UNITED STATES
SECURITIESANDEXCHANGECOMMISSION
Washington,D.C. 20549
FORM 10-Q
☒QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
Forthequarterlyperiodended June September30,2015
or
☐ TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
Forthetransitionperiodfrom_____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 of incorporation or organization) | (I.R.S. Employer Identification No.) |
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 ☒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☒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(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,November 13, 2015.
TABLE OF CONTENTS
PAGE # | ||
PARTI. | FINANCIALINFORMATION | |
Item 1. | Financial Statements | |
Condensed Balance Sheets as of | 1 | |
Condensed Statements of Operations and Comprehensive Income (Loss) for the Three and | 2 | |
Condensed Statements of Cash Flows for the | 3 | |
Notes to Condensed Financial Statements (unaudited) | 4 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 4. | Controls and Procedures |
|
PART II. | OTHER INFORMATION | |
Item 6. | Exhibits |
|
Signatures |
|
PARTI.FINANCIALINFORMATION
Item 1.FinancialStatements
MikrosSystemsCorporation
Mikros Systems Corporation
CondensedBalanceSheets
(unaudited)
June 30, 2015 | December 31, 2014 | September30, 2015 | December31, 2014 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,159,584 | $ | 1,161,634 | $ | 1,645,255 | $ | 1,161,634 | ||||||||
Receivables on government contracts | 1,607,621 | 1,575,954 | 1,022,107 | 1,575,954 | ||||||||||||
Prepaid expenses and other current assets | 151,926 | 105,197 | 95,607 | 105,197 | ||||||||||||
Deferred tax asset, current | 28,065 | 28,065 | 28,065 | 28,065 | ||||||||||||
Total current assets | 2,947,196 | 2,870,850 | 2,791,034 | 2,870,850 | ||||||||||||
Property and equipment: | ||||||||||||||||
Equipment | 64,379 | 61,686 | 64,379 | 61,686 | ||||||||||||
Furniture & fixtures | 14,728 | 14,728 | 14,728 | 14,728 | ||||||||||||
Less: accumulated depreciation | (65,562 | ) | (62,123 | ) | (67,251 | ) | (62,123 | ) | ||||||||
Property and equipment, net | 13,545 | 14,291 | 11,856 | 14,291 | ||||||||||||
Patents and trademarks | 1,383 | 1,383 | ||||||||||||||
Intangible Asset | 127,383 | 1,383 | ||||||||||||||
Less: accumulated amortization | (1,243 | ) | (1,173 | ) | (6,527 | ) | (1,173 | ) | ||||||||
Intangible assets, net | 140 | 210 | 120,856 | 210 | ||||||||||||
Deferred tax assets | 86,935 | 140,935 | 78,935 | 140,935 | ||||||||||||
Total assets | $ | 3,047,816 | $ | 3,026,286 | $ | 3,002,681 | $ | 3,026,286 | ||||||||
Liabilities and shareholders' equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accrued payroll and payroll taxes | $ | 420,005 | $ | 493,308 | $ | 433,170 | $ | 493,308 | ||||||||
Accounts payable and accrued expenses | 517,049 | 688,534 | 161,244 | 688,534 | ||||||||||||
Accrued warranty expense | 40,100 | 33,500 | 139,410 | 33,500 | ||||||||||||
Deferred revenue | 36,000 | - | ||||||||||||||
Total current liabilities | 977,154 | 1,215,342 | 769,824 | 1,215,342 | ||||||||||||
Long-term liabilities | 4,625 | 7,770 | 129,052 | 7,770 | ||||||||||||
Total liabilities | 981,779 | 1,223,112 | 898,876 | 1,223,112 | ||||||||||||
| Commitments and contingencies (Note 9) | ||||||||||||||||
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 150,000 shares, 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 | 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, convertible, par value $.01 per share, authorized 2,000,000shares, issued and outstanding 255,000 shares (involuntary liquidationvalue - $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 | 6,900 | 6,900 | ||||||||||||
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 32,018,753 shares at June 30, 2015 and December 31, 2014 | 320,188 | 320,188 | ||||||||||||||
| Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 32,018,753 shares at September 30, 2015 and December 31, 2014, respectively | 320,188 | 320,188 | ||||||||||||||
Capital in excess of par value | 11,630,090 | 11,628,728 | 11,631,121 | 11,628,728 | ||||||||||||
Accumulated deficit | (9,985,165 | ) | (10,246,666 | ) | (9,948,428 | ) | (10,246,666 | ) | ||||||||
Total shareholders' equity | 1,985,587 | 1,722,724 | 2,023,355 | 1,722,724 | ||||||||||||
Total liabilities and shareholders' equity | $ | 3,047,816 | $ | 3,026,286 | $ | 3,002,681 | $ | 3,026,286 | ||||||||
SeeNotestoUnauditedCondensedFinancialStatements
Mikros Systems Corporation
Condensed Statements ofOperationsandComprehensiveIncome(Loss)
(unaudited)
Three Months Ended, | Six Months Ended, | ThreeMonthsEnded, | NineMonthsEnded, | |||||||||||||||||||||||||||||
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | September30, | September30, | September30, | September30, | |||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||
Contract revenues | $ | 1,734,382 | $ | 1,209,802 | $ | 4,210,421 | $ | 2,093,142 | $ | 1,240,393 | $ | 1,057,442 | $ | 5,450,815 | $ | 3,150,584 | ||||||||||||||||
Cost of sales | 877,168 | 439,701 | 2,339,073 | 852,380 | 529,303 | 431,701 | 2,868,377 | 1,284,081 | ||||||||||||||||||||||||
Gross margin | 857,214 | 770,101 | 1,871,348 | 1,240,762 | 711,090 | 625,741 | 2,582,438 | 1,866,503 | ||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||
Engineering | 326,521 | 276,751 | 748,936 | 502,653 | 309,769 | 329,864 | 1,058,705 | 832,517 | ||||||||||||||||||||||||
General and administrative | 300,574 | 308,504 | 622,597 | 592,635 | 328,734 | 213,956 | 951,331 | 806,591 | ||||||||||||||||||||||||
Total expenses | 627,095 | 585,255 | 1,371,533 | 1,095,288 | 638,503 | 543,820 | 2,010,036 | 1,639,108 | ||||||||||||||||||||||||
Income from operations | 230,119 | 184,846 | 499,815 | 145,474 | 72,587 | 81,921 | 572,402 | 227,395 | ||||||||||||||||||||||||
Interest income | 93 | 93 | 186 | 221 | 149 | 95 | 336 | 316 | ||||||||||||||||||||||||
Net income before income taxes | 230,212 | 184,939 | 500,001 | 145,695 | 72,736 | 82,016 | 572,738 | 227,711 | ||||||||||||||||||||||||
Income tax expense | 109,500 | 54,656 | 238,500 | 23,446 | ||||||||||||||||||||||||||||
Income tax expense (benefit) | 36,000 | (45,419 | ) | 274,500 | (21,973 | ) | ||||||||||||||||||||||||||
Net income and comprehensive income | $ | 120,712 | $ | 130,283 | $ | 261,501 | $ | 122,249 | ||||||||||||||||||||||||
Net income | $ | 36,736 | $ | 127,435 | $ | 298,238 | $ | 249,684 | ||||||||||||||||||||||||
Basic income per common share | $ | - | $ | - | $ | 0.01 | $ | - | ||||||||||||||||||||||||
Other comprehensive income (loss) | - | - | - | - | ||||||||||||||||||||||||||||
Basic weighted average number of common shares outstanding | 31,947,753 | 31,888,753 | 32,124,260 | 31,886,549 | ||||||||||||||||||||||||||||
Comprehensive income | $ | 36,736 | $ | 127,435 | $ | 298,238 | $ | 249,684 | ||||||||||||||||||||||||
Diluted income per common share | $ | - | $ | - | $ | 0.01 | $ | - | ||||||||||||||||||||||||
Income per common share - basic | $ | - | $ | - | $ | 0.01 | $ | 0.01 | ||||||||||||||||||||||||
Diluted weighted average number of common shares outstanding | 35,548,552 | 35,469,052 | 35,722,826 | 35,465,181 | ||||||||||||||||||||||||||||
Basic weighted average number of shares outstanding | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | ||||||||||||||||||||||||||||
Income per common share - diluted | $ | - | $ | - | $ | 0.01 | $ | 0.01 | ||||||||||||||||||||||||
Diluted weighted average number of shares outstanding | 35,548,552 | 35,509,307 | 35,665,577 | 35,488,707 | ||||||||||||||||||||||||||||
SeeNotestoUnauditedCondensedFinancialStatements
Mikros Systems Corporation
Condensed Statements of Cash Flows
(unaudited)
Six Months Ended | ||||||||||||||||
June 30, 2015 | June 30, 2014 | NineMonthsEnded | ||||||||||||||
September30, 2015 | September30, 2014 | |||||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 261,501 | $ | 122,249 | $ | 298,238 | $ | 249,684 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operatingactivities: | ||||||||||||||||
Depreciation and amortization | 3,509 | 3,122 | 10,482 | 4,707 | ||||||||||||
Deferred tax expense | 54,000 | 14,902 | ||||||||||||||
Deferred tax expense (benefit) | 62,000 | (34,000 | ) | |||||||||||||
Share-based compensation expense | 1,362 | 7,716 | 2,043 | 9,703 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Increase in receivables on government contracts | (31,667 | ) | (157,707 | ) | ||||||||||||
Increase in prepaid expenses and other current assets | (46,729 | ) | (27,305 | ) | ||||||||||||
Increase (decrease) in accrued payroll and payroll taxes | (73,303 | ) | 127,987 | |||||||||||||
Decrease in accounts payable and accrued expenses | (171,485 | ) | (33,153 | ) | ||||||||||||
Increase in accrued warranty expense | 6,600 | 9,054 | ||||||||||||||
Decrease (Increase) in receivables on government contracts | 553,847 | (211,821 | ) | |||||||||||||
Decrease (Increase) in prepaid expenses and other current assets | 9,590 | (2,579 | ) | |||||||||||||
(Decrease) Increase in accrued payroll and payroll taxes | (60,138 | ) | 218,004 | |||||||||||||
(Decrease) Increase in accounts payable and accrued expenses | (527,290 | ) | 41,745 | |||||||||||||
Increase (Decrease) in accrued warranty expense | 105,910 | (1,690 | ) | |||||||||||||
Increase in deferred revenue | 36,000 | - | ||||||||||||||
Decrease in long-term liabilities | (3,145 | ) | (2,281 | ) | (4,718 | ) | (3,422 | ) | ||||||||
Net cash provided by operating activities | 643 | 64,584 | 485,964 | 270,331 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchase of property and equipment | (2,693 | ) | (11,890 | ) | (2,693 | ) | (11,890 | ) | ||||||||
Net cash used in investing activities: | (2,693 | ) | (11,890 | ) | (2,693 | ) | (11,890 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds received upon the exercise of stock options | - | 350 | 350 | 350 | ||||||||||||
Net cash provided by financing activities | - | 350 | 350 | 350 | ||||||||||||
Net (decrease) increase in cash and cash equivalents | (2,050 | ) | 53,044 | |||||||||||||
Net increase in cash and cash equivalents | 483,621 | 258,791 | ||||||||||||||
Cash and cash equivalents, beginning of period | 1,161,634 | 1,028,146 | 1,161,634 | 1,028,146 | ||||||||||||
Cash and cash equivalents, end of period | $ | 1,159,584 | $ | 1,081,190 | $ | 1,645,255 | $ | 1,286,937 | ||||||||
Supplemental cash flow information: | ||||||||||||||||
Cash paid during the period for income taxes | $ | 143,900 | $ | 558 | $ | 215,183 | $ | 558 | ||||||||
Supplementalnon-cash investing activity: | ||||||||||||||||
Estimated consideration to be paid in connection with purchase of intangible asset | $ | 126,000 | $ | - | ||||||||||||
SeeNotestoUnauditedCondensedFinancialStatements
See Notes to Unaudited Condensed Financial Statements
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
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, 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 JuneSeptember 30, 2015, and the results of its operations for the three and sixnine months ended JuneSeptember 30, 2015 and 2014 and cash flows for the sixnine months ended JuneSeptember 30, 2015 and 2014. Changes in the Company’s stockholders’ equity from December 31, 2014 to JuneSeptember 30, 2015 are a result of share-based compensation expense of $1,362$2,043, proceeds received upon the exercise of options of $350, and net income of $261,501.$298,238.
Interim results are not necessarily indicative of results for the full fiscal year.
Note2–RecentAccountingPronouncements
There have been no developments to recentlyIn May 2014, the FASB issued accounting standards, including the expected dates of adoption and estimated effectsAccounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The amendment in this ASU provides guidance on the Company’s condensed financial statements, fromrevenue recognition 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 disclosedgoods or services. The core principle of this update provides guidance to identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligations in the Company’s 2014 Annual Reportcontract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. This standard will replace most existing revenue recognition guidance. On July 9, 2015, the FASB approved a one-year deferral of the effective date of this standard to 2018 for public companies, with an option that would permit companies to adopt the standard as early as the original effective date of 2017. Early adoption prior to the original effective date is not permitted. The Company has not yet selected a transition method nor has the Company determined the effect of the standard on Form 10-Kour financial position and results of operations.
Mikros Systems Corporation
NotestoCondensedFinancialStatements
(unaudited)
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 future AdaptiveDiagnosticElectronicPortableTestset(“ADEPT”) units to be developed and delivered to the Federal government.
Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. The Company had unbilled revenues of $87,980$38,884 and $34,366 included in accounts receivablereceivables on government contracts as of JuneSeptember 30, 2015 and December 31, 2014, respectively. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of JuneSeptember 30, 2015 and December 31, 2014, the Company had no advanced billings.
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
WarrantyExpense
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 JuneSeptember 30, 2015 and 2014, the Company recognized warranty (benefit)(recoveries) expense of $(23,300)$106,800 and $5,600,$(10,744), respectively, and $113,400 and(1,690) for the sixnine months ended JuneSeptember 30, 2015 and 2014, the Company recognized warranty expense of $6,600 and $10,200, respectively. Since the inception of the IDIQ contract in March 2010, the Company has delivered 137163 ADEPT units. As of JuneSeptember 30, 2015, there are 1541 ADEPT units that remain under the limited warranty coverage. As of JuneSeptember 30, 2015 and December 31, 2014, the Company had an accrued warranty expense of $40,100$139,410 and $33,500, respectively.
The following table reflects the reserve for product warranty activity as of JuneSeptember 30, 2015 and December 31, 2014:
2015 | 2014 | |||||||||||||||
| 2015 | 2014 | |||||||||||||||
Reserve for product warranty, beginning of period | $ | 33,500 | $ | 35,190 | $ | 33,500 | $ | 35,190 | ||||||||
Provision for product warranty | 29,900 | 51,210 | 136,700 | 51,210 | ||||||||||||
Product warranty expirations | (23,300 | ) | (52,900 | ) | (23,300 | ) | (52,900 | ) | ||||||||
Product warranty costs paid | - | - | (7,490 | ) | - | |||||||||||
Reserve for product warranty, end of period | $ | 40,100 | $ | 33,500 | $ | 139,410 | $ | 33,500 | ||||||||
ResearchandDevelopmentCosts
Research and Development expenditures for 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 $8,191$24,890 and $1,649$1,724 for the three months ended JuneSeptember 30, 2015 and 2014, respectively, and $9,735$34,625 and $3,297,$5,021, for the sixnine months ended JuneSeptember 30, 2015 and 2014, respectively.
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
Intangible Assets
A majority of the Company’s intangible assets consist of a license acquired in July 2015. Trade names and trademarks with finite lives are amortized using the straight-line method over their estimated useful lives. Licenses are amortized using a straight-line method over their estimated life of six years.
Mikros Systems Corporation
NotestoCondensedFinancialStatements
(unaudited)
Note 4–Income(Loss)PerShare
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’stable below sets forth the calculation of the percentage of net earnings per share is as follows:(loss) allocable to common shareholders under the two-class method:
Three Months Ended, | Six Months Ended, | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Basic earnings per common share: | ||||||||||||||||
Net income applicable to common shareholders - basic | $ | 120,712 | $ | 130,283 | $ | 261,501 | $ | 122,249 | ||||||||
Portion allocable to common shareholders | 99.2 | % | 99.2 | % | 99.2 | % | 99.2 | % | ||||||||
Net income allocable to common shareholders | 119,746 | 129,242 | 259,409 | 121,271 | ||||||||||||
Weighted average basic shares outstanding | 31,947,753 | 31,888,753 | 32,124,260 | 31,886,549 | ||||||||||||
Basic earnings per share | $ | - | $ | - | $ | 0.01 | $ | - | ||||||||
Dilutive earnings per common share: | ||||||||||||||||
Net income allocable to common shareholders | 119,746 | 129,242 | 259,409 | 121,271 | ||||||||||||
Add: undistributed earnings allocated to participating securities | 966 | 1,042 | 2,092 | 978 | ||||||||||||
Numerator for diluted earnings per common share | 120,712 | 130,283 | 261,501 | 122,249 | ||||||||||||
Weighted average basic shares outstanding | 31,947,753 | 31,888,753 | 32,124,260 | 31,886,549 | ||||||||||||
Diluted effect: | ||||||||||||||||
Stock options | 19,250 | 18,000 | 18,667 | 16,333 | ||||||||||||
Unvested restricted stock awards | 19,250 | - | 17,600 | - | ||||||||||||
Conversion equivalent of dilutive Series B Convertible Preferred Stock | 3,307,299 | 3,307,299 | 3,307,299 | 3,307,299 | ||||||||||||
Conversion equivalent of dilutive Convertible Preferred Stock | 255,000 | 255,000 | 255,000 | 255,000 | ||||||||||||
Weighted average dilutive shares outstanding | 35,548,552 | 35,469,052 | 35,722,826 | 35,465,181 | ||||||||||||
Dilutive earnings per share | $ | - | $ | - | $ | 0.01 | $ | - | ||||||||
| ThreeMonthsEnded | NineMonthsEnded | |||||||||||||||
| September30, | September30, | September30, | September30, | |||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Basic Income per Share: | ||||||||||||||||
Net income applicable to common shareholders -basic | $ | 36,736 | $ | 127,435 | $ | 298,238 | $ | 249,684 | ||||||||
Portion allocable to common shareholders | 99.2 | % | 99.2 | % | 99.2 | % | 99.2 | % | ||||||||
Net earnings allocable to common shareholders | 36,442 | 126,416 | 295,852 | 247,687 | ||||||||||||
Weighted average basic shares outstandingBasic income per share | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | ||||||||||||
| Basic income per share | $ | - | $ | - | $ | 0.01 | $ | 0.01 | ||||||||
Dilutive Income Per Share: | ||||||||||||||||
| Net income applicable to common shareholders | 36,442 | 126,416 | 295,852 | 247,687 | ||||||||||||
Add: Undistributed earnings allocated to participating securities | 294 | 1,019 | 2,386 | 1,997 | ||||||||||||
Numerator for diluted income per share | 36,736 | 127,435 | 298,238 | 249,684 | ||||||||||||
Weighted average shares outstanding - basic | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | ||||||||||||
Diluted effect: | ||||||||||||||||
Stock options | 19,250 | 20,222 | 19,250 | 18,000 | ||||||||||||
Unvested restricted stock awards | 19,250 | - | 19,250 | - | ||||||||||||
Conversion equivalent of diluted Series B Convertible Preferred Stock | 3,307,299 | 3,307,299 | 3,307,299 | 3,307,299 | ||||||||||||
Conversion equivalent of diluted Convertible | 255,000 | 255,000 | 255,000 | 255,000 | ||||||||||||
Restricted stock options | - | 22,000 | - | 15,714 | ||||||||||||
Weighted average dilutive shares outstanding | 35,548,552 | 35,509,307 | 35,665,577 | 35,488,707 | ||||||||||||
Dilutive income per share | $ | - | $ | - | $ | 0.01 | $ | 0.01 | ||||||||
Mikros Systems Corporation
NotestoCondensedFinancialStatements
(unaudited)
| ThreeMonthsEnded | NineMonthsEnded | |||||||||||||||
| September 30, | September30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
Numerator | ||||||||||||||||
Weighted average participating common shares | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | ||||||||||||
Denominator: | ||||||||||||||||
Weighted average participating common shares | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | ||||||||||||
Add: Weighted average shares of ConvertiblePreferred Stock | 255,000 | 255,000 | 255,000 | 255,000 | ||||||||||||
Weighted average participating shares | 32,202,753 | 32,159,786 | 32,319,778 | 32,147,694 | ||||||||||||
Portion allocable to common shareholders | 99.2 | % | 99.2 | % | 99.2 | % | 99.2 | % | ||||||||
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
This table below sets forth the calculation of the percentage ofDiluted net earnings allocable to common shareholders under the two-class method:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Numerator: | ||||||||||||||||
Weighted average participating common shares | 31,947,753 | 31,888,753 | 32,124,260 | 31,886,549 | ||||||||||||
Denominator: | ||||||||||||||||
Weighted average participating common shares | 31,947,753 | 31,888,753 | 32,124,260 | 31,886,549 | ||||||||||||
Add: Weighted average shares of Convertible Preferred Stock | 255,000 | 255,000 | 255,000 | 255,000 | ||||||||||||
Weighted average participating shares | 32,202,753 | 32,143,753 | 32,379,260 | 32,141,549 | ||||||||||||
Portion allocable to common shareholders | 99.2 | % | 99.2 | % | 99.2 | % | 99.2 | % | ||||||||
Diluted earningsincome (loss) per share for the three and sixnine months ended JuneSeptember 30, 2015 and 2014 does not reflect the following potential common shares, as the effect would be antidilutive.
June 30,2015 | June 30, 2014 | |||||||
Stock options | 610,000 | 610,000 | ||||||
Unvested portion of restricted stock | - | 75,000 | ||||||
Convertible preferred stock | - | - | ||||||
| 610,000 | 685,000 | |||||||
September30, 2015 | September30, 2014 | |||||||
Stock options | 610,000 | 610,000 | ||||||
| 610,000 | 610,000 | |||||||
Note 5 – Income Tax Matters
The Company conducts an on-going analysis to review its netthe deferred tax assetassets and the need for a related valuation allowance.allowance that it has recorded against deferred tax assets, primarily associated with Federal net operating loss carryforwards. As a result of this analysis and the actual results of operations, the Company has decreased its net deferred tax assets by $54,000 and $14,902$62,000 during the sixnine months ended JuneSeptember 30, 2015 and 2014, respectively.2015. The net deferred tax assets increased by $34,000 during the nine months ended September 30, 2014. The change in deferred tax assets is attributable to utilization of income tax attributes, primarily federal net operating losses, as the Company anticipates annual earnings from operations to continue.
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
Note 6 – Share-Based Compensation
During the three and sixnine months ended JuneSeptember 30, 2015 and 2014, the Company did not issue stock awards. During the sixnine months ended JuneSeptember 30, 2014, 7,000 sharesoptions were exercised for proceeds in the amount of $350. The Company recognized stock-based compensation expense for stock options of $37 and $2,850$969 for the three months ended JuneSeptember 30, 2015 and 2014, respectively. The Company recognized stock-based compensation expense for stock options of $74$111 and $5,680$6,649 for the sixnine months ended JuneSeptember 30, 2015 and 2014, respectively. The intrinsic value of the options as of JuneSeptember 30, 2015 is $3,080.
As of JuneSeptember 30, 2015 and 2014, there were 103,00044,000 restricted stock awards outstanding. The Company recognized stock-based compensation expense for restricted stock of $644 and $1,018 for the three months ended JuneSeptember 30, 2015 and 2014, respectively. The Company recognized stock-based compensation expense for restricted stock of $1,288$1,932 and $2,036$3,054 for the sixnine months ended JuneSeptember 30, 2015 and 2014, respectively.
As of JuneSeptember 30, 2015, there was $3,376$2,695 of unrecognized stock-based compensation expense related to all outstanding equity awards that will be recognized in a future periods.
Mikros Systems Corporation
NotestoCondensedFinancialStatements(unaudited)
(unaudited)
Note 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. Atair provided subcontracting services to the Company relating to the design of the chassis component within the ADEPT units. The Company incurred subcontracting service costs from Atair of $2,279 during the three and six months ended June 30, 2015. During the three and six months ended JuneSeptember 30, 2015 and 2014, the Company incurred subcontracting service costs from Atair of $2,000$0 and $26,689,$6,779, respectively. During the nine months ended September 30, 2015 and 2014, the Company incurred subcontracting service costs from Atair of $2,279 and $33,468, respectively.
Note 8 – Subsequent Events
In July 2015, the Company purchased certain software products, intellectual property and related assets from VSE Corporation. As payment for such products, the Company agreed to pay to VSE Corporation 30% of the gross royalty revenue related to the Company’s sale of licenses for the purchased software products during the six year period following the completion of the transaction, up to a maximum amount of $1,000,000. The primary software programs purchased by the Company are the Prognostics Framework (PF) and Diagnostic Profiler (DP) programs. The Diagnostic Profiler software is used worldwide by several multinational companies for optimized maintenance of diverse product lines. The Diagnostic Profiler is also used by the US Air Force for depot test programs, and Prognostics Framework is used by the US Army for several missile defense systems.
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 in or redirection of the U.S. defense budget;budget; the termination of any contracts with the U.S. Government; continuation of the Federal automatic sequestration cuts;Government; 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; our ability to integrate newly acquired software into our business model;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, 2014 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-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 OperationsOperations.
Mikros Systems Corporation (“Mikros,” the “Company,” “we” or “us”) is an advanced technology company specializing in the research, development and developmentproduction 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 sixnine months ended JuneSeptember 30, 2015 and 2014. We believe that we can utilize the intellectual property developed under our various SBIR awards and our other product offerings, 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, 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 newan innovative 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,systems, 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 that will help optimize performance for the Ballistic Missile Defense mission.system.
ADSSS
In 2013, we developed a second-generation of our Adaptive Distance Support Sensor Suite, or ADSSS, for the Littoral Combat Ship (LCS). ADSSS is a network-enabled system which can be configured to monitor multiple shipboard systems and report maintenance data onshore for further analysis to detect trends and predict failures. This development program remains on schedule internally and initial shipboard testing is planned for Summer 2016. 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.
Recent Developments
In July 2015, we purchased certain software products, intellectual property and related assets from VSE Corporation. The primary software programs purchased by us are the Prognostics Framework (PF) and Diagnostic Profiler (DP) programs. The Diagnostic Profiler software is used worldwide by several multinational companies for optimized maintenance of diverse product lines. The Diagnostic Profiler is also used by the US Air Force for depot test programs, and Prognostics Framework is used by the US Army for several missile defense systems. We believe that the new software products provide us with the opportunity to service commercial customers and additional DoD customers outside of the Navy. No payment was required at closing. We are required to pay the seller 30% of the gross royalty revenue generated over a six year period up to a maximum payment of $1.0 million.
In October 2015, our Quality Management System (“QMS”) was formally certified as compliant with the requirements of ISO 9001:2008. The ISO 9001 auditor found zero non-conformances at our facilities in both Fort Washington, PA and Largo, FL. Earlier this year, our QMS was certified by the Naval Sea Systems Command as compliant to NAVSEA Technical Specification 9090-310F, Appendix C and FY 2015 NAVSEA Standard Item 009-04. This Navy certification enables us to form shipboard Alteration Installation Teams and perform shipboard equipment installation and maintenance tasks. The new ISO 9001:2008 certification extends our NAVSEA certification to the leading industry-standard and applies across all of our business processes, for both development and manufacturing capabilities.
Contracts
On March 18, 2010, we were awarded and entered into a multi-year Indefinite Delivery, Indefinite Quantity (“IDIQ”) contract with the Naval Surface Warfare Center related to our ADEPT product. The contract provides for the purchase and sale of up to $26 million of ADEPT units and related engineering and logistics support. The initial term of the contract was five years, and in March 2015, the period of performance was extended through August 11, 2016. Substantially all of our revenue is attributable to our ADEPT product. In the past, we were generating revenues primarily from the production and delivery of ADEPT units. After executing the ADEPT program for four years, we now have contracts to do further R&Dresearch and development on ADEPT units to enhance functionality as well as provide other forms of support. We expect additional delivery orders during the remaining term of the contract.
In June 2013, we were awarded a $2.8 million service contract with Condition-Based Maintenance (“CBM”) for LCS systems using the 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, the SPS-49 long-range air surveillance radar.
During the second quarter of 2014, we were awarded four contracts collectively valued at approximately $1.0 million to be funded over the next two years. [NTD: Confirm whether it is still the “next two years” or a shorter period] 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's new 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, Pennsylvania. The second ADSSS award funds the installation of CBM equipment on the USS Fort Worth and continued shipboard testing. This "Pilot Program" extends our pilot installation of ADSSS on the USS Freedom, a project that was described by our Navy customer as "completely successful".
In July 2014, we were awarded additional funding of $0.3 million under the current IDIQ contract to upgrade the capabilities of the first 69 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 the 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 54 additional ADEPT units. As of JuneSeptember 30, 2015, we have delivered 1236 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 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. In January 2015, we were awarded an additional $0.1 million for the calibration of 31 additional ADEPT units.
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 which will provide the SPS-75 Air Search Radar and Rolling Airframe (RAM) systems with Combat Systems (CS), 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 AN/SPY-1 radar. We have delivered two of these units and expect to deliver these additionalthe balance of the units in late 2015 following the completion of the current production run of 54 units.2015. Also during March 2015, the Navy 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, we received a study contract valued at $30 thousand from Lockheed Martin Corporation, to start work with Lockheed Martin on CBM for Aegis systems.
In August 2015, the Navy issued Mikros a contract award valued at approximately $0.2 million for the calibration of 45 additional ADEPT units. This is the seventh contract award of this type that Mikros haswe have received in support of the calibration effort.
We received two contracts in September 2015, for software development on the SLA-10B and SPQ-9B radars, totaling approximately $0.25 million. We have been tasked to define how the ADEPT tool can help support testing of the SPQ-9B system on Self Defense Test Ships (SDTS).
In September 2015, we also received a contract modification for our current service contract with Condition-Based Maintenance (“CBM”) for LCS systems using the ADSSS, which added an additional $1.5 million for ongoing development. This funding will extend the program until September 30, 2016, and allow us to perform installations and support for the LCS Classes.
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 2015,2014, and expected revenue over the next sixtwelve months, is or will be from sales of ADEPT units under our IDIQ contract and releated R&D and support, 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 continue 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 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. ThisOur state-of-the-art test equipment cancould 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, along with software products that we recently purchased from VSE, 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 2015, our primary strategic focus is to continue to: (i) establish Mikrosourselves as a premium provider of research and development and product development services to the defense industry, including assembly and integration at our facility in Largo, FL;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, and using our newly purchased software products to increase our service offerings.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, continuing to generate recurring maintenance and calibration revenue for deployed ADEPT units, 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 expected 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. Our new Prognostics Framework and Diagnostic Profiler offerings are expected to accelerate these initiatives. 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, 2014. As of JuneSeptember 30, 2015, there have been no changes to such critical accounting policies and estimates.
Results of Operations
ThreeMonthsEnded June September30,2015and 20142014
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. We generated revenues of $1,734,382$1,240,393 during the three months ended JuneSeptember 30, 2015 compared to $1,209,802$1,057,442 during the three months ended JuneSeptember 30, 2014, an increase of $524,580,$182,951, or 43%17%. The increase was primarily attributabledue to the timing of the receipt of the production contracts for 64 ADEPT units.
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 JuneSeptember 30, 2015 was $877,168was$529,303 compared to $439,701$431,701 for the three months ended JuneSeptember 30, 2014,2015, an increase of $437,467$97,602, or 99%23%. The increase was due to our growth in revenue and attributable to receiving the production contracts for an aggregate of 64 ADEPT units.
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 benefits 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 JuneSeptember 30, 2015 were $326,521$309,769 compared to $276,751$329,864 for the three months ended JuneSeptember 30, 2014, an increasea decrease of $49,770,$20,095, or 18%.The increase6%. The decrease was primarily due to the decrease in incentive compensation and engineering tools and equipment offset by an increase in fringe benefits, salaries and consulting fees offset by a decrease in incentive compensation. fees.
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 JuneSeptember 30, 2015 were $300,574$328,734 compared to $308,504$213,956 for the three months ended JuneSeptember 30, 2014, a decreasean increase of $7,930,$114,778, or 3%54%. The decreaseincrease was primarily due primarily to decreases inincreased bid and proposal costs, and professional fees, offset by an increase in salariesresearch and legal costs.development, and general and administrative salaries.
At JuneSeptember 30, 2015, we estimateestimated our annual effective tax rate for 2015 to be 47.6%49.5%. We recognized a tax expense of $109,500of$36,000 for the three months ended JuneSeptember 30, 2015 primarily due to expected net income for the remainder of 2015. At JuneSeptember 30, 2015,the difference from the expected federal income tax rate is attributable to state income taxes, and certain permanent book-tax differences. As of JuneSeptember 30, 2015, we had net operating loss carryforwardscarry forwards of $170,709, which will begin expiring in 2033 if not utilized.
We reported net income of $120,712$36,736 during the three months ended JuneSeptember 30, 2015 as compared to net income of $130,283$127,435 during the three months ended JuneSeptember 30, 2014. The decrease in net income was primarily attributable to income tax expense due to the tax benefit recognized from the decrease in valuation allowance established for net deferred tax assets during the three months ended September 30, 2014 and higher revenues.general and administrative costs.
SixNine Months Ended JuneSeptember 30, 20152015 and 20142014
We generated revenues of $4,210,421 million$5,450,815 during the sixnine months ended JuneSeptember 30, 2015 compared to $2,093,142 million$3,150,584 during the sixnine months ended JuneSeptember 30, 2014, an increase of $2,117,279,$2,300,231, or 101%73%. The increase was primarily attributable to the production contracts for an aggregate of 64 ADEPT units.
Cost of sales for the sixnine months ended JuneSeptember 30, 2015 was $2,339,073$2,868,377 compared to $852,380$1,284,081 for the sixnine months ended JuneSeptember 30, 2014, an increase of $1,486,693,$1,584,296, or 174%123%. The increase was due to our growth in revenue and attributable to receiving the production contracts for an aggregate of 64 ADEPT units.
Engineering costs for the sixnine months ended JuneSeptember 30, 2015 were $748,936$1,058,705 compared to $502,653$832,517 for the sixnine months ended JuneSeptember 30, 2014, an increase of $246,283,$226,188, or 49%27%. The increase was primarily due to the increase in fringe benefits, salaries, consulting fees, engineering, travel and incentive compensations, partially offset by a decrease in recruiting costs, engineering tools and equipment and computer software and related costs.
General and administrative costsexpenses for the sixnine months ended JuneSeptember 30, 2015 were $622,597$951,331 compared to $592,635$806,591 for the sixnine months ended JuneSeptember 30, 2014, an increase of $29,962,$144,740, or 5%18%. The increase was due primarily to an increase in salaries and professional fees, partially offset by a decrease in bid and proposal costs and professional fees.costs.
We recognized a tax expense of $238,500of$274,500 for the sixnine months ended JuneSeptember 30, 2015 primarily due to expected net income for the remainder of 2015. At JuneSeptember 30, 2015, 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 hadreported net income of $261,501$298,238 during the sixnine months ended JuneSeptember 30, 2015 as compared to net income of $122,249$249,684 during the sixnine months ended JuneSeptember 30, 2014. The increase is primarily attributable to the award under the ADEPT contracts offor an aggregate of 64 units.
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.
During the sixnine months ended JuneSeptember 30, 2015, net cash provided by operations was $643$485,964 compared to $64,584 during the six months ended June 30, 2014. While our net income increased by $139,252, net cash provided by operations decreasedof $270,331 during the nine months ended September 30, 2014. The increase was due primarily to decreasesan increase in net income of $48,544, a decrease in accounts receivable partially offset by a decrease in accounts payable and accrued payroll and payroll taxes, and increases in accounts receivable, partially offset by higher deferred tax expense.taxes.
During the sixnine months ended JuneSeptember 30, 2015, net cash used in investing activities was $2,693 compared to $11,890 during the sixnine months ended JuneSeptember 30, 2014. The decrease is attributablewas due to lowerless capital expenditures in 2015.
During the sixnine months ended JuneSeptember 30, 2015 there was no net cash provided by financing activities compared toand 2014, net cash provided by financing activities of $350 during the six months ended June 30, 2014.The decrease was attributable to cash proceeds received due to the exercise of stock options in 2014.options.
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 JuneSeptember 30, 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-balanceoff- 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.
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 JuneSeptember 30, 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.
Our management, including our president, conducted an evaluation of the effectiveness of internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control - Integrated Framework (2013). 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 JuneSeptember 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item6.Exhibits
No. | Description | |
31.1 | Certification of principal executive officer and principal financial officer pursuant to Rules 13a-14(a) or |
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. |
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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.
| MIKROS SYSTEMS CORPORATION | ||
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November 16, 2015 | By: | /s/ Thomas J. Meaney | |
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| Thomas J. Meaney | |
| President and Chief Financial Officer | |||
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