Form 10QSB for MIKROS SYSTEMS CORP
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10-May-2007
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Mikros Systems Corporation (the "Company", "we" or "us") was founded in 1978. We are an advanced technology company specializing in the research and development of electronic systems technology primarily for military applications. Classified by the U.S. Department of Defense (DoD) as a small business, our capabilities include technology management, electronic systems engineering and integration, radar systems engineering, combat/command, control, communications, computers and intelligence (C4I) systems engineering, and communications engineering.
Our primary business focus is to pursue Small Business Innovation Research (SBIR) programs from the U.S. Department of Defense, Department of Homeland Security, and other governmental authorities, and to expand this Government funded research and development into products, services, and business areas of the Company. Since 2002, we have been awarded a number of Phase I, II, and III SBIR contracts.
Revenues from our government contracts represented 100% of our revenues for the three months ended March 31, 2007 and 2006. We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products for both the government and commercial marketplace.
In September 2004, we were awarded a SBIR Phase III contract valued at approximately $2,400,000 from the Naval Surface Warfare Center - Dahlgren, Virginia, for the commercialization of the Company's MFDAT (Multi-Functional Distributed Analysis Tool) SBIR-developed technology. This contract resulted in the development of ADEPT(r) (a registered trademark of the Company), a computer-aided alignment and maintenance tool for the AN/SPY-1 radar system, which is the primary air and surface radar for the AEGIS Combat System installed on the Ticonderoga (CG-47) and Arleigh Burke (DDG-51) class guided missile warships. Five Low Rate Initial Production (LRIP) ADEPT units were manufactured for U.S. Navy evaluation.
In March 2006, we were awarded an amendment to this SBIR Phase III contract valued at approximately $2,950,000 to expand the application of ADEPT to include all the SPY-1 radar variants aboard all of the AEGIS cruisers and destroyers. In addition, we are developing a smaller, lighter version of ADEPT for applications where weight and size are critical factors. ADEPT functional testing has been accomplished aboard the USS SAN JACINTO (CG-56) and continues at the Cruiser Modernization (CGM) SPY-1A Test Facility in Moorestown, New Jersey.
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 focuses on the real world implications of incorporating wireless networking into the aircraft carrier (CVN class ships) and amphibious assault ship (LHD class ships) environments. Under this program, a prototype of an Interference-Aware Wireless Network Planning Tool is being developed to assist in the implementation and fielding of wireless networks on board U.S. Navy surface vessels.
As part of this RWSE SBIR Phase II program, our engineers have performed Wi- Fi propagation surveys aboard the aircraft carrier USS GEORGE WASHINGTON (CVN-73) and the amphibious assault ship USS BATAAN (LHD-5). The empirical results from these surveys were used to refine the Wi-Fi signal propagation algorithms embedded in the Wireless Network Planning Tool prototype. In March 2007, our engineers sailed aboard the U.S. Navy amphibious assault ship USS KEARSARGE (LHD-3) during its underway exercise in the Atlantic Ocean near Norfolk, Virginia. This afforded us the opportunity to measure the shipboard radio frequency environment during actual at-sea operating conditions. This information is critical to analyzing potential interference to and from commercial wireless networks and to validate the interference aspect of the Interference-Aware Wireless Network Planning Tool currently under development.
On April 30, 2007, we were awarded a $2.4 million contract from the Naval Surface Weapons Center, Port Hueneme Division (NSWC PHD) for the continuing development of ADEPT(r), our automated maintenance tool designed to significantly reduce the man-hours required to align the AN/SPY-1 Radar System aboard U.S. Navy AEGIS cruisers and destroyer while optimizing system performance and readiness. NSWC PHD is the U.S. Navy's In-Service Engineering Agency (ISEA) for the AN/SPY-1 Radar System.
This new contract provides for the continuing development of advanced capabilities for ADEPT, the finalizing of an ADEPT Integrated Logistics Support Plan required for fleet fielding, and the Low Rate Initial Production (LRIP) of ten (10) ADEPT(V)2 units, which are half the size and weight of the original ADEPT(V)1 while maintaining the same functionality. The contract follows successful testing and evaluation of ADEPT on one AEGIS cruiser along with testing at the Navy's AN/SPY-1 Cruiser Modernization Test Facility in Moorestown, NJ. It is expected that the ADEPT equipment will initially be installed on AEGIS cruisers undergoing modernization with introduction into the destroyers to follow. The entire U.S. Navy AEGIS fleet consists of 22 cruisers and 62 destroyers.
Changes to Critical 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, 2006. As of March 31, 2007, there have been no changes to such critical accounting policies and estimates.
Results of Operations
Three Months Ended March 31, 2007 and 2006
We generated revenues of $794,950 for the quarter ended March 31, 2007 compared to $538,590 for the quarter ended March 31, 2006. Cost of sales were $486,234 for the quarter ended March 31, 2007 compared to $339,506 for the quarter ended March 31, 2006. These increases are primarily attributable to the SBIR Phase III and RWSE Phase II contracts.
Engineering costs for the quarter ended March 31, 2007 were $95,433 compared to $52,182 for the quarter ended March 31, 2006. The increase in engineering costs for the quarter ended March 31, 2007 was due to the hiring of a consultant and fringe benefits now being included in engineering costs.
General and administrative expenses for the quarter ended March 31, 2007 were $153,038 compared to $111,534 for the quarter ended March 31, 2006. The increase was due to higher costs related to bid and proposal consulting fees, increased salaries and professional fees.
For the quarter ended March 31, 2007, income tax expense was $29,630 compared to $15,200 for the quarter ended March 31, 2006. Net income for the quarter ended March 31, 2007 was $30,615 as compared to net income of $20,168 for the quarter ended March 31, 2006. The increase in both income tax expense and net income is largely due to the addition of the SBIR Phase III and RWSE Phase II contracts. With regard to income tax expense, amounts recorded for both periods are impacted by actual contract profitability versus that estimated for purposes of recording our deferred tax assets and associated valuation allowance.
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.
For the three months ended March 31, 2007, net cash provided by operations was $137,155 compared to $77,907 for the three months ended March 31, 2006. The increase was primarily the result of increased contract revenues. We had working capital of $313,887 as of March 31, 2007 as compared to working capital of $150,094 at March 31, 2006.
On November 16, 2006, we entered into a $50,000 revolving line of credit with Sun National Bank (the "Lender") evidenced by a Promissory Note made by us in favor of the Lender. The revolving line of credit will be available to us for two years. On November 14, 2008, advances will no longer be made under the revolving line of credit. At that time, the then outstanding principal balance will be converted into a five-year term loan with payments based on a five-year amortization schedule. The term loan will be payable in 60 equal monthly installments and be due in full on November 14, 2013. During the first five months of the revolving line of credit, any outstanding principal balance will bear interest at 5.99% per annum. Thereafter, any outstanding principal balance will bear interest equal to the Sun National Bank Prime Rate. The loan is secured by substantially all of our assets pursuant to a Commercial Security Agreement (the "Security Agreement") made by us in favor of the Lender and is guaranteed by Thomas J. Meaney, our President and Chief Executive Officer. There were no outstanding amounts under this line of credit at March 31, 2007.
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.
Contractual Obligations
We lease 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 was due on January 1, 2006 and the terms of the lease include an annual rate increase through the end of the lease.
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