mti_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
x |
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
|
|
ACT OF
1934 |
|
|
FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2010 |
|
|
OR |
|
o |
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
|
|
ACT OF
1934 |
FOR THE TRANSITION PERIOD FROM ____
TO ______
______________
Mechanical Technology, Incorporated
(Exact name of registrant as
specified in its charter)
______________
New
York |
0-6890 |
14-1462255 |
(State or Other
Jurisdiction |
(Commission File
Number) |
(IRS
Employer |
of
Incorporation) |
|
Identification
No.) |
431 New
Karner Road, Albany, New York 12205
(Address of registrant’s principal
executive office)
(518) 533-2200
(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
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
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 during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). Yes o No o
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 definition
of “large accelerated filer”, “accelerated filer”, and “smaller reporting
company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
o |
Accelerated filer o |
Non-accelerated filer
o |
Smaller reporting company
x |
(Do not check if a small
reporting company) |
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12B-2 of the Act).
Yes o No x
The number of shares of
common stock, par value of $0.01 per share, outstanding as of August 13, 2010
was 4,771,658.
MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL
INFORMATION |
2 |
|
|
Item 1. Financial
Statements |
2 |
|
|
Condensed Consolidated Balance Sheets as of December 31, 2009 and
June 30, 2010 (Unaudited) |
2 |
|
|
Condensed Consolidated Statements of Operations
(Unaudited) |
|
For the Three and Six Months Ended June 30, 2009 and
2010 |
3 |
|
|
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
and Comprehensive Loss (Unaudited) |
|
For the Six Months Ended June 30, 2009 and 2010 |
4 |
|
|
Condensed Consolidated Statements of Cash Flows
(Unaudited) |
|
For the Six Months Ended June 30, 2009 and 2010 |
5 |
|
|
Notes to Condensed Consolidated Financial Statements
(Unaudited) |
6 |
|
|
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
17 |
|
|
Item 4. Controls and
Procedures |
24 |
|
|
PART II. OTHER
INFORMATION |
24 |
|
|
|
|
Item
1. |
|
Legal
Proceedings |
24 |
|
|
|
|
Item
1A. |
|
Risk
Factors |
25 |
|
|
|
|
Item 5. |
|
Other
Information |
26 |
|
|
|
|
Item
6. |
|
Exhibits |
26 |
|
|
SIGNATURES |
27 |
1
PART I. FINANCIAL
INFORMATION
Item 1. Financial Statements
Mechanical Technology, Incorporated
and Subsidiaries
Condensed Consolidated Balance
Sheets as of December 31, 2009 and June 30, 2010 (Unaudited)
(Dollars in
thousands) |
|
December 31, |
|
June 30, |
|
|
2009 |
|
2010 |
Assets |
Current
Assets: |
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
$ |
785 |
|
|
$ |
811 |
|
Accounts receivable, less
allowance for doubtful accounts ($92 in 2009 and 2010) |
|
|
1,142 |
|
|
|
941 |
|
Inventories, net |
|
|
789 |
|
|
|
747 |
|
Prepaid expenses and other
current assets |
|
|
166 |
|
|
|
239 |
|
Total Current Assets |
|
|
2,882 |
|
|
|
2,738 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net: |
|
|
859 |
|
|
|
628 |
|
Total Assets |
|
$ |
3,741 |
|
|
$ |
3,366 |
|
|
Liabilities and Stockholder’s
Equity (Deficit) |
Current
Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
323 |
|
|
$ |
501 |
|
Accrued liabilities |
|
|
1,290 |
|
|
|
1,355 |
|
Deferred revenue |
|
|
16 |
|
|
|
16 |
|
Income taxes payable |
|
|
20 |
|
|
|
20 |
|
Total Current Liabilities |
|
|
1,649 |
|
|
|
1,892 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities: |
|
|
|
|
|
|
|
|
Derivative liability |
|
|
70 |
|
|
|
52 |
|
Total Long-Term-Liabilities |
|
|
70 |
|
|
|
52 |
|
Total Liabilities |
|
|
1,719 |
|
|
|
1,944 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
(Deficit): |
|
|
|
|
|
|
|
|
Common stock, par value $0.01
per share, authorized 75,000,000; 5,776,750 issued in |
|
|
|
|
|
|
|
|
both 2009 and 2010 |
|
|
58 |
|
|
|
58 |
|
Paid-in-capital |
|
|
133,286 |
|
|
|
134,316 |
|
Accumulated deficit |
|
|
(120,724 |
) |
|
|
(122,395 |
) |
Common stock in treasury, at
cost, 1,005,092 shares in both 2009 and 2010 |
|
|
(13,754 |
) |
|
|
(13,754 |
) |
Total MTI stockholders’ deficit |
|
|
(1,134 |
) |
|
|
(1,775 |
) |
Noncontrolling
interest |
|
|
3,156 |
|
|
|
3,197 |
|
Total Equity |
|
|
2,022 |
|
|
|
1,422 |
|
Total Liabilities and Stockholders’ Equity |
|
$ |
3,741 |
|
|
$ |
3,366 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
2
Mechanical Technology, Incorporated
and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three and Six Months Ended June 30, 2009 and
2010
(Dollars in thousands, except
per share) |
|
Three Months
Ended |
|
Six Months
Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2010 |
|
2009 |
|
2010 |
Product revenue |
|
$ |
1,310 |
|
|
$ |
1,627 |
|
|
$ |
2,859 |
|
|
$ |
2,895 |
|
Funded research and
development revenue |
|
|
1,059 |
|
|
|
418 |
|
|
|
1,059 |
|
|
|
774 |
|
Total revenue |
|
|
2,369 |
|
|
|
2,045 |
|
|
|
3,918 |
|
|
|
3,669 |
|
Operating costs and
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
revenue |
|
|
628 |
|
|
|
726 |
|
|
|
1,294 |
|
|
|
1,271 |
|
Research and product
development expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded research and product development |
|
|
1,088 |
|
|
|
827 |
|
|
|
2,122 |
|
|
|
1,597 |
|
Unfunded research and product development |
|
|
308 |
|
|
|
345 |
|
|
|
736 |
|
|
|
705 |
|
Total research and product
development expenses |
|
|
1,396 |
|
|
|
1,172 |
|
|
|
2,858 |
|
|
|
2,302 |
|
Selling, general and
administrative expenses |
|
|
754 |
|
|
|
850 |
|
|
|
1,645 |
|
|
|
2,706 |
|
Operating loss |
|
|
(409 |
) |
|
|
(703 |
) |
|
|
(1,879 |
) |
|
|
(2,610 |
) |
Interest expense |
|
|
(59 |
) |
|
|
— |
|
|
|
(101 |
) |
|
|
— |
|
Gain on derivatives |
|
|
14 |
|
|
|
16 |
|
|
|
32 |
|
|
|
18 |
|
Other (expense) income,
net |
|
|
2 |
|
|
|
(13 |
) |
|
|
23 |
|
|
|
(28 |
) |
Loss before income taxes and
non-controlling interest |
|
|
(452 |
) |
|
|
(700 |
) |
|
|
(1,925 |
) |
|
|
(2,620 |
) |
Income tax benefit |
|
|
5 |
|
|
|
— |
|
|
|
199 |
|
|
|
— |
|
Net loss, net of tax |
|
|
(447 |
) |
|
|
(700 |
) |
|
|
(1,726 |
) |
|
|
(2,620 |
) |
Plus: Net loss attributed to
noncontrolling interest |
|
|
3 |
|
|
|
263 |
|
|
|
38 |
|
|
|
949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to
MTI |
|
$ |
(444 |
) |
|
$ |
(437 |
) |
|
$ |
(1,688 |
) |
|
$ |
(1,671 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Share attributed to
MTI (Basic and Diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share attributed to
MTI |
|
$ |
(.09 |
) |
|
$ |
(.09 |
) |
|
$ |
(.35 |
) |
|
$ |
(.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
3
MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES
Condensed Consolidated Statements of
Stockholders’ Equity (Deficit) and Comprehensive Loss (Unaudited)
For the Six
Months Ended June 30, 2009 and 2010
(Dollars in
thousands) |
|
Six Months
Ended |
|
|
June 30, |
|
|
2009 |
|
2010 |
Common Stock |
|
|
|
|
|
|
|
|
Balance, beginning |
|
$ |
58 |
|
|
$ |
58 |
|
Balance, ending |
|
$ |
58 |
|
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
Paid-In
Capital |
|
|
|
|
|
|
|
|
Balance, beginning |
|
$ |
132,781 |
|
|
$ |
133,286 |
|
Stock-based compensation |
|
|
302 |
|
|
|
1,030 |
|
Balance, ending |
|
$ |
133,083 |
|
|
$ |
134,316 |
|
|
|
|
|
|
|
|
|
|
Accumulated
Deficit |
|
|
|
|
|
|
|
|
Balance, beginning |
|
$ |
(117,570 |
) |
|
$ |
(120,724 |
) |
Net loss |
|
|
(1,688 |
) |
|
|
(1,671 |
) |
Balance, ending |
|
$ |
(119,258 |
) |
|
$ |
(122,395 |
) |
|
|
|
|
|
|
|
|
|
Treasury
Stock |
|
|
|
|
|
|
|
|
Balance, beginning |
|
$ |
(13,754 |
) |
|
$ |
(13,754 |
) |
Balance, ending |
|
$ |
(13,754 |
) |
|
$ |
(13,754 |
) |
|
|
|
|
|
|
|
|
|
Noncontrolling Interest
(NCI) |
|
|
|
|
|
|
|
|
Balance, beginning |
|
$ |
11 |
|
|
$ |
3,156 |
|
Equity contribution |
|
|
— |
|
|
|
990 |
|
Net loss attributed to NCI |
|
|
(38 |
) |
|
|
(949 |
) |
Balance, ending |
|
$ |
(27 |
) |
|
$ |
3,197 |
|
|
|
|
|
|
|
|
|
|
Total Stockholders’
Equity |
|
|
|
|
|
|
|
|
Balance, ending |
|
$ |
102 |
|
|
$ |
1,422 |
|
|
|
|
|
|
|
|
|
|
Total Comprehensive
(Loss) |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,688 |
) |
|
$ |
(1,671 |
) |
Other comprehensive (loss) |
|
|
— |
|
|
|
— |
|
Total comprehensive
(loss) |
|
$ |
(1,688 |
) |
|
$ |
(1,671 |
) |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
4
MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, 2009 and
2010
(Dollars in
thousands) |
|
Six Months Ended June
30, |
|
|
2009 |
|
2010 |
Operating
Activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,726 |
) |
|
$ |
(2,620 |
) |
Adjustments to reconcile net
loss to net cash used by operating activities: |
|
|
|
|
|
|
|
|
Gain on derivatives |
|
|
(32 |
) |
|
|
(18 |
) |
Depreciation and
amortization |
|
|
338 |
|
|
|
257 |
|
Stock based
compensation |
|
|
302 |
|
|
|
1,030 |
|
Changes in operating assets
and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,216 |
) |
|
|
201 |
|
Inventories |
|
|
236 |
|
|
|
42 |
|
Prepaid expenses and other
current assets |
|
|
(95 |
) |
|
|
(73 |
) |
Accounts payable |
|
|
238 |
|
|
|
178 |
|
Income taxes payable |
|
|
(213 |
) |
|
|
— |
|
Deferred revenue |
|
|
2 |
|
|
|
— |
|
Accrued liabilities |
|
|
(235 |
) |
|
|
65 |
|
Accrued liabilities – related
parties |
|
|
101 |
|
|
|
— |
|
Net cash used by operating
activities |
|
|
(2,300 |
) |
|
|
(938 |
) |
|
|
|
|
|
|
|
|
|
Investing
Activities |
|
|
|
|
|
|
|
|
Purchases of property, plant
and equipment |
|
|
— |
|
|
|
(26 |
) |
Net cash used by investing
activities |
|
|
— |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities |
|
|
|
|
|
|
|
|
Net borrowings on related
party debt |
|
|
1,045 |
|
|
|
— |
|
Proceeds from capital raise
and warrants issued |
|
|
— |
|
|
|
990 |
|
Net cash used in financing
activities |
|
|
1,045 |
|
|
|
990 |
|
Increase (Decrease) in cash
and cash equivalents |
|
|
(1,255 |
) |
|
|
26 |
|
Cash and cash equivalents -
beginning of period |
|
|
1,662 |
|
|
|
785 |
|
Cash and cash equivalents -
end of period |
|
$ |
407 |
|
|
$ |
811 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
5
MECHANICAL TECHNOLOGY,
INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
Notes to Condensed Consolidated
Financial Statements (Unaudited)
1. Description of Business
Mechanical
Technology, Incorporated, (“MTI” or the “Company”), a New York corporation, was
incorporated in 1961. MTI operates in two segments, the New Energy segment,
which is conducted through MTI MicroFuel Cells Inc. (“MTI Micro”), a majority
owned subsidiary, and the Test and Measurement Instrumentation segment, which is
conducted through MTI Instruments, Inc. (“MTI Instruments”), a wholly owned
subsidiary.
MTI Micro
was incorporated in Delaware on March 26, 2001, and is developing Mobion®, a handheld energy-generating
device to replace current lithium-ion and similar rechargeable battery systems
in many handheld electronic devices for the military and consumer markets.
Mobion® handheld generators are based on
direct methanol fuel cell (DFMC) technology, which has been recognized as
enabling technology for advanced portable power sources by the scientific
community and industry analysts. As the need for advancements in portable power
increases, MTI Micro is developing Mobion® as a solution for advancing current
and future electronic device power needs and addressing the multi-billion dollar
portable electronics market. As of June 30, 2010, the Company owned
approximately 55.36% of MTI Micro’s outstanding common stock.
MTI
Instruments was incorporated in New York on March 8, 2000. MTI Instruments is a
worldwide supplier of precision non-contact physical measurement solutions,
condition based monitoring systems, portable balance equipment and wafer
inspection tools. MTI Instrument’s products use a comprehensive array of
technologies to solve complex, real world applications in numerous industries
including manufacturing, semiconductor, solar, commercial and military aviation,
automotive and data storage. Our products consist of electronic gauging
instruments for position, displacement and vibration application within the
design, manufacturing/production, test and research market; wafer
characterization of semi-insulating and semi-conducting wafers within both the
semiconductor and solar industries; and engine vibration analysis systems for
both military and commercial aircraft.
2. Liquidity and Going Concern
The Company
has incurred significant losses as it continued to fund the direct methanol fuel
cell product development and commercialization programs of its majority owned
subsidiary, MTI Micro, and had a consolidated accumulated deficit of $122
million and working capital of $846 thousand at June 30, 2010. Because of these
losses, limited current cash and cash equivalents, negative cash flows and
accumulated deficit, there is substantial doubt about the Company’s ability to
continue as a going concern. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
At present,
the Company does not expect to continue to fund MTI Micro on a long-term basis.
The Company has projected positive cash flows to meet future cash requirements
for operations and capital expenditures exclusive of MTI Micro, and has cash and
cash equivalents of $811 thousand at June 30, 2010. Management believes that MTI
Instruments will continue to generate positive cash flows and be able to fund
its current operations. However, no assurance can be provided regarding MTI and
MTI Instrument’s ability to continue as a going concern given the level of
uncertainty involved with the parent company’s operations.
Since the
Company will no longer fund MTI Micro on a long-term basis, the subsidiary has
sought other sources of funding. In September 2008, MTI Micro closed on $2.2
million of funding in the form of convertible secured notes (the “Bridge Notes”)
to investors (the “Bridge Investors”), including MTI, Dr. Walter L. Robb, a
member of the Company’s and MTI Micro’s Boards of Directors, and Counter Point
Ventures Fund II, LP (Counter Point). Counter Point is a venture capital fund
sponsored and managed by Dr. Walter L. Robb. General Electric Pension Trust, an
employee benefit plan trust, is a passive limited partner in Counter Point. In
February 2009, MTI Micro issued additional bridge notes to Counter Point in the
amount of $500 thousand. On April 15, 2009, MTI Micro, Counter Point and an
additional investor agreed to additional bridge notes in the amount $800
thousand to be drawn down in increments not to exceed $165 thousand monthly. The
final principal draw down occurred on December 4, 2009. The Bridge Notes carried
an annual interest rate of 10%. On December 9, 2009, these bridge notes with the
aggregate principal and accrued interest amount of $3,910,510 outstanding were
converted into an aggregate of 55,864,425 shares of Common Stock of MTI Micro
using a conversion price per share of $0.070 (the “Negotiated
Conversion”).
On January
11, 2010, MTI Micro entered into a Common Stock and Warrant Purchase Agreement
(the “Purchase Agreement”) with Counter Point. Through June 30, 2010, $990
thousand has been drawn against this Purchase Agreement. See Note 9 for further
discussion of this transaction.
6
On April
16, 2009, MTI Micro was awarded a cost share funding grant of $2.4 million from
the United States Department of Energy (DOE) as part of DOE’s $41.9 million in
American Recovery and Reinvestment Act funding for fuel cell technology. As of
June 30, 2010, the entire grant has been billed and paid by the DOE. On April
30, 2010, MTI Micro was approved for an extension of this grant to December 31,
2010, with additional funds available of $594 thousand under this program, of
which $418 thousand has been billed and $176 thousand remains.
On July 28,
2010, MTI was awarded a cost share funding grant of $296 thousand from the New
York State Energy Research and Development Authority (NYSERDA). No funds have
been received to date for this grant.
In order to
continue full commercialization of its micro fuel cell solution, MTI Micro will
need to do one or more of the following to raise additional resources, or reduce
its cash requirements:
-
obtain
additional government or private funding of the Company’s direct methanol fuel
cell research, development, manufacturing readiness and
commercialization;
-
secure
additional debt or equity financing;or
-
further
reduce its current expenditure run-rate.
There is no
guarantee that resources will be available to MTI Micro on terms acceptable to
it, or at all, or that such resources will be received in a timely manner, if at
all, or that MTI Micro will be able to reduce its expenditure run-rate further
without materially and adversely affecting its business. MTI Micro had cash and
cash equivalents as of June 30, 2010 of $136 thousand. Subsequent to June 30,
2010, MTI Micro has drawn down an additional $220 thousand under the Purchase
Agreement with an additional $790 thousand of available borrowing capacity
through the Purchase Agreement. However, the funds available through the
Purchase Agreement are only available to MTI Micro at increments of $330
thousand bi-monthly. MTI Micro’s next available draw down is $110 thousand in
August 2010. In addition, subsequent to June 30, 2010, MTI Micro received $160
thousand from the DOE for billings relative to work performed through June 30,
2010, and has an additional $176 thousand under the extension as work is
performed. In order to conserve cash and extend operations while we pursue any
additional necessary financing, we reduced operating expenses in the first
quarter of 2010. Without other resources, management currently believes it will
have adequate funds to operate MTI Micro through the end of 2010.
3. Basis of Presentation
In the
opinion of management, our Financial Statements reflect all adjustments, which
are of a normal recurring nature, necessary for a fair statement of the results
for the periods presented in accordance with U.S. Generally Accepted Accounting
Principles (GAAP) and with the instructions to Form 10-Q in Article 10 of SEC
Regulation S-X. The results of operations for the interim periods presented are
not necessarily indicative of results for the full year.
Certain
information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) have
been condensed or omitted. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2009.
The
information presented in the accompanying condensed consolidated balance sheet
as of December 31, 2009 has been derived from the Company’s audited consolidated
financial statements but does not include all disclosures required by U.S. GAAP.
All other information has been derived from the Company’s unaudited condensed
consolidated financial statements for the three and six months ended June 30,
2010.
While
preparing the second quarter report for 2010, management identified an error in
the results of operations reported for the three month period ended June 30,
2009. On April 16, 2009, the Company was notified that they received a
government grant from the Department of Energy in the amount of $2.4 million. On
May 13, 2009, the Department of Energy approved that the Company could bill for
expenditures retroactive beginning January 8, 2009. For the six-month period
ended June 30, 2009, the Company appropriately recognized revenue of $1,059
thousand in accordance with the terms of the grant agreement. However, for the
three-month period ended June 30, 2009, the Company reported revenue of $542
thousand related to only the three-month period rather than appropriately
reporting the full amount earned dating back to January 8, 2009. As a result,
the net loss for the three-month period ended June 30, 2009 was overstated by
$517 thousand. The net loss for the six-month period ended June 30, 2009 was
properly reported. The following table shows results of operations for the
three-month period ended June 30, 2009 both as reported and as revised.
7
|
|
As Reported |
|
As Revised
|
Sales |
|
$ |
542 |
|
|
$ |
1,059 |
|
Operating loss |
|
|
(926 |
) |
|
|
(409 |
) |
Net loss attributed to
NCI |
|
|
18 |
|
|
|
3 |
|
Net loss |
|
|
(946 |
) |
|
|
(444 |
) |
EPS |
|
|
(.20 |
) |
|
|
(.09 |
) |
This
revision has no impact on the consolidated Balance Sheet at June 30, 2009 and
the related Statements of Operations and Cash Flows for the sixth-month period
ended June 30, 2009. The revised June 30, 2009 amounts have also been reflected
in the Segment Information disclosure in Note 11 of these financial
statements.
4. Recently Adopted Accounting
Standards
In January
2010, the FASB issued guidance that requires reporting entities to make new
disclosures about recurring or nonrecurring fair-value measurements, including
significant transfers into and out of Level 1 and Level 2 fair-value
measurements and information on purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of Level 3 fair-value measurements. The
guidance is effective for reporting periods beginning after December 15, 2009,
except for Level 3 reconciliation disclosures that are effective for periods
beginning after December 15, 2010. Our adoption of the currently effective
portion of this guidance did not have a material effect on the financial
statements.
5. Accounts Receivable and Allowance
for Doubtful Accounts
Receivable
balances consist of the following at:
(Dollars in
thousands) |
|
|
|
|
Test and |
|
|
|
|
|
|
|
|
Measurement |
|
Consolidated |
|
|
New Energy |
|
Instrumentation |
|
Totals |
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and State
Government |
|
$ |
143 |
|
$ |
— |
|
|
$ |
143 |
|
Commercial |
|
|
— |
|
|
1,091 |
|
|
|
1,091 |
|
Total Accounts
Receivable |
|
|
143 |
|
|
1,091 |
|
|
|
1,234 |
|
Less: Allowance for Doubtful
Accounts |
|
|
— |
|
|
(92 |
) |
|
|
(92 |
) |
Total |
|
$ |
143 |
|
$ |
999 |
|
|
$ |
1,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and State
Government |
|
$ |
160 |
|
|
206 |
|
|
|
366 |
|
Commercial |
|
|
— |
|
|
667 |
|
|
|
667 |
|
Total Accounts
Receivable |
|
|
160 |
|
|
873 |
|
|
|
1,033 |
|
Less: Allowance for Doubtful
Accounts |
|
|
— |
|
|
(92 |
) |
|
|
(92 |
) |
Total |
|
$ |
160 |
|
|
781 |
|
|
|
941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six
months ended June 30, 2009 and 2010, a single commercial customer represented
12.2% and 8.2%, respectively, and a U.S. governmental agency represented 21.2%
and 20.8%, respectively, of the Company’s instrumentation segment product
revenue. As of December 31, 2009 and June 30, 2010, the largest commercial
customer represented 0.0% and 10.3%, respectively, and the U.S. governmental
agency represented 0.0% and 23.4%, respectively, of the Company’s
instrumentation segment accounts receivable.
As of
December 31, 2009 and June 30, 2010, 100% of the accounts receivable of the new
energy segment is due from a U.S. governmental agency.
8
6. Inventories,
net
Inventories, net consist of the following at:
(Dollars in
thousands) |
|
Dec. 31, |
|
June 30, |
|
|
2009 |
|
2010 |
Finished goods |
|
$ |
465 |
|
$ |
224 |
Work in process |
|
|
193 |
|
|
208 |
Raw materials, net |
|
|
131 |
|
|
315 |
|
|
$ |
789 |
|
$ |
747 |
|
|
|
|
|
|
|
7. Income Taxes
The
Company’s effective income tax (expense) rate from operations differed from the
federal statutory rate for each of the three and six months ended June 30 as
follows:
(Dollars in
thousands) |
|
Three Months
Ended |
|
Six Months
Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2010 |
|
2009 |
|
2010 |
Federal statutory tax
rate |
|
34.00 |
% |
|
34.00 |
% |
|
34.00 |
% |
|
34.00 |
% |
State taxes, net of federal
tax effect |
|
6.19 |
|
|
6.14 |
|
|
6.10 |
|
|
6.04 |
|
Change in valuation
allowance |
|
(41.24 |
) |
|
(40.92 |
) |
|
(40.58 |
) |
|
(40.27 |
) |
Minimum State Income Tax YTD –
Estimated |
|
1.11 |
|
|
— |
|
|
0.17 |
|
|
— |
|
Reversal of Uncertain Tax
Position for NYS Settlement |
|
— |
|
|
— |
|
|
10.08 |
|
|
— |
|
Permanent tax difference on
derivative valuation |
|
1.05 |
|
|
0.78 |
|
|
0.57 |
|
|
0.23 |
|
Tax rate |
|
1.11 |
% |
|
0.00 |
% |
|
10.34 |
% |
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
(expense) benefit for the three and six months ended June 30 consists of the
following:
(Dollars in
thousands) |
|
Three Months
Ended |
|
Six Months
Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2010 |
|
2009 |
|
2010 |
Operations before
noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
State |
|
|
5 |
|
|
— |
|
|
199 |
|
|
— |
Total |
|
$ |
5 |
|
$ |
— |
|
$ |
199 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
valuation allowance at December 31, 2009 and June 30, 2010 was $26.4 million and
$27.4 million, respectively, and represents a full valuation allowance. The
valuation allowance reflects the estimate that it is more likely than not that
the net deferred tax assets in excess of deferred tax liabilities may not be
realized.
At June 30,
2010, the Company had unused Federal net operating loss carry forwards of
approximately $66.9 million. Of these carry forwards, $1.3 million represents
windfall tax benefits from stock option transactions, the tax effect of which
are not included in the Company’s net deferred tax assets. Additionally, it is
estimated that $6.69 million of these carryforwards will expire prior to
utilization due to IRC Section 382 limitation described below. This net
operating loss limited by IRC Section 382 is not reflected in the Company’s
deferred tax asset as of June 30, 2010. The Federal net operating loss carry
forwards, if unused, will begin to expire in 2010.
The
Company's and/or its subsidiaries’ ability to utilize their net operating loss
carryforwards may be significantly limited by Section 382 of the Internal
Revenue Code of 1986, as amended, if the Company or any of its subsidiaries
undergoes an “ownership change” as a result of changes in the ownership of the
Company's or its subsidiaries’ outstanding stock pursuant to the exercise of the
warrants or otherwise. A corporation generally undergoes an “ownership change”
when the ownership of its stock, by value, changes by more than 50 percentage
points over any three-year testing period. In the event of an ownership change,
Section 382 imposes an annual limitation on the amount of post-ownership change
taxable income a corporation may offset with pre-ownership change net operating
loss carryforwards and certain recognized built-in losses. As of June 30, 2010,
although no formal Section 382 study has been performed, the Company does not
appear to have had an ownership change for Section 382 purposes. However, as
noted below, it appears that as a result of MTI Micro’s conversion of the Bridge
Notes (combined with the Company’s ownership changes) MTI Micro appears to have
had an ownership change for Section 382 purposes, which places limitations on
the utilization of MTI Micro’s separate company net operating loss
carryforwards.
9
As a result
of the conversion of the Bridge Notes, MTI no longer maintains an 80% or greater
ownership in MTI Micro. Thus, MTI Micro will no longer be included in Mechanical
Technology, Inc. and Subsidiaries' consolidated federal and combined New York
State tax returns, effective December 9, 2009. Additionally, as the result of
conversion, MTI Micro may have experienced a Section 382 ownership change which
subjects MTI Micro's separate company net operating losses to an annual Section
382 limitation.
Pursuant to
the Internal Revenue Service's consolidated tax return regulations (IRS
Regulation Section 1.1502-36), upon MTI Micro leaving the Mechanical Technology,
Inc. and Subsidiaries consolidated group, MTI is permitted to elect to reduce a
portion of its stock tax basis in MTI Micro by "reattributing" a portion of MTI
Micro's net operating loss carry forwards to MTI, for an amount equivalent to
its built in loss amount in MTI's investment in MTI Micro's stock.
As the
result of MTI anticipating that it will make this election with its December 31,
2009 tax return, MTI will reattribute approximately $45.2 million of MTI Micro's
net operating losses (reducing its tax basis in MTI Micro's stock by the same
amount), leaving MTI Micro with approximately $13 million of separate company
net operating loss carry forwards at the time of conversion of the Bridge Notes.
However, as noted above, as the result of a Section 382 limitation, caused by
the conversion, it is estimated that $6.69 million of these net operating losses
will expire prior to utilization.
As of June
30, 2010, it is estimated that MTI had net operating loss carryforwards of
approximately $52.5 million and MTI Micro has net operating loss carryforwards
of approximately $14.4 million (with a portion, as noted above, being subject to
IRC Section 382 limitation).
On February
2, 2009, the New York State Department of Taxation and Finance notified the
Company that it was no longer going to pursue the issue associated with
potentially not permitting the Company to file combined tax returns for the
period 2002 through 2004. The Company had recorded a $213 thousand long-term
liability for this issue. In settlement of this issue, the Company paid New York
State approximately $19 thousand, and recognized the benefit of the reversal of
this liability of $194 thousand in the first quarter of 2009.
8. Stockholders’ Equity
(Deficit)
Changes in
common shares issued and treasury stock outstanding are as follows:
|
|
Year Ended |
|
Six Months
Ended |
|
|
Dec. 31, 2009 |
|
June 30,
2010 |
Common Shares |
|
|
|
|
Balance, beginning |
|
5,776,750 |
|
5,776,750 |
Balance, ending |
|
5,776,750 |
|
5,776,750 |
|
|
|
|
|
Warrants/
Derivatives
On December
20, 2006, the Company issued warrants to investors to purchase 378,472 shares of
the Company’s common stock at an exercise price of $18.16 per
share.
The Company
held or has outstanding the following derivative financial
instruments:
|
|
Dec. 31, |
|
June 30, |
|
|
|
|
2009 |
|
2010 |
|
Expiration |
Derivatives
issued: |
|
|
|
|
|
|
Warrants, exercisable
beginning June 20, 2007, to purchase the Company’s |
|
|
|
|
|
|
common stock issued to three
investors at a purchase price of $18.16 per |
|
|
|
|
|
|
share |
|
378,472 |
|
378,472 |
|
12/19/2011 |
The
estimated fair value of this warrant at time of issue was determined using a
Black-Scholes Option Pricing model and assumptions similar to those used for
valuing the Company’s employee stock-based compensation.
On January
1, 2009, we adopted a newly issued accounting standard regarding disclosure of
derivative instruments. We recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these instruments
at fair value. The fair value of the derivative is recorded in the “Derivative
liability” line on the financial statements, and is valued quarterly using the
Black-Scholes Option Pricing Model. The significant assumptions used for the
valuations are as follows:
10
|
|
Dec. 31, |
|
June 30, |
|
|
2009 |
|
2010 |
Expected life of option (number
of days) |
|
730 |
|
|
548 |
|
Risk-free interest
rate |
|
1.14 |
% |
|
0.61 |
% |
Expected volatility of
stock |
|
162.7 |
% |
|
184.73 |
% |
Expected dividend
yield |
|
None |
|
|
None |
|
The fair value of the
warrants at December 31, 2009 and June 30, 2010 was $70 thousand and $52
thousand, respectively. Gains on derivatives are included in “Gain on
derivatives” in the Consolidated Statement of Operations. During the six month
periods ending June 30, 2009 and 2010 the Company recognized a gain on
derivatives of $32 thousand and $18 thousand, respectively.
The Company
accounts for derivative instruments and embedded derivative instruments in
accordance with Accounting Standards Codification 815, Derivatives and
Hedging. The standard requires freestanding contracts that are settled in a
company's own stock, including common stock warrants, to be designated as an
equity instrument, asset or a liability. A contract designated as an asset or a
liability must be carried at fair value, with any changes in fair value recorded
in the results of operations. A contract designated as an equity instrument can
be included in equity, with no fair value adjustments required. Based on the
terms and conditions of the warrants discussed above, the instrument does not
qualify to be designated as an equity instrument and is therefore recorded as a
derivative liability.
Reservation of
Shares
The Company
has reserved common shares for future issuance as of June 30, 2010 as
follows:
Stock options
outstanding |
|
707,716 |
Stock options available for
issuance |
|
317,716 |
Warrants outstanding |
|
378,472 |
Number of common shares
reserved |
|
1,403,904 |
|
|
|
On September
19, 2009, the Company amended its 2006 Equity Incentive Plan to increase the
shares authorized for issuance by 350,000 shares.
Loss per
Share
The
following table sets forth the reconciliation of the numerators and denominators
of the basic and diluted per share computations for the three and six months
ended June 30:
(Dollars in thousands, except
shares) |
|
|
Three Months
Ended |
|
Six Months
Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2010 |
|
2009 |
|
2010 |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(444 |
) |
|
$ |
(437 |
) |
|
$ |
(1,688 |
) |
|
$ |
(1,671 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding,
beginning of period |
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
4,771,658 |
|
Less Weighted average
non-vested restricted stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Denominator for basic earnings
per common shares – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares |
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding,
beginning of period |
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
4,771,658 |
|
Less weighted average
non-vested restricted stock due to anti- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dilutive effect |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Denominator for diluted
earnings per common shares – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares |
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
4,771,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Not included
in the computation of earnings per share, assuming dilution for the three and
six months ended June, 2009, were options to purchase 702,864 shares of the
Company’s common stock, warrants to purchase 378,472 shares of the Company’s
common stock, and options to purchase 22,668 shares of MTI Micro’s common stock.
These potentially dilutive items were excluded because the Company incurred a
loss for this period and their inclusion would be anti-dilutive.
Not included
in the computation of earnings per share, assuming dilution for the three and
six months ended June 30, 2010, were options to purchase 707,716 shares of the
Company’s common stock, warrants to purchase 378,472 shares of the Company’s
common stock, and options to purchase 27,520,001 shares of MTI Micro’s common
stock. These potentially dilutive items were excluded because the Company
incurred a loss for this period and their inclusion would be
anti-dilutive.
9. Issuance of Stock, Warrants and
Stock Options by Subsidiary
Common Stock Issued – MTI
Micro
MTI Micro
was formed on March 26, 2001, and as of June 30, 2010, the Company owned
approximately 55.36% of MTI Micro’s outstanding common stock. On January 11,
2010, MTI Micro entered into a Common Stock and Warrant Purchase Agreement (the
“Purchase Agreement”) with Counter Point Ventures Fund II, L.P. (“Counter
Point”). Counter Point is managed by Dr. Walter L. Robb, a member of the Board
of Directors of the Company and MTI Micro, and is a current stockholder of MTI
Micro. Dr. Robb and Counter Point beneficially held approximately 29.5% of the
fully-diluted common stock of MTI Micro of December 31, 2009, and as of June 30,
2010 hold an aggregate of approximately 36.3% of the fully-diluted common stock
of MTI Micro.
Pursuant to
the Purchase Agreement, MTI Micro may issue and sell to Counter Point up to
28,571,429 shares of common stock, par value $0.01 per share (the “Micro Common
Stock”), at a purchase price per share of $0.070, over a period of twelve (12)
months, and warrants (“Warrants”) to purchase shares of Micro Common Stock equal
to 20% of the shares of Micro Common Stock purchased under the Purchase
Agreement at an exercise price of $0.070 per share. The sale and issuance of the
Micro Common Stock and Warrants shall occur over multiple closings (each, a
“Closing”) occurring over two (2) one month closing periods and five (5)
two-month closing periods (each, a “Closing Period”). Four Closings occurred
through June 30, 2010, with MTI Micro raising $990 thousand from the sale of
14,142,857 shares of Micro Common Stock and Warrants to purchase 2,828,571
shares of Micro Common Stock to Counter Point. One Closing occurred on July 19,
2010, with MTI Micro raising an additional $220 thousand from the sale of
3,142,857 shares of Micro Common Stock and Warrants to purchase 628,571 shares
of Micro Common Stock to Counter Point. Subsequent Closings may occur thereafter
at MTI Micro’s sole discretion during the Closing Periods upon delivery of
written notice by MTI Micro to Counter Point of its desire to consummate a
Closing, and Counter Point’s acceptance of such offer under the Purchase
Agreement on the terms agreed upon with MTI Micro. In the event the terms and
conditions of the Purchase Agreement no longer reflect current market conditions
or otherwise, either party may elect not to participate in a Subsequent
Closing(s) or the parties may amend the Purchase Agreement on mutually agreeable
terms with respect to such Subsequent Closing(s). If MTI Micro was to issue and
sell the remainder of the 28,571,429 shares under the Purchase Agreement, and
the remainder of the 5,714,286 warrants under the Purchase Agreement were
exercised, as well as all warrants currently outstanding as detailed below, the
Company would continue to hold an aggregate of 55.8% of the fully-diluted
capital stock of MTI Micro. Further dilution to the Company’s ownership
percentage could occur if and when MTI Micro Stock Options are
exercised.
The
following table represents all MTI Micro common stock shares
issued.
|
|
|
|
MTI
|
|
Non Controlling
Interest |
|
|
|
|
Average |
|
|
|
Ownership |
|
|
|
Ownership |
|
|
|
|
Price |
|
Shares |
|
% |
|
Shares |
|
% |
|
Total
Shares |
Balance at 12/31/2007 |
|
|
|
46,030,453 |
|
96.3 |
|
1,750,345 |
|
3.7 |
|
47,780,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for MTI Options to
MFC Employees |
|
$0.45 |
|
31,469 |
|
|
|
|
|
|
|
31,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of Plug Power
securities to MFC |
|
$0.35 |
|
7,319,181 |
|
|
|
|
|
|
|
7,319,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Loan
Receivable |
|
$0.24 |
|
10,416,667 |
|
|
|
|
|
|
|
10,416,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 12/31/08 |
|
|
|
63,797,770 |
|
97.3 |
|
1,750,345 |
|
2.7 |
|
65,548,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for MTI Options to
MFC Employees |
|
$0.14 |
|
10,501 |
|
|
|
|
|
|
|
10,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Bridge
Loan |
|
$0.07 |
|
11,241,666 |
|
|
|
44,622,759 |
|
|
|
55,864,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 12/31/09 |
|
|
|
75,049,937 |
|
61.8 |
|
46,373,104 |
|
38.2 |
|
121,423,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued under
Purchase Agreement |
|
$0.07 |
|
|
|
|
|
14,142,857 |
|
|
|
14,142,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 06/30/10 |
|
|
|
75,049,937 |
|
55.36 |
|
60,515,961 |
|
44.64 |
|
135,565,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Warrants Issued – MTI
Micro
On December
9, 2009, MTI Micro issued warrants to the current shareholders of MTI Micro,
including the Company, without consideration, to purchase 32,779,310 shares of
MTI Micro Stock at an exercise price of $0.07 per share. The warrants become
exercisable on December 9, 2010 and expire on December 8, 2017. The warrants
have been accounted for as an equity distribution of $2,030 thousand, including
warrants to the Company with a value of $1,974 thousand that were eliminated in
consolidation.
On December
9, 2009, MTI Micro issued warrants to the Bridge Investors of MTI Micro,
including the Company, to purchase 5,081,237 shares of MTI Micro Stock at an
exercise price of $0.07 per share. The Warrants became exercisable on December
9, 2009 and will expire on the earlier of: (i) April 15, 2014; (ii) immediately
prior to a change in control; or (iii) immediately prior to an initial public
offering of MTI Micro. The warrants were issued without consideration and were
accounted for as equity and a loss on extinguishment of debt was recorded in the
amount of $289 thousand, including warrants to the Company with a value of $57
thousand that were eliminated in consolidation.
On January
11, February 11, March 4, and May 12, 2010, MTI Micro issued warrants to Counter
Point to purchase 471,429, 471,429, 942,857 and 942,857 shares, respectively, of
MTI Micro Stock at an exercise price of $0.07 per share, under the Purchase
Agreement. The warrants become exercisable on the date of issuance and will
expire on the earlier of (a) the five (5) year anniversary of the Date of
Issuance of the Warrant; (b) immediately prior to a Change of Control; or (c)
the closing of a firm commitment underwritten public offering pursuant to a
registration statement under the Securities Act. The warrants were accounted for
as equity.
Stock Based
Compensation
On February
10, 2010, MTI Micro granted 28,296,800 options to its employees from the 2009
Micro Stock Option Plan. The options vest 50% on the grant date and 50% ratably
on a quarterly basis over the next three years. The fair value of these stock
options granted was estimated at the date of grant using a Black-Scholes Option
Pricing model consistent with the accounting standards.
The key
inputs and assumptions used to estimate the fair value of these stock options
were as follows:
Option term |
|
5 years |
Volatility |
|
115 |
% |
Risk-free interest
rate |
|
2.39 |
% |
Dividend yield |
|
0 |
% |
Fair value per option
granted |
|
$0.07 |
The amount of expense recognized for this grant was $892 thousand for the
six month period ending June 30, 2010. Share-based compensation expense
recognized in the Consolidated Statement of Operations is based on awards
ultimately expected to vest, therefore, awards are reduced for estimated
forfeitures. The accounting standard requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company has assumed a forfeiture
rate of 5% for this grant.
10. Fair Value
Measurement
The
estimated fair value of certain financial instruments, including cash, cash
equivalents and short-term debt approximates their carrying value due to their
short maturities and varying interest rates. “Fair value” is the price that
would be received to sell an asset or transfer a liability in an orderly
transaction between market participants at the measurement date. The Company
utilizes valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Based on the observability of the
inputs used in the valuation methods, the Company is required to provide the
following information according to the fair value accounting standards. These
standards established a fair value hierarchy that ranks the quality and
reliability of the information used to determine fair values. Financial assets
and liabilities are classified and disclosed in one of the following three
categories:
Level
1: |
|
Quoted market prices in active markets for
identical assets or liabilities, which includes listed
equities.
|
|
|
|
Level
2: |
|
Observable market based inputs or
unobservable inputs that are corroborated by market data. These items are
typically priced using models or other valuation techniques. These models
are primarily financial industry-standard models that consider various
assumptions, including the time value of money, yield curves, volatility
factors, as well as other relevant economic measures.
|
|
|
|
Level
3: |
|
These use unobservable inputs that are not
corroborated by market data. These values are generally estimated based
upon methodologies utilizing significant inputs that are generally less
observable from objective sources.
|
13
In
determining the appropriate levels, the Company performs a detailed analysis of
financial assets and liabilities. At each reporting period, all assets and
liabilities for which the fair value measurements are based upon significant
unobservable inputs are classified as Level 3. The derivative liability is
valued using the Black-Sholes Option Pricing Model which is based upon
unobservable inputs.
The
following is a summary of the Company’s fair value instruments categorized by
their associated fair value input level:
(Dollars in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
Balance Sheet
Classification |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
June 30,
2010 |
Financial
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability |
|
$ |
— |
|
$ |
— |
|
$ |
52 |
|
$ |
52 |
Total fair value of
liabilities |
|
$ |
— |
|
$ |
— |
|
$ |
52 |
|
$ |
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a rollforward of Level 3 fair value instruments for the twelve
months ended December 31, 2009:
(Dollars in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Gains)
/ |
|
|
|
|
|
|
|
|
Beginning |
|
Losses |
|
Purchases, |
|
Ending |
|
|
Balance as of |
|
Realized and |
|
Issuances,
Sales |
|
Balance as
of |
Instrument |
|
Jan. 1, 2009 |
|
Unrealized |
|
and
Settlements |
|
Dec. 31,
2009 |
Derivative liability |
|
$ |
41 |
|
$ |
29 |
|
$ |
— |
|
$ |
70 |
Total Level 3
instruments |
|
$ |
41 |
|
$ |
29 |
|
$ |
— |
|
$ |
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a rollforward of Level 3 fair value instruments for the six months
ended June 30, 2010:
(Dollars in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Gains)
/ |
|
|
|
|
|
|
|
|
Beginning |
|
Losses |
|
Purchases, |
|
Ending |
|
|
Balance as of |
|
Realized and |
|
Issuances,
Sales |
|
Balance as
of |
Instrument |
|
Jan. 1, 2010 |
|
Unrealized |
|
and
Settlements |
|
June 30,
2010 |
Derivative liability |
|
$ |
70 |
|
$ |
(18 |
) |
|
$ |
— |
|
$ |
52 |
Total Level 3
instruments |
|
$ |
70 |
|
$ |
(18 |
) |
|
$ |
— |
|
$ |
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Segment
Information
The Company
operates in two business segments, New Energy and Test and Measurement
Instrumentation. The New Energy segment is focused on commercializing direct
methanol fuel cells. The Test and Measurement Instrumentation segment designs,
manufactures, markets and services high performance test and measurement
instruments and systems, wafer characterization tools for the semiconductor and
solar industries and computer-based balancing systems for aircraft engines. The
Company’s principal operations are located in North America.
The
accounting policies of the New Energy and Test and Measurement Instrumentation
segments are similar to those described in the summary of significant accounting
policies in the Company’s Annual Report on Form 10-K. The Company evaluates
performance based on profit or loss from operations before income taxes,
accounting changes, items management does not deem relevant to segment
performance, and interest income and expense. Inter-segment sales and expenses
are not significant.
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table. The “Other” column includes corporate related items and
items such as income taxes or unusual items, which are not allocated to
reportable segments. The “Reconciling Items” column includes noncontrolling
interests in a consolidated subsidiary. In addition, segments’ non-cash items
include any depreciation and amortization in reported profit or
loss.
14
(Dollars in
thousands) |
|
|
|
|
|
Test and |
|
|
|
|
|
|
|
|
|
Condensed |
|
|
|
|
|
|
Measurement |
|
|
|
|
|
Reconciling |
|
Consolidated |
|
|
New Energy |
|
Instrumentation |
|
Other |
|
Items |
|
Totals |
Three months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
$ |
— |
|
|
$ |
1,310 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,310 |
|
Funded research and development
revenue |
|
|
1,059 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,059 |
|
Research and product
development expenses |
|
|
1, 145 |
|
|
|
251 |
|
|
|
— |
|
|
|
— |
|
|
|
1,396 |
|
Selling, general and
administrative expenses |
|
|
(7 |
) |
|
|
386 |
|
|
|
375 |
|
|
|
— |
|
|
|
754 |
|
Segment loss from operations
before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and noncontrolling
interest |
|
|
(141 |
) |
|
|
(18 |
) |
|
|
(293 |
) |
|
|
— |
|
|
|
(452 |
) |
Segment (loss) profit |
|
|
(141 |
) |
|
|
(18 |
) |
|
|
(288 |
) |
|
|
3 |
|
|
|
(444 |
) |
Total assets |
|
|
2,189 |
|
|
|
2,204 |
|
|
|
1,355 |
|
|
|
(755 |
) |
|
|
4,993 |
|
Depreciation and
amortization |
|
|
125 |
|
|
|
26 |
|
|
|
12 |
|
|
|
— |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
$ |
— |
|
|
|
1,627 |
|
|
|
— |
|
|
|
— |
|
|
|
1,627 |
|
Funded research and development
revenue |
|
|
418 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
418 |
|
Research and product
development expenses |
|
|
931 |
|
|
|
241 |
|
|
|
— |
|
|
|
— |
|
|
|
1,172 |
|
Selling, general and
administrative expenses |
|
|
66 |
|
|
|
506 |
|
|
|
278 |
|
|
|
— |
|
|
|
850 |
|
Segment (loss) / profit from
operations before |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and
noncontrolling interest |
|
|
(590 |
) |
|
|
48 |
|
|
|
(158 |
) |
|
|
— |
|
|
|
(700 |
) |
Segment (loss) profit |
|
|
(590 |
) |
|
|
48 |
|
|
|
(158 |
) |
|
|
263 |
|
|
|
(437 |
) |
Total assets |
|
|
824 |
|
|
|
1,677 |
|
|
|
865 |
|
|
|
— |
|
|
|
3,366 |
|
Capital expenditures |
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
Depreciation and
amortization |
|
|
100 |
|
|
|
22 |
|
|
|
4 |
|
|
|
— |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
$ |
— |
|
|
$ |
2,859 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,859 |
|
Funded research and development
revenue |
|
|
1,059 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,059 |
|
Research and product
development expenses |
|
|
2,322 |
|
|
|
536 |
|
|
|
— |
|
|
|
— |
|
|
|
2,858 |
|
Selling, general and
administrative expenses |
|
|
83 |
|
|
|
870 |
|
|
|
692 |
|
|
|
— |
|
|
|
1,645 |
|
Segment (loss) / profit from
operations before |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and
noncontrolling interest |
|
|
(1,439 |
) |
|
|
(25 |
) |
|
|
(461 |
) |
|
|
— |
|
|
|
(1,925 |
) |
Segment (loss) profit |
|
|
(1,439 |
) |
|
|
(25 |
) |
|
|
(262 |
) |
|
|
38 |
|
|
|
(1,688 |
) |
Total assets |
|
|
2,189 |
|
|
|
2,204 |
|
|
|
1,355 |
|
|
|
(755 |
) |
|
|
4,993 |
|
Depreciation and
amortization |
|
|
259 |
|
|
|
54 |
|
|
|
25 |
|
|
|
— |
|
|
|
338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
$ |
— |
|
|
|
2,895 |
|
|
|
— |
|
|
|
— |
|
|
|
2,895 |
|
Funded research and development
revenue |
|
|
774 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
774 |
|
Research and product
development expenses |
|
|
1,798 |
|
|
|
504 |
|
|
|
— |
|
|
|
— |
|
|
|
2,302 |
|
Selling, general and
administrative expenses |
|
|
1,173 |
|
|
|
978 |
|
|
|
555 |
|
|
|
— |
|
|
|
2,706 |
|
Segment (loss) / profit from
operations before |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and
noncontrolling interest |
|
|
(2,226 |
) |
|
|
(86 |
) |
|
|
(308 |
) |
|
|
— |
|
|
|
(2,620 |
) |
Segment (loss) profit |
|
|
(2,226 |
) |
|
|
(86 |
) |
|
|
(308 |
) |
|
|
949 |
|
|
|
(1,671 |
) |
Total assets |
|
|
824 |
|
|
|
1,677 |
|
|
|
865 |
|
|
|
— |
|
|
|
3,366 |
|
Capital expenditures |
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
Depreciation and
amortization |
|
|
204 |
|
|
|
45 |
|
|
|
8 |
|
|
|
— |
|
|
|
257 |
|
15
The
following table presents the details of “Other” segment (loss)
profit:
(Dollars in
thousands) |
|
Three Months
Ended |
|
Six Months
Ended |
|
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2010 |
|
2009 |
|
2010 |
Corporate and other (expenses)
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
$ |
(12 |
) |
|
$ |
(3 |
) |
|
$ |
(25 |
) |
|
$ |
(8 |
) |
Interest income |
|
|
18 |
|
|
|
— |
|
|
|
36 |
|
|
|
— |
|
Gain on derivatives |
|
|
14 |
|
|
|
16 |
|
|
|
32 |
|
|
|
18 |
|
Income tax (expense)
benefit |
|
|
5 |
|
|
|
— |
|
|
|
199 |
|
|
|
— |
|
Other expense, net |
|
|
(313 |
) |
|
|
(171 |
) |
|
|
(504 |
) |
|
|
(318 |
) |
Total income
(expense) |
|
$ |
(288 |
) |
|
$ |
(158 |
) |
|
$ |
(262 |
) |
|
$ |
(308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Commitments and
Contingencies
Leases
The Company
and its subsidiaries lease certain manufacturing, laboratory and office
facilities. The leases generally provide for the Company to pay either an
increase over a base year level for taxes, maintenance, insurance and other
costs of the leased properties or the Company’s allocated share of insurance,
taxes, maintenance and other costs of leased properties. The leases contain
renewal provisions.
The
Company’s future minimum rental payments required under non-cancelable operating
leases are (dollars in thousands): $250 remaining in 2010, $306 in 2011 and $273
in 2012 and $283 in 2013 and $270 for 2014 and thereafter.
Warranties
Below is a
reconciliation of changes in product warranty liabilities:
(Dollars in
thousands) |
|
Six Months
Ended |
|
|
June 30, |
|
|
2009 |
|
2010 |
Balance, January 1 |
|
$ |
31 |
|
|
$ |
21 |
|
Accruals for warranties
issued |
|
|
14 |
|
|
|
14 |
|
Settlements made (in cash or in
kind) |
|
|
(6 |
) |
|
|
(7 |
) |
Balance, end of
period |
|
$ |
39 |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
Licenses
Under a 2002
NYSERDA contract, MTI Micro agreed to pay NYSERDA a royalty of 5.0% of the sales
price of any product sold incorporating IP developed pursuant to the NYSERDA
contract. If the product is manufactured by a New York State manufacturer, this
royalty is reduced to 1.5%. Total royalties are subject to a cap equal to two
times the total contract funds paid by NYSERDA to MTI Micro, and may be reduced
to reflect any New York State jobs created by MTI Micro.
Under the
2010 NYSERDA contract, MTI Micro agreed to pay NYSERDA a royalty of 5.0% of the
sales price of any product sold incorporating IP developed pursuant to the
NYSERDA contract. The obligation commences on the first date of the first sale
of these products and is in place for fifteen years. Total royalties are subject
to a cap equal to three times the total contract funds paid by NYSERDA to MTI
Micro. However, if the product is manufactured by a New York State manufacturer,
this royalty is reduced to 1.5% and total royalties are subject to a cap equal
to one times the total contract funds paid by NYSERDA to MTI Micro.
Employment
Agreements
The Company
has employment agreements with certain employees that provide severance
payments, certain other payments, accelerated vesting and exercise extension
periods of certain options upon termination of employment under certain
circumstances, as defined in the applicable agreements. As of June 30, 2010, the
Company’s potential minimum cash obligation to these employees was approximately
$696 thousand.
As of June
30, 2010, MTI and their subsidiaries had an accrual on their books for the bonus
payment to Peng Lim, as outlined in the companies’ proxy previously filed, of
$175 thousand; MTI Micro had an accrual for $9 thousand for the bonus due James
Prueitt. Both of these bonuses will be paid in the third quarter of
2010.
16
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Unless the context requires
otherwise, the terms “we,” “us,” and “our” refer to Mechanical Technology,
Incorporated, a New York Corporation, “MTI Micro” refers to MTI MicroFuel Cells
Inc., a Delaware corporation and our majority owned subsidiary, and “MTI
Instruments” refers to MTI Instruments, Inc., a New York corporation and our
wholly owned subsidiary. We have a registered trademark in the United States for
“Mobion.” Other trademarks, trade names, and service marks used in this
Quarterly Report on Form 10-Q are the property of their respective
owners.
The following discussion of our
financial condition and results of operations should be read in conjunction with
the condensed consolidated financial statements and the notes thereto included
in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited
consolidated financial statements and the notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2009 contained in our 2009 Annual Report on Form
10-K.
In addition to historical
information, the following discussion contains forward-looking statements, which
involve risk and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements. Important factors that
could cause actual results to differ include those discussed in Part II, Item 1A
“Risk Factors” and elsewhere in this Quarterly Report on Form
10-Q.
Overview
MTI operates in two segments, the New
Energy segment conducted through MTI MicroFuel Cells, Inc. (MTI Micro) and the
Test and Measurement Instrumentation segment, through MTI Instruments, Inc. (MTI
Instruments).
New Energy Segment - MTI Micro is developing and
commercializing off-the-grid power solutions for various portable electronic
devices. Our patented proprietary direct methanol fuel cell technology platform
called Mobion, converts 100% methanol fuel to usable electricity capable of
providing continuous power as long as necessary fuel flows are maintained. Our
proprietary fuel cell power solution consists of two primary components
integrated in an easily manufactured device: the direct methanol fuel cell power
engine, which we refer to as our Mobion Chip, and methanol fuel cartridges. Our
current Mobion Chip weighs less than one ounce and is small enough to fit in the
palm of one’s hand. The methanol used by the technology is fully biodegradable.
We have demonstrated power density of over 84 mW/cm 2, while producing more than 1,800
Wh/kg or 1.4 Wh/cc of fuel from its direct methanol fuel feed. For these
reasons, we believe our technology offers a superior power solution compared to
current lithium-ion and similar rechargeable battery systems currently used by
original equipment manufacturers and branded partners, or OEMs, in many handheld
electronic devices, such as smart phones, mobile phone accessories, digital
cameras, portable gaming devices, e-readers and other portable devices. We
believe our platform will facilitate further developments of numerous electronic
product advantages, including smaller size, environmental friendliness, greatly
extended run-time of current portable devices and simplicity of design, all
critical for commercialization in the consumer market, and can be implemented as
three different product options: a handheld power generator for consumer
electronic devices, a snap-on or attached power accessory, or an embedded fuel
cell in handheld devices. We have strategic agreements with a global Japanese
consumer electronics company, with a U.S. based developer and marketer of
universal chargers, with a global power tool manufacturer, and a letter of
intent with Duracell, part of the Procter & Gamble Company. Our goal is to
become the leading provider of portable power for various types of electronic
devices and, assuming available financing, we intend to commercialize Mobion
products in 2010.
Our Mobion
technology is protected by a patent portfolio that includes 56 patents and 61
active U.S. patent applications covering five key technologies and manufacturing
areas, one of which is the process that eliminates the need for active water
recirculation pumps or the inclusion of water as a fuel dilutant. The water
required for the electrochemical process is transferred internally within the
Mobion Chip from the site of water generation on the air-side of the cell. This
internal flow of water takes place without the need for any pumps, complicated
re-circulation loops or other micro-plumbing tools.
Test and Measurement
Segment – MTI
Instruments is a worldwide supplier of metrology, portable balancing equipment
and inspection systems for semiconductor wafers. Our products use
state-of-the-art technology to solve complex real world applications in numerous
industries including automotive, semiconductor, solar cell manufacturing,
commercial and military aviation and data storage. We are continuously working
on ways to expand our sales reach, including more sales coverage in Europe and
the Far East, as well as a focus on internet marketing. We have industry
recognized customer service and have worked with hundreds of companies
worldwide.
Our test and
measurement segment has three product groups: general dimensional gauging,
semiconductor/solar and aviation. Our products consist of electronic,
computerized gauging instruments for position, displacement and vibration
applications for the design, manufacturing and test markets; metrology tools for
wafer characterization of semiconductor and solar wafers; and engine balancing
and vibration analysis systems for both military and commercial
aircraft.
17
Liquidity
Our cash
requirements depend on numerous factors, including completion of our portable
power source products development activities, our ability to commercialize our
portable power source products, market acceptance of our portable power source
products, and other factors.
Several key
indicators of our liquidity are summarized in the following table:
|
|
Six Months
Ended |
(Dollars in
thousands) |
|
June 30, |
|
|
2009 |
|
2010 |
Cash and cash
equivalents |
|
$ |
407 |
|
|
$ |
811 |
|
Working capital
(deficit) |
|
|
(1,079 |
) |
|
|
846 |
|
Net loss attributed to
MTI |
|
|
(1,688 |
) |
|
|
(1,671 |
) |
Net cash used in operating
activities |
|
|
(2,300 |
) |
|
|
(938 |
) |
Purchase of property, plant and
equipment |
|
|
— |
|
|
|
26 |
|
From
inception through June 30, 2010, we have incurred an accumulated deficit of $122
million, and we expect to incur losses for the foreseeable future as we continue
micro fuel cell product development and commercialization programs. We expect
that losses will fluctuate from year to year and that such fluctuations may be
substantial as a result of, among other factors, our operating results, the
availability of equity financing, and the ability to attract government funding
resources to offset research and development costs.
At present,
the Company does not expect to continue to fund over the long-term MTI Micro’s
development and commercialization of its portable power source products. MTI
Micro had cash and cash equivalents as of June 30, 2010 of $136
thousand.
On January
11, 2010, MTI Micro entered into a Common Stock and Warrant Purchase Agreement
(the “Purchase Agreement”) with Counter Point Ventures Fund II, L.P. (“Counter
Point”). Counter Point is managed by Dr. Walter L. Robb, a member of the Board
of Directors of the Company and MTI Micro, and is a current stockholder of MTI
Micro. Dr. Robb and Counter Point beneficially held approximately 29.5% of the
fully-diluted common stock of MTI Micro of December 31, 2009, and as of June 30,
2010 hold an aggregate of approximately 36.3% of the fully-diluted common stock
of MTI Micro.
Pursuant to
the Purchase Agreement, MTI Micro may issue and sell to Counter Point up to
28,571,429 shares of common stock, par value $0.01 per share (the “Micro Common
Stock”), at a purchase price per share of $0.070, over a period of twelve (12)
months, and warrants (“Warrants”) to purchase shares of Micro Common Stock equal
to 20% of the shares of Micro Common Stock purchased under the Purchase
Agreement at an exercise price of $0.070 per share. The sale and issuance of the
Micro Common Stock and Warrants shall occur over multiple closings (each, a
“Closing”) occurring over two (2) one month closing periods and five (5)
two-month closing periods (each, a “Closing Period”). Four Closings have
occurred through June 30, 2010, with MTI Micro raising $990,000 from the sale of
14,142,857 shares of Micro Common Stock and Warrants to purchase 2,828,571
shares of Micro Common Stock to Counter Point. Subsequent Closings may occur
thereafter at MTI Micro’s sole discretion during the Closing Periods upon
delivery of written notice by MTI Micro to Counter Point of its desire to
consummate a Closing, and Counter Point’s acceptance of such offer under the
Purchase Agreement on the terms agreed upon with MTI Micro. In the event the
terms and conditions of the Purchase Agreement no longer reflect current market
conditions or otherwise, either party may elect not to participate in a
Subsequent Closing(s) or the parties may amend the Purchase Agreement on
mutually agreeable terms with respect to such Subsequent Closing(s). If MTI
Micro were to issue and sell the remainder of the 28,571,429 shares under the
Purchase Agreement, the Company would continue to hold an aggregate of 50.4% of
the outstanding capital stock of MTI Micro, or 55.8% of the fully-diluted
capital stock of MTI Micro.
Subsequent
to June 30, 2010, MTI Micro has drawn down an additional $220 thousand under the
Purchase Agreement with an additional $790 thousand of available borrowing
capacity through the Purchase Agreement. However, the funds available through
the Purchase Agreement are only available to us at increments of $330 thousand
bi-monthly. Our next available draw down is $110 thousand in August 2010. In
addition, subsequent to June 30, 2010, MTI Micro received $160 thousand from the
DOE for billings relative to work performed through June 30, 2010, and has an
additional $176 under the extension as work is performed. MTI Micro was also
awarded a grant from NYSERDA for $296 thousand on July 28, 2010, for which
billings have not commenced. MTI Micro will be required to raise additional
funds through issuance of its equity or debt, government funding and/or explore
other strategic alternatives including but not limited to the sale of assets
and/or the company. If MTI Micro is unable to raise additional financing, it may
be required to discontinue or severely reduce its business
operations.
18
As part of a
cash conservation program at MTI Micro, all MTI Micro employee salaries were
reduced by 20% starting April 12, 2010, Peng Lim, the CEO of MTI Micro,
voluntarily reduced the portion of his monthly salary that is allocated to MTI
Micro from $9,722.22 to $2,430.56, and in an effort to focus on
commercialization, MTI Micro further streamlined its organization. These
reductions will continue until such time as MTI Micro secures additional
financing. There is no assurance that funds raised in any such a financing will
be sufficient, that the financing will be available on terms favorable to us or
to existing stockholders and at such times as required, or that we will be able
to obtain the additional financing required for the continued operation and
growth of our business. During the twenty one months ended June 30, 2010, MTI
Micro has raised $3.8 million in external debt and equity financing. If MTI
Micro raises additional funds by issuing equity securities, MTI Micro’s
stockholders will experience further dilution. Additional debt financing, if
available, may involve restrictive covenants. Any debt financing or additional
equity financing may contain terms that are not favorable to us or our
stockholders. If we raise additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to relinquish some rights
to our technologies or our products, or grant licenses on terms that are not
favorable to us. If we are unable to raise adequate funds, we may have to
liquidate some or all of our assets or delay, reduce the scope of or eliminate
some or all of our research and development programs, or discontinue our
portable power source business. Without other resources, management currently
believes it will have adequate funds through the end of 2010.
Management
currently believes that MTI Instruments will continue to generate positive cash
flow and would be able to fund its current operations. However, no assurances
can be provided on this subsidiary’s or our ability to continue as a going
concern given the level of uncertainty involved with the parent company’s
operations.
Results of
Operations
Results of Operations for the Three
and Six Months Ended June 30, 2010 Compared to the Three and Six Months Ended
June 30, 2009.
Product Revenue.
Product revenue in our test and
measurement instrumentation business for the three months ended June 30, 2010
increased in comparison to the same period in 2009 by $317 thousand, or 24.2%,
to $1.63 million. This increase in revenue was attributed to an overall increase
in US Air Force activity under existing multi-year contracts (see table below).
For the second quarter of 2010, the US Air Force was the top customer for the
segment; accounting for $588 thousand, or 36.1%, of the quarterly revenue, as
compared to $255 thousand, or 19.5%, of the second quarter revenue in 2009. The
segment’s top commercial customer for the second quarter of 2010 accounted for
$155 thousand, or 9.5%, of the quarterly revenue, as compared to the top
commercial customer last year accounting for $176 thousand, or 13.4%, of the
second quarter revenue in 2009.
Product
revenue in our test and measurement instrumentation business for the six months
ended June 30, 2010 rose by $36 thousand, or 1.3%, in comparison to the same
period in 2009, remaining at $2.9 million. For the six months ended June 30,
2010, the US Air Force was the top customer for the segment; accounting for $603
thousand, or 20.8%, of the year-to-date revenue, as compared to $606 thousand,
or 21.2%, of the year-to-date revenue on June 30, 2009. The segment’s top
commercial customer for the six months ended June 30, 2010 accounted for $237
thousand, or 8.2%, of the year-to-date revenue, as compared to the top
commercial customer last year accounting for $348 thousand, or 12.2%, of the
year-to-date revenue on June 30, 2009.
Information
regarding government contracts included in product revenue is as
follows:
(Dollars in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contract |
|
|
|
|
|
Revenues for
the |
|
Revenue |
|
Orders
Received |
|
|
|
|
|
Three Months Ended June
30, |
|
Contract to
Date |
|
to Date |
Contract (1) |
|
Expiration |
|
2009 |
|
2010 |
|
June 30, 2010 |
|
June 30,
2010 |
$2.3 million Air Force New
PBS-4100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems |
|
07/28/2010 |
(2) |
|
$ |
171 |
|
$ |
— |
|
$ |
2,109 |
|
$ |
2,109 |
$8.8 million Air Force Retrofit
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance of
PBS-4100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems |
|
06/19/2008 |
(3) |
|
$ |
— |
|
$ |
— |
|
$ |
8,009 |
|
$ |
8,009 |
$6.5 million Air Force Retrofit
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance of
PBS-4100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems |
|
09/27/2014 |
(4) |
|
$ |
— |
|
$ |
583 |
|
$ |
1,026 |
|
$ |
1,147 |
19
(Dollars in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contract |
|
|
|
|
|
Revenues for
the |
|
Revenue |
|
Orders
Received |
|
|
|
|
|
Six Months Ended June
30, |
|
Contract to
Date |
|
to Date |
Contract (1) |
|
Expiration |
|
2009 |
|
2010 |
|
June 30, 2010 |
|
June 30,
2010 |
$2.3 million Air Force New
PBS-4100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems |
|
07/28/2010 |
(2) |
|
$ |
456 |
|
$ |
— |
|
$ |
2,109 |
|
$ |
2,109 |
$8.8 million Air Force Retrofit
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance of
PBS-4100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems |
|
06/19/2008 |
(3) |
|
$ |
50 |
|
$ |
— |
|
$ |
8,009 |
|
$ |
8,009 |
$6.5 million Air Force Retrofit
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance of
PBS-4100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems |
|
09/27/2014 |
(4) |
|
$ |
— |
|
$ |
587 |
|
$ |
1,026 |
|
$ |
1,147 |
____________________
(1) |
|
Contract
values represent maximum potential values and may not be representative of
actual results. |
(2) |
|
Date
represents expiration of contract, including all three potential option
extensions. |
(3) |
|
The contract
expiration date has passed, however, one delivery order remains open under
the contract. |
(4) |
|
Date
represents expiration of contract, including all four potential option
extensions. |
Funded Research and Development
Revenue. Funded research and development revenue in our new energy business for
the three months ended June 30, 2010 decreased in comparison to the same period
in 2009 by $641 thousand. The DOE contract was not approved until May 2009, and
MTI Micro was able to retroactively bill in the second quarter for the first
quarter’s work that was performed. Thus, the revenue for 2009 of $1.1 million
represents six months of billings, while the revenue for the three months of
2010 represents three months of billings. The revenue related to the three
months ended June 30, 2009 was $542 thousand, and when compared to the three
month period ended June 30, 2010, revenue decreased by $124 thousand or 22.8%.
This is a result of the majority of work under the DOE contract being performed
in 2009.
Funded
research and development revenue in our new energy business for the six months
ended June 30, 2010 decreased in comparison to the same period in 2009 by $285
thousand, or 26.9%, to $774 thousand. The decrease in revenue was primarily the
result of the majority of work under the DOE contract being completed in
2009.
Information
regarding our contract included in funded research and development revenue is as
follows:
(Dollars in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
Revenue |
|
|
|
|
Revenue |
|
|
|
Six Months |
|
|
|
|
Six Months |
|
|
|
|
Contract to |
|
|
|
Ended |
|
% of 2009 |
|
Ended |
|
% of 2010 |
|
Date |
Contract |
Expiration (1) |
|
June 30, 2009 |
|
Total |
|
June 30, 2010 |
|
Total |
|
June 30,
2010 |
$2.99 million DOE (2) |
12/31/10 |
|
$ |
1,059 |
|
100 |
% |
|
$ |
774 |
|
100 |
% |
|
$ |
2,818 |
____________________
(1) |
|
Dates
represent expiration of contract, not date of final billing. |
(2) |
|
The DOE contract is a cost share
contract. |
Cost of Product
Revenue. Cost of product revenue in our test and measurement instrumentation
business for the three months ended June 30, 2010 increased in comparison to the
same period in 2009 by $98 thousand, or 15.6%, to $726 thousand. The increase
corresponded to the 24.4% rise in product revenue for the quarter. Gross profit,
as a percentage of product revenue, increased to 55%, compared to 52% for the
same period in 2009 due to a $25 thousand expense for potentially obsolete and
slow-moving inventory recorded in 2009 that did not recur in 2010.
Cost of
product revenue in our test and measurement instrumentation business for the six
months ended June 30, 2010 decreased in comparison to the same period in 2009 by
$23 thousand, or 1.8%, remaining at $1.3 million. The cost of product revenue
decreased, even though revenue slightly increased, due to a $50 thousand expense
for potentially obsolete and slow-moving inventory recorded in 2009 that did not
recur in 2010. Gross profit, as a percentage of product revenue, increased one
point to 56% for the six months ended June 30, 2010.
20
Funded Research and Product
Development Expenses. Funded research and product
development expenses in our new energy business decreased by $261 thousand or
24% for the three months ended June 30, 2010 in comparison to the same period in
2009. This is a result of the majority of the work being performed in 2009 for
the DOE contract, as discussed in Funded research and development revenue
above.
The DOE
contract was approved during the second quarter 2009 and therefore six months of
revenue was recorded for the three month and six month periods ending June 30,
2009, as outlined above under Funded Research and Development Revenue. Upon
approval from the government, to bill retrospectively back to January 8, 2009,
MTI applied the approved government rates to expenses incurred for the full six
month period, reclassifying expenses from unfunded research and development and
selling, general and administrative to funded research and development in
accordance with the DOE contract. This reclassification is reflected in the
financials presented for the six months ended June 30, 2009.
Funded
research and product development expenses in our new energy business decreased
by $525 thousand, or 24.7%, to $1.6 million for the six months ended June 30,
2010 in comparison to the same period in 2009. This change was the result of the
majority of the work under the DOE contract being completed in 2009, as
mentioned above in Funded Research and Development Revenue.
Unfunded Research and Product
Development Expenses. Unfunded research and product
development expenses increased by $37 thousand to $345 thousand for the three
months ended June 30, 2010 from $308 thousand for the three months ended June
30, 2009. This increase is directly related to the reduction of billings to the
DOE.
Unfunded
research and product development expenses decreased by $31 thousand, or 4.2%, to
$705 thousand for the six months ended June 30, 2010 from $736 thousand for the
six months ended June 30, 2009. This decrease is attributable to cost reductions
instituted by management in the second quarter due to decreases in
funding.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses increased by $96 thousand, or 12.7% to $850 thousand for the three
months ended June 30, 2010 from $754 thousand for the three months ended June
30, 2009. This increase was primarily the result of the recognition of stock
option expense in relation to options granted to MTI Micro employees, and
additional staffing in the test and measurement sales and business development
departments.
Selling,
general and administrative expenses increased by $1.1 million, or 64.5%, to $2.7
million for the six months ended June 30, 2010 from $1.6 million for the six
months ended June 30, 2009. This increase was primarily the result of the
recognition of stock option expenses related to the issuance of MTI Micro stock
options in the first quarter of approximately $892 thousand to date, and
additional staffing in the test and measurement segment’s sales and business
development departments.
Operating Loss.
Operating
loss increased by $294 thousand, or 71.88%, to $703 thousand through the three
months ended June 30, 2010 compared with the three months ended June 30, 2009
loss of $409 thousand as a result of the factors noted above.
Operating
loss increased by $731 thousand, or 38.9%, to $2.61 million for the six months
ended June 30, 2010 compared with the six months ended June 30, 2009 as a result
of the factors noted above.
Gain on Derivatives.
Our gain
on derivatives related to the freestanding warrants issued in conjunction with
our December 2006 capital raise increased by $2 thousand, or 14.3%, to $16
thousand for the three months ended June 30, 2010 compared with $14 thousand for
the three months ended June 30, 2009. The increase in derivative gain was
attributable to valuation changes of the underlying warrants using the
Black-Scholes pricing model.
Our gain on
derivative treatment of the freestanding warrants issued in conjunction with our
December 2006 capital raise decreased by $14 thousand, or 43.8%, to $18 thousand
for the six months ended June 30, 2010 compared with $32 thousand for the six
months ended June 30, 2009. The decrease in derivative income was attributable
to valuation changes of the underlying warrants using the Black-Scholes pricing
model.
Income Tax (Expense) Benefit.
Our
effective income tax rate for the three months ended June 30, 2010 was 0.0% and
our income tax rate for the three months ended June 30, 2009 was 1.11%. These
tax rates were primarily the result of losses generated by operations, changes
in the valuation allowance, and permanent differences for derivative
valuations.
21
Our income
tax rate for the six months ended June 30, 2010 was 0.00% and our income tax
rate for the six months ended June 30, 2009 was 10.34%. These tax rates were
primarily the result of losses generated by operations, changes in the valuation
allowance, state true-ups, and permanent deductible differences for derivative.
Additionally, the June 30, 2009 tax rate was impacted by the reversal of the
uncertain tax position for the NYS settlement.
The
valuation allowance against our deferred tax assets at June 30, 2010 was $27.4
million and at December 31, 2009 was $26.4 million. We determined that it was
more likely than not that ultimate recognition of certain deferred tax assets
would not be realized.
Capital Resources
Our working
capital was $846 thousand at June 30, 2010, comparable to $1.2 million at
December 31, 2009.
At June 30,
2010, our order backlog was $1,121 thousand compared to $419 thousand at
December 31, 2009.
Our
inventory turnover ratios and accounts receivable days sales outstanding for the
trailing twelve month periods and their changes at June 30, 2009 and 2010 are as
follows:
|
|
2009 |
|
2010 |
|
Change |
Inventory turnover |
|
1.6 |
|
2.7 |
|
1.1 |
Average accounts receivable
days sales outstanding |
|
40 |
|
41 |
|
1 |
The
increase in inventory turnover is attributed to a 41% decrease in average
inventory balances on a comparable sales volume.
The average
accounts receivable days sales outstanding for the last twelve months compared
to the previous twelve months, only increasing by one day.
Net cash
used by operating activities was $938 thousand for the six months ended June 30,
2010 compared with $2.3 million in 2009. This cash use decrease of $1.3 million
is primarily attributed to a large increase in the accounts receivable balance
from 2008 to 2009 of $1.2 million, compared to a reduction of accounts
receivable from 2009 to 2010 of $201 thousand.
There were
$26 thousand in capital expenditures during the six months ended June 30, 2010,
with no capital expenditures in the same period for 2009. There were no
outstanding commitments for capital expenditures as of June 30, 2010. We expect
to finance any potential future expenditures with current cash and cash
equivalents as appropriate and to the extent available.
Off-Balance Sheet
Arrangements
There were
no off balance sheet arrangements.
Contractual Payment
Obligations
We have
entered into various agreements that result in contractual payment obligations
in future years. These contracts include financing arrangements for current
manufacturing, laboratory and office facility lease agreements. The following
table summarizes cash payments that we are committed to make under the existing
terms of contracts to which we are a party as of June 30, 2010. This table does
not include contingencies.
|
|
Less |
|
|
|
|
|
|
|
More |
|
|
|
Contractual Payment
Obligations |
|
Than 1 |
|
1-3 |
|
3-5 |
|
Than 5 |
|
|
|
(in
thousands) |
|
Year |
|
Years |
|
Years |
|
Years |
|
Total |
Operating Leases / Total
Contractual Payment Obligations |
|
$ |
250 |
|
$ |
862 |
|
$ |
270 |
|
$ |
— |
|
$ |
1,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Critical Accounting Policies and
Significant Judgments and Estimates
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Note 2 to the consolidated financial statements in our Annual Report on
Form 10-K for the year ended December 31, 2009 includes a summary of our most
significant accounting policies. There have been no material changes to the
critical accounting policies previously disclosed in our 2009 Annual Report on
Form 10-K. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of assets and liabilities. On an
ongoing basis, we evaluate our estimates and judgments, including those related
to revenue recognition, inventories, income taxes, stock-based compensation and
derivatives. Management bases its estimates on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Periodically, we review our critical accounting
estimates with the Audit Committee of our Board of Directors.
Statement Concerning Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties within the meaning of Section 27A of the Securities Act
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Any statements contained in this Form 10-Q that are not statements
of historical fact may be forward-looking statements. When we use the words
“anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,”
“expects,” “management believes,” “we believe,” “we intend,” “should,” “could,”
“may,” “will” and similar words or phrases, we are identifying forward-looking
statements. Forward-looking statements involve risks, uncertainties, estimates
and assumptions which may cause our actual results, performance or achievements
to be materially different from those expressed or implied by forward-looking
statements. Important factors that could cause these differences include the
following:
- our need to raise
additional financing for our New Energy segment;
- our history of recurring
net losses and the risk of continued net losses;
- our independent auditors
have included a going concern paragraph in their opinion;
- sales revenue growth of
our test and measurement instrumentation business may not be achieved;
- the dependence of our
test and measurement instrumentation business on a small number of customers
and potential loss of government funding;
- our ownership position
in MTI Micro may be further reduced as a result of our plans to seek external
financing for MTI Micro’s operations:
- risks related to
developing Mobion direct methanol fuel cells and whether we will ever
successfully develop reliable and commercially viable Mobion fuel cell
solutions;
- our portable power
source products or our customers’ products that utilize our portable power
source products may not be accepted by the market;
- our inability to build
and maintain relationships with our customers;
- our limited experience
in manufacturing fuel cell systems on a commercial basis;
- our dependence on others
for our production requirements for our portable power source products;
- our dependence on our
manufacturing subcontractors to maintain high levels of productivity and
satisfactory delivery schedules for our portable power source products;
- our dependence on
third-party suppliers for most of the manufacturing equipment necessary to
produce our portable power source products;
- our inability to obtain
sufficient quantities of components and other materials, including platinum
and ruthenium, necessary for the production of our portable power source
products;
- our dependence on OEMs
integrating Mobion fuel cell systems into their devices;
- our lack of long-term
purchase commitments from our customers and the ability of our customers to
cancel, reduce, or delay orders for our products;
- risks related to
protection and infringement of intellectual property;
- our new technologies may
not result in customer or market acceptance;
- our inability to
commercialize our proposed portable power source solutions and develop new
product solutions on a timely basis;
- our inability to develop
and utilize new technologies that address the needs of our customers;
- intense competition in
the direct methanol fuel cell and instrumentation businesses;
- change in policies by
U.S. or foreign governments that hinder, disrupt or economically
disadvantage international trade;
- the impact of future
exchange rate fluctuations;
- the uncertainty of the
U.S. economy;
- the historical
volatility of our stock price;
- the cyclical nature of
the electronics industry;
- failure of our strategic
alliances to achieve their objectives or perform as contemplated and the risk
of cancellation or early termination of such alliance by either party;
- product liability or
defects;
- risks related to the
flammable nature of methanol as a fuel source;
- the loss of services of
one or more of our key employees or the inability to hire, train, and retain
key personnel;
- significant periodic and
seasonal quarterly fluctuations in our results of operations;
- our dependence on sole
suppliers or a limited group of suppliers for both business segments;
- risks related to the
limitation of the use of our net operating losses in the event of certain
ownership changes; and
- other factors discussed
under the heading “Risk Factors” in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009 and in Part II, Item 1A of this Quarterly
Report on Form 10-Q.
23
Forward-looking statements speak only as of the date they are made. You
should not put undue reliance on any forward-looking statements. We assume no
obligation to update forward-looking statements to reflect actual results,
changes in assumptions, or changes in other factors affecting forward-looking
information, except to the extent required by applicable securities laws. If we
do update one or more forward-looking statements, no inference should be drawn
that we will make additional updates with respect to those or other
forward-looking statements.
Item 4. Controls and Procedures
The
certifications of our Chief Executive Officer and Acting Chief Financial Officer
attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q
include, in paragraph 4 of such certifications, information concerning our
disclosure controls and procedures and internal control over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 4 for a more complete understanding of the
matters covered by such certifications.
(a) Evaluation of Disclosure
Controls and Procedures
Our
management, with the participation of our chief executive officer and our acting
chief financial officer evaluated the effectiveness of MTI’s disclosure controls
and procedures as of June 30, 2010. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. We recognize that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and we necessarily apply our
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based on the valuation of our disclosure controls and procedures as
of June 30, 2010, our chief executive officer and acting chief financial officer
concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
(b) Changes in Internal Control Over
Financial Reporting
There have
been no changes in our internal control over financial reporting, as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our
fiscal quarter ended June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal
Proceedings
At any
point in time, we may be involved in various lawsuits or other legal
proceedings. Such lawsuits could arise from the sale of products or services or
from other matters relating to our regular business activities, compliance with
various governmental regulations and requirements, or other transactions or
circumstances. We do not believe there are any such proceedings presently
pending that could have a material adverse effect on our financial condition.
See Note 12 to our Condensed Consolidated Financial Statements for further
information.
24
Item 1A. Risk Factors
Our Annual
Report on Form 10-K for the year ended December 31, 2009 contains a detailed
discussion of our risk factors. In addition, information regarding risk factors
appears in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Statement Concerning Forward Looking Statements”. These
risk factors could cause our actual results to differ materially from those
stated in forward-looking statements contained in this document and elsewhere.
Pursuant to the instructions to this Quarterly Report on Form 10-Q, we have
provided below only those risk factors that are new or that have been materially
amended since the time that we filed our 2009 Annual Report on Form 10-K.
Accordingly, the information presented below should be read in conjunction with
the risk factors and information disclosed in our 2009 Annual Report on Form
10-K.
We have incurred recurring net
losses and anticipate continued net losses as we execute our commercialization
plan for our portable power source business.
We have
incurred recurring net losses, including net losses of $1.7 million for the six
months ended June 30, 2009 and the six months ended June 30, 2010. As a result
of ongoing operating losses, we had an accumulated deficit of $122 million as of
June 30, 2010. Subject to cash availability, we expect to continue to make
significant expenditures and incur substantial expenses as we develop and
commercialize our proposed portable power source products; develop our
manufacturing, sales, and distribution networks; implement internal systems and
infrastructure; and hire additional personnel. As a result, we expect to
continue to incur significant losses as we execute our plan to commercialize our
portable power source business and may never achieve or maintain profitability.
We will be unable to satisfy our current obligations solely from cash generated
from operations or become profitable until we successfully commercialize our
portable power source business. If we continue to incur substantial losses and
are unable to secure additional financing, we could be forced to discontinue or
curtail our business operations; sell assets at unfavorable prices; or merge,
consolidate, or combine with a company with greater financial resources in a
transaction that may be unfavorable to us.
At present,
the Company does not expect to continue to fund MTI Micro on a long-term basis.
Based on the Company’s projected cash requirements for operations and capital
expenditures and its current cash and cash equivalents of $811 thousand at June
30, 2010, management believes it will have adequate resources to fund its
current operations, excluding MTI Micro operations, but there can be no
assurance. Since the company will no longer fund MTI Micro on a long-term basis,
the subsidiary has sought other sources of funding, but there is no assurance
that such funding will be available on acceptable terms, if at all.
We currently do not have sufficient
funds to commercialize MTI Micro’s portable power source products.
In order to
continue full commercialization of its micro fuel cell solution, MTI Micro will
need to do one or more of the following to raise additional resources, or reduce
its cash requirements:
- obtain additional
government or private funding of the Company’s direct methanol fuel cell
research, development, manufacturing readiness and commercialization;
- secure additional debt
or equity financing; or
- further reduce its
current expenditure run-rate.
There is no
guarantee that resources will be available to MTI Micro on terms acceptable to
it, or at all, or that such resources will be received in a timely manner, if at
all, or that MTI Micro will be able to reduce its expenditure run-rate without
materially and adversely affecting its business. MTI Micro had cash and cash
equivalents as of June 30, 2010 of $136 thousand. Subsequent to June 30, 2010,
MTI Micro has drawn down an additional $220 thousand under the Purchase
Agreement with an additional $790 thousand of available borrowing capacity
through the Agreement. However, the funds available through the Agreement are
only available to us at increments of $330 thousand bi-monthly. Our next
available draw down is $110 thousand in August 2010. Subsequent to June 30,
2010, MTI Micro received $160 thousand from the DOE for billings relative to
work performed through June 30, 2010, and has an additional $176 thousand under
the extension as work is performed. In addition, on July 28, 2010, MTI was
awarded a cost share funding grant of $296 thousand from the New York State
Energy Research and Development Authority (NYSERDA). No funds have been received
to date for this grant.
In order to
conserve cash and extend operations while we pursue any additional necessary
financing, we made reductions to operating expenses in the first quarter of 2010
which have continued through the second quarter. There is no assurance that
funds raised in any such a financing will be sufficient, that the financing will
be available on terms favorable to us or to existing stockholders and at such
times as required, or that we will be able to obtain the additional financing
required for the continued operation and growth of our business. During the last
twenty one months, MTI Micro has raised $3.8 million in external debt and equity
financing. If we raise additional funds by issuing equity securities, MTI
Micro’s stockholders will experience further dilution. Additional debt
financing, if available, may involve restrictive covenants. Any debt financing
or additional equity financing may contain terms that are not favorable to us or
our stockholders. If we raise additional funds through collaboration and
licensing arrangements with third parties, it may be necessary to relinquish
some rights to our technologies or our products, or grant licenses on terms that
are not favorable to us. If we are unable to raise adequate funds, we may have
to liquidate some or all of our assets or delay, reduce the scope of or
eliminate some or all of our research and development programs, or discontinue
our portable power source business. Management currently believes it will have
adequate resources to fund its MTI Micro operations through the end of 2010;
however, there can be no assurance that MTI Micro will not require funding
before then to continue operations.
25
Our ownership position in MTI Micro
may be reduced as a result of external financing for MTI Micro's operations,
which could limit our ability to control the operations.
As of June
30, 2010, we owned approximately 55.36% or 61.25% on a fully-diluted basis. On
January 11, 2010, MTI Micro entered into a Common Stock and Warrant Purchase
Agreement (the “Purchase Agreement”) with Counter Point Ventures Fund II, L.P.
(“Counter Point”). Pursuant to the Purchase Agreement, MTI Micro may issue and
sell to Counter Point up to 28,571,429 shares of common stock of Micro at a
purchase price per share of $0.070, over a period of twelve months, and warrants
(“Warrants”) to purchase shares of Micro Common Stock equal to 20% of the shares
of Micro Common Stock purchased under the Purchase Agreement at an exercise
price of $0.070 per share. If MTI Micro was to issue and sell all of the
28,571,429 shares under the Purchase Agreement, the remainder of the 5,714,286
warrants under the Purchase Agreement were exercised, as well as all warrants
currently outstanding were exercised, the Company would continue to hold an
aggregate of 50.4% of the outstanding capital stock of MTI Micro, or 55.8% of
the fully-diluted capital stock of MTI Micro.
In
addition, we do not currently expect to advance additional long-term resources
to MTI Micro to fund its continued direct methanol fuel cell development and
commercialization programs. Instead, MTI Micro will seek additional capital from
external sources to fund future development and operations. Depending on the
valuation of MTI Micro at the time of future financings, if any, our ownership
position could be substantially diluted, and we may no longer have sufficient
equity to control the operations of MTI Micro. If MTI Micro is unable to secure
the necessary additional external financing, we may be forced to substantially
downsize or eliminate its operations.
We may experience an ownership
change which would result in a limitation of the use of our net operating
losses.
As of June
30, 2010, we had approximately $66.9 million of net operating loss, or NOL,
carryforwards. As a result of the conversion of the Bridge Notes, MTI no longer
maintains an 80% or greater ownership of MTI Micro. Thus MTI Micro will no
longer be included in the MTI and subsidiaries consolidated federal and combined
New York State tax returns, effective December 9, 2009. A reattribution of a
portion of MTI Micro’s NOLs is expected with the filing of the 2009 tax returns,
which will reduce MTI Micro’s NOLs as of the date of the Bridge Conversion to
approximately $13 million, and MTI’s balance will be approximately $52 million.
Also as a result of the conversion of the Bridge Note, MTI Micro may have
experienced a Section 382 ownership change, which would further reduce their
NOLs by an estimated $6.7 million. Our ability to utilize both the MTI and MTI
Micro NOL carryforwards, including any future NOL carryforwards that may arise,
may be limited by Section 382 of the Internal Revenue Code of 1986, as amended,
if we or MTI Micro undergo any further “ownership changes” as a result of
subsequent changes in the ownership of our outstanding common stock pursuant to
the exercise of the warrants, the conversion of the MTI Micro’s bridge notes, or
otherwise. A corporation generally undergoes an “ownership change” when the
ownership of its stock, by value, changes by more than 50 percentage points over
any three-year testing period. In the event of an ownership change, Section 382
imposes an annual limitation on the amount of post-ownership change taxable
income a corporation may offset with pre-ownership change NOL carryforwards and
certain recognized built-in losses. As of June 30, 2010, it is estimated that
MTI has NOL carryforwards of approximately $52.5 million and MTI Micro has NOL
carryforwards of approximately $14.4 million, with a portion, as noted above,
being subject to IRC Section 382 limitations.
Item 5. Other
Information
None
Item 6. Exhibits
Exhibit
No. |
|
Description |
|
10.168 |
|
Seventh
Amendment to Lease Agreement between Kingfisher LLC and Mechanical
Technology, Incorporated |
|
|
|
31.1 |
|
Rule
13a-14(a)/15d-14(a) Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, of Peng K. Lim |
|
|
|
31.2 |
|
Rule
13a-14(a)/15d-14(a) Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, of Frederick W. Jones |
|
|
|
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of
2002, of Peng K. Lim |
|
|
|
32.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of
2002, of Frederick W. Jones |
26
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.
|
|
Mechanical Technology,
Incorporated |
|
|
|
Date: August 13,
2010 |
By: |
/S/ PENG K.
LIM |
|
|
Peng K. Lim |
|
|
Chief
Executive Officer |
|
|
|
|
By: |
/S/
FREDERICK W. JONES |
|
|
Frederick W.
Jones |
|
|
Acting Chief Financial
Officer |
27