As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

11/14/19  Mikros Systems Corp               10-Q        9/30/19   37:2.2M                                   RDG Filings/FA

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                (Parentheticals)                                                 
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TABLE OF CONTENTS

 

		PAGE #
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	1
	Condensed Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	2
	Condensed Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	3
	Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	4
	Notes to Condensed Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 4.	Controls and Procedures	15
PART II.	OTHER INFORMATION
Item 6.	Exhibits	16
	Signatures	16

 

		September 30,				December 31,
		2019				2018
Assets
Current assets:
Cash and cash equivalents		$	1,884,123			$	2,206,749
Receivables on government contracts			352,687				1,043,738
Prepaid expenses and other current assets			334,073				94,717
Total current assets			2,570,883				3,345,204
Property and equipment
Operating lease-right to use asset			383,467				-
Equipment			389,923				357,796
Leasehold improvements			21,306				21,306
Furniture & fixtures			43,174				43,174
Less: accumulated depreciation			(155,203	)			(109,484	)
Property and equipment, net			682,667				312,792
Intangible assets			140,660				140,428
Less: accumulated amortization			(91,106	)			(75,241	)
Intangible assets, net			49,554				65,187
Deferred tax assets			32,453				34,623
Total assets		$	3,335,557			$	3,757,806
Liabilities and shareholders' equity
Current liabilities:
Accrued payroll and payroll taxes		$	501,759			$	868,618
Accounts payable and accrued expenses			42,510				308,415
Accrued warranty expense			100,835				153,723
Lease obligation, current portion			124,354				-
Deferred revenue			35,173				39,824
Total current liabilities			804,631				1,370,580
Lease obligation, net of current portion			277,131				-
Other long-term liabilities			-				19,560
Total liabilities			1,081,762				1,390,140
Shareholders' equity:
Preferred stock, convertible, par value $.01 per share, authorized 5,000,000 shares, none issued and outstanding			-				-
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 35,588,775 and 35,568,775 shares, respectively			355,889				355,689
Capital in excess of par value			10,124,721				10,106,344
Accumulated deficit			(8,226,815	)			(8,094,367	)
Total shareholders' equity			2,253,795				2,367,666
Total liabilities and shareholders' equity		$	3,335,557			$	3,757,806

 

		Three months ended September 30,								Nine months ended September 30,
		2019				2018				2019				2018
Contract revenues		$	1,017,121			$	1,893,945			$	4,890,889			$	6,626,716
Cost of sales			317,015				776,493				1,887,708				3,055,932
Gross margin			700,106				1,117,452				3,003,181				3,570,784
Expenses:
Engineering			691,337				648,739				2,049,425				1,882,829
General and administrative			349,230				413,731				1,182,537				1,287,668
Total expenses			1,040,567				1,062,470				3,231,962				3,170,497
(Loss) income from operations			(340,461	)			54,982				(228,781	)			400,287
Other income:
Interest income			898				322				3,569				1,238
(Loss) income before income taxes			(339,563	)			55,304				(225,212	)			401,525
Income tax benefit (expense)			130,031				(18,275	)			92,764				(127,364	)
Net (loss) income available to common shareholders		$	(209,532	)		$	37,029			$	(132,448	)		$	274,161
(Loss) income per common share - basic		$	(0.01	)		$	-			$	-			$	0.01
Basic weighted average number of shares outstanding			35,588,775				35,568,775				35,578,519				35,308,668
(Loss) income per common share - diluted		$	(0.01	)		$	-			$	-			$	0.01
Diluted weighted average number of shares outstanding			35,588,775				35,876,540				35,578,519				35,594,805

 

		Preferred Stock								Common Stock
		$0.01 Par Value								$0.01 Par Value								Capital in Excess				Accumulated
		Number of shares				Par Value				Number of Shares				Par Value				of Par Value				Deficit				Total
Balance at July 1, 2019			-				-				35,588,775			$	355,889			$	10,119,222			$	(8,017,283	)		$	2,457,828
Stock compensation			-				-				-				-				5,499								5,499
Net loss			-				-				-				-				-				(209,532	)			(209,532	)
Balance at September 30, 2019			-			$	-				35,588,775			$	355,889			$	10,124,721			$	(8,226,815	)		$	2,253,795

		Preferred Stock								Common Stock
		$0.01 Par Value								$0.01 Par Value								Capital in Excess				Accumulated
		Number of shares				Par Value				Number of Shares				Par Value				of Par Value				Deficit				Total
Balance at July 1, 2018			-				-				35,568,775			$	355,689			$	10,097,266			$	(8,186,445	)		$	2,266,510
Stock compensation			-				-				-				-				4,539								4,539
Net income			-				-				-				-				-				37,029				37,029
Balance at September 30, 2018			-			$	-				35,568,775			$	355,689			$	10,101,805			$	(8,149,416	)		$	2,308,078

		Preferred Stock								Common Stock
		$0.01 Par Value								$0.01 Par Value								Capital in Excess				Accumulated
		Number of shares				Par Value				Number of shares				Par Value				of Par Value				Deficit				Total
Balance at January 1, 2019			-			$	-				35,568,775			$	355,689			$	10,106,344			$	(8,094,367	)		$	2,367,666
Stock compensation			-				-				-				-				14,577				-				14,577
Exercise of stock options											20,000				200				3,800								4,000
Net loss			-				-				-				-				-				(132,448	)			(132,448	)
Balance at September 30, 2019			-			$	-				35,588,775			$	355,889			$	10,124,721			$	(8,226,815	)		$	2,253,795

		Preferred Stock								Common Stock
		$0.01 Par Value								$0.01 Par Value								Capital in Excess				Accumulated
		Number of shares				Par Value				Number of shares				Par Value				of Par Value				Deficit				Total
Balance at January 1, 2018			-			$	-				35,561,775			$	355,619			$	10,087,843			$	(8,423,577	)		$	2,019,885
Stock compensation																			13,682								13,682
Exercise of stock options											7,000				70				280								350
Net income																							274,161				274,161
Balance at September 30, 2018			-			$	-				35,568,775			$	355,689			$	10,101,805			$	(8,149,416	)		$	2,308,078

 

		Nine months ended September 30,
		2019				2018
Cash flows from operating activities:
Net (loss) income		$	(132,448	)		$	274,161
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization			61,584				63,795
Deferred tax expense (benefit)			2,170				(47,032	)
Share-based compensation expense			14,577				13,682
Changes in assets and liabilities:
Decrease (increase) in receivables on government contracts			691,051				(243,585	)
(Increase) in prepaid expenses and other current assets			(239,356	)			(8,618	)
(Decrease) increase in accrued payroll and payroll taxes			(366,860	)			189,890
(Decrease) in accounts payable and accrued expenses			(265,904	)			(122,176	)
(Decrease) increase in accrued warranty expense			(52,888	)			90,370
(Decrease) increase in deferred revenue			(4,651	)			6,500
(Decrease) in long-term liabilities			(1,542	)			(2,990	)
Net cash (used in) provided by operating activities			(294,266	)			213,997
Cash flows from investing activities:
Payments related to intangible assets			(233	)			(2,263	)
Purchase of property and equipment			(32,127	)			(96,455	)
Net cash used in investing activities:			(32,360	)			(98,718	)
Cash flows from financing activities:
Exercise of stock options			4,000				350
Net cash provided by financing activities:			4,000				350
Net (decrease) increase in cash and cash equivalents			(322,626	)			115,629
Cash and cash equivalents, beginning of period			2,206,749				1,173,177
Cash and cash equivalents, end of period		$	1,884,123			$	1,288,806
Cash paid for income taxes		$	121,000			$	66,500

 

Note 1 – Basis of Presentation

 

The financial statements included herein have been prepared by Mikros Systems Corporation (the “Company”, “we” or “us”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

In the opinion of the Company’s management, the accompanying unaudited interim condensed financial statements contain all adjustments, consisting solely of those which are of a normal recurring nature, necessary to present fairly its financial position as of September 30, 2019, the results of its operations for the three and nine months ended September 30, 2019 and 2018, changes in shareholders’ equity for the three and nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018.

 

Note 2 – Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard supersedes the present U.S. GAAP standard on leases and requires substantially all leases to be reported on 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 date 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.

 

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.

 

Note 3 – Significant Accounting Policies

 

Revenue Recognition

We provide our products and services under fixed-price and cost-reimbursable contracts. Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract. We also enter into cost-plus-fixed-fee contracts. The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does not vary with actual costs. We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.

 

We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract.

 

 

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

 

Accordingly, our contracts are typically accounted for as one performance obligation. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period. We classify net sales as products or services on our statements of income based on the predominant attributes of the performance obligations.

 

We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. Our contracts do not include variable consideration. At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts or delivery orders are distinct and will be accounted for as a separate contract.

 

We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of our revenue is recognized over a period of time as we perform under the contract because control of the work in process transfers continuously to the customer. This continuous transfer of control of the work in process to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit, and take control of any work in process.

 

For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. For performance obligations to provide services to the customer, revenue is recognized over a period of time based on costs incurred as our customer receives and consumes the benefits.

 

Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. The estimated consideration is determined at the outset of the contract and considers the risks related to the technical, schedule and cost impacts to complete the contract. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of revenue. As of September 30, 2019, our ending backlog was $1.9 million. For arrangements with the Department of Defense, we generally do not begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type.

 

Warranty Expense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, expected and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended September 30, 2019 and 2018, the Company recognized a warranty expense of $0 and $75,000, respectively, and for the nine months ended September 30, 2019 and 2018, the Company recognized a warranty (benefit) expense of ($40,400) and $115,000, respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 226 ADEPT units. As of September 30, 2019, there were 26 ADEPT units remaining under the limited warranty coverage.

 

 

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

 

The following table reflects the reserve for product warranty activity for:

 

 

Research and Development Expense

Research and Development expenditures for research and development of the Company's products are expensed when incurred and are included in general and administrative expenses. The Company recognized research and development costs as follows:

 

 

Intangible Assets

The Company’s intangible assets include a license acquired during 2015. In July 2015, the Company purchased certain software products, intellectual property and related assets from VSE Corporation. The primary software programs purchased were the Prognostics Framework and Diagnostic Profiler programs. The Diagnostic Profiler software is used worldwide by several multinational companies for optimized maintenance of diverse product lines. The Diagnostic Profiler is also used by the US Air Force for depot test programs, and Prognostics Framework is used by the US Army for several missile defense systems.

 

Licenses are amortized using a straight-line method over their estimated life of nine years. For the three and nine months ended September 30, 2019 and 2018, amortization expense related to the Company’s license amounted to $5,250 and $5,250 and $15,750 and $15,750, respectively, and is included in general and administrative expenses on the Statements of Income.

 

Note 4 – Income Tax Matters

 

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. At September 30, 2019, the difference from the statutory federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

 

The Company conducts an on-going analysis to review its net deferred tax asset and the need for a related valuation allowance. As a result of this analysis and the actual results of operations, the Company has (decreased) increased its net deferred tax assets by $(2,170) and $47,032 during the nine months ended September 30, 2019 and 2018, respectively. The change in deferred tax assets is attributable to the changes in various book/tax temporary differences.

 

Note 5 –  (Loss) Income Per Share

 

Net (loss) income per common share information is as follows:

 

 

Diluted net (loss) income per share for the three and nine months ended September 30, 2019 and 2018 does not reflect the following potential common shares, as the effect would be antidilutive.