See Notes to Unaudited Condensed Financial Statements 

Mikros Systems Corporation

Statements of Shareholders' Equity

(unaudited)

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

The weighted average remaining lease terms and discount rates for all of the Company’s operating leases as of September 30, 2019March 31, 2020 were as follows:

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This reportdocument contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-lookingforward 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 by their nature address matters that 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.degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:include, but are not limited to: 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, 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 Innovation Research grants;grants, competitive pricing pressures;pressures, market acceptance of our products under development:development, delays in the development of products;products, our ability to adequately integrate our software offerings into our business model, our ability to developmarket our solutions to commercial customers, the duration and market solutions for commercial customers,severity of the current coronavirus COVID-19 pandemic and its effect on our business operations, personnel, supply chain, Federal Government procurement process, and the geographic markets in which we operate and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature; statements of assumption underlying any of the foregoing, as well as other factors set forth under the captionnature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. These uncertainties are described in more detail in Part I, Item 1A. “Risk Factors” in ourof this Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission.2019. 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 dutydo not undertake to update or revise our forward-looking statements.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited condensed financial statements and related information contained herein and our audited financial statements as of December 31, 2018.2019.

Overview

Mikros Systems Corporation (the “Company”, “we”, “Mikros” or “us”) designs and manufactures software, hardware and electronic systems used to maintain complex distributed systems. Examples of such systems include defense equipment such as radars and combat systems, and commercial and industrial applications such as printing presses, power distribution, utility systems, and Federal Aviation Administration systems.

Our primary business focus is to (i) provide engineering services, products, software and related maintenance under contracts with the United States Department of Defense (DoD), primarily the United States Navy and (ii) pursue Small Business Innovation Research (SBIR) programs from the Department of Defense,DoD, Department of Homeland Security, and other governmental authorities, andwith a view to expandexpanding this government funded research and development into products and services.government contracts. Since 2002, we have been awarded several Phase I, II, and III Small Business Innovation ResearchSBIR contracts, and several IDIQ contracts for our ADEPT and ADSSS products.

Revenues from our government contracts represented substantially all of our revenues for the ninethree months ended September 30, 2019March 31, 2020 and 2018.2019. Over the past decade, our principal customer has been the U.S. Department of Defense, primarily the U.S. Navy (“Navy”). We have developedprovide the following two key systems forsystem to the Navy for maintenance of radars and combat systems:

More recently, we have developed and marketed software products to analyze maintenance data collected from target systems, optimize maintenance procedures, and predict failures. Our Prognostics Framework®Framework (PF) and Diagnostic Profiler®Profiler (DP) products provide software capabilities which complement our maintenance hardware products (ADEPT(ADEPT® and ADSSS) and allow us to provide complete hardware/software solutions for advanced maintenance, particularly of complex distributed systems. Now that we have a complete hardware/software solution for advanced maintenance, we are expanding into commercial and industrial markets.

Product PortfolioOur Products

Revenues from our government contracts represented substantially all of our revenues for the nine months ended September 30, 2019. We believe that we can utilize the intellectual property developed under our various Small Business Innovation Research awards to develop proprietary products for both the government and commercial marketplace.

Adaptive Diagnostic Electronic Portable Testset (ADEPT) (ADEPT). ADEPTADEPT®, also known as the AN/PSM-132, is an automated maintenance workstation designed to significantly reduce the time required to align all variants of the AN/SPY-1 Radar System aboard U.S. Navy Aegis cruisers and destroyers, while optimizing system performance and readiness. ADEPT Systems are currently deploying on all Aegis CGManufacturing, selling and DDG platforms to support the AN/SPY1 radar system. Since the system uses commercial instrument case and modules,servicing ADEPT units can be modified to support both preventative maintenance and condition-based maintenancewas a substantial part of other radars and complex electronic systems in military or commercial applications. Since inceptionour business over the past decade. During the life of the program, we have delivered a total of 226 ADEPT units. Inunits to our Navy customers. Effective October 1, 2019, we received notice from Program Executive Office Integrated Warfare Systems thatthe US Navy determined to stop funding the ADEPT program will not be funded in fiscal year 2020.

ADEPT Distance Support Sensor Suite (ADSSS). In 2013, we started development of ADSSS for the Navy’s Littoral Combat Ship (“LCS”). ADSSSLCS. Our system has now matured and has earned the official Navy nomenclature AN/SYM-3. The LCS is the U.S. Navy’s latest combat warship. AN/SYM-3 is a network-enabled system that can be configured to monitor multiple shipboard systems and report maintenance data onshore for further analysis to detect trends and predict failures. ADSSSAN/SYM-3 provides an open architecture approach with industry standardindustry-standard hardware, and cybersecurity compliant software to acquire and process system operational and maintenance data. ADSSSThe AN/SYM-3 system fully automates the capture of system operation, environment and maintenance data to provide unattended operation. The system monitors key parameters and sends alert notifications when parameters move out of tolerance.

The first full AN/SYM-3 system was successfully completed on LCS 2 and onshore installation of prognostics software has been completed at Port Hueneme Division. The ADSSS with its remote monitoring and prognostics capabilities, is nowused on both variants of the LCS, currently planned to be at least 32 ships. In 2019, we completed installations on four additional LCS ships that are being further developeddeployed allowing for installationdata collection while operational at sea. During 2020, we expect to install systems on two or three additional ship classes.ships.

We are working with the government to have their virtual data transport system installed on two deploying ships, allowing for near real-time data to be sent back to shore and processed through our prognostics framework models. During 2020, we expect to add several new combat system elements to our LCS platform which is expected to expand our footprint and bring condition-based maintenance plus (CBM +) to additional mission-critical systems. We are also working to maintain SYM-3 for modernization systems that are being planned in the next 3-5 years

Through our NSSMS contract awarded in the fourth quarter of 2019, we plan to develop a new variant of the AN/SYM-3 system for the NATO Seasparrow Surface Missile System. NSSMS is installed on Navy Aircraft Carriers (CVN class) and “Big Deck” Amphibious Assault Ships (LHD/LHA class), so the new variant could be installed on these two new ship classes. We have started the software, hardware, and systems engineering tasks needed to move this CBM capability to land based test events and then to a long-term pilot installation for four systems on the NSSMS platform.

The SYM-3 has also generated interest from other ship classes, Aegis and unmanned systems, and for use to monitor shipboard hull, mechanical and electrical (HME) systems, additional combat systems, and navigational radars. This is part of the Navy’s continued effort to increase operational, sustainability and lethality for many different ship classes. We are also working to maintain SYM-3 for modernization systems that are being planned in the next three to five years.

Diagnostic Profiler.Profiler. The Diagnostic Profiler is an integrated development environment for developing diagnostic capabilities used in maintenance, embedded diagnostics, and troubleshooting applications. The software provides diagnostic services to its host application, including fault call-outs,callouts, suggested “next best” test to further isolate faults, and direct maintenance actions. When additional faults are identified, the software prioritizes the fault call-outscallouts by probability. The use of the diagnostic profilerDiagnostic Profiler eliminates the need for the development and maintenance of diagnostic flow charts and hard-coded text sequences. This reduces the effort required to correct bugs and design changes and overchanges. Over the life of the system, this could result in significant cost savings. This system is used by clients and has also generated yearly support contracts for service. Mikros has also been upgrading and customizing the system to the client needs.  

Prognostics Framework.Prognostics Framework is an analysisanalytic software framework for framework that implementsimplementing real-time prognostics, diagnostics, and status monitoring to support embedded prognostic applications, health management systems and condition-based maintenance applications. The Prognostics Framework software institutes an information framework that organizes relevant data related to: (i) the condition of the system; (ii) the system’s ability to perform required functions over specific time intervals; and (iii) the need for maintenance actions and repair parts. The Prognostics Framework has been used to implement a complete health management system on one of the first radar systems to require prognostics as a key element of its overall solutions. Other potential applications include complex computer networks, power generators, power supply, cooling, C4I (Command, Control, Communications, Computers & Intelligence), environmental and environmentalimaging systems.

Government Contracts

In September 2016, we were awarded and entered into a multi-year IDIQ contract with the Naval Surface Warfare Center, Port Hueneme Division, relating to our ADSSS product. The contract has a term of five years and provides for the purchase and sale of up to $48 million of ADSSS units and related engineering and logistics support. The first delivery order in the amount of $3.0 million was awarded on September 15, 2016 to perform installations, support and logistics for the LCS class.

In April 2017, we received contract awards totaling $2.0 million from the U.S. Navy to extend the capabilities of the ADSSS Condition-Based Maintenance (CBM) system to support a fourth Navy radar system, the MK 99. The Small Business Innovation Research office in Dahlgren, VA provided $0.5 million of the total funding to support this effort.

In June 2018, we received the second delivery order under our multi-year IDIQ relating to our ADSSS product. This $2.5 million order provides for further MK 99 Fire Control System (FCS) development, test and installation.

In September 2019, we received the third delivery order under our multi-year IDIQ relating to our ADSSS product. The award covers the installation of condition-based maintenance systems for the Littoral Combat Ship and has a ceiling of $15 million.

In October 2019, we received an additional contract award under our multi-year IDIQ relating to our ADSSS product. This incremental funding with a ceiling up to $6 million, under the third delivery order, covers the development of a new variant of the AN/SYM-3 system and installation of the new CBM system on two additional ship classes; the Aircraft Carriers (CVN class) and the “Big Deck” Amphibious Assault Ships (LHD/LHA class).

In February 2017, we were awarded a follow-on multi-year Small Business Innovation Research Phase III IDIQ contract with the Naval Surface Warfare Center, Crane Division, for our ADEPT program. The contract providesprovided for the purchase and sale of up to $35.1 million of ADEPT units and related engineering, such as calibration, repair, training and other logistics services. We have been awarded several delivery orders under the ADEPT IDIQ Contract. In October 2019, we received notice from Program Executive Office Integrated Warfare Systems that the ADEPT program will not be funded in fiscal year 2020. We will continue to fulfill our current obligations under outstanding engineering services task orders previously issued under the program. As of the date of this report, we have the followingone open task orders: order for general engineering services.

Commercial Contracts

In September 2019 and 2020, HP Indigo, Saab Grintek DefenceDefense and Northrop Grumman renewed itstheir annual contractcontracts for Diagnostic Profiler and Diagnostician Software Maintenance and Support.  We have also increased our capabilities to provide online support at one of the client’s facility. 

The Mikros MindR™system is a vendor-agnostic facility health status monitoring solution which provides the ability to collect data from critical building infrastructure systems including HVAC, mechanical systems, communication systems, chillers, pumps, electrical switchgear, seismometers and surveillance systems, as well as monitor energy usage data, water level data, and data from any other systems. Data collected can be aggregated on a centralized physical or secure cloud-based server where Mikros MindR Enterprise software can perform analysis to determine status, diagnose existing failures, and predict future failures. We are currently piloting our Mikros MindR system at a client facility to collect and distribute data from the HVAC units to the client.

Key Performance Indicator

As substantially all of our revenue is derived from contracts with the U.S. Federal government, our key performance indicator isindicators are (i) the dollar volume of contracts and task orders awarded to us under our IDIQ contract, coveringand (ii) the ADSSS program.number and dollar amount of new contracts and SBIR grants awarded to us. Increases in the number and value of contracts and tradedelivery orders awarded will generally result in increased revenues in future periods and, assuming relatively stable variable costs associated with our fulfilling such awards, 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 substantial majority of our revenue in 2019, and expected revenue in 2020, is expected to comeor will be from sales of ADSSSAN/SYM-3 systems under our IDIQ contract, continued generation of task orders and our ability to expand the market and potential customer base for this technology is our products will be a key indicator of future revenue.primary focus.

Outlook

Our strategy for continued growth is based on continuing expansion of our defense business and executing new initiatives to apply our advanced maintenance technology in commercial markets. With regard to the defense industry, we expect to continue expanding our technology base, backlog and revenue by continuing our active participation in the Department of Defense Small Business Innovation Research program and biddingto bid 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, communications engineering, remote monitoring and communications engineering.augmented reality. We believe that we can utilize the intellectual property developed under our various Small Business Innovation ResearchSBIR awards to develop proprietary products, such as ADEPT and ADSSS, with broad appeal in both the government and commercial marketplace. Our state of the art test equipment can be used by many commercial and governmental customers such as the Federal Aviation Administration,FAA, radio and television stations, cell phone stations, and airlines. Second, we will continue to actively participate in the SBIR program and pursue Small Business Innovation ResearchSBIR projects with the DoD, Department of Homeland Security, the U.S. Navy, and other government agencies. Third, we believe that through our marketing of products, we will develop key relationships with prime defense contractors. Our strategy is to develop these relationships into long-term, key subcontractor roles on future major defense programs awarded to these prime contractors.

Historically, the ADEPT IDIQ contract generated a material amount of our revenue. In 2019, revenues from this program materially decreased as we did not receive any new production orders, ongoing maintenance and recalibration services were reduced, and we experienced delays in follow-on contract awards. In October 2019, we received notice from Program Executive Office Integrated Warfare Systems that the ADEPT program will not be funded in fiscal year 2020. Although this development adversely impacted our revenues and level of activity in 2019, we expect to offset this reduction in future periods through awards under our ADSSS IDIQ contract.

With regard to commercial markets, our Diagnostics Profiler and Prognostics Framework software offerings complement our hardware products and allow us to provide complete hardware/software solutions for advanced maintenance applications. Current customers for these systems include major multinational corporations such as HP, Indigo, which recently extended our Diagnostic Profiler software support for a ninthseventh year. We continue to receive repeat orders from these customers to support their applications.

We plan to provide “condition-based maintenance” systems for “complex distributed systems” to commercial customers. In that regard, we are currently developing a condition-based maintenance solution for heating ventilation, air conditioning and refrigeration (HVAC)HVAC equipment based on our proprietary Prognostics Framework solution.solution which we call Mikros Mindr. We have deployed two active pilot systems that are providing key maintenance data on a daily basis to service technicians. More recently, we commenced a pilot programWe are also working with an energy consulting firmbusiness in Florida to collectremotely monitor energy consumption data to reduce power consumption, decrease system downtime,use and recommend proactiverequired maintenance to commercial and industrial energy users.for its customers. We are also in discussions with additional commercial companies regarding the use of our condition-basedcondition based maintenance applications.

In the fourth quarter of 2019 and into 2020, our primary strategic focus is to continue as a premium provider of ResearchR&D and Product Developmentproduct development services to the defense industry, generate multiple task orders under our ADSSS IDIQ contract,and BOA contracts, additional Phase I and Phase II SBIR grants with a view to obtaining additional government contracts, and expand our commercial business through marketing and sales of our Prognostics Framework and Diagnostic Profiler software products. In furtherance of this strategy, we have made material investments in our engineering and technical staffs to provide broader and deeper expertise to our customers. We will also seek to generate incremental revenue through providing light assembly and production services to commercial customers at our manufacturing and depot centerM&D Center in Largo, Florida (the “M&D Center”).Florida.

Over the longer term, we intend to further develop advanced maintenance technologies and implement these technologies in products for deployment in defense applications and to expand into more 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.

Recent Developments

An outbreak of a novel strain of the coronavirus, COVID-19, has been recognized as a pandemic by the World Health Organization. This outbreak has severely restricted the level of economic activity around the world. In response to this coronavirus outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. The Governor of Pennsylvania has ordered the closure of all non-life sustaining businesses in Pennsylvania where the majority of our employees work.  Further, individuals' ability to travel has been curtailed through mandated travel restrictions and may be further limited through additional voluntary or mandated closures of travel-related businesses. Although our employees are able to work remotely, this coronavirus outbreak has had a negative impact on our productivity and revenues to date in 2020.

In addition, the pandemic and resulting closures has negatively impacted our supply chain for component parts necessary to timely deliver AN/SYM-3 systems to our Government customer. Non-essential travel bans and quarantine protocols imposed to access US Navy ships have and are expected to continue to materially delay our ability to complete on-ship installations, result in excessive down-time for our engineering personnel, and increase travel costs. The pandemic has also resulted in delays in contract awards, task orders, and contract modifications to fund our projects. All of the forgoing has and will continue to adversely impact our financial condition and results of operation. Given the uncertainty regarding the spread of this coronavirus, the related financial impact cannot be reasonably estimated at this time.

During recent years, the combination of spending caps, discretionary spending cuts, sequestration and further changes in defense spending and priorities have caused, and may in the future continue to cause, delays in funding certain projects. This may negatively impact our revenues and profits.

Changes to Critical Accounting Policies and Estimates

In February 2016,We reviewed all of the FASBrecently issued ASU 2016-02, Leases (Topic 842). The new standard supersedesaccounting pronouncement through May 2020 which are not yet effective and we do not believe the present U.S. GAAP standardfuture adoption of any such pronouncements may be expected to cause a material impact on leases and requires substantially all leases to be reported onour financial condition or the balance sheet as right-of-use assets and lease obligations. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods. Early adoption is permitted and in the original guidance the modified retrospective application was required, however, in July 2018 the FASB issued ASU 2018-11 which permits entities with another transition method in which the effective date would be the dateresults of initial application of transition. Under this optional transition method, we would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective approach and the optional transition method. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classifications.its operations.

Adoption of the new standard resulted in the recording of operating lease right-of-use assets and operating lease liabilities on our balance sheet, but did not have an impact on the Company's beginning retained earnings, statement of income or statement of cash flows. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged.

Results of Operations

Three Months Ended March 31, September2020 30, 2019 and 2018March 31, 2019

We generated revenues of $ $1,017,121$1,081,163 during the three months ended September 30, 2019March 31, 2020 compared to $ $1,893,945$2,020,265 during the three months ended September 30, 2018,March 31, 2019, a decrease of $876,824,$939,102, or 46%. The decrease was due principally to delaysThis resulted primarily from the delay of follow-on contract awardsfunding and no ADEPT units producedthe delivery of direct components. Revenues in 2019.the first quarter of 2020 and 2019 consisted entirely of engineering support services contracts.

Cost of sales consists of direct contract costs including labor, material, subcontracts, for the ADEPT units that have been delivered, travel, and other direct costs. Cost of sales during the three months ended September 30, 2019 was $ 317,015 compared to $ 776,493 for the three months ended September 30, 2018,March 31, 2020 was $357,473 compared to $778,542 for the three months ended March 31, 2019, a decrease of $459,478$421,069 or 59%54%. The decrease relates to a change inreduction resulted from the mixdelay of contracts generating revenues as compared tofollow-on funding and the third quarterdelivery of 2018. In 2019, we did not produce any ADEPT units and all revenue was generated from engineering support services.direct components.

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 benefit 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 September 30, 2019March 31, 2020 were $691,337$609,961 compared to $648,739$662,250 for the three months ended September 30, 2018, an increaseMarch 31, 2019, a decrease of $42,598,$52,289, or 7%8%. The increase in 2019 was due to delays of follow-on contract awards, and shift of increases in engineering personnel from revenue generating contracts.

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, including independent research and development (IR&D) which consists of research and development expenses unrelated to our defense contracts). General and administrative costs for the three months ended September 30, 2019March 31, 2020 were $349,230$445,319 as compared to $413,731$463,565 for the three months ended September 30, 2018,March 31, 2019, a decrease of $64,501,$18,246, or 16%4%. The decrease in 2019 was due to a decrease in research and development costs and the elimination of incentive compensation expenses in 2019.

We estimated our annual effective tax rate for 2020 and 2019 to be 35% and 31%. As a result, we recognized a tax benefit of $130,031$114,503 for the three months ended September 30,March 31, 2020, as compared to tax expense of $(36,835) for the three months ended March 31, 2019. At September 30, 2019, the differenceThe differences from the expectedstatutory federal statutory income tax rate iswere attributable to state income taxes and certain permanent book-tax differences.

We reported a net loss of $209,532 for$216,285 in the three months ended September 30, 2019March 31, 2020 as compared to net income of $37,029 for the$80,805 in three months ended September 30, 2018. The decrease was attributable primarily to the decrease in revenues in the third quarter ofMarch 31, 2019.

Nine Months Ended September 30, 2019 and 2018

We generated revenues of $ $4,890,889 during the nine months ended September 30, 2019 compared to $6,626,716 during the nine months ended September 30, 2018, a decrease of $ $1,735,827, or 26%. The decrease was due principally to delays of follow-on contract awards and no ADEPT units produced in 2019.

Cost of sales for the nine months ended September 30, 2019 was $1,887,708 compared to $3,055,932 for the nine months ended September 30, 2018, a decrease of $1,168,224 or 38%. The decrease relates to a change in the mix of contracts generating revenues as compared to the corresponding period of 2018. In 2019, we did not produce any ADEPT units and all revenue was generated from engineering support services.

Engineering costs for the nine months ended September 30, 2019 were $2,049,425 compared to $1,882,829 for the nine months ended September 30, 2018, an increase of $166,596, or 8%. The increase in 2019 was due to delays of follow-on contract awards, and a shift of increases in engineering personnel from revenue generating contracts.

General and administrative costs for the nine months ended September 30, 2019 were $1,182,537 compared to $1,287,668 for the nine months ended September 30, 2018, a decrease of $105,131, or 9%. The decrease is due to the elimination of the incentive compensation expenses in 2019.

At September 30, 2019, we estimated our annual effective tax rate for 2019 to be 41%. We recognized a tax benefit of $92,764 for the nine months ended September 30, 2019 primarily due to expected net losses for the remainder of 2019. At September 30, 2019, the difference from the expected federal statutory income tax rate is attributable to state income taxes and certain permanent book-tax differences.

We reported a net loss of $132,448 for the nine months ended September 30, 2019 as compared to net income of $274,161 for the nine months ended September 30, 2018. The decrease was attributable primarily to the decrease in revenues in the first nine monthsquarter of 2019.2020.  

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 ninethree months ended September 30, 2019,March 31, 2020, net cash used in operations was $294,266$411,374 compared to net cash provided byused in operations of $213,997$559,073 during the ninethree months ended September 30, 2018.March 31, 2019. The decrease in cash used in operations of $147,699 was primarily due to a $404,259 decrease in cash used in operations resulting from the net loss for the nine months ended September 30, 2019 and timing of receipts and payments related to our operating assets and liabilities. The decrease in cash used in operations related to noncash charges of $40,530 which amounts were offset by an increase in cash used in operations of $297,090 which represents the increase in our net loss of $216,285 for the three months ended March 31, 2020 as compared to net income of $80,805 for the three months ended March 31, 2019.

Net cash used in investing activities was $32,360$0 in the ninethree months ended September 30, 2019March 31, 2020 as compared to $98,718$30,842 in the ninethree months ended September 30, 2018,March 31, 2019, a decrease of $66,358.$30,842. The decrease was duerelated to the decrease in purchasescompletion of equipment and furniture and fixtures related to an expansion of our Pennsylvania offices in 2018.Pennsylvania in 2019.

On January 31, 2018, we entered into a $550,000 credit facility with PNC Bank. The facility initially matured on January 31, 20192020 and has been extended to January 31, 2020.2021. The facility accrues interest at a variable rate equal to the Daily LIBOR Rate plus 250 basis points. Interest is paid monthly. Principal borrowings may be prepaid at any time without penalty and the facility is secured by substantially all of our assets. The facility contains customary affirmative and negative nonfinancial covenants. As of September 30, 2019,March 31, 2020, no amounts were outstanding under the facility.

In order to pursue strategic opportunities, obtain additional Small Business Innovation ResearchSBIR 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.

Off-Balance Sheet Arrangements

As of September 30, 2019,March 31, 2020, 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 Chief Executive Officer who serves asand our principal executive officer and principal financial officer.Chief Financial Officer. Based upon that evaluation, our presidentChief Executive Officer and Chief Financial Officer concluded that as of September 30, 2019,March 31, 2020, 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, as amended, 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)) that occurred during the fiscal quarter ended September 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 5.  Other Information.

We are providing the following disclosure in lieu of filing a Current Report on Form 8-K relating to “Item 8.01 Other Events” of Form 8-K.

On May 13, 2020, we paid $753,300 to PNC Bank representing repayment in full of the amount we borrowed from PNC pursuant to the Paycheck Protection Program of the recently enacted Coronavirus Aid, Relief, and Economic Security Act administered by the U.S. Small Business Administration. 

Item 6.   Exhibits

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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