Product Development

MTIInstruments continuously conducts research to develop new and advance existing technologies in support of its business strategy. Along with innovation as a key hallmark to itsour 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 2015, MTI Instruments2017, we launched its latest laser line to address market demand,two different series of The Protrak^™ 2D/3D, which is part of the Microtrak 4, which features a “quick start” interface for easy setup and is powered directly byPRO-2D product line; the user’s personal computer using its universal serial bus port (USB). The Microtrak 4 is available in four different models oflaser heads with versions capable of measuring standard smooth surfaces, rough surfaces and glass thickness with models that range from 2mm to 20mm. We have priced this new product lower than similar product offerings by our competitors, even though the Microtrak 4 provides the same level of performance as competing products plus the ability to use its 2x exposure feature which provides extra accuracy when scanning very dark or highly shiny (mirror-like) targets.

The Microtrak 4 systemG series Protrak^™ 2D/3D has a sensor sampling ratespeed of up to 40,000 samples4000 hertz (Hz) or a capture rate of 3.6 million measurement points per second and 0.03% full scale range (FSR) linearity accuracy viaresolutions as low as 3.3 microns. The HD series Protrak^™ 2D/3D can achieve high speeds of up to 6000Hz and even better resolution - as low as 2.5 microns. Both products come in a USB connection - covering the majorityvariety of applications in our selected target markets. Overall, the last few years of product development for the optical based laser systems has proven successful – today, the Microtrak 4 series of products have been adopteddifferent measurement ranges and are being used by some of the largest consumer electronic assembly operations in Asia.

Following the 2014 launch of the Accumeasure D series, our engineersoffered with either red or blue visible laser light. The blue laser light is particularly useful with translucent materials including liquid crystal displays, quartz and scientists worked hand in hand to combine capacitance principles with modern enabling digital technology – the result, an ultra precise linear displacement capacitance system with a true digital output, and a range of sensing probes to accommodate a large range of customer applications. This series of products also offers a range of features that give customers the ability to quickly and easily set them up in production, thereby minimizing downtime while also providing internet connectivity conducive for automation.glass.

In 2015, we have further improved our2016, 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, productis 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 coversupport the growing AFM users in the R&D market. The MTI Tensile MicroStage is designed with a varietyreduced 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 fast and growing dielectric (non-conductive)Accumeasure D capable of measuring the thickness of non-conductive materials applications, i.e.such as glass, plastic sheet thickness and sapphire wafer thickness (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 die threadinginternal thread inspection that utilizes our Accumeasure D series of products. We expect to launch this product line extension in mid-2016. 

We also developed and commercialized new enhancements in ourAlso during 2016, we enhanced the PBS 4100+ product during 2015, includingto accommodate the capability to measure vibration and balance a numberlatest generation of turbo-shaft engines for rotary wingfuel-efficient aircraft (helicopter), which has proven effective with several commercial customers.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 intimatea high level customer support.support based on our in-depth understanding and knowledge of our customers’ businesses and needs. 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. basedU.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. For example, in 2015, MTI Instruments increased capacity of the Accumeasure D operations by more than double in anticipation of new qualifications at key customers in the Americas, Asia and Europe.

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In April 2014,2017, the Company received initial ISO certification 9001:2008 and was recertified in April 2015. The certifications werecertification was authorized by TÜVRheinland^®, an independent agency. To obtain these certifications,this certification, we underwent a rigorous five step process including preparation, documentation, implementation, internal audit, and final certification. The ISO 9001:20082015 certification confirms our commitment to an effective management system and continuous improvement, a practice management believes is important for continuous growth.  

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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. 

Significant Customers

MTI Instruments’ largest customer is an Asian distributor of our general instrumentation products.the U.S. Air Force. We also have strong relationships with companies in the electronics, aircraft, aerospace, automotive, semiconductor and research industries. The largest commercial customer in 2015 was the Asian distributor, who accounted for 6.8% of total product revenue in 2015. The largest commercial customer in 2014 was an Asian customer, who accounted for 8.3% of total product revenue in 2014.  The largest government customer continues to be the U.S. Air Force which accounted for 4.4%20.1% and 27.9%18.1%, respectively, of total product revenues during 20152017 and 2014.2016. The largest commercial customer in 2017 was a manufacturer of semiconductor equipment in Asia, which accounted for 10.0% of total product revenue during 2017. The largest commercial customer in 2016 was an Asian distributor, which accounted for 8.1% of total product revenue during 2016. 

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 competition includesmarket, we compete with companies involved in both precision linear displacement and material testing, including Gatan, Deben, and E+H (Eichhorn+Hausmann)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 $1.5$1.1 million and $1.3$1.2 million for the years ended December 31, 20152017 and 2014,2016, 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, 2015,2017, we had 3427 employees including 2923 full-time employees.

Recent Developments

On March 19, 2018, the Company filed a Form 15 with the Securities and Exchange Commission (“SEC”) terminating the registration of its common stock, par value $0.01 per share, thereby suspending its obligations to file periodic and current reports and other filings with the SEC, including annual reports on Form 10-K and quarterly reports on Form 10-Q for years beginning after December 31, 2017. We expect the deregistration of our common stock to result in significant cost savings to MTI in the near term from the elimination of complying with SEC reporting requirements. Also, the deregistration of the common stock will allow the Company to avoid the substantial additional costs associated with the compliance and auditing requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and to focus its resources on increasing long-term growth. Although we will not be required to do so, following deregistration we plan to continue to provide stockholders with annual audited financial statements and quarterly unaudited financial statements through the OTC Markets Group (“OTC Markets”) website.

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 of 1933, as amended (Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended, or 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:

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• anticipated growth, including in revenues and cash flows;
• the expected launching of the product-line extension of our Accumeasure D series of products during mid-2016;
• our expectations regarding the award of a new U.S. Air Force contractstatements with respect to management’s strategy and the timing thereof;
• our expectations regarding the receipt of an anticipated product order;
• our ability to continue as a going concern;planned initiatives;
• management’s belief that it will have adequate resources to fund the Company’s operations and capital expenditures overfor the year ending December 31, 2018 and through at least the next twelve months;end of the first quarter of 2019;
• projected taxable incomethe expected impact of recent and the ability to use deferred tax assets (currently held at a full valuation allowance);pending accounting standards or updates;

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• generating earnings in the future;
• that the Company should be able to generate sufficient cash flows to fund its active operations in the foreseeable future;

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

• future capital expenditures and spending on research and development;
• needing to purchase equipment;
• 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;  
• 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;

• 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 orbe able to 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 aAlthough we had net lossincome of $2.8 million$582 thousand during the year ended December 31, 20152017, we incurred a net loss for the three prior fiscal years and had an accumulated deficit of $120.6$120.4 million as of such date.at December 31, 2017. In order to achieve andconsistently 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 efficiencyefficiencies 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 have made estimates regarding our cash flow and results of operations for the year ending December 31, 2016.2018 and through the end of the first quarter of 2019. 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 2011,2017, 2014, 2013 and 2014,2011, we hadincurred a net loss during each of 2016, 2015 and 2012 and prior to 2011 we had generatedincurred net losses since 1998, and we may not be able to achieve or sustain consistent profitability in the future. If we do achieve consistent 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.  

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Our auditors have expressed substantial doubt as to our ability to continue as a going concern in their report.

In its report on our consolidated financial statements for the year ended December 31, 2015, our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern. A “going concern” opinion means, in general, that our independent registered public accounting firm has substantial doubt about our ability to continue our operations without continuing infusions of capital from external sources. This opinion could impair our ability to finance our operations through the sale of debt or equity securities or commercial bank loans, including though obtaining new lines of credit.

The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. If the going concern basis were not appropriate for these financial statements, adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.

We believe that the “going concern” opinion resulted primarily from delays in entering into a new agreement with the U.S. Air Force (as discussed in Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in a product order we are expecting but has not yet been placed, as well as our cancellation of our existing lines of credit on March 24, 2016, as further discussed in Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report. While we believe that we will enter into a new agreement with the U.S. Air Force during the second quarter of 2016 and that the new order we are expecting will be received, there can be no assurance that these events will happen; if one or both of these do not occur or our business strategy is not successful in addressing our current financial issues, and if we cannot continue as a going concern, our stockholders may lose their entire investment in us.

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;
• the potential for a continued slowdown or cancellation of sales to the military as a result of a potential redeployment of, or sequestration, of governmentalcuts in, government funding; 

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

• 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. 

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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.

Recently enacted tariffs on certain imports to the United States and other potential changes to U.S. tariff and import/export regulations may have a negative effect on global economic conditions and our business, financial results and financial condition.

On March 8, 2018, President Trump implemented new tariffs on imports of steel and aluminum into the United States, although Canada and Mexico are temporarily exempt pending the outcome of certain trade negotiations and there is flexibility for other countries to be exempted at a later date. These tariffs went into effect on March 25, 2018.  Further, there has been ongoing discussions and activities regarding changes to other U.S. trade policies and treaties, including threats by the United States to withdraw from certain treaties and other countries signing new trade agreements without U.S. participation.  These developments may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our access to suppliers or customers and have a material adverse effect on our business, financial condition and results of operations.

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In particular, the new tariffs could have a negative impact on MTI in a number of ways. While any steel and aluminum we use in our products in produced solely in the United States, the new tariffs may provide domestic steel and aluminum producers the flexibility to increase their prices, at least to a level where their products would still be priced below foreign competitors once the tariffs are taken into account. Any price increases, to the extent we did not pass such increases on to our customers, 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. On the other hand, if we attempt to pass any such increases on to our customers, that may result in lower sales, which would likely decrease our net income and could have a material adverse effect on our financial condition. In addition, in response to the new tariffs, a number of other countries are threatening to impose tariffs on U.S. imports, which, if implemented, could increase the price of our products in these countries and may result in our customers looking to alternative sources for our products.  This would result in decreased sales, which could have a negative impact on our net income and financial condition.

We anticipate possible further changes to current policies by the U.S. government that could affect our business, including potentially through import tariffs on other materials or products 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 other tariffs imposed by the U.S. government on imports into the United States may 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, 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.

The tariffs enacted on March 8 have just recently gone into effect and are subject to a number of uncertainties, including future adjustments and changes in the countries excluded from such tariffs. The ultimate reaction of other countries, and the impact of these tariffs on the United States, the global economy and our business, financial condition and results of operations, cannot be predicted at this time, nor can we predict the impact of any other actions, including U.S. withdrawal from or attempted renegotiation of trade treaties, that may be undertaken by the current administration with respect to global trade.

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:

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• continue research and development activities on all product lines;  

• ·hire additional engineering and other technical personnel; and  

• ·purchase advanced design tools and test equipment.

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:

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·difficulties with other suppliers of components 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 ofAdverse changes in economic or other market conditions in the U.S.United States and global economyglobally may have serious implications for the growth and stability of our business.business and could otherwise adversely affect our business, results of operations and financial condition.

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. Since the recession ended almost nine years ago, economic growth has been slow by historic standards and uneven.  Further, delaysthe current expansion is already the third longest in U.S. history, and many economists believe that the risk of a recession in the medium-term (2019-2020) is increasing. Softening demand in our target markets caused by a return to recessionary conditions or prolonged stagnant or deteriorating economic conditions, economic uncertainties even outside a recession, including concerns about U.S. debt levels and related governmental actions, new and potentially additional futuretariffs on imports into the United States, Congress’ inability to pass yearly budgets, and cuts in government spending, as well as technological developments, competitive changes or other factors, may result in decreased demand for our products and/or increased costs and, therefore, lower revenue and earnings. Delays or reductions in spending by our customers and potential customers resulting from these or other factors 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.

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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;  restrictions, as discussed further above;  

• ·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.

TheIf one or more of these risks associated with international sales materialize, it could negatively affect our operating results.

WeIn addition, we transact our business in U.S. dollars and bill and collect our sales in U.S. dollars. In 2015,2017, approximately 34.6%40.5% 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.

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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.

Brookstone’s ownership of 40.0% of the outstanding shares of our common stock gives it a controlling interest in the Company.

Brookstone Partners Acquisition, XXIV, LLC (“Brookstone”), owns approximately 40.0% of our outstanding shares of common stock and has designated three directors that sit on our six-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.

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

Brookstone and its 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 its 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 3,750,000 shares of our common stock 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 businesses that compete 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.

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We experiencedIn the future, we may experience an ownership change in the Company that would result MeOH Power, Inc.that resulted in a limitation of tax attributes relating to the use of their net operating losses, and we may experience further ownership changes in MTI that would result in a further limitation of 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)(“NOL”) carryforwards and certain recognized built-in losses.

We estimate that as of December 31, 2015,2017, the Company and MTI Instruments have NOL carryforwards of approximately $52.3$52.0 million. Our ability to utilize the MTIthese 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)(“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.

Acquisitions may have an adverse effect on our business.

We expect to continue searching for acquisitions as part of our long-term business strategy. Any such acquisitions will involve significant challenges and risks including that the transaction does not advance our business strategy, that we don’t realize a satisfactory return on the investment we make, that we may experience difficulty in the integration of new employees, business systems, and technology, or diversion of management’s attention from our ongoing businesses. If one or more of these risks materialize in connection with any future acquisitions, it could adversely affect our operating results or financial condition.

The deregistration of our shares of our common stock under the Exchange Act and our suspension of our periodic reporting obligations thereunder is likely to decrease the liquidity of our common stock and may result in a decrease in the trading price of our common stock.

As discussed above, on March 19, 2018, we filed a Form 15 with the SEC to deregister our common stock under the Exchange Act, thereby suspending our Exchange Act reporting obligations.  Subsequent to the filing of the Form 15, our common stock was removed from the OTCQB venture stage marketplace of the OTC Markets quotation system and is now quoted on the on the OTC Pink – Current Information tier of the OTC Markets. As a lower-tier market than the OTCQB, trading volumes in our common stock may be lower than they were previously, which can impact the liquidity in our common stock and have an adverse impact on the market price of our common stock.  Further, while we intend to continue to provide stockholders with annual audited financial statements and quarterly unaudited financial statements through the OTC Markets Group website, there can be no guarantee that we will do so, and even if we do stockholders and potential investors will have access to much less information about us than they did when we were required to file reports with the SEC pursuant to the Exchange Act.  The lack of publicly available information about the Company may also have a negative impact on the liquidity and market price of our common stock.

Item 1B: Unresolved Staff Comments

Not applicable.

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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.

Item 4: Mine Safety DisclosureDisclosures

Not applicable.

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PART II

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)

Market Information

Our common stock is quoted on the OTC Markets Group quotation system (OTCQB: MKTY) on the OTC Pink – Current Information tier under the symbol “MKTY”; prior to March 20, 2018, our common stock quoted on the OTC Markets’ OTCQB venture stage marketplace for early stage and developing U.S. and international companies. We are current in our reporting and undergo an annual verification and management certification process. Investors can find Real-Time quotes and market information for the Company on www.otcmarkets.com.  The following table sets forth the high and low bid information for our common stock as reported on the OTC Market Group quotation system for the periods indicated:

Overview

MTI’s core business is conducted through our wholly-owned subsidiary MTI Instruments, Inc.Instruments. 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, 3)and 4) tensile stage systems for materials testing and precision linear displacement gauges all for use in academic and industrial research and development settings, and 4) engine balancing and vibration analysis systems for both military and commercial aircraft.

settings. We are continuously working on ways to increase our sales reach, including expanded worldwide sales coverage and enhanced internet marketing.   

Recent Developments

On June 11, 2015, the Board of Directors of the Company approved a share repurchase program of up to 525,000 shares of its outstanding shares of common stock. Stock may be purchased from time to time, in the open market or through private transactions, as market conditions warrant. Such stock repurchases, if and when commenced, may be suspended or discontinued at any time. Any repurchased shares will be held as treasury stock and available for general corporate purposes. 

On June 16, 2015, the Company entered into a Loan Agreement with Bank of America, N.A. (the Bank) to replace its previous line of credit with the Bank. See “– Management’s Plan, Liquidity and Capital Resources – Debt” for additional information.

On December 28, 2015, the Company entered into a stock repurchase plan with a registered broker-dealer in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, in accordance with the Company’s previously-announced authorization by its Board approving the Company’s repurchase of up to 525,000 of its outstanding shares of common stock. Pursuant to the stock repurchase plan, the broker-dealer will have the authority to repurchase on the Company’s behalf a portion of the shares of common stock authorized by the Board for repurchase. The timing and extent of the repurchases under the repurchase plan are subject to certain price, market volume and other constraints specified in the plan.    

Results of Operations

Results of Operations for the Year Ended December 31, 20152017 Compared to the Year Ended December 31, 2014.2016. 

The following table summarizes changes in the various components of our net income (loss) income during the year ended December 31, 20152017 compared to the year ended December 31, 2014.2016.

Product Revenue: Product revenue consists of revenue recognized from our variousMTI Instruments’ product lines.

The $2.5 million decrease in productProduct revenue duringfor the year ended December 31, 2015 compared2017 remained comparable to 2014that of 2016, with a higher concentration of Asian and European commercial sales in 2017. The increased activity in Asia was attributabledriven by sales to $2.3 million lessa manufacturer of semiconductor equipment, while the rise in European revenue was attributed to a power generation equipment manufacturer. These increases in international sales offset a decline in U.S. commercial engine vibration analysis system sales. The U.S. Air Force business due towas the expirationlargest government customer for the years ended December 31, 2017 and 2016, and accounted for 20.1% and 18.1%, respectively, of prior contracts with the U.S. Air Force and delays associated with our entry into a new contract with the U.S. Air Force to replace the expired ones (see below), as well as reduced instrument shipments to Asia resulting from the weakness in the Asian economies. Sales from new products during 2015 did not fully offset these decreases.annual product revenue. For the year ended December 31, 2015,2017, the largest commercial customer was a manufacturer of semiconductor equipment in Asia, which accounted for 10.0% of our annual product revenue.  For the year ended December 31, 2016, the largest commercial customer was an Asian distributor of our general instrumentation products, which accounted for 6.8%8.1% of theour annual product revenue. In 2014, the largest commercial was an Asian customer, which accounted for 8.3% of product revenue during the year ended December 31, 2014. The U.S. Air Force was the largest government customer for the years ended December 31, 2015 and 2014, and accounted for 4.4% and 27.9%, respectively, of annual product revenue. 

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

____________________

On March 16, 2016, we received the 2015 solicitation request for proposal by the U.S. Air Force as a follow up to the two aforementioned maintenance and systems contracts which had expired. This current solicitation is for a five year supply of the PBS 4100+ systems, accessories and maintenance and we expect the U.S. Air Force to make a decision in this regard, and that we will enter into a new agreement with the U.S. Air Force, during the second quarter of 2016.

Cost of Product Revenue:Revenue; Gross Margin: Cost of product revenue includes the direct material and labor cost as well as an allocation of overhead costs that relate to the manufacturing of products we sell. In addition, cost of product revenue also includes the labor and material costs incurred for product maintenance, replacement parts and service under our contractual obligations.

The $809 thousand decrease in the costCost of product revenue during the year ended December 31, 20152017 compared to 20142016decreased by $488 thousand, or 17.9%, to $2.2 million from $2.7 million on a comparable sales volume. The primary reason for the decrease in the cost of product revenue was primarilythat the cost of product revenue in 2016 was inflated by a resultone-time, $350 thousand charge to inventory for excessive inventory amounts built in advance of an order that never materialized. Lower material costs, a change in the product mix, reduced charges for excess inventory stemming from improved procurement management and lower overhead costs from reduced staffing were responsible for the balance of the decreased sales as discussed above under Product Revenue.decrease in cost of product revenue during 2017. Gross profit, as a percentage of product revenue, decreasedrose from 61.4% during the year ended December 31, 2016 to 60.9% in 2015 compared to 62.6% in 201468.4% during the year ended December 31, 2017 due to the compositionaforementioned reductions on the cost of the current customer and product mix.revenue on a comparable sales volume. 

Research and Product Development Expenses: Research and product development expenses includes the costs of materials to build development and prototype units, cash and non-cash compensation and benefits for the engineering and related staff, expenses for contract engineers, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies consumed, facility related costs such as computer and network services, and other general overhead costs associated with our research and development activities, to the extent not reimbursed by our customers.

Research and product development expenses increased $200decreased $94 thousand during the year ended December 31, 20152017 compared to 20142016 due to additionalreduced staffing and increaseddecreased material spending on current development projects.

Selling, General and Administrative Expenses: Selling, general and administrative expenses includes cash and non-cash compensation, benefits and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, selling and marketing, information technology and legal services.

Selling, general and administrative expenses at MTI Instruments for the year ended December 31, 2015 increased2017 decreased by $301$362 thousand, or 13.3%10.5%, to $2.6$3.1 million in 20152017 from $2.3$3.5 million in 2014.2016. This increasedecrease is the result of additionalstaff reductions in the sales and engineering staffing, utilizationadministrative departments in conjunction with an organizational restructuring during the first quarter of IT and sales application consultants, increased international travel and $562017. 2017 expenses of $3.1 million included $398 thousand in reserves established during 2015 for potentially uncollectible receivables.one-time severance, reorganizational and acquisition activity costs.  

Selling, general and administrative expenses incurred by the Corporate Entity for the year ended December 31, 2015 decreased by $108 thousand, or 8.2%, to $1.2 million in 2015 from $1.3 million in 2014. This decrease is primarily the result of decreased incentive compensation benefits for executive officers and professional fees.

Operating Income (Loss) Income::We had an operating loss of $2 Operating income was $588 thousand for the year ended December 31, 20152017 compared to an operating incomeloss of $365$361 thousand in 2014.2016. The decrease in operating incomeThis $949 thousand improvement, on a comparable sales volume, was a result of the factors noted above, primarilythat is, improvement in the decrease in product revenue.gross margin, combined with decreased research and development and selling, general and administrative expenses. 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Mechanical Technology, Incorporated

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Mechanical Technology, Incorporated (the Company) as of December 31, 20152017 and 2014,2016, 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, 2015. The2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management is responsible for these financial statements.management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. 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 considerationAs part of our audits, we are required to obtain an understanding 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

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. 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, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that Mechanical Technology, Incorporated will continue as a going concern.  As more fully described in Note 1, the Company incurred a significant operating loss in 2015 and its current liquidity position raises substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regards to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.  Our opinion is not modified with respect to that matter.

/s/ UHY LLP

We have served as the Company’s auditor since 2012.

Albany, New York

March 30, 201629, 2018

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

MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

 December 31, 2015 and 2014

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