the information required by this Part III is incorporated by reference to Micropac Industries, Inc.’s definitive proxy statement relating to its 2022 Annual Meeting of Stockholders, as set forth below. The 2022 Proxy Statement will be filed with the Securities and Exchange Commission on or about February 9, 2022.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Name Age Position with the Company Director Since
Mark King CEO, President and Member
of Audit Committee and
Chairman of the Board October 2005
Heinz-Werner Hempel Director and Member of
Audit Committee February 1997
Christine B. Dittrich Director and Member of
Audit Committee October 2015
Gerald Tobey Director and Member of
Audit Committee June 2017
Donald Robinson Director and Member of
Audit Committee December 2019
Shaunna Black Director and Member of
Audit Committee December 2019
Patrick S. Cefalu CFO, Executive Vice President N/A
Mr. King is the current President and Chief Executive of the Company. Prior to November 2002, Mr. King was the President and Chief Operating Officer of Lucas Benning Power Electronics. Mr. King joined the Company in November of 2002, and was elected Chief Executive Officer, President and Director in October 2005.
Mr. Hempel has served as the Chief Operating Officer of Hanseatische Waren-Gesellschaft MBH & Co, KG, Bremen, Germany for over 25 years.
Ms. Dittrich was an Executive Vice President of Raytheon Systems Company and the General Manager of the Sensor
and Electronic Systems segment. Before working for Raytheon, Ms. Dittrich was a Senior Vice President of Texas Instruments (TI) Systems Group, a Malcolm Baldrige Quality Award winner, and the General Manager of the Electronic Systems Division. Her prior assignments include TI Systems Group Vice President and Engineering Manager, Software Engineering Director for the defense business, and Senior Member of Technical Staff. She has had senior executive responsibility for product engineering efforts that involve large scale software and hardware development and integration. Ms. Dittrich provided consulting services with a focus on business strategy and operational performance to various technology companies after leaving Raytheon. She became a Visiting Scientist at the Carnegie Mellon University Software Engineering Institute (SEI), a Federally Funded Research and Development Center and chaired the SEI Board of Advisors for over 10 years. She was a Fellow of the Cutter Business Technical Council and a senior consultant for Cutter Consortium. In addition, she has held membership positions on the Army Science Board, the Department of Defense Software Best Practices - Airlie Software Council and other advisory boards.
Mr. Tobey was a Vice President of Business Development at Raytheon Missile Systems Company retiring in 2016 following a 38 year career in the defense, aerospace, and civil security sectors. He also served as Vice President of International Business Development for both Raytheon's Missile Systems and Network Centric Systems businesses. Until 1997, when Texas Instruments' Defense Systems and Electronics Group was acquired by Raytheon, Mr. Tobey served as that company's Vice President of International Business Development and Managing Director of Texas Instruments UK, Ltd. (a wholly owned TI subsidiary). During Mr. Tobey's career, he has served in various business creation and capture, strategy, program and manufacturing management positions both in the U.S. and abroad. Mr. Tobey holds a Bachelor of Science and a Masters of Business Administration degree from Utah State University. He is a graduate of the U.S. Defense Department's Defense Acquisition University, and has completed Executive Study at the Anderson School of Management at UCLA.
Mr. Robinson is a practical, executive-level leader interested in making a difference within organizations and maximizing the potential collective impact of people. He has deep experience in corporate strategy, structuring and executing successful complex corporate initiatives, manufacturing, and mergers and acquisitions. As a partner-level consultant, Mr. Robinson has led engagements in strategy development, M&A integration and executing complex corporate initiatives. His industry experience includes time as an Industrial Engineer with Texas Instruments’ Defense Systems Group and as an executive over industrial engineering, safety and quality systems with Decibel Products, a $35M in annual revenue manufacturer which grew into Allen Telecom. He served on the Chicago and North Texas chapter boards of the National Association of Corporate Directors (NACD), a national organization focused on providing information and education to corporate directors. Mr. Robinson served as a Business Leadership Center Instructor at the SMU Cox School of Business in Dallas, TX and is a two-time recipient of the Teaching Excellence Award. He holds an MBA from the University of Dallas and a B.S. in Industrial Engineering from Texas A&M University.
Ms. Shaunna Black is President of Shaunna Black and Associates. Ms. Black advises companies on global operations, provides experienced executive talent, and coaches leadership teams. The focus of her company is start-ups, business turnarounds and growth, strategy, organization and systems design, and leadership development. Ms. Black is an innovative and highly accomplished operations/manufacturing executive, who enables leaders to rapidly solve complicated problems. She has managed operations internationally in 25 countries. Ms. Black’s methodology delivers extraordinary performance utilizing the power of diverse, multi-generational teams, creating high performance cultures and metrics-driven systems. She has expertise in leadership and team development, technical and systems design, and production methodology in the technology, industrial, manufacturing and hospitality sectors. Her executive career has provided significant experience in strategy, global operations, technology, risk management and sustainability. Ms. Black has served on Audit, Governance, Safety/Risk and M&A Committees. Her industry experience includes Texas Instruments Vice President, (24 years) Dallas/Fort Worth Area including Vice President, Worldwide Facilities - responsible for the design, construction and operation of TI facilities, environmental, safety and health programs, global real estate, worldwide security, and TI's sustainability strategy; Vice President, Dallas Fabrication - Manager for semiconductor manufacturing in one of TI's premier analog wafer fabrication facilities; and Vice President, Worldwide Facilities and Worldwide Environmental, Safety and Health.
Mr. Cefalu has over 35 years of experience in management, manufacturing and financial operations in a variety of industries. Mr. Cefalu has been the Chief Financial Officer and Executive Vice President of the Company since September 2001.
Board Meetings and Committees
The Board of Directors held five (5) board meetings during the year ended November 2021. Directors received a fee of $1,500 (other than Mr. King) for each meeting attended during the year ended November 2021. In addition, the Board agreed to pay an annual retainer of $10,000 to Mr. Donald Robinson, Ms. Dittrich, Ms. Shaunna Black and Mr. Gerald Tobey.
The Audit Committee held four (4) meetings during the year ended November 30, 2021. Members of the Audit Committee received a fee of $750 for each meeting attended during the year ended November 2021. Mr. King did not receive any payments for attending meetings of the Audit Committee.
Director Compensation 2021
Director Audit Committee Other fees Total Fees
Shaunna Black $ 17,500 $ 3,000 - $ 20,500
Donald Robinson $ 17,500 $ 3,000 - $ 20,500
Christine Dittrich $ 17,500 $ 3,000 - $ 20,500
Gerald Tobey $ 17,500 $ 3,000 - $ 20,500
Mr. King does not receive any additional compensation for serving as a Director and as a member of the Audit Committee.
Audit Committee
The Board of Directors formed an Audit Committee on May 13, 2002. The members of the Audit Committee operate pursuant to a charter developed by the Board of Directors. The Board has determined that all Audit Committee members qualify as an “audit committee financial expert” for purposes of the rules and regulations of the SEC and that each of these members is sufficiently proficient in reading and understanding our financial statements to serve on the Audit Committee.
With the exception of Mr. King and Mr. Hempel, members of the Audit Committee are considered independent members under the Securities and Exchange Act rules and regulations.
The Audit Committee has reviewed with management and the independent auditors the quality and adequacy of the Company's significant accounting policies. The Audit Committee has considered and reviewed with the independent auditors their audit plans, the scope of the audit, and the identification of audit risks. The Audit Committee has reviewed and discussed the audited financial statements with management and has discussed such financial statements with the independent auditors.
The Audit Committee has received the written disclosures and the report from the independent accountant required by the applicable requirements of the Public Company Accounting Oversight Board (United States) regarding the independent accountant’s communications with the Audit Committee concerning independence and has discussed with the independent accountants the independent accountant’s independence. Based upon the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s annual report on Form 10-K for the fiscal year ended November 30, 2021, for filing with the Securities and Exchange Commission.
Management has the responsibility for the preparation and integrity of the Company's financial statements and the independent registered public accounting firm have the responsibility for the audit of those statements. It is not the duty of the Audit Committee to conduct audits to determine that the Company’s financial statements are complete and accurate and are in accordance with accounting principles generally accepted in the United States. In giving its recommendations, the Audit Committee considered (a) management's representation that such financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States of America, and (b) the report of the Company’s independent auditors with respect to such financial
statements.
Nominating, Compensation and Corporate Governance
The Board of Directors does not have a nominating, compensation committee or corporate governance committee or committees performing similar functions.
The Directors of the Company are responsible for developing and recommending corporate governance guidelines, identifying qualified individuals to become directors, recommending selected nominees to serve on the Board, and overseeing the evaluation of the Board. In addition, the Directors are responsible for considering and recommending the compensation arrangements for senior management. As part of its other responsibilities, they provide general
oversight of our compensation structure, and, if deemed, necessary, retains and approves compensation consultants and other compensation experts. Other specific duties and responsibilities of reviewing the performance of executive officers; reviewing and approving objectives relevant to executive officer compensation; recommending incentive compensation plans; and recommending compensation policies and practices for service on our Board of Directors.
Board Leadership Structure
Our Board of Directors does not have a policy on whether the roles of Chief Executive Officer and Chairman of the Board of Directors should be separate and, if they are to be separate, whether the Chairman of the Board should be selected from the non-employee directors or be an employee. Our Board of Directors believes that it should be free to make a choice from time to time in any manner that is in the best interest of us and our stockholders.
The Board of Directors believes that Mr. King’s service as both Chief Executive Officer and Chairman of the Board is in the best interest of us and our stockholders. Mr. King possesses detailed and in-depth knowledge of the issues, opportunities and challenges we face and is thus best positioned to develop agendas, to ensure that the Board’s time and attention are focused on the most critical matters. His combined role enables decisive leadership, ensures clear accountability, and enhances our ability to communicate our message and strategy clearly and consistently to our stockholders, employees, and customers and suppliers.
Our Board of Directors believes that the independent directors provide effective oversight of management.
Board of Directors’ Role in the Oversight of Risk Management
The Board of Directors has designated the Audit Committee to take the lead in overseeing risk management at the Board of Directors level. Accordingly, the Audit Committee schedules time for periodic review of risk management, in addition to its other duties. In this role, the Audit Committee receives reports from management, independent registered public accounting firm, outside legal counsel, and other advisors, and strives to generate serious and thoughtful attention to our risk management process and system, the nature of the material risks we face, and the adequacy of our policies and procedures designed to respond to and mitigate these risks.
In addition to the formal compliance program, our Board of Directors encourage management to promote a corporate culture that understands risk management and incorporates it into our overall corporate strategy and day-to-day business operations.
Employee, Officer and Director Hedging
None
Section 16(a) Beneficial Owner Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors, executive officers, and 10% stockholders to file reports of ownership and reports of change in ownership of the Company's equity securities with the Securities and Exchange Commission. Directors, executive officers, and 10% stockholders are required to furnish the Company with copies of all Section16(a) forms they file. Based on information provided by such persons and a review of the copies of such reports furnished, the Company believes that during the fiscal year ended November 30, 2021, the Company's directors, executive officers, and 10% stockholders filed on a timely basis all reports required by Section 16(a) of the Exchange Act.
Code of Ethics
The Company has adopted a code of ethics that applies to the Company’s principal executive officer and principal financial officer. In addition, the Company has a code of conduct for all employees, officers and directors of the Company.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information set forth in the 2022 Proxy Statement under the heading “Management Remuneration and Transactions” is incorporated herein.
The following table shows as of November 30, 2021, all cash compensation paid to, or accrued and vested for the account of Mr. Mark King, President and Chief Executive Officer and Mr. Patrick Cefalu, Vice President and Chief Financial Officer. Mr. King and Mr. Cefalu received no non-cash compensation during 2021.
Annual Compensation
Name and Principal Position Year Annual Salary Bonus All Other Compensation (a) Total
Mark King, $ 301,924 $ 13,400 $ 42,672 $ 357,997
President and $ 300,391 $ 36,000 $ 41,280 $ 378,211
Chief Executive Officer (1) $ 286,536 $ 15,000 $ 36,115 $ 337,651
Patrick Cefalu, $ 187,873 $ 13,400 $ 32,918 $ 234,191
Vice President and $ 186,889 $ 36,000 $ 33,065 $ 256,854
Chief Financial Officer (2) $ 178,264 $ 15,000 $ 30,748 $ 224,012
(a) Reflects amounts contributed by Micropac Industries, Inc., under Micropac’s 401(k) profit sharing plan; unused vacation pay; life insurance premiums paid; and reimbursement for medical expenses under Micropac’s Family Medical Reimbursement Plan.
(1) Effective November 2005, Mr. King’s existing employment agreement was revised to provide that Mr. King would serve as the Company’s President and Chief Executive Officer, and a member on the Board of Directors and Audit Committee at a base salary of $186,400 for a term of three (3) years. In December 2005, the Company and Mr. King amended his employment agreement to increase his annual base salary to $225,000. In June 2009, the Company and Mr. King amended his employment agreement to increase his annual base salary to $247,104 for renewable terms of three (3) years with annual increases based on consumer price index with additional increases to be determined by the Board of Directors. The June 2009 amendment also provides under certain events, either the Company or Mr. King can terminate the agreement upon a payment to Mr. King of 18 or 36 months’ salary as severance payments.
(2) Effective February 2004, Mr. Cefalu entered into an employment agreement that Mr. Cefalu would serve as Executive Vice President and Chief Financial Officer for a term of two (2) years. On April 6, 2020, the employment agreement was amended to extend the term for three (3) years and the remaining terms and conditions of the Employment Agreement shall remain if full force and effect.
The Board of Directors reviews and approves the Company’s annual bonus payment’s structure. Mr. King and Mr. Cefalu received a bonus payment of $13,400 in December 2020.
Amount included in all other compensation relating to employee benefit plans
The Company maintains a Family Medical Reimbursement Plan for the benefit of its executive officers and their dependents. The Plan is funded through a group insurance policy issued by an independent carrier and provides for reimbursement of 100% of all bona fide medical and dental expenses that are not covered by other medical insurance plans capped at an annual family maximum. During the fiscal year ended November 30, 2021, the Company paid $14,604 in premiums each for Mr. King and Mr. Cefalu which amounts are included in the "All Other Compensation" column shown in the preceding remuneration table.
In July 1984, the Company adopted a Salary Reduction Plan pursuant to Section 401(k) of the Internal Revenue Code. The Plan's benefits are available to all Company employees who are at least 18 years of age and have completed at least six months of service to the Company as of the beginning of a Plan year. Plan participants may elect to defer up to 15% of their total compensation as their contributions, subject to the maximum allowed by the Internal Revenue code 401(k), and the Company matches their contributions up to a maximum of 6% of their total compensation. A participant's benefits vest to the extent of 20% after two years of eligible service and become fully vested at the end of six years. During the fiscal year ended November 30, 2021, the Company made contributions to the Plan for Mr. King in the amount of $17,100 and for Mr. Cefalu in the amount of $11,773 which amount is included in the "All Other Compensation" column shown in the preceding remuneration table.
Employment agreements of the Company’s officers provide that they may elect to carry over any unused vacation time to subsequent periods or elect to be paid for such unused vacation time. Mr. King and Mr. Cefalu did not receive any unused vacation pay in 2021.
During the fiscal year ended November 30, 2021, the Company paid life insurance premiums for the benefit of Mr. King and Mr. Cefalu valued at $10,968 and $6,540, respectively.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table shows the number and percentage of shares of the Company's common stock beneficially owned (a) by each person known by the Company to own 5% or more of the outstanding common stock, (b) by each director and nominee, and (c) by all present officers and directors as a group.
Name and Address of Beneficial Owner (1) Number of Shares Beneficially Owned Percent of Class (1)
Jeff Capital, LP 151,545 5.9%
Heinz-Werner Hempel (2) (3) (4) 1,952,577 75.7%
Shaunna Black (3) 0%
Patrick Cefalu 0%
Christine Dittrich (3) 0%
Mark King (3) 14,100 Less than 0.6%
Donald Robinson (3) 0%
Gerald Tobey (3) 0%
All officers and directors as a group (7 Persons) 1,966,677 76.3%
_______________________
(1)
Calculated on the basis of the 2,578,315 outstanding shares. There are no options, warrants, or convertible securities outstanding. The address of each person listed is 905 East Walnut Street, Garland, Texas 75040.
(2)
The Company and Mr. Heinz-Werner Hempel are parties to an Ancillary Agreement entered into in March 1987. The Ancillary Agreement primarily obligates the Company to register Mr. Hempel’s stock and allows Mr. Hempel to participate in any sale of stock by the Company.
(3)
A director of the Company. Each incumbent director has been nominated for re-election at the Annual Meeting.
(4)
Effective October 10, 2007, Mr. Hempel transferred all of the shares of the Company’s common stock owned by him and consisting of 1,952,577 shares, to a partnership organized under the laws of Germany. This partnership is composed of Mr. Hempel, his son, and his daughter. As the consideration for this transfer, Mr. Hempel received a 99.98% share in this partnership and received the sole voting and management control. His son and daughter each own a 0.01% ownership interest in this partnership.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
None.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
Whitley Penn LLP was selected as the Company’s independent registered public accounting firm in 2016 and has been responsible for the Company's financial audit for the fiscal years ended November 30, 2016 through November 30, 2021.
Management anticipates that a representative from Whitley Penn LLP will be present at the Annual Meeting and will be given the opportunity to make a statement if he or she desires to do so. It is also anticipated that such representative will be available to respond to appropriate questions from stockholders.
AUDIT FEES
The fees for professional services rendered for the audit of our annual financial statements for each of the fiscal years ended November 30, 2021 and November 30, 2020, and the reviews of the financial statements included in our Quarterly Reports on Form 10-Q during those periods were $137,500 and $136,000, respectively.
TAX FEES
Whitley Penn LLP fees for tax return preparation services were $26,500 in 2021 and 2020.
ALL OTHER FEES
Whitley Penn LLP fees for audit of the Company’s 401K plan was $10,000 in 2021 and 2020.
The Audit Committee requests that the Principal Accounting Firm provide the committee with the anticipated charges of all accounting and tax related services to be performed in advance of performing such services. The Audit Committee approves all services in advance of the performance of such services.
Part IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(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.
3.1 Bylaws - In the form of Exhibit 3.1 to the Form 8-K filed March 3, 2011 which is incorporated herein.
4.1 Certificate of Incorporation - In the form of Exhibit 4.1 to the Form S-8 filed August 15, 2001 which is incorporated herein.
10.1
Loan Agreement dated as of January 23, 2013 by and among Frost Bank and Micropac Industries, Inc. which is filed as Exhibit 10.1 to the Form 8K filed January 29, 2013 which is incorporated by reference herein.
10.4 Employment Agreement with Patrick Cefalu dated April 6, 2020 - In the form attached as Exhibit 10.4 to the Form 10KSB filed August 23, 2004 which is incorporated herein.
10.7 Code of Ethics - In the form attached as Exhibit 10.7 to the Form 10KSB filed August 23, 2005 which is incorporated herein.
10.11 Restated and Amended Employment Agreement with Mark W. King dated June 1, 2009 - In the form attached as Exhibit 10.11 to the Form 10K filed February 10, 2021 which is incorporated herein.
10.12
Amended Employment Agreement with Patrick Cefalu dated April 6, 2020 - In the form attached as Exhibit 10.12 to the Form 10K filed February 10, 2021 which is incorporated herein.
10.13
“Sixth Amendment to Loan Agreement” dated March 26, 2021 between Micropac Industries, Inc. as borrower and Frost Bank attached as Exhibit 10.13 to Form 8K filed March 30, 2021 which is incorporated herein.
10.14 “Construction Loan Agreement dated March 26, 2021 between Micropac Industries, Inc. as borrower and Frost Bank attached as Exhibit 10.14 to Form 8K filed March 30, 2021 which is incorporated herein.