10QSB 1 septc.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------------------------- FORM 10QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 Commission File No. 2-67918 Mikros Systems Corporation -------------------------- (Exact Name of Small Business Issuer as Specified in its Charter) Delaware 14-1598200 -------- ---------- (State of Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey 08540 ------------------------------------------- (Address of Principal Executive Offices) 609-987-1513 ------------ (Issuer's Telephone Number, Including Area Code) ------------------------------------------------- (Former Address, If Changed Since Last Report) Check whether the Issuer: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ___X___ No:_______ State the number of shares outstanding of each of the Issuer's classes of common stock, as of September 30, 2002: Class Number of Shares ----- ---------------- Common Stock, Par Value $.01 31,566,753 Transitional Small Business Disclosure Format (check one): Yes:___X___ No:________ TABLE OF CONTENTS PART I. FINANCIAL STATEMENTS PAGE # Item 1. Financial Statements 3 CONDENSED BALANCE SHEET As of September 30, 2002 4 CONDENSED STATEMENTS OF OPERATIONS For the Three Months Ended and the Nine Months Ended September 30, 2002 and 2001 6 CONDENSED STATEMENTS OF CASH FLOWS For the Three Months Ended and Nine Months Ended September 30, 2002 and 2001 7 NOTES TO THE CONDENSED FINANCIAL STATEMENTS 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Results of Operations 13 Liquidity and Capital Resources 13 PART II OTHER INFORMATION Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted from the following financial statements pursuant to the rules and regulations of the Securities and Exchange Commission, although Mikros Systems Corporation (the "Company") believes that such financial disclosures are adequate to assure that the information presented is not misleading in any material respect. The following financial statements should be read in conjunction with the year-end financial statements and notes thereto included in the Company's Annual Report on Form 10K-SB for the fiscal year ended December 31, 2001. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire fiscal year. MIKROS SYSTEMS CORPORATION CONDENSED BALANCE SHEET (UNAUDITED) September 30, ASSETS 2002 ------ -------- CURRENT ASSETS Cash $ 66,574 Accounts Receivable 11,667 Other Current Assets 10,019 -------- TOTAL CURRENT ASSETS 88,260 -------- FIXED ASSETS EQUIPMENT 67,738 Less: Accumulated Depreciation (52,281) -------- FIXED ASSETS, NET 15,457 -------- OTHER ASSETS Patent Costs, Net 21,664 -------- 22,194 -------- TOTAL ASSETS $ 125,381 ========= See Accompanying Notes MIKROS SYSTEMS CORPORATION CONDENSED BALANCE SHEET (UNAUDITED) September 30, LIABILITIES AND SHAREHOLDERS' DEFICIENCY 2002 --------- CURRENT LIABILITIES Accounts Payable $36,112 Accrued Payroll and Payroll Taxes 22,503 Accrued Expenses 6,212 Advanced Billing 2,840 Advances from an affiliate 48,705 Customer Advances 15,000 --------- TOTAL CURRENT LIABILITIES $131,372 -------- COMMITMENTS AND CONTINGENCIES MANDATORILY REDEEMABLE SERIES C PREFERRED STOCK par value $.01 per share, authorized 150,000 shares, issued and outstanding 5,000 shares 80,450 ------- SHAREHOLDERS' DEFICIENCY Preferred Stock, convertible, par value $.01 per share, authorized 2,000,000 shares, issued and outstanding 255,000 shares 2,550 Preferred Stock, Series B convertible, par value $.01 per share, authorized 1,200,000 shares, issued and outstanding 1,102,433 shares 11,024 Preferred Stock, Series D, par value $.01 per share, 690,000 shares authorized, issued and outstanding 6,900 Common Stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 31,566,753 315,668 Capital in excess of par 11,370,271 Accumulated deficit (11,792,854) ----------- TOTAL SHAREHOLDERS' DEFICIENCY ( 86,441) ----------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 125,381 ============ See Accompanying Notes MIKROS SYSTEMS CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended, Nine Months Ended, 238: September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 239: ------------------ ---------------- ------------------ ------------- Revenues: Royalties $ - $ 6,218 $ 56,213 $ 56,371 Contract Revenues 35,000 - 46,667 - 243: ------------- ------------ ------------- ------------- Total Revenues 35,000 6,218 102,880 56,371 ------------- ------------- -------------- ------------- Cost of Sales: Contract Cost 18,571 - 27,727 - 249: ------------- ------------ ------------- -------------- Total Cost of Sales 18,571 - 27,727 - 251: ------------- ------------ ------------- -------------- Gross Margin 16,429 6,218 75,153 56,371 253: ------------- ------------- ------------- --------------- Expenses: General & Administrative 37,053 33,024 133,658 128,112 256: ------------- ------------- ------------- ------------- 37,053 33,024 133,658 128,112 258: ------------- ----------- ------------- ------------- $ (20,624) $ (26,806) $(58,505) $(71,741) 260: ============ ============ ============= ============= See Accompanying Notes MIKROS SYSTEMS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) The Three Months Ended The Nine Months Ended 278: September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 279: ------------------ ------------------ ----------------- ------------------ Cash Flow From Operating Activities: $(20,624) $ (26,806) $(58,505) $(71,741) Adjustments to reconcile Net Loss to Used by Operating Activities: Depreciation and Amortization 1,153 597 2,347 1,791 Common Stock Issued for - - 11,200 - Net Changes in Operating Assets and Liabilities (Increase) Decrease in: Accounts Receivable - 20,118 24,475 44,163 Other Current Assets (9,519) (6,493) 7,406 (6,863) Other Assets - - - 2,206 Increase (Decrease) in: Accounts Payable - 3,492 - 9,764 (906) (311) (695) 799 (24,823) (8,490) (7,010) (147) -------- -------- -------- ------- Net Cash (Used In) Operations (54,719) (17,893) (20,782) (20,028) --------- -------- --------- -------- Cash Flows from Investing Activities: Acquisition of Equipment - - (6,675) (1,341) -------- -------- --------- -------- Cash Flows from Financing Activities: Advance (repayment) - (372) (221) (23,867) Proceeds from exercise of Options and warrants - - - 9,646 -------- -------- --------- -------- Net Cash Provided by financing Activities - (372) (221) 14,221 -------- -------- --------- -------- (27,678) (35,590) 124,990 94,252 142,316 -------- -------- --------- --------- $ 66,574 $106,726 $ 66,574 $106,726 ======== ========= =========== ======== Supplemental Disclosure of non-cash Information: Stock Issued from Conversion of $ - $ - $ - $ 24,000 See Accompanying Notes MIKROS SYSTEMS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 Note 1 Basis of Presentation: The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10KSB for the year ended December 31, 2001. In the opinion of the Company's management the accompanying unaudited financial statements contain all adjustments, consisting solely of those which are of a normal recurring nature, necessary to present fairly its financial position as of September 30, 2002 and the results of its operations and its cash flows for the nine months ended September 30, 2002. Interim results are not necessarily indicative of results for the full fiscal year. 362: The Company's financial statements have been prepared assuming that the Company will be able to continue as a going concern. The Company has sustained substantial operating losses in recent years. In addition, the Company has used substantial amounts of working capital in its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans and intentions on the going concern issue are discussed below. These financial statements do not include any adjustments that would be required if the Company were unable to continue as a going concern. In order to continue as a going concern, the Company will need to incur substantial expenditures to develop and market its commercial wireless communications business. The Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flows to meet its obligations as they come due. The Company is seeking additional financing to fund its operating and capital requirements through 2003. If cash flows are insufficient or the Company is unable to raise funds on acceptable terms, there would be a material adverse effect on the Company's financial position and operations and its ability to continue as a going concern. This would force the Company to further reduce its expenditures, reduce its workforce, sell certain assets or possibly explore additional alternatives including seeking bankruptcy protection. The Company cannot be certain that additional debt or equity financing will be available when required or, if available, that it can secure it on terms satisfactory to the Company. In view of these matters, realization of a major portion of the assets in the accompanying business sheet is dependent upon continued operations of the Company, which in turn is dependent on the Company being able to obtain financing and/or equity capital to support further development for its commercial wireless business and continuing operations. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity to continue as a going concern. Note 2 Stockholder's Equity: MANDATORILY REDEEMABLE SERIES C PREFERRED STOCK ---------------------------------------------------- The Series C Preferred Stock, was issued in 1988 in order to satisfy notes payable and other trade accounts payable pursuant to a debt restructuring. The Series C Preferred Stock is not convertible into any other class of the Company's stock and is subject to redemption at the Company's option at any time and redemption is mandatory if certain events occur, such as capital reorganizations, consolidations, mergers, or sale of all or substantially all of the Company's assets. Upon any liquidation, dissolution or winding up of the Company, each holder of Series C Preferred Stock will be entitled to be paid, before any distribution or payment is made upon any other class of stock of the Company, an amount in cash equal to the redemption price for each share of Series C Preferred Stock held by such holder, and the holders of Series C Preferred Stock will not be entitled to any further payment. The redemption price per share is $16.09. SERIES B CONVERTIBLE PREFERRED STOCK ------------------------------------ The Series B Preferred Stock, was issued in 1988 in order to satisfy notes payable and other trade accounts payable pursuant to a debt restructuring. Each share of Series B Preferred Stock is convertible into three shares of the Company's common stock at a price of $.33 per share of common stock to be received upon conversion and entitles the holder thereof to cast three votes on all matters to be voted on by the Company's Shareholders. Upon any liquidation, dissolution, or winding up of the Company, each holder of Series B Preferred Stock will be entitled to be paid, after all distributions of payments are made upon the Series C Preferred Stock and before any payment is made upon the Company's Convertible Preferred Stock, an amount in cash equal to $1.00 for each share of Series B Preferred Stock held, and such holders will not be entitled to any further payment. SERIES D PREFERRED STOCK ------------------------ The Series D Preferred Stock was issued in 1993 in order to partially satisfy notes payable and accrued interest thereon pursuant to a debt restructuring. The Series D Preferred Stock provides for an annual cumulative dividend of $.10 per share. The shares are not convertible into any other class of stock and are subject to redemption at the Company's option at any time at a redemption price of $1.00 per share plus all unpaid cumulative dividends. Upon liquidation, dissolution or winding up of the Corporation, each holder of Series D Preferred Stock will be entitled to be paid, after all distributions or payments are made upon the Corporation's Convertible Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock, an amount in cash equal to the Redemption Price for each share of Series D Preferred Stock held by such holder. The holders of Series D Preferred Stock will not be entitled to any further payment. The Company has neither paid nor declared dividends on its Common Stock since its inception and does not plan to pay dividends on its Common Stock in the foreseeable future. The Company expects that any earnings which the Company may realize and which are not paid as dividends to holders of Preferred Stock will be retained to finance the growth of the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Result of Operations. Overview Mikros Systems Corporation was founded in 1978 in Albany, New York to exploit microprocessor technology developed at the General Electric Research and Development Center for the military defense industry. The Company's headquarters are located at 707 Alexander Road, Suite 208, Princeton, New Jersey; telephone (609)987-1513. The Company supplied technology for military applications through March 1998. The knowledge base and proprietary technology developed were recognized as applicable to the rapidly expanding commercial wireless business. In 1995, the Company decided to also pursue a business plan which would employ these advanced techniques to enhance the data transmission rates in the AM and FM radio spectrum. In 1996, Safeguard Scientifics (Delaware), Inc., invested $1 million in Mikros in exchange for 10% ownership in the Company. At the same time, Mobile Broadcasting Corporation (MBC) was created to exploit the AM radio technology, particularly in mobile or portable platforms such as automobiles. Mikros currently owns a majority interest in MBC, with the balance of MBC ownership held by Safeguard Scientifics. Data Design and Development Corporation (3D) was also founded in 1996 as part of the Safeguard Scientific agreement and retains ownership of the AM and FM technology. 3D has licensed the FM technology rights in North America to Mikros and the AM technology rights in North America to MBC. Mikros owns two-thirds of the equity of 3D, and Safeguard owns the remaining one-third interest. The Company sold its military contracts to an unrelated third party (the Purchaser). The Purchaser entered into a royalty agreement with the Company, and is required to pay a 2% royalty on all data terminal set sales over a four-year period that expired in April 2002. In addition, the Purchaser was obligated to supply $1,000,000 in engineering services to the Company, which was expended by the end of 1999 on the AM data program in cooperation with MBC. Mikros' commercial business assets now consists of both the original FM technology and the AM Radio technology. Continued development of the FM technology has been postponed in order to focus on the further development of the AM Radio technology. The digital system Mikros is developing for AM radio data transmission is intended to allow simultaneous broadcasting of the present radio signal with a digital signal. The Company believes that this is accomplished with minimal disturbance to the existing radio channel. This system will require minor modifications to the radio station transmitter which is not expected to require new FCC approval since adjacent channel interference is avoided. The Company developed a business model for the AM technology during 1999. This model combines the AM data transmission technology with the operations of a nationwide or area wide network of AM radio stations equipped with the minor modifications to the radio station's transmitter. Data could be broadcast from point to multipoint, and the signal received by a small portable receiver to be developed based on the prototype used in the Company's experimental trials. During 2001, the Company's Board of Directors decided to explore providing services to the government business sector in order to further leverage its technical knowledge base. Prior to its exclusive focus on the commercial business sector, which begun in 1998, Mikros had been successful in securing a number of governmental contracts. For example, Mikros had received over twelve competitive contract awards through the Small Business Innovative Research Program. In May 2002, the U.S. Navy's Dahlgren Division, Naval Surface Warfare Center (NSWCDD) awarded Mikros a Phase I SBIR (Small Business Innovative Research) contract. The contract is valued at approximately $75,000 and represents the first stage in the development of a Multiple Function Distributed Test and Analysis Tool (MFDTAT). This project will focus on developing standardized test equipment and testing processes, using modern artificial intelligence techniques, to provide a foundation for new, less manpower-intensive methods of system maintenance, alignment, fault detection and isolation. The Company believes the potential benefits to the U.S. Navy are: (1) increased readiness through reduced maintenance downtime of critical systems; (2)increased system reliability through predictive failure analysis and proactive remediation; and (3) more efficient and effective use of technical manpower through increased automation, distance support, and interactive training. Mikros, in conjunction with Anteon Corporation, as a subcontractor, will initially focus on the development of an intelligent test and maintenance tool for the AN/SPY-1 AEGIS Radar. The objective is to develop a "smart" tool capable of aiding the technician in the troubleshooting, repair, alignment, and maintenance efforts necessary to keep the SPY-1 Radar system in peak operating condition, while at the same time, significantly reducing the downtime currently required for periodic system alignment and calibration. Added benefits include a system measurement data collection capability, and interactive capability for distance support, and an interactive offline training capability. Certain matters discussed in this Form 10-QSB are "forward- looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding technology under development, strategies and objectives. The forward- looking statements include risks and uncertainties, including, but not limited to, the Company's ability to continue as a going concern, the need for substantial financing to continue operations, the anticipated size of and growth in the markets for the Company's products, the trends favoring the use of the Company's proposed commercial products, the anticipated demand for the Company's new products, the timing of development and implementation of the Company's new product offerings, the utilization of such products by the Company's clients and trends in future operating performance, and other factors not within the Company's control. The factors discussed herein and expressed from time to time in the Company's filings with the Securities and Exchange Commission could cause actual results and development to be materially different from those expressed in or implied by such statements. The forward-looking statements made herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from these estimates. For a more detailed explanation of judgments made in these areas, refer to our Annual Report on Form 10-K for the year ended December 31, 2001 Results of Operations --------------------- Nine Months Ended September 30, 2002 Total revenues were $35,000 for the third quarter ended September 30, 2002 compared to $6,218 for the same period in 2001. The 2002 revenues represent revenues from an SBIR Phase I that commenced in June 2002. The 2001 revenues represent royalties earned pursuant to the Company's 1998 divestiture of its military contracts and contract revenue related to a SBIR contract. General and Administrative expenses for the quarter ended September 30, 2002 were $37,053 versus $33,024 in the quarter ended September 30, 2001. Net loss for the nine months ended September 30, 2002 was $58,505 versus a net loss of $71,741 for the same period in 2001. Liquidity and Capital Resources ------------------------------- Since its inception, the Company has financed its operations through debt, private and public offerings of equity securities and cash generated by operations. At September 30, 2002, the Company had cash of $66,574. As of September 30, 2002, the Company had negative working capital of $43,112. Net cash used in operating activities was $20,782. which includes changes in certain of the Company's operating assets and liabilities and the net loss of the nine months ended September 30, 2002. Commencing April 10, 1998, for a period of four years, the Company is receiving a royalty of 2% of all data terminal sales by General Atronics Corporation (GAC). The royalty agreement provides for quarterly reports and payments based on the GAC shipments and receipts during the quarter. The royalties for 2002 were $56,213 and represents the final revenue related to this agreement. Mikros is presently seeking $5,000,000 in financing in order to implement its business plan. There is no guarantee that the Company will be able to obtain the necessary financing or that the application contemplated will be embraced by potential users. The Company intends to continue the development and marketing of its commercial applications of its wireless communications technology both directly and through its relationship with MBC. In order to continue such development and marketing, the Company will be required to raise additional funds. The Company intends to consider the sale of additional debt and equity securities under appropriate market conditions, alliances or other partnership agreements with entities interested in supporting the Company's commercial programs, or other business transactions which would generate resources sufficient to assure continuation of the Company's operations and research programs. There can be no assurance, assuming the Company successfully raises additional funds or enters into business alliances, that the Company will achieve profitability or positive cash flow. If the Company is unable to obtain additional adequate financing or enter into such business alliances, management will be required to sharply curtail its operations. This would force the Company to further reduce its expenditures, reduce its work force, sell certain assets, or possibly explore other alternatives including seeking bankruptcy protection. Failure to obtain additional financing on terms acceptable to the Company may materially adversely affect the Company's ability to continue as a going concern. Item 3. Controls and Procedures. a) Evaluation of disclosure controls and procedures. Based on his evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-QSB, the Company's president (principal executive officer and principal financial officer) has concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. PART II. OTHER INFORMATION Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (b) Reports on Form 8-K. None. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIKROS SYSTEMS CORPORATION DATE: November 14, 2002 By:/s/Thomas J. Meaney ---------------------- President (Chief Executive Officer and Chief Financial Officer) CERTIFICATION I, Thomas J. Meaney, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Mikros Systems Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ____________________________________ Dated: November 14, 2002 Thomas J. Meaney, President (Principal Executive Officer and Principal Financial Officer) EXHIBIT 99.1 839: STATEMENT PURSUANT TO 18 U.S.C. 1350 841: Pursuant to 18 U.S.C. 1350, the undersigned certifies that this Quarterly Report on Form 10-QSB for the period ended September 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Mikros Systems Corporation. By: /s/Thomas J. Meaney Dated: November 14, 2002 ---------------------------- Thomas J. Meaney, President, Chief Executive Officer and Chief Financial Officer