MIKROS SYSTEMS CORPORATION This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward looking statements that involve risks and uncertainties. All forward looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward looking statements. Our actual results may differ materially from those anticipated in these forward looking statements as a result of a number of factors, including those set forth under the caption "Risk Factors" contained in this report and elsewhere herein. The following should be read in conjunction with our annual financial statements contained elsewhere in this report.
Overview
Our primary business focus is to (i) provide engineering services, products,
software and related maintenance under contracts with the
Revenues from our government contracts represented substantially all of our
revenues for the years ended
Product Portfolio
Adaptive Diagnostic Electronic Portable Testset. 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
ADEPT Distance Support Sensor Suite. In 2013, we started development of ADSSS
for the
The AN/SYM-3 system is used on both variants of the LCS, currently planned to be at least 32 ships and we plan to extend the system to the Aircraft Carriers (CVN class) and the "Big Deck" Amphibious Assault Ships (LHD/LHA class). The system has also generated interest in other ship classes, including Aegis and unmanned systems, and to monitor shipboard hull, mechanical and electrical systems additional combat systems, and navigational radars.
Diagnostic Profiler. The Diagnostic Profiler is an integrated development environment for developing diagnostic capabilities used in maintenance, embedded diagnostics and troubleshooting applications. The software provides diagnostic services to its host application, including fault call-outs, suggested "next best" test to further isolate faults, and direct maintenance actions. When additional faults are identified, the software prioritizes the fault call-outs by probability. The use of the diagnostic profiler eliminates the need for the development and maintenance of diagnostic flow charts and hard-coded text sequences. This reduces the effort required to correct bugs and implement design changes. Over the life of the system, this could result in significant cost savings.
Prognostics Framework. Prognostics Framework is an analysis software framework that implements real-time prognostics, diagnostics and status monitoring to support embedded prognostic applications, health management systems and condition-based maintenance applications. The Prognostics Framework software institutes an information framework that organizes relevant data related to: (i) the condition of the system; (ii) the system's ability to perform required functions over specific time intervals; and (iii) the need for maintenance actions and repair parts. The Prognostics Framework has been used to implement a complete health management system on one of the first radar systems to require prognostics as a key element of its overall solutions. Other potential applications include complex computer networks, power generators, power supply, cooling, C4I (Command, Control, Communications, Computers & Intelligence), and environmental and imaging systems.
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Please see ITEM 1. BUSINESS above for a description of our Government Contracts.
Key Performance Indicator
As substantially all of our revenue is derived from contracts with the
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
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 heating ventilation, air conditioning and refrigeration
(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 on a daily basis to service technicians. We are
also working with an energy consulting business in
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
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
As discussed under "Item 1A. Risk Factors" above, an outbreak of a novel strain
of the coronavirus, COVID-19, has been recognized as a pandemic by the
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.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with
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--------------------------------------------------------------------------------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 in a given period. We classify net sales as products or services on our statements of income based on the predominant attributes of the performance obligations.
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 of 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
Accounts Receivable Accounts receivable from government contracts are stated at outstanding balances. When necessary, an allowance for doubtful accounts is established through provisions charged against operations. Receivables deemed to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance.
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Management's periodic evaluation of the adequacy of the allowance is based on
past experience, aging of the receivables, adverse situations that may affect a
customer's ability to pay, current economic conditions and other relevant
factors. This evaluation is inherently subjective as it requires estimates that
may be susceptible to significant change. Unpaid balances remaining after the
stated payment terms are considered past due. Substantially all of our business
is conducted with the federal government in which nonpayment for awarded
contracts is unlikely. No allowance for doubtful accounts was deemed necessary
by management at
Warranty We provide a limited warranty, as defined by the related warranty
agreements, for its production units. Our warranties require us to repair or
replace defective products during the 12 month period following delivery and
acceptance of production units by the government. We estimate the costs that may
be incurred under its warranty and record a liability in the amount of such
costs at the time product revenue is recognized. Factors that affect our
warranty liability include the number of units sold, anticipated rates of
warranty claims, and cost per claim. We periodically assess the adequacy of our
recorded warranty liability and adjust the amount as necessary. During the years
ended
Income Taxes Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
We recognize liabilities for uncertain tax positions. If we ultimately determine
that the payment of such a liability is not necessary, then we reverse the
liability and recognize a tax benefit during the period in which the
determination is made that the liability is no longer necessary. As of
Recently Issued Accounting Pronouncements
In
Adoption of the new standard resulted in the recording of operating lease
right-of-use assets and operating lease liabilities on our balance sheet, but
did not have an impact on the Company's beginning retained earnings,
consolidated statement of income , or statement of cash flows. The most
significant impact was the recognition of right-of-use assets and lease
liabilities for operating leases, while our accounting for finance leases
remained substantially unchanged. As of
Results of Operations
Years ended
We generated revenues of
Cost of sales consists of direct contract costs including labor, material,
subcontracts, warranty expense benefit for ADEPT units that have been
delivered, travel, and other direct costs. Costs of sales were
The majority of our engineering costs consist of (i) salary, wages and related
fringe benefits paid to engineering employees, (ii) rent-related costs, and
(iii) consulting fees paid to engineering consultants. As the nature of these
costs benefit the entire organization and all research and development efforts,
and their benefit cannot be identified with a specific project or contract,
these engineering costs are classified as part of "engineering overhead" and
included in operating expenses. Engineering costs were
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General and administrative expenses consist primarily of salary, intellectual
property, consulting fees and related costs, professional fees, business
insurance, franchise tax,
The income tax expense was
We reported a net income of
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.
At
Net cash used in investing activities was
During 2019, cash provided by financing activities was
On
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, assuming we successfully raise additional funds or enter into business alliances, that we will remain profitable or continue to generate positive cash flow.
We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months.
Off-Balance Sheet Arrangements
As of
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