10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended June 30, 2016

or

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

For the transition period from _____to_____.

Commission File Number: 000-14801

Mikros Systems Corporation

(Exact name of registrant as specified in its charter)

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

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

(Address of Principal Executive Offices)

(609) 987-1513

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes    ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes    ☐ No

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

Large accelerated filer    ☐	Accelerated filer                   ☐
Non-accelerated filer      ☐	Smaller reporting company ☒
(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 34,747,167 issued and outstanding shares of the issuer’s common stock, $.01 par value per share, on August 15, 2016.

TABLE OF CONTENTS

		PAGE #
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Balance Sheets as of June 30, 2016 and December 31, 2015 (unaudited)	1
	Condensed Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)	2
	Condensed Statement of Stockholders’ Equity for the Six Months Ended June 30, 2016 (unaudited)	3
	Condensed Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)	4
	Notes to Condensed Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 4.	Controls and Procedures	16
PART II.  OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 6.	Exhibits	17
	Signatures	18

Part I Financial Information 

Item 1 Financial Statements

Mikros Systems Corporation 

Condensed Balance Sheets 

(Unaudited)

	June 30, 2016			December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	1,634,801		$	2,858,655
Receivables on government contracts		464,629			431,012
Prepaid expenses and other current assets		98,885			59,205
Total current assets		2,198,315			3,348,872
Property and equipment
Equipment		95,693			95,693
Furniture & fixtures		16,394			16,394
Less: accumulated depreciation		(78,474	)		(70,257	)
Property and equipment, net		33,613			41,830
Intangible assets		128,716			127,383
Less: accumulated amortization		(22,383	)		(11,812	)
Intangible assets, net		106,333			115,571
Deferred tax assets		222,185			214,548
Total assets	$	2,560,446		$	3,720,821
Liabilities and shareholders' equity
Current liabilities:
Accrued payroll and payroll taxes	$	248,108		$	574,019
Accounts payable and accrued expenses		139,925			377,928
Accrued warranty expense		324,575			359,654
Deferred revenue		30,000			24,000
Total current liabilities		742,608			1,335,601
Long-term liabilities		128,315			117,436
Total liabilities		870,923			1,453,037
Redeemable series C preferred stock, par value $.01 per share, authorized 150,000 shares, issued and outstanding, 0 and 5,000 shares, respectively		-			80,450
Shareholders' equity:
Preferred stock, series B convertible, par value $.01 per share, authorized 1,200,000 shares, issued and outstanding, 208,971 and 1,102,433 shares, respectively		2,090			11,024
Preferred stock, convertible, par value $.01 per share, authorized 2,000,000 shares, issued and outstanding, 0 and 255,000 shares, respectively		-			2,550
Preferred stock, series D, par value $.01 per share, 690,000 shares authorized issued and outstanding, 46,092 and 690,000 shares respectively		461			6,900
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 34,376,084 and 32,025,753 shares, respectively		343,761			320,258
Capital in excess of par value		10,014,911			11,631,732
Accumulated deficit		(8,671,700	)		(9,785,130	)
Total shareholders' equity		1,689,523			2,187,334
Total liabilities and shareholders' equity	$	2,560,446		$	3,720,821

See Notes to Unaudited Condensed Financial Statements 

1

Mikros Systems Corporation

Condensed Statements of Operations and Comprehensive Income (unaudited)

	Three Months Ended,				Six Months Ended,
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Contract Revenues	$	978,372	$	1,734,382	$	1,966,301	$	4,210,421
Cost of sales		349,526		877,168		673,854		2,339,073
Gross margin		628,846		857,214		1,292,447		1,871,348
Expenses:
Engineering		312,849		326,521		636,762		748,936
General and administrative		296,754		300,574		632,902		622,597
Total expenses		609,603		627,095		1,269,664		1,371,533
Income from operations		19,243		230,119		22,783		499,815
Other income:
Interest		1,256		93		2,705		186
Net income before income taxes		20,499		230,212		25,488		500,001
Income tax expense		12,512		109,500		15,655		238,500
Net income		7,987		120,712		9,833		261,501
Discount upon exchange of Preferred Stock, net of related fees		1,103,597		-		1,103,597		-
Net income available to common shareholders	$	1,111,584	$	120,712	$	1,113,430	$	261,501
Income per common share - basic	$	0.03	$	-	$	0.03	$	0.01
Basic weighted average number of shares outstanding		32,419,016		31,947,753		32,224,577		32,124,260
Income per common share - diluted	$	0.03	$	-	$	0.03	$	0.01
Diluted weighted average number of shares outstanding		35,506,914		35,548,552		35,554,403		35,722,826

See Notes to Unaudited Condensed Financial Statements

2

Mikros Systems Corporation

Statements of Shareholders' Equity (unaudited)

	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
	Number of shares			Par Value			Number of shares			Par Value			Number of shares			Par Value			Number of shares			Par Value			Excess of Par Value			Accumulated Deficit			Total
Balance at December 31, 2015		1,102,433			11,024			255,000			2,550			690,000			6,900			32,025,753			320,258			11,631,732			(9,785,130	)	$	2,187,334
Extinguishment of Preferred Stock in exchange for cash and Common Stock		(893,462	)		(8,934	)		(255,000	)		(2,550	)		(643,908	)		(6,439	)		4,427,498			44,275			(1,491,742	)		1,103,597			(361,793	)
Purchase of Commons Stock																				(2,084,167	)		(20,842	)		(126,609	)					(147,451	)
Stock compensation		-			-			-			-			-			-			-			-			1,250			-			1,250
Exercise of non-restricted stock awards		-			-			-			-			-			-			7,000			70			280			-			350
Net income		-			-			-			-			-			-			-			-			-			9,833			9,833
Balance at June 30, 2016		208,971		$	2,090			-		$	-			46,092		$	461			34,376,084		$	343,761		$	10,014,911		$	(8,671,700	)	$	1,689,523

3

Mikros Systems Corporation

Condensed Statements of Cash Flows (unaudited)

	Three months ended
	June 30, 2016			June 30, 2015
Cash flows from operating activities
Net income	$	9,833		$	261,501
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		18,788			3,509
Deferred tax expense		(7,637	)		54,000
Share-based compensation expense		1,250			1,362
Changes in assets and liabilities:
(Increase) in receivables on government contracts		(33,617	)		(31,667	)
(Increase) in prepaid expenses and other current assets		(39,680	)		(46,729	)
Decrease in accrued payroll and payroll taxes		(325,911	)		(73,303	)
Decrease in accounts payable and accrued expenses		(271,943	)		(171,485	)
Increase (Decrease) in accrued warranty expense		(35,079	)		6,600
Increase in deferred revenue		6,000			-
Increase (Decrease) in long-term liabilities		10,879			(3,145	)
Net cash (used in) provided by operating activities		(667,117	)		643
Cash flows from investing activities:
Payments related to intangible assets		(1,333	)		-
Purchase of property and equipment		-			(2,693	)
Net cash used in investing activities:		(1,333	)		(2,693	)
Cash flows from financing activities:
Payments to preferred shareholders in conjunction with a recapitalization		(362,213	)		-
Payments to acquire and retire Common Stock		(147,451	)		-
Professional fees paid in conjunction with recapitalization		(46,090	)		-
Exercise of stock options		350			-
Net cash used in financing activities:		(555,404	)		-
Net decrease in cash and cash equivalents		(1,223,854	)		(2,050	)
Cash and cash equivalents, beginning of period		2,858,655			1,161,634
Cash and cash equivalents, end of period	$	1,634,801		$	1,159,584
Supplement cash flow information:
Cash paid during the period for income taxes	$	44,500		$	143,900
Noncash investing and financing activities:
Issuance of common stock in in exchange for preferred stock	$	442,750
Recognition of an extinguishment liability in exchange for preferred stock	$	33,941

See Notes to Unaudited Condensed Financial Statements 

4

Mikros Systems Corporation

Notes to Condensed Financial Statements (unaudited)

Note 1 – Basis of Presentation

The financial statements included herein have been prepared by Mikros Systems Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

In the opinion of the Company’s management, the accompanying unaudited interim condensed financial statements contain all adjustments, consisting solely of those which are of a normal recurring nature, necessary to present fairly its financial position as of June 30, 2016, and the results of its operations for the three and six months ended June 30, 2016 and 2015 and changes in stockholders’ equity and cash flows for the six months ended June 30, 2016 and 2015.

Note 2 – Recent Accounting Pronouncements

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s condensed financial statements, from those disclosed in the Company’s 2015 Annual Report on Form 10-K.

Note 3 – Significant Accounting Policies

Revenue Recognition

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

The Company recognizes revenue as it relates to the license of software when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access to take immediate possession of the software or technology. Software license agreements include post-contract customer support ("PCS"). For the Company’s software and software-related multiple element arrangements, where customers purchase both software related products and software related services, the Company uses vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. The Company has established VSOE of fair value for the majority of the PCS, professional services, and training. Given the limited number of sales related to this software, and the fact that the Company does not sell the PCS element separately, there is no VSOE currently available to bifurcate the PCS element from the contract.  In accordance with ASC 985-605-25-10a, the fees earned from sale of licenses to which the only undelivered element is the PCS, are recognized ratably over the life of the contract. Revenues from the sale of software licenses for the three and six months ended June 30, 2016 and 2015 were $33,751 and $0 and $61,501 and $0, respectively. At June 30, 2016 and December 31, 2015, deferred revenues amounted to $30,000 and $24,000, respectively.

5

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of June 30, 2016 and December 31, 2015, the Company had unbilled revenues of $122,342 and $60,857, respectively which are recorded within receivables on government contracts in the Company’s balance sheet. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of June 30, 2016 and December 31, 2015, there were $0 and $125,157, respectively, of advanced billings.

Warranty Expense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, expected and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended June 30, 2016 and 2015, the Company recognized warranty (benefit) expense of $0 and $(23,300), respectively, and for the six months ended June 30, 2016 and 2015, the Company recognized warranty expense (benefit) of $(20,801) and $6,600, respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 189 ADEPT units. As of June 30, 2016, there are 64 ADEPT units that remain under the limited warranty coverage.

The following table reflects the reserve for product warranty activity as of June 30, 2016 and December 31, 2015:

	June 30, 2016			December 31, 2015
Beginning balance	$	359,654		$	33,500
Provision for product warranty		-			400,500
Product warranty expirations		(20,801	)		-
Product warranty costs paid		(14,278	)		(74,346	)
Ending balance	$	324,575		$	359,654

Research and Development Expense

Research and Development expenditures for research and development of the Company's products are expensed when incurred, and are included in general and administrative expenses. The Company recognized research and development costs of $24,359 and $8,191 for the three months ended June 30, 2016 and 2015, respectively, and $45,256 and $9,735 for the six months ended June 30, 2016 and 2015, respectively.

Intangible Assets

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

Licenses are amortized using a straight-line method over their estimated life of six years. For the three months ended June 30, 2016 and 2015, amortization expense related to the Company’s license amounted to $5,250 and $0, respectively, and $10,500 and $0 for the six months ended June 30, 2016 and 2015, respectively, and are included in general and administrative expenses on the Statements of Operations and Comprehensive Income.

6

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Note 4 – Income Per Share

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Basic earnings per common share:
Net income		7,987			120,712			9,833			261,501
Discount upon exchange of Preferred Stock, net of related fees		1,103,597			-			1,103,597			-
		1,111,584			120,712			1,113,430			261,501
Portion allocable to common shareholders		99.3	%		99.2	%		99.3	%		99.2	%
Net income available to common shareholders		1,103,803			119,746			1,105,636			259,409
Weighted average basic shares outstanding		32,419,016			31,947,753			32,224,577			32,124,260
Basic (loss) income per common share	$	0.03		$	-		$	0.03		$	0.01
Dilutive earnings per common share:
Net income allocable to common shareholders		1,103,803			119,746			1,105,636			259,409
Add: undistributed earnings allocated to participating securities		7,781			966			7,794			2,092
Numerator for diluted earnings per common share		1,111,584			120,712			1,113,430			261,501
Weighted average shares outstanding - basic		32,419,016			31,947,753			32,224,577			32,124,260
Diluted effect:
Stock options		7,636			19,250			7,636			18,667
Unvested restricted stock units		1,818			19,250			1,818			17,600
Conversion equivalent of dilutive Series B Convertible Preferred Stock		2,865,477			3,307,299			3,086,388			3,307,299
Conversion equivalent of dilutive Convertible Preferred Stock		212,967			255,000			233,984			255,000
Weighted average dilutive shares outstanding		35,506,914			35,548,552			35,554,403			35,722,826
Dilutive income per common share	$	0.03		$	-		$	0.03		$	0.01

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Numerator:
Weighted average participating common shares		32,419,016			31,947,753			32,224,577			32,124,260
Denominator:
Weighted average participating common shares		32,419,016			31,947,753			32,224,577			32,124,260
Add: Weighted average shares of Convertible Preferred Stock		212,967			255,000			233,984			255,000
Weighted average participating shares		32,631,983			32,202,753			32,458,561			32,379,260
Portion allocable to common shareholders		99.3	%		99.2	%		99.3	%		99.2	%

7

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Diluted net income per share for the three and six months ended June 30, 2016 and 2015 does not reflect the following potential common shares, as the effect would be antidilutive.

	June 30,
	2016		2015
Stock options		610,000		610,000

Note 5 – Income Tax Matters

The Company conducts an on-going analysis to review its net deferred tax asset and the need for a related valuation allowance. As a result of this analysis and the actual results of operations, the net deferred tax assets changed by $(7,637) and $54,000 during the six months ended June 30, 2016 and 2015, respectively. The change in deferred tax assets is attributable to the reversal of various book/tax differences. utilization of income tax attributes, primarily federal net operating losses, as the Company anticipates annual earnings from operations to continue.

Note 6 – Share-Based Compensation

During the three and six months ended June 30, 2016, the Company did not issue stock awards. During the six months ended June 30, 2016, 7,000 shares were exercised for proceeds in the amount of $350. The Company recognized stock-based compensation expense for stock options of $34 and $37 for the three months ended June 30, 2015 and 2014, respectively. The Company recognized stock-based compensation expense for stock options of $69 and $74 for the six months ended June 30, 2016 and 2015, respectively. The intrinsic value of the options as of June 30, 2016 is $840.

As of June 30, 2016 and 2015, there were 44,000 and 103,000 restricted stock awards outstanding, respectively. The Company recognized stock-based compensation expense for restricted stock of $580 and $644 for the three months ended June 30, 2016 and 2015, respectively. The Company recognized stock-based compensation expense for restricted stock of $1,181 and $1,288 for the six months ended June 30, 2016 and 2015, respectively.

Note 7 – Recapitalization

During the second quarter 2016, the Company executed a series of Exchange Agreements with holders of a majority of its outstanding shares of preferred stock. Under the terms of the agreements, each series of preferred stock held by such holders was exchanged for a combination of cash and shares of common stock in the amounts set forth in the table below.

Series of Preferred Stock	Amount of Cash per Share		Number of Shares of Common Stock Per Share
Convertible Preferred	$	0.165		1.95
Series B	$	0.0825		2.43
Series C	$	2.708		31.27
Series D	$	0.36232		5.072464

8

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

The Company entered into a separate exchange agreement (the “SBA Exchange Agreement”) with the United States Small Business Administration (“SBA”), pursuant to which it agreed to pay $250,000 to the SBA in exchange for all shares of preferred stock, all 2,084,167 shares of common stock then owned by the SBA, and the 1,658,540 shares of common stock which would have been issuable to the SBA if it had participated in the Exchange Agreements on the same terms as the other holders of the Company’s preferred stock. On June 16, 2016, the Company conducted closings under the Exchange Agreements and the SBA Exchange Agreement, pursuant to which it issued an aggregate of 4,427,498 shares of common stock and made aggregate cash payments of $509,664. In connection with the closings, the Company issued notices of redemption to holders of the 208,971 remaining issued and outstanding shares of Series B Preferred Stock and the 46,092 remaining issued and outstanding share of Series D Preferred Stock for a combination of cash and shares of common stock on the same terms as the Exchange Agreements (the “Redemption”). We anticipate that the redemption will be completed by the end of the third quarter in 2016.

The Company determined the difference between the fair value of the Company’s common stock and the cash paid to the holders of the preferred stock and the carrying amount of the preferred stock (net of issuance costs of $46,090) which amounted to $1,103,597 and added this amount to net income in the calculation of earnings per share (see Note 4 above). In addition, the discount upon exchange of the preferred stock, net of the related fees, was recorded in accumulated deficit since the discount represents a return from the preferred shareholders. The Company accounted for the purchase and subsequent retirement of the common stock from the SBA as the purchase of treasury stock and was recorded in the amount of $147,451 based on the amount paid to repurchase such shares.

As a result of the approval of the Redemption by the holders of requisite majorities of the Series B Preferred Stock and Series D Preferred Stock, the Company has recorded the discount upon exchange of the preferred stock as of June 30, 2016. Upon redemption of the 208,971 remaining issued and outstanding shares of Series B Preferred Stock and the 46,092 remaining issued and outstanding shares of Series D Preferred Stock, the Company will issue 741,600 additional shares of Common Stock and make aggregate cash payments of $33,941. At June 30, 2016, the Company has recorded an extinguishment liability of $33,941, which is included in accounts payable and accrued expenses on the balance sheet and represents the cash to be paid upon redemption of the remaining preferred stock.

9

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” These forward- looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward- looking statements include: changes in business conditions; a decline or redirection of the U.S. defense budget; the termination of any contracts with the U.S. Government; changes in our sales strategy and product development plans; changes in the marketplace; continued services of our executive management team; our limited marketing experience; competition between us and other companies seeking Small Business Innovative Research (“SBIR”) grants; competitive pricing pressures; market acceptance of our products under development; delays in the development of products; our ability to adequately integrate our new software offerings into our business model; and statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. We assume no duty to update or revise our forward-looking statements.

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

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

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

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

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

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

Product Portfolio

Adaptive Diagnostic Electronic Portable Testset (ADEPT®). ADEPT is an automated maintenance workstation designed to significantly reduce the time required to align the AN/SPY-1 Radar System aboard U.S. Navy Aegis cruisers and destroyers, while optimizing system performance and readiness. ADEPT Systems are currently deploying on all Aegis CG and DDG platforms to support the AN/SPY1 radar system. Since the system uses commercial instrument case and modules, ADEPT units can be modified to support both preventative maintenance and condition-based maintenance of other radars and complex electronic systems in military or commercial applications. In that regard, we have a service contract with 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 Missile Defense Mission. As of June 30, 2016, we have delivered a total of 189 ADEPT units.

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Adaptive Distance Support Sensor Suite (ADSSS). In 2013, we started development of ADSS for the Navy’s Littoral Combat Ship (“LCS”). ADSSS is a network-enabled system that can be configured to monitor multiple shipboard systems and report maintenance data onshore for further analysis to detect trends and predict failures. ADSSS provides an open architecture approach with industry standard hardware, and cybersecurity compliant software to acquire and process system operational and maintenance data. ADSSS fully automates the capture of system operation, environment and maintenance data to provide unattended operation. The system monitors key parameters and sends alert notifications when parameters move out of tolerance. Development of the production system is ongoing and initial shipboard testing is planned for late 2016. We expect ADSSS to be used on both variants of the LCS, currently planned to be at least 32 ships. ADSSS, with its remote monitoring and prognostics capabilities, has also generated interest in other ship classes, including Aegis, and we are currently pursuing several related opportunities.

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

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

Government Contracts

On March 18, 2010, we were awarded and entered into a multi-year IDIQ contract with the Naval Surface Warfare Center related to our ADEPT product. The contract provides for the purchase and sale of up to $26 million of ADEPT units and related engineering and logistics support. The initial term of the contract was five years, and in March 2015, the period of performance was extended through August 11, 2016. It has been extended again until February 13, 2017, to conclude some development programs. Substantially all of our revenue is attributable to our ADEPT product. In the past, we were generating revenues primarily from the production and delivery of ADEPT units. After executing the ADEPT program for six years, we now have contracts to do further R&D on ADEPT units to enhance functionality as well as provide other forms of support. We expect additional contract awards during the remaining term of the contract.

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

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

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

In July 2014, we were awarded additional funding of $0.3 million under the current IDIQ contract to upgrade the capabilities of the first 66 ADEPT units currently deployed in the fleet.  This effort involves installing a faster and more capable controller module and upgrading the Operating System software from Windows XP to Windows 7, and will be executed at our Largo, FL facility as units are returned for routine calibration.

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

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In March 2015, the Navy also issued an additional contract for ADEPT General Engineering and Support, with initial funding of $0.1 million. This contract covers various technical tasking for deployed ADEPT systems, including logistics support, customer consultation and regularly scheduled team review meetings.

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

In August 2015, we received contract award valued at approximately $0.2 million for the calibration of 45 additional ADEPT units. This is the seventh contract award of this type that we have received in support of the calibration effort. We also received two contracts in September 2015, for software development on the SLA-10B and SPQ-9B radars, totaling approximately $0.25 million. We have been tasked to define how the ADEPT tool can help support testing of the SPQ-9B system on Self Defense Test Ships (SDTS).

In September 2015, we entered into a contract modification for our current service contract for LCS systems using the ADSSS, which added an additional $1.5 million for ongoing development. This funding will extend the program until September 30, 2016, and allow us to perform installations and support for the LCS classes.

In March 2016, we received a contract award valued at approximately $0.15 million to provide Initial System Familiarization Training of the ADEPT system on all CG-47 and DDG-51 Class ships. Two events in Norfolk, VA and San Diego, CA have already occurred, and a third is scheduled in San Diego, CA in the month of August.

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

In July 2016, we received two (2) additional contract modifications for our current service contract for LCS systems using the ADSSS, which added an additional $4.65 million for ongoing development. This funding will extend the program until June 2018, and allow us to perform installations and support for the LCS classes.

It should be noted that contracting with the Federal government is a lengthy and complex process and that many factors could materialize that would negatively impact our ability to secure future contracts. In addition, our contracts with the Federal government contain unfavorable termination provisions and are subject to audit and modification.

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 2015, and expected revenue over the next nine 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.

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Outlook

Our strategy for continued growth is based on continuing expansion of our defense business, plus new initiatives to market our advanced maintenance technology to commercial markets. 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 ADEPT, with broad appeal in both the government and commercial marketplace. Our state-of-the-art test equipment can be used by many commercial and governmental customers such as the Federal Aviation Administration, radio and television stations, cell phone stations, and airlines. Second, we will continue to pursue SBIR projects with the Department of Homeland Security, the U.S. Navy, and other government agencies. Third, we believe that through our marketing of products, such as ADEPT, we will develop key relationships with prime defense contractors. Our strategy is to develop these relationships into long-term, key subcontractor roles on future major defense programs awarded to these prime contractors.

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

In 2016, our primary strategic focus is to continue as a premium provider of R&D and product development services to the defense industry, and expand our commercial business through marketing and sales of our Prognostics Framework and Diagnostic Profiler software products. From an operational prospective, we expect to focus substantial resources on generating purchase orders for ADEPT units, expanding ADEPT to support other radar systems, including the SPS-49, and exploring commercialization opportunities. 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 SPS-49, which is expected to assist in optimizing performance for the Ballistic Missile Defense Mission.

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

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

Changes to Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. As of June 30, 2016, there have been no changes to such critical accounting policies and estimates.

Results of Operations

Three Months Ended June 30, 2016 and 2015

We generated revenues of $978,372 during the three months ended June 30, 2016 compared to $1,734,382 during the three months ended June 30, 2015, a decrease of $756,010, or 44%. The decrease was primarily due to the completion of the production contracts for 64 ADEPT units in 2015 and significant delays in the award of several new Navy contracts. We expect these contracts to be awarded later in 2016. Such delays are not uncommon in the current defense contracting environment and we may experience similar delays in future periods.

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Cost of sales consists of direct contract costs including labor, material, subcontracts, warranty expense for ADEPT units that have been delivered, travel, and other direct costs. Cost of sales for the three months ended June 30, 2016 was $349,526 compared to $877,168 for the three months ended June 30, 2015, a decrease of $527,642 or 60%. The decrease was primarily due to the completion of the production contracts for 64 ADEPT units in 2015. As a percentage of revenue, cost of sales decreased to 36% of revenues for the three months ended June 30, 2016 as compared to 51% of revenues for the three months ended June 30, 2015. The decrease was primarily due to the change of the mix of costs incurred in 2016. There were significant decreases in material purchases due to delays in receiving production contracts. There were slight increases in direct labor and subcontract costs related to engineering service contracts awarded in the first quarter of 2016.

The majority of our engineering costs consist of (i) salary, wages and related fringe benefits paid to engineering employees, (ii) rent-related costs, and (iii) consulting fees paid to engineering consultants. As the nature of these costs benefit the entire organization and all research and development efforts, and their benefit cannot be identified with a specific project or contract, these engineering costs are classified as part of “engineering overhead” and included in operating expenses. Engineering costs for the three months ended June 30,2016 were $312,849 compared to $326,521 for the three months ended June 30, 2015, a decrease of $13,672, or 4%. The decrease was primarily due to a decrease in consulting fees and incentive compensation expense.

General and administrative expenses consist primarily of salary, intellectual property, consulting fees and related costs, professional fees, business insurance, franchise tax, SEC compliance costs, travel, and unallowable expenses (representing those expenses for which the government will not reimburse us). General and administrative costs for the three months ended June 30, 2016 were $296,754 compared to $300,574 for the three months ended June 30, 2015, a decrease of $3,820, or 1%.

At June 30, 2016, we estimated our annual effective tax rate for 2016 to be 61.0%. We recognized a tax expense of $12,512 for the three months ended June 30, 2016 primarily due to expected net income for the remainder of 2016. At June 30, 2016, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

We reported net income of $7,987 for the three months ended June 30, 2016 as compared to net income of $120,712 for the three months ended June 30, 2015. The decrease is primarily attributable to the decrease in revenues during the three months ended June 30, 2016.

Six Months Ended June 30, 2016 and 2015

We generated revenues of $1,966,301 during the six months ended June 30, 2016 compared to $4,210,421 during the six months ended June 30, 2015, a decrease of $2,244,120, or 53%. The decrease was primarily due to the completion of the production contracts for 64 ADEPT units in 2015 and significant delays in the award of several new Navy contracts. We expect these contracts to be awarded later in 2016. Such delays are not uncommon in the current defense contracting environment and we may experience similar delays in future periods.

Cost of sales consists of direct contract costs including labor, material, subcontracts, warranty expense for ADEPT units that have been delivered, travel, and other direct costs. Cost of sales for the six months ended June 30, 2016 was $673,854 compared to $2,339,073 for the six months ended June 30, 2015, a decrease of $1,665,219 or 71%. The decrease was primarily due to the completion of the production contracts for 64 ADEPT units in 2015. As a percentage of revenue, cost of sales decreased to 34% of revenues for the six months ended June 30, 2016 as compared to 56% of revenues for the six months ended June 30, 2015. The decrease was primarily due to the change of the mix of costs incurred in 2016. There were significant decreases in material purchases due to delays in receiving production contracts. There were slight increases in direct labor and subcontract costs related to engineering service contracts awarded in the first quarter of 2016.

The majority of our engineering costs consist of (i) salary, wages and related fringe benefits paid to engineering employees, (ii) rent-related costs, and (iii) consulting fees paid to engineering consultants. As the nature of these costs benefit the entire organization and all research and development efforts, and their benefit cannot be identified with a specific project or contract, these engineering costs are classified as part of “engineering overhead” and included in operating expenses. Engineering costs for the six months ended June 30,2016 were $636,762 compared to $748,936 for the six months ended June 30, 2015, a decrease of $112,174, or 15%. The decrease was primarily due to a decrease in consulting fees and incentive compensation expense.

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General and administrative expenses consist primarily of salary, intellectual property, consulting fees and related costs, professional fees, business insurance, franchise tax, SEC compliance costs, travel, and unallowable expenses (representing those expenses for which the government will not reimburse us). General and administrative costs for the six months ended June 30, 2016 were $632,902 compared to $622,597 for the six months ended June 30, 2015, an increase of $10,305, or 2%.

At June 30, 2016, we estimated our annual effective tax rate for 2016 to be 61.0%. We recognized a tax expense of $15,655 for the six months ended June 30, 2016 primarily due to expected net income for the remainder of 2016. At June 30, 2016, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

We reported net income of $9,833 for the six months ended June 30, 2016 as compared to net income of $261,501 for the six months ended June 30, 2015. The decrease is primarily attributable to the decrease in revenues during the six months ended June 30, 2016.

Liquidity and Capital Resources

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

During the six months ended June 30, 2016, net cash used in operations was $666,117 compared to net cash provided by operations of $643 during the six months ended June 30, 2015. The decrease was primarily due a decrease in net income of $251,668 and the timing of receipts and payments related to our operating assets and liabilities.

We currently do not have any outstanding loan or line of credit with any bank or financial institution. We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months.

By the end of the third quarter 2016, we expect to complete a recapitalization transaction (the “Recapitalization Transaction”) pursuant to which all issued and outstanding shares of our preferred stock will be exchanged or redeemed for a combination of cash and shares of our common stock in the amounts set forth in the table below.

Series of Preferred Stock	Amount of Cash per Share		Number of Shares of Common Stock Per Share
Convertible Preferred	$	0.165		1.95
Series B	$	0.0825		2.43
Series C	$	2.708		31.27
Series D	$	0.36232		5.072464

As part of the Recapitalization Transaction, we also repurchased 2,084,167 shares of common stock owned by the United States Small Business Administration. Pursuant to the Recapitalization Transaction, we will make cash payments of $544,017 and issue 5,173,973 shares of common stock which will result in the net issuance of 3,089,806 additional shares of common stock, and eliminated $2,955,433 of aggregate liquidation preferences applicable to our previously outstanding shares of preferred stock.

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.

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Off-Balance Sheet Arrangements

As of June 30, 2016, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off- balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Item 4. Controls and Procedures.

An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) was carried out by us under the supervision and with the participation of our president, who serves as our principal executive officer and principal financial officer. Based upon that evaluation, our president concluded that as of March 31, 2016, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) that such information is accumulated and communicated to management, including our president, in order to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d- 15(f)) that occurred during the fiscal quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

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

In connection with the Recapitalization Transaction described above, on June 16, 2016 we repurchased 2,084,167 issued and outstanding shares of common stock pursuant to a privately negotiated transaction with the holder of such shares as set forth in the table below.

Period	Total Number of Shares (or Units) Purchased		Average Price Paid per Share (or Unit)			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
Repurchases from June 1, 2016 through June 30, 2016		2,084,167	$	0.071	(1)		0		0

(1) This amount does not give effect to the 1,658,540 shares of common stock that would have been issued to the holder of such shares if it had participated in the Recapitalization Transaction on the same terms as the other holders of our preferred stock. Including these shares in the amount repurchased results in a per share purchase price of $0.0394.

Item 6.     Exhibits

No.	Description
10.1	Form of Exchange Agreement by and between Mikros Systems Corporation and certain holders of shares of preferred stock.
10.2	Exchange Agreement by and between Mikros Systems Corporation and the United States Small Business Association dated May 3, 2016.
31.1	Certification of principal executive officer and principal financial officer pursuant to Rules 13a-14(a) or 15d- 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1	Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
101.INS	XBRL Instance
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Labels
101.PRE	XBRL Taxonomy Extension Presentation

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SIGNATURES

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

	MIKROS SYSTEMS CORPORATION
August 15, 2016	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney
		President and Chief Financial Officer

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EX-10.1

Exhibit 10.1

FORM OF

EXCHANGE AGREEMENT

This Exchange Agreement (this “Agreement”) dated on and as of the date set forth on the signature page hereto by and between Mikros Systems Corporation, a Delaware corporation (“Issuer”), and the stockholder identified on the signature page hereof (“Holder”).

Recitals

WHEREAS, Holder is the record and beneficial owner of shares of the Issuer's Convertible Preferred Stock, $0.01 par value per share (the “Convertible Preferred Shares”), Series B Preferred Stock, $0.01 par value per share (the “Series B Shares”), Series C Preferred Stock, $0.01 par value per share (the “Series C Shares”), and/or Series D Preferred Stock, $0.01 par value per share (the “Series D Shares”), as set forth on Exhibit A hereto;

WHEREAS, upon the terms and subject to the conditions hereof, Holder and Issuer wish to exchange the foregoing shares for shares of the Issuer’s common stock, $0.01 par value per share (“Common Stock”), and cash as set forth in Exhibit B;

WHEREAS, the parties hereto desire to make certain representations, warranties, covenants and other agreements in connection with the transactions contemplated hereby.

NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

ARTICLE I
EXCHANGE OF SECURITIES

Section 1.1.     Exchange of Securities. Upon the terms and subject to the conditions of this Agreement, at the Closing (a) Holder will convey, assign, transfer and deliver to Issuer, and Issuer will receive from Holder, the Convertible Preferred Shares, the Series B Shares, Series C Shares and Series D Shares, set forth on Exhibit A (collectively, the “Exchanged Shares”), free and clear of all encumbrances, and (b) Issuer will convey, assign, transfer and deliver to Holder, and Holder will receive from Issuer: (i) the shares of Common Stock, free and clear of all encumbrances, set forth on Exhibit B (the “Issued Shares”); and (ii) the amount of cash (the “Cash Payment”) set forth on Exhibit B. Upon completion of the exchange of the Exchanged Shares, Holder will have no ownership or other rights with respect to the Exchanged Shares including, but not limited to, any right to receive any dividends, whether accrued but unpaid, declared but unpaid, or undeclared and unpaid or otherwise, distributions, or other payment on account of such Exchanged Shares.

Section 1.2.     Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) will take place after all conditions set forth in Article IV have been satisfied or waived (other than those conditions that are to be satisfied at the Closing). The date on which the Closing actually occurs will be referred to as the “Closing Date” and the Closing will for all purposes be deemed effective as of 12:01 a.m., EST, on the Closing Date. At the Closing, the following transactions and deliveries shall occur:

(a)     Issuer will issue and deliver to Holder at the address set forth in Section 6.3 hereof, certificates representing the Issued Shares and a check in the amount of the Cash Payment in exchange for the Exchanged Shares in accordance with Section 1.1; and

(b)     Holder will deliver to Issuer at the address set forth in Section 6.3 hereof, certificate(s) representing the Exchanged Shares together with a stock power in the form attached hereto as Exhibit C, duly endorsed by Holder for each such certificate (or in the event that any such certificate(s) have been lost or misplaced, an Affidavit of Lost Certificate in the form attached hereto as Exhibit D duly endorsed by Holder for each such lost or misplaced certificate) in exchange for the Issued Shares and Cash Payment in accordance with Section 1.1.

ARTICLE II
REPRESENTATIONS AND WARRANTIES OF HOLDER

As of the date hereof and as of the Closing Date, Holder represents and warrants to Issuer as follows:

Section 2.1.     Ownership of Exchanged Shares.

(a)     Holder is the sole record and beneficial owner of the Exchanged Shares. The Exchanged Shares are not subject to any liens or encumbrances of any kind or nature, and Holder has not granted any rights to any person or entity to purchase any of the Exchanged Shares. Holder has the sole right to transfer the Exchanged Shares to Issuer.

Section 2.2.     Authority; Non-Contravention.

(a)     Holder has all requisite power and authority to execute, deliver and perform its obligations under this Agreement. This Agreement has been duly and validly authorized, executed and delivered by Holder and constitutes the valid and legally binding obligation of Holder, enforceable in accordance with its terms and conditions, subject to bankruptcy, insolvency, fraudulent transfer, moratorium or similar laws relating to or affecting creditors’ rights generally and to general principles of equity.

(b)     The execution, delivery and performance of this Agreement by Holder and the consummation of the transactions contemplated hereby will not result in any violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over Holder or any of its properties or assets, except where such violation will not, individually or in the aggregate, prevent Holder from consummating the transactions contemplated hereby.

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(c)     No consent, approval, authorization or order of, or filing or registration with, any court or governmental agency or body having jurisdiction over Holder or any of its properties or assets is required for the execution, delivery and performance of this Agreement by Holder or the consummation of the transactions contemplated hereby.

Section 2.3.     Restrictive Legend. Holder acknowledges that the Issued Shares have not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act of 1933, as amended (the “Securities Act”), or an exemption from such registration is available in the opinion of counsel reasonably acceptable to Issuer. Holder acknowledges that the certificate representing the Issued Shares to be issued by Issuer to Holder hereunder will bear the following legend:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, REGISTRATION UNDER SAID ACT IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO ISSUER.

Section 2.4.     Accredited Investor.      Holder is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D under the Securities Act.

Section 2.5.     Investment Intent. The Issued Shares are being acquired for the Holder’s own account for investment purposes only, not as a nominee or agent and not with a view to the resale or distribution of any part thereof, and Holder has no present intention of selling, granting any participation in or otherwise distributing the same. By executing this Agreement, Holder further represents that Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or third person with respect to any of the Common Stock to be issued and exchanged by Issuer to Holder.

Section 2.6.     No General Solicitation. Holder acknowledges that neither the Issuer nor any person or entity acting on its behalf has offered to issue any of the Issued Shares to Holder by means of any form of general solicitation or advertising, including without limitation (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media, or broadcast over television or radio, and (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

Section 2.7.     Access to Information. Holder acknowledges that it has had access to and has reviewed all documents and records relating to the Issuer, including, but not limited to, that certain Confidential Information Statement of the Issuer dated April 29, 2016, that it has deemed necessary in order to make an informed investment decision with respect to the transaction contemplated hereby; that it has had the opportunity to ask representatives of the Issuer certain questions and request certain additional information regarding the terms and conditions of transaction contemplated hereby and the finances, operations, business and prospects of the Issuer and has had any and all such questions and requests answered to its satisfaction; and that it understands the risks and other considerations relating to the transactions contemplated hereby. Holder has, to the extent deemed necessary by Holder, consulted with its own advisors (including Holder’s attorney, accountant or investment advisor) regarding the transactions contemplated by this Agreement, including without limitation any tax consequences related thereto.

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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ISSUER

As of the date hereof and as of the Closing Date, Issuer represents and warrants to Holder as follows:

Section 3.1.     Organization of Issuer. Issuer has been duly incorporated and is validly existing and in good standing as a corporation under the laws of Delaware, with all corporate power and authority necessary to conduct the business in which it is engaged and is duly qualified or licensed to do business and in good standing as a foreign corporation in each jurisdiction in which its ownership or lease of its properties or assets or the conduct of its businesses requires such qualification or license, except where the failure to be so qualified or be so licensed or in good standing would not, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), results of operations, stockholders’ equity, properties or business of Issuer and its subsidiaries taken as a whole.

Section 3.2.     Duly Issued Shares. The shares of Common Stock to be issued and exchanged by Issuer to Holder hereunder have been duly authorized and, upon delivery in accordance with this Agreement (a) will be validly issued, fully paid and non-assessable, and (b) will not be subject to any encumbrances, other than those imposed under applicable federal and state securities laws.

Section 3.3.     Authority; Non-Contravention.

(a)     Issuer has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. This Agreement has been duly and validly authorized by Issuer and executed and delivered by Issuer. This Agreement constitutes the valid and legally binding obligation of Issuer, enforceable in accordance with its terms and conditions, subject to bankruptcy, insolvency, fraudulent transfer, moratorium or similar laws relating to or affecting creditors’ rights generally and to general principles of equity.

(b)     The execution, delivery and performance of this Agreement by Issuer and the consummation of the transactions contemplated hereby will not (i)  result in any violation of the provisions of the governing instruments of Issuer or (ii) result in any violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over Issuer or any of its properties or assets, except where such violation will not, individually or in the aggregate, prevent Holder from consummating the transactions contemplated hereby.

(c)     No consent, approval, authorization or order of, or filing or registration with, any court or governmental agency or body having jurisdiction over Issuer or any of its subsidiaries or any of their properties or assets is required for the execution, delivery and performance of this Agreement by Issuer or the consummation of the transactions contemplated hereby.

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(d)     The issuance of the Issued Shares by Issuer to Holder pursuant to this Agreement does not require registration under the Securities Act.

ARTICLE IV
CLOSING CONDITIONS

Section 4.1.     Holder Conditions to Closing. The obligation of Holder to effect the Closing and consummate the transactions contemplated by this Agreement is subject to satisfaction or waiver on or prior to the Closing Date of the following conditions:

(a)     Issuer will deliver to Holder certificates representing the Issued Shares and a check in the amount of the Cash Payment in exchange for the Exchanged Shares in accordance with Section 1.1;

(b)     Issuer will have performed or complied with, in all material respects, its covenants and agreements contained in this Agreement that are required to be performed or complied with on or prior to the Closing Date;

(c)     There will not be any judgment, order, decree, stipulation, injunction or charge, or applicable law in any jurisdiction material to Issuer or Holder, in each case, issued by any court of competent jurisdiction or any other governmental entity in effect preventing consummation of the transactions contemplated by this Agreement;

(d)     All holders of Series D Shares shall have executed an agreement with Issuer for the exchange of their Series D Shares on terms substantially similar to those contained in this Agreement, all conditions to each such holder’s and the Issuer’s obligation to close the transactions contemplated thereby have been satisfied or waived in accordance with such agreements, and prior to or simultaneous with the Closing, a closing shall be conducted with respect to the transactions contemplated by such agreements; and

(e)     The United States Small Business Association (the “SBA”) shall have executed an agreement with Issuer for the exchange of all shares of capital stock of the Issuer owned by the SBA on substantially the terms described in the Information Statement, all conditions to the SBA’s and the Issuer’s obligation to close the transactions contemplated thereby have been satisfied or waived in accordance with such agreement, and simultaneous with the Closing, a closing shall be conducted with respect to the transactions contemplated by such agreement.

Section 4.2.     Issuer Conditions to Closing. The obligation of Issuer to effect the Closing and consummate the transactions contemplated by this Agreement is subject to satisfaction or waiver on or prior to the Closing Date of the following conditions:

(a)     Holder will deliver to Issuer certificates representing the Exchanged Shares together with a stock power in the form attached hereto as Exhibit C duly endorsed by Holder for each such certificate (or in the event that any such certificates have been lost or misplaced, an Affidavit of Lost Certificate in the form attached hereto as Exhibit D duly endorsed by Holder for each such lost or misplaced certificate) in exchange for the Issued Shares and Cash Payment in accordance with Section 1.1;

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(b)     Holder will have performed or complied with, in all material respects, its covenants and agreements contained in this Agreement that are required to be performed or complied with on or prior to the Closing Date;

(c)     There will not be any judgment, order, decree, stipulation, injunction or charge, or applicable law in any jurisdiction material to Issuer or Holder, in each case, issued by any court of competent jurisdiction or any other governmental entity in effect preventing consummation of the transactions contemplated by this Agreement

(d)     All holders of Series D Shares shall have executed an agreement with Issuer for the exchange of their Series D Shares on terms substantially similar to those contained in this Agreement, all conditions to each such holder’s and the Issuer’s obligation to close the transactions contemplated thereby have been satisfied or waived in accordance with such agreements, and prior to or simultaneous with the Closing, a closing shall be conducted with respect to the transactions contemplated by such agreements; and

(e)     The SBA shall have executed an agreement with Issuer for the exchange of all shares of capital stock of the Issuer owned by the SBA on substantially the terms described in the Information Statement, all conditions to the SBA’s and the Issuer’s obligation to close the transactions contemplated thereby have been satisfied or waived in accordance with such agreement, and simultaneous with the Closing, a closing shall be conducted with respect to the transactions contemplated by such agreement.

ARTICLE V
ADDITIONAL AGREEMENTS

Section 5.1.     Confidentiality. Holder acknowledges and agrees that (i) certain of the information contained herein, including the existence and terms of this Agreement, is of a confidential nature and constitutes material non-public information under United States federal securities laws, (ii) United States federal securities laws prohibit any person who has received material non-public information relating to the Issuer from purchasing or selling securities of the Issuer, or from communicating such information to any person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell securities of the Issuer, and (iii) until such time as any such non-public information has been adequately disseminated to the public, Holder shall not purchase or sell any securities of the Issuer, or communicate such information to any other person or entity, other than its personal financial and legal advisors for the sole purpose of evaluating the entering into and the consummation of the transactions contemplated hereby.

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Section 5.2.     Release. Holder, on behalf of him or herself and each of his or her heirs, assigns, beneficiaries, executors, administrators and affiliates (collectively, the “Release Group Members” and individually a “Release Group Member”), hereby fully, forever, absolutely, irrevocably and unconditionally release, remise and forever discharge Issuer and each of its officers, directors, employees, agents, affiliates, successors and assigns (collectively, the “Releasees” and individually, a “Releasee”), of and from any and all manner of claims, actions, demands, causes of action, suits, covenants, contracts, promises, grievances, liabilities, obligations, promises, damages, agreements, rights, debts and expenses (including claims for attorneys' fees and costs), of every kind and nature, either in law or in equity, whether contingent, mature, known or unknown, or suspected or unsuspected, including, without limitation, any claims arising under any federal, state, local or municipal law, common law or statute, and whether arising in contract or in tort, and any claims arising under any other laws or regulations of any nature whatsoever that any Release Group Member ever had, now has or may have, for or by reason of, or in any way related to, his or her ownership of the Exchanged Shares or the transactions contemplated by this Agreement, including, but not limited to, any right to receive any dividends, distributions, or payment on account of such Exchanged Shares, from the beginning of the world to the Closing Date (collectively, the “Released Claims”). Holder represents and warrants to the Releasees that neither Holder nor any other Release Group Member has previously directly or indirectly assigned or otherwise transferred to any person or entity all or any of any of the Released Claims.

Section 5.3.     Indemnification. Holder shall indemnify, defend and hold harmless the Issuer and each of its officers, directors, employees, agents, affiliates, successors and assigns (collectively, the “Indemnified Parties” and individually, an “Indemnified Party”) from and against any and all demands, claims, actions, causes of action, investigations, proceedings judgments, assessments, losses, liabilities, damages or penalties and reasonable attorneys’ fees and related disbursements incurred by the Issuer that arise out of or result from a breach of any representations, warranties or covenants made by Holder herein, regardless of whether any such Indemnified Party is a party thereto and to reimburse each Indemnified Party for reasonable legal and other expenses as they are incurred in connection with investigating, responding to or defending any of the foregoing; provided that Holder’s maximum liability to the Indemnified Parties under this Section 5.3 shall not exceed the amount of the Cash Payment, the Issued Shares and the proceeds from the Issued Shares.

ARTICLE VI
GENERAL PROVISIONS

Section 6.1.     Further Assurances. Each of the parties will use commercially reasonable efforts to take or cause to be taken all actions and to do or cause to be done, as soon as possible, all things necessary, proper or advisable (subject to any applicable laws) to consummate the Closing and the other transactions contemplated by this Agreement. In the event that at any time after the Closing Date any further action is reasonably necessary to carry out the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of such further instruments and documents) as the other party may reasonably request, at the sole cost and expense of the requesting party. Each party shall promptly notify the other party of any facts, circumstances, changes, events or actions discovered by such party and occurring between the date of this Agreement and the Closing Date that has resulted in, or could reasonably be expected to result in, any representation or warranty made by such party not being true and correct.

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Section 6.2.     Survival. The representations and warranties contained in Articles II and III will survive the Closing and continue in full force and effect indefinitely. Any covenants or agreements contained in this Agreement, which by their terms have any remaining obligation to be performed or observed following the occurrence of the Closing will survive and continue in full force and effect until fully performed or observed in accordance with their terms.

Section 6.3.     Notices. Any notice, request, instruction, or other communication to be given hereunder, and any delivery to be made hereunder, will be in writing and delivered personally or sent by reputable, overnight courier service (charges prepaid), according to the instructions set forth below. Such notices, requests, other communications and deliveries will be sent to Issuer and Holder, as the case may be at the addresses indicated below:

if to Issuer:

Mikros Systems Corporation

220 Commerce Drive, Suite 300

Fort Washington, PA 19034

Attention: Patricia Kapp, Vice President of Finance,

      Secretary and Treasurer

if to Holder:

[____________________]

[____________________]

[____________________]

Section 6.4.     Counterparts. This Agreement may be executed in counterparts and each such counterpart will for all purposes be deemed to be an original, and both such counterparts will together constitute but one and the same instrument. Facsimiles or other electronic copies of signatures will be deemed to be originals.

Section 6.5.     Governing Law. This Agreement will be deemed to be a contract made under the laws of the State of New Jersey and for all purposes will be governed by and construed in accordance with the internal laws of said State except to the extent that the General Corporation Law of the State of Delaware shall apply to the internal corporate governance of the Issuer. The parties hereto irrevocably consent to the jurisdiction of the state and federal courts sitting in Mercer County New Jersey in connection with any action, suit or proceeding arising out of or relating to this Agreement.

Section 6.6.     Entire Agreement. This Agreement constitutes the entire agreement of Issuer and Holder with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, between Issuer and Holder with respect to the subject matter hereof.

Section 6.7.     Amendment and Waiver. This Agreement may be amended, modified or supplemented, and any of the provisions hereof may be waived, provided that the same are in writing and signed by Issuer and Holder.

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Section 6.8.     Assignment. Neither this Agreement nor any of the rights, interests or obligations provided by this Agreement will be assigned by either party (whether by operation of law or otherwise) without the prior written consent of the other party. Subject to the preceding sentence, this Agreement will be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns.

[Signature page follows]

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IN WITNESS WHEREOF, intending to be legally bound, the parties hereto have caused this Agreement to be executed as of the date set forth below.

HOLDER

___________________________________

Name: [_____________________________]

Agreed and Accepted by the Mikros Systems Corporation on and as of this ____ day of _______, 2016.

MIKROS SYSTEMS CORPORATION.

By____________________________________

Name: ________________________________

Title: _________________________________

[Signature Page to Exchange Agreement]

Exhibit A

Convertible Preferred Stock:	__________ Shares
Series B Preferred Stock:	__________ Shares
Series C Preferred Stock:	__________ Shares
Series D Preferred Stock:	__________ Shares

Exhibit B

Series of Preferred Stock	Amount of Cash per Share		Number of Shares of Common Stock Per Share		Total Amount of Cash	Total Number of Shares of Common Stock
_____ Convertible Preferred Shares	$	0.165		1.95	[__]	[__]
_____Series B Shares	$	0.0825		2.43	[__]	[__]
_____Series C Shares	$	2.708		31.27	[__]	[__]
_____Series D Shares	$	0.36232		5.072464	[__]	[__]
			TOTALS		[__](1)	[__](2)

⁽¹⁾     The Cash Payment

⁽²⁾     The Issued Shares

EX-10.2

Exhibit 10.2

EXCHANGE AGREEMENT

This Exchange Agreement (this “Agreement”) dated on and as of the latest date set forth on the signature page hereto by and between Mikros Systems Corporation, a Delaware corporation (“Issuer”), and U. S. Small Business Administration (“SBA”).

Recitals

WHEREAS, SBA is the record and beneficial owner of 202,500 shares (the “Convertible Shares”) of the Issuer's Convertible Preferred Stock, $0.01 par value per share (the “Convertible Preferred Stock”), 231,961 shares (the “Series B Shares”) of the Issuer's Series B Preferred Stock, $0.01 par value per share (the “Series B Stock”), 138,000 shares (the “Series D Shares”) of the Issuer's Series D Preferred Stock, $0.01 par value per share (the “Series D Stock”), and 2,084,167 shares (the “Common Shares”) of the Issuer's Common Stock, $0.01 par value per share (“Common Stock”);

WHEREAS, concurrently with the closing of this Agreement, the Issuer will conduct closings with respect to a series of exchange agreements (the “Recapitalization”) with the other holders of all issued and outstanding shares of Series D Stock (i.e., holders other than SBA), the holder of 50,000 issued and outstanding shares of Convertible Preferred Stock, the holders of an additional 664,925 shares of Series B Stock, and the holder of all issued and outstanding shares of the Issuer’s Series C Preferred Stock, $0.01 par value per share (the “Series C Stock”), pursuant to which such shares of Series D Stock, Convertible Preferred Stock, Series B Stock, and Series C Stock will be exchanged for a combination of cash and shares of Common Stock in the per share amounts set forth on Exhibit A hereto;

WHEREAS, SBA intends to participate in the Recapitalization, but has requested that the Issuer repurchase all shares of Common Stock currently owned by the SBA and all shares of Common Stock issuable to it under the Recapitalization in consideration of additional cash payment of $147,451;

WHEREAS, SBA and Issuer wish to exchange all of the Convertible Shares, Series B Shares, Series D Shares, and Common Shares (collectively, the “Exchanged Shares”) in consideration of payment to SBA of $250,000 upon the terms and subject to the conditions hereof; and

WHEREAS, the parties hereto desire to make certain representations, warranties, covenants and other agreements in connection with the transactions contemplated hereby.

NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

Article I
EXCHANGE OF SECURITIES

Section 1.1     Exchange of Securities. Upon the terms and subject to the conditions of this Agreement, at the Closing (a) SBA will convey, assign, transfer and deliver to Issuer, and Issuer will receive from SBA, the Exchanged Shares, free and clear of all encumbrances except for as set forth in Section 2.1, and (b) Issuer will deliver to SBA, and SBA will receive from Issuer $250,000 (the “Cash Payment”). Upon completion of the exchange of the Exchanged Shares, SBA will have no ownership or other rights with respect to the Exchanged Shares including, but not limited to, any right to receive any dividends, whether accrued but unpaid, declared but unpaid, or undeclared and unpaid or otherwise, distributions, or other payment on account of such Exchanged Shares.

Section 1.2     Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) will take place the earlier of (a) after all conditions set forth in Article IV have been satisfied or waived (other than those conditions that are to be satisfied at the Closing); or (b) no later than June 30, 2016. If the Closing does not occur on or before June 30, 2016, then the terms of this Agreement shall expire and be of no effect unless extended by a further written agreement of Issuer and SBA. The date on which the Closing actually occurs will be referred to as the “Closing Date” and the Closing will for all purposes be deemed effective as of 12:01 a.m., EST, on the Closing Date. At the Closing, the following transactions and deliveries shall occur:

(a)     Issuer will issue and deliver via Federal Express or United Parcel Service to SBA at the address set forth in Section 6.3 hereof, a check in the amount of the Cash Payment in exchange for the Exchanged Shares in accordance with Section 1.1; and

(b)     SBA will deliver to Issuer at the address set forth in Section 6.3 hereof, certificate(s) representing the Exchanged Shares or in the event that any such certificate(s) have been lost or misplaced, an Affidavit of Lost Certificate in the form attached hereto as Exhibit B duly endorsed by SBA for each such lost or misplaced certificate) in exchange for the Cash Payment in accordance with Section 1.1.

Article II
REPRESENTATIONS AND WARRANTIES OF HOLDER

As of the date hereof and as of the Closing Date, SBA represents and warrants to Issuer as follows:

Section 2.1     Ownership of Exchanged Shares. To the best of SBA’s knowledge, SBA is the sole record and beneficial owner of the Exchanged Shares. Except for a lien in the amount of approximately $180,000 held by the United States Internal Revenue Service (the “IRS”) pursuant to IRS filings dated December 30, 2002 and March 25, 2003 (and which lien may have expired), the Exchanged Shares are not subject to any liens or encumbrances of any kind or nature, and SBA has not granted any rights to any person or entity to purchase any of the Exchanged Shares. The IRS did not contact SBA regarding enforcement, execution or collection of the foregoing lien after the closure on February 13, 2013 of the federal receivership from which SBA acquired the Exchanged Shares. The SBA does not know of any effort of the IRS after the closure of that receivership to enforce, execute or collect the forgoing lien with respect to the Exchanged Shares. SBA has the sole right to transfer the Exchanged Shares to Issuer.

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Section 2.2     Authority; Non-Contravention.

(a)     SBA has all requisite organizational power and authority to execute, deliver and perform its obligations under this Agreement. This Agreement has been duly and validly authorized, executed and delivered by SBA and constitutes the valid and legally binding obligation of SBA, enforceable in accordance with its terms and conditions, subject to bankruptcy, insolvency, fraudulent transfer, moratorium or similar laws relating to or affecting creditors’ rights generally and to general principles of equity.

(b)     The execution, delivery and performance of this Agreement by SBA and the consummation of the transactions contemplated hereby will not result in any violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over SBA or any of its properties or assets, except where such violation will not, individually or in the aggregate, prevent SBA from consummating the transactions contemplated hereby.

(c)     No consent, approval, authorization or order of, or filing or registration with, any court or governmental agency or body having jurisdiction over SBA or any of its properties or assets is required for the execution, delivery and performance of this Agreement by SBA or the consummation of the transactions contemplated hereby.

Section 2.3     Access to Information. SBA acknowledges that it has had access to and has had the opportunity to review all documents and records relating to the Issuer, including, but not limited to, that certain Confidential Information Statement of the Issuer dated April 29, 2016, that it has deemed necessary in order to make an informed investment decision with respect to the transaction contemplated hereby; that it has had the opportunity to ask representatives of the Issuer certain questions and request certain additional information regarding the terms and conditions of the transaction contemplated hereby and the finances, operations, business and prospects of the Issuer and has had any and all such questions and requests answered to its satisfaction; and that it understands the risks and other considerations relating to the transactions contemplated hereby. SBA has, to the extent deemed necessary by SBA, consulted with its own advisors (including SBA’s attorney, accountant or investment advisor) regarding the transactions contemplated by this Agreement, including without limitation any tax consequences related thereto.

Article III
REPRESENTATIONS AND WARRANTIES OF ISSUER

As of the date hereof and as of the Closing Date, Issuer represents and warrants to SBA as follows:

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Section 3.1     Organization of Issuer. Issuer has been duly incorporated and is validly existing and in good standing as a corporation under the laws of Delaware, with all corporate power and authority necessary to conduct the business in which it is engaged and is duly qualified or licensed to do business and in good standing as a foreign corporation in each jurisdiction in which its ownership or lease of its properties or assets or the conduct of its businesses requires such qualification or license, except where the failure to be so qualified or be so licensed or in good standing would not, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), results of operations, stockholders’ equity, properties or business of Issuer and its subsidiaries taken as a whole.

Authority; Non-Contravention.(a)     Issuer has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. This Agreement has been duly and validly authorized by Issuer and executed and delivered by Issuer. This Agreement constitutes the valid and legally binding obligation of Issuer, enforceable in accordance with its terms and conditions, subject to bankruptcy, insolvency, fraudulent transfer, moratorium or similar laws relating to or affecting creditors’ rights generally and to general principles of equity.

(b)     The execution, delivery and performance of this Agreement by Issuer and the consummation of the transactions contemplated hereby will not (i)  result in any violation of the provisions of the governing instruments of Issuer or (ii) result in any violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over Issuer or any of its properties or assets, except where such violation will not, individually or in the aggregate, prevent SBA from consummating the transactions contemplated hereby.

(c)     No consent, approval, authorization or order of, or filing or registration with, any court or governmental agency or body having jurisdiction over Issuer or any of its subsidiaries or any of their properties or assets is required for the execution, delivery and performance of this Agreement by Issuer or the consummation of the transactions contemplated hereby.

Section 3.3     Lawful Source of Funds. The funds used to make the Cash Payment were generated from performance of services and provision of products to the United States Department of Defense.

Article IV
CLOSING CONDITIONS

Section 4.1     SBA Conditions to Closing. The obligation of SBA to effect the Closing and consummate the transactions contemplated by this Agreement is subject to satisfaction or waiver on or prior to the Closing Date of the following conditions:

(a)     Issuer will deliver to SBA a check in the amount of the Cash Payment in exchange of the Exchanged Shares in accordance with Section 1.1;

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(b)     Issuer will have performed or complied with, in all material respects, its covenants and agreements contained in this Agreement that are required to be performed or complied with on or prior to the Closing Date;

(c)     There will not be any judgment, order, decree, stipulation, injunction or charge, or applicable law in any jurisdiction material to Issuer or SBA, in each case, issued by any court of competent jurisdiction or any other governmental entity in effect preventing consummation of the transactions contemplated by this Agreement; and

(d)     All holders of Series D Stock other than SBA shall have executed an agreement with Issuer for the exchange of their Series D Shares on substantially the terms described in the Information Statement, all conditions to each such holder’s and the Issuer’s obligation to close the transactions contemplated thereby have been satisfied or waived in accordance with such agreements, and prior to or simultaneous with the Closing, a closing shall be conducted with respect to the transactions contemplated by such agreements.

Section 4.2     Issuer Conditions to Closing. The obligation of Issuer to effect the Closing and consummate the transactions contemplated by this Agreement is subject to satisfaction or waiver on or prior to the Closing Date of the following conditions:

(a)     SBA will deliver to Issuer certificates representing the Exchanged Shares (or in the event that any such certificates have been lost or misplaced, an Affidavit of Lost Certificate in the form attached hereto as Exhibit B duly endorsed by SBA for each such lost or misplaced certificate) in exchange for the Issued Shares and Cash Payment in accordance with Section 1.1;

(b)     SBA will have performed or complied with, in all material respects, its covenants and agreements contained in this Agreement that are required to be performed or complied with on or prior to the Closing Date;

(c)     There will not be any judgment, order, decree, stipulation, injunction or charge, or applicable law in any jurisdiction material to Issuer or SBA, in each case, issued by any court of competent jurisdiction or any other governmental entity in effect preventing consummation of the transactions contemplated by this Agreement; and

(d)     All holders of Series D Stock other than SBA shall have executed an agreement with Issuer for the exchange of their Series D Shares on substantially the terms described in the Information Statement, all conditions to each such holder’s and the Issuer’s obligation to close the transactions contemplated thereby have been satisfied or waived in accordance with such agreements, and prior to or simultaneous with the Closing, a closing shall be conducted with respect to the transactions contemplated by such agreements.

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Article V
ADDITIONAL AGREEMENTS

Section 5.1     Confidentiality. SBA acknowledges and agrees that (i) certain of the information contained herein, including the existence and terms of this Agreement, is of a confidential nature and constitutes material non-public information under United States federal securities laws, (ii) United States federal securities laws prohibit any person who has received material non-public information relating to the Issuer from purchasing or selling securities of the Issuer, or from communicating such information to any person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell securities of the Issuer, and (iii) until such time as any such non-public information has been adequately disseminated to the public, SBA shall not purchase or sell any securities of the Issuer, or communicate such information to any other person or entity, other than its personal financial and legal advisors for the sole purpose of evaluating the entering into and the consummation of the transactions contemplated hereby, or the Office of SBA Inspector General or to any federal agency, department or federal institution with a lawful reason for requiring SBA to supply such information.

Section 5.2     Mutual Releases.

(a)     SBA, for itself, but not for any other agency or department, hereby fully, forever, absolutely, irrevocably and unconditionally releases, remises and forever discharges Issuer and each of its officers, directors, employees, agents, affiliates, successors and assigns (collectively, the “SBA Releasees” and individually, an “SBA Releasee”), of and from any and all manner of claims, actions, demands, causes of action, suits, covenants, contracts, promises, grievances, liabilities, obligations, promises, damages, agreements, rights, debts and expenses (including claims for attorneys' fees and costs), of every kind and nature, either in law or in equity, whether contingent, mature, known or unknown, or suspected or unsuspected, including, without limitation, any claims arising under any federal, state, local or municipal law, common law or statute, and whether arising in contract or in tort, and any claims arising under any other laws or regulations of any nature whatsoever that SBA ever had, now has or may have, for or by reason of, or in any way related to, its ownership of the Exchanged Shares, including, but not limited to, any right to receive any dividends, distributions, or payment on account of such Exchanged Shares, from the beginning of the world to the Closing Date (collectively, the “SBA Released Claims”); provided, however, that the release set forth in this Section 5.2(a) shall not apply to any claim unrelated to SBA’s ownership of stock in Issuer or any claim arising from or related to fraud, criminal laws, anti-trust laws, environmental laws or Federal taxes; provided, however, that the release set forth in this Section 5.2(a) shall not apply to any claim to enforce this Agreement. SBA represents and warrants to the SBA Releasees that SBA has not previously directly or indirectly assigned or otherwise transferred to any person or entity all or any of any of the SBA Released Claims.

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(b)     Issuer, on behalf of itself and its successors and assigns (collectively, the “Release Group Members” and individually a “Release Group Member”), hereby fully, forever, absolutely, irrevocably and unconditionally release, remise and forever discharge SBA and each of its employees, agents, attorneys, successors and assigns (collectively, the “Issuer Releasees” and individually, a “Issuer Releasee”), of and from any and all manner of claims, actions, demands, causes of action, suits, covenants, contracts, promises, grievances, liabilities, obligations, promises, damages, agreements, rights, debts and expenses (including claims for attorneys' fees and costs), of every kind and nature, either in law or in equity, whether contingent, mature, known or unknown, or suspected or unsuspected, including, without limitation, any claims arising under any federal, state, local or municipal law, common law or statute, and whether arising in contract or in tort, and any claims arising under any other laws or regulations of any nature whatsoever that any Release Group Member ever had, now has or may have, for or by reason of, or in any way related to, the Exchanged Shares, from the beginning of the world to the Closing Date (collectively, the “Issuer Released Claims”); provided, however, that the release set forth in this Section 5.2(b) shall not apply to any claim to enforce this Agreement. Issuer represents and warrants to the SBA that neither Issuer nor any other Release Group Member has previously directly or indirectly assigned or otherwise transferred to any person or entity all or any of any of the Issuer Released Claims.

Section 5.3     Payment of IRS Lien. To the extent the IRS lien has not expired, SBA shall pay to the IRS the amount of the lien on the Exchanged Shares held by the IRS, but in no event in any amount greater than the proceeds SBA actually receives from Issuer.

Section 5.4     Indemnification. SBA shall indemnify the Issuer and each of its officers, directors, employees, agents, affiliates, successors and assigns (collectively, the “Indemnified Parties” and individually, an “Indemnified Party”) from and against any and all demands, claims, actions, causes of action, investigations, proceedings judgments, assessments, losses, liabilities, damages or penalties and reasonable attorneys’ fees and related disbursements incurred by the Issuer that arise out of or result from a breach of any representations, warranties or covenants made by SBA herein or any claim by the IRS related in any way to its lien on the Exchanged Shares, regardless of whether any such Indemnified Party is a party thereto, and to reimburse each Indemnified Party for reasonable legal and other expenses as they are incurred in connection with investigating, responding to or defending any of the foregoing; provided that SBA’s maximum total liability (including any expenses) to the Indemnified Parties in the aggregate under this Section 5.4 shall not exceed the amount of the Cash Payment actually received by SBA.

Article VI
GENERAL PROVISIONS

Section 6.1     Further Assurances. Each of the parties will use reasonable efforts to take or cause to be taken all actions and to do or cause to be done, as soon as possible, all things necessary, proper or advisable (subject to any applicable laws) to consummate the Closing and the other transactions contemplated by this Agreement. In the event that at any time after the Closing Date any further action is reasonably necessary to carry out the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of such further instruments and documents) as the other party may reasonably request, at the sole cost and expense of the requesting party. Each party shall promptly notify the other party of any facts, circumstances, changes, events or actions discovered by such party and occurring between the date of this Agreement and the Closing Date that has resulted in, or could reasonably be expected to result in, any representation or warranty made by such party not being true and correct.

7

Section 6.2     Survival. The representations and warranties contained in Articles II and III will survive the Closing and continue in full force and effect indefinitely if the Closing occurs. Any covenants or agreements contained in this Agreement, which by their terms have any remaining obligation to be performed or observed following the occurrence of the Closing will survive and continue in full force and effect until fully performed or observed in accordance with their terms.

Section 6.3     Notices. Any notice, request, instruction, or other communication to be given hereunder, and any delivery to be made hereunder, will be in writing and delivered personally or sent by reputable, overnight courier service (charges prepaid), according to the instructions set forth below. Such notices, requests, other communications and deliveries will be sent to Issuer and SBA, as the case may be at the addresses indicated below:

if to Issuer:

Mikros Systems Corporation
220 Commerce Drive, Suite 300
Fort Washington, PA 19034
Attention: Patricia Kapp, Vice President of Finance,

                   Secretary and Treasurer

if to SBA:

U.S. Small Business Administration
Office of SBIC Liquidation
Attn: Angela Wingard-Brusch, Senior Financial Analyst
409 Third St., S.W.
Washington, D.C. 20416

Section 6.4     Counterparts. This Agreement may be executed in counterparts and each such counterpart will for all purposes be deemed to be an original, and both such counterparts will together constitute but one and the same instrument. Facsimiles or other electronic copies of signatures will be deemed to be originals.

Section 6.5     Governing Law. This Agreement shall be interpreted, construed and enforced in accordance with federal law, with the laws of the State of Delaware governing in the absence of applicable federal law, without giving effect to Delaware principles of conflicts of law.

Section 6.6     Entire Agreement. This Agreement constitutes the entire agreement of Issuer and SBA with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, between Issuer and SBA with respect to the subject matter hereof.

8

Section 6.7     Amendment and Waiver. This Agreement may be amended, modified or supplemented, and any of the provisions hereof may be waived, provided that the same are in writing and signed by Issuer and SBA.

Section 6.8     Assignment. Neither this Agreement nor any of the rights, interests or obligations provided by this Agreement will be assigned by either party (whether by operation of law or otherwise) without the prior written consent of the other party. Subject to the preceding sentence, this Agreement will be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns.

[Signature page follows]

9

IN WITNESS WHEREOF, intending to be legally bound, the parties hereto have caused this Agreement to be executed as of the date set forth below.

UNITED STATES SMALL BUSINESS ADMINISTRATION
By:	/s/ Thomas G. Morris
Name:	Thomas G. Morris
Title:	Director, Office of SBIC Liquidation
Dated:	May 2, 2016

Agreed and Accepted by the Mikros Systems Corporation on and as of this 3d day of May, 2016.

MIKROS SYSTEMS CORPORATION.
By:	/s/ Thomas J. Meaney
Name:	Thomas J. Meaney
Title:	President and Chief Executive Officer

[Signature Page to Exchange Agreement]

Exhibit A

Series of Preferred Stock	Amount of Cash per Share		Number of Shares of Common Stock Per Share
Convertible Preferred Stock	$	0.165		1.95
Series B Preferred Stock	$	0.0825		2.43
Series C Preferred Stock	$	2.708		31.27
Series D Preferred Stock	$	0.36232		5.072464

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Thomas J. Meaney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Mikros Systems Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. As the registrant’s sole certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. As the registrant’s sole certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

August 15, 2016

/s/ Thomas J. Meaney

Thomas J. Meaney

President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certifications Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

In connection with the Quarterly Report (the “report”) of Mikros Systems Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2016, 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.

August 15, 2015	By:	/s/ Thomas J. Meaney
		Thomas J. Meaney
		President and Chief Financial Officer

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2016	Aug. 15, 2016
Document Information [Line Items]
Entity Registrant Name	MIKROS SYSTEMS CORP
Entity Central Index Key	0000317340
Trading Symbol	mkrs
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		34,747,167
Document Type	10-Q
Document Period End Date	Jun. 30, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q2
Amendment Flag	false

XML

Condensed Balance Sheets (Unaudited) - USD ($)	Jun. 30, 2016	Dec. 31, 2015
Redeemable Preferred Stock [Member]
Liabilities and shareholders' equity
Preferred stock		$ 80,450
Shareholders' equity:
Preferred stock		80,450
Series B Preferred Stock [Member]
Liabilities and shareholders' equity
Preferred stock	2,090	11,024
Shareholders' equity:
Preferred stock	2,090	11,024
Convertible Preferred Stock [Member]
Liabilities and shareholders' equity
Preferred stock		2,550
Shareholders' equity:
Preferred stock		2,550
Series D Preferred Stock [Member]
Liabilities and shareholders' equity
Preferred stock	461	6,900
Shareholders' equity:
Preferred stock	461	6,900
Cash and cash equivalents	1,634,801	2,858,655
Receivables on government contracts	464,629	431,012
Prepaid expenses and other current assets	98,885	59,205
Total current assets	2,198,315	3,348,872
Equipment	95,693	95,693
Furniture & fixtures	16,394	16,394
Less: accumulated depreciation	(78,474)	(70,257)
Property and equipment, net	33,613	41,830
Intangible assets	128,716	127,383
Less: accumulated amortization	(22,383)	(11,812)
Intangible assets, net	106,333	115,571
Deferred tax assets	222,185	214,548
Total assets	2,560,446	3,720,821
Accrued payroll and payroll taxes	248,108	574,019
Accounts payable and accrued expenses	139,925	377,928
Accrued warranty expense	324,575	359,654
Deferred revenue	30,000	24,000
Total current liabilities	742,608	1,335,601
Long-term liabilities	128,315	117,436
Total liabilities	870,923	1,453,037
Preferred stock	343,761	320,258
Capital in excess of par value	10,014,911	11,631,732
Accumulated deficit	(8,671,700)	(9,785,130)
Total shareholders' equity	1,689,523	2,187,334
Total liabilities and shareholders' equity	$ 2,560,446	$ 3,720,821

XML

Condensed Balance Sheets (Unaudited) (Parentheticals) - $ / shares	Jun. 30, 2016	Dec. 31, 2015
Redeemable Preferred Stock [Member]
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, auhtorized (in shares)	150,000	150,000
Preferred stock, issued (in shares)	0	5,000
Preferred stock, outstanding (in shares)	0	5,000
Series B Preferred Stock [Member]
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, auhtorized (in shares)	1,200,000	1,200,000
Preferred stock, issued (in shares)	208,781	1,102,433
Preferred stock, outstanding (in shares)	208,781	1,102,433
Convertible Preferred Stock [Member]
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, auhtorized (in shares)	2,000,000	2,000,000
Preferred stock, issued (in shares)	0	255,000
Preferred stock, outstanding (in shares)	0	255,000
Series D Preferred Stock [Member]
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, auhtorized (in shares)	690,000	690,000
Preferred stock, issued (in shares)	46,092	690,000
Preferred stock, outstanding (in shares)	46,092	690,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized (in shares)	60,000,000	60,000,000
Common stock, issued (in shares)	34,376,084	32,025,753
Common stock, outstanding (in shares)	34,376,084	32,025,753

XML

Condensed Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Engineering [Member]
Expenses:
Engineering	$ 312,849	$ 326,521	$ 636,762	$ 748,936
Contract Revenues	978,372	1,734,382	1,966,301	4,210,421
Cost of sales	349,526	877,168	673,854	2,339,073
Gross margin	628,846	857,214	1,292,447	1,871,348
Engineering	24,359	8,191	45,256	9,735
General and administrative	296,754	300,574	632,902	622,597
Total expenses	609,603	627,095	1,269,664	1,371,533
Income from operations	19,243	230,119	22,783	499,815
Other income:
Interest	1,256	93	2,705	186
Net income before income taxes	20,499	230,212	25,488	500,001
Income tax expense	12,512	109,500	15,655	238,500
Net income	7,987	120,712	9,833	261,501
Discount upon exchange of Preferred Stock, net of related fees	1,103,597		1,103,597
Net income available to common shareholders	$ 1,111,584	$ 120,712	$ 1,105,636	$ 261,501
Income per common share - basic (in dollars per share)	$ 0.03		$ 0.03	$ 0.01
Basic weighted average number of shares outstanding (in shares)	32,419,016	31,947,753	32,224,577	32,124,260
Income per common share - diluted (in dollars per share)	$ 0.03		$ 0.03	$ 0.01
Diluted weighted average number of shares outstanding (in shares)	35,506,914	35,548,552	35,554,403	35,722,826

XML

Statements of Shareholders' Equity (Unaudited) - 6 months ended Jun. 30, 2016 - USD ($)	Preferred Stock [Member] Series B Preferred Stock [Member]	Preferred Stock [Member] Convertible Preferred Stock [Member]	Preferred Stock [Member] Series D Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balance, shares (in shares) at Dec. 31, 2015	1,102,433	255,000	690,000	32,025,753
Balance at Dec. 31, 2015	$ 11,024	$ 2,550	$ 6,900	$ 320,258	$ 11,631,732	$ (9,785,130)	$ 2,187,334
Extinguishment of Preferred Stock in exchange for cash and Common Stock (in shares)	(893,462)	(255,000)	(643,908)	4,427,498
Extinguishment of Preferred Stock in exchange for cash and Common Stock	$ (8,934)	$ (2,550)	$ (6,439)	$ 44,275	(1,491,742)	1,103,597	(361,793)
Purchase of Commons Stock (in shares)				(2,084,167)
Purchase of Commons Stock				$ (20,842)	(126,609)		(147,451)
Stock compensation					1,250		$ 1,250
Exercise of non-restricted stock awards (in shares)				7,000			7,000
Exercise of non-restricted stock awards				$ 70	280		$ 350
Net income						9,833	9,833
Balance, shares (in shares) at Jun. 30, 2016	208,971		46,092	34,376,084
Balance at Jun. 30, 2016	$ 2,090		$ 461	$ 343,761	$ 10,014,911	$ (8,671,700)	$ 1,689,523

XML

Condensed Statements of Cash Flows (Unaudited) - USD ($)	6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015
Cash flows from operating activities
Net income	$ 9,833	$ 261,501
Depreciation and amortization	18,788	3,509
Deferred tax expense	(7,637)	54,000
Share-based compensation expense	1,250	1,362
Changes in assets and liabilities:
(Increase) in receivables on government contracts	(33,617)	(31,667)
(Increase) in prepaid expenses and other current assets	(39,680)	(46,729)
Decrease in accrued payroll and payroll taxes	(325,911)	(73,303)
Decrease in accounts payable and accrued expenses	(271,943)	(171,485)
Increase (Decrease) in accrued warranty expense	(35,079)	6,600
Increase in deferred revenue	6,000
Increase (Decrease) in long-term liabilities	10,879	(3,145)
Net cash (used in) provided by operating activities	(667,117)	643
Cash flows from investing activities:
Payments related to intangible assets	(1,333)
Purchase of property and equipment		(2,693)
Net cash used in investing activities	(1,333)	(2,693)
Cash flows from financing activities:
Payments to preferred shareholders in conjunction with a recapitalization	(362,213)
Payments to acquire and retire Common Stock	(147,451)
Professional fees paid in conjunction with recapitalization	(46,090)
Exercise of stock options	350
Net cash used in financing activities:	(555,404)
Net decrease in cash and cash equivalents	(1,223,854)	(2,050)
Cash and cash equivalents, beginning of period	2,858,655	1,161,634
Cash and cash equivalents, end of period	1,634,801	1,159,584
Supplement cash flow information:
Cash paid during the period for income taxes	44,500	143,900
Noncash investing and financing activities:
Issuance of common stock in in exchange for preferred stock	442,750
Recognition of an extinguishment liability in exchange for preferred stock	$ 33,941

XML

Note 1 - Basis of Presentation

6 Months Ended

Jun. 30, 2016

Notes to Financial Statements

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

Note

1

–

Basis

of

Presentation

The financial statements included herein have been prepared by Mikros Systems Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

In the opinion of the Company’s management, the accompanying unaudited interim condensed financial statements contain all adjustments, consisting solely of those which are of a normal recurring nature, necessary to present fairly its financial position as of June 30, 2016, and the results of its operations for the three and six months ended June 30, 2016 and 2015 and changes in stockholders’ equity and cash flows for the six months ended June 30, 2016 and 2015.

XML

Note 2 - Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2016

Notes to Financial Statements

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

Note

2

–

Recent

Accounting

Pronouncements

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s condensed financial statements, from those disclosed in the Company’s 2015 Annual Report on Form 10-K.

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Note 3 - Significant Accounting Policies

6 Months Ended

Jun. 30, 2016

Notes to Financial Statements

Significant Accounting Policies [Text Block]

Note

3

–

Significant

Accounting

Policies

Revenue

Recognition

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

Diagnostic Electronic Portable Testset

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

The Company recognizes revenue as it relates to the license of software when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access to take immediate possession of the software or technology. Software license agreements include post-contract customer support ("PCS"). For the Company’s software and software-related multiple element arrangements, where customers purchase both software related products and software related services, the Company uses vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. The Company has established VSOE of fair value for the majority of the PCS, professional services, and training. Given the limited number of sales related to this software, and the fact that the Company does not sell the PCS element separately, there is no VSOE currently available to bifurcate the PCS element from the contract.  In accordance with ASC 985-605-25-10a, the fees earned from sale of licenses to which the only undelivered element is the PCS, are recognized ratably over the life of the contract. Revenues from the sale of software licenses for the three and six months ended June 30, 2016 and 2015 were $33,751 and $0 and $61,501 and $0, respectively. At June 30, 2016 and December 31, 2015, deferred revenues amounted to $30,000 and $24,000, respectively.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of June 30, 2016 and December 31, 2015, the Company had unbilled revenues of $122,342 and $60,857, respectively which are recorded within receivables on government contracts in the Company’s balance sheet. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of June 30, 2016 and December 31, 2015, there were $0 and $125,157, respectively, of advanced billings.

Warranty

Expense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, expected and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended June 30, 2016 and 2015, the Company recognized warranty (benefit) expense of $0 and $(23,300), respectively, and for the six months ended June 30, 2016 and 2015, the Company recognized warranty expense (benefit) of $(20,801) and $6,600, respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 189 ADEPT units. As of June 30, 2016, there are 64 ADEPT units that remain under the limited warranty coverage.

The following table reflects the reserve for product warranty activity as of June 30, 2016 and December 31, 2015:

	June 30, 2016			December 31, 2015
Beginning balance	$	359,654		$	33,500
Provision for product warranty		-			400,500
Product warranty expirations		(20,801	)		-
Product warranty costs paid		(14,278	)		(74,346	)
Ending balance	$	324,575		$	359,654

Research and Development Expense

Research and Development expenditures for research and development of the Company's products are expensed when incurred, and are included in general and administrative expenses. The Company recognized research and development costs of $24,359 and $8,191 for the three months ended June 30, 2016 and 2015, respectively, and $45,256 and $9,735 for the six months ended June 30, 2016 and 2015, respectively.

Intangible Assets

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

Licenses are amortized using a straight-line method over their estimated life of six years. For the three months ended June 30, 2016 and 2015, amortization expense related to the Company’s license amounted to $5,250 and $0, respectively, and $10,500 and $0 for the six months ended June 30, 2016 and 2015, respectively, and are included in general and administrative expenses on the Statements of Operations and Comprehensive Income.

XML

Note 4 - Income Per Share

6 Months Ended

Jun. 30, 2016

Notes to Financial Statements

Earnings Per Share [Text Block]

Note 4

–

Income

Per

Share

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Basic earnings per common share:
Net income		7,987			120,712			9,833			261,501
Discount upon exchange of Preferred Stock, net of related fees		1,103,597			-			1,103,597			-
		1,111,584			120,712			1,113,430			261,501
Portion allocable to common shareholders		99.3	%		99.2	%		99.3	%		99.2	%
Net income available to common shareholders		1,103,803			119,746			1,105,636			259,409
Weighted average basic shares outstanding		32,419,016			31,947,753			32,224,577			32,124,260
Basic (loss) income per common share	$	0.03		$	-		$	0.03		$	0.01
Dilutive earnings per common share:
Net income allocable to common shareholders		1,103,803			119,746			1,105,636			259,409
Add: undistributed earnings allocated to participating securities		7,781			966			7,794			2,092
Numerator for diluted earnings per common share		1,111,584			120,712			1,113,430			261,501
Weighted average shares outstanding - basic		32,419,016			31,947,753			32,224,577			32,124,260
Diluted effect:
Stock options		7,636			19,250			7,636			18,667
Unvested restricted stock units		1,818			19,250			1,818			17,600
Conversion equivalent of dilutive Series B Convertible Preferred Stock		2,865,477			3,307,299			3,086,388			3,307,299
Conversion equivalent of dilutive Convertible Preferred Stock		212,967			255,000			233,984			255,000
Weighted average dilutive shares outstanding		35,506,914			35,548,552			35,554,403			35,722,826
Dilutive income per common share	$	0.03		$	-		$	0.03		$	0.01

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Numerator:
Weighted average participating common shares		32,419,016			31,947,753			32,224,577			32,124,260
Denominator:
Weighted average participating common shares		32,419,016			31,947,753			32,224,577			32,124,260
Add: Weighted average shares of Convertible Preferred Stock		212,967			255,000			233,984			255,000
Weighted average participating shares		32,631,983			32,202,753			32,458,561			32,379,260
Portion allocable to common shareholders		99.3	%		99.2	%		99.3	%		99.2	%

Diluted net income per share for the three and six months ended June 30, 2016 and 2015 does not reflect the following potential common shares, as the effect would be antidilutive.

	June 30,
	2016		2015
Stock options		610,000		610,000

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Note 5 - Income Tax Matters

6 Months Ended

Jun. 30, 2016

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 5 – Income Tax Matters

The Company conducts an on-going analysis to review its net deferred tax asset and the need for a related valuation allowance. As a result of this analysis and the actual results of operations, the net deferred tax assets changed by $(7,637) and $54,000 during the six months ended June 30, 2016 and 2015, respectively. The change in deferred tax assets is attributable to the reversal of various book/tax differences. utilization of income tax attributes, primarily federal net operating losses, as the Company anticipates annual earnings from operations to continue.

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Note 6 - Share-based Compensation

6 Months Ended

Jun. 30, 2016

Notes to Financial Statements

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

Note 6 – Share-Based Compensation

During the three and six months ended June 30, 2016, the Company did not issue stock awards. During the six months ended June 30, 2016, 7,000 shares were exercised for proceeds in the amount of $350. The Company recognized stock-based compensation expense for stock options of $34 and $37 for the three months ended June 30, 2015 and 2014, respectively. The Company recognized stock-based compensation expense for stock options of $69 and $74 for the six months ended June 30, 2016 and 2015, respectively. The intrinsic value of the options as of June 30, 2016 is $840.

As of June 30, 2016 and 2015, there were 44,000 and 103,000 restricted stock awards outstanding, respectively. The Company recognized stock-based compensation expense for restricted stock of $580 and $644 for the three months ended June 30, 2016 and 2015, respectively. The Company recognized stock-based compensation expense for restricted stock of $1,181 and $1,288 for the six months ended June 30, 2016 and 2015, respectively.

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Note 7 - Recapitalization

6 Months Ended

Jun. 30, 2016

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

Note 7 – Recapitalization

During the second quarter 2016, the Company executed a series of Exchange Agreements with holders of a majority of its outstanding shares of preferred stock. Under the terms of the agreements, each series of preferred stock held by such holders was exchanged for a combination of cash and shares of common stock in the amounts set forth in the table below.

Series of Preferred Stock	Amount of Cash per Share		Number of Shares of Common Stock Per Share
Convertible Preferred	$	0.165		1.95
Series B	$	0.0825		2.43
Series C	$	2.708		31.27
Series D	$	0.36232		5.072464

The Company entered into a separate exchange agreement (the “SBA Exchange Agreement”) with the United States Small Business Administration (“SBA”), pursuant to which it agreed to pay $250,000 to the SBA in exchange for all shares of preferred stock, all 2,084,167 shares of common stock then owned by the SBA, and the 1,658,540 shares of common stock which would have been issuable to the SBA if it had participated in the Exchange Agreements on the same terms as the other holders of the Company’s preferred stock. On June 16, 2016, the Company conducted closings under the Exchange Agreements and the SBA Exchange Agreement, pursuant to which it issued an aggregate of 4,427,498 shares of common stock and made aggregate cash payments of $509,664. In connection with the closings, the Company issued notices of redemption to holders of the 208,971 remaining issued and outstanding shares of Series B Preferred Stock and the 46,092 remaining issued and outstanding share of Series D Preferred Stock for a combination of cash and shares of common stock on the same terms as the Exchange Agreements (the “Redemption”). We anticipate that the redemption will be completed by the end of the third quarter in 2016.

The Company determined the difference between the fair value of the Company’s common stock and the cash paid to the holders of the preferred stock and the carrying amount of the preferred stock (net of issuance costs of $46,090) which amounted to $1,103,597 and added this amount to net income in the calculation of earnings per share (see Note 4 above). In addition, the discount upon exchange of the preferred stock, net of the related fees, was recorded in accumulated deficit since the discount represents a return from the preferred shareholders. The Company accounted for the purchase and subsequent retirement of the common stock from the SBA as the purchase of treasury stock and was recorded in the amount of $147,451 based on the amount paid to repurchase such shares.

As a result of the approval of the Redemption by the holders of requisite majorities of the Series B Preferred Stock and Series D Preferred Stock, the Company has recorded the discount upon exchange of the preferred stock as of June 30, 2016. Upon redemption of the 208,971 remaining issued and outstanding shares of Series B Preferred Stock and the 46,092 remaining issued and outstanding shares of Series D Preferred Stock, the Company will issue 741,600 additional shares of Common Stock and make aggregate cash payments of $33,941. At June 30, 2016, the Company has recorded an extinguishment liability of $33,941, which is included in accounts payable and accrued expenses on the balance sheet and represents the cash to be paid upon redemption of the remaining preferred stock.

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Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2016

Accounting Policies [Abstract]

New Accounting Pronouncements, Policy [Policy Text Block]

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s condensed financial statements, from those disclosed in the Company’s 2015 Annual Report on Form 10-K.

Revenue Recognition, Policy [Policy Text Block]

Revenue

Recognition

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

Diagnostic Electronic Portable Testset

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

The Company recognizes revenue as it relates to the license of software when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access to take immediate possession of the software or technology. Software license agreements include post-contract customer support ("PCS"). For the Company’s software and software-related multiple element arrangements, where customers purchase both software related products and software related services, the Company uses vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. The Company has established VSOE of fair value for the majority of the PCS, professional services, and training. Given the limited number of sales related to this software, and the fact that the Company does not sell the PCS element separately, there is no VSOE currently available to bifurcate the PCS element from the contract.  In accordance with ASC 985-605-25-10a, the fees earned from sale of licenses to which the only undelivered element is the PCS, are recognized ratably over the life of the contract. Revenues from the sale of software licenses for the three and six months ended June 30, 2016 and 2015 were $33,751 and $0 and $61,501 and $0, respectively. At June 30, 2016 and December 31, 2015, deferred revenues amounted to $30,000 and $24,000, respectively.

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of June 30, 2016 and December 31, 2015, the Company had unbilled revenues of $122,342 and $60,857, respectively which are recorded within receivables on government contracts in the Company’s balance sheet. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of June 30, 2016 and December 31, 2015, there were $0 and $125,157, respectively, of advanced billings.

Standard Product Warranty, Policy [Policy Text Block]

Warranty

Expense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, expected and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended June 30, 2016 and 2015, the Company recognized warranty (benefit) expense of $0 and $(23,300), respectively, and for the six months ended June 30, 2016 and 2015, the Company recognized warranty expense (benefit) of $(20,801) and $6,600, respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 189 ADEPT units. As of June 30, 2016, there are 64 ADEPT units that remain under the limited warranty coverage.

The following table reflects the reserve for product warranty activity as of June 30, 2016 and December 31, 2015:

	June 30, 2016			December 31, 2015
Beginning balance	$	359,654		$	33,500
Provision for product warranty		-			400,500
Product warranty expirations		(20,801	)		-
Product warranty costs paid		(14,278	)		(74,346	)
Ending balance	$	324,575		$	359,654

Research and Development Expense, Policy [Policy Text Block]

Research and Development Expense

Research and Development expenditures for research and development of the Company's products are expensed when incurred, and are included in general and administrative expenses. The Company recognized research and development costs of $24,359 and $8,191 for the three months ended June 30, 2016 and 2015, respectively, and $45,256 and $9,735 for the six months ended June 30, 2016 and 2015, respectively.

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

Intangible Assets

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

Licenses are amortized using a straight-line method over their estimated life of six years. For the three months ended June 30, 2016 and 2015, amortization expense related to the Company’s license amounted to $5,250 and $0, respectively, and $10,500 and $0 for the six months ended June 30, 2016 and 2015, respectively, and are included in general and administrative expenses on the Statements of Operations and Comprehensive Income.

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Note 3 - Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2016

Notes Tables

Schedule of Product Warranty Liability [Table Text Block]

	June 30, 2016			December 31, 2015
Beginning balance	$	359,654		$	33,500
Provision for product warranty		-			400,500
Product warranty expirations		(20,801	)		-
Product warranty costs paid		(14,278	)		(74,346	)
Ending balance	$	324,575		$	359,654

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Note 4 - Income Per Share (Tables)

6 Months Ended

Jun. 30, 2016

Notes Tables

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Basic earnings per common share:
Net income		7,987			120,712			9,833			261,501
Discount upon exchange of Preferred Stock, net of related fees		1,103,597			-			1,103,597			-
		1,111,584			120,712			1,113,430			261,501
Portion allocable to common shareholders		99.3	%		99.2	%		99.3	%		99.2	%
Net income available to common shareholders		1,103,803			119,746			1,105,636			259,409
Weighted average basic shares outstanding		32,419,016			31,947,753			32,224,577			32,124,260
Basic (loss) income per common share	$	0.03		$	-		$	0.03		$	0.01
Dilutive earnings per common share:
Net income allocable to common shareholders		1,103,803			119,746			1,105,636			259,409
Add: undistributed earnings allocated to participating securities		7,781			966			7,794			2,092
Numerator for diluted earnings per common share		1,111,584			120,712			1,113,430			261,501
Weighted average shares outstanding - basic		32,419,016			31,947,753			32,224,577			32,124,260
Diluted effect:
Stock options		7,636			19,250			7,636			18,667
Unvested restricted stock units		1,818			19,250			1,818			17,600
Conversion equivalent of dilutive Series B Convertible Preferred Stock		2,865,477			3,307,299			3,086,388			3,307,299
Conversion equivalent of dilutive Convertible Preferred Stock		212,967			255,000			233,984			255,000
Weighted average dilutive shares outstanding		35,506,914			35,548,552			35,554,403			35,722,826
Dilutive income per common share	$	0.03		$	-		$	0.03		$	0.01

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Numerator:
Weighted average participating common shares		32,419,016			31,947,753			32,224,577			32,124,260
Denominator:
Weighted average participating common shares		32,419,016			31,947,753			32,224,577			32,124,260
Add: Weighted average shares of Convertible Preferred Stock		212,967			255,000			233,984			255,000
Weighted average participating shares		32,631,983			32,202,753			32,458,561			32,379,260
Portion allocable to common shareholders		99.3	%		99.2	%		99.3	%		99.2	%

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

	June 30,
	2016		2015
Stock options		610,000		610,000

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Note 7 - Recapitalization (Tables)

6 Months Ended

Jun. 30, 2016

Notes Tables

Schedule of Conversions of Stock [Table Text Block]

Series of Preferred Stock	Amount of Cash per Share		Number of Shares of Common Stock Per Share
Convertible Preferred	$	0.165		1.95
Series B	$	0.0825		2.43
Series C	$	2.708		31.27
Series D	$	0.36232		5.072464

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Note 3 - Significant Accounting Policies (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015	Dec. 31, 2015
Licenses [Member]
Finite-Lived Intangible Asset, Useful Life			6 years
Amortization of Intangible Assets	$ 5,250	$ 0	$ 10,500	$ 0
Licenses Revenue	33,751	0	61,501	0
Deferred Revenue, Current	30,000		30,000		$ 24,000
Government Contract Receivable, Unbilled Amounts	122,342		122,342		60,857
Customer Advances, Current	0		0		$ 125,157
Product Warranty (Recovery) Expense	0	23,300	(20,801)	6,600
Research and Development Expense	$ 24,359	$ 8,191	$ 45,256	$ 9,735

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Note 3 - Significant Accounting Policies - Reserve for Product Warranty Activity (Details) - USD ($)	6 Months Ended	12 Months Ended
	Jun. 30, 2016	Dec. 31, 2015
Beginning balance	$ 359,654	$ 33,500
Provision for product warranty		400,500
Product warranty expirations	(20,801)
Product warranty costs paid	(14,278)	(74,346)
Ending balance	$ 324,575	$ 359,654

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Note 4 - Income Per Share - Weighted Average Shares Outstanding (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Restricted Stock Units (RSUs) [Member]
us-gaap_WeightedAverageNumberDilutedSharesOutstandingAdjustmentAbstract
Unvested restricted stock units (in shares)	1,818	19,250	1,818	17,600
Preferred Stock Series B Convertible [Member]
us-gaap_WeightedAverageNumberDilutedSharesOutstandingAdjustmentAbstract
Conversion equivalent of dilutive Series B Convertible Preferred Stock (in shares)	2,865,477	3,307,299	3,086,388	3,307,299
Convertible Preferred Stock [Member]
us-gaap_WeightedAverageNumberDilutedSharesOutstandingAdjustmentAbstract
Conversion equivalent of dilutive Series B Convertible Preferred Stock (in shares)	212,967	255,000	233,984	255,000
Net income	$ 7,987	$ 120,712	$ 9,833	$ 261,501
Preferred Stock Redemption Discount	1,103,597		1,103,597
	$ 1,111,584	$ 120,712	$ 1,105,636	$ 261,501
Portion allocable to common shareholders	99.30%	99.20%	99.30%	99.20%
Weighted average basic shares outstanding (in shares)	32,419,016	31,947,753	32,224,577	32,124,260
Basic (loss) income per common share (in dollars per share)	$ 0.03		$ 0.03	$ 0.01
	$ 1,111,584	$ 120,712	$ 1,105,636	$ 261,501
Add: undistributed earnings allocated to participating securities	7,781	966	7,794	2,092
Numerator for diluted earnings per common share	$ 1,111,584	$ 120,712	$ 1,113,430	$ 261,501
Weighted average basic shares outstanding (in shares)	32,419,016	31,947,753	32,224,577	32,124,260
Stock options (in shares)	7,636	19,250	7,636	18,667
Conversion equivalent of dilutive Series B Convertible Preferred Stock (in shares)	212,967	255,000	233,984	255,000
Weighted average dilutive shares outstanding (in shares)	35,506,914	35,548,552	35,554,403	35,722,826
Dilutive income per common share (in dollars per share)	$ 0.03		$ 0.03	$ 0.01

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Note 4 - Income Per Share - Percentage of Net Earnings Allocable to Common Shareholders (Details) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Weighted average participating common shares (in shares)	32,419,016	31,947,753	32,224,577	32,124,260
Conversion equivalent of dilutive Series B Convertible Preferred Stock (in shares)	212,967	255,000	233,984	255,000
Weighted average participating shares (in shares)	32,631,983	32,202,753	32,458,561	32,379,260
Portion allocable to common shareholders	99.30%	99.20%	99.30%	99.20%

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Note 4 - Income Per Share - Diluted Net Earnings (Loss) Per Share (Details) - shares	6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015
Employee Stock Option [Member]
Antidilutive shares (in shares) (in shares)	610,000	610,000

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Note 5 - Income Tax Matters (Details Textual) - USD ($)	6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015
Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount	$ (7,637)	$ 54,000

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Note 6 - Share-based Compensation (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Employee Stock Option [Member]
Allocated Share-based Compensation Expense	$ 34	$ 37	$ 69	$ 74
Restricted Stock [Member]
Allocated Share-based Compensation Expense	$ 580	$ 644	$ 1,181	$ 1,288
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding, Number	44,000	103,000	44,000	103,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	0		0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period			7,000
Proceeds from Stock Options Exercised			$ 350
Allocated Share-based Compensation Expense			1,250	$ 1,362
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value	$ 840		$ 840

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Note 7 - Recapitalization (Details Textual) - USD ($)		1 Months Ended	3 Months Ended		6 Months Ended
	Jun. 16, 2016	Jun. 30, 2016	Jun. 30, 2016	Jun. 30, 2015	Dec. 31, 2016	Jun. 30, 2016	Jun. 30, 2015
United States Small Business Administration [Member] | SBA Exchange Agreement [Member]
Stock Repurchased and Retired During Period, Shares		1,658,540
United States Small Business Administration [Member]
Cash Payment in Exchange for Preferred Stock		$ 250,000
Stock Repurchased and Retired During Period, Shares		2,084,167
Stock Issued During Period, Shares, New Issues	4,427,498
Cash Payment, In Connection to the Issuance of Stock	$ 509,664
Series B Preferred Stock [Member]
Stock Redeemed or Called During Period, Shares	208,971
Series D Preferred Stock [Member]
Stock Redeemed or Called During Period, Shares	46,092
Scenario, Forecast [Member]
Stock Issued During Period, Shares, New Issues					741,600
Cash Payment, In Connection to the Issuance of Stock						$ 33,941
Payments of Stock Issuance Costs						46,090
Preferred Stock Redemption Discount			$ 1,103,597			1,103,597
Payments for Repurchase of Common Stock						147,451
Liabilities Exchanged for Preferred Stock						$ 33,941

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Note 7 - Recapitalization - Preferred Stock Exchanged for Cash and Common Stock (Details)	6 Months Ended
	Jun. 30, 2016 $ / shares shares
Convertible Preferred Stock [Member]
Convertible Preferred (in dollars per share) | $ / shares	$ 0.165
Convertible Preferred (in shares) | shares	1.95
Series B Preferred Stock [Member]
Convertible Preferred (in dollars per share) | $ / shares	$ 0.0825
Convertible Preferred (in shares) | shares	2.43
Series C Preferred Stock [Member]
Convertible Preferred (in dollars per share) | $ / shares	$ 2.708
Convertible Preferred (in shares) | shares	31.27
Series D Preferred Stock [Member]
Convertible Preferred (in dollars per share) | $ / shares	$ 0.36232
Convertible Preferred (in shares) | shares	5.072464