Soluna Holdings, Inc - Annual Report: 2016 (Form 10-K)

 

 

 

x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
OR
¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____TO _____

New York	000-06890	14-1462255
(State or other jurisdiction	(Commission File Number)	(IRS Employer
of incorporation or organization)		Identification No.)

Title of each class	Name of each exchange on which registered
None	None

Large accelerated filero

Accelerated filero

Non-accelerated filero (Do not check if a smaller reporting company)

Smaller reporting company x

 

 

PART I
Item 1.		Business		Page 3
Item 1A.		Risk Factors		8
Item 1B.		Unresolved Staff Comments		14
Item 2.		Properties		14
Item 3.		Legal Proceedings		14
Item 4.		Mine Safety Disclosures		15
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		15
Item 6.		Selected Financial Data		15
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk		21
Item 8.		Financial Statements and Supplementary Data		21
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		21
Item 9A.		Controls and Procedures		21
Item 9B.		Other Information		22
PART III
Item 10.		Directors, Executive Officers and Corporate Governance		22
Item 11.		Executive Compensation		22
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		22
Item 13.		Certain Relationships and Related Transactions, and Director Independence		23
Item 14.		Principal Accounting Fees and Services		23
PART IV
Item 15.		Exhibits, Financial Statement Schedules		24
Item 16.		Form 10-K Summary		25

 

 

PART I

 

Item 1: Business

 

Unless the context requires otherwise in this Annual Report on Form 10-K, the terms the “Company,” “we,” “us,” and “our” refer to Mechanical Technology, Incorporated and “MTI Instruments” refers to MTI Instruments, Inc. Other trademarks, trade names, and service marks used in this Annual Report on Form 10-K are the property of their respective owners.

 

Mechanical Technology, Incorporated, a New York corporation, was incorporated in 1961. The Company’s core business is conducted through MTI Instruments, Inc., a wholly-owned subsidiary incorporated in New York on March 8, 2000. The Company’s operations are headquartered in Albany, New York where it designs, manufactures, and markets its products globally.

 

The Company also owns a 47.5% interest, which as of December 31, 2016 has a fair value of $0, in MeOH Power, Inc. (formerly MTI MicroFuel Cells, Inc.), which the Company operated as a subsidiary until December 31, 2013, at which time the majority interest was transferred to one of our directors. We do not expect our current interest in MeOH Power, Inc. to have a material impact on our results of operations or financial condition going forward.

 

MTI Instruments is a supplier of precision linear displacement solutions, vibration measurement and system balancing solutions, and wafer inspection tools. These tools and solutions are developed for markets that require the precise measurements and control of products processes for the development and implementation of automated manufacturing, assembly, and consistent operation of complex machinery. 

 

As part of its strategy, MTI Instruments provides its customers with enabling sensors and sensing technologies that help advance manufacturing processes and new product development efforts. The demand for higher quality and lower cost products ranging from semiconductor chips to electronics and large items such as automobiles continues to drive Original Equipment Manufacturers (OEMs) and their suppliers to invest in technology and the capability to rapidly produce high quality products. The industry has moved towards flexible manufacturing doctrines around mass customization and production incorporating lean principles to reduce labor and waste, while increasing quality. Modern manufacturing advances at a very rapid pace with the help of automation controls and precision sensing technologies for operating equipment, processes in factories, and other applications with minimal or reduced human intervention. OEMs find that using automation helps them not only improve on quality, but also can save labor, energy and materials while significantly improving accuracy and precision. In some industries like semiconductors, fabrication facilities are fully automated and are aided by humans on a low frequency basis. 

 

Using a combination of integrated smart robotics, manufacturing lines, and a myriad of sensors that measure ongoing equipment performance, monitoring and drive controls have resulted in significant advancements in productivity and quality in manufacturing. There is no question that the world is moving from classic manufacturing and assembly towards automation and measurement.

 

MTI Instruments has decades of experience in working with OEMs and their subcontractors in the supply of sensor, instruments and systems technology to incorporate into OEMs’ equipment and major companies’ manufacturing processes as they develop and implement new process, quality and automation controls. The Company has moved to a customer and market-based approach by targeting leading companies in specific market segments including the industrial and consumer electronics, automotive and other precision automated manufacturing industries, turbo machinery and the research and development aspects within these markets for both product and process improvements. 

 

This same approach is driving the demand for engine vibration measurement and balancing. Ongoing efforts to improve engine performance and lower fuel consumption drive both military and commercial axial turbo-machinery operators to maintain their equipment at peak performance.

 

These market drivers are also providing opportunity and demand for MTI to enhance current and develop new products and technologies. This has become a central theme in our supporting a larger, more complex customer base. Our efforts to become more capable and competitive in operations and quality are being met by our well defined approach to lean manufacturing principles and the achievement of International Organization for Standardization (ISO) ISO 9001:2008 certification in 2014.

 

 

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Automated Monitoring and Precision Automation Manufacturing Automated monitoring allows companies and engineers to rectify system problems before they become costly repairs and maintenance costs. MTI’s latest system has a non-magnetic paper-thin probe that allows users to measure and monitor gaps in high power generators, wind turbines, and other auxiliary equipment. Its Ethernet interface supports remote access to this critical information. Meanwhile, MTI is also supporting the world-wide need for OEMs to drive continuous improvement efforts through use of the most innovative manufacturing and assembly techniques in products and processes. Due to the level of precision required, these products or processes are managed through automated systems (Piezo positioners, robot guide, dielectric material/LED wafer inspection, etc.) and require precise measurement, data transmission, analysis and management.

 

MTI Instruments provides advanced linear displacement solutions for OEMs that can be incorporated into a tool or equipment manufactured by a company to monitor performance and/or achieve control (“in product application”) or into a process to control the manufacture of parts or measure critical parameters of parts as they enter or leave a process (“in process applications”). 

 

MTI Instruments is a preferred supplier for applications that require complex and extremely precise measurement of intricate targets and assemblies. MTI Instruments uses its significant track record and experience in capacitance, laser and fiber optic technologies to make products that range from basic sensors to complete, fully integrated measurement systems. Applications include precision positioning, material surface measurements, off-center vibration measurements, and pattern recognition analysis.

 

Listed below are selected MTI Instruments’ automated monitoring and precision automation manufacturing product offerings:

 

 

 

Axial Turbo Machinery

Turbo machines are categorized according to the type of flow. When the fuel and air flow is parallel to the axis of rotation, they are referred to as axial flow machines. MTI Instruments is a leader in the development and commercialization of vibration measurement and system balancing for axial type engines – typically medium and large turbo fan aircraft engines – for both military and commercial applications. In addition, we are exploring possibilities for expansion of its product offerings for a variety of applications within this market segment.   MTI Instruments designs and manufactures computer-based portable balancing systems (PBS) products which automatically collect and record engine vibration data, identifying vibration or balance trouble, and calculating a solution to the problem. These products are designed to quickly pinpoint engine vibration issues for improved fuel efficiency, lower maintenance cost and safety.

 

PBS products are used by major aircraft engine manufacturers, the U.S. and foreign militaries, and commercial airlines, as well as gas turbine manufacturers.

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	Product Model	Description
	PBS-4100+ Portable Balancing System	Provides easy to follow solutions for engine vibration and trim balancing problems.
	PBS-4100R+ Test Cell Vibration Analysis & Trim Balancing System	Advanced trim balancing and diagnostics for engine test cells.
	TSC-4800A Tachometer Signal Conditioner	Tachometer signal conditioner detects and conditions signals for monitoring, measuring, and indicating engine speeds.
	1510A Calibrator	National Institute of Standards and Technology (NIST) traceable signal generator that outputs voltage signals useful to test and calibrate electronic equipment.

	Product Model	Description
	Accumeasure Digital Series	Ultra-high precision digital capacitive systems offering sub-nanometer accuracy.
	Accumeasure Analog Series	Ultra-high precision capacitive displacement systems offering nanometer accuracy.
NEW	Tensile MicroStage	Specifically designed to fit under atomic force microscopes (AFMs), these MicroTensile Testers provide high resolution tensile, compression, fatigue and bend testing of up to 450 Newton (100 lbs).
	Microtrak 4	Single spot laser sensor equipped with the latest complementary metal oxide semiconductor (CMOS) sensor technology with true digital data output.
	Proforma 300i	Manual, non-contact measurement of semiconductor wafer thickness, total thickness variation and bow.
	PV 1000	Manual tool for measuring thickness and bow of solar wafers.
	MTI-2100 Fotonic Sensor Series	Fiber-optic based displacement sensor systems with high frequency response.

 

 

 

To supplement these efforts, we use both commercial and industrial search engines, targeted newsletters, purchased customer lists and participation in trade shows to identify and expand our customer base.

 

Product Development

MTI Instruments continuously conducts research to develop new and advance existing technologies in support of its business strategy. Along with innovation as a key hallmark to its efforts, we carefully consider a number of factors including customer needs, product or technology uniqueness, market trends, costs, the competitive landscape, and creative marketing and communications plans in developing our products. We take a customer-centered approach in order to find new ways to solve customer needs, engage with customers directly, and create a loyal customer base while offering a more compelling value proposition.

 

In 2016, MTI Instruments introduced a paper-thin capacitance probe that is non-magnetic, a feature that allows the probe to conform and be bonded in a thin gap and also provide accurate measurement within surrounding magnetic fields. This paper-thin probe, together with the recently launched Accumeasure D, is designed to be used to measure and monitor gaps in high power generators, wind turbines, and other auxiliary equipment. In addition, its Ethernet interface supports remote access to critical information.

 

We launched an additional line of SEMtester products to support the growing AFM users in the R&D market. The MTI Tensile MicroStage is designed with a reduced height to fit under AFMs or other adjustable lens microscopes. This new MicroStage also uses lightweight materials to meet air table and motorized stage requirements.

 

We also launched, during 2016, a line of Accumeasure D capable of measuring the thickness of non-conductive materials such as glass, plastic sheet and sapphire wafer (used in white light-emitting diode (LED) manufacturing). Additionally, we continue to invest in the development of a system to measure defects in industrial tool and internal thread inspection that utilizes our Accumeasure D series of products. 

 

During 2015, we developed and commercialized new enhancements in our PBS 4100+ product, including the capability to measure vibration and balance a number of turbo-shaft engines for rotary wing aircraft (helicopter), which has proven effective with several commercial customers. During 2016, the PBS 4100+ has been enhanced to accommodate the latest generation of fuel-efficient aircraft engines.

 

With investments in research and product development, we seek to achieve a competitive position by continuously advancing our technology, producing new state-of-the-art precision measurement equipment, expanding our worldwide distribution, and providing intimate customer support. Management believes that MTI Instruments’ success depends to a large extent on identifying market requirements, innovation, and utilizing our technological expertise to develop and implement new products.

 

Product Manufacturing & Operations

We conduct research, product development and innovation, and manufacture our products, in the United States. While many companies in the sensor, instrument and systems markets have manufacturing operations overseas, MTI is and has always been a U.S.-based manufacturing company. Products are conceived, developed, tested, and shipped out from our headquarters in Albany, New York.

 

Management believes that there are inherent advantages in keeping manufacturing in the U.S., including reducing the risk of inadvertent technology transfer, the ability to control manufacturing quality, and a much more effective customer management and satisfaction process. We have long-term vendor relationships and believe that most raw materials used in our products are readily available from a variety of vendors.

 

To prepare for future growth, we have also made strides in bringing a more flexible approach to manufacturing. While cross-training our employees in operations in different functional areas, management has also implemented lean principles on the manufacturing floor to increase capacity, productivity and throughput, eliminate waste, and quickly adapt to larger customers’ demands while continuing to keep inventory levels under control. MTI has additional capabilities in its existing, flexible manufacturing space as production volumes increase.

 

In April 2014, the Company received initial ISO certification 9001:2008 and was most recently recertified in April 2016. The certifications were authorized by TÜVRheinland^®, an independent agency. To obtain these certifications, we underwent a rigorous five step process including preparation, documentation, implementation, internal audit, and final certification. The ISO 9001:2008 certification confirms our commitment to an effective management system and continuous improvement, a practice management believes is important for continuous growth.  

 

Intellectual Property and Proprietary Rights

We rely on trade secret and copyright laws to establish and protect the proprietary rights of our products. In addition, we enter into standard confidentiality agreements with our employees and consultants and seek to control access to and distribution of our proprietary information. Even with these precautions, however, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization or to develop similar technology independently. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. 

 

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Significant Customers

MTI Instruments’ largest customer is the U.S Air Force. We also have strong relationships with companies in the electronics, aircraft, aerospace, automotive, semiconductor and research industries. The U.S. Air Force accounted for 18.1% and 4.4%, respectively, of total product revenues during 2016 and 2015.The largest commercial customer in 2016 was an Asian distributor, who accounted for 8.1% and 6.8%, respectively, of total product revenue during 2016 and 2015. 

Competition

We compete with several companies, several of which are substantially larger than MTI Instruments.

In the precision automated manufacturing market, MTI Instruments faces competition from companies including Keyence, Micro Epsilon, Schmitt Industries, Capacitec, Microsense and Lion Precision Instruments.

In the axial turbo machinery market, MTI Instruments competes with companies including ACES Systems and Meggitt Sensing Systems.

In the R&D market, we compete with companies involved in material testing, include Gatan, Deben, and E+H Metrology GmbH.  Competitors in precision linear displacement include Keyence, Micro Epsilon, Schmitt Industries, Capacitec, Microsense and Lion Precision Instruments.

The primary competitive considerations in MTI Instruments’ markets are product quality, performance, price, timely delivery, responsiveness and the ability to identify, pursue and obtain new customers. MTI Instruments believes that its employees, product development skills, sales and marketing systems and reputation are competitive advantages.

 

Research and Development

 

MTI Instruments conducts research and develops technology to support its existing products and develop new products. MTI incurred research and development costs of approximately $1.2 million and $1.5 million for the years ended December 31, 2016 and 2015, respectively. We expect to continue to invest in research and development in the future at MTI Instruments as part of our growth strategy.

 

Employees

 

As of December 31, 2016, we had 29 employees including 24 full-time employees.

 

Recent Developments

 

Adoption of Shareholder Rights Plan

On October 6, 2016 (the “Rights Dividend Declaration Date”), the Company’s Board of Directors adopted a Section 382 rights plan (the “Rights Plan”) and declared a dividend distribution of one right (the “Rights”) for each outstanding share of common stock, par value $0.01 per share (the “Common Stock”), of the Company to shareholders of record at the close of business on October 19, 2016. Each share of common stock issued thereafter will also include one Right. Subject to the terms, provisions and conditions of the Rights Plan, if the Rights become exercisable, each Right would represent the right to purchase from the Company one share of our common stock at a purchase price of $5.00 per share, subject to adjustment.

The Board adopted the Rights Plan in an effort to protect against a possible limitation on the Company’s ability to use its net operating loss carryforwards (“NOLs”), which totaled approximately $51.9 million as of December 31, 2016. The Company may utilize these NOLs in certain circumstances to offset future U.S. taxable income and reduce its U.S. federal income tax liability. 

For additional information about the Rights Plan and the Rights, please see the Company’s Current Report on Form 8-K filed on October 6, 2016.

Sale of Common Stock to Brookstone Partners Acquisition XXIV, LLC

On October 21, 2016, the Company issued and sold 3,750,000 shares of its common stock (the “Shares”) to Brookstone Partners Acquisition XXIV, LLC (“Brookstone”), for an aggregate of $2,737,500, pursuant to a Securities Purchase Agreement between Brookstone and the Company.  In connection therewith, we also appointed three designees of Brookstone to the Company’s Board of Directors. Immediately subsequent to the issuance of the Shares, Brookstone owned 41.7% of the outstanding shares of our common stock. 

 

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Also on October 21, 2016, the Company and Brookstone entered into a Registration Rights Agreement, pursuant to which the Company agreed to, at any time after December 20, 2016 and upon the request of holders of at least 25% of the outstanding Shares, to file a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), to register the resale of the Shares.

For additional information about the Brookstone transaction, please see the Company’s Current Report on Form 8-K filed on October 21, 2016.

Departure of Directors or Certain Officers; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

 

On January 18, 2017, Kevin G. Lynch resigned as President and Chief Executive Officer as well as Chairman of the Board of the Company. Mr. Lynch will remain on the Company’s Board of Directors. In conjunction with his resignation, Mr. Lynch and the Company entered into a separation agreement (dated February 1, 2017). The Company’s Board of Directors appointed Frederick W. Jones, our current Chief Financial Officer, as President and Chief Executive Officer. Mr. Jones will remain our Chief Financial Officer as well.

For additional information about the departure of Mr. Lynch and the appointment of Mr. Jones, please see the Company’s Current Reports on Form 8-K filed on January 24, 2017 and February 8, 2017.

 

Item 1A: Risk Factors

 

Factors Affecting Future Results

 

This Annual Report on Form 10-K 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, (the “Exchange Act”). Any statements contained, or incorporated by reference, in this Annual Report on Form 10-K 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. Such forward-looking statements include, but are not limited to, statements regarding:

 

• anticipated growth, including in revenues and cash flows;
• statements with respect to management’s strategy and planned initiatives;
• management’s belief that it will have adequate resources to fund the Company’s operations and capital expenditures for the year ending December 31, 2017 and through the end of the first quarter of 2018;
• the expected impact of recent and pending accounting standards or updates;
• projected taxable income and the ability to use deferred tax assets (currently held at a full valuation allowance);
• generating earnings in the future;

• the expectation that future cost-cutting measures will be avoided;

• future capital expenditures and spending on research and development;
• expected funding of future cash expenditures; and
• the expected impact of our investment in MeOH Power, Inc.

 

Forward-looking statements involve risks, uncertainties, estimates and assumptions that 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:

• statements with respect to management’s strategy and planned initiatives;
• sales revenue growth may not be achieved or maintained;  

• the dependence of our business on a small number of customers and potential loss of government contracts - particularly in light of potential cuts that may be imposed as a result of U.S. government budget appropriations;
• 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;  

• our inability to build and maintain relationships with our customers;  
• our inability to develop and utilize new technologies that address the needs of our customers;  
• our inability to obtain new credit facilities;
• the cyclical nature of the electronics and military industries;  
• the uncertainty of the U.S. and global economy, including as a result of the United Kingdom’s impending exit from the European Union;  
• the impact of future exchange rate fluctuations;  
• 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;  
• the loss of services of one or more of our key employees or the inability to hire, train, and retain key personnel;

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• risks related to protection and infringement of intellectual property;  
• our occasional dependence on sole suppliers or a limited group of suppliers;

• our ability to generate income to realize the tax benefit of our historical net operating losses;

• risks related to the limitation of the use, for tax purposes, of our net historical operating losses in the event of certain ownership changes; and

• other risks discussed below.

 

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in, or incorporated by reference into, this Annual Report on Form 10-K as a result of new information or future events or developments. Thus, assumptions should not be made that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.

 

Risk Factors

 

You should consider carefully the following risks, along with other information contained in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones that may affect us. Additional risks and uncertainties also may adversely affect our business and operations including those discussed in the heading “Factors Affecting Future Results” above. Any of the following events, should they actually occur, could materially and adversely affect our business and financial results.

 

If we are unsuccessful at addressing our business challenges, we may not achieve or maintain profitability in the future, our business and results of operations and financial condition may be adversely affected and our ability to invest in and grow our business could be limited. 

 

We have incurred significant operating and net losses since our inception. We incurred a net loss of $359 thousand during the year ended December 31, 2016 and had an accumulated deficit of $121.0 million as of such date. In order to achieve and maintain profitability and improve liquidity, we must successfully achieve all or some combination of the following initiatives: increasing sales, developing new products, controlling operating expenses, managing our cash flows, successfully obtaining new credit facilities, improving operational efficiency and estimating and projecting accurately our liquidity and capital resources. In “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Management’s Plan, Liquidity and Capital Resources” in this Annual Report on Form 10-K, we made estimates regarding our cash flow and results of operations for the year ending December 31, 2017 and through the end of the first quarter of 2018. If our cash flow or results of operations are less favorable than we have estimated, we may not be able to make all of our planned operating or capital expenditures or fully execute all of our other plans. Our financial success depends in part on management’s ability to execute our growth strategy. We expect that we will depend primarily on cash generated by our operations for funds to pay our expenses and any other indebtedness we may incur. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flows from operations in the future and our currently anticipated growth in revenues and cash flows may not be realized, either or both of which could result in our being unable to repay indebtedness or to fund other liquidity needs. If we do not have enough money, we may be required to sell assets or borrow money, in each case on terms that may not be acceptable to us. In addition, the terms of any future debt agreements, including new lines of credit, may restrict us from adopting any of these alternatives. Further, any significant levels of indebtedness in the future could place us at a competitive disadvantage compared to our competitors that may have access to additional resources or proportionately less debt and could make us more vulnerable to economic downturns and adverse developments in our business. Any future loss incurred by the Company could have a material adverse effect on our business and our ability to generate the cash needed to operate our business. Although we generated net income in 2011, 2013 and 2014, we had a net loss during 2016 and 2015 and prior to 2011 we had generated net losses since 1998, and we may not be able to achieve or sustain profitability in the future. If we do achieve profitability in the future, the level of any profitability cannot be predicted and may vary significantly from quarter to quarter and from year to year. Failure to continue to successfully implement these initiatives could prevent us from achieving and maintaining profitability and otherwise have a material adverse effect on our business plans, liquidity, results of operations and financial condition and may result in a downsize to the business. Further, even if implemented successfully there is no guarantee that our efforts in this regard would result in sustained and improving profitability.  

 

We currently derive all of our product revenue from our MTI Instruments business.

 

All of our revenue is currently derived from our MTI Instruments business. We do not have a broad portfolio of other products we could rely on to support operations if we were to experience a substantial slowdown in our MTI Instruments business, which is subject to a number of risks, including:

 

• dependence on a limited number of customers;
• a continued slowdown or cancellation of sales to the military as a result of a potential redeployment, or sequestration, of governmental funding; 

• our ability to maintain, improve, or expand our channels of distribution; 

 

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• the potential failure to expand or maintain our business as a result of competition, a lack of brand awareness, or market saturation; and

• an inability to launch new products as a result of intense competition, uncertainty of new technology development, or limited or unavailable resources to fund development. 

 

In addition, revenues from the sale of MTI Instruments’ products can vary significantly from one period to the next. We may sell a significant amount of our products to one or a few customers for various short term projects in one period, and then have markedly decreased sales in following periods as these projects end or customers have the products they require for the foreseeable future. The fact that we sell a significant amount of our products to a limited number of customers also results in a customer concentration risk. The loss of any significant portion of such customers or a material adverse change in the financial condition of any one of these customers could have a material adverse effect on our revenues, our business and our ability to generate the cash needed to operate our business. 

 

We may not be able to enhance our product solutions and develop new product solutions in a timely manner.

 

Our future operating results will depend to a significant extent on our ability to provide new products that compare favorably with alternative solutions on the basis of time to introduction, cost, performance, and end-user preferences. Our success in attracting and retaining customers and developing business will depend on various factors, including the following:

• innovative development of new products for customers;  

• utilization of advances in technology;  

• maintenance of quality standards;  

• efficient and cost-effective solutions; and  

• timely completion of the design and introduction of new products.

Our inability to develop new product solutions on a timely basis could harm our operating results and impede our growth.

 

Our operating results may experience significant fluctuations.

 

In addition to the variability resulting from the short-term nature of our customers’ commitments, other factors contribute to significant periodic fluctuations in our results of operations. These factors include:

• the cyclicality of the markets we serve;  

• the timing and size of orders;  

• the volume of orders relative to our capacity;  

• product introductions and market acceptance of new products or new generations of products;  

• evolution in the life cycles of our customers’ products;

• timing of expenses in anticipation of future orders;

• changes in product mix;

• availability of manufacturing and assembly services;

• changes in cost and availability of labor and components;  

• timely delivery of product solutions to customers;

• pricing and availability of competitive products;

• introduction of new technologies into the markets we serve;

• pressures on reducing selling prices;

• our success in serving new markets; and

• changes in economic conditions.

If we do not keep pace with technological innovations, our products may not be competitive and our revenue and operating results may suffer.

 

The electronic, semiconductor, solar, automotive and general industrial segments are subject to constant technological change. Our future success will depend on our ability to respond appropriately to changing technologies and changes in product function and quality. If we rely on products and technologies that are not attractive to end users, we may not be successful in capturing or retaining market share. Technological advances, the introduction of new products, and new design techniques could adversely affect our business prospects unless we are able to adapt to the changing conditions. Technological advances could render our products obsolete, and we may not be able to respond effectively to the technological requirements of evolving markets. As a result, we will be required to expend substantial funds for and commit significant resources to:

• continue research and development activities on all product lines;  

• hire additional engineering and other technical personnel; and  

• purchase advanced design tools and test equipment.

 

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Our business could be harmed if we are unable to develop and utilize new technologies that address the needs of our customers, or our competitors do so more effectively than we do.

 

Our efforts to develop new technologies may not result in commercial success and/or may result in delays in development, which could cause a decline in our revenue and could harm our business.

 

Our research and development efforts with respect to our technologies may not result in customer or market acceptance. Some or all of those technologies may not successfully make the transition from the research and development lab to cost-effective production as a result of technology problems, competitive cost issues, yield problems, and other factors. Even when we successfully complete a research and development effort with respect to a particular technology, our customers may decide not to introduce or may discontinue products utilizing the technology for a variety of reasons, including the following:

• difficulties with other suppliers of components for the products;  

• superior technologies developed by our competitors and unfavorable comparisons of our solutions with these technologies;  

• price considerations; and  

• lack of anticipated or actual market demand for the products.

The nature of our business will require us to make continuing investments to develop new technologies. Significant expenses relating to one or more new technologies that ultimately prove to be unsuccessful for any reason could have a material adverse effect on us. In addition, any investments or acquisitions made to enhance our technologies may prove to be unsuccessful. If our efforts are unsuccessful, our business could be harmed.

 

Continuing uncertainty of the U.S. and global economy may have serious implications for the growth and stability of our business.

 

Revenue growth and continued profitability of our business will depend significantly on the overall demand for test and measurement instrumentations in key markets including research and development, automotive, semiconductor and electronics. Softening demand in these markets caused by ongoing economic uncertainty, a return to recessionary conditions, technological developments, competitive changes or other factors may result in decreased revenue or earnings levels. The U.S. and global economy has been historically cyclical and market conditions continue to be challenging, which has resulted in individuals and companies delaying or reducing expenditures. Further delays or reductions in spending could have a material adverse effect on demand for our products, and consequently on our business, financial condition, results of operations, prospects, stock price, and ability to continue to operate.

 

Variability of customer requirements resulting in cancellations, reductions, or delays may adversely affect our operating results.

 

We are required to provide rapid product turnaround and respond to short lead times. A variety of conditions, both specific to individual customers and generally affecting the demand for OEMs’ products, may cause customers to cancel, reduce, or delay orders. Cancellations, reductions, or delays by a significant customer or by a group of customers could adversely affect our operating results. Conversely, if our customers unexpectedly and significantly increase product orders, we may be required to rapidly increase production, which could strain our resources and reduce our margins.

 

The cyclical nature of the electronics and military industries may result in fluctuations in our operating results.

 

The electronics and military industries have experienced significant economic downturns at various times. These downturns are characterized by diminished product demand, accelerated erosion of average selling prices, and production overcapacity. We may seek to reduce our exposure to industry downturns by providing design and production services for leading companies in rapidly expanding industry segments. We may, however, experience substantial period-to-period fluctuations in future operating results because of general industry conditions or events occurring in the general economy.

 

International sales risks could adversely affect our operating results. Furthermore, our operating results could be adversely affected by changes to U.S. policy and fluctuations in the value of the U.S. dollar against foreign currencies.

 

Having a worldwide distribution network for our products exposes us to various economic, political, and other risks that could adversely affect our operations and operating results, including the following:

•  unexpected changes in regulatory requirements;

• timing to meet regulatory requirements;  

• tariffs, duties and other trade barrier restrictions;  

• greater difficulty in collecting accounts receivable;  

• the burdens and costs of compliance with a variety of foreign laws;  

• potentially reduced protection for intellectual property rights; and  

• political or economic instability in certain parts of the world.

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All of these risks associated with international sales could negatively affect our operating results.

 

We anticipate possible changes to current policies by the U.S. government that could affect our business, including potentially through increased import tariffs and other changes in U.S. trade relations with other countries (e.g., China). Our suppliers source some of their raw materials from foreign countries, so any tariffs imposed by the U.S. government on imports into the United States would likely increase our cost of product revenue and, as a result, decrease our gross margins, operating income and net income, which could have a material adverse effect on our financial condition. Further, if the U.S. government imposes tariffs on imports into the United States, other countries may respond by imposing tariffs on products manufactured in the United States, which would increase the price of our products in these countries and may result in our customers looking to alternative sources for our products. Further, the imposition of such tariffs, and other recent and potential actions of the U.S government with respect to other countries, may generate negative views of the United States in other countries and make persons in those countries less inclined to purchase products from U.S. companies like us.

 

In addition, we transact our business in U.S. dollars and bill and collect our sales in U.S. dollars. In 2016, approximately 32.3% of our revenue was from customers located outside of the United States. It is possible that U.S. policy changes and uncertainty about policy could increase market volatility and currency exchange rate fluctuations. Market volatility and currency exchange rate fluctuations could impact our results of operations and financial condition related to transactions denominated in a foreign currency. A weakening of the dollar could cause our overseas vendors to require renegotiation of either the prices or currency we pay for their goods and services. Similarly, a strengthening of the dollar could cause our products to be more expensive for our international customers, which could impact price and margins and/or cause the demand for our products, and thus our revenue, to decline.

 

In the future, customers may negotiate pricing and make payments in non-U.S. currencies. If our overseas vendors or customers require us to transact business in non-U.S. currencies, fluctuations in foreign currency exchange rates could affect our cost of goods, operating expenses, and operating margins and could result in exchange losses. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact that future exchange rate fluctuations may have on our operating results.

 

Our confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information, which could limit our ability to compete.

 

We rely on trade secrets to protect our proprietary technology and processes. Trade secrets are difficult to protect. We enter into confidentiality and intellectual property assignment agreements with our employees, consultants, and other advisors. These agreements generally require that the other party keep confidential and not disclose to third parties confidential information developed by the party under such agreements or made known to the party by us during the course of the party’s relationship with us. However, these agreements may not be honored and enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time-consuming, and the outcome is unpredictable. Our failure to obtain and maintain trade secret protection could adversely affect our competitive position.

 

We depend on key personnel who would be difficult to replace, and our business will likely be harmed if we lose their services or cannot hire additional qualified personnel.

 

Our success depends substantially on the efforts and abilities of our senior management and key personnel. The competition for qualified management and key personnel, especially engineers, is intense. Although we maintain non-competition and non-disclosure covenants with most of our key personnel, we do not have employment agreements with most of them. The loss of services of one or more of our key employees or the inability to hire, train, and retain key personnel, especially engineers, technical support personnel, and capable sales and customer-support employees outside the United States, could delay the development and sale of our products, disrupt our business, and interfere with our ability to execute our business plan.

 

Future sales of our common stock, or the perception that future sales may occur, may cause the market price of our common stock to decline, even if our business is doing well.

 

Pursuant to the Registration Rights Agreement entered into between the Company and Brookstone, the Company is obligated to register for resale the shares of common stock sold to Brookstone in October 2016. Sales of substantial amounts of our common stock in the market after such registration, or the perception that these sales may occur, could materially and adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional equity securities.

 

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Brookstone’s ownership of 41.6% of the outstanding shares of our common stock gives it a controlling interest in the Company.

 

Brookstone owns approximately 41.6% of our outstanding shares of common stock and has designated three directors that sit on our seven-member Board of Directors. Accordingly, Brookstone has the ability to exert a significant degree of influence or actual control over our management and affairs and, as a practical matter, will control corporate actions requiring shareholder approval, irrespective of how our other shareholders may vote, including the election of directors, amendments to our certificate of incorporation and bylaws, and the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets, and Brookstone may vote its shares in a manner that is adverse to the interests of our minority stockholders. For example, Brookstone will be able to prevent a merger or similar transaction, including a transaction in which stockholders will receive a premium for their shares, even if our other shareholders are in favor of such transaction. This concentration of voting control could deprive our investors of an opportunity to receive a premium for their shares of our common stock as part of a sale of the Company. Further, Brookstone’s control position might adversely affect the market price of our common stock to the extent investors perceive disadvantages in owning shares of a company with a controlling shareholder.

 

Brookstone and their director designees may acquire interests and positions that could present potential conflicts with our and our shareholders’ interests.

 

Brookstone and their director designees may make investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Brookstone and their director designees may also pursue, for their own accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities might not be available to us. As part of our sale of the Shares to Brookstone in October 2016 and as required by Brookstone as a condition to purchasing the Shares, our Board of Directors renounced, to the extent permitted by New York law, the Company's expectancy with respect to being offered an opportunity to participate in any business opportunity that is discovered by or presented to a director designee (a “Business Opportunity”), whether in such director designee’s capacity as a director of the Company or otherwise. Accordingly, the interests of Brookstone and the designated directors with respect to a Business Opportunity may supersede ours, and Brookstone or its affiliates or the Brookstone-designated directors may be involved with business in competition with us and may pursue opportunities for the sole benefit of Brookstone and its affiliates without our involvement, for which we have limited recourse. Such actions on the part of Brookstone or its director designees could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from selling our products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief.

 

We may receive notices from third parties that the manufacture, use, or sale of any products we develop infringes upon one or more claims of their patents. Moreover, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, that may later result in issued patents that materially and adversely affect our business. Third parties could also assert infringement or misappropriation claims against us with respect to our future product offerings, if any. We cannot be certain that we have not infringed the intellectual property rights of any third parties. Any infringement or misappropriation claim could result in significant costs, substantial damages, and our inability to manufacture, market, or sell any of our product offerings that are found to infringe another person’s patent. Even if we were to prevail in any such action, the litigation could result in substantial cost and diversion of resources that could materially and adversely affect our business. If a court determined, or if we independently discovered, that our product offerings violated third-party proprietary rights, there can be no assurance that we would be able to re-engineer our product offerings to avoid those rights or obtain a license under those rights on commercially reasonable terms, if at all. As a result, we could be prohibited from selling products that are found to infringe upon the rights of others. Even if obtaining a license were feasible, it may be costly and time-consuming. A court could also enter orders that temporarily, preliminarily, or permanently enjoin us from making, using, selling, offering to sell, or importing our products that are found to infringe on third parties’ intellectual property rights, or could enter orders mandating that we undertake certain remedial actions. Further, a court could order us to pay compensatory damages for any such infringement, plus prejudgment interest, and could in addition treble the compensatory damages and award attorneys’ fees. Any such payments could materially and adversely affect our business and financial condition.

 

If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged.

 

Our business involves the collection, storage and transmission of personal, financial or other information that is entrusted to us by our customers and employees. Our information systems also contain the Company's proprietary and other confidential information related to our business. Our efforts to protect such information may be unsuccessful due to the actions of third parties, computer viruses, physical or electronic break-ins, catastrophic events, employee error or malfeasance or other attempts to harm our systems. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures in time. We could also experience a loss of critical data and delays or interruptions in our ability to manage inventories or process transactions. Some of our commercial partners, such as those that help us maintain our websites, may receive or store information provided by us or our users through our websites. If these third parties fail to adopt or adhere to adequate information security practices, or fail to comply with our policies in this regard, or in the event of a breach of their networks, our customers’ information may be improperly accessed, used or disclosed.

 

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If our systems are harmed or fail to function properly, we may need to expend significant financial resources to repair or replace systems or to otherwise protect against security breaches or to address problems caused by breaches. If we experience a significant security breach or fail to detect and appropriately respond to a significant security breach, we could be exposed to costly legal actions against us in connection with such incidents, which could result in orders or judgments forcing us to pay damages or fines or to take certain actions with respect to our information systems. Any incidents involving unauthorized access to or improper use of user information, or incidents that are a violation of our online privacy could harm our brand reputation and diminish our competitive position. Any of these events could have a material and adverse effect on our business, reputation or financial results. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.

 

In the future, we may experience an ownership change in the Company that would result in a limitation of tax attributes relating to the use of our net operating losses.

 

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 of the Internal Revenue Code of 1986 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change net operating loss (NOL) carryforwards and certain recognized built-in losses.

 

We estimate that as of December 31, 2016, the Company and MTI Instruments have NOL carryforwards of approximately $51.9 million. Our ability to utilize these NOL carryforwards, including any future NOL carryforwards that may arise, may be limited by Section 382 if we undergo any further “ownership changes” as a result of subsequent changes in the ownership of our outstanding common stock pursuant to the exercise of MTI options outstanding, additional financings obtained, or otherwise. 

 

Our risk management process may not identify all risks that we are subject to and will not eliminate all risk.

 

Our Enterprise Risk Management (ERM) process seeks to identify and address significant risks. Our ERM process uses the most recent integrated risk framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess, manage, and monitor risks. We believe that risk-taking is an inherent aspect of the pursuit of our growth and performance strategy. Our goals are to proactively manage risks in a structured approach in conjunction with strategic planning, with the intent to preserve and enhance shareowner value, and to manage prudently, rather than wholly avoiding, risks. We can mitigate risks and their impact on the Company, however, only to a limited extent, and no ERM process can identify all risks that we may face. Therefore, there may be risks that we are currently unaware of, that may develop in the future or that we currently consider immaterial. Further, our management of risks may prove inadequate. The emergence of risks of which we were unaware or are unable to manage could have a material adverse effect on our business, prospectus, financial condition and results of operations.

 

Item 1B: Unresolved Staff Comments

 

Not applicable.

 

 

Item 2: Properties

 

We lease approximately 17,400 square feet of office, manufacturing and research and development space at 325 Washington Avenue Extension, Albany, NY 12205. The current lease agreement expires on November 30, 2019. We believe our facilities are generally well maintained and adequate for our current needs and for expansion, if required.

 

 

Item 3: 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 effect on our business, financial condition or results of operations.

 

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	High			Low
Fiscal Year Ended December 31, 2016
First Quarter	$	1.40		$	0.67
Second Quarter		0.95			0.55
Third Quarter		1.41			0.35
Fourth Quarter		1.60			0.95
Fiscal Year Ended December 31, 2015
First Quarter	$	1.20		$	0.70
Second Quarter		1.49			0.86
Third Quarter		1.36			1.06
Fourth Quarter		1.29			0.20

 

 

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including those discussed in Item 1A: “Risk Factors” and elsewhere in this Annual Report.

 

 

Overview

 

MTI’s core business is conducted through our wholly-owned subsidiary MTI Instruments, Inc. MTI Instruments is a supplier of precision linear displacement sensors, instruments and system solutions, vibration measurement and system balancing solutions, precision tensile measurement systems and wafer inspection tools, serving markets that require 1) the precise measurements and control of products and processes in automated manufacturing, assembly, and consistent operation of complex machinery, 2) engine balancing and vibration analysis systems for both military and commercial aircraft, 3) metrology tools for semiconductor and solar wafer characterization, and 4) tensile stage systems for materials testing and precision linear displacement gauges all for use in academic and industrial research and development settings.

 

Recent Developments

 

On July 1, 2016, the Company entered into a follow-on, multi-year contract with the U.S. Air Force to purchase new PBS4100+ and PBS4100R+ vibration measurement and balancing systems and corresponding maintenance of previously deployed systems and accessories. The total contract, if fully executed, has a value of $9.35 million, with the initial basic one-year term of the contract having an estimated value of approximately $1.8 million.  

 

In addition to the basic term of the contract, the contract includes four option periods that the U.S. Air Force may exercise on or before the last day of the previous basic contract period or option period. Each option period covers the U.S. Air Force’s option to purchase the Company’s products set forth in the contract with respect to that specific option. Option I (concurrent with the initial basic one-year term) may be exercised at any time, from time-to-time, through June 30, 2017, Option II may be exercised at any time, from time-to-time, through June 30, 2018, Option III may be exercised at any time, from time-to-time, through June 30, 2019, and Option IV may be exercised at any time, from time-to-time, through June 30, 2020. Within this schedule, the U.S. Air Force may exercise multiple option periods simultaneously. The contract provides the U.S. Air Force with an option to extend the term of the contract, but no such extension will be beyond June 30, 2021. 

 

Results of Operations

 

Results of Operations for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015. 

 

The following table summarizes changes in the various components of our net loss during the year ended December 31, 2016 compared to the year ended December 31, 2015.

 

 

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Product Revenue: Product revenue consists of revenue recognized from the MTI Instruments’ product lines.

 

The $726 thousand increase in product revenue during the year ended December 31, 2016 compared to 2015 was driven by activity under the new U.S. Air Force contract, which offset declines in commercial engine vibration analysis system sales. The U.S. Air Force was the largest government customer for the years ended December 31, 2016 and 2015, and accounted for 18.1% and 4.4%, respectively, of our annual product revenue. For the years ended December 31, 2016 and 2015, the largest commercial customer was an Asian distributor of our general instrumentation products, which accounted for 8.1% and 6.8%, respectively, of our annual product revenue.

 

Information regarding government contracts included in product revenue is as follows:

 

____________________

 

 

 

 

Operating Loss: Operating loss was $361 thousand for the year ended December 31, 2016 compared to $1.5 million in 2015. The improvement was a result of the factors noted above, that is, the increased sales and improvement in the gross margin, combined with decreased research and development and selling, general and administrative expenses. 

 

Other Expense: Other expense was $7 thousand for the year ended December 31, 2016 compared to $2 thousand in 2015. The expense for the year ended December 31, 2016 primarily related to a $6 thousand loss recorded on the disposal of equipment in the first quarter.

 

Income Tax Benefit (Expense): Income tax benefit for the year ended December 31, 2016 was $9 thousand and primarily relates to a refund received from our year ended December 31, 2015 consolidated federal income tax return. Our effective income tax rate for the year ended December 31, 2016 was (2)%. Income tax expense for the year ended December 31, 2015 was $1.4 million and primarily related to the increase in the valuation allowance against the previously-recognized $1.3 million deferred tax asset. Our effective income tax rate for the year ended December 31, 2015 was 92%.

 

Net Loss: Net loss for the year ended December 31, 2016 was $359 thousand compared to $2.8 million in 2015. The decrease in net loss during 2016 was attributable to increased sales and improvements in the gross margin and the decreased research and development and selling, general and administrative expenses, as discussed above, as well as the increase in the valuation allowance against the previously-recognized $1.3 million deferred tax asset during 2015, which heavily contributed to the unusually large net loss in 2015.

 

Management’s Plan, Liquidity and Capital Resources

 

Several key indicators of our liquidity are summarized in the following table:

 

 

The Company has historically incurred significant losses (the majority, until 2012, stemming from the direct methanol fuel cell product development and commercialization programs of its former subsidiary, MeOH Power, Inc.) and had a consolidated accumulated deficit of $121.0 million as of December 31, 2016. Management believes that the Company currently has adequate resources to avoid future cost-cutting measures that could adversely affect its business. As of December 31, 2016, we had no debt, no outstanding commitments for capital expenditures and approximately $3.4 million of cash available to fund our operations.

 

Based on business developments, including changes in production levels, staffing requirements and network infrastructure improvements, additional capital equipment may be required in the foreseeable future. We expect to spend approximately $75 thousand on capital equipment and $1.4 million in research and development on MTI Instruments’ products during 2017. We expect to finance any future expenditures and continue funding our operations from our current cash position and our projected 2017 cash flows pursuant to management’s plans. We may also seek to supplement our resources by obtaining credit facilities to fund operational working capital and capital expenditure requirements. Any additional financing, if required, may not be available to us on acceptable terms or at all.

 

While it cannot be assured, management believes that, due in part to our current working capital level, recent realignment in sales and operations and stabilized spending, the Company will have adequate resources to fund operations and capital expenditures for the year ending December 31, 2017 and through the end of the first quarter of 2018. However, if our revenue estimates are off either in timing or amount, the Company may need to implement additional steps to ensure liquidity including, but not limited to, the deferral of planned capital spending and/or delaying existing or pending product development initiatives. Such steps, if required, could potentially have a material and adverse effect on our business, results of operations and financial condition.

 

Debt

 

During the first quarter of 2016, we entered into discussions with Bank of America, N.A. (the Bank) to strengthen our then-existing lines of credit with the Bank and re-align their terms to be more consistent with our current business plan. During such discussions, the Bank informed the Company that based on its results for 2015 it was not in compliance with certain financial covenants of the lines. Since an agreement on new covenants could not be reached, the Company decided that the lines of credit could not be utilized and therefore terminated them on March 24, 2016. There were no amounts outstanding under the credit facilities at the time of cancellation.

 

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Backlog, Inventory and Accounts Receivable

 

At December 31, 2016, the Company’s order backlog was $349 thousand, compared to $234 thousand at December 31, 2015. The increase in backlog was due to a large order for capacitance systems that we received during the fourth quarter of 2016, with scheduled deliveries through the first half of 2017. 

 

Our inventory turnover ratios and average accounts receivable days outstanding for the years ended December 31, 2016 and 2015 and their changes are as follows:

 

The decrease in inventory turns is due to a 17% increase in average inventory balances in anticipation of orders from Asia.  

 

The average accounts receivable days’ outstanding decreased 18 days during 2016 compared to the prior year due to a proportionate increase in U.S. government sales, as commercial customers take a longer period to pay than the U.S. government.

 

Off-Balance Sheet Arrangements

 

We have no off balance sheet arrangements.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

The prior discussion and analysis of our financial condition and results of operations is 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 of the Consolidated Financial Statements included in this Annual Report on Form 10-K includes a summary of our most significant accounting policies. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, 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 and share-based compensation. We base our estimates on historical experience and on various other factors that we believe are 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, our management reviews our critical accounting estimates with the Audit Committee of our Board of Directors.

 

The significant accounting policies that we believe are most critical to aid in fully understanding and evaluating our consolidated financial statements include the following:

 

Revenue Recognition. We recognize product revenue when there is persuasive evidence of an arrangement, delivery of the product to the customer or distributor has occurred, at which time title generally is passed to the customer or distributor, and we have determined that collection of a fixed fee is probable, all of which occur upon shipment of the product. If the product requires that we provide installation, all revenue related to the product is deferred and recognized upon the completion of the installation. 

 

Inventory. Inventory is valued at the lower of cost or the current estimated market value of the inventory. We periodically review inventory quantities on hand and record a provision for excess or obsolete inventory based primarily on our estimated forecast of product demand, as well as based on historical usage. Demand and usage for products and materials can fluctuate significantly. A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. Therefore, although we make every effort to assure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and our reported operating results. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to cost of product revenue.

 

Share-Based Payments. We grant options to purchase our common stock and award restricted stock to our employees and directors under our equity incentive plans. The benefits provided under these plans are share-based payments subject to the appropriate accounting provisions regarding Share-Based Payments. We use the fair value method of accounting with the modified prospective application, which provides for certain changes to the method for valuing share-based compensation. The valuation provisions apply to new awards and to awards that are outstanding on the effective date and subsequently modified. Under the modified prospective application, prior periods are not revised for comparative purposes.

 

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We estimate the fair value of share-based awards on the date of grant using a Black-Scholes option-pricing model. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate, and expected dividends.

 

If factors change and we employ different assumptions for the accounting methodology during future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period. Therefore, we believe it is important for investors to be aware of the high degree of subjectivity involved when using option-pricing models to estimate share-based compensation. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions, are fully transferable and do not cause dilution. Because our share-based payments have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect our estimates of fair values, in our opinion, existing valuation models, including the Black-Scholes Option Pricing model, may not provide reliable measures of the fair values of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the intrinsic values realized upon the exercise, expiration, cancellation, or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and expensed in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and expensed in our financial statements. There currently is neither a market-based mechanism nor other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor a way to compare and adjust the estimates to actual values. Although the fair value of employee share-based awards is determined using a qualified option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. Estimates of share-based compensation expenses are significant to our financial statements, but these expenses are based on the aforementioned option valuation model and will never result in our payment of cash.

 

Theoretical valuation models and market-based methods are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability, and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization, and testing for adequacy of internal controls.

 

For purposes of estimating the fair value of stock options granted during the twelve months ended December 31, 2016 using the Black-Scholes model, we used the historical volatility of our stock for the expected volatility assumption input to the Black-Scholes model, consistent with the accounting guidance. The risk-free interest rate is based on the risk-free zero-coupon rate for a period consistent with the expected option term at the time of grant. We do not currently pay nor do we anticipate paying dividends, but we are required to assume a dividend yield as an input to the Black-Scholes model. As such, we use a zero dividend rate. The expected option term is calculated as an average time to forfeiture for all grants.

 

Income Taxes. As part of the process of preparing our consolidated financial statements, we calculate income taxes for each of the jurisdictions in which we operate. This involves estimating actual current taxes due together with assessing temporary differences resulting from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities. We periodically evaluate deferred tax assets, net operating loss carryforwards and tax credit carryforwards to determine their recoverability based primarily on our ability to generate future taxable income.

 

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We considered all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income amongst other items in determining our valuation allowance. In addition, our assessment requires us to schedule future taxable income in accordance with accounting standards that address income taxes to assess the appropriateness of a valuation allowance, which further requires the exercise of significant management judgment.

 

We account for taxes in accordance with the asset and liability method of accounting for income taxes. Under this method, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The impact of our reassessment of our tax positions for these standards did not have a material impact on our results of operations, financial condition, or liquidity.

 

 

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Recent Accounting Pronouncements

 

A discussion of recently adopted and new accounting pronouncements is included in Note 2 of the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

 

Item 8: Financial Statements and Supplementary Data

 

The Company’s Consolidated Financial Statements begin on page F-1 and are incorporated in this Item 8 by reference.

 

Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A: Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of MTI’s disclosure controls and procedures as of December 31, 2016. 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 U.S. Securities and Exchange Commission’s (the “SEC”) 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 evaluation of our disclosure controls and procedures as of December 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

(b) Management’s Report on Internal Control Over Financial Reporting

Management of our Company is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control—Integrated Framework (2013 version) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation using the criteria set forth in Internal Control—Integrated Framework, Management has concluded that our internal control over financial reporting was effective as of December 31, 2016. 

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only Management’s Report in this annual report.

 

 

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(c) 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 December 31, 2016 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

 

 

Item 9B: Other Information

 

No information was required to be disclosed in a current Report on Form 8-K during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K that has not been reported.

 

 

PART III

 

Item 10: Directors, Executive Officers and Corporate Governance

 

Code of Ethics: We have adopted a Code of Ethics for employees, officers and directors. A copy of the Code of Ethics is available on our website at http://www.mechtech.com under Governance, Governance Documents.

 

The remaining information required by this Item 10 is incorporated herein by reference to the information appearing under the captions “Information about our Directors,” “Executive Officers,” “Board of Director Meetings and Committees – Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC on or before May 1, 2017.

 

Item 11: Executive Compensation

 

The information required by this Item 11 is incorporated herein by reference to the information appearing under the caption “Executive Compensation” in the Company’s definitive Proxy Statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC on or before May 1, 2017.

 

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Equity Compensation Plans

 

As of December 31, 2016, we have three equity compensation plans, each of which was originally approved by our stockholders; the Mechanical Technology Incorporated 2006 Equity Incentive Plan (the “2006 Plan”), the Mechanical Technology Incorporated 2012 Equity Incentive Plan and the Mechanical Technology Incorporated 2014 Equity Incentive Plan (collectively, the “Plans”). The 2006 Plan was amended and restated and approved by our Board of Directors in 2011 and 2009. See Note 11 of our Consolidated Financial Statements in this Annual Report on Form 10-K for a description of the Plans.

 

The following table presents information regarding these plans as of December 31, 2016:

 

 ____________________

  

 

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The remaining information required by this Item 12 is incorporated herein by reference to information appearing under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our definitive Proxy Statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC on or before May 1, 2017.

 

Item 13: Certain Relationships and Related Transactions, and Director Independence

 

The information required by this Item 13 is incorporated herein by reference to the information appearing under the captions “Certain Relationships and Related Transactions” and “Information about our Directors” in our definitive Proxy Statement for the 2017 Annual Meeting of Stockholders to be filed with the SEC on or before May 1, 2017.

 

Item 14: Principal Accounting Fees and Services

 

The information required by this Item 14 is incorporated herein by reference to the information appearing under the caption “Independent Registered Public Accounting Firm” in our definitive Proxy Statement for the 2017 Annual Meeting of Stockholders to be filed with the SEC on or before May 1, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART IV

 

Item 15: Exhibits, Financial Statement Schedules

 

15(a) (1) Financial Statements: The financial statements filed herewith are set forth on the Index to Consolidated Financial Statements on page F-1 of the separate financial section which accompanies this Report, which is incorporated herein by reference.

 

15(a) (2) Financial Statement Schedules: Financial statement schedules not listed have been omitted because they are either not required, not applicable, or the information has been included elsewhere in the consolidated financial statements or notes thereto.

 

15(a) (3)

Exhibits: The exhibits listed in the Exhibit Index below are filed as part of this Annual Report on Form 10-K.

 

 

 

 

All exhibits for which no other filing information is given are filed herewith.

 

# Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been filed with the Securities and Exchange Commission pursuant to our application for confidential treatment. The items are identified in the exhibit with “**”.

 

*              Represents management contract or compensation plan or arrangement.

 

 

Item 16: Form 10-K Summary

None.

 

 

 

 

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Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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

 

 

 

 

 

 

MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES

 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Board of Directors and

Stockholders of Mechanical Technology, Incorporated

 

 

We have audited the accompanying consolidated balance sheets of Mechanical Technology, Incorporated as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2016. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mechanical Technology, Incorporated as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

 

 

 

 

 

 

/s/ UHY LLP

 

Albany, New York

March 2, 2017

 

 

A member of UHY International, a network of independent accounting and consulting firms

 

 

 

 

 

 

 

 

 

 

 

 

 

F-2

 

 

 

 

 

 

MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

 December 31, 2016 and 2015

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 F-3

 

 

 

 

 

 

 

 

 

 

MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF OPERATIONS

 For the Years Ended December 31, 2016 and 2015

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

F-4

 

 

MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

  For the Years Ended December 31, 2016 and 2015

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 F-5