UNITED STATES
SECURITIESANDEXCHANGECOMMISSION
Washington,D.C. 20549
FORM 10-Q
☒ | QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934 |
ForthequarterlyperiodendedMarch31,2015
or
☐ | TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACT |
OF1934
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For
For the quarterly transitionperiod ended June 30, 2014
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____to_____.
Commission File Number: 000-14801
Mikros Systems Corporation
(Exact name of registrant as specified in its charter)
Delaware | 14-1598200 |
| |
(State or other jurisdiction | (I.R.S. Employer |
of incorporation or organization) |
|
707AlexanderRoad,BuildingTwo,Suite208, Princeton,NewJersey08540 |
|
(Address of Principal Executive Offices) (609) 987-1513 |
(Registrant’s Telephone Number, Including Area Code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒Yes ☐No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).☒Yes ☐No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “ smaller“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer ☐ |
| ||
Non-accelerated filer | ☐ | Smaller reporting company ☒ |
(Do not check if a smaller reporting company) |
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☒ No☒No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 32,018,753 issued and outstanding shares of the issuer’s common stock, $.01 par value per share, on August 14, 2014.
May 15, 2015.
TABLE OF CONTENTS
| PAGE # | ||
PART I. | FINANCIAL INFORMATION |
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Condensed Balance Sheets as of | 1 | |
Condensed Statements of Operations and Comprehensive Income (Loss) for the Three | 2 | |
Condensed Statements of Cash Flows for the | 3 | |
Notes | 4 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 4. | Controls and Procedures |
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PART II. | OTHER INFORMATION | |
Item 6. | Exhibits |
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PARTI.FINANCIALINFORMATION
PART I. FINANCIAL INFORMATIONItem 1.FinancialStatements
MIKROSSYSTEMSCORPORATION
CONDENSEDBALANCESHEET
(Unaudited)
Item 1. Financial Statements
Mikros Systems Corporation
Condensed Balance Sheets
(unaudited)
March31, | December31, | |||||||||||||||
June 30, 2014 | December 31, 2013 | 2015 | 2014 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,081,190 | $ | 1,028,146 | $ | 1,159,075 | $ | 1,161,634 | ||||||||
Receivables on government contracts | 577,147 | 419,440 | 1,176,498 | 1,575,954 | ||||||||||||
Prepaid expenses and other current assets | 96,363 | 69,058 | 112,621 | 105,197 | ||||||||||||
Deferred tax asset, current | 28,065 | 28,065 | ||||||||||||||
Total current assets | 1,754,700 | 1,516,644 | 2,476,259 | 2,870,850 | ||||||||||||
Property and equipment: | ||||||||||||||||
Equipment | 51,583 | 45,157 | 64,379 | 61,686 | ||||||||||||
Furniture & fixtures | 14,728 | 9,264 | 14,728 | 14,728 | ||||||||||||
Less: accumulated depreciation | (50,750 | ) | (47,697 | ) | (63,873 | ) | (62,123 | ) | ||||||||
Property and equipment, net | 15,561 | 6,724 | 15,234 | 14,291 | ||||||||||||
Patents and trademarks | 1,383 | 1,383 | 1,383 | 1,383 | ||||||||||||
Less: accumulated amortization | (1,104 | ) | (1,035 | ) | (1,208 | ) | (1,173 | ) | ||||||||
Intangible assets, net | 279 | 348 | 175 | 210 | ||||||||||||
Deferred tax assets | 67,098 | 82,000 | 110,935 | 140,935 | ||||||||||||
Total assets | $ | 1,837,638 | $ | 1,605,716 | $ | 2,602,603 | $ | 3,026,286 | ||||||||
Liabilities and shareholders' equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accrued payroll and payroll taxes | $ | 293,530 | $ | 165,543 | $ | 346,433 | $ | 493,308 | ||||||||
Accounts payable and accrued expenses | 97,919 | 131,072 | 241,929 | 688,534 | ||||||||||||
Accrued warranty expense | 44,244 | 35,190 | 63,400 | 33,500 | ||||||||||||
Total current liabilities | 435,693 | 331,805 | 651,762 | 1,215,342 | ||||||||||||
Long-term liabilities | 10,195 | 12,476 | 6,197 | 7,770 | ||||||||||||
Total liabilities | 445,888 | 344,281 | 657,959 | 1,223,112 | ||||||||||||
Commitments and contingencies (Note 8) | ||||||||||||||||
Redeemable series C preferred stock par value $.01 per share, authorized 150,000 shares, issued and outstanding 5,000 shares (involuntary liquidation value - $80,450) | 80,450 | 80,450 | ||||||||||||||
Redeemable series C preferred stock par value $.01 per share, authorized 150,000shares, issued and outstanding 5,000 shares (involuntary liquidation value -$80,450) | 80,450 | 80,450 | ||||||||||||||
Shareholders' equity: | ||||||||||||||||
Preferred stock, series B convertible, par value $.01 per share, authorized 1,200,000 shares, issued and outstanding 1,102,433 shares (involuntary liquidation value - $1,102,433) | 11,024 | 11,024 | ||||||||||||||
Preferred stock, convertible, par value $.01 per share, authorized 2,000,000 shares, issued and outstanding 255,000 shares (involuntary liquidation value - $255,000) | 2,550 | 2,550 | ||||||||||||||
Preferred stock, series D, par value $.01 per share, 690,000 shares authorized, issued and outstanding (involuntary liquidation value - $1,518,000) | 6,900 | 6,900 | ||||||||||||||
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 32,018,753 shares and 32,011,753 shares at June 30, 2014 and December 31, 2013, respectively | 320,188 | 320,118 | ||||||||||||||
Preferred stock, series B convertible, par value $.01 per share, authorized 1,200,000 shares, issued and outstanding 1,102,433 shares (involuntaryliquidation value - $1,102,433) | 11,024 | 11,024 | ||||||||||||||
Preferred stock, convertible, par value $.01 per share, authorized 2,000,000 shares, issued and outstanding 255,000 shares (involuntary liquidation value -$255,000) | 2,550 | 2,550 | ||||||||||||||
Preferred stock, series D, par value $.01 per share, 690,000 shares authorized,issued and outstanding (involuntary liquidation value - $1,518,000) | 6,900 | 6,900 | ||||||||||||||
| Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 32,018,753 shares at March 31, 2015 and December 31, 2014 | 320,188 | 320,188 | ||||||||||||||
Capital in excess of par value | 11,628,483 | 11,620,487 | 11,629,409 | 11,628,728 | ||||||||||||
Accumulated deficit | (10,657,845 | ) | (10,780,094 | ) | (10,105,877 | ) | (10,246,666 | ) | ||||||||
Total shareholders' equity | 1,311,300 | 1,180,985 | 1,864,194 | 1,722,724 | ||||||||||||
Total liabilities and shareholders' equity | $ | 1,837,638 | $ | 1,605,716 | $ | 2,602,603 | $ | 3,026,286 | ||||||||
SeeNotestoUnauditedCondensedFinancialStatements
MIKROS SYSTEMS CORPORATION
CONDENSED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| ThreeMonthsEnded, | ||||||||
March31, 2015 | March31, 2014 | |||||||
Contract Revenues | $ | 2,476,039 | $ | 883,340 | ||||
Cost of sales | 1,461,905 | 412,679 | ||||||
Gross profit | 1,014,134 | 470,661 | ||||||
Expenses: | ||||||||
| Engineering | 422,415 | 225,902 | ||||||
General and administrative | 322,023 | 284,131 | ||||||
Total expenses | 744,438 | 510,033 | ||||||
Income (loss) from operations | 269,696 | (39,372 | ) | |||||
Interest income | 93 | 128 | ||||||
Net income (loss) before income taxes | 269,789 | (39,244 | ) | |||||
Income tax expense (benefit) | 129,000 | (31,210 | ) | |||||
Net income (loss) and comprehensive income (loss) | $ | 140,789 | $ | (8,034 | ) | |||
Basic income (loss) per common share | $ | - | $ | - | ||||
Basic weighted average number of common shares outstanding | 31,947,753 | 31,884,320 | ||||||
Diluted income (loss) per common share | $ | - | $ | - | ||||
Diluted weighted average number of common shares outstanding | 35,553,766 | 31,884,320 | ||||||
Mikros Systems Corporation
Condensed Statements of Operations and Comprehensive Income (Loss)
(unaudited)
Three Months Ended, | Six Months Ended, | |||||||||||||||
June 30, 2014 | June 30, 2013 | June 30, 2014 | June 30, 2013 | |||||||||||||
Contract revenues | $ | 1,209,802 | $ | 367,558 | $ | 2,093,142 | $ | 1,269,754 | ||||||||
Cost of sales | 439,701 | 215,442 | 852,380 | 677,393 | ||||||||||||
Gross margin | 770,101 | 152,116 | 1,240,762 | 592,361 | ||||||||||||
Expenses: | ||||||||||||||||
Engineering | 276,751 | 203,109 | 502,653 | 405,007 | ||||||||||||
General and administrative | 308,504 | 285,006 | 592,635 | 548,396 | ||||||||||||
Total expenses | 585,255 | 488,115 | 1,095,288 | 953,403 | ||||||||||||
Income (loss) from operations | 184,846 | (335,999 | ) | 145,474 | (361,042 | ) | ||||||||||
Interest income | 93 | - | 221 | 17 | ||||||||||||
Net income (loss) before income taxes | 184,939 | (335,999 | ) | 145,695 | (361,025 | ) | ||||||||||
Income tax expense (benefit) | 54,656 | (154,814 | ) | 23,446 | (160,214 | ) | ||||||||||
Net income (loss) | $ | 130,283 | $ | (181,185 | ) | $ | 122,249 | $ | (200,811 | ) | ||||||
Other comprehensive income (loss) | - | - | - | - | ||||||||||||
Comprehensive income (loss) | $ | 130,283 | $ | (181,185 | ) | $ | 122,249 | $ | (200,811 | ) | ||||||
Income (Loss) per common share - basic | $ | - | $ | (0.01 | ) | $ | - | $ | (0.01 | ) | ||||||
Basic weighted average number of shares outstanding | 31,888,753 | 31,825,753 | 31,886,549 | 31,825,753 | ||||||||||||
Income (Loss) per common share - diluted | $ | - | $ | (0.01 | ) | $ | - | $ | (0.01 | ) | ||||||
Diluted weighted average number of shares outstanding | 35,469,052 | 31,825,753 | 35,465,181 | 31,825,753 | ||||||||||||
SeeNotestoUnauditedCondensedFinancialStatements
Mikros Systems CorporationMIKROS SYSTEMS CORPORATION
Condensed Statements of Cash FlowsCONDENSED STATEMENT OF CASH FLOWS
(unaudited)(Unaudited)
Six Months Ended | ||||||||
June 30, 2014 | June 30, 2013 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | 122,249 | $ | (200,811 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,122 | 2,786 | ||||||
Deferred tax expense (benefit) | 14,902 | (116,214 | ) | |||||
Share-based compensation expense | 7,716 | 7,562 | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in receivables on government contracts | (157,707 | ) | 896,961 | |||||
Increase in prepaid expenses and other current assets | (27,305 | ) | (74,953 | ) | ||||
Increase (decrease) in accrued payroll and payroll taxes | 127,987 | (157,752 | ) | |||||
Decrease in accounts payable and accrued expenses | (33,153 | ) | (207,133 | ) | ||||
Increase in accrued warranty expense | 9,054 | 17,795 | ||||||
Decrease in long-term liabilities | (2,281 | ) | (1,418 | ) | ||||
Net cash provided by operating activities | 64,584 | 166,823 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (11,890 | ) | (1,500 | ) | ||||
Net cash used in investing activities: | (11,890 | ) | (1,500 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds received upon the exercise of stock options | 350 | - | ||||||
Net cash provided by financing activities | 350 | - | ||||||
Net increase in cash and cash equivalents | 53,044 | 165,323 | ||||||
Cash and cash equivalents, beginning of period | 1,028,146 | 887,140 | ||||||
Cash and cash equivalents, end of period | $ | 1,081,190 | $ | 1,052,463 | ||||
Supplemental cash flow information: | ||||||||
Cash paid during the period for income taxes | $ | 558 | $ | 10,065 | ||||
| ThreeMonthsEnded, | ||||||||
March31, 2015 | March31, 2014 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | 140,789 | $ | (8,034 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operatingactivities: | ||||||||
Depreciation and amortization | 1,785 | 1,332 | ||||||
Deferred tax benefit (expense) | 30,000 | (29,907 | ) | |||||
Share-based compensation expense | 681 | 3,848 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease (increase) in receivables on government contracts | 399,456 | (52,314 | ) | |||||
Increase in prepaid expenses and other current assets | (7,424 | ) | (38,225 | ) | ||||
Decrease in accrued payroll and payroll taxes | (146,875 | ) | (15,869 | ) | ||||
(Decrease) increase in accounts payable and accrued expenses | (446,605 | ) | 7,890 | |||||
Increase in accrued warranty expense | 29,900 | 3,931 | ||||||
Decrease in long-term liabilities | (1,573 | ) | (1,141 | ) | ||||
Net cash provided by (used in) operating activities | 134 | (128,489 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (2,693 | ) | (6,430 | ) | ||||
Net cash used in investing activities | (2,693 | ) | (6,430 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds received upon the exercise of stock options | - | 350 | ||||||
Net cash provided by financing activities | - | 350 | ||||||
Net decrease in cash and cash equivalents | (2,559 | ) | (134,569 | ) | ||||
Cash and cash equivalents, beginning of period | 1,161,634 | 1,028,146 | ||||||
Cash and cash equivalents, end of period | $ | 1,159,075 | $ | 893,577 | ||||
Supplemental cash flow information | ||||||||
Cash paid during the period for income taxes | $ | 7,900 | $ | 558 | ||||
SeeNotestoUnauditedCondensedFinancialStatements
See Notes to Unaudited Condensed Financial Statements
Mikros Systems CorporationMIKROS SYSTEMS CORPORATION
Notes to Condensed Financial StatementsNOTES TOCONDENSEDFINANCIALSTATEMENTS
(unaudited)(Unaudited)
Note NOTE1–BasisofPresentation
The financial statements included herein have been prepared by Mikros Systems Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.2014.
In the opinion of the Company’s management, the accompanying unaudited interim condensed financial statements contain all adjustments, consisting solely of those which are of a normal recurring nature, necessary to present fairly its financial position as of June 30, 2014,March 31, 2015, and the results of its operations for the three and six months ended June 30, 2014 and 2013 andits cash flows for the sixthree months ended June 30, 2014March 31, 2015 and 2013.2014. Changes in the Company’s stockholders’ equity from December 31, 2013 to June 30, 2014 are a result of share-based compensation expense of $7,716, proceeds received upon the exercise of options of $350,$681 and net income of $122,249.$140,789 for the three months ended March 31, 2015.
Interim results are not necessarily indicative of results for the full fiscal year.
Note NOTE2–RecentAccountingPronouncements
In MayThere have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s condensed financial statements, from those disclosed in the Company’s 2014 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers”. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. The Company is currently evaluating the impact of this amendment to its financial position and results of operations.Annual Report on Form 10-K.
In June 2014, the FASB issued ASU No. 2014-12,"Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period," ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This ASU is effective for annual and interim periods beginning after December 15, 2015, and early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its financial statements.
Note NOTE3–SignificantAccountingPolicies
RevenueRecognition
The Company is engaged in research and development contracts with the federal government to develop certain technology to be utilized by the U.S. Department of Defense (“DoD”). The contracts are cost plus fixed fee contracts and revenue is recognized on the basis of such measurement of partial performance as will reflect reasonably assured realization or delivery of completed articles. Fees earned under the Company’s contracts may also be accrued as they are billable, under the terms of the agreements, unless such accrual is not reasonably related to the proportionate performance of the total work or services to be performed by the Company from inception to completion. Under the terms of certain contracts, fixed fees are not recognized until the receipt of full payment has become unconditional, that is, when the product has been delivered and accepted by the Federal government. Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. The Company’s backlog includes futureAdaptive Diagnostic Electronic Portable Testset (“ADEPT”) ADEPT units to be developed and delivered to the Federal government.
Unbilled revenue reflects work performed, but not yet billed at the time, per contractual requirements. The Company had unbilled revenues of $16,130$96,505 and $34,366, included in accounts receivablereceivables on government contracts as of June 30, 2014March 31, 2015 and December 31, 2013,2014, respectively. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of June 30, 2014March 31, 2015 and December 31, 2013,2014, the Company had no advanced billings.
Mikros Systems CorporationMIKROS SYSTEMS CORPORATION
Notes to Condensed Financial StatementsNOTES TOCONDENSEDFINANCIALSTATEMENTS
(unaudited)(Unaudited)
Warranty Expense
The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, expected and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended June 30,March 31, 2015 and 2014, and 2013, the Company recognized warranty expense of $5,600$29,900 and $5,800, respectively, and $10,200 and $31,800 for the six months ended June 30, 2014 and 2013,$4,600, respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 125137 ADEPT units. As of June 30, 2014,March 31, 2015, there are 4421 ADEPT units that remain under the limited warranty coverage. As of June 30, 2014March 31, 2015 and December 31, 2013,2014, the Company had an accrued warranty expense of $44,244$63,400 and $35,190,$33,500, respectively.
The following table reflects the reserve for product warranty activity as of June 30, 2014March 31, 2015 and December 31, 2013:2014:
2014 | 2013 | 2015 | 2014 | |||||||||||||
Reserve for product warranty, beginning of period | $ | 35,190 | $ | 69,655 | $ | 33,500 | $ | 35,190 | ||||||||
Provision for product warranty | 10,200 | 42,300 | 29,900 | 51,210 | ||||||||||||
Product warranty expirations | - | (57,800 | ) | - | (52,900 | ) | ||||||||||
Product warranty costs paid | (1,146 | ) | (18,965 | ) | ||||||||||||
Reserve for product warranty, end of period | $ | 44,244 | $ | 35,190 | $ | 63,400 | $ | 33,500 | ||||||||
Research and Development Costs
Research and Development expenditures for the research and development of the Company's products are expensed when incurred, and are included in general and administrative expenses. The Company recognized research and development costs of $1,649$1,544 and $52,814$1,649 for the three months ended June 30,March 31, 2015 and 2014, and 2013, respectively, and $3,297 and $75,484, for the six months ended June 30, 2014 and 2013, respectively.
Mikros Systems CorporationMIKROS SYSTEMS CORPORATION
Notes to Condensed Financial StatementsNOTES TOCONDENSEDFINANCIALSTATEMENTS
(unaudited)(Unaudited)
NoteNOTE 4 – Income (Loss) Per Share
For periods with net income, net income per common share information is computed using the two-class method. Under the two-class method, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Basic net loss attributable to common stockholders is computed by an adjustment to subtract from net income the portion of current period earnings that the preferred shareholders would have been entitled to receive pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the convertible preferred shares have no obligation to fund losses.
The Company’s calculation of earnings per share is as follows:
March 31, 2015 | March 31, 2014 | |||||||
Basic earnings per common share: | ||||||||
Net income (loss) applicable to common shareholders – basic | $ | 140,789 | $ | (8,034) | ||||
Portion allocable to common shareholders | 99.2% | 100.0% | ||||||
Net income allocable to common shareholders | 139,663 | (8,034) | ||||||
Weighted average basic shares outstanding | 31,947,753 | 31,884,320 | ||||||
Basic earnings per share | $ | - | $ | - | ||||
Dilutive earnings per common share: | ||||||||
Net income allocable to common shareholders | 139,663 | (8,034) | ||||||
Add: undistributed earnings allocated to participating securities | 1,126 | - | ||||||
Numerator for diluted earnings per common share | 140,789 | (8,034) | ||||||
Weighted average basic shares outstanding | 31,947,753 | 31,884,320 | ||||||
Diluted effect: | ||||||||
Stock options | 28,000 | - | ||||||
Unvested restricted stock awards | 15,714 | |||||||
Conversion equivalent of dilutive Series B Convertible Preferred Stock | 3,307,299 | - | ||||||
Conversion equivalent of dilutive Convertible Preferred Stock | 255,000 | - | ||||||
Weighted average dilutive shares outstanding | 35,553,766 | 31,884,320 | ||||||
Dilutive earnings per share | $ | - | $ | - | ||||
The table below sets forth the calculation of the percentage of net earnings (loss) allocable to common shareholders under the two-class method:
Three Months Ended, | Six Months Ended, | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Basic Income (Loss) Per Share: | ||||||||||||||||
Net income (loss) applicable to common shareholders - basic | $ | 130,283 | $ | (181,185 | ) | $ | 122,249 | $ | (200,811 | ) | ||||||
Portion allocable to common shareholders | 99.2 | % | 100.0 | % | 99.2 | % | 100.0 | % | ||||||||
Net earnings (losses) allocable to common shareholders | 129,242 | (181,185 | ) | 121,271 | (200,811 | ) | ||||||||||
Weighted average basic shares outstanding | 31,888,753 | 31,825,753 | 31,886,549 | 31,825,753 | ||||||||||||
Basic income (loss) per share | $ | - | $ | (0.01 | ) | $ | - | $ | (0.01 | ) | ||||||
Dilutive Income (Loss) Per Share: | ||||||||||||||||
Net income (loss) applicable to common shareholders | 129,242 | (181,185 | ) | 121,271 | (200,811 | ) | ||||||||||
Add: undistributed earnings allocated to participating securities | 1,042 | - | 978 | - | ||||||||||||
Numerator for diluted income (loss) per share | 130,283 | (181,185 | ) | 122,249 | (200,811 | ) | ||||||||||
Weighted average shares outstanding - basic | 31,888,753 | 31,825,753 | 31,886,549 | 31,825,753 | ||||||||||||
Diluted effect: | ||||||||||||||||
Stock options | 18,000 | - | 16,333 | - | ||||||||||||
Conversion equivalent of dilutive Series B Convertible Preferred Stock | 3,307,299 | - | 3,307,299 | - | ||||||||||||
Conversion equivalent of dilutive Convertible Preferred Stock | 255,000 | - | 255,000 | - | ||||||||||||
Weighted average dilutive shares outstanding | 35,469,052 | 31,825,753 | 35,465,181 | 31,825,753 | ||||||||||||
Dilutive income (loss) per share | $ | - | $ | (0.01 | ) | $ | - | $ | (0.01 | ) | ||||||
March 31, 2015 | March 31, 2014 | |||||||
Numerator: | ||||||||
Weighted average participating common shares | 31,947,753 | 31,884,320 | ||||||
Denominator: | ||||||||
Weighted average participating common shares | 31,947,753 | 31,884,320 | ||||||
Add: Weighted average shares of Convertible Preferred Stock | 255,000 | - | ||||||
Weighted average participating shares | 32,202,753 | 31,884,320 | ||||||
Portion allocable to common shareholders | 99.2 % | 100.0 % | ||||||
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Numerator: | ||||||||||||||||
Weighted average participating common shares | 31,888,753 | 31,825,753 | 31,886,549 | 31,825,753 | ||||||||||||
Denominator: | ||||||||||||||||
Weighted average participating common shares | ||||||||||||||||
Add: Weighted average shares of Convertible Preferred Stock | 255,000 | - | 255,000 | - | ||||||||||||
Weighted average participating shares | 32,143,753 | 31,825,753 | 32,141,549 | 31,825,753 | ||||||||||||
Portion allocable to common shareholders | 99.2 | % | 100.0 | % | 99.2 | % | 100.0 | % | ||||||||
Diluted net incomeearnings (loss) per share for the three and six months ended June 30,March 31, 2015 and 2014 and 2013 doesdo not reflect the following potential common shares, as the effect would be antidilutive.
June 30,2014 | June 30, 2013 | |||||||
Stock options | 610,000 | 721,000 | ||||||
Unvested portion of restricted stock | 75,000 | 174,000 | ||||||
Convertible preferred stock | - | 3,562,299 | ||||||
| 685,000 | 4,457,299 | |||||||
March 31, 2015 | March 31, 2014 | |||||||
Stock options | 610,000 | 638,000 | ||||||
Unvested restricted stock awards | - | 89,000 | ||||||
Convertible preferred stock | - | 3,562,299 | ||||||
Total | 610,000 | 4,289,299 | ||||||
Note NOTE5–Income TaxMatters
The Company conducts an on-going analysis to review theits net deferred tax assetsasset and the need for a related valuation allowance that it has recorded against deferred tax assets, primarily associated with Federal net operating loss carryforwards.allowance. As a result of this analysis and the actual results of operations, the Company has decreased(decreased) increased its net deferred tax assets by $14,902($30,000) and $29,907 during the sixthree months ended June 30, 2014. The net deferred tax assets increased by $116,214 during the six months ended June 30, 2013.March 31, 2015 and 2014, respectively. The change in deferred tax assets is attributable to the change in the valuation allowanceutilization of income tax attributes, primarily federal net operating losses, as the Company anticipates annual earnings from operations to continue.
Note NOTE6– Share-Based ShareBasedCompensation
A summary of the status of the Company’s 2007 Stock Incentive Plan as of June 30, 2014 is presented below.
Options | Weighted Exercise Price | Weighted Life (in years) | ||||||||||
Options outstanding - December 31, 2013 | 645,000 | $ | 0.38 | 4.79 | ||||||||
Granted | - | - | ||||||||||
Exercised | (7,000 | ) | 0.05 | |||||||||
Forfeited | - | - | ||||||||||
Options outstanding – June 30, 2014 | 638,000 | $ | 0.38 | 4.26 | ||||||||
Options exercisable – June 30, 2014 | 567,000 | $ | 0.33 | 3.99 | ||||||||
During the three and six months ended June 30,March 31, 2015 and 2014, and 2013, the Company issued 0 and 35,000did not issue stock option awards, respectively. In accordance withawards. During the recognition provisionsthree months ended March 31, 2014, 7,000 shares were exercised for proceeds in the amount of the FASB’s Accounting Standards Codification 718, Share-Based Payments, the Company recorded the fair value of the options issued at $0.02 per share. The fair value of the options was determined using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of 0.75%, volatility of 123.3%, and an expected term of 6.5 years.$350. The Company recognized stock-based compensation expense for stock options of $2,850$37 and $2,361$3,027 for the three months ended June 30,March 31, 2015 and 2014, respectively. As of March 31, 2015 and 2013, respectively. The Company recognized stock-based compensation expense for stock2014, there were outstanding options to purchase 638,000 shares of $5,680 and $4,906 for the six months ended June 30, 2014 and 2013, respectively.common stock. The intrinsic value of the options as of June 30, 2014March 31, 2015 is $1,372.
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)$3,080.
As of June 30,March 31, 2015 and 2014, and 2013, there were 103,00044,000 and 174,000103,000 restricted stock awards outstanding, respectively. The Company recognized stock-based compensation expense for restricted stock of $1,018$644 and $1,328of $821 for the three months ended June 30,March 31, 2015 and 2014, and 2013, respectively. The Company recognized stock-based compensation expense for restricted stock of $2,036 and $2,656 for the six months ended June 30, 2014 and 2013, respectively.
As of June 30, 2014,March 31, 2015, there was $4,887$4,057 of unrecognized stock-based compensation expense related to all outstanding equity awards that will be recognized in a future weighted average period of 1.91 years.periods.
NoteNOTE 7 – Related Party Transactions
Paul Casner, the chairman of the Company’s board of directors, also serves as the executive chairman and CEO of Atair Aerospace Incorporation. During 2014, Atair provided subcontracting services to the Company relating to the design of the chassis component within the ADEPT units. During the three months ended June 30,March 31, 2014, and 2013, the Company incurred subcontracting service costs from Atair of $2,000 and $21,205, respectively. During the six months ended June 30, 2014 and 2013, the$24,689. The Company incurred subcontractingdid not incur any of these service costs from Atair of $26,689 and $70,670, respectively.in 2015.
Note 8 – Commitments and Contingencies
The Company had a $500,000line of credit agreement with Sun National Bank. The facility expired on June 30, 2014. There were no borrowings or payments related to this facility during the six months ended June 30, 2014 and 2013 and the Company was in compliance with all the customary affirmative and negative covenants including its net worth financial covenant. The Company is currently pursuing a new credit facility.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” These forward-lookingforward- looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-lookingforward- looking statements include: changes in business conditions;conditions; a decline or redirection of the U.S. defense budget;budget; the termination of any contracts with the U.S. Government;Government; continuation of the Federal automatic sequestration cuts;cuts; changes in our sales strategy and product development plans;plans; changes in the marketplace;marketplace; continued services of our executive management team;team; our limited marketing experience;experience; competition between us and other companies seeking Small Business Innovative Research (“SBIR”) grants;grants; competitive pricing pressures;pressures; market acceptance of our products under development;development; delays in the development of products;products; and statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20132014 filed with the Securities and Exchange Commission.
All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-lookingforward- looking statements based on changes in internal estimates or expectations or otherwise.
Item 2. Management’s Discussion and Analysis of Financial Position and Results of Operations.Operations
Mikros Systems Corporation (“Mikros,” the “Company,” “we” or “us”) is an advanced technology company specializing in the research development and productiondevelopment of electronic systems technology primarily for military applications. Classified by the Department of Defense (“DoD”) as a small business, our capabilities include technology management, electronic systems engineering and integration, radar systems engineering, combat/command, control, communications, computers and intelligence (“C4I”) systems engineering, and communications engineering.
Overview
Our primary business focus is to pursue SBIR and other research and development programs from the DoD, Department of Homeland Security, and other governmental authorities, and to expand this government funded research and development into products and services. Since 2002, we have been awarded several Phase I, II, and III SBIR contracts.
Revenues from our government contracts represented 100% of our revenues for the three and six months ended June 30, 2014March 31, 2015 and 2013.2014. We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products for both the government and commercial marketplace.
ADEPT®
Our primary source of revenue is sales of our Adaptive Diagnostic Electronic Portable Testset, or ADEPT,ADEPT®, to the United States Navy. ADEPT is an automated maintenance workstation designed to significantly reduce the man-hours required to align the AN/SPY-1 Radar System aboard U.S. Navy AEGIS cruisers and destroyers, while optimizing system performance and readiness. ADEPT represents a new approach to Navy shipboard maintenance, integrating modular instrumentation cards in a rugged enclosure with an onboard computer, input and output devices, networking hardware, removable hard drives, and a touch screen display. A custom software application provides the user interface and integrates the hardware with a database that stores user information, instrument readings, maintenance requirements, and training aids. ADEPT is designed to be adapted to other complex shipboard system, and to provide integrated distance support capabilities for remote diagnostics and troubleshooting by shore-based Navy experts. We are currently extending the ADEPT system to a second Navy radar system. system, the SPS-49, which is expected to assist in optimizing performance for the Ballistic Missile Defense mission.
ADSSS
In 2013, we developed a second-generation of our AdaptiveADEPT Distance Support Sensor Suite, or ADSSS, for the Littoral Combat Ship (LCS). ADSSS is a network-enabled system which can be configured to monitor multiplemany shipboard systems and report maintenance data onshore for further analysis to detect trends and predict failures. This development program remains on schedule in-house and initial shipboard testing is planned for Summer 2015. We expect ADSSS to be used on both variants of the LCS which is currently planned to be at least 32 ships. ADSSS, with its remote monitoring and prognostics capabilities, has also generated interest in other ship classes, including Aegis, and we are currently pursuing several related opportunities.
Contracts
On March 19,18, 2010, we were awarded and entered into a multi-year Indefinite Delivery, Indefinite Quantity (“IDIQ”) contract with the Naval Surface Warfare Center Crane IN related to our ADEPT product. The contract is for a term of five years and provides for the purchase and sale of up to $26 million of ADEPT units and related engineering and logistics support. We realizedIn March, 2015, the period of performance was extended through August 11, 2016. The ADEPT contracts drive all revenue. In the past, we were generating revenues related toprimarily from the production and delivery of ADEPT units. After executing the ADEPT production and support servicesprogram for four years, we now have contracts to do further R&D on ADEPT units to enhance functionality as well as provide other forms of $1.2 million and $0.4 million during the three months ended June 30, 2014 and 2013, respectively, and $2.1 million and $1.3 million during the six months ended June 30, 2014 and 2013, respectively.support. We expect additional delivery orders during the remaining term of the contract. It should be noted that contracting with the Federal government is a lengthy and complex process and that many factors could materialize that would negatively impact our ability to secure future ADEPT orders.
In June 2013, we were awarded a $2.8 million service contract to developwith Condition-Based Maintenance (“CBM”) for Littoral Combat Ship (LCS)LCS Systems using the AdaptiveADEPT Distance Support Sensor Suite, or ADSSS. This project will extend the development of the ADEPT to better facilitate the integration of multiple distributed sensors and portable data collection units, provide enhanced automated data collection and processing capabilities, and support hosting of prognostics modeling tools that use the collected data to predict remaining end of life for equipment under test components.
In August 2013, we were awarded a $5.5 million service contract under our IDIQ contract to provide necessary research, development, and program management and implementation of improvements to ADEPT units. We received an initial commitment of $0.8 million under this service contract which was increased to $2.1 million in the first quarter of 2014.
In January 2014, we were awarded a $0.5 million contract by the U.S. Navy that will extend the ADEPT system to a second Navy radar, system.the SPS-49 long-range air surveillance radar.
During the second quarter of 2014, we were awarded four contracts valued at approximately $1.0 million to be funded over the next two years. Two of the awards are to support and improve our ADEPT product line by providing funding for continued training of Navy personnel and a new development effort to upgrade ADEPT instrumentation functions for data acquisition. The remaining two awards are to upgrade the ADSSS system for the Navy'sNavy’s new Littoral Combat Ship (“LCS”). Under the first ADSSS contract, we will design a new portable maintenance device for shipboard use, working closely with the Naval Ship Systems Engineering Station (“NAVSSES”) office in Philadelphia, PA. The second ADSSS award fundsextends to the installation of Condition Based Maintenance (“CBM”) equipment on the USS Fort Worth and continued shipboard testing. This "Pilot Program" extends our pilot installation ofADSSS “Pilot Program” which previously installed ADSSS on the USS Freedom. This contract award funds the installation of an ADSSS Pilot system on a second LCS ship, the USS Forth Worth.
In July 2014, we were awarded additional funding of $0.3 million under the current IDIQ contract to upgrade the capabilities of the first 6966 ADEPT units currently deployed in the fleet. This effort involves installing a faster and more capable controller module and upgrading the Operating System software from Windows XP to Windows 7, and will be executed at our Largo, FL facility as units are returned for routine calibration.
In August 2014, we were awarded a major new production contract valued at $5 million for additional ADEPT units. The Navy plans to purchase fifty-four (54) ADEPT units over the next year. As of March 31, 2015, we have delivered 12 of these units. These systems are deployed on Navy “Aegis” destroyers and cruisers to support the AN/SPY-1 radar in air defense and ballistic missile defense missions. These systems join the 125 ADEPT units previously deployed and in everyday use by the Navy. Also, in August and September 2014, we were awarded two contracts for approximately $0.2 million for ADEPT training and calibration of 34 ADEPT units. We were also awarded an additional $0.1 million in January 2015, for 31 more ADEPT units to be calibrated.
In November 2014, we were awarded a contract valued at $0.1 million for technical support on the USS Fort Worth (LCS3) using the latest version of our ADSSS (ADEPT Distance Support Sensor Suite) which will provide the SPS-75 Air Search Radar and Rolling Airframe (RAM) systems with Combat Systems (CS) Condition Based Monitoring (CBM) and Distance Support (DS) capability.
In March 2015, we received a further production contract, valued at $1.1 million, for an additional ten ADEPT units for the Aegis SPY-1 radar. These units will be manufactured at the Mikros Manufacturing and Depot Facility in Largo FL, and will be delivered late this year, following the completion of the current production run of 54 units.
In March 2015, the Navy also issued an additional contract for ADEPT General Engineering and Support, with initial funding of $0.1 million. This contract covers various technical tasking for deployed ADEPT systems, including logistics support, customer consultation and regularly scheduled team review meetings.
In May 2015, Mikros received a study contract valued at $30 thousand from Lockheed Martin Corporation, to start work with Lockheed Martin on Condition Based Maintenance for Aegis systems.
It should be noted that contracting with the Federal government is a lengthy and complex process and that many factors could materialize that would negatively impact our ability to secure future contracts. In addition, our contracts with the Federal government contain unfavorable termination provisions and are subject to audit and modification.
Key Performance Indicator
As substantially all of our revenue is derived from contracts with the Federal government, our key performance indicator is the dollar volume of contracts awarded to us. Increases in the number and value of contracts awarded will generally result in increased revenues in future periods and, assuming relatively stable variable costs associated with our fulfilling such contracts, increased profits in future periods. The timing of such awards is uncertain as we sell to Federal government agencies where the process of obtaining such awards can be lengthy and at times uncertain. As the majority of our revenue in 2014,2015, and expected revenue over the next sixnine months, is or will be from sales of ADEPT units under our IDIQ contract, continued generation of task orders and our ability to expand the market and potential customer base for ADEPT units will be a key indicator of future revenue. ADEPT units must be serviced and calibrated every two years. Accordingly, as we continue to increase the installed base of ADEPT units and expand the units to other radar systems, we expect to generate future recurring maintenance and service revenue.
Outlook
Our strategy for continued growth is three-fold. First, we expect to continue expanding our technology base, backlog and revenue by continuing our active participation in the DoD SBIR program and bidding on projects that fall within our areas of expertise. These areas include electronic systems engineering and integration, radar systems engineering, combat/C4I (Command, Control, Communications, Computers & Intelligence) systems engineering, and communications engineering. We believe that we can potentially utilize the intellectual property developed under our various SBIR awards to develop proprietary products, such as the ADEPT described above, with broad appeal in both the government and commercial marketplace. OurThis state-of-the-art test equipment couldcan be used by many commercial and governmental customers such as the FAA, radio and television stations, cellular phone service providers and airlines. Second, we will continue to pursue SBIR projects with the Department of Homeland Security, the U.S. Navy, and other government agencies. Third, we believe that through our marketing of products such as ADEPT, we will develop key relationships with prime defense contractors. Our strategy is to develop these relationships into longer-term, key subcontractor roles on future major defense programs awarded to these prime contractors.
In 2014,2015, our primary strategic focus is to continue to: (i) establish ourselvesMikros as a premium provider of research and development and product development services, including assembly and integration at our facility in Largo, FL, to the defense industry;industry; and (ii) grow our business, generate profits and increase our cash reserves through obtaining additional SBIR contracts and positioning ourselves to obtain future SBIR contracts. From an operational prospective, we expect to focus substantial resources on generating purchase orders under the IDIQ contract for ADEPT units, expanding ADEPT to support other radar systems, and exploring commercialization opportunities. We intend to capitalize on the Navy modernization program which could result in two or three ADEPT units being placed on each destroyer and cruiser in the U.S. Navy, with the potential to install multiple units on additional U.S. Navy ships and submarines. As the installed base increases, we expect additional and recurring revenue for calibration and other maintenance and support. In January 2014, we were awarded a contract to extend the ADEPT system to a second U.S. Navy radar system, the SBS-49, which is exptected to assist in optimizing performance for the Ballistic Missile Defense Mission.
Over the longer term, we expect to further develop technology based on existing and additional SBIR contracts and to develop these technologies into products for wide deployment to DoD customers and contractors as well as developing potential commercial applications. We believe that many of our core capabilities, remote monitoring, rugged systems, predictive maintenance and communications expertise, are applicable to other industries that work with complex distributed systems, such as utilities, communications and transportation systems. We are currently in discussions with certain industry participants regarding this initiative.
During the past two fiscal years, the combination of spending caps, discretionary spending cuts, sequestration and further proposed reductions in defense spending has caused, and may in the future continue to cause, delays in funding certain projects. This has and may continue to adversely impact our revenues and profits.
Changes to Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.2014. As of June 30, 2014,March 31, 2015, there have been no changes to such critical accounting policies and estimates.
Results of Operations
ThreeMonthsEnded June 30, March31,2015and2014 and 2013
We generated revenues of $1,209,802$2,476,039 during the three months ended June 30, 2014March 31, 2015 compared to $367,558$883,340 during the three months ended June 30, 2013,March 31, 2014, an increase of $842,244,$1,592,669, or 229%180%. The increase was primarily due to the timingresult of receiving the production and delivery of threecontract for 54 ADEPT units offset by the change in the revenue mix between 2014 and 2013. Revenues earned are based upon the labor, subcontracting services, materials, and other direct costs that we incur. Generally, labor and other direct costs generate higher revenues compared to subcontracting services and material costs. While we experienced a delay in new delivery orders for ADEPT units during the three months ended June 30, 2014, we added nine newseven additional labor contracts. During the three months ended June 30, 2014, revenues derived from labor hours completed outpaced subcontracting services and materials, resulting in higher revenues earned in 2014.
Cost of sales consists of direct contract costs including labor, material, subcontracts, and warranty expense for ADEPT units that have been delivered, travel, stock-based compensation expense and other direct costs. Cost of sales for the three months ended June 30, 2014March 31, 2015 was $439,701$1,461,905 compared to $215,442$412,679 for the three months ended June 30, 2013,March 31, 2014, an increase of $224,259$1,049,226, or 104%254%. The increase was due to our growth in 2014 was primarilyrevenue and attributable to increases in direct labor of $192,569 due to ninereceiving the production contract for 54 ADEPT units and seven additional labor contracts. Our cost of sales during the three months ended June 30, 2014 was comprised of additional subcontracting services of $27,866related contracts for engineering and other direct costs of $20,382 which were offset by a reduction in material purchases of $16,358. Our warranty reserve decreased by $200 during the three months ended due to the contract warranty allowance under the IDIQ contract for three ADEPT units. The increase for 2013 was related to an adjustment in labor rates during that period.logistical support.
The majority of our engineering costs consist of (i) salary, wages and related fringe benefits paid to engineering employees,
(ii) rent-related costs, and (iii) consulting fees paid to engineering consultants. As the nature of these costs benefit the entire organization and all research and development efforts, and their benefitsbenefit cannot be identified with a specific project or contract, these engineering costs are classified as part of “engineering overhead” and included in operating expenses. Engineering costs for the three months ended June 30, 2014March 31, 2015 were $276,751$422,415 compared to $203,109$225,902 for the three months ended June 30, 2013,March 31, 2014, an increase of $73,642,$196,513, or 36%87%. There were increases of $33,463The increase was primarily due to the increase in fringe benefits, incurred in connection with the addition of five new employees to the engineering staff, increasedsalaries, consulting fees and incentive compensation of $32,135, computer & software maintenance expenses of $6,881, and other miscellaneous engineering costs of $18,750. These increases werecompensations offset by reduced engineering travel expenses and salaries of $11,562 and $6,025, respectively.a decrease in recruiting costs.
General and administrative expenses consist primarily of salary, intellectual property, consulting fees and related costs, professional fees, business insurance, franchise tax, SEC compliance costs, travel, and unallowable expenses (representing those expenses for which the government will not reimburse us). General and administrative costs for the three months ended June 30, 2014March 31, 2015 were $308,504$322,023 compared to $285,006$284,131 for the three months ended June 30, 2013,March 31, 2014, an increase of $23,498,$37,892, or 8%13%. The increase was due primarily due to increasesan increase in incentive compensation and unallowable costs offset by a decrease in bid and proposal costs of $13,483 and incentive compensation of $61,530. These increases were offset by reductions in research and development and general and administrative salaries of $50,745 and $9,987, respectively.professional fees.
At June 30, 2014,March 31, 2015, we estimated our annual effective tax rate for 20142015 to be 34.3%47.8%. We recognized a tax expense of $54,656$129,000 for the quarterthree months ended June 30, 2014March 31, 2015 primarily due to expected net income for the remainder of 2014.2015. At June 30, 2014,March 31, 2015, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences and the income tax benefit related to the tax benefit recognized from the decrease in valuation allowance established for net deferred tax assets.differences. As of June 30, 2014,March 31, 2015, we had net operating loss carryforwards of $713,920,$170,709, which will begin expiring in 20192033 if not utilized.
We hadreported net income of $130,283$140,789 during the three months ended June 30, 2014March 31, 2015 as compared to a net loss of $181,185$8,034 during the three months ended June 30, 2013.March 31, 2014. The increase in net income wasis attributable primarily attributable to the award under the ADEPT contract of nine54 units and additional labor contracts and the completion and delivery of three ADEPT units.
Six Months Ended June 30, 2014 and 2013
We generated revenues of $2,093,142 during the six months ended June 30, 2014 compared to $1,269,754 during the six months ended June 30, 2013, an increase of $823,388, or 65%. The increase was primarily due to the timing of the production and delivery of three ADEPT units offset by the change in the revenue mix between 2014 and 2013.While we experienced a delay in new delivery orders for ADEPT units during the six months ended June 30, 2014, we added nine additional labor contracts. Revenues earned are based upon the labor, subcontracting services, materials, and other direct costs that we incur. Generally, labor and other direct costs generate higher revenues compared to subcontracting services and material costs. During the six months ended June 30, 2014, revenues derived from labor hours completed outpaced subcontracting services and materials, resulting in higher revenues earned in 2014.
Cost of sales for the six months ended June 30, 2014 was $852,380 compared to $677,393 for the six months ended June 30, 2013, an increase of $174,987, or 26%. The increase in 2014 was primarily due to increases in direct labor of $263,808 due to 9 additional labor contracts. Our cost of sales during the six months ended June 30, 2014 was comprised of increased material costs of $73,723 and other direct costs of $31,101 reduced by subcontract services of $172,045. Labor costs were significantly lower during the comparable period in 2013. Our warranty reserve decreased during the six months ended June 30, 2014 by $21,600 due to the addition of three ADEPT units in 2014 versus 15 units in 2013.
Engineering costs for the six months ended June 30, 2014 were $502,653 compared to $405,007 for the six months ended June 30, 2013, an increase of $97,646, or 24%. The increase was primarily due to the change in the mix of costs incurred. There were increases in fringe benefits of $59,457 due to the addition of five new employees to the engineering staff, incentive compensation of $29,135, additional rent due to the Florida office expansion of $4,496, computer, tools and equipment of $15,510, recruiting costs of $9,325, and miscellaneous office related costs of $15,452. The increases were offset by reductions in engineering travel and salaries of $18,476 and $17,253, respectively.
General and administrative expenses for the six months ended June 30, 2014 were $592,635 compared to $548,396 for the six months ended June 30, 2013, an increase of $44,239, or 8%. The increase was primarily due to the increases in bid and proposal costs of $29,313, incentive compensation of $61,530, and professional fees of $26,716. These increases were offset by reductions in research and development and general and administrative salaries of $64,228 and $9,161, respectively.
We recognized a tax expense of $23,446 for the six months ended June 30, 2014 primarily due to expected net income for the remainder of 2014. At June 30, 2014, the difference from the expected federal income tax rate is attributable to state income taxes, certain permanent book-tax differences and the income tax benefit related to the tax benefit recognized from the decrease in valuation allowance established for net deferred tax assets.
We had net income of $122,249 during the six months ended June 30, 2014 as compared to a net loss of $200,811 during the six months ended June 30, 2013. The increase in net income was primarily attributable to the award of nine additional labor contracts and timing as we completed delivery order contracts for three ADEPT units.engineering and logistical support in 2015.
Liquidity and Capital Resources
Since our inception, we have financed our operations through debt, private and public offerings of equity securities and cash generated by operations.
As of March 31, 2015, we had cash and cash equivalents of $1,159,075 and net working capital of $1,824,497. During the sixthree months ended June 30, 2014,March 31, 2015, net cash provided by operationsoperating activities was $64,584$134 compared to $166,823net cash used in operating activities of $128,489 during the sixthree months ended June 30, 2013.March 31, 2014. The decreaseincrease was due primarily to us having net income of $140,789 in 2015 compared to a net loss of $8,034 in 2014 and the timing of payments related to our operating assets and liabilities. We had decreases inSpecifically, accounts payable and accrued expensesincreased due to the timing of our vendor payments and increases in accounts receivable as a result of less payments being received than revenue billed. These amounts were offset by increases inadditional material purchases for new contracts. The accrued payroll and payroll taxes increased due to the6 additional employees and timing of payroll processing. We had working capitalAdditionally, accounts receivable increased as a result of $1,319,007 asadditional contracts and timing of June 30, 2014 as compared to $1,184,839 as of December 31, 2013.
During the six months ended June 30, 2014, net cash used in investing activities was $11,890 compared to $1,500 during the six months ended June 30, 2013. The increase was due to capital expenditures related to the expansion of our Florida office.billings and collections.
During the sixthree months ended June 30, 2014,March 31, 2015, net cash used in investment activities was $2,693 compared to net cash used in investment activities of $6,430 during the three months ended March 31, 2014. The decrease is attributable to lower capital expenditures.
During the three months ended March 31, 2015, there was no net cash provided by financing activities wascompared to net cash provided by financing activities of $350 andduring the three months ended March 31, 2014. The decrease was attributable to the exercise of stock options.
We had a $500,000 credit facility with Sun National Bank. The facility expired on June 30, 2014.There were no borrowings or payments related to this facility during the six months ended June 30, 2014 and 2013 and we wereoptions in compliance with all the customary affirmative and negative covenants including the net worth financial covenant. We are currently pursuing a new credit facility. 2014.
We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months.
In order to pursue strategic opportunities, obtain additional SBIR contracts, or acquire strategic assets or businesses, we may need to obtain additional financing or seek strategic alliances or other partnership agreements with other entities. In order to raise any such financing, we anticipate considering the sale of additional debt or equity securities under appropriate market conditions. There can be no assurance, assuming we successfully raise additional funds or enter into business alliances, that we will remain profitable or continue to generate positive cash flow.
Off-Balance Sheet Arrangements
As of June 30, 2014,March 31, 2015, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. We are currently evaluating the impact of this amendment on our financial position and results of operations.
In June 2014, the FASB issued Accounting Stands Update No. 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period," ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This ASU is effective for annual and interim periods beginning after December 15, 2015, and early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our financial statements.
Item 4. Controls and Procedures.
An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) was carried out by us under the supervision and with the participation of our president, who serves as our principal executive officer and principal financial officer. Based upon that evaluation, our president concluded that as of June 30, 2014,March 31, 2015, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) that such information is accumulated and communicated to management, including our president, in order to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d-15(f)15d- 15(f)) that occurred during the fiscal quarter ended June 30, 2014March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits |
No. | Description | |
31.1
Certification of principal executive officer and principal financial officer pursuant to Rules 13a-14(a) or 15d-14(a)
31.1 | Certification of principal executive officer and principal financial officer pursuant to Rules 13a-14(a) or 15d- 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
32.1 | Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. | |
| 101.INS | XBRL Instance | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation | |
| 101.DEF | XBRL Taxonomy Extension Definition | |
| 101.LAB | XBRL Taxonomy Extension Labels | |
| 101.PRE | XBRL Taxonomy Extension Presentation |
SIGNATURES
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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May 15, 2015
By: /s/ Thomas J. Meaney
16
Thomas J. Meaney
President and Chief Financial Officer
19/19