Business

Micropac Industries, Inc. (the "Company"), a Delaware corporation, designs,
manufactures and distributes various types of microelectronic circuits including
solid state relays and power controllers, optoelectronic components, and sensor
and display components and assemblies. The Company's products are used as
components and assemblies in a broad range of military, space and industrial
systems, including aircraft instrumentation and navigation systems, satellite
systems, power supplies, electronic controls, computers, medical devices, and
high-temperature (200o C) products.



The Company's facilities are certified and qualified by the Defense Logistics
Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS
(space level) and are certified to ISO 9001:2008 and AS 9100D. Micropac is a
National Aeronautics and Space Administration (NASA) core supplier, and is
registered to AS9100-Aerospace Industry standard for supplier certification. The
Company has Underwriters Laboratories (UL) approval on our industrial power
controllers.



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

Critical Accounting Policies





The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. We base our estimates on historical
experience and on various other assumptions and factors that are believed to be
reasonable under the circumstances. Note 2 to the Financial Statements in the
Quarterly Report Form 10-Q for the quarter ended August 27, 2022, describes the
significant accounting policies and methods used in the preparation of the
Financial Statements. Actual results could differ from these estimates.

The core principle of revenue recognition under accounting principles generally
accepted in the Unites States of America (GAAP) is that the Company should
recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The Company's
revenue on the majority of its customer contracts are recognized at a point in
time, generally upon shipment of products. The application of GAAP related to
the measurement and recognition of revenue requires us to make judgments and
estimates. Specifically, the determination of whether revenues related to our
revenue contracts should be recognized over time or at a point in time, as these
determinations impact the timing and amount of our reported revenues and net
income. Other significant judgments include the estimation of the point in the
manufacturing process at which we are entitled to receive payment, as well as
the progress of the job order to completion in order to determine the amount of
consideration earned for contractual revenue recognized over time.



The allowance for doubtful accounts is based on our assessment of the
collectability of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected.



Inventory purchases and commitments are based upon future demand. If there is a
sudden and significant decrease in demand for our products or there is a higher
risk of inventory obsolescence because of changing customer requirements, we may
be required to increase our inventory allowances and our gross margin could

be
adversely affected.



The Company recognizes deferred tax assets and liabilities based on differences
between the financial reporting and tax basis of assets and liabilities using
the enacted tax rates and laws that are expected to be in effect when the
differences are expected to be recovered. If we were to determine we would not
be able to realize all or part of the deferred tax asset in the future, an
adjustment to the deferred tax asset would be necessary which would reduce our
net income for that period.



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Depreciable and useful lives estimated for property and equipment are based on
initial expectations of the period of time these assets will provide benefit.
Changes in circumstances related to a change in our business or other factors
could result in these assets becoming impaired, which could adversely affect the
value of these assets



Results of Operations

                                          Three months ended                  Nine months ended
                                      8/27/2022        8/28/2021         8/27/2022        8/28/2021
NET SALES                                 100.0 %          100.0 %           100.0 %          100.0 %

COST AND EXPENSES:
  Cost of Goods Sold                       52.9 %           53.9 %            55.4 %           56.6 %
  Research and development                  8.2 %            6.2 %             7.6 %            6.3 %
  Selling, general &
administrative expenses                    32.1 %           20.2 %            29.0 %           23.3 %
                  Total cost and
expenses                                   93.2 %           80.3 %            92.0 %           86.2 %

OPERATING INCOME BEFORE INTEREST
AND INCOME TAXES                            6.8 %           19.7 %             8.0 %           13.8 %

  Interest and other income                13.9 %           (2.6 %)            4.8 %           (0.9 %)

INCOME BEFORE TAXES                        20.7 %           17.2 %            12.8 %           12.9 %

  Provision for taxes                       4.7 %            3.9 %             2.6 %            2.4 %

NET INCOME                                 16.0 %           13.3 %            10.2 %           10.5 %




Sales for the three and nine month periods ended August 27, 2022 totaled
$6,940,000 and $20,194,000, respectively. Sales for the third quarter decreased
$1,240,000 from the same period of 2021 while sales for the first nine months of
2022 increased $329,000 from the first nine months of 2021. The majority of the
decrease for the three months ended August 27, 2022 is related to timing of
shipments of customer orders of custom sensor products. Sales were 9% in the
commercial market, 10% in the medical market, 69% in the military market, and
12% in the space market for the nine months ended August 27, 2022 compared to 5%
in the commercial market, 14% in the medical market, 66% in the military market,
and 15% in the space market for the nine months ended August 28, 2021.



One customer accounted for 18% of the Company's sales for the three months ended
August 27, 2022, and two customers accounted for 17% and 10% for the nine months
ended August 27, 2022, while one customer accounted for 21% and 20% of the
Company's sales for the three months and nine months ended August 28, 2021.



Cost of goods sold for the third quarters of 2022 and 2021 totaled 52.9% and
53.9% of net sales, respectively, while cost of goods sold for the nine months
ended August 27, 2022 and August 28, 2021 totaled 55.4% and 56.6% of net sales,
respectively. In actual dollars, cost of goods sold decreased $740,000 in the
third quarter of 2022 compared to the same period of 2021. Year to date cost of
goods sold decreased $49,000 for the first nine months of 2022 as compared

to
the same period in 2021.




Research and development expense increased $58,000 for the third quarter of 2022
versus 2021 and increased $281,000 for the first nine months of 2022 compared to
the same period of 2021. The research and development expenditures were
associated with continued development of several power management products,
fiber optic transceivers and high voltage optocouplers. The Company will
continue to invest in research and development of these products and other

new
opportunities.




Selling, general and administrative expense for the third quarter and first nine
months of 2022 totaled 32.1% and 29.0% respectively of net sales compared to
20.2% and 23.3% for the same periods in 2021. In actual dollars, selling,
general and administrative expense increased $582,000 for the third quarter and
increased $1,221,000 for the first nine months of 2022 compared to the same
periods in 2021. The majority of the

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increase for the first nine months resulted from an increase in commission expense in 2022, property tax on the new building and consultant fees.

Provisions for taxes increased $19,000 for the third quarter of 2022 and increased $53,000 for the first nine months of 2022 compared to the same period in 2021. The estimated effective tax rate was 20% for 2022 and 18% for 2021.

Net income increased $17,000 for the third quarter of 2022 versus 2021 and decreased $20,000 for the first nine months of 2022 compared to the same period of 2021.

Liquidity and Capital Resources





The Company will use a combination of cash and a commercial real estate
construction loan for the construction of a new 76,000 square foot manufacturing
center on the 9.2 acres of land in Garland, Texas the Company purchased. On
March 26, 2021, the Company (acting as borrower) entered into a Construction
Loan Agreement with Frost Bank ("Frost"), (acting as lender). The Construction
Loan Agreement provides for a construction loan as discussed in Note 5 to the
condensed financial statements.



As of August 27, 2022, the Company has $18,616,000 in construction in process on
the new facility and has $14,538,000 in notes payable on the construction loan,
outstanding draw request of $128,000 in account payables and has used $2,515,000
of the Company's cash. In addition, the Company has unamortized loan fees on the
construction loan in the amount of $179,000.

In addition, the Company continues on-going investigations for the use of cumulative cash for business expansion and improvements, such as operational improvements and new product expansion.





Cash and cash equivalents totaled $15,602,000 as of August 27, 2022 compared to
$15,252,000 on November 30, 2021, an increase of $350,000. The increase in cash
and cash equivalents is attributable to $1,549,000 cash provided by operations,
$10,990,000 proceeds from the construction loan, offset by the payment of a cash
dividend of $258,000, $504,000 in cash for additional manufacturing equipment
and $11,427,000 for construction in process on the new facility.

In addition to cash on hand, the Company also has the ability to borrow under a loan agreement as discussed in Note 5 to the condensed financial statements.

The Company has no significant off-balance sheet arrangements.





Outlook

New orders for year-to-date 2021 totaled $19,792,000 compared to $23,568,000 for 2022. The increase resulted from timing of new orders for several custom products.





Backlog totaled $36,421,000 on August 27, 2022 compared to $29,943,000 as of
August 28, 2021 and $32,635,000 on November 30, 2021 and represents a good mix
of the company's products and technologies.



                         2022 Current Backlog by Major Market
                          Military       Space     Medical      Commercial        Total
Domestic Direct         $ 15,351     $ 2,595     $ 6,381     $     1,853     $ 26,180

Domestic Distribution      8,113         703          -              448   

    9,264
International                277         120          -              580          977
                        $ 23,741     $ 3,418     $ 6,381     $     2,881     $ 36,421




  2022 Current Backlog by Product Line
Microelectronics             $  12,449
Optoelectronics                  5,658
Sensors and Displays            18,314
                             $  36,421




The Company cannot assure that the results of operations for the interim period
presented are indicative of total results for the entire year due to
fluctuations in customer delivery schedules, or other factors over which the
Company has no control.



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Impact of COVID-19 on our Business

In March 2020 the World Health Organization declared the spread of the COVID-19 virus a pandemic.


The Company continues to monitor our supply chain and orders from customers for
COVID-19 pandemic related changes. We are continuing to serve our customers
while taking precautions to provide a safe work environment for our employees
and customers. We have been staggering some shifts and otherwise adjusting work
schedules to maximize our capacity while adhering to recommended precautions. We
have established and implemented a work from home provision where possible.



To date, we have not experienced significant raw material shortages; however,
supply-chain disruptions could potentially delay or prevent us from fulfilling
customer orders.



Cautionary Statement



This Form 10-Q contains forward-looking statements that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially. Investors are warned that
forward-looking statements involve risks and unknown factors including, but not
limited to: our expectations regarding the potential impacts on our operations
of the COVID-19 pandemic; our expectations regarding the potential impacts on
our supply chain and on our customers of the COVID-19 pandemic; overall changes
in governmental spending for military and space programs; customer cancellation
or rescheduling of orders, problems affecting delivery of vendor-supplied raw
materials and components, unanticipated manufacturing problems and availability
of direct labor resources.

The Company does not intend to update the forward-looking statements contained herein, except as may be required by law.

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