10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

or

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

For the transition period from _____to_____.

Commission File Number: 000-14801

Mikros Systems Corporation

(Exact name of registrant as specified in its charter)

Delaware	14-1598200
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey 08540 (Address of Principal Executive Offices)

(609) 987-1513

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes    ☐ No

Indicate by check mark whether the registrant has submitted electronically 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). ☒ Yes    ☐ No

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 ☐	Accelerated filer     ☐
Non-accelerated filer ☐	Smaller reporting company ☒

(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). ☐

Yes ☒ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 32,018,753 issued and outstanding shares of the issuer’s common stock, $.01 par value per share, on November 13, 2015.

TABLE OF CONTENTS

		PAGE #
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Balance Sheets as of September 30, 2015 and December 31, 2014 (unaudited)	1
	Condensed Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)	2
	Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (unaudited)	3
	Notes to Condensed Financial Statements (unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4.	Controls and Procedures	19
PART II.	OTHER INFORMATION
Item 6.	Exhibits	20
	Signatures	21

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

Mikros Systems Corporation

Condensed Balance Sheets (unaudited)

	September 30, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	1,645,255		$	1,161,634
Receivables on government contracts		1,022,107			1,575,954
Prepaid expenses and other current assets		95,607			105,197
Deferred tax asset, current		28,065			28,065
Total current assets		2,791,034			2,870,850
Property and equipment:
Equipment		64,379			61,686
Furniture & fixtures		14,728			14,728
Less: accumulated depreciation		(67,251	)		(62,123	)
Property and equipment, net		11,856			14,291
Intangible Asset		127,383			1,383
Less: accumulated amortization		(6,527	)		(1,173	)
Intangible assets, net		120,856			210
Deferred tax assets		78,935			140,935
Total assets	$	3,002,681		$	3,026,286
Liabilities and shareholders' equity
Current liabilities:
Accrued payroll and payroll taxes	$	433,170		$	493,308
Accounts payable and accrued expenses		161,244			688,534
Accrued warranty expense		139,410			33,500
Deferred revenue		36,000			-
Total current liabilities		769,824			1,215,342
Long-term liabilities		129,052			7,770
Total liabilities		898,876			1,223,112
Commitments and contingencies (Note 9)
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 32,018,753 shares at September 30, 2015 and December 31, 2014, respectively		320,188			320,188
Capital in excess of par value		11,631,121			11,628,728
Accumulated deficit		(9,948,428	)		(10,246,666	)
Total shareholders' equity		2,023,355			1,722,724
Total liabilities and shareholders' equity	$	3,002,681		$	3,026,286

See Notes to Unaudited Condensed Financial Statements

1

Mikros Systems Corporation

Condensed Statements of Operations and Comprehensive Income (Loss)

(unaudited)

	Three Months Ended,					Nine Months Ended,
	September 30,		September 30,			September 30,		September 30,
	2015		2014			2015		2014
Contract revenues	$	1,240,393	$	1,057,442		$	5,450,815	$	3,150,584
Cost of sales		529,303		431,701			2,868,377		1,284,081
Gross margin		711,090		625,741			2,582,438		1,866,503
Expenses:
Engineering		309,769		329,864			1,058,705		832,517
General and administrative		328,734		213,956			951,331		806,591
Total expenses		638,503		543,820			2,010,036		1,639,108
Income from operations		72,587		81,921			572,402		227,395
Interest income		149		95			336		316
Net income before income taxes		72,736		82,016			572,738		227,711
Income tax expense (benefit)		36,000		(45,419	)		274,500		(21,973	)
Net income	$	36,736	$	127,435		$	298,238	$	249,684
Other comprehensive income (loss)		-		-			-		-
Comprehensive income	$	36,736	$	127,435		$	298,238	$	249,684
Income per common share - basic	$	-	$	-		$	0.01	$	0.01
Basic weighted average number of shares outstanding		31,947,753		31,904,786			32,064,778		31,892,694
Income per common share - diluted	$	-	$	-		$	0.01	$	0.01
Diluted weighted average number of shares outstanding		35,548,552		35,509,307			35,665,577		35,488,707

See Notes to Unaudited Condensed Financial Statements

2

Mikros Systems Corporation

Condensed Statements of Cash Flows

(unaudited)

	Nine Months Ended
	September 30, 2015			September 30, 2014
Cash flows from operating activities
Net income	$	298,238		$	249,684
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,482			4,707
Deferred tax expense (benefit)		62,000			(34,000	)
Share-based compensation expense		2,043			9,703
Changes in operating assets and liabilities:
Decrease (Increase) in receivables on government contracts		553,847			(211,821	)
Decrease (Increase) in prepaid expenses and other current assets		9,590			(2,579	)
(Decrease) Increase in accrued payroll and payroll taxes		(60,138	)		218,004
(Decrease) Increase in accounts payable and accrued expenses		(527,290	)		41,745
Increase (Decrease) in accrued warranty expense		105,910			(1,690	)
Increase in deferred revenue		36,000			-
Decrease in long-term liabilities		(4,718	)		(3,422	)
Net cash provided by operating activities		485,964			270,331
Cash flows from investing activities:
Purchase of property and equipment		(2,693	)		(11,890	)
Net cash used in investing activities:		(2,693	)		(11,890	)
Cash flows from financing activities:
Proceeds received upon the exercise of stock options		350			350
Net cash provided by financing activities		350			350
Net increase in cash and cash equivalents		483,621			258,791
Cash and cash equivalents, beginning of period		1,161,634			1,028,146
Cash and cash equivalents, end of period	$	1,645,255		$	1,286,937
Supplemental cash flow information:
Cash paid during the period for income taxes	$	215,183		$	558
Supplemental non-cash investing activity:
Estimated consideration to be paid in connection with purchase of intangible asset	$	126,000		$	-

See Notes to Unaudited Condensed Financial Statements

3

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”) 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, 2014.

In the opinion of the Company’s management, the accompanying unaudited interim condensed financial statements contain all adjustments necessary to present fairly its financial position as of September 30, 2015, and the results of its operations for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 30, 2015 and 2014. Changes in the Company’s stockholders’ equity from December 31, 2014 to September 30, 2015 are a result of share-based compensation expense of $2,043, proceeds received upon the exercise of options of $350, and net income of $298,238.

Interim results are not necessarily indicative of results for the full fiscal year.

Note 2 – Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The amendment in this ASU provides guidance on the revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle of this update provides guidance to identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligations in the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. This standard will replace most existing revenue recognition guidance. On July 9, 2015, the FASB approved a one-year deferral of the effective date of this standard to 2018 for public companies, with an option that would permit companies to adopt the standard as early as the original effective date of 2017. Early adoption prior to the original effective date is not permitted. The Company has not yet selected a transition method nor has the Company determined the effect of the standard on our financial position and results of operations.

4

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Note 3 – Significant Accounting Policies

Revenue Recognition

The Company is engaged in research and development contracts with the federal government to develop certain technology to be utilized by the U.S. Department of Defense (“DoD”). The contracts are cost plus fixed fee contracts and revenue is recognized on the basis of such measurement of partial performance as will reflect reasonably assured realization or delivery of completed articles. Fees earned under the Company’s contracts may also be accrued as they are billable, under the terms of the agreements, unless such accrual is not reasonably related to the proportionate performance of the total work or services to be performed by the Company from inception to completion. Under the terms of certain contracts, fixed fees are not recognized until the receipt of full payment has become unconditional, that is, when the product has been delivered and accepted by the Federal government. Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. The Company’s backlog includes future Adaptive Diagnostic Electronic Portable Testset (“ADEPT”) units to be developed and delivered to the Federal government.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. The Company had unbilled revenues of $38,884 and $34,366 included in receivables on government contracts as of September 30, 2015 and December 31, 2014, respectively. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of September 30, 2015 and December 31, 2014, the Company had no advanced billings.

Warranty Expense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the 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 rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended September 30, 2015 and 2014, the Company recognized warranty (recoveries) expense of $106,800 and $(10,744), respectively, and $113,400 and (1,690) for the nine months ended September 30, 2015 and 2014, respectively. Since the inception of the IDIQ contract in March 2010, the Company has delivered 163 ADEPT units. As of September 30, 2015, there are 41 ADEPT units that remain under limited warranty coverage. As of September 30, 2015 and December 31, 2014, the Company had an accrued warranty expense of $139,410 and $33,500, respectively.

The following table reflects the reserve for product warranty activity as of September 30, 2015 and December 31, 2014:

	2015			2014
Reserve for product warranty, beginning of period	$	33,500		$	35,190
Provision for product warranty		136,700			51,210
Product warranty expirations		(23,300	)		(52,900	)
Product warranty costs paid		(7,490	)		-
Reserve for product warranty, end of period	$	139,410		$	33,500

Research and Development Costs

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 of $24,890 and $1,724 for the three months ended September 30, 2015 and 2014, respectively, and $34,625 and $5,021, for the nine months ended September 30, 2015 and 2014, respectively.

5

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Intangible Assets

A majority of the Company’s intangible assets consist of a license acquired in July 2015. Trade names and trademarks with finite lives are amortized using the straight-line method over their estimated useful lives. Licenses are amortized using a straight-line method over their estimated life of six years.

6

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Note 4 – Income (Loss) Per Share

For periods with net income, net income per common share information is computed using the two-class method. Under the two-class method, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Basic net loss attributable to common stockholders is computed by an adjustment to subtract from net income the portion of current period earnings that the preferred shareholders would have been entitled to receive pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the convertible preferred shares have no obligation to fund losses.

The table below sets forth the calculation of the percentage of net earnings (loss) allocable to common shareholders under the two-class method:

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2015			2014			2015			2014
Basic Income per Share:
Net income applicable to common shareholders - basic	$	36,736		$	127,435		$	298,238		$	249,684
Portion allocable to common shareholders		99.2	%		99.2	%		99.2	%		99.2	%
Net earnings allocable to common shareholders		36,442			126,416			295,852			247,687
Weighted average basic shares outstanding Basic income per share		31,947,753			31,904,786			32,064,778			31,892,694
Basic income per share	$	-		$	-		$	0.01		$	0.01
Dilutive Income Per Share:
Net income applicable to common shareholders		36,442			126,416			295,852			247,687
Add: Undistributed earnings allocated to participating securities		294			1,019			2,386			1,997
Numerator for diluted income per share		36,736			127,435			298,238			249,684
Weighted average shares outstanding - basic		31,947,753			31,904,786			32,064,778			31,892,694
Diluted effect:
Stock options		19,250			20,222			19,250			18,000
Unvested restricted stock awards		19,250			-			19,250			-
Conversion equivalent of diluted Series B Convertible Preferred Stock		3,307,299			3,307,299			3,307,299			3,307,299
Conversion equivalent of diluted Convertible		255,000			255,000			255,000			255,000
Restricted stock options		-			22,000			-			15,714
Weighted average dilutive shares outstanding		35,548,552			35,509,307			35,665,577			35,488,707
Dilutive income per share	$	-		$	-		$	0.01		$	0.01

7

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Numerator
Weighted average participating common shares		31,947,753			31,904,786			32,064,778			31,892,694
Denominator:
Weighted average participating common shares		31,947,753			31,904,786			32,064,778			31,892,694
Add: Weighted average shares of Convertible Preferred Stock		255,000			255,000			255,000			255,000
Weighted average participating shares		32,202,753			32,159,786			32,319,778			32,147,694
Portion allocable to common shareholders		99.2	%		99.2	%		99.2	%		99.2	%

8

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Diluted net income (loss) per share for the three and nine months ended September 30, 2015 and 2014 does not reflect the following potential common shares, as the effect would be antidilutive.

	September 30, 2015		September 30, 2014
Stock options		610,000		610,000
		610,000		610,000

Note 5 – 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 $62,000 during the nine months ended September 30, 2015. The net deferred tax assets increased by $34,000 during the nine months ended September 30, 2014. The change in deferred tax assets is attributable to utilization of income tax attributes, primarily federal net operating losses, as the Company anticipates annual earnings from operations to continue.

9

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Note 6 – Share-Based Compensation

During the three and nine months ended September 30, 2015 and 2014, the Company did not issue stock awards. During the nine months ended September 30, 2014, 7,000 options were exercised for proceeds in the amount of $350. The Company recognized stock-based compensation expense for stock options of $37 and $969 for the three months ended September 30, 2015 and 2014, respectively. The Company recognized stock-based compensation expense for stock options of $111 and $6,649 for the nine months ended September 30, 2015 and 2014, respectively. The intrinsic value of the options as of September 30, 2015 is $3,080.

As of September 30, 2015 and 2014, there were 44,000 restricted stock awards outstanding. The Company recognized stock-based compensation expense for restricted stock of $644 and $1,018 for the three months ended September 30, 2015 and 2014, respectively. The Company recognized stock-based compensation expense for restricted stock of $1,932 and $3,054 for the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, there was $2,695 of unrecognized stock-based compensation expense related to all outstanding equity awards that will be recognized in a future periods.

10

Mikros Systems Corporation

Notes to Condensed Financial Statements (unaudited)

Note 7 – Related Party Transactions

Paul Casner, the chairman of the Company’s board of directors, also serves as the executive chairman and CEO of Atair Aerospace Incorporation. Atair provided subcontracting services to the Company relating to the design of the chassis component within the ADEPT units. During the three months ended September 30, 2015 and 2014, the Company incurred subcontracting service costs from Atair of $0 and $6,779, respectively. During the nine months ended September 30, 2015 and 2014, the Company incurred subcontracting service costs from Atair of $2,279 and $33,468, respectively.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report 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- looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward- looking statements include: 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, 2014 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 (“Mikros,” the “Company,” “we” or “us”) is an advanced technology company specializing in the research, development and production of electronic systems, primarily for military applications. Classified by the Department of Defense (“DoD”) as a small business, our capabilities include technology management, electronic systems engineering and integration, radar systems engineering, command, control, communications, computers and intelligence (“C4I”) systems engineering, and communications engineering.

Overview

Our primary business focus is to pursue SBIR and other research and development programs from the DoD, Department of Homeland Security, and other governmental authorities, and to expand this government funded research and development into products and services. Since 2002, we have been awarded several Phase I, II, and III SBIR contracts.

Revenues from our government contracts represented 100% of our revenues for the three and nine months ended September 30, 2015 and 2014. We believe that we can utilize the intellectual property developed under our various SBIR awards and our other product offerings, to develop proprietary products for both the government and commercial marketplace.

ADEPT®

Our primary source of revenue is sales of our Adaptive Diagnostic Electronic Portable Testset, or ADEPT, to the United States Navy. 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 an innovative 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. We are currently extending the ADEPT system to a second Navy radar system.

12

ADSSS

In 2013, we developed a second-generation of our Adaptive Distance Support Sensor Suite, or ADSSS, for the Littoral Combat Ship (LCS). ADSSS is a network-enabled system which can be configured to monitor multiple shipboard systems and report maintenance data onshore for further analysis to detect trends and predict failures. This development program remains on schedule internally and initial shipboard testing is planned for Summer 2016. We expect ADSSS to be used on both variants of the LCS which is currently planned to be at least 32 ships. ADSSS, with its remote monitoring and prognostics capabilities, has also generated interest in other ship classes, including Aegis, and we are currently pursuing several related opportunities.

Recent Developments

In July 2015, we purchased certain software products, intellectual property and related assets from VSE Corporation. The primary software programs purchased by us are 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. We believe that the new software products provide us with the opportunity to service commercial customers and additional DoD customers outside of the Navy. No payment was required at closing. We are required to pay the seller 30% of the gross royalty revenue generated over a six year period up to a maximum payment of $1.0 million.

In October 2015, our Quality Management System (“QMS”) was formally certified as compliant with the requirements of ISO 9001:2008. The ISO 9001 auditor found zero non-conformances at our facilities in both Fort Washington, PA and Largo, FL. Earlier this year, our QMS was certified by the Naval Sea Systems Command as compliant to NAVSEA Technical Specification 9090-310F, Appendix C and FY 2015 NAVSEA Standard Item 009-04. This Navy certification enables us to form shipboard Alteration Installation Teams and perform shipboard equipment installation and maintenance tasks. The new ISO 9001:2008 certification extends our NAVSEA certification to the leading industry-standard and applies across all of our business processes, for both development and manufacturing capabilities.

Contracts

On March 18, 2010, we were awarded and entered into a multi-year Indefinite Delivery, Indefinite Quantity (“IDIQ”) contract with the Naval Surface Warfare Center related to our ADEPT product. The contract provides for the purchase and sale of up to $26 million of ADEPT units and related engineering and logistics support. The initial term of the contract was five years, and in March 2015, the period of performance was extended through August 11, 2016. Substantially all of our revenue is attributable to our ADEPT product. In the past, we were generating revenues primarily from the production and delivery of ADEPT units. After executing the ADEPT program for four years, we now have contracts to do further research and development on ADEPT units to enhance functionality as well as provide other forms of support. We expect additional delivery orders during the remaining term of the contract.

In June 2013, we were awarded a $2.8 million service contract with Condition-Based Maintenance (“CBM”) for LCS systems using the ADSSS. This project will extend the development of the ADEPT to better facilitate the integration of multiple distributed sensors and portable data collection units, provide enhanced automated data collection and processing capabilities, and support hosting of prognostics modeling tools that use the collected data to predict remaining end of life for equipment under test components.

In August 2013, we were awarded a $5.5 million service contract under our IDIQ contract to provide necessary research, development, and program management and implementation of improvements to ADEPT units. We received an initial commitment of $0.8 million under this service contract which was increased to $2.1 million in the first quarter of 2014.

In January 2014, we were awarded a $0.5 million contract by the U.S. Navy that will extend the ADEPT system to a second Navy radar, the SPS-49 long-range air surveillance radar.

During the second quarter of 2014, we were awarded four contracts collectively valued at approximately $1.0 million to be funded over the next two years. Two of the awards are to support and improve our ADEPT product line by providing funding for continued training of Navy personnel and a new development effort to upgrade ADEPT instrumentation functions for data acquisition. The remaining two awards are to upgrade the ADSSS system for the Navy's new LCS. Under the first ADSSS contract, we will design a new portable maintenance device for shipboard use, working closely with the Naval Ship Systems Engineering Station office in Philadelphia, Pennsylvania. The second ADSSS award funds the installation of CBM equipment on the USS Fort Worth and continued shipboard testing. This "Pilot Program" extends our pilot installation of ADSSS on the USS Freedom, a project that was described by our Navy customer as "completely successful".

13

In July 2014, we were awarded additional funding of $0.3 million under the current IDIQ contract to upgrade the capabilities of the first 69 ADEPT units currently deployed in the fleet. This effort involves installing a faster and more capable controller module and upgrading the operating system software from Windows XP to Windows 7, and will be executed as units are returned for routine calibration.

In August 2014, we were awarded a major new production contract valued at $5 million for 54 additional ADEPT units. As of September 30, 2015, we have delivered 36 of these units. These systems are deployed on Navy Aegis destroyers and cruisers to support the AN/SPY-1 radar in air defense and ballistic missile defense missions. Also, in August and September 2014, we were awarded two contracts for approximately $0.2 million for ADEPT training and calibration of 34 ADEPT units. In January 2015, we were awarded an additional $0.1 million for the calibration of 31 additional ADEPT units.

In November 2014, we were awarded a contract valued at $0.1 million for technical support on the USS Fort Worth (LCS3) using the latest version of our ADSSS which will provide the SPS-75 Air Search Radar and Rolling Airframe (RAM) systems with Combat Systems (CS), CBM and Distance Support (DS) capability.

In March 2015, we received a further production contract, valued at $1.1 million, for an additional ten ADEPT units for the Aegis AN/SPY-1 radar. We have delivered two of these units and expect to deliver the balance of the units in 2015. Also during March 2015, the Navy issued an additional contract for ADEPT general engineering and support, with initial funding of $0.1 million. This contract covers various technical tasking for deployed ADEPT systems, including logistics support, customer consultation and regularly scheduled team review meetings.

In May 2015, we received a study contract valued at $30 thousand from Lockheed Martin Corporation, to start work with Lockheed Martin on CBM for Aegis systems.

In August 2015, the Navy issued a contract award valued at approximately $0.2 million for the calibration of 45 additional ADEPT units. This is the seventh contract award of this type that we have received in support of the calibration effort.

We received two contracts in September 2015, for software development on the SLA-10B and SPQ-9B radars, totaling approximately $0.25 million. We have been tasked to define how the ADEPT tool can help support testing of the SPQ-9B system on Self Defense Test Ships (SDTS).

In September 2015, we also received a contract modification for our current service contract with Condition-Based Maintenance (“CBM”) for LCS systems using the ADSSS, which added an additional $1.5 million for ongoing development. This funding will extend the program until September 30, 2016, and allow us to perform installations and support for the LCS Classes.

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 future contracts. In addition, our contracts with the Federal government contain unfavorable termination provisions and are subject to audit and modification.

14

Key Performance Indicator

As substantially all of our revenue is derived from 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. As the majority of our revenue in 2014, and expected revenue over the next twelve months, is or will be from sales of ADEPT units under our IDIQ contract and releated R&D and support, continued generation of task orders and our ability to expand the market and potential customer base for ADEPT units will be a key indicator of future revenue. ADEPT units must be serviced and calibrated every two years. Accordingly, as we continue to increase the installed base of ADEPT units and expand the units to other radar systems, we expect to continue to generate future recurring maintenance and service revenue.

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, 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. Our state-of-the-art test equipment could be used by many commercial and governmental customers such as the FAA, radio and television stations, cellular phone service providers 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, along with software products that we recently purchased from VSE, we will develop key relationships with prime defense 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 2015, our primary strategic focus is 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 ourselves to obtain future SBIR contracts. From an operational prospective, we expect to focus substantial resources on generating purchase orders under the IDIQ contract for ADEPT units, expanding ADEPT to support other radar systems, continuing to generate recurring maintenance and calibration revenue for deployed ADEPT units, and exploring commercialization opportunities. 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. As the installed base increases, we expect additional and recurring revenue for calibration and other maintenance and support. In January 2014, we were awarded a contract to extend the ADEPT system to a second U.S. Navy radar system, the SBS-49, which is expected to assist in optimizing performance for the Ballistic Missile Defense Mission.

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 DoD customers and contractors as well as developing potential commercial applications. Our new Prognostics Framework and Diagnostic Profiler offerings are expected to accelerate these initiatives. 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.

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During the past two fiscal years, the combination of spending caps, discretionary spending cuts, sequestration and further proposed reductions in defense spending has caused, and may in the future continue to cause, delays in funding certain projects. This has and may continue to adversely impact our revenues and profits.

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, 2014. As of September 30, 2015, there have been no changes to such critical accounting policies and estimates.

Results of Operations

Three Months Ended September 30, 2015 and 2014

Revenues earned are based upon the labor, subcontracting services, materials and other direct costs that we incur. Generally, labor and other direct costs generate higher revenues compared to subcontracting services and material costs. We generated revenues of $1,240,393 during the three months ended September 30, 2015 compared to $1,057,442 during the three months ended September 30, 2014, an increase of $182,951, or 17%. The increase was primarily due to the timing of the receipt of the production contracts for 64 ADEPT units.

Cost of sales consists of direct contract costs including labor, material, subcontracts, and warranty expense for ADEPT units that have been delivered, travel and other direct costs. Cost of sales for the three months ended September 30, 2015 was $529,303 compared to $431,701 for the three months ended September 30, 2015, an increase of $97,602, or 23%. The increase was due to our growth in revenue and attributable to receiving the production contracts for an aggregate of 64 ADEPT units.

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 benefits 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 30, 2015 were $309,769 compared to $329,864 for the three months ended September 30, 2014, a decrease of $20,095, or 6%. The decrease was primarily due to the decrease in incentive compensation and engineering tools and equipment offset by an increase in fringe benefits, salaries and consulting fees.

General and administrative expenses consist primarily of salary, intellectual property, consulting fees and related costs, professional fees, business insurance, franchise tax, SEC compliance costs, travel, and unallowable expenses (representing those expenses for which the government will not reimburse us). General and administrative costs for the three months ended September 30, 2015 were $328,734 compared to $213,956 for the three months ended September 30, 2014, an increase of $114,778, or 54%. The increase was primarily due to increased bid and proposal costs, professional fees, research and development, and general and administrative salaries.

At September 30, 2015, we estimated our annual effective tax rate for 2015 to be 49.5%. We recognized a tax expense of $36,000 for the three months ended September 30, 2015 primarily due to expected net income for the remainder of 2015. At September 30, 2015, the difference from the expected federal income tax rate is attributable to state income taxes, certain permanent book-tax differences. As of September 30, 2015, we had net operating loss carry forwards of $170,709, which will begin expiring in 2033 if not utilized.  

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We reported net income of $36,736 during the three months ended September 30, 2015 as compared to net income of $127,435 during the three months ended September 30, 2014. The decrease in net income was primarily attributable to income tax expense due to the tax benefit recognized from the decrease in valuation allowance established for net deferred tax assets during the three months ended September 30, 2014 and higher general and administrative costs.

Nine Months Ended September 30, 2015 and 2014

We generated revenues of $5,450,815 during the nine months ended September 30, 2015 compared to $3,150,584 during the nine months ended September 30, 2014, an increase of $2,300,231, or 73%. The increase was primarily attributable to the production contracts for an aggregate of 64 ADEPT units.

Cost of sales for the nine months ended September 30, 2015 was $2,868,377 compared to $1,284,081 for the nine months ended September 30, 2014, an increase of $1,584,296, or 123%. The increase was due to our growth in revenue and attributable to receiving the production contracts for an aggregate of 64 ADEPT units.

Engineering costs for the nine months ended September 30, 2015 were $1,058,705 compared to $832,517 for the nine months ended September 30, 2014, an increase of $226,188, or 27%. The increase was primarily due to the increase in fringe benefits, salaries, consulting fees, engineering, travel and incentive compensations, partially offset by a decrease in recruiting costs, engineering tools and equipment and computer software and related costs.

General and administrative expenses for the nine months ended September 30, 2015 were $951,331 compared to $806,591 for the nine months ended September 30, 2014, an increase of $144,740, or 18%. The increase was due primarily to an increase in salaries and professional fees, partially offset by a decrease in bid and proposal costs.

We recognized a tax expense of $274,500 for the nine months ended September 30, 2015 primarily due to expected net income for the remainder of 2015. At September 30, 2015, the difference from the expected federal income tax rate is attributable to state income taxes, certain permanent book-tax differences and the income tax benefit related to the tax benefit recognized from the decrease in valuation allowance established for net deferred tax assets. 

We reported net income of $298,238 during the nine months ended September 30, 2015 as compared to net income of $249,684 during the nine months ended September 30, 2014. The increase is primarily attributable to the award under the ADEPT contracts for an aggregate of 64 units.

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 months ended September 30, 2015, net cash provided by operations was $485,964 compared to net cash provided by operations of $270,331 during the nine months ended September 30, 2014. The increase was due to an increase in net income of $48,544, a decrease in accounts receivable partially offset by a decrease in accounts payable and accrued payroll and payroll taxes.

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During the nine months ended September 30, 2015, net cash used in investing activities was $2,693 compared to $11,890 during the nine months ended September 30, 2014. The decrease was due to less capital expenditures in 2015.

During the nine months ended September 30, 2015 and 2014, net cash provided by financing activities of $350 was attributable to cash proceeds received due to the exercise of stock options.

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 we will remain profitable or continue to generate positive cash flow.

Off-Balance Sheet Arrangements

As of September 30, 2015, 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.

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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 president, who serves as our principal executive officer and principal financial officer. Based upon that evaluation, our president concluded that as of September 30, 2015, 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 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 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 6. Exhibits

No. Description

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.

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

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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
November 16, 2015	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney
		President and Chief Financial Officer

21

EX-31.1

Exhibit 31.1

CERTIFICATION

 I, Thomas J. Meaney, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Mikros Systems Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	As the registrant’s sole certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	As the registrant’s sole certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

November 16, 2015 

/s/ Thomas J. Meaney

Thomas J. Meaney

President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certifications Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

In connection with the Quarterly Report (the “report”) of Mikros Systems Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2015, as filed with the Securities and Exchange Commission, I, Thomas J. Meaney, President and Chief Financial Officer of the Company, do hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to my knowledge:

(1)	the report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 16, 2015	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney
		President and Chief Financial Officer

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Note 4 - Income (Loss) Per Share

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Earnings Per Share [Text Block]

Note 4

–

Income

(Loss)

Per

Share

For periods with net income, net income per common share information is computed using the two-class method. Under the two-class method, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Basic net loss attributable to common stockholders is computed by an adjustment to subtract from net income the portion of current period earnings that the preferred shareholders would have been entitled to receive pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the convertible preferred shares have no obligation to fund losses.

The table below sets forth the calculation of the percentage of net earnings (loss) allocable to common shareholders under the two-class method:

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2015			2014			2015			2014
Basic Income per Share:
Net income applicable to common shareholders - basic	$	36,736		$	127,435		$	298,238		$	249,684
Portion allocable to common shareholders		99.2	%		99.2	%		99.2	%		99.2	%
Net earnings allocable to common shareholders		36,442			126,416			295,852			247,687
Weighted average basic shares outstanding Basic income per share		31,947,753			31,904,786			32,064,778			31,892,694
Basic income per share	$	-		$	-		$	0.01		$	0.01
Dilutive Income Per Share:
Net income applicable to common shareholders		36,442			126,416			295,852			247,687
Add: Undistributed earnings allocated to participating securities		294			1,019			2,386			1,997
Numerator for diluted income per share		36,736			127,435			298,238			249,684
Weighted average shares outstanding - basic		31,947,753			31,904,786			32,064,778			31,892,694
Diluted effect:
Stock options		19,250			20,222			19,250			18,000
Unvested restricted stock awards		19,250			-			19,250			-
Conversion equivalent of diluted Series B Convertible Preferred Stock		3,307,299			3,307,299			3,307,299			3,307,299
Conversion equivalent of diluted Convertible		255,000			255,000			255,000			255,000
Restricted stock options		-			22,000			-			15,714
Weighted average dilutive shares outstanding		35,548,552			35,509,307			35,665,577			35,488,707
Dilutive income per share	$	-		$	-		$	0.01		$	0.01

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Numerator
Weighted average participating common shares		31,947,753			31,904,786			32,064,778			31,892,694
Denominator:
Weighted average participating common shares		31,947,753			31,904,786			32,064,778			31,892,694
Add: Weighted average shares of Convertible Preferred Stock		255,000			255,000			255,000			255,000
Weighted average participating shares		32,202,753			32,159,786			32,319,778			32,147,694
Portion allocable to common shareholders		99.2	%		99.2	%		99.2	%		99.2	%

Diluted net income (loss) per share for the three and nine months ended September 30, 2015 and 2014 does not reflect the following potential common shares, as the effect would be antidilutive.

	September 30, 2015		September 30, 2014
Stock options		610,000		610,000
		610,000		610,000

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Note 3 - Significant Accounting Policies

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Significant Accounting Policies [Text Block]

Note

3

–

Significant

Accounting

Policies

Revenue

Recognition

The Company is engaged in research and development contracts with the federal government to develop certain technology to be utilized by the U.S. Department of Defense (“DoD”). The contracts are cost plus fixed fee contracts and revenue is recognized on the basis of such measurement of partial performance as will reflect reasonably assured realization or delivery of completed articles. Fees earned under the Company’s contracts may also be accrued as they are billable, under the terms of the agreements, unless such accrual is not reasonably related to the proportionate performance of the total work or services to be performed by the Company from inception to completion. Under the terms of certain contracts, fixed fees are not recognized until the receipt of full payment has become unconditional, that is, when the product has been delivered and accepted by the Federal government. Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. The Company’s backlog includes future Adaptive

Diagnostic

Electronic

Portable

Testset

(“ADEPT”) units to be developed and delivered to the Federal government.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. The Company had unbilled revenues of $38,884 and $34,366 included in receivables on government contracts as of September 30, 2015 and December 31, 2014, respectively. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of September 30, 2015 and December 31, 2014, the Company had no advanced billings.

Warranty

Expense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the 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 rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended September 30, 2015 and 2014, the Company recognized warranty (recoveries) expense of $106,800 and $(10,744), respectively, and $113,400 and

(1,690) for the nine months ended September 30, 2015 and 2014, respectively. Since the inception of the IDIQ contract in March 2010, the Company has delivered 163 ADEPT units. As of September 30, 2015, there are 41 ADEPT units that remain under limited warranty coverage. As of September 30, 2015 and December 31, 2014, the Company had an accrued warranty expense of $139,410 and $33,500, respectively.

The following table reflects the reserve for product warranty activity as of September 30, 2015 and December 31, 2014:

	2015			2014
Reserve for product warranty, beginning of period	$	33,500		$	35,190
Provision for product warranty		136,700			51,210
Product warranty expirations		(23,300	)		(52,900	)
Product warranty costs paid		(7,490	)		-
Reserve for product warranty, end of period	$	139,410		$	33,500

Research

and

Development

Costs

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 of $24,890 and $1,724 for the three months ended September 30, 2015 and 2014, respectively, and $34,625 and $5,021, for the nine months ended September 30, 2015 and 2014, respectively.

Intangible Assets

A majority of the Company’s intangible assets consist of a license acquired in July 2015. Trade names and trademarks with finite lives are amortized using the straight-line method over their estimated useful lives. Licenses are amortized using a straight-line method over their estimated life of six years.

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Condensed Balance Sheets (Unaudited) - USD ($)	Sep. 30, 2015	Dec. 31, 2014
Series C Preferred Stock [Member]
Liabilities and shareholders' equity
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
Series B Preferred Stock [Member]
Shareholders' equity:
Preferred stock	11,024	11,024
Convertible Preferred Stock [Member]
Shareholders' equity:
Preferred stock	2,550	2,550
Series D Preferred Stock [Member]
Shareholders' equity:
Preferred stock	6,900	6,900
Cash and cash equivalents	1,645,255	1,161,634
Receivables on government contracts	1,022,107	1,575,954
Prepaid expenses and other current assets	95,607	105,197
Deferred tax asset, current	28,065	28,065
Total current assets	2,791,034	2,870,850
Equipment	64,379	61,686
Furniture & fixtures	14,728	14,728
Less: accumulated depreciation	(67,251)	(62,123)
Property and equipment, net	11,856	14,291
Intangible Asset	127,383	1,383
Less: accumulated amortization	(6,527)	(1,173)
Intangible assets, net	120,856	210
Deferred tax assets	78,935	140,935
Total assets	3,002,681	3,026,286
Accrued payroll and payroll taxes	433,170	493,308
Accounts payable and accrued expenses	161,244	688,534
Accrued warranty expense	139,410	$ 33,500
Deferred revenue	36,000
Total current liabilities	769,824	$ 1,215,342
Long-term liabilities	129,052	7,770
Total liabilities	$ 898,876	$ 1,223,112
Commitments and contingencies (Note 9)
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 32,018,753 shares at September 30, 2015 and December 31, 2014, respectively	$ 320,188	$ 320,188
Capital in excess of par value	11,631,121	11,628,728
Accumulated deficit	(9,948,428)	(10,246,666)
Total shareholders' equity	2,023,355	1,722,724
Total liabilities and shareholders' equity	$ 3,002,681	$ 3,026,286

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Note 1 - Basis of Presentation

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

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

Note

1

–

Basis

of

Presentation

The financial statements included herein have been prepared by Mikros Systems Corporation (the “Company”) 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, 2014.

In the opinion of the Company’s management, the accompanying unaudited interim condensed financial statements contain all adjustments necessary to present fairly its financial position as of September 30, 2015, and the results of its operations for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 30, 2015 and 2014. Changes in the Company’s stockholders’ equity from December 31, 2014 to September 30, 2015 are a result of share-based compensation expense of $2,043, proceeds received upon the exercise of options of $350, and net income of $298,238.

Interim results are not necessarily indicative of results for the full fiscal year.

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Note 5 - Income Tax Matters (Details Textual) - USD ($)	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount	$ (62,000)	$ 34,000

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Note 7 - Related Party Transactions (Details Textual) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Board of Directors Chairman [Member] | Management Consulting Services [Member]
Related Party Transaction, Expenses from Transactions with Related Party	$ 0	$ 6,779	$ 2,279	$ 33,468

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Note 2 - Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Description of New Accounting Pronouncements Not yet Adopted [Text Block]

Note

2

–

Recent

Accounting

Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The amendment in this ASU provides guidance on the revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle of this update provides guidance to identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligations in the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. This standard will replace most existing revenue recognition guidance. On July 9, 2015, the FASB approved a one-year deferral of the effective date of this standard to 2018 for public companies, with an option that would permit companies to adopt the standard as early as the original effective date of 2017. Early adoption prior to the original effective date is not permitted. The Company has not yet selected a transition method nor has the Company determined the effect of the standard on our financial position and results of operations.

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Condensed Balance Sheets (Unaudited) (Parentheticals) - USD ($)	Sep. 30, 2015	Dec. 31, 2014
Series C Preferred Stock [Member]
Par value (in dollars per share)	$ 0.01	$ 0.01
Authorized (in shares)	150,000	150,000
Issued (in shares)	5,000	5,000
Outstanding (in shares)	5,000	5,000
Liquidation value	$ 80,450	$ 80,450
Series B Preferred Stock [Member]
Par value (in dollars per share)	$ 0.01	$ 0.01
Authorized (in shares)	1,200,000	1,200,000
Issued (in shares)	1,102,433	1,102,433
Outstanding (in shares)	1,102,433	1,102,433
Liquidation value	$ 1,102,433	$ 1,102,433
Convertible Preferred Stock [Member]
Par value (in dollars per share)	$ 0.01	$ 0.01
Authorized (in shares)	2,000,000	2,000,000
Issued (in shares)	255,000	255,000
Outstanding (in shares)	255,000	255,000
Liquidation value	$ 255,000	$ 255,000
Series D Preferred Stock [Member]
Par value (in dollars per share)	$ 0.01	$ 0.01
Authorized (in shares)	690,000	690,000
Issued (in shares)	690,000	690,000
Outstanding (in shares)	690,000	690,000
Liquidation value	$ 1,518,000	$ 1,518,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized (in shares)	60,000,000	60,000,000
Common stock, issued (in shares)	32,018,753	32,018,753
Common stock, outstanding (in shares)	32,018,753	32,018,753

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Note 3 - Significant Accounting Policies (Details Textual)	3 Months Ended		9 Months Ended		66 Months Ended
	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($)	Dec. 31, 2014 USD ($)
ADEPT Units [Member] | IDIQ Agreement [Member]
Units Delivered					163
Units to be Delivered	41		41		41
Licensing Agreements [Member]
Finite-Lived Intangible Asset, Useful Life			6 years
Customer Advances, Current	$ 0		$ 0		$ 0	$ 0
Government Contract Receivable, Unbilled Amounts	38,884		38,884		38,884	34,366
Product Warranty (Benefit) Expense	106,800	$ (10,744)	113,400	$ (1,690)
Standard Product Warranty Accrual, Current	139,410		139,410		$ 139,410	$ 33,500
Research and Development Expense	$ 24,890	$ 1,724	$ 34,625	$ 5,021

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Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Nov. 13, 2015
Entity Registrant Name	MIKROS SYSTEMS CORP
Entity Central Index Key	0000317340
Trading Symbol	mkrs
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		32,018,753
Document Type	10-Q
Document Period End Date	Sep. 30, 2015
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3
Amendment Flag	false

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Note 3 - Significant Accounting Policies - Reserve for Product Warranty Activity (Details) - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Reserve for product warranty, beginning of period	$ 33,500	$ 35,190
Provision for product warranty	136,700	51,210
Product warranty expirations	(23,300)	$ (52,900)
Product warranty costs paid	(7,490)
Reserve for product warranty, end of period	$ 139,410	$ 33,500

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Condensed Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Engineering [Member]
Expenses:
Engineering	$ 309,769	$ 329,864	$ 1,058,705	$ 832,517
Contract revenues	1,240,393	1,057,442	5,450,815	3,150,584
Cost of sales	529,303	431,701	2,868,377	1,284,081
Gross margin	711,090	625,741	2,582,438	1,866,503
Engineering	24,890	1,724	34,625	5,021
General and administrative	328,734	213,956	951,331	806,591
Total expenses	638,503	543,820	2,010,036	1,639,108
Income from operations	72,587	81,921	572,402	227,395
Interest income	149	95	336	316
Net income before income taxes	72,736	82,016	572,738	227,711
Income tax expense (benefit)	36,000	(45,419)	274,500	(21,973)
Net income	$ 36,736	$ 127,435	$ 298,238	$ 249,684
Other comprehensive income (loss)
Comprehensive income	$ 36,736	$ 127,435	$ 298,238	$ 249,684
Basic income per share (in dollars per share)			$ 0.01	$ 0.01
Weighted average shares outstanding - basic (in shares)	31,947,753	31,904,786	32,064,778	31,892,694
Dilutive income per share (in dollars per share)			$ 0.01	$ 0.01
Diluted weighted average number of shares outstanding (in shares)	35,548,552	35,509,307	35,665,577	35,488,707

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Note 7 - Related Party Transactions

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

Note 7 – Related Party Transactions

Paul Casner, the chairman of the Company’s board of directors, also serves as the executive chairman and CEO of Atair Aerospace Incorporation. Atair provided subcontracting services to the Company relating to the design of the chassis component within the ADEPT units. During the three months ended September 30, 2015 and 2014, the Company incurred subcontracting service costs from Atair of $0 and $6,779, respectively. During the nine months ended September 30, 2015 and 2014, the Company incurred subcontracting service costs from Atair of $2,279 and $33,468, respectively.

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Note 6 - Share-Based Compensation

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note 6 – Share-Based Compensation

During the three and nine months ended September 30, 2015 and 2014, the Company did not issue stock awards. During the nine months ended September 30, 2014, 7,000 options were exercised for proceeds in the amount of $350. The Company recognized stock-based compensation expense for stock options of $37 and $969 for the three months ended September 30, 2015 and 2014, respectively. The Company recognized stock-based compensation expense for stock options of $111 and $6,649 for the nine months ended September 30, 2015 and 2014, respectively. The intrinsic value of the options as of September 30, 2015 is $3,080.

As of September 30, 2015 and 2014, there were 44,000 restricted stock awards outstanding. The Company recognized stock-based compensation expense for restricted stock of $644 and $1,018 for the three months ended September 30, 2015 and 2014, respectively. The Company recognized stock-based compensation expense for restricted stock of $1,932 and $3,054 for the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, there was $2,695 of unrecognized stock-based compensation expense related to all outstanding equity awards that will be recognized in a future periods.

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Note 6 - Share-Based Compensation (Details Textual) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding, Number	44,000	44,000	44,000	44,000
Allocated Share-based Compensation Expense	$ 644	$ 1,018	$ 1,932	$ 3,054
Employee Stock Option [Member]
Allocated Share-based Compensation Expense	$ 37	$ 969	$ 111	$ 6,649
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	0	0	0	0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period				7,000
Proceeds from Stock Options Exercised			$ 350	$ 350
Allocated Share-based Compensation Expense			2,043	$ 9,703
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value	$ 3,080		3,080
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	$ 2,695		$ 2,695

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Note 4 - Income (Loss) Per Share - Weighted Average Shares Outstanding (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Preferred Stock Series B Convertible [Member]
Diluted effect:
Diluted effect (in shares)	3,307,299	3,307,299	3,307,299	3,307,299
Diluted effect (in shares)	3,307,299	3,307,299	3,307,299	3,307,299
Convertible Preferred Stock [Member]
Diluted effect:
Diluted effect (in shares)	255,000	255,000	255,000	255,000
Diluted effect (in shares)	255,000	255,000	255,000	255,000
Restricted Stock [Member]
Diluted effect:
Diluted effect (in shares)		22,000		15,714
Diluted effect (in shares)		22,000		15,714
Net Income (Loss) Attributable to Parent	$ 36,736	$ 127,435	$ 298,238	$ 249,684
Portion allocable to common shareholders	99.20%	99.20%	99.20%	99.20%
Net income applicable to common shareholders	$ 36,442	$ 126,416	$ 295,852	$ 247,687
Weighted average shares outstanding - basic (in shares)	31,947,753	31,904,786	32,064,778	31,892,694
Basic income per share (in dollars per share)			$ 0.01	$ 0.01
Net income applicable to common shareholders	$ 36,442	$ 126,416	$ 295,852	$ 247,687
Add: Undistributed earnings allocated to participating securities	294	1,019	2,386	1,997
Numerator for diluted income per share	$ 36,736	$ 127,435	$ 298,238	$ 249,684
Weighted average shares outstanding - basic (in shares)	31,947,753	31,904,786	32,064,778	31,892,694
Stock options (in shares)	19,250	20,222	19,250	18,000
Diluted effect (in shares)	19,250		19,250
Diluted effect (in shares)	19,250		19,250
Weighted average dilutive shares outstanding (in shares)	35,548,552	35,509,307	35,665,577	35,488,707
Dilutive income per share (in dollars per share)			$ 0.01	$ 0.01

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Note 4 - Income (Loss) Per Share (Tables)

9 Months Ended

Sep. 30, 2015

Notes Tables

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

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2015			2014			2015			2014
Basic Income per Share:
Net income applicable to common shareholders - basic	$	36,736		$	127,435		$	298,238		$	249,684
Portion allocable to common shareholders		99.2	%		99.2	%		99.2	%		99.2	%
Net earnings allocable to common shareholders		36,442			126,416			295,852			247,687
Weighted average basic shares outstanding Basic income per share		31,947,753			31,904,786			32,064,778			31,892,694
Basic income per share	$	-		$	-		$	0.01		$	0.01
Dilutive Income Per Share:
Net income applicable to common shareholders		36,442			126,416			295,852			247,687
Add: Undistributed earnings allocated to participating securities		294			1,019			2,386			1,997
Numerator for diluted income per share		36,736			127,435			298,238			249,684
Weighted average shares outstanding - basic		31,947,753			31,904,786			32,064,778			31,892,694
Diluted effect:
Stock options		19,250			20,222			19,250			18,000
Unvested restricted stock awards		19,250			-			19,250			-
Conversion equivalent of diluted Series B Convertible Preferred Stock		3,307,299			3,307,299			3,307,299			3,307,299
Conversion equivalent of diluted Convertible		255,000			255,000			255,000			255,000
Restricted stock options		-			22,000			-			15,714
Weighted average dilutive shares outstanding		35,548,552			35,509,307			35,665,577			35,488,707
Dilutive income per share	$	-		$	-		$	0.01		$	0.01

Schedule of Earnings Per Share, Basic, by Common Class, Including Two Class Method [Table Text Block]

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Numerator
Weighted average participating common shares		31,947,753			31,904,786			32,064,778			31,892,694
Denominator:
Weighted average participating common shares		31,947,753			31,904,786			32,064,778			31,892,694
Add: Weighted average shares of Convertible Preferred Stock		255,000			255,000			255,000			255,000
Weighted average participating shares		32,202,753			32,159,786			32,319,778			32,147,694
Portion allocable to common shareholders		99.2	%		99.2	%		99.2	%		99.2	%

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

	September 30, 2015		September 30, 2014
Stock options		610,000		610,000
		610,000		610,000

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2015

Accounting Policies [Abstract]

Revenue Recognition, Policy [Policy Text Block]

Revenue

Recognition

The Company is engaged in research and development contracts with the federal government to develop certain technology to be utilized by the U.S. Department of Defense (“DoD”). The contracts are cost plus fixed fee contracts and revenue is recognized on the basis of such measurement of partial performance as will reflect reasonably assured realization or delivery of completed articles. Fees earned under the Company’s contracts may also be accrued as they are billable, under the terms of the agreements, unless such accrual is not reasonably related to the proportionate performance of the total work or services to be performed by the Company from inception to completion. Under the terms of certain contracts, fixed fees are not recognized until the receipt of full payment has become unconditional, that is, when the product has been delivered and accepted by the Federal government. Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. The Company’s backlog includes future Adaptive

Diagnostic

Electronic

Portable

Testset

(“ADEPT”) units to be developed and delivered to the Federal government.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. The Company had unbilled revenues of $38,884 and $34,366 included in receivables on government contracts as of September 30, 2015 and December 31, 2014, respectively. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of September 30, 2015 and December 31, 2014, the Company had no advanced billings.

Standard Product Warranty, Policy [Policy Text Block]

Warranty

Expense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the 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 rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended September 30, 2015 and 2014, the Company recognized warranty (recoveries) expense of $106,800 and $(10,744), respectively, and $113,400 and

(1,690) for the nine months ended September 30, 2015 and 2014, respectively. Since the inception of the IDIQ contract in March 2010, the Company has delivered 163 ADEPT units. As of September 30, 2015, there are 41 ADEPT units that remain under limited warranty coverage. As of September 30, 2015 and December 31, 2014, the Company had an accrued warranty expense of $139,410 and $33,500, respectively.

The following table reflects the reserve for product warranty activity as of September 30, 2015 and December 31, 2014:

	2015			2014
Reserve for product warranty, beginning of period	$	33,500		$	35,190
Provision for product warranty		136,700			51,210
Product warranty expirations		(23,300	)		(52,900	)
Product warranty costs paid		(7,490	)		-
Reserve for product warranty, end of period	$	139,410		$	33,500

Research, Development, and Computer Software, Policy [Policy Text Block]

Research

and

Development

Costs

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 of $24,890 and $1,724 for the three months ended September 30, 2015 and 2014, respectively, and $34,625 and $5,021, for the nine months ended September 30, 2015 and 2014, respectively.

Goodwill and Intangible Assets, Intangible Assets, Policy [Policy Text Block]

Intangible Assets

A majority of the Company’s intangible assets consist of a license acquired in July 2015. Trade names and trademarks with finite lives are amortized using the straight-line method over their estimated useful lives. Licenses are amortized using a straight-line method over their estimated life of six years.

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Note 3 - Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Product Warranty Liability [Table Text Block]

	2015			2014
Reserve for product warranty, beginning of period	$	33,500		$	35,190
Provision for product warranty		136,700			51,210
Product warranty expirations		(23,300	)		(52,900	)
Product warranty costs paid		(7,490	)		-
Reserve for product warranty, end of period	$	139,410		$	33,500

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Note 1 - Basis of Presentation (Details Textual) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Allocated Share-based Compensation Expense			$ 2,043	$ 9,703
Proceeds from Stock Options Exercised			350	350
Net Income (Loss) Attributable to Parent	$ 36,736	$ 127,435	$ 298,238	$ 249,684

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Note 4 - Income (Loss) Per Share - Diluted Net Earnings (Loss) Per Share (Details) - shares	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Employee Stock Option [Member]
Antidilutive shares (in shares) (in shares)	610,000	610,000
Antidilutive shares (in shares) (in shares)	610,000	610,000

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Condensed Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Cash flows from operating activities
Net income	$ 298,238	$ 249,684
Depreciation and amortization	10,482	4,707
Deferred tax expense (benefit)	62,000	(34,000)
Share-based compensation expense	2,043	9,703
Changes in operating assets and liabilities:
Decrease (Increase) in receivables on government contracts	553,847	(211,821)
Decrease (Increase) in prepaid expenses and other current assets	9,590	(2,579)
(Decrease) Increase in accrued payroll and payroll taxes	(60,138)	218,004
(Decrease) Increase in accounts payable and accrued expenses	(527,290)	41,745
Increase (Decrease) in accrued warranty expense	105,910	$ (1,690)
Increase in deferred revenue	36,000
Decrease in long-term liabilities	(4,718)	$ (3,422)
Net cash provided by operating activities	485,964	270,331
Cash flows from investing activities:
Purchase of property and equipment	(2,693)	(11,890)
Net cash used in investing activities:	(2,693)	(11,890)
Cash flows from financing activities:
Proceeds received upon the exercise of stock options	350	350
Net cash provided by financing activities	350	350
Net increase in cash and cash equivalents	483,621	258,791
Cash and cash equivalents, beginning of period	1,161,634	1,028,146
Cash and cash equivalents, end of period	1,645,255	1,286,937
Supplemental cash flow information:
Cash paid during the period for income taxes	215,183	$ 558
Supplemental non-cash investing activity:
Estimated consideration to be paid in connection with purchase of intangible asset	$ 126,000

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Note 5 - Income Tax Matters

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 5 – 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 $62,000 during the nine months ended September 30, 2015. The net deferred tax assets increased by $34,000 during the nine months ended September 30, 2014. The change in deferred tax assets is attributable to utilization of income tax attributes, primarily federal net operating losses, as the Company anticipates annual earnings from operations to continue.

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Note 4 - Income (Loss) Per Share - Percentage of Net Earnings Allocable to Common Shareholders (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Weighted average participating common shares (in shares)	31,947,753	31,904,786	32,064,778	31,892,694
Weighted average participating common shares (in shares)	31,947,753	31,904,786	32,064,778	31,892,694
Add: Weighted average shares of Convertible Preferred Stock (in shares)	255,000	255,000	255,000	255,000
Weighted average participating shares (in shares)	32,202,753	32,159,786	32,319,778	32,147,694
Portion allocable to common shareholders	99.20%	99.20%	99.20%	99.20%