10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

or

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____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.)

707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey 08540

(Address of Principal Executive Offices)

(609) 987-1513

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None

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 every Interactive Data File required to be submitted 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 such files). ☒ Yes    ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

           Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of August 14, 2020, 35,588,775 shares of the registrant's common stock were outstanding.

TABLE OF CONTENTS

		PAGE #
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements.
	Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019	1
	Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	2
	Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	3
	Statements of Cash Flows for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	4
	Notes to Condensed Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	10
Item 4.	Controls and Procedures.	15
PART II.	OTHER INFORMATION
Item 6.	Exhibits.	16
	Signatures	16

 Part I Financial Information 

 Item 1 Financial Statements 

 Mikros Systems Corporation 

 Balance Sheets 

(unaudited)

	June 30,			December 31,
	2020			2019
Assets
Current assets:
Cash and cash equivalents	$	1,773,465		$	1,621,309
Receivables on government contracts		742,042			587,848
Prepaid expenses and other current assets		355,381			273,004
Total current assets		2,870,888			2,482,161
Property and equipment
Operating lease-right to use asset		293,002			353,685
Equipment		433,328			404,091
Leasehold improvements		21,306			21,306
Furniture & fixtures		43,174			43,174
Less: accumulated depreciation		(258,647	)		(171,956	)
Property and equipment, net		532,163			650,300
Intangible assets		142,001			141,158
Less: accumulated amortization		(106,971	)		(96,394	)
Intangible assets, net		35,030			44,764
Deferred tax assets		-			682
Total assets	$	3,438,081		$	3,177,907
Liabilities and shareholders' equity
Current liabilities:
Line of credit-bank	$	260,000		$	-
Accrued payroll and payroll taxes		354,344			327,246
Accounts payable and accrued expenses		76,144			41,299
Lease obligation, current portion		131,274			126,633
Deferred revenue		65,500			17,000
Total current liabilities		887,262			512,178
Lease obligation, net of current portion		177,721			244,655
Deferred tax liability		6,956			-
Total liabilities		1,071,939			756,833
Shareholders' equity:
Preferred stock, convertible, par value $.01 per share, authorized 5,000,000 shares, none issued and outstanding		-			-
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 35,588,775 shares		355,889			355,889
Capital in excess of par value		10,136,343			10,129,020
Accumulated deficit		(8,126,090	)		(8,063,835	)
Total shareholders' equity		2,366,142			2,421,074
Total liabilities and shareholders' equity	$	3,438,081		$	3,177,907

 See Notes to Unaudited Condensed Financial Statements 

1

Mikros Systems Corporation

Statements of Income

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
Contract revenues	$	1,844,923		$	1,853,503		$	2,926,086		$	3,873,768
Cost of sales		734,223			792,151			1,091,696			1,570,693
Gross margin		1,110,700			1,061,352			1,834,390			2,303,075
Expenses:
Engineering		531,816			695,838			1,141,777			1,358,088
General and administrative		344,286			369,742			789,605			833,307
Total expenses		876,102			1,065,580			1,931,382			2,191,395
Income (loss) from operations		234,598			(4,228	)		(96,992	)		111,680
Other income:
Interest income, net		595			939			1,397			2,671
Income (loss) before income taxes		235,193			(3,289	)		(95,595	)		114,351
Income tax (expense) benefit		(81,163	)		(432	)		33,340			(37,267	)
Net income (loss) available to common shareholders	$	154,030		$	(3,721	)	$	(62,255	)	$	77,084
Income (loss) per common share - basic	$	-		$	-		$	-		$	-
Basic weighted average number of shares outstanding		35,588,775			35,577,786			35,588,775			35,573,305
Income (loss) per common share - diluted	$	-		$	-		$	-		$	-
Diluted weighted average number of shares outstanding		35,588,775			35,577,786			35,588,775			35,765,111

See Notes to Unaudited Condensed Financial Statements 

2

Mikros Systems Corporation

Statements of Shareholders' Equity

	Preferred Stock $0.01 Par Value				Common Stock $0.01 Par Value				Capital in Excess		Accumulated
	Number of shares		Par Value		Number of shares		Par Value		of Par Value		Deficit			Total
Balance at April 1, 2020		-	$	-		35,588,775	$	355,889	$	10,133,259	$	(8,280,120	)	$	2,209,028
Stock-based compensation		-		-		-		-		3,084		-			3,084
Net income		-		-		-		-		-		154,030			154,030
Balance at June 30, 2020		-	$	-		35,588,775	$	355,889	$	10,136,343	$	(8,126,090	)	$	2,366,142

	Preferred Stock $0.01 Par Value				Common Stock $0.01 Par Value				Capital in Excess		Accumulated
	Number of shares		Par Value		Number of shares		Par Value		of Par Value		Deficit			Total
Balance at April 1, 2019		-		-		35,568,775	$	355,689	$	10,110,883	$	(8,013,561	)	$	2,453,011
Stock-based compensation		-		-		-		-		4,539		-			4,539
Exercise of stock options		-		-		20,000		200		3,800		-			4,000
Net loss		-		-		-		-		-		(3,721	)		(3,721	)
Balance at June 30, 2019		-	$	-		35,588,775	$	355,889	$	10,119,222	$	(8,017,282	)	$	2,457,829

	Preferred Stock $0.01 Par Value				Common Stock $0.01 Par Value				Capital in Excess		Accumulated
	Number of shares		Par Value		Number of shares		Par Value		of Par Value		Deficit			Total
Balance at January 1, 2020		-	$	-		35,588,775	$	355,889	$	10,129,020	$	(8,063,835	)		2,421,074
Stock-based compensation		-		-		-		-		7,323		-			7,323
Net loss		-		-		-		-		-		(62,255	)		(62,255	)
Balance at June 30, 2020		-	$	-		35,588,775	$	355,889	$	10,136,343	$	(8,126,090	)	$	2,366,142

	Preferred Stock $0.01 Par Value				Common Stock $0.01 Par Value				Capital in Excess		Accumulated
	Number of shares		Par Value		Number of shares		Par Value		of Par Value		Deficit			Total
Balance at January 1, 2019		-	$	-		35,568,775	$	355,689	$	10,106,344	$	(8,094,366	)		2,367,667
Stock-based compensation		-		-		-		-		9,078		-			9,078
Exercise of stock options		-		-		20,000		200		3,800		-			4,000
Net income		-		-		-		-		-		77,084			77,084
Balance at June 30, 2019		-	$	-		35,588,775	$	355,889	$	10,119,222	$	(8,017,282	)	$	2,457,829

See Notes to Unaudited Condensed Financial Statements

3

Mikros Systems Corporation

Statements of Cash Flows

(unaudited)

	Six months ended June 30,
	2020			2019
Cash flows from operating activities:
Net (loss) income	$	(62,255	)	$	77,084
Adjustments to reconcile net (loss) income to net cash (used in) operating activities:
Depreciation and amortization		72,005			51,771
Deferred tax expense (benefit)		7,638			(15,805	)
Share-based compensation expense		7,323			9,078
Changes in assets and liabilities:
(Increase) in receivables on government contracts		(154,194	)		(146,432	)
(Increase) in prepaid expenses and other current assets		(82,377	)		(44,468	)
Increase (decrease) in accrued payroll and payroll taxes		27,098			(327,432	)
Increase (decrease) in accounts payable and accrued expenses		34,845			(80,210	)
(Decrease) in accrued warranty expense		-			(47,173	)
Increase (decrease) in deferred revenue		48,500			(5,977	)
(Decrease) in long-term liabilities		(1,610	)		(1,542	)
Net cash used in operating activities		(103,027	)		(531,106	)
Cash flows from investing activities:
Payments related to intangible assets		(843	)		(232	)
Purchase of property and equipment		(3,974	)		(27,984	)
Net cash used in investing activities		(4,817	)		(28,216	)
Cash flows from financing activities:
Proceeds from term loan		753,300			-
Repayment of term loan		(753,300	)		-
Borrowings from line of credit-bank		260,000			-
Exercise of stock options		-			4,000
Net cash provided by financing activities		260,000			4,000
Net increase (decrease) in cash and cash equivalents		152,156			(555,322	)
Cash and cash equivalents, beginning of period		1,621,309			2,206,749
Cash and cash equivalents, end of period	$	1,773,465		$	1,651,427

See Notes to Unaudited Condensed Financial Statements

4

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Note 1 – Basis of Presentation

The financial statements included herein have been prepared by Mikros Systems Corporation (the “Company” or “we”) 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, 2019.

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 the Company’s financial position as of June 30, 2020, the results of its operations for the three and six months ended June 30, 2020 and 2019, changes in shareholders’ equity for the three and six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019.

Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future.

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our business, financial condition and results of operations.

In light of the COVID-19 pandemic, the Company has taken proactive steps to manage its costs and discretionary spending.

Note 2 – Recent Accounting Pronouncements

The Company reviewed all recently issued but not yet effective, accounting pronouncements in 2020 and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on the Company’s financial condition or the results of its operations.

Note 3 – Significant Accounting Policies

Revenue Recognition

We provide our products and services under fixed-price and cost-reimbursable contracts. Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract. We also enter into cost-plus-fixed-fee contracts. The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does not vary with actual costs. We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.

5

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as one performance obligation. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded each period.

We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. Our contracts do not include variable consideration. At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts or delivery orders are distinct and will be accounted for as a separate contract.

We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all our revenue is recognized over a period of time as we perform under the contract because control of the work in process transfers continuously to the customer. This continuous transfer of control of the work in process to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit, and take control of any work in process.

For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. For performance obligations to provide services to the customer, revenue is recognized over a period of time based on costs incurred as our customer receives and consumes the benefits.

Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. The estimated consideration is determined at the outset of the contract and considers the risks related to the technical, schedule and cost impacts to complete the contract. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of June 30, 2020, our ending backlog was $5.2 million. For arrangements with the U.S. Department of Defense, or DoD, we generally do not begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on several factors, including the contract type.

Research and Development 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 as follows:

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Salaries	$	-	$	11,195	$	3,185	$	17,641
Other costs		313		12,454		436		12,454
	$	313	$	23,649	$	3,621	$	30,095

6

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Intangible Assets

The Company’s intangible assets include a license acquired during 2015. In July 2015, the Company purchased certain software products, intellectual property and 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 and six months ended June 30, 2020 and 2019, amortization expense related to the Company’s license amounted to $5,250 and $5,250 and $10,500 and $10,500, respectively, and is included in general and administrative expenses on the Statements of Income.

Note 4 – Income Tax Matters

At June 30, 2020, we estimated our annual effective tax rate for 2020 to be 35%. We recognized a tax benefit of $33,340 for the six months ended June 30, 2020. At June 30, 2020, the difference from the statutory federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

The Company conducts an on-going analysis to review its net deferred tax asset and the need for a related valuation allowance. As a result of this analysis and the actual results of operations, the Company has decreased/(increased) its net deferred tax assets by $7,638 and $(15,805) during the six months ended June 30, 2020 and 2019, respectively. The change in deferred tax assets is attributable to the changes in various book/tax differences.

Note 5 – Income Per Share

Net income (loss) per common share information is as follows:

	Three months ended June 30,					Six months ended June 30,
	2020		2019			2020			2019
Basic earnings per common share:
Net income (loss) allocable to common shareholders	$	154,030	$	(3,721	)	$	(62,255	)	$	77,084
Weighted average basic shares outstanding		35,588,775		35,577,786			35,588,775			35,573,305
Basic income (loss) per common share	$	-	$	-		$	-		$	-
Dilutive earnings per common share:
Net income (loss) allocable to common shareholders	$	154,030	$	(3,721	)	$	(62,255	)	$	77,084
Weighted average shares outstanding - basic		35,588,775		35,577,786			35,588,775			35,573,305
Diluted effect:
Stock options		-		-			-			41,516
Unvested restricted stock		-		-			-			150,290
Weighted average dilutive shares outstanding		35,588,775		35,577,786			35,588,775			35,765,111
Dilutive income (loss) per common share	$	-	$	-		$	-		$	-

7

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Diluted income (loss) per share for the three and six months ended June 30, 2020 and 2019 does not reflect issuance of the following potential common shares, as the effect would be antidilutive.

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Unvested restricted stock		429,000		447,000		429,000		80,000
Stock options		-		195,000		-		-

Note 6 – Operating Leases

A right-of-use asset is measured at the amount of the lease liability adjusted for deferred straight-line rent, prepaid rent and lease incentive allowances previously recognized.

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. there is a change in contractual terms, other than a renewal or extension of the arrangement;

b. a renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;

c. there is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. there is a substantial change to the asset.

Whenever a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b).

Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Operating lease payments are recognized as an operating expense on a straight-line basis over the lease term.

The Company has operating lease agreements for each of its offices. The Company has determined that the risks and benefits related to the leased properties are retained by the lessors. Accordingly, these are accounted for as operating leases. These lease agreements are for terms ranging from 5.25 to 5.33 years and provide for rental escalations of approximately 2.1%.

Additional information regarding the Company’s office operating leases is as follows:

Six months ended June 30,	2020
Rent expense for long-term operating leases	$	60,683
Rent expense for short-term leases		53,833
Total rent expense	$	114,516

8

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

The following table presents the maturity profile of the Company’s operating lease liabilities based on the contractual undiscounted payments with a reconciliation of these amounts to the remaining net present value of the operating lease liability reported in the balance sheet as of June 30, 2020.

Year	Amount
Remainder of 2020	$	71,238
2021		144,976
2022		110,857
Total lease payments		327,071
Less: Interest		(18,076	)
Net present value of lease liabilities	$	308,995

The weighted average remaining lease terms and discount rates for all the Company’s operating leases as of June 30, 2020 were as follows:

Weighted average lease term (months)	27
Weighted average discount rate	4.89	%

Note 7 – Loan and Line of Credit

On January 31, 2018, the Company 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, 2021 and 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, 2020, there was $260,000 outstanding under the facility.

On April 14, 2020, the Company entered into a Paycheck Protection Program Term Note (the “PNC Note”) with PNC Bank pursuant to the Paycheck Protection Program (the “Program”) of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received total proceeds of $753,300 from the PNC Note. On May 12, 2020, the Company repaid the loan in full.

9

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This document 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.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, but are not limited to: 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 Innovation Research grants, competitive pricing pressures, market acceptance of our products under development, delays in the development of products, our ability to adequately integrate our software offerings into our business model, our ability to market our solutions to commercial customers, the duration and severity of the current coronavirus COVID-19 pandemic and its effect on our business operations, personnel, supply chain, Federal Government procurement process, and the geographic markets in which we operate, and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. These uncertainties are described in more detail in Part I, Item 1A. “Risk Factors” of our Annual Report on SEC Form 10-K for the year ended December 31, 2019 . 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, we do not undertake to update our forward-looking statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION.

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, 2019.

Mikros Systems Corporation (the “Company”, “we”, 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 (i) provide engineering services, products, software and related maintenance under contracts with the United States Department of Defense (DoD), primarily the United States Navy and (ii) pursue Small Business Innovation Research (SBIR) programs from the DoD, Department of Homeland Security, and other governmental authorities, with a view to expanding this government funded research and development into government contracts. Since 2002, we have been awarded several Phase I, II, and III SBIR 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, 2020 and 2019. 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 key system to the Navy for maintenance of radars and combat systems:

● ADSSS, the ADEPT Distance Support Sensor Suite, 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 (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.

Our Products

Adaptive Diagnostic Electronic Portable Testset® (ADEPT). ADEPT, also known as the AN/PSM-132, is an automated maintenance workstation designed to significantly reduce the time required to align all variants of the AN/SPY-1 Radar System aboard U.S. Navy Aegis cruisers and destroyers, while optimizing system performance and readiness. Manufacturing, selling and servicing ADEPT units was a substantial part of our business over the past decade. During the life of the program, we delivered a total of 226 ADEPT units to our Navy customers. Effective October 1, 2019, the US Navy determined to stop funding the ADEPT program in fiscal year 2020.

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ADEPT Distance Support Sensor Suite® (ADSSS). In 2013, we started development of ADSSS for the Navy’s LCS. Our system has now matured and has earned the official Navy nomenclature AN/SYM-3. The LCS is the U.S. Navy’s latest combat warship. AN/SYM-3 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. AN/SYM-3 provides an open architecture approach with industry-standard hardware, and cybersecurity compliant software to acquire and process system operational and maintenance data. The AN/SYM-3 system 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.

The first full AN/SYM-3 system was successfully completed on LCS 2 and onshore installation of prognostics was completed at Port Hueneme Division. The ADSSS is used on both variants of the LCS, currently planned to be at least 32 ships. In 2019, we completed installations on four additional LCS ships that are being deployed allowing for data collection while operational at sea. During 2020, we expect to install systems on two or three additional ships.

We are working with the government to have their virtual data transport system installed on two deploying ships, allowing for near real-time data to be sent back to shore and processed through our prognostics framework models. During 2020, we expect to add several new combat system elements to our LCS platform which is expected to expand our footprint and bring condition-based maintenance plus (CBM +) to additional mission-critical systems. We are also working to maintain SYM-3 for modernization systems that are being planned in the next 3-5 years.

Through our NSSMS contract awarded in the fourth quarter of 2019, we plan to develop a new variant of the AN/SYM-3 system for the NATO Seasparrow Surface Missile System. NSSMS is installed on Navy Aircraft Carriers (CVN class) and “Big Deck” Amphibious Assault Ships (LHD/LHA class), so the new variant could be installed on these two new ship classes. We have started the software, hardware, and systems engineering tasks needed to move this CBM capability to land based test events and then to a long-term pilot installation for four systems on the NSSMS platform.

The SYM-3 has also generated interest from other ship classes, Aegis and unmanned systems, and for use to monitor shipboard hull, mechanical and electrical (HME) systems, additional combat systems, and navigational radars. This is part of the Navy’s continued effort to increase operational, sustainability and lethality for many different ship classes. We are also working to maintain SYM-3 for modernization systems that are being planned in the next three to five years.

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 callouts, suggested “next best” test to further isolate faults, and direct maintenance actions. When additional faults are identified, the software prioritizes the fault callouts 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. Over the life of the system, this could result in significant cost savings. This system is used by clients and has also generated yearly support contracts for service. We have also been upgrading and customizing the system to the client needs.  

Prognostics Framework. Prognostics Framework is an analytic software framework for implementing 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, C4I (Command, Control, Communications, Computers & Intelligence), environmental and imaging systems.

Government Contracts

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 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 April 2017, we received contract awards totaling $2.0 million from the U.S. Navy to extend the capabilities of the ADSSS 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.

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In June 2018, we received the second delivery order under our multi-year IDIQ relating to our ADSSS product. This $2.5 million order provides for further MK 99 Fire Control System (FCS) development, test and installation.

In September 2019, we received the third delivery order under our multi-year IDIQ relating to our ADSSS product. The award covers the installation of condition-based maintenance systems for the Littoral Combat Ship and has a ceiling of $15 million. As of the date of this report, approximately $4.0 million of incremental funding has been awarded for work to be executed in government fiscal year (FY) 2020.

In October 2019, we received an additional contract award under our multi-year IDIQ relating to our ADSSS product. This incremental funding with a ceiling up to $6 million, under the third delivery order, covers the development of a new variant of the AN/SYM-3 system and installation of the new CBM system on two additional ship classes; the Aircraft Carriers (CVN class) and the “Big Deck” Amphibious Assault Ships (LHD/LHA class). As of the date of this report, $3.0 million of incremental funding has been awarded for work to be executed in FY 2020.

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 provided 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. We have been awarded several delivery orders under the ADEPT IDIQ Contract. In October 2019, we received notice from Program Executive Office Integrated Warfare Systems that the ADEPT program will not be funded in fiscal year 2020. We will continue to fulfill our current obligations under outstanding engineering services task orders previously issued under the program. As of the date of this report, we have one open task order for general engineering services.

In November 2019, we were awarded a five (5) year Basic Ordering Agreement (BOA) from Naval Air Warfare Center Aircraft Division, to begin a Phase I SBIR effort entitled “Unmanned Surface Vehicle and Unmanned Underwater Vehicle Autonomous Behavior Development”. The amount of this Phase I effort was approximately $150,000.

In April 2020, we received $4.9 million of additional funding from the U.S. Navy to expand its flagship AN/SYM-3 program to additional LCS systems, new combat systems, and two new ship classes.  The new funding was part of the third Delivery Order awarded under our multi-year IDIQ relating to our ADSSS product.   The funding will provide for continuing installations on the LCS class and development of CBM solutions for aircraft carriers and “big deck” amphibious ships.

In April 2020, we received notification of a Phase I SBIR contract entitled “ADAPT - Naval Depot Modernization and Sustainment” This program seeks to develop an integrated solution to allow facility managers to monitor the status of a wide range of infrastructure systems, identify areas of concern, and predict future areas of concern. The Phase I objective is to demonstrate proposed solution feasibility. We will develop a solution to collect data from critical building infrastructure systems including HVAC, mechanical systems, communication systems, chillers, pumps, electrical switchgear, seismometers and surveillance systems, as well as monitor energy usage data, water level data, and data from other critical infrastructure systems. This work will include developing a limited scale system to illustrate the concept.  The amount of this Phase I effort was approximately $200,000.

In June 2020, we received $1.2 million of additional funding from the U.S. Navy to expand its flagship AN/SYM-3 program to additional LCS systems and new combat systems.  The new funding was part of the third Delivery Order awarded under our multi-year IDIQ relating to our ADSSS product.   The funding will provide for continuing installations on the LCS.

Commercial Contracts

In 2019 and 2020, HP Indigo, Saab Grintek Defense, and Northrop Grumman renewed their annual contracts for Diagnostic Profiler and Diagnostician Software Maintenance and Support.  We have also increased our capabilities to provide online support at one of the client’s facility. 

The Mikros MindR® system is a vendor-agnostic facility health status monitoring solution which provides the ability to collect data from critical building infrastructure systems including HVAC, mechanical systems, communication systems, chillers, pumps, electrical switchgear, seismometers and surveillance systems, as well as monitor energy usage data, water level data, and data from any other systems. Data collected can be aggregated on a centralized physical or secure cloud-based server where Mikros MindR Enterprise software can perform analysis to determine status, diagnose existing failures, and predict future failures. We are currently piloting our Mikros MindR system at a client facility to collect and distribute data from the HVAC units to the client.

Key Performance Indicator

As substantially all of our revenue is derived from contracts with the U.S. Federal government, our key performance indicators are (i) the dollar volume of contracts and task orders awarded to us under our IDIQ contract, and (ii) the number and dollar amount of new contracts and SBIR grants awarded to us. Increases in the number and value of contracts and delivery 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 2019, and expected revenue in 2020, is or will be from sales of AN/SYM-3 systems under our IDIQ contract, continued generation of task orders and our ability to expand the market and potential customer base for this technology is our primary focus.

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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 to bid 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, communications engineering, remote monitoring and augmented reality. We believe that we can utilize the intellectual property developed under our various SBIR 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 FAA, radio and television stations, cell phone stations, and airlines. Second, we will continue to actively participate in the SBIR program and pursue SBIR projects with the DoD, Department of Homeland Security, U.S. Navy, and other government agencies. Third, we believe that through our marketing of products, 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, which recently extended our Diagnostic Profiler software support for a seventh 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 developing a condition-based maintenance solution for HVAC equipment based on our proprietary Prognostics Framework solution which we call Mikros MindR. We have deployed two active pilot systems that are providing key maintenance data daily to service technicians. We are also working with an energy consulting business in Florida to remotely monitor energy use and required maintenance for its customers. We are in discussions with additional commercial companies regarding the use of our condition- based maintenance applications.

In 2020, our primary strategic focus is to continue as a premium provider of R&D and product development services to the defense industry, generate multiple task orders under our ADSSS IDIQ and BOA contracts, additional Phase I and Phase II SBIR grants with a view to obtaining additional government 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.

Recent Developments  

An outbreak of a novel strain of the coronavirus, COVID-19, has been recognized as a pandemic by the World Health Organization. This outbreak has severely restricted the level of economic activity around the world. In response to this coronavirus outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. In March 2020, the Governor of Pennsylvania ordered the closure of all non-life sustaining businesses in Pennsylvania where most of our employees work.  Further, individuals' ability to travel has been curtailed through mandated travel restrictions and may be further limited through additional voluntary or mandated closures of travel-related businesses. Although our employees are able to work remotely, this coronavirus outbreak has had a negative impact on our productivity and revenues to date in 2020.

In addition, the pandemic and resulting closures has negatively impacted our supply chain for component parts necessary to timely deliver AN/SYM-3 systems to our Government customer. Non-essential travel bans, quarantine protocols imposed to access US Navy ships, and self-quarantine orders imposed by the Governor of Pennsylvania on interstate travel have and are expected to continue to materially delay our ability to complete on-ship installations, result in excessive down-time for our engineering personnel, and increase travel costs. The pandemic has also resulted in delays in contract awards, task orders, and contract modifications to fund our projects. All of the forgoing has and will continue to adversely impact our financial condition and results of operation. Given the uncertainty regarding the spread of this coronavirus, the related financial impact cannot be reasonably estimated at this time.

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. 

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Changes to Critical Accounting Policies and Estimates

We reviewed all of the recently issued accounting pronouncement through August 2020 which are not yet effective and we do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of its operations.

Results of Operations 

Three Months Ended June 30, 2020 and June 30, 2019

We generated revenues of $1,844,923 during the three months ended June 30, 2020 as compared to $1,853,503 during the three months ended June 30, 2019. Revenues in the second quarter of 2020 and 2019 consisted entirely of engineering support services contracts which included direct components delivered during the second quarter of 2020.

Cost of sales consists of direct contract costs including labor, material, subcontracts, travel, and other direct costs. Cost of sales for the three months ended June 30, 2020 was $734,223 compared to $792,151 for the three months ended June 30, 2019, a decrease of $57,928 or 7%. The reduction resulted from timing of delivery of direct components.

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 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, 2020 were $531,816 compared to $695,838 for the three months ended June 30, 2019, a decrease of $164,022, or 24%. The decrease was due primarily to staff reduction and associated fringe benefits and reduced third party consultant costs.

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 which consists of research and development expenses unrelated to our defense contracts). General and administrative costs for the three months ended June 30, 2020 were $344,286 as compared to $369,742 for the three months ended June 30, 2019, a decrease of $25,456, or 7%.

We estimated our annual effective tax rate for 2020 and 2019 to be 35% and 33%. As a result, we recognized a tax expense of $81,163 for the three months ended June 30, 2020, as compared to tax expense of $432 for the three months ended June 30, 2019. The differences from the statutory federal income tax rate were attributable to state income taxes and certain permanent book-tax differences.

We reported net income of $154,030 in the three months ended June 30, 2020 as compared to a net loss of $3,721 in three months ended June 30, 2019. The increase was attributable primarily to the decrease in operating expenses in the second quarter of 2020.  

Six Months Ended June 30, 2020 and June 30, 2019

We generated revenues of $2,926,086 during the six months ended June 30, 2020 compared to $3,873,768 during the six months ended June 30, 2019, a decrease of $947,682, or 32%. The decrease resulted primarily from the delay of follow-on funding during the first quarter of 2020 and the delivery of direct components. Revenues for the six months ended June 30, 2020 and 2019 consisted entirely of engineering support services contracts.

Cost of sales for the six months ended June 30, 2020 was $1,091,696 compared to $1,570,693 for the six months ended June 30, 2019, a decrease of $478,997, or 44%. The reduction resulted from the delay of follow-on funding and the delivery of direct components.

Engineering costs for the six months ended June 30, 2020 were $1,141,777 compared to $1,358,088 for the six months ended June 30, 2019, a decrease of $216,311, or 19%. The decrease was due primarily to staff reduction and associated fringe benefits, and third party consultant costs.

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General and administrative costs for the six months ended June 30, 2020 were $789,605 as compared to $833,307 for the six months ended June 30, 2019, a decrease of $43,702, or 6%. The decrease was due primarily to staff reduction, and third party consultant costs.

We recognized a tax benefit of $33,340 for the six months ended June 30, 2020 due primarily to expected net income for the remainder of 2020. At June 30, 2020, 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 $ $62,255 for the six months ended June 30, 2020 as compared to net income of $77,084 for the six months ended June 30, 2019. The decrease was attributable primarily to the decrease in revenues in the first six months of 2020.

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, 2020, net cash used in operations was $103,027 compared to net cash used in operations of $531,106 during the six months ended June 30, 2019. The $428,079 decrease in cash used in operations was due to the timing of receipts and payments related to our operating assets and liabilities and a $41,922 increase in noncash charges which were offset by a decrease in net income (loss) of $139,339 during the six months ended June 30, 2019.

Net cash used in investing activities was $4,817 for the six months ended June 30, 2020 as compared to $28,216 for the six months ended June 30, 2019, a decrease of $23,399. The decrease was related to the completion of an expansion of our Pennsylvania office in 2019.

Net cash provided by financing activities was $260,000 for the six months ended June 30, 2020 as compared to $4,000 for the six months ended June 30, 2019, an increase of $256,000. The increase consisted primarily of $260,000 of borrowings under our line of credit in 2020.

On January 31, 2018, we entered into a $550,000 credit facility with PNC Bank. The facility initially matured on January 31, 2020 and has been extended to January 31, 2021. 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, 2020, $260,000 was outstanding under the facility.

On April 14, 2020, we entered into a Term Note with PNC Bank pursuant to the Paycheck Protection Program of the recently enacted Coronavirus Aid, Relief, and Economic Security Act administered by the U.S. Small Business Administration. We received total proceeds of $753,300 from the PNC Note. On May 12, 2020, the term loan was repaid in full.

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 of success in such strategic opportunities, assuming we successfully raise additional funds or enter into business alliances.

Off-Balance Sheet Arrangements

As of June 30, 2020, 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.

Item 4.   Controls and Procedures.

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 Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2020, 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, as amended, 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 June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION 

Item 6.   Exhibits

No.	Description
10.1	Letter Agreement between Mikros Systems Corporation and Mark J. Malone, dated July 29, 2020. (incorporated by reference to the Company’s Current Report on Form 8-K filed July 29, 2020)
31.1	Certification of principal executive officer pursuant to Rules 13a-14(a) or 15d- 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2	Certification of principal financial officer pursuant to Rules 13a-14(a) or 15d- 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1	Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
32.2	Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
101.INS	XBRL Instance
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Labels
101.PRE	XBRL Taxonomy Extension Presentation

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.

	MIKROS SYSTEMS CORPORATION
August 14, 2020	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney
		Chief Executive Officer

MIKROS SYSTEMS CORPORATION

August 14, 2020	By	/s/ Mark J. Malone
		Mark J. Malone
		Chief Financial Officer

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Thomas J. Meaney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Mikros Systems Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I  are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant 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 registrant, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report my 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant'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 registrant'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 company's internal control over financial reporting.

August 14, 2020

/s/ Thomas J. Meaney

Thomas J. Meaney

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Mark J. Malone, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Mikros Systems Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant 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 registrant, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report my 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant'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 registrant'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 company's internal control over financial reporting.

August 14, 2020

/s/ Mark J. Malone

Mark J. Malone

Chief Financial Officer

EX-32.1

Exhibit 32.1

Certifications Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

In connection with the Quarterly Report (the “report”) of Mikros Systems Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2020, as filed with the Securities and Exchange Commission, I, Thomas J. Meaney, Chief Executive Officer of the Company, do hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to my knowledge:

(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.

August 14, 2020	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney
		Chief Executive Officer

EX-32.2

Exhibit 32.2

Certifications Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

In connection with the Quarterly Report (the “report”) of Mikros Systems Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2020, as filed with the Securities and Exchange Commission, I, Mark J. Malone, Chief Financial Officer of the Company, do hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to my knowledge:

(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.

August 14, 2020	By:	/s/ Mark J. Malone
		Mark J. Malone
		Chief Financial Officer

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2020	Aug. 14, 2020
Document Information [Line Items]
Entity Registrant Name	MIKROS SYSTEMS CORP
Entity Central Index Key	0000317340
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		35,588,775
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Jun. 30, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q2
Amendment Flag	false
Title of 12(g) Security	Common Stock, $.01 par value

XML

Balance Sheets (Current Period Unaudited) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
Assets
Cash and cash equivalents	$ 1,773,465	$ 1,621,309
Receivables on government contracts	742,042	587,848
Prepaid expenses and other current assets	355,381	273,004
Total current assets	2,870,888	2,482,161
Property and equipment
Operating lease-right to use asset	293,002	353,685
Equipment	433,328	404,091
Leasehold improvements	21,306	21,306
Furniture & fixtures	43,174	43,174
Less: accumulated depreciation	(258,647)	(171,956)
Property and equipment, net	532,163	650,300
Intangible assets	142,001	141,158
Less: accumulated amortization	(106,971)	(96,394)
Intangible assets, net	35,030	44,764
Deferred tax assets		682
Total assets	3,438,081	3,177,907
Liabilities and shareholders' equity
Line of credit-bank	260,000
Accrued payroll and payroll taxes	354,344	327,246
Accounts payable and accrued expenses	76,144	41,299
Lease obligation, current portion	131,274	126,633
Deferred revenue	65,500	17,000
Total current liabilities	887,262	512,178
Lease obligation, net of current portion	177,721	244,655
Deferred tax liability	6,956
Total liabilities	1,071,939	756,833
Shareholders' equity:
Preferred stock, convertible, par value $.01 per share, authorized 5,000,000 shares, none issued and outstanding
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 35,588,775 shares	355,889	355,889
Capital in excess of par value	10,136,343	10,129,020
Accumulated deficit	(8,126,090)	(8,063,835)
Total shareholders' equity	2,366,142	2,421,074
Total liabilities and shareholders' equity	$ 3,438,081	$ 3,177,907

XML

Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Jun. 30, 2020	Dec. 31, 2019
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	60,000,000	60,000,000
Common stock, shares issued (in shares)	35,588,775	35,588,775
Common stock, shares outstanding (in shares)	35,588,775	35,588,775

XML

Statements of Income (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Contract revenues	$ 1,844,923	$ 1,853,503	$ 2,926,086	$ 3,873,768
Cost of sales	734,223	792,151	1,091,696	1,570,693
Gross margin	1,110,700	1,061,352	1,834,390	2,303,075
Expenses:
Engineering	531,816	695,838	1,141,777	1,358,088
General and administrative	344,286	369,742	789,605	833,307
Total expenses	876,102	1,065,580	1,931,382	2,191,395
Income (loss) from operations	234,598	(4,228)	(96,992)	111,680
Other income:
Interest income, net	595	939	1,397	2,671
Income (loss) before income taxes	235,193	(3,289)	(95,595)	114,351
Income tax (expense) benefit	(81,163)	(432)	33,340	(37,267)
Net income (loss) available to common shareholders	$ 154,030	$ (3,721)	$ (62,255)	$ 77,084
Income (loss) per common share - basic (in dollars per share)
Basic weighted average number of shares outstanding (in shares)	35,588,775	35,577,786	35,588,775	35,573,305
Income (loss) per common share - diluted (in dollars per share)
Diluted weighted average number of shares outstanding (in shares)	35,588,775	35,577,786	35,588,775	35,765,111

XML

Statements of Shareholders' Equity (Unaudited) - USD ($)	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balance (in shares) at Dec. 31, 2018		35,568,775
Balance at Dec. 31, 2018		$ 355,689	$ 10,106,344	$ (8,094,366)	$ 2,367,667
Stock-based compensation			9,078		9,078
Net income				77,084	77,084
Exercise of stock options (in shares)		20,000
Exercise of stock options		$ 200	3,800		4,000
Balance (in shares) at Jun. 30, 2019		35,588,775
Balance at Jun. 30, 2019		$ 355,889	10,119,222	(8,017,282)	2,457,829
Balance (in shares) at Mar. 31, 2019		35,568,775
Balance at Mar. 31, 2019		$ 355,689	10,110,883	(8,013,561)	2,453,011
Stock-based compensation			4,539		4,539
Net income				(3,721)	(3,721)
Exercise of stock options (in shares)		20,000
Exercise of stock options		$ 200	3,800		4,000
Balance (in shares) at Jun. 30, 2019		35,588,775
Balance at Jun. 30, 2019		$ 355,889	10,119,222	(8,017,282)	2,457,829
Balance (in shares) at Dec. 31, 2019		35,588,775
Balance at Dec. 31, 2019		$ 355,889	10,129,020	(8,063,835)	2,421,074
Stock-based compensation			7,323		7,323
Net income				(62,255)	(62,255)
Balance (in shares) at Jun. 30, 2020		35,588,775
Balance at Jun. 30, 2020		$ 355,889	10,136,343	(8,126,090)	2,366,142
Balance (in shares) at Mar. 31, 2020		35,588,775
Balance at Mar. 31, 2020		$ 355,889	10,133,259	(8,280,120)	2,209,028
Stock-based compensation			3,084		3,084
Net income				154,030	154,030
Balance (in shares) at Jun. 30, 2020		35,588,775
Balance at Jun. 30, 2020		$ 355,889	$ 10,136,343	$ (8,126,090)	$ 2,366,142

XML

Statements of Cash Flows (Unaudited) - USD ($)	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Cash flows from operating activities:
Net (loss) income	$ (62,255)	$ 77,084
Adjustments to reconcile net (loss) income to net cash (used in) operating activities:
Depreciation and amortization	72,005	51,771
Deferred tax expense (benefit)	7,638	(15,805)
Share-based compensation expense	7,323	9,078
Changes in assets and liabilities:
(Increase) in receivables on government contracts	(154,194)	(146,432)
(Increase) in prepaid expenses and other current assets	(82,377)	(44,468)
Increase (decrease) in accrued payroll and payroll taxes	27,098	(327,432)
Increase (decrease) in accounts payable and accrued expenses	34,845	(80,210)
(Decrease) in accrued warranty expense		(47,173)
Increase (decrease) in deferred revenue	48,500	(5,977)
(Decrease) in long-term liabilities	(1,610)	(1,542)
Net cash used in operating activities	(103,027)	(531,106)
Cash flows from investing activities:
Payments related to intangible assets	(843)	(232)
Purchase of property and equipment	(3,974)	(27,984)
Net cash used in investing activities	(4,817)	(28,216)
Cash flows from financing activities:
Proceeds from term loan	753,300
Repayment of term loan	(753,300)
Borrowings from line of credit-bank	260,000
Exercise of stock options		4,000
Net cash provided by financing activities	260,000	4,000
Net increase (decrease) in cash and cash equivalents	152,156	(555,322)
Cash and cash equivalents, beginning of period	1,621,309	2,206,749
Cash and cash equivalents, end of period	$ 1,773,465	$ 1,651,427

XML

Note 1 - Basis of Presentation

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note

1

– Basis of Presentation

The financial statements included herein have been prepared by Mikros Systems Corporation (the “Company” or “we”) 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, 2019.

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 the Company's financial position as of

June 30, 2020,

the results of its operations for the

three

and

six

months ended

June 30, 2020

and

2019,

changes in shareholders' equity for the

three

and

six

months ended

June 30, 2020

and

2019,

and cash flows for the

six

months ended

June 30, 2020

and

2019.

Because COVID-

19

infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-

19.

Additional, more restrictive proclamations and/or directives

may

be issued in the future.

The ultimate impact of the COVID-

19

pandemic on the Company's operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-

19

outbreak, new information which

may

emerge concerning the severity of the COVID-

19

pandemic, and any additional preventative and protective actions that governments, or the Company,

may

direct, which

may

result in an extended period of continued business disruption and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but

may

have a material impact on our business, financial condition and results of operations.

In light of the COVID-

19

pandemic, the Company has taken proactive steps to manage its costs and discretionary spending.

XML

Note 2 - Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Accounting Standards Update and Change in Accounting Principle [Text Block]

Note

2

– Recent Accounting Pronouncements

The Company reviewed all recently issued but

not

yet effective, accounting pronouncements in

2020

and does

not

believe the future adoption of any such pronouncements

may

be expected to cause a material impact on the Company's financial condition or the results of its operations.

XML

Note 3 - Significant Accounting Policies

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Significant Accounting Policies [Text Block]

Note

3

– Significant Accounting Policies

Revenue Recognition

We provide our products and services under fixed-price and cost-reimbursable contracts. Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract. We also enter into cost-plus-fixed-fee contracts. The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does

not

vary with actual costs. We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether

two

or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.

We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having

one

or more performance obligations. The products and services in our contracts are typically

not

distinct from

one

another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as

one

performance obligation. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded each period.

We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. Our contracts do

not

include variable consideration. At the inception of a contract we estimate the transaction price based on our current rights and do

not

contemplate future modifications. Contracts are often subsequently modified to include changes in specifications, requirements or price, which

may

create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts or delivery orders are distinct and will be accounted for as a separate contract.

We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all our revenue is recognized over a period of time as we perform under the contract because control of the work in process transfers continuously to the customer. This continuous transfer of control of the work in process to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit, and take control of any work in process.

For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. For performance obligations to provide services to the customer, revenue is recognized over a period of time based on costs incurred as our customer receives and consumes the benefits.

Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has

not

yet transferred to the customer. The estimated consideration is determined at the outset of the contract and considers the risks related to the technical, schedule and cost impacts to complete the contract. Periodically, we review these risks and

may

increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers

may

be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of

June 30, 2020,

our ending backlog was

$5.2

million. For arrangements with the U.S. Department of Defense, or DoD, we generally do

not

begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on several factors, including the contract type.

Research and Development 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 as follows:

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Salaries	$	-	$	11,195	$	3,185	$	17,641
Other costs		313		12,454		436		12,454
	$	313	$	23,649	$	3,621	$	30,095

Intangible Assets

The Company's intangible assets include a license acquired during

2015.

In

July 2015,

the Company purchased certain software products, intellectual property and 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

and

six

months ended

June 30, 2020

and

2019,

amortization expense related to the Company's license amounted to

$5,250

and

$5,250

and

$10,500

and

$10,500,

respectively, and is included in general and administrative expenses on the Statements of Income.

XML

Note 4 - Income Tax Matters

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note

4

– Income Tax Matters

At

June 30, 2020,

we estimated our annual effective tax rate for

2020

to be

35%.

We recognized a tax benefit of

$33,340

for the

six

months ended

June 30, 2020.

At

June 30, 2020,

the difference from the statutory federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

The Company conducts an on-going analysis to review its net deferred tax asset and the need for a related valuation allowance. As a result of this analysis and the actual results of operations, the Company has decreased/(increased) its net deferred tax assets by

$7,638

and $(

15,805

) during the

six

months ended

June 30, 2020

and

2019,

respectively. The change in deferred tax assets is attributable to the changes in various book/tax differences.

XML

Note 5 - Income Per Share

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Earnings Per Share [Text Block]

Note

5

– Income Per Share

Net income (loss) per common share information is as follows:

	Three months ended June 30,					Six months ended June 30,
	2020		2019			2020			2019
Basic earnings per common share:
Net income (loss) allocable to common shareholders	$	154,030	$	(3,721	)	$	(62,255	)	$	77,084
Weighted average basic shares outstanding		35,588,775		35,577,786			35,588,775			35,573,305
Basic income (loss) per common share	$	-	$	-		$	-		$	-
Dilutive earnings per common share:
Net income (loss) allocable to common shareholders	$	154,030	$	(3,721	)	$	(62,255	)	$	77,084
Weighted average shares outstanding - basic		35,588,775		35,577,786			35,588,775			35,573,305
Diluted effect:
Stock options		-		-			-			41,516
Unvested restricted stock		-		-			-			150,290
Weighted average dilutive shares outstanding		35,588,775		35,577,786			35,588,775			35,765,111
Dilutive income (loss) per common share	$	-	$	-		$	-		$	-

Diluted income (loss) per share for the

three

and

six

months ended

June 30, 2020

and

2019

does

not

reflect issuance of the following potential common shares, as the effect would be antidilutive.

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Unvested restricted stock		429,000		447,000		429,000		80,000
Stock options		-		195,000		-		-

XML

Note 6 - Operating Leases

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Lessee, Operating Leases [Text Block]

Note

6

– Operating Leases

A right-of-use asset is measured at the amount of the lease liability adjusted for deferred straight-line rent, prepaid rent and lease incentive allowances previously recognized.

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if

one

of the following applies:

a. there is a change in contractual terms, other than a renewal or extension of the arrangement;

b. a renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;

c. there is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. there is a substantial change to the asset.

Whenever a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b).

Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Operating lease payments are recognized as an operating expense on a straight-line basis over the lease term.

The Company has operating lease agreements for each of its offices. The Company has determined that the risks and benefits related to the leased properties are retained by the lessors. Accordingly, these are accounted for as operating leases. These lease agreements are for terms ranging from

5.25

to

5.33

years and provide for rental escalations of approximately

2.1%.

Additional information regarding the Company's office operating leases is as follows:

Six months ended June 30,	2020
Rent expense for long-term operating leases	$	60,683
Rent expense for short-term leases		53,833
Total rent expense	$	114,516

The following table presents the maturity profile of the Company's operating lease liabilities based on the contractual undiscounted payments with a reconciliation of these amounts to the remaining net present value of the operating lease liability reported in the balance sheet as of

June 30, 2020.

Year	Amount
Remainder of 2020	$	71,238
2021		144,976
2022		110,857
Total lease payments		327,071
Less: Interest		(18,076	)
Net present value of lease liabilities	$	308,995

The weighted average remaining lease terms and discount rates for all the Company's operating leases as of

June 30, 2020

were as follows:

Weighted average lease term (months)	27
Weighted average discount rate	4.89	%

XML

Note 7 - Loan and Line of Credit

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Debt Disclosure [Text Block]

Note

7

–

Loan and Line of Credit

On

January 31, 2018,

the Company 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, 2021

and 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, 2020,

there was

$260,000

outstanding under the facility.

On

April 14, 2020,

the Company entered into a Paycheck Protection Program Term Note (the “PNC Note”) with PNC Bank pursuant to the Paycheck Protection Program (the “Program”) of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received total proceeds of

$753,300

from the PNC Note. On

May 12, 2020,

the Company repaid the loan in full.

XML

Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Revenue [Policy Text Block]

Revenue Recognition

We provide our products and services under fixed-price and cost-reimbursable contracts. Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract. We also enter into cost-plus-fixed-fee contracts. The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does

not

vary with actual costs. We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether

two

or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.

We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having

one

or more performance obligations. The products and services in our contracts are typically

not

distinct from

one

another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as

one

performance obligation. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded each period.

We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. Our contracts do

not

include variable consideration. At the inception of a contract we estimate the transaction price based on our current rights and do

not

contemplate future modifications. Contracts are often subsequently modified to include changes in specifications, requirements or price, which

may

create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts or delivery orders are distinct and will be accounted for as a separate contract.

We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all our revenue is recognized over a period of time as we perform under the contract because control of the work in process transfers continuously to the customer. This continuous transfer of control of the work in process to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit, and take control of any work in process.

For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. For performance obligations to provide services to the customer, revenue is recognized over a period of time based on costs incurred as our customer receives and consumes the benefits.

Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has

not

yet transferred to the customer. The estimated consideration is determined at the outset of the contract and considers the risks related to the technical, schedule and cost impacts to complete the contract. Periodically, we review these risks and

may

increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers

may

be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of

June 30, 2020,

our ending backlog was

$5.2

million. For arrangements with the U.S. Department of Defense, or DoD, we generally do

not

begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on several factors, including the contract type.

Research and Development Expense, Policy [Policy Text Block]

Research and Development 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 as follows:

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Salaries	$	-	$	11,195	$	3,185	$	17,641
Other costs		313		12,454		436		12,454
	$	313	$	23,649	$	3,621	$	30,095

Intangible Assets, Finite-Lived, Policy [Policy Text Block]

Intangible Assets

The Company's intangible assets include a license acquired during

2015.

In

July 2015,

the Company purchased certain software products, intellectual property and 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

and

six

months ended

June 30, 2020

and

2019,

amortization expense related to the Company's license amounted to

$5,250

and

$5,250

and

$10,500

and

$10,500,

respectively, and is included in general and administrative expenses on the Statements of Income.

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Note 3 - Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

Research and Development Expense [Table Text Block]

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Salaries	$	-	$	11,195	$	3,185	$	17,641
Other costs		313		12,454		436		12,454
	$	313	$	23,649	$	3,621	$	30,095

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Note 5 - Income Per Share (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three months ended June 30,					Six months ended June 30,
	2020		2019			2020			2019
Basic earnings per common share:
Net income (loss) allocable to common shareholders	$	154,030	$	(3,721	)	$	(62,255	)	$	77,084
Weighted average basic shares outstanding		35,588,775		35,577,786			35,588,775			35,573,305
Basic income (loss) per common share	$	-	$	-		$	-		$	-
Dilutive earnings per common share:
Net income (loss) allocable to common shareholders	$	154,030	$	(3,721	)	$	(62,255	)	$	77,084
Weighted average shares outstanding - basic		35,588,775		35,577,786			35,588,775			35,573,305
Diluted effect:
Stock options		-		-			-			41,516
Unvested restricted stock		-		-			-			150,290
Weighted average dilutive shares outstanding		35,588,775		35,577,786			35,588,775			35,765,111
Dilutive income (loss) per common share	$	-	$	-		$	-		$	-

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Unvested restricted stock		429,000		447,000		429,000		80,000
Stock options		-		195,000		-		-

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Note 6 - Operating Leases (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

Lease, Cost [Table Text Block]

Six months ended June 30,	2020
Rent expense for long-term operating leases	$	60,683
Rent expense for short-term leases		53,833
Total rent expense	$	114,516

Lessee, Operating Lease, Liability, Maturity [Table Text Block]

Year	Amount
Remainder of 2020	$	71,238
2021		144,976
2022		110,857
Total lease payments		327,071
Less: Interest		(18,076	)
Net present value of lease liabilities	$	308,995

Operating Lease, Weighted Average Remaining Lease Terms and Discount Rates [Table Text Block]

Weighted average lease term (months)	27
Weighted average discount rate	4.89	%

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Note 3 - Significant Accounting Policies (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Contract with Customer, Asset, after Allowance for Credit Loss, Total	$ 5,200,000		$ 5,200,000
Licensing Agreements [Member]
Finite-Lived Intangible Asset, Useful Life (Year)			6 years
Amortization of Intangible Assets, Total	$ 5,250	$ 5,250	$ 10,500	$ 10,500

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Note 3 - Significant Accounting Policies - Research and Development Expense (Details) - General and Administrative Expense [Member] - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Research and development cost	$ 313	$ 23,649	$ 3,621	$ 30,095
Research and Development, Salaries [Member]
Research and development cost		11,195	3,185	17,641
Research and Development, Other Costs [Member]
Research and development cost	$ 313	$ 12,454	$ 436	$ 12,454

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Note 4 - Income Tax Matters (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Effective Income Tax Rate Reconciliation, Percent, Total			35.00%
Income Tax Expense (Benefit), Total	$ 81,163	$ 432	$ (33,340)	$ 37,267
Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount			$ 7,638	$ (15,805)

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Note 5 - Income Per Share - Weighted Average Shares Outstanding (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Basic earnings per common share:
Net income (loss) allocable to common shareholders	$ 154,030	$ (3,721)	$ (62,255)	$ 77,084
Weighted average basic shares outstanding (in shares)	35,588,775	35,577,786	35,588,775	35,573,305
Basic income (loss) per common share (in dollars per share)
us-gaap_EarningsPerShareDilutedAbstract
Net income (loss) allocable to common shareholders	$ 154,030	$ (3,721)	$ (62,255)	$ 77,084
Weighted average basic shares outstanding (in shares)	35,588,775	35,577,786	35,588,775	35,573,305
Diluted effect:
Stock options (in shares)				41,516
Weighted average dilutive shares outstanding (in shares)	35,588,775	35,577,786	35,588,775	35,765,111
Dilutive income (loss) per common share (in dollars per share)
Restricted Stock [Member]
Diluted effect:
Stock options (in shares)				150,290

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Note 5 - Income Per Share - Diluted Net Earnings (Loss) Per Share (Details) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Restricted Stock [Member]
Antidilutive shares (in shares)	429,000	447,000	429,000	80,000
Share-based Payment Arrangement, Option [Member]
Antidilutive shares (in shares)		195,000

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Note 6 - Operating Leases (Details Textual)	Jun. 30, 2020 Rate
Operating Lease, Provided, Rental Escalations (Rate)	2.10%
Minimum [Member]
Lessee, Operating Lease, Term of Contract (Year)	5 years 91 days
Maximum [Member]
Lessee, Operating Lease, Term of Contract (Year)	5 years 120 days

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Note 6 - Operating Leases - Lease Cost (Details)	6 Months Ended
	Jun. 30, 2020 USD ($)
Rent expense for long-term operating leases	$ 60,683
Rent expense for short-term leases	53,833
Total rent expense	$ 114,516

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Note 6 - Operating Leases - Maturity Based on the Contractual Undiscounted Payments (Details)	Jun. 30, 2020 USD ($)
Remainder of 2020	$ 71,238
2021	144,976
2022	110,857
Total lease payments	327,071
Less: Interest	(18,076)
Net present value of lease liabilities	$ 308,995

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Note 6 - Operating Leases - Weighted Average Remaining Lease Terms and Discount Rates (Details)	Jun. 30, 2020
Weighted average lease term (Month)	2 years 90 days
Weighted average discount rate	4.89%

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Note 7 - Loan and Line of Credit (Details Textual) - USD ($)				6 Months Ended
	May 12, 2020	Apr. 14, 2020	Jan. 31, 2018	Jun. 30, 2020	Jun. 30, 2019
Proceeds from Issuance of Unsecured Debt				$ 753,300
Repayments of Unsecured Debt				753,300
Paycheck Protection Program CARES Act [Member]
Proceeds from Issuance of Unsecured Debt		$ 753,300
Repayments of Unsecured Debt	$ 753,300
PNC Bank [Member]
Line of Credit Facility, Maximum Borrowing Capacity			$ 550,000
Long-term Line of Credit, Total				$ 260,000
PNC Bank [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate			2.50%