Mikros Systems Corpo

Delayed OTC Bulletin Board - 07/24 09:58:03 pm
0.525USD
+0.96%

MIKROS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION. (form 10-Q)

Envoyer par e-mail
08/14/2019 | 09:49 pm

This Management's Discussion and Analysis of Financial Condition and Results of
Operations summarizes the significant factors affecting the operating results,
financial condition, liquidity and cash flows of the Company as of and for the
periods presented below. The following discussion and analysis should be read in
conjunction with our unaudited condensed financial statements and related
information contained herein and our audited financial statements as of December
31, 2018
.






Overview




Mikros Systems Corporation (the "Company", "we", "Mikros" or "us") designs and
manufactures software, hardware and electronic systems used 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, utility systems, and Federal Aviation
Administration
systems.



Our primary business focus is to pursue Small Business Innovation Research
programs from the Department of Defense, 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 Small Business Innovation Research contracts, and
several IDIQ contracts for our ADEPT and ADSSS products.



Revenues from our government contracts represented substantially all of our
revenues for the six months ended June 30, 2019 and 2018. Over the past decade,
our principal customer has been the U.S. Department of Defense, primarily the
U.S. Navy ("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 (CG) and Destroyers (DDG).


? 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 have developed and marketed software products to analyze
maintenance data collected from target systems, optimize maintenance procedures,
and predict failures. Our Prognostics Framework® (PF) and Diagnostic Profiler®
(DP) 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 complete hardware/software solution for
advanced maintenance, we are expanding into commercial and industrial markets.






Product Portfolio




Revenues from our government contracts represented substantially all of our
revenues for the six months ended June 30, 2019. We believe that we can utilize
the intellectual property developed under our various Small Business Innovation
Research
awards to develop proprietary products for both the government and
commercial marketplace.






10


--------------------------------------------------------------------------------



Adaptive Diagnostic Electronic Portable Testset (ADEPT). ADEPT is an automated
maintenance workstation designed to significantly reduce the time required to
align the AN/SPY-1 Radar System aboard U.S. Navy Aegis cruisers and destroyers,
while optimizing system performance and readiness. ADEPT Systems are currently
deploying on all Aegis CG and DDG platforms to support the AN/SPY1 radar system.
Since the system uses commercial instrument case and modules, ADEPT units 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, the SPS-49. These
services are expected to assist in optimizing performance for the Ballistic
Missile Defense Mission
. As of the date of this report, we have delivered a
total of 226 ADEPT units.



ADEPT Distance Support Sensor Suite (ADSSS). In 2013, we started development of
ADSSS for the Navy's Littoral Combat Ship ("LCS"). ADSSS is a network-enabled
system that can be configured to monitor multiple shipboard systems and report
maintenance data onshore for further analysis to detect trends and predict
failures. ADSSS 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. We expect ADSSS to be used on both variants of the LCS,
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.



Diagnostic 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.



Prognostics Framework. Prognostics Framework is an analysis software for
framework that implements real-time prognostics, diagnostics, and status
monitoring to support embedded prognostic applications, health management
systems and condition-based maintenance applications. The Prognostics Framework
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 (iii) the need for
maintenance actions and repair parts. The Prognostics Framework has been used to
implement a complete health management system on one of the first radar systems
to require prognostics as a key element of its overall solutions. Other
potential applications include complex computer networks, power generators,
power supply, cooling and environmental systems.






Government Contracts




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.



In July 2016, we received two additional contract modifications for our current
service contract for LCS systems using the ADSSS, which added an additional
$4.65 million for ongoing development. This funding extended the program through
June 2018 and allows us to perform installations and support for the LCS
classes.



In September 2016, we were awarded and entered into a multi-year IDIQ contract
with the Naval Surface Warfare Center, Port Hueneme Division, relating to our
ADSSS product. The contract has a term of five years and provides for the
purchase and sale of up to $48 million of ADSSS units and related engineering
and logistics support. The IDIQ contract covers the first eight ships of the 28
ship program. The first delivery order in the amount of $3.0 million was awarded
on September 15, 2016 to perform installations, support and logistics for the
LCS class. In June 2018, we received the second delivery order totaling $2.5
million
to support the MK 99 FCS development, test and installation.



In September 2016, we received multiple contracts totaling approximately $0.4
million
to continue logistics support of the ADEPT maintenance workstation.
These contracts include general engineering support, repair, calibration and
training.



In February 2017, we were awarded a follow-on multi-year Small Business
Innovation Research Phase III IDIQ contract with the Naval Surface Warfare
Center
, Crane Division, for our ADEPT program. The contract provides for the
purchase and sale of up to $35.1 million of ADEPT units and related engineering,
such as calibration, repair, training and other logistics services. Since the
award, we have received multiple delivery orders, some of which are described
below.






11


--------------------------------------------------------------------------------



Between March and September 2017, we have been awarded several delivery orders
under the ADEPT IDIQ Contract. The second delivery order covers engineering
services in the amount of $11.5 million which will be funded incrementally and
facilitate the engineering and technical support for the ADEPT program during
the next three years. The third delivery order for $0.6 million is to provide
sustainment services, such as calibration, repair, evaluations, and screenings
of ADEPT units to be performed in our Manufacturing and Depot (M&D) Center in
Largo, Florida. The fourth delivery order for $0.1 million is to provide
training to sailors in the fleet to operate the ADEPT maintenance automation
workstation. The fifth delivery order in the amount of $2.4 million covered
production and delivery of additional ADEPT units. These new units will continue
our fleet support on Aegis cruisers and destroyers in the U.S. Navy.



In April 2017, we received contract awards totaling $2.0 million from the U.S.
Navy
to extend the capabilities of the ADSSS Condition-Based Maintenance (CBM)
system to support a fourth Navy radar system, the MK 99. The Small Business
Innovation Research
office in Dahlgren, VA provided $0.5 million of the total
funding to support this effort.



In July 2017 and November 2017, we received modifications which added funding to
our ADEPT IDIQ Contract, for engineering services in the amounts of $0.4 million
and $0.1 million, respectively. These awards will allow us to continue to
support the ADEPT product line in the fleet, implement necessary software
enhancements, and provide general support of the program.



In August 2017, and August 2018 we received modifications to our ADEPT
sustainment delivery order, adding $0.5 million and $0.25 million, respectively,
for our manufacturing and depot center in Largo, Florida, ("M&D Center") to
continue to provide bi-annual sustainment services for units from the fleet
cycling through our M&D Center.



In 2018, we received additional modifications to our ADEPT IDIQ Contract and
incremental awards for continued engineering services in the aggregate amount of
$0.42 million. This funding will support necessary software enhancements to
sustainment services for the ADEPT product out of our M&D Center.



In February and March 2018, we received modifications to our ADEPT sustainment
delivery orders, adding $0.25 million to allow us to continue to provide
bi-annual sustainment services for units from the fleet cycling through the M&D
Center. In addition to those sustainment services, it allows our team at the M&D
Center to provide training to sailors in the fleet to operate the ADEPT
maintenance automation workstation.



Between January 2018 through April 2018, we received multiple contract awards
which increased funding on our ADEPT IDIQ contract for engineering services. The
total amount awarded in the first quarter of 2018 was $0.5 million and an
additional $1.6 million was awarded in April 2018. This funding will allow us to
continue supporting the ADEPT product line in the fleet and implementing
necessary software enhancements to increase readiness.



In August 2018, we received a contract modification to add funding to our ADEPT
IDIQ Contract for engineering services in the amount of $1.3 million. This
additional funding will support the ADEPT product line in the fleet, implement
necessary software enhancements and provide general support.



In September 2018, we received modifications to our ADEPT sustainment delivery
orders, adding $0.25 million. This funding allows the M&D Center in Largo,
Florida
to provide bi-annual sustainment services for units from the fleet.



In November 2018, we received a contract modification to add funding to our
ADEPT IDIQ Contract for engineering services in the amount of $0.2 million. This
additional funding will support the ADEPT product line in the fleet, implement
necessary software enhancements and provide general support.



In May 2019, we received a contract modification to add funding in the amount of
$0.05 million to our ADEPT IDIQ Contract for sustainment services. This award
will allow us to continue to support the ADEPT product line in the fleet and
implement necessary software enhancements.



In May 2019, we also received a contract modification to add funding in the
amount of $0.8 million to our ADEPT IDIQ Contract for engineering services. This
funding will provide general support for the program.



In June 2019, an additional $0.1 million was received for ADEPT general
engineering services, along with $0.04 in July 2019 for sustainment services.






12


--------------------------------------------------------------------------------







Commercial Contracts




In May 2019, our long-time customer HP Indigo renewed its annual contract for
Diagnostic Profiler and Diagnostician Software Maintenance and Support.






Key Performance Indicator




As substantially all of our revenue is derived from contracts with the U.S.
Federal government, our key performance indicator is the dollar volume of
contracts and task orders awarded to us under our IDIQ contracts. Increases in
the number and value of contracts and trade orders awarded will generally result
in increased revenues in future periods and, assuming relatively stable variable
costs associated with our fulfilling such awards, 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 substantial majority of our revenue in 2018, and expected
revenue in 2019, is or will be from sales of ADEPT units and ADSSS systems under
our IDIQ contracts, 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, if we can continue to increase the installed base of
ADEPT units and expand the units to other radar systems, we expect to generate
future recurring maintenance and service revenue.






Outlook




Our strategy for continued growth is based on continuing expansion of our
defense business and executing new initiatives to apply our advanced maintenance
technology in commercial markets. With regard to the defense industry, we expect
to continue expanding our technology base, backlog and revenue by continuing our
active participation in the Department of Defense Small Business Innovation
Research
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 Small Business Innovation Research awards to develop proprietary
products, such as ADEPT and ADSSS, with broad appeal in both the government and
commercial marketplace. Our state of the art test equipment can be used by many
commercial and governmental customers such as the Federal Aviation
Administration
, radio and television stations, cell phone stations, and
airlines. Second, we will continue to pursue Small Business Innovation Research
projects with the Department of Homeland Security, the U.S. Navy, and other
government agencies. Third, we believe that through our marketing of products,
such as ADEPT, we will develop key relationships with prime defense contractors.
Our strategy is to develop these relationships into long-term, key subcontractor
roles on future major defense programs awarded to these prime contractors.



With regard to commercial markets, our Diagnostics Profiler and Prognostics
Framework software offerings complement our hardware products and allow us to
provide complete hardware/software solutions for advanced maintenance
applications. Current customers for these systems include major multinational
corporations such as HP Indigo, which recently extended our Diagnostic Profiler
software support for a sixth year. We continue to receive repeat orders from
these customers to support their applications. We plan to provide
"condition-based maintenance" systems for "complex distributed systems" to
commercial customers. In that regard, we are currently developing a
condition-based maintenance solution for heating ventilation, air conditioning
and refrigeration (HVAC) equipment based on our proprietary Prognostics
Framework solution. We have deployed two active pilot systems that are providing
key maintenance data on a daily basis to service technicians. More recently, we
commenced a pilot program with an energy consulting firm to collect energy
consumption data to reduce power consumption, decrease system downtime, and
recommend proactive maintenance to commercial and industrial energy users. We
are also in discussions with additional commercial companies regarding the use
of our condition based maintenance applications.



In 2019, our primary strategic focus is to continue as a premium provider of
Research and Product Development services to the defense industry, generate
multiple task orders under our two IDIQ contracts, and expand our commercial
business through marketing and sales of our Prognostics Framework and Diagnostic
Profiler software products. In furtherance of this strategy, we have made
material investments in our engineering and technical staffs to provide broader
and deeper expertise to our customers. We will also seek to generate incremental
revenue through providing light assembly and production services to commercial
customers at our M&D Center in Largo, Florida.



Over the longer term, we intend to further develop advanced maintenance
technologies and implement these technologies in products for deployment in
defense applications and to expand into more commercial applications. 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.






13


--------------------------------------------------------------------------------



During recent years, the combination of spending caps, discretionary spending
cuts, sequestration and further changes in defense spending and priorities have
caused, and may in the future continue to cause, delays in funding certain
projects. This may negatively impact our revenues and profits.



Changes to Critical Accounting Policies and Estimates



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new
standard supersedes the present U.S. GAAP standard on leases and requires
substantially all leases to be reported on the balance sheet as right-of-use
assets and lease obligations. ASU 2016-02 is effective for annual reporting
periods beginning after December 15, 2018, and interim reporting periods within
those annual reporting periods. Early adoption is permitted and in the original
guidance the modified retrospective application was required, however, in July
2018
the FASB issued ASU 2018-11 which permits entities with another transition
method in which the effective date would be the date of initial application of
transition. Under this optional transition method, we would recognize a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. We adopted ASU 2016-02 as of January 1, 2019 using the
modified retrospective approach and the optional transition method. In addition,
we elected the package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allowed us to carry
forward historical lease classifications.



Adoption of the new standard resulted in the recording of operating lease
right-of-use assets and operating lease liabilities on our balance sheet, but
did not have an impact on the Company's beginning retained earnings, statement
of income or statement of cash flows. The most significant impact was the
recognition of right-of-use assets and lease liabilities for operating leases,
while our accounting for finance leases remained substantially unchanged.






Results of Operations




Three Months Ended June 30, 2019 and 2018



We generated revenues of $1,853,503 during the three months ended June 30, 2019
compared to $2,242,111 during the three months ended June 30, 2018, a decrease
of $388,608, or 17%. The decrease was due principally to delays of follow-on
contract awards and no ADEPT units produced in 2019.



Cost of sales consists of direct contract costs including labor, material,
subcontracts for the ADEPT units that have been delivered, travel, and other
direct costs. Cost of sales during the three months ended June 30, 2019 was
$792,151 compared to $1,102,407 for the three months ended June 30, 2018, a
decrease of $310,256 or 28%. The decrease relates to a change in the mix of
contracts generating revenues as compared to the second quarter of 2018. In
2019, we did not produce any ADEPT units and all revenue was generated from
engineering support services.



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 benefit cannot be identified with a specific project or contract,
these engineering costs are classified as part of "engineering overhead" and
included in operating expenses. Engineering costs for the three months ended
June 30, 2019 were $695,838 compared to $593,797 for the three months ended June
30, 2018
, an increase of $102,041, or 17%. The increase in 2019 was due to
delays of follow-on contract awards, and shift of increases in engineering
personnel from revenue generating contracts.



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,
including independent research and development (IR&D) which consists of research
and development expenses unrelated to our defense contracts). General and
administrative costs for the three months ended June 30, 2019 were $369,742
compared to $422,259 for the three months ended June 30, 2017, a decrease of
$52,517, or 12%.



We recognized a tax expense of $432 for the three months ended June 30, 2019. At
June 30, 2019, the difference from the expected federal statutory income tax
rate is attributable to state income taxes and certain permanent book-tax
differences.



We reported a net loss of $3,721 for the three months ended June 30, 2019 as
compared to net income of $84,287 for the three months ended June 30, 2018. The
decrease was attributable primarily to the decrease in revenues in the second
quarter of 2019.






14


--------------------------------------------------------------------------------



Six Months Ended June 30, 2019 and 2018



We generated revenues of $3,873,768 during the six months ended June 30, 2019
compared to $4,732,771 during the six months ended June 30, 2018, a decrease of
$859,003, or 22%. The decrease was due principally to delays of follow-on
contract awards and no ADEPT units produced in 2019.



Cost of sales for the six months ended June 30, 2019 was $1,570,693 compared to
$2,279,439 for the six months ended June 30, 2018, a decrease of $708,746 or
45%. The decrease relates to a change in the mix of contracts generating
revenues as compared to the corresponding period of 2018. In 2019, we did not
produce any ADEPT units and all revenue was generated from engineering support
services.



Engineering costs for the six months ended June 30, 2019 were $ 1,358,088
compared to $1,234,090 for the six months ended June 30, 2018, an increase of
$123,998, or 9%. The increase in 2019 was due to delays of follow-on contract
awards, and a shift of increases in engineering personnel from revenue
generating contracts.



General and administrative costs for the six months ended June 30, 2019 were $
833,307
compared to $873,937 for the six months ended June 30, 2017, an increase
of $40,630, or 5%.



At June 30, 2019, we estimated our annual effective tax rate for 2019 to be 32%.
We recognized a tax expense of $37,267 for the six months ended June 30, 2019
primarily due to expected net income for the remainder of 2019. At June 30,
2019
, the difference from the expected federal statutory income tax rate is
attributable to state income taxes and certain permanent book-tax differences.



We reported a net income of $77,084 for the six months ended June 30, 2019 as
compared to net income of $237,132 for the three months ended June 30, 2018. The
decrease was attributable primarily to the decrease in revenues in the first six
months of 2019.



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.



During the six months ended June 30, 2019, net cash used in operations was
$531,106 compared to net cash used in operations of $51,819 during the six
months ended June 30, 2018. The increase was primarily due to the timing of
receipts and payments related to our operating assets and liabilities.



Net cash used in investing activities was $28,216 in the six months ended June
30, 2019
as compared to $40,506 in the six months ended June 30, 2018, a
decrease of $12,213. The decrease was due to the decrease in purchases of
equipment and furniture and fixtures related to an expansion of our Pennsylvania
offices in 2018.



On January 31, 2018, we entered into a $550,000 credit facility with PNC Bank.
The facility initially matured on January 31, 2019 and has been extended to
January 31, 2020. The facility accrues interest at a variable rate equal to the
Daily LIBOR Rate plus 250 basis points. Interest is paid monthly. Principal
borrowings may be prepaid at any time without penalty and the facility is
secured by substantially all of our assets. The facility contains customary
affirmative and negative nonfinancial covenants. As of June 30, 2019, no amounts
were outstanding under the facility.



In order to pursue strategic opportunities, obtain additional Small Business
Innovation Research
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-Balance Sheet Arrangements



As of June 30, 2019, 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.






15


--------------------------------------------------------------------------------

© Edgar Online, source Glimpses

Acquiremedia 2019
Envoyer par e-mail