UNITED STATES
SECURITIESANDEXCHANGECOMMISSION
Washington,D.C. 20549
FORM 10-Q
☒QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
ForthequarterlyperiodendedSeptember30,2015 March 31, 2016
or
☐ TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
Forthetransitionperiodfrom_____to_____.
Commission File Number: 000-14801
Mikros Systems Corporation
(Exact name of registrant as specified in its charter)
Delaware | 14-1598200 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
707AlexanderRoad,BuildingTwo,Suite208, Princeton,NewJersey08540
(Address of Principal Executive Offices)
(609) 987-1513
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒Yes ☐No
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 | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐
Yes☐Yes ☒No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 32,018,75332,032,753 issued and outstanding shares of the issuer’s common stock, $.01 par value per share, on NovemberMay 13, 2015.2016.
TABLE OF CONTENTS
PAGE # | ||
| PARTI. | FINANCIALINFORMATION | |
Item 1. | Financial Statements | |
|
| |
Condensed | 1 | |
Condensed Statements of | 2 | |
Condensed Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015(unaudited) | 3 | |
Notes to Condensed Financial Statements (unaudited) | 4 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 4. | Controls and Procedures |
|
PARTII. | OTHERINFORMATION | |
Item 6. | Exhibits |
|
Signatures |
|
PARTI.FINANCIALINFORMATIONPart I Financial Information
Item 1. 1 FinancialStatements
MikrosSystemsCorporation
CondensedBalanceSheets(unaudited)
(Unaudited)
March 31, | December 31, | |||||||||||||||
2016 | 2015 | |||||||||||||||
September30, 2015 | December31, 2014 | |||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,645,255 | $ | 1,161,634 | $ | 2,249,425 | $ | 2,858,655 | ||||||||
Receivables on government contracts | 1,022,107 | 1,575,954 | 405,882 | 431,012 | ||||||||||||
Prepaid expenses and other current assets | 95,607 | 105,197 | 89,455 | 59,205 | ||||||||||||
Deferred tax asset, current | 28,065 | 28,065 | ||||||||||||||
Total current assets | 2,791,034 | 2,870,850 | 2,744,762 | 3,348,872 | ||||||||||||
| Property and equipment: | ||||||||||||||||
Property and equipment | ||||||||||||||||
Equipment | 64,379 | 61,686 | 95,693 | 95,693 | ||||||||||||
Furniture & fixtures | 14,728 | 14,728 | 16,394 | 16,394 | ||||||||||||
Less: accumulated depreciation | (67,251 | ) | (62,123 | ) | (74,428 | ) | (70,257 | ) | ||||||||
Property and equipment, net | 11,856 | 14,291 | 37,659 | 41,830 | ||||||||||||
Intangible Asset | 127,383 | 1,383 | ||||||||||||||
Intangible assets | 127,383 | 127,383 | ||||||||||||||
Less: accumulated amortization | (6,527 | ) | (1,173 | ) | (17,097 | ) | (11,812 | ) | ||||||||
Intangible assets, net | 120,856 | 210 | 110,286 | 115,571 | ||||||||||||
Deferred tax assets | 78,935 | 140,935 | 213,167 | 214,548 | ||||||||||||
Total assets | $ | 3,002,681 | $ | 3,026,286 | $ | 3,105,874 | $ | 3,720,821 | ||||||||
| Liabilitiesandshareholders'equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
Accrued payroll and payroll taxes | $ | 433,170 | $ | 493,308 | $ | 235,661 | $ | 574,019 | ||||||||
Accounts payable and accrued expenses | 161,244 | 688,534 | 125,877 | 377,928 | ||||||||||||
Accrued warranty expense | 139,410 | 33,500 | 331,370 | 359,654 | ||||||||||||
Deferred revenue | 36,000 | - | 26,250 | 24,000 | ||||||||||||
Total current liabilities | 769,824 | 1,215,342 | 719,158 | 1,335,601 | ||||||||||||
Long-term liabilities | 129,052 | 7,770 | 116,100 | 117,436 | ||||||||||||
Total liabilities | 898,876 | 1,223,112 | 835,258 | 1,453,037 | ||||||||||||
| Commitments and contingencies (Note 9) | ||||||||||||||||
Redeemable series C preferred stock par value $.01 per share, authorized 150,000 shares, issued and outstanding 5,000 shares (involuntary liquidation value -$80,450) | 80,450 | 80,450 | ||||||||||||||
Redeemable series C preferred stockpar value $.01 per share, authorized 150,000 shares, issuedand 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 (involuntaryliquidation value - $1,102,433) | 11,024 | 11,024 | ||||||||||||||
Preferred stock, convertible, par value $.01 per share, authorized 2,000,000shares, issued and outstanding 255,000 shares (involuntary liquidationvalue - $255,000) | 2,550 | 2,550 | ||||||||||||||
Preferred stock, series D, par value $.01 per share, 690,000 shares authorized, issued and outstanding (involuntary liquidation value -$1,518,000) | 6,900 | 6,900 | ||||||||||||||
| Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 32,018,753 shares at September 30, 2015 and December 31, 2014, respectively | 320,188 | 320,188 | ||||||||||||||
Preferred stock, series B convertible, par value $.01 per share,authorized 1,200,000 shares, issued and outstanding 1,102,433shares (involuntary liquidation value - $1,102,433) | 11,024 | 11,024 | ||||||||||||||
Preferred stock, convertible, par value $.01 per share, authorized2,000,000 shares, issued and outstanding 255,000 shares (involuntaryliquidation value - $255,000) | 2,550 | 2,550 | ||||||||||||||
Preferred stock, series D, par value $.01 per share, 690,000 sharesauthorized, 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 32,032,753 and 32,025,753 shares, respectively | 320,328 | 320,258 | ||||||||||||||
| Capital in excess of par value | 11,631,121 | 11,628,728 | 11,632,648 | 11,631,732 | ||||||||||||
| Accumulated deficit | (9,948,428 | ) | (10,246,666 | ) | (9,783,284 | ) | (9,785,130 | ) | ||||||||
Total shareholders' equity | 2,023,355 | 1,722,724 | 2,190,166 | 2,187,334 | ||||||||||||
Total liabilities and shareholders' equity | $ | 3,002,681 | $ | 3,026,286 | $ | 3,105,874 | $ | 3,720,821 | ||||||||
SeeNotestoUnauditedCondensedFinancialStatements
Mikros Systems Corporation
Condensed Statements ofOperationsandComprehensiveIncome(Loss)
(unaudited)
| ThreeMonthsEnded, | NineMonthsEnded, | Three Months Ended, | ||||||||||||||||||||||
September30, | September30, | September30, | September30, | March 31, | ||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2016 | 2015 | |||||||||||||||||||
Contract revenues | $ | 1,240,393 | $ | 1,057,442 | $ | 5,450,815 | $ | 3,150,584 | ||||||||||||||||
Contract Revenues | $ | 987,929 | $ | 2,476,039 | ||||||||||||||||||||
Cost of sales | 529,303 | 431,701 | 2,868,377 | 1,284,081 | 324,328 | 1,461,905 | ||||||||||||||||||
Gross margin | 711,090 | 625,741 | 2,582,438 | 1,866,503 | 663,601 | 1,014,134 | ||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||
Engineering | 309,769 | 329,864 | 1,058,705 | 832,517 | 323,913 | 422,415 | ||||||||||||||||||
General and administrative | 328,734 | 213,956 | 951,331 | 806,591 | 336,148 | 322,023 | ||||||||||||||||||
Total expenses | 638,503 | 543,820 | 2,010,036 | 1,639,108 | 660,061 | 744,438 | ||||||||||||||||||
Income from operations | 72,587 | 81,921 | 572,402 | 227,395 | 3,540 | 269,696 | ||||||||||||||||||
Interest income | 149 | 95 | 336 | 316 | ||||||||||||||||||||
Other income: | ||||||||||||||||||||||||
Interest | 1,449 | 93 | ||||||||||||||||||||||
Net income before income taxes | 72,736 | 82,016 | 572,738 | 227,711 | 4,989 | 269,789 | ||||||||||||||||||
Income tax expense (benefit) | 36,000 | (45,419 | ) | 274,500 | (21,973 | ) | ||||||||||||||||||
Income tax expense | 3,143 | 129,000 | ||||||||||||||||||||||
Net income | $ | 36,736 | $ | 127,435 | $ | 298,238 | $ | 249,684 | $ | 1,846 | $ | 140,789 | ||||||||||||
Other comprehensive income (loss) | - | - | - | - | ||||||||||||||||||||
Comprehensive income | $ | 36,736 | $ | 127,435 | $ | 298,238 | $ | 249,684 | ||||||||||||||||
Income per common share - basic | $ | - | $ | - | $ | 0.01 | $ | 0.01 | $ | - | $ | - | ||||||||||||
Basic weighted average number of shares outstanding | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | 32,030,138 | 31,947,753 | ||||||||||||||||||
Income per common share - diluted | $ | - | $ | - | $ | 0.01 | $ | 0.01 | $ | - | $ | - | ||||||||||||
Diluted weighted average number of shares outstanding | 35,548,552 | 35,509,307 | 35,665,577 | 35,488,707 | 35,608,255 | 35,553,766 | ||||||||||||||||||
SeeNotestoUnauditedCondensedFinancialStatements
See Notes to Unaudited Condensed Financial Statements
Mikros Systems Corporation
Condensed Statements of Cash Flows
(unaudited)
| NineMonthsEnded | ||||||||
September30, 2015 | September30, 2014 | |||||||
Cashflowsfromoperatingactivities | ||||||||
Net income | $ | 298,238 | $ | 249,684 | ||||
Adjustments to reconcile net income to net cash provided by operatingactivities: | ||||||||
Depreciation and amortization | 10,482 | 4,707 | ||||||
Deferred tax expense (benefit) | 62,000 | (34,000 | ) | |||||
Share-based compensation expense | 2,043 | 9,703 | ||||||
Changes in operating assets and liabilities: | ||||||||
Decrease (Increase) in receivables on government contracts | 553,847 | (211,821 | ) | |||||
Decrease (Increase) in prepaid expenses and other current assets | 9,590 | (2,579 | ) | |||||
(Decrease) Increase in accrued payroll and payroll taxes | (60,138 | ) | 218,004 | |||||
(Decrease) Increase in accounts payable and accrued expenses | (527,290 | ) | 41,745 | |||||
Increase (Decrease) in accrued warranty expense | 105,910 | (1,690 | ) | |||||
Increase in deferred revenue | 36,000 | - | ||||||
Decrease in long-term liabilities | (4,718 | ) | (3,422 | ) | ||||
Net cash provided by operating activities | 485,964 | 270,331 | ||||||
Cashflowsfrominvestingactivities: | ||||||||
Purchase of property and equipment | (2,693 | ) | (11,890 | ) | ||||
Net cash used in investing activities: | (2,693 | ) | (11,890 | ) | ||||
Cashflowsfromfinancingactivities: | ||||||||
Proceeds received upon the exercise of stock options | 350 | 350 | ||||||
Net cash provided by financing activities | 350 | 350 | ||||||
Net increase in cash and cash equivalents | 483,621 | 258,791 | ||||||
Cash and cash equivalents, beginning of period | 1,161,634 | 1,028,146 | ||||||
Cash and cash equivalents, end of period | $ | 1,645,255 | $ | 1,286,937 | ||||
Supplementalcashflowinformation: | ||||||||
Cash paid during the period for income taxes | $ | 215,183 | $ | 558 | ||||
Supplementalnon-cash investing activity: | ||||||||
Estimated consideration to be paid in connection with purchase of intangible asset | $ | 126,000 | $ | - | ||||
Three months ended | ||||||||
March 31, 2016 | March 31, 2015 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 1,846 | $ | 140,789 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 9,456 | 1,785 | ||||||
Deferred tax expense | 1,381 | 30,000 | ||||||
Share-based compensation expense | 636 | 681 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease in receivables on government contracts | 25,130 | 399,456 | ||||||
(Increase) in prepaid expenses and other current assets | (30,250 | ) | (7,424 | ) | ||||
Decrease in accrued payroll and payroll taxes | (338,358 | ) | (146,875 | ) | ||||
Decrease in accounts payable and accrued expenses | (252,051 | ) | (446,605 | ) | ||||
Increase (Decrease) in accrued warranty expense | (28,284 | ) | 29,900 | |||||
Increase in deferred revenue | 2,250 | - | ||||||
Decrease in long-term liabilities | (1,336 | ) | (1,573 | ) | ||||
Net cash (used in) provided by operating activities | (609,580 | ) | 134 | |||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | - | (2,693 | ) | |||||
Net cash used in investing activities: | - | (2,693 | ) | |||||
Cash flows from financing activities: | ||||||||
Exercise of stock options | 350 | - | ||||||
Net cash provided by investing activities: | 350 | - | ||||||
Net decrease in cash and cash equivalents | (609,230 | ) | (2,559 | ) | ||||
Cash and cash equivalents, beginning of period | 2,858,655 | 1,161,634 | ||||||
Cash and cash equivalents, end of period | $ | 2,249,425 | $ | 1,159,075 | ||||
Supplement cash flow information: | ||||||||
Cash paid during the period for income taxes | $ | 44,500 | $ | 7,900 | ||||
SeeNotestoUnauditedCondensedFinancialStatements
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
Note1–BasisofPresentation
The financial statements included herein have been prepared by Mikros Systems Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.2015.
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, 2015,March 31, 2016, and the results of its operations for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 and cash flows for the ninethree months ended September 30, 2015March 31, 2016 and 2014.2015. Changes in the Company’s stockholders’ equity from December 31, 20142015 to September 30, 2015March 31, 2016 are a result of share-based compensation expense of $2,043,$636, proceeds received upon the exercise of options of $350, and net income of $298,238.
$1,846. Interim results are not necessarily indicative of results for the full fiscal year.
Note2–RecentAccountingPronouncements
In May 2014,There have been no developments to recently issued accounting standards, including the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The amendment in this ASU provides guidanceexpected dates of adoption and estimated effects on the revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange forCompany’s condensed financial statements, from those goods or services. The core principle of this update provides guidance to identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligationsdisclosed in the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. This standard will replace most existing revenue recognition guidance. On July 9,Company’s 2015 the FASB approved a one-year deferral of the effective date of this standard to 2018 for public companies, with an option that would permit companies to adopt the standard as early as the original effective date of 2017. Early adoption prior to the original effective date is not permitted. The Company has not yet selected a transition method nor has the Company determined the effect of the standardAnnual Report on our financial position and results of operations.Form 10-K
Mikros Systems Corporation
NotestoCondensedFinancialStatements
(unaudited)
Note3–SignificantAccountingPolicies
RevenueRecognition
The Company is engaged in research and development contracts with the federal government to develop certain technology to be utilized by the U.S. Department of Defense (“DoD”). The contracts are cost plus fixed fee contracts and revenue is recognized on the basis of such measurement of partial performance as will reflect reasonably assured realization or delivery of completed articles. Fees earned under the Company’s contracts may also be accrued as they are billable, under the terms of the agreements, unless such accrual is not reasonably related to the proportionate performance of the total work or services to be performed by the Company from inception to completion. Under the terms of certain contracts, fixed fees are not recognized until the receipt of full payment has become unconditional, that is, when the product has been delivered and accepted by the Federalfederal government. Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. The Company’s backlog includes future AdaptiveDiagnosticElectronicPortableTestset(“ADEPT”) units to be developed and delivered to the Federalfederal government.
The Company recognizes revenue as it relates to the license of software when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access to take immediate possession of the software or technology. Software license agreements include post-contract customer support ("PCS"). For the Company’s software and software-related multiple element arrangements, where customers purchase both software related products and software related services, the Company uses vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. The Company has established VSOE of fair value for the majority of the PCS, professional services, and training. Given the limited number of sales related to this software, and the fact that the Company does not sell the PCS element separately, there is no VSOE currently available to bifurcate the PCS element from the contract. In accordance with ASC 985-605-25-10a, the fees earned from sale of licenses to which the only undelivered element is the PCS, are recognized ratably over the life of the contract. Revenues from the sale of software licenses for the three months ended March 31, 2016 and 2015 were $27,750 and $0, respectively. At March 31, 2016 and December 31, 2015, deferred revenues amounted to $26,250 and $24,000, respectively.
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. TheAs of March 31, 2016 and December 31, 2015, the Company had unbilled revenues of $38,884$60,636 and $34,366 included in$60,857, respectively which are recorded within receivables on government contracts as of September 30, 2015 and December 31, 2014, respectively.in the Company’s balance sheet. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of September 30, 2015March 31, 2016 and December 31, 2014, the Company had no2015, there were $0 and $125,157, respectively, of advanced billings.
WarrantyExpense
The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, expected and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended September 30,March 31, 2016 and 2015, and 2014, the Company recognized a net warranty (recoveries)(recovery) expense, which is a component of $106,800the Company’s cost of sales of $(20,801) and $(10,744), respectively, and $113,400 and(1,690) for the nine months ended September 30, 2015 and 2014,$29,900, respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 163189 ADEPT units. As of September 30, 2015,March 31, 2016, there are 4126 ADEPT units that remain under the limited warranty coverage. As of September 30, 2015 and December 31, 2014, the Company had an accrued warranty expense of $139,410 and $33,500, respectively.
The following table reflects the reserve for product warranty activity as of September 30, 2015March 31, 2016 and December 31, 2014:2015:
| 2015 | 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
Reserve for product warranty, beginning of period | $ | 33,500 | $ | 35,190 | ||||||||||||
Beginning balance | $ | 359,654 | $ | 33,500 | ||||||||||||
Provision for product warranty | 136,700 | 51,210 | - | 434,000 | ||||||||||||
Product warranty expirations | (23,300 | ) | (52,900 | ) | (20,801 | ) | (33,500 | ) | ||||||||
Product warranty costs paid | (7,490 | ) | - | (7,483 | ) | (74,346 | ) | |||||||||
Reserve for product warranty, end of period | $ | 139,410 | $ | 33,500 | ||||||||||||
Ending balance | $ | 331,370 | $ | 359,654 | ||||||||||||
ResearchandDevelopmentCosts 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 of $24,890$20,897 and $1,724$1,544 for the three months ended September 30,March 31, 2016 and 2015, respectively.
Intangible Assets
The majority of the Company’s intangible assets is a license acquired during 2015. In July 2015, the Company purchased certain software products, intellectual property and 2014,related assets from VSE Corporation. The primary software programs purchased were the Prognostics Framework (PF) and Diagnostic Profiler (DP) programs. The Diagnostic Profiler software is used worldwide by several multinational companies for optimized maintenance of diverse product lines. The Diagnostic Profiler is also used by the US Air Force for depot test programs, and Prognostics Framework is used by the US Army for several missile defense systems.
Licenses are amortized using a straight-line method over their estimated life of six years. For the three months ended March 31, 2016 and 2015, amortization expense related to the Company’s license amounted to $5,250 and $0, respectively, and $34,625is included in general and $5,021, foradministrative expenses on the nine months ended September 30, 2015Statements of Operations and 2014, respectively.Comprehensive Income.
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
Intangible Assets
A majority of the Company’s intangible assets consist of a license acquired in July 2015. Trade names and trademarks with finite lives are amortized using the straight-line method over their estimated useful lives. Licenses are amortized using a straight-line method over their estimated life of six years.
Mikros Systems Corporation
NotestoCondensedFinancialStatements
(unaudited)
Note 4–Income(Loss)PerShare
For periods with net income, netNet income per common share information is computed using the two-class method. Under the two-class method, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. BasicThe table below sets forth the calculation of the percentage of net loss attributableearnings allocable to common stockholders is computed by an adjustment to subtract from net incomeshareholders under the portion of current period earnings that the preferred shareholders would have been entitled to receive pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the convertible preferred shares have no obligation to fund losses.two-class method:
Three Months Ended, | ||||||||
March 31, | ||||||||
| 2016 | 2015 | |||||||
Basic earnings per common share: |
|
| ||||||
Net income allocable to common shareholders | 1,846 | 140,789 | ||||||
Portion allocable to common shareholders | 99.2 | % | 99.2 | % | ||||
Net income allocable to common shareholders | 1,831 | 139,663 | ||||||
Weighted average basic shares outstanding | 32,030,138 | 31,947,753 | ||||||
Basic income per common share | $ | - | $ | - | ||||
Dilutive earnings per common share: | ||||||||
Net income allocable to common shareholders | 1,831 | 139,663 | ||||||
Add: undistributed earnings allocated to participating securities | 15 | 1,126 | ||||||
Numerator for diluted earnings per common share | 1,846 | 140,789 | ||||||
Weighted average shares outstanding - basic | 32,030,138 | 31,947,753 | ||||||
Diluted effect: | ||||||||
Stock options | 14,000 | 28,000 | ||||||
Unvested restricted stock units | 1,818 | 15,714 | ||||||
Conversion equivalent of dilutive Series B Convertible Preferred Stock | 3,307,299 | 3,307,299 | ||||||
Conversion equivalent of dilutive Convertible Preferred Stock | 255,000 | 255,000 | ||||||
Weighted average dilutive shares outstanding | 35,608,255 | 35,553,766 | ||||||
Diluted income per common share | $ | - | $ | - | ||||
The table below sets forth the calculation of the percentage of net earnings (loss) allocable to common shareholders under the two-class method:
| ThreeMonthsEnded | NineMonthsEnded | |||||||||||||||
| September30, | September30, | September30, | September30, | |||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Basic Income per Share: | ||||||||||||||||
Net income applicable to common shareholders -basic | $ | 36,736 | $ | 127,435 | $ | 298,238 | $ | 249,684 | ||||||||
Portion allocable to common shareholders | 99.2 | % | 99.2 | % | 99.2 | % | 99.2 | % | ||||||||
Net earnings allocable to common shareholders | 36,442 | 126,416 | 295,852 | 247,687 | ||||||||||||
Weighted average basic shares outstandingBasic income per share | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | ||||||||||||
| Basic income per share | $ | - | $ | - | $ | 0.01 | $ | 0.01 | ||||||||
Dilutive Income Per Share: | ||||||||||||||||
| Net income applicable to common shareholders | 36,442 | 126,416 | 295,852 | 247,687 | ||||||||||||
Add: Undistributed earnings allocated to participating securities | 294 | 1,019 | 2,386 | 1,997 | ||||||||||||
Numerator for diluted income per share | 36,736 | 127,435 | 298,238 | 249,684 | ||||||||||||
Weighted average shares outstanding - basic | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | ||||||||||||
Diluted effect: | ||||||||||||||||
Stock options | 19,250 | 20,222 | 19,250 | 18,000 | ||||||||||||
Unvested restricted stock awards | 19,250 | - | 19,250 | - | ||||||||||||
Conversion equivalent of diluted Series B Convertible Preferred Stock | 3,307,299 | 3,307,299 | 3,307,299 | 3,307,299 | ||||||||||||
Conversion equivalent of diluted Convertible | 255,000 | 255,000 | 255,000 | 255,000 | ||||||||||||
Restricted stock options | - | 22,000 | - | 15,714 | ||||||||||||
Weighted average dilutive shares outstanding | 35,548,552 | 35,509,307 | 35,665,577 | 35,488,707 | ||||||||||||
Dilutive income per share | $ | - | $ | - | $ | 0.01 | $ | 0.01 | ||||||||
Mikros Systems Corporation
NotestoCondensedFinancialStatements
(unaudited)
| ThreeMonthsEnded | NineMonthsEnded | Three Months Ended, | ||||||||||||||||||||||
| September 30, | September30, | March 31, | ||||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||
Numerator | ||||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Weighted average participating common shares | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | 32,030,138 | 31,947,753 | ||||||||||||||||||
Denominator: | ||||||||||||||||||||||||
Weighted average participating common shares | 31,947,753 | 31,904,786 | 32,064,778 | 31,892,694 | 32,030,138 | 31,947,753 | ||||||||||||||||||
Add: Weighted average shares of ConvertiblePreferred Stock | 255,000 | 255,000 | 255,000 | 255,000 | ||||||||||||||||||||
Add: Weighted average shares of Convertible Preferred Stock | 255,000 | 255,000 | ||||||||||||||||||||||
Weighted average participating shares | 32,202,753 | 32,159,786 | 32,319,778 | 32,147,694 | 32,285,138 | 32,202,753 | ||||||||||||||||||
Portion allocable to common shareholders | 99.2 | % | 99.2 | % | 99.2 | % | 99.2 | % | 99.2 | % | 99.2 | % | ||||||||||||
Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)
Diluted net income (loss) per share for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 does not reflect the following potential common shares, as the effect would be antidilutive.
September30, 2015 | September30, 2014 | |||||||
Stock options | 610,000 | 610,000 | ||||||
| 610,000 | 610,000 | |||||||
Three Months Ended, | ||||||||
March 31, | ||||||||
2016 | 2015 | |||||||
Stock options | 610,000 | 610,000 | ||||||
Note 5 – Income Tax Matters
The Company conducts an on-going analysis to review theits net deferred tax assetsasset and the need for a related valuation allowance that it has recorded against deferred tax assets, primarily associated with Federal net operating loss carryforwards.allowance. As a result of this analysis and the actual results of operations, the Company has decreased its net deferred tax assets by $62,000$1,381 and $30,000 during the ninethree months ended September 30, 2015. The net deferred tax assets increased by $34,000 during the nine months ended September 30, 2014.March 31, 2016 and 2015, respectively. The change in deferred tax assets is attributable to the reversal of various book/tax differences. utilization of income tax attributes, primarily federal net operating losses, as the Company anticipates annual earnings from operations to continue.
Mikros Systems Corporation
NotesAt March 31, 2016, the Company estimated its annual effective tax rate for 2016 to Condensed Financial Statements
(unaudited)be 63.0%. The Company recognized a tax expense of $3,143 for the three months ended March 31, 2016 primarily due to expected net income for the remainder of 2016. At March 31, 2016, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.
Note 6 – Share-Based Compensation
During the three and nine months ended September 30, 2015 and 2014,March 31, 2016, the Company did not issue any stock option awards. During the ninethree months ended September 30, 2014,March 31, 2016, 7,000 options were exercised for proceeds in the amount of $350. The Company recognized stock-based compensation expense for stock options of $37$35 and $969$37 for the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively. The Company recognized stock-based compensation expense for stockAs of March 31, 2016, there were outstanding options to purchase 624,000 shares of $111 and $6,649 for the nine months ended September 30, 2015 and 2014, respectively.common stock. The intrinsic value of the options as of September 30, 2015March 31, 2016 is $3,080.$840.
As of September 30, 2015 and 2014,March 31, 2016, there were 44,000 restricted stock awards outstanding. The Company recognized stock-based compensation expense for restricted stock of $644$601 and $1,018$644 for the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively. The Company recognized stock-based compensation expense for restricted stock of $1,932 and $3,054 for the nine months ended September 30, 2015 and 2014, respectively.
As of September 30, 2015,March 31, 2016, there was $2,695$1,083 of unrecognized stock-based compensation expense related to all outstanding equityrestricted stock awards that will be recognized in a future periods.outstanding.
Mikros Systems Corporation
NotestoCondensedFinancialStatements(unaudited)
Note 7 – Related Party Transactions
Paul Casner, the chairman of the Company’s board of directors, also serves as the executive chairman and CEO of Atair Aerospace Incorporation. Atair provided subcontracting services to the Company relating to the design of the chassis component within the ADEPT units. During the three months ended September 30, 2015 and 2014, the Company incurred subcontracting service costs from Atair of $0 and $6,779, respectively. During the nine months ended September 30, 2015 and 2014, the Company incurred subcontracting service costs from Atair of $2,279 and $33,468, respectively.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” These forward- looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward- looking statements include: 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; our ability to adequately integrate our new software offerings into our business model; 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, 20142015 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, weWe assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.statements.
Item 2. Management’s Discussion and Analysis of Financial Position and Results of Operations.
Mikros Systems Corporation (“Mikros,” the “Company,”(the “Company”, “we” or “us”) is an advanced technology company specializing in the research, developmentdesigns and production ofmanufactures software, hardware and electronic systems primarily for military applications. Classified byused 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 and utility systems, and Federal Aviation Administration systems.
Over the past decade, our principal customer has been the U.S. Department of Defense, (“DoD”) asprimarily the U.S. Navy. We provide the following two key systems to the Navy for maintenance of radars and combat systems:
● | ADEPT®, the Adaptive Diagnostic Electronic Portable Testset, is a PC-based maintenance automation workstation used to maintain the Navy’s premier AN/SPY-1 phased array radar on cruisers and destroyers; and |
● | ADSSS, the ADEPT Distance Support Sensor Suite, is a Condition-Based Maintenance (CBM) system used to monitor Combat System Elements (CSEs) onboard the Littoral Combat Ship (LCS). |
More recently, we acquired certain software and related assets from VSE Corporation. The software is used in our Prognostics Framework® (PF) and Diagnostic Profiler® (DP) products to analyze maintenance data collected from target systems, optimize maintenance procedures, and predict failures. These products provide software capabilities which complement our maintenance hardware products (ADEPT and ADSSS), and allow us to provide complete hardware/software solutions for advanced maintenance, particularly of complex distributed systems. Now that we have a small business, our capabilities include technology management, electronic systems engineeringcomplete hardware/software solution for advanced maintenance, we are expanding into commercial and integration, radar systems engineering, command, control, communications, computers and intelligence (“C4I”) systems engineering, and communications engineering.industrial markets.
OverviewProduct Portfolio
Our primary business focus is to pursue SBIR and other research and development programs from the DoD, Department of Homeland Security, and other governmental authorities, and to expand this government funded research and development into products and services. Since 2002, we have been awarded several Phase I, II, and III SBIR contracts.
Revenues from our government contracts represented 100% of our revenues for the three and nine months ended September 30, 2015 and 2014. We believe that we can utilize the intellectual property developed under our various SBIR awards and our other product offerings, to develop proprietary products for both the government and commercial marketplace.
ADEPT®
Our primary source of revenue is sales of our Adaptive Diagnostic Electronic Portable Testset or ADEPT, to the United States Navy.(ADEPT®). ADEPT is an automated maintenance workstation designed to significantly reduce the man-hourstime required to align the AN/SPY-1 Radar System aboard U.S. Navy AEGISAegis cruisers and destroyers, while optimizing system performance and readiness. ADEPT represents an innovative approach to Navy shipboard maintenance, integrating modular instrumentation cards in a rugged enclosure with an onboard computer, input and output devices, networking hardware, removable hard drives, and a touch screen display. A custom software application provides the user interface and integrates the hardware with a database that stores user information, instrument readings, maintenance requirements, and training aids. ADEPT is designed to be adapted to other complex shipboard systems, and to provide integrated distance support capabilities for remote diagnostics and troubleshooting by shore-based Navy experts. WeSystems are currently extendingdeploying on all Aegis CG and DDG platforms to support the AN/SPY1 radar system. Since the system uses commercial instrument case and modules, ADEPT systemunits can be modified to support both preventative maintenance and condition-based maintenance of other radars and complex electronic systems in military or commercial applications. In that regard, we have a service contract with the U.S. Navy to extend ADEPT to a second U.S. Navy radar system.system, the SPS-49. These services are expected to assist in optimizing performance for the Ballistic Missile Defense Mission.
ADSSS
In 2013, we developed a second-generation of our Adaptive Distance Support Sensor Suite or ADSSS,(ADSSS). In 2013, we started development of ADSS for the Navy’s Littoral Combat Ship (LCS)(“LCS”). ADSSS is a network-enabled system whichthat can be configured to monitor multiple shipboard systems and report maintenance data onshore for further analysis to detect trends and predict failures. This development program remains on schedule internallyADSSS provides an open architecture approach with industry standard hardware, and cybersecurity compliant software to acquire and process system operational and maintenance data. ADSSS 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. Development of the production system is ongoing and initial shipboard testing is planned for Summerlate 2016. We expect ADSSS to be used on both variants of the LCS, which is currently planned to be at least 32 ships. ADSSS, with its remote monitoring and prognostics capabilities, has also generated interest in other ship classes, including Aegis, and we are currently pursuing several related opportunities.
Recent DevelopmentsDiagnostic Profiler®. The Diagnostic Profiler® is an integrated development environment for developing diagnostic capabilities used in maintenance, embedded diagnostics and troubleshooting applications. The software provides diagnostic services to its host application, including fault call-outs, suggested “next best” test to further isolate faults, and direct maintenance actions. When additional faults are identified, the software prioritizes the fault call-outs 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 and over the life of the system, could result in significant cost savings.
In July 2015, we purchased certainPrognostics Framework®. Prognostics Framework® is an analysis software products, intellectual propertyfor framework that implements real-time prognostics, diagnostics and related assets from VSE Corporation.status monitoring to support embedded prognostic applications, health management systems and condition-based maintenance applications. The primary software programs purchased by us are the Prognostics Framework (PF)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 Diagnostic Profiler (DP) programs.(iii) the need for maintenance actions and repair parts. 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 ishas been used by the US Army for several missile defense systems. We believe that the new software products provide us with the opportunity to service commercial customers and additional DoD customers outsideimplement a complete health management system on one of the Navy. No payment was required at closing. We are requiredfirst radar systems to pay the seller 30%require prognostics as a key element of the gross royalty revenue generated over a six year period up to a maximum payment of $1.0 million.
In October 2015, our Quality Management System (“QMS”) was formally certified as compliant with the requirements of ISO 9001:2008. The ISO 9001 auditor found zero non-conformances at our facilities in both Fort Washington, PAits overall solutions. Other potential applications include complex computer networks, power generators, power supply, cooling and Largo, FL. Earlier this year, our QMS was certified by the Naval Sea Systems Command as compliant to NAVSEA Technical Specification 9090-310F, Appendix C and FY 2015 NAVSEA Standard Item 009-04. This Navy certification enables us to form shipboard Alteration Installation Teams and perform shipboard equipment installation and maintenance tasks. The new ISO 9001:2008 certification extends our NAVSEA certification to the leading industry-standard and applies across all of our business processes, for both development and manufacturing capabilities.environmental systems.
Government Contracts
On March 18, 2010, we were awarded and entered into a multi-year Indefinite Delivery, Indefinite Quantity (“IDIQ”)IDIQ contract with the Naval Surface Warfare Center related to our ADEPT product. The contract provides for the purchase and sale of up to $26 million of ADEPT units and related engineering and logistics support. The initial term of the contract was five years, and in March 2015, the period of performance was extended through August 11, 2016. Substantially all of our revenue is attributable to our ADEPT product. In the past, we were generating revenues primarily from the production and delivery of ADEPT units. After executing the ADEPT program for fourfive years, we now have contracts to do further research and developmentR&D on ADEPT units to enhance functionality as well as provide other forms of support. We expect additional delivery orderscontract awards during the remaining term of the contract.
In June 2013, we were awarded a $2.8 million service contract with Condition-Based Maintenance (“CBM”) for LCS systems using the ADSSS. This project will extend the development of the ADEPT to better facilitate the integration of multiple distributed sensors and portable data collection units, provide enhanced automated data collection and processing capabilities, and support hosting of prognostics modeling tools that use the collected data to predict remaining end of life for equipment under test components.
In August 2013, we were awarded a $5.5 million service contract under our IDIQ contract to provide necessary research, development, and program management and implementation of improvements to ADEPT units. We received an initial commitment of $0.8 million under this service contract which was increased to $2.1 million in the first quarter of 2014.
In January 2014, we were awarded a $0.5 million contract by the U.S. Navy that will extend the ADEPT system to a second Navy radar, the SPS-49 long-range air surveillance radar.
During the second quarter of 2014, we were awarded four contracts collectively valued at approximately $1.0 million to be funded over the next two years.million. Two of the awards are to support and improve our ADEPT product line by providing funding for continued training of Navy personnel and a new development effort to upgrade ADEPT instrumentation functions for data acquisition. The remaining two awards are to upgrade the ADSSS system for the Navy's new LCS. Under the first ADSSS contract, we will design a new portable maintenance device for shipboard use, working closely with the Naval Ship Systems Engineering Station (“NAVSSES”) office in Philadelphia, Pennsylvania. The second ADSSS award funds the installation of CBM equipment on the USS Fort Worth and continued shipboard testing. This "Pilot Program" extends our pilot installation of ADSSS on the USS Freedom, a project that was described by our Navy customer as "completely successful".
In July 2014, we were awarded additional funding of $0.3 million under the current IDIQ contract to upgrade the capabilities of the first 6966 ADEPT units currently deployed in the fleet. This effort involves installing a faster and more capable controller module and upgrading the operating systemOperating System software from Windows XP to Windows 7, and will be executed at our Largo, FL facility as units are returned for routine calibration.
In August 2014, we were awarded a major new production contract valued at $5 million for 54 additional ADEPT units. As of September 30, 2015, we have delivered 36 of these units. These systems are deployed on Navy Aegis destroyers and cruisers to support the AN/SPY-1 radar in air defense and ballistic missile defense missions. Also, in August and September 2014, we were awarded two contracts for approximately $0.2 million for ADEPT training and calibration of 34 ADEPT units. In January 2015, we were awarded an additional $0.1 million for the calibration of 31 additional ADEPT units.
In November 2014, we were awarded a contract valued at $0.1 million for technical support on the USS Fort Worth (LCS3) using the latest version of our ADSSS which will provide the SPS-75 Air Search Radar and Rolling Airframe (RAM) systems with Combat Systems (CS), CBM Condition Based Monitoring (CBM) and Distance Support (DS) capability.
In March 2015, we received a further production contract, valued at $1.1 million, for an additional ten ADEPT units for the Aegis AN/SPY-1 radar. We have delivered two of these units and expect to deliver the balance of the units in 2015. Also during March 2015, the Navy also issued an additional contract for ADEPT general engineeringGeneral Engineering and support,Support, with initial funding of $0.1 million. This contract covers various technical tasking for deployed ADEPT systems, including logistics support, customer consultation and regularly scheduled team review meetings.
In May 2015, we received a study contract valued at $30 thousand from Lockheed Martin Corporation, to start work with Lockheed Martin on CBMCondition Based Maintenance for Aegis systems.
In August 2015, the Navy issued awe received contract award valued at approximately $0.2 million for the calibration of 45 additional ADEPT units. This is the seventh contract award of this type that we have received in support of the calibration effort.
We also received two contracts in September 2015, for software development on the SLA-10B and SPQ-9B radars, totaling approximately $0.25 million. We have been tasked to define how the ADEPT tool can help support testing of the SPQ-9B system on Self Defense Test Ships (SDTS).
In September 2015, we also receivedentered into a contract modification for our current service contract with Condition-Based Maintenance (“CBM”) for LCS systems using the ADSSS, which added an additional $1.5 million for ongoing development. This funding will extend the program until September 30, 2016, and allow us to perform installations and support for the LCS Classes.classes.
In March 2016, we received a contract award valued at approximately $0.15 million to provide Initial System Familiarization Training of the ADEPT system on all CG-47 and DDG-51 Class ships. The first event in Norfolk has already occurred, and a second event in San Diego is currently scheduled for May.
In April 2016, we received three contracts to continue logistics support of the ADEPT maintenance automation workstation. A contract valued at approximately $0.3 million to provide ADEPT General Engineering and Support was awarded, along with two other logistics contracts to perform necessary updates, repair and calibration on the ADEPT units, totaling $0.25 million. Along with the contracts received for our ADEPT product, we received a follow on contract in the amount of $0.1 million, for technical support on the USS Fort Worth (LCS3) using the latest version of our ADSSS.
It should be noted that contracting with the Federal government is a lengthy and complex process and that many factors could materialize that would negatively impact our ability to secure future contracts. In addition, our contracts with the Federal government contain unfavorable termination provisions and are subject to audit and modification.
Key Performance Indicator
As substantially all of our revenue is derived from contracts with the Federal government, our key performance indicator is the dollar volume of contracts awarded to us. Increases in the number and value of contracts awarded will generally result in increased revenues in future periods and, assuming relatively stable variable costs associated with our fulfilling such contracts, increased profits in future periods. The timing of such awards is uncertain as we sell to Federal government agencies where the process of obtaining such awards can be lengthy and at times uncertain. As the majority of our revenue in 2014,2015, and expected revenue over the next twelvenine months, is or will be from sales of ADEPT units under our IDIQ contract, and releated R&D and support, continued generation of task orders and our ability to expand the market and potential customer base for ADEPT units will be a key indicator of future revenue. ADEPT units must be serviced and calibrated every two years. Accordingly, as we continue to increase the installed base of ADEPT units and expand the units to other radar systems, we expect to continue to generate future recurring maintenance and service revenue.
Outlook
Our strategy for continued growth is three-fold.based on continuing expansion of our defense business, plus new initiatives to market our advanced maintenance technology to commercial markets. 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. Our state-of-the-art test equipment couldcan be used by many commercial and governmental customers such as the FAA,Federal Aviation Administration, radio and television stations, cellularcell phone service providersstations, and airlines. Second, we will continue to pursue SBIR projects with the Department of Homeland Security, the U.S. Navy, and other government agencies. Third, we believe that through our marketing of products, such as ADEPT, along with software products that we recently purchased from VSE, we will develop key relationships with prime defense contractors. Our strategy is to develop these relationships into longer-term,long-term, key subcontractor roles on future major defense programs awarded to these prime contractors.
In 2015,addition, our new commercial software offerings complement our hardware products and allow us to provide complete hardware/software solutions for advanced maintenance applications. We plan to provide “condition-based maintenance” systems for applications such as FAA radar surveillance and support systems, power distribution and utilities infrastructure, commercial shipping, and other “complex distributed systems.” Customers for these systems include major multinational corporations. We have received several repeat orders from these customers and continue to support their applications.
In 2016, our primary strategic focus is to continue to: (i) establish ourselves as a premium provider of research and developmentR&D and product development services to the defense industry;industry and (ii) growexpand our commercial business generate profitsthrough marketing and increasesales of our cash reserves through obtaining additional SBIR contractsPrognostics Framework and positioning ourselves to obtain future SBIR contracts.Diagnostic Profiler software products. From an operational prospective, we expect to focus substantial resources on generating purchase orders under the IDIQ contract for ADEPT units, expanding ADEPT to support other radar systems, continuing to generate recurring maintenance and calibration revenue for deployed ADEPT units,including theSPS-49, and exploring commercialization opportunities. We intend to capitalize on the Navy modernization program which could result in two or three ADEPT units being placed on each destroyer and cruiser in the U.S. Navy, with the potential to install multiple units on additional U.S. Navy ships and submarines. As the installed base increases, we expect additional and recurring revenue for calibration and other maintenance and support. In January 2014, we were awarded a contract to extend the ADEPT system to a second U.S. Navy radar system, the SBS-49, which is expected to assist in optimizing performance for the Ballistic Missile Defense Mission.
Over the longer term, we expectintend to further develop technology based on existingadvanced maintenance technologies and additional SBIR contractsimplement these technologies in products for deployment in defense applications and to develop these technologiesexpand into products for wide deployment to DoD customers and contractors as well as developing potentialadditional commercial applications. Our new Prognostics Framework and Diagnostic Profiler offerings are expected to accelerate these initiatives. We believe that many of our core capabilities, remote monitoring, rugged systems, predictive maintenance and communications expertise, are applicable to other industries that work with complex distributed systems, such as utilities, communications and transportation systems. We are currently in discussions with certain industry participants regarding this initiative.
During the past two fiscal years, the combination of spending caps, discretionary spending cuts, sequestration and further proposed reductions in defense spending has caused, and may in the future continue to cause, delays in funding certain projects. This has and may continue to adverselynegatively impact our revenues and profits.
Changes to Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2015. As of September 30, 2015,March 31, 2016, there have been no changes to such critical accounting policies and estimates.
Results of Operations
ThreeMonthsEndedSeptemberMarch30,31,20152016and20142015
Revenues earned are based upon the labor, subcontracting services, materials and other direct costs that we incur. Generally, labor and other direct costs generate higher revenues compared to subcontracting services and material costs. We generated revenues of $1,240,393$987,929 during the three months ended September 30, 2015March 31, 2016 compared to $1,057,442$2,476,039 during the three months ended September 30, 2014, an increaseMarch 31, 2015, a decrease of $182,951,$1,488,110, or 17%60%. The increasedecrease was primarily due to the timing of the receiptcompletion of the production contracts for 64 ADEPT units.units in 2015 and significant delays in the award of several Navy contracts. We expect these contracts to be awarded later in 2016. Such delays are not uncommon in the current defense contracting environment and we may experience similar delays in future periods.
Cost of sales consists of direct contract costs including labor, material, subcontracts, and warranty expense for ADEPT units that have been delivered, travel, and other direct costs. Cost of sales for the three months ended September 30, 2015 was$529,303March 31, 2016 was $324,328 compared to $431,701$1,461,905 for the three months ended September 30,March 31, 2015, an increasea decrease of $97,602,$1,137,577, or 23%78%. The increasedecrease was primarily due to our growth in revenue and attributable to receivingthe completion of the production contracts for an aggregate of 64 ADEPT units.units in 2015. As a percentage of revenue, cost of sales decreased to 33% of revenues for the three months ended March 31, 2016 as compared to 59% of revenues for the three months ended March 31, 2015. The decrease was primarily due to the change of the mix of costs incurred in 2016. There were significant decreases in material purchases due to delays in receiving production contracts. There were slight increases in direct labor and subcontract costs related to engineering service contracts awarded in the first quarter of 2016.
The majority of our engineering costs consist of (i) salary, wages and related fringe benefits paid to engineering employees,(ii) rent-related costs, and (iii) consulting fees paid to engineering consultants. As the nature of these costs benefit the entire organization and all research and development efforts, and their benefitsbenefit 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, 2015March 31, 2016 were $309,769$323,913 compared to $329,864$422,415 for the three months ended September 30, 2014,March 31, 2015, a decrease of $20,095,$98,502, or 6%23%. The decrease was primarily due to thea decrease in consulting fees and incentive compensation and engineering tools and equipment offset by an increase in fringe benefits, salaries and consulting fees.expense.
General and administrative expenses consist primarily of salary, intellectual property, consulting fees and related costs, professional fees, business insurance, franchise tax, SEC compliance costs, travel, and unallowable expenses (representing those expenses for which the government will not reimburse us). General and administrative costs for the three months ended September 30, 2015March 31, 2016 were $328,734$336,148 compared to $213,956$322,023 for the three months ended September 30, 2014,March 31, 2015, an increase of $114,778,$14,125, or 54%4%. The increase was due primarily due to increasedincreases in bid and proposal costs, professional fees,expenses, research and development expenses, and generalprofessional fees which were offset by decreases in incentive compensation and administrative salaries.unallowable costs.
At September 30, 2015,March 31, 2016, we estimated our annual effective tax rate for 20152016 to be 49.5%63.0%. We recognized a tax expense of$36,000of $3,143 for the three months ended September 30, 2015March 31, 2016 primarily due to expected net income for the remainder of 2015.2016. At September 30, 2015,March 31, 2016, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences. As of September 30, 2015,March 31, 2016, we had state net operating loss carry forwardscarryforwards of $170,709,$112,981, which will begin expiring in 2033 if not utilized.
We reported net income of $36,736 during the three months ended September 30, 2015 as compared to net income of $127,435 during the three months ended September 30, 2014. The decrease in net income was primarily attributable to income tax expense due to the tax benefit recognized from the decrease in valuation allowance established for net deferred tax assets during the three months ended September 30, 2014 and higher general and administrative costs.
Nine Months Ended September 30, 2015 and 2014
We generated revenues of $5,450,815 during the nine months ended September 30, 2015 compared to $3,150,584 during the nine months ended September 30, 2014, an increase of $2,300,231, or 73%. The increase was primarily attributable to the production contracts for an aggregate of 64 ADEPT units.
Cost of sales for the nine months ended September 30, 2015 was $2,868,377 compared to $1,284,081 for the nine months ended September 30, 2014, an increase of $1,584,296, or 123%. The increase was due to our growth in revenue and attributable to receiving the production contracts for an aggregate of 64 ADEPT units.
Engineering costs for the nine months ended September 30, 2015 were $1,058,705 compared to $832,517 for the nine months ended September 30, 2014, an increase of $226,188, or 27%. The increase was primarily due to the increase in fringe benefits, salaries, consulting fees, engineering, travel and incentive compensations, partially offset by a decrease in recruiting costs, engineering tools and equipment and computer software and related costs.
General and administrative expenses for the nine months ended September 30, 2015 were $951,331 compared to $806,591 for the nine months ended September 30, 2014, an increase of $144,740, or 18%. The increase was due primarily to an increase in salaries and professional fees, partially offset by a decrease in bid and proposal costs.
We recognized a tax expense of$274,500 for the nine months ended September 30, 2015 primarily due to expected net income for the remainder of 2015. At September 30, 2015, the difference from the expected federal income tax rate is attributable to state income taxes, certain permanent book-tax differences and the income tax benefit related to the tax benefit recognized from the decrease in valuation allowance established for net deferred tax assets.
We reported net income of $298,238 during$1,846 for the ninethree months ended September 30, 2015March 31, 2016 as compared to net income of $249,684 during$140,789 for the ninethree months ended September 30, 2014.March 31, 2015. The increasedecrease is primarily attributable to the award underdecrease in revenues during the ADEPT contracts for an aggregate of 64 units.three months ended March 31, 2016.
LiquidityandCapitalResources
Since our inception, we have financed our operations through debt, private and public offerings of equity securities, and cash generated by operations.
During the ninethree months ended September 30, 2015,March 31, 2016, net cash provided byused in operations was $485,964$609,580 compared to net cash provided by operations of $270,331$134 during the ninethree months ended September 30, 2014.March 31, 2015. The increasedecrease was primarily due to an increasea decrease in net income of $48,544, a decrease in accounts receivable partially offset by a decrease in accounts payable$138,943 and accrued payrollthe timing of receipts and payroll taxes.
During the nine months ended September 30, 2015, net cash used in investing activities was $2,693 comparedpayments related to $11,890 during the nine months ended September 30, 2014. The decrease was due to less capital expenditures in 2015.our operating assets and liabilities.
During the nine months ended September 30, 2015 and 2014, net cash provided by financing activitiesWe currently do not have any outstanding loan or line of $350 was attributable to cash proceeds received due to the exercise of stock options.
credit with any bank or financial institution. We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months.
In order to pursue strategic opportunities, obtain additional SBIR contracts, or acquire strategic assets or businesses, we may need to obtain additional financing or seek strategic alliances or other partnership agreements with other entities. In order to raise any such financing, we anticipate considering the sale of additional debt or equity securities under appropriate market conditions. There can be no assurance, assuming we successfully raise additional funds or enter into business alliances, that we will remain profitable or continue to generate positive cash flow.
Off-BalanceSheetArrangements
As of September 30, 2015,March 31, 2016, 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.
Item4.ControlsandProcedures.
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, 2015,March 31, 2016, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) that such information is accumulated and communicated to management, including our president, in order to allow timely decisions regarding required disclosure.
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, 2015March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item6.Exhibits
Item6.Exhibits |
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No.
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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.
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