10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2013

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	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

707 Alexander Road, Suite 208, Princeton, New Jersey 08540

(Address of Principal Executive Offices) (Zip Code)

609-987-1513

Registrant’s Telephone Number, including area code:

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

None

Securities Registered Pursuant to Section 12(g) of the Exchange Act:

Common Stock, $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [   ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [   ] No [X]

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

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 [ X ] No [   ]

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

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 definitions of "large accelerated filer”, “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	[   ]	Accelerated filer	[   ]
Non-accelerated filer	[   ]	Smaller reporting company	[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ] No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter,  based on the last sales price of the issuer’s common stock as reported by the OTCBB was $2,153,536.  Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant.  This determination of affiliate status is not a conclusive determination for other purposes.

As of March 27, 2014, 32,011,753 shares of the registrant's common stock were outstanding.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		5
Item 2.	Properties		10
Item 3.	Legal Proceedings		10
Item 4.	Mine Safety Disclosures		10
PART II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		11
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		12
Item 8.	Financial Statements and Supplementary Data		16
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosures		16
Item 9A.	Controls and Procedures		17
Item 9B.	Other Information		17
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		18
Item 11.	Executive Compensation		20
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		24
Item 13.	Certain Relationships and Related Transactions, and Director Independence		30
Item 14.	Principal Accounting Fees and Services		30
PART IV
Item 15.	Exhibits and Financial Statement Schedules		31

PART I

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, but are not limited to:  changes in business conditions, continuation of the federal automatic sequestration cuts, a decline or redirection of the U.S. defense budget, the termination of any contracts with the U.S. Government, changes in our sales strategy and product development plans, changes in the marketplace, continued services of our executive management team, our limited marketing experience, competition between us and other companies seeking Small Business Innovation Research grants, competitive pricing pressures, market acceptance of our products under development, delays in the development of products, and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. These uncertainties are described in more detail in Part I, Item 1A. “Risk Factors” of this Form 10-K Report. 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.  We do not undertake to update our forward-looking statements.

ITEM 1.  BUSINESS.

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

History of the Company

Founded in Albany, New York, Mikros was formed to leverage the microprocessor advancements coming out of the nearby General Electric Research and Development Center into state-of-the-art digital signal processing applications for the defense industry.  We specialized in developing technology and products advancing the state of military RF (radio frequency or wireless) data communications.  Through several U.S. Small Business Innovation Research (“SBIR”) awards in the early 1990s, we developed and fielded the AN/USQ-120 Multi-Frequency Link-11 Data Terminal Set still in use today by the U.S. Navy.

In the mid-1990s, we began shifting our core business away from military communication applications to the rapidly expanding commercial wireless communications arena.  Our advanced Digital Signal Processing (“DSP”) technology base and core competencies enabled us to develop unique, proprietary technology, high-speed data broadcasting techniques utilizing the commercial AM and FM radio spectrum.  In 1998, we sold our military communications business to an unrelated third party.

Due to expanding cellular and satellite communications technologies, market demand for commercial wireless data broadcasting (one-way communication) applications never fully materialized. Upon expiration of our non-compete restrictions imposed by the 1998 sale of our military communications business, we redirected our focus back to research and development for military electronic systems.    In 2002, we began developing SBIR initiated technology products within our areas of expertise, and remain committed to this strategic approach today.

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Adaptive Diagnostic Electronic Portable Testset (ADEPT®)

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

Key benefits of ADEPT include:

• Distance support capability enabling remote (shore-based) system support by subject matter experts and fleet-wide system analysis;

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

• Modularity and programmability to overcome obsolescence issues encountered with current test equipment and support capability enhancements in future systems.

The initial goal for ADEPT has been to obtain a multi-year Indefinite-Delivery, Indefinite-Quantity (“IDIQ”) contract for production, engineering, and logistics support.  On March 19, 2010, we were awarded and entered into an IDIQ contract with the Naval Surface Warfare Center.  The contract is for a term of five years and provides for the purchase and sale of up to $26 million of ADEPT units and related support.   

As of December 31, 2013, we have delivered a total of 122 ADEPT units under the IDIQ contract. During the years ended December 31, 2013 and 2012, we realized revenues of $3.0 million and $4.6 million, respectively, related to the ADEPT production orders.  During the first quarter of 2014, we did not deliver any additional units and there are 3 remaining units in our backlog. We expect to receive task orders for additional ADEPT Units under the IDIQ in 2014.

In August 2013, we were awarded a $5,492,143 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 $842,612 under this service contract which has been increased to $2,117,543 as of March 27, 2014.

A further goal for ADEPT has been to expand the capabilities to other radar systems. In January 2014, we were awarded a $492,611 service contract by the U.S. Navy to extend ADEPT to a second U.S. Navy radar system, the SPS-49. These services are expected to assist in optimizing performance for the Ballistic Missle Defense Mission.

Wireless Local Area Network Systems

Since June 2004, we have been working with the Office of Naval Research regarding emerging Wireless Local Area Network systems (“WLANs”) and DoD radar systems to, among other things, evaluate and quantify the potential improvements which may be afforded by selected mitigation techniques.  We completed two contracts in connection with this project and have worked closely with engineers from the Naval Air Warfare Center, Weapons Division (“NAWCWD”).  The technical objective of this effort was to develop simulation models that can be used to predict the performance of data links in a jamming environment.

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Additional Contracts and Recent Developments

In January and April 2013, we were awarded an additional $185,000 and $187,238, respectively, under the IDIQ contract to provide additional engineering and logistics support related to ADEPT.

In June 2013, we were awarded a $2,803,845 service contract with Condition-Based Maintenance (“CBM”) for Littoral Combat Ship Systems using the Adaptwe Distance Support Sensor Suite, which allows remote monitoring and predictive maintenance to reduce costs and enhance readiness. 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. Specific objectives of this project will be realized using a phased approach and will contain specific milestones.

In January 2014, we were awarded a $492,661 contract by the U.S. Navy that will extend the ADEPT system to a second Navy radar system that will help optimize performance for the Ballistic Missile Defense mission.

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

Corporate Growth & Strategy

Our strategy for continued growth is three-fold.  First, we expect to continue expanding our technology base, backlog and revenue by continuing our active participation in the DoD SBIR program and bidding on projects that fall within our areas of expertise.  These areas include electronic systems engineering and integration, radar systems engineering, combat/C4I (Command, Control, Communications, Computers & Intelligence) systems engineering, and communications engineering.  We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products, such as the ADEPT described above, with broad appeal in both the government and commercial marketplace.  This state-of-the-art test equipment can be used by many commercial and governmental customers such as the FAA, radio and television stations, cell phone stations, and airlines.  Second, we will continue to pursue SBIR projects with the Department of Homeland Security, the U.S. Navy, and other government agencies.  Third, we believe that through our marketing of products such as ADEPT we will develop key relationships with prime defense system contractors.  Our strategy is to develop these relationships into longer-term, key subcontractor roles on future major defense programs awarded to these prime contractors.

In 2014, 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 perspective, we expect to focus substantial resources on generating purchase orders under the IDIQ contract for ADEPT units, expanding ADEPT to support other radar systems, 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.

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.  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.

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 negatively impact our revenues and profits.

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Competition

The SBIR arena is highly competitive and we compete against numerous small businesses for SBIR awards.  In our general business area of electronic defense systems and products, we also compete against many larger companies which have greater financial and human resources.   We believe that the primary competitive factors in obtaining SBIR contracts are technical expertise, prior relevant experience, and cost.  Our history of completing projects in a timely and efficient manner and the experience of our management and technical personnel enables us to compete for future SBIR grants.

Intellectual Property

We have two patents covering digital signal processing technology and our base scheme of implementing Link-11.   We have also developed and continue to develop intellectual property (technology and data) under our SBIR contracts. Our request for a trademark for the product name “ADEPT” has been approved by the U.S. Patent and Trademark Office, and ADEPT® is now a registered trademark.

Under SBIR data rights, we are protected from unauthorized use of SBIR-developed technology and data for a period of five years after acceptance of all items to be delivered under a particular SBIR contract or any follow-on contract.

During 2012, we discontinued the use of certain technology and related patents and removed the historical carrying value of these patents of $4,000 from our balance sheet. As a result, we immediately recognized $2,933 of amortization expense for the year ended December 31, 2012.

Customer Concentration and Dependence on Federal Government

Substantially all of our revenue is derived from SBIR and IDIQ contracts for the Federal government.  Approximately 98% and 96% of our revenues in 2013 and 2012, respectively, were realized in connection with task orders issued under our IDIQ contract with the Naval Surface Warfare Center to deliver ADEPT units and provide related support services.  Although our operations are not subject to any particular government approval or regulations, we are dependent upon funding being made available to the DoD in amounts sufficient to cover the SBIR grants and other DoD contracts for which we compete.

Research and Development

We specialize in the development of electronic systems technology primarily for military applications.  All of our research and development costs in 2013 and 2012 were for the benefit of our customers, who are agencies of the Federal government.  The customer-sponsored research and development projects are performed under contracts and are accounted for as contract costs as the work is performed.  In future periods, we may engage in company-sponsored research and development projects which would be expensed as incurred.

Backlog

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed.  Our backlog consists of future ADEPT units to be developed and delivered to the Federal government and continued development and testing. At December 31, 2013, our backlog was $2,632,403.

Employees

As of December 31, 2013, we had 13 full-time employees, of which 8 work at our Fort Washington, Pennsylvania, Research & Development Center, 2 work at our Princeton, New Jersey corporate headquarters and 3 work at our Largo, Florida production support office.  None of our employees belong to a labor union.  We believe relations with our employees are good.   We also use the services of subcontractors and consultants as necessary to aid in software and hardware development and for the manufacture of products.

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ITEM 1A.  RISK FACTORS.

An investment in our common stock involves a high degree of risk.  You should carefully consider the following risk factors in addition to other information in this Annual Report on Form 10-K before purchasing our common stock. The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our company and our industry.  In addition to these risks, our business may be subject to risks currently unknown to us.  If any of these or other risks actually occurs, our business may be adversely affected, the trading price of our common stock may decline and you may lose all or part of your investment.

RISKS ASSOCIATED WITH OUR BUSINESS AND OR INDUSTRY

A decline in or a redirection of the U.S. defense budget could result in a material decrease in our sales, earnings and cash flows.   Because we derive nearly all of our revenue from contracts with the federal government, the success and development of our business will continue to depend on our successful participation in federal government contract programs. Changes in federal government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs that we support or a change in federal government contracting policies could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise options to renew contracts.

Our government contracts are primarily dependent upon the U.S. defense budget. Recently Department of Defense, or DoD, budgets have been and are expected to continue to be negatively affected by several factors, including events we cannot foresee, U.S. Government budget deficits, current or future economic conditions, new administration priorities, U.S. national security strategies, a change in spending priorities, the cost of sustaining U.S. military and related security operations around the world where U.S. military support may be pivotal, and other related exigencies and contingencies. While we are unable to predict the impact and outcome of these uncertainties, the effect of changes in these DoD imperatives have and could continue to cause the DoD budget to decrease.

In August 2011, Congress enacted the Budget Control Act of 2011 (“BCA”). The BCA imposed spending caps and discretionary spending cuts to the DoD budget. The BCA also triggered an automatic sequestration process, which imposed additional budget cuts to U.S. national security accounts of approximately $490 billion for FY 2013 to FY 2021 and other U.S. Government budget cuts of another $500 billion to discretionary non-national security accounts. The Consolidated Appropriations Act of 2014 limited defense spending to $487 billion in 2014 and President Obama’s proposed 2015 budget allocates $495.6 billion for the Department of Defense.

Declining DoD budgets may reduce funding for some of our programs and generally will have a negative impact on our sales, results of operations and cash flows.

We depend on U.S. Government contract awards that are only partially funded and which depend upon annual budget appropriations. A delay in the completion of the U.S. Government’s budget process or the impact of sequestration, (automatic spending cuts), could delay procurement of the services and solutions we provide and have an adverse effect on our future revenue. Budget decisions made by the U.S. Government are outside of our control and could have significant consequences for our business. Funding for U.S. Government contract awards is subject to Congressional appropriations. Although multi-year awards may be planned or authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may be expected to continue for several years. Consequently, awards often initially receive only partial funding, and additional funds are committed only as Congress makes further appropriations. The termination of funding for any of our U.S. Government prime contracts or subcontracts could result in a loss of anticipated future revenue attributable to that program and a reduction in our cash flows and could have an adverse impact on our operating results.

In years when the U.S. Government does not complete its budget process before the end of its fiscal year on September 30, government operations are typically funded pursuant to a “continuing resolution” that authorizes agencies of the U.S. Government to continue to operate, but does not authorize new spending initiatives. When the U.S. Government operates under a continuing resolution, delays can occur in the procurement of the services and solutions that we provide. When supplemental budgets are required to operate the U.S. Government and passage of legislation needed to approve any supplemental budget is delayed, the overall funding environment for our business could be adversely affected.

Our government contracts contain unfavorable termination provisions and are subject to audit and modification. If a termination right is exercised by the government, it could have a material adverse effect on our business, financial condition and results of operations. Companies engaged primarily in supplying defense-related equipment and services to U.S. Government agencies are subject to certain business risks particular to the defense industry. These risks include the ability of the U.S. Government to unilaterally:

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● suspend us from receiving new contracts;

● terminate existing contracts;

● reduce the value of existing contracts; and

● audit our contract-related costs and fees, including allocated indirect costs.

All of our U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if we default by failing to perform under the terms of the contract. Termination for convenience provisions provide only for our recovery of costs incurred or committed settlement expenses and profit on the work completed prior to termination. Termination for default provisions provide for us to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.

We rely predominantly on U.S. Government entities, and the loss of our contracts could have a material adverse effect on our results of operations and cash flows.  Our earnings are predominantly derived from contracts with agencies of the U.S. Government. The loss of any of our contracts with the U.S. Government could have a material adverse effect on our results of operations and cash flows.

In addition, future financial results may be adversely affected by:

● curtailment of the U.S. Government’s use of technology or other services and products providers, including curtailment due to government budget reductions and related fiscal matters;

● developments in Afghanistan or other geopolitical developments that affect demand for our products and services; and

● technological developments that impact purchasing decisions or our competitive position.

We may experience variability in our quarterly operating results.  Our revenue, gross margin, operating income and net income may vary from quarter to quarter due to a number of factors. Many factors, some of which are not within our control, may contribute to fluctuations in operating results. These factors include the following:

● market acceptance of our products;

● budgetary constraints of the Federal government;

● new product and service introductions by us or our competitors;

● ability to earn new task orders and contract awards as others expire;

● market factors affecting the availability or costs of qualified technical personnel;

● timing and customer acceptance of our product and service offerings;

● length of sales cycle; and

● industry and general economic conditions.

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Any failure by us to continue to generate task orders or fulfill our obligations under this contract would have a material adverse effect on our financial condition and results of operation.   In March 2010, we were awarded an IDIQ contract for the production, engineering and logistics support for our ADEPT product.  This IDIQ contract is for a term of five years and provides for the purchase and sale of up to $26,000,000 of ADEPT units and related support.  Sales under this contract accounted for approximately 98% of our revenues in 2013.  We are substantially dependent upon generating continued task orders under this IDIQ contract.  Any reduction in task orders or any failure by us to fulfill our contractual obligations under this IDIQ contract would result in substantially reduced revenue and profits and would have a material adverse effect on our financial condition and results of operation.

Our success depends on the services of our senior management and our ability to hire and retain additional skilled personnel. Our future success depends on the personal efforts and abilities of the members of our senior management team to provide strategic direction, develop business, manage operations and maintain a cohesive and stable environment. Specifically, we are dependent upon Thomas J. Meaney, President and Chief Executive Officer, Walter T. Bristow, Vice President of Engineering, and Operations, and David Henry Silcock, Chief Technology Officer.  We do not have employment agreements with any key personnel. Furthermore, our performance also depends on our ability to attract and retain management and qualified professional and technical operating staff, which are in high demand in our industry.  The loss of services of any key executive, or our inability to continue to attract and retain qualified technical staff, could have a material adverse effect on our business, results of operations and financial condition. We do not maintain any key employee insurance on any of our executives.

The demand for our products is subject to rapid technological change.  The demand for our products and planned products is characterized by rapid changes in technology, including the potential introduction of new types of wireless communications and digital signal processor technologies, which could have a material adverse impact on our business.  Our future success will depend in part on our ability to continually enhance our current technology and to develop or acquire new ideas that address the needs of the defense industry and other potential users.  There can be no assurance that we will be successful in developing new products or procedures that respond to technological changes. There can be no assurance that research and development by competitors will not render our technology obsolete or uncompetitive.  In addition, in a technology-based industry, there can be no assurance that a claim of patent or other infringement will not be made against us.  While we are not aware of any such claims, no infringement studies have been conducted on our behalf.

Our industry is highly competitive.  High technology applications such as those being developed by us often require large investments of both money and talent.  Many large entities with greater financial, technical and human resources than us are currently investing heavily in products and services that compete directly with our services and underlying products. There is no assurance that our offerings can be successfully marketed against such competition.  In addition, being first in the market with new high technology is a critical factor in our success in the market. There is no assurance that we will be able to introduce new offerings to the market before any of our competitors.  As the markets in which we compete are mature and new and existing companies compete for customers, price competition is likely to intensify, and such price competition could adversely affect our results of operations.

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We rely on third-party contractors for certain engineering services that may be difficult to replace.  We currently provide a portion of our engineering services through third-party contractors. These services may not continue to be available on commercially reasonable terms, if at all.  Services that are not immediately replaceable would need to be internally developed, which could strain existing engineering personnel and require us to spend substantial time and resources to retain additional personnel or third-party contractors.  The loss or inability to maintain any of these engineering service providers could result in delays in the development of our products and services until equivalent services, if available, are identified, developed, and integrated, which could harm our business.

We have limited operating history in providing commercial wireless applications. Historically, we have developed and sold technology and products for military applications, primarily to the U.S. Navy.  In the future, we may develop commercial wireless products and applications that would perform different functions than our historic products, and would be targeted at an entirely different customer base.  Because we have not previously operated as a provider of commercial wireless products, we have no basis to evaluate our ability to develop, market and sell such products.  Our ability to commercialize any products or services and generate operating profits and positive operating cash flow will depend principally upon our ability to:

● develop and manufacture commercially attractive products;

● attract and retain an adequate number of customers;

● enter new markets and compete successfully in them;

● manage operating expenses;

● raise any necessary capital; and

● attract and retain qualified personnel.

Our business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions. As a defense contractor, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information; threats to the security of our facilities and infrastructure; and threats from terrorist acts. Although we utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities, essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations, or cash flows.

Cybersecurity attacks in particular are evolving and include but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could damage our reputation and lead to financial losses from remedial actions, loss of business or potential liability.

RISKS RELATED TO OUR COMMON STOCK

We may issue additional shares of our capital stock that could dilute the value of your shares.  Our outstanding securities include shares of convertible preferred stock and options to purchase common stock.  During the respective terms of the options, and while the preferred stock is outstanding, the holders thereof are given an opportunity to profit from a rise in the market price of our common stock, causing a dilution of the interests of existing stockholders.  Thus, the terms on which we may obtain additional financing during that period may be adversely affected.  The holders of preferred stock and options may exercise their respective rights to acquire our common stock at a time when we could be seeking to raise additional capital through sales of securities on terms more favorable than those being offered by us to new investors.  In the event that such holders exercise their rights to acquire shares of our common stock at such time, the net tangible book value per share of our common stock will be subject to dilution.

Future sales of our securities by existing stockholders could adversely affect the market price of our common stock.   Future sales of shares by existing stockholders under Rule 144 of the Securities Act of 1933, as amended, through the exercise of outstanding options, through vesting of restricted stock awards, or otherwise could have a negative impact on the market price of our common stock.  We are unable to estimate the number of shares that may be sold under Rule 144 because such sales depend on the market price for our common stock, the personal circumstances of the sellers and a variety of other factors.  Any sale of substantial amounts of our common stock in the open market may adversely affect the market price of our common stock and may adversely affect our ability to obtain future financing in the capital markets.

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Our common stock is considered a “penny stock” and is subject to the penny stock rules.  Our common stock currently trades over-the-counter on the OTCQB.  Since our common stock continues to trade below $5.00 per share, our common stock is considered a “penny stock” and is subject to Securities and Exchange Commission rules and regulations which impose limitations upon the manner in which our shares can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks.  Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale.  These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

We have never paid dividends on our common stock and we do not anticipate paying dividends in the foreseeable future. We have never paid cash dividends on our common stock.  Any payment of cash dividends in the future will depend upon our earnings (if any), financial condition and capital requirements. We do not anticipate paying dividends in the foreseeable future. In addition, certain provisions of our preferred shares prohibit payment of dividends and our loan agreement prohibits us from paying a dividend on our common stock as long as such loan is in place.  Accordingly, any potential investor who anticipates the need for current dividends from its investment should not purchase any of our securities.

Our common stock is thinly traded and the price of our common stock may experience price volatility.  Our common stock is currently traded over-the-counter on the OTCQB.  There can be no assurance that an active market for our shares will develop or, if developed, will be sustained.  Absent a public trading market, an investor may be unable to liquidate its investment.  We believe that factors such as the announcements of the availability of new services and new contracts by us or our competitors, quarterly fluctuations in our financial results and general conditions in the communications industry could cause the price of our common stock to fluctuate substantially. If stockholders seek to sell their shares in a thinly traded stock, it may be difficult to obtain the price desired.  In addition, stock markets have experienced extreme price volatility in recent years.  This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the specific companies.

Our share ownership is highly concentrated.  Our directors, officers and principal stockholders, beneficially own approximately 31.5% of our common stock and will continue to have significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of our directors.  In addition, such influence by management could have the effect of discouraging others from attempting to take control of us, thereby increasing the likelihood that the market price of our common stock will not reflect a premium for control.

We have adopted certain anti-takeover provisions.  We are authorized to issue 960,000 additional shares of preferred stock, which may be issued by our board of directors on such terms, and with such rights, preferences and designations as the board may determine. Issuance of such preferred stock, depending upon the rights, preferences and designations thereof, may have the effect of delaying, deterring or preventing a change in control of our company.  The existing 2,052,433 shares of issued and outstanding preferred stock have certain rights and preferences, including dividend and liquidation preferences, which also may have the effect of delaying, deterring or preventing a change in control.  In addition, certain “anti-takeover” provisions of the Delaware General Corporation Law (the “DGCL”), among other things, restrict the ability of stockholders to effect a merger or business combination or obtain control of the Company, and may be considered disadvantageous by a stockholder.

Ineffective internal controls could impact our business and operating results.  Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations.

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ITEM 2.  PROPERTIES.

Our principal executive offices are located at 707 Alexander Road, Building 2, Suite 208, Princeton, New Jersey 08540-6331 under a month to month lease. 

Our engineering research, design and development facility is located at 220 Commerce Drive, Suite 300, Fort Washington, Pennsylvania 19034, where we lease approximately 2,500 square feet of general office space under a lease agreement that was renewed in December 2010 and will continue through February 2016.   

We maintain a marketing office at 80 M Street, Suite 640, Washington, D.C. under a month-to-month lease.   

We lease a facility at 8076 114th Ave N., Largo, Florida 33777 which supports production of our ADEPT product line and quality assurance, field support, and life cycle management.  We renewed our lease for one year in February 2014.

We believe that our office, research, design, and development space is adequate to support our current and anticipated operations over the next 12 months.

ITEM 3.  LEGAL PROCEEDINGS.

We are not currently a party to any legal action.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not Applicable.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is quoted on the OTC Bulletin Board (the "OTCBB") under the trading symbol “MKRS”.  Commencing on or about March 4, 2011, our common stock has also been quoted on the OTCQB under the trading symbol “MKRS”.  The following table sets forth the range of high and low bid prices of our common stock for the periods indicated as reported by the OTCBB and OTCQB.  The quoted prices represent only prices between dealers on each trading day as submitted from time to time by certain of the securities dealers wishing to trade in our common stock, do not reflect retail mark-ups, mark-downs or commissions, and may differ substantially from prices in actual transactions.

	Bid
	High		Low
2013
First Quarter	$	0.60	$	0.05
Second Quarter		0.16		0.06
Third Quarter		0.14		0.06
Fourth Quarter		0.12		0.07
2012
First Quarter	$	0.12	$	0.05
Second Quarter		0.14		0.06
Third Quarter		0.08		0.02
Fourth Quarter		0.08		0.03

The last price of our common stock as reported on the OTCBB as of March 27, 2014 was $0.09 per share.

Dividends

We have never paid cash dividends on our common stock.   Any payment of cash dividends in the future will depend upon our earnings (if any), financial condition, and capital requirements.  Our secured loan agreement with Sun National Bank prohibits us from paying any dividends on our common stock.  Certain provisions of our convertible preferred stock also prohibit us from declaring or paying dividends on our common stock.  The declaration and payment of dividends on our common stock is subject to the discretion of our board of directors and limitations imposed under applicable Delaware law.  We do not anticipate paying dividends in the foreseeable future.

Holders

As of March 27, 2014, we had 333 holders of record of our common stock.

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties.  All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption “Risk Factors” contained in this report and elsewhere herein.  The following should be read in conjunction with our annual financial statements contained elsewhere in this report.

Overview

Our primary business focus is to pursue SBIR 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 years ended December 31, 2013 and 2012.  We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products for both the government and commercial marketplace.

Contracts

On March 19, 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 is for a term of five years and provides for the purchase and sale of up to $26 million of ADEPT units and related engineering and logistics support.   For the years ended December 31, 2013 and 2012, we realized revenues of $3.0 million and $4.6 million, respectively, related to the ADEPT production orders.  We expect additional delivery orders during the remaining term of the contract.  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 ADEPT orders.

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 2013, and expected revenue over the next twelve months, is or will be from sales of ADEPT units under our IDIQ contract, 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 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, combat/C4I (Command, Control, Communications, Computers & Intelligence) systems engineering, and communications engineering.  We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products, such as the ADEPT described above, with broad appeal in both the government and commercial marketplace.  This state-of-the-art test equipment can be used by many commercial and governmental customers such as the FAA, radio and television stations, 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, we will develop key relationships with prime defense system contractors.  Our strategy is to develop these relationships into longer-term, key subcontractor roles on future major defense programs awarded to these prime contractors.

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In 2014, 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, 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 exptected 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.  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.

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 negatively impact our revenues and profits.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).  The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to bad debts, warranty costs, recoverability of long-lived assets, income taxes, stock-based compensation, backlog and commitments.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.

Revenue Recognition

We are engaged in research and development contracts with the Federal government to develop certain technology to be utilized by the U.S. DoD. The contracts are cost plus fixed fee contracts and we recognize revenue on the basis of such measurement of partial performance as will reflect reasonably assured realization or delivery of completed articles. Fees earned under our 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 us 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.  

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements.   As of December 31, 2013 and 2012, we had unbilled revenues of $16,130, and $0, respectively and are included in receivables on government contracts. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability.  As of December 31, 2013 and 2012, there were no advanced billings or unbilled revenue.  

Accounts Receivable

Accounts receivable from government contracts are stated at outstanding balances.  When necessary, an allowance for doubtful accounts is established through provisions charged against operations.  Receivables deemed to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

The allowance for doubtful accounts is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on past experience, aging of the receivables, adverse situations that may affect a customer's ability to pay, current economic conditions and other relevant factors.  This evaluation is inherently subjective as it requires estimates that may be susceptible to significant change.  Unpaid balances remaining after the stated payment terms are considered past due. All of our business is conducted with the Federal government in which nonpayment for awarded contracts is unlikely.  No allowance for doubtful accounts was deemed necessary by management at December 31, 2013 and 2012.

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Warranty Expense

We provide a limited warranty, as defined by the related warranty agreements, for our production units.  Our warranties require us to repair or replace defective products during such warranty period.  We estimate the costs that may be incurred under our warranty and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of units sold, expected and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liability and adjust the amount as necessary.  We had a net warranty recovery, which is a component of our cost of sales, of $15,500 and $7,900 for the years ended December 31, 2013 and 2012, respectively.  The warranty recovery is attributable to the warranty product expirations outpacing warranty product expenses for units produced and sold under the IDIQ contract.  We had an accrued warranty expense liability of $35,190 and $69,655 at December 31, 2013 and 2012, respectively.

Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.   During 2013, we generated federal net operating loss carryforwards of approximately $180,000. The valuation allowance associated with the related deferred tax assets was increased by approximately $7,000 in 2013 and decreased by approximately $109,000 in 2012.  The change in our valuation allowance for 2013 and 2012 was attributable to the expected profitability on contracts being fulfilled as of the end of each period.

Share-based Compensation

We record compensation expense associated with stock options and other forms of equity compensation based on the estimated fair value at the grant date. We issued 35,000 stock options during the year ended December 31, 2013.  We use the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair value of stock-based awards.  Expected volatility is based on historical volatility of our common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The expected term is estimated consistent with the simplified method, as identified in Accounting Standards Codification (“ASC”) 718.  In December 2007, the SEC issued guidance that allows companies, in certain circumstances, to utilize a simplified method in determining the expected term of stock option grants when calculating the compensation expense to be recorded under GAAP for employee stock options. The simplified method can be used after December 31, 2007 only if a company's stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term. Through 2007, we used the simplified method to determine the expected option term, based upon the vesting and original contractual terms of the option. We have continued to use the simplified method to determine the expected option term since our stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term.

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Recently Issued Accounting Pronouncements

Effective January 1, 2012, we Company adopted Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income and ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-5. In these updates, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU No. 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of ASU Nos. 2011-05 and 2011-12 did not have a material impact on the Company’s consolidated financial statements. The Company has presented comprehensive loss in the accompanying consolidated statements of operations and comprehensive loss.

In February 2013, the FASB issued ASU No. 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements, however, it does require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial statements.

Results of Operations

Years ended December 31, 2013 and 2012

Total contract revenues were $3,050,126 in 2013 compared to $4,825,068 in 2012, a decrease of $1,774,942, or 37%. The decrease was primarily due to decreases in the number of ADEPT units delivered in 2013 and an unfavorable change in the mix of revenues earned. These reductions were due, in part, to the continued effects of sequestration and reduction in the defense budget. Revenues for direct labor hours outpaced subcontracting and materials revenues during the year ended December 31, 2013 compared to a higher mix of material and subcontract revenues during the comparable period in 2012.

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.   Costs of sales were $1,422,135 in 2013 compared to $2,690,510 in 2012, a decrease of $1,268,375, or 47%.  The decrease was primarily attributable to the change in total contract revenues. Our costs of sales, as a percentage of total contract revenues was 46% and 56% during the years ended December 31, 2013 and 2012, respectively. The decrease in cost of sales as a percentage of contract revenue was primarily attributable to lower subcontracting services and material purchases and increased direct labor hours. In addition, we had a $7,600 decrease in our cost of sales due to a larger recovery of warranty expense in 2013 of $15,500 compared to $7,900 during 2012. The change is a direct result in the timing of units shipped during 2013 and the expiration of warranty coverage and reversal of accrued warranties.

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 were $816,039 in 2013 compared to $747,084 in 2012, an increase of $68,955, or 9%. The increase was primarily due to the increase in engineering salaries, travel and the allocation of engineering overhead due to the delay in receiving new task orders.

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 expenses were $1,017,058 in 2013 compared to $1,133,788 in 2012, a decrease of $116,730, or 10%. The decrease was primarily due to a reduction in bid and proposal costs, salaries, and consulting costs.

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The provision for income taxes was a $57,607 benefit in 2013 compared to $26,675 of expense in 2012, representing an effective income tax rate of 28.1%, and 10.5%%, respectively.  The change in the effective federal income tax rate is attributable to changes to our valuation allowance against our deferred tax asset as well as permanent differences in the treatment of certain items for book and tax purposes.  

We reported a net loss of $147,482 in 2013 as compared to net income of $227,109 in 2012. The decrease is primarily attributable to the decreases in delivery of ADEPT units in 2013.   

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.

At December 31, 2013, we had cash and cash equivalents of $1,028,146 and net working capital of $1,184,839.  During the year ended December 31, 2013, net cash provided by operating activities was $145,748 compared to net cash used in operating activities of $73,070 in 2012.  The increase was attributable primarily to timing of payments related to our operating assets and liabilities. We experienced a decrease in accounts receivable as a result of receiving payments and decreases in accounts payable and accrued expenses, including accrued payroll and payroll taxes due to the timing of our vendor payments and payroll processing.

During the year ended December 31, 2013, net cash used in investment was $4,742 and attributable to capital expenditures.   

We have a $500,000 credit facility with Sun National Bank.  The facility matures on June 30, 2014 and accrues interest at a variable rate equal to the bank’s prime rate plus 250 basis points with a minimum annual interest rate of 4.500%. Principal borrowings may be prepaid at any time without penalty, and the facility is secured by substantially all of our assets. Borrowings under the facility are limited to a percentage of aggregate outstanding receivables that are due within 90 days.  The facility contains customary affirmative and negative nonfinancial covenants and a net worth financial covenant.  As of December 31, 2013 and the date of this report, our borrowing capacity under the facility was $403,310, there were no amounts outstanding, and we were in compliance with all covenants.

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 December 31, 2013, 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 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required to be filed pursuant to this Item 8 are appended to this report beginning on page F-1 located immediately after the signature page.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

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ITEM 9A. CONTROLS AND PROCEDURES.

Disclosure 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), as amended (the “Exchange Act”) 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 December 31, 2013, 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to management, including our president, in order to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act.  Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting and the preparation of financial statements for external purposes, in accordance with GAAP.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including our president, conducted an evaluation of the effectiveness of internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework.  Based on its evaluation, our president concluded that our internal control over financial reporting was effective as of December 31, 2013.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  The management report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits us to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act ) that occurred during the fiscal quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION.

None.

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PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The current members of our Board of Directors and executive officers of our Company are as follows:

Name	Age	Positions with the Company
Paul G. Casner	76	Chairman of the Board of Directors
Thomas C. Lynch	71	Director
Thomas J. Meaney	79	President, Chief Executive Officer, Chief Financial Officer, and Director
Tom L. Schaffnit	67	Director
Walter T. Bristow	56	Vice President of Engineering
David Henry Silcock	61	Chief Technology Officer
Patricia A. Kapp	47	Secretary and Treasurer

Board of Directors

We believe that our Board should be composed of individuals with sophistication and experience in many substantive areas that impact our business.  We believe that experience, qualifications, or skills in the following areas are most important: regulatory and government affairs; accounting and finance; design, innovation and engineering; strategic planning; human resources and development practices; and board practices of other corporations.  These areas are in addition to the personal qualifications described in this section.  We believe that all of our current Board members possess the professional and personal qualifications necessary for board service, and have highlighted particularly noteworthy attributes for each Board member in the individual biographies below.  In addition, length of service on our Board has provided several directors with significant exposure to both our business and our industry in which we compete. The principal occupation and business experience, for at least the past five years, of each current director is as follows:

Paul G. Casner, Jr. has been a director since May 2002 and was elected Chairman of the Board in October 2009. Since 2008, he has served as a director and as the Chief Executive Officer of Atair Aerospace, Inc., an aerospace defense contractor located in Brooklyn, New York. From 2005 to July 2011, Mr. Casner was the CEO and President of Integral Systems, Inc., a defense contractor based in Columbia, Maryland. Mr. Casner is currently the COO of The Boston Holding Group, a financial management and investment organization. Mr. Casner has over forty years of defense industry experience, holding several senior positions in business management, technical management, strategic planning and business development including serving as the President of the Electronic Systems Group of DRS Technologies. He is a member of the Naval Reserve Association and is a Commodore of the Navy League of the United States, in addition to other professional affiliations. As a result of these and other professional experiences, Mr. Casner possesses particular knowledge and experience in business development, technology development, and the defense industry that strengthen the Board’s collective qualifications, skills, and experience.

Thomas C. Lynch has been a director since February 1997.  Mr. Lynch has served as a Managing Director of The Musser Group since 2007 and as a Consultant for Jones Lang LaSalle, formerly The Staubach Company, since 2001.  Prior to this, Mr. Lynch held senior management positions with Safeguard Scientifics, Inc. and CompuCom Systems, Inc., a Safeguard subsidiary.  Mr. Lynch, a retired Navy Admiral, serves as a director on the following boards: Armed Forces Benefit Association, Buckeye Insurance Company, XOS Digital, and PRWT Services, Inc.   He currently serves as a Chairman of the US Naval Academy Athletic & Scholarship Foundation, New Day USA (a mortgage lending company focused on servicing active and veteran military members) and he also serves as the President of the Union League Club of Philadelphia.  As a result of these and other professional experiences, Mr. Lynch possesses particular knowledge and experience in management, board practices of other organizations, operations and the defense industry that strengthen the Board’s collective qualifications, skills, and experience.

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Thomas J. Meaney has been a director since July 1986.  He has served as President of the Company since 1998.  Mr. Meaney has over forty years of executive management experience, including holding senior positions at Robotic Vision Systems Incorporated, a manufacturer of robotic vision systems, and  Norden Systems, a division of United Technologies Corporation.  Mr. Meaney presently owns his own defense consulting company with offices in Arlington, Virginia and Chadds Ford, Pennsylvania.  As a result of these and other professional experiences, Mr. Meaney possesses particular knowledge and experience in management, manufacturing, the defense industry, and board practices of other corporations that strengthen the Board’s collective qualifications, skills, and experience.

Tom L. Schaffnit has been a director since June 2000.  Since March 1999, he has been President of Schaffnit Consulting, Inc., a technology-related management consulting company specializing in vehicle safety communications, automotive telematics, and wireless data communications.  Mr. Schaffnit is actively involved in the development and deployment of wireless technologies and standards. He is currently active in the Connected Vehicle Program, which is planning for the deployment of vehicle-to-vehicle and vehicle-to-infrastructure wireless communications to prevent crashes.  He currently serves as President of the Vehicle Infrastructure Integration Consortium, a consortium of ten major automobile manufacturers focusing on policy issues related to the deployment of Connected Vehicle safety systems. As a result of these and other professional experiences, Mr. Schaffnit possesses particular knowledge and experience in technology development and management that strengthen the Board’s collective qualifications, skills, and experience.

Executive Officers

The principal occupation and business experience, for at least the past five years, of each current executive officer is as follows:

Walter T. Bristow has been Vice President of Engineering since August 2007 and served as our Director of Engineering from October 2003 to October 2007.  Prior to Mikros, Mr. Bristow served as the Director of Network Engineering for Clariti Telecommunications International, and a hardware engineer with Magnavox/General Atronics Corporation, a manufacturer of military communications equipment. 

David Henry Silcock has been Chief Technology Officer since February 2009, and was a Senior Staff Engineer from 2003 until 2009.  Mr. Silcock has more than thirty years of experience and has been lead engineer on a number of successful R&D programs, including frequency-diversity modems for tactical radio networks, telemetry networks for ocean-going buoys, and digital voice pager design and development. He also has experience in network and system simulation, software and microprocessor architecture, custom VSLI development, DSP and real-time systems.

Patricia A. Kapp has been Corporate Secretary since April 1996.  In September 1998, Ms. Kapp was also named Treasurer.  Ms. Kapp has served in various capacities with the Company since 1987.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors, officers and stockholders who beneficially own more than 10% of any class of our equity securities registered pursuant to Section 12 of the Exchange Act to file initial reports of ownership and reports of changes in ownership with respect to our equity securities with the SEC.  All reporting persons are required by SEC regulation to furnish us with copies of all reports that such reporting persons file with the SEC pursuant to Section 16(a).  Based solely on our review of the copies of such forms received by us and upon written representations of such reporting persons, we believe that all reporting persons are in compliance with all Section 16(a) filing requirements applicable to such reporting persons, except that Mr. Meaney did not timely file a Form 4 to report one transaction.

Audit Committee

In March 2004, our board of directors formed an Audit Committee. The members of the Audit Committee are Tom L. Schaffnit (Chair), Thomas C. Lynch, and Paul G. Casner, Jr.  The Audit Committee oversees and monitors management’s and the independent outside auditor’s participation in the accounting and financial reporting processes and the audits of our financial statements.  The Audit Committee has the responsibility to appoint, compensate, retain and oversee the work of the outside independent auditors and to consult with the independent auditors and the appropriate officers of the Company on matters relating to outside auditor independence, corporate financial reporting, accounting procedures and policies, adequacy of financial accounting and operating controls, and the scope of audits. The Audit Committee is governed by an Audit Committee Charter, which was adopted on March 10, 2004 and amended on March 17, 2008 and February 9, 2009.

Since our inception, we have had a limited number of employees and generated limited revenues, most of which have been from a single customer.  In light of the foregoing, and the need to conserve our financial resources to execute our business plan, our Board of Directors concluded that the benefits of retaining an individual who qualifies as an “audit committee financial expert,” would be outweighed by the costs of retaining such a person.  As a result, no member of our Board of Directors qualifies as an “audit committee financial expert.”

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Code of Ethics

We have adopted a written code of ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.   Our Code of Business Conduct and Ethics is available on our website, www.mikrossystems.com, or without charge upon written request directed to Patricia A. Kapp, Secretary, Mikros Systems Corporation, 707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey 08540.

ITEM 11.  EXECUTIVE COMPENSATION

The following table provides certain summary information concerning compensation earned by the executive officers named below (“named executive officers”) during the fiscal years ended December 31, 2013 and 2012.

SUMMARY COMPENSATION TABLE

Name and Principal Position	Year	Salary ($)	Bonus ($)	Total ($)
Thomas J. Meaney	2013	180,180	7,000	187,180
President, Chief Executive Officer, and Chief Financial Officer	2012	180,180	16,000	196,180
Walter T. Bristow	2013	148,457	7,500	155,957
Vice President of Engineering	2012	148,002	12,000	160,002
David Henry Silcock	2013	148,457	5,000	$153,457
Chief Technology Officer	2012	144,692	10,000	$154,692

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR−END

The following table sets forth information regarding unexercised stock options and restricted stock awards that have not vested for each named executive officer outstanding as of December 31, 2013:

	OPTION AWARDS					STOCK AWARDS
Name	Number of securities underlying unexercised options (#) exercisable	Number of securities underlying unexercised options (#) unexercisable		Option exercise price ($)	Option expiration date	Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)(1)
Thomas J. Meaney	25,000(2)	-		0.55	10/2/2017	-		-
Walter T. Bristow	50,000(3)	-		0.55	10/2/2017	15,000	(4)	1,500
				0.20	7/12/2019	15,000	(4)	1,500
David Henry Silcock	32,000	8,000	(5)	-	-			-

(1)  Market value at December 31, 2013, based on closing market price of our common stock on December 31, 2013 of $0.10 per share.

(2)  The stock options were granted on October 3, 2007 and vested in equal annual installments over a three year period commencing on the date of grant.

(3)  The stock options were granted on October 3, 2007 and vested in equal annual installments over a five year period commencing on the date of grant.

(4)  Represents the unvested portion of a restricted stock award consisting of 25,000 shares of common stock granted on September 6, 2011, which vests in five equal annual installments beginning on September 6, 2012 and is fully vested on September 6, 2016.

(5) The stock options were granted on July 13, 2009 and vest in equal annual installments over a five year period commencing on the date of grant.

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Narrative Disclosure to Summary Compensation and Outstanding Equity Awards Tables

On October 3, 2007, we issued options to Messrs. Meaney, Bristow and Silcock under the 2007 Stock Incentive Plan to purchase 25,000, 50,000 and 40,000 shares of common stock, respectively, at an exercise price of $0.55 per share, the last sales price of our common stock as reported on the OTCBB on the date of grant. Mr. Meaney’s options vest in three equal annual installments and terminate ten years from the date of grant.   Mr. Bristow’s and Mr. Silcock’s options vest in five equal annual installments and terminate ten years from the date of grant.  

On December 19, 2007, we revised our arrangement with Mr. Meaney, who apportions his professional time between us and his consulting firm which provides services to various defense contractors.   Mr. Meaney historically devoted approximately 50% of his professional time to us.  In light of the resignation of our Executive Vice President on September 1, 2007, and the importance of Mr. Meaney to both our operations and continued growth, Mr. Meaney has been required to and is expected to continue to devote substantial additional time and attention to the Company.  In recognition of the forgoing, since January 1, 2008, Mr. Meaney has devoted approximately 75% of his professional time to us and his annual base compensation was increased from approximately $105,000 in 2007 to approximately $160,000 in 2008.  His base salary is currently $180,180.  Mr. Meaney has, and is expected to continue to devote approximately 75% of his professional time to us.

On July 13, 2009, we issued to Mr. Bristow under the 2007 Stock Incentive Plan options to purchase 40,000 shares of common stock at an exercise price of $0.20 per share, the last sales price of our common stock as reported on the OTCBB on the date of grant.  The options vest in five equal annual installments and terminate ten years from the date of grant.  

The options issued to Messrs. Meaney and Bristow were issued under our 2007 Stock Incentive Plan, which provides for certain benefits upon a change in control of the Company.  Specifically, upon the occurrence of a "reorganization event", defined as the merger of the Company with or into another corporation as a result of which our common stock is converted into or exchanged for cash, securities or other property or is cancelled, the exchange of all shares of our common stock for cash, securities or other property pursuant to a share exchange, or the liquidation of the Company, the Board may take any number of actions.  These actions include, providing for all options outstanding under the Plan to be assumed by the acquiring corporation or to become immediately vested and exercisable in full, and in the case of a reorganization event in which holders of our common stock receive a cash payment, to provide for a cash payment to holders of options equal to the excess, if any, of the per share cash payment over the exercise price of such options.

On September 6, 2011, we granted Mr. Bristow and Mr. Silcock restricted stock awards each consisting of 25,000 shares of common stock. The award vests in five equal annual installments beginning on September 6, 2012 and will be fully vested on September 6, 2016.

For a more complete description of the terms and conditions of the foregoing awards, including a description of the change in control provisions, please see   “2007 Stock Incentive Plan ” in Item 12 below.

Based primarily on the overall financial performance of the Company, including the award of the ADEPT IDIQ contract in 2010, and increases in revenue, net income and cash flow, we awarded discretionary cash bonuses to our officers in 2012. Although we reported a net loss in 2013, we generated meaningful ADEPT orders, were awarded $2.1 million of new contracts and grants, made significant progress in expanding the reach of our ADEPT product line, and retained all key technical employees. As a result, we awarded discretionary bonuses to our executive officers in 2013 which were approximately 50% lower than in 2012.  We believe these bonuses were necessary to motivate and retain our key officers.

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COMPENSATION OF DIRECTORS

The following table sets forth the compensation for 2013 for those persons who served as members of our board of directors during 2013:

Name(1)	Fees earned or paid in cash ($)(2)	Total ($)
Paul G Casner(2)	16,000	16,000
Thomas C. Lynch(2)	16,000	16,000
Tom L. Schaffnit(2)	16,000	16,000

(1)	Thomas J. Meaney is not listed in the above table because he did not receive any compensation for serving on our board of directors in 2013.
(2)	As of December 31, 2013, Messrs. Schaffnit, Casner, and Lynch each owned options to purchase 25,000 and 20,000 shares of our common stock, respectively, at exercise prices of $0.55 and $0.20 per share, respectively.

Narrative Disclosure To Director Compensation Table

We pay an annual fee of $16,000 to each of our non-employee directors.  Each member of our board of directors receives reimbursement of expenses incurred in connection with his services as a member of our board or board committees.

On October 3, 2007, we issued options to each member of our board of directors under the 2007 Stock Incentive Plan to purchase 25,000 shares of common stock at an exercise price of $0.55 per share, the last sales price of our common stock as reported on the OTCBB on the date of grant. On July 13, 2009, we issued options to certain members of our board of directors under the 2007 Stock Incentive Plan to purchase 20,000 shares of common stock at an exercise price of $0.20 per share, the last sales price of our common stock as reported on the OTCBB on the date of grant. The options vest in three equal annual installments and terminate ten years from the date of grant.  For a more complete description of the terms and conditions of these options, including a description of the change in control provisions, see   “ 2007 Stock Incentive Plan ” in Item 12 below.

On September 6, 2011, we granted to Messrs. Schaffnit, Casner and Lynch restricted stock awards consisting of 25,000 shares of common stock. The awards vest in three equal annual installments beginning on September 6, 2012 and will be fully vested on September 6, 2014.

For a more complete description of the terms and conditions of the foregoing awards, including a description of the change in control provisions, see “ 2007 Stock Incentive Plan ” in Item 12 below.

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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Common Stock

The following table sets forth certain information, as of March27, 2014 with respect to holdings of our common stock by (i) each person known by us to be the beneficial owner of more than 5% of the total number of shares of common stock outstanding as of such date, (ii) each of our directors and executive officers, and (iii) all directors and executive officers as a group.  Except as otherwise indicated, the address of each person is 707 Alexander Road, Suite 208, Princeton, New Jersey 08540. 

Name of Beneficial Ownership	Amount and Nature of Beneficial Ownership(1)			Percent of Class
5% Beneficial Owners:
US Small Business Administration 409 Third Street N.W. Washington, DC 20416		2,920,050	(2)		9.1	%
Directors and Executive Officers:
Walter T. Bristow		120,000	(3)		*
Paul G. Casner		438,399	(4)		1.4	%
Patricia A. Kapp		227,000	(3)		*
Thomas C. Lynch		422,399	(4)		1.3	%
Thomas J. Meaney		5,536,842	(5)		17.3	%
Tom L. Schaffnit		781,457	(4)		2.4	%
David Henry Silcock		56,000	(6)		*
All Current Directors and Officers as a Group (seven persons)		7,582,097			22.4	%

*Less than 1%

(1) The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and, in accordance therewith, includes all shares of our common stock that may be acquired by such beneficial owners within 60 days of March 27, 2014 upon the exercise or conversion of any options, warrants or other convertible securities.  This table has been prepared based on 32,219,756 shares of common stock outstanding on March 27, 2014.  Except as otherwise indicated, all shares are beneficially owned and the sole investment and voting power is held by the persons named.

(2) Includes 202,500 shares issuable upon conversion of Convertible Preferred Stock and 695,883 shares issuable upon conversion of Series B Convertible Preferred Stock.

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(3) Includes 82,000 shares issuable upon exercise of options. Also includes 25,000 shares of restricted common stockwhich vest in five equal annual installments.  Does not include 8,000 shares issuable upon exercise of options subject to vesting.

(4) Includes 45,000 shares issuable upon exercise of options.  Also includes 25,000 shares of restricted common stock which vest in three equal annual installments.  

(5) Includes 50,000 shares issuable upon conversion of Convertible Preferred Stock, 1,949,775 shares issuable upon conversion of Series B Convertible Preferred Stock, and 25,000 shares issuable upon exercise of options.  

(6) Consists of 72,000 shares issuable upon exercise of options.  Also includes 25,000 shares of restricted common stock which vest in five equal annual installments. Does not include 8,000 shares issuable upon exercise of options subject to vesting.

Convertible Preferred Stock

The following table sets forth certain information, as of March 27, 2014, with respect to holdings of our Convertible Preferred Stock by (i) each person known by us to be the beneficial owner of more than 5% of the total number of shares of our Convertible Preferred Stock outstanding as of such date, (ii) each of our directors and executive officers, and (iii) all directors and executive officers as a group.  Except as otherwise indicated, the address of each person is 707 Alexander Road, Suite 208, Princeton, New Jersey 08540.

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)	Percent Of Class
5% Beneficial Owners:
US Small Business Administration 409 Third Street N.W. Washington, DC 20416	202,500	79.4%
Directors and Executive Officers:
Walter T. Bristow	--	--
Paul G. Casner	--	--
Patricia A. Kapp	--	--
Thomas C. Lynch	--	--
Thomas J. Meaney	50,000	19.6%
Tom L. Schaffnit	--	--
David Henry Silcock	--	--
All Current Directors and Officers as a Group (seven persons)	50,000	19.6%

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(1) Except as otherwise indicated, all shares are beneficially owned and the sole investment and voting power is held by the persons named. This table has been prepared based on 255,000 shares of convertible preferred stock outstanding on March 27, 2014.

Series B Convertible Preferred Stock

The following table sets forth certain information, as of March 27, 2014, with respect to holdings of our Series B Convertible Preferred Stock by (i) each person known by us to be the beneficial owner of more than 5% of the total number of shares of our Series B Convertible Preferred Stock outstanding as of such date, (ii) each of our directors and executive officers, and (iii) all directors and executive officers as a group.  Except as otherwise indicated, the address of each person is 707 Alexander Road, Suite 208, Princeton, New Jersey 08540.

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)		Percent of Class
5% Beneficial Owners:
The Mercantile & General Reinsurance Company, PLC Moorfields House Moorfields London EC2Y 9AL		91,342		8.3%
US Small Business Administration 409 Third Street N.W. Washington, DC 20416		231,961		21.0%
Directors and Executive Officers:
Walter T. Bristow		--		--
Paul G. Casner		--		--
Thomas C. Lynch		--		--
Patricia A. Kapp		--		--
Thomas J. Meaney		649,925		59.0%
Tom L. Schaffnit		--		--
David Henry Silcock		--		--
All Current Directors and Officers as a Group (seven persons)		649,925		59.0%

(1) Except as otherwise indicated, all shares are beneficially owned and the sole investment and voting power is held by the persons named. This table has been prepared based on 1,102,433 shares of Series B Convertible Preferred Stock outstanding on March 27, 2014.

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Redeemable Series C Preferred Stock

The following table sets forth certain information, as of March 27, 2014, with respect to holdings of our Redeemable Series C Preferred Stock by (i) each person known by us to be the beneficial owner of more than 5% of the total number of shares of our Redeemable Series C Preferred Stock outstanding as of such date, (ii) each of our directors and executive officers, and (iii) all directors and executive officers as a group.  Except as otherwise indicated, the address of each person is 707 Alexander Road, Suite 208, Princeton, New Jersey 08540.

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)	Percent of Class
Directors and Executive Officers:
Walter T. Bristow	--	--
Paul G. Casner	--	--
Patricia A. Kapp	--	--
Thomas C. Lynch	--	--
Thomas J. Meaney	5,000	100.0%
Tom L. Schaffnit	--	--
David Henry Silcock	--	--
All Current Directors and Officers as a Group (seven persons)	5,000	100.0%

(1) Except as otherwise indicated, all shares are beneficially owned and the sole investment and voting power is held by the persons named. This table has been prepared based on 5,000 shares of Redeemable Series C Preferred Stock outstanding on March 27, 2014.

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Series D Preferred Stock

The following table sets forth certain information, as of March 27, 2014, with respect to holdings of our Series D Preferred Stock by (i) each person known by us to be the beneficial owner of more than 5% of the total number of shares of our Series D Preferred Stock outstanding as of such date, (ii) each of our directors and executive officers, and (iii) all directors and executive officers as a group.  Except as otherwise indicated, the address of each person is 707 Alexander Road, Suite 208, Princeton, New Jersey 08540.

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)		Percent Of Class
5% Beneficial Owners:
US Small Business Administration 409 Third Street N.W. Washington, DC 20416		138,000		20.0%
Frederick C. Tecce c/o Mikros Systems Corporation 707 Alexander Road, Bldg 2, Suite 208 Princeton, New Jersey 08540		138,000		20.0%
JoAnne E. Burns c/o Mikros Systems Corporation 707 Alexander Road, Bldg 2, Suite 208 Princeton, New Jersey 08540		69,000		10.0%
George W. Taylor c/o Mikros Systems Corporation 707 Alexander Road, Bldg 2, Suite 208 Princeton, New Jersey 08540		69,000		10.0%
Directors and Executive Officers:
Walter T. Bristow		--		--
Paul G. Casner		--		--
Patricia A. Kapp		--		--
Thomas C. Lynch		--		--
Thomas J. Meaney		138,000		20.0%
Tom L. Schaffnit		--		--
David Henry Silcock		--		--
All Current Directors and Officers as a Group (seven persons)		138,000		20.0%

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(1) Except as otherwise indicated, all shares are beneficially owned and the sole investment and voting power is held by the persons named. This table has been prepared based on 690,000 shares of Series D Preferred Stock outstanding on March 27, 2014.

EQUITY COMPENSATION PLAN INFORMATION

The following is certain information about our equity compensation plans as of December 31, 2013:

	(a)		(b)		(c)
	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted–average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
Plan Category
Equity compensation plans not approved by security holders		645,000	$	0.38000		2,050,000
Total		645,000	$	0.38000		2,050,000

2007 Stock Incentive Plan

On August 6, 2007, we adopted the Mikros Systems Corporation 2007 Stock Incentive Plan (the "Plan").  Awards may be made under the Plan for up to 3,000,000 shares of our common stock in the form of stock options or restricted stock awards.  Awards may be made to our employees, officers or directors as well as our consultants or advisors.  The Plan is administered by our Board of Directors which has full and final authority to interpret the Plan, select the persons to whom awards may be granted, and determine the amount, vesting and all other terms of any awards.  To the extent permitted by applicable law, our Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board.  The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and is not a "qualified plan" under Section 401(a) of the Internal Revenue Code of 1986, as amended.  The Plan has not been approved by our shareholders.  As a result, "incentive stock options" as defined under Section 422 of the Internal Revenue Code may not be granted under the Plan until such approval is received for the Plan. The Plan terminates on August 5, 2017.

All stock options granted under the Plan are exercisable for a period of up to ten years from the date of grant, are subject to vesting as determined by the Board upon grant, and have an exercise price equal to not less than the fair market value of our common stock on the date of grant.  Unless otherwise determined by the Board, awards may not be transferred except by will or the laws of descent and distribution.  The Board has discretion to determine the effect on any award granted under the Plan of the death, disability, retirement, resignation, termination or other change in employment or other status of any participant in the Plan.  The maximum number of shares of common stock for which awards may be granted to a participant under the Plan in any calendar year is 300,000.

Upon the occurrence of a "reorganization event", defined as the merger of the Company with or into another corporation as a result of which our common stock is converted into or exchanged for cash, securities or other property or is cancelled, the exchange of all shares of our common stock for cash, securities or other property pursuant to a share exchange, or the liquidation of the Company, the Board may take any number of actions.  These actions include providing for all options outstanding under the Plan to be assumed by the acquiring corporation or to become immediately vested and exercisable in full, and in the case of a reorganization event in which holders of our common stock receive a cash payment, to provide for a cash payment to holders of options equal to the excess, if any, of the per share cash payment over the exercise price of such options.  As of the date of this report, we have issued options under the Plan to purchase 645,000 shares of common stock.

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ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Related Party Transactions

Ocean Power Technologies, Inc. operates as a subcontractor to the Company. Thomas Meaney, the Company’s President and Chief Financial Officer and member of the Company’s board of directors, also served as a director of Ocean Power Technologies, Inc. through October 2012. For the year ended December 31, 2012, the Company incurred subcontractor expenses of $49,588.

Paul Casner, the Chairman of the Board of Directors, also serves as the Executive Chairman and Chief Executive Officer of Atair Aerospace, Inc., a defense contractor located in Brooklyn, New York.  In 2012, upon completion of our competitive bidding process, we entered into a subcontract with Atair to design the chassis component for the ADEPT units.  During the years ended December 31, 2013 and 2012, we incurred subcontracting service costs from Atair of $77,935 and $188,197, respectively.

Director Independence

Upon consideration of the criteria and requirements regarding director independence set forth in Rules 5000(a)(19) and 5605(a)(2) of the rules of the Nasdaq Stock Market, we have determined that Thomas C. Lynch and Tom L. Schaffnit are independent.

With regard to our Audit Committee, the board of directors has determined that Messrs. Lynch and Schaffnit (Chair), who constitute a majority of the members of the Audit Committee, are independent with respect to the independence criteria for Audit Committee members set forth in Rule 5605(c)(2) of the rules of the Nasdaq Stock Market and Rule 10A-3(b)(1) of the Exchange Act.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

We engaged ParenteBeard LLC for the audit of our financial statements for the year ended December 31, 2012 and the review of the financial statements included in our quarterly report on Form 10-Q for the quarter ended March 31, 2013. Aggregate fees billed for the foregoing professional services during the years ended December 31, 2013 and 2012 were $5,000 and $42,333, respectively.

In June 2013, we engaged BDO USA, LLP for the audit of our financial statements for the year ended December 31, 2013, and the review of the financial statements included in each of our quarterly reports on Form 10-Q for the quarters ended June 30 and September 30 of 2013. Aggregate fees billed for the forgoing professional services during the year ended December 31, 2013 were $37,550.

Audit-Related Fees

There were no fees billed by our independent accountants for audit-related services during the fiscal years ended December 31, 2013 and 2012.

Tax Fees

There were no fees billed by our independent accountants for tax fees for the years ended December 31, 2013 and 2012.

All Other Fees

There were no fees billed by our independent accountants for non-audit services during the years ended December 31, 2013 and 2012.

Audit Committee Pre-Approval Policies and Procedures

All auditing services and non-audit services (other than the de minimis exceptions provided by Exchange Act) provided to us by our independent accountants must be pre-approved by the Audit Committee. Any future Audit-Related Fees and Tax Fees were pre-approved by the Audit Committee.

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PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following exhibits are filed or incorporated by reference as part of this report:

3.1	Certificate of Incorporation (incorporated by reference to Exhibit 2(I) to the Company's Registration Statement on Form S-18, File No. 2-67918-NY, as amended).
3.2	By-laws (incorporated by reference to Exhibit 2(II) to the Company's Registration Statement on Form S-18, File No. 2-67918-NY, as amended).
3.3	Form of Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 2(III) to the Company's Registration Statement on Form S-18, File No. 2-67918-NY, as amended).
3.4	Form of Certificate of Amendment of Incorporation with respect to increase of authorized shares (incorporated by reference to Exhibit 2(IV) to the Company's Registration Statement on Form S-18, File No. 2-67918-NY, as amended).
3.5	Certificate of Designations of Series B Preferred Stock and Series C Preferred Stock (incorporated by reference to Exhibit 4.1 to Form 8-K filed September 12, 1988).
3.6	Certificate of Designations of Series D Preferred Stock (incorporated by reference to Exhibit 4.16 to Form 10-K for 1993 filed March 30, 1994).
10.1	Mikros Systems Corporation 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 9, 2007).
14.1	Mikros Systems Corporation Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to Form 10-QSB filed August 11, 2006).
31.1	Certification of principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.
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

* XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March 27, 2014	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.

SIGNATURES	DATE
/s/ Paul G. Casner	March 27, 2014
Paul G. Casner, Director

/s/ Thomas C. Lynch	March 27, 2014
Thomas C. Lynch, Director

/s/ Thomas J. Meaney	March 27, 2014
Thomas J. Meaney, President, Chief Financial Officer, and Director (Principal Executive Officer, Principal Financial and Accounting Officer)

/s/ Tom L. Schaffnit	March 27, 2014
Tom L. Schaffnit, Director

32

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

MIKROS SYSTEMS CORPORATION

Princeton, New Jersey

We have audited the accompanying balance sheet of Mikros Systems Corporation as of December 31, 2013 and the related statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for the year ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mikros Systems Corporation at December 31, 2013, and the results of its operations and its cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

BDO USA, LLP

Philadelphia, PA

March 31, 2014

33

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

MIKROS SYSTEMS CORPORATION

Princeton, New Jersey

We have audited the accompanying balance sheet of Mikros Systems Corporation ("Company") as of December 31, 2012 and the related statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mikros Systems Corporation at December 31, 2012, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ ParenteBeard LLC

ParenteBeard LLC

Philadelphia, Pennsylvania

April 1, 2013

34

 MIKROS SYSTEMS CORPORATION

Balance Sheets

	DECEMBER 31, 2013			DECEMBER 31, 2012
Assets
Current assets:
Cash and cash equivalents	$	1,028,146		$	887,140
Receivables on government contracts		419,440			1,162,423
Prepaid expenses and other current assets		69,058			31,888
Total current assets		1,516,644			2,081,451
Property and equipment
Equipment		45,157			40,416
Furniture & fixtures		9,264			9,264
Less: accumulated depreciation		(47,697	)		(42,038	)
Property and equipment, net		6,724			7,642
Patents and trademarks		1,383			1,383
Less: accumulated amortization		(1,035	)		(897	)
Intangible assets, net		348			486
Deferred tax assets		82,000			23,000
Total assets	$	1,605,716		$	2,112,579

See Notes to Financial Statements

35

MIKROS SYSTEMS CORPORATION

Balance Sheets

 (continued)

	DECEMBER 31, 2013			DECEMBER 31, 2012
Liabilities and shareholders' equity
Current liabilities:
Accrued payroll and payroll taxes	$	165,543		$	273,089
Accounts payable and accrued expenses		131,072			359,029
Accrued warranty expense		35,190			69,655
Total current liabilities		331,805			701,773
Long-term liabilities		12,476			15,456
Total liabilities		344,281			717,229
Commitments and contingencies (Note 8)
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 32,011,753 shares at December 31, 2013 and 2012		320,118			320,118
Capital in excess of par value		11,620,487			11,606,920
Accumulated deficit		(10,780,094	)		(10,632,612	)
Total shareholders' equity		1,180,985			1,314,900
Total liabilities and shareholders' equity	$	1,605,716		$	2,112,579

See Notes to Financial Statements

36

MIKROS SYSTEMS CORPORATION

Statements of Operations and Comprehensive Income (Loss)

	Years Ended December 31,
	2013			2012
Contract revenues	$	3,050,126		$	4,825,068
Cost of sales		1,422,135			2,690,510
Gross margin		1,627,991			2,134,558
Expenses:
Engineering		816,039			747,084
General and administrative		1,017,058			1,133,788
Total expenses		1,833,097			1,880,872
Income (loss) from operations		(205,106	)		253,686
Other income:
Interest		17			98
Net income (loss) before income taxes		(205,089	)		253,784
Income tax expense (benefit)		(57,607	)		26,675
Net income (loss) and comprehensive income (loss)	$	(147,482	)	$	227,109
Basic income (loss) per common share	$	-		$	0.01
Basic weighted average number of shares outstanding		31,843,704			31,872,617
Diluted income (loss) per common share	$	-		$	0.01
Diluted weighted average number of shares outstanding		31,843,704			35,620,916

See Notes to Financial Statements

37

 MIKROS SYSTEMS CORPORATION

Statements of Shareholders’ Equity

Years ended December 31, 2013 and 2012

	Preferred Stock Series B $0.01 Par Value				Convertible Preferred Stock $0.01 Par Value				Preferred Stock Series D $0.01 Par Value				Common Stock $0.01 Par Value						Capital in Excess of Par Value		Accumulated Deficit			Total
	Number of shares		Par Value		Number of shares		Par Value		Number of shares		Par Value		Number of shares			Par Value
Balance, December 31, 2011		1,102,433	$	11,024		255,000	$	2,550		690,000	$	6,900		32,016,753		$	320,168		$	11,575,436	$	(10,859,721	)	$	1,056,357
Stock Compensation		-		-		-		-		-		-		-			-			31,434		-			31,434
Forfeiture of common stock		-		-		-		-		-		-		(5,000	)		(50	)		50		-			-
Net income and comprehensive income		-		-		-		-		-		-		-			-			-		227,109			227,109
Balance, December 31, 2012		1,102,433	$	11,024		255,000	$	2,550		690,000	$	6,900		32,011,753		$	320,118		$	11,606,920	$	(10,632,612	)	$	1,314,900
Stock Compensation		-		-		-		-		-		-		-			-			13,567		-			13,567
Net loss and comprehensive loss		-		-		-		-		-		-		-			-			-		(147,482	)		(147,482	)
Balance, December 31, 2013		1,102,433	$	11,024		255,000	$	2,550		690,000	$	6,900		32,011,753		$	320,118		$	11,620,487	$	(10,780,094	)	$	1,180,985

See Notes to Financial Statements

38

 MIKROS SYSTEMS CORPORATION

Statements of Cash Flows

	Years Ended December 31,
	2013			2012
Cash flow from operating activities:
Net (loss) income	$	(147,482	)	$	227,109
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		5,798			9,993
Deferred tax (benefit) expense		(59,000	)		(2,000	)
Share-based compensation expense		13,567			31,434
Net changes in assets and liabilities
Decrease in receivables on government contracts		742,983			315,680
Increase in prepaid expenses and other current assets		(37,170	)		(1,042	)
Decrease in accrued payroll and payroll taxes		(107,546	)		(91,059	)
Decrease in accounts payable and accrued expenses		(227,957	)		(545,188	)
Decrease in accrued warranty expense		(34,465	)		(16,745	)
Decrease increase in long-term liabilities		(2,980	)		(1,252	)
Net cash provided by (used in) operating activities		145,748			(73,070	)
Cash flow from investing activities:
Purchase of property and equipment		(4,742	)		(3,346	)
Net cash used in investing activities		(4,742	)		(3,346	)
Net increase (decrease) in cash and cash equivalents		141,006			(76,416	)
Cash and cash equivalents, beginning of period		887,140			963,556
Cash and cash equivalents, end of period	$	1,028,146		$	887,140
Supplemental cash flows information:
Cash paid during the period for income taxes	$	10,069		$	31,000

See Notes to Financial Statements

39

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Note 1 – The Company

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

The Company’s primary business focus is to pursue U.S. Small Business Innovation Research (“SBIR”) programs from the DoD, Department of Homeland Security, and other governmental authorities, and to expand this government funded research and development into products, services, and business areas of the Company.  Since 2002, the Company has been awarded several Phase I, II, and III SBIR contracts.

Note 2 – Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents

Cash balances consist of funds that are immediately available to the Company and are held by financial institutions.  For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Concentrations of credit risk

Substantially all of the Company’s revenue is derived from Small Business Innovation Research (“SBIR”) and Indefinite-Delivery, Indefinite-Quantity (“IDIQ”) contracts for the Federal government.  Approximately 98% and 96% of revenues in 2013 and 2012, respectively, were realized in connection with task orders issued under the IDIQ contract with the Naval Surface Warfare Center to deliver ADEPT units.  Although the Company’s operations are not subject to any particular government approval or regulations, the Company is dependent upon funding being made available to the DoD in amounts sufficient to cover the SBIR grants and other DoD contracts for which the Company competes.

Financial instruments that subject the Company to credit risk consist of cash and cash equivalents and accounts receivable.

The Company's policy is to limit the amount of credit exposure to any one financial institution, and place investments with financial institutions evaluated as being creditworthy, or in short-term money market funds which are exposed to minimal interest rate and credit risk. The Company maintains its cash primarily in investment accounts within large financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances up to $250,000 per bank. At times, the Company’s cash and cash equivalent balances may exceed the FDIC insured limits. The Company has not experienced any losses on its bank deposits and management believes these deposits do not expose the Company to any significant credit risk.

Receivables on government contracts are stated at outstanding balances, less an allowance for doubtful accounts, if necessary.  The allowance for doubtful accounts is established through provisions charged against operations.  Receivables deemed to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

The allowance for doubtful accounts is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on past experience, aging of the receivables, adverse situations that may affect a customers’ ability to pay, current economic conditions, and other relevant factors.  This evaluation is inherently subjective as it requires estimates that may be susceptible to significant change.  Unpaid balances remaining after the stated payment terms are considered past due.  All of our business is conducted with the Federal government in which nonpayment for awarded contracts is unlikely.  No allowance for doubtful accounts was deemed necessary by management at December 31, 2013 and 2012, respectively.

40

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Property and Equipment

Equipment is stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives of three years. Depreciation expense amounted to $4,336 and $5,548 for the years ended December 31, 2013 and 2012, respectively, and is included in engineering expense.

Furniture and fixtures are stated at cost.  Depreciation expense is computed using the straight-line method based on estimated useful lives of seven years.  Depreciation expense amounted to $1,323 for each of the years ended December 31, 2013 and 2012, and is included in engineering expense.

Patents and Trademarks

The Company has developed and continues to develop intellectual property (technology and data) under SBIR and other contracts.  The request for a trademark for the product name “ADEPT” has been approved by the U.S. Patent and Trademark Office, and ADEPT® is now a registered trademark of the Company.

Under SBIR data rights, the Company is protected from unauthorized use of SBIR-developed technology and data for a period of five years after acceptance of all items to be delivered under a particular SBIR contract or any follow-on contract.

During the year ended December 31, 2012, the Company discontinued the use of certain technology and related patents.  The Company removed the historical carrying value of these patents of $4,000 from its balance sheet as of December 31, 2012 and immediately recognized $2,933 of unamortized balance as amortization expense for the year ended December 31, 2012.

For each of the years ended December 31, 2013 and 2012, amortization expense amounted to $139 and $3,122, respectively, which related to the cost of the patents and trademarks. These costs are being amortized over their 10 year legal lives.  Amortization expense for 2014 through 2015 will be $138 per year and $72 in 2016.

Impairment of long-lived assets

The Company assesses the potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An asset's value is impaired if management's estimate of the aggregate future cash flows, undiscounted and without interest charges, to be generated by the asset are less than the carrying value of the asset. Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the asset over the estimated fair value of the asset. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges. There were no impairments of long-lived assets in 2013 or 2012.

41

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Revenue Recognition

The Company is a party to research and development contracts with the Federal government to develop certain technology to be utilized by the US Department of Defense. The contracts are cost plus fixed fee contracts and 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 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. As of December 31, 2013 and 2012, the Company had unbilled revenues of $16,130 and $0, respectively and is 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 December 31, 2013 and 2012, the Company had no advanced billings. Under the IDIQ agreement, the Company delivered 41 units during the year ended December 31, 2013.

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, which is 12 months following delivery and acceptance of production units by the government.  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.  The Company had a net warranty recovery, which is a component of the Company’s cost of sales of $15,500 and $7,900 for the years ended December 31, 2013 and 2012, respectively.  Since the inception of the IDIQ contract in March 2010, the Company has delivered 122 ADEPT units.  As of December 31, 2013, there are 41 ADEPT units that remain under the limited warranty coverage.  The Company had an accrued warranty expense liability of $35,190 and $69,655 at December 31, 2013 and 2012, respectively.

The following table reflects the reserve for product warranty activity for the years ended December 31:

	2013			2012
Reserve for product warranty, beginning of period	$	69,655		$	86,400
Provision for product warranty		42,300			24,500
Product warranty expirations		(57,800	)		(32,400	)
Product warranty costs paid		(18,965	)		(8,845	)
Reserve for product warranty, end of period	$	35,190		$	69,655

42

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

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 $81,598 and $59,245 for the years ended December 31, 2013 and 2012, respectively.

Share-based Compensation

The Company records compensation expense associated with stock options and other forms of equity compensation based on the estimated fair value at the grant-date. During 2013, the Company issued 35,000 stock options. There were no equity compensation awards issued for the year ended December 31, 2012.  The Company uses the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair value of share-based awards.  Expected volatility is based on historical volatility of the Company's common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The expected term is estimated consistent with the simplified method, as identified in ASC 718.  In December 2007, the Securities and Exchange Commission (“SEC”) issued guidance that allows companies, in certain circumstances, to utilize a simplified method in determining the expected term of stock option grants when calculating the compensation expense to be recorded under GAAP, for employee stock options. The simplified method can be used after December 31, 2007 only if a company's stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term. Through 2007, the Company used the simplified method to determine the expected option term, based upon the vesting and original contractual terms of the option. The Company has continued to use the simplified method to determine the expected option term since the Company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term.

The fair values of options are amortized over the vesting period of the awards utilizing a straight-line method.  The Company used the following assumptions to calculate compensation expense:

	2013
	5 year options
Expected Life		6.5
Expected volatility		123.3	%
Risk-free interest rate		0.75	%

Income Taxes

The Company accounts for income taxes under a liability method.  Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The deferred tax assets will be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company adopted a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. No significant income tax uncertainties were identified.  Therefore, the Company recognized no adjustment for unrecognized tax benefits for the years ended December 31, 2013 and 2012.

The Company has determined that any future interest accrued, related to unrecognized tax benefits, will be included in interest expense. In the event the Company must accrue for penalties, such penalties will be included as an operating expense.

43

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Earnings (loss) per share

Basic earnings (loss) per share ("EPS") is calculated by dividing net earnings (loss) allocable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the assumed exercise or conversion of all dilutive securities, using the treasury stock method for options and if-converted method for convertible preferred securities.  Potentially dilutive securities include employee stock options, Series B Preferred Stock, and Convertible Preferred Stock (see “Note 3. Redeemable Series C Preferred Stock and Shareholders’ Equity" below for information about the Series B Preferred Stock and Convertible Preferred Stock).

In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (ASC 260-10-45). ASC 260-10-45 clarified that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Shares of the Company's Convertible Preferred Stock are considered participating securities since they contain a non-forfeitable right to dividends and distributions with common shareholders.  ASC 260-10-45 requires that the two-class method of computing basic EPS be applied. Under the two-class method, the Company's stock options are not considered to be participating securities. Dividends on common stock were not declared in 2013 or 2012.  

Recently Issued Accounting Standards

Effective January 1, 2012, the Company adopted Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income and ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-5. In these updates, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU No. 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of ASU Nos. 2011-05 and 2011-12 did not have a material impact on the Company’s consolidated financial statements. The Company has presented comprehensive loss in the accompanying consolidated statements of operations and comprehensive loss.

In February 2013, the FASB issued ASU No. 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements, however, it does require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial statements.

44

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Note 3 – Redeemable Series C Preferred Stock and Shareholders’ Equity

Redeemable Series C Preferred Stock

The Redeemable Series C Preferred Stock is not convertible into any other class of the Company’s stock and is subject to redemption at the Company’s option at any time if certain events occur, such as capital reorganizations, consolidations, mergers, or sale of all or substantially all of the Company’s assets.  Each share is entitled to cast one vote on all matters to be voted on by the Company’s shareholders.  Upon any liquidation, dissolution or winding up of the Company, each holder of Redeemable Series C Preferred Stock will be entitled to be paid, before any distribution or payment is made upon any other class of stock of the Company, an amount in cash equal to the redemption price for each share of Redeemable Series C Preferred Stock held by such holder, and the holders of Redeemable Series C Preferred Stock will not be entitled to any further payment. The redemption price is $16.09 per share. The Redeemable Series C Preferred Stock stock is subject to redemption under certain “deemed liquidation” events, as defined, and as such, the convertible preferred stock is considered contingently redeemable for accounting purposes. Accordingly, the convertible preferred stock has been recorded within temporary equity in the Company’s financial statements.

Series B Convertible Preferred Stock

Each share of Series B Preferred Stock is convertible into three shares of the Company’s common stock at a price of $.33 per common share to be paid upon conversion and entitles the holder thereof to cast three votes on all matters to be voted on by the Company’s shareholders.  Upon any liquidation, dissolution, or winding up of the Company, each holder of Series B Preferred Stock will be entitled to be paid, after all distributions of payments are made upon redemption of the Series C Preferred Stock an amount in cash equal to $1.00 for each share of Series B Preferred Stock held, and such holders will not be entitled to any further payment.

Convertible Preferred Stock

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

Series D Preferred Stock

The Series D Preferred Stock provided for an annual cumulative dividend of $.10 per share and entitles the holder thereof to cast one vote on all matters to be voted on by the Company’s shareholders.  The shares are not convertible into any other class of stock and are subject to redemption at the Company’s option at any time at a redemption price of $1.00 per share plus all unpaid cumulative dividends.  Upon liquidation, dissolution or winding up of the Corporation, each holder of Series D Preferred Stock will be entitled to be paid, after all distributions or payments are made upon the Corporation’s Convertible Preferred Stock, Series B Preferred Stock, and Redeemable Series C Preferred Stock, an amount in cash equal to the redemption price, as defined, for each share of Series D Preferred Stock held by such holder. The holders of Series D Preferred Stock will not be entitled to any further payment.

Effective January 1, 2006, the holders of the shares of Series D Preferred Stock agreed to waive the future accumulation of dividends.  As of December 31, 2005, there were dividends in arrears on the Series D Preferred Stock of $828,000.  Such waiver does not affect dividends accrued through December 31, 2005.  Accordingly, $828,000 of such undeclared dividends in arrears remain outstanding at December 31, 2013 and are included in the liquidation value of $1,518,000.

45

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Note 4 – Income Taxes

The income tax provision is comprised of the following for the years ended December 31:

	2013			2012
Current state tax expense	$	1,393		$	28,675
Deferred federal tax expense (benefit)		(59,000	)		(2,000	)
Income tax expense (benefit)	$	(57,607	)	$	26,675

The reconciliation between the statutory federal income tax rate and the Company’s effective tax rate is as follows:

	2013			2012
Federal statutory rate		34.0	%		34.0	%
State taxes		(0.5	)		7.4
Nondeductible/Nontaxable Items		(8.3	)		7.0
Change in federal valuation allowance asset		2.9			(37.9	)
Effective tax rate		28.1	%		10.5	%

46

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Total available net operating loss carry forwards at December 31, 2013 are reflected in the following schedule:

Year of Expiration	Available for Federal Tax Purposes
2019	$	306,757
2021		76,872
2022		40,330
2023		106,651
2033		183,310
	$	713,920

During 2013, the Company generated federal net operating loss carryforwards of approximately $180,000. The Company’s valuation allowance associated with the related deferred tax assets was increased by approximately $7,000 in 2013 and decreased by approximately $109,000 in 2012.  The change in our valuation allowance for 2013 and 2012 was attributable to the expected profitability on contracts being fulfilled as of the end of each period.

  Deferred tax assets consist of the following as of December 31:

	2013			2012
Deferred tax asset:
Fixed assets and other	$	108,137		$	122,148
Net operating loss carryforwards		252,878			180,407
Research and development credit		12,041			4,802
Valuation allowance		(291,056	)		(284,357	)
Net deferred tax asset	$	82,000		$	23,000

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers both positive and negative evidence in making this assessment, including the future reversal of existing temporary taxable differences, projected future taxable income, the recent expiration of unused net operating losses and tax planning strategies.  Due to the Company’s inability to project future taxable income over the periods in which the deferred tax assets may become deductible, management does not believe it is more likely than not that the Company will realize the entire benefit of its deferred tax assets. As a result, management believes the maintenance of a valuation allowance is required at December 31, 2013 against that portion of the Company’s net deferred tax asset that may not be realized.

The Company continues to analyze its income tax positions and no significant income tax uncertainties were identified in 2013 and 2012. Therefore, the Company recognized no adjustment for unrecognized tax benefits for the years ended December 31, 2013 and 2012. The Company is not currently under examination by the Internal Revenue Service. The United States federal statute of limitations remains open for the years 2010 onward. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company is not currently under examination in any state jurisdictions. The Company is no longer subject to federal or state income tax assessments for years prior to 2007.

47

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Note 5 – Share-Based Compensation

2007 Stock Incentive Option Plan

In October 2007, March 2008 and July 2009, the Company issued options to purchase 420,000, 10,000 and 345,000 shares, respectively, of the Company’s common stock under the Company’s 2007 Stock Incentive Plan.  The options vest over a five year period and are exercisable at $0.20 to $0.62 per share, the last sales price of the Company’s common stock as reported on the OTCBB on the date of grant.  There were 35,000 shares issued during the year ended December 31, 2013. No shares were issued during 2012.  A summary of the status of the Company’s 2007 Stock Incentive Plan as of December 31, 2013 and 2012 is presented below.

	2013
	Options			Weighted Exercise Price		Weighted Life (in years)
Options outstanding - beginning of year		690,000		$	0.39		5.61
Granted		35,000			0.05
Exercised		-			-
Forfeited / Cancelled		(80,000	)		0.37
Options outstanding - end of year		645,000		$	0.38		4.79
Options exercisable - December 31, 2013		605,000		$	0.39		4.56

	2012
	Options		Weighted Exercise Price		Weighted Life (in years)
Options outstanding - beginning of year		690,000	$	0.39		6.60
Granted		-		-
Exercised		-		-
Forfeited / Cancelled		-		-
Options outstanding - end of year		690,000	$	0.39		5.61
Options exercisable - December 31, 2012		588,000	$	0.42		5.46

The aggregate intrinsic value of options outstanding at December 31, 2013 and 2012 under the 2007 Stock Incentive Plan was $1,750 and $0, respectively.

The aggregate intrinsic value of stock options above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the options) that would have been received by the option holders had they exercised their options on December 31, 2013 and 2012.  The aggregate intrinsic value of stock options changes based on the changes in the market value of the Company’s common stock.  The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of the grant using the Black-ScholesMerton option pricing model.

There were a total of 40,000 and 102,000 unvested options at December 31, 2013 and 2012, respectively.  The total fair value of unvested options as of December 31, 2013 and 2012 was approximately $1,300 and $19,140, respectively.  For the year ended December 31, 2013 and 2012, the Company recognized share-based compensation expense of $9,552 and $26,159, respectively.  As of December 31, 2013 and 2012, there was approximately $4,181 and $15,839, respectively, of unamortized stock option compensation expense.

48

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Restricted Stock

The Company did not grant any restricted stock awards during 2013 or 2012. During 2013 and 2012 there were restricted shares forfeitures of 27,000 and 5,000, respectively.   There were 56,000 and 59,000 restricted shares that vested during 2013 and 2012, respectively.  For the years ended December 31, 2013 and 2012, the Company recognized $4,015 and $5,275 of share-based compensation expense.  As of December 31, 2013, there were 103,000 restricted stock awards outstanding and $6,328 of unrecognized share-based compensation expense that will be recognized in future periods.

Note 6 – Debt

During the quarter ended June 30, 2013, the Company renewed its line of credit agreement with Sun National Bank and increased its borrowing capacity to $500,000. The facility matures on June 30, 2014 and accrues interest at a variable rate equal to the bank’s prime rate plus 250 basis points with a minimum interest rate of 4.500% per annum.  At December 31, 2013, the interest rate was 5.75%. Principal borrowings may be prepaid at any time without penalty, and the facility is secured by substantially all of the Company’s assets. Borrowings under the facility are limited to a percentage of aggregate outstanding receivables that are due within 90 days.  The facility contains customary affirmative and negative covenants and a net worth financial covenant.  As of December 31, 2013 and the date of this report, the Company’s borrowing capacity under the facility was $403,310, there were no amounts outstanding, and the Company was in compliance with all covenants.

Note 7 – Earnings (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. 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 Company’s calculation of earnings per share is as follows:

	2013			2012
Basic earnings (loss) per common share:
Net income (loss) applicable to common shareholders – basic	$	(147,482	)	$	227,109
Portion allocable to common shareholders		100.0	%		99.2	%
Net income (loss) allocable to common shareholders		(147,482	)		225,292
Weighted average basic shares outstanding		31,843,704			31,872,617
Basic earnings per share	$	-		$	0.01
Dilutive earnings (loss) per common share:
Net income (loss) allocable to common shareholders		(147,482	)		225,292
Add: undistributed earnings allocated to participating securities		-			1,817
Numerator for diluted earnings (loss) per common share		(147,482	)		227,109
Weighted average basic shares outstanding		31,843,704			31,872,617
Diluted effect:
Unvested restricted stock awards		-			186,000
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		31,843,704			35,620,916
Dilutive earnings (loss) per share	$	-		$	0.01

49

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

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

	2013			2012
Numerator:
Weighted average participating common shares		31,843,704			31,872,617
Denominator:
Weighted average participating common shares		31,843,704			31,872,617
Add: Weighted average shares of Convertible Preferred Stock		-			255,000
Weighted average participating shares		31,843,704			32,127,617
Portion allocable to common shareholders		100.0	%		99.2	%

Diluted earnings(loss) per share for the years ended December 31, 2013 and 2012 do not reflect following potential common shares, as the effect would be antidilutive.

	Years Ended December 31,
	2013		2012
Stock options		645,000		690,000
Unvested restricted stock awards		103,000		-
Convertible preferred stock		3,562,299		-
Total		4,310,299		690,000

50

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Note 8 - Commitments

The Company’s principal executive offices are located in Princeton, New Jersey. Monthly rent is $75.

The engineering research, design and development facility is located in Fort Washington, Pennsylvania where the Company leases general office space under a lease agreement that was renewed in December 2010 and terminates in February 2016.   The rent under the initial year was approximately $51,421 with a 30% increase in the second year and 2% - 3% increases each year thereafter.  Rent is being expensed on a straight-line basis over the term of the lease.

The Company also leases a facility in Largo, Florida which supports production of the ADEPT product line and quality assurance, field support, and life cycle management.  In February 2014, the Company renewed the lease for a period of one year at a monthly rent of $2,143.

Total rent expense during 2013 and 2012 was $106,521 and $101,240, respectively.  The Company has $154,135 in future obligations under non-cancellable operating leases that are due as follows:

2014		70,088
2015		71,814
2016		12,233
	$	154,135

Note 9 – Related Party Transactions

Ocean Power Technologies, Inc. operates as a subcontractor to the Company. Thomas Meaney, the Company’s President and Chief Financial Officer and member of the Company’s board of directors, also served as a director of Ocean Power Technologies, Inc. through October 2012. For the year ended December 31, 2012, the Company incurred subcontractor expenses of $49,588.

Paul Casner, the Chairman of the Company’s Board of Directors, also serves as the executive chairman and CEO of Atair Aerospace Incorporation.  During 2013 and 2012, Atair provided subcontracting services to the Company in designing the chassis component within the ADEPT units.  The Company incurred subcontracting service costs from Atair of $77,935 and $188,197 during the years ended December 31, 2013 and 2012, respectively.

51

EX-31

Exhibit 31.1

CERTIFICATION

I, Thomas J. Meaney, certify that:

1. I have reviewed this annual report on Form 10-K of Mikros Systems Corporation (the “company”);

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 company as of, and for, the periods presented in this report;

 4. As the company’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 company 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 company, 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 company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

 5. As the company’s sole certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the company's auditors and the Audit Committee of the company'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 company'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.

Date:  March 27, 2014
	/s/ Thomas J. Meaney
	Thomas J. Meaney President and Chief Financial Officer

EX-32

 Exhibit 32.1

Certification Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

In connection with the Annual Report (the “report”) of Mikros Systems Corporation (the “Company”) on Form 10-K for the year ended December 31, 2013 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.

Date:  March 27, 2014
	/s/ Thomas J. Meaney
	Thomas J. Meaney President and Chief Financial Officer

XML

Note 9 - Related Party Transactions (Details) (USD $)	12 Months Ended
	Dec. 31, 2012 Ocean Power Technologies, Inc. [Member]	Dec. 31, 2013 Atair Aerospace Inc. [Member]	Dec. 31, 2012 Atair Aerospace Incorporation [Member]
Note 9 - Related Party Transactions (Details) [Line Items]
Related Party Transaction, Expenses from Transactions with Related Party	$ 49,588	$ 77,935	$ 188,197

XML

Note 6 - Debt (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Jun. 30, 2013
Sun National Bank [Member]
Note 6 - Debt (Details) [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity		$ 500,000
Debt Instrument, Maturity Date	Jun. 30, 2014
Debt Instrument, Basis Spread on Variable Rate	2.50%
Line of Credit Facility, Interest Rate at Period End	5.75%
Line of Credit Facility, Remaining Borrowing Capacity	403,310
Line of Credit Facility, Amount Outstanding	$ 0
Minimum [Member]
Note 6 - Debt (Details) [Line Items]
Debt Instrument, Interest Rate, Stated Percentage	4.50%

XML

Note 3 - Redeemable Series C Preferred Stock and Shareholders' Equity (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Series C Preferred Stock [Member]
Note 3 - Redeemable Series C Preferred Stock and Shareholders' Equity (Details) [Line Items]
Preferred Stock, Redemption Price Per Share	$ 16.09
Series B Preferred Stock [Member]
Note 3 - Redeemable Series C Preferred Stock and Shareholders' Equity (Details) [Line Items]
Convertible Preferred Stock, Shares Issued upon Conversion (in Shares)	3
Convertible Preferred Stock, Conversion Price	$ 0.33
Preferred Stock, Liquidation Preference Per Share	$ 1.00
Preferred Stock, Liquidation Preference, Value (in Dollars)	$ 1,102,433	$ 1,102,433
Convertible Preferred Stock [Member]
Note 3 - Redeemable Series C Preferred Stock and Shareholders' Equity (Details) [Line Items]
Preferred Stock, Redemption Price Per Share	$ 1.00
Convertible Preferred Stock, Conversion Price	$ 1.00
Preferred Stock, Liquidation Preference Per Share	$ 1.00
Preferred Stock, Liquidation Preference, Value (in Dollars)	255,000	255,000
Series D Preferred Stock [Member]
Note 3 - Redeemable Series C Preferred Stock and Shareholders' Equity (Details) [Line Items]
Preferred Stock, Redemption Price Per Share	$ 1.00
Preferred Stock, Dividend Rate, Per-Dollar-Amount	$ 0.10
Preferred Stock, Amount of Preferred Dividends in Arrears (in Dollars)	828,000
Preferred Stock, Liquidation Preference, Value (in Dollars)	$ 1,518,000	$ 1,518,000

XML

Note 8 - Commitments (Details) (USD $)	12 Months Ended		1 Months Ended		12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Feb. 28, 2014 Subsequent Event [Member] Adept Production Facility [Member]	Feb. 28, 2014 Subsequent Event [Member] Adept Production Facility [Member] Monthly Rent [Member]	Dec. 31, 2013 Principal Executive Offices [Member] Monthly Rent [Member]	Dec. 31, 2011 Engineering, Research, Design and Development Facility [Member]	Dec. 31, 2012 Engineering, Research, Design and Development Facility [Member] Second Year [Member]	Dec. 31, 2013 Minimum [Member] Annually After Year Two [Member]	Dec. 31, 2013 Maximum [Member] Annually After Year Two [Member]
Note 8 - Commitments (Details) [Line Items]
Payments for Rent					$ 75	$ 51,421
Increase in Rent in Subsequent Years							30.00%	2.00%	3.00%
Lessee Leasing Arrangements, Operating Leases, Renewal Term				1 year
Operating Leases, Rent Expense, Minimum Rentals			2,143
Operating Leases, Rent Expense	106,521	101,240
Operating Leases, Future Minimum Payments Due	$ 154,135

XML

Note 3 - Redeemable Series C Preferred Stock and Shareholders' Equity

12 Months Ended

Dec. 31, 2013

Stockholders' Equity Note [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

Note 3 – Redeemable Series C Preferred Stock and Shareholders’ Equity

Redeemable Series C Preferred Stock

The Redeemable Series C Preferred Stock is not convertible into any other class of the Company’s stock and is subject to redemption at the Company’s option at any time if certain events occur, such as capital reorganizations, consolidations, mergers, or sale of all or substantially all of the Company’s assets.  Each share is entitled to cast one vote on all matters to be voted on by the Company’s shareholders.  Upon any liquidation, dissolution or winding up of the Company, each holder of Redeemable Series C Preferred Stock will be entitled to be paid, before any distribution or payment is made upon any other class of stock of the Company, an amount in cash equal to the redemption price for each share of Redeemable Series C Preferred Stock held by such holder, and the holders of Redeemable Series C Preferred Stock will not be entitled to any further payment. The redemption price is $16.09 per share. The Redeemable Series C Preferred Stock stock is subject to redemption under certain “deemed liquidation” events, as defined, and as such, the convertible preferred stock is considered contingently redeemable for accounting purposes. Accordingly, the convertible preferred stock has been recorded within temporary equity in the Company’s financial statements.

Series B Convertible Preferred Stock

Each share of Series B Preferred Stock is convertible into three shares of the Company’s common stock at a price of $.33 per common share to be paid upon conversion and entitles the holder thereof to cast three votes on all matters to be voted on by the Company’s shareholders.  Upon any liquidation, dissolution, or winding up of the Company, each holder of Series B Preferred Stock will be entitled to be paid, after all distributions of payments are made upon redemption of the Series C Preferred Stock an amount in cash equal to $1.00 for each share of Series B Preferred Stock held, and such holders will not be entitled to any further payment.

Convertible Preferred Stock

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

Series D Preferred Stock

The Series D Preferred Stock provided for an annual cumulative dividend of $.10 per share and entitles the holder thereof to cast one vote on all matters to be voted on by the Company’s shareholders.  The shares are not convertible into any other class of stock and are subject to redemption at the Company’s option at any time at a redemption price of $1.00 per share plus all unpaid cumulative dividends.  Upon liquidation, dissolution or winding up of the Corporation, each holder of Series D Preferred Stock will be entitled to be paid, after all distributions or payments are made upon the Corporation’s Convertible Preferred Stock, Series B Preferred Stock, and Redeemable Series C Preferred Stock, an amount in cash equal to the redemption price, as defined, for each share of Series D Preferred Stock held by such holder. The holders of Series D Preferred Stock will not be entitled to any further payment.

Effective January 1, 2006, the holders of the shares of Series D Preferred Stock agreed to waive the future accumulation of dividends.  As of December 31, 2005, there were dividends in arrears on the Series D Preferred Stock of $828,000.  Such waiver does not affect dividends accrued through December 31, 2005.  Accordingly, $828,000 of such undeclared dividends in arrears remain outstanding at December 31, 2013 and are included in the liquidation value of $1,518,000.

XML

Note 4 - Income Taxes (Details) - Total Available Net Operating Loss Carry forwards (USD $)	Dec. 31, 2013
Operating Loss Carryforwards [Line Items]
Net Operating Loss Available for Federal Tax Purposes	$ 713,920
Expiring 2019 [Member]
Operating Loss Carryforwards [Line Items]
Net Operating Loss Available for Federal Tax Purposes	306,757
Expiring 2021 [Member]
Operating Loss Carryforwards [Line Items]
Net Operating Loss Available for Federal Tax Purposes	76,872
Expiring 2022 [Member]
Operating Loss Carryforwards [Line Items]
Net Operating Loss Available for Federal Tax Purposes	40,330
Expiring 2023 [Member]
Operating Loss Carryforwards [Line Items]
Net Operating Loss Available for Federal Tax Purposes	106,651
Expiring 2033 [Member]
Operating Loss Carryforwards [Line Items]
Net Operating Loss Available for Federal Tax Purposes	$ 183,310

XML

Note 4 - Income Taxes (Details) - Reconciliation between the Statutory Federal Income Tax Rate and the Company’s Effective Tax Rate	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Reconciliation between the Statutory Federal Income Tax Rate and the Company’s Effective Tax Rate [Abstract]
Federal statutory rate	34.00%	34.00%
State taxes	(0.50%)	7.40%
Nondeductible/Nontaxable Items	(8.30%)	7.00%
Change in federal valuation allowance asset	2.90%	(37.90%)
Effective tax rate	28.10%	10.50%

XML

Note 4 - Income Taxes (Details) - Deferred Tax Assets (USD $)	Dec. 31, 2013	Dec. 31, 2012
Deferred tax asset:
Fixed assets and other	$ 108,137	$ 122,148
Net operating loss carryforwards	252,878	180,407
Research and development credit	12,041	4,802
Valuation allowance	(291,056)	(284,357)
Net deferred tax asset	$ 82,000	$ 23,000

XML

Note 5 - Share-Based Compensation (Details) (USD $)	12 Months Ended			12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Oct. 31, 2007	Dec. 31, 2013 Restricted Stock [Member]	Dec. 31, 2012 Restricted Stock [Member]	Dec. 31, 2013 2007 Stock Incentive Option Plan [Member]	Dec. 31, 2012 2007 Stock Incentive Option Plan [Member]	Jul. 31, 2009 2007 Stock Incentive Option Plan [Member]	Mar. 31, 2008 2007 Stock Incentive Option Plan [Member]
Note 5 - Share-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized			420,000					345,000	10,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period						5 years
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit (in Dollars per share)						$ 0.20
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit (in Dollars per share)						$ 0.62
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period	35,000	0				35,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value (in Dollars)						$ 1,750	$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Nonvested, Number of Shares						40,000	102,000
Unvested Options Fair Value (in Dollars)						1,300	19,140
Share-based Compensation (in Dollars)	13,567	31,434		4,015	5,275	9,552	26,159
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized (in Dollars)				$ 6,328		$ 4,181	$ 15,839
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period				0	0
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Forfeited in Period				27,000	5,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period				56,000	59,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number				103,000

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Note 2 - Significant Accounting Policies

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

Note 2 – Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents

Cash balances consist of funds that are immediately available to the Company and are held by financial institutions.  For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Concentrations of credit risk

Substantially all of the Company’s revenue is derived from Small Business Innovation Research (“SBIR”) and Indefinite-Delivery, Indefinite-Quantity (“IDIQ”) contracts for the Federal government.  Approximately 98% and 96% of revenues in 2013 and 2012, respectively, were realized in connection with task orders issued under the IDIQ contract with the Naval Surface Warfare Center to deliver ADEPT units.  Although the Company’s operations are not subject to any particular government approval or regulations, the Company is dependent upon funding being made available to the DoD in amounts sufficient to cover the SBIR grants and other DoD contracts for which the Company competes.

Financial instruments that subject the Company to credit risk consist of cash and cash equivalents and accounts receivable.

The Company's policy is to limit the amount of credit exposure to any one financial institution, and place investments with financial institutions evaluated as being creditworthy, or in short-term money market funds which are exposed to minimal interest rate and credit risk. The Company maintains its cash primarily in investment accounts within large financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances up to $250,000 per bank. At times, the Company’s cash and cash equivalent balances may exceed the FDIC insured limits. The Company has not experienced any losses on its bank deposits and management believes these deposits do not expose the Company to any significant credit risk.

Receivables on government contracts are stated at outstanding balances, less an allowance for doubtful accounts, if necessary.  The allowance for doubtful accounts is established through provisions charged against operations.  Receivables deemed to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

The allowance for doubtful accounts is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on past experience, aging of the receivables, adverse situations that may affect a customers’ ability to pay, current economic conditions, and other relevant factors.  This evaluation is inherently subjective as it requires estimates that may be susceptible to significant change.  Unpaid balances remaining after the stated payment terms are considered past due.  All of our business is conducted with the Federal government in which nonpayment for awarded contracts is unlikely.  No allowance for doubtful accounts was deemed necessary by management at December 31, 2013 and 2012, respectively.

Property and Equipment

Equipment is stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives of three years. Depreciation expense amounted to $4,336 and $5,548 for the years ended December 31, 2013 and 2012, respectively, and is included in engineering expense.

Furniture and fixtures are stated at cost.  Depreciation expense is computed using the straight-line method based on estimated useful lives of seven years.  Depreciation expense amounted to $1,323 for each of the years ended December 31, 2013 and 2012, and is included in engineering expense.

Patents and Trademarks

The Company has developed and continues to develop intellectual property (technology and data) under SBIR and other contracts.  The request for a trademark for the product name “ADEPT” has been approved by the U.S. Patent and Trademark Office, and ADEPT® is now a registered trademark of the Company.

Under SBIR data rights, the Company is protected from unauthorized use of SBIR-developed technology and data for a period of five years after acceptance of all items to be delivered under a particular SBIR contract or any follow-on contract.

During the year ended December 31, 2012, the Company discontinued the use of certain technology and related patents.  The Company removed the historical carrying value of these patents of $4,000 from its balance sheet as of December 31, 2012 and immediately recognized $2,933 of unamortized balance as amortization expense for the year ended December 31, 2012.

For each of the years ended December 31, 2013 and 2012, amortization expense amounted to $139 and $3,122, respectively, which related to the cost of the patents and trademarks. These costs are being amortized over their 10 year legal lives.  Amortization expense for 2014 through 2015 will be $138 per year and $72 in 2016.

Impairment of long-lived assets

The Company assesses the potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An asset's value is impaired if management's estimate of the aggregate future cash flows, undiscounted and without interest charges, to be generated by the asset are less than the carrying value of the asset. Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the asset over the estimated fair value of the asset. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges. There were no impairments of long-lived assets in 2013 or 2012.

Revenue Recognition

The Company is a party to research and development contracts with the Federal government to develop certain technology to be utilized by the US Department of Defense. The contracts are cost plus fixed fee contracts and 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 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. As of December 31, 2013 and 2012, the Company had unbilled revenues of $16,130 and $0, respectively and is 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 December 31, 2013 and 2012, the Company had no advanced billings. Under the IDIQ agreement, the Company delivered 41 units during the year ended December 31, 2013.

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, which is 12 months following delivery and acceptance of production units by the government.  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.  The Company had a net warranty recovery, which is a component of the Company’s cost of sales of $15,500 and $7,900 for the years ended December 31, 2013 and 2012, respectively.  Since the inception of the IDIQ contract in March 2010, the Company has delivered 122 ADEPT units.  As of December 31, 2013, there are 41 ADEPT units that remain under the limited warranty coverage.  The Company had an accrued warranty expense liability of $35,190 and $69,655 at December 31, 2013 and 2012, respectively.

The following table reflects the reserve for product warranty activity for the years ended December 31:

	2013			2012
Reserve for product warranty, beginning of period	$	69,655		$	86,400
Provision for product warranty		42,300			24,500
Product warranty expirations		(57,800	)		(32,400	)
Product warranty costs paid		(18,965	)		(8,845	)
Reserve for product warranty, end of period	$	35,190		$	69,655

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 $81,598 and $59,245 for the years ended December 31, 2013 and 2012, respectively.

Share-based Compensation

The Company records compensation expense associated with stock options and other forms of equity compensation based on the estimated fair value at the grant-date. During 2013, the Company issued 35,000 stock options. There were no equity compensation awards issued for the year ended December 31, 2012.  The Company uses the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair value of share-based awards.  Expected volatility is based on historical volatility of the Company's common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The expected term is estimated consistent with the simplified method, as identified in ASC 718.  In December 2007, the Securities and Exchange Commission (“SEC”) issued guidance that allows companies, in certain circumstances, to utilize a simplified method in determining the expected term of stock option grants when calculating the compensation expense to be recorded under GAAP, for employee stock options. The simplified method can be used after December 31, 2007 only if a company's stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term. Through 2007, the Company used the simplified method to determine the expected option term, based upon the vesting and original contractual terms of the option. The Company has continued to use the simplified method to determine the expected option term since the Company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term.

The fair values of options are amortized over the vesting period of the awards utilizing a straight-line method.  The Company used the following assumptions to calculate compensation expense:

	2013
	5 year options
Expected Life		6.5
Expected volatility		123.3	%
Risk-free interest rate		0.75	%

Income Taxes

The Company accounts for income taxes under a liability method.  Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The deferred tax assets will be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company adopted a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. No significant income tax uncertainties were identified.  Therefore, the Company recognized no adjustment for unrecognized tax benefits for the years ended December 31, 2013 and 2012.

The Company has determined that any future interest accrued, related to unrecognized tax benefits, will be included in interest expense. In the event the Company must accrue for penalties, such penalties will be included as an operating expense.

Earnings (loss) per share

Basic earnings (loss) per share ("EPS") is calculated by dividing net earnings (loss) allocable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the assumed exercise or conversion of all dilutive securities, using the treasury stock method for options and if-converted method for convertible preferred securities.  Potentially dilutive securities include employee stock options, Series B Preferred Stock, and Convertible Preferred Stock (see “Note 3. Redeemable Series C Preferred Stock and Shareholders’ Equity" below for information about the Series B Preferred Stock and Convertible Preferred Stock).

In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (ASC 260-10-45). ASC 260-10-45 clarified that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Shares of the Company's Convertible Preferred Stock are considered participating securities since they contain a non-forfeitable right to dividends and distributions with common shareholders.  ASC 260-10-45 requires that the two-class method of computing basic EPS be applied. Under the two-class method, the Company's stock options are not considered to be participating securities. Dividends on common stock were not declared in 2013 or 2012.  

Recently Issued Accounting Standards

Effective January 1, 2012, the Company adopted Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income and ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-5. In these updates, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU No. 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of ASU Nos. 2011-05 and 2011-12 did not have a material impact on the Company’s consolidated financial statements. The Company has presented comprehensive loss in the accompanying consolidated statements of operations and comprehensive loss.

In February 2013, the FASB issued ASU No. 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements, however, it does require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial statements.

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Note 5 - Share-Based Compensation (Details) - Stock Options Activity (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Stock Options Activity [Abstract]
Options outstanding - shares	645,000	690,000	690,000
Options outstanding - weighted exercise price	$ 0.38	$ 0.39	$ 0.39
Options outstanding - weighted life	4 years 288 days	5 years 222 days	6 years 219 days
Options exercisable - shares	605,000	588,000
Options exercisable - weighted exercise price	$ 0.39	$ 0.42
Options exercisable - weighted life	4 years 204 days	5 years 167 days
Granted - shares	35,000	0
Granted - weighted exercise price	$ 0.05	$ 0
Exercised - shares	0	0
Exercised - weighted exercise price	$ 0	$ 0
Forfeited / Cancelled - shares	(80,000)	0
Forfeited / Cancelled - weighted exercise price	$ 0.37	$ 0

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Balance Sheets (USD $)	Dec. 31, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 1,028,146	$ 887,140
Receivables on government contracts	419,440	1,162,423
Prepaid expenses and other current assets	69,058	31,888
Total current assets	1,516,644	2,081,451
Property and equipment
Equipment	45,157	40,416
Furniture & fixtures	9,264	9,264
Less: accumulated depreciation	(47,697)	(42,038)
Property and equipment, net	6,724	7,642
Patents and trademarks	1,383	1,383
Less: accumulated amortization	(1,035)	(897)
Intangible assets, net	348	486
Deferred tax assets	82,000	23,000
Total assets	1,605,716	2,112,579
Liabilities and shareholders' equity
Accrued payroll and payroll taxes	165,543	273,089
Accounts payable and accrued expenses	131,072	359,029
Accrued warranty expense	35,190	69,655
Total current liabilities	331,805	701,773
Long-term liabilities	12,476	15,456
Total liabilities	344,281	717,229
Commitments and contingencies (Note 8)
Shareholders' equity
Total shareholders' equity	1,180,985	1,314,900
Total liabilities and shareholders' equity	1,605,716	2,112,579
Redeemable Preferred Stock [Member]
Liabilities and shareholders' equity
Preferred stock value	80,450	80,450
Series B Preferred Stock [Member]
Liabilities and shareholders' equity
Preferred stock value	11,024	11,024
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 32,011,753 shares at December 31, 2013 and 2012	320,118	320,118
Capital in excess of par value	11,620,487	11,606,920
Accumulated deficit	(10,780,094)	(10,632,612)
Convertible Preferred Stock [Member]
Liabilities and shareholders' equity
Preferred stock value	2,550	2,550
Series D Preferred Stock [Member]
Liabilities and shareholders' equity
Preferred stock value	$ 6,900	$ 6,900

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Statements of Cash Flows (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Cash flow from operating activities:
Net (loss) income	$ (147,482)	$ 227,109
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	5,798	9,993
Deferred tax (benefit) expense	(59,000)	(2,000)
Share-based compensation expense	13,567	31,434
Net changes in assets and liabilities
Decrease in receivables on government contracts	742,983	315,680
Increase in prepaid expenses and other current assets	(37,170)	(1,042)
Decrease in accrued payroll and payroll taxes	(107,546)	(91,059)
Decrease in accounts payable and accrued expenses	(227,957)	(545,188)
Decrease in accrued warranty expense	(34,465)	(16,745)
Decrease increase in long-term liabilities	(2,980)	(1,252)
Net cash provided by (used in) operating activities	145,748	(73,070)
Cash flow from investing activities:
Purchase of property and equipment	(4,742)	(3,346)
Net cash used in investing activities	(4,742)	(3,346)
Net increase (decrease) in cash and cash equivalents	141,006	(76,416)
Cash and cash equivalents, beginning of period	887,140	963,556
Cash and cash equivalents, end of period	1,028,146	887,140
Supplemental cash flows information:
Cash paid during the period for income taxes	$ 10,069	$ 31,000

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Note 7 - Earnings (Loss) Per Share (Details) - Percentage of Net Earnings Allocable to Common Shareholders	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Numerator:
Weighted average participating common shares	31,843,704	31,872,617
Add: Weighted average shares of Convertible Preferred Stock		255,000
Weighted average participating shares	31,843,704	32,127,617
Portion allocable to common shareholders	100.00%	99.20%

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Note 2 - Significant Accounting Policies (Details) (USD $)	12 Months Ended			46 Months Ended	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013 ADEPT Units [Member] IDIQ Agreement [Member]	Dec. 31, 2013 ADEPT Units [Member] IDIQ Agreement [Member]	Dec. 31, 2013 Equipment [Member]	Dec. 31, 2012 Equipment [Member]	Dec. 31, 2013 Furniture and Fixtures [Member]	Dec. 31, 2012 Furniture and Fixtures [Member]	Dec. 31, 2013 Government Contracts Concentration Risk [Member] Sales Revenue, Goods, Net [Member]	Dec. 31, 2012 Government Contracts Concentration Risk [Member] Sales Revenue, Goods, Net [Member]	Dec. 31, 2013 Technology-Based Intangible Assets [Member]	Dec. 31, 2012 Patents [Member]	Dec. 31, 2013 Patents and Trademarks [Member]	Dec. 31, 2012 Patents and Trademarks [Member]
Note 2 - Significant Accounting Policies (Details) [Line Items]
Concentration Risk, Percentage									98.00%	96.00%
Cash, FDIC Insured Amount	$ 250,000
Property, Plant and Equipment, Useful Life					3 years		7 years
Depreciation					4,336	5,548	1,323	1,323
Finite-Lived Intangible Asset, Useful Life											5 years		10 years
Finite-Lived Intangible Assets, Net	348	486										(4,000)
Amortization of Intangible Assets												2,933	139	3,122
Finite-Lived Intangible Assets, Amortization Expense, Next Twelve Months													138
Finite-Lived Intangible Assets, Amortization Expense, Year Two													72
Government Contract Receivable, Unbilled Amounts	16,130	0
Customer Advances, Current	0	0
Units Delivered			41	122
Product Warranty Expense	15,500	7,900
Units To Be Delivered			41	41
Standard Product Warranty Accrual	35,190	69,655
Research and Development Expense	$ 81,598	$ 59,245
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period (in Shares)	35,000	0

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Note 7 - Earnings (Loss) Per Share (Details) - Diluted Net Earnings (Loss) Per Share	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive shares	4,310,299	690,000
Stock Compensation Plan [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive shares	645,000	690,000
Restricted Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive shares	103,000
Convertible Debt Securities [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive shares	3,562,299

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Note 2 - Significant Accounting Policies (Details) - The Fair Values Assumptions for Options (Five Year Options [Member])	12 Months Ended
	Dec. 31, 2013
Five Year Options [Member]
5 year options
Expected Life	6 years 6 months
Expected volatility	123.30%
Risk-free interest rate	0.75%

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Note 1 - The Company

12 Months Ended

Dec. 31, 2013

Disclosure Text Block [Abstract]

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

Note 1 – The Company

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

The Company’s primary business focus is to pursue U.S. Small Business Innovation Research (“SBIR”) programs from the DoD, Department of Homeland Security, and other governmental authorities, and to expand this government funded research and development into products, services, and business areas of the Company.  Since 2002, the Company has been awarded several Phase I, II, and III SBIR contracts.

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Balance Sheets (Parentheticals) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Redeemable Preferred Stock [Member]
Preferred stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	150,000	150,000
Preferred stock, shares issued	5,000	5,000
Preferred stock, shares outstanding	5,000	5,000
Preferred stock, involuntary liquidation value (in Dollars)	$ 80,450	$ 80,450
Series B Preferred Stock [Member]
Preferred stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	1,200,000	1,200,000
Preferred stock, shares issued	1,102,433	1,102,433
Preferred stock, shares outstanding	1,102,433	1,102,433
Preferred stock, involuntary liquidation value (in Dollars)	1,102,433	1,102,433
Common stock par value (in Dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	60,000,000	60,000,000
Common stock, shares issued	32,011,753	32,011,753
Common stock, shares outstanding	32,011,753	32,011,753
Convertible Preferred Stock [Member]
Preferred stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	2,000,000	2,000,000
Preferred stock, shares issued	255,000	255,000
Preferred stock, shares outstanding	255,000	255,000
Preferred stock, involuntary liquidation value (in Dollars)	255,000	255,000
Series D Preferred Stock [Member]
Preferred stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	690,000	690,000
Preferred stock, shares issued	690,000	690,000
Preferred stock, shares outstanding	690,000	690,000
Preferred stock, involuntary liquidation value (in Dollars)	$ 1,518,000	$ 1,518,000

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Note 2 - Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Schedule of Product Warranty Liability [Table Text Block]

	2013			2012
Reserve for product warranty, beginning of period	$	69,655		$	86,400
Provision for product warranty		42,300			24,500
Product warranty expirations		(57,800	)		(32,400	)
Product warranty costs paid		(18,965	)		(8,845	)
Reserve for product warranty, end of period	$	35,190		$	69,655

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	2013
	5 year options
Expected Life		6.5
Expected volatility		123.3	%
Risk-free interest rate		0.75	%

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Document And Entity Information (USD $)	12 Months Ended
	Dec. 31, 2013	Mar. 27, 2014	Jun. 28, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	MIKROS SYSTEMS CORP
Document Type	10-K
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		32,011,753
Entity Public Float			$ 2,153,536
Amendment Flag	false
Entity Central Index Key	0000317340
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Dec. 31, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	FY

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Note 4 - Income Taxes (Tables)

12 Months Ended

Dec. 31, 2013

Income Tax Disclosure [Abstract]

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

	2013			2012
Current state tax expense	$	1,393		$	28,675
Deferred federal tax expense (benefit)		(59,000	)		(2,000	)
Income tax expense (benefit)	$	(57,607	)	$	26,675

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

	2013			2012
Federal statutory rate		34.0	%		34.0	%
State taxes		(0.5	)		7.4
Nondeductible/Nontaxable Items		(8.3	)		7.0
Change in federal valuation allowance asset		2.9			(37.9	)
Effective tax rate		28.1	%		10.5	%

Summary of Operating Loss Carryforwards [Table Text Block]

Year of Expiration	Available for Federal Tax Purposes
2019	$	306,757
2021		76,872
2022		40,330
2023		106,651
2033		183,310
	$	713,920

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]

	2013			2012
Deferred tax asset:
Fixed assets and other	$	108,137		$	122,148
Net operating loss carryforwards		252,878			180,407
Research and development credit		12,041			4,802
Valuation allowance		(291,056	)		(284,357	)
Net deferred tax asset	$	82,000		$	23,000

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Statements of Operations and Comprehensive Income (Loss) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Contract revenues	$ 3,050,126	$ 4,825,068
Cost of sales	1,422,135	2,690,510
Gross margin	1,627,991	2,134,558
Expenses:
Engineering	81,598	59,245
General and administrative	1,017,058	1,133,788
Total expenses	1,833,097	1,880,872
Income (loss) from operations	(205,106)	253,686
Other income:
Interest	17	98
Net income (loss) before income taxes	(205,089)	253,784
Income tax expense (benefit)	(57,607)	26,675
Net income (loss) and comprehensive income (loss)	(147,482)	227,109
Basic income (loss) per common share (in Dollars per share)		$ 0.01
Basic weighted average number of shares outstanding (in Shares)	31,843,704	31,872,617
Diluted income (loss) per common share (in Dollars per share)		$ 0.01
Diluted weighted average number of shares outstanding (in Shares)	31,843,704	35,620,916
Engineering [Member]
Expenses:
Engineering	$ 816,039	$ 747,084

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Note 6 - Debt

12 Months Ended

Dec. 31, 2013

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

Note 6 – Debt

During the quarter ended June 30, 2013, the Company renewed its line of credit agreement with Sun National Bank and increased its borrowing capacity to $500,000. The facility matures on June 30, 2014 and accrues interest at a variable rate equal to the bank’s prime rate plus 250 basis points with a minimum interest rate of 4.500% per annum.  At December 31, 2013, the interest rate was 5.75%. Principal borrowings may be prepaid at any time without penalty, and the facility is secured by substantially all of the Company’s assets. Borrowings under the facility are limited to a percentage of aggregate outstanding receivables that are due within 90 days.  The facility contains customary affirmative and negative covenants and a net worth financial covenant.  As of December 31, 2013 and the date of this report, the Company’s borrowing capacity under the facility was $403,310, there were no amounts outstanding, and the Company was in compliance with all covenants.

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Note 5 - Share-Based Compensation

12 Months Ended

Dec. 31, 2013

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

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

Note 5 – Share-Based Compensation

2007 Stock Incentive Option Plan

In October 2007, March 2008 and July 2009, the Company issued options to purchase 420,000, 10,000 and 345,000 shares, respectively, of the Company’s common stock under the Company’s 2007 Stock Incentive Plan.  The options vest over a five year period and are exercisable at $0.20 to $0.62 per share, the last sales price of the Company’s common stock as reported on the OTCBB on the date of grant.  There were 35,000 shares issued during the year ended December 31, 2013. No shares were issued during 2012.  A summary of the status of the Company’s 2007 Stock Incentive Plan as of December 31, 2013 and 2012 is presented below.

	2013
	Options			Weighted Exercise Price		Weighted Life (in years)
Options outstanding - beginning of year		690,000		$	0.39		5.61
Granted		35,000			0.05
Exercised		-			-
Forfeited / Cancelled		(80,000	)		0.37
Options outstanding - end of year		645,000		$	0.38		4.79
Options exercisable - December 31, 2013		605,000		$	0.39		4.56

	2012
	Options		Weighted Exercise Price		Weighted Life (in years)
Options outstanding - beginning of year		690,000	$	0.39		6.60
Granted		-		-
Exercised		-		-
Forfeited / Cancelled		-		-
Options outstanding - end of year		690,000	$	0.39		5.61
Options exercisable - December 31, 2012		588,000	$	0.42		5.46

The aggregate intrinsic value of options outstanding at December 31, 2013 and 2012 under the 2007 Stock Incentive Plan was $1,750 and $0, respectively.

The aggregate intrinsic value of stock options above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the options) that would have been received by the option holders had they exercised their options on December 31, 2013 and 2012.  The aggregate intrinsic value of stock options changes based on the changes in the market value of the Company’s common stock.  The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of the grant using the Black-Scholes Merton option pricing model.

There were a total of 40,000 and 102,000 unvested options at December 31, 2013 and 2012, respectively.  The total fair value of unvested options as of December 31, 2013 and 2012 was approximately $1,300 and $19,140, respectively.  For the year ended December 31, 2013 and 2012, the Company recognized share-based compensation expense of $9,552 and $26,159, respectively.  As of December 31, 2013 and 2012, there was approximately $4,181 and $15,839, respectively, of unamortized stock option compensation expense.

Restricted Stock

The Company did not grant any restricted stock awards during 2013 or 2012. During 2013 and 2012 there were restricted shares forfeitures of 27,000 and 5,000, respectively.   There were 56,000 and 59,000 restricted shares that vested during 2013 and 2012, respectively.  For the years ended December 31, 2013 and 2012, the Company recognized $4,015 and $5,275 of share-based compensation expense.  As of December 31, 2013, there were 103,000 restricted stock awards outstanding and $6,328 of unrecognized share-based compensation expense that will be recognized in future periods.

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Note 2 - Significant Accounting Policies (Details) - Reserve for Product Warranty Activity (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Reserve for Product Warranty Activity [Abstract]
Reserve for product warranty, beginning of period	$ 69,655	$ 86,400
Provision for product warranty	42,300	24,500
Product warranty expirations	(57,800)	(32,400)
Product warranty costs paid	(18,965)	(8,845)
Reserve for product warranty, end of period	$ 35,190	$ 69,655

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Note 5 - Share-Based Compensation (Tables)

12 Months Ended

Dec. 31, 2013

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

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

	2013
	Options			Weighted Exercise Price		Weighted Life (in years)
Options outstanding - beginning of year		690,000		$	0.39		5.61
Granted		35,000			0.05
Exercised		-			-
Forfeited / Cancelled		(80,000	)		0.37
Options outstanding - end of year		645,000		$	0.38		4.79
Options exercisable - December 31, 2013		605,000		$	0.39		4.56

	2012
	Options		Weighted Exercise Price		Weighted Life (in years)
Options outstanding - beginning of year		690,000	$	0.39		6.60
Granted		-		-
Exercised		-		-
Forfeited / Cancelled		-		-
Options outstanding - end of year		690,000	$	0.39		5.61
Options exercisable - December 31, 2012		588,000	$	0.42		5.46

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Note 9 - Related Party Transactions

12 Months Ended

Dec. 31, 2013

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

Note 9 – Related Party Transactions

Ocean Power Technologies, Inc. operates as a subcontractor to the Company. Thomas Meaney, the Company’s President and Chief Financial Officer and member of the Company’s board of directors, also served as a director of Ocean Power Technologies, Inc. through October 2012. For the year ended December 31, 2012, the Company incurred subcontractor expenses of $49,588.

Paul Casner, the Chairman of the Company’s Board of Directors, also serves as the executive chairman and CEO of Atair Aerospace Incorporation.  During 2013 and 2012, Atair provided subcontracting services to the Company in designing the chassis component within the ADEPT units.  The Company incurred subcontracting service costs from Atair of $77,935 and $188,197 during the years ended December 31, 2013 and 2012, respectively.

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Note 7 - Earnings (Loss) Per Share

12 Months Ended

Dec. 31, 2013

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

Note 7 – Earnings (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. 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 Company’s calculation of earnings per share is as follows:

	2013			2012
Basic earnings (loss) per common share:
Net income (loss) applicable to common shareholders – basic	$	(147,482	)	$	227,109
Portion allocable to common shareholders		100.0	%		99.2	%
Net income (loss) allocable to common shareholders		(147,482	)		225,292
Weighted average basic shares outstanding		31,843,704			31,872,617
Basic earnings per share	$	-		$	0.01
Dilutive earnings (loss) per common share:
Net income (loss) allocable to common shareholders		(147,482	)		225,292
Add: undistributed earnings allocated to participating securities		-			1,817
Numerator for diluted earnings (loss) per common share		(147,482	)		227,109
Weighted average basic shares outstanding		31,843,704			31,872,617
Diluted effect:
Unvested restricted stock awards		-			186,000
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		31,843,704			35,620,916
Dilutive earnings (loss) per share	$	-		$	0.01

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

	2013			2012
Numerator:
Weighted average participating common shares		31,843,704			31,872,617
Denominator:
Weighted average participating common shares		31,843,704			31,872,617
Add: Weighted average shares of Convertible Preferred Stock		-			255,000
Weighted average participating shares		31,843,704			32,127,617
Portion allocable to common shareholders		100.0	%		99.2	%

Diluted earnings(loss) per share for the years ended December 31, 2013 and 2012 do not reflect following potential common shares, as the effect would be antidilutive.

	Years Ended December 31,
	2013		2012
Stock options		645,000		690,000
Unvested restricted stock awards		103,000		-
Convertible preferred stock		3,562,299		-
Total		4,310,299		690,000

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Note 8 - Commitments

12 Months Ended

Dec. 31, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

Note 8 - Commitments

The Company’s principal executive offices are located in Princeton, New Jersey. Monthly rent is $75.

The engineering research, design and development facility is located in Fort Washington, Pennsylvania where the Company leases general office space under a lease agreement that was renewed in December 2010 and terminates in February 2016.   The rent under the initial year was approximately $51,421 with a 30% increase in the second year and 2% - 3% increases each year thereafter.  Rent is being expensed on a straight-line basis over the term of the lease.

The Company also leases a facility in Largo, Florida which supports production of the ADEPT product line and quality assurance, field support, and life cycle management.  In February 2014, the Company renewed the lease for a period of one year at a monthly rent of $2,143.

Total rent expense during 2013 and 2012 was $106,521 and $101,240, respectively.  The Company has $154,135 in future obligations under non-cancellable operating leases that are due as follows:

2014		70,088
2015		71,814
2016		12,233
	$	154,135

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Accounting Policies, by Policy (Policies)

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and cash equivalents

Cash balances consist of funds that are immediately available to the Company and are held by financial institutions.  For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Concentrations of credit risk

Substantially all of the Company’s revenue is derived from Small Business Innovation Research (“SBIR”) and Indefinite-Delivery, Indefinite-Quantity (“IDIQ”) contracts for the Federal government.  Approximately 98% and 96% of revenues in 2013 and 2012, respectively, were realized in connection with task orders issued under the IDIQ contract with the Naval Surface Warfare Center to deliver ADEPT units.  Although the Company’s operations are not subject to any particular government approval or regulations, the Company is dependent upon funding being made available to the DoD in amounts sufficient to cover the SBIR grants and other DoD contracts for which the Company competes.

Financial instruments that subject the Company to credit risk consist of cash and cash equivalents and accounts receivable.

The Company's policy is to limit the amount of credit exposure to any one financial institution, and place investments with financial institutions evaluated as being creditworthy, or in short-term money market funds which are exposed to minimal interest rate and credit risk. The Company maintains its cash primarily in investment accounts within large financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances up to $250,000 per bank. At times, the Company’s cash and cash equivalent balances may exceed the FDIC insured limits. The Company has not experienced any losses on its bank deposits and management believes these deposits do not expose the Company to any significant credit risk.

Receivables on government contracts are stated at outstanding balances, less an allowance for doubtful accounts, if necessary.  The allowance for doubtful accounts is established through provisions charged against operations.  Receivables deemed to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

The allowance for doubtful accounts is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on past experience, aging of the receivables, adverse situations that may affect a customers’ ability to pay, current economic conditions, and other relevant factors.  This evaluation is inherently subjective as it requires estimates that may be susceptible to significant change.  Unpaid balances remaining after the stated payment terms are considered past due.  All of our business is conducted with the Federal government in which nonpayment for awarded contracts is unlikely.  No allowance for doubtful accounts was deemed necessary by management at December 31, 2013 and 2012, respectively.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Equipment is stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives of three years. Depreciation expense amounted to $4,336 and $5,548 for the years ended December 31, 2013 and 2012, respectively, and is included in engineering expense.

Furniture and fixtures are stated at cost.  Depreciation expense is computed using the straight-line method based on estimated useful lives of seven years.  Depreciation expense amounted to $1,323 for each of the years ended December 31, 2013 and 2012, and is included in engineering expense.

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

Patents and Trademarks

The Company has developed and continues to develop intellectual property (technology and data) under SBIR and other contracts.  The request for a trademark for the product name “ADEPT” has been approved by the U.S. Patent and Trademark Office, and ADEPT® is now a registered trademark of the Company.

Under SBIR data rights, the Company is protected from unauthorized use of SBIR-developed technology and data for a period of five years after acceptance of all items to be delivered under a particular SBIR contract or any follow-on contract.

During the year ended December 31, 2012, the Company discontinued the use of certain technology and related patents.  The Company removed the historical carrying value of these patents of $4,000 from its balance sheet as of December 31, 2012 and immediately recognized $2,933 of unamortized balance as amortization expense for the year ended December 31, 2012.

For each of the years ended December 31, 2013 and 2012, amortization expense amounted to $139 and $3,122, respectively, which related to the cost of the patents and trademarks. These costs are being amortized over their 10 year legal lives.  Amortization expense for 2014 through 2015 will be $138 per year and $72 in 2016.

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

Impairment of long-lived assets

The Company assesses the potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An asset's value is impaired if management's estimate of the aggregate future cash flows, undiscounted and without interest charges, to be generated by the asset are less than the carrying value of the asset. Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the asset over the estimated fair value of the asset. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges. There were no impairments of long-lived assets in 2013 or 2012.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

The Company is a party to research and development contracts with the Federal government to develop certain technology to be utilized by the US Department of Defense. The contracts are cost plus fixed fee contracts and 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 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. As of December 31, 2013 and 2012, the Company had unbilled revenues of $16,130 and $0, respectively and is 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 December 31, 2013 and 2012, the Company had no advanced billings. Under the IDIQ agreement, the Company delivered 41 units during the year ended December 31, 2013.

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, which is 12 months following delivery and acceptance of production units by the government.  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.  The Company had a net warranty recovery, which is a component of the Company’s cost of sales of $15,500 and $7,900 for the years ended December 31, 2013 and 2012, respectively.  Since the inception of the IDIQ contract in March 2010, the Company has delivered 122 ADEPT units.  As of December 31, 2013, there are 41 ADEPT units that remain under the limited warranty coverage.  The Company had an accrued warranty expense liability of $35,190 and $69,655 at December 31, 2013 and 2012, respectively.

The following table reflects the reserve for product warranty activity for the years ended December 31:

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 $81,598 and $59,245 for the years ended December 31, 2013 and 2012, respectively.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Share-based Compensation

The Company records compensation expense associated with stock options and other forms of equity compensation based on the estimated fair value at the grant-date. During 2013, the Company issued 35,000 stock options. There were no equity compensation awards issued for the year ended December 31, 2012.  The Company uses the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair value of share-based awards.  Expected volatility is based on historical volatility of the Company's common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The expected term is estimated consistent with the simplified method, as identified in ASC 718.  In December 2007, the Securities and Exchange Commission (“SEC”) issued guidance that allows companies, in certain circumstances, to utilize a simplified method in determining the expected term of stock option grants when calculating the compensation expense to be recorded under GAAP, for employee stock options. The simplified method can be used after December 31, 2007 only if a company's stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term. Through 2007, the Company used the simplified method to determine the expected option term, based upon the vesting and original contractual terms of the option. The Company has continued to use the simplified method to determine the expected option term since the Company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term.

The fair values of options are amortized over the vesting period of the awards utilizing a straight-line method.  The Company used the following assumptions to calculate compensation expense:

	2013
	5 year options
Expected Life		6.5
Expected volatility		123.3	%
Risk-free interest rate		0.75	%

Income Tax, Policy [Policy Text Block]

Income Taxes

The Company accounts for income taxes under a liability method.  Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The deferred tax assets will be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company adopted a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. No significant income tax uncertainties were identified.  Therefore, the Company recognized no adjustment for unrecognized tax benefits for the years ended December 31, 2013 and 2012.

The Company has determined that any future interest accrued, related to unrecognized tax benefits, will be included in interest expense. In the event the Company must accrue for penalties, such penalties will be included as an operating expense.

Earnings Per Share, Policy [Policy Text Block]

Earnings (loss) per share

Basic earnings (loss) per share ("EPS") is calculated by dividing net earnings (loss) allocable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the assumed exercise or conversion of all dilutive securities, using the treasury stock method for options and if-converted method for convertible preferred securities.  Potentially dilutive securities include employee stock options, Series B Preferred Stock, and Convertible Preferred Stock (see “Note 3. Redeemable Series C Preferred Stock and Shareholders’ Equity" below for information about the Series B Preferred Stock and Convertible Preferred Stock).

In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (ASC 260-10-45). ASC 260-10-45 clarified that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Shares of the Company's Convertible Preferred Stock are considered participating securities since they contain a non-forfeitable right to dividends and distributions with common shareholders.  ASC 260-10-45 requires that the two-class method of computing basic EPS be applied. Under the two-class method, the Company's stock options are not considered to be participating securities. Dividends on common stock were not declared in 2013 or 2012.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Standards

Effective January 1, 2012, the Company adopted Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income and ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-5. In these updates, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU No. 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of ASU Nos. 2011-05 and 2011-12 did not have a material impact on the Company’s consolidated financial statements. The Company has presented comprehensive loss in the accompanying consolidated statements of operations and comprehensive loss.

In February 2013, the FASB issued ASU No. 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements, however, it does require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial statements.

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Note 7 - Earnings (Loss) Per Share (Details) - Weighted Average Shares Outstanding (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Note 7 - Earnings (Loss) Per Share (Details) - Weighted Average Shares Outstanding [Line Items]
Net income (loss) applicable to common shareholders – basic	$ (147,482)	$ 227,109
Portion allocable to common shareholders	100.00%	99.20%
Net income allocable to common shareholders	(147,482)	225,292
Add: undistributed earnings allocated to participating securities		1,817
Numerator for diluted earnings (loss) per common share	$ (147,482)	$ 227,109
Weighted average basic shares outstanding	31,843,704	31,872,617
Unvested restricted stock awards		186,000
Conversion equivalent of dilutive preferred stock		255,000
Weighted average dilutive shares outstanding	31,843,704	35,620,916
Dilutive earnings (loss) per share		$ 0.01
Basic earnings per share		$ 0.01
Preferred Stock Series B Convertible [Member}
Note 7 - Earnings (Loss) Per Share (Details) - Weighted Average Shares Outstanding [Line Items]
Conversion equivalent of dilutive preferred stock		3,307,299
Convertible Preferred Stock [Member]
Note 7 - Earnings (Loss) Per Share (Details) - Weighted Average Shares Outstanding [Line Items]
Conversion equivalent of dilutive preferred stock		255,000

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Note 8 - Commitments (Tables)

12 Months Ended

Dec. 31, 2013

Commitments and Contingencies Disclosure [Abstract]

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

2014		70,088
2015		71,814
2016		12,233
	$	154,135

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Note 4 - Income Taxes (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Income Tax Disclosure [Abstract]
Increase (Decrease) in Deferred Income Taxes	$ 180,000
Valuation Allowance, Deferred Tax Asset, Change in Amount	$ 7,000	$ (109,000)

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Statements of Shareholders’ Equity (USD $)	Series B Preferred Stock [Member]	Convertible Preferred Stock [Member]	Series D Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balance, amount at Dec. 31, 2011	$ 11,024	$ 2,550	$ 6,900	$ 320,168	$ 11,575,436	$ (10,859,721)	$ 1,056,357
Balance, shares (in Shares) at Dec. 31, 2011	1,102,433	255,000	690,000	32,016,753
Stock Compensation					31,434		31,434
Forfeiture of common stock				(50)	50
Forfeiture of common stock (in Shares)				(5,000)
Net income						227,109	227,109
Balance, amount at Dec. 31, 2012	11,024	2,550	6,900	320,118	11,606,920	(10,632,612)	1,314,900
Balance, shares (in Shares) at Dec. 31, 2012	1,102,433	255,000	690,000	32,011,753
Stock Compensation					13,567		13,567
Net income						(147,482)	(147,482)
Balance, amount at Dec. 31, 2013	$ 11,024	$ 2,550	$ 6,900	$ 320,118	$ 11,620,487	$ (10,780,094)	$ 1,180,985
Balance, shares (in Shares) at Dec. 31, 2013	1,102,433	255,000	690,000	32,011,753

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Note 4 - Income Taxes

12 Months Ended

Dec. 31, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 4 – Income Taxes

The income tax provision is comprised of the following for the years ended December 31:

	2013			2012
Current state tax expense	$	1,393		$	28,675
Deferred federal tax expense (benefit)		(59,000	)		(2,000	)
Income tax expense (benefit)	$	(57,607	)	$	26,675

The reconciliation between the statutory federal income tax rate and the Company’s effective tax rate is as follows:

	2013			2012
Federal statutory rate		34.0	%		34.0	%
State taxes		(0.5	)		7.4
Nondeductible/Nontaxable Items		(8.3	)		7.0
Change in federal valuation allowance asset		2.9			(37.9	)
Effective tax rate		28.1	%		10.5	%

Total available net operating loss carry forwards at December 31, 2013 are reflected in the following schedule:

Year of Expiration	Available for Federal Tax Purposes
2019	$	306,757
2021		76,872
2022		40,330
2023		106,651
2033		183,310
	$	713,920

During 2013, the Company generated federal net operating loss carryforwards of approximately $180,000. The Company’s valuation allowance associated with the related deferred tax assets was increased by approximately $7,000 in 2013 and decreased by approximately $109,000 in 2012.  The change in our valuation allowance for 2013 and 2012 was attributable to the expected profitability on contracts being fulfilled as of the end of each period.

  Deferred tax assets consist of the following as of December 31:

	2013			2012
Deferred tax asset:
Fixed assets and other	$	108,137		$	122,148
Net operating loss carryforwards		252,878			180,407
Research and development credit		12,041			4,802
Valuation allowance		(291,056	)		(284,357	)
Net deferred tax asset	$	82,000		$	23,000

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers both positive and negative evidence in making this assessment, including the future reversal of existing temporary taxable differences, projected future taxable income, the recent expiration of unused net operating losses and tax planning strategies.  Due to the Company’s inability to project future taxable income over the periods in which the deferred tax assets may become deductible, management does not believe it is more likely than not that the Company will realize the entire benefit of its deferred tax assets. As a result, management believes the maintenance of a valuation allowance is required at December 31, 2013 against that portion of the Company’s net deferred tax asset that may not be realized.

The Company continues to analyze its income tax positions and no significant income tax uncertainties were identified in 2013 and 2012. Therefore, the Company recognized no adjustment for unrecognized tax benefits for the years ended December 31, 2013 and 2012. The Company is not currently under examination by the Internal Revenue Service. The United States federal statute of limitations remains open for the years 2010 onward. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company is not currently under examination in any state jurisdictions. The Company is no longer subject to federal or state income tax assessments for years prior to 2007.

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Note 4 - Income Taxes (Details) - Income Tax Provision (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Income Tax Provision [Abstract]
Current state tax expense	$ 1,393	$ 28,675
Deferred federal tax expense (benefit)	(59,000)	(2,000)
Income tax expense (benefit)	$ (57,607)	$ 26,675

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Note 8 - Commitments (Details) - Future Obligations under Non-cancellable Operating Leases (USD $)	Dec. 31, 2013
Future Obligations under Non-cancellable Operating Leases [Abstract]
2014	$ 70,088
2015	71,814
2016	12,233
	$ 154,135

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Note 7 - Earnings (Loss) Per Share (Tables)

12 Months Ended

Dec. 31, 2013

Earnings Per Share [Abstract]

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

	2013			2012
Basic earnings (loss) per common share:
Net income (loss) applicable to common shareholders – basic	$	(147,482	)	$	227,109
Portion allocable to common shareholders		100.0	%		99.2	%
Net income (loss) allocable to common shareholders		(147,482	)		225,292
Weighted average basic shares outstanding		31,843,704			31,872,617
Basic earnings per share	$	-		$	0.01
Dilutive earnings (loss) per common share:
Net income (loss) allocable to common shareholders		(147,482	)		225,292
Add: undistributed earnings allocated to participating securities		-			1,817
Numerator for diluted earnings (loss) per common share		(147,482	)		227,109
Weighted average basic shares outstanding		31,843,704			31,872,617
Diluted effect:
Unvested restricted stock awards		-			186,000
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		31,843,704			35,620,916
Dilutive earnings (loss) per share	$	-		$	0.01

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

	2013			2012
Numerator:
Weighted average participating common shares		31,843,704			31,872,617
Denominator:
Weighted average participating common shares		31,843,704			31,872,617
Add: Weighted average shares of Convertible Preferred Stock		-			255,000
Weighted average participating shares		31,843,704			32,127,617
Portion allocable to common shareholders		100.0	%		99.2	%

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

	Years Ended December 31,
	2013		2012
Stock options		645,000		690,000
Unvested restricted stock awards		103,000		-
Convertible preferred stock		3,562,299		-
Total		4,310,299		690,000