UNITED STATES

~~UNITED STATES~~

SECURITIES~~SECURITIES~~ANDEXCHANGECOMMISSION

Washington,~~Washington,~~D.C. 20549

☒	QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
	~~For~~~~the~~~~quarterly~~~~period~~~~ended~~ ~~March 31, 2017~~

ForthequarterlyperiodendedSeptember 30, 2017

☐	TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
	~~For~~~~the~~~~transition~~~~period~~~~from~~~~_____to_____.~~

Forthetransitionperiodfrom_____to_____.

Commission File Number: 000-14801

Mikros~~Mikros~~ Systems Corporation

(Exact name of registrant as specified in its charter)

Delaware	~~Delaware~~		14-1598200
	~~(State~~(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)~~

707~~(609) 987-1513~~AlexanderRoad,BuildingTwo,Suite208, Princeton,NewJersey08540

(~~Registrant’s~~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~~

☒ 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~~☒ Yes ☐ No

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

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

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

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

Yes ~~☒No~~ ☒ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were ~~35,494,775~~35,561,775 issued and outstanding shares of the issuer’s common stock, $.01 par value per share, on ~~May 11,~~November 14, 2017.

TABLE~~TABLE~~ OF CONTENTS

		PAGE ~~PAGE~~ #
PARTI.	FINANCIALINFORMATION


Item 1.	Financial Statements


	Condensed Balance Sheets as of ~~March 31,~~September 30, 2017 and December 31, 2016 (unaudited)	1

	Condensed Statements of ~~Operations~~Income and Comprehensive Income for the Three ~~MonthsEnded March 31,~~and Nine Months Ended September 30, 2017 and 2016 (unaudited)	2

	Condensed Statement of ~~Stockholders’~~Changes in Shareholders’ Equity for the ~~Three~~Nine Months Ended ~~March 31, 2017(unaudited)~~ September 30, 2017 (unaudited)	3

	Condensed Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2017 and ~~2016(unaudited)~~ 2016 (unaudited)	4

	Notes to Condensed Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 4.	Controls and Procedures	13

PARTII.	OTHERINFORMATION

Item 2.2	Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceeds.	14

Item 6.	~~Exhibits~~Exhibits	14

	~~Signatures~~Signatures	15

Part I Financial Information

Item 1 Financial Statements

Mikros Systems Corporation

~~Condensed~~ Balance Sheets

(Unaudited)

	March 31,			December 31,			September 30,			December 31,
	2017			2016			2017			2016

Assets
Current assets:
Cash and cash equivalents	$	1,351,485		$	858,868		$	1,079,789		$	858,868
Receivables on government contracts		1,146,026			1,704,301			1,364,968			1,704,301
Prepaid expenses and other current assets		52,635			55,144			82,766			55,144
Total current assets		2,550,146			2,618,313			2,527,523			2,618,313
Property and equipment
Equipment		103,253			95,693			138,105			95,693
Leasehold improvements								21,306			-
Furniture & fixtures		16,394			16,394			37,557			16,394
Less: accumulated depreciation		(90,725	)		(86,436	)		(100,370	)		(86,436	)
Property and equipment, net		28,922			25,651			96,598			25,651
Intangible assets		129,704			128,916			133,899			128,916
Less: accumulated amortization		(38,236	)		(32,947	)		(48,812	)		(32,947	)
Intangible assets, net		91,468			95,969			85,087			95,969
Deferred tax assets		169,822			204,991			141,731			204,991
Total assets	$	2,840,358		$	2,944,924		$	2,850,939		$	2,944,924
Liabilities and shareholders' equity
Current liabilities:
Accrued payroll and payroll taxes	$	387,093		$	460,434		$	509,720		$	460,434
Accounts payable and accrued expenses		362,114			338,872			198,107			338,872
Accrued warranty expense		98,090			240,980			-			240,980
Deferred revenue		-			7,500			30,000			7,500
Total current liabilities		847,297			1,047,786			737,827			1,047,786
Long-term liabilities		140,004			140,377			138,681			140,377
Total liabilities		987,301			1,188,163			876,508			1,188,163



Shareholders' equity:
Preferred stock, convertible, par value $.01 per share, authorized5,000,000 shares, none issued and outstanding		-			-
Common stock, par value $.01 per share, authorized 60,000,000 shares,issued and outstanding 35,476,775 and 35,424,775 shares, respectively		354,769			354,249
Preferred stock, convertible, par value $.01 per share, authorized 5,000,000 shares, none issued and outstanding								-			-
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 35,561,775 and 35,424,775 shares, respectively								355,619			354,249
Capital in excess of par value		10,067,363			10,061,894			10,082,657			10,061,894
Accumulated deficit		(8,569,075	)		(8,659,382	)		(8,463,845	)		(8,659,382	)
Total shareholders' equity		1,853,057			1,756,761			1,974,431			1,756,761
Total liabilities and shareholders' equity	$	2,840,358		$	2,944,924		$	2,850,939		$	2,944,924

See Notes to Unaudited Condensed Financial Statements

Mikros Systems Corporation

Condensed Statements of ~~Operations~~Income and Comprehensive Income ~~(unaudited)~~(Unaudited)

	Three Months Ended,				Three Months Ended,					Nine Months Ended,
	March 31,				September 30,			September 30,		September 30,		September 30,
	2017		2016		2017			2016		2017		2016

Contract Revenues	$	1,754,973	$	987,929	$	1,551,620		$	1,180,491	$	5,047,456	$	3,146,792

Cost of sales		651,536		324,328		636,128			446,810		1,909,246		1,120,664

Gross margin		1,103,437		663,601		915,492			733,681		3,138,210		2,026,128

Expenses:
Engineering		517,180		323,913		530,477			421,296		1,587,069		1,058,058
General and administrative		408,903		336,148		379,407			261,528		1,218,694		894,430

Total expenses		926,083		660,061		909,884			682,824		2,805,763		1,952,488

Income from operations		177,354		3,540		5,608			50,857		332,447		73,640

Other income:
Interest		728		1,449		701			1,005		2,154		3,710

Net income before income taxes		178,082		4,989		6,309			51,862		334,601		77,350

Income tax expense		87,775		3,143
Income tax expense (benefit)						(22,696	)		31,136		139,064		46,791

Net income						29,005			20,726		195,537		30,559

Discount upon exchange of Preferred Stock, net of related fees						-			3,275		-		1,106,872

Net income available to common shareholders	$	90,307	$	1,846	$	29,005		$	24,001	$	195,537	$	1,137,431

Income per common share - basic	$	-	$	-	$	-		$	-	$	0.01	$	0.04

Basic weighted average number of shares outstanding		35,430,119		32,030,138		35,555,742			32,419,016		35,246,893		32,048,486

Income per common share - diluted	$	-	$	-	$	-		$	-	$	0.01	$	0.03

Diluted weighted average number of shares outstanding		35,643,392		35,608,255		35,862,205			32,864,713		35,524,857		34,450,220

See Notes to Unaudited Condensed Financial Statements

Mikros Systems Corporation

~~Condensed~~ Statements of Changes in Shareholders' Equity

(Unaudited)

	Preferred Stock				Common Stock
	$0.01 Par Value				$0.01 Par Value				Capital in								Preferred Stock $0.01 Par Value				Common Stock $0.01 Par Value				Capital
	Number of shares		Par Value		Number of shares		Par Value		Excess of Par Value			Accumulated Deficit			Total		Number of shares		Par Value		Number of shares		Par Value		in Excess of Par Value			Accumulated Deficit			Total
Balance at January 1, 2017		-	$	-		35,424,775	$	354,249	$	10,061,894		$	(8,659,382	)	$	1,756,761		-	$	-		35,424,775	$	354,249	$	10,061,894		$	(8,659,382	)	$	1,756,761
Stock compensation		-		-		-		-		2,639			-			2,639		-		-		-		-		9,783			-			9,783
Exercise of non-restricted stock awards		-		-		22,000		220		3,130			-			3,350		-		-		67,000		670		11,680			-			12,350
Common shares issued to director		-		-		30,000		300		(300	)					-
Restricted common shares issued																		-		-		70,000		700		(700	)					-
Net income		-		-		-		-		-			90,307			90,307		-		-		-		-		-			195,537			195,537

Balance at March 31, 2017		-	$	-		35,476,775	$	354,769	$	10,067,363		$	(8,569,075	)	$	1,853,057
Balance at September 30, 2017																		-	$	-		35,561,775	$	355,619	$	10,082,657		$	(8,463,845	)	$	1,974,431

See Notes to Unaudited Condensed Financial Statements

Mikros Systems Corporation

~~Condensed~~ Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,						Nine Months Ended September 30
	2017			2016			2017			2016

Cash flows from operating activities
Net income	$	90,307		$	1,846		$	195,537		$	30,559
Adjustments to reconcile net income to net cash provided by (used in ) operating activities:

Depreciation and amortization		9,578			9,456			33,657			27,930
Deferred tax expense		35,169			1,381			63,260			12,940
Share-based compensation expense		2,639			636			9,783			1,864
Changes in assets and liabilities:
Decrease in receivables on government contracts		558,275			25,130
Decrease (increase) in prepaid expenses and other current assets		2,509			(30,250	)
(Decrease) in accrued payroll and payroll taxes		(73,341	)		(338,358	)
Increase (Decrease) in accounts payable and accrued expenses		23,242			(252,051	)
Decrease (increase) in receivables on government contracts								339,333			(223,968	)
Increase in prepaid expenses and other current assets								(27,622	)		(267,592	)
Increase (decrease) in accrued payroll and payroll taxes								49,286			(261,950	)
(Decrease) in accounts payable and accrued expenses								(140,765	)		(200,115	)
(Decrease) in accrued warranty expense		(142,890	)		(28,284	)		(240,980	)		(103,356	)
(Decrease) increase in deferred revenue		(7,500	)		2,250
(Decrease) in long-term liabilities		(373	)		(1,336	)
Increase (decrease) in deferred revenue								22,500			(5,250	)
(Decrease) increase in long-term liabilities								(1,696	)		23,170
Net cash provided by (used in) operating activities		497,615			(609,580	)		302,293			(965,768	)
Cash flows from investing activities:
Payments related to intangible assets		(788	)		-			(4,983	)		(1,533	)
Purchase of property and equipment		(7,560	)		-			(88,739	)		-
Net cash used in investing activities:		(8,348	)		-			(93,722	)		(1,533	)
Cash flows from financing activities:
Proceeds from exercise of stock options		3,350			350
Net cash provided by financing activities:		3,350			350
Exercise of stock options								12,350			350
Payments to preferred shareholders in conjunction with a recapitalization								-			(375,795	)
Payments to acquire and retire Common Stock								-			(147,451	)
Professional fees paid in conjunction with recapitalization								-			(58,285	)
Net cash provided by (used in) financing activities:								12,350			(581,181	)
Net increase (decrease) in cash and cash equivalents		492,617			(609,230	)		220,921			(1,548,482	)
Cash and cash equivalents, beginning of period		858,868			2,858,655			858,868			2,858,655
Cash and cash equivalents, end of period	$	1,351,485		$	2,249,425		$	1,079,789		$	1,310,173
Supplement cash flow information:
Cash paid during the period for income taxes	$	-		$	44,500		$	70,150		$	69,500

Noncash investing and financing activities:
Issuance of common stock in in exchange for preferred stock										$	525,830
Recognition of an extinguishment liability in exchange for preferred stock										$	33,941

See Notes to Unaudited Condensed Financial Statements

Mikros~~Mikros~~ Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

Note1–BasisofPresentation

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~~10-K for the year ended December 31, 2016.

In the opinion of the Company’s management, the accompanying unaudited interim condensed financial statements contain all adjustments, consisting solely of those which are of a normal recurring nature, necessary to present fairly its financial position as of ~~March 31,~~September 30, 2017, the results of its operations for the three and nine months ended ~~March 31,~~September 30, 2017 and 2016, changes in stockholders’ equity from January 1, 2017 to ~~March 31,~~September 30, 2017 and cash flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2017 and 2016.

Note2–RecentAccountingPronouncements

~~There have~~In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify the identification of performance obligations and licensing arrangements. In May 2016, the FASB issued guidance addressing the presentation of sales and other similar taxes collected from customers, providing clarification of the collectability criterion assessment, as well as clarifying certain transition requirements.

The Company has been ~~no developments~~analyzing the new standard and the related ASU's across all revenue streams to ~~recently issued~~evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting ~~standards, including~~policies and practices to identify potential differences that would result from applying the ~~expected dates~~requirements under the new standard. The Company is completing contract evaluations and validating the results of ~~adoption~~applying the new revenue guidance and ~~estimated effects on the Company’s condensed financial statements, from those disclosed~~is in the ~~Company’s 2016 Annual Report~~process of finalizing its accounting policies, drafting the new disclosures, quantifying the potential financial adjustment and completing its evaluation of the impact of the accounting and disclosure requirements on ~~Form 10-K.~~business processes, controls and systems. Full implementation will be completed by the end of 2017. The Company expects to adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018.

Note3–SignificantAccountingPolicies

RevenueRecognition

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~~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.

Mikros Systems Corporation

Notes to Condensed Financial Statements

(unaudited)

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~~Company’s software and software-related multiple element arrangements, where customers purchase both software related products and software related services, the Company uses vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. The Company has established VSOE of fair value for the majority of the PCS, professional services, and training. Given the limited number of sales related to this software, and the fact that the Company does not sell the PCS element separately, there is no VSOE currently available to bifurcate the PCS element from the contract. In accordance with Accounting Standards Codification Topic ~~985-605-25-10a,~~985-605-25-10a, the fees earned from sale of licenses to which the only undelivered element is the PCS, are recognized ratably over the life of the contract. Revenues from the sale of software licenses and maintenance for the three and nine months ended ~~March 31,~~September 30, 2017 and 2016 were ~~$7,500~~$10,000 and ~~$27,750,~~$10,695 and $22,500 and $72,196, respectively. At ~~March 31,~~September 30, 2017 and December 31, 2016, deferred revenues amounted to $0$30,000 and ~~$7,500,~~$7,500, respectively.

~~Mikros Systems Corporation~~

~~Notes to Condensed Financial Statements~~

~~(unaudited)~~

Unbilled revenue reflects work performed, but not billed at the time, per contractual requirements. As of ~~March 31,~~September 30, 2017 and December 31, 2016, the Company had unbilled revenues of ~~$218,261~~$226,130 and ~~$235,421,~~$235,421, respectively which are recorded within receivables on government contracts in the Company’s balance sheet. Billings to customers in excess of revenue earned are classified as advanced billings, and shown as a liability. As of ~~March 31,~~September 30, 2017 and December 31, 2016, there were no advanced billings.

WarrantyExpense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during such warranty period. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, expected and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the three months ended ~~March 31,~~September 30, 2017 and 2016, the Company recognized a ~~net~~ warranty ~~(recovery) expense, which is a component~~benefit of $0 and $65,500, respectively, and for the ~~Company’s cost of sales of $(141,300)~~ nine months ended September 30, 2017 and ~~$(20,801), respectively. Since the inception of the ADEPT IDIQ contract in March 2010,~~2016, the Company ~~has delivered 189 ADEPT units.~~recognized a warranty benefit of $238,967 and $86,301, respectively. As of ~~March 31,~~September 30, 2017, ~~there are 26~~no ADEPT units ~~that~~ remain under the limited warranty coverage.

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

September 30, 2017

December 31, 2016

Balance, beginning of the period
$ 240,980 $ 359,654
Provision for product warranty
- 1,800
Product warranty expirations
(238,967 ) (86,301 )
Product warranty costs paid
(2,013 ) (34,173 )
Balance, end of the period
$ - $ 240,980

March 31, 2017

December 31, 2016

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

Mikros Systems Corporation
Notes to Condensed Financial Statements
(unaudited)

Research and Development Expense

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

Three months ended March 31,

2017

2016

Salaries
$ 39,606 $ 19,552
Other costs
2,189 1,345
$ 41,795 $ 20,897

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Salaries
$ 68,158 $ 12,288 $ 159,237 $ 49,292
Other costs
12,193 1,600 39,645 9,852
$ 80,351 $ 13,888 $ 198,882 $ 59,144

~~Mikros Systems Corporation~~
~~Notes to Condensed Financial Statements~~
~~(unaudited)~~Intangible Assets

The~~Intangible Assets~~
~~The~~ majority of the Company’s intangible assets isconsists of 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 and nine months ended ~~March 31,~~September 30, 2017 and 2016, amortization expense related to the Company’s license amounted to ~~$5,250~~$5,250 and ~~$5,250,~~$5,250 and $15,750 and $15,750, respectively, and are included in general and administrative expenses on the ~~Condensed~~ Statements of ~~Operations~~Income and Comprehensive Income.

Note 4–IncomePerShare

~~Net~~Net income per common share information is as follows:

	Three Months Ended,
	March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2017			2016
Basic earnings per common share:
Net (loss) income allocable to common shareholders		90,307			1,846
Net income							$	29,005		$	20,726		$	195,537		$	30,559
Discount upon exchange of Preferred Stock, net of related fees								-			3,275			-			1,106,872
								29,005			24,001			195,537			1,137,431
Portion allocable to common shareholders		100.0	%		99.2	%		100.0	%		100.0	%		100.0	%		99.5	%
Net income allocable to common shareholders		90,307			1,831
Net income available to common shareholders							$	29,005		$	24,001		$	195,537		$	1,131,744

Weighted average basic shares outstanding		35,430,119			32,030,138			35,555,742			32,419,016			35,246,893			32,048,486

Basic (loss) income per common share	$	-		$	-		$	-		$	-		$	0.01		$	0.04

Dilutive earnings per common share:
Net (loss) income allocable to common shareholders		90,307			1,831
Net income allocable to common shareholders							$	29,005		$	24,001		$	195,537		$	1,131,744
Add: undistributed earnings allocated to participating securities		-			15			-			-			-			5,687
Numerator for diluted earnings per common share		90,307			1,846			29,005			24,001			195,537			1,137,431

Weighted average shares outstanding - basic		35,430,119			32,030,138			35,555,742			32,419,016			35,246,893			32,048,486
Diluted effect:
Stock options		71,523			14,000			82,200			10,316			75,400			46,827
Unvested restricted stock		141,750			1,818
Unvested restricted stock units								224,263			6,087			202,564			5,263
Conversion equivalent of dilutive Series B Convertible Preferred Stock		-			3,307,299			-			429,294			-			2,194,224
Conversion equivalent of dilutive Convertible Preferred Stock		-			255,000			-			-			-			155,420
Weighted average dilutive shares outstanding		35,643,392			35,608,255			35,862,205			32,864,713			35,524,857			34,450,220

Dilutive (loss) income per common share	$	-		$	-
Dilutive income per common share							$	-		$	-		$	0.01		$	0.03

MikrosSystemsCorporation

Notes to Condensed Financial Statements

(unaudited)

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

Three Months Ended,

March 31,

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

2017

2016

Numerator:

Weighted average participating common shares

35,430,119

32,030,138

35,555,742

32,419,016

35,246,893

32,048,486

Denominator:

Weighted average participating common shares

35,430,119

32,030,138

35,555,742

32,419,016

35,246,893

32,048,486

Add: Weighted average shares of Convertible Preferred Stock

255,000

155,420

Weighted average participating shares

35,430,119

32,285,138

35,555,742

32,419,016

35,246,893

32,203,906

Portion allocable to common shareholders

100.0

99.2

100.0

99.5

Diluted net income per share for the three and nine months ended ~~March 31,~~September 30, 2017 and 2016 does not reflect the following potential common shares, as the effect would be antidilutive.

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Stock options
- 610,000 - 610,000

Unvested restricted stock
60,000 - 60,000 -

Three Months Ended,

March 31,

2016

2015

Stock options
335,000 610,000

Unvested restricted stock
30,000 -

Note~~Note~~ 5 – Income Tax Matters

The Company conducts an on-going analysis to review its net deferred tax asset and the need for a related valuation allowance. As a result of this analysis and the actual results of operations, the ~~Company has decreased its~~ net deferred tax assets decreased by ~~$35,169~~$63,260 and ~~$1,381~~$12,940 during the ~~three~~nine months ended ~~March 31,~~September 30, 2017 and 2016, respectively. The change in deferred tax assets is attributable to the reversal of various book/tax ~~differences.~~

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

Note~~Note~~ 6 – Stock-Based Compensation

~~On January 30,~~ During 2017, the Company issued ~~30,000~~70,000 shares of restricted stock with a weighted average fair value of ~~$0.37~~$0.46 per share. As of ~~March 31,~~September 30, 2017, there was ~~$11,100~~$29,740 of unrecognized stock-based compensation expense related to the restricted stock issued ~~in January~~ during 2017, which will be recognized in future periods. During the ~~three~~nine months ended ~~March 31,~~September 30, 2017, ~~22,000~~67,000 options were exercised for proceeds amounting to ~~$3,350.~~$12,350. The intrinsic value of the options as of ~~March 31,~~September 30, 2017 is ~~$40,530.~~$56,550.

~~The~~During the three and nine months ended September 30, 2017 and 2016, the Company recognized stock-based compensation expense ~~for restricted stock~~ of ~~$2,639~~$3,571 and ~~$636 for the three months ended March 31, 2017~~$614 and ~~2016,~~$9,782 and $1,864, respectively.

CAUTIONARY~~CAUTIONARY~~ STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” These forward- looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward- looking statements include: changes in business conditions; a decline or redirection of the U.S. defense budget; the termination of any contracts with the U.S. Government; changes in our sales strategy and product development plans; changes in the marketplace; continued services of our executive management team; our limited marketing experience; competition between us and other companies seeking Small Business Innovative Research (“SBIR”) grants; competitive pricing pressures; market acceptance of our products under development; delays in the development of products; our ability to adequately integrate our ~~new~~ software offerings into our business model, our ability to develop and market solutions for commercial customers, numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature; statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.

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

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

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

●

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

●

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

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

~~Product Portfolio~~

Product Portfolio

Adaptive Diagnostic Electronic Portable Testset ~~(ADEPT®)~~(ADEPT).ADEPT is an automated maintenance workstation designed to significantly reduce the time required to align the AN/SPY-1 Radar System aboard U.S. Navy Aegis cruisers and destroyers, while optimizing system performance and readiness. ADEPT Systems are currently deploying on all Aegis CG and DDG platforms to support the AN/SPY1 radar system. ADEPT represents an innovative approach to Navy shipboard maintenance, integrating modular instrumentation cards in a rugged enclosure with an onboard computer, input and output devices, networking hardware, removable hard drives, and a touch-screen display. A custom software application provides the user interface and integrates the hardware with a database that stores user information, instrument readings, maintenance requirements, and training aids. ADEPT is designed to be adapted to other complex shipboard systems, and provide integrated distance support capabilities for remote diagnostics and troubleshooting by shore-based Navy experts.

Since the system uses commercial instrument case and modules, ADEPT units can be modified to support both preventative maintenance and condition-based maintenance of other radars and complex electronic systems in military or commercial applications. 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 the date of this report, we have delivered a total of ~~189~~ 194 ADEPT units.

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

A pilot version of ADSSS has been deployed on the LCS Class since 2014. Development of the production system is ongoing and initial shipboard testing was completed in 2016. In July 2017, we installed the first ADSSS system on the LCS Class. We expect ADSSS to be used on both variants of the LCS, currently planned to be at least 32 ships. ADSSS, with its remote monitoring and prognostics capabilities, has also generated interest in other ship classes, including Aegis, and we are currently pursuing several related opportunities.

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

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

Government Contracts

On March 18, 2010, we were awarded and entered into a multi-year IDIQ contract with the Naval Surface Warfare Center related to our ADEPT product. The contract provided for the purchase and sale of up to $26 million of ADEPT units and related engineering and logistics support. The initial term of the contract was five years, but the period of performance was extended through February 13, 2017, to conclude some development programs.

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

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

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

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

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

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

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

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

In July 2017 and November 2017 we received modifications which added funding to ~~sailors~~our ADEPT IDIQ Contract, for engineering services in the ~~fleet.~~amounts of $0.4 million and $0.1 million, respectively. These awards will allow us to continue to support of the ADEPT product line in the fleet, implement necessary software enhancements, and provide general support of the program.

In August 2017 we received a modification to our ADEPT sustainment delivery order, adding $0.5 million to allow our M&D Center in Largo, Florida to continue providing bi-annual sustainment services for units cycling through the depot center from the fleet. The sustainment efforts include implementing modifications of existing units (54 in total) awaiting fielding.

In September 2017 we received a delivery order in the amount of $2.4 million for the production and delivery of ADEPT units under our Phase III IDIQ contract at NSWC Crane. These new units will continue our fleet support on Aegis cruisers and destroyers in the U.S. Navy.

Key Performance Indicator

As substantially all of our revenue is derived from contracts with the federal government, our key performance indicator is the dollar volume of contracts and delivery orders awarded to us under our IDIQ contracts. Increases in the number and value of contracts awarded will generally result in increased revenues in future periods and, assuming relatively stable variable costs associated with our fulfilling such awards, increased profits in future periods. The timing of such awards is uncertain as we sell to federal government agencies where the process of obtaining such awards can be lengthy and at times uncertain. As the majority of our revenue ~~for the three months ended March 31, 2017,~~in 2016, and expected revenue ~~for the next nine months of~~in 2017, is or will be from sales of ADEPT units and ADSSS systems under our IDIQ ~~contracts,~~contracts, continued generation of delivery orders and our ability to expand the market and potential customer base for ADEPT units will be a key indicator of future revenue. ADEPT units must be serviced and calibrated every two years. Accordingly, as we continue to increase the installed base of ADEPT units and expand the units to other radar systems, we expect to generate future recurring maintenance and service revenue.

Outlook

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

With regard to commercial markets, our Diagnostics Profiler and Prognostics Framework software offerings complement our hardware products and allow us to provide complete hardware/software solutions for advanced maintenance applications. Current customers for these systems include major multinational corporations such as HP, which recently extended our Diagnostic Profiler software support with for a fifth year. We continue to receive repeat orders from these customers to support their applications. We plan to provide “condition-based maintenance” systems for applications such as FAA radar surveillance and support systems, power distribution and utilities infrastructure, commercial shipping, cooling and environmental systems, and other “complex distributed systems” to commercial customers. ~~Customers~~In that regard, we are currently developing a condition-based maintenance solution for ~~these systems, include major multinational corporations.~~heating ventilation, air conditioning and refrigeration (HVAC) equipment based on our proprietary Prognostics Framework solution. We have ~~received several repeat orders from these customers and continue~~deployed two active pilot systems that are providing key maintenance data on a daily basis to ~~support their applications.~~service technicians.

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

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

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

Changes to Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. As of ~~March 31,~~September 30, 2017, there have been no changes to such critical accounting policies and estimates.

Results of Operations

~~Results of Operations~~

ThreeMonthsEnded ~~March 31,~~September 30, 2017and2016

We generated revenues of ~~$1,754,973~~$1,551,620 during the three months ended ~~March 31,~~September 30, 2017 compared to ~~$987,929~~$1,180,491 during the three months ended ~~March 31,~~September 30, 2016, an increase of ~~$767,044,~~$371,129, or ~~78%~~31%. The increase was due primarily ~~due~~ to a production order for 11 ADEPT units in February 2017 and the receipt of ~~six~~ additional contracts for engineering services, support and repairs and calibration services amounting to ~~$584,537.~~$3,355,938.

Cost of sales consists of direct contract costs including labor, material, subcontracts, warranty expense for ADEPT units that have been delivered, travel, and other direct costs. Cost of sales for the three months ended ~~March 31,~~September 30, 2017 was ~~$651,536~~$636,128 compared to ~~$324,328~~$446,810 for the three months ended ~~March 31,~~September 30, 2016, an increase of ~~$327,208~~$189,318 or ~~101%~~42%. The increase was due primarily ~~due~~ to the receipt of a production order for 11 ADEPT units in February 2017 ~~in addition to~~and the receipt of ~~six~~four additional contracts for engineering services, support and repairs and calibration services. As a percentage of revenue, cost of sales ~~increased to 37%~~was 41% of revenues for the three months ended ~~March 31,~~September 30, 2017 as compared to ~~33%~~38% of revenues for the three months ended ~~March 31,~~September 30, 2016. The increase ~~was primarily~~is due to ~~the change of the mix of~~an increase in production costs ~~incurred in 2017 specifically, increases in~~and other direct ~~labor, material and subcontract costs related to engineering service contracts awarded in the first quarter of 2017 which were offset by the expiration of warranty reserves.~~costs.

The majority of our engineering costs consist of (i) salary, wages and related fringe benefits paid to engineering employees, (ii) rent-related costs, and (iii) consulting fees paid to engineering consultants. As the nature of these costs benefit the entire organization and all research and development efforts, and their benefit cannot be identified with a specific project or contract, these engineering costs are classified as part of “engineering overhead” and included in operating expenses. Engineering costs for the three months ended ~~March 31,~~September 30, 2017 were ~~$517,180~~$530,477 compared to ~~$323,913~~$421,296 for the three months ended ~~March 31,~~September 30, 2016, an increase of ~~$193,267,~~$109,181, or ~~60%~~26%. The increase was due to significant increases in fringe benefits and engineering salaries due to the hiring of six additional employees, recruiting costs, travel and subsistence expenses, engineering consulting costs, and incentive compensation.

General and administrative expenses consist primarily of salary, intellectual property, consulting fees and related costs, professional fees, business insurance, franchise tax, SEC compliance costs, travel, and unallowable expenses (representing those expenses for which the government will not reimburse ~~us)~~us, including independent research and development (IR&D) which consists of research and development expenses unrelated to our defense contracts). General and administrative costs for the three months ended ~~March 31,~~September 30, 2017 were ~~$408,903~~$379,407 compared to ~~$336,148~~$261,528 for the three months ended ~~March 31,~~September 30, 2016, an increase of ~~$72,755,~~$117,879, or ~~22%~~45%. The increase was due primarily to increases in ~~Independent Research & Development (IR&D)~~ salaries, incentive compensation, research and development costs, and professional fees.

At ~~March 31,~~September 30, 2017, we estimated our annual effective tax rate for 2017 to be ~~49%~~46%. We recognized a tax ~~expense~~benefit of ~~$87,775~~$(22,695) for the three months ended ~~March 31,~~September 30, 2017 primarily due to ~~expected net income for the remainder of 2017.~~stock compensation related tax deductions and tax credits. At ~~March 31,~~September 30, 2017, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

Nine~~Liquidity~~MonthsEndedSeptember 30, 2017and2016

We generated revenues of $5,047,456 during the nine months ended September 30, 2017 compared to $3,146,792 during the nine months ended September 30, 2016, an increase of $1,900,664, or 60%. The increase was due primarily to a production order for 11 ADEPT units in February 2017 and the receipt of ten additional contracts for engineering services, support and repairs and calibration services amounting to $6,756,321.

Cost of sales for the nine months ended September 30, 2017 was $1,909,246 compared to $1,120,664 for the nine months ended September 30, 2016, an increase of $788,582 or 70%. The increase was due primarily to the receipt of a production order for 11 ADEPT units in February 2017 and the receipt of ten additional contracts for engineering services, support and repairs, and calibration services. As a percentage of revenue, cost of sales was 38% for the nine months ended September 30, 2017 as compared to 36% of revenues for the nine months ended September 30, 2016. The increase is due to an increase in production costs and other direct costs.

Engineering costs for the nine months ended September 30, 2017 were $1,587,069 compared to $1,058,058 for the nine months ended September 30, 2016, an increase of $529,011, or 50%. The increase was due to significant increases in fringe benefits and engineering salaries due to the hiring of six additional employees, recruiting costs, travel and subsistence expenses, engineering consulting costs and incentive compensation.

General and administrative costs for the nine months ended September 30, 2017 were $1,218,694 compared to $894,430 for the nine months ended September 30, 2016, an increase of $324,264, or 36%. The increase was due primarily to increases in salaries, incentive compensation, research and development costs, and professional fees.

At September 30, 2017, we estimated our annual effective tax rate for 2017 to be 42%. We recognized a tax expense of $139,064 for the nine months ended September 30, 2017 primarily due to expected net income for the remainder of 2017. At September 30, 2017, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

LiquidityandCapitalResources

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

During the ~~three~~nine months ended ~~March 31,~~September 30, 2017, net cash provided by operations was ~~$497,615~~$302,293 compared to net cash used in operations of ~~$609,580~~$965,768 during the ~~three~~nine months ended ~~March 31,~~September 30, 2016. The increase was due primarily ~~due~~ to an increase in net income of ~~$88,461~~$164,978 and the timing of receipts and payments related to our operating assets and liabilities.

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

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

Off-BalanceSheetArrangements

As of ~~March 31,~~September 30, 2017, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off- balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Item~~Item~~4.ControlsandProcedures.

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,~~Chief Executive Officer, who serves as our principal executive officer and principal financial officer. Based upon that evaluation, our ~~president~~Chief Executive Officer concluded that as of ~~March 31,~~September 30, 2017, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) that such information is accumulated and communicated to management, including our president, in order to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d- 15(f)) that occurred during the fiscal quarter ended ~~March 31,~~September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART~~PART~~ II. OTHER INFORMATION

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

During the quarter ended ~~March 31,~~September 30, 2017, we issued ~~22,000~~5,000 shares of common stock to ~~certain employees and consultants~~an employee upon exercise of options in consideration of cash payment of ~~$3,350.~~$1,000. The forgoing shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

During the quarter ended September 30, 2017, we issued 10,000 shares of restricted common stock to a new employee which vest in equal annual installments over a five year period. The forgoing shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

Item 6.Exhibits

	No.	Description

	3.1	~~Restated Certificate~~Amendment to the By-laws of ~~Incorporation~~Mikros Systems Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form ~~8-k ,~~8-K filed with the SEC on ~~February 3,~~July 28, 2017)

10.1	Mikros Systems Corporation 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 28, 2017)

10.2	Form of Restricted Stock Award Agreement under the Mikros Systems Corporation 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 28, 2017)

10.3	Form of Stock Option Agreement under the Mikros Systems Corporation 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 28, 2017)

31.1	Certification of principal executive officer and principal financial officer pursuant to Rules 13a-14(a) ~~or 15d- 14(a)~~ of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

	32.1	Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

101.INS	~~101.INS~~	XBRL Instance

101.SCH	~~101.SCH~~	XBRL Taxonomy Extension Schema

	101.CAL	XBRL Taxonomy Extension Calculation

101.DEF	~~101.DEF~~	XBRL Taxonomy Extension Definition

101.LAB	~~101.LAB~~	XBRL Taxonomy Extension Labels

101.PRE	~~101.PRE~~	XBRL Taxonomy Extension Presentation

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~~MIKROS~~ SYSTEMS CORPORATION

November 14, 2017	By:	/s/ Thomas J. Meaney
~~May 15, 2017~~	~~By:~~	~~/s/ Thomas J. Meaney~~


		Thomas J. Meaney
		~~Thomas J. Meaney~~
		~~President~~Chief Executive Officer and Chief Financial Officer

	September 30, 2017			December 31, 2016
Balance, beginning of the period	$	240,980		$	359,654
Provision for product warranty		-			1,800
Product warranty expirations		(238,967	)		(86,301	)
Product warranty costs paid		(2,013	)		(34,173	)
Balance, end of the period	$	-		$	240,980

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