10QSB 1 junemkrs.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------------------------- FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 Commission File No. 2-67918 Mikros Systems Corporation -------------------------- (Exact Name of Small Business Issuer as Specified in its Charter) Delaware 14-1598200 -------- ---------- (State of Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey 08540 ------------------------------------------- (Address of Principal Executive Offices) 609-987-1513 ------------ (Issuer's Telephone Number, Including Area Code) ------------------------------------------------- (Former Address, If Changed Since Last Report) Check whether the Issuer: (1) 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: ___X___ No:_______ State the number of shares outstanding of each of the Issuer's classes of common stock, as of August 5, 2005: Class Number of Shares ----- ---------------- Common Stock, Par Value $.01 31,766,753 Transitional Small Business Disclosure Format (check one): Yes:___ ___ No:__X____ TABLE OF CONTENTS PAGE # PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements 3 CONDENSED BALANCE SHEET As of June 30, 2005 4 CONDENSED STATEMENTS OF INCOME For the Three Months Ended and Six Months Ended June 30, 2005 and 2004 5 CONDENSED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2005 and 2004 6 NOTES TO THE CONDENSED FINANCIAL STATEMENTS 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview 10 Results of Operations 11 Liquidity and Capital Resources 11 Item 3. Controls and Procedures 12 PART II OTHER INFORMATION Item 6. Exhibits 13 SIGNATURES 14 CERTIFICATIONS 15 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted from the following financial statements pursuant to the rules and regulations of the Securities and Exchange Commission, although Mikros Systems Corporation (the "Company") believes that such financial disclosures are adequate to assure that the information presented is not misleading in any material respect. The following financial statements should be read in conjunction with the year-end financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire fiscal year. MIKROS SYSTEMS CORPORATION CONDENSED BALANCE SHEET (UNAUDITED) June 30, ASSETS 2005 ------ -------- CURRENT ASSETS Cash $ 117,970 Receivable on Government Contracts 141,409 Other Current Assets 12,793 -------- TOTAL CURRENT ASSETS 272,172 ------- FIXED ASSETS EQUIPMENT 4,383 Less: Accumulated Depreciation (1,644) -------- FIXED ASSETS, NET 2,739 -------- TOTAL ASSETS $ 274,911 ========= See Accompanying Notes to Condensed Financial Statements. MIKROS SYSTEMS CORPORATION CONDENSED BALANCE SHEET (UNAUDITED) June 30, LIABILITIES AND SHAREHOLDERS' EQUITY 2005 ---------- CURRENT LIABILITIES Accrued Payroll and Payroll Taxes $ 47,416 Accrued Expenses 52,297 Accounts Payable 57,322 ---------- TOTAL CURRENT LIABILITIES $157,035 ---------- REDEEMABLE SERIES C PREFERRED STOCK par value $.01 per share, authorized 150,000 shares, issued and outstanding 5,000 shares 80,450 -------- SHAREHOLDERS' EQUITY Preferred Stock, convertible, par value $.01 per share, authorized 2,000,000 shares, issued and outstanding 255,000 shares 2,550 Preferred Stock, Series B convertible, par value $.01 per share, authorized 1,200,000 shares, issued and outstanding 1,102,433 shares 11,024 Preferred Stock, Series D, par value $.01 per share, 690,000 shares authorized, issued and outstanding 6,900 Common Stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 31,766,753 317,668 Capital in excess of par 11,422,976 Accumulated deficit (11,723,692) ----------- TOTAL SHAREHOLDERS' EQUITY 37,426 ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 274,911 ============ See Accompanying Notes to Condensed Financial Statements. MIKROS SYSTEMS CORPORATION CONDENSED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended, Six Months Ended, ------------- -------------- ------------- ------------- Revenues: Contract Revenue $ 436,356 $ 288,629 $ 791,769 $ 507,070 Cost of Sales 266,215 186,769 472,645 320,206 248: -------------- -------------- ------------ ------------ Gross Margin 170,141 101,860 319,124 186,864 250: -------------- -------------- ---------- ----------- Expenses: Engineering 26,677 20,567 48,132 35,240 General & Administrative 99,939 38,667 196,653 80,393 ------------- Total Expenses 126,616 59,233 244,785 115,633 ------------- Net Income $ 43,525 $ 42,627 74,339 71,231 ========== Basic and diluted earnings per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 =========== Weighted average number 268: of share outstanding 31,766,753 31,766,753 31,766,753 31,766,753 ============ See Accompanying Notes to Condensed Financial Statements. MIKROS SYSTEMS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) The Six Months Ended June 30, 2005 June 30, 2004 ------------------ ------------------ Cash Flow From Operating Activities: Net Income $ 74,339 $ 71,231 Adjustments to reconcile Net Income to net cash provided by Operating Activities: Depreciation and Amortization 707 2,116 Net Changes in Operating Assets and Liabilities (Increase) Decrease in: Accounts Receivable 30,732 (34,982) Other Current Assets (8,712) (843) Increase (Decrease) in: Accounts Payable (23,607) (4,701) Accrued Payroll and Payroll Taxes 390 1,087 Other Accrued Expenses (46,500) 17,726 --------- --------- Net Cash provided by Operations 27,349 51,634 --------- --------- Cash Flow from Investing Activities: Purchase of Equipment (3,102) - --------- --------- Net Cash used in Investing Activities (3,102) - ---------- ---------- Net Increase in Cash 24,247 51,634 Cash, beginning of the period 93,723 8,828 --------- --------- Cash, end of period $ 117,970 $ 60,462 ========= ========= See Accompanying Notes to Condensed Financial Statements. MIKROS SYSTEMS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS June 30, 2005 (UNAUDITED) Note 1 Basis of Presentation: The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. 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 financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004. In the opinion of the Company's management, the accompanying unaudited 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 June 30, 2005 and the results of its operations and its cash flows for the six months ended June 30, 2005. Interim results are not necessarily indicative of results for the full fiscal year. The Company's financial statements have been prepared assuming that the Company will be able to continue as a going concern. The Company has sustained substantial operating losses in recent years. In addition, the Company has used substantial amounts of working capital in its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans and intentions on the going concern issue are discussed below. These financial statements do not include any adjustments that would be required if the Company were unable to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flows to meet its obligations as they come due. Management has pursued Small Business Innovative Research (SBIR) contracts in order to generate cash flow, while also allowing development of new potential products. The Company was awarded an SBIR Phase I firm-fixed price contract from the Office of Naval Research (ONR) for approximately $100,000. In September 2004, the Company was awarded an SBIR Phase III contract from the Naval Surface Weapons Center Dahlgren, VA 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 Multi Function Distributed Analysis Tool (MFDAT) has been designed by the Company under a $1,000,000 SBIR Phase II contract, which began in August 2003. If cash flows are insufficient, there would be a material adverse effect on the Company's financial position and operations and its ability to continue as a going concern. This would force the Company to further reduce its expenditures, reduce its workforce, sell certain assets or possibly explore additional alternatives, including seeking bankruptcy protection. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent on the Company being able to sustain sufficient cash flow to support further development of its new products and for continuing operations. Management believes that actions presently being taken to sustain the Company's operating and financial requirements will allow it to continue as a going concern. Note 2 Shareholder's Equity: CONVERTIBLE PREFERRED STOCK --------------------------- Each share of the convertible preferred stock can be redeemed at the Company's option for $1.00 per share or can be converted into shares of the Company's common stock. Each share of preferred stock is convertible into one share of common stock. This conversion rate is subject to adjustment in certain circumstances. Upon any liquidation, dissolution or winding up of the Company, each holder will be entitled to their redemption price once shareholders of Series B and Series C preferred stock have been fully paid. SERIES B CONVERTIBLE PREFERRED STOCK ------------------------------------ Each share of Series B Preferred Stock is convertible into three shares of the Company's common stock at a price of $0.33 per share of common stock to be received upon conversion and entitles the holder thereof to cast three votes on all matters to be voted on by the Company's stockholders. Upon any liquidation, dissolution, or winding up of the Company, each holder of Series B Preferred Stock will be entitled to be paid, after all distributions of payments are made upon the Series C Preferred Stock and before any payment is made upon the Company's Convertible Preferred Stock, an amount in cash equal to $1.00 for each share of Series B Preferred Stock held, and such holders will not be entitled to any further payment. MANDATORILY REDEEMABLE SERIES C PREFERRED STOCK ----------------------------------------------- The Series C Preferred Stock is not convertible into any other class of the Company's stock and is subject to redemption at the Company's option at any time and redemption is mandatory if certain events occur, such as capital reorganizations, consolidations, mergers, or sale of all or substantially all of the Company's assets. Upon any liquidation, dissolution or winding up of the Company, each holder of Series C Preferred Stock will be entitled to be paid, before any distribution or payment is made upon any other class of stock of the Company, an amount in cash equal to the then effective redemption price for each share of Series C Preferred Stock held by such holder, and the holders of Series C Preferred Stock will not be entitled to any further payment. SERIES D PREFERRED STOCK ------------------------ The Series D Preferred Stock provides for an annual cumulative dividend of $0.10 per share. The shares are not convertible into any other class of stock and are subject to redemption at the Company's option at any time at a redemption price of $1.00 per share plus all unpaid cumulative dividends. Upon liquidation, dissolution or winding up of the Corporation, each holder of Series D Preferred Stock will be entitled to be paid, after all distributions or payments are made upon the Corporation's Convertible Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock, an amount in cash equal to the Redemption Price for each share of Series D Preferred Stock held by such holder. The holders of Series D Preferred Stock will not be entitled to any further payment. As of June 30, 2005, there were dividends in arrears on shares of Series D Preferred Stock of approximately $793,500. Note 3 Earnings Per Share The Company's calculation of earnings per share is as follows for the periods presented: The Three Months Ended The Six Months Ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 484: Net Income Applicable to Common Stockholders $ 43,525 $ 42,627 $ 74,339 $ 71,231 ========== ============ ============ Average Basic Shares 31,766,753 31,766,753 31,766,753 31,766,753 Assumed conversion of preferred stock 3,562,299 3,562,299 3,562,299 3,562,299 Effect of dilutive options and warrants 86,452 - 56,000 - ------------ ------------ Average dilutive shares 35,415,504 35,329,052 35,385,052 35,329,052 ============= ============= Net Earnings Per Common 0.00 $ 0.00 $ 0.00 $ 0.00 505: =========== ============ ============= ============= A total of 5,570,818 common stock options and warrants were not included in the computation of diluted earnings per share because of their anti-dilutive effect for the quarter ended June 30, 2005. A total of 10,000 shares of common stock options were not included in the above calculation due to expiration. A total of 5,850,623 common stock options and warrants were not included in the computation of diluted earnings per share because of their anti-dilutive effect for the quarter ended June 30, 2004. Note 4 - New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) replaces Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." Statement No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. Public companies are required to adopt the new standard using a modified prospective method and may elect to restate prior periods using the modified retrospective method. Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested 533: portion, at the date of adoption, of previously issued and outstanding 533: awards over the remaining vesting period of such awards. No change to 534:: prior periods presented is permitted under the modified prospective method. Under the modified retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies' footnotes. Also, in the period of adoption and after, companies record compensation cost based on the modified prospective method. On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a new rule that amends the compliance dates for Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"). Under the new rule, the Company is required to adopt SFAS No. 123R in the first annual period beginning after December 15, 2005 for SB issuers. The Company has not yet determined the method of adoption or the effect of adopting SFAS No. 123R. In May 2005, FASB issued SFAS 154, "Accounting Changes and Error Corrections". The Statement requires retroactive application of a voluntary change in accounting principle to prior period financial statements unless it is impracticable. SFAS 154 also requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS 154 replaces APB Opinion 20, "Accounting Changes", and SFAS 3, "Reporting Accounting Changes in Interim Financial Statements". SFAS 154 will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Management currently believes that adoption of the provisions of SFAS 154 will not have a material impact on the Company's condensed financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW -------- 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 & Intelligence (C4I) systems engineering, and communications engineering. Our headquarters are located at 707 Alexander Road, Suite 208, in Princeton, New Jersey. References to "we", "us", "our" or the "Company" refer to Mikros unless the context requires otherwise. In May 2002, the U.S. Navy's Dahlgren Division, Naval Surface Warfare Center (NSWCDD) awarded us a $100,000 Phase I SBIR contract to investigate the feasibility of a Multi-Function Distributed Analysis Tool, or MFDAT. As envisioned, the MFDAT was to be a semi-automated, intelligent test tool designed to support U.S. Navy technical personnel in the maintenance, alignment and diagnosis of complex electronic systems. The overall objectives of the MFDAT program were: - To achieve higher readiness through reduced maintenance downtime and better system assurance; - To increase system reliability by supporting predictive failure analysis and proactive remediation; and - To promote more effective use of technicians through increased automation, distance support and interactive training. The completed Phase I program produced an operational, proof-of-concept, software demonstration/simulation model of the MFDAT system. In August 2003, we were awarded a $750,000 Phase II SBIR contract from NSWCDD to continue our development of the MFDAT system. The Phase II program produced a prototype system capable of performing alignment and maintenance procedures on the Aegis AN/SPY-1A radar system. This MFDAT prototype system proved the viability of incorporating the functionality of multiple electronic test equipment into a single, programmable system. In general, the MFDAT technology that has been developed enables common testing processes, training, and equipment for electronic system support thereby providing a viable path toward meeting the Navy's readiness goals while reducing the dependency on manpower, manpower training, and discrete test equipment. The success of our MFDAT Phase II program prompted the Navy to award an additional $250,000 enhancement to the Phase II contract to accelerate the transitioning, or "commercializing" in SBIR parlance, of the technology into a product suitable for naval shipboard use. In September 2004, we received another award from NSWCDD valued at approximately $2,400,000 to commercialize our MFDAT technology into a fully-integrated, man-portable test tool qualified for U.S. Navy fleet use. This contract is referred to as an SBIR Phase III contract, and it secures our SBIR data rights in the MFDAT technology for a period of five years beyond the last delivery under the contract. We have named the resulting product ADEPT, an acronym for the Adaptive Diagnostic Electronic Portable 629: Testset. The initial application for ADEPT will be as a computer-aided alignment and maintenance tool for the AN/SPY-1 radar system, which 631: is the primary air and surface radar for the Aegis Combat System 632: installed on the Ticonderoga (CG-47) and Arleigh Burke (DDG-51) 633: class warships. Also in 2004, we began work on another independent SBIR subject area. In June 2004, the Office of Naval Research awarded us a $100,000 SBIR Phase I contract to analyze the potential for interference between emerging Wireless Local Area Network systems (WLANs) and DoD radar systems, and to evaluate and quantify the potential improvements which may be afforded by selected mitigation techniques. This Radar Wireless Spectral Efficiency (RWSE) SBIR Phase I program was completed in January 2005. We concluded that the potential exists for mutual interference between WLANs and DoD radars, particularly during land-based, littoral and harbor navigation operation of DoD radars. We recommended that further study of the identified mutual interference mechanisms was warranted, including empirical testing to characterize the effects of the interference and the potential mitigation techniques identified during the Phase I program. In April 2005, under the MFDAT Phase III program, we subcontracted the manufacturing of the ADEPT equipment to DRS Laurel Technologies in Johnstown, Pennsylvania. A contract for $876,000 has been awarded by Mikros to DRS Laurel Technologies. This new equipment is to be marketed under the ADEPT product name and is planned for installation in the US Navy's Aegis Cruisers. In May 2005, under the MFDAT Phase III program, we subcontracted to In-Phase Technologies, Inc. of Clarksburg, New Jersey to assist in ADEPTTM software development, integration and qualification. A contract for $299,000 has been awarded by Mikros to In-Phase Technologies, Inc. In July 2005, we awarded a subcontract to Lockheed Martin Corporation in Moorestown, New Jersey to provide engineering technical services in support of the ADEPT Phase III SBIR production and qualification 665: contract. As the design agent of the AN/SPY-1 radar system, Lockheed Martin will be providing expertise to assist us in the verification and qualification of ADEPT as a SPY-1 maintenance and alignment tool. The total value of this time and materials subcontract is expected to be approximately $100,000. 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 Company's ability to continue as a going concern, 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. The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from these estimates. For a more detailed explanation of judgments made in these areas, refer to our Annual Report on Form 10-KSB for the year ended December 31, 2004. Changes to Accounting Policies and Estimates -------------------------------------------- The Company's critical accounting policies and estimates are set forth in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004. As of June 30, 2005, 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, 2006. 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 June 30, 2005 and 2004 There were revenues of $436,356 for the second quarter ended June 30, 2005 compared to $288,629 for the same period in 2004 and there were cost of sales of $266,215 for the quarter ended June 30, 2005 compared to $186,769 for the same period in 2004. These increases are primarily attributable to the SBIR Phase III contract awarded during September 2004. Engineering costs for the quarter ended June 30, 2005 were $26,677 compared to $20,567 in the quarter ended June 30, 2004. There were higher engineering costs for the quarter ended June 30, 2005 due to the SBIR Phase III contract awarded during September 2004. General and administrative expenses for the quarter ended June 30, 2005 were $99,939 compared to $38,667 in the quarter ended June 30, 2004 due to higher costs incurred for administrative and bid and proposal salaries and related costs. Net income for the three months ended June 30, 2005 was $43,525 compared to net income of $42,627 for the same period in 2004. Six Months Ended June 30, 2005 and 2004 There were revenues of $791,769 for the six months ended June 30, 2005 versus $507,070 for the same period in 2004 and there were cost of sales of $472,645 for the six months ended June 30, 2005 compared to $320,206 for the same period in 2004. Engineering costs for the six months ended June 30, 2005 were $48,132 versus $35,240 for the same period in 2004. These increases are primarily attributable to the SBIR Phase III contract awarded during September 2004. General and Administrative expenses for the six months ended June 30, 2005 were $196,653 compared to $80,393 in the six months ended June 30, 2004. These increases are primarily attributable to the SBIR Phase III contract awarded during September 2004. Net income for the six months ended June 30, 2005 was $74,339 versus $71,231 for the same period in 2004. Liquidity and Capital Resources ------------------------------- Since its inception, the Company has financed its operations through debt, private and public offerings of equity securities and cash generated by operations. In September 2004, the Company was 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. The Company maintains a line of credit facility for maximum borrowings of up to $34,000. There were no amounts outstanding under this line at June 30, 2005. Our financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. For the six months ended at June 30, 2005, we had net income of $74,339 and working capital of $115,137. However, we still had an accumulated deficit of $11,723,692. Thus, there is substantial doubt about our ability to continue as a going concern. 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. Failure to obtain such additional financing on terms acceptable to us may materially adversely affect our ability to continue as a going concern. Contractual Obligations ----------------------- Our major outstanding contractual obligations relate to the leases for our office space and engineering office that are leased on a month-to-month basis for $800 per month and $3,000 per month until September 2005. Item 3. Controls and Procedures. Based on his evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2005, the Company's president (principal executive officer and principal financial officer) has concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. There were no changes in the Company's internal controls or in other factors that could significantly affect these controls during the quarter ended June 30, 2005. PART II. OTHER INFORMATION Item 6. Exhibits Exhibit 31.1Certification of principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIKROS SYSTEMS CORPORATION DATE: August 8, 2005 By:/s/Thomas J. Meaney ---------------------- President (Chief Executive Officer and Chief Financial Officer) Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas J. Meaney, certify that: 930: 1. I have reviewed this quarterly report on Form 10-QSB of Mikros Systems 931: Corporation; 933: 2. Based on my knowledge, this report does not contain any untrue 934:statement of a material fact or omit to state a material fact necessary 935: to make the statements made, in light of the circumstances under 936: which such statements were made, not misleading with respect 937: to the period covered by this report; 939: 3. Based on my knowledge, the financial statements, and other financial 940: information included in this report, fairly present in all material 941: respects the financial condition, results of operations and cash 942: flows of the small business issuer as of, and for, the periods 943: presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; b)[Paragraph omitted in accordance with SEC transition instructions 955: contained in SEC Release 34-47986] c)evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. /s/ Thomas J. Meaney ___________________ Dated: August 8, 2005 Thomas J. Meaney, President, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-QSB of Mikros Systems Corporation (the "Company") for the quarter ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Thomas J. Meaney, President of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas J. Meaney* Dated: August 8, 2005 Thomas J. Meaney, President, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) 1022: *A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.