SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

May 25, 2024

Note 2 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:

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 (200^o C) products.

The Company’s revenues are from purchase orders and/or contracts with customers associated with manufacture of products. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

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.

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.

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.

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.

Schedule of net sales by product line
	Three months ended				Six months ended
	25-May-24		27-May-23		25-May-24		27-May-23
Microcircuits	$	3,340	$	1,574	$	5,829	$	2,650
Optoeletronics		1,759		2,147		3,259		4,008
Sensors and Displays		2,964		3,722		5,093		6,974
	$	8,063	$	7,443	$	14,181	$	13,632

Timing of revenue recognition
Transferred at a point in time	$	7,235	$	6,054	$	12,164	$	11,221
Transferred over time		828		1,389		2,017		2,411
Total Revenue	$	8,063	$	7,443	$	14,181	$	13,632

The following table summarizes the Company’s net sales by major market.

Schedule of net sales by major market
2024 Second Quarter Sales by Major Market
	Military		Space		Medical		Commercial		Total
Domestic Direct	$	3,992	$	110	$	487	$	420	$	5,009
Domestic Distribution		2,117		33		-		352		2,502
International		177		278		-		97		552
	$	6,286	$	421	$	487	$	869	$	8,063

2023 Second Quarter Sales by Major Market
	Military		Space		Medical		Commercial		Total
Domestic Direct	$	3,006	$	827	$	826	$	609	$	5,268
Domestic Distribution		1,143		239		4		268		1,654
International		71		162		-		288		521
	$	4,220	$	1,228	$	830	$	1,165	$	7,443

2024 Six Months Sales by Major Market
	Military		Space		Medical		Commercial		Total
Domestic Direct	$	6,831	$	307	$	855	$	1,021	$	9,014
Domestic Distribution		3,342		180		-		729		4,251
International		274		381		-		261		916
	$	10,447	$	868	$	855	$	2,011	$	14,181

2023 Six Months Sales by Major Market
	Military		Space		Medical		Commercial		Total
Domestic Direct	$	4,315	$	727	$	1,780	$	1,915	$	8,737
Domestic Distribution		2,879		800		-		419		4,098
International		99		164		-		534		797
	$	7,293	$	1,691	$	1,780	$	2,868	$	13,632

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 (deferred revenue) on the Condensed Balance Sheet.

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


	Receivables, net, Contract Assets and Contract Liabilities (Dollars in thousands)

	May 25, 2024		November 30, 2023		December 1, 2022
Receivables, net	$	4,602	$	8,021	$	3,644
Contract assets	$	580	$	307	$	408
Deferred revenue	$	308	$	618	$	1,192

There was $398,331 of revenue recognized in fiscal year 2024 that was included in the deferred revenue liability balance at the beginning of the fiscal year.

Contract costs

The Company does not have material incremental costs to obtain a contract in the form of sales commissions or bonuses. The Company incurs other immaterial costs to obtain and fulfill a contract; however, the Company has elected the practical expedient under ASC 340-40-24-4 to recognize all incremental costs to obtain a contract as an expense when incurred if the amortization period is one year or less.

Leases

In the first quarter of 2020, the Company entered into a three (3) year lease extension on the property that has been leased on a year to year basis. As a result, we recognized $165,000 for an operating lease liabilities and right-of-use assets in accordance with ASC 842. The Company had an operating lease expense of $14,000 for 2023. 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 lease expired in March 2023 and was not renewed.

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 May 25, 2024 or November 30, 2023.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost, and depreciation is provided using the straight-line method at rates based upon the following estimated useful lives (in years) of the assets:


Buildings	15-30
Facility improvements	8-15
Machinery and equipment	5-10
Furniture and fixtures	5-8

The Company assesses long-lived assets for impairment in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) ASC 360-10-35, Property, Plant and Equipment – Subsequent Measurement. 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 year ended November 30, 2023 and the six months ended May 25, 2024.

Repairs and maintenance are expensed as incurred. Improvements which extend the useful lives of property, plant, and equipment are capitalized.

During the second quarter of 2024, the company recognized a gain of approximately $706,000 from the completion of sale of one manufacturing facility which resulted in a disposal of approximately $444,000 of fully depreciated assets.

Research and Development Costs

Costs for the design and development of new products are expensed as incurred.

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.

MICROPAC INDUSTRIES INC 10-Q