10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2017
		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, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☒ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 35,494,775 issued and outstanding shares of the issuer’s common stock, $.01 par value per share, on May 11, 2017.

TABLE OF CONTENTS

		PAGE #
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)	1
	Condensed Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (unaudited)	2
	Condensed Statement of Stockholders’ Equity for the Three Months Ended March 31, 2017 (unaudited)	3
	Condensed Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)	4
	Notes to Condensed Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 4.	Controls and Procedures	13
PART II. OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 6.	Exhibits	14
	Signatures	15

Part I Financial Information

Item 1 Financial Statements

Mikros Systems Corporation

Condensed Balance Sheets 

(Unaudited)

	March 31,			December 31,
	2017			2016
Assets
Current assets:
Cash and cash equivalents	$	1,351,485		$	858,868
Receivables on government contracts		1,146,026			1,704,301
Prepaid expenses and other current assets		52,635			55,144
Total current assets		2,550,146			2,618,313
Property and equipment
Equipment		103,253			95,693
Furniture & fixtures		16,394			16,394
Less: accumulated depreciation		(90,725	)		(86,436	)
Property and equipment, net		28,922			25,651
Intangible assets		129,704			128,916
Less: accumulated amortization		(38,236	)		(32,947	)
Intangible assets, net		91,468			95,969
Deferred tax assets		169,822			204,991
Total assets	$	2,840,358		$	2,944,924
Liabilities and shareholders' equity
Current liabilities:
Accrued payroll and payroll taxes	$	387,093		$	460,434
Accounts payable and accrued expenses		362,114			338,872
Accrued warranty expense		98,090			240,980
Deferred revenue		-			7,500
Total current liabilities		847,297			1,047,786
Long-term liabilities		140,004			140,377
Total liabilities		987,301			1,188,163
Shareholders' equity:
Preferred stock, convertible, par value $.01 per share, authorized 5,000,000 shares, none issued and outstanding		-			-
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 35,476,775 and 35,424,775 shares, respectively		354,769			354,249
Capital in excess of par value		10,067,363			10,061,894
Accumulated deficit		(8,569,075	)		(8,659,382	)
Total shareholders' equity		1,853,057			1,756,761
Total liabilities and shareholders' equity	$	2,840,358		$	2,944,924

See Notes to Unaudited Condensed Financial Statements

1

Mikros Systems Corporation

Condensed Statements of Operations and Comprehensive Income (unaudited)

	Three Months Ended,
	March 31,
	2017		2016
Contract Revenues	$	1,754,973	$	987,929
Cost of sales		651,536		324,328
Gross margin		1,103,437		663,601
Expenses:
Engineering		517,180		323,913
General and administrative		408,903		336,148
Total expenses		926,083		660,061
Income from operations		177,354		3,540
Other income:
Interest		728		1,449
Net income before income taxes		178,082		4,989
Income tax expense		87,775		3,143
Net income available to common shareholders	$	90,307	$	1,846
Income per common share - basic	$	-	$	-
Basic weighted average number of shares outstanding		35,430,119		32,030,138
Income per common share - diluted	$	-	$	-
Diluted weighted average number of shares outstanding		35,643,392		35,608,255

See Notes to Unaudited Condensed Financial Statements

2

Mikros Systems Corporation

Condensed Statements of Shareholders' Equity

	Preferred Stock				Common Stock
	$0.01 Par Value				$0.01 Par Value				Capital in
	Number of shares		Par Value		Number of shares		Par Value		Excess of Par Value			Accumulated Deficit			Total
Balance at January 1, 2017		-	$	-		35,424,775	$	354,249	$	10,061,894		$	(8,659,382	)	$	1,756,761
Stock compensation		-		-		-		-		2,639			-			2,639
Exercise of non-restricted stock awards		-		-		22,000		220		3,130			-			3,350
Common shares issued to director		-		-		30,000		300		(300	)					-
Net income		-		-		-		-		-			90,307			90,307
Balance at March 31, 2017		-	$	-		35,476,775	$	354,769	$	10,067,363		$	(8,569,075	)	$	1,853,057

See Notes to Unaudited Condensed Financial Statements

3

Mikros Systems Corporation

Condensed Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities
Net income	$	90,307		$	1,846
Adjustments to reconcile net income to net cash provided by (used in ) operating activities:
Depreciation and amortization		9,578			9,456
Deferred tax expense		35,169			1,381
Share-based compensation expense		2,639			636
Changes in assets and liabilities:
Decrease in receivables on government contracts		558,275			25,130
Decrease (increase) in prepaid expenses and other current assets		2,509			(30,250	)
(Decrease) in accrued payroll and payroll taxes		(73,341	)		(338,358	)
Increase (Decrease) in accounts payable and accrued expenses		23,242			(252,051	)
(Decrease) in accrued warranty expense		(142,890	)		(28,284	)
(Decrease) increase in deferred revenue		(7,500	)		2,250
(Decrease) in long-term liabilities		(373	)		(1,336	)
Net cash provided by (used in) operating activities		497,615			(609,580	)
Cash flows from investing activities:
Payments related to intangible assets		(788	)		-
Purchase of property and equipment		(7,560	)		-
Net cash used in investing activities:		(8,348	)		-
Cash flows from financing activities:
Proceeds from exercise of stock options		3,350			350
Net cash provided by financing activities:		3,350			350
Net increase (decrease) in cash and cash equivalents		492,617			(609,230	)
Cash and cash equivalents, beginning of period		858,868			2,858,655
Cash and cash equivalents, end of period	$	1,351,485		$	2,249,425
Supplement cash flow information:
Cash paid during the period for income taxes	$	-		$	44,500

See Notes to Unaudited Condensed Financial Statements

4

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, 2016.

In the opinion of the Company’s management, the accompanying unaudited interim condensed financial statements contain all adjustments, consisting solely of those which are of a normal recurring nature, necessary to present fairly its financial position as of March 31, 2017, the results of its operations for the three months ended March 31, 2017 and 2016, changes in stockholders’ equity from January 1, 2017 to March 31, 2017 and cash flows for the three months ended March 31, 2017 and 2016.

Note 2 – Recent Accounting Pronouncements

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s condensed financial statements, from those disclosed in the Company’s 2016 Annual Report on Form 10-K.

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.

The Company recognizes revenue as it relates to the license of software when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access to take immediate possession of the software or technology. Software license agreements include post-contract customer support ("PCS"). For the Company’s software and software-related multiple element arrangements, where customers purchase both software related products and software related services, the Company uses vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. The Company has established VSOE of fair value for the majority of the PCS, professional services, and training. Given the limited number of sales related to this software, and the fact that the Company does not sell the PCS element separately, there is no VSOE currently available to bifurcate the PCS element from the contract.  In accordance with Accounting Standards Codification Topic 985-605-25-10a, the fees earned from sale of licenses to which the only undelivered element is the PCS, are recognized ratably over the life of the contract. Revenues from the sale of software licenses and maintenance for the three months ended March 31, 2017 and 2016 were $7,500 and $27,750, respectively. At March 31, 2017 and December 31, 2016, deferred revenues amounted to $0 and $7,500, respectively.

5

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of March 31, 2017 and December 31, 2016, the Company had unbilled revenues of $218,261 and $235,421, respectively which are recorded within receivables on government contracts in the Company’s balance sheet. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of March 31, 2017 and December 31, 2016, there were 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 March 31, 2017 and 2016, the Company recognized a net warranty (recovery) expense, which is a component of the Company’s cost of sales of $(141,300) and $(20,801), respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 189 ADEPT units. As of March 31, 2017, there are 26 ADEPT units that remain under the limited warranty coverage.

The following table reflects the reserve for product warranty activity as of March 31, 2017 and December 31, 2016:

	March 31, 2017			December 31, 2016
Beginning balance	$	240,980		$	359,654
Provision for product warranty		-			1,800
Product warranty expirations		(141,300	)		(86,301	)
Product warranty costs paid		(1,590	)		(34,173	)
Ending balance	$	98,090		$	240,980

Research and Development Expense

Research and Development expenditures for research and development of the Company's products are expensed when incurred, and are included in general and administrative expenses. The Company recognized research and development costs as follows:

	Three months ended March 31,
	2017		2016
Salaries	$	39,606	$	19,552
Other costs		2,189		1,345
	$	41,795	$	20,897

6

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Intangible Assets

The majority of the Company’s intangible assets is a license acquired during 2015. In July 2015, the Company purchased certain software products, intellectual property and related assets from VSE Corporation. The primary software programs purchased were the Prognostics Framework (PF) and Diagnostic Profiler (DP) programs. The Diagnostic Profiler software is used worldwide by several multinational companies for optimized maintenance of diverse product lines. The Diagnostic Profiler is also used by the US Air Force for depot test programs, and Prognostics Framework is used by the US Army for several missile defense systems.

Licenses are amortized using a straight-line method over their estimated life of six years. For the three months ended March 31, 2017 and 2016, amortization expense related to the Company’s license amounted to $5,250 and $5,250, respectively, and are included in general and administrative expenses on the Condensed Statements of Operations and Comprehensive Income.

Note 4 – Income Per Share

Net income per common share information is as follows:

	Three Months Ended,
	March 31,
	2017			2016
Basic earnings per common share:
Net (loss) income allocable to common shareholders		90,307			1,846
Portion allocable to common shareholders		100.0	%		99.2	%
Net income allocable to common shareholders		90,307			1,831
Weighted average basic shares outstanding		35,430,119			32,030,138
Basic (loss) income per common share	$	-		$	-
Dilutive earnings per common share:
Net (loss) income allocable to common shareholders		90,307			1,831
Add: undistributed earnings allocated to participating securities		-			15
Numerator for diluted earnings per common share		90,307			1,846
Weighted average shares outstanding - basic		35,430,119			32,030,138
Diluted effect:
Stock options		71,523			14,000
Unvested restricted stock		141,750			1,818
Conversion equivalent of dilutive Series B Convertible Preferred Stock		-			3,307,299
Conversion equivalent of dilutive Convertible Preferred Stock		-			255,000
Weighted average dilutive shares outstanding		35,643,392			35,608,255
Dilutive (loss) income per common share	$	-		$	-

7

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

The table below sets forth the calculation of the percentage of net earnings allocable to common shareholders under the two-class method in 2016

	Three Months Ended,
	March 31,
	2017			2016
Numerator:
Weighted average participating common shares		35,430,119			32,030,138
Denominator:
Weighted average participating common shares		35,430,119			32,030,138
Add: Weighted average shares of Convertible Preferred Stock		-			255,000
Weighted average participating shares		35,430,119			32,285,138
Portion allocable to common shareholders		100.0	%		99.2	%

Diluted net income per share for the three and nine months ended March 31, 2017 and 2016 does not reflect the following potential common shares, as the effect would be antidilutive.

	Three Months Ended,
	March 31,
	2016		2015
Stock options		335,000		610,000
Unvested restricted stock		30,000		-

Note 5 – Income Tax Matters

The Company conducts an on-going analysis to review its net deferred tax asset and the need for a related valuation allowance. As a result of this analysis and the actual results of operations, the Company has decreased its net deferred tax assets by $35,169 and $1,381 during the three months ended March 31, 2017 and 2016, respectively. The change in deferred tax assets is attributable to the reversal of various book/tax differences.

At March 31, 2017, the Company estimated its annual effective tax rate for 2017 to be 49.3%. The Company recognized a tax expense of $87,775 for the three months ended March 31, 2017 primarily due to expected net income for the remainder of 2017. At March 31, 2017, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

Note 6 – Stock-Based Compensation

On January 30, 2017, the Company issued 30,000 shares of restricted stock with a fair value of $0.37 per share. As of March 31, 2017, there was $11,100 of unrecognized stock-based compensation expense related to the restricted stock issued in January 2017 which will be recognized in future periods. During the three months ended March 31, 2017, 22,000 options were exercised for proceeds amounting to $3,350. The intrinsic value of the options as of March 31, 2017 is $40,530.

The Company recognized stock-based compensation expense for restricted stock of $2,639 and $636 for the three months ended March 31, 2017 and 2016, respectively.

8

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; our ability to adequately integrate our new software offerings into our business model, our ability to develop and market solutions for commercial customers, numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature; 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, 2016 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.

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

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

Over the past decade, our principal customer has been the U.S. Department of Defense, primarily the U.S. Navy. We provide the following two key systems to the Navy for maintenance of radars and combat systems:

● ADEPT®, the Adaptive Diagnostic Electronic Portable Testset, is a PC-based maintenance automation workstation used to maintain the Navy’s premier AN/SPY-1 phased array radar on cruisers and destroyers.

● ADSSS, the ADEPT Distance Support Sensor Suite, is a Condition-Based Maintenance (CBM) system used to monitor Combat System Elements (CSEs) onboard the Littoral Combat Ship (LCS).

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

Product Portfolio

Adaptive Diagnostic Electronic Portable Testset (ADEPT®). ADEPT is an automated maintenance workstation designed to significantly reduce the time required to align the AN/SPY-1 Radar System aboard U.S. Navy Aegis cruisers and destroyers, while optimizing system performance and readiness. ADEPT Systems are currently deploying on all Aegis CG and DDG platforms to support the AN/SPY1 radar system. 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 provide integrated distance support capabilities for remote diagnostics and troubleshooting by shore-based Navy experts.

Since the system uses commercial instrument case and modules, ADEPT units can be modified to support both preventative maintenance and condition-based maintenance of other radars and complex electronic systems in military or commercial applications. As of the date of this report, we have delivered a total of 189 ADEPT units.

9

Adaptive Distance Support Sensor Suite (ADSSS). In 2013, we started development of the ADEPT Distance Support Sensor Suite, or ADSSS, for the Navy’s Littoral Combat Ship (“LCS”). The LCS is the U.S. Navy’s latest combat warship. ADSSS is a network-enabled system that can be configured to monitor multiple shipboard systems and report maintenance data onshore for further analysis to detect trends and predict failures. ADSSS provides an open architecture approach with industry standard hardware, and cybersecurity compliant software to acquire and process system operational and maintenance data. ADSSS fully automates the capture of system operation, environment and maintenance data to provide unattended operation. The system monitors key parameters and sends alert notifications when parameters move out of tolerance.

A pilot version of ADSSS has been deployed on the LCS Class since 2014. Development of the production system is ongoing and initial shipboard testing was completed in 2016. We expect ADSSS to be used on both variants of the LCS, 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.

Diagnostic Profiler. The Diagnostic Profiler is an integrated development environment for developing diagnostic capabilities used in maintenance, embedded diagnostics and troubleshooting applications. The software provides diagnostic services to its host application, including fault call-outs, suggested “next best” test to further isolate faults, and direct maintenance actions. When additional faults are identified, the software prioritizes the fault call-outs by probability. The use of the diagnostic profiler eliminates the need for the development and maintenance of diagnostic flow charts and hard-coded text sequences. This reduces the effort required to correct bugs and design changes and over the life of the system, could result in significant cost savings.

Prognostics Framework. Prognostics Framework is an analysis software for framework that implements real-time prognostics, diagnostics and status monitoring to support embedded prognostic applications, health management systems and condition-based maintenance applications. The Prognostics Framework software institutes an information framework that organizes relevant data related to: (i) the condition of the system; (ii) the system’s ability to perform required functions over specific time intervals; and (iii) the need for maintenance actions and repair parts. The Prognostics Framework has been used to implement a complete health management system on one of the first radar systems to require prognostics as a key element of its overall solutions. Other potential applications include complex computer networks, power generators, power supply, cooling and environmental systems.

Government Contracts

On March 18, 2010, we were awarded and entered into a multi-year IDIQ contract with the Naval Surface Warfare Center related to our ADEPT product. The contract provided 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, but the period of performance was extended through February 13, 2017, to conclude some development programs.

In March 2016, we received a contract award valued at approximately $0.15 million to provide Initial System Familiarization Training of the ADEPT system on all CG-47 and DDG-51 Class ships. The first event in Norfolk has already occurred, and a second event in San Diego is currently scheduled for May.

In April 2016, we received three contracts to continue logistics support of the ADEPT maintenance automation workstation. A contract valued at approximately $0.3 million to provide ADEPT General Engineering and Support was awarded, along with two other logistics contracts to perform necessary updates, repair and calibration on the ADEPT units, totaling $0.25 million. Along with the contracts received for our ADEPT product, we received a follow on contract in the amount of $0.1 million, for technical support on the USS Fort Worth (LCS3) using the latest version of our ADSSS.

In July 2016, we received two additional contract modifications for our current service contract for LCS systems using the ADSSS, which added an additional $4.65 million for ongoing development. This funding will extend the program until June 2018 and allow us to perform installations and support for the LCS classes.

In September 2016, we were awarded and entered into a multi-year IDIQ contract with the Naval Surface Warfare Center, Port Hueneme Division, relating to the ADSSS product. The contract has a term of five years and provides for the purchase and sale of up to $48 million of ADSSS units and related engineering and logistics support. The first delivery order in the amount of $3.0 million was awarded on September 15, 2016 to perform installations, support and logistics for the LCS class.

In September 2016, we also received multiple contracts totaling approximately $0.4 million to continue logistics support of the ADEPT maintenance workstation. These contracts include general engineering support, repair, calibration and training.

In February 2017, we were awarded a follow-on multi-year Small Business Innovation Research (SBIR) Phase III IDIQ contract with the Naval Surface Warfare Center, Crane Division, for our ADEPT program. The contract provides for the purchase and sale of up to $35.1 million of ADEPT units and related engineering, such as calibration, repair, training and other logistics services. The first delivery order for $1.1 million was also awarded in February 2017 to build eleven ADEPT systems for continuing fleet support on all Aegis cruisers and destroyers.

10

In March 2017, we were awarded the second and third delivery orders for engineering services in the amount of $11.5 million which will be funded incrementally, and facilitate the engineering and technical support for the ADEPT program during the next three years. The third delivery order contract for $0.6 million is to provide logistic services, such as calibration, repair, evaluations and screenings of ADEPT units to be performed in our Manufacturing and Depot Center in Largo, Florida.

In April 2017, we received contract awards totaling $2.0 million from the U.S. Navy to extend the capabilities of the ADSSS Condition-Based Maintenance (CBM) system to support a fourth Navy radar system, the MK 99. The Small Business Innovation Research (SBIR) office in Dahlgren, VA provided $0.5 million of the total funding to support this effort. Along with those awards, we received the fourth delivery order for $0.1 million under the existing ADEPT IDIQ contract, to provide training of the ADEPT maintenance automation workstation to sailors in the fleet.

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 and delivery orders awarded to us under our IDIQ contracts. 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 awards, increased profits in future periods. The timing of such awards is uncertain as we sell to federal government agencies where the process of obtaining such awards can be lengthy and at times uncertain. As the majority of our revenue for the three months ended March 31, 2017, and expected revenue for the next nine months of 2017, is or will be from sales of ADEPT units and ADSSS systems under our IDIQ contracts, continued generation of delivery 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 generate future recurring maintenance and service revenue.

Outlook 

Our strategy for continued growth is based on continuing expansion of our defense business, plus new initiatives to apply our advanced maintenance technology in commercial markets. With regard to the defense industry, we expect to continue expanding our technology base, backlog and revenue by continuing our 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 ADEPT and ADSSS, with broad appeal in both the government and commercial marketplace. Our state-of-the-art test equipment can be used by many commercial and governmental customers such as the 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 contractors. Our strategy is to develop these relationships into long-term, key subcontractor roles on future major defense programs awarded to these prime contractors.

With regard to commercial markets, our Diagnostics Profiler and Prognostics Framework software offerings complement our hardware products and allow us to provide complete hardware/software solutions for advanced maintenance applications. We plan to provide “condition-based maintenance” systems for applications such as FAA radar surveillance and support systems, power distribution and utilities infrastructure, commercial shipping, cooling and environmental systems, and other “complex distributed systems” to commercial customers. Customers for these systems, include major multinational corporations. We have received several repeat orders from these customers and continue to support their applications.

In 2017, our primary strategic focus is to continue as a premium provider of R&D and product development services to the defense industry, generate multiple delivery orders under our two IDIQ contracts, and expand our commercial business through marketing and sales of our Prognostics Framework and Diagnostic Profiler software products. We will also seek to generate incremental revenue through providing light assembly and production services to commercial customers at our manufacturing and depot center in Largo, Florida.

Over the longer term, we intend to further develop advanced maintenance technologies and implement these technologies in products for deployment in defense applications and to expand into additional commercial applications. We believe that many of our core capabilities, remote monitoring, rugged systems, predictive maintenance and communications expertise, are applicable to other industries that work with complex distributed systems, such as utilities, communications and transportation systems, and building maintenance. We are currently in discussions with certain industry participants regarding this initiative.

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 may negatively impact our revenues and profits.

11

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, 2016. As of March 31, 2017, there have been no changes to such critical accounting policies and estimates.

Results of Operations

Three Months Ended March 31, 2017 and 2016

We generated revenues of $1,754,973 during the three months ended March 31, 2017 compared to $987,929 during the three months ended March 31, 2016, an increase of $767,044, or 78%. The increase was primarily due to a production order for 11 ADEPT units in February 2017 and the receipt of six additional contracts for engineering services, support and repairs and calibration services amounting to $584,537.

Cost of sales consists of direct contract costs including labor, material, subcontracts, warranty expense for ADEPT units that have been delivered, travel, and other direct costs. Cost of sales for the three months ended March 31, 2017 was $651,536 compared to $324,328 for the three months ended March 31, 2016, an increase of $327,208 or 101%. The increase was primarily due to the receipt of a production order for 11 ADEPT units in February 2017 in addition to the receipt of six additional contracts for engineering services, support and repairs and calibration services. As a percentage of revenue, cost of sales increased to 37% of revenues for the three months ended March 31, 2017 as compared to 33% of revenues for the three months ended March 31, 2016. The increase was primarily due to the change of the mix of costs incurred in 2017 specifically, increases in direct labor, material and subcontract costs related to engineering service contracts awarded in the first quarter of 2017 which were offset by the expiration of warranty reserves.

The majority of our engineering costs consist of (i) salary, wages and related fringe benefits paid to engineering employees, (ii) rent-related costs, and (iii) consulting fees paid to engineering consultants. As the nature of these costs benefit the entire organization and all research and development efforts, and their benefit cannot be identified with a specific project or contract, these engineering costs are classified as part of “engineering overhead” and included in operating expenses. Engineering costs for the three months ended March 31, 2017 were $517,180 compared to $323,913 for the three months ended March 31, 2016, an increase of $193,267, or 60%. The increase was due to significant increases in fringe benefits and engineering salaries due to the hiring of six additional employees, recruiting costs, and incentive compensation.

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 March 31, 2017 were $408,903 compared to $336,148 for the three months ended March 31, 2016, an increase of $72,755, or 22%. The increase was due primarily to increases in Independent Research & Development (IR&D) salaries, incentive compensation, and professional fees.

At March 31, 2017, we estimated our annual effective tax rate for 2017 to be 49%. We recognized a tax expense of $87,775 for the three months ended March 31, 2017 primarily due to expected net income for the remainder of 2017. At March 31, 2017, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

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 three months ended March 31, 2017, net cash provided by operations was $497,615 compared to net cash used in operations of $609,580 during the three months ended March 31, 2016. The increase was primarily due to an increase in net income of $88,461 and the timing of receipts and payments related to our operating assets and liabilities.

We currently do not have any outstanding loan or line of credit with any bank or financial institution. 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.

12

Off-Balance Sheet Arrangements

As of March 31, 2017, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off- balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Item 4. Controls and Procedures.

An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) was carried out by us under the supervision and with the participation of our president, who serves as our principal executive officer and principal financial officer. Based upon that evaluation, our president concluded that as of March 31, 2017, 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 March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

13

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the quarter ended March 31, 2017, we issued 22,000 shares of common stock to certain employees and consultants upon exercise of options in consideration of cash payment of $3,350. The forgoing shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

Item 6. Exhibits

No.	Description
3.1	Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-k , filed with the SEC on February 3, 2017)

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

14

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
May 15, 2017	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney
		President and Chief Financial Officer

 15

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.

May 15, 2017

/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 March 31, 2017, 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.

May 15, 2017	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney
		President and Chief Financial Officer

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2017	May 11, 2017
Document Information [Line Items]
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)		35,494,775
Document Type	10-Q
Document Period End Date	Mar. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

Condensed Balance Sheets (Current Period Unaudited) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 1,351,485	$ 858,868
Receivables on government contracts	1,146,026	1,704,301
Prepaid expenses and other current assets	52,635	55,144
Total current assets	2,550,146	2,618,313
Property and equipment
Equipment	103,253	95,693
Furniture & fixtures	16,394	16,394
Less: accumulated depreciation	(90,725)	(86,436)
Property and equipment, net	28,922	25,651
Intangible assets	129,704	128,916
Less: accumulated amortization	(38,236)	(32,947)
Intangible assets, net	91,468	95,969
Deferred tax assets	169,822	204,991
Total assets	2,840,358	2,944,924
Current liabilities:
Accrued payroll and payroll taxes	387,093	460,434
Accounts payable and accrued expenses	362,114	338,872
Accrued warranty expense	98,090	240,980
Deferred revenue	0	7,500
Total current liabilities	847,297	1,047,786
Long-term liabilities	140,004	140,377
Total liabilities	987,301	1,188,163
Shareholders' equity:
Preferred stock, convertible, par value $.01 per share, authorized 5,000,000 shares, none issued and outstanding
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 35,476,775 and 35,424,775 shares, respectively	354,769	354,249
Capital in excess of par value	10,067,363	10,061,894
Accumulated deficit	(8,569,075)	(8,659,382)
Total shareholders' equity	1,853,057	1,756,761
Total liabilities and shareholders' equity	$ 2,840,358	$ 2,944,924

XML

Condensed Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Mar. 31, 2017	Dec. 31, 2016
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
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)	35,476,775	35,424,775
Common stock, outstanding (in shares)	35,476,775	35,424,775

XML

Condensed Statements of Operations and Comprehensive Income (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Contract Revenues	$ 1,754,973	$ 987,929
Cost of sales	651,536	324,328
Gross margin	1,103,437	663,601
Expenses:
General and administrative	408,903	336,148
Total expenses	926,083	660,061
Income from operations	177,354	3,540
Other income:
Interest	728	1,449
Net income before income taxes	178,082	4,989
Income tax expense	87,775	3,143
Net income available to common shareholders	$ 90,307	$ 1,846
Income per common share - basic (in dollars per share)
Basic weighted average number of shares outstanding (in shares)	35,430,119	32,030,138
Income per common share - diluted (in dollars per share)
Diluted weighted average number of shares outstanding (in shares)	35,643,392	35,608,255
Engineering [Member]
Expenses:
Engineering	$ 517,180	$ 323,913

XML

Condensed Statements of Shareholders' Equity (Unaudited) - 3 months ended Mar. 31, 2017 - USD ($)	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balance (in shares) at Dec. 31, 2016		35,424,775
Balance at Dec. 31, 2016		$ 354,249	$ 10,061,894	$ (8,659,382)	$ 1,756,761
Stock compensation			2,639		$ 2,639
Exercise of non-restricted stock awards (in shares)		22,000			22,000
Exercise of non-restricted stock awards		$ 220	3,130		$ 3,350
Common shares issued to director (in shares)		30,000
Common shares issued to director		$ 300	(300)
Net income				90,307	90,307
Balance (in shares) at Mar. 31, 2017		35,476,775
Balance at Mar. 31, 2017		$ 354,769	$ 10,067,363	$ (8,569,075)	$ 1,853,057

XML

Condensed Statements of Cash Flows (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Cash flows from operating activities
Net income	$ 90,307	$ 1,846
Adjustments to reconcile net income to net cash provided by (used in ) operating activities:
Depreciation and amortization	9,578	9,456
Deferred tax expense	35,169	1,381
Share-based compensation expense	2,639	636
Changes in assets and liabilities:
Decrease in receivables on government contracts	558,275	25,130
Decrease (increase) in prepaid expenses and other current assets	2,509	(30,250)
(Decrease) in accrued payroll and payroll taxes	(73,341)	(338,358)
Increase (Decrease) in accounts payable and accrued expenses	23,242	(252,051)
(Decrease) in accrued warranty expense	(142,890)	(28,284)
(Decrease) increase in deferred revenue	(7,500)	2,250
(Decrease) in long-term liabilities	(373)	(1,336)
Net cash provided by (used in) operating activities	497,615	(609,580)
Cash flows from investing activities:
Payments related to intangible assets	(788)
Purchase of property and equipment	(7,560)
Net cash used in investing activities	(8,348)
Cash flows from financing activities:
Proceeds from exercise of stock options	3,350	350
Net cash provided by financing activities:	3,350	350
Net increase (decrease) in cash and cash equivalents	492,617	(609,230)
Cash and cash equivalents, beginning of period	858,868	2,858,655
Cash and cash equivalents, end of period	1,351,485	2,249,425
Supplement cash flow information:
Cash paid during the period for income taxes		$ 44,500

XML

Note 1 - Basis of Presentation

3 Months Ended

Mar. 31, 2017

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,

2016.

In the opinion of the Company’s management, the accompanying unaudited interim condensed financial statements contain all adjustments, consisting solely of those which are of a normal recurring nature, necessary to present fairly its financial position as of

March

31,

2017,

the results of its operations for the

three

months ended

March

31,

2017

and

2016,

changes in stockholders’ equity from

January

1,

2017

to

March

31,

2017

and cash flows for the

three

months ended

March

31,

2017

and

2016.

XML

Note 2 - Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

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

Note

2

–

Recent

Accounting

Pronouncements

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s condensed financial statements, from those disclosed in the Company’s

2016

Annual Report on Form

10

-K.

XML

Note 3 - Significant Accounting Policies

3 Months Ended

Mar. 31, 2017

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.

The Company recognizes revenue as it relates to the license of software when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access to take immediate possession of the software or technology. Software license agreements include post-contract customer support ("PCS"). For the Company’s software and software-related multiple element arrangements, where customers purchase both software related products and software related services, the Company uses vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. The Company has established VSOE of fair value for the majority of the PCS, professional services, and training. Given the limited number of sales related to this software, and the fact that the Company does not sell the PCS element separately, there is no VSOE currently available to bifurcate the PCS element from the contract.  In accordance with Accounting Standards Codification Topic

985

-

605

-

25

-

10a,

the fees earned from sale of licenses to which the only undelivered element is the PCS, are recognized ratably over the life of the contract. Revenues from the sale of software licenses and maintenance for the

three

months ended

March

31,

2017

and

2016

were

$7,500

and

$27,750,

respectively. At

March

31,

2017

and

December

31,

2016,

deferred revenues amounted to

$0

and

$7,500,

respectively.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of

March

31,

2017

and

December

31,

2016,

the Company had unbilled revenues of

$218,261

and

$235,421,

respectively which are recorded within receivables on government contracts in the Company’s balance sheet. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of

March

31,

2017

and

December

31,

2016,

there were 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

March

31,

2017

and

2016,

the Company recognized a net warranty (recovery) expense, which is a component of the Company’s cost of sales of

$(141,300)

and

$(20,801),

respectively. Since the inception of the ADEPT IDIQ contract in

March

2010,

the Company has delivered

189

ADEPT units. As of

March

31,

2017,

there are

26

ADEPT units that remain under the limited warranty coverage.

The following table reflects the reserve for product warranty activity as of

March

31,

2017

and

December

31,

2016:

	March 31, 2017			December 31, 2016
Beginning balance	$	240,980		$	359,654
Provision for product warranty		-			1,800
Product warranty expirations		(141,300	)		(86,301	)
Product warranty costs paid		(1,590	)		(34,173	)
Ending balance	$	98,090		$	240,980

Research and Development Expense

Research and Development expenditures for research and development of the Company's products are expensed when incurred, and are included in general and administrative expenses. The Company recognized research and development costs as follows:

	Three months ended March 31,
	2017		2016
Salaries	$	39,606	$	19,552
Other costs		2,189		1,345
	$	41,795	$	20,897

Intangible Assets

The majority of the Company’s intangible assets is a license acquired during

2015.

In

July

2015,

the Company purchased certain software products, intellectual property and related assets from VSE Corporation. The primary software programs purchased were the Prognostics Framework (PF) and Diagnostic Profiler (DP) programs. The Diagnostic Profiler software is used worldwide by several multinational companies for optimized maintenance of diverse product lines. The Diagnostic Profiler is also used by the US Air Force for depot test programs, and Prognostics Framework is used by the US Army for several missile defense systems.

Licenses are amortized using a straight-line method over their estimated life of

six

years. For the

three

months ended

March

31,

2017

and

2016,

amortization expense related to the Company’s license amounted to

$5,250

and

$5,250,

respectively, and are included in general and administrative expenses on the Condensed Statements of Operations and Comprehensive Income.

XML

Note 4 - Income Per Share

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Earnings Per Share [Text Block]

Note

4

–

Income

Per

Share

Net income per common share information is as follows:

	Three Months Ended,
	March 31,
	2017			2016
Basic earnings per common share:
Net (loss) income allocable to common shareholders		90,307			1,846
Portion allocable to common shareholders		100.0	%		99.2	%
Net income allocable to common shareholders		90,307			1,831
Weighted average basic shares outstanding		35,430,119			32,030,138
Basic (loss) income per common share	$	-		$	-
Dilutive earnings per common share:
Net (loss) income allocable to common shareholders		90,307			1,831
Add: undistributed earnings allocated to participating securities		-			15
Numerator for diluted earnings per common share		90,307			1,846
Weighted average shares outstanding - basic		35,430,119			32,030,138
Diluted effect:
Stock options		71,523			14,000
Unvested restricted stock		141,750			1,818
Conversion equivalent of dilutive Series B Convertible Preferred Stock		-			3,307,299
Conversion equivalent of dilutive Convertible Preferred Stock		-			255,000
Weighted average dilutive shares outstanding		35,643,392			35,608,255
Dilutive (loss) income per common share	$	-		$	-

The table below sets forth the calculation of the percentage of net earnings allocable to common shareholders under the

two

-class method in

2016

	Three Months Ended,
	March 31,
	2017			2016
Numerator:
Weighted average participating common shares		35,430,119			32,030,138
Denominator:
Weighted average participating common shares		35,430,119			32,030,138
Add: Weighted average shares of Convertible Preferred Stock		-			255,000
Weighted average participating shares		35,430,119			32,285,138
Portion allocable to common shareholders		100.0	%		99.2	%

Diluted net income per share for the

three

and

nine

months ended

March

31,

2017

and

2016

does not reflect the following potential common shares, as the effect would be antidilutive.

	Three Months Ended,
	March 31,
	2016		2015
Stock options		335,000		610,000
Unvested restricted stock		30,000		-

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Note 5 - Income Tax Matters

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note

5

– Income Tax Matters

The Company conducts an on-going analysis to review its net deferred tax asset and the need for a related valuation allowance. As a result of this analysis and the actual results of operations, the Company has decreased its net deferred tax assets by

$35,169

and

$1,381

during the

three

months ended

March

31,

2017

and

2016,

respectively. The change in deferred tax assets is attributable to the reversal of various book/tax differences.

At

March

31,

2017,

the Company estimated its annual effective tax rate for

2017

to be

49.3%.

The Company recognized a tax expense of

$87,775

for the

three

months ended

March

31,

2017

primarily due to expected net income for the remainder of

2017.

At

March

31,

2017,

the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

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Note 6 - Share-based Compensation

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

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

Note

6

– Stock-Based Compensation

On

January

30,

2017,

the Company issued

30,000

shares of restricted stock with a fair value of

$0.37

per share. As of

March

31,

2017,

there was

$11,100

of unrecognized stock-based compensation expense related to the restricted stock issued in

January

2017

which will be recognized in future periods. During the

three

months ended

March

31,

2017,

22,000

options were exercised for proceeds amounting to

$3,350.

The intrinsic value of the options as of

March

31,

2017

is

$40,530.

The Company recognized stock-based compensation expense for restricted stock of

$2,639

and

$636

for the

three

months ended

March

31,

2017

and

2016,

respectively.

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Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2017

Accounting Policies [Abstract]

New Accounting Pronouncements, Policy [Policy Text Block]

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s condensed financial statements, from those disclosed in the Company’s

2016

Annual Report on Form

10

-K.

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.

The Company recognizes revenue as it relates to the license of software when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access to take immediate possession of the software or technology. Software license agreements include post-contract customer support ("PCS"). For the Company’s software and software-related multiple element arrangements, where customers purchase both software related products and software related services, the Company uses vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. The Company has established VSOE of fair value for the majority of the PCS, professional services, and training. Given the limited number of sales related to this software, and the fact that the Company does not sell the PCS element separately, there is no VSOE currently available to bifurcate the PCS element from the contract.  In accordance with Accounting Standards Codification Topic

985

-

605

-

25

-

10a,

the fees earned from sale of licenses to which the only undelivered element is the PCS, are recognized ratably over the life of the contract. Revenues from the sale of software licenses and maintenance for the

three

months ended

March

31,

2017

and

2016

were

$7,500

and

$27,750,

respectively. At

March

31,

2017

and

December

31,

2016,

deferred revenues amounted to

$0

and

$7,500,

respectively.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of

March

31,

2017

and

December

31,

2016,

the Company had unbilled revenues of

$218,261

and

$235,421,

respectively which are recorded within receivables on government contracts in the Company’s balance sheet. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of

March

31,

2017

and

December

31,

2016,

there were 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

March

31,

2017

and

2016,

the Company recognized a net warranty (recovery) expense, which is a component of the Company’s cost of sales of

$(141,300)

and

$(20,801),

respectively. Since the inception of the ADEPT IDIQ contract in

March

2010,

the Company has delivered

189

ADEPT units. As of

March

31,

2017,

there are

26

ADEPT units that remain under the limited warranty coverage.

The following table reflects the reserve for product warranty activity as of

March

31,

2017

and

December

31,

2016:

	March 31, 2017			December 31, 2016
Beginning balance	$	240,980		$	359,654
Provision for product warranty		-			1,800
Product warranty expirations		(141,300	)		(86,301	)
Product warranty costs paid		(1,590	)		(34,173	)
Ending balance	$	98,090		$	240,980

Research and Development Expense, Policy [Policy Text Block]

Research and Development Expense

Research and Development expenditures for research and development of the Company's products are expensed when incurred, and are included in general and administrative expenses. The Company recognized research and development costs as follows:

	Three months ended March 31,
	2017		2016
Salaries	$	39,606	$	19,552
Other costs		2,189		1,345
	$	41,795	$	20,897

Intangible Assets, Finite-Lived, Policy [Policy Text Block]

Intangible Assets

The majority of the Company’s intangible assets is a license acquired during

2015.

In

July

2015,

the Company purchased certain software products, intellectual property and related assets from VSE Corporation. The primary software programs purchased were the Prognostics Framework (PF) and Diagnostic Profiler (DP) programs. The Diagnostic Profiler software is used worldwide by several multinational companies for optimized maintenance of diverse product lines. The Diagnostic Profiler is also used by the US Air Force for depot test programs, and Prognostics Framework is used by the US Army for several missile defense systems.

Licenses are amortized using a straight-line method over their estimated life of

six

years. For the

three

months ended

March

31,

2017

and

2016,

amortization expense related to the Company’s license amounted to

$5,250

and

$5,250,

respectively, and are included in general and administrative expenses on the Condensed Statements of Operations and Comprehensive Income.

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Note 3 - Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Product Warranty Liability [Table Text Block]

	March 31, 2017			December 31, 2016
Beginning balance	$	240,980		$	359,654
Provision for product warranty		-			1,800
Product warranty expirations		(141,300	)		(86,301	)
Product warranty costs paid		(1,590	)		(34,173	)
Ending balance	$	98,090		$	240,980

Research and Development Expense [Table Text Block]

	Three months ended March 31,
	2017		2016
Salaries	$	39,606	$	19,552
Other costs		2,189		1,345
	$	41,795	$	20,897

XML

Note 4 - Income Per Share (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

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

	Three Months Ended,
	March 31,
	2017			2016
Basic earnings per common share:
Net (loss) income allocable to common shareholders		90,307			1,846
Portion allocable to common shareholders		100.0	%		99.2	%
Net income allocable to common shareholders		90,307			1,831
Weighted average basic shares outstanding		35,430,119			32,030,138
Basic (loss) income per common share	$	-		$	-
Dilutive earnings per common share:
Net (loss) income allocable to common shareholders		90,307			1,831
Add: undistributed earnings allocated to participating securities		-			15
Numerator for diluted earnings per common share		90,307			1,846
Weighted average shares outstanding - basic		35,430,119			32,030,138
Diluted effect:
Stock options		71,523			14,000
Unvested restricted stock		141,750			1,818
Conversion equivalent of dilutive Series B Convertible Preferred Stock		-			3,307,299
Conversion equivalent of dilutive Convertible Preferred Stock		-			255,000
Weighted average dilutive shares outstanding		35,643,392			35,608,255
Dilutive (loss) income per common share	$	-		$	-

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

	Three Months Ended,
	March 31,
	2017			2016
Numerator:
Weighted average participating common shares		35,430,119			32,030,138
Denominator:
Weighted average participating common shares		35,430,119			32,030,138
Add: Weighted average shares of Convertible Preferred Stock		-			255,000
Weighted average participating shares		35,430,119			32,285,138
Portion allocable to common shareholders		100.0	%		99.2	%

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

	Three Months Ended,
	March 31,
	2016		2015
Stock options		335,000		610,000
Unvested restricted stock		30,000		-

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Note 3 - Significant Accounting Policies (Details Textual)	3 Months Ended		84 Months Ended
	Mar. 31, 2017 USD ($)	Mar. 31, 2016 USD ($)	Mar. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
Licenses Revenue	$ 7,500	$ 27,750
Deferred Revenue, Current	0		$ 0	$ 7,500
Government Contract Receivable, Unbilled Amounts	218,261		218,261	235,421
Product Warranty (Recovery) Expense	(141,300)	(20,801)
Customer Advances, Current	$ 0		$ 0	$ 0
Licenses [Member]
Finite-Lived Intangible Asset, Useful Life	6 years
Amortization of Intangible Assets	$ 5,250	$ 5,250
IDIQ Agreement [Member] | ADEPT Units [Member]
Units Delivered			189
Units to be Delivered	26		26

XML

Note 3 - Significant Accounting Policies - Reserve for Product Warranty Activity (Details) - USD ($)	3 Months Ended	12 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Beginning balance	$ 240,980	$ 359,654
Provision for product warranty		1,800
Product warranty expirations	(141,300)	(86,301)
Product warranty costs paid	(1,590)	(34,173)
Ending balance	$ 98,090	$ 240,980

XML

Note 3 - Significant Accounting Policies - Research and Development Expense (Details) - General and Administrative Expense [Member] - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Research and Development Expense	$ 41,795	$ 20,897
Research and Development, Salaries [Member]
Research and Development Expense	39,606	19,552
Research and Development, Other Costs [Member]
Research and Development Expense	$ 2,189	$ 1,345

XML

Note 4 - Income Per Share - Weighted Average Shares Outstanding (Details) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Net (loss) income allocable to common shareholders	$ 90,307	$ 1,846
Portion allocable to common shareholders	100.00%	99.20%
Net income allocable to common shareholders	$ 90,307	$ 1,831
Weighted average basic shares outstanding (in shares)	35,430,119	32,030,138
Basic (loss) income per common share (in dollars per share)
Add: undistributed earnings allocated to participating securities		$ 15
Numerator for diluted earnings per common share	$ 90,307	$ 1,846
Stock options (in shares)	71,523	14,000
Conversion equivalent of dilutive Series B Convertible Preferred Stock (in shares)		255,000
Weighted average dilutive shares outstanding (in shares)	35,643,392	35,608,255
Dilutive (loss) income per common share (in dollars per share)
Series B Preferred Stock [Member]
Conversion equivalent of dilutive Series B Convertible Preferred Stock (in shares)		3,307,299
Restricted Stock [Member]
Unvested restricted stock (in shares)	141,750	1,818

XML

Note 4 - Income Per Share - Percentage of Net Earnings Allocable to Common Shareholders (Details) - shares	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Weighted average participating common shares (in shares)	35,430,119	32,030,138
Weighted average participating common shares (in shares)	35,430,119	32,030,138
Add: Weighted average shares of Convertible Preferred Stock (in shares)		255,000
Weighted average participating shares (in shares)	35,430,119	32,285,138
Portion allocable to common shareholders	100.00%	99.20%

XML

Note 4 - Income Per Share - Diluted Net Earnings (Loss) Per Share (Details) - shares	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Employee Stock Option [Member]
Antidilutive shares (in shares)	335,000	610,000
Restricted Stock [Member]
Antidilutive shares (in shares)	30,000

XML

Note 5 - Income Tax Matters (Details Textual) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount	$ 35,169	$ 1,381
Effective Income Tax Rate Reconciliation, Percent	49.30%
Income Tax Expense (Benefit)	$ 87,775	$ 3,143

XML

Note 6 - Share-based Compensation (Details Textual) - USD ($)		3 Months Ended
	Jan. 30, 2017	Mar. 31, 2017	Mar. 31, 2016
Stock Issued During Period, Shares, Restricted Stock Award, Net of Forfeitures	30,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized		$ 11,100
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		22,000
Proceeds from Stock Options Exercised		$ 3,350	$ 350
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value		40,530
Restricted Stock [Member]
Share Price	$ 0.37
Allocated Share-based Compensation Expense		$ 2,639	$ 636