Edgar Filing: MIKROS SYSTEMS CORP

mikros_10q-063009.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2009

o 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)

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. xYes oNo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). oYes oNo

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes xNo

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 31,766,753 issued and outstanding shares of the issuer’s common stock, $.01 par value per share, on August 12, 2009.

TABLE OF CONTENTS

		PAGE #
PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Condensed Balance Sheets as of June 30, 2009 and December 31, 2008 (unaudited)	1

	Condensed Statements Of Operations for the Three and Six Months Ended June 30, 2009 and 2008 (unaudited)	3

	Condensed Statements Of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (unaudited)	4

	Notes To The Unaudited Condensed Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 4T.	Controls and Procedures	17

PART II.	OTHER INFORMATION	17

Item 6.	Exhibits	17

	SIGNATURES	18

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MIKROS SYSTEMS CORPORATION

CONDENSED BALANCE SHEETS

(UNAUDITED)

	June 30, 2009		December 31, 2008
ASSETS

CURRENT ASSETS

Cash and Cash Equivalents	$	432,604		608,530
Receivables on Government Contracts		215,484		169,766
Other Current Assets		63,529		17,903

TOTAL CURRENT ASSETS		711,617		796,199

Patents and Trademarks		5,383		5,383
Less: Accumulated Amortization		(929)		(760)
		4,454		4,623

PROPERTY AND EQUIPMENT
Equipment		16,515		14,625
Furniture and Fixtures		9,264		9,264
		25,779		23,889

Less: Accumulated Depreciation		(16,759)		(15,235)


		9,020		8,654

Deferred Tax Asset		9,303		18,000

TOTAL ASSETS	$	734,394		827,476

See Accompanying Notes to Condensed Financial Statements.

MIKROS SYSTEMS CORPORATION

CONDENSED BALANCE SHEET (UNAUDITED)

(continued)

	June 30, 2009		December 31, 2008
LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Accrued Payroll and Payroll Taxes	$	109,716	$	98,193
Accounts Payable and Accrued Expenses		16,927		143,654

TOTAL CURRENT LIABILITIES		126,643		241,847

Long-term Liabilities		8,950		11,170

TOTAL LIABILITIES		135,593		253,017

REDEEMABLE SERIES C PREFERRED STOCK par value $.01 per share, authorized 150,000 shares,
Issued and outstanding 5,000 shares (involuntary liquidation value - $80,450)		80,450		80,450

SHAREHOLDERS’ EQUITY

Preferred Stock, Series B convertible, par value $.01 per share, authorized 1,200,000 shares, issued
and outstanding 1,102,433 shares (involuntary liquidation value - $1,102,433)		11,024		11,024

Preferred Stock, convertible, par value $.01 per share, authorized 2,000,000 shares, issued and
outstanding 255,000 shares (involuntary liquidation value - $255,000)		2,550		2,550

Preferred Stock, Series D, par value $.01 per share 690,000 shares authorized, issued and outstanding
(involuntary liquidation value - $1,518,000)		6,900		6,900

Common Stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 31,766,753 shares		317,668		317,668

Capital in excess of par value		11,483,887		11,468,662

Accumulated Deficit		(11,303,678)		(11,312,795)

TOTAL SHAREHOLDERS’ EQUITY		598,801		494,009

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	734,394	$	827,476

See Accompanying Notes to Condensed Financial Statements.

MIKROS SYSTEMS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

		Three Months Ended				Six Months Ended
		June 30, 2009		June 30, 2008		June 30, 2009		June 30, 2008

Contract Revenue	$	636,476	$	1,062,832	$	1,143,785	$	1,714,114

Cost of Revenue		282,591		617,672		484,721		924,026

Gross Margin		353,885		445,160		659,064		790,088

Expenses:

Engineering		142,582		157,055		297,147		285,430
General & Administrative		167,900		210,801		340,999		405,597

Total Expenses		310,482		367,856		638,146		691,027

Income from Operations		43,403		77,304		20,918		99,061

Interest Income		-		695		3		2,191

Income Before Income Tax Expense		43,403		77,999		20,921		101,252

Income Tax Expense		24,407		43,633		11,804		56,133

Net Income	$	18,996	$	34,366	$	9,117	$	45,119

Basic and diluted (loss) earnings per share	$	-	$	-	$	-	$	-

Basic weighted average number of Shares outstanding		31,766,753		31,766,753		31,766,753		31,766,753

Diluted weighted average number of Shares outstanding		35,401,734		35,231,234		35,393,074		35,237,012

See Accompanying Notes to Condensed Financial Statements.

MIKROS SYSTEMS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	June 30, 2009		June 30, 2008
Cash Flow From Operating Activities:
Net Income	$	9,117	$	45,119

Adjustments to reconcile Net (Loss) Income to
Net Cash used in Operating Activities:
Depreciation and Amortization		1,693		2,813
Deferred Tax Expense		8,697		39,743
Stock Compensation Expense		15,225		19,813

Net Changes in Operating Assets and Liabilities:
(Increase) Decrease in Receivables on Government Contracts		(45,718)		8,390
Increase in Other Current Assets		(45,626)		(20,715)
Decrease in Accounts Payable, accrued expenses and other liabilities		(128,947)		(83,462)
Increase in Accrued Payroll and Payroll Taxes		11,523		16,932
Net Cash used in Operating Activities		(174,036)		(68,305)

Cash Flow from Investing Activities:
Purchase of Furniture and Fixtures and Equipment		(1,890)		-
Net Cash used in Investing Activities		(1,890)		-

Net increase (decrease) Increase in Cash and Cash Equivalents		(175,926)		64,316

Cash and Cash Equivalents, beginning of the period		608,530		404,557

Cash and Cash Equivalents, end of period	$	432,604	$	468,873

See Accompanying Notes to Condensed Financial Statements.

MIKROS SYSTEMS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – Basis of Presentation:

The accompanying unaudited interim condensed Financial Statements of Mikros Systems Corporation (the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statements rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods presented. The interim operating results are not necessarily indicative of the results for a full year or for any interim period. 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 relating to interim financial statements. The Condensed Financial Statements included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-Q and included together with the Company's Financial Statements and Notes thereto included in the Company's 2008 Annual Report on Form 10-K.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS 165 is effective for interim and annual periods ending after June 15, 2009 and should be applied prospectively. The implementation of SFAS 165 did not have a material impact on the Company’s financial statements. In accordance with SFAS No. 165, the Company assessed subsequent events through August 14, 2009, the date of issuance of these condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of this standard to have an impact on its financial position or results of operations.

In April 2009, the FASB released FASB Staff Position (“FSP”) 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about the fair value of financial instruments (“FSP SFAS 107-1 and APB 28-1”) This pronouncement amends FASB 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in the interim financial statements as well as in the annual financial statements. FSP SFAS 107-1 and APB 28-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information in interim financial statements. In addition, the FSP requires disclosures of the methods and significant assumptions used to estimate the fair value of those financial instruments. The adoption of the FSP did not have any impact on the Company’s financial statements.

In June 2008, the Emerging Issues Task Force (“EITF”) ratified Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 clarifies how to determine whether certain instruments or features were indexed to an entity’s own stock. The consensus will replace EITF 01-6 as a critical component of the literature applied to evaluating financial instruments for debt or equity classification and embedded features for bifurcation as derivatives. EITF 07-5 became effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of EITF 07-5 on January 1, 2009 did not have a material effect on the Company’s financial statements.

MIKROS SYSTEMS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“LASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

NOTE 3 – REVENUE RECOGNITION

The Company is engaged in research and development contracts with the Federal Government to develop certain technology to be utilized by the US Department of Defense. The contracts are cost plus fixed fee contracts and the Company accounts for these contracts within the scope of Chapter 11 of Accounting Research Bulletin No. 43, Government Contracts or Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts using the percentage-of -completion accounting method. Under this method, revenue is recognized based on the extent of progress towards completion of the long term contract.

The Company generally uses a variation of the cost to cost method to measure progress for all long term contracts unless it believes another method more clearly measures progress towards completion of the contract.

Revenues are recognized as costs are incurred and include estimated earned fees, or profit, calculated on the basis of the relationship between costs incurred and total estimated costs at completion.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of June 30, 2009 and December 31, 2008, we had no unbilled revenues. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of June 30, 2009 and December 31, 2008, we had no advanced billings.

MIKROS SYSTEMS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 4 – REDEEMABLE SERIES C PREFERRED STOCK

The Redeemable Series C Preferred Stock is not convertible into any other class of the Company’s stock, is subject to redemption at the Company’s option at any time, and if certain events occur, such as capital reorganizations, consolidations, mergers, or sale of all or substantially all of the Company’s assets, is subject to mandatory redemption. Upon any liquidation, dissolution or winding up of the Company, each holder of Redeemable 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 $16.09 for each share of Redeemable Series C Preferred Stock held by such holder.

NOTE 5 – SHAREHOLDER’S EQUITY

SERIES B CONVERTIBLE PREFERRED STOCK

Each share of Series B Convertible 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 per share 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 Redeemable 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.

CONVERTIBLE PREFERRED STOCK

Each share of Convertible Preferred Stock is entitled to dividends when, as and if declared by the Board of Directors of the Company and in the event any dividend is payable to holders of the Company’s common stock, each share is entitled to receive a dividend equal to the amount of such common stock dividend multiplied by the number of shares of common stock into which each share of convertible preferred stock may be converted. Shares of Convertible Preferred Stock can be redeemed in whole but not in part, at the Company’s option for $1.00 per share. Holders of Convertible Preferred Stock are entitled to cast one vote per share on all maters to be voted on by the Company’s shareholders. Each share of Convertible Preferred Stock is convertible at any time into one share of common stock at a conversion price of $1.00 per share, subject to adjustment in certain circumstances. Upon any liquidation, dissolution or winding up of the Company, each holder will be entitled to be paid, after holders of Redeemable Series C Preferred Stock and Series B Preferred Stock have been paid in full, $1.00 per share.

SERIES D PREFERRED STOCK

The Series D Preferred Stock provided for an annual cumulative dividend of $.10 per share and entitles holders to cast one vote per share on all matters to be voted on by the Company’s shareholders. 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 Company, each holder of Series D Preferred Stock will be entitled to be paid, after all distributions or payments are made upon the Company’s Convertible Preferred Stock, Series B Preferred Stock, and Redeemable Series C Preferred Stock, an amount in cash equal to $1.00 plus all unpaid cumulative dividends 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.

MIKROS SYSTEMS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

SERIES D PREFERRED STOCK

Effective January 2006, the holders of the shares of Series D Preferred Stock agreed to waive future accumulation of dividends, effective as of January 1, 2006. As of December 31, 2005, there were dividends in arrears on shares of Series D Preferred Stock of $828,000. Such waiver does not affect dividends accrued through December 31, 2005. Accordingly, $828,000 of such undeclared dividends in arrears remain outstanding at June 30, 2009.

NOTE 6 – EARNINGS PER SHARE

The Company’s calculation of earnings per share is as follows for the periods presented: To be updated

	Three Months Ended				Six Months Ended
	June 30, 2009		June 30, 2008		June 30, 2009		June 30, 2008
Net income applicable
to common Stockholders	$	18,966	$	34,366	$	9,117	$	45,119

Average basic
shares outstanding		31,766,753		31,766,753		31,766,753		31,766,753

Assumed conversion
of preferred stock		3,562,299		3,307,299		3,562,299		3,307,299

Effect of dilutive
Options		72,682		157,182		64,022		162,690

Average diluted
shares outstanding		35,401,734		35,231,234		35,393,074		35,237,012

Net earnings per common share
basic and diluted	$	0.00	$	0.00	$	0.00	$	0.00

For the three and six months ended June 30, 2009 and 2008, the following potential shares of common stock and their effects on income were excluded from the diluted net income per share calculation because their effect would be anti-dilutive:

At June 30, 2009 and 2008, options to purchase 420,000 shares and 440,000 shares of common stock, respectively, at prices ranging from $0.55 to $0.62 per share were excluded from the calculation.

MIKROS SYSTEMS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 6 – INCOME TAX MATTERS

The Company conducts an on-going analysis to review the deferred tax assets and the related valuation allowance that it has recorded against deferred tax assets, primarily associated with Federal net operating loss carryforwards. As a result of this analysis and the actual results of operations, the Company has decreased its net deferred tax assets by $8,697 and $39,743 during the six months ended June 30, 2009 and 2008, respectively. Income tax expense includes expense associated with state tax liabilities

NOTE 7 – SHARE BASED COMPENSATION

During the three and six months ended June 30, 2009, the Company did not issue any stock options. In accordance with the recognition provisions of SFAS No. 123(R), the Company recognized stock-based compensation expense of $7,988 and $10,650 for the three months ended June 30, 2009 and 2008, respectively, and $15,225 and $19,814 for the six months ended June 30, 2009 and 2008, respectively. No tax benefits were recognized related to this stock-based compensation.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation there on or similar terminology or expressions.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from results proposed in such statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations 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 Innovative Research (SBIR) grants, competitive pricing pressures, market acceptance of our products under development, delays in the development of products, and statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission.

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 no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.

Item 2. Management’s Discussion and Analysis of Financial Position and Results of Operations

Mikros Systems Corporation (the “Company”, “we” or “us”) was founded in 1978. We are an advanced technology company specializing in the research and development of electronic systems technology primarily for military applications. Classified by the U.S. Department of Defense (DoD) as a small business, our capabilities include technology management, electronic systems engineering and integration, radar systems engineering, combat/command, control, communications, computers and intelligence (C4I) systems engineering, and communications engineering.

Overview

Our primary business focus is to pursue Small Business Innovation Research (SBIR) programs from the U.S. Department of Defense, Department of Homeland Security, and other governmental authorities, and to expand this government funded research and development into products, services, and business areas of the Company. Since 2002, we have been awarded a number of Phase I, II, and III SBIR contracts.

Revenues from our government contracts represented 100% of our revenues for the three and six months ended June 30, 2009 and 2008. We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products for both the government and commercial marketplace.

Below is a brief description of certain of the material projects we are working on at this time.

Adaptive Diagnostic Electronic Portable Testset (ADEPT®)

Originally designated as the Multiple Function Distributed Test and Analysis Tool (MFDAT), the Adaptive Diagnostic Electronic Programmable Test-Set (ADEPT®) began as a SBIR investigation in 2002. Additional ADEPT development was completed through a series of SBIR grants and contracts. ADEPT is an automated maintenance workstation designed to significantly reduce the man-hours required to align the AN/SPY-1 Radar System aboard U.S. Navy AEGIS cruisers and destroyers, while optimizing system performance and readiness. ADEPT represents a new approach to Navy shipboard maintenance, integrating modular instrumentation cards in a rugged enclosure with an onboard computer, input and output devices, networking hardware, removable hard drives, and a touch screen display. A custom software application provides the user interface and integrates the hardware with a database that stores user information, instrument readings, maintenance requirements, and training aids. ADEPT is designed to be adapted to other complex shipboard systems, and to provide integrated distance support capabilities for remote diagnostics and troubleshooting by shore-based Navy experts.

Key anticipated benefits of ADEPT include:

Significant reduction in system calibration, alignment, maintenance, and repair times;

Improved system readiness, availability, and performance;

More effective use of technical manpower through increased automation, distance support, and interactive training;

Distance support capable enabling “expert” remote (shore-based) system support and fleet-wide system analysis;

Reduction in the amount of electronic test equipment required for organizational level support; and

Modular and programmable to overcome current test equipment obsolescence issues and to support capability enhancements in future systems.

ADEPT is being provided to the Navy’s Cruisers (CGs) and Destroyers (DDGs), through the US Navy’s Cruiser and Destroyer modernization program. On September 29, 2008, we were awarded an $800,000 modification to our contract with NSWCPHD for eight ADEPT LRIP units and additional logistics development work. The logistics effort includes development of fielding support and calibration plans required for widespread use of ADEPT aboard U.S. Navy ships. In April 2009, we received a $450,000 contract award for four ADEPT V2 systems which are scheduled for delivery to the USS Mobile Bay (CG-53) and the USS Philippine Sea (CG-58) by the end of 2009.

The goal of this program is to obtain a multi-year Indefinite-Delivery, Indefinite-Quantity (IDIQ) contract for production, engineering, and logistics support. We anticipate this contract award and additional orders for ADEPT equipment in the third quarter of 2009. It should be noted that contracting with the Federal Government is a lengthy and complex process and that many factors could materialize that would negatively impact our ability to secure this contract and future ADEPT orders.

Wireless Local Area Network Systems

Since June 2004, we have been working with the Office of Naval Research regarding emerging Wireless Local Area Network systems (WLANs) and DoD radar systems to, among other things, evaluate and quantify the potential improvements which may be afforded by selected mitigation techniques. We continue to perform contracts in connection with this project and are working closely with engineers from the Naval Air Warfare Center Weapons Division (NAWCWD), located in China Lake, California. NAWCWD, a division of Naval Air Systems Command (NAVAIR), is responsible for "Arming the Fleet". The technical objective of this effort is to develop simulation models that can be used to predict the performance of data links in a jamming environment.

Radar Wireless Spectral Efficiency (RWSE)

Since May 2006, we have been involved in research and development under the SBIR topic entitled RWSE which is focused on the real world implications of incorporating wireless networking into the aircraft carrier (CVN platform) environment. The overall technical objective is to facilitate the introduction of commercial wireless communication systems, e.g. Wi-Fi, onto U.S. Navy ships through the: (1) identification and testing of potential own-ship electromagnetic interference (EMI) issues; (2) development and testing of viable mitigation technologies to overcome adverse EMI effects; and (3) development of a CVN Wi-Fi network planning tool to support networking within a highly reconfigurable shipboard environment. This project was initially for the CVN platform, but is expected to eventually be applicable to other U.S. Navy ships.

Our engineers have performed Wi-Fi propagation surveys aboard the aircraft carrier USS GEORGE WASHINGTON (CVN-73), the amphibious assault ship USS BATAAN (LHD-5), and the U.S. Navy amphibious assault ship USS KEARSARGE (LHD-3). This project has evolved to include the development of AIRchitect - EMC, a software package which allows the Navy to plan and optimize deployment of shipboard WiFi networks, with our team partner Mobilisa Inc. AIRchitect - EMC is designed to place shipboard Access Points to optimize coverage based on user-specified wireless requirements and analyze potential interference between network equipment and onboard RF systems such as radars, and where possible, mitigate interference using smart placement and channel selection algorithms. AIRchitect - EMC is expected to be used by the Navy to plan network deployments on aircraft carriers (CVNs) and other platforms.

Additional Contracts and Recent Developments

In October 2007, we were awarded an SBIR Phase I contract through SPAWAR. This $100,000 effort titled “Small Buoy for Energy Harvesting” will collaborate in the design and development of a miniaturized, self-powered ocean buoy which can be deployed at sea for extended periods to support various on-board payload packages, such as network communications nodes. This communication package is designed to allow submarines to communicate with the Battle Group while operating at speed and depth. This contract was structured as a base effort worth $70,000, and an option worth $30,000. The option was exercised on October 30, 2008, and we are pursuing an SBIR Phase II follow-on contract with this customer. If awarded, we could receive $750,000 or more to further develop this technology.

In February 2009, we were awarded a $68,000 production support contract on the Navy’s Next Generation Command and Control Processor (NGC2P) program by Northrop Grumman Corporation. The NGC2P system is a tactical data link (TDL) communications processor which provides warfighters with critical real-time information during combat operations. We anticipate future work with Northrop Grumman in areas associated with our expertise in electronic systems development and wireless technologies.

In February 2009, we were awarded a $9,991 subcontract from Gnostech, Inc of Warminster, Pennsylvania for engineering services in support of Gnostech’s program "GPS Scenario Development and Test Support for both Electronic Protection and Electronic Attack Threat Environment".

In April 2009, we were awarded a $22,000 purchase order from Ocean Power Technologies, Inc. (OPT). We have teamed with OPT and Rutgers University to develop and test the Littoral Expeditionary Autonomous Power Buoy system for the US Navy’s NUWC Keyport Program Office. The LEAP system is designed for persistent littoral surveillance applications, and combines the OPT PowerBuoy technology with advanced multistatic radar and data fusion capabilities originally developed at Rutgers. Mikros will provide system architecture, design and integration support for the program.

In May 2009, we were awarded a $45,000 contract by the Navy to continue wireless network design studies for the new CVN-78 aircraft carrier USS Gerald R. Ford. This program is a follow-on to work we performed in 2008 on network modeling and simulation for the Navy's PMW 750 Carrier Integration group.

In June 2009, we were awarded a $225,000 contract by DRS C3 Systems of Gaithersburg, MD for the interface definition of distance support applications for the Common Digital Sensor Architecture (CDSA) program. The CDSA Program will provide a common computing platform for above water sensors and will reduce the knowledge and skills required to operate and maintain the sensor systems, as well as improve the quality, quantity, and compatibility of collected field data. Sharing of sensor data using existing and planned US Navy distance support technologies is a key element for successful. This work is an extension of the distance support experience Mikros gained under Adaptive Diagnostic Electronic Portable Testset (ADEPT) development contracts with the US Navy.

Key Performance Indicator

As substantially all of our revenue is derived from SBIR contracts with the federal government, our key performance indicator is the dollar volume of contracts awarded to us. Increases in the number and value of contracts awarded will generally result in increased revenues in future periods and assuming relatively stable variable costs associated with our fulfilling such contracts, 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.

Competition in the SBIR arena is intense, and we compete against numerous small businesses for SBIR awards. We believe that the primary competitive factors in obtaining SBIR contracts are technical expertise, prior relevant experience, and cost. Our history of completing projects in a timely and efficient manner as well as the experience of our management and technical personnel position us well to compete for future SBIR grants.

Outlook

Our strategy for continued growth is three-fold. First, we expect to continue expanding our technology base, backlog and revenue by continuing our active participation in the DoD SBIR 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. We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products, such as the ADEPT described above, with broad appeal in both the government and commercial marketplace. This state-of-the-art test equipment can be used by many commercial and governmental customers such as the FAA, radio and television stations, cell phone stations, and airlines. Second, we will continue to pursue SBIR projects with the Department of Homeland Security, the U.S. Navy, and other government agencies. Third, we believe that through our marketing of products such as ADEPT we will develop key relationships with prime defense system contractors. Our strategy is to develop these relationships into longer-term, key subcontractor roles on future major defense programs awarded to these prime contractors.

In 2009, our primary strategic focus will be to continue to: (i) establish ourselves as a premium provider of research and development and product development services to the defense industry; and (ii) grow our business, generate profits and increase our cash reserves through obtaining additional SBIR contracts and positioning the Company to obtain future SBIR contracts. From an operational prospective, we expect to focus substantial resources on generating sales of our ADEPT product. We intend to capitalize on the Navy modernization program which could result in two or three ADEPT units being placed on each destroyer and cruiser in the U.S. Navy, with the potential to install multiple units on additional U.S. Navy ships and submarines.

Over the longer term, we expect to further develop technology based on existing and additional SBIR contracts and to develop these technologies into products for wide deployment to Department of Defense customers and contractors as well as developing potential commercial applications. For example, we recently entered into a memorandum of understanding with a global provider of telecommunications equipment and related services pursuant to which we will assist the global provider in marketing its products to the DoD.

Changes to Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. As of June 30, 2009, there have been no changes to such critical accounting policies and estimates.

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, recoverability of long-lived assets, income taxes and commitments. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Results of Operations

Three Months Ended June 30, 2009 and 2008

We generated revenues of $636,476 during the three months ended June 30, 2009 compared to $1,062,832 during the three months ended June 30, 2008, a decrease of $426,356 or 40.1%. The decrease was primarily due to the delay in receipt of follow-on contracts from the Federal Government.

Cost of revenues consist of direct contract costs such as labor, material, subcontracts, travel, and other direct costs. Cost of revenues for the three months ended June 30, 2009 were $282,591 compared to $617,672 for the three months ended June 30, 2008, a decrease of $335,081 or 54.2%. The decrease was primarily due to the delay in receipt of follow-on contracts from the Federal Government resulting in lower subcontractor and material costs and the change of distribution of direct costs from 2008 to 2009.

Substantially all 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 June 30, 2009 were $142,582 compared to $157,055 for the three months ended June 30, 2008, a decrease of $14,473 or 9.2%. The decrease was due primarily to incentive compensation and consultant fees which was offset by an increase in engineering salaries.

General and administrative expenses (“G&A”) consist primarily of salary, consulting fees paid to bid and proposal consultants and related costs, professional fees, business insurance, corporate taxes, stock registrar and public company related costs, travel, and unallowable expenses. General and administrative costs for the three months ended June 30, 2009 were $167,900 compared to $210,801 for the three months ended June 30, 2008, a decrease of $42,901 or 20.3 %. The decrease was due primarily to a reduction of G&A salaries, outside services, G&A travel and consultants, and no incentive compensation costs.

The application of the estimated effective income tax rate to the financial activity of the three months ended June 30, 2009 resulted in a tax expense of $24,407. At June 30, 2009, the anticipated effective income tax rate of 62.1% is attributable to state income taxes and income tax related to permanent differences.

We generated net income of $18,996 during the three months ended June 30, 2009 as compared to net income of $34,366 during the three months ended June 30, 2008. The decrease was due to a delay in receiving follow-on contracts from the Federal Government.

Six Months Ended June 30, 2009 and 2008

We generated revenues of $1,143,785 during the six months ended June 30, 2009 compared to $1,714,114 for the same period in 2008, a decrease of $570,329 or 33.3%. The decrease was primarily due to the delay in receipt of follow-on contracts from the Federal Government.

Cost of revenues for the six months ended June 30, 2009 were $484,721 compared to $924,026 for the six months ended June 30, 2008, a decrease of $439,305 or 47.5%. The decrease was primarily due to the delay in receipt of follow-on contracts from the Federal Government resulting in lower subcontractor and material costs and the change of distribution of direct costs from 2008 to 2009.

Engineering costs for the six months ended June 30, 2009 were $297,147 compared to $285,430 for the six months ended June 30, 2008, an increase of $11,717 or 4.1%. The increase was due to additional engineering salaries and medical benefit expenses, offset by a decrease in engineering consultant costs and no incentive compensation costs.

General and administrative costs for the six months ended June 30, 2009 were $340,999 compared to $405,597 for the six months ended June 30, 2008, a decrease of $64,598 or 16%. The decrease was due primarily to a reduction of G&A salaries, outside services, G&A travel and consultants, and no incentive compensation costs.

The application of the estimated effective income tax rate to the financial activity of the six months ended June 30, 2009 results in a tax expense of $11,804. At June 30, 2009, the anticipated effective income tax rate of 62.1% is attributable to state income taxes and income tax related to permanent differences.

We generated net income of $9,117 during the six months ended June 30, 2009 as compared to net income of $45,119 during the six months ended June 30, 2008. The decrease was due to a delay in receiving follow-on contracts from the Federal Government.

Liquidity and Capital Resources

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

During the six months ended June 30, 2009, net cash used in operations was $174,036 compared to $68,305 during the six months ended June 30, 2008. The increase was due primarily to the payment of $91,800 of accrued incentive compensation, a $45,718 increase in accounts receivable, and a decrease in accounts payable. We had working capital of $584,974 as of June 30, 2009 as compared to working capital of $554,352 at December 31, 2008.

On January 9, 2009, we entered into a $50,000 line of credit agreement with Sun National Bank (“Sun”). The line of credit will be available to us for one year. The line of credit is secured by a $50,000 Certificate of Deposit with Sun.

We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months.

In order to pursue strategic opportunities, obtain additional SBIR contracts, or acquire strategic assets or businesses, we may need to obtain additional financing or seek strategic alliances or other partnership agreements with other entities. In order to raise any such financing, we anticipate considering the sale of additional debt or equity securities under appropriate market conditions. There can be no assurance, assuming we successfully raise additional funds or enter into business alliances, that any such transaction will achieve profitability or generate positive cash flow.

Contractual Obligations

We lease our engineering office in Fort Washington, Pennsylvania pursuant to a five-year lease which continues through November 30, 2010. Our current monthly lease payment is $5,613, and is subject to an annual increase.

In February 2009, we executed a lease for a facility in Largo, Florida which will support production of our Advanced Diagnostic Electronic Portable Testset (ADEPT) product line, including quality assurance, field support, and life cycle management. The lease agreement runs through February 2010 for a total cost of $8,162 per year.

Off-Balance Sheet Arrangements

As of June 30, 2009, 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 4T. 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 president, who serves as our principal executive officer and principal financial officer. Based upon that evaluation, our president concluded that as of June 30, 2009, 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 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to management, including our president, in order to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d-15(f)) that occurred during the fiscal quarter ended June 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

Exhibit 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.

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MIKROS SYSTEMS CORPORATION

August 14, 2009	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney President (Principal Executive Officer and Principal Financial Officer)