See Notes to Unaudited Condensed Financial Statements 

See Notes to Unaudited Condensed Financial Statements

See Notes to Unaudited Condensed Financial Statements

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Diluted net income (loss) per share for the three and sixnine months ended JuneSeptember 30, 2020 and 2019 does not reflect issuance of the following potential common shares, as the effect would be antidilutive.

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

The following table presents the maturity profile of the Company’s operating lease liabilities based on the contractual undiscounted payments with a reconciliation of these amounts to the remaining net present value of the operating lease liability reported in the balance sheet as of JuneSeptember 30, 2020.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This document 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.” Forward-looking statements by their nature address matters that are, to different 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, but are not limited to: changes in business conditions, a decline or redirection of the U.S. defense budget, the termination of any contracts with the U.S. Government, changes in our sales strategy and product development plans, changes in the marketplace, continued services of our executive management team, our limited marketing experience, competition between us and other companies seeking Small Business Innovation Research grants, competitive pricing pressures, market acceptance of our products under development, delays in the development of products, our ability to adequately integrate our software offerings into our business model, our ability to market our solutions to commercial customers, the duration and 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. 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” of our Annual Report on SEC Form 10-K for the year ended December 31, 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 do not undertake to update 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, 2019.2019.

Mikros Systems Corporation (the “Company”, “we”, 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 DoD, Department of Homeland Security, and other governmental authorities, with a view to expanding this government funded research and development into government contracts. Since 2002, we have been awarded several Phase I, II, and III SBIR contracts, and several IDIQ contracts for our ADEPT® and ADSSS® products.

Revenues from our government contracts represented substantially all of our revenues for the sixnine months ended JuneSeptember 30, 2020 and 2019. Over the past decade, our principal customer has been the U.S. Department of Defense, primarily the U.S. Navy (“Navy”). We provide the following key system to the Navy for maintenance of radars and combat systems:

More recently, weWe have also developed and marketed software products to analyze maintenance data collected from target systems, optimize maintenance procedures, and predict failures. Our Prognostics Framework® (PF) and Diagnostic Profiler® (DP) products provide software capabilities which complement our maintenance hardware products (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.

Our Products

Adaptive Diagnostic Electronic Portable Testset®Testset® (ADEPT). ADEPT, 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. Manufacturing, selling and servicing ADEPT units was a substantial part of our business over the past decade. During the life of the program, we delivered a total of 226 ADEPT units to our Navy customers. Effective October 1, 2019, the US Navy determined to stop funding the ADEPT program in fiscal year 2020.

ADEPT Distance Support Sensor Suite®Suite® (ADSSS). In 2013, we started development of ADSSS for the Navy’s LCS. 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. AN/SYM-3 provides an open architecture approach with industry-standard hardware, and cybersecurity compliant software to acquire and process system operational and maintenance data. The 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 was completed at Port Hueneme Division. The ADSSS is used 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 deployed allowing for data collection while operational at sea. During 2020, we expect to install systems on two or three additional 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 contractAN/SYM-3 delivery order awarded in the fourth quarterSeptember of 2019, we plan to developdeveloped 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. During the new variant could be installedthird quarter of 2020, our Government customer notified us to stop work on these two new ship classes.the AN/SYM-3 expansion into NATO Seasparrow, as it does not expect further funding for this initiative in fiscal year 2021.  We have startedcompleted all work under all outstanding task orders for this effort.  Although this is subject to change, there can be no assurance whether this initiative will be funded in 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 installationfuture, if at all.  Work for four systemsthe Littoral Combat Ship continues uninterrupted on the NSSMS platform.same delivery order.

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. 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 callouts, suggested “next best” test to further isolate faults, and direct maintenance actions. When additional faults are identified, the software prioritizes the fault callouts by probability. The use of the Diagnostic 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. 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. We have also been upgrading and customizing the system to the client needs.  

Prognostics Framework. Prognostics Framework is an analytic software framework for implementing 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 imaging 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 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. As of the date of this report, approximately $4.0 million of incremental funding has been awarded for work to be executed in government fiscal year (FY) 2020.

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). As of the date of this report, $3.0 million of incremental funding has been awarded for work to be executed in FY 2020.

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 provided 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 one open task order for general engineering services.

In November 2019, we were awarded a five (5) year Basic Ordering Agreement (BOA) from Naval Air Warfare Center Aircraft Division, to begin a Phase I SBIR effort entitled “Unmanned Surface Vehicle and Unmanned Underwater Vehicle Autonomous Behavior Development”. The amount of this Phase I effort was approximately $150,000.

In April 2020, we received $4.9 million of additional funding from the U.S. Navy to expand its flagship AN/SYM-3 program to additional LCS systems, new combat systems, and two new ship classes.  The new funding was part of the third Delivery Order awarded under our multi-year IDIQ relating to our ADSSS product.   The funding will provide for continuing installations on the LCS class and development of CBM solutions for aircraft carriers and “big deck” amphibious ships.

In April 2020, we received notification of a Phase I SBIR contract entitled “ADAPT - Naval Depot Modernization and Sustainment” This program seeks to develop an integrated solution to allow facility managers to monitor the status of a wide range of infrastructure systems, identify areas of concern, and predict future areas of concern. The Phase I objective is to demonstrate proposed solution feasibility. We will develop a solution 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 other critical infrastructure systems. This work will include developing a limited scale system to illustrate the concept.  The amount of this Phase I effort was approximately $200,000.

In June 2020, we received $1.2 million of additional funding from the U.S. Navy to expand its flagship AN/SYM-3 program to additional LCS systems and new combat systems.  The new funding was part of the third Delivery Order awarded under our multi-year IDIQ relating to our ADSSS product.   The funding will provide for continuing installations on the LCS.

In September 2020, we received an additional $1.7 million from U.S. Navy under the third delivery order for the AN/SYM-3 program. This funding will allow for continued installations on the LCS platform and new combat systems.

Commercial Contracts

In 2019 and 2020, HP Indigo, Saab Grintek Defense, and Northrop Grumman renewed their annual contracts 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 indicators are (i) the dollar volume of contracts and task orders awarded to us under our IDIQ contract, and (ii) the number and dollar amount of new contracts and SBIR grants awarded to us. Increases in the number and value of contracts and delivery 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 or will be from sales of AN/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 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 to 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 augmented reality. We believe that we can utilize the intellectual property developed under our various SBIR 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 FAA, radio and television stations, cell phone stations, and airlines. Second, we will continue to actively participate in the SBIR program and pursue SBIR projects with the DoD, Department of Homeland Security, 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.

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, which recently extended our Diagnostic Profiler software support for a seventh 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 developing a condition-based maintenance solution for HVAC equipment based on our proprietary Prognostics Framework solution which we call Mikros MindR. We have deployed two active pilot systems that are providing key maintenance data daily to service technicians. We are also working with an energy consulting business in Florida to remotely monitor energy use and required maintenance for its customers. We are in discussions with additional commercial companies regarding the use of our condition- based maintenance applications.

In 2020, our primary strategic focus is to continue as a premium provider of R&D and product development services to the defense industry, generate multiple task orders under our ADSSS IDIQ 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 M&D Center in Largo, 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  

On November 12, 2020, we announced that we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with McKean Defense Group, Inc., a Delaware corporation (“McKean”), pursuant to which we will be acquired by McKean. Under the terms of the MergerAgreement, all issued and outstanding shares of our common stock will automatically be cancelled and converted into the right to receive payment in cash of $0.13 per share.  Closing of the Merger is expected to occur in the first quarter of 2021 subject to satisfaction of customary conditions, including approval by our stockholders.  For more information, please see our Current Report on Form 8-K filed with the SEC on November 13, 2020.

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. In March 2020, the Governor of Pennsylvania ordered the closure of all non-life sustaining businesses in Pennsylvania where most of our employees work.  Further, individuals' ability to travel has beenwas 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, quarantine protocols imposed to access US Navy ships, and self-quarantine orders imposed by the Governor of Pennsylvania on interstate travel 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

We reviewed all of the recently issued accounting pronouncement through AugustNovember 2020 which are not yet effective and we do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of its operations.

Results of Operations 

Three Months Ended JuneSeptember 30, 2020 and JuneSeptember 30, 2019

We generated revenues of $1,844,923$1,804,800 during the three months ended JuneSeptember 30, 2020 as compared to $1,853,503$1,017,121 during the three months ended JuneSeptember 30, 2019.2019 an increase of $787,679, or 77%. Revenues in the secondthird quarter of 2020 and 2019 consisted entirely of engineering support services contracts which included direct components delivered duringwhile revenue in the secondthird quarter of 2020.2019 consisted of engineering support services and production.

Cost of sales consists of direct contract costs including labor, material, subcontracts, travel, and other direct costs. Cost of sales for the three months ended JuneSeptember 30, 2020 was $734,223$690,901 compared to $792,151$317,015 for the three months ended JuneSeptember 30, 2019, a decreasean increase of $57,928$373,886 or 7%118%. The reductionincrease resulted from timing of delivery of 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 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 JuneSeptember 30, 2020 were $531,816$577,722 compared to $695,838$691,337 for the three months ended JuneSeptember 30, 2019, a decrease of $164,022,$113,615, or 24%16%. The decrease was due primarily to staff reductionreductions and associated fringe benefits and reduced third party consultant costs.

General and administrative expenses consist primarily of salary, intellectual property, consulting fees and related costs, professional fees, business insurance, franchise tax, SEC compliance costs, travel, and unallowable expenses (representing those expenses for which the government will not reimburse us, including independent research and development which consists of research and development expenses unrelated to our defense contracts). General and administrative costs for the three months ended JuneSeptember 30, 2020 were $344,286$355,844 as compared to $369,742$349,230 for the three months ended JuneSeptember 30, 2019, a decreasean increase of $25,456,$6,614, or 7%2%.

We estimated our annual effective tax rate for 2020 and 2019 to be 35%28% and 33%41%. As a result, we recognized a tax expense of $81,163$56,265 for the three months ended JuneSeptember 30, 2020, as compared to a tax expensebenefit of $432$130,031 for the three months ended JuneSeptember 30, 2019. The differences from the statutory federal income tax rate were attributable to state income taxes and certain permanent book-tax differences.

We reported net income of $154,030$122,554 in the three months ended JuneSeptember 30, 2020 as compared to a net loss of $3,721$209,532 in three months ended JuneSeptember 30, 2019. The increase was attributable primarily to the decreaseincrease in operating expensesrevenues in the secondthird quarter of 2020.  

SixNine Months Ended JuneSeptember 30, 2020 and JuneSeptember 30, 2019

We generated revenues of $2,926,086$4,730,886 during the sixnine months ended JuneSeptember 30, 2020 compared to $3,873,768$4,890,889 during the sixnine months ended JuneSeptember 30, 2019, a decrease of $947,682,$160,003, or 32%3%. The decrease resulted primarily from the delay of follow-on funding during the first quarter of 2020 and the delivery of direct components. Revenues for the sixnine months ended JuneSeptember 30 2020 and 2019 consisted entirely of engineering support services contracts.

Cost of sales for the sixnine months ended JuneSeptember 30, 2020 was $1,091,696$1,782,597 compared to $1,570,693$1,887,708 for the sixnine months ended JuneSeptember 30, 2019, a decrease of $478,997,$105,111, or 44%6%. The reduction resulted from the delay of follow-on funding and the delivery of direct components.

Engineering costs for the six months ended June 30, 2020 were $1,141,777 compared to $1,358,088 for the six months ended June 30, 2019, a decrease of $216,311, or 19%. The decrease was due primarily to staff reduction and associated fringe benefits, and third party consultant costs.

General and administrativeEngineering costs for the sixnine months ended JuneSeptember 30, 2020 were $789,605 as$1,719,499 compared to $833,307$2,049,425 for the sixnine months ended JuneSeptember 30, 2019, a decrease of $43,702,$329,926, or 6%19%. The decrease was due primarily to staff reduction,reductions and third partyassociated fringe benefits, and third-party consultant costs.

We recognized a tax benefit of $33,340General and administrative costs for the sixnine months ended JuneSeptember 30, 2020 were $1,145,449 as compared to $1,182,537 for the nine months ended September 30, 2019, a decrease of $37,088, or 3%. The decrease was due primarily to staff reductions, and third-party consultant costs.

At September 30, 2020, we recognized tax expense of $22,925 for the nine months ended September 30, 2020 due primarily to expected net income for the remainder of 2020.2020 as compared to a tax benefit of $92,764 for the three months ended September 30, 2019. At JuneSeptember 30, 2020, 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 lossincome of $ $62,255$60,300 for the sixnine months ended JuneSeptember 30, 2020 as compared to a net incomeloss of $77,084$132,448 for the sixnine months ended JuneSeptember 30, 2019. The decreaseincrease in net income was attributable primarily to the decreaseincrease in revenues in the first sixnine months of 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 sixnine months ended JuneSeptember 30, 2020, net cash used inprovided by operations was $103,027$178,848 compared to net cash used in operations of $531,106$294,266 during the sixnine months ended JuneSeptember 30, 2019. The $428,079 decrease$473,114 increase in cash used inprovided by operations was due to the timing of receipts and payments related to our operating assets and liabilities, an increase in net income of $192,748, and a $41,922$42,614 increase in noncash charges which were offset by a decrease in net income (loss) of $139,339 during the sixnine months ended JuneSeptember 30, 2019.2020.

Net cash used in investing activities was $4,817$7,732 for the sixnine months ended JuneSeptember 30, 2020 as compared to $28,216$32,360 for the sixnine months ended JuneSeptember 30, 2019, a decrease of $23,399.$24,628. The decrease was related to the completion of an expansion of our Pennsylvania office in 2019.

Net cash provided by financing activities was $260,000 for the sixnine months ended JuneSeptember 30, 2020 as compared to $4,000 for the sixnine months ended JuneSeptember 30, 2019, an increase of $256,000. The increase consisted primarily of $260,000 of borrowings under our line of credit of in 2020.

On January 31, 2018, we entered into a $550,000 credit facility with PNC Bank. The facility initially matured on January 31, 2020 and has been extended to January 31, 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 JuneSeptember 30, 2020, $260,000 was outstanding under the facility.

On April 14, 2020, we entered into a Paycheck Protection Program Term Note with PNC Bank 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. We received total proceeds of $753,300 from the PNC Note.$753,300. On May 12, 2020, the term loan was repaid in full.

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, of success in such strategic opportunities, assuming we successfully raise additional funds or enter into business alliances.

Off-Balance Sheet Arrangements

As of JuneSeptember 30, 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- 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 and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of JuneSeptember 30, 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 JuneSeptember 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION 

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.