UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2009
or
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.) |
707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey 08540 |
(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. xYes oNo
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). oYes oNo
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 reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | o | Smaller reporting company | x |
(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). oYes xNo
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 31,766,753 issued and outstanding shares of the issuer’s common stock, $.01 par value per share, on November 12, 2009.
TABLE OF CONTENTS
PAGE # | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Financial Statements. | |
Condensed Balance Sheets as of September 30, 2009 and December 31, 2008 (unaudited) | 1 | |
Condensed Statements Of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited) | 3 | |
Condensed Statements Of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (unaudited) | 4 | |
Notes To The Unaudited Condensed Financial Statements | 5 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 12 |
Item 4T. | Controls and Procedures. | 18 |
PART II. | OTHER INFORMATION | 18 |
Item 6. | Exhibits. | 18 |
SIGNATURES | 19 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIKROS SYSTEMS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
September 30, 2009 | December 31, 2008 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and Cash Equivalents | $ | 302,389 | 608,530 | |||||
Receivables on Government Contracts | 393,142 | 169,766 | ||||||
Other Current Assets | 53,026 | 32,483 | ||||||
TOTAL CURRENT ASSETS | 748,557 | 810,779 | ||||||
Patents and Trademarks | 5,383 | 5,383 | ||||||
Less: Accumulated Amortization | (1,014) | (760) | ||||||
4,369 | 4,623 | |||||||
PROPERTY AND EQUIPMENT | ||||||||
Equipment | 25,801 | 14,625 | ||||||
Furniture and Fixtures | 9,264 | 9,264 | ||||||
35,065 | 23,889 | |||||||
Less: Accumulated Depreciation | (18,286) | (15,235) | ||||||
16,779 | 8,654 | |||||||
Deferred Tax Asset | 2,272 | 18,000 | ||||||
TOTAL ASSETS | $ | 771,977 | 842,056 |
See Accompanying Notes to Condensed Financial Statements.
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MIKROS SYSTEMS CORPORATION
CONDENSED BALANCE SHEET (UNAUDITED)
(continued)
September 30, 2009 | December 31, 2008 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accrued Payroll and Payroll Taxes | $ | 87,559 | $ | 98,193 | ||||
Accounts Payable and Accrued Expenses | 59,067 | 158,234 | ||||||
TOTAL CURRENT LIABILITIES | 146,626 | 256,427 | ||||||
Long-term Liabilities | 7,696 | 11,170 | ||||||
TOTAL LIABILITIES | 154,322 | 267,597 | ||||||
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 | ||||||
Preferred Stock, convertible, par value $.01 per share, authorized 2,000,000 shares, issued and | ||||||||
outstanding 255,000 shares (involuntary liquidation value - $255,000) | 2,550 | 2,550 | ||||||
Preferred Stock, Series D, par value $.01 per share, 690,000 shares authorized, issued and outstanding | ||||||||
(involuntary liquidation value - $1,518,000) | 6,900 | 6,900 | ||||||
Common Stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 31,766,753 shares | 317,668 | 317,668 | ||||||
Capital in excess of par value | 11,496,787 | 11,468,662 | ||||||
Accumulated Deficit | (11,297,724) | (11,312,795) | ||||||
TOTAL SHAREHOLDERS’ EQUITY | 537,205 | 494,009 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 771,977 | $ | 842,056 |
See Accompanying Notes to Condensed Financial Statements.
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MIKROS SYSTEMS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | September 30, 2009 | September 30, 2008 | |||||||||||||
Contract Revenue | $ | 588,719 | $ | 822,764 | $ | 1,732,505 | $ | 2,536,878 | ||||||||
Cost of Revenue | 271,347 | 439,361 | 756,068 | 1,363,387 | ||||||||||||
Gross Margin | 317,372 | 383,403 | 976,437 | 1,173,491 | ||||||||||||
�� | ||||||||||||||||
Expenses: | ||||||||||||||||
Engineering | 145,541 | 144,897 | 442,688 | 430,327 | ||||||||||||
General & Administrative | 158,920 | 183,225 | 499,920 | 588,823 | ||||||||||||
Total Expenses | 304,461 | 328,122 | 942,608 | 1,019,150 | ||||||||||||
Income from Operations | 12,911 | 55,281 | 33,829 | 154,341 | ||||||||||||
Interest Income | - | 327 | 3 | 2,519 | ||||||||||||
Income Before Income Tax Expense | 12,911 | 55,608 | 33,832 | 156,860 | ||||||||||||
Income Tax Expense | 6,957 | 34,144 | 18,761 | 90,277 | ||||||||||||
Net Income | $ | 5,954 | $ | 21,464 | $ | 15,071 | $ | 66,583 | ||||||||
Basic and diluted earnings per share | $ | - | $ | - | $ | - | $ | - | ||||||||
Basic weighted average number of Shares outstanding | 31,766,753 | 31,766,753 | 31,766,753 | 31,766,753 | ||||||||||||
Diluted weighted average number of Shares outstanding | 35,415,299 | 35,206,602 | 35,418,758 | 35,227,984 |
See Accompanying Notes to Condensed Financial Statements.
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MIKROS SYSTEMS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended | ||||||||
September 30, 2009 | September 30, 2008 | |||||||
Cash Flow From Operating Activities: | ||||||||
Net Income | $ | 15,071 | $ | 66,583 | ||||
Adjustments to reconcile Net Income to | ||||||||
Net Cash used in Operating Activities: | ||||||||
Depreciation and Amortization | 3,305 | 3,956 | ||||||
Deferred Tax Expense | 15,728 | 60,828 | ||||||
Stock Compensation Expense | 28,125 | 29,714 | ||||||
Net Changes in Operating Assets and Liabilities: | ||||||||
Increase (Decrease) in Receivables on Government Contracts | (223,376) | 40,251 | ||||||
Increase in Other Current Assets | (20,543) | (10,171) | ||||||
Decrease in Accounts Payable, Accrued Expenses and Long-term Liabilities | (102,641) | (74,590) | ||||||
Increase (decrease). in Accrued Payroll and Payroll Taxes | (10,634) | 13,011 | ||||||
Net Cash (used in ) provided by Operating Activities | (294,965) | 129,582 | ||||||
Cash Flow from Investing Activities: | ||||||||
Purchase of Equipment | (11,176) | - | ||||||
Net Cash used in Investing Activities | (11,176) | - | ||||||
Net increase (decrease) Increase in Cash and Cash Equivalents | (306,141) | 129,582 | ||||||
Cash and Cash Equivalents, beginning of the period | 608,530 | 404,557 | ||||||
Cash and Cash Equivalents, end of period | $ | 302,389 | $ | 534,139 |
See Accompanying Notes to Condensed Financial Statements.
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MIKROS SYSTEMS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – Basis of Presentation:
The accompanying unaudited interim condensed financial statements of Mikros Systems Corporation (the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statements rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods presented. The interim operating results are not necessarily indicative of the results for a full year. 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 relating to interim financial statements.The condensed financial statements included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-Q and included together with the Company's Financial Statements and Notes thereto included in the Company's 2008 Annual Report on Form 10-K.
The Company evaluated subsequent events through November 13, 2009, the date the Financial Statements as of and for the period ended September 30, 2009 were issued.
Certain amounts in the condensed balance sheet as of December 31, 2008 and statement of cash flow for the nine months ended September 30, 2008 were reclassified to conform to the current year presentation.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
In August 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2009-05. ASU No. 2009-05 provides amendments to FASB Accounting Standards Codification (ASC) 820-10 for the fair value measurement of liabilities. ASU No. 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets or another valuation technique that is consistent with the principles of FASB ASC 820. The amendments in the update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments in the update also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in FASB ASU No. 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of FASB ASU No. 2009-05 did not have a material effect on the Company’s financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “FASB Accounting Standards Codification” (“SFAS No. 168” or “Codification”) as the single source of authoritative non-governmental United States Generally Accepted Accounting Principles (“US GAAP”) to be launched on July 1, 2009. SFAS No. 168 replaces FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification has no impact on the Company’s Consolidated Financial Statements.
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MIKROS SYSTEMS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS No. 165”) as codified in ASC Topic 855. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS No. 165 sets forth the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s Consolidated Financial Statements.
In June 2008, the EITF reached consensus on Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”) as codified in ASC Topic 815. EITF 07-5 clarifies how to determine whether certain instruments or features were indexed to an entity’s own stock. EITF 07-5 replaced EITF 01-6 as a critical component of the literature applied to evaluating financial instruments for debt or equity classification and embedded features for bifurcation as derivatives. The consensus is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of the consensus on January 1, 2009 did not have a material impact on the Company’s Financial Statements.
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MIKROS SYSTEMS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC is expected to make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its financial statements, and it will continue to monitor the development of the potential implementation of IFRS.
NOTE 3 – REVENUE RECOGNITION
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. The contracts are cost plus fixed fee contracts and the Company accounts for these contracts using the percentage-of-completion accounting method. Under this method, revenue is recognized based on the extent of progress towards completion of the long term contract.
The Company generally uses a variation of the cost to cost method to measure progress for all long term contracts unless it believes another method more clearly measures progress towards completion of the contract.
Revenues are recognized as costs are incurred and include estimated earned fees, or profit, calculated on the basis of the relationship between costs incurred and total estimated costs at completion.
Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of September 30, 2009 and December 31, 2008, we had no unbilled revenues. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of September 30, 2009 and December 31, 2008, we had no advanced billings.
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MIKROS SYSTEMS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 – REDEEMABLE SERIES C PREFERRED STOCK
The Redeemable Series C Preferred Stock is not convertible into any other class of the Company’s stock, is subject to redemption at the Company’s option at any time, and if certain events occur, such as capital reorganizations, consolidations, mergers, or sale of all or substantially all of the Company’s assets, is subject to mandatory redemption. Upon any liquidation, dissolution or winding up of the Company, each holder of Redeemable Series C Preferred Stock will be entitled to be paid, before any distribution payment is made upon any other class of stock of the Company, an amount in cash equal to $16.09 for each share of Redeemable Series C Preferred Stock held by such holder.
NOTE 5 – SHAREHOLDERS' EQUITY
SERIES B CONVERTIBLE PREFERRED STOCK
Each share of Series B Convertible Preferred Stock is convertible into three shares of the Company’s common stock at a price of $.33 per share of common stock to be received upon conversion, and entitles the holder thereof to cast three votes per share on all matters to be voted on by the Company’s shareholders. Upon any liquidation, dissolution, or winding up of the Company, each holder of Series B Preferred Stock will be entitled to be paid, after all distributions of payments are made upon the Redeemable Series C Preferred Stock and before any payment is made upon the Company’s Convertible Preferred Stock and Series D Preferred Stock, an amount in cash equal to $1.00 for each share of Series B Preferred Stock held, and such holders will not be entitled to any further payment.
CONVERTIBLE PREFERRED STOCK
Each share of Convertible Preferred Stock is entitled to dividends when, as and if declared by the Board of Directors of the Company. In the event any dividend is payable to holders of the Company’s common stock, each share is entitled to receive a dividend equal to the amount of such common stock dividend multiplied by the number of shares of common stock into which each share of Convertible Preferred Stock may be converted. Shares of Convertible Preferred Stock can be redeemed in whole, but not in part, at the Company’s option for $1.00 per share. Holders of Convertible Preferred Stock are entitled to cast one vote per share on all matters to be voted upon by the Company’s shareholders. Each share of Convertible Preferred Stock is convertible at any time into one share of common stock at a conversion price of $1.00 per share, subject to adjustment in certain circumstances. Upon any liquidation, dissolution or winding up of the Company, each holder will be entitled to be paid, after holders of Redeemable Series C Preferred Stock and Series B Preferred Stock have been paid in full, an amount in cash equal to $1.00 per share.
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MIKROS SYSTEMS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
SERIES D PREFERRED STOCK
The Series D Preferred Stock provided for an annual cumulative dividend of $.10 per share and entitles holders to cast one vote per share on all matters to be voted on by the Company’s shareholders. The shares are not convertible into any other class of stock and are subject to redemption at the Company’s option at any time at a redemption price of $1.00 per share plus all unpaid cumulative dividends. Upon liquidation, dissolution or winding up of the Company, each holder of Series D Preferred Stock will be entitled to be paid, after all distributions or payments are made upon the Company’s Convertible Preferred Stock, Series B Preferred Stock, and Redeemable Series C Preferred Stock, an amount in cash equal to $1.00 plus all unpaid cumulative dividends for each share of Series D Preferred Stock held by such holder. The holders of Series D Preferred Stock will not be entitled to any further payment.
In January 2006, the holders of the shares of Series D Preferred Stock agreed to waive future accumulation of dividends, effective as of January 1, 2006. As of December 31, 2005, there were dividends in arrears on shares of Series D Preferred Stock of $828,000. Such waiver does not affect dividends accrued through December 31, 2005. Accordingly, $828,000 of such undeclared dividends in arrears remain outstanding at September 30, 2009.
NOTE 6 – EARNINGS PER SHARE
The Company’s calculation of earnings per share is as follows for the periods presented:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | September 30, 2009 | September 30, 2008 | |||||||||||||
Net income applicable | ||||||||||||||||
to common stockholders | $ | 5,954 | $ | 21,464 | $ | 15,071 | $ | 66,583 | ||||||||
Average basic | ||||||||||||||||
shares outstanding | 31,766,753 | 31,766,753 | 31,766,753 | 31,766,753 | ||||||||||||
Assumed conversion | ||||||||||||||||
of preferred stock | 3,562,299 | 3,307,299 | 3,562,299 | 3,307,299 | ||||||||||||
Effect of dilutive | ||||||||||||||||
options | 86,247 | 132,550 | 89,706 | 153,932 | ||||||||||||
Average diluted | ||||||||||||||||
shares outstanding | 35,415,299 | 35,206,602 | 35,418,758 | 35,227,984 | ||||||||||||
Net earnings per common share | ||||||||||||||||
basic and diluted | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 |
For the three and nine months ended September 30, 2009 and 2008, options to purchase 420,000 shares and 440,000 shares of common stock, respectively, at prices ranging from $0.55 to $0.62 per share, and their effects on income, were excluded from the diluted net income per share calculation because their effect would be anti-dilutive.
9
MIKROS SYSTEMS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 – INCOME TAX MATTERS
The Company conducts an on-going analysis to review the deferred tax assets and the related valuation 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 $15,728 and $60,828 and charged income tax expense during the nine months ended September 30, 2009 and 2008, respectively. Income tax expense includes expense associated with state tax liabilities.
NOTE 8 – SHARE BASED COMPENSATION
In July 2009, the Company issued options under the Plan to certain of its employees, officers, directors, advisors and consultants to purchase an aggregate of 345,000 shares of common stock at an exercise price of $.20 per share, the last sales price of the Company’s common stock on the date of grant. The 60,000 options issued to the Company’s directors have a term of ten years and vest in three equal annual installments over the three year period commencing on the date of grant. The 285,000 options issued to the Company’s employees, officers, advisors and consultants have a term of ten years and vest in five equal annual installments over the five year period commencing on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Expected Life | 6.5 |
Expected volatility | 117.2% |
Risk-free interest rate | 2.94% |
The expected life of options granted is based on the vesting period. The expected volatility is based on historical stock prices. The risk-free interest rate is determined using the U.S. Treasury bill rate at the time of grant. The Company has never paid a dividend, and as such the dividend yield is zero. The forfeiture rate is zero.
The Company recognized stock-based compensation expense of $12,900 and $9,900 for the three months ended September 30, 2009 and 2008, respectively, and $28,125 and $29,714 for the nine months ended September 30, 2009 and 2008, respectively. No tax benefits were recognized related to this stock-based compensation.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation thereon or similar terminology or expressions.
These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from results proposed in such statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations 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 Innovative Research (SBIR) grants, competitive pricing pressures, market acceptance of our products under development, delays in the development of 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, 2008 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.
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Item 2. Management’s Discussion and Analysis of Financial Position and Results of Operations
Mikros Systems Corporation (the “Company,” “we” or “us”) was founded in 1978. We are an advanced technology company specializing in the research and development of electronic systems technology primarily for military applications. Classified by the U.S. 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 Small Business Innovation Research (SBIR) programs from the U.S. Department of Defense, Department of Homeland Security, and other governmental authorities, and to expand this government funded research and development into products, services, and business areas of the Company. Since 2002, we have been awarded a number of Phase I, II, and III SBIR contracts.
Revenues from our government contracts represented 100% of our revenues for the three and nine months ended September 30, 2009 and 2008. We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products for both the government and commercial marketplace.
Below is a brief description of certain of the material projects we are working on at this time.
Adaptive Diagnostic Electronic Portable Testset (ADEPT®)
Originally designated as the Multiple Function Distributed Test and Analysis Tool (MFDAT), the Adaptive Diagnostic Electronic Programmable Test-Set (ADEPT®) began as an SBIR investigation in 2002. Additional ADEPT development was completed through a series of SBIR grants and contracts. ADEPT is an automated maintenance workstation designed to significantly reduce the man-hours required to align the AN/SPY-1 Radar System aboard U.S. Navy AEGIS cruisers and destroyers, while optimizing system performance and readiness. ADEPT represents a new approach to Navy shipboard maintenance, integrating modular instrumentation cards in a rugged enclosure with an onboard computer, input and output devices, networking hardware, removable hard drives, and a touch screen display. A custom software application provides the user interface and integrates the hardware with a database that stores user information, instrument readings, maintenance requirements, and training aids. ADEPT is designed to be adapted to other complex shipboard systems, and to provide integrated distance support capabilities for remote diagnostics and troubleshooting by shore-based Navy experts.
Key anticipated benefits of ADEPT include:
• | Significant reduction in system calibration, alignment, maintenance, and repair times; | |
• | Improved system readiness, availability, and performance; | |
• | More effective use of technical manpower through increased automation, distance support, and interactive training; |
• | Distance support capable enabling “expert” remote (shore-based) system support and fleet-wide system analysis; |
• | Reduction in the amount of electronic test equipment required for organizational level support; and |
• | Modular and programmable to overcome current test equipment obsolescence issues and to support capability enhancements in future systems. |
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ADEPT is being provided to the Navy’s Cruisers (CGs) and Destroyers (DDGs), through the US Navy’s Cruiser and Destroyer modernization program. On September 29, 2008, we were awarded an $800,000 modification to our contract with Naval Air Warfare Center Weapons Division (NAWCWD), located in China Lake, California. NAWCWD, a division of Naval Air Systems Command (NAVAIR), is responsible for "Arming the Fleet". NSWCPHD for eight ADEPT LRIP units and additional logistics development work. The logistics effort includes development of fielding support and calibration plans required for widespread use of ADEPT aboard U.S. Navy ships. In April 2009, we received a $450,000 contract award for four ADEPT V2 systems which are scheduled for delivery to the USS Mobile Bay (CG-53) and the USS Philippine Sea (CG-58) by the end of 2009.
In October 2009, we were awarded a contract by Technology Service Corporation (TSC) to provide project management and engineering support for the Common Digital Sensor Architecture (CDSA) project and new acquisition radar programs. This contract also provides for continuation of pre-production engineering tasks in support of the Adaptive Diagnostic Electronic Portable Testset (ADEPT).
The goal for ADEPT is to obtain a multi-year Indefinite-Delivery, Indefinite-Quantity (IDIQ) contract for production, engineering, and logistics support. We anticipate this contract award and additional orders for ADEPT equipment by the end of calendar year 2009. 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 this contract and future ADEPT orders.
Wireless Local Area Network Systems
Since June 2004, we have been working with the Office of Naval Research regarding emerging Wireless Local Area Network systems (WLANs) and DoD radar systems to, among other things, evaluate and quantify the potential improvements which may be afforded by selected mitigation techniques. We continue to perform contracts in connection with this project and are working closely with engineers from the NAWCWD. The technical objective of this effort is to develop simulation models that can be used to predict the performance of data links in a jamming environment.
Radar Wireless Spectral Efficiency (RWSE)
From May 2006 through June 2009, we were involved in research and development under the SBIR topic entitled RWSE, which is focused on the real world implications of incorporating wireless networks into the aircraft carrier (CVN platform) environment. The overall technical objective is to facilitate the introduction of commercial wireless communication systems, e.g. Wi-Fi, onto U.S. Navy ships through the: (1) identification and testing of potential own-ship electromagnetic interference (EMI) issues; (2) development and testing of viable mitigation technologies to overcome adverse EMI effects; and (3) development of a CVN Wi-Fi network planning tool to support networking within a highly reconfigurable shipboard environment. This project was initially for the CVN platform, but is expected to eventually be applicable to other U.S. Navy ships.
Additional Contracts and Recent Developments
In October 2007, we were awarded an SBIR Phase I contract through SPAWAR. This $100,000 effort titled “Small Buoy for Energy Harvesting” will collaborate in the design and development of a miniaturized, self-powered ocean buoy which can be deployed at sea for extended periods to support various on-board payload packages, such as network communications nodes. This communication package is designed to allow submarines to communicate with the Battle Group while operating at speed and depth. This contract was structured as a base effort worth $70,000, and an option worth $30,000. The option was exercised on October 30, 2008, and we are pursuing an SBIR Phase II follow-on contract with this customer. If awarded, we could receive $750,000 or more to further develop this technology.
In February 2009, we were awarded a $68,000 production support contract on the Navy’s Next Generation Command and Control Processor (NGC2P) program by Northrop Grumman Corporation. The NGC2P system is a tactical data link (TDL) communications processor which provides warfighters with critical real-time information during combat operations. We anticipate future work with Northrop Grumman in areas associated with our expertise in electronic systems development and wireless technologies.
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In February 2009, we were awarded a $9,991 subcontract from Gnostech, Inc of Warminster, Pennsylvania for engineering services in support of Gnostech’s program entitled "GPS Scenario Development and Test Support for both Electronic Protection and Electronic Attack Threat Environment."
In April 2009, we were awarded a $22,000 purchase order from Ocean Power Technologies, Inc. (OPT), to support proposal development for the Littoral Expeditionary Autonomous Power Buoy system for the U.S. Navy’s NUWC Keyport Program Office. As a direct result of this effort, in October 2009, OPT was awarded a prime contract for the first year of a proposed four-year program to develop and deploy a Vessel Detection System based on the Littoral Expeditionary Autonomous Power Buoy (LEAP) technology. In turn, OPT awarded us a $275,000 subcontract for the first year. The LEAP system is designed for persistent littoral surveillance applications, and combines the OPT PowerBuoy technology with advanced multistatic radar and data fusion capabilities originally developed at the Rutgers University Instiitute of Marine and Coastal Sciences. We will provide system architecture, design and integration support for the program.
In May 2009, we were awarded a $45,000 contract by the Navy to continue wireless network design studies for the new CVN-78 aircraft carrier USS Gerald R. Ford. This program is a follow-on to work we performed in 2008 on network modeling and simulation for the Navy's PMW 750 Carrier Integration group.
In June 2009, we were awarded a $225,000 contract by DRS C3 Systems of Gaithersburg, Maryland to develop interface definitions for distance support applications in the Common Digital Sensor Architecture (CDSA) program. The CDSA Program will provide a common computing platform for above water sensors and will reduce the knowledge and skills required to operate and maintain the sensor systems, as well as improve the quality, quantity, and compatibility of collected field data. This work is an extension of the distance support experience Mikros gained under Adaptive Diagnostic Electronic Portable Testset (ADEPT) development contracts with the US Navy.
Key Performance Indicator
As substantially all of our revenue is derived from SBIR 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.
Competition in the SBIR arena is intense, and we compete against numerous small businesses for SBIR awards. We believe that the primary competitive factors in obtaining SBIR contracts are technical expertise, prior relevant experience, and cost. Our history of completing projects in a timely and efficient manner as well as the experience of our management and technical personnel position us well to compete for future SBIR grants.
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. This 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 pursue SBIR projects with the Department of Homeland Security, the U.S. Navy, and other government agencies. Third, we believe that through our marketing of products such as ADEPT we will develop key relationships with prime defense system 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 2009, our primary strategic focus is to continue to: (i) establish ourselves as a premium provider of research and development and product development services to the defense industry; and (ii) grow our business, generate profits and increase our cash reserves through obtaining additional SBIR contracts and positioning ourselves to obtain future SBIR contracts. From an operational prospective, we expect to focus substantial resources on generating sales of our ADEPT product. 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.
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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. For example, we recently entered into a memorandum of understanding with a global provider of telecommunications equipment and related services pursuant to which we will assist the global provider in marketing its products to the DoD.
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, 2008. As of September 30, 2009, there have been no changes to such critical accounting policies and estimates.
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, recoverability of long-lived assets, income taxes and commitments. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Results of Operations
Three Months Ended September 30, 2009 and 2008
We generated revenues of $588,719 during the three months ended September 30, 2009 compared to $822,764 during the three months ended September 30, 2008, a decrease of $234,045 or 28.5%. The decrease was primarily due to the delay in receipt of follow-on contracts from the Federal Government.
Cost of revenues consist of direct contract costs such as labor, materials, subcontracts, travel, and other direct costs. Cost of revenues for the three months ended September 30, 2009 was $271,347 compared to $439,361 for the three months ended September 30, 2008, a decrease of $168,014 or 38.2%. The decrease was primarily due to the delay in receipt of follow-on contracts from the Federal Government, resulting in lower subcontractor and material costs and the change of distribution of direct costs from 2008 to 2009.
Substantially all 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, 2009 were $145,541 compared to $144,897 for the three months ended September 30, 2008, an increase of $644 or ..4%.
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General and administrative expenses consist primarily of salary, consulting fees paid to bid and proposal consultants and related costs, professional fees, business insurance, corporate taxes, stock registrar and public company related costs, travel, and unallowable expenses. General and administrative costs for the three months ended September 30, 2009 were $158,920 compared to $183,225 for the three months ended September 30, 2008, a decrease of $24,305 or 13.3%. The decrease was due primarily to a reduction of general and administrative salaries, outside services, and no incentive compensation costs or general and administrative consultant costs.
The application of the estimated effective income tax rate to the financial activity of the three months ended September 30, 2009 resulted in a tax expense of $6,957. At September 30, 2009, the anticipated effective income tax rate of 64.1% is attributable to state income taxes and income tax related to permanent differences.
We generated net income of $5,954 during the three months ended September 30, 2009 as compared to net income of $21,464 during the three months ended September 30, 2008. The decrease was primarily due to a delay in receiving follow-on contracts from the Federal Government.
Nine Months Ended September 30, 2009 and 2008
We generated revenues of $1,732,505 during the nine months ended September 30, 2009 compared to $2,536,878 for the nine months ended September 30, 2008, a decrease of $804,373 or 31.7%. The decrease was primarily due to the delay in receipt of follow-on contracts from the Federal Government.
Cost of revenues for the nine months ended September 30, 2009 were $756,068 compared to $1,363,387 for the nine months ended September 30, 2008, a decrease of $607,319 or 44.5%. The decrease was primarily due to the delay in receipt of follow-on contracts from the Federal Government resulting in lower subcontractor and material costs and the change of distribution of direct costs from 2008 to 2009.
Engineering costs for the nine months ended September 30, 2009 were $442,688 compared to $430,327 for the nine months ended September 30, 2008, an increase of $12,361 or 2.9%. The increase was due to additional engineering salaries and medical benefit expenses, offset by no costs for engineering consultants and incentive compensation in 2009.
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General and administrative costs for the nine months ended September 30, 2009 were $499,920 compared to $588,823 for the nine months ended September 30, 2008, a decrease of $88,903 or 15.1%. The decrease was due primarily to a reduction of general and administrative salaries, professional fees, general and administrative travel and no incentive compensation costs in 2009. These amounts were offset by increases in bid and proposal salaries and consultant costs in connection with seeking new business.
The application of the estimated effective income tax rate to the financial activity of the nine months ended September 30, 2009 results in a tax expense of $18,761. At September 30, 2009, the anticipated effective income tax rate of 64.1% is attributable to state income taxes and income tax related to permanent differences.
We generated net income of $15,071 during the nine months ended September 30, 2009 as compared to net income of $66,583 during the nine months ended September 30, 2008. The decrease was due to a delay in receiving follow-on contracts from the Federal Government.
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.
Net cash used in operations was $294,965 for the nine months ended September 30, 2009 compared to net cash provided by operating activities of $129,582 for the nine months ended September 30, 2008. The increase in cash used in operations was due primarily to an increase in receivables from government contracts of approximately $264,000, the payment of approximately $72,000 of accrued incentive compensation and an approximately $33,000 decrease in accounts payable and accrued payroll liability in 2009. We had working capital of $601,931 as of September 30, 2009 compared to working capital of $554,352 at December 31, 2008.
On January 9, 2009, we entered into a $50,000 line of credit agreement with Sun National Bank (“Sun”). The line of credit is available to us for one year and is secured by a $50,000 Certificate of Deposit with Sun.
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 any such transaction will achieve profitability or generate positive cash flow.
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Contractual Obligations
We lease our engineering office in Fort Washington, Pennsylvania pursuant to a five-year lease which continues through November 30, 2010. Our current monthly lease payment is $5,613, and is subject to annual increase.
In February 2009, we entered into a lease for a facility in Largo, Florida which will support production of our Advanced Diagnostic Electronic Portable Testset (ADEPT) product line, including quality assurance, field support, and life cycle management. The lease runs through February 2010 at a total cost of $8,162 per year.
Off-Balance Sheet Arrangements
As of September 30, 2009, 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 4T. 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 September 30, 2009, 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 SEC’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, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit No. | Description |
31.1 | Certification of principal executive officer and principal financial officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
32.1 | Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
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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 | |||
November 13, 2009 | By: | /s/ Thomas J. Meaney | |
Thomas J. Meaney President (Principal Executive Officer and Principal Financial Officer) |