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 ~~September~~March 3031, ~~2019~~2020

☐ 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

☒ 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

~~Indicate~~As ~~the number~~ of ~~shares~~May ~~outstanding~~14, ~~of each of the issuer's classes of common stock~~2020, ~~as of the latest practicable date: There were~~ 35,588,775 ~~issued and outstanding~~ shares of the ~~issuer’~~registrant's common stock, ~~$.01~~were ~~par value per share, on November 13, 2019~~outstanding.

TABLE OF CONTENTS

		PAGE #
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements.
	Condensed Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	1
	Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited)	1
	Condensed Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	2
	Statements of Income for the Three Months Ended March 31, 2020 and 2019 (unaudited)	2
	Condensed Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	3
	Statement of Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (unaudited)	3
	Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	4
	Statements of Cash Flows for the Three Months Ended March 31, 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.	109
Item 4.	Controls and Procedures.	1514
PART II.	OTHER INFORMATION
Item 6.	Exhibits	16
Item 5.	Other Information.	15
	Signatures	16
Item 6.	Exhibits.	15
	Signatures	15

Part I Financial Information ~~Item 1 Financial Statements Mikros Systems Corporation Balance Sheets (unaudited)~~

	September 30,			December 31,
	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	1,884,123		$	2,206,749
Receivables on government contracts		352,687			1,043,738
Prepaid expenses and other current assets		334,073			94,717
Total current assets		2,570,883			3,345,204
Property and equipment
Operating lease-right to use asset		383,467			-
Equipment		389,923			357,796
Leasehold improvements		21,306			21,306
Furniture & fixtures		43,174			43,174
Less: accumulated depreciation		(155,203	)		(109,484	)
Property and equipment, net		682,667			312,792
Intangible assets		140,660			140,428
Less: accumulated amortization		(91,106	)		(75,241	)
Intangible assets, net		49,554			65,187
Deferred tax assets		32,453			34,623
Total assets	$	3,335,557		$	3,757,806
Liabilities and shareholders' equity
Current liabilities:
Accrued payroll and payroll taxes	$	501,759		$	868,618
Accounts payable and accrued expenses		42,510			308,415
Accrued warranty expense		100,835			153,723
Lease obligation, current portion		124,354			-
Deferred revenue		35,173			39,824
Total current liabilities		804,631			1,370,580
Lease obligation, net of current portion		277,131			-
Other long-term liabilities		-			19,560
Total liabilities		1,081,762			1,390,140
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 and 35,568,775 shares, respectively		355,889			355,689
Capital in excess of par value		10,124,721			10,106,344
Accumulated deficit		(8,226,815	)		(8,094,367	)
Total shareholders' equity		2,253,795			2,367,666
Total liabilities and shareholders' equity	$	3,335,557		$	3,757,806

Item 1 Financial Statements

Mikros Systems Corporation

Balance Sheets

(unaudited)

	March 31,			December 31,
	2020			2019

Assets
Current assets:
Cash and cash equivalents	$	1,209,935		$	1,621,309
Receivables on government contracts		623,998			587,848
Prepaid expenses and other current assets		451,801			273,004
Total current assets		2,285,734			2,482,161

Property and equipment
Operating lease-right to use asset		322,978			353,685
Equipment		429,354			404,091
Leasehold improvements		21,306			21,306
Furniture & fixtures		43,174			43,174
Less: accumulated depreciation		(227,822	)		(171,956	)
Property and equipment, net		588,990			650,300
Intangible assets		141,158			141,158
Less: accumulated amortization		(101,683	)		(96,394	)
Intangible assets, net		39,475			44,764
Deferred tax assets		-			682
Total assets	$	2,914,199		$	3,177,907

Liabilities and shareholders' equity
Current liabilities:
Accrued payroll and payroll taxes	$	275,035		$	327,246
Accounts payable and accrued expenses		59,131			41,299
Lease obligation, current portion		128,939			126,633
Deferred revenue		8,750			17,000
Total current liabilities		471,855			512,178
Lease obligation, net of current portion		211,642			244,655
Deferred tax liability		21,674			-
Total liabilities		705,171			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		10,133,259			10,129,020
Accumulated deficit		(8,280,120	)		(8,063,835	)
Total shareholders' equity		2,209,028			2,421,074
Total liabilities and shareholders' equity	$	2,914,199		$	3,177,907

See Notes to Unaudited Condensed Financial Statements

Mikros Systems Corporation ~~Statements of Income (unaudited)~~

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Contract revenues	$	1,017,121		$	1,893,945		$	4,890,889		$	6,626,716
Cost of sales		317,015			776,493			1,887,708			3,055,932
Gross margin		700,106			1,117,452			3,003,181			3,570,784
Expenses:
Engineering		691,337			648,739			2,049,425			1,882,829
General and administrative		349,230			413,731			1,182,537			1,287,668
Total expenses		1,040,567			1,062,470			3,231,962			3,170,497
(Loss) income from operations		(340,461	)		54,982			(228,781	)		400,287
Other income:
Interest income		898			322			3,569			1,238
(Loss) income before income taxes		(339,563	)		55,304			(225,212	)		401,525
Income tax benefit (expense)		130,031			(18,275	)		92,764			(127,364	)
Net (loss) income available to common shareholders	$	(209,532	)	$	37,029		$	(132,448	)	$	274,161
(Loss) income per common share - basic	$	(0.01	)	$	-		$	-		$	0.01
Basic weighted average number of shares outstanding		35,588,775			35,568,775			35,578,519			35,308,668
(Loss) income per common share - diluted	$	(0.01	)	$	-		$	-		$	0.01
Diluted weighted average number of shares outstanding		35,588,775			35,876,540			35,578,519			35,594,805

Statements of Income

(unaudited)

	Three months ended March 31,
	2020			2019

Contract revenues	$	1,081,163		$	2,020,265

Cost of sales		357,473			778,542

Gross margin		723,690			1,241,723

Expenses:
Engineering		609,961			662,250
General and administrative		445,319			463,565

Total expenses		1,055,280			1,125,815

(Loss) income from operations		(331,590	)		115,908

Other income:
Interest income		802			1,732


(Loss) income before income taxes		(330,788	)		117,640

Income tax benefit (expense)		114,503			(36,835	)


Net (loss) income available to common shareholders	$	(216,285	)	$	80,805

(Loss) income per common share - basic	$	(0.01	)	$	-

Basic weighted average number of shares outstanding		35,588,775			35,568,775

(Loss) income per common share - diluted	$	(0.01	)	$	-

Diluted weighted average number of shares outstanding		35,588,775			35,807,830

See Notes to Unaudited Condensed Financial Statements

Mikros Systems Corporation ~~Statements of Shareholders' Equity~~

	Preferred Stock				Common Stock
	$0.01 Par Value				$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 July 1, 2019		-		-		35,588,775	$	355,889	$	10,119,222	$	(8,017,283	)	$	2,457,828
Stock compensation		-		-		-		-		5,499					5,499
Net loss		-		-		-		-		-		(209,532	)		(209,532	)
Balance at September 30, 2019		-	$	-		35,588,775	$	355,889	$	10,124,721	$	(8,226,815	)	$	2,253,795

Statements of Shareholders' Equity

	Preferred Stock				Common Stock
	$0.01 Par Value				$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 July 1, 2018		-		-		35,568,775	$	355,689	$	10,097,266	$	(8,186,445	)	$	2,266,510
Stock compensation		-		-		-		-		4,539					4,539
Net income		-		-		-		-		-		37,029			37,029
Balance at September 30, 2018		-	$	-		35,568,775	$	355,689	$	10,101,805	$	(8,149,416	)	$	2,308,078

(unaudited)

	Preferred Stock				Common Stock
	$0.01 Par Value				$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	$	(8,094,367	)	$	2,367,666
Balance at January 1, 2020		-	$	-		35,588,775	$	355,889	$	10,129,020	$	(8,063,835	)	$	2,421,074
Stock compensation		-		-		-		-		14,577		-			14,577
Stock-based compensation		-		-		-		-		4,239		-			4,239
Exercise of stock options						20,000		200		3,800					4,000
Net loss		-		-		-		-		-		(216,285	)		(216,285	)
Net loss		-		-		-		-		-		(132,448	)		(132,448	)
Balance at March 31, 2020		-	$	-		35,588,775	$	355,889	$	10,133,259	$	(8,280,120	)	$	2,209,028
Balance at September 30, 2019		-	$	-		35,588,775	$	355,889	$	10,124,721	$	(8,226,815	)	$	2,253,795

	Preferred Stock				Common Stock
	$0.01 Par Value				$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, 2018		-	$	-		35,561,775	$	355,619	$	10,087,843	$	(8,423,577	)	$	2,019,885
Balance at January 1, 2019		-	$	-		35,568,775	$	355,689	$	10,106,344	$	(8,094,366	)	$	2,367,667
Stock compensation										13,682					13,682
Stock-based compensation		-		-		-		-		4,539		-			4,539
Exercise of stock options						7,000		70		280					350
Net income		-		-		-		-		-		80,805			80,805
Net income												274,161			274,161
Balance at March 31, 2019		-	$	-		35,568,775	$	355,689	$	10,110,883	$	(8,013,561	)	$	2,453,011
Balance at September 30, 2018		-	$	-		35,568,775	$	355,689	$	10,101,805	$	(8,149,416	)	$	2,308,078

See Notes to Unaudited Condensed Financial Statements

Mikros Systems Corporation ~~Statements of Cash Flows (unaudited)~~

	Nine months ended September 30,
	2019			2018
Cash flows from operating activities:
Net (loss) income	$	(132,448	)	$	274,161
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		61,584			63,795
Deferred tax expense (benefit)		2,170			(47,032	)
Share-based compensation expense		14,577			13,682
Changes in assets and liabilities:
Decrease (increase) in receivables on government contracts		691,051			(243,585	)
(Increase) in prepaid expenses and other current assets		(239,356	)		(8,618	)
(Decrease) increase in accrued payroll and payroll taxes		(366,860	)		189,890
(Decrease) in accounts payable and accrued expenses		(265,904	)		(122,176	)
(Decrease) increase in accrued warranty expense		(52,888	)		90,370
(Decrease) increase in deferred revenue		(4,651	)		6,500
(Decrease) in long-term liabilities		(1,542	)		(2,990	)
Net cash (used in) provided by operating activities		(294,266	)		213,997
Cash flows from investing activities:
Payments related to intangible assets		(233	)		(2,263	)
Purchase of property and equipment		(32,127	)		(96,455	)
Net cash used in investing activities:		(32,360	)		(98,718	)
Cash flows from financing activities:
Exercise of stock options		4,000			350
Net cash provided by financing activities:		4,000			350
Net (decrease) increase in cash and cash equivalents		(322,626	)		115,629
Cash and cash equivalents, beginning of period		2,206,749			1,173,177
Cash and cash equivalents, end of period	$	1,884,123		$	1,288,806
Cash paid for income taxes	$	121,000		$	66,500

Statements of Cash Flows

(unaudited)

	Three months ended March 31,
	2020			2019

Cash flows from operating activities:
Net (loss) income	$	(216,285	)	$	80,805
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		35,892			20,502
Deferred tax expense (benefit)		22,356			(3,084	)
Share-based compensation expense		4,239			4,539
Changes in assets and liabilities:
(Increase) in receivables on government contracts		(36,150	)		(257,974	)
(Increase) decrease in prepaid expenses and other current assets		(178,797	)		20,096
(Decrease) in accrued payroll and payroll taxes		(52,211	)		(309,349	)
Increase (decrease) in accounts payable and accrued expenses		17,832			(103,995	)
(Decrease) in accrued warranty expense		-			(6,773	)
(Decrease) in deferred revenue		(8,250	)		(2,603	)
(Decrease) in long-term liabilities		-			(1,237	)
Net cash used in operating activities		(411,374	)		(559,073	)
Cash flows from investing activities:
Purchase of property and equipment		-			(30,842	)
Net cash used in investing activities:		-			(30,842	)
Net decrease in cash and cash equivalents		(411,374	)		(589,915	)
Cash and cash equivalents, beginning of period		1,621,309			2,206,749
Cash and cash equivalents, end of period	$	1,209,935		$	1,616,834

See Notes to Unaudited Condensed Financial Statements

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”, ~~“we”~~ or “uswe”) 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, ~~2018~~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 its financial position as of ~~September~~March 3031, ~~2019~~2020, the results of its operations ~~for the three and nine months ended September 30~~, ~~2019 and 2018,~~ changes in shareholders’ equity ~~for the three~~ and ~~nine months ended September 30, 2019 and 2018 and~~ cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019, respectively.

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.

The significance of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot be determined at this time. 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

~~In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).~~ The ~~new~~Company ~~standard~~reviewed ~~supersedes the present U.S. GAAP standard on leases and requires substantially~~ all ~~leases~~recently toissued bebut ~~reported~~not onyet ~~the balance sheet as right-of-use assets and lease obligations. ASU 2016-02 is~~ effective ~~for annual reporting periods beginning after December 15~~, ~~2018,~~accounting ~~and~~pronouncements ~~interim~~in ~~reporting~~2020 ~~periods within those annual reporting periods. Early adoption is permitted~~ and indoes ~~the~~not ~~original~~believe ~~guidance~~ the ~~modified~~future ~~retrospective~~adoption ~~application~~of ~~was~~any ~~required,~~such ~~however,~~pronouncements inmay ~~July 2018 the FASB issued ASU 2018-11 which permits entities with another transition method in which the effective date would~~ be ~~the~~expected ~~date~~to ofcause ~~initial application of transition. Under this optional transition method, we would recognize~~ a ~~cumulative-effect~~material ~~adjustment~~impact toon the ~~opening~~Company’s ~~balance~~financial ofcondition ~~retained~~or ~~earnings in~~ the ~~period~~results of ~~adoption.~~its ~~We adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective approach and the optional transition method~~operations. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classifications.

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

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.

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 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 ~~revenue~~sales. As of ~~September~~April 301, ~~2019~~2020, our ending backlog was $14.~~9 million~~5M. 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 a number of factors, including the contract type.

~~Warranty~~Research and Development Expense

~~The~~Research ~~Company~~and ~~provides~~development aexpenditures ~~limited~~for ~~warranty,~~research asand ~~defined~~development byof the ~~related warranty agreements, for its production units. The~~ Company’'s ~~warranties require the Company to repair or replace defective~~ products ~~during~~are ~~such~~expensed ~~warranty~~when ~~period. The Company estimates the costs that may be~~ incurred ~~under its warranty~~ and ~~records~~are aincluded ~~liability~~ in ~~the~~general ~~amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, expected~~ and ~~anticipated~~administrative ~~rates of warranty claims, and cost per claim~~expenses. The Company ~~periodically~~recognized ~~assesses~~research ~~the adequacy of its recorded warranty liability~~ and ~~adjusts~~development ~~the~~costs ~~amount~~ as necessary. During the three months ended September 30, 2019 and 2018, the Company recognized a warranty expense of $0 and $75,000, respectively, and for the nine months ended September 30, 2019 and 2018, the Company recognized a warranty (benefit) expense of ($40,400) and $115,000, respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 226 ADEPT units. As of September 30, 2019, there were 26 ADEPT units remaining under the limited warranty coverage.follows:

	Three month ended March 31,
	2020		2019
Salaries	$	3,185	$	6,446
Other costs		123	$	-
	$	3,308	$	6,446

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

The following table reflects the reserve for product warranty activity for:

	September 30, 2019			December 31, 2018
Balance, beginning of the period	$	153,723		$	40,000
Provision for product warranty		-			142,000
Product warranty expirations		(40,400	)		-
Product warranty costs paid		(12,488	)		(28,277	)
Balance, end of the period	$	100,835		$	153,723

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 September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Salaries	$	15,841	$	7,047	$	33,482	$	69,727
Other costs		4,584		14,000		17,038		38,401
	$	20,425	$	21,047	$	50,520	$	108,128

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 months ended March 31, 2020 and 2019, amortization expense related to the Company’s license amounted to $5,250 for both periods and is included in general and administrative expenses on the Statements of Income.

Licenses are amortized using a straight-line method over their estimated life of nine years. For the three and nine months ended September 30, 2019 and 2018, amortization expense related to the Company’s license amounted to $5,250 and $5,250 and $15,750 and $15,750, respectively, and is included in general and administrative expenses on the Statements of Income.

Note 4 – Income Tax Matters

At ~~September~~March 3031, ~~2019~~2020, we estimated our annual effective tax rate for ~~2019~~2020 to be 4135%. We recognized a tax benefit of $92114,~~764~~ 503 for the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020. At ~~September~~March 3031, ~~2019~~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 $(222,~~170)~~356 and $47(3,~~032~~084) during the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019, respectively. The change in deferred tax assets is attributable to the changes in various book/tax ~~temporary~~ differences.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the impact of the CARES Act, but at present does not expect such impact to be material to our financial statements.

Note 5 – Income Per Share

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

	Three months ended March 31,
	2020			2019
Basic earnings per common share:
Net (loss) income	$	(216,285	)	$	80,805

Weighted average basic shares outstanding		35,588,775			35,568,775

Basic (loss) income per common share	$	(0.01	)	$	-

Dilutive earnings per common share:
Net (loss) income allocable to common shareholders	$	(216,285	)	$	80,805

Weighted average shares outstanding - basic		35,588,775			35,568,775
Diluted effect:
Stock options		-			57,333
Unvested restricted stock		-			181,722
Weighted average dilutive shares outstanding		35,588,775			35,807,830

Dilutive (loss) income per common share	$	(0.01	)	$	-

Diluted net (loss) income per share for the three months ended March 31, 2020 and 2019 does not reflect issuance of the following potential common shares, as the effect would be antidilutive.

	Three month ended March 31,
	2020		2019

Unvested restricted stock		429,000		80,000

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Note 5 – (Loss) Income Per Share

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

	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019			2018
Basic earnings per common share:
Net (loss) income	$	(209,532	)	$	37,029	$	(132,448	)	$	274,161
Weighted average basic shares outstanding		35,588,775			35,568,775		35,578,519			35,308,668
Basic (loss) income per common share	$	(0.01	)	$	-	$	-		$	0.01
Dilutive earnings per common share:
Net (loss) income allocable to common shareholders	$	(209,532	)	$	37,029	$	(132,448	)	$	274,161
Weighted average shares outstanding - basic		35,588,775			35,568,775		35,578,519			35,308,668
Dilutive effect:
Stock options		-			76,347		-			70,364
Unvested restricted stock		-			231,418		-			215,773
Weighted average dilutive shares outstanding		35,588,775			35,876,540		35,578,519			35,594,805
Diluted (loss) income per common share	$	(0.01	)	$	-	$	-		$	0.01

Diluted net (loss) income per share for the three and nine months ended September 30, 2019 and 2018 does not reflect the following potential common shares, as the effect would be antidilutive.

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Unvested restricted stock		449,000		70,000		449,000		80,000

Note 6 – Operating Leases

The Company adopted the ASU Topic 842- Leases beginning January 1, 2019 and adopted the practical expedients consistently for all of its leases. Accordingly, the Company:

● Did not reassess whether any expired or existing contracts are or contain leases.

● Did not reassess the lease classification for any expired or existing leases.

● Did not reassess initial direct costs for any existing leases.

In addition, the Company elected to retrospectively determine the lease term and assess impairment of right of use asset.

At the date of transition, the Company recognized an operating lease liability and right of use asset. The amount of lease liability is equal to the present value of the remaining lease payments as of January 1, 2019 discounted using the incremental borrowing rate of 4.89%.

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

A right-of-use asset is measured at the amount of the lease liability adjusted for the amount of 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.

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 of 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%.

~~The~~Additional ~~following~~information ~~table~~regarding ~~presents~~ the ~~maturity profile of the~~ Company’s ~~operating~~office ~~lease liabilities based on the contractual undiscounted payments with a reconciliation of these amounts to the remaining net present value of the~~ operating ~~lease~~leases ~~liability~~is ~~reported in the balance sheet~~ as ~~of September 30, 2019.~~follows:

Year	Amount
Three months ended March 31,	2020
Remainder of 2019	$	34,869
Rent expense for long-term operating leases	$	30,152
2020		141,976
Rent expense for short-term leases		30,845
2021		144,976
Total rent expense	$	60,997
2022		110,967
Total lease payments		432,788
Less: Interest		(31,303	)
Net present value of lease liabilities	$	401,485

The ~~weighted~~following ~~average~~table ~~remaining~~presents the maturity profile of the Company’s operating lease ~~terms~~liabilities ~~and~~based ~~discount~~on ~~rates~~the ~~for~~contractual ~~all~~undiscounted payments with a reconciliation of these amounts to the ~~Company’s~~remaining ~~operating~~net ~~leases~~present asvalue of ~~September~~the ~~30,~~operating ~~2019~~lease ~~were~~liability reported in the balance sheet as ~~follows:~~of March 31, 2020.

Weighted average lease term (in months)		36
Year	Amount
Weighted average discount rate		4.89	%
Remainder of 2020		106,747
2021		144,976
2022		110,967
Total lease payments		362,690
Less: Interest		(22,109	)
Net present value of lease liabilities	$	340,581

9The weighted average remaining lease terms and discount rates for all of the Company’s operating leases as of March 31, 2020 were as follows:

Weighted average lease term (months)			30
Weighted average discount rate			4.89	%

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This ~~report~~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.” ~~These forward~~Forward-looking statements ~~are~~by ~~not~~their ~~guarantees~~nature ~~and~~address ~~are~~matters ~~subject to known and unknown risks, uncertainties and assumptions about us~~ that ~~may cause our actual results~~are, ~~levels of activity, performance or achievements~~ to ~~be materially~~ different ~~from any future results~~degrees, ~~levels of activity, performance or achievements expressed or implied by such forward-looking statements~~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 ~~develop and~~ market our solutions ~~for~~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;. ~~statements~~These ofuncertainties ~~assumption~~may ~~underlying~~cause ~~any~~our ofactual ~~the~~future ~~foregoing,~~results asto ~~well~~be asmaterially ~~other~~different ~~factors~~than ~~set~~those ~~forth~~expressed ~~under~~in ~~the~~our ~~caption~~forward-looking statements. These uncertainties are described in more detail in Part I, Item 1A. “Risk Factors” inof ~~our~~this Annual Report on Form 10-K for the year ended December 31, ~~2018 filed with the Securities and Exchange Commission~~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 ~~assume~~do nonot ~~duty~~undertake to update ~~or revise~~ 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, ~~2018~~2019.

Overview

Mikros Systems Corporation (the “Company”, “we”, ~~“Mikros”~~ or “us”) designs and manufactures software, hardware and electronic systems used to maintain complex distributed systems. Examples of such systems include defense equipment such as radars and combat systems, and commercial and industrial applications such as printing presses, power distribution, utility systems, and Federal Aviation Administration systems.

Our primary business focus is to (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 ~~Department of Defense~~DoD, Department of Homeland Security, and other governmental authorities, ~~and~~with a view to ~~expand~~expanding this government funded research and development into ~~products~~government ~~and services~~contracts. Since 2002, we have been awarded several Phase I, II, and III ~~Small~~SBIR ~~Business Innovation Research~~ contracts, and several IDIQ contracts for our ADEPT and ADSSS products.

Revenues from our government contracts represented substantially all of our revenues for the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019. Over the past decade, our principal customer has been the U.S. Department of Defense, primarily the U.S. Navy (“Navy”). We ~~have~~provide ~~developed~~ the following ~~two~~ key ~~systems~~system ~~for~~to the Navy for maintenance of radars and combat systems:

● ~~ADEPT®~~ADSSS, the ~~Adaptive~~ADEPT ~~Diagnostic~~Distance ~~Electronic~~Support ~~Portable~~Sensor ~~Testset~~Suite, is a PCCondition-~~based~~Based ~~maintenance~~Maintenance ~~automation~~(CBM) ~~workstation~~system used to ~~maintain~~monitor ~~the~~Combat ~~Navy’s~~System ~~premier~~Elements ~~AN/SPY-1~~(CSEs) ~~phased~~onboard ~~array~~the ~~radar~~Littoral onCombat ~~Cruisers~~Ship (CGLCS) ~~and Destroyers (DDG)~~.

●More ~~ADSSS®~~recently, ~~the~~we ~~ADEPT~~have ~~Distance~~developed ~~Support~~and ~~Sensor~~marketed ~~Suite~~software products to analyze maintenance data collected from target systems, isoptimize amaintenance ~~Condition-Based~~procedures, ~~Maintenance~~and ~~(CBM)~~predict ~~system~~failures. ~~used~~Our toPrognostics ~~monitor~~Framework ~~Combat~~(PF) ~~System~~and ~~Elements~~Diagnostic Profiler (~~CSEs~~DP) ~~onboard~~products ~~the~~provide ~~Littoral~~software ~~Combat~~capabilities ~~Ship~~which complement our maintenance hardware products (~~LCS~~ADEPT® and ADSSS) and allow us to provide complete hardware/software solutions for advanced maintenance, particularly of complex distributed systems. Now that we have a complete hardware/software solution for advanced maintenance, we are expanding into commercial and industrial markets.

More recently, we have developed and marketed software products to analyze maintenance data collected from target systems, optimize maintenance procedures, and predict failures. Our Prognostics Framework® (PF) and Diagnostic Profiler® (DP) products provide software capabilities which complement our maintenance hardware products (ADEPT and ADSSS) and allow us to provide complete hardware/software solutions for advanced maintenance, particularly of complex distributed systems. Now that we have a complete hardware/software solution for advanced maintenance, we are expanding into commercial and industrial markets.9

10Our Products

~~Product~~Adaptive ~~Portfolio~~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.

~~Revenues~~ADEPT ~~from~~Distance ~~our~~Support ~~government~~Sensor ~~contracts~~Suite ~~represented~~(ADSSS). ~~substantially~~In ~~all~~2013, ofwe ~~our~~started ~~revenues~~development of ADSSS for the ~~nine~~Navy’s ~~months~~LCS. ~~ended~~Our ~~September~~system ~~30,~~has ~~2019.~~now Wematured ~~believe~~and ~~that~~has weearned ~~can~~the ~~utilize~~official Navy nomenclature AN/SYM-3. The LCS is the ~~intellectual~~U.S. ~~property~~Navy’s ~~developed~~latest ~~under~~combat ~~our~~warship. ~~various~~AN/SYM-3 ~~Small~~is ~~Business~~a ~~Innovation~~network-enabled ~~Research~~system ~~awards~~that can be configured to ~~develop~~monitor ~~proprietary~~multiple ~~products~~shipboard systems and report maintenance data onshore for ~~both~~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 ~~government~~capture of system operation, environment and ~~commercial~~maintenance ~~marketplace~~data to provide unattended operation. The system monitors key parameters and sends alert notifications when parameters move out of tolerance.

~~Adaptive~~The ~~Diagnostic~~first ~~Electronic~~full ~~Portable Testset (ADEPT). ADEPT is an automated maintenance workstation designed to significantly reduce the time required to align the~~ AN/~~SPY~~SYM-13 ~~Radar System aboard U.S. Navy Aegis cruisers and destroyers, while optimizing~~ system ~~performance~~was ~~and~~successfully ~~readiness.~~completed ~~ADEPT Systems are currently deploying~~ on ~~all~~LCS ~~Aegis~~2 CG and ~~DDG~~onshore ~~platforms~~installation toof ~~support~~prognostics ~~the~~software ~~AN/SPY1~~has ~~radar~~been ~~system.~~completed ~~Since~~at ~~the~~Port ~~system~~Hueneme ~~uses~~Division. ~~commercial~~The ~~instrument~~ADSSS ~~case~~is ~~and~~used ~~modules,~~on ~~ADEPT units can be modified to support~~ both ~~preventative~~variants ~~maintenance and condition-based maintenance~~ of ~~other~~the ~~radars~~LCS, ~~and~~currently ~~complex~~planned ~~electronic~~to ~~systems~~be inat ~~military~~least or32 ~~commercial applications~~ships. ~~Since~~In ~~inception of the program~~2019, we ~~have~~completed ~~delivered~~installations aon ~~total~~four ofadditional ~~226~~LCS ~~ADEPT~~ships ~~units.~~that Inare ~~October~~being ~~2019,~~deployed weallowing ~~received~~for ~~notice~~data ~~from~~collection ~~Program~~while ~~Executive~~operational ~~Office~~at ~~Integrated~~sea. ~~Warfare~~During ~~Systems~~2020, ~~that~~we ~~the~~expect ~~ADEPT~~to ~~program~~install ~~will~~systems ~~not~~on betwo ~~funded~~or inthree ~~fiscal~~additional ~~year 2020~~ships.

~~ADEPT~~We ~~Distance~~are ~~Support~~working ~~Sensor~~with ~~Suite (ADSSS). In 2013, we started development of ADSSS for~~ the ~~Navy’s~~government ~~Littoral~~to ~~Combat~~have ~~Ship~~their ~~(“LCS”).~~virtual ~~ADSSS~~data istransport ~~a network-enabled~~ system ~~that~~installed ~~can~~on betwo ~~configured~~deploying toships, ~~monitor~~allowing ~~multiple~~for ~~shipboard~~near ~~systems~~real-time ~~and report maintenance~~ data ~~onshore~~to ~~for~~be ~~further~~sent ~~analysis~~back to ~~detect~~shore ~~trends~~ and ~~predict~~processed ~~failures.~~through ~~ADSSS~~our ~~provides~~prognostics anframework ~~open~~models. ~~architecture~~During ~~approach with industry standard hardware~~2020, ~~and~~we ~~cybersecurity~~expect ~~compliant software~~ to ~~acquire~~add ~~and~~several ~~process~~new combat system ~~operational~~elements ~~and~~to ~~maintenance~~our ~~data.~~LCS ~~ADSSS~~platform ~~fully~~which ~~automates~~is ~~the~~expected ~~capture~~to ofexpand ~~system~~our ~~operation,~~footprint ~~environment~~ and ~~maintenance~~bring ~~data~~condition-based tomaintenance ~~provide~~plus ~~unattended~~(CBM ~~operation.~~+) ~~The~~to ~~system~~additional ~~monitors~~mission-critical ~~key~~systems. ~~parameters~~We ~~and~~are ~~sends~~also ~~alert~~working ~~notifications~~to ~~when~~maintain ~~parameters~~SYM-3 ~~move~~for ~~out~~modernization ofsystems ~~tolerance.~~that ~~ADSSS,~~are ~~with its remote monitoring and prognostics capabilities, is now~~ being ~~further~~planned ~~developed~~in ~~for~~the ~~installation~~next on3-5 ~~two additional ship classes.~~years

~~Diagnostic~~Through ~~Profiler.~~our ~~The~~NSSMS ~~Diagnostic~~contract ~~Profiler~~awarded isin anthe ~~integrated~~fourth ~~development~~quarter ~~environment~~of ~~for~~2019, ~~developing~~we ~~diagnostic~~plan ~~capabilities~~to ~~used~~develop ina ~~maintenance,~~new ~~embedded~~variant ~~diagnostics~~of ~~and~~the ~~troubleshooting~~AN/SYM-3 ~~applications.~~system ~~The~~for ~~software~~the ~~provides~~NATO ~~diagnostic~~Seasparrow ~~services~~Surface toMissile ~~its~~System. ~~host~~NSSMS ~~application,~~is ~~including~~installed ~~fault~~on ~~call-outs,~~Navy ~~suggested~~Aircraft ~~“next~~Carriers ~~best”~~(CVN ~~test~~class) ~~to further isolate faults,~~ and ~~direct~~“Big ~~maintenance~~Deck” ~~actions.~~Amphibious ~~When~~Assault ~~additional~~Ships ~~faults~~(LHD/LHA ~~are identified~~class), ~~the~~so ~~software prioritizes~~ the ~~fault~~new ~~call-outs~~variant bycould ~~probability.~~be ~~The~~installed ~~use~~on ofthese ~~the~~two ~~diagnostic~~new ~~profiler~~ship ~~eliminates~~classes. ~~the~~We ~~need~~have ~~for~~started the ~~development~~software, ~~and~~hardware, ~~maintenance of diagnostic flow charts~~ and ~~hard-coded~~systems ~~text~~engineering ~~sequences.~~tasks ~~This~~needed ~~reduces~~to ~~the~~move ~~effort~~this ~~required~~CBM capability to ~~correct~~land ~~bugs~~based ~~and~~test ~~design~~events ~~changes~~ and ~~over~~then ~~the~~to ~~life~~a oflong-term ~~the~~pilot ~~system,~~installation ~~could~~for ~~result~~four insystems ~~significant~~on ~~cost~~the ~~savings~~NSSMS platform.

~~Prognostics~~The ~~Framework.~~SYM-3 ~~Prognostics~~has ~~Framework~~also isgenerated aninterest ~~analysis~~from ~~software~~other ~~for~~ship ~~framework~~classes, ~~that~~Aegis ~~implements~~and ~~real-time~~unmanned ~~prognostics~~systems, ~~diagnostics,~~ and ~~status~~for ~~monitoring~~use to ~~support~~monitor ~~embedded~~shipboard ~~prognostic applications~~hull, ~~health~~mechanical ~~management systems~~ and ~~condition-based~~electrical ~~maintenance~~(HME) ~~applications.~~systems, ~~The~~additional ~~Prognostics~~combat ~~Framework~~systems, ~~software~~and ~~institutes~~navigational anradars. ~~information~~This ~~framework~~is ~~that~~part ~~organizes relevant data related to: (i) the condition~~ of the ~~system; (ii) the system~~Navy’s ~~ability~~continued effort to ~~perform~~increase ~~required~~operational, ~~functions~~sustainability ~~over specific time intervals;~~ and ~~(iii)~~lethality ~~the need~~ for ~~maintenance~~many ~~actions~~different ~~and~~ship ~~repair parts~~classes. ~~The~~We ~~Prognostics~~are ~~Framework~~also ~~has~~working ~~been used~~ to ~~implement~~maintain aSYM-3 ~~complete~~for ~~health~~modernization ~~management~~systems ~~system~~that onare ~~one~~being ofplanned in the ~~first~~next ~~radar~~three ~~systems~~ to ~~require~~five ~~prognostics as a key element of its overall solutions~~years. ~~Other potential applications include complex computer networks, power generators, power supply, cooling and environmental systems.~~

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. Mikros has 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~~February 2017, we ~~received~~were ~~contract~~awarded ~~awards~~a ~~totaling~~follow-on ~~$2.0~~multi-year ~~million~~Small ~~from~~Business Innovation Research Phase III IDIQ contract with the UNaval Surface Warfare Center, Crane Division, for our ADEPT program.S. ~~Navy~~The tocontract ~~extend~~provided for the ~~capabilities~~purchase and sale of ~~the~~up ~~ADSSS~~to ~~Condition-Based~~$35.1 ~~Maintenance~~million ~~(CBM)~~of ~~system~~ADEPT tounits ~~support~~and arelated ~~fourth~~engineering, ~~Navy~~such ~~radar~~as ~~system~~calibration, repair, training and other logistics services. We have been awarded several delivery orders under the MKADEPT 99IDIQ Contract. ~~The~~In ~~Small~~October ~~Business~~2019, ~~Innovation~~we ~~Research~~received ~~office~~notice from Program Executive Office Integrated Warfare Systems that the ADEPT program will not be funded in ~~Dahlgren,~~fiscal VAyear ~~provided~~2020. $0We will continue to fulfill our current obligations under outstanding engineering services task orders previously issued under the program.5 ~~million~~As of the ~~total~~date ~~funding~~of tothis ~~support~~report, ~~this~~we ~~effort~~have one open task order for general engineering services.

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.

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.10

In ~~October~~September 2019, we received anthe ~~additional~~third ~~contract~~delivery ~~award~~order under our multi-year IDIQ relating to our ADSSS product. ~~This~~The ~~incremental~~award ~~funding~~covers ~~with~~the ainstallation ~~ceiling~~of upcondition-based tomaintenance $6systems ~~million,~~for ~~under~~ the ~~third~~Littoral ~~delivery~~Combat ~~order,~~Ship ~~covers~~and ~~the~~has ~~development~~a ceiling of a$15 ~~new~~million. ~~variant~~As of the ~~AN/SYM-3 system~~date ~~and installation~~ of ~~the~~this ~~new~~report, ~~CBM~~approximately ~~system~~$4.0 onmillion ~~two~~of ~~additional~~incremental ~~ship~~funding ~~classes;~~has ~~the~~been ~~Aircraft~~awarded ~~Carriers~~for ~~(CVN~~work ~~class)~~to ~~and~~be ~~the~~executed ~~“Big~~in ~~Deck”~~government ~~Amphibious~~fiscal ~~Assault~~year ~~Ships~~ (~~LHD/LHA class~~FY) 2020.

11In 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~~November ~~2017~~2019, we were awarded a ~~follow-on~~five ~~multi-~~(5) year ~~Small~~Basic ~~Business~~Ordering ~~Innovation~~Agreement ~~Research~~(BOA) ~~Phase~~from ~~III IDIQ contract with the~~ Naval ~~Surface~~Air Warfare Center, ~~Crane~~Aircraft Division, ~~for our ADEPT program. The contract provides for the purchase and sale of up~~ to ~~$35.1~~begin ~~million~~a ofPhase ~~ADEPT~~I ~~units~~SBIR ~~and~~effort ~~related~~entitled ~~engineering,~~“Unmanned ~~such~~Surface asVehicle ~~calibration, repair, training~~ and ~~other~~Unmanned ~~logistics~~Underwater ~~services.~~Vehicle WeAutonomous ~~have~~Behavior ~~been awarded several delivery orders under the ADEPT IDIQ Contract~~Development”. InThe ~~October~~amount 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,~~Phase weI ~~have~~effort ~~the~~was ~~following~~approximately ~~open task orders:~~ $150,000.

●In April 2020, we received $04.19 million ~~for~~of ~~ADEPT~~additional ~~general~~funding ~~engineering~~from ~~services~~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 $0April 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.04 ~~million~~The ~~for~~Phase ~~sustainment~~I ~~services~~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.

● $0.2 million for general support for the program.

Commercial Contracts

In ~~September~~ 2019 and 2020, HP Indigo, Saab Grintek ~~Defence~~Defense and Northrop Grumman renewed ~~its~~their annual ~~contract~~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 ~~indicator~~indicators isare (i) the dollar volume of contracts and task orders awarded to us under our IDIQ contract, ~~covering~~and (ii) the ~~ADSSS~~number ~~program~~and dollar amount of new contracts and SBIR grants awarded to us. Increases in the number and value of contracts and ~~trade~~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 isin 2019, and expected torevenue ~~come~~in 2020, is or will be from sales of ~~ADSSS~~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 ~~our~~this ~~products~~technology ~~will~~is beour aprimary ~~key indicator of future revenue~~focus.

Outlook

Our strategy for continued growth is based on continuing expansion of our defense business and executing new initiatives to apply our advanced maintenance technology in commercial markets. With regard to the defense industry, we expect to continue expanding our technology base, backlog and revenue by continuing ~~our~~to ~~active~~bid ~~participation in the Department of Defense Small Business Innovation Research program and bidding~~ on projects that fall within our areas of expertise. These areas include electronic systems engineering and integration, radar systems engineering, combat/C4I (Command, Control, Communications, Computers & Intelligence) systems engineering, ~~and~~ communications engineering, remote monitoring and augmented reality. We believe that we can utilize the intellectual property developed under our various ~~Small~~SBIR ~~Business Innovation Research~~ awards to develop proprietary products, such as ADEPT and ADSSS, with broad appeal in both the government and commercial marketplace. Our state of the art test equipment can be used by many commercial and governmental customers such as the ~~Federal Aviation Administration~~FAA, radio and television stations, cell phone stations, and airlines. Second, we will continue to ~~pursue~~actively ~~Small~~participate ~~Business~~in ~~Innovation~~the ~~Research~~SBIR program and pursue SBIR projects with the DoD, Department of Homeland Security, ~~the~~ 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.

~~Historically~~With regard to commercial markets, ~~the~~our ~~ADEPT~~Diagnostics ~~IDIQ~~Profiler ~~contract~~and ~~generated~~Prognostics aFramework ~~material~~software ~~amount~~offerings ofcomplement our ~~revenue~~hardware products and allow us to provide complete hardware/software solutions for advanced maintenance applications. InCurrent ~~2019,~~customers ~~revenues~~for ~~from~~these ~~this~~systems ~~program~~include ~~materially~~major ~~decreased~~multinational corporations such as weHP, ~~did~~which ~~not~~recently ~~receive~~extended ~~any~~our ~~new~~Diagnostic ~~production~~Profiler software support for a seventh year. We continue to receive repeat orders, ~~ongoing~~from these customers to support their applications. We plan to provide “condition-based maintenance” ~~and~~systems ~~recalibration~~for ~~services~~“complex ~~were~~distributed ~~reduced,~~systems” ~~and~~to commercial customers. In that regard, we ~~experienced~~are ~~delays~~developing ina ~~follow~~condition-based maintenance solution for HVAC equipment based on ~~contract~~our ~~awards.~~proprietary InPrognostics ~~October~~Framework ~~2019,~~solution which we ~~received~~call ~~notice~~Mikros ~~from~~Mindr. ~~Program~~We ~~Executive~~have ~~Office~~deployed ~~Integrated~~two ~~Warfare~~active ~~Systems~~pilot systems that ~~the~~are ~~ADEPT~~providing ~~program~~key ~~will~~maintenance ~~not~~data beon ~~funded~~a indaily ~~fiscal~~basis ~~year~~to ~~2020~~service technicians. ~~Although~~We ~~this~~are ~~development~~also ~~adversely~~working ~~impacted~~with ~~our~~an ~~revenues~~energy ~~and~~consulting ~~level~~business ofin ~~activity~~Florida into ~~2019,~~remotely wemonitor ~~expect~~energy touse ~~offset~~and ~~this~~required ~~reduction~~maintenance for its customers. We are in ~~future~~discussions ~~periods~~with ~~through~~additional ~~awards~~commercial ~~under~~companies regarding the use of our ~~ADSSS~~condition ~~IDIQ~~based ~~contract~~maintenance applications.

~~With~~In ~~regard~~2020, our primary strategic focus is to ~~commercial~~continue ~~markets,~~as ~~our~~a ~~Diagnostics~~premium ~~Profiler~~provider of R&D and ~~Prognostics~~product ~~Framework~~development ~~software~~services ~~offerings~~to ~~complement~~the defense industry, generate multiple task orders under our ~~hardware~~ADSSS ~~products~~IDIQ and ~~allow~~BOA uscontracts, toadditional ~~provide~~Phase ~~complete~~I ~~hardware/software~~and ~~solutions~~Phase ~~for~~II ~~advanced~~SBIR ~~maintenance~~grants ~~applications.~~with ~~Current~~a ~~customers~~view ~~for~~to ~~these~~obtaining ~~systems~~additional ~~include~~government ~~major~~contracts, ~~multinational~~and ~~corporations~~expand ~~such~~our ascommercial HPbusiness ~~Indigo,~~through ~~which~~marketing ~~recently~~and ~~extended~~sales of our Prognostics Framework and Diagnostic Profiler software ~~support~~products. ~~for~~In afurtherance ~~ninth~~of ~~year~~this strategy, we have made material investments in our engineering and technical staffs to provide broader and deeper expertise to our customers. We ~~continue~~will also seek to ~~receive~~generate ~~repeat~~incremental ~~orders~~revenue ~~from~~through ~~these~~providing ~~customers~~light assembly and production services to ~~support~~commercial ~~their~~customers ~~applications~~at our M&D Center in Largo, Florida.

We plan to provide “condition-based maintenance” systems for “complex distributed systems” to commercial customers. In that regard, we are currently developing a condition-based maintenance solution for heating ventilation, air conditioning and refrigeration (HVAC) equipment based on our proprietary Prognostics Framework solution. We have deployed two active pilot systems that are providing key maintenance data on a daily basis to service technicians. More recently, we commenced a pilot program with an energy consulting firm to collect energy consumption data to reduce power consumption, decrease system downtime, and recommend proactive maintenance to commercial and industrial energy users. We are also in discussions with additional commercial companies regarding the use of our condition-based maintenance applications.

In the fourth quarter of 2019 and into 2020, our primary strategic focus is to continue as a premium provider of Research and Product Development services to the defense industry, generate multiple task orders under our ADSSS IDIQ contract, 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 manufacturing and depot center in Largo, Florida (the “M&D Center”).

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. The Governor of Pennsylvania has ordered the closure of all non-life sustaining businesses in Pennsylvania where the majority 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 and quarantine protocols imposed to access US Navy ships 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.

Changes to Critical Accounting Policies and Estimates

InWe ~~February~~reviewed ~~2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard supersedes the present U.S. GAAP standard on leases and requires substantially~~ all ~~leases to be reported on the balance sheet as right-~~of~~-use~~ assets and lease obligations. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods. Early adoption is permitted and in the ~~original~~recently ~~guidance~~issued ~~the~~accounting ~~modified~~pronouncement ~~retrospective~~through ~~application~~May ~~was~~2020 ~~required, however, in July 2018 the FASB issued ASU 2018-11~~ which ~~permits~~are ~~entities~~not ~~with~~yet ~~another transition method in which the~~ effective ~~date~~and ~~would be the date of initial application of transition. Under this optional transition method,~~ we ~~would~~do ~~recognize~~not abelieve ~~cumulative-effect adjustment to~~ the ~~opening~~future ~~balance of retained earnings in the period of~~ adoption. ~~We adopted ASU 2016-02 as~~ of ~~January~~any 1,such ~~2019~~pronouncements ~~using~~may ~~the~~be ~~modified~~expected ~~retrospective~~to ~~approach~~cause ~~and~~a ~~the~~material ~~optional~~impact ~~transition~~on ~~method.~~our Infinancial ~~addition,~~condition weor ~~elected~~ the ~~package~~results of ~~practical~~its ~~expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classifications~~operations.

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

Results of Operations

Three Months Ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~March 31, 2019

We generated revenues of $ $1,~~017~~081,~~121~~163 during the three months ended ~~September~~March 3031, ~~2019~~2020 compared to $ $12,~~893~~020,~~945~~265 during the three months ended ~~September~~March 3031, ~~2018~~2019, a decrease of $~~876~~939,~~824~~102, or 46%. ~~The~~This ~~decrease~~resulted ~~was~~primarily ~~due~~from ~~principally~~the todelay ~~delays~~ of follow-on ~~contract~~funding ~~awards~~ and nothe ~~ADEPT~~delivery ~~units~~of ~~produced~~direct components. Revenues in the first quarter of 2020 and 2019 consisted entirely of engineering support services contracts.

Cost of sales consists of direct contract costs including labor, material, subcontracts ~~for the ADEPT units that have been delivered~~, travel, and other direct costs. Cost of sales ~~during~~for the three months ended ~~September~~March 3031, ~~2019~~2020 was $ ~~317~~357,~~015~~473 compared to $ ~~776~~778,~~493~~542 for the three months ended ~~September~~March 3031, ~~2018~~2019, a decrease of $~~459~~421,~~478~~069 or 5954%. The ~~decrease~~reduction ~~relates~~resulted tofrom ~~a change in~~ the ~~mix~~delay of ~~contracts~~follow-on ~~generating~~funding ~~revenues~~and ~~as compared to~~ the ~~third~~delivery ~~quarter~~ of ~~2018.~~direct ~~In 2019, we did not produce any ADEPT units and all revenue was generated from engineering support services~~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 all research and development efforts~~, and their benefit cannot be identified with a specific project or contract, these engineering costs are classified as part of “engineering overhead” and included in operating expenses. Engineering costs for the three months ended ~~September~~March 3031, ~~2019~~2020 were $~~691~~609,~~337~~961 compared to $~~648~~662,~~739~~250 for the three months ended ~~September~~March 3031, ~~2018~~2019, ana ~~increase~~decrease of $4252,~~598~~289, or 78%. ~~The increase in 2019 was due to delays of follow-on contract awards, and shift of increases in engineering personnel from revenue generating contracts.~~

13General 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 March 31, 2020 were $445,319 as compared to $463,565 for the three months ended March 31, 2019, a decrease of $18,246, or 4%.

~~General~~We ~~and~~estimated ~~administrative~~our ~~expenses~~annual ~~consist~~effective ~~primarily~~tax ofrate ~~salary,~~for ~~intellectual~~2020 ~~property, consulting fees~~ and ~~related~~2019 ~~costs,~~to ~~professional~~be ~~fees,~~35% ~~business insurance, franchise tax, SEC compliance costs, travel,~~ and ~~unallowable~~31%. ~~expenses~~As ~~(representing~~a ~~those expenses for which the government will not reimburse us~~result, ~~including~~we ~~independent~~recognized ~~research~~a ~~and~~tax ~~development~~benefit ~~(IR&D) which consists~~ of ~~research~~$114,503 ~~and development expenses unrelated to our defense contracts). General and administrative costs~~ for the three months ended ~~September~~March 3031, ~~2019 were $349~~2020,~~230~~ as compared to tax expense of $~~413~~(36,~~731~~835) for the three months ended ~~September~~March 3031, ~~2018,~~2019. aThe ~~decrease~~differences offrom ~~$64,501,~~the orstatutory ~~16%.~~federal ~~The~~income ~~decrease~~tax inrate ~~2019~~were ~~was~~attributable ~~due~~ to astate ~~decrease~~income intaxes ~~research~~ and ~~development~~certain ~~costs~~permanent ~~and~~book-tax ~~the elimination of incentive compensation expenses in 2019~~differences.

We ~~recognized~~reported a ~~tax~~net ~~benefit~~loss of $~~130~~216,~~031~~285 ~~for~~in the three months ended ~~September~~March 3031, ~~2019.~~2020 Atas ~~September~~compared ~~30,~~to ~~2019,~~net ~~the~~income ~~difference~~of ~~from~~$80,805 ~~the~~in ~~expected~~three ~~federal~~months ~~statutory~~ended ~~income~~March ~~tax~~31, ~~rate~~2019. isThe decrease was attributable primarily to ~~state~~the ~~income~~decrease ~~taxes~~in ~~and~~revenues ~~certain~~in ~~permanent~~the ~~book-tax~~first ~~differences~~quarter of 2020.

We reported a net loss of $209,532 for the three months ended September 30, 2019 as compared to net income of $37,029 for the three months ended September 30, 2018. The decrease was attributable primarily to the decrease in revenues in the third quarter of 2019.

Nine Months Ended September 30, 2019 and 2018

We generated revenues of $ $4,890,889 during the nine months ended September 30, 2019 compared to $6,626,716 during the nine months ended September 30, 2018, a decrease of $ $1,735,827, or 26%. The decrease was due principally to delays of follow-on contract awards and no ADEPT units produced in 2019.

Cost of sales for the nine months ended September 30, 2019 was $1,887,708 compared to $3,055,932 for the nine months ended September 30, 2018, a decrease of $1,168,224 or 38%. The decrease relates to a change in the mix of contracts generating revenues as compared to the corresponding period of 2018. In 2019, we did not produce any ADEPT units and all revenue was generated from engineering support services.

Engineering costs for the nine months ended September 30, 2019 were $2,049,425 compared to $1,882,829 for the nine months ended September 30, 2018, an increase of $166,596, or 8%. The increase in 2019 was due to delays of follow-on contract awards, and a shift of increases in engineering personnel from revenue generating contracts.

General and administrative costs for the nine months ended September 30, 2019 were $1,182,537 compared to $1,287,668 for the nine months ended September 30, 2018, a decrease of $105,131, or 9%. The decrease is due to the elimination of the incentive compensation expenses in 2019.

At September 30, 2019, we estimated our annual effective tax rate for 2019 to be 41%. We recognized a tax benefit of $92,764 for the nine months ended September 30, 2019 primarily due to expected net losses for the remainder of 2019. At September 30, 2019, the difference from the expected federal statutory income tax rate is attributable to state income taxes and certain permanent book-tax differences.

We reported a net loss of $132,448 for the nine months ended September 30, 2019 as compared to net income of $274,161 for the nine months ended September 30, 2018. The decrease was attributable primarily to the decrease in revenues in the first nine months of 2019.

Liquidity and Capital Resources

Since our inception, we have financed our operations through debt, private and public offerings of equity securities, and cash generated by operations.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020, net cash used in operations was $~~294~~411,~~266~~ 374 compared to net cash ~~provided~~used byin operations of $~~213~~559,~~997~~073 during the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019. The decrease ~~was~~in ~~primarily~~cash used in operations of $147,699 was due to ~~the~~a ~~net~~$404,259 ~~loss~~decrease ~~for~~in ~~the~~cash ~~nine~~used ~~months~~in ~~ended~~operations ~~September~~resulting ~~30,~~from ~~2019~~the ~~and~~ timing of receipts and payments related to our operating assets and liabilities. The decrease in cash used in operations related to noncash charges of $40,530 which amounts were offset by an increase in cash used in operations of $297,090 which represents the increase in our net loss of $216,285 for the three months ended March 31, 2020 as compared to net income of $80,805 for the three months ended March 31, 2019.

Net cash used in investing activities was $~~32,360~~ 0 in the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020 as compared to $9830,~~718~~842 in the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019, a decrease of $6630,~~358~~842. The decrease was ~~due~~related to the ~~decrease~~completion ~~in purchases~~ of ~~equipment and furniture and fixtures related to~~ an expansion of our ~~Pennsylvania~~ offices in ~~2018~~Pennsylvania in 2019.

14On 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 March 31, 2020, no amounts were outstanding under the facility.

On January 31, 2018, we entered into a $550,000 credit facility with PNC Bank. The facility initially matured on January 31, 2019 and has been extended to January 31, 2020. The facility accrues interest at a variable rate equal to the Daily LIBOR Rate plus 250 basis points. Interest is paid monthly. Principal borrowings may be prepaid at any time without penalty and the facility is secured by substantially all of our assets. The facility contains customary affirmative and negative nonfinancial covenants. As of September 30, 2019, no amounts were outstanding under the facility.13

In order to pursue strategic opportunities, obtain additional ~~Small~~SBIR ~~Business Innovation Research~~ contracts, or acquire strategic assets or businesses, we may need to obtain additional financing or seek strategic alliances or other partnership agreements with other entities. In order to raise any such financing, we anticipate considering the sale of additional debt or equity securities under appropriate market conditions. There can be no assurance, assuming we successfully raise additional funds or enter into business alliances.

Off-Balance Sheet Arrangements

As of ~~September~~March 3031, ~~2019~~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, ~~who~~and ~~serves as~~ our ~~principal~~Chief ~~executive~~Financial ~~officer and principal financial officer~~Officer. Based upon that evaluation, our ~~president~~Chief Executive Officer and Chief Financial Officer concluded that as of ~~September~~March 3031, ~~2019~~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 ~~September~~March 3031, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

1514

PART II. OTHER INFORMATION

Item 5. Other Information.

We are providing the following disclosure in lieu of filing a Current Report on Form 8-K relating to “Item 8.01 Other Events” of Form 8-K.

On May 13, 2020, we paid $753,300 to PNC Bank representing repayment in full of the amount we borrowed from PNC 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.

Item 6. Exhibits

No.	Description
31.1	Certification of principal executive officer and 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.
10.1	Consulting Agreement dated March 2, 2020 by and between the Company and Mark J. Malone.
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

32.1	Certification of principal executive officer and 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 CORPORATIO
	MIKROS SYSTEMS CORPORATION
November 14, 2019	By:	/s/ Thomas J. Meaney
May 15, 2020	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney
		Chief Executive Officer and Chief Financial Officer
		Chief Executive Officer

	MIKROS SYSTEMS CORPORATION

May 15, 2020	By:	/s/ Mark J. Malone
		Mark J. Malone
		Chief Financial Officer

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