Form 10QSB for MIKROS SYSTEMS CORP
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15-May-2006
Quarterly Report
Item 2. Management?s Discussion and Analysis of
Financial Condition and Results of Operations.
OVERVIEW
Unless otherwise indicated or the context otherwise requires, all references to ?Mikros?, the ?Company?, ?we?, or ?our? and similar terms refer to Mikros Systems Corporation. Mikros is 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. Our headquarters are located at 707 Alexander Road, Suite 208, in Princeton, New Jersey.
On March 2, 2006, we received an amendment to the SBIR Phase III contract for additional funding in the amount of $2.95M from The Department of the Navy for the continuation of the development and production of our Adaptive Diagnostic Electronic Portable Testset or ADEPT? maintenance tool for U.S. Navy surface combatants. This modification will expand the application of ADEPT? to include all Aegis ship variants for cruisers and destroyers. This market totals over 80 ships plus shore-based facilities. Future potential markets include foreign navies and other U.S. Navy ships. This maintenance and training tool allows U.S. Navy personnel to engage cutting-edge technology to reduce maintenance time and enhance skill levels of shipboard personnel.
ADEPT? began as a U.S. Navy Small Business Innovation Research (SBIR) program in 2002, and over the course of development, Mikros has filed for three technology patents with the U.S. Patent & Trademark Office dealing with maintenance procedure automation and dynamic maintenance personnel training. Mikros expects to file additional patents in the near future.
The first two production units are now in qualification testing, and an additional four units were scheduled and completed in April 2006. These additional units will be delivered to the U.S. Navy for shore- based and shipboard testing and evaluation.
On May 1, 2006, we were awarded an SBIR Phase II contract from Space and Naval Warfare Systems Command (SPAWAR), San Diego, as a follow-on to our SBIR Phase I work performed under the SBIR topic entitled Radar Wireless Spectral Efficiency (RWSE). The total award is valued at approximately $750,000 divided into a $600,000 base program and a $150,000 option program. This SBIR Phase II effort will focus on the real world implications of incorporating wireless networking 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 the U.S. Navy CVN platform through: (1) the identification and testing of potential own-ship electromagnetic interference (EMI) issues; (2) the development and testing of viable mitigation technologies to overcome adverse EMI effects; (3) the development of a CVN Wi-Fi network planning tool to support networking within a highly reconfigurable shipboard environment. ****This contract is initially for the CVN platform, but is expected to be eventually applicable to other U.S. Navy ships.******
Mikros continues to pursue several SBIR projects with Homeland Security, the U.S. Navy, and other government agencies.
Statements contained or incorporated by reference in this Quarterly Report on Form 10-QSB that are not based on historical facts are ?forward-looking statements? within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management including, without limitation, our expectations regarding results of operations, selling, general and administrative expenses, research and development expenses and the sufficiency of our cash for future operations. Forward-looking statements may be identified by the use of forward-looking terminology such as ?may,? ?will,? ?expect,? ?estimate,? ?anticipate,? ?continue,? or similar terms, variations of such terms or the negative of those terms.
Such forward-looking statements include, without limitation, statements regarding technology under development, strategies and objectives. The forward-looking statements include risks and uncertainties, including, but not limited to, the anticipated size of and growth in the markets for the Company?s products, the trends favoring the use of the Company?s proposed commercial products, the anticipated demand for the Company?s new products, the timing of development and implementation of the Company?s new product offerings, the utilization of such products by the Company?s clients and trends in future operating performance, and other factors not within the Company?s control. The factors discussed herein and expressed from time to time in the Company?s filings with the Securities and Exchange Commission could cause actual results and development to be materially different from those expressed in or implied by such statements. The forward-looking statements made herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Changes to Accounting Policies and Estimates
Our critical accounting policies and estimates are set forth in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005. As of March 31, 2006, there have been no changes to such critical accounting policies and estimates.
Compliance with Sarbanes-Oxley Requirements
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to perform an evaluation of its internal control over financial reporting and have our independent auditors attest to such evaluation as of December 31, 2007. We have been actively preparing for the implementation of this requirement by, among other things, establishing an ongoing program to document, evaluate and test the systems and processes necessary for compliance. While we anticipate that we will be able to comply on a timely basis with these requirements, unforeseen delays may occur which could prevent us from achieving timely compliance.
If we fail to complete our evaluation on a timely basis and in a satisfactory manner, or if our external auditors are unable to attest on a timely basis to the adequacy of our internal controls, we may be subject to additional scrutiny surrounding our internal controls over financial reporting.
Results of Operations
Three Months Ended March 31, 2006 and 2005
There were revenues of $538,590 for the first quarter ended March 31, 2006 compared to $355,413 for the same period in 2005 and there were cost of sales of $339,506 for the quarter ended March 31, 2006 compared to $206,430 for the same period in 2005. These increases are primarily attributable to the SBIR Phase III contract.
Engineering costs for the quarter ended March 31, 2006 were $52,182 compared to $21,455 in the quarter ended March 31, 2005. There were higher engineering costs for the quarter ended March 31, 2006 due to the research and development engineering office salaries and other costs related to the SBIR Phase III contract.
General and administrative expenses for the quarter ended March 31, 2006 were $111,534 compared to $96,714 in the quarter ended March 31, 2005 due to higher costs incurred for administrative and bid and proposal salaries and related costs.
For the three months ended March 31, 2006, income tax expense was $15,200 compared to $0 for the same period in 2005. During 2005, the Company?s deferred tax assets were fully reserved by a valuation allowance, thus the related income tax expense was offset by the reversal of the corresponding valuation allowance.
Net income for the three months ended March 31, 2006 was $20,168 versus net income of $30,814 for the same period in 2005.
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.
In September 2004, we were awarded a Small Business Innovation Research (SBIR) Phase III contract from the Naval Surface Weapons Center ? Dahlgren, Virginia valued at approximately $2,400,000. The contract is to complete the development and to begin initial production of an intelligent test tool for Navy radars. The MFDAT has been designed by the Company under a $1,000,000 SBIR Phase II contract, which began in August 2003. In March 2006, an amendment to this SBIR Phase III contract increased funding by approximately $2,950,000 and extended the period of performance through February 2008. The contract amendment calls for an expansion of ADEPT? applications to include all Aegis ship variants for cruisers and destroyers.
On May 1, 2006, we were awarded an SBIR Phase II contract from Space and Naval Warfare Systems Command (SPAWAR), San Diego, as a follow-on to our SBIR Phase I work performed under the SBIR topic entitled Radar Wireless Spectral Efficiency (RWSE). The total award is valued at approximately $750,000 divided into a $600,000 base program and a $150,000 option program.
We maintain a line of credit facility for maximum borrowings of up to $34,000. There were no amounts outstanding under this line at March 31, 2006.
For the three months ended at March 31, 2006, we had net income of $20,168 and working capital of $150,094. However, we still had an accumulated deficit of $11,643,338.
We intend to continue the development and marketing of our commercial applications of our wireless communications technology both directly and through third parties. In order to continue such development and marketing, we will be required to raise additional funds. We intend to consider the sale of additional debt and equity securities under appropriate market conditions, alliances or other partnership agreements with entities interested in supporting our commercial programs, or other business transactions which would generate resources sufficient to assure continuation of our operations and research programs. There can be no assurance, assuming we successfully raise additional funds or enter into business alliances, that we will achieve profitability or positive cash flow. If we are unable to obtain additional adequate financing or enter into such business alliances, management will be required to sharply curtail our operations.
Contractual Obligations
Our major outstanding contractual obligations relate to the leases of our executive office and marketing facilities through month- to-month leases. We executed a new lease for engineering office space in Fort Washington, Pennsylvania that commenced on September 1, 2005 and continues for 63 months. The first monthly payment of $5,181.00 was due on January 1, 2006 and the terms of the lease include an annual rate increase through the end of lease.
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