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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE FISCAL YEAR ENDED DECEMBER 31, | ||
| OR | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE TRANSITION PERIOD FROM_____TO_____ | ||
__________________
__________________
| New York | 0-6890 | 14-1462255 | ||
| (State or Other Jurisdiction | (Commission File Number) | (IRS Employer | ||
| of Incorporation) | Identification No.) |
325 Washington Avenue Extension, Albany, New York 12205
(Address of registrant’s principal executive office)(518) 218-2550
(Registrant’s telephone number, including area code)431 New Karner Road, Albany, New York 12205
(Address of registrant’s principal executive office)Former name or former address, if changed since last report.)(518) 533-2200
(Registrant’s former telephone number, including area code)code, if changed since last report)Securities Registered Pursuant to Section 12(b) of the Act:Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common StockNoneThe NASDAQ Stock Market LLC($0.01 par value)None
Common Stock
Noo
| Large Accelerated Filero | Accelerated Filero | Non-Accelerated Filero | Smaller reporting companyx |
$2,868,816.
INDEX TO FORM 10-K
| PART I | |||
| Page | |||
| Item 1. | Business | 3 | |
| Item 1A. | Risk Factors | 12 | |
| Item 1B. | Unresolved Staff Comments | 18 | |
| Item 2. | Properties | 18 | |
| Item 3. | Legal Proceedings | 18 | |
| Item 4. | Mine Safety Disclosure | 18 | |
| PART II | |||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 19 | |
| Item 6. | Selected Financial Data | 20 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 30 | |
| Item 8. | Financial Statements and Supplementary Data | 30 | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 31 | |
| Item 9A. | Controls and Procedures | 31 | |
| Item 9B. | Other Information | 32 | |
| PART III | |||
| Item 10. | Directors, Executive Officers and Corporate Governance | 32 | |
| Item 11. | Executive Compensation | 32 | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 32 | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 33 | |
| Item 14. | Principal Accounting Fees and Services | 33 | |
| PART IV | |||
| Item 15. | Exhibits, Financial Statement Schedules | 34 | |
PART I
Item 1: Business
Unless the context requires otherwise in this Annual Report on Form 10-K, the terms “we”, “us” and “our” refer to Mechanical Technology, Incorporated, a New York corporation,“MTI Instruments” refers to MTI Instruments, Inc., and “MTI Micro” refers to MTI MicroFuel Cells, Inc., a Delaware corporation and our majority owned subsidiary, and “MTI Instruments” refers to MTI Instruments, Inc., a New York corporation and our wholly owned subsidiary. We have a registered trademark in the United States for “Mobion”. Other trademarks, trade names, and service marks used in this Annual Report on Form 10-K are the property of their respective owners.
We are developingMechanical Technology, Incorporated, (MTI or the Company), a New York corporation, was incorporated in 1961. MTI operates in two segments: the Test and commercializing off-the-grid rechargeable power sources for portable electronics. We have developedMeasurement Instrumentation segment, which is conducted through MTI Instruments, Inc. (MTI Instruments), a patented, proprietary direct methanol fuel cell technology platform called Mobion,wholly-owned subsidiary, and the New Energy segment, which generates electrical power using up to 100% methanolis conducted through MTI MicroFuel Cells, Inc. (MTI Micro), a variable interest entity (VIE) as fuel. Our proprietary fuel cell power solution consists of two primary components integratedDecember 31, 2011.
MTI Instruments was incorporated in an easily manufactured device: the direct methanol fuel cell power engine, which we refer to as our Mobion Chip, and methanol replacement cartridges. Our current Mobion Chip weighs less than one ounceNew York on March 8, 2000 and is small enougha worldwide supplier of precision non-contact physical measurement solutions, portable balance equipment and wafer inspection tools. MTI Instrument’s products use a comprehensive array of technologies to fitsolve complex, real world applications in numerous industries including manufacturing, semiconductor, solar, commercial and military aviation, automotive and data storage. MTI Instruments’ products consist of electronic gauging instruments for position, displacement and vibration application within the palmdesign, manufacturing/production, test and research market; wafer characterization of one’s hand. The methanol used bysemi-insulating and semi-conducting wafers within both the technology is fully biodegradable. We have demonstrated power density of over 62 mW/cmsemiconductor and solar industries; tensile stage systems for materials testing at academic and industrial settings; and engine vibration analysis systems for both military and commercial aircraft.
MTI Micro was incorporated in Delaware on March 26, 2001, and has been developing Mobion2® while producing more than 1,800 Wh/kg of energy from the direct methanol fuel feed. For these reasons, we believe our technology offers, a compelling alternativehandheld energy-generating device to replace current lithium-ion and similar rechargeable battery systems currently used by original equipment manufacturers and branded partners, or OEMs, in many handheld electronic devices such as mobile phones (including smart phones)for the military and mobile phone accessories, digital cameras, portable media players, personal digital assistants (PDAs), and global positioning systems (GPS) devices. We believe our platform will facilitate the development of numerous product advantages, including small size, environmental friendliness, and simplicity of design, all critical for commercialization in the consumer market, and can be implemented as three different product options: a compact external charging device, a snap-on or attached power accessory, or an embeddedmarkets. Mobion® handheld generators are based on direct methanol fuel cell power solution. We have strategic arrangements with Samsung Electronics, an OEM of mobile phones and mobile phone accessories, with a global Japanese consumer electronics company, with a U.S. based developer and marketer of universal chargers and a letter of intent with Duracell, part of the Procter & Gamble Company. Our goal is to become a leading provider of(DMFC) technology, which has been recognized as enabling technology for advanced portable power for handheld electronic devicessources by the scientific community and assuming available financing, we intend to commercialize Mobion products in 2009.
Our Mobion technology eliminatesindustry analysts. As the need for active water recirculation pumps or the inclusion of wateradvancements in portable power increases, MTI Micro has been developing Mobion® as a fuel dilutant. The water requiredsolution for the electrochemical process is transferred internally within the Mobion Chip from the site of water generation on the air-sideadvancing current and future electronic device power needs of the cell. This internal flowportable electronics market. As of water takes place withoutDecember 31, 2011, the needCompany owned approximately 47.6% of MTI Micro’s outstanding common stock. Although MTI Micro continues to believe in the potential of its Mobion® based power solutions, operations have been suspended at MTI Micro until such time as market demand and other deciding factors, including obtaining additional external financing, the successful completion of customer trials, a new development program with a government agency, and/or a customer order, come to fruition. Currently, MTI Micro has no employees and projects to spend between $5 and $10 thousand per month for any pumps, complicated re-circulation loops or other micro-plumbing tools. Our Mobion technology is protected by aoperating activities including rent, preparing prototypes for customer demonstrations, minimal sales efforts, patent fees to keep its patent portfolio that includes 110 U.S. patentcurrent and minimal consultant costs to perform these initiatives. MTI Micro will continue to seek additional capital from external sources to resume operations and fund future development, if any. If MTI Micro is unable to secure additional financing, a new development program or customer order, the MTI Micro board of directors will assess other options for MTI Micro, including the sale of MTI Micro’s intellectual property portfolio and other assets.
The Test and Measurement Instrumentation Segment
MTI Instruments is a worldwide supplier of metrology, portable balancing equipment and inspection systems. Our products use state-of-the-art technology to solve complex real world applications covering five key technologiesin numerous industries including automotive, semiconductor, solar cell manufacturing, material testing, commercial and manufacturing areas.military aviation and data storage. We are continuously working on ways to expand our sales reach, including expanded sales coverage throughout Europe and Asia, as well as a focus on internet marketing.
We also design, manufacture, and sell high-performanceProducts
Our test and measurement instrumentssegment has three product groups:Precision Instruments, Semiconductor and systems serving several global markets. TheseSolar Metrology Systems and Aviation Balancing Systems. Our products consist of:of electronic, computerized gauging instruments for position, displacement and vibration applications for the design, manufacturingmanufacturing/production and test and research markets; metrology tools for wafer characterization tools for theof semiconductor and solar markets;wafers; tensile stage systems for materials testing in research and industrial settings; and engine balancing and vibration analysis systems for both military and commercial aircraft.
Precision Instruments: The Precision Instruments group employs capacitance, laser and fiber optic technologies to make nano-accurate measurements. These advanced sensing and physical measurement technologies are used to produce products that range from basic sensors to complete, fully integrated measurement systems, and are available as single sensors for integration into existing data acquisition systems or as complete system level solutions that can be further integrated into a facility wide communication backbone.
Listed below are selected MTI Instruments’ Precision Instruments product offerings & technologies:
Accumeasure Family:
The Accumeasure family of products is designed to address the needs of product developers, process engineers, researchers, designers, and others who need precise, reliable, non-contact measurements.
MTI Instruments has a large installed base of Accumeasure products around the world, and offers off-the-shelf as well as custom capacitance amplifiers designed per customer specifications. Additionally, MTI Instruments has developed state-of-the-art unique designs to more accurately measure targets that cannot easily be grounded called “push-pull”. The market appeal for the Accumeasure family of products is based in part on the strategically offered single/dual channel systems for simple general displacement and position applications, as well as multiple-channel systems for more complex applications, including process control monitoring, differential measurements and profiling. The Accumeasureproducts have fast response time and extremely low noise levels making them ideal for critical measurements of targets such as rotating spindles, disks, tires, precision X-Y stages and piezoelectric elements. |
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Microtrak Family:
MTI Instrument's Microtrak family of laser triangulation sensors offers high speed, high resolution displacement, position and vibration measurements. The Microtrak features state-of-the-art complementary metal oxide semiconductors with charged coupled device (CMOS – CCD) laser triangulation technology, which is ideal for solving tough in-process, production and quality control sensing applications. The large variety of laser triangulation sensors provides operating distances to 300mm, measurement ranges to 200mm and measurement resolution to less than 1 micron. Our Laser triangulation sensors contain a solid-state laser light source and a CMOS detector.
Microtrak II Series:
The Microtrak II comes standard with an interface controller that provides a convenient digital display of the target position, alarm set points and connections for analog and RS-485 outputs.
To complement the laser product offerings, MTI Instruments also offers the performance of the standard Microtrak II Laser Triangulation System in a versatile high speed stand-alone configuration for measuring displacement, position, vibration and thickness. Unaffected by surface texture, color or stray light, the Microtrak II is ideal for solving tough production measurement applications throughout a variety of industries. The Microtrak II Stand-Alone Laser Head also uses CMOS - CCD detection technology for accurate and reliable measurements making it ideal for high volume original equipment manufactures (OEMs), production and quality control applications. Configuration of system parameters such as measurement units, frequency response and limits are easily accomplished through a laptop or desktop using the included MTI Instrument’s proprietary remote control software program. |
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Microtrak Pro-2D:
In the summer of 2011, MTII launched its new Microtrak PRO-2D laser triangulation scanners, which provide high speed profile, displacement and dimensional information in real time.
| As technological advances are made in manufacturing, process and quality control, customers encounter more and more critical measurement applications that can only be solved with non-contact 2D and 3D technology; we believe our Microtrak PRO-2D fulfills many of these application requirements. Unlike some competitor’s products, the Microtrak PRO-2D is unaffected by surface texture, color or stray light, and is ideal for solving tough production and quality control applications throughout a wide variety of industries. For example, the Microtrak PRO-2D can be used in manufacturing applications like welding and glue dispersion, as well as demanding roboticand motion control applications. Laser head electronics have been specially designed to protect against high shock and vibration. Additionally, by using multiple heads, customers have the ability to expand the system measurement capabilities and perform 3-D analysis. The Microtrak PRO-2D uses the triangulation principle to obtain a two dimensional height profile of target surfaces. |
MTI-2100 Fotonic Sensor Series:
The MTI-2100 features advanced fiber-optic and electronic technologies for precise measurements of displacement, position andvibration. It achieves such precision by measuring changes in light intensity reflected from a target. Light is emitted from a tungsten halogen lamp through a fiber optic probe which also receives light from the target reflection. The MTI-2100’s modular design has the flexibility to be tailored to specific requirements through the use of a wide range of interchangeable and custom fiber-optic probes. These probes are immune to electromagnetic interference and operate on almost any type of surface: metallic, composite, plastic, glass, ceramic or liquid. |
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MTI Tensile Stages:
MTI Instruments’ miniature tensile, compression and bend testing machines are specifically designed for use in scanning electron microscopes, atomic force microscopes, and light microscopes. These are used by industrial and research institutions to investigate how different materials perform under certain conditions. Material specimens are placed within the jaws of the tensile stage and compressive or expansive load forces are applied. Additional stimuli such as heating or cooling can be directed at the sample during the test in order to gather data under various conditions. |
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Semiconductor and Solar Metrology Systems: Our family of wafer metrology systems includes manual and semi-automated systems which test key wafer characteristics critical to producing integrated circuits. Primarily used in quality control applications, these systems provide highly precise measurements of thickness variation, bow, warp, resistivity, and flatness. These systems can be used on substrates varying widely in size and materials. In addition to MTI Instrument’s push/pull capacitance probe technology, we have expanded our line of products to include offerings for the solar industry, including the measurement of solar wafer thickness.
The Semiconductor and Solar Metrology Systems include the following products:
Proforma 200SA/300SA:
| Microchips drive the sophisticated electronic devices we use today. These tiny chips are created from larger wafers, which must meet high quality standards. Our Proforma series of products quickly analyze wafer quality to help improve process line efficiency. The Proforma 200SA/300SA is a semi-automated thickness measurement system capable of handling state-of-the-art 200 mm and 300mm wafers using defined and ASTM/SEMI standard patterns. Summary information is provided in standard export formats along with 3-dimensional images of the wafers for advanced analysis. This series of products is built around MTI Instrument’s exclusive push-pull measurement technology which we believe produces more accurate results than other methods. Our thickness measurements on silicon wafers can be faster than many other technologies, and are a good fit for front-end semiconductor processes. Additionally,the Proforma 300SA comes with an easy to use and set-up Windows® user interface. |
Proforma 300:
The Proforma 300 is an easy-to-use, manual tool that accepts any wafer size and can measure a number of different materials without recalibrating or electrically grounding the wafers.
Portable and easy to set up, the Proforma 300 provides the user precise non-contact measurements at critical points throughout the wafer manufacturing process. Thickness and total thickness variation (TTV) values are obtained by placing the wafer between MTI Instruments' non-contact capacitance probes. The teflon coated wafer stage allows for easy, non-abrasive positioning of the wafer, while removable locating pins can be used for precise center thickness measurements. Thickness and TTV values are indicated on the high resolution LCD display. |
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PV-1000:
The PV-1000 series brings our 40+ years of precision measurement experience to a line of products specifically designed for the photovoltaic/solar industry.
| The PV-1000 is incorporated into solar cell production lines to help manufacturers quickly determine quality control issues. The PV-1000 is used for both process development and production environments, the PV-1000 solar wafer measurement module fits anywhere on the production line. Its modular design offers expandability to meet our customers’ current and future measurement demands. The system uses an integrated data acquisition package and control electronics to analyze and transmit wafer data via the on-board Ethernet port. Additionally, the PV-1000 allows for remote monitoring in production areas. |
Aviation Balancing Systems:The computer-based portable balancing systems (PBS) products automatically collect and record aircraft engine vibration data, identify vibration or balance trouble in an engine, and calculate a solution to the problem. These units are used and recommended by major aircraft engine manufacturers and are also used extensively by the U.S. Air Force, other military and commercial airlines, and gas turbine manufacturers.
Our aviation balancing systems products include vibration analysis and engine trim balance instruments and accessories for commercial and military jets. These products are designed to quickly pinpoint engine problems and eliminate unnecessary engine removals. Selected products in this area include:
PBS-4100+ /4100R+ Portable Balancing System:
The portable PBS-4100+ detects if an engine has a vibration problem or a trim balance problem and provides a solution, resulting in reduced engine vibration, longer engine life, and lower fuel costs. The PBS-4100R+ rack mounted system offers the same features and functions as the portable PBS-4100+ with added data channels, speed input channels, DC outputs and diagnostic options. It is used in test cell or other fixed installations and can be configured and operated remotely. |
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TSC-4800A Tachometer Signal Conditioner:
Targeted for operators of Engine Test cells, where accurate and reliable conditioning of speed signals is essential, MTI Instruments has designed the TSC-4800A Tachometer Signal Conditioner to detect and condition signals for monitoring, measuring, and indicating engine speeds.
| During the testing of advanced aircraft engines, speed signals are monitored and recorded by a large number of different instruments. The TSC-4800A features multiple output circuits that provide more than 10 different signals types for the monitoring devices. The TSC-4800A Tachometer Conditioner leverages design technologies developed for the PBS-4100R+ systems and offers web-based control. It features firmware based circuitry to determine the nature of the speed signals and the required conditioning algorithms. Advanced filtering, threshold detection and noise controls are also a benefit of the new firmware technologies. The firmware based design also ensures that evolving detection and conditioning requirements for future engine designs will be met with easily accomplished firmware refreshes. |
1510A Calibrator:
The PBS family of products includes a 1510A calibrator – a product that automatically performs a complete calibration check of the PBS unit which otherwise would take hours. The 1510A calibrator emits, National Institute of Standards and Technology (NIST) traceable, output voltage signals, including voltage levels, frequency, waveshape and phase that allow for easy calibration of the PBS-4100+. If the PBS unit is out of tolerance, the calibration function automatically performs a second set of tests to determine calibration factors, which are automatically stored in the instrument. Due to its versatile functionality, the 1510A calibrator was introduced into the general gauging market in 2011. |
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Marketing and Sales
We market our products and services using channels of distribution specific to each of our product groups and customer base. The precision instruments group markets it products through a combination of manufacturer representatives in the United States and distributors overseas. The semiconductor and solar metrology systems group markets its products directly to end customers in the United States and internationally through distributors, while the aviation balancing systems group primarily sells direct to the end user.
To supplement these efforts, the company utilizes both commercial and industrial search engines, targeted newsletters and trade shows to identify and expand its customer base.
Comparisons of sales by class of products of MTI Instrument’s sales are shown below for the years ended December 31:
| 2011 | 2010 | 2009 | ||||||||||||||||
| (Dollars in thousands) | Sales | % | Sales | % | Sales | % | ||||||||||||
| Aviation Balancing Systems | $ | 5,359 | 52.1 | % | $ | 3,007 | 41.9 | % | $ | 2,768 | 44.2 | % | ||||||
| Precision Instruments | 3,983 | 38.8 | 2,804 | 39.1 | 2,619 | 41.8 | ||||||||||||
| Semiconductor and Solar Metrology | 938 | 9.1 | 1,368 | 19.0 | 876 | 14.0 | ||||||||||||
| Total | $ | 10,280 | 100.0 | % | $ | 7,179 | 100.0 | % | $ | 6,263 | 100.0 | % | ||||||
Product Development and Manufacturing
MTI Instruments conducts research and develops technology to support its existing products and develop new ones. Management believes that MTI Instruments’ success depends to a large extent upon innovation, technological expertise and new product development.
Our most recent product offerings include:
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 and product customization.
MTI Instruments assembles and tests its products at its facility located in Albany, New York. Management believes that most of the raw materials used in our products are readily available from a variety of vendors.
Intellectual Property and Proprietary Rights
We rely on trade secret laws and patents 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, 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 patent and trade secret protection may be unavailable or limited in certain foreign countries.
Significant Customers
MTI Instruments’ largest customer is the U.S. Air Force. We also have strong relationships with companies in the manufacturing, semiconductor, automotive, aerospace, aircraft and research industries. In 2011, the U.S. Air Force accounted for $2.3 million or 22.4% of product revenues; in 2010, it accounted for $1.6 million or 22.3% of product revenues; and in 2009, it accounted for $1.2 million, or 19.2%, of product revenue. The largest commercial customer in 2011 was a Southeast Asian distributor, who accounted for $1.1 million or 10.7% of total product revenue in 2011. The largest commercial customer in 2010 was a Chinese distributor, who accounted for $560 thousand, or 7.8% of total product revenue in 2010. The largest commercial customer in 2009 was a domestic US defense contractor, who accounted for $618 thousand or 9.9% of total product revenue in 2009.
Recent Contracts
In 2011, MTI Instruments was awarded a $4.1 million multi-year U.S. Air Force contract for the purchase of PBS4100+ portable aircraft engine balancing systems. As of December 31, 2011, MTI Instruments had recorded $684 thousand in orders, approximately 16.7% of the total contract’s total value.
In 2009, MTI Instruments was awarded a multi-year U.S. Air Force contract to service and repair its existing fleet of PBS-4100 jet engine balancing systems with the latest diagnostic and balancing technology, which could potentially generate up to a total of $6.5 million in sales for the Company between 2009 and 2014. As of December 31, 2011, MTI Instruments had recorded $2.9 million in orders, approximately 44.6% of the five-year contract’s total value.
Competition
We are subject to competition from several companies, many of which are larger than MTI Instruments and have greater financial resources. MTI Instruments’ competitors include KLA-Tencor, Sigma Tech Corporation, E+H Eichhorn+Hausmann GmbH,Chadwick-Helmuth Company, Inc., ACES Systems, Micro-Epsilon, and Keyence Corporation.
The primary competitive considerations in MTI Instruments’ markets are product quality, performance, price, timely delivery, 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.
The Portable Power Source IndustryNew Energy Segment
Industry Background
Consumers demand portable electronics that offer an enhanced experience through expanded memory, improved display technologies, constant connectivity, robust software, and a reduced form factor. In addition, technologicalTechnological advances in semiconductor manufacturing, LEDLCD displays, memory costs and availability, wireless technologies, and software applications have resulted in a dramatic increase in the number of portable electronic devices, their usage, and especially, their power requirements. As a result of these consumer demands and technological advances,In addition, there are a number of new handheld electronic devices, such as mobilesmart phones, (including smart phones) and mobile phone accessories, digital cameras, portable media players, PDAs,gaming devices, e-readers and GPSother portable devices that have been introduced into the market. Many ofDemand for these devices provide consumers and mobile professionals withportable electronics that offer an enhanced experience include the ability to communicate any time, anywhere and have effectively enabled the creation of an “always-on” environment independent of the end user’s location. This trend towards increased functionality in portable electronic devices has led to a “power gap” in which the disparity between a device’s power supply, typically a rechargeable lithium-ion battery, and its power need, are not being met.is growing. This power gap leads to a need for the end user to plug-inplug in their devices to the electrical grid on a regular basis,more frequently, which limits theirthe ability to use these electronic devices where and when needed.
MTI Micro has been developing an off-the-grid power solution for various portable electronic devices to address this power gap. Our patented proprietary DMFC technology platform, called Mobion®, converts methanol fuel to usable electricity capable of providing continuous power as long as necessary fuel flows are maintained. Our proprietary fuel cell power solution consists of two primary components integrated into an easily manufactured device: the need arises.
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direct methanol fuel cell power engine, which we refer to as our Mobion® Chip, and methanol fuel cartridges. Our current Mobion® Chip is small enough to fit in the palm of one’s hand. The Power Source Bottleneck
Improvements in rechargeable battery technology have not kept pace with the evolution of consumer electronic device performance. Over the last ten years, device performance as measured by silicon processor speed has increased by a factor of 128 times, while the energy density of lithium-ion technology has only doubled. We believe that further gains in lithium-ion technology for portable electronics will be incremental at best, as any achievable benefits may be outweighedmethanol used by the decreasing stability, availability, integrity,technology is fully biodegradable.
Although MTI Micro continues to believe in the potential of its Mobion® based power solutions, operations have been suspended at MTI Micro until such time as market demand and relative safetyother deciding factors, including obtaining additional external financing, the successful completion of customer trials, a new development program with a government agency, and/or a customer order, come to fruition. Currently, MTI Micro has no employees and projects to spend between $5 and $10 thousand per month for operating activities including rent, preparing prototypes for customer demonstrations, minimal sales efforts, and patent fees to keep its patent portfolio current and minimal consultant costs to perform these higher energy output batteries. In additioninitiatives. MTI Micro will continue to their performance shortfalls, lithium-ion battery technology poses an environmental risk as the various heavy metals incorporated in these batteries require special disposal to prevent contamination of waste disposal sites.
According to a report dated February 2008 by Frost and Sullivan, an independent research firm, the global rechargeable lithium-ion battery market was approximately 1.8 billion units in 2006 and is projected to increase to roughly 3.9 billion units by 2013. This market can be divided into two segments: consumer and industrial applications. Consumer applications represented approximately 77% of this market and are projected to represent an overwhelming majority of sales through at least 2013.
OEMs are actively seeking improved powerseek additional capital from external sources to replace existing rechargeable lithium-ion batteriesresume operations and fund future development, if any. If MTI Micro is unable to powersecure additional improvements to their mobile electronic devices. Thefinancing, a new development program or customer order, the MTI Micro board of new products using technologies that already exist, such as radio frequency technologiesdirectors will assess other options for MTI Micro, including the sale of MTI Micro’s intellectual property portfolio and 4G wireless capabilities, but cannot be effectively commercialized on mobile devices will result from the availability of portable, compact, economical, rechargeable/replaceable higher energy density power sources, including micro fuel cells.other assets.
OurMTI Micro’s Solution
At the core of ourMTI Micro’s solution is ourits proprietary Mobion® Chip engine, a design architecture that embodies a reduction in the size, complexity, and cost of fuel cell construction, which results in a reliable, manufacturable, and affordable power solution that we believe provides improvedhigher energy density and portability over competing rechargeable batteryportable power technologies. OurMTI Micro’s proprietary fuel cell power solution consists of two primary components integrated in an easily manufactured device: the direct methanol fuel cell power engine, which we referMTI Micro refers to as ourthe Mobion® Chip, and methanol replacement cartridges. OurThe Mobion® Chip weighs less than one ounce and is small enough to fit in the palm of one’s hand. For these reasons, we believeMTI Micro believes that ourits Mobion® platform is ideally suited to provide a replacement foror go along with rechargeable lithium-ion batteries. Based upon ourMTI Micro’s ability to provide a compact, efficient, clean, safe, and long-lasting power source, for lower power applications, we intendMTI Micro intends to initially target power solutions for applications such as universal handheld chargers, military equipment, power tools, remote sensors, mobile phones, (including smart phones) and mobile phone accessories, digital cameras, portable media players, PDAs,gaming devices, e-readers and GPS devices.
For handheld consumer electronic applications, we have demonstrated power density of over 62 mW/cm2 with energy efficiencies of 1.4 Wh/cc of fuel, which is a direct result of our Mobion platform’s ability to use 100% methanol – a widely available, environmentally friendly, inexpensive, and biodegradable fuel. These advantages result in higher energy density and reduced size, cost, and complexity of our power solution offering consumersother portable on-demand power, independence from power outlets, and freedom from the need to constantly recharge their devices.
OurMTI Micro’s Strategy
Our goal isAlthough MTI Micro has suspended its operations, if/when those operations are able to resume, its goals remain the same, to become a leading provider of portable power for handheldvarious electronic devices. Key elements of ourMTI Micro’s strategy designed to achieve this objective include the following:would include:
Business Focus. We are focusing our efforts on the development and commercialization of ourMTI Micro’s portable power source products and test and measurement instrumentation business. We continue to seek external or debt investments to finance our portable power business. We will also continue to evaluate our test and measurement instrumentation business, and may explore other strategic alternatives for both of our portable power and test and measurement instrument businesses, including but not limited to, the sale of assets and/or either company.
Design for Mass Manufacturing. Our portable power source products willcan be manufactured using standard processes, such as injection molding and automated test and assembly, which are broadly employed throughout the electronics manufacturing industry.assembly. In preparing Mobion® for commercialization, ourthe current Mobion® Chip is injection molded and is being designed for mass manufacturing. In addition, we have continued integrating more functionality into our Mobion Chip while reducing its part count to one piece. Our current Mobion Chip is small enough to fit in the palm of a hand.
Outsource Manufacturing. We planMTI Micro plans to outsource manufacturing of its products to allow MTI Micro to expand rapidly and diversify ourits production capacity. This strategy willshould allow usMTI Micro to maintain a variable cost model in which we doMTI Micro does not incur most of ourtheir manufacturing costs until ourtheir proprietary fuel cell power solution has been shipped and billed to ourtheir customers. We intendMTI Micro intends to concentrate on ourtheir core competencies of research and development and product design. This approach should reduce ourMTI Micro’s fixed capital expenditures and allow usthem to efficiently scale production.
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Utilize our Technology to Provide Compelling Products. We planMTI Micro plans to utilize ourits intellectual property portfolio and technological expertise to develop and offer portable power source products across multiple electronic device markets. We intendMTI Micro intends to employ ourits technological expertise to reduce the overall size and weight of our portable power source products while increasing their ease of manufacturing, power capacity, and power duration and decreasing their cost. We believe that these efforts
Additionally, MTI Micro’s board of directors will enable us to meet customer expectations and to achieve our goalassess other options for MTI Micro including the sale of supplying on a timely and cost-effective basis the most environmentally friendly portable power source products to our target markets. We believe our products will offer advantages in terms of performance, functionality, size, weight, and ease of use. We plan to continue enhancing our customers’ industrial design alternatives and device functionality through innovative product development based on our existing capabilities and technological advances.
Capitalize on Growth Markets. We intend to capitalize on the growth of the electronic device markets, including new products that may be brought about by the convergence of computing, communications, and entertainment devices. We believe our portable power source products will address the growing need for portability, connectivity, and functionality in the evolving electronic device markets. We plan to offer these power solutions to OEM customers to enable them to offer products that have advantages in terms of size, weight, power duration, and environmental friendliness. We plan to utilize our existing technologies, as well as aggressively pursue new technologies and evolving markets that demand enhanced power solutions.
Develop Strong Customer Relationships. We plan to develop strong and long-lasting customer relationships with leading electronic device OEMs and to provide them with power solutions for their products. We believe that our portable power source products will enable our OEM customers to deliver a more positive user experience and to differentiate their products from those of their competitors. We will attempt to enhance the competitive position of our customers by providing them with innovative, distinctive, and high-quality portable power supply products on a timely and cost-effective basis. We will work continually to improve our portable power source products, to reduce costs, and to speed the delivery of our products. We will endeavor to streamline our designs and delivery processes through ongoing design, engineering, and production improvement efforts. We will also devote considerable effort to support our customers after the purchase of our portable power source products.
Pursue Strategic Relationships. We intend to develop and expand strategic relationships to enhance our ability to offer value-added customer solutions, penetrate new markets, and strengthen the technological leadership of our portable power source products.
Products
Portable Power Source Products
We are developing three product categories of our Mobion technology: (i) external power charger products, (ii) snap-on or attached power source products, and (iii) embedded power source products. In addition, we are working with our strategic partners and suppliers to develop removable methanol cartridges that will be used to fuel our portable power source products.
External Power Charger: Our design for an external power charger is a standalone device that uses a standard and widely used universal serial bus, or USB, interface as a power output connector that can be used to recharge handheld mobile devices. Our current design for the device is roughly the size of two decks of playing cards (see photo below) and employs a 100% methanol fuel cartridge, which occupies the same volume as a pack of chewing gum. For each removable cartridge, our current prototype external power charger provides up to one month of power for the typical mobile phone. It can also be designed to enable a professional photographer to take over 5,000 pictures using a high end digital camera from a single cartridge. Our device is designed to provide 2.5 watts of power from its USB interface and also offer fast charge, ultra-long run time and self-charging modes.
Mobion external power charger with removable cartridge prototype
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Snap-on or Attached Power Source Products: Similar to aftermarket battery attachments, our snap-on direct methanol fuel cell power solution is an attached power supply that is compatible with existing portable electronic devices and offers users extended run-time power. In this category, we envision a number of product applications, including attachments for digital cameras, portable media players, GPS devices,MTI Micro’s intellectual property portfolio and other consumer and electronic products. Our initial design is a direct methanol fuel cell camera-grip (see photo below) that replaces comparable rechargeable lithium-ion battery-pack grips and is designed to provide twice as much energy as similar rechargeable lithium-ion battery-based products. Our Mobion direct methanol fuel cell camera grip allows photographers the benefits of extended usage plus the freedom to refill using a methanol cartridge rather than by plugging into a wall outlet.assets.
Sample Mobion attached power source camera-grip prototype
Embedded power source products: Our goal is to produce direct methanol fuel cells that can be embedded into portable electronic devices in order to increase their run time and to provide fast charge capability by hot-swapping 100% methanol cartridges. We have developed an embedded fuel cell prototype for a GPS unit that we believe will generate three times as much usage time as GPS devices powered by conventional disposable AA batteries (see photo below.)
Prototype of a GPS unit with an embedded Mobion power source
We have also developed an embedded fuel cell concept model designed for a smart phone (see photo below) and believe that this concept model highlights the anticipated future product direction for our portable power source products in the consumer market.
Concept model of a smart phone with an embedded Mobion power source
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Advantages of our Portable Power Source Products
We believe that our portable power source products will offer the following advantages:
Codes and Standards
In 2004, we became the world’s first company to obtain micro fuel cell safety compliance certifications for a fuel cell product from Underwriter’s Laboratory and CSA International. In addition, we received United Nations packaging certification and our methanol cartridges were deemed compliant by the U.S. Department of Transportation for worldwide cargo shipment. Certification is required for every commercial product prior to its shipment. Based upon our previous experiences with these regulatory agencies, we do not anticipate delays associated with seeking Underwriter’s Laboratory and CSA International product certifications for our commercial products, which, assuming available financing, are anticipated to begin shipping in 2009.
Also, we helped to develop a proposal adopted by the United Nations to provide methanol fuel cartridges a separate classification and we worked with other micro fuel cell companies, and the appropriate regulatory bodies, to generate the first draft of the international standards for methanol safety and use related to transport on commercial airplanes.
As a result of our industry coalition efforts, the International Civil Aviation Organization technical instructions and the International Air Transport Association Dangerous Goods Regulations now permit airline passengers and crew to carry on and use certain fuel cell power systems and fuel cell cartridges containing methanol. On April 30, 2008, the U.S. Department of Transportation issued a final ruling adopting the International Civil Aviation Organization, or ICAO, regulations permitting commercial aircraft passengers and crew to bring in their carry-on baggage methanol fuel cell cartridges and fuel cell systems designed for portable electronic devices. The effective date of this ruling is February 13, 2009.
MTI Micro is pursuing the development of an external power charger product as a standalone device that uses a standard and widely used Universal Serial Bus (USB) interface as a power output connector that can be used to recharge handheld mobile devices. Our current design for the device is roughly the size of two decks of playing cards (see photo to the right) and employs a methanol fuel cartridge. For each removable cartridge, our current prototype external power charger provides up to one month of power for the typical mobile phone. Our device is designed to provide 2.5 watts of power output from its USB interface and also offer fast charge, ultra-long run time and self-charging modes. |
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Test and Measurement Instrumentation Products
We are a global supplier of computerized gauging instruments, metrology systems for semiconductor wafers, and jet engine balancing systems.
General Dimensional Gauging: Our gauging instruments employ fiber optic, laser, and capacitance technologies to make precision measurements in product design, production, and quality related processes. Our gauging instruments include capacitance gauging systems offering ultra-high precision measurement, a fiber-optic based vibration sensor system with extremely high frequency response, a high-speed laser sensor system utilizing the latest complementary metal-oxide semiconductor/charge-coupled device technology, and a stand-alone data acquisition system that incorporates multiple sensor technologies. These products are targeted towards the data storage, semiconductor, and automotive industries.
Semiconductor: Our family of wafer metrology systems range from manually operated units to fully automated systems, which test key wafer characteristics critical to producing high-quality chips used in the semiconductor industry. These units are used as quality control tools delivering highly precise measurements for thickness variations, bow, warp, resistivity, and flatness. These systems can be used on substrates varying widely in size and materials. Our wafer metrology systems include an automated wafer characterization system, a semi-automated, full wafer surface scanning system, and a device that provides for manual, non-contact measurements.
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Jet Engine Balancing Systems: Our portable and test cell balance systems automatically collect and record aircraft engine vibration data, identify vibration or balance issues in an engine, and calculate a solution to the problem. These units are used by major aircraft engine manufacturers, the U.S. Air Force, other military and commercial airlines and gas turbine manufacturers.
Technology
A fuel cell is an electrochemical energy conversion device, which is similar to a battery that produces electricity from a liquid or gaseous fuel, such as methanol, and an oxidant, such as oxygen. Fuel cells are different from batteries in that they consume a reactant which mustthat can be replenished, while batteries store electrical energy chemically in a closed system.
Generally, the reactants flow in and reaction products flow out of the fuel cell. While the electrodes within a battery react and change as a battery is charged or discharged, a fuel cell’s electrodes are catalytic and relatively stable.
TheA direct methanol fuel cell relies upon the reaction of water with methanol at the catalytic anode layer to release protons and electrons and to form carbon dioxide. The electrons pass through a circuit and generate electricity that can be used to power external devices. The protons generated through this reaction pass through the proton exchange membrane to the cathode, where they combine to form water. The anode and cathode layers of a direct methanol fuel cell are usually made of platinum ruthenium particles and platinum ruthenium particles embedded on either side of a proton exchange membrane.
Methanol fuel cells need water at the anode and therefore pure methanol cannot be used without the provision of water via either active transport, such as the pumping of water generated at the cathode back to the anode layer (see Chart A), or a passive recirculation mechanism that incorporates pressurized internal ducts or piping. Without either an active or a passive recirculation mechanism, a direct methanol fuel cell would require the inclusion of water as a dilutant in the methanol fuel, which limits the energy content of the diluted fuel (see Chart B).
Direct Methanol Fuel Cell with Active Water Transport (Chart A)
Methanol Fuel Cell With Water As A Fuel Dilutant (Chart B)
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Our Mobion technology eliminates the need for active water recirculation pumps or the inclusion of water as a fuel dilutant. The water required for reaction at the anode is transferred internally within the Mobion Chip from the site of water generation on the air-side of the cell through a proprietary, passive design that eliminates the need for water movement by external pumps, complicated re-circulation loops or other micro-plumbing tools (see Chart C).
Our Mobion Technology with 100% Methanol and Passive Water Recirculation (Chart C)
Our Mobion solution contains a passive water recirculation sub-system that allows for the consumption of 100% methanol, results in a reduced parts count design and offers the advantage of higher energy density than competing fuel cell technologies for portable electronic devices.
Strategic Agreements
On September 10, 2008, MTI Micro and Duracell, part of The Gillete Company, which is part of the Procter & Gamble Company (“Duracell”) entered into a letter of intent whereby both parties agree to explore a new relationship to collaborate on the market development and commercialization of Mobion based fuel cell systems and methanol fuel cartridges for the consumer market.
On October 26, 2010, MTI Micro was awarded a $100 thousand firm fixed contract from a United States Department of Defense (DOD) agency for the development of proof of concept fuel cells for technical testing and subsequent demonstration in a capabilities based experiment. The total contract was billed and paid as of December 31, 2008, we signed an agreement with a U.S. based developer and marketer of universal chargers to evaluate the feasibility, development and production of our Mobion products. This agreement, which took effect on August 29, 2008, will enable us and this developer to collaborate in evaluating and adopting our Mobion technology for use with a number of their products.2011.
On July 9, 2008, we entered into an agreement with NeoSolar Corporation, or NeoSolar,28, 2010, MTI Micro was awarded a Korean manufacturercost share funding grant of portable digital devices$296 thousand from the New York State Energy Research and energy products, to develop Mobion fuel cell technology for use in future modelsDevelopment Authority (NYSERDA). The total contract was billed and paid as of NeoSolar portable digital devices, including ultra mobile portable computers. We intend to work together to develop, test, and evaluate Mobion prototypes for their integration with a number of NeoSolar products, which could lead to the use of external Mobion power sources, like chargers and snap-on attachments, and embedded Mobion power sources for integration into various digital products.December 31, 2011.
On April 28, 2008,16, 2009, we entered into a development agreement with a global Japanese consumer electronics company to evaluate the feasibility, development, and production of our Mobion products. This agreement will enable us and this developer to collaborate in evaluating and adopting our Mobion technology for use in various precision imaging applications, including digital cameras. On May 12, 2008, we announced that we delivered a Mobion prototype to this company for their evaluation.
On December 13, 2007, we entered into an agreement with Trident Systems, Inc. to pursue opportunities to leverage our consumer market platform into low-power military markets. Teaming opportunities include demonstrations of unattended ground sensor prototypes powered by Mobion and evaluations and potential submissions of proposals for military programs.
On May 16, 2006, we entered into an alliance with Samsung Electronics Co., Ltd., or Samsung, to develop next-generation fuel cell prototypes for Samsung’s mobile phone business. We developed, and together with Samsung we jointly tested and evaluated, our Mobion technology for several Samsung mobile phone applications. We are continuing to work with Samsung on a non-exclusive collaboration under which we continue to refine our Mobion baseline product design.
On August 1, 2004, we entered into a $6.1$4.8 million cost-shared development contract with the U.S. Department of Energy or the DOE,(DOE), for the development of manufacturing techniques and the optimization of our Mobion product solutions. Through December 2008, the DOE has authorized $6.1 million of spending on a cost-shared basis. This contract expires on March 31, 2009.
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Manufacturing
We plan to outsource manufacturing of our portable power source products through third-party relationship contract manufacturers. We believe this strategy will provide us with a business model that allows us to concentrate on our core competencies of research and development and technological know-how and reduce our capital expenditures. In addition, this strategy will significantly reduce our working capital requirements for inventory because we will not incur most of our manufacturing costs until we have actually shipped our portable power source products to our customers and billed those customers for those products. To date, we have established an internal developmental pilot production line to test our design and engineering capabilities and a representative office in Shanghai to facilitate our efforts to develop relationships with manufacturers and low cost component suppliers in China. Although we have developed an internal developmental pilot production line, we intend to rely upon third parties to forecast production requirements and have established the basic design, function, and performance of our in-house engineering capabilities to foster the successful commercialization of our products.
The commercialization of our Mobion power solution will depend upon our ability® product solutions, with $2.4 million in funds available under this program. On April 30, 2010, MTI Micro was approved for an extension of this grant with additional funds available of $594 thousand. As of April 25, 2011, all amounts awarded have been billed and paid by the DOE under this grant. During the first quarter of 2011, we completed the work required under this DOE grant. The objective of the grant was to reducedemonstrate and field test a commercially viable one watt DMFC charger for consumer electronic devices. As part of this objective, MTI Micro field tested 75 units to various users, including 17 OEM’s, 33 individuals, 21 military agencies and four governmental agencies. We have achieved all technical performance targets required by the costsDOE under this grant; this field testing has concluded and the final report to the DOE may be found at http://www.mtimicrofuelcells.com/news/events.asp. Additional experimental testing was conducted at the DOD since the fourth quarter of 2010 that resulted in product improvements in the third quarter of 2011. Further testing by the DOD of our portable power source products,Mobion® fuel cell charger commenced in October 2011. If approval is granted, this may result in the signing of a commercialization contract or purchase orders for final production. To date, no approval has been granted and there is no clear indication as they are currently more expensive than existing rechargeable battery technologies. In addition, we continue to work on enhancing our Mobion power source design, including our injection molded Mobion Chip, to ensure its manufacturability (including engineering, verification and product testing), design for assembly, design for testability, and design for serviceability, all of which are critical to successful high-volume production.
We assemble and test our test and instrumentation measurement products at our facilities located in Albany, New York. We believe that our existing assembly and test capacity is sufficient to meet our current needs and short-term future requirements. We believe that most of the raw materials used in our test and measurement products are readily available from a variety of vendors.
Sales and Marketing
We plan to sell our portable power source products for incorporation into the products of our OEM customers or to be sold as accessories through them. We plan to generate sales to OEM customers through direct sales employees as well as outside sales representatives and distributors. We have established sales representatives in South Korea and Japan.
We build awareness in our target markets through a series of targeted campaigns, which include our website, e-mails, conferences, tradeshows, and other standard marketing efforts. In addition, we provide progress reports on our Mobion developments through a wide array of publications, active public relations, updates with industry analysts and the investment community, and speaking engagements.
We market our test and measurement instrumentation products through a combination of direct sales personnel and domestic and international distributors.
Customers
We expect that our customers for our portable power source products will include a number of the world’s leading electronic device OEMs.
Revenue from our test and measurement instrumentation products to Koyo, our Japanese distributor, and the U.S. Air Force accounted for 13.9% and 15.6%, respectively, of product revenue in 2008. In 2007, sales to Koyo and the U.S. Air Force accounted for 26.4% and 27.8%, respectively, of product revenue. In 2006, sales to Koyo and the U.S. Air Force accounted for 22.9% and 23.1%, respectively, of product revenue. No other single customer accounted for greater than 10% of product revenue in 2006, 2007 or 2008.
Competition
We expect that the primary competitive factor in our portable power source businesswhen MTI Micro will be market acceptance of our portable power source products as an alternative power source to conventional lithium-ion and other rechargeable batteries. Market acceptance of our portable power source products will depend on a wide variety of factors, including the compatibility of direct methanol fuel cell power sources with portable electronic devices and the market’s assessment of the advantages offered by our products in terms of size, weight, power density and duration, safety, reliability, and environmental friendliness when measured against price disadvantages. We anticipate direct competition from large Asian-based companies and some of our potential OEM customers.notified.
Competition in the sale of our measurement and instrumentation products is based on product quality, performance, price, and timely delivery. Our competitors for test and measurement instrumentation products include National Instruments, KLA-Tencor, Capacitec, Sigma Tech, Corning Tropel, Chadwick-Helmuth, ACES Systems, Micro-Epsilon, and Keyence.
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Product Development
Over the past three years, we have developed and built a number of engineering prototypes used to validate our technology and to generate discussions with potential customers about the inclusion of our technology in new products. During the same period, we have created four generations of external power charger prototypes, each of which has shown a dramatic size reduction over the previous generation. Our latest external power charger prototype achieved a 60% reduction in volume over our first generation prototype and it has incorporated a removable methanol cartridge.
We have improved the capabilities of our Mobion Chip technology during the last three years, which we expect will continue to evolve as we integrate greater functionality into our designs. This continuous iterative integration process is intended to reduce the size, simplify the design and construction, and reduce assembly complexity of our technology. We continue to improve the product design of the Mobion Chip and believe that future product generations will deliver performance improvements in terms of energy density, size, weight, and power duration and should be able to power wireless electronic devices for longer periods of time than rechargeable lithium-ion batteries.
Intellectual Property and Proprietary Rights
We rely on a combination of patentpatents (both national and international), trade secret, trademark,secrets, trademarks, and copyright protectioncopyrights to protect our intellectual property. Our strategy is to apply for patent protection for all significant design requirements. Additionally, we systematically analyze the existing intellectual property landscape for direct methanol fuel cells to determine where the greatest opportunities for developing intellectual property exist. We also enter into standard confidentiality agreements with our employees, consultants, vendors, partners and potential customers and seek to control access to and distribution of our proprietary information.
As of March 23, 2009 weDecember 31, 2011, MTI Micro’s Mobion® Technology had filed over 110106 U.S. patent applications, 5154 of which have been awarded. Of the awarded patents, 4244 are assigned to us and 910 are assigned to Duracell as part of our strategic alliance agreement with them.Duracell. We have filed 3033 Patent Cooperation Treaty Applications and have filed for National Phase Patent Protection for 25 pieces of intellectual property in multiple countries, including Japan, the European Union, and South Korea.5 of which have been issued. We have developed a portfolio of patent applications in areas including fuel cell systems, fuel refill and packaging, fuel, components, controls, manufacturing processes, and system packaging.
Research and Development
OurMTI Instruments conducts research and development team is responsible for advanced research, product planning, design and development, and quality assurance. Through our supply chain, we are also working with subcontractors in developing specific components of our technologies.
The primary objective of our research and development program is to advance the development of our direct methanol fuel celldevelops technology to enhance the commercial value of oursupport its existing products and technology, as well asdevelop new products. Management believes that the success of MTI Instruments depends to develop next generation fuel cell products.a large extent upon innovation, technological expertise and new product development.
We haveMTI, through MTI Instruments and MTI Micro, has incurred research and development costs of approximately $12.9$1.5 million, $11.8$3.9 million and $8.3$5.4 million for the years ended December 31, 2006, 2007,2011, 2010, and 2008,2009, respectively. We expect to continue to invest in research and development in the future.future in our MTI Instruments segment.
Employees
As of March 23, 2009December 31, 2011, we had 5743 employees including 42 full-time employees. Of these employees, 25 were involved in our portable power source business (including 14 scientists and engineers, of whom 10 have advanced degrees) and 30 were involved in our test and measurement instrumentation business. Two of our employees are involved in corporate functions.
Properties
We presently lease two premises in the United States, one located at 325 Washington Avenue Extension, Albany, New York and the other at 431 New Karner Road, Albany, New York. Both leases expire at the end of 2009. We are currently in negotiations with our landlords to renew and potentially restructure our lease agreements. The 325 Washington Avenue Extension premise consists of approximately 20,700 useable square feet of space, and the 431 New Karner Road consists of approximately 23,500 useable square feet of space. Together, the premises are adequate for our current and foreseeable needs. We also lease a representative office in Shanghai, China. The lease expires in 2009 and the premise consists of approximately 160 useable square feet of space.
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Legal Proceedings
We are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business or financial condition.
Availability of Information
We make available through our website(http://www.mechtech.com),www.mechtech.com) free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.Securities and Exchange Commission (SEC). These reports may be accessed through our website’s Investor Relations page.
The public may read and copy any materials we file with the SEC at the SECSEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We file electronically with the SEC and the SEC maintains an Internetinternet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
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Item 1A: Risk Factors
Factors Affecting Future Results
This Annual Report on Form 10-K and the documents we have filed with the SEC that are incorporated by reference into this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties.uncertainties within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements contained, 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. Forward-looking statements involve risks, uncertainties, estimates and assumptions which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, among others:
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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
Set forth below are certain risks and uncertainties that could adversely affect our results of operations or financial condition and cause our actual results to differ materially from those expressed in our forward-looking statements. Also refer to Factorsthe heading “Factors Affecting Future Results.Results” above.
We have incurred recurring net losses and anticipate continued net losses as we execute our commercialization plan for our portable power source business. If we do not raise financing in the next few months, we will be required to dramatically downsize, discontinue, or sell our portable power source business and/or our test and measurement instrumentation business.
We have incurred recurring net losses, including net losses of $13.7 million in 2006, $9.6 million in 2007 and $12.5 million in 2008, which includes a net gain of $0.7 million on derivatives and a gain of $1.0 million on sales of Plug Power stock in 2008. As a result of ongoing operating losses, we had an accumulated deficit of approximately $117.6 million as of December 31, 2008. If external resources permit, we expect to continue to incur significant expenditures to develop and commercialize our proposed portable power source products, which may entail developing our manufacturing, sales, and distribution networks; implementing internal systems and infrastructure; and hiring additional personnel. Failure to secure sufficient external funding for our portable power source business may cause us to dramatically downsize, discontinue, or sell our portable power source business.
At present, the Company does not expect to fund MTI Micro’s development and commercialization of its portable power source products. Based on MTI Micro’s projected cash requirements for 2009 and their current cash and cash equivalents, we believe MTI Micro will have adequate resources to fund operations into the month of April 2009. MTI Micro will be required to raise additional funds through issuance of its equity or debt, government funding and/or explore other strategic alternative, including the sale of assets and/or the company. If MTI Micro is unable to raise additional financing, it may be required to discontinue its business operations. Based upon projected cash requirements and current cash and cash equivalents for MTI Instruments, along with cash necessary to operate the public parent company, we believe that we will have adequate resources to fund MTI Instruments and the public parent company at least through December 2009.
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Our independent auditors have included a going concern paragraph in their opinion.
Our auditors have included an explanatory paragraph in their opinion that accompanies our audited consolidated financial statements as of December 31, 2008, indicating that our recurring losses from operations, net capital deficiency, and current liquidity position raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Continuing uncertainty of the U.S. economy may have serious implications for the growth and stability of our business and may negatively affect our stock price.
The revenue growth and profitability of our business will depend significantly on the overall demand for test and measurement instrumentations as well as electronic devices. Softening demand in these markets caused by ongoing economic uncertainty may result in decreased revenue or earnings levels. The U.S. 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.
We currently derive all of our product revenue from our test and measurement instrumentation business, but our principal focus is the development and commercialization of our portable power source business.
We currently derive all of our product revenue from our test and measurement instrumentation business, but our principal focus is the development and commercialization of our portable power source business. Our test and measurement instrumentation business is subject to a number of risks, including the following:
In addition, our test and measurement instrumentation products can be sold in quantity to a relatively few number of customers, resulting in a customer concentration risk. This business experienced a significant decline in sales in 2008 and sales are currently expected to be comparable in 2009. The further 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 business.
IfSince we are required to discontinue our portable power source businesshave suspended operations for MTI Micro due to lack of funding, all of our corporate overhead costs wouldmust be allocated tofunded by the test and measurement instrumentation business.
We have not generated any product revenue from our portable power source business and currently have no portable power source commercial products.
We have not generated any product revenue from our portable power source business and currently have no portable power source commercial products. The successful development and commercialization of our portable power source products will depend on a number of factors, including the following:
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Additionally, our technology is new and complex, and there may be technical barriers to the development of our portable power source products. The development of our portable power source products may not succeed or may be significantly delayed. Our portable power source products will be produced through manufacturing arrangements that have not been finalized or tested on a commercial scale. If we fail to successfully develop or experience significant delays in the development of our portable power source products, or if there are significant delays in commercialization, we are unlikely to recover those losses, thus making it impossible for us to become profitable through the sales of these products. This would materially and adversely affect our business and financial condition. If adequate funds are not available in the second quarter of 2009, we may have to delay development or commercialization of our portable power source products, license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. Any of these factors could harm our business and financial condition.
Any revenue derived in the relatively near-term relating to our portable power source business likely will result from governmental contracts or other governmental funding. We can offer no assurance that we will be able to secure continued government funding. The loss of such contracts or the inability to obtain additional contracts could materially harm our business.
We currently do not have sufficient funds to commercialize our portable power source products.
We will need additional funding to commercialize our portable power source business. Based upon projected cash requirements for the portable power source business in 2009 and its cash and cash equivalents of $0.7 million at December 31, 2008, plus a $0.5 million bridge loan in February 2009, we believe this business will have adequate resources to fund operations into the month of April 2009. If we are unable to secure the necessary additional funding, we will need to delay further commercialization plans. In order to conserve cash and extend operations while we pursue any additional necessary financing, we would be required to reduce operating expenses. There is no assurance that funds raised in any such a financing will be sufficient, that the financing will be available on terms favorable to us or to existing stockholders and at such times as required, or that we will be able to obtain the additional financing required for the continued operation and growth of our business. During the last twelve months, we have raised $2.2 million in external debt financing. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Additional debt financing, if available, may involve restrictive covenants. Any debt financing or additional equity financing may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets or delay, reduce the scope of or eliminate some or all of our research and development programs, or discontinue our portable power source business.
Our ownership position in MTI Micro may be reduced as a result of our plans to seek external financing for MTI Micro's operations, which could limit our ability to control the operations.
We currently own approximately 97% of the outstanding equity in MTI Micro and have control over the operations of this subsidiary. In February 2009 and September 2008, MTI Micro issued $0.5 million and $1.5 million, respectively of secured notes to outside investors, which notes are convertible into shares of MTI Micro. If the notes are converted, our ownership could decrease significantly. In addition, we do not currently expect to advance additional resources to MTI Micro to fund its continued direct methanol fuel cell development and commercialization programs. Instead, MTI Micro will seek additional capital from external sources to fund future development and operations. Depending on the valuation of MTI Micro at the time of future financings, if any, our ownership position could be substantially diluted, and we may no longer have sufficient equity to control the operations of MTI Micro. If MTI Micro is unable to secure the necessary additional external financing, we may be forced to substantially downsize or eliminate its operations.
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Our portable power source products may not be accepted by the market.
Any portable power source products that we develop may not achieve market acceptance. The development of a successful market for our proposed portable power source products and our ability to sell those products at favorable prices may be adversely affected by a number of factors, many of which are beyond our control, including the following:
Target markets for our proposed portable power source products, such as those for mobile phones (including smart phones) and mobile phone accessories, digital cameras, portable media players, PDAs, and GPS devices, are volatile, cyclical, and rapidly changing and could continue to utilize existing technology or adopt other new competing technologies. The market for certain of these products depends in part upon the development and deployment of wireless and other technologies, which may or may not address the needs of users of these new products.
Many manufacturers of portable electronic devices have well-established relationships with competitive suppliers. Penetrating these markets will require us to offer better performance alternatives to existing solutions at competitive costs. The failure of any of our target markets to continue to expand, or our failure to penetrate these markets to a significant extent, will impede our sales growth. We cannot predict the growth rate of these markets or the market share we will achieve in these markets in the future.
If our proposed portable power source products fail to gain market acceptance, it could materially and adversely affect our business and financial condition.
Market acceptance of our customers’ products that utilize our portable power source products may decline or may not develop and, as a result, our sales will be harmed.
We currently do not anticipate selling our portable power source products directly to end users. Instead, we plan to produce portable power source products that our OEM customers incorporate into their products. As a result, the success of our proposed portable power source products will depend upon the widespread market acceptance of the products of our OEM customers. We will not control or influence the manufacture, promotion, distribution, or pricing of the products that incorporate our portable power source products. Instead, we will depend on our OEM customers to manufacture and distribute products incorporating our portable power source products and to generate consumer demand through their marketing and promotional activities. Even if our technologies and products successfully meet our customers’ price and performance goals, our sales would be harmed if our OEM customers do not achieve commercial success in selling their products to consumers that incorporate our portable power source products.
Any lack of adoption in the use of our portable power source products by OEM customers in the electronic device markets, the reduced demand for our OEM customers’ products, or a slowdown in their markets would adversely affect our sales.
If we fail to build and maintain relationships with our customers and do not satisfy our customers, we may lose future sales and our revenue may stagnate or decline.
Because our success depends on the widespread market acceptance of our customers’ products, we must develop and maintain our relationships with leading global OEMs of electronic devices, such as mobile phones (including smart phones) and mobile phone accessories, digital cameras, portable media players, PDAs, and GPS devices. In addition, we must identify areas of significant growth potential in other markets, establish relationships with OEMs in those markets, and assist them in developing products that use our portable power source products and technologies. Our failure to identify potential growth opportunities, particularly in new markets, or establish and maintain relationships with OEMs in those markets, would prevent our business from growing in those markets.
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Our ability to meet the expectations of our customers will require us to provide portable power source products for customers on a timely and cost-effective basis and to maintain customer satisfaction with our product solutions. We must match our design and production capacity with customer demand, maintain satisfactory delivery schedules, and meet specific performance goals. If we are unable to achieve these goals for any reason, our customers could reduce their purchases from us and our sales would decline or fail to develop.
Our customer relationships also can be affected by factors affecting our customers that are unrelated to our performance. These factors can include a myriad of situations, including business reversals of customers, determinations by customers to change their product mix or abandon business segments, or mergers, consolidations, or acquisitions involving our customers.
We have no experience manufacturing portable power source products on a commercial scale.
To date, we have focused primarily on research, development, and pilot production, and we have no experience manufacturing any portable power source products on a commercial scale. Our pilot production efforts to date have been limited in scale. It is our intent to manufacture our portable power source products through OEM customers and third-party manufacturers. Failure to secure manufacturing capabilities could materially and adversely affect our business and financial condition.
We will rely on others for our production, and any interruptions of these arrangements could disrupt our ability to fill our customers’ orders.
We plan to rely on others for all of our production requirements for our portable power source products. The majority of this manufacturing is anticipated to be conducted in Asia by manufacturing subcontractors that also perform services for numerous other companies. We do not expect to have a guaranteed level of production capacity with any of our manufacturing subcontractors. Qualifying new manufacturing subcontractors is time consuming and might result in unforeseen manufacturing and operating problems. The loss of any relationships with our manufacturing subcontractors or assemblers or their inability to conduct their manufacturing and assembly services for us as anticipated in terms of cost, quality, and timeliness could adversely affect our ability to fill customer orders in accordance with required delivery, quality, and performance requirements. If this were to occur, the resulting decline in revenue would harm our business.
We will depend on third parties to maintain satisfactory manufacturing yields and delivery schedules, and their inability to do so could increase our costs, disrupt our supply chain, and result in our inability to deliver our portable power source products, which would adversely affect our results of operations.
We will depend on our manufacturing subcontractors to maintain high levels of productivity and satisfactory delivery schedules for our portable power source products from manufacturing and assembly facilities likely located primarily in Asia. We plan to provide our manufacturing subcontractors with rolling forecasts of our production requirements. We do not, however, anticipate having long-term agreements with any of our manufacturing subcontractors that guarantee production capacity, prices, lead times, or delivery schedules. Our manufacturing subcontractors will serve other customers, many of which will have greater production requirements than we do. As a result, our manufacturing subcontractors could determine to prioritize production capacity for other customers or reduce or eliminate deliveries to us on short notice. We may experience lower than anticipated manufacturing yields and lengthening of delivery schedules. Lower than expected manufacturing yields could increase our costs or disrupt our supply chain. We may encounter lower manufacturing yields and longer delivery schedules while commencing volume production of any new products. Any of these problems could result in our inability to deliver our product solutions in a timely manner and adversely affect our operating results.
We plan to rely on third-party suppliers for most of our manufacturing equipment.
We plan to rely on third-party suppliers for most of the manufacturing equipment necessary to produce our portable power source products. The failure of suppliers to supply manufacturing equipment in a timely manner or on commercially reasonable terms could delay our commercialization plans and otherwise disrupt our production schedules or increase our manufacturing costs. Further, our orders with certain of our suppliers may represent a very small portion of their total orders. As a result, they may not give priority to our business, leading to potential delays in or cancellation of our orders. If any single-source supplier were to fail to supply our needs on a timely basis or cease providing us with key components, we would be required to substitute suppliers. We may have difficulty identifying a substitute supplier in a timely manner and on commercially reasonable terms. If this were to occur, our business would be harmed.
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Shortages of components and raw materials may delay or reduce our sales and increase our costs, thereby harming our results of operations.
The inability to obtain sufficient quantities of components and other materials, including platinum and ruthenium, necessary for the production of our portable power source products could result in reduced or delayed sales or lost orders. Any delay in or loss of sales could adversely impact our operating results. Many of the materials used in the production of our portable power source products will be available only from a limited number of foreign suppliers, particularly component suppliers located in Asia. In most cases, neither we nor our manufacturing subcontractors will have long-term supply contracts with these suppliers. As a result, we will be subject to economic instability in these Asian countries as well as to increased costs, supply interruptions, and difficulties in obtaining materials. Our customers also may encounter difficulties or increased costs in obtaining the materials necessary to produce their products into which our product solutions are incorporated.
From time to time, materials and components necessary for our portable power source products or in other aspects of our customers’ products may be subject to allocation because of shortages of these materials and components. Shortages in the future could cause delayed shipments, customer dissatisfaction, and lower revenue.
We will be subject to lengthy development periods and product acceptance cycles, which can result in development and engineering costs without any future revenue.
We plan to provide portable power source solutions that are incorporated by OEMs into the products they sell. OEMs will make the determination during their product development programs whether to incorporate our portable power source solutions or pursue other alternatives. This process may require us to make significant investments of time and resources in the design of portable customer-specific power source solutions well before our customers introduce their products incorporating our product solutions and before we can be sure that we will generate any significant sales to our customers or even recover our investment. During a customer’s entire product development process, we will face the risk that our portable power source products will fail to meet our customer’s technical, performance, or cost requirements or that our products will be replaced by competing products or alternative technological solutions. Even if we complete our design process in a manner satisfactory to our customer, the customer may decide to delay or terminate its product development efforts. The occurrence of any of these events could cause sales to not materialize, to be deferred, or to be cancelled, which would adversely affect our operating results.
We will not have long-term purchase commitments from our customers, and their ability to cancel, reduce, or delay orders could reduce our revenue and increase our costs.
Customers for our portable power source products will not provide us with firm, long-term volume purchase commitments, but instead will issue purchase orders to buy a specified number of units. As a result, customers may be able to cancel purchase orders or reduce or delay orders at any time. The cancellation, delay, or reduction of customer purchase orders could result in reduced revenue, excess inventory, and unabsorbed overhead. We currently have no presence in the electronic device markets. Our success in the electronic device markets will require us to establish the value added proposition of our products to OEMs that have traditionally used other portable power solutions. All of the markets we plan to serve are subject to severe competitive pressures, rapid technological change and product obsolescence, which may increase our inventory and overhead risks, resulting in increased costs.
Variability of customer requirements resulting in cancellations, reductions, or delays may adversely affect our operating results.
We will beare 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. Customers may require rapid increases in production, which could strain our resources and reduce our margins.
If we are unable to adequately protect our intellectual property, our competitors and other third parties could produce products based on our intellectual property, which would substantially impair our ability to compete.
Our success and ability to compete depends in part upon our ability to maintain the proprietary nature of our technologies. We rely on a combination of patent, trade secret, copyright, and trademark law and license agreements, as well as nondisclosure agreements, to protect our intellectual property. These legal means, however, afford only limited protection and may not be adequate to protect our intellectual property rights. We cannot be certain that we were the first creator of inventions covered by pending patent applications or the first to file patent applications on these inventions. In addition, we cannot be sure that any of our pending patent applications will issue. The United States Patent and Trademark Office or other foreign patent and trademark offices may deny or significantly narrow claims made under our patent applications and, even if issued, these patents may be successfully challenged, designed around, or may otherwise not provide us with any commercial protection.
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We may in the future need to assert claims of infringement against third parties to protect our intellectual property. Regardless of the final outcome, any litigation to enforce our intellectual property rights in patents, copyrights, or trademarks could be highly unpredictable and result in substantial costs and diversion of resources, which could have a material and adverse effect on our business and financial condition. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, or are invalid or unenforceable, and could award attorneys’ fees to the other party.
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, which 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. Whether or not such claims are valid, we cannot be certain that we have not infringed the intellectual property rights of such 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. 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 portable power source products, or could enter orders mandating that we undertake certain remedial activities. Further, a court could order us to pay compensatory damages for such infringement, plus prejudgment interest, and could in addition treble the compensatory damages and award attorneys’ fees. These damages could materially and adversely affect our business and financial condition.
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 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. The failure to obtain and maintain trade secret protection could adversely affect our competitive position.
Our efforts to develop new technologies may not result in commercial success, 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 terminate products utilizing the technology for a variety of reasons, including the following:
The nature of our business will require us to make continuing investments for 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.
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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 portable power source 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 maintaining customers and developing business will depend on various factors, including the following:
Our inability to commercialize our proposed portable power source solutions and develop new product solutions on a timely basis could harm our operating results and impede our growth.
If we do not keep pace with technological innovations, our products may not be competitive and our revenue and operatingresults may suffer.
The electronic, semiconductor, solar, automotive and general instrumentation industries 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 significant 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 proposed portable power source 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 toto:
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.
New technology solutions that achieve significant market share could harm our business.
New portable power source solutions could be developed. Existing electronic devices also could be modified to allow for a different power source solution. Our business could be harmed if our products become noncompetitive as a result of a technological breakthrough that allows a new power source solution to displace our solution and achieve significant market acceptance.
Our inability to respond to changing technologies will harm our business.
The electronics industry is 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 consumers, we may not be successful in capturing or retaining any significant market share. In addition, any new technologies utilized in our portable power source products may not perform as expected or as desired, in which event our adoption of such products or technologies may harm our business.
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International sales and manufacturing risks could adversely affect our operating results.
We anticipate that the manufacturing and assembly operationsHaving a worldwide distribution network for our portable power source products will be conducted primarily in Asia by manufacturing subcontractors. We also believe that many of our OEM customers will be located and much of our sales and distribution operations will be conducted in Asia. These international operations will exposeexposes us to various economic, political, and other risks that could adversely affect our operations and operating results, including the following:
The risks associated with international operationssales could negatively affect our operating results.
Our business may suffer if international trade is hindered, disrupted, or economically disadvantaged.Historically, we have incurred net losses as a result of MTI Micro. Despite the suspension of MTI Micro’s operations in late 2011, there can be no assurance that there will be adequate resources to fund our future operations.
PoliticalPrior to 2011, when we generated net income of $2.4 million primarily attributable to the reversal of a portion of the deferred tax asset’s valuation reserve of $1.5 million, representing the portion of the Company’s deferred tax asset that management has estimated is more likely than not to be realized and economic conditions abroad may adversely affectMTI Instrument’s strong performance, we had incurred recurring net losses, including net losses of $1.8 million in 2010, and $3.1 million in 2009. As a result of historic operating losses, we had an accumulated deficit of approximately $120.1 million as of December 31, 2011. MTI Micro suspended its operations at the foreign productionend of 2011 and, sale of our portable power source products. Protectionist trade legislation in either the United States or foreign countries, such as a changetherefore, expects to incur minimal ongoing operating expenses unless additional funding becomes available to fund its operations in the current tariff structures, export or import compliance laws, or other trade policies,future. If MTI Micro is unable to secure additional financing, MTI Micro could adversely affect our abilitybe forced to sell our portable power source productsassets at unfavorable prices; or merge, consolidate, or combine with a company with greater financial resources in foreign marketsa transaction that may be unfavorable to us.
Since the Company no longer expects to fund MTI Micro, MTI Micro has sought and will continue to obtain materials or equipment from foreign suppliers.
Changes in policies by the U.S. or foreign governments resulting in, amongseek other things, higher taxation, currency conversion limitations, restrictionssources of funding, but there is no assurance that such funding will be available on the transfer of funds, or the expropriation of private enterprises also could have a material adverse effect on us. Any actions by countries in which we conduct business to reverse policies that encourage foreign investment or foreign trade also could adversely affect our operating results. In addition, U.S. trade policies, such as “most favored nation” status and trade preferences for certain Asian nations, could affect the attractiveness of our products to our U.S. customers and adversely impact our operating results.acceptable terms, if at all.
Our operating results could be adversely affected by fluctuations in the value of the U.S. dollar against foreign currencies.
We transact our business predominantly in U.S. dollars and bill and collect our sales in U.S. dollars. In 2008,2011, approximately 44%33.3% of our revenue was from customers outside of the United States. 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 cause the demand for our products and 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 of future exchange rate fluctuations on our operating results.
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We expect that a majorityContinuing uncertainty of the U.S. economy may have serious implications for the growth and stability of our manufacturing subcontractors will be located in Asia, increasing the risk that a natural disaster, labor strike, war, or political unrest in those countries would disruptbusiness and may negatively affect our operations.stock price.
We expect that a majorityThe revenue growth and profitability of our manufacturing subcontractorsbusiness will depend significantly on the overall demand for test and measurement instrumentations as well as electronic devices. Softening demand in these markets caused by ongoing economic uncertainty may result in decreased revenue or earnings levels. The U.S. economy has been historically cyclical and market conditions continue to be locatedchallenging, which has resulted in Asia. Events outindividuals 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.
Our common stock was delisted from the NASDAQ Stock Market, which has adversely affected the price of our control, such as earthquakes, fires, floods, or other natural disasters, or political unrest, war, labor strikes, or work stoppages in Asia could disrupt their operations, which would impact our business. In addition, there is political tension between Taiwanstock and China that could lead to hostilities. If any of these events occur, we may not be able to obtain alternative manufacturing capacity. Failure to secure alternative manufacturing capacity could cause a delay in the shipmentability of our products,stockholders to trade in our stock.
In April 2009, we voluntarily delisted our common stock from the NASDAQ Stock Market to reduce expenses and to avoid a likely involuntary delisting for failure to comply with the continued listing requirements. Our common stock subsequently began trading on the Pink Sheets under the symbol “MKTY PK.” As a result of the delisting, the liquidity in our stock has decreased, which would causeadversely affected the price of our revenuestock, which may make it more difficult for you to fluctuate or decline.trade in our stock.
The electronics industry is cyclical and may result in fluctuations in our operating results.
The electronics industry has experienced significant economic downturns at various times. These downturns are characterized by diminished product demand, accelerated erosion of average selling prices, and production overcapacity. In addition, the electronics industry is cyclical in nature. We will seek to reduce our exposure to industry downturns and cyclicality 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.
Our strategic alliances may not achieve their objectives, and their failure to do so could impede our growth.
Our prospects depend to a significant extent on our strategic alliances with Samsung and Duracell. In addition, weWe plan to explore additional strategic alliances designed to enhance or complement our technology or to work in conjunction with our technology; to provide necessary know-how, components, or supplies; and to develop, introduce, and distribute products utilizing our technology. Any strategic alliances may not achieve their intended objectives, may be cancelled by either party and parties to our strategic alliances may not perform as contemplated. The failure of our current alliances or our inability to form additional alliances may impede our ability to introduce new products and enter new markets.
Product liability claims against us could result in adverse publicity and potentially significant monetary damages.
As a seller of consumer products using a flammable material such as methanol, we will face an inherent risk of exposure to product liability claims in the event that injuries result from product usage by customers. It is possible that our products could result in injury, whether by product malfunctions, defects, improper installation, or other causes. If such injuries or claims of injuries were to occur, we could incur monetary damages and our business could be adversely affected by any resulting negative publicity. The successful assertion of product liability claims against us could result in potentially significant monetary damages and, if our insurance protection is inadequate to cover these claims, could require us to make significant payments from our own resources.
We expect to face intense competition that could result in failing to gain market share and suffering reduced revenue from our portable power source products.
We plan to serve intensely competitive markets that are characterized by price erosion, rapid technological change, and competition from major domestic and international companies. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Most of our competitors have greater market recognition, larger customer bases, and substantially greater financial, technical, marketing, distribution, and other resources than we possess and that afford them competitive advantages. As a result, they may be able to devote greater resources to the promotion and sale of products, to negotiate lower prices for raw materials and components, to deliver competitive products at lower prices, and to introduce new product solutions and respond to customer requirements more quickly than we can. Our competitive position could suffer if one or more of our customers determine not to utilize our portable power source products and instead decide to contract with our competitors or to use alternative technologies.
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Our ability to compete successfully will depend on a number of factors, both within and outside our control. These factors include the following:
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 will dependdepends 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, and 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.
Our operating results may experience significant fluctuations.
In addition to the variability resulting from the short-term nature of our customers’ commitments, other factors will contribute to significant periodic and seasonal quarterly fluctuations in our results of operations. These factors include the following:
Accordingly, you should not rely on period-to-period comparisons as an indicator of our future performance. Negative or unanticipated fluctuations in our operating results may result in a decline in the price of our stock.
22We have experienced an ownership change in MTI Micro that has resulted in a limitation of the use of their net operating losses, and we may experience further ownership changes in both MTI and MTI Micro which would result in a further limitation of the use of our net operating losses.
As of December 31, 2011, it is estimated that MTI has net operating loss (NOL) carryforwards of approximately $50.4 million and MTI Micro has NOL carryforwards of approximately $16.5 million. As a result of the conversion of the bridge notes in December 2009, MTI no longer maintained an 80% or greater ownership in MTI Micro. Thus, MTI Micro is no longer included in Mechanical Technology, Incorporated and Subsidiaries' consolidated federal and combined New York State tax returns, effective December 9, 2009. Pursuant to the Internal Revenue Service's consolidated tax return regulations (IRS Regulation Section 1.1502-36), upon MTI Micro leaving the Mechanical Technology, Incorporated and Subsidiaries’ consolidated group, MTI elected to reduce a portion of its stock tax basis in MTI Micro by "reattributing" a portion of MTI Micro's NOL carryforwards to MTI, for an amount equivalent to its built-in loss amount in MTI's investment in MTI Micro's stock. As the result of MTI making this election with its December 31, 2009 tax return, MTI reattributed approximately $45.2 million of MTI Micro's NOLs (reducing its tax basis in MTI Micro's stock by the same amount), leaving MTI Micro with approximately $13 million of separate company NOL carryforwards at the time of conversion of the Bridge Notes.
The Company and its subsidiaries have undergone a formal Section 382 study. 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 NOL carryforwards and certain recognized built-in losses. As a result of MTI Micro’s issuance of stock between 2009 and 2011, MTI Micro has experienced a Section 382 ownership change, which has reduced their NOLs by an estimated $14.6 million.
Our ability to utilize the MTI and remaining MTI Micro NOL carryforwards, including any future NOL carryforwards that may arise, may be limited by Section 382, if we or MTI Micro undergo any further “ownership changes” as a result of subsequent changes in the ownership of our outstanding common stock pursuant to the exercise of the MTI Micro warrants, MTI or MTI Micro options outstanding, additional financings obtained, or otherwise.
Our ownership position in MTI Micro has been reduced as a result of external financing for MTI Micro's operations, which could limit our ability to control the operations.
As of December 31, 2011, we owned approximately 47.6% of MTI Micro’s Common Stock issued. Between September 2008 and September 2011, MTI Micro entered into numerous debt and equity financings with third parties, primarily, Dr. Walter L. Robb, a member of the Company’s and MTI Micro’s boards of directors, and Counter Point Ventures Fund II, LP (Counter Point). Counter Point is a venture capital fund sponsored and managed by Dr. Robb. After these series of transactions, MTI now holds an aggregate of approximately 47.6% of the outstanding common stock of MTI Micro or 53.3% of the outstanding common stock and warrants issued of MTI Micro, and Dr. Robb and Counter Point hold approximately 5.1% and 45.2%, respectively of the outstanding common stock of MTI Micro or 4.3% and 40.3%, respectively of the outstanding common stock and warrants issued of MTI Micro. Since no entity of the related parties has power but, as a group, the Company and its related parties have the power, then the party within the related party group that is most closely associated with the VIE, MTI Micro, is the primary beneficiary. Even though Dr. Robb and Counterpoint combined control a majority of the outstanding common stock, and they have the ability to elect the directors of MTI Micro and decide whether to continue to seek business opportunities for MTI Micro or instead seek opportunities to sell the intellectual property, they have not elected to do so. The Company continues to oversee the day to day operations, exercise management decision making, seek opportunities to sell intellectual properties, and have a vested interest in the commercialization of MTI Micro’s fuel cell technology. Since inception in 2001, the Company has made the largest investment and been the principal funder of MTI Micro. The Company has also been exposed to losses and has the ability to benefit from MTI Micro. Considering the facts and circumstances, management believes the Company is most closely associated with the VIE, MTI Micro, and therefore, it is the primary beneficiary of MTI Micro. Should there be a change in the facts and circumstances (such as a change in governance or a change to the related party group) management will reassess whether they act as the primary beneficiary and should continue to include MTI Micro in the Company’s consolidated results of operations.
MTI Micro currently does not have sufficient funds to commercialize its portable power source products.
In order to resume operations and continue full commercialization of its micro fuel cell solution, MTI Micro will need to do one or more of the following to raise additional resources, or reduce its cash requirements:
There is no guarantee that resources will be available to MTI Micro on terms acceptable to it, or at all, or that such resources will be received in a timely manner, if at all, or that MTI Micro will be able to resume operations or reduce its expenditure run-rate further. MTI Micro had cash and cash equivalents of $110 thousand as of December 31, 2011. Since 2008, MTI Micro has raised $5.4 million in external debt and equity financing. At the end of 2011, MTI Micro suspended its operations while additional necessary funding is being pursued. If MTI Micro raises additional funds by issuing equity securities, MTI Micro’s stockholders, including MTI, will experience further dilution. Additional debt financing, if available, may involve restrictive covenants. There is no assurance that funds raised in any future debt financing or additional equity financing arrangements will be sufficient, that the financing will be available on terms favorable to MTI Micro or to existing stockholders and at such times as required, or that MTI Micro will be able to obtain the additional financing required to resume the operation of its business. If MTI Micro raises additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to MTI Micro’s technologies or its products, or grant licenses on terms that are not favorable to MTI Micro. If MTI Micro is unable to secure additional financing, MTI Micro could be forced to sell assets at unfavorable prices; or merge, consolidate, or combine with a company with greater financial resources in a transaction that may be unfavorable to us.
MTI Micro’s portable power source products may not be accepted by the market.
Any portable power source products that MTI Micro develops may not achieve market acceptance. The development of a successful market for MTI Micro’s proposed portable power source products and the ability to sell those products at favorable prices may be adversely affected by a number of factors, many of which are beyond MTI Micro’s control, including the following:
Target markets for MTI Micro’s proposed portable power source products, such as those for mobile phones (including smart phones) and mobile phone accessories, digital cameras, portable media players, PDAs, and GPS devices, are volatile, cyclical, and rapidly changing and could continue to utilize existing technology or adopt other new competing technologies. The market for certain of these products depends in part upon the development and deployment of wireless and other technologies, which may or may not address the needs of users of these new products.
Many manufacturers of portable electronic devices have well-established relationships with competitive suppliers. Penetrating these markets will require MTI Micro to offer better performance alternatives to existing solutions at competitive costs. The failure of any of the target markets to continue to expand, or the failure to penetrate these markets to a significant extent, will impede MTI Micro’s potential sales growth. We cannot predict the growth rate of these markets or the market share MTI Micro will achieve in these markets in the future.
If MTI Micro’s proposed portable power source products do not achieve market acceptance, it could materially and adversely affect MTI Micro’s business and financial condition.
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
We lease office, manufacturing and research and development space in the following locations:
| Approximate Number of | |||||
| Location | Segment | Primary Use | Square Feet | Lease Expiration | |
| Albany, NY | Test and Measurement | Manufacturing, office and sales | 20,700 | 2009 | |
| Instrumentation | |||||
| Albany, NY | New Energy | Corporate headquarters, office and | 23,500 | 2009 | |
| research and development | |||||
| Shanghai, | New Energy | Representative office | 160 | 2009 | |
| China | |||||
| Approximate Number of | ||||||||||
| Location | Segment | Primary Use | Square Feet | Lease Expiration | ||||||
| Albany, NY | Test and Measurement | Corporate headquarters, manufacturing, | 17,400 | November, 2014 | ||||||
| Instrumentation | office and sales | |||||||||
| Albany, NY | New Energy | Office and research and development | 20,000 | April, 2012 | ||||||
| Shanghai, | New Energy | Representative office | 300 | March, 2012 | ||||||
| China | ||||||||||
We believe our facilities are generally well maintained and adequate for our current needs and for expansion, if required. We further believe that aThe New Energy lease renewal on reasonable terms for these properties may be achieved.has been extended until April 2012, at which time the Company intends to vacate the premises.
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 its 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 which could have a material adverse effect on our financial condition.
Item 4: Submission of Matters to a Vote of Security HoldersMine Safety Disclosure
There were no matters submitted to a vote of our security holders during the fourth quarter of fiscal 2008.Not applicable.
23
PART II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock is traded on The Nasdaq Capital Marketthe over the counter (OTC) Markets at PinkSheets.com under the symbol “MKTY”“MKTY.PK”. The following table sets forth the high and low sale prices of our common stock as reported by NasdaqPink Sheets for the periods indicated (for periods prior to May 16, 2008, such pricesindicated:
| High | Low | ||||
| Fiscal Year Ended December 31, 2011 | |||||
| First Quarter | $ | .95 | $ | .59 | |
| Second Quarter | .95 | .69 | |||
| Third Quarter | .72 | .41 | |||
| Fourth Quarter | .59 | .41 | |||
| Fiscal Year Ended December 31, 2010 | |||||
| First Quarter | $ | 1.13 | $ | .66 | |
| Second Quarter | .90 | .42 | |||
| Third Quarter | .80 | .25 | |||
| Fourth Quarter | .89 | .55 | |||
Dividend Policy
We have been derived by multiplying the actual prices by eight to reflect the reverse split ofnever declared or paid dividends on our common stock that was approved by our stockholders at a meeting heldand do not anticipate or contemplate paying cash dividends on May 15, 2008, pursuant to which every eight shares of our common stock were combined into one sharein the foreseeable future. We currently intend to use all available funds to develop our business. We can give no assurances that we will ever have excess funds available to pay dividends. Any future determination as to the payment of dividends will depend upon critical requirements and limitations imposed by our common stock):credit agreements, if any, and such other factors as our board of directors may consider.
Equity Compensation Plan Information
See also Part III Item 12 in this Annual Report on Form 10-K for additional detail related to security ownership and related stockholder matters, and for additional detail on equity compensation plan matters.
| High | Low | ||||
| Fiscal Year Ended December 31, 2007 | |||||
| First Quarter | $ | 15.44 | $ | 10.56 | |
| Second Quarter | 14.40 | 9.60 | |||
| Third Quarter | 11.28 | 7.20 | |||
| Fourth Quarter | 10.80 | 5.76 | |||
| Fiscal Year Ended December 31, 2008 | |||||
| First Quarter | $ | 7.44 | $ | 3.77 | |
| Second Quarter | 7.80 | 1.11 | |||
| Third Quarter | 5.50 | .79 | |||
| Fourth Quarter | 1.93 | .75 | |||
Item 6: Selected Financial Data
The following table sets forth our summary consolidated financial data for the fiscal years ended December 31, 2006, 2007,2011, 2010 and 2008,2009 which was derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We derived our summary consolidated financial data for the years ended December 31, 20042008 and 20052007 set forth in the following table from our audited consolidated financial statementstatements not included in this report. You should read the following summary consolidated financial data together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the related notes thereto.
| (In thousands, except per share data) | Years Ended December 31, | ||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||
| Statement of Operations Data | |||||||||||||||||||
| Product revenue | $ | 7,530 | $ | 6,012 | $ | 7,667 | $ | 9,028 | $ | 6,224 | |||||||||
| Funded research and development revenue | 1,040 | 1,829 | 489 | 1,556 | 1,154 | ||||||||||||||
| Gain (loss) on derivatives | 614 | (10,407 | ) | 182 | 2,967 | 655 | |||||||||||||
| Net gain (loss) on sale of securities available for sale | 3,626 | 10,125 | 4,289 | 2,549 | 1,018 | ||||||||||||||
| (Loss) income from continuing operations before income taxes, | |||||||||||||||||||
| equity in holdings’ losses and minority interest | (9,121 | ) | (14,949 | ) | (12,980 | ) | (7,609 | ) | (10,760 | ) | |||||||||
| Income tax (expense) benefit | 3,564 | (1,587 | ) | (1,895 | ) | (2,548 | ) | (2,004 | ) | ||||||||||
| Minority interests in losses of consolidated subsidiary | 1,366 | 1,442 | 1,208 | 582 | 260 | ||||||||||||||
| Loss from continuing operations | (4,191 | ) | (15,094 | ) | (13,667 | ) | (9,575 | ) | (12,504 | ) | |||||||||
| Net (loss) income | $ | (4,191 | ) | $ | (15,094 | ) | $ | (13,667 | ) | $ | (9,575 | ) | $ | (12,504 | ) | ||||
| Basic and Diluted (Loss) Earnings Per Share | |||||||||||||||||||
| Loss from continuing operations | $ | (1.15 | ) | $ | (3.93 | ) | $ | (3.46 | ) | $ | (2.01 | ) | $ | (2.62 | ) | ||||
| (Loss) earnings per share | $ | (1.15 | ) | $ | (3.93 | ) | $ | (3.46 | ) | $ | (2.01 | ) | $ | (2.62 | ) | ||||
| Balance Sheet Data (as of period end): | |||||||||||||||||||
| Working capital | $ | 33,663 | $ | 33,045 | $ | 23,076 | $ | 11,347 | $ | 252 | |||||||||
| Securities available for sale | 17,678 | 18,947 | 10,075 | 4,492 | — | ||||||||||||||
| Securities available for sale – restricted | 16,497 | — | — | — | — | ||||||||||||||
| Total assets | 66,830 | 41,267 | 33,811 | 18,716 | 5,511 | ||||||||||||||
| Total long-term obligations | 1,149 | — | 3,664 | 904 | 254 | ||||||||||||||
| Total stockholders' equity | 55,584 | 32,916 | 22,871 | 13,803 | 1,515 | ||||||||||||||
| (In thousands, except per share data) | Years Ended December 31, | |||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||
| Statement of Operations Data | ||||||||||||||||||
| Product revenue | $ | 10,280 | $ | 7,179 | $ | 6,263 | $ | 6,224 | $ | 9,028 | ||||||||
| Funded research and development revenue | 13 | 1,234 | 2,043 | 1,154 | 1,556 | |||||||||||||
| Gain (loss) on derivatives | 73 | (3 | ) | (29 | ) | 655 | 2,967 | |||||||||||
| Net gain on sale of securities available for sale | — | — | — | 1,018 | 2,549 | |||||||||||||
| Income (loss) before income taxes and non-controlling interest | 100 | (3,392 | ) | (3,572 | ) | (10,760 | ) | (7,609 | ) | |||||||||
| Income tax benefit (expense) | 1,548 | (4 | ) | 208 | (2,004 | ) | (2,548 | ) | ||||||||||
| Net income (loss), net of tax | 1,648 | (3,396 | ) | (3,364 | ) | (12,764 | ) | (10,157 | ) | |||||||||
| Plus: Net loss attributed to non-controlling interest | 738 | 1,638 | 265 | 260 | 582 | |||||||||||||
| Net income (loss) attributed to MTI | 2,386 | (1,758 | ) | (3,099 | ) | (12,504 | ) | (9,575 | ) | |||||||||
| Basic and Diluted Income (Loss) Per Share | ||||||||||||||||||
| Income (loss) per share, basic and diluted | $ | 0.48 | $ | (0.37 | ) | $ | (0.65 | ) | $ | (2.62 | ) | $ | (2.01 | ) | ||||
| Weighted average number of common shares outstanding | 5,001,934 | 4,771,658 | 4,771,658 | 4,772,359 | 4,763,547 | |||||||||||||
| Balance Sheet Data (as of period end): | ||||||||||||||||||
| Working capital | $ | 3,142 | $ | 1,534 | $ | 1,163 | $ | 252 | $ | 11,347 | ||||||||
| Securities available for sale | — | — | — | — | 4,492 | |||||||||||||
| Total assets | 6,402 | 3,601 | 3,741 | 5,511 | 18,716 | |||||||||||||
| Total long-term obligations | — | — | — | 254 | 904 | |||||||||||||
| Total MTI stockholders' equity (deficit) | 1,601 | (1,446 | ) | (1,135 | ) | 1,515 | 13,803 | |||||||||||
24
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 operates in two segments: the Test and Measurement Instrumentation segment, which is conducted through MTI Instruments, Inc. (MTI Instruments), a wholly-owned subsidiary, and the New Energy segment, which is conducted through MTI MicroFuel Cells, Inc. (MTI Micro), a variable interest entity (VIE) as of December 31, 2011. MTI and MTI Micro currently share the same board of directors, while MTI also continues to oversee the day to day operations, exercise management decision making, seek opportunities to sell intellectual properties, and have a vested interest in the commercialization of MTI Micro’s fuel cell technology. Since inception in 2001, MTI has made the largest investment and been the principal funder of MTI Micro. MTI has also been exposed to losses and has the ability to benefit from MTI Micro. Considering the facts and circumstances, management believes MTI is most closely associated with the VIE, MTI Micro, and therefore, it is the primary beneficiary. Should there be a change in the facts and circumstances (such as a change in governance or a change to the related party group) management will reassess whether they act as the primary beneficiary and should continue to include MTI Micro in MTI’s consolidated results of operations.
Test and Measurement Segment – MTI Instruments is a worldwide supplier of metrology, portable balancing equipment and inspection systems. Our products use state-of-the-art technology to solve complex real world applications in numerous industries including automotive, semiconductor, solar cell manufacturing, material testing, commercial and military aviation and data storage. We are continuously working on ways to expand our sales reach, including expanded sales coverage throughout Europe and Asia, as well as a focus on internet marketing.
Our test and measurement segment has three product groups: Precision Instruments, Semiconductor and Solar Metrology Systems, and Aviation Balancing Systems. Our products consist of electronic, computerized gauging instruments for position, displacement and vibration applications for the design, manufacturing/production and test and research markets; metrology tools for wafer characterization of semiconductor and solar wafers; tensile stage systems for materials testing in research and industrial settings; and engine balancing and vibration analysis systems for both military and commercial aircraft.
In 2011, MTI Instruments was awarded a $4.1 million multi-year U.S. Air Force contract for the purchase of PBS4100+ portable aircraft engine balancing systems. As of December 31, 2011, MTI Instruments had recorded $684 thousand in orders, approximately 16.7% of the total contract’s total value. MTI Instruments also has a multi-year U.S. Air Force contract to service and repair its existing fleet of PBS-4100/+ jet engine balancing systems with the latest diagnostic and balancing technology, which could potentially generate up to a total of $6.5 million in sales for the Company between 2009 and 2014. As of December 31, 2011, MTI Instruments had recorded $2.9 million in orders, approximately 44.6% of the contract’s total value.
New Energy Segment - MTI Micro has been developing and commercializingan off-the-grid rechargeable power sourcessolutions for various portable electronics. We have developed aelectronic devices. Our patented proprietary direct methanol fuel cell (DMFC) technology platform, called Mobion which generates electrical®, converts methanol fuel to usable electricity capable of providing continuous power using up to 100% methanol as fuel.long as necessary fuel flows are maintained. Our proprietary fuel cell power solution consists of two primary components integrated ininto an easily manufactured device: the direct methanol fuel cell power engine, which we refer to as our Mobion® Chip, and methanol replacementfuel cartridges. Our Mobion Chip weighs less than one ounce and is small enough to fit in the palm of one’s hand. The methanol used by the technology is fully biodegradable. We have demonstrated power density of over 62 mW/cm2 while producing more than 1,800 Wh/kg of energy from the direct methanol fuel feed. For these reasons, we
Although MTI Micro continues to believe our technology offers a compelling alternative to current lithium-ion and similar rechargeable battery systems currently used by original equipment manufacturers and branded partners, or OEMs, in many handheld electronic devices, such as mobile phones (including smart phones) and mobile phone accessories, digital cameras, portable media players, PDAs, and GPS devices. We believe our platform will facilitate the development of numerous product advantages, including small size, environmental friendliness, and simplicity of design, all critical for commercialization in the consumerpotential of its Mobion® based power solutions, operations have been suspended at MTI Micro until such time as market demand and can be implemented as three different product options:other deciding factors, including obtaining additional external financing, the successful completion of customer trials, a compact external charging device,new development program with a snap-on or attached power accessory, government agency, and/or a lithium-ion battery replacement embedded fuel cell power solution. With adequate funding, we intendcustomer order come to commercialize the Mobion platform in 2009.
Our Mobion technology eliminates the needfruition. Currently, MTI Micro has no employees and projects to spend between $5 and $10 thousand per month for active water recirculation pumps or the inclusion of water as a fuel dilutant. The water requiredoperating activities including rent, preparing prototypes for the electrochemical process is transferred internally within the Mobion Chip from the site of water generation on the air-side of the cell. This internal flow of water takes place without the need for any pumps, complicated re-circulation loops or other micro-plumbing tools. Our Mobion technology is protected by acustomer demonstrations, minimal sales efforts, and patent fees to keep its patent portfolio that includes over 110 U.S. patent applications covering five key technologiescurrent and manufacturing areas.
We also design, manufacture, and sell high-performance test and measurement instruments and systems serving several global markets. These products consist of: electronic, computerized gauging instruments for position, displacement and vibration applications for the design, manufacturing and test markets; wafer characterization tools for the semiconductor and solar markets; and engine balancing and vibration analysis systems for military and commercial aircraft.
Our cash requirements depend on numerous factors, including completion of our portable power source products development activities, our abilityminimal consultant costs to commercialize our portable power source products, market acceptance of our portable power source products, and other factors. We expect to pursue the expansion of our operations through internal growth and strategic partnerships.
Liquidity
Several key indicators of our liquidity are summarized in the following table:
| (Dollars in thousands) | Years ended December 31, | ||||||||||
| 2006 | 2007 | 2008 | |||||||||
| Cash and cash equivalents | $ | 14,545 | $ | 7,650 | $ | 1,662 | |||||
| Securities available for sale | 10,075 | 4,492 | — | ||||||||
| Working capital | 20,820 | 11,347 | 252 | ||||||||
| Net loss | (13,667 | ) | (9,575 | ) | (12,504 | ) | |||||
| Net cash used in operating activities | (12,706 | ) | (11,683 | ) | (10,346 | ) | |||||
| Purchase of property, plant and equipment | (1,574 | ) | (414 | ) | (181 | ) | |||||
From inception through December 31, 2008, we have incurred an accumulated deficit of $117.6 million and we expect to incur losses for the foreseeable future as we continue micro fuel cell product development and commercialization programs. We expect that losses will fluctuate from year to year and that such fluctuations may be substantial as a result of, among other factors, operating results of our businesses.
25
At present, the Company does not expect to continue to fund MTI Micro’s development and commercialization of its portable power source products. Based on MTI Micro’s projected cash requirements for 2009 and their current cash and cash equivalents of $0.7 million at December 31, 2008, plus a $0.5 million bridge loan in February 2009, we believeperform these initiatives. MTI Micro will have adequate resourcescontinue to seek additional capital from external sources to resume operations and fund operations into the month of April 2009. MTI Micro will be required to raise additional funds through issuance of its equity or debt, government funding and/or explore other strategic alternatives including but not limited to the sale of assets and/or the company.future development, if any. If MTI Micro is unable to raisesecure additional financing, it may be required to discontinue its business operations. Based upon projected cash requirements and current cash and cash equivalentsa new development program or customer order, the MTI Micro board of directors will assess other options for MTI Instruments, along with cash necessary to operateMicro including the public parent company, we believe that we will have adequate resources to fund MTI Instruments and the public parent company at least through December 2009.
Restructuring
In March 2007, the Company announced the suspensionsale of MTI Micro’s high power direct methanol fuel cell program in response to decreased fundingintellectual property portfolio and sales opportunities inother assets.
In the military market. In connection with this action, the Company accrued restructuring chargessecond half of $344,000 pre-tax, consisting primarily of cash-based employee severance and benefit costs related to the reduction of 23 positions within its New Energy segment and Corporate staff. Restructuring expenses were classified as selling, general and administrative expenses within the Company’s Consolidated Statements of Operations2010, we entered into a firm fixed price contract for the period. All amounts under this plan were settled by March 31, 2008.
In August 2008, the Boarddevelopment of Directors approvedproof of concept fuel cells for technical testing with a restructuring plan (the “Restructuring”), which was designed to help the Company reduce expenses and preserve cash. As partUnited States Department of the Restructuring, a total of 29 positions across the Company and its subsidiaries were eliminated. The Company accrued and at present expects to incur total severance and other benefit charges of approximately $342,000 in connection with this plan. Through December 31, 2008, the Company incurred cash expenditures to implement this plan of $273,000, and incurred the remaining cash expenditures inDefense (DOD) agency. Additionally, during the first quarter of 2009.2011, we completed the work required under the United States Department of Energy (DOE) grant awarded for the period January 8, 2009 through March 30, 2011. The objective of the grant was to demonstrate and field test a commercially viable one watt DMFC charger for consumer electronic devices. As part of this objective, MTI Micro field tested 75 units to various users, including 17 OEM’s, 33 individuals, 21 military agencies and four governmental agencies. We have achieved all technical performance targets required by the DOE under this grant; this field testing has concluded and the final report to the DOE may be found athttp://www.mtimicrofuelcells.com/news/events.asp. Additional experimental testing was conducted at the DOD since the fourth quarter of 2010 that resulted in product improvements in the third quarter of 2011. Further testing by the DOD of our Mobion® fuel cell charger commenced in October 2011. If approval is granted, this may result in the signing of a commercialization contract or purchase orders for final production. To date, no such approval has been granted and there is no clear indication as to when MTI Micro will be notified.
Recent Developments
Material Agreements–On February 9, 2011, Amendment No. 1 to the Common Stock and Warrant Purchase Agreement (the Purchase Agreement) was entered into between MTI Micro and Counter Point. The total $450 thousand of Amendment No. 1 was drawn down as of September 30, 2011. In exchange, Counter Point received 6,428,574 shares of MTI Micro Common Stock and 1,285,715 MTI Micro Warrants. See Note 10 in the consolidated financial statements for further discussion of this transaction.
On September 23, 2011, Amendment No. 2 to the Purchase Agreement was entered into between MTI Micro and Counter Point. The total $84 thousand of Amendment No. 2 has been drawn down as of December 31, 2011. In exchange, Counter Point received 1,200,000 shares of MTI Micro Common Stock and 240,000 MTI Micro Warrants. See Note 10 in the consolidated financial statements for further discussion of this transaction.
Line of Credit –On September 20, 2011, MTI Instruments entered into a working capital line of credit with First Niagara Bank, N.A. Pursuant to the Demand Grid Note, MTI Instruments may borrow from time to time up to $400 thousand to support its working capital needs. The note is payable upon demand, and the interest rate on the note is equal to the prime rate with a floor of 4.0% per annum. The note is secured by a lien on all of the assets of MTI Instruments and is guaranteed by the Company. The line of credit is subject to a review date of June 30, 2012. Under the line of credit, MTI Instruments is required to hold a line balance of $0 for 30 consecutive days out during each consecutive year. As of December 31, 2011, there were no amounts outstanding under the line of credit.
Results of Operations
Results of Operations for the Year Ended December 31, 20082011 Compared to December 31, 2007.2010.
Test and Measurement Instrumentation Segment
Product Revenue:Product revenue in our test and measurement instrumentation businesssegment for 2008 decreased by $2.8 million, or 31.1%, to $6.2 million for the fiscal year ended December 31, 20082011 increased by $3.1 million, or 43.2%, to $10.3 million in 2011 from $9.0$7.2 million for the fiscal year ended December 31, 2007. Thein 2010. This increase in product revenue decrease was primarily the result of a $1.5 million decrease in general dimensional gauging sales from significantly lower salesdue to a Japanese OEM. Aviation$2.6 million rise in new aviation balancing equipment sales also decreased $1.4 million due to lower sales to the U.S. Air Force and commercial engine balancing system revenues decreased by $0.3 million.higher capacitance product sales. These declinesproduct revenue increases were partially offset by an increasea decline in semiconductor/solar equipment sales of $0.4 million.
In our test and measurement instrumentation business during 2008,wafer metrology tool shipments. As with the U.S.prior year, the US Air Force was the largest customer for the segment; accounting for $2.3 million, or 22.4%, of the total year product revenue, as compared to $1.6 million, or 22.3%, of the total product revenue in 2010. The segment’s largest commercial customer in 2011 was a Southeast Asian distributor, who accounted for $1.0$1.1 million, or 15.7%10.7%, of the total product revenue, while during 2007,as compared to the U.S. Air Forcelargest commercial customer in the prior year who was a Chinese distributor, who accounted for $2.4 million,$560 thousand, or 26.3%7.8%, of product revenue. Additionally, during 2008, Koyo Precision, our Japanese distributor, represented $0.9 million, or 13.9%, ofthe total product revenue while during 2007, Koyo Precision represented $2.5 million, or 22.9%, of product revenue.in 2010.
Information regarding government contracts included in product revenue is as follows:
| (Dollars in thousands) | Revenue | Total Contract | Revenues for the | Total Contract | ||||||||||||||||||||||||
| Year Ended | Revenue | Orders Received | Twelve Months Ended | Revenue | Orders Received | |||||||||||||||||||||||
| December 31, | Contract to Date | to Date | December 31, | Contract to Date | to Date | |||||||||||||||||||||||
| Contract(1) | Expiration | 2007 | 2008 | Dec. 31, 2008 | Dec. 31, 2008 | Expiration | 2011 | 2010 | December 31, 2011 | December 31, 2011 | ||||||||||||||||||
| $2.3 million Air Force New PBS-4100 Systems | 07/28/2010 | (2) | $ | 1,596 | $ | 0 | $ | 1,596 | $ | 1,881 | 07/28/2010 | (2) | $ | — | $ | 57 | $ | 2,166 | $ | 2,166 | ||||||||
| $8.8 million Air Force Retrofit and Maintenance | ||||||||||||||||||||||||||||
| of PBS-4100 Systems | 06/19/2008 | (3) | $ | 738 | $ | 594 | $ | 7,959 | $ | 7,959 | ||||||||||||||||||
| $6.5 million Air Force Retrofit and Maintenance of PBS-4100 Systems | 09/27/2014 | (3) | $ | 1,080 | $ | 1,386 | $ | 2,905 | $ | 2,936 | ||||||||||||||||||
| $4.1 million Air Force New PBS-4100 Systems | 08/29/2015 | (4) | $ | 684 | $ | — | $ | 684 | $ | 684 | ||||||||||||||||||
| (1) | Contract values represent maximum potential values and may not be representative of actual results. | |
| (2) | Date represents expiration of contract after all three annual option extensions. | |
| (3) | Date represents expiration of contract, including all | |
26Cost of Product Revenue:Cost of product revenue in our test and measurement instrumentation segment for the year ended December 31, 2011 increased by $851 thousand, or 29.1%, to $3.8 million in 2011 from $2.9 million in 2010 in conjunction with the aforementioned 43.2% increase in product revenue. Gross profit, as a percentage of product revenue, increased to 63.2%, compared to 59.2% for the same period in 2010 due to reductions in material component costs and warranty repairs.
Unfunded Research and Product Development Expenses: Unfunded research and product development expenses in our test and measurement instrumentation segment for the year ended December 31, 2011 increased by $284 thousand, or 29.6%, to $1.2 million in 2011 from $959 thousand in 2010. This increase is attributable to higher material spending on current development projects throughout the year, along with additional personnel costs in the segment’s engineering department.
Selling, General and Administrative Expenses:Selling, general and administrative expenses in our test and measurement instrumentation segment for the year ended December 31, 2011 increased by $322 thousand, or 16.2%, to $2.3 million in 2011 from $2.0 million in 2010. This increase is the result of additional staffing in the segment’s sales and business development departments along with higher consultant costs.
New Energy Segment
Funded Research and Development Revenue:Funded research and development revenue in our portable power, or new energy business decreased by $0.4 million, or 25%, to $1.2 millionsegment for the year ended December 31, 20082011 decreased $1.2 million, or 99.0%, to $13 thousand in 2011 from $1.6$1.2 million for the year ended December 31, 2007.in 2010. The decrease in funded research and development revenue was primarily the result of the completion of the Samsung alliance, the SAFT contract and the NCMS contract in 2007. All revenues for 2008 were a result of reimbursement for research and development costswork performed under the DOE contract withand NYSERDA contracts being substantially completed in 2010 for the final billing occurringcommercialization of our fuel cell product. Final billings for these grants occurred in January of 2009. The DOE funding was suspended in 2006, and was reinstated during May 2007, thus only eight months of funding was recognized in 2007, or $675,000. Revenue during 2007 also included $418,000 from the SAFT contract, for which revenue recognition had been deferred until the delivery under the contract was accepted during the first quarter of 2007,2011, and no further grants have been received.
Information regarding government contracts included in funded research and development revenue recognized under the Samsung alliance agreement of $448,000 and revenue from the NCMS contract of $15,000.is as follows:
| (Dollars in thousands) | Revenue Year Ended | Revenue Year Ended | Revenue | ||||||||||||||
| December 31, 2007 | December 31, 2008 | Contract to Date | |||||||||||||||
| Contract | Expiration(1) | Revenue | Percent | Revenue | Percent | Dec. 31, 2008 | |||||||||||
| $3.0 million DOE(2) | 03/31/09 | $ | 675 | 43.4 | % | $ | 1,154 | 100 | % | $ | 3,000 | ||||||
| $1.0 million Samsung(3) | 07/31/07 | 448 | 28.8 | 875 | |||||||||||||
| $418,000 SAFT(4) | 12/31/06 | 418 | 26.9 | 418 | |||||||||||||
| $15,000 NCMS(5) | 06/30/07 | 15 | 0.9 | 15 | |||||||||||||
| Total | $ | 1,556 | 100.0 | % | $ | 1,154 | 100 | % | $ | 4,308 | |||||||
| (Dollars in thousands) | Revenue for the Year | Revenue for the Year | ||||||||
| Ended | Ended | Revenue | ||||||||
| Contract | Expiration(1) | December 31, 2011 | December 31, 2010 | Contract to Date | ||||||
| $2.99 million DOE(2) | 03/31/11 | $ | 7 | $ | 944 | $ | 2,994 | |||
| $296 thousand NYSERDA | 12/31/10 | 6 | 290 | 296 | ||||||
| Total | $ | 13 | $ | 1,234 | $ | 3,290 | ||||
| (1) | Dates represent expiration of contract, not date of final billing. | |
| (2) | The DOE contract | |
Cost of Product Revenue:Cost of product revenue in our test and measurement instrumentation business decreased by $0.2 million, or 6%, to $3.2 million during the year ended December 31, 2008 from $3.4 million during the year ended December 31, 2007. The decrease primarily resulted from a change in product sales mix to a higher concentration of standard products, partially offset by higher inventory reserves for potentially obsolete inventory.
Gross profit as a percentage of product revenue decreased by 13.1% to 48.9% for the year ended December 31, 2008. The decrease resulted from a change in the product sales mix to a higher concentration of standard products which yielded a lower gross margin as well as the increase in inventory reserves for potentially obsolete inventory.
Funded Research and Product Development Expenses: Funded research and product development expenses in our new energy business increased $0.5 million, or 26%, to $2.4 millionsegment for the year ended December 31, 20082011 decreased by $2.5 million, or 99.0%, to $25 thousand in 2011 from $1.9$2.5 million for the year ended December 31, 2007.in 2010. This decrease is a result of a full yearthe majority of recognition of costs associated withthe work being performed in 2010 for the DOE contract, with reimbursement also increasing by $0.5 million for 2008.and NYSERDA contracts, whose contracts concluded in the first quarter of 2011, as discussed in funded research and development revenue above.
Unfunded Research and Product Development Expenses: Unfunded research and product development expensesin our new energy segment for the year ended December 31, 2011 decreased $4.0 million,by $160 thousand, or 41%44.7%, to $5.9$199 thousand in 2011 from $358 thousand in 2010. This decrease from the prior year was due to staff reductions and substantial cut backs in external development spending throughout 2011.
Selling, General and Administrative Expenses:Selling, general and administrative expenses in our new energy segment for the year ended December 31, 2011 decreased by $957 thousand, or 49.1%, to $993 thousand in 2011 from $1.9 million in 2010. This decrease was primarily the result of a significant decrease in personnel costs and benefits of $2.1 million, a reduction in rent and other facility costs of $256 thousand, travel expense reductions of $28 thousand, depreciation expense reductions of $174 thousand and a reduction in China operations of $81 thousand for the year. These reductions in expense were offset by a reduction in the allocation of costs to research and development of $1.7 million.
Results of Consolidated Operations
Operating Income (Loss): Operating income for the year ended December 31, 2011 was $52 thousand compared to an operating loss of $3.4 million for the year ended December 31, 2008 from $9.9 million for the year ended December 31, 2007.2010. This decrease is attributable to three factors (a) a $0.5 million decrease in development costs that were related to the DOE contract that was in effect for the entire year, which relates to the increase in funded research and product development expenses, (b) the maturity of development of our principle product for the new energy business line and (c) continued cost reductions by management due to decreases in funding.
Selling, General and Administrative Expenses:Selling, general and administrative expenses decreased by $0.3 million, or 4%, to $8.4 million for the year ended December 31, 2008 from $8.7 million for the year ended December 31, 2007. This decrease was primarily the result of (a) a $756,000 decrease in payroll costs due to staff reductions in 2007, with a full year impact in 2008, and further layoffs in 2008 (b) $605,000 in corresponding decreases in benefit related costs, bonuses and commissions (c) a $715,000 decrease in stock compensation related expenses and (d) a $583,000 decrease in general operating expenses representing management efforts to reduce expenditures due to decreases in funding sources. These decreases in expenditures were offset by increases in outside fees, including audit legal, and consulting fees of $248,000 and a $2,000,000 increase related to a decrease in allocations of expense from SG&A to funded and unfunded research and development costs for overhead and other costs allocable to research and development programs.
27
Operating Loss:Operating loss for the year ended December 31, 2008 compared with the operating loss for the year ended December 31, 2007 decreased by $0.9 million to $12.5 million, a 7% decrease, aswas a result of the factors noted above.
Gain on Sale of Securities Available for Sale:The gain on sale of securities available for sale for the year ended December 31, 2008 was $1.0 million compared with a gain of $2.5 million for the year ended December 31, 2007. During 2008, we sold 1,137,166 shares of Plug Power common stock at a weighted average price of $2.67 per share, with gross proceeds to us of $3.3 million. As of December 31, 2008, we no longer own any Plug Power common stock.
Gain (loss) on Derivatives: We recorded a gain on derivative accounting of $0.7 million$73 thousand for the year ended December 31, 20082011 and a gainloss of $3.0$3 thousand on derivative accounting for the year ended December 31, 2007.2010. Both the 20082011 gain and 2007 gains2010 loss are the result of derivative treatment of the freestanding warrants issued to investors in conjunction with our December 2006 capital raise. These warrants expired on December 19, 2011.
Income Tax Benefit (Expense) Benefit:: Income tax benefit for the year ended December 3, 2011 was $1.5 million compared to income tax expense of $4 thousand for the same period in 2010. Our income tax rate for the yearyears ended December 31, 20082011 and 2010 was 19%1,548% and 0%, while the incomerespectively. The 2011 tax rate forwas primarily the year ended December 31, 2007result of the reversal of a portion of the valuation allowance toreflect the portion of the Company’s deferred tax asset that management has estimated is more likely than not to be realized. The 2010 tax rate was 33%. These tax rates were primarily the result of losses generated by operations, changes in the valuation allowance, state true-ups upon tax return filings, and permanent deductible differences for the derivative valuation, and disproportionate effects of reclassification of gains on Plug Power security sales included in operating loss.
valuation. The valuation allowance against our deferred tax assets at December 31, 2008 was $27.5 million2011 and at December 31, 20072010 was $22.3 million. We determined$19.8 million and $27.8 million, respectively.
Net Losses Attributed to Non-Controlling Interests (of MTI Micro): The net loss attributed to non-controlling interests for the year ended December 31, 2011 decreased by $900 thousand, or 55.0%, to $738 thousand in 2011 from $1.6 million in 2010. This is the result of a decrease in the net loss of MTI Micro from $3.6 million in 2010 to $1.5 million in 2011, offset in part, by an increase in the percentage of ownership of the non-controlling interest of MTI Micro in 2011.
Net Income (Loss):Net income for the year ended December 31, 2011 was $2.4 million compared to a net loss of $1.8 million for the same period in 2010. The increase in net income of $4.1 million for the year ended December 31, 2011 as compared to the same period in 2010 is primarily attributed to the reversal of a portion of the deferred tax asset’s valuation reserve of $1.5 million, representing the portion of the Company’s deferred tax asset that it wasmanagement has estimated is more likely than not thatto be realized, an increase of MTI Instruments yearly net income of $1.6 million, a reduction of the ultimate recognitionyearly net loss of certain deferred tax assets would not be realized.MTI Micro of $2.2 million, and a reduction in the net loss attributed to non-controlling interests of $900 thousand. These are a result of the factors discussed above.
Results of Operations for the Year Ended December 31, 20072010 Compared to December 31, 2006.2009.
Test and Measurement Instrumentation Segment
Product Revenue:Product revenue in our test and measurement instrumentation businesssegment for 2007 increased by $1.4 million, or 17.8%, to $9.0 million for the fiscal year ended December 31, 2007 from $7.7 million2010 increased by $915 thousand, or 14.6%, in comparison to 2009, to $7.2 million. As with the prior year, the US Air Force was the top customer for the fiscalsegment; accounting for $1.6 million, or 22.0%, of the total year ended December 31, 2006. This performance was primarilyrevenue, as compared to $1.2 million, or 19.0%, of the result of a $602,000 increasetotal revenue in activity by the U.S. Air Force, driven by the New PBS-4100 systems contract. Also contributing were increased purchases by our Japanese distributor (particularly OEM capacitance), as well as increased volume2009. The segment’s top commercial customer in semiconductor product shipments. Total product revenue for general dimensional gauging products increased by $298,000, or 7.2%, to $4.5 million, while total product revenue for semiconductor products increased by $364,000, or 71.2%, to $875,000.
In our test and measurement instrumentation business during 2007, the U.S. Air Force2010 accounted for $2.4 million,$560 thousand, or 26.3%7.8%, of productthe annual revenue, while during 2006,as compared to the U.S. Air Force accountedtop commercial customer last year accounting for $1.8 million,$618 thousand, or 23.1%9.9%, of productthe total 2009 revenue. Additionally, during 2007, Koyo Precision, our Japanese distributor, represented $2.5 million, or 27.7%, of product revenue while during 2006, Koyo Precision represented $1.8 million, or 22.9%, of product revenue.
Information regarding government contracts included in product revenue is as follows:
| (Dollars in thousands) | Revenue | Total Contract | Revenues for the | Total Contract | |||||||||||||||||||||||||
| Year Ended | Revenue | Orders Received | Twelve Months Ended | Revenue | Orders Received | ||||||||||||||||||||||||
| December 31, | Contract to Date | to Date | December 31, | Contract to Date | to Date | ||||||||||||||||||||||||
| Contract(1) | Expiration | 2006 | 2007 | Dec. 31, 2007 | Dec. 31, 2007 | Expiration | 2010 | 2009 | December 31, 2010 | December 31, 2010 | |||||||||||||||||||
| $2.3 million Air Force New PBS-4100 Systems | 07/28/2010 | (2) | $ | — | $ | 1,596 | $ | 1,596 | $ | 1,596 | 07/28/2010 | (2) | $ | 57 | $ | 513 | $ | 2,166 | $ | 2,166 | |||||||||
| $8.8 million Air Force Retrofit and Maintenance | |||||||||||||||||||||||||||||
| of PBS-4100 Systems | 05/19/2008 | (3) | $ | 1,417 | $ | 738 | $ | 7,365 | $ | 7,365 | |||||||||||||||||||
| $8.8 million Air Force Retrofit and Maintenance of PBS-4100 Systems | 06/19/2008 | (3) | $ | — | $ | 50 | $ | 8,009 | $ | 8,009 | |||||||||||||||||||
| $6.5 million Air Force Retrofit and Maintenance of PBS-4100 Systems | 09/27/2014 | (4) | $ | 1,386 | $ | 439 | $ | 1,825 | $ | 1,828 | |||||||||||||||||||
| (1) | Contract values represent maximum potential values and may not be representative of actual results. | |
| (2) | Date represents expiration of contract, including all three potential option extensions. | |
| (3) | ||
| (4) | Date represents expiration of contract, including all four potential option extensions. |
28Cost of Product Revenue:Cost of product revenue in our test and measurement instrumentation segment for the year ended December 31, 2010 increased in comparison to 2009 by $265 thousand, or 9.9%, to $2.9 million in conjunction with the aforementioned 14.6% increase in product revenue. Gross profit, as a percentage of product revenue, rose two points to 59% in 2010 due to a reduction in expense for potentially obsolete and slow-moving inventory.
Unfunded Research and Product Development Expenses: Unfunded research and product development expenses in our test and measurement segment for the year ended December 31, 2010 decreased by $6 thousand, or 0.6%, to $959 thousand from $965 thousand in 2009. This decrease is attributable to lower personnel costs in the segment’s engineering department during the year, which were partially offset by increases in material spending for new product development and existing product support.
Selling, General and Administrative Expenses:Selling, general and administrative expenses in our test and measurement segment increased for the year ended December 31, 2010 by $162 thousand, or 8.2%, to $1.98 million from $1.82 million for 2009. This increase is primarily the result of additional staffing in the segment’s sales and business development departments.
New Energy Segment
Funded Research and Development Revenue:Funded research and development revenue in our new energy business during 2007 increasedsegment decreased by $1.1 million,$810 thousand, or 218.2%40%, to $1.6$1.23 million for the year ended December 31, 20072010 from $489,000$2.04 million for the year ended December 31, 2006.2009. The increasedecrease in revenue was primarily the result of billingsthe research and development performed under the DOE contract which had its funding reinstated during May 2007 after it hadin 2009 for the commercialization of our fuel cell product, while billing in 2010 has been suspended during 2006. This DOE funding resumption contributed an additional $613,000 tosubstantially less as we entered into the market test phase of the commercialization.
Information regarding our contracts included in funded research and development revenue during 2007. Revenue during 2007 also included $418,000 from the SAFT contract, for which revenue recognition had been deferred until the delivery under the contract was accepted during the first quarter of 2007. Revenue recognized under the Samsung alliance agreement increased by $21,000 during 2007 over 2006.is as follows:
| (Dollars in thousands) | Revenue Year Ended | Revenue Year Ended | Revenue | ||||||||||||||
| December 31, 2006 | December 31, 2007 | Contract to Date | |||||||||||||||
| Contract | Expiration(1) | Revenue | Percent | Revenue | Percent | Dec. 31, 2007 | |||||||||||
| $3.0 million DOE(2) | 09/30/08 | $ | 62 | 12.7 | % | $ | 675 | 43.4 | % | $ | 1,846 | ||||||
| $1.0 million Samsung(3) | 07/31/07 | 427 | 87.3 | 448 | 28.8 | 875 | |||||||||||
| $418,000 SAFT(4) | 12/31/06 | — | — | 418 | 26.9 | 418 | |||||||||||
| $15,000 NCMS(5) | 06/30/07 | — | — | 15 | 0.9 | 15 | |||||||||||
| Total | $ | 489 | 100.0 | % | $ | 1,556 | 100.0 | % | $ | 3,154 | |||||||
| (Dollars in thousands) | Revenue for the Year | Revenue for the Year | |||||||||
| Ended | Ended | Revenue | |||||||||
| Contract | Expiration(1) | December 31, 2010 | December 31, 2009 | Contract to Date | |||||||
| $2.99 million DOE(2) | 03/31/11 | $ | 944 | $ | 2,043 | $ | 2,987 | ||||
| $296 thousand NYSERDA | 12/31/10 | 290 | — | 290 | |||||||
| Total | $ | 1,234 | $ | 2,043 | $ | 3,277 | |||||
| (1) | Dates represent expiration of contract, not date of final billing. | |
| (2) | The DOE contract was initially awarded for $2.4 million, effective for January 2009 through March 31, 2010. An extension to this was granted in April 2010, increasing total funding to $2.99 million and an expiration date of 3/31/2011. The DOE contract is a cost share contract. | |
Cost of Product Revenue:Cost of product revenue in our test and measurement instrumentation business increased by $0.5 million, or 18.3%, to $3.4 million during the year ended December 31, 2007 from $2.9 million during the year ended December 31, 2006. As a percentage of product revenue, the annual cost of product revenue remained relatively consistent with 2006, and this increase was consistent with the higher revenue during 2007.
Gross profit as a percentage of product revenue decreased by 0.2% to 62.0% for the year ended December 31, 2007, remaining relatively consistent with 2006.
Funded Research and Product Development Expenses: Funded research and product development expenses in our new energy business increased $0.7 million, or 64.1%, to $1.9 millionsegment for the year ended December 31, 20072010 decreased by $1.56 million or 38% to $2.54 million from $1.2$4.1 million forin 2009. This is a result of the year ended December 31, 2006. Whilemajority of the active contracts were relatively consistent between periods, costswork being performed in 2009 for the DOE contract, increased $1.3 million, reflecting its reinstatement during May 2007, while costs for the Samsung contract increased by $22,000. These increases were partially offset by a decreaseas discussed in costs for the SAFT contract of $576,000, as that contract was completed during the first quarter of 2007.funded research and development revenue above.
Unfunded Research and Product Development Expenses: Unfunded research and product development expensesin our new energy segment decreased $1.9 million,by $26 thousand, or 16.1%7%, to $9.9 million$358 thousand for the year ended December 31, 2007 from $11.8 million for the year ended December 31, 2006.2010 compared to 2009. This decrease reflects a $2.2 million decrease in development costs related to (a) the DOE contract that resumed during May 2007, which related increase is reflected in funded research and product development expenses, and (b) cost savings from the decisionprior year was due to suspend work on our high power program during March 2007. This decrease was partially offset by a $317,000 increasestaff reductions and substantial cut backs in productexternal development expenses in our test and measurement instrumentation business reflecting increased staffing and external product development costs focused on the development of the division’s new stand-alone measurement and data acquisition solution, stand-alone laser head, as well as other precision measurement solutions.spending.
Selling, General and Administrative Expenses:Selling, general and administrative expenses decreased by $1.3 million, or 13.2%, to $8.7 millionin our new energy segment for the year ended December 31, 20072010 increased by $1.85 million, or 1,758%, to $1.95 million in 2010 from $10.1 million for the year ended December 31, 2006.$105 thousand in 2009. This decreaseincrease was primarily the result of (a) a $387,000 decrease in non-cash stock-based compensation charges reflecting the difference between signstock option expense on MTI and promotion grants during 2006 compared with primarily annual compensation grants during 2007 and the reversal of expense during 2007 related to certain cancelled executive stock-based performance grants where performance goals were not met, (b) a $528,000 decrease in outside services, including audit, legal, and consulting fees, (c) a $345,000 decrease in recruiting and relocation costs, (d) a $178,000 increase in severance costs attributableMTI Micro Options awarded to employees terminated as a result of our March 2007 restructuring, (e) a $632,000 decreaseincreasing from $428 thousand in wages2009 to $1.4 million in 2010 and benefits, which was also attributable to our March 2007 restructuring, (f) a $227,000 decrease in other operating expenses, primarily insurance and laboratory operating fees, (g) a $647,000 increase related to a decrease in allocationsthe allocation of expense from SG&A to funded and unfunded research and development costs for overhead and other costs allocable to research and development programs, and (h) a $40,000 decrease in other expenses, net.development.
29Results of Consolidated Operations
Operating Loss:Operating loss for the year ended December 31, 20072010 compared with the operating loss for the year ended December 31, 2006 decreased2009 increased by $4.4 million$305 thousand to $13.3$3.4 million, a 24.7% decrease,10% increase, as a result of the factors noted above.
Gain on Sale of Securities Available for Sale:The gain on sale of securities available for sale for the year ended December 31, 2007 was $2.5 million compared with a gain of $4.3 million for the year ended December 31, 2006. During 2007, we sold 1,452,770 shares of Plug Power common stock at a weighted average price of $3.53 per share, with gross proceeds to us of $5.1 million.
Gain (loss) on Derivatives: We recorded a gainloss on derivative accounting of $3.0 million$3 thousand for the year ended December 31, 20072010 and a gainloss of $0.2 million$29 thousand on derivative accounting for the year ended December 31, 2006.2009. Both the 20072010 loss and 2006 gains2009 loss are the result of derivative treatment of the freestanding warrants issued to investors in conjunction with our December 2006 capital raise.
Income Tax (Expense) Benefit: Income tax benefit went from a benefit of $208 thousand in 2009 to an expense of $4 thousand for 2010. This is primarily the result of a reversal of an uncertain tax position in 2009 of $194 thousand that was recorded in 2008 and settled in 2009. Our income tax rate for the year ended December 31, 20072010 was 33%0%, while the income tax rate for the year ended December 31, 20062009 was 15%6%. These tax rates were primarily the result of losses generated by operations, changes in the valuation allowance, state true-ups upon tax return filings, and permanent deductible differences for the derivative valuation, and disproportionate effects of reclassification of gains on Plug Power security sales included in operating loss.valuation.
The valuation allowance against our deferred tax assets at December 31, 20072010 was $22.3$27.8 million and at December 31, 20062009 was $18.9$26.4 million. We determined that it was more likely than not that the ultimate recognition of certain deferred tax assets would not be realized.
Net Losses Attributed to Non-Controlling Interests (of MTI Micro): The net loss attributed to non-controlling interests increased from $265 thousand for 2009 to $1.6 million in 2010. This is a result of the increase in the percentage of ownership of the non-controlling interest of MTI Micro in 2010 due to additional equity contributions of $1.9 million. In addition, the equity contributions of $3.4 million in 2009 occurred in September 2009; thus 2010 includes a full year of losses for these additions.
Net Income (Loss):Net loss for the year ended December 31, 2010 was $1.8 million compared to a net loss of $3.1 million for 2009. This reduction in losses is a result of the factors discussed above.
Liquidity and Capital Resources
We haveSeveral key indicators of our liquidity are summarized in the following table:
| (Dollars in thousands) | Years ended December 31, | |||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Cash and cash equivalents | $ | 1,669 | $ | 1,118 | $ | 785 | ||||||
| Working capital | 3,142 | 1,534 | 1,163 | |||||||||
| Net income (loss) attributed to MTI | 2,386 | (1,758 | ) | (3,099 | ) | |||||||
| Net cash provided by (used in) operating activities | 67 | (1,506 | ) | (2,170 | ) | |||||||
| Purchase of property, plant and equipment | (175 | ) | (47 | ) | (7 | ) | ||||||
The Company has historically incurred significant losses, the majority stemming from the direct methanol fuel cell product development and commercialization programs of MTI Micro, and had a consolidated accumulated deficit of $120.1 million as weof December 31, 2011. During 2011, the Company generated net income attributed to MTI of $2.4 million and had working capital at December 31, 2011 of $3.1 million, a $1.6 million increase from $1.5 million at December 31, 2010. This increase was primarily attributed to the reversal of a portion of the deferred tax asset’s valuation reserve of $1.5 million, representing the portion of the Company’s deferred tax asset that management has estimated is more likely than not to be realized, the improved result of operations for MTI Instruments, a continued hold on expenses, and capital raised through the issuance of MTI Micro stock. The Company had an operating cash surplus of $67 thousand in 2011 and currently has no debt. While it cannot be assured, management believes that MTI Instruments will continue to generate positive cash flows and be able to fund the Company’s operations for at least the next twelve months.
Although MTI Micro continues to believe in the potential of its Mobion® based power solutions, operations have been suspended at MTI Micro until such time as market demand and other deciding factors, including obtaining additional external financing, the successful completion of customer trials, a new development program with a government agency, and/or a customer order, come to fruition. MTI Micro had cash and commercialization of our portable power source business. We expect that losses will fluctuate from year to year and that such fluctuations may be substantialcash equivalents as a result of, among other factors, our operating results, the availability of equity financing, including warrants issued in connection with the December 2006 capital raise, and the ability to attract government funding resources to offset research and development costs. As of December 31, 2008, we had an accumulated deficit2011 of $117.6 million. $110 thousand. Currently, MTI Micro has no employees and projects to spend between $5 and $10 thousand per month for operating activities including rent, preparing prototypes for customer demonstrations, minimal sales efforts, patent fees to keep its patent portfolio current and minimal consultant costs to perform these initiatives. MTI Micro will continue to seek additional capital from external sources to resume operations and fund future development, if any. If MTI Micro is unable to secure additional financing, a new development program or customer order, the MTI Micro board of directors will assess other options for MTI Micro, including the sale of MTI Micro’s intellectual property portfolio and other assets.
During the year ended December 31, 2008,2011, cash provided by operating activities was $67 thousand, consisting of net income of $1.6 million, non-cash expenses of $(617) thousand (primarily including $307 thousand for depreciation, $661 thousand for stock based compensation, and a $(1.5) million income tax benefit), and other changes in operating assets and liabilities of $(964) thousand (primarily due to the increase in accounts receivable at year end). Cash used by investing activities for the year ended December 31, 2011 was $163 thousand, comprised primarily of purchases of property, plant and equipment primarily for MTI Instruments related to computers and laboratory and demo equipment. We had no outstanding commitments for capital expenditures as of December 31, 2011. Cash provided by financing activities for the year ended December 31, 2011 was $647 thousand consisting of capital raised through the issuance of MTI Micro common stock.
As of December 31, 2011, we had approximately $1.7 million of cash and cash equivalents to fund our future operations. During the year ended December 31, 2011, our results of operations resulted in a net lossincome after the non-controlling interest allocation of $12.5$2.4 million and cash used inprovided by operating activities totaling $10.3 million. This cash use in 2008 was funded primarily by cash and cash equivalents on hand as of December 31, 2007 of $7.7 million and proceeds from the sales of securities available for sale of $3.0 million.
$67 thousand. We expect to continue to incur lossesspend approximately $1.4 million in research and development on MTI Instruments’ products during this global economic slowdown, and we2012. We expect to continue funding our operations from current cash and cash equivalents, proceeds, if any, from additional debt or equity financings and government funding. We expectmay also seek to spend approximately $1.2 millionsupplement our resources through the sales of assets (including our investment in research and development on MTI Instruments’ products during 2009.
In September 2008,Micro). Besides the line of credit at MTI Micro closed on $1.5 million of funding in the form of convertible secured notes (the “Bridge Notes”) from an investor group (the “Bridge Investors”) that included Dr. Walter L. Robb, a member of our Board of Directors. We agreed to convert $0.7 million of our prior advances to MTI Micro into these Bridge Notes. In February 2009, MTI Micro and the Bridge Investors agreed to, among other things, amend the Bridge Notes (“Amendment No. 1”) to permit MTI Micro to sell additional Bridge Notes with an additional principal amount of up to $0.5 million to additional investors, and to extend the maturity date from March 31, 2009 to May 31, 2009 (the “Maturity Date”). No other terms of the Bridge Notes were amended. Following the effectiveness of the Amendment No. 1, MTI Micro borrowed an additional $0.5 million from an existing Bridge Investor, a fund managed by Dr. Walter L. Robb, a member of our Board of Directors, bringing the aggregate outstanding principal amount borrowed under the Bridge Notes, as amended, to $2.7 million, including conversion of outstanding debt totaling $0.7 million owed to the Company. The Bridge Notes carry an annual interest rate of 10%. If a qualified financing event (expected to be Series A Preferred Stock) occurs prior to the maturity of the Bridge Notes, all note holders will exchange their principal and interest amounts for MTI Micro securities issued during the qualified financing event (at then-issued prices). If no such qualifying financing event occurs before the Maturity Date, the Bridge Notes will either be repaid or converted into securities of MTI Micro at a mutually agreeable price among all note holders. These Bridge Notes are secured by all of the assets of MTI Micro, including intellectual property. Lastly, five-year warrants to purchase additional securities were issued to all investors, having an aggregate exercise price equal to 10% of the outstanding principal amounts under the Bridge Notes. These warrants will be priced in a manner similar to the conversion of the Bridge Notes.
WeInstruments, we have no other commitments for funding future needs of the organization at this time and such additional financing during 20092012 may not be available to us on acceptable terms, if at all. We
Line of Credit
On September 20, 2011, MTI Instruments entered into a working capital line of credit with First Niagara Bank, N.A. Pursuant to the Demand Grid Note, MTI Instruments may also seekborrow from time to supplement our resources through additional debt or equity financings, salestime up to $400 thousand to support its working capital needs. The note is payable upon demand, and the interest rate on the note is equal to the prime rate with a floor of 4.0% per annum. The note is secured by a lien on all of the assets (includingof MTI Micro orInstruments and is guaranteed by the Company. The line of credit is subject to a review date of June 30, 2012. Under the line of credit, MTI Instruments), and additional government funding.
Working capital was $0.2 million atInstruments is required to hold a line balance of $0 for 30 consecutive days out during each consecutive year. As of December 31, 2008, a $11.1 million decrease from $11.3 million at December 31, 2007. This decrease was primarily2011, there were no amounts outstanding under the resultline of the use of cash in operationscredit.
Backlog, Inventory and sales of securities available for sale securities.Accounts Receivable
At December 31, 2008,2011, the Company’s order backlog was $1,372,000,$861 thousand, compared to $445,000$2.1 million at December 31, 2007.2010. The backlog at December 31, 2010 was elevated by record high fourth quarter order activity that year.
30
Our inventory turnover ratios and average accounts receivable days sales outstanding for the years ended December 31, 20072011 and 20082010 and their changes are as follows:
| Years Ended December 31, | Years Ended December 31, | |||||||||||
| 2007 | 2008 | Change | 2011 | 2010 | Change | |||||||
| Inventory turnover | 2.3 | 1.5 | (0.8 | ) | 4.0 | 3.7 | .3 | |||||
| Average accounts receivable days sales outstanding | 58 | 48 | (10 | ) | 42 | 42 | — | |||||
The declinepositive increase in inventory turnover stemmed from an increase inis driven by average inventory balances of $136,000 at December 31, 2008,increasing 27% on a 43% higher annual sales volume in 2011 as compared to December 31, 2007, to support a higher level of subassemblies necessary for two large orders expected to ship duringwell as better managed production quantities and inventory purchases over the first quarter of 2009.last twelve months.
The decrease in average accounts receivable days sales outstanding remained consistent in 20082011 compared with 2007 was primarily attributable to our decision to grant our largest commercial customer 90-day payment terms during 2007. This customer accounted for 28% of our total product revenue in 2007, but only 14% of total sales in 2008. These extended payment terms were eliminated in conjunction with the expiration of our formal distribution agreement in September 2008 and the customer is now back to net 30 payment terms.
Cash flow used by operating activities was $10.3 million during 2008 compared with $11.7 million during 2007. This cash use decrease of $1.4 million reflects a net decrease in cash expenditures to fund operations of $0.9 million, together with net balance sheet changes which decreased cash expenditures by $0.5 million, reflecting the timing of cash payments and receipts, particularly a reduction of accounts receivable of $0.8 million and the recognition of deferred revenue.
Capital expenditures were $0.2 million during 2008, a decrease of $0.2 million from the prior year. This decrease was attributable to lower laboratory equipment expenditures to support our micro fuel cell business. Capital expenditures in 2008 included manufacturing, laboratory and demonstration equipment. We had no outstanding commitments for capital expenditures as of December 31, 2008.
During 2008, we sold our remaining 1,137,166 shares of Plug Power common stock with proceeds totaling $3.0 million and gains totaling $1.0 million. These proceeds reflect our previously announced strategy to raise additional capital through the sale of Plug Power stock to fund our micro fuel cell operations. We expect the net gains to be offset by our operating losses for purposes of computing taxable income. We estimate that as of December 31, 2008, our remaining net operating loss carry forwards were approximately $64.0 million.2010.
Off-Balance Sheet Arrangements
Pursuant to a financing transaction between us and certain investors on December 15, 2006, we issued warrants to purchase up to an aggregate 378,472 shares of our common stock exercisable at any time until December 19, 2011 at an exercise price per share of $18.16. The shares issuable upon exercise of these warrants would be issued under a shelf registration statement covering the resale of such shares. The termsThere are no off balance sheet arrangements of the warrant agreement permit a cash settlement with the holders of the warrants if we are acquired by, or merge with, a private company. Because of the possibility of such a settlement, we have classified this agreement as an asset/liability derivative in accordance with SFAS No. 133 and EITF 00-19.Company.
Contractual Payment Obligations
We have entered into various agreements with non-cancelable terms that result in contractual payment obligations in future years. These contracts include financing arrangementsmanufacturing, laboratory and office facility lease agreements as well as purchase commitments for general operations of the Bridge Notes and leases.Company. The following table summarizes cash payments that we are committed to make under the existing terms of contracts to which we are a party as of December 31, 2008.2011. This table does not include contingencies.
| Less | More | ||||||||||||||
| Contractual Payment Obligations | Than 1 | 1-3 | 3-5 | Than 5 | |||||||||||
| (in thousands) | Year | Years | Years | Years | Total | ||||||||||
| Convertible Notes: | |||||||||||||||
| Principal (1) | $ | 1,500 | $ | — | $ | — | $ | — | $ | 1,500 | |||||
| Interest | 44 | — | — | — | 44 | ||||||||||
| Operating Leases (2) | 601 | 19 | — | — | 620 | ||||||||||
| Uncertain Tax Position Liability | 213 | — | — | — | 213 | ||||||||||
| Total Contractual Payment Obligations | $ | 2,358 | $ | 19 | $ | — | $ | — | $ | 2,377 | |||||
| Less | More | |||||||||||||
| Contractual Payment Obligations | Than 1 | 1-3 | 3-5 | Than 5 | ||||||||||
| (in thousands) | Year | Years | Years | Years | Total | |||||||||
| Operating lease obligations | $ | 27 | $ | 564 | $ | 266 | $ | — | $ | 857 | ||||
| Purchase obligations | 376 | 14 | — | — | 390 | |||||||||
| Total Contractual Payment Obligations | $ | 403 | $ | 578 | $ | 266 | $ | — | $ | 1,247 | ||||
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Market Risk
Market risk is the risk that changes in market conditions will adversely affect earnings or cashflow. We categorize our market risks as interest rate risk and credit risk. Immediately below are detailed descriptions of the market risks and explanations as to how each of these risks are managed.
Interest Rate Risk. Interest rate risk is the risk that changes in interest rates could adversely affect earnings or cashflows. The Company’s cash equivalents are sensitive to changes in interest rates. Interest rate changes would result in a change in interest income due to the difference between the current interest rates on cash. Interest rate risk sensitivity analysis is used to measure interest rate risk by computing estimated changes in cashflowscashflow as a result of assumed changes in market interest rates. A 10% decrease in 20082011 interest rates would be immaterial to the Company’s consolidated financial statements.
Our Bridge Notes have fixed interest rates. Changes in the current market rates for the Bridge Notes would not result in a change in interest expense due to the fixed rate.
Credit Risk. Credit risk is the risk of loss we would incur if counterparties fail to perform their contractual obligations. Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents, marketable securities, trade accounts receivable and unbilled contract costs.
Our trade accounts receivable and unbilled contract costs and fees are primarily from sales to commercial customers, the U.S. government and state agencies. We do not require collateral and have not historically experienced significant credit losses related to receivablestoreceivables or unbilled contract costs and fees from individual customers or groups of customers in any particular industry or geographic area.
Our deposits itsare primarily in cash and investsdeposited in marketable securities primarily through commercial banks and investment companies. Credit exposure to any one entity is limited by Company policy.
Critical Accounting Policies and Significant Judgments and Estimates
The following 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 toof the consolidated audited financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K includes a summary of our most significant accounting policies. The preparation of these consolidated financial statements requires usmanagement to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, securities available for sale, income taxes, share-based compensation and derivatives. We base our estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Periodically, we review our critical accounting estimates with the Audit Committee of our Board of Directors.
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 installation to be performed by us, all revenue related to the product is deferred and recognized upon the completion of the installation.
We recognize revenue from development contracts based upon the relationship of actual costs to estimated costs to complete the contract. These types of contracts typically provide development services to achieve a specific scientific result relating to direct methanol fuel cell technology. Some of these contracts require us to contribute to the development effort. The customers for these contracts are commercial customers and various state and federal government agencies. While government agencies are providing revenue, we do not expect the government to be a significant end user of the resulting products. Therefore, we do not reduce funded research and product development expense by the funding received. When it appears probable that estimated costs will exceed available funding on fixed price contracts and we are not successful in securing additional funding, we record the estimated additional expense before it is incurred.
We apply theaccounting guidance in SAB No. 104, Revenue Recognition,on revenue recognition in the evaluation of commercially funded fuel cell research and prototype agreements to determine when to properly recognize income. Payments received in connection with commercial research and prototype agreements are deferred and recognized on a straight-line basis over the term of the agreement for service-related payments. For milestone and prototype delivery payments, if and when achieved, revenue is deferred and recognized on a straight-line basis over the remaining term of the agreement. When revenue qualifies for recognition it will be recorded as funded research and development revenue. The costs associated with research and prototype-producing activities are expensed as incurred. Expenses in an amount equal to revenue recognized are reclassified from unfunded research and product development to funded research and product development.
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We also recognize revenue from product sales in accordance with SAB No. 104. 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 installation to be performed by us, 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.
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 of SFAS No. 123R, Share-Based Payment, and SEC Staff Accounting Bulletin 107,regarding Share-Based Payments. Effective January 1, 2006, we use the fair value method to apply the provisions of FAS 123Raccounting with the modified prospective application, which provides for certain changes to the method for valuing share-based compensation. The valuation provisions of FAS 123R 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. Share-based compensation expense recognized under FAS 123Rthese accounting methods for the year ended December 31, 20082011 was $0.8 million.$661 thousand. At December 31, 2008,2011, total unrecognized estimated compensation expense related to non-vested awards granted prior to that date was $0.7 million,$104 thousand, which is expected to be recognized over a weighted average period of .98.87 years.
Upon adoption of FAS 123R, we began estimatingWe estimate the fair value of share-based awards on the date of grant using a Black-Scholes option-pricing model. Prior to the adoption of FAS 123R, the value of each share-based award was estimated on the date of grant using the Black-Scholes model for the pro forma information required to be disclosed under FAS 123. 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 infor the application of FAS 123Raccounting methodology during future periods, the compensation expense that we record under FAS 123R 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 under FAS 123R.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 in accordance with FAS 123R and SAB 107 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 the payment of cash by us.
The guidance in FAS 123R and SAB 107 is still relatively new, and best practices are not well established. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of share-based payments. It may also result in a lack of comparability with other companies that use different models, methods, and assumptions.
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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 threetwelve months ended December 31, 20082011 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 guidance in FAS 123R and SAB 107.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 estimated using both historical term measures and projected termination estimates.
Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate ourcalculate income taxes infor each of the jurisdictions in which we operate. This process involves the estimation of ourestimating actual current tax exposuretaxes due together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination ofpurposes that are recorded as deferred tax assets and liabilities. We periodically evaluate deferred tax assets, net operating loss carry forwards. These differences result in a net deferredcarryforwards and tax asset. We must assess the likelihood thatcredit carryforwards to determine their recoverability based primarily on our deferred tax assets will be recovered fromability to generate future taxable income and, to the extent that we believe that recovery is not likely, we must establish a valuation allowance.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 have recordedconsidered all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income amongst other items in determining whether a full or partial release of our valuation allowance is required. 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, aswhich further requires the exercise of significant management judgment.
As a result of uncertaintiesour analyses in 2011, we released a portion of our abilityvaluation allowance against our deferred tax assets. The partial release of the valuation allowance caused an incremental tax benefit of $1.5 million to realize certain netbe recognized in the fourth quarter of 2011. For our analysis, we projected our pre-tax earnings utilizing a combination of historical and projected results, taking into consideration existing levels of permanent differences, non-deductible expense and the reversal of significant temporary differences. We need to generate approximately $225 thousand of taxable income in each year over the next twenty years to ensure the realizability of the $1.5 million of deferred tax assets primarily consisting of net operating losses being carried forward.recorded on our balance sheet at December 31, 2011. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. We have recorded a fullThe remaining valuation allowance againstat December 31, 2011 is $19.8 million and relates primarily to net operating losses and stock based compensation. We will continue to evaluate the ability to realize our net deferred tax assets of $27.5 millionand related valuation allowance on a quarterly basis.
Our Federal net operating loss carryforwards as of December 31, 2008. In2011 were $66.9 million. Of these, $50.4 are MTI’s and $16.5 are MTI MicroFuel Cells. However, approximately $14.6 million of MFC’s NOLs have been reduced due to limitations caused by Section 382 ownership changes. Of the event actual results differ from these estimates or we adjust these estimatesremaining NOL’s, $4.1 million expire in future periods, we may need to adjust our valuation allowance which could materially impact our financial position2020, with the remainder expiring through 2031.
We account for taxes in accordance with the asset and resultsliability method of operations.
During June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, Accountingaccounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 or FIN 48, which became effective for us beginning in fiscal 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.income taxes. Under FIN 48,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 in accordance with FIN 48for these standards did not have a material impact on our results of operations, financial condition, or liquidity.
Derivative Instruments. We account for derivative instruments and embedded derivative instruments in accordance with SFAS No. 133,the accounting standard for Accounting for Derivative Instruments and Hedging Activities, as amended. The amended standard requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. Fair value is estimated using the Black-Scholes Pricing model. We also follow EITF Issue No. 00-19,accounting standards for the Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock, which requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under thethese provisions of EITF Issue No. 00-19, a contract designated as an asset or a liability must be carried at fair value, with any changes in fair value recorded in the results of operations. A contract designated as an equity instrument can be included in equity, with no fair value adjustments are required.
The asset/liability derivatives are valued on a quarterly basis using the Black-Scholes Pricing model. Significant assumptions used in the valuation included exercise dates, closing prices for our common stock, volatility of our common stock, and a proxy risk-free interest rate. Gains (losses) on derivatives are included in “Gain (loss) on derivatives” in our consolidated statement of operations.
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NewRecent Accounting Pronouncements
EffectA discussion of Recent Accounting Pronouncements:
In June 2008, the FASB Staff Position EITF No. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(“EITF No. 03-6-1”). EITF No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vestingrecently adopted and therefore need to benew accounting pronouncements is included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” EITF No. 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate classNote 2 of securities in calculating earnings per share. It is effective for calendar-year companies beginning January 1, 2009. The Company is currently assessing the potential impact of implementing this standard.
In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP14-1). This staff position applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” FSP 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate on the instrument’s issuance date when interest cost is recognized. This staff position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not allowed. The Company expects that the adoption of FSP 14-1 will not have a material effect on the financial statements.
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles (“FASB No. 162”). This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). The standard is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently assessing the potential impact of implementing this standard.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3,Determination of the Useful Life of Intangible Assets(“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” The objective of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and GAAP. FSP FAS 142-3 is effective for financial statements issued for years beginning after December 15, 2008, and interim periods within those years and applied prospectively to intangible assets acquired after the effective date. Since the Company’s consolidated financial statements presently do not include any intangible assets, it does not expect the adoption of FSP FAS 142-3 to have a material impact on its financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”).SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedging items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedging items affect an entity’s financial position, financial performance, and cash flows. This statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2008. This statement will be effective for the Company for its fiscal year beginning January 1, 2009. The Company has not yet determined the impact, if any, of this statement on its Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141R,Business Combinations—a replacement of FASB Statement No. 141(“SFAS No. 141R”), which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginning after December 15, 2008. This statement will be effective for the Company for its fiscal year beginning January 1, 2009. The Company has not yet determined the impact, if any, of this statement on its Consolidated Financial Statements.
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In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51(“SFAS No. 160”). SFAS No. 160 requires that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. This statement will be effective for the Company for its fiscal year beginning January 1, 2009. Based upon the December 31, 2008 balance sheet, the impact of adopting SFAS No. 160 would be to reclassify $11,000 from minority interests in consolidated subsidiaries to the Company’s stockholders’ equity section as a separate component of stockholders’ equity. In addition, the exercise of existing convertible notes could result in a change of ownership structure of MTI Micro and in the related accounting.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The adoption of this statement on January 1, 2008 did not have a material effect on the Company’s Consolidated Financial Statements as the Company did not elect to implement the fair value option for its marketable equity securities.in Part II, Item 8 of this Annual Report on Form 10-K.
Item 7A. Quantitative Andand Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and credit risk, which could affect its future results of operations and financial condition. We manage our exposure to these risks through regular operating and financing activities. (See “Market Risk”,See Market Risk, included in Part II, Item 7 above, Management’s Discussion and Analysis of Financial Condition and Results of Operations above.)Operations.
Item 8: Financial Statements and Supplementary Data
The financial statements filed herewith are set forth on the Index toCompany’s Consolidated Financial Statements on Pagefiled herewith beginning at page F-1 of the separate financial section, which follows page 45 of this report and are incorporated hereinin this Item 8 by reference.
Selected Quarterly Financial Data
| (Unaudited and in thousands except per share amounts) | Q1 | Q2 | Q3 | Q4 | ||||||||||||
| 2007 | ||||||||||||||||
| Product revenue | $ | 1,701 | $ | 2,275 | $ | 2,196 | $ | 2,856 | ||||||||
| Funded research and development revenue | 615 | 353 | 357 | 231 | ||||||||||||
| Gross profit – product revenue | 963 | 1,459 | 1,348 | 1,828 | ||||||||||||
| Gross profit (loss) – funded research and development | 391 | (151 | ) | (334 | ) | (241 | ) | |||||||||
| Net loss | $ | (3,156 | ) | $ | (2,487 | ) | $ | (2,481 | ) | $ | (1,451 | ) | ||||
| Loss per Share (Basic and Diluted): | ||||||||||||||||
| Net loss | $ | (0.66 | ) | $ | (0.52 | ) | $ | (0.52 | ) | $ | (0.31 | ) | ||||
| 2008 | ||||||||||||||||
| Product revenue | $ | 1,980 | $ | 1,720 | $ | 1,400 | $ | 1,124 | ||||||||
| Funded research and development revenue | 173 | 309 | 399 | 273 | ||||||||||||
| Gross profit – product revenue | 1,140 | 894 | 565 | 444 | ||||||||||||
| Gross loss – funded research and development | (183 | ) | (325 | ) | (420 | ) | (327 | ) | ||||||||
| Net loss | $ | (3,187 | ) | $ | (3,278 | ) | $ | (4,016 | ) | $ | (2,023 | ) | ||||
| Loss per Share (Basic and Diluted): | ||||||||||||||||
| Net loss | $ | (0.67 | ) | $ | (0.69 | ) | $ | (0.84 | ) | $ | (0.42 | ) | ||||
| (Unaudited and in thousands except per share amounts) | Q1 | Q2 | Q3 | Q4 | |||||||||||
| 2011 | |||||||||||||||
| Product revenue | $ | 2,539 | $ | 2,140 | $ | 2,326 | $ | 3,275 | |||||||
| Funded research and development revenue | 13 | — | — | — | |||||||||||
| Gross profit – product revenue | 1,600 | 1,290 | 1,465 | 2,145 | |||||||||||
| Gross loss – funded research and development | (12 | ) | — | — | — | ||||||||||
| Net income (loss) attributed to MTI | $ | 194 | $ | (97 | ) | $ | (101 | ) | $ | 2,390 | |||||
| Net Income (Loss) per Share (Basic and Diluted): | |||||||||||||||
| Net income (loss) per share attributed to MTI | $ | 0.04 | $ | (0.02 | ) | $ | (0.02 | ) | $ | 0.45 | |||||
Selected Quarterly Financial Data
| (Unaudited and in thousands except per share amounts) | Q1 | Q2 | Q3 | Q4 | |||||||||||
| 2010 | |||||||||||||||
| Product revenue | $ | 1,267 | $ | 1,627 | $ | 1,646 | $ | 2,639 | |||||||
| Funded research and development revenue | 357 | 418 | 334 | 125 | |||||||||||
| Gross profit – product revenue | 723 | 901 | 984 | 1,641 | |||||||||||
| Gross loss – funded research and development | (413 | ) | (409 | ) | (203 | ) | (279 | ) | |||||||
| Net (loss) income attributed to MTI | $ | (1,234 | ) | $ | (437 | ) | $ | (366 | ) | $ | 279 | ||||
| Net (Loss) Income per Share (Basic and Diluted): | |||||||||||||||
| Net (loss) income per share attributed to MTI | $ | (.26 | ) | $ | (.09 | ) | $ | (.08 | ) | $ .06 | |||||
As a result of rounding and quarterly calculations, the sum of the quarters may not agree to the year to date results.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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Item 9A: Controls and Procedures
(a) Evaluation of Disclosure Controls and ProceduresEvaluation of Disclosure Controls and Procedures:Our management, with the participation of our chief executive officer who is also our acting principaland chief financial officer, evaluated the effectiveness of MTI’s disclosure controls and procedures as of December 31, 2008.2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. We recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and we necessarily apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the valuation of our disclosure controls and procedures as of December 31, 2008,2011, our chief executive officer who is also our acting principaland chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective due to staffing turnover and a lack of adequate resources withinat the accounting and finance department. In August 2008, the Board of Directors approved a restructuring plan (the “ August 2008 Restructuring”), which was designed to help the Company reduce expenses and preserve cash. As part of the Restructuring, the Company’s Chief Financial Officer transitioned out of the Company along with other several other accounting and Information Technology personnel. Prior to the August 2008 Restructuring, the Company’s Controller left the Company to pursue other opportunities. Additionally, effective December 1, 2008 the Company’s Interim Chief Financial and Director of Financial Reporting resigned from the Company. In response to the turnover, the Company has retained an outside consulting firm to provide controllership and chief financial officer related services.
Changes in Internal Control over Financial Reporting: Except as described in the paragraph above, 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, 2008 that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.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 who is also our actingand principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation using the criteria set forth inInternal Control—Integrated Framework,Management has concluded that our internal control over financial reporting was not effective as of December 31, 2008 as a result of the matters referred to in section (a) of this Item 9A above.2011.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2008, management determined the turnover of its accounting and Information Technology staff and resulting lack of resources is a material weakness. Management believes the cost savings resulting from the August 2008 Restructuring outweighs any increase in control risk.
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 temporary rules of the SEC that permit us to provide only Management’s reportReport in this annual report.
(c) Changes in Internal Control over Financial Reporting Item 9B: Other Information PART III Item 10: Directors, Executive Officers and Corporate Governance (a) Directors (b) Executive Officers Incorporated herein by reference is the information appearing under the caption “Board of Director Meetings and Committees – Audit Committee” in our definitive Proxy Statement for our Code of Ethics: We have adopted a Code of Ethics for employees, officers and directors. The Code of Ethics is intended to comply with Item 406 of Regulation S-K of the Securities Exchange Act Item 11: Executive Compensation Incorporated herein by reference is the information appearing under the caption “Executive Compensation” in the Company’s definitive Proxy Statement for our Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated herein by reference is the information appearing under the caption “Principal Stockholders” in our definitive Proxy Statement for our Equity Compensation Plans The following table presents information regarding these Under the 1996, 1999 and 2006 Plans, the securities available under the Plans for issuance and issuable pursuant to exercises of outstanding options may be adjusted in the event of a change in outstanding stock by reason of stock dividend, stock splits, reverse stock splits, etc. Item 13: Certain Relationships and Related Transactions, and Director Independence Incorporated herein by reference is the information appearing under the caption “Certain Relationships and Related Transactions” in our definitive Proxy Statement for the Item 14: Principal Incorporated herein by reference is the information appearing under the caption “Independent Accountants” in our definitive Proxy Statement for the 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: The following Report of Independent Registered Public Accounting Firm on Financial Statements Schedule; All other 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 Exhibit Number Description /s/ Peng K. Lim/s/ Peng K. Lim /s/ Frederick W. Jones Chief Executive Officer(Principal Executive OfficerChief Financial Officer (Principal Executive Officer) (Principal Financial Officer)
There have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and Principal Financial Officer)15d-15(1) under the Exchange Act, during our fiscal quarter ended December 31, 2011 that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.37None.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 which has not been reported.38
Incorporated herein by reference is the information appearing under the captions “Information about our Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in our definitive Proxy Statement for our 20092012 Annual Meeting of Stockholders to be filed with the SEC.SEC on or before April 29, 2012.
Incorporated herein by reference is the information appearing under the captions “Executive Officers” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in our definitive Proxy Statement for our 20092012 Annual Meeting of Stockholders to be filed with the SEC.SEC on or before April 29, 2012.20092012 Annual Meeting of Stockholders to be filed with the SEC.SEC on or before April 29, 2012.and with applicable rules of Nasdaq.1934. A copy may be obtained at no charge by written request to the attention of our Secretary at 431 New Karner Road,325 Washington Avenue Extension, Albany, New York 12205. A copy of the Code of Ethics is also available on our website at http://www.mechtech.com.www.mechtech.com under Investor Relations, Corporate Governance.20092012 Annual Meeting of Stockholders to be filed with the SEC.SEC on or before April 29, 2012.20092012 Annual Meeting of Stockholders to be filed with the SEC.SEC on or before April 29, 2012.
As of December 31, 2008,2011, we have three equity compensation plans, each of which has beenwas originally approved by our stockholders; the Mechanical Technology, Incorporated 1996 Stock Incentive Plan (the “1996 Plan”)1996 Plan), 1999 Employee Stock Incentive Plan (the “1999 Plan”)1999 Plan) and 2006 Equity Incentive Plan (the “2006 Plan”),2006 Plan). The 2006 Plan was amended and restated and approved by our Board of Directors in 2011 and 2009. We refer collectively to which we refer collectivelythese as the Plans. See Note 13 toof the Consolidated Financial Statements referred to in Part II, Item 8 of this Annual Report on Form 10-K for a description of these Plans.plans:plans as of December 31, 2011:____________________ Number of Securities Remaining Number of Securities Remaining Available for Future Issuance Available for Future Issuance Number of Securities To Be Under Number of Securities To Be Under Issued Upon Exercise of Weighted Average Exercise Equity Compensation Plans Issued Upon Exercise of Weighted Average Exercise Equity Compensation Plans Outstanding Price of Outstanding (excluding securities reflected in Outstanding Price of Outstanding (excluding securities reflected in Options, Warrants, Rights(1) Options, Warrants, Rights column (a)) Options, Warrants, Rights(1) Options, Warrants, Rights column (a)) Plan Category (a) (b) (c) (a) (b) (c) Equity compensation plans approved by security holders 780,340 $ 21.56 68,641 348,513 $ 21.24 -0- Equity compensation plans not approved by security holders 448,924 2.28 261,601
(1) 20092012 Annual Meeting of Stockholders to be filed with the SEC.SEC on or before April 29, 2012.AccountantAccounting Fees and Services20092012 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.SEC on or before April 29, 2012.39consolidated financial statement scheduleConsolidated Financial Statement Schedule for the years ended December 31, 2006, 2007,2011, 2010, and 20082009 is included pursuant to Item 15(d):
Schedule II - Valuation and Qualifying Accounts.immediately preceding the exhibitsbelow are filed as part of this Annual Report on Form 10-K.The following exhibits are filed as part of this Report:ExhibitNumber 3.1 Certificate of Incorporation of the registrant, as amended and restated. (22)restated (Incorporated by reference from Exhibit 3.1 of the Company’s Form 10-K Report for the year ended December 31, 2007). 3.2 Certificate of Amendment of the Certificate of Incorporation of the registrant. (23) registrant (Incorporated by reference from Exhibit 3.2 of the Company’s Form 8-K Report filed May 15, 2008). 3.3 Amended and Restated By-Laws of the registrant as amended and restated. (21)(Incorporated by reference from Exhibit 3.3 of the Company’s Form 8-K Report filed December 14, 2007). 4.1Form of Common Stock Purchase Warrant to be issued by the Company. (17)10.1 10.14Mechanical Technology, Incorporated 1996 Stock Incentive Plan. (1)Plan (Incorporated by reference from Appendix A of the Company’s Definitive Proxy Statement Schedule 14A filed November 19, 1996).* 10.3010.2 Mechanical Technology, Incorporated 1999 Employee Stock Incentive Plan. (2)Plan (Incorporated by reference from Exhibit A of the Company’s Proxy Statement Schedule 14A filed February 13, 1999).* 10.3810.3 Lease dated August 10, 1999 between Carl E. Touhey and Mechanical Technology, Inc. (3)(Incorporated by reference from Exhibit 10.38 of the Company’s Form 10-K Report for the fiscal year ended September 30, 1999). 10.4310.4 Lease dated April 2, 2001 between Kingfisher, LLC and Mechanical Technology, Inc. (4)(Incorporated by reference from Exhibit 10.43 of the Company’s Form 10-K Report for the fiscal year ended September 30, 2001). 10.4410.5 First Amendment to lease dated March 13, 2003 between Kingfisher, LLC and Mechanical Technology, Inc. (5)(Incorporated by reference from Exhibit 10.44 of the Company’s Form 10-K Report for the year ended December 31, 2002). 10.119Strategic Alliance Agreement, dated as of September 19, 2003, between The Gillette Company and MTI MicroFuel Cells Inc (terminated September 3, 2008). (6)10.6 10.123Amendment to the Strategic Alliance Agreement between The Gillette Company and MTI MicroFuel Cells Inc. dated August 18, 2004 (terminated September 3, 2008). (8)10.131Amendment No. 2 to the Strategic Alliance Agreement between The Gillette Company and MTI MicroFuel Cells Inc. dated June 20, 2005 (terminated September 3, 2008). (9)10.132Second Amendment to lease dated December 12, 2005 between Kingfisher, LLC and Mechanical Technology, Incorporated. (10)Incorporated (Incorporated by reference from Exhibit 10.132 of the Company’s Form 8-K Report filed December 13, 2005). 10.136Employment Agreement dated September 25, 2002 between Cynthia A. Scheuer and Mechanical Technology, Incorporated and MTI MicroFuel Cells Inc. (11)10.7 10.137Employment Agreement dated November 19, 2004 between Juan Becerra and MTI MicroFuel Cells Inc (terminated March 4, 2008, no Separation Agreement). (11)4010.139Employment Agreement dated May 4, 2006 between Peng K. Lim and MTI MicroFuel Cells Inc (amended and restated on December 31, 2008)Mechanical Technology, Incorporated (Incorporated by reference from Exhibit 10.139 of the Company’s Form 8-K Report filed May 9, 2006). (13)* 10.14010.8 Form of Restricted Stock Agreement for the 1996 and 1999 Mechanical Technology, Inc. Stock Incentive Plans. (14)Plans (Incorporated by reference from Exhibit 10.140 of the Company’s Form 8-K Report filed May 18, 2006).* 10.14110.9 (A)Alliance Agreement dated May 16, 2006 between MTI MicroFuel Cells Inc. and Samsung Electronics Co., Ltd. (15)10.142Third Amendment to lease dated August 7, 2006 between Kingfisher, LLC and Mechanical Technology, Incorporated. (15)Incorporated (Incorporated by reference from Exhibit 10.142 of the Company’s Form 10-Q Report for the quarter ended June 30, 2006). 10.14310.10 (A)Amendment No. 3 to the Strategic Alliance Agreement dated September 13, 2006, between MTI MicroFuel Cells Inc. and The Gillette Company (terminated September 3, 2008). (16)10.144Form of Subscription Agreement. (17)10.145Mechanical Technology, Incorporated 2006 Equity Incentive Plan. (12)10.147Employment Agreement dated March 27, 2007 between Robert Kot and MTI Instruments, Inc (terminated January 2009). (18)10.148Fourth Amendment to lease dated August 6, 2007 between Kingfisher LLC and Mechanical Technology, Incorporated. (19)Incorporated (Incorporated by reference from Exhibit 10.148 of the Company’s Form 10-Q Report for the quarter ended June 30, 2007). 10.150Future Collaboration Agreement dated October 22, 2007 between MTI MicroFuel Cells Inc. and Samsung Electronics Co., Ltd. (20)10.11 10.151Employment Agreement dated April 3, 2006 between James K. Prueitt and MTI MicroFuel Cells Inc (amended and restated on(Incorporated by reference from Exhibit 10.151 of the Company’s Form 10-K Report for the year ended December 31, 2008) (22)2007).* 10.152Separation Agreement dated September 4, 2008 between Cynthia A. Scheuer and Mechanical Technology, Incorporated (24)10.12 10.153Form of Convertible Note and Warrant Purchase Agreement dated September 18, 2008 (24)(Incorporated by reference from Exhibit 10.153 of the Company’s Form 10-Q Report for the quarter ended September 30, 2008). 10.15410.13 Amended and Restated Employment Agreement dated December 30, 2008 between James K. Prueitt and MTI MicroFuel Cells Inc. (Incorporated by reference from Exhibit 10.154 of the Company’s Form 10-K Report for the year ended December 31, 2008).* 10.15510.14 Amended and Restated Employment Agreement dated December 31, 2008 between Peng K. Lim and Mechanical Technology, Inc. (Incorporated by reference from Exhibit 10.155 of the Company’s Form 10-K Report for the year ended December 31, 2008).* 10.15 10.156Amendment to Employment Agreement dated March 27, 2007 between Robert Kot and MTI Instruments, Inc.10.157Separation Agreement and Release Agreement dated January 16, 2009 between Robert Kot and MTI Instruments, Inc.10.158Amendment No. 1 to Convertible Note and Warrant Purchase Agreement, Security Agreement and Secured Convertible Promissory Notes and Consent dated February 20, 2009 (Incorporated by reference from Exhibit 10.158 of the Company’s Form 10-K Report for the year ended December 31, 2008). 10.15910.16 Letter Agreement dated February 24, 2009 between Peng K. Lim and Mechanical Technology, Inc. (Incorporated by reference from Exhibit 10.159 of the Company’s Form 10-K Report for the year ended December 31, 2008).* 10.16010.17 Letter Agreement dated February 24, 2009 between James K. Prueitt and MTI MicroFuel Cells Inc. (Incorporated by reference from Exhibit 10.160 of the Company’s Form 10-K Report for the year ended December 31, 2008).* 14.110.18 Amendment No. 2 to Convertible Note and Warrant Purchase Agreement, Security Agreement and Secured Convertible Promissory Notes and Consent dated April 15, 2009 (Incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q Report for the quarter ended June 30, 2009). 10.19 Secured Convertible Promissory Note Negotiated Conversion Agreement, dated December 9, 2009, by and among the Company, MTI Micro and the Bridge Investors (Incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed December 15, 2009). 10.20 Form of MTI Micro Common Stock Purchase Warrant (Incorporated by reference from Exhibit 10.2 of the Company’s Form 8-K Report filed December 15, 2009). 10.21 Mechanical Technology, Incorporated Amended and Restated 2006 Equity Incentive Plan (Incorporated by reference from Exhibit 10.1 of the Company’s Form S-8 Registration Statement filed September 18, 2009).* 10.22 Fifth Amendment of lease dated March 31, 2009 by and between Kingfisher, LLC and Mechanical Technology, Incorporated (Incorporated by reference from Exhibit 10.165 of the Company’s Form 10-K Report for the year ended December 31, 2009). 10.23 Amendment No. 1 to Lease Agreement Between Mechanical Technology Inc. and Carl E. Touhey dated September 29, 2009 (Incorporated by reference from Exhibit 10.166 of the Company’s Form 10-K Report for the year ended December 31, 2009). 10.24 MTI MicroFuel Cells Inc. 2009 Stock Plan (Incorporated by reference from Exhibit 10.167 of the Company’s Form 10-K Report for the year ended December 31, 2009).* 10.25 Common Stock and Warrant Purchase Agreement, dated January 11, 2010, by and among MTI MicroFuel Cells Inc. and Counter Point Ventures Fund II, L.P. (Incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed January 14, 2010). 10.26 Form of MTI Micro Common Stock Warrant (Incorporated by reference from Exhibit 10.2 of the Company’s Form 8-K Report filed January 14, 2010). 10.27 Seventh Amendment to Lease Agreement by and between Kingfisher, LLC and Mechanical Technology, Incorporated (Incorporated by reference from Exhibit 10.168 of the Company’s Form 10-Q Report for the quarter ended June 30, 2010). 10.28 Amendment No. 1, dated February 9, 2011, to the Common Stock and Warrant Purchase Agreement, dated January 11, 2010, by and between MTI MicroFuel Cells Inc. and Counter Point Ventures Fund II, L.P. (Incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed February 11, 2011). 10.29 Form of MTI Micro Common Stock Warrant (Incorporated by reference from Exhibit 10.2 of the Company’s Form 8-K Report filed February 11, 2011). 10.30 Lease Extension and Modification Agreement dated April 19, 2011, between Kingfisher, LLC and MTI MicroFuel Cells, Inc. (Incorporated by reference from Exhibit 10.19 of the Company’s Form 10-Q Report for the quarter ended March 31, 2011). 10.31 Mechanical Technology, Incorporated Amended and Restated 2006 Equity Incentive Plan (Incorporated by reference from Exhibit 10.1 of the Company’s Form S-8 Registration Statement (File No. 333-175406) filed July 8, 2011).* 10.32 Form of Restricted Stock Agreement for Mechanical Technology, Incorporated Amended and Restated 2006 Equity Incentive Plan (Incorporated by reference from Exhibit 10.2 of the Company’s Form 8-K Report filed July 11, 2011).* 10.33 Lease Extension and Modification Agreement II dated July 18, 2011, between Kingfisher, LLC and MTI MicroFuel Cells, Inc. (Incorporated by reference from Exhibit 10.20 of the Company’s Form 10-Q Report for the quarter ended June 30, 2011). 10.34 Amendment No. 2, dated September 23, 2011, to the Common Stock and Warrant Purchase Agreement, dated January 11, 2010, as amended February 9, 2011, by and between MTI MicroFuel Cells Inc. and Counter Point Ventures Fund II, L.P. (Incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed September 28, 2011). 10.35 Supplemental Lease Extension and Modification Agreement dated September 29, 2011, between Kingfisher, LLC and MTI MicroFuel Cells, Inc. (Incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q Report for the quarter ended September 30, 2011). 10.36 Demand Grid Note dated September 20, 2011 between MTI Instruments, Inc. and First Niagara Bank, N.A. (Incorporated by reference from Exhibit 10.2 of the Company’s Form 10-Q Report for the quarter ended September 30, 2011). 10.37 Guaranty Agreement dated September 20, 2011 between Mechanical Technology, Incorporated and First Niagara Bank, N.A. (Incorporated by reference from Exhibit 10.3 of the Company’s Form 10-Q Report for the quarter ended September 30, 2011). 10.38 Security Agreement dated September 20, 2011 between MTI Instruments, Inc. and First Niagara Bank, N.A. (Incorporated by reference from Exhibit 10.4 of the Company’s Form 10-Q Report for the quarter ended September 30, 2011). 14.1 Code of Ethics. (11)Ethics (Incorporated by reference from Exhibit 14.1 of the Company’s Form 10-K Report for the year ended December 31, 2005).21 Subsidiaries of the Registrant. (7)Registrant23.223.1 Consent of Independent Registered Public Accounting Firm – PricewaterhouseCoopers LLP. 31Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer and Principal Financial Officer.31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 3231.2 Section 1350 Certification of PrincipalChief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification of Chief Executive Officer and PrincipalPursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2 Certification of Chief Financial Officer.Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200241Certain exhibits were previously filed (as indicated below) and are incorporated herein by reference. All other exhibits for which no other filing information is given are filed herewith:
42
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.
| MECHANICAL TECHNOLOGY, INCORPORATED | |||||
| Date: March 27, | By: | /s/ Peng K. Lim | |||
| Peng K. Lim | |||||
| Chief Executive Officer | |||||
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.
| Signature | Title | Date | ||||
| /s/ Peng K. Lim | Chairman, Chief Executive Officer, | |||||
| Peng K. Lim | (Principal Executive Officer | March 27, 2012 | ||||
| /s/ Frederick W. Jones | Chief Financial Officer and | |||||
| Frederick W. Jones | (Principal Financial and Accounting Officer) | March 27, 2012 | ||||
| /s/ Thomas J. Marusak | Director | |||||
| Thomas J. Marusak | March 27, 2012 | |||||
| /s/ William P. Phelan | Director | |||||
| William P. Phelan | March 27, 2012 | |||||
| /s/ E. Dennis O’Connor | Director | |||||
| E. Dennis O’Connor | March 27, 2012 | |||||
| /s/ Walter L. Robb | Director | |||||
| Dr. Walter L. Robb | March 27, 2012 | |||||
43
REPORT OF INDEPENDENT REGISTERED PUBLICReport of Independent Registered Public Accounting Firm onACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULEFinancial Statement Schedule
To the Board of Directors and Stockholders
of Mechanical Technology, Incorporated:
Our audits of the consolidated financial statements referred to in our report dated March 27, 20092012 appearing on page F-2 of this Form 10-K of Mechanical Technology, Incorporated also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presentspresent fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/PricewaterhouseCoopers LLP
Buffalo,Albany, New York
March 27, 20092012
44
MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
| Balance at | Additions | ||||||||||||||||
| Beginning of | Additions Charged to | Charged to | Balance at End of | ||||||||||||||
| Description | Period | Costs and Expenses | Other Accounts | Deductions | Period | ||||||||||||
| Allowance for doubtful accounts (accounts receivable) for the years ended: | |||||||||||||||||
| December 31, 2006 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
| December 31, 2007 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
| December 31, 2008 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
| Includes accounts written off as uncollectible and recoveries. | |||||||||||||||||
| Valuation allowance for deferred tax assets for the years ended: | |||||||||||||||||
| December 31, 2006 | $ | 10,923 | $ | 7,915 | $ | (23 | ) | $ | — | $ | 18,815 | ||||||
| December 31, 2007 | $ | 18,815 | $ | 3,518 | $ | — | $ | — | $ | 22,333 | |||||||
| December 31, 2008 | $ | 22,333 | $ | 5,219 | $ | — | $ | $ | 27,552 | ||||||||
| Inventory reserve for the years ended: | |||||||||||||||||
| December 31, 2006 | $ | 48 | $ | 136 | $ | (1 | ) | $ | (33 | ) | $ | 150 | |||||
| December 31, 2007 | $ | 150 | $ | 137 | $ | 28 | $ | 133 | $ | 182 | |||||||
| December 31, 2008 | $ | 182 | $ | 446 | $ | (42 | ) | $ | (75 | ) | $ | 511 | |||||
| Balance at | Additions | ||||||||||||||
| Beginning of | Additions Charged to | Charged to | Balance at End of | ||||||||||||
| Description | Period | Costs and Expenses | Other Accounts | Deductions | Period | ||||||||||
| Allowance for doubtful accounts (accounts receivable) for the years ended: | |||||||||||||||
| December 31, 2011 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
| December 31, 2010 | $ | 92 | $ | — | $ | — | $ | 92 | $ | — | |||||
| December 31, 2009 | $ | — | $ | 92 | $ | — | $ | — | $ | 92 | |||||
45
MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||
| F-2 | ||
| Consolidated Financial Statements: | ||
| Balance Sheets as of December 31, | F-3 | |
| Statements of Operations for the Years Ended December 31, | F-4 | |
| Statements of Stockholders’ Equity and Comprehensive | ||
| Years Ended December 31, | F-5 | |
| Statements of Cash Flows for the Years Ended December 31, | F-6 | |
| Notes to Consolidated Financial Statements | F-7 to |
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Mechanical Technology, Incorporated:
In our opinion,We have audited the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders'consolidated statements of stockholder's equity and comprehensive loss,(loss) income, and consolidated statements of cash flows present fairly, in all material respects, the financial position of Mechanical Technology, Incorporated and its subsidiaries atas of December 31, 20082011 and 2007,2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United(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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanyingIn our opinion, the consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussedreferred to above present fairly, in Note 1 toall material respects, the financial statements,position of Mechanical Technology Incorporated at December 31, 2011 and 2010, and the Company has suffered recurring losses fromresults of its operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's planscash flows for each of the three years in regard to these matters are also describedthe period ended December 31, 2011 in Note 1. The financial statements do not include any adjustments that might result fromconformity with accounting principles generally accepted in the outcomeUnited States of this uncertainty.America.
| /s/ PricewaterhouseCoopers LLP |
| March 27, |
F-2
MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 20072011 and 20082010
| (Dollars in thousands) | December 31, | ||||||||||||||
| (In thousands) | December 31, | ||||||||||||||
| 2007 | 2008 | 2011 | 2010 | ||||||||||||
| Assets | Assets | Assets | |||||||||||||
| Current Assets: | |||||||||||||||
| Cash and cash equivalents | $ | 7,650 | $ | 1,662 | $ | 1,669 | $ | 1,118 | |||||||
| Securities available for sale | 4,492 | — | |||||||||||||
| Accounts receivable | 1,369 | 540 | 1,881 | 1,086 | |||||||||||
| Inventories, net | 1,373 | 1,509 | |||||||||||||
| Inventories | 957 | 844 | |||||||||||||
| Deferred income taxes, net | 20 | — | |||||||||||||
| Prepaid expenses and other current assets | 329 | 272 | 102 | 128 | |||||||||||
| Total Current Assets | 15,213 | 3,983 | 4,629 | 3,176 | |||||||||||
| Deferred income taxes, net | 1,515 | — | |||||||||||||
| Property, plant and equipment, net | 2,159 | 1,528 | 258 | 425 | |||||||||||
| Deferred income taxes | 1,344 | — | |||||||||||||
| Total Assets | $ | 18,716 | $ | 5,511 | $ | 6,402 | $ | 3,601 | |||||||
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | |||||||||||||
| Current Liabilities: | |||||||||||||||
| Accounts payable | $ | 273 | $ | 508 | $ | 191 | $ | 255 | |||||||
| Accrued liabilities | 2,121 | 1,692 | 1,238 | 1,273 | |||||||||||
| Deferred revenue | 117 | 8 | 58 | 21 | |||||||||||
| Convertible notes payable – related party | — | 1,500 | |||||||||||||
| Derivative liability | — | 73 | |||||||||||||
| Income taxes payable | 11 | 23 | — | 20 | |||||||||||
| Deferred income taxes | 1,344 | — | |||||||||||||
| Total Current Liabilities | 3,866 | 3,731 | 1,487 | 1,642 | |||||||||||
| Long-Term Liabilities: | |||||||||||||||
| Uncertain tax position liability | 208 | 213 | |||||||||||||
| Derivative liability | 696 | 41 | |||||||||||||
| Total Long-Term-Liabilities | 904 | 254 | |||||||||||||
| Total Liabilities | 4,770 | 3,985 | |||||||||||||
| Commitments and Contingencies | |||||||||||||||
| Minority interests | 143 | 11 | |||||||||||||
| Commitments and Contingencies (Note 16) | |||||||||||||||
| Stockholders’ Equity: | |||||||||||||||
| Common stock, par value $0.01 per share, authorized 75,000,000; 5,777,578 | |||||||||||||||
| issued in 2007 and 5,776,750 issued in 2008 | 58 | 58 | |||||||||||||
| Common stock, par value $0.01 per share, authorized 75,000,000; | |||||||||||||||
| 6,259,975 issued in 2011 and 5,776,750 issued in 2010 | 63 | 58 | |||||||||||||
| Paid-in-capital | 132,065 | 132,781 | 135,389 | 134,733 | |||||||||||
| Accumulated deficit | (105,066 | ) | (117,570 | ) | (120,097 | ) | (122,483 | ) | |||||||
| Accumulated Other Comprehensive Income (Loss): | |||||||||||||||
| Unrealized gain on securities available for sale, net of tax | 500 | — | |||||||||||||
| Common stock in treasury, at cost, 1,005,092 shares in 2007 and 2008 | (13,754 | ) | (13,754 | ) | |||||||||||
| Common stock in treasury, at cost, 1,005,092 shares in both 2011 and 2010 | (13,754 | ) | (13,754 | ) | |||||||||||
| Total MTI stockholders’ equity (deficit) | 1,601 | (1,446 | ) | ||||||||||||
| Non-controlling interest | 3,314 | 3,405 | |||||||||||||
| Total Stockholders’ Equity | 13,803 | 1,515 | 4,915 | 1,959 | |||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 18,716 | $ | 5,511 | $ | 6,402 | $ | 3,601 | |||||||
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, 2006, 2007,2011, 2010, and 20082009
| (Dollars in thousands, except per share) | Years Ended December 31, | ||||||||||
| 2006 | 2007 | 2008 | |||||||||
| Product revenue | $ | 7,667 | $ | 9,028 | $ | 6,224 | |||||
| Funded research and development revenue | 489 | 1,556 | 1,154 | ||||||||
| Total revenue | 8,156 | 10,584 | 7,378 | ||||||||
| Operating costs and expenses: | |||||||||||
| Cost of product revenue | 2,900 | 3,430 | 3,181 | ||||||||
| Research and product development expenses: | |||||||||||
| Funded research and product development | 1,152 | 1,891 | 2,409 | ||||||||
| Unfunded research and product development | 11,769 | 9,874 | 5,855 | ||||||||
| Total research and product development expenses | 12,921 | 11,765 | 8,264 | ||||||||
| Selling, general and administrative expenses | 10,072 | 8,738 | 8,369 | ||||||||
| Operating loss | (17,737 | ) | (13,349 | ) | (12,436 | ) | |||||
| Gain on derivatives | 182 | 2,967 | 655 | ||||||||
| Gain on sale of securities available for sale | 4,289 | 2,549 | 1,018 | ||||||||
| Other income, net | 286 | 224 | 3 | ||||||||
| Loss before income taxes and minority interests | (12,980 | ) | (7,609 | ) | (10,760 | ) | |||||
| Income tax expense | (1,895 | ) | (2,548 | ) | (2,004 | ) | |||||
| Minority interests in losses of consolidated subsidiary | 1,208 | 582 | 260 | ||||||||
| Net loss | $ | (13,667 | ) | $ | (9,575 | ) | $ | (12,504 | ) | ||
| Loss per Share (Basic and Diluted): | |||||||||||
| Loss per share | $ | (3.46 | ) | $ | (2.01 | ) | $ | (2.62 | ) | ||
| (In thousands, except per share amounts) | Years Ended December 31, | ||||||||||
| 2011 | 2010 | 2009 | |||||||||
| Product revenue | $ | 10,280 | $ | 7,179 | $ | 6,263 | |||||
| Funded research and development revenue | 13 | 1,234 | 2,043 | ||||||||
| Total revenue | 10,293 | 8,413 | 8,306 | ||||||||
| Operating costs and expenses: | |||||||||||
| Cost of product revenue | 3,781 | 2,930 | 2,665 | ||||||||
| Research and product development expenses: | |||||||||||
| Funded research and product development | 25 | 2,538 | 4,095 | ||||||||
| Unfunded research and product development | 1,441 | 1,317 | 1,349 | ||||||||
| Total research and product development expenses | 1,466 | 3,855 | 5,444 | ||||||||
| Selling, general and administrative expenses | 4,994 | 5,020 | 3,284 | ||||||||
| Operating income (loss) | 52 | (3,392 | ) | (3,087 | ) | ||||||
| Interest expense | — | — | (222 | ) | |||||||
| Loss on extinguishment of debt | — | — | (232 | ) | |||||||
| Gain (loss) on derivatives | 73 | (3 | ) | (29 | ) | ||||||
| Other (expense) income, net | (25 | ) | 3 | (2 | ) | ||||||
| Income (loss) before income taxes and non-controlling interest | 100 | (3,392 | ) | (3,572 | ) | ||||||
| Income tax benefit (expense) | 1,548 | (4 | ) | 208 | |||||||
| Net income (loss), net of tax | 1,648 | (3,396 | ) | (3,364 | ) | ||||||
| Plus: Net loss attributed to non-controlling interest | 738 | 1,638 | 265 | ||||||||
| Net income (loss) attributed to MTI | $ | 2,386 | $ | (1,758 | ) | $ | (3,099 | ) | |||
| Net income (loss) per share attributable to MTI (Basic and Diluted) | $ | 0.48 | $ | (0.37 | ) | $ | (0.65 | ) | |||
| Weighted average shares outstanding (Basic and Diluted) | 5,001,934 | 4,771,658 | 4,771,658 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-4
MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS(LOSS) INCOME
For the Years Ended December 31, 2006, 2007,2011, 2010, and 20082009
| (Dollars in thousands) | Years Ended December 31, | ||||||||||
| 2006 | 2007 | 2008 | |||||||||
| Common Stock | |||||||||||
| Balance, beginning | $ | 49 | $ | 58 | $ | 58 | |||||
| Issuance of shares – capital | 8 | — | — | ||||||||
| Issuance of shares – stock options | 1 | — | — | ||||||||
| Balance, ending | $ | 58 | $ | 58 | $ | 58 | |||||
| Paid-In Capital | |||||||||||
| Balance, beginning | $ | 122,436 | $ | 130,968 | $ | 132,065 | |||||
| Capital raise and warrant issuance, net of expenses | 6,303 | — | — | ||||||||
| Issuance of shares – stock options | 1,187 | 60 | — | ||||||||
| Share-based compensation | 2,406 | 1,558 | 844 | ||||||||
| MTI MicroFuel Cell investment | (1,284 | ) | (521 | ) | (128 | ) | |||||
| Elimination of unearned compensation due to change in accounting principle | (80 | ) | — | — | |||||||
| Balance, ending | $ | 130,968 | $ | 132,065 | $ | 132,781 | |||||
| Accumulated Deficit | |||||||||||
| Balance, beginning | $ | (81,718 | ) | $ | (95,385 | ) | $ | (105,066 | ) | ||
| Cumulative effect of adoption of FIN 48 | — | (106 | ) | — | |||||||
| Net loss | (13,667 | ) | (9,575 | ) | (12,504 | ) | |||||
| Balance, ending | $ | (95,385 | ) | $ | (105,066 | ) | $ | (117,570 | ) | ||
| Accumulated Other Comprehensive Income (Loss): | |||||||||||
| Balance, beginning | $ | 5,983 | $ | 984 | $ | 500 | |||||
| Change in unrealized (loss) gain on securities available for sale (net of taxes | |||||||||||
| of $0 in 2006, 2007, and 2008) | (3,212 | ) | 68 | — | |||||||
| Less reclassification adjustment for gains included in net income (net of | |||||||||||
| taxes of $1,913 in 2006, $2,518 in 2007 and $1,971 in 2008) | (1,787 | ) | (552 | ) | (500 | ) | |||||
| Balance, ending | $ | 984 | $ | 500 | $ | — | |||||
| Restricted Stock Grants – Unearned Compensation | |||||||||||
| Balance, beginning | $ | (80 | ) | $ | — | $ | — | ||||
| Elimination of unearned compensation due to change in accounting principle | 80 | — | — | ||||||||
| Balance, ending | $ | — | $ | — | $ | — | |||||
| Treasury Stock | |||||||||||
| Balance, beginning | $ | (13,754 | ) | $ | (13,754 | ) | $ | (13,754 | ) | ||
| Balance, ending | $ | (13,754 | ) | $ | (13,754 | ) | $ | (13,754 | ) | ||
| Total Stockholders’ Equity | $ | 22,871 | $ | 13,803 | $ | 1,515 | |||||
| Total Comprehensive Loss: | |||||||||||
| Net loss | $ | (13,667 | ) | $ | (9,575 | ) | $ | (12,504 | ) | ||
| Other comprehensive loss: | |||||||||||
| Reclassification adjustment for gains included in net income, net of taxes | (1,787 | ) | (552 | ) | (500 | ) | |||||
| Change in unrealized (loss) gain on securities available for sale, net of taxes | (3,212 | ) | 68 | — | |||||||
| Total comprehensive loss | $ | (18,666 | ) | $ | (10,059 | ) | $ | (13,004 | ) | ||
| Common Stock | Treasury Stock | |||||||||||||||||||||||||||||
| Total | Total | |||||||||||||||||||||||||||||
| Additional Paid- | Accumulated | Non-Controlling | Stockholders' | Comprehensive | ||||||||||||||||||||||||||
| (Dollars in thousands) | Shares | Amount | in-Capital | Deficit | Shares | Amount | Interest (NCI) | Equity | Loss | |||||||||||||||||||||
| December 31, 2008 | 5,776,750 | $ | 58 | $ | 132,781 | $ | (117,570 | ) | 1,005,092 | $ | (13,754 | ) | $ | 11 | $ | 1,526 | ||||||||||||||
| Net loss | - | - | - | (3,099 | ) | - | - | - | (3,099 | ) | (3,099 | ) | ||||||||||||||||||
| Total comprehensive loss | $ | (3,099 | ) | |||||||||||||||||||||||||||
| Stock based compensation | - | - | 505 | - | - | - | - | 505 | ||||||||||||||||||||||
| MTI Micro warrants issued | - | - | - | (56 | ) | - | - | - | (56 | ) | ||||||||||||||||||||
| Net loss attributed to NCI | - | - | - | - | - | - | (265 | ) | (265 | ) | ||||||||||||||||||||
| Equity contribution to NCI | - | - | - | - | - | - | 3,411 | 3,411 | ||||||||||||||||||||||
| December 31, 2009 | 5,776,750 | $ | 58 | $ | 133,286 | $ | (120,725 | ) | 1,005,092 | $ | (13,754 | ) | $ | 3,157 | $ | 2,022 | ||||||||||||||
| Net loss | - | - | - | (1,758 | ) | - | - | - | (1,758 | ) | (1,758 | ) | ||||||||||||||||||
| Total comprehensive loss | $ | (1,758 | ) | |||||||||||||||||||||||||||
| Stock based compensation | - | - | 1,447 | - | - | - | - | 1,447 | ||||||||||||||||||||||
| Net loss attributed to NCI | - | - | - | - | - | - | (1,638 | ) | (1,638 | ) | ||||||||||||||||||||
| Equity contribution to NCI | - | - | - | - | - | - | 1,886 | 1,886 | ||||||||||||||||||||||
| December 31, 2010 | 5,776,750 | $ | 58 | $ | 134,733 | $ | (122,483 | ) | 1,005,092 | $ | (13,754 | ) | $ | 3,405 | $ | 1,959 | ||||||||||||||
| Net income | - | - | - | 2,386 | - | - | - | 2,386 | 2,386 | |||||||||||||||||||||
| Total comprehensive income | $ | 2,386 | ||||||||||||||||||||||||||||
| Stock based compensation | - | - | 656 | - | - | - | - | 656 | ||||||||||||||||||||||
| Issuance of shares – restricted stock | 483,225 | 5 | - | - | - | - | - | 5 | ||||||||||||||||||||||
| Net loss attributed to NCI | - | - | - | - | - | - | (738 | ) | (738 | ) | ||||||||||||||||||||
| Equity contribution to NCI | - | - | - | - | - | - | 647 | 647 | ||||||||||||||||||||||
| December 31, 2011 | 6,259,975 | $ | 63 | $ | 135,389 | $ | (120,097 | ) | 1,005,092 | $ | (13,754 | ) | $ | 3,314 | $ | 4,915 | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2006, 2007,2011, 2010, and 20082009
| (Dollars in thousands) | Years Ended December 31, | |||||||||||||||||||||
| (In thousands) | Years Ended December 31, | |||||||||||||||||||||
| 2006 | 2007 | 2008 | 2011 | 2010 | 2009 | |||||||||||||||||
| Operating Activities | ||||||||||||||||||||||
| Net loss | $ | (13,667 | ) | $ | (9,575 | ) | $ | (12,504 | ) | |||||||||||||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||||||||||||||||
| Gain on derivatives | (182 | ) | (2,967 | ) | (655 | ) | ||||||||||||||||
| Gain on sale of securities available for sale | (4,289 | ) | (2,549 | ) | (1,018 | ) | ||||||||||||||||
| Depreciation and amortization | 1,101 | 1,129 | 819 | |||||||||||||||||||
| Minority interests in losses of consolidated subsidiary | (1,208 | ) | (582 | ) | (260 | ) | ||||||||||||||||
| Allowance for bad debts | (1 | ) | — | — | ||||||||||||||||||
| Loss (gain) on disposal of fixed assets | 40 | 39 | (7 | ) | ||||||||||||||||||
| Net income (loss) | $ | 1,648 | $ | (3,396 | ) | $ | (3,364 | ) | ||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||||
| (Gain) loss on derivatives | (73 | ) | 3 | 29 | ||||||||||||||||||
| Depreciation | 307 | 481 | 660 | |||||||||||||||||||
| Loss on disposal of property, plant and equipment | 23 | — | 16 | |||||||||||||||||||
| Deferred income taxes | 1,890 | 2,518 | 1,971 | (1,535 | ) | — | — | |||||||||||||||
| Stock based compensation | 2,406 | 1,558 | 844 | 661 | 1,447 | 505 | ||||||||||||||||
| Loss on extinguishment of debt | — | — | 232 | |||||||||||||||||||
| Provision for doubtful accounts | — | — | 92 | |||||||||||||||||||
| Provision for inventory obsolescence | — | — | 124 | |||||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||||
| Accounts receivable | (614 | ) | 244 | 829 | (795 | ) | 56 | (694 | ) | |||||||||||||
| Other receivables – related parties | 3 | — | — | |||||||||||||||||||
| Inventories | (158 | ) | (157 | ) | (136 | ) | (113 | ) | (54 | ) | 781 | |||||||||||
| Prepaid expenses and other current assets | 9 | 113 | 57 | 26 | 38 | 106 | ||||||||||||||||
| Accounts payable | 277 | (379 | ) | 235 | (64 | ) | (68 | ) | (186 | ) | ||||||||||||
| Income taxes payable | 25 | 23 | 17 | (20 | ) | — | (216 | ) | ||||||||||||||
| Deferred revenue | 746 | (749 | ) | (109 | ) | 37 | 5 | 8 | ||||||||||||||
| Accrued liabilities - related parties | (2 | ) | — | — | ||||||||||||||||||
| Accrued liabilities | 918 | (349 | ) | (429 | ) | (35 | ) | (18 | ) | (263 | ) | |||||||||||
| Net cash used by operating activities | (12,706 | ) | (11,683 | ) | (10,346 | ) | ||||||||||||||||
| Net cash provided by (used in) operating activities | 67 | (1,506 | ) | (2,170 | ) | |||||||||||||||||
| Investing Activities | ||||||||||||||||||||||
| Purchases of property, plant and equipment | (1,574 | ) | (414 | ) | (181 | ) | (175 | ) | (47 | ) | (7 | ) | ||||||||||
| Proceeds from sale of property, plant and equipment | 2 | 12 | — | 12 | — | — | ||||||||||||||||
| Proceeds from sale of securities available for sale | 6,249 | 5,130 | 3,039 | |||||||||||||||||||
| Net cash provided by investing activities | 4,677 | 4,728 | 2,858 | |||||||||||||||||||
| Net cash used in investing activities | (163 | ) | (47 | ) | (7 | ) | ||||||||||||||||
| Financing Activities | ||||||||||||||||||||||
| Gross proceeds from capital raise and warrants issued | 10,900 | — | — | |||||||||||||||||||
| Proceeds from issuance of convertible debt – related party | — | — | 1,500 | |||||||||||||||||||
| Cost of capital raise | (744 | ) | — | — | ||||||||||||||||||
| Proceeds from stock option exercises | 1,188 | 60 | — | |||||||||||||||||||
| Proceeds from short-term debt | — | — | 1,300 | |||||||||||||||||||
| Proceeds from the sale of subsidiary equity and warrants issued | 647 | 1,886 | — | |||||||||||||||||||
| Net cash provided by financing activities | 11,344 | 60 | 1,500 | 647 | 1,886 | 1,300 | ||||||||||||||||
| Increase (decrease) in cash and cash equivalents | 3,315 | (6,895 | ) | (5,988 | ) | 551 | 333 | (877 | ) | |||||||||||||
| Cash and cash equivalents - beginning of year | 11,230 | 14,545 | 7,650 | 1,118 | 785 | 1,662 | ||||||||||||||||
| Cash and cash equivalents - end of year | $ | 14,545 | $ | 7,650 | $ | 1,662 | $ | 1,669 | $ | 1,118 | $ | 785 | ||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
Description of Business
Mechanical Technology, Incorporated, (“MTI”(MTI or the “Company”)Company), a New York corporation, was incorporated in 1961. MTI operates in two segments, the New Energy segment which is conducted through MTI MicroFuel Cells Inc. (“MTI Micro”), a majority owned subsidiary, and the Test and Measurement Instrumentation segment, which is conducted through MTI Instruments, Inc. (“MTI Instruments”)(MTI Instruments), a wholly owned subsidiary.wholly-owned subsidiary, and the New Energy segment which is conducted through MTI MicroFuel Cells Inc. (MTI Micro), a variable interest entity (VIE) that is included in these consolidated financial statements and described further below in Note 2.
MTI Instruments was incorporated in New York on March 8, 2000 and is a worldwide supplier of precision non-contact physical measurement solutions, portable balance equipment and wafer inspection tools. MTI Instrument’s products use a comprehensive array of technologies to solve complex, real world applications in numerous industries including manufacturing, semiconductor, solar, commercial and military aviation, automotive and data storage. MTI Instrument’s products consist of electronic gauging instruments for position, displacement and vibration application within the design, manufacturing/production, test and research market; wafer characterization of semi-insulating and semi-conducting wafers within both the semiconductor and solar industries; tensile stage systems for materials testing at academic and industrial settings; and engine vibration analysis systems for both military and commercial aircraft.
At its MTI Micro subsidiary, the Company’swas incorporated in Delaware on March 26, 2001, and is developing Mobion® cord-free power packs are being developed, a handheld energy-generating device to replace current lithium-ion and similar rechargeable battery systems in many handheld electronic devices for the military and consumer markets. Mobion® power packshandheld generators are based on direct methanol fuel cell (DMFC) technology, which has been recognized as enabling technology for advanced portable power sources by the scientific community and industry analysts. As the need for advancements in portable power increases, MTI Micro is developing Mobion® cord-free rechargeable power pack technology as a superior solution for poweringadvancing current and future electronic device power needs of the multi-billion dollar portable electronics market.
At its MTI Instruments subsidiary, As of December 31, 2011, the Company continues to be a worldwide supplierowned approximately 47.6% of precision non-contact physical measurement solutions, condition based monitoring systems, portable balancing equipment and semiconductor wafer inspection tools. MTI Instruments’ products use a comprehensive array of technologies to solve complex real world applications in numerous industries including manufacturing, semiconductor, commercial/military aviation, automotive and data storage. The Company’s products consist of electronic gauging instruments for position, displacement and vibration applications within the design, manufacturing/production, test and research markets; semiconductor products for wafer characterization of semi-insulating and semi-conducting wafers within the semiconductor industry; and engine balancing and vibration analysis systems for both military and commercial aircraft.
Reverse Stock Split
Unless otherwise noted, all capital values, share, and per share amounts in the consolidated financial statements have been retroactively restated for the effects of the Company’s reverse split of its issued andMicro’s outstanding common stock at a rate of 1-for-8 which became effective on May 16, 2008. This action was approved by stockholders on May 15, 2008.stock.
Liquidity and Going Concern
The Company has historically incurred significant losses, as it continued to fundthe majority stemming from the direct methanol fuel cell product development and commercialization programs of its majority owned subsidiary, MTI MicroFuel Cells Inc. (“MTI Micro”),Micro, and had a consolidated accumulated deficit of $117,570 thousand$120.1 million as of December 31, 2011. During 2011, the Company generated net income attributed to MTI of $2.4 million and had working capital of $252 thousand at December 31, 2008. Because2011 of these losses, limited current$3.1 million, a $1.6 million increase from $1.5 million at December 31, 2010. This increase was primarily attributed to the reversal of a portion of the deferred tax asset’s valuation reserve of $1.5 million, representing the portion of the Company’s deferred tax asset that management has estimated is more likely than not to be realized, the improved result of operations for MTI Instruments, a continued hold on expenses, and capital raised through the issuance of MTI Micro stock. The Company had an operating cash cash equivalentssurplus of $67 thousand in 2011 and securities available for sale, negativecurrently has no debt. While it cannot be assured, management believes that MTI Instruments will continue to generate positive cash flows and accumulated deficit, the report ofbe able to fund the Company’s independent registered public accounting firmoperations for at least the next twelve months.
Although MTI Micro continues to believe in the potential of its Mobion® based power solutions, it has suspended its MTI Micro operations until such time as market demand and other deciding factors, including obtaining additional external financing, the successful completion of customer trials, a new development program with a government agency, and/or a customer order, come to fruition. MTI Micro had cash and cash equivalents as of December 31, 2011 of $110 thousand. Currently, MTI Micro has no employees and projects to spend between $5 and $10 thousand per month for operating activities including rent, preparing prototypes for customer demonstrations, minimal sales efforts, patent fees to keep the patent portfolio current and minimal consultant costs to perform these initiatives. If MTI Micro is unable to secure additional financing, a new development program or customer order, the MTI Micro board of directors will assess other options for MTI Micro, including the sale of MTI Micro’s intellectual property portfolio and other assets.
As of December 31, 2011, we had approximately $1.7 million of cash and cash equivalents to fund our future operations. During the year ended December 31, 2008 expressed substantial doubt about2011, our results of operations resulted in net income after the Company’s abilitynon-controlling interest allocation of $2.4 million and cash provided by operating activities totaling $67 thousand. We expect to continue as a going concern.
During 2008, the Company sold 1,137,166 shares of Plug Power Inc. (“Plug Power”) common stock with proceeds totaling $3,039 thousandspend approximately $1.4 million in research and gains totaling $1,018 thousand. These proceeds reflect the Company’s previous strategy to raise additional capital through the sale of Plug Power common stock in order to funddevelopment on MTI Micro operations.
At present, the Company does notInstruments’ products during 2012. We expect to continue to fund MTI Micro’s portable power source business. Based on the Company’s projected cash requirements forfunding our operations and capital expenditures and itsfrom current cash and cash equivalents, of $1,662 thousand at December 31, 2008, management believes it will have adequate resources to fund its current operations, excluding MTI Micro operations, through December 2009.
F-7
In September 2008, MTI Micro issued convertible secured notes to external investors, including Dr. Walter L. Robb, a member of the Company’s Board of Directors, totaling $1,500 thousand. In February 2009, MTI Micro issued a convertible secured note to an external investor, a fund managed by Dr. Walter L. Robb, a member of the Company’s Board of Directors, in the amount of $500 thousand (See Notes 17 and 18). In order to continue full commercialization of its micro fuel cell solution, MTI Micro will need to do one or more of the following to raise additional resources, or reduce its cash requirements:
There isfinancings and government funding. We may also seek to supplement our resources through the sales of assets (including our investment in MTI Micro). Besides the line of credit at MTI Instruments, we have no guarantee that resources willother commitments for funding future needs of the organization at this time and such additional financing during 2012 may not be available to MTI Microus on terms acceptable to it, or at all, or that such resources will be received in a timely manner,terms, if at all, or that MTI Micro will be able to reduce its expenditure run-rate without materially and adversely affecting its business. Based upon MTI Micro’s projected cash requirements for 2009 and its cash and cash equivalents of $700 thousand at December 31, 2008, plus the $500 thousand bridge loan in February 2009, management believes it will have adequate resources to fund its MTI Micro operations into the month of April 2009.all.
F-7
2. Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries.its’ wholly-owned subsidiary, MTI Instruments and its’ VIE, MTI Micro. The Company is the primary beneficiary of the VIE. All significant inter-company balances and transactions are eliminated in consolidation.
Minority interest in subsidiaries consists of equity securities issued by a subsidiary of the Company. No gain or loss was recognized as a result of the issuance of these securities, and the Company owned a majority of the voting equity of the subsidiary both before and after the transactions. The Company reflects the impact of the equity securities issuances in its investment in subsidiarya VIE and additional paid-in-capital accounts for the dilution or anti-dilution of its ownership interest in the subsidiary.VIE. It is the Company’s policy to reclassify prior year consolidated financial statements to conform to current year presentation, if applicable.
The Company has performed an analysis under the VIE model and determined that MTI Micro is a VIE. One of the criteria for determining whether an entity is a VIE is determining if the entity, MTI Micro, has equity at risk. Management has concluded that MTI Micro does not have equity at risk to fund operations into its next phase of development. Further, the Company has determined that it is the primary beneficiary of MTI Micro, and therefore should include MTI Micro’s results of operations in the Company’s consolidated financial statements.
The Company's analysis to determine the primary beneficiary of MTI Micro focused primarily on determining which variable interest holder has the power to direct the activities that would have the most significant impact on the financial performance of MTI Micro. MTI Micro is governed by its own board of directors and significant decisions are determined by a majority vote of this board. MTI does not have control of the MTI Micro board of directors; however, at this time, the Company’s board of directors and the MTI Micro board of directors consist of the same members. Under the Articles of Incorporation of MTI Micro, each share of MTI Micro stock is entitled to a vote, and further, holders of a majority of the shares of MTI Micro's common stock have the ability to reconstitute the board. As of December 31, 2011, MTI, Counter Point Ventures Fund II, LP (Counter Point), Dr. Walter L. Robb, a member of the Company’s and MTI Micro’s board of directors, and Peng Lim, CEO and board member own 47.6%, 45.2%, 5.1% and 0.5% of the common shares of MTI Micro, respectively. Counter Point is a venture capital fund sponsored and managed by Dr. Robb. Since no entity of the related parties has power but, as a group, the Company and its related parties have the power, then the party within the related party group that is most closely associated with the VIE, MTI Micro, is the primary beneficiary. Even though Dr. Robb and Counterpoint combined control a majority of the outstanding common stock, and they have the ability to elect the directors of MTI Micro and decide whether to continue to seek business opportunities for MTI Micro or instead seek opportunities to sell the intellectual property, they have not elected to do so. The Company continues to oversee the day to day operations, exercise management decision making, seek opportunities to sell intellectual properties, and have a vested interest in the commercialization of MTI Micro’s fuel cell technology. Since inception in 2001, the Company has made the largest investment and been the principal funder of MTI Micro. The Company has also been exposed to losses and has the ability to benefit from MTI Micro. Considering the facts and circumstances, management believes the Company is most closely associated with the VIE, MTI Micro, and therefore, it is the primary beneficiary.
Should there be a change in the facts and circumstances (such as a change in governance or a change to the related party group) management will reassess whether they act as the primary beneficiary and should continue to include MTI Micro in the Company’s consolidated results of operations.
Non-controlling interest in subsidiaries consists of equity securities issued by a VIE of the Company. Non-controlling interests are now classified as equity in the consolidated financial statements. The consolidated income statement is presented by requiring net income to include the net income for both the parent and the non-controlling interests, with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share is based on income amounts attributable to the parent.
Use of Estimates
The preparation of the consolidated financial statements isof the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”)(U.S. GAAP), which requiresrequire management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, unbilled contract costs and fees, derivatives and accounts payable. The estimated fair values of these financial instruments approximate their carrying values at December 31, 20072011 and 2008.2010. The estimated fair values have been determined through information obtained from market sources, where available, or Black-Scholes Option Pricing model valuations.
Fair Value Measurement
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements(“SFAS No. 157”). SFAS No. 157 applies to all financial instruments that are being measured and reported on a fair value basis. However, in February 2008, the FASB issued FASB Staff Position No. FAS 157-2,Effective Date of FASB Statement No. 157(“FSP No. 157-2”), which deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact of SFAS No. 157 on its consolidated financial statements for items within the scope of FSP No. 157-2, which will become effective on January 1, 2009.
Current items subject to SFAS No. 157 include financial assets including “Securities available for sale” (see Note 7) and financial liabilities including “Derivative liability” (see Note 15) on the balance sheet. As defined in SFAS No. 157, “fair value” is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation methods, the Company is required to provide the following information according to the fair value hierarchy as specified by SFAS No. 157. This hierarchy ranks the quality and reliability of the information used to determine fair values.
F-8
Financial assets and liabilities are classified and disclosed in one of the following three categories:
In determining the appropriate levels, the Company performs a detailed analysis of financial assets and liabilities that are subject to SFAS No. 157. At each reporting period, all assets and liabilities for which the fair value measurements are based upon significant unobservable inputs are classified as Level 3.
The following is a summary of the Company’s fair value instruments categorized by their associated fair value input level:
| (Dollars in thousands) | |||||||||||
| Balance | |||||||||||
| at December 31, | |||||||||||
| Balance Sheet Classification | Level 1 | Level 2 | Level 3 | 2008 | |||||||
| Financial Assets: | |||||||||||
| Securities available for sale | $ | — | $ | — | $ | — | $ | — | |||
| Total fair value of assets | $ | — | $ | — | $ | — | $ | — | |||
| Financial Liabilities: | |||||||||||
| Derivative liability | $ | — | $ | — | $ | 41 | $ | 41 | |||
| Total fair value of liabilities | $ | — | $ | — | $ | 41 | $ | 41 | |||
| The following is a rollforward of Level 3 fair value instruments for the year ended December 31, 2008: | |||||||||||
| (Dollars in thousands) | |||||||||||
| Total Gains / | |||||||||||
| Beginning | (Losses) | Purchases, | Ending Balance as | ||||||||
| Balance as of | Realized and | Issuances, Sales | of December 31, | ||||||||
| Instrument | Jan. 1, 2008 | Unrealized | and Settlements | 2008 | |||||||
| Derivative liability | $ | 696 | $ | 655 | $ | — | $ | 41 | |||
| Total Level 3 instruments | $ | 696 | $ | 655 | $ | — | $ | 41 | |||
Accounting for Derivative Instruments
The Company accounts for derivative instruments and embedded derivative instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The amended standard requires an entity to recognizerecognizes all derivatives as either assets or liabilities in the statement of financial position and measuremeasures these instruments at fair value. FairThe fair value of the derivative is estimatedrecorded in the “Derivative liability” line on the consolidated balance sheets, and is valued quarterly using the Black-Scholes Option Pricing model.Model. The Company also follows Emerging Issues Task Force (“EITF”) Issue No. 00-19,the accounting provisions for Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock,, which requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under thethese provisions, of EITF Issue No. 00-19, a contract designated as an asset or a liability must be carried at fair value, with any changes in fair value recorded in the results of operations. A contract designated as an equity instrument can be included in equity, with no fair value adjustments are required. Based on the terms and conditions of the warrant of the Company, the instrument does not qualify to be designated as an equity instrument and is therefore recorded as a derivative liability.
F-8
The asset/liability derivatives are valued on a quarterly basis using the Black-Scholes Option Pricing model.Model. Significant assumptions used in the valuation include exercise dates, closing market prices for the Company’s common stock, volatility of the Company’s common stock, and proxy risk-free interest rates. Gains (losses) on derivatives are included in the “Gain (loss) on derivatives” inline on the Consolidated Statementconsolidated statements of Operations.operations.
F-9
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recordedstated at the invoiced amount billed to customers and do not bear interest. An allowance for doubtful accounts, if necessary, represents the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience and current exposures identified. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market. The Company provides estimated inventory allowances for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value.
Property, Plant, and Equipment
Property, plant and equipment are stated at cost and depreciated using primarily the straight-line method over their estimated useful lives:lives as follows:
| Leasehold improvements | Lesser of the life of the lease or the useful life of the improvement |
| Computers and related software | 3 to 5 years |
| Machinery and equipment | 3 to 10 years |
| Office furniture, equipment and fixtures | 2 to 10 years |
Significant additions or improvements extending assets’ useful lives are capitalized; normal maintenance and repair costs are expensed as incurred. The costs of fully depreciated assets remaining in use are included in the respective asset and accumulated depreciation accounts. When items are sold or retired, related gains or losses are included in net (loss) income.
Income Taxes
The Company accounts for taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”), which requires the use of the assetDeferred tax assets and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxesliabilities are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable for future years totemporary differences between financial statement and income tax bases of existing assets and liabilities. Under SFAS No. 109, the effect ofliabilities, loss carryforwards, and tax rate changes on deferred taxes is recognized in thecredit carryforwards, for which income tax provisionbenefits are expected to be realized in the period that includes the enactment date. The provision for taxes is reduced by investment and other tax credits in the years such credits become available.future years. A valuation allowance is recordedhas been established to reduce the carrying amounts of deferred tax assets, unless it is more likely than not those assets will be realized.
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies) accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that all, or some portion, of such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the period which includes the enactment date.
The Company accounts for uncertain tax positions in accordance with accounting standards that address income taxes. The Company must recognize in its financial statements the impact of a tax position, willif that position is more likely than not to be sustained on an audit, based on the technical merits of the position.
F-9
Fair Value Measurement
The estimated fair value of certain financial instruments, including resolution of related appealscash, cash equivalents and short-term debt approximates their carrying value due to their short maturities and varying interest rates. “Fair value” is the price that would be received to sell an asset or litigation processes, if any. The second step is to measuretransfer a liability in an orderly transaction between market participants at the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.measurement date. The Company considers many factors when evaluatingutilizes valuation techniques that maximize the use of observable inputs and estimating its tax positionsminimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation methods, the Company is required to provide the following information according to the fair value accounting standards. These standards established a fair value hierarchy as specified that ranks the quality and tax benefits, which may require periodic adjustmentsreliability of the information used to determine fair values. Financial assets and which may not accurately forecast actual outcomes.liabilities are classified and disclosed in one of the following threecategories:
| Level 1: | Quoted market prices in active markets for identical assets or liabilities, which includes listed equities. |
| Level 2: | Observable market based inputs or unobservable inputs that are corroborated by market data. These items are typically priced using models or other valuation techniques. These models are primarily financial industry-standard models that consider various assumptions, including the time value of money, yield curves, volatility factors, as well as other relevant economic measures. |
| Level 3: | These use unobservable inputs that are not corroborated by market data. These values are generally estimated based upon methodologies utilizing significant inputs that are generally less observable from objective sources. |
Revenue Recognition
The Company applies the accounting guidance within SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition(“SAB No. 104”)for revenue recognition in the evaluation of its contracts to determine when to properly recognize revenue. Under SAB No. 104,The following outlines the various types of revenue is recognized when title and riskthe determination of loss have passed to the customer, there is persuasive evidencerecognition of an arrangement, the fee is fixed or determinable, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured.income for each category:
F-10
Product Revenue
Product revenue is recognized when there is persuasive evidence of an arrangement, the collection of a fixed fee is probable or determinable, and delivery of the product to the customer or distributor has occurred, at which time title generally is passed to the customer or distributor, alldistributor. All of whichthese generally occur upon shipment of the product. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions areis satisfied.
MTI Instruments currently has distributor agreements in place for the international sale of general instrument and semiconductor products in certain global regions. Such agreements grant a distributor the right of first refusal to act as distributor for such products in the distributor’s territory. In return, the distributor agrees to not market other products which are considered by MTI Instruments to be in direct competition with MTI Instruments’ products. The distributor is allowed to purchase MTI Instruments’ equipment at a price which is discounted off the published domestic/international list prices. Such list prices can be adjusted by MTI Instruments during the term of the distributor agreement, but MTI Instruments must provide advance notice at least 90 days before the price adjustment goes into effect. Generally, payment terms with the distributor are standard net 30 days; however, on occasion, extended payment terms have been granted. Title and risk of loss of the product passes to the distributor upon delivery to the independent carrier (standard “free-on-board” factory), and the distributor is responsible for any required training and/or service with the end-user. The sale (and subsequent payment) between MTI Instruments and the distributor is not contingent upon the successful resale of the product by the distributor. Distributor sales are covered by MTI Instruments’ standard one-year warranty and there are no special return policies for distributors.
Some of MTI Instruments’ direct sales, particularly sales of semi-automatic and fully-automated semiconductor metrology equipment, or rack-mounted vibration systems, involve on-site customer acceptance and/or installation. In those instances, revenue recognition does not take place at time of shipment. Instead, MTI Instruments recognizes the sale after the unit is installed and/or an on-site acceptance is given by the customer. Agreed-upon acceptance terms and conditions, if any, are negotiated at the time of purchase.
Funded Research and Development Revenue
The Company performs funded research and development for government agencies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as the services are performed. In each type of contract, the Company generally receives periodic progress payments or payments upon reaching interim milestones. When the current estimates of total contract revenue for commercial development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as research and development expense as incurred. When government agencies are providing funding they do not expect the government to be the only significant end user of the resulting products. These contracts do not require delivery of products that meet defined performance specifications, but are best efforts arrangements to achieve overall research and development objectives. Included in accounts receivable are billed and unbilled work-in-progress on contracts. Billings in excess of contract revenues earned are recorded as deferred revenue. While the Company’s accounting for government contract costs is subject to audit by the sponsoring entity, in the opinion of management, no material adjustments are expected as a result of such audits. Adjustments are recognized in the period made.
F-10
Commercial Research and Prototype Agreement Income
The Company also applies the proper accounting guidance in SAB No. 104 in the evaluation of commercially funded fuel cell research and prototype agreements in order to determine when to properly recognize income. Payments received in connection with commercial research and prototype agreements are deferred and recognized on a straight-line basis over the term of the agreement for service-related payments, and for milestone and prototype delivery payments, if and when achieved, revenue is deferred and recognized on a straight-line basis over the remaining term of the agreement. Under this policy, when revenue qualifies for recognition it will be recorded in the Consolidated Statements of Operations in the line titled “Funded research and development revenue.” The costs associated with research and prototype-producing activities are expensed as incurred. Expenses in an amount equal to revenues recognized are reclassified from the line titled “Unfunded research and product development” to “Funded research and product development” in the Consolidated Statements of Operations.
F-11
Information regarding MTI Micro’s government and commercial funded research and development contracts is as follows:
F-12
The Company’s cost-shared contracts require that MTI Micro conduct research, deliver direct methanol fuel cell prototypes, and other deliverables pursuant to predefined work plans and schedules. For cost-shared contracts spanning multiple years, the following table summarizes as of December 31, 2008 the total expenditures incurred or expected to be incurred by MTI Micro along with the related funded research and development revenue received or expected to be received:
| Total Contract Value | ||||
| Funded | Funded | |||
| Contract | Expense | Revenue | ||
| (dollars in thousands) | ||||
| DOE | $6,144 | $3,000 | ||
MTI Micro retains ownership of the intellectual property (“IP”) generated by MTI Micro under each of its federal government contract and under the contract with Samsung. Each federal government agency retains a government use license and march-in rights if MTI Micro fails to commercialize technology generated under the contract. In addition, under the New York State Energy Research and Development Authority (“NYSERDA”) contract, MTI Micro has the right to elect to retain any invention made under the NYSERDA contract within six months of invention. NYSERDA also retains rights to a government use license for New York State and its political subdivisions for any inventions made under the contract. Additionally, MTI Micro agreed to pay NYSERDA a royalty of 5.0% of the sales price of any product sold incorporating IP developed pursuant to the NYSERDA contract. If the product is manufactured by a New York State manufacturer, this royalty is reduced to 1.5%. Total royalties are subject to a cap equal to two times the total contract funds paid by NYSERDA to MTI Micro, and may potentially be reduced to reflect any New York State jobs created by MTI Micro.
Prototype Evaluation Agreements
The Company recognizes income derived from its micro fuel cell prototype evaluation agreements, where the Company receives a lump-sum amount from Original Equipment Manufacturers (“OEMs”)(OEMs) which are testing the Company’s Mobion® prototypes for an OEM-specific application, upon delivery of the evaluation prototypes. These prototypes are returned to the Company once the evaluation period expires. There are no warranties given to any OEM regarding these prototypes, and each evaluation agreement is considered a customer specific arrangement. The costs associated with executing these prototype evaluation arrangements are expensed in research and development expense as they are incurred. Income derived from these arrangements of $23 thousand in 2008 and zero in 2007 are recorded in the Consolidated Statements of Operations in the line titled “Other“Unfunded research and development expense” as they are incurred and income (expense), net.”derived from these arrangements is offset against the expense.
Cost of Product Revenue
Cost of product revenue includes material, labor, overhead and overhead.shipping and handling costs. Costs incurred in connection with funded research and development arrangements are included in funded research and product development expenses.
Deferred Revenue
Deferred revenue consists of payments received from customers in advance of services performed, completed installation or customer acceptance.
Warranty
The Company recordsaccrues a warranty reserveliability at the time product revenue is recorded based on a historical rate.experience. The reserveliability is reviewed during the year and is adjusted, if appropriate, to reflect new product offerings or changes in experience. Actual warranty claims are tracked by product line. Warranty liability was $26 thousand and $36 thousand at December 31, 2011 and 2010, respectively.
Accounting for Goodwill and Other Intangible Assets
Intangible assets include patents and trade names. Goodwill and other intangible assets are accounted for in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. Intangible assets with finite useful lives are amortized over those periods. Indefinite life intangible assets are tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Definite life assets are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss to be recorded is calculated by the excess of the assets carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Costs related to internally-developed intangible assets are expensed as incurred.
F-13
Accounting for Impairment or Disposal of Long-Lived Assets
The Company accounts for impairment or disposal of long-lived assets in accordance with SFAS No. 144, Accounting foraccounting standards that address the Impairment or Disposal of Long-Lived Assets. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets, and specifiesspecify how impairment will be measured, and how impaired assets will be classified in the consolidated financial statements. On a quarterly basis, the Company analyzes the status of its long-lived assets at each subsidiary for potential impairment. As of December 31, 2008,2011, the Company does not believe that any of its long-lived assets have suffered any type of impairment that would require an adjustment to that asset’s recorded value.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of less than three months.
Securities Available for SaleNet Income (Loss) per Share
Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such determinations at each balance sheet date. Marketable securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale. Securities available for sale are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of stockholders’ equity. The Company has had no investments that qualify as trading or held to maturity. Realized gains and losses are included in the caption “Gain (loss) on sale of securities available for sale” in the Consolidated Statements of Operations. The cost of securities sold is based on the specific identification method.
Net (Loss) Income per Common Share
The Company reports net (loss)computes basic income per basic and diluted common share in accordance with SFAS No. 128, Earnings Per Share, which establishes standards for computing and presenting (loss) income per share. Basic earnings (loss) per common share are computed by dividing net income (loss) income by the weighted average number of common shares outstanding during the reporting period. Diluted income (loss) income per share reflects the potential dilution, if any, computed by dividing netincome (loss) income by the combination of dilutive common share equivalents, comprised of shares issuable under outstanding investment rights, warrants and the Company’s share-based compensation plans, and the weighted average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money stock options, which are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of a stock option, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of windfall tax benefits that would be recorded in additional paid-in capital, if any, when the stock option is exercised are assumed to be used to repurchase shares in the current period.
F-11
Share-Based Payments
The Company accounts for stock based awards exchanged for employee service in accordance with the stock-based payment accounting guidance. The Company has three share-based employee compensation plans and MTI Micro has onetwo share-based employee compensation plan,plans, all of which are described more fully in Note 13, Stock Based Compensation.
In December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS No. 123 (“FAS 123R”),Share-Based Payment, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. The accounting provisions of FAS 123R were adopted by the Company as of January 1, 2006. In March 2005, the SEC issued SAB 107,Share-Based Payment(“SAB 107”) to assist filers by simplifying some of the implementation challenges of FAS 123R. In particular, SAB 107 provides supplemental implementation guidance on FAS 123R, including guidance on valuation methods, classification of compensation expense, inventory capitalization of share-based compensation cost, income tax effects, disclosures in Management’s Discussion and Analysis and several other issues. The Company applied the principles of SAB 107 in conjunction with its adoption of FAS 123R.
Under FAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. The Company has awards with performance conditions, but no awards with market conditions. The Company adopted the provisions of FAS 123R on January 1, 2006, the first day of the Company’s fiscal year, using the modified prospective application, which provided for certain changes to the method for valuing share-based compensation. Under the modified prospective application, prior periods were not revised for comparative purposes. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under the original FASB Statement No. 123,Accounting for Stock-Based Compensation (“FAS 123”).
F-14
In November 2005, the FASB issued Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123R. This method included a simplified method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R.
Prior to the adoption of FAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations as permitted under FAS 123. Under the intrinsic value method, stock-based compensation was typically only recognized by the Company due to modifications in option provisions, since the exercise price of the Company’s and MTI Micro’s common stock options granted to employees and directors generally equaled the fair market value of the underlying stock at the date of grant.
Stock-based compensation represents the cost related to stock-based awards granted to employees and directors. The Company measures stock-based compensation cost at grant date based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis in accordance with the vesting of the options (net of estimated forfeitures) over the option’s requisite service period. The Company estimates the fair value of stock-based awards using a Black Scholes valuation model. Stock-based compensation expense is recorded in the lines titles “Selling, general and administrative expenses” and “Unfunded research and product development expenses” in the Consolidated Statements of Operations based on the employees’ respective functions.
The Company records deferred tax assets for awards that potentially can result in deductions on the Company’s income tax returns based on the amount of compensation cost that would be recognized upon issuance of the award and the Company’s statutory tax rate. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the Company’s income tax return are recorded in Additional Paid-In Capital (if the tax deduction exceeds the deferred tax asset) or in the Consolidated Statement of Operations (if the deferred tax asset exceeds the tax deduction and no historical pool of windfall tax benefits exists). Since the adoption of FAS 123R,the revised accounting standard on share-based payments, no tax benefits have been recognized related to share-based compensation since the Company has incurred net operating losses and has established a full valuation allowancedallowance to offset all potential tax benefits associated with these deferred tax assets. The Company continues to record the fair market value of stock options and warrants granted to non-employees and non-directors in exchange for services in accordance with EITF Issue No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, in the Consolidated Statements of Operations.
Advertising
The costs of advertising are expensed as incurred. Advertising expense was approximately $110, $102, and $92 thousand for the years ended December 31, 2006, 2007, and 2008, respectively.
Concentration of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents, marketable securities, trade accounts receivable and unbilled contract costs.
The Company’s trade accounts receivable and unbilled contract costs and fees are primarily from sales to commercial customers, the U.S. government and state agencies. The Company does not require collateral and has not historically experienced significant credit losses related to receivables or unbilled contract costs and fees from individual customers or groups of customers in any particular industry or geographic area.
The Company has cash deposits itsin excess of federally insured limits. The amount of such deposits is essentially all cash and invests in marketable securities primarily through commercial banks and investment companies. Credit exposure to any one entity is limited by Company policy.at December 31, 2011.
Research and Development Costs
The Company expenses research and development costs as incurred.
F-15
Comprehensive (Loss) Income
Comprehensive (loss) income includes net (loss) income, as well as changes in stockholders’ equity, other than those resulting from investments by stockholders (i.e., issuance or repurchase of common shares and dividends).
Effect of Recent Accounting Pronouncements
In June 2008, the FASB Staff Position EITF No. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(“EITF No. 03-6-1”). EITF No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” EITF No. 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. It is effective for calendar-year companies beginning January 1, 2009. The Company is currently assessing the potential impact of implementing this standard.
In May 2008,September 2011, the FASB issued FASB Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP14-1). This staff position applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." FSP 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rateguidance on the instrument’s issuance date when interest cost is recognized.presentation of comprehensive income. This staff position is effective for financial statements issued for fiscal years beginning after December 15, 2008,guidance eliminates the current option to report other comprehensive income and interim periods within those fiscal years. Early adoption is not allowed. The Company expects that the adoption of FSP 14-1 will not have a material effect on the financial statements.
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles (“FASB No. 162”). This standard identifies the sources of accounting principles and the framework for selecting the principles to be usedits components in the preparationstatement of financialchanges in equity. The guidance allows two presentation alternatives: (1) present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income; or (2) in two separate, but consecutive, statements that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). The standard is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently assessing the potential impact of implementing this standard.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3,Determination of the Useful Life of Intangible Assets(“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwillnet income and Other Intangible Assets.” The objective of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and GAAP. FSP FAS 142-3 is effective for financial statements issued for years beginning after December 15, 2008, and interim periods within those years and applied prospectively to intangible assets acquired after the effective date. Since the Company’s consolidated financial statements presently do not include any intangible assets, it does not expect the adoption of FSP FAS 142-3 to have a material impact on its financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”).SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedging items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedging items affect an entity’s financial position, financial performance, and cash flows.other comprehensive income. This statementguidance is effective as of the beginning of an entity’s firsta fiscal year beginning after November 15, 2008. This statement will be effective for the Company for its fiscal year beginning January 1, 2009. The Company has not yet determined the impact, if any, of this statement on its Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141R,Business Combinations—a replacement of FASB Statement No. 141(“SFAS No. 141R”), which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginningthat begins after December 15, 2008. This2011. Early adoption is permitted, but full retrospective application is required under both sets of accounting standards. The guidance also previously required the presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement will be effective forwhere the Company for its fiscal year beginning January 1, 2009.components of net income and the components of other comprehensive income are presented; however, this portion of the guidance has been deferred. The Company has not yet determinedplans to adopt the impact, if any, of this statement on its Consolidated Financial Statements.
F-16
In December 2007,guidance during the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 requires that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish betweenquarter ended March 31, 2012. The Company believes the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. This statement will be effective for the Company for its fiscal year beginning January 1, 2009. Based upon the December 31, 2008 balance sheet, the impact of adopting SFAS No. 160 would be to reclassify $11 thousand from minority interests in consolidated subsidiaries to the Company’s stockholders’ equity section as a separate component of stockholders’ equity. In addition, the exercise of existing convertible notes could result in a change of ownership structure of MTI Micro and in the related accounting.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The adoption of this statement on January 1, 2008 didnew guidance will not have a material effectimpact on its condensed consolidated financial statements as this update has an impact on presentation only.
Reclassifications
Prior period amounts related to inventory have been reclassified to conform to the Company’s Consolidated Financial Statements as the Company did not elect to implement the fair value option for its marketable equity securities.current period presentation.
F-12
3. Accounts Receivable and Allowance for Doubtful Accounts
ReceivablesAccounts receivables consist of the following at December 31:
| 2007 | 2008 | 2011 | 2010 | ||||||||
| (dollars in thousands) | (dollars in thousands) | ||||||||||
| U.S. and State Government: | |||||||||||
| Amount billable | $ | 0 | $ | 102 | $ | — | $ | 30 | |||
| Amount billed | 79 | 4 | 990 | 313 | |||||||
| Total U.S. and State Government | 79 | 106 | 990 | 343 | |||||||
| Commercial | 1,290 | 434 | 891 | 743 | |||||||
| Total | $ | 1,369 | $ | 540 | $ | 1,881 | $ | 1,086 | |||
As of December 31, 20072011 and 2008,2010, the Company concluded that a reservehad no allowance for doubtful trade accounts receivable was not considered necessary.receivable.
4. Issuance of Stock by Subsidiary
MTI Micro was formed on March 26, 2001 and as of December 31, 2008, the Company owns approximately 97% of MTI Micro’s outstanding common stock.
On December 31, 2006, MTI Micro issued 3,772,727 shares of its common stock at a price of $1.10 per share to the Company in connection with the conversion of its $4,150 thousand loan receivable to equity; on December 1, 2006, MTI Micro issued 739 shares of its common stock at a price of $1.61 per share to the Company as compensation for the minority stockholder benefit in connection with the Company issuing Company options to MTI Micro employees; on November 11, 2006, MTI Micro issued 1,960,506 shares of its common stock at a price of $1.06 per share to the Company in connection with the transfer of $2,070 thousand worth of Plug Power common stock to MTI Micro; on September 30, 2006, MTI Micro issued 2,574,627 shares of its common stock at a price of $1.34 per share to the Company in connection with the conversion of its $3,450 thousand loan receivable to equity; on September 1, 2006, MTI Micro issued 56,055 shares of its common stock at a price of $3.10 per share to the Company as compensation for the minority stockholder benefit in connection with the Company issuing Company options to MTI Micro employees; on May 27, 2006, MTI Micro issued 50,158 shares of its common stock at a price of $2.32 to the Company as compensation for the minority stockholder benefit in connection with the Company issuing Company options to MTI Micro employees; between April 11 and April 18, 2006, MTI Micro issued 1,662,400 shares of its common stock at a price of $2.50 per share to the Company in connection with the transfer of $4,156 thousand worth of Plug Power common stock to MTI Micro; and on March 31, 2006, MTI Micro issued 1,400,000 shares of its common stock at a price of $2.50 per share to the Company in connection with the conversion of its $3,500 thousand loan receivable to equity.
F-17
Between October 10 and October 25, 2007, MTI Micro issued 4,050,488 shares of its common stock at a price between $0.37 and $0.41 per share to the Company in connection with the transfer of $2,808 thousand worth of Plug Power common stock to MTI Micro; on November 16, 2007, MTI Micro issued 1,630,339 shares of its common stock at a price of $0.33 per share to the Company in connection with the transfer of $1,113 thousand worth of Plug Power common stock to MTI Micro; on September 1, 2007, MTI Micro issued 35,625 shares of its common stock at a price of $0.62 per share to the Company as compensation for the minority stockholder benefit in connection with the Company issuing Company options to MTI Micro employees; on September 30, 2007, MTI Micro issued 2,740,715 shares of its common stock at a price of $0.69 per share to the Company in connection with the conversion of its $1,900 thousand loan receivable to equity; on June 1, 2007, MTI Micro issued 8,653 shares of its common stock at a price of $0.94 per share to the Company as compensation for the minority stockholder benefit in connection with the Company issuing Company options to MTI Micro employees; on June 30, 2007, MTI Micro issued 6,083,334 shares of its common stock at a price of $0.60 per share to the Company in connection with the conversion of its $3,650 thousand loan receivable to equity; on March 1, 2007, MTI Micro issued 682 shares of its common stock at a price of $0.98 per share to the Company as compensation for the minority stockholder benefit in connection with the Company issuing Company options to MTI Micro employees; and on March 31, 2007, MTI Micro issued 4,243,721 shares of its common stock at a price of $0.84 per share to the Company in connection with the conversion of its $3,550 thousand loan receivable to equity.
On September 1, 2008, MTI Micro issued 22,738 shares of its common stock at a price of $0.36 per share to the Company as compensation for the minority shareholder benefit in connection with the Company issuing its options to MTI Micro employees; on June 30, 2008, MTI Micro issued 10,416,667 shares of its common stock to the Company at a price of $0.24 per share in connection with conversion of its $2,500 thousand loan receivable to equity; on June 4, 2008, MTI Micro issued 5,464,612 shares of its common stock to the Company at a price of $0.33 per share in connection with the transfer of $1,810 thousand worth of Plug Power common stock to MTI Micro; on June 1, 2008, MTI Micro issued 78 shares of its common stock at a price of $0.44 per share to the Company as compensation for the minority shareholder benefit in connection with the Company issuing its options to MTI Micro employees; on April 1, 2008, MTI Micro issued 1,854,569 shares of its common stock to the Company at a price of $0.42 per share in connection with the transfer of $1,855 thousand worth of Plug Power common stock to MTI Micro; on March 1, 2008, MTI Micro issued 8,653 shares of its common stock at a price of $0.68 per share to the Company as compensation for the minority shareholder benefit in connection with the Company issuing its options to MTI Micro employees.
The decrease in the Company’s paid-in-capital of $1,284, $521, and $128 thousand in 2006, 2007, and 2008, respectively, represents the changes in the Company’s equity investment in MTI Micro, which resulted from the anti-dilutive impact of the Company’s investments into and third-party stock transactions in MTI Micro stock.
5. Inventories
Inventories net consist of the following at December 31:
| 2007 | 2008 | 2011 | 2010 | ||||||||
| (dollars in thousands) | (dollars in thousands) | ||||||||||
| Finished goods | $ | 467 | $ | 772 | $ | 310 | $ | 283 | |||
| Work in process | 168 | 449 | 211 | 156 | |||||||
| Raw materials, net | 738 | 288 | |||||||||
| Raw materials | 436 | 405 | |||||||||
| $ | 1,373 | $ | 1,509 | $ | 957 | $ | 844 | ||||
As of December 31, 2011 and 2010, the Company had an inventory reserve of $243 thousand and $393 thousand, respectively.
6.5. Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31:
| 2007 | 2008 | 2011 | 2010 | ||||||||
| (dollars in thousands) | (dollars in thousands) | ||||||||||
| Leasehold improvements | $ | 1,213 | $ | 1,213 | $ | 1,213 | $ | 1,213 | |||
| Computers and related software | 2,241 | 2,199 | 2,130 | 2,164 | |||||||
| Machinery and equipment | 3,895 | 4,018 | 3,541 | 3,823 | |||||||
| Office furniture and fixtures | 303 | 299 | 457 | 473 | |||||||
| 7,652 | 7,729 | 7,341 | 7,673 | ||||||||
| Less accumulated depreciation | 5,493 | 6,201 | 7,083 | 7,248 | |||||||
| $ | 2,159 | $ | 1,528 | $ | 258 | $ | 425 | ||||
Depreciation expense was $1,101, $1,129,$307, $481, and $819$660 thousand for 2006, 2007,2011, 2010, and 2008,2009, respectively. Repairs and maintenance expense was $75, $82,$39, $18, and $57$20 thousand for 2006, 2007,2011, 2010, and 2008,2009, respectively.
F-18F-13
7. Securities Available for Sale
Securities available for sale are classified as current assets and accumulated net unrealized gains (losses) are charged to other comprehensive income (loss).
The principal components of the Company’s securities available for sale consist of the following at:
| Quoted | |||||||||||||||||
| Market | |||||||||||||||||
| Recorded | Price | ||||||||||||||||
| Book | Unrealized | Fair | Per | ||||||||||||||
| Security | Basis | Gain | Value | NASDAQ | Ownership | Shares | |||||||||||
| (dollars in thousands, except stock price and share data) | |||||||||||||||||
| December 31, 2007 | |||||||||||||||||
| Plug Power | $ | 2,021 | $ | 2,471 | $ | 4,492 | $ | 3.95 | 1.29 | % | 1,137,166 | ||||||
| December 31, 2008 | |||||||||||||||||
| Plug Power | $ | 0 | $ | 0 | $ | 0 | 0 | % | 0 | ||||||||
The book basis roll forward of Plug Power securities as of December 31 is as follows:
| 2007 | 2008 | |||||||
| (dollars in thousands) | ||||||||
| Securities available for sale, beginning of period | $ | 10,075 | $ | 4,492 | ||||
| Sale of shares | (8,054 | ) | (4,492 | ) | ||||
| Securities book basis | 2,021 | 0 | ||||||
| Unrealized gain on securities available for sale | 2,471 | 0 | ||||||
| Securities available for sale, end of period | $ | 4,492 | $ | 0 | ||||
Accumulated unrealized gains related to securities available for sale for each of the years ended December 31 are as follows:
| 2006 | 2007 | 2008 | |||||||||
| (dollars in thousands) | |||||||||||
| Accumulated unrealized gains | $ | 5,473 | $ | 2,471 | $ | 0 | |||||
| Accumulated deferred tax expense on unrealized gains | (4,489 | ) | (1,971 | ) | 0 | ||||||
| Accumulated net unrealized gains | $ | 984 | $ | 500 | $ | 0 | |||||
Realized gains related to Plug Power securities available for sale sold during each of the years ended December 31 are as follows:
| 2006 | 2007 | 2008 | |||||||
| (dollars in thousands, except shares) | |||||||||
| Shares sold | 1,103,500 | 1,452,770 | 1,137,166 | ||||||
| Proceeds | $ | 6,249 | $ | 5,130 | $ | 3,039 | |||
| Total net gain on sales | $ | 4,289 | $ | 2,549 | $ | 1,018 | |||
The Company regularly reviews its securities available for sale to determine if any declines in value of those securities available for sale are other than temporary. The Company assesses whether declines in the value of its securities in publicly traded companies, measured by comparison of the current market price of the securities to the carrying value of the Company’s securities, are considered to be other than temporary based on factors that include the length of time carrying value exceeds fair market value, the Company’s assessment of the financial condition and the near term prospects of the companies and the Company’s intent with respect to the securities.
F-19
8.6. Income Taxes
Income tax benefit (expense) benefit for each of the years ended December 31 consists of the following:
| 2006 | 2007 | 2008 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Operations before minority interest | ||||||||||||
| Federal | $ | — | $ | — | $ | — | ||||||
| State | (5 | ) | (30 | ) | (33 | ) | ||||||
| Deferred | (1,890 | ) | (2,518 | ) | (1,971 | ) | ||||||
| Total | $ | (1,895 | ) | $ | (2,548 | ) | $ | (2,004 | ) | |||
Income tax benefit (expense) allocated directly to stockholders’ equity for each of the years ended December 31 is as follows:
| 2006 | 2007 | 2008 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Total change in unrealized (gain) loss on securities available for sale: | ||||||||||||
| Deferred tax benefit (expense) | $ | 2,774 | $ | 1,201 | 989 | |||||||
| Valuation allowance (expense) | (2,774 | ) | (1,201 | ) | (989 | ) | ||||||
| Tax effect of reclassification adjustment for gains included in | ||||||||||||
| net income (loss) | 1,913 | 2,518 | 1,971 | |||||||||
| $ | 1,913 | $ | 2,518 | $ | 1,971 | |||||||
| 2011 | 2010 | 2009 | |||||||
| (dollars in thousands) | |||||||||
| Federal | $ | — | $ | — | $ | 9 | |||
| State | 13 | (4 | ) | 199 | |||||
| Deferred | 1,535 | — | — | ||||||
| Total | $ | 1,548 | $ | (4 | ) | $ | 208 | ||
The significant components of deferred income tax (expense) benefit from operations before minoritynon-controlling interest for each of the years ended December 31 consists of the following:
| 2006 | 2007 | 2008 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Deferred tax benefit (expense) | $ | 1,158 | $ | 1,181 | $ | 721 | ||||||
| Net operating loss carry forward | 3,983 | 3,069 | 3,837 | |||||||||
| Valuation allowance | (5,118 | ) | (4,250 | ) | (4,558 | ) | ||||||
| Disproportionate tax effect of reclassification adjustment for | ||||||||||||
| gains included in net income (loss) | (1,913 | ) | (2,518 | ) | (1,971 | ) | ||||||
| $ | (1,890 | ) | $ | (2,518 | ) | $ | (1,971 | ) | ||||
| 2011 | 2010 | 2009 | |||||||||
| (dollars in thousands) | |||||||||||
| Deferred tax benefit | $ | (402 | ) | $ | 675 | $ | 432 | ||||
| Net operating loss carry forward | (6,035 | ) | 740 | (1,927 | ) | ||||||
| Valuation allowance | 7,972 | (1,415 | ) | 1,495 | |||||||
| $ | 1,535 | $ | — | $ | — | ||||||
The Company’s effective income tax rate from operations before minoritynon-controlling interest differed from the Federal statutory rate for each of the years ended December 31 is as follows:
| 2006 | 2007 | 2008 | 2011 | 2010 | 2009 | |||||||||||||||
| Federal statutory tax rate | 34 | % | 34 | % | 34 | % | 34 | % | 34 | % | 34 | % | ||||||||
| State taxes, net of federal tax effect | 3 | 1 | 3 | (45 | ) | 6 | — | |||||||||||||
| Impact of adjustments to state tax rates | 3,099 | — | — | |||||||||||||||||
| Change in valuation allowance | (37 | ) | (56 | ) | (42 | ) | (7,972 | ) | (42 | ) | 42 | |||||||||
| Disproportionate tax effect of reclassification | ||||||||||||||||||||
| adjustment for gains included in net income (loss) | (13 | ) | (28 | ) | (16 | ) | ||||||||||||||
| Permanent tax difference on derivative valuation | — | 16 | 2 | (25 | ) | — | — | |||||||||||||
| Loss on extinguishment of debt | — | — | (2 | ) | ||||||||||||||||
| IRC Section 382 Limitation | 3,097 | — | (64 | ) | ||||||||||||||||
| Expiring net operating loss | 3 | (3 | ) | — | ||||||||||||||||
| Adjustment to opening deferred tax balance | 260 | 5 | (3 | ) | ||||||||||||||||
| Other, net | (2 | ) | — | — | 1 | — | (1 | ) | ||||||||||||
| Tax Rate | (15 | )% | (33 | )% | (19 | )% | (1,548 | )% | 0 | % | 6 | % | ||||||||
F-20
Pre-tax lossgain (loss) before minoritynon-controlling interests was $12,980, $7,609,$100 thousand, $(3.4) million, and $10,760 thousand$(3.6) million for 2006, 2007,2011, 2010, and 2008,2009, respectively. The
F-14
Deferred Tax Assets:
Deferred tax assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates. Temporary differences, net operating loss carryforwards and tax credit carryforwards that give rise to deferred tax assets and liabilities are summarized as follows as of December 31:
| 2011 | 2010 | ||||||
| (dollars in thousands) | |||||||
| Current deferred tax assets: | |||||||
| Inventory valuation | $ | 84 | $ | 157 | |||
| Inventory capitalization | 11 | 13 | |||||
| Vacation pay | 57 | 77 | |||||
| Warranty and other sale obligations | 9 | 14 | |||||
| Other reserves and accruals | 111 | 63 | |||||
| 272 | 324 | ||||||
| Valuation allowance – current | (252 | ) | (324 | ) | |||
| Net current deferred tax assets | $ | 20 | $ | — | |||
| Noncurrent deferred tax assets: | |||||||
| Net operating loss | $ | 17,654 | $ | 23,688 | |||
| Property, plant and equipment | 53 | 366 | |||||
| Stock options | 2,880 | 2,918 | |||||
| Research and development tax credit | 450 | 450 | |||||
| Alternative minimum tax credit | 54 | 54 | |||||
| 21,091 | 27,476 | ||||||
| Valuation allowance – noncurrent | (19,576 | ) | (27,476 | ) | |||
| Non-current net deferred tax assets | $ | 1,515 | $ | — | |||
As of December 31, consist2011, the Company has approximately $450 thousand of research and development tax credit carry forwards, which begin to expire in 2018, and approximately $54 thousand of alternative minimum tax credit carry forwards, which have no expiration date.
Valuation Allowance:
The Company provides for recognition of deferred tax assets if the realization of such assets is more likely than not to occur in accordance with accounting standards that address income taxes. Significant management judgment is required in determining the period in which the reversal of a valuation allowance should occur. The Company has 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 whether a full or partial release of our valuation allowance is required. In addition, the Company’s 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.
As a result of our analyses in 2011, the Company released a portion of our valuation allowance against our deferred tax assets. The partial release of the followingvaluation allowance caused an incremental tax effects relatingbenefit of $1.5 million to be recognized in the fourth quarter of 2011. The release of a portion of the valuation allowance was based upon a recent cumulative income history for MTI and Subsidiaries exclusive of MTI Micro (MTI Micro files separate federal and state tax returns) causing the Company to evaluate what portion of the Company's deferred tax assets it believes are more likely that not to be realized. The Company has determined that it will generate sufficient levels of pre-tax earnings in the future to realize the net deferred tax assets recorded on the balance sheet at December 31, 2011. The Company has projected such pre-tax earnings utilizing a combination of historical and projected results, taking into consideration existing levels of permanent differences, non-deductible expense and the reversal of significant temporary differencesdifferences. The Company needs to generate approximately $225 thousand of taxable income in each year over the next twenty years to ensure the realizability of the approximately $1.5 million of deferred tax assets recorded on the balance sheet at December 31, 2011.
The Company believes that the accounting estimate for the valuation of deferred tax assets is a critical accounting estimate because judgment is required in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. The Company based our estimate of deferred tax assets and carry forwards:liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, the Company may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations.
| 2007 | 2008 | |||||||
| (dollars in thousands) | ||||||||
| Current deferred tax (liabilities) assets: | ||||||||
| Inventory valuation | $ | 73 | $ | 204 | ||||
| Inventory capitalization | 13 | 13 | ||||||
| Securities available for sale | (1,362 | ) | — | |||||
| Vacation pay | 147 | 77 | ||||||
| Warranty and other sale obligations | 29 | 12 | ||||||
| Other reserves and accruals | 56 | 22 | ||||||
| (1,044 | ) | 328 | ||||||
| Valuation allowance | (300 | ) | (328 | ) | ||||
| Net current deferred tax liabilities | $ | (1,344 | ) | $ | — | |||
| Noncurrent deferred tax assets (liabilities): | ||||||||
| Net operating loss | $ | 21,037 | $ | 24,874 | ||||
| Property, plant and equipment | 27 | 27 | ||||||
| Stock options | 1,800 | 2,138 | ||||||
| Research and development tax credit | 459 | 459 | ||||||
| Alternative minimum tax credit | 54 | 54 | ||||||
| 23,377 | 27,552 | |||||||
| Valuation allowance | (22,033 | ) | (27,552 | ) | ||||
| Non-current net deferred tax assets | $ | 1,344 | $ | — | ||||
The valuation allowance at December 31, 20072011 and 20082010 was $22,333$19.8 million and $27,880 thousand,$27.8 million, respectively. The net changeActivity in the valuation allowance was $3,518 thousand in 2007 and $5,547 thousand in 2008. for deferred tax assets is as follows as of December 31:
| 2011 | 2010 | 2009 | ||||||||
| (dollars in thousands) | ||||||||||
| Valuation allowance, beginning of year | $ | 27,800 | $ | 26,385 | $ | 27,880 | ||||
| Deductions resulting in income tax benefit | (1,535 | ) | — | — | ||||||
| Additions charged to other accounts | — | 1,415 | — | |||||||
| Deduction charged to other accounts | (6,437 | ) | — | (1,495 | ) | |||||
| Valuation allowance, end of year | $ | 19,828 | $ | 27,800 | $ | 26,385 | ||||
The remaining valuation allowance at December 31, 20072011 of $19.8 million primarily relates to net operating losses and 2008 reflectsstock based compensation. The Company will continue to evaluate the estimate that it is more likely than not that the netability to realize our deferred tax assets may not be realized. During 2007, in addition to the increases in theand related valuation allowance reflected in continuing operations of $4,250 thousand and reflected in stockholders equity of $1,201 thousand, the valuation allowance was decreased by $1,933 thousand as the result of the adoption of FIN 48.allowances on a quarterly basis.
Net operating losses:
At December 31, 2008,2011, the Company has unused Federal net operating loss carry forwards of approximately $63,511 thousand. Of these$66.9 million.
As a result of the conversion of the Bridge Notes in December of 2009 (see Note 17 for further discussion of the transaction), MTI no longer maintained an 80% or greater ownership in MTI Micro. Thus, MTI Micro is no longer included in Mechanical Technology, Incorporated and Subsidiaries' consolidated federal and combined New York State tax returns, effective December 9, 2009. Pursuant to the Internal Revenue Service's consolidated tax return regulations (IRS Regulation Section 1.1502-36), upon MTI Micro leaving the Mechanical Technology, Incorporated and Subsidiaries’ consolidated group, MTI has elected to reduce a portion of its stock tax basis in MTI Micro by "reattributing" a portion of MTI Micro's net operating loss carryforwards to MTI, for an amount equivalent to its built in loss in MTI's investment in MTI Micro's stock. As the result of MTI making this election with its December 31, 2009 tax return, MTI reattributed approximately $45.2 million of MTI Micro's net operating losses (reducing its tax basis in MTI Micro's stock by the same amount), leaving MTI Micro with approximately $13 million of separate company net operating loss carry forwards $1,325 thousandat the time of conversion of the Bridge Notes.
As of December 31, 2011, it is estimated that MTI has net operating loss carryforwards of approximately $50.4 million and MTI Micro has net operating loss carryforwards of approximately $16.5 million. Of the Company’s carry forwards, $1.3 million represents windfall tax benefits from stock option transactions, the tax effect of which are not included in the Company’s net deferred tax assets. The Federal net operating loss carry forwards, if unused, will begin to expire in 2010.
In addition, a formal Section 382 study was performed for both the Company and MTI Micro. The Company's and/or its subsidiaries’ ability to utilize their net operating loss carryforwards may be significantly limited by Section 382 of the Internal Revenue CodeIRC of 1986, as amended, if the Company or any of its subsidiaries undergoes an “ownership change” as a result of subsequent changes in the ownership of the Company's or its subsidiaries’ outstanding stock pursuant to the exercise of the warrants the conversion of the notes, or otherwise. A corporation generally undergoes an “ownership change” when the ownership of its stock, by value, changes by more than 50 percentage points over any three-year testing period. In the event of an ownership change, IRC Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change net operating loss carryforwards and certain recognized built-in losses.
As of December 31, 2008, although no formal 382 study has been performed,2011, the Company and its subsidiaries dodoes not appear to have had an ownership change for IRC Section 382 purposes. However, when combined with the changes that the Company has experienced through December 31, 2008, any additional change in ownership that couldas a result from the conversion of MTI Micro’s convertible notes payable is likely to trigger aissuance of stock between 2009 and 2011, MTI Micro has had an ownership change for IRC Section 382 ownership change that will subject MTI Micro’s net operating loss carryforwards to significant annual Section 382purposes which places limitations and will likely result in MTI Micro no longer being permitted to be included in Mechanical Technology, Inc. and Subsidiaries' consolidated federal and combined New York State tax returns, resulting in Mechanical Technology, Inc. not being able to utilize MTI Micro's net operating losses.
on the utilization of MTI Micro’s separate company net operating loss carryforwardscarryforwards. MTI Micro’s net operating losses have been reduced by $14.6 million. This net operating loss limited by IRC Section 382 is not reflected in the Company’s deferred tax asset as of December 31, 2008, which are currently included with Mechanical Technology, Inc.'s consolidated2011.
The balance of the Company’s net operating losses carried forward from 2010 of $67.2 million was reduced by $8 thousand in expired net operating losses. The remaining Federal net operating loss carryforwards, equal approximately $59.6 million.
As of December 31, 2008,carry forwards, if unused, will continue to expire beginning in 2020 for the Company, has approximately $459 thousand of research and development2022 for MTI Micro.
F-16
Unrecognized tax credit carry forwards, which begin to expire in 2018, and approximately $54 thousand of alternative minimum tax credit carry forwards, which have no expiration date. Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates.
F-21
The Company adopted the provisions of FIN 48 on January 1, 2007, the first day of its 2007 fiscal year. As a result of the implementation of FIN 48, the Company recorded a $106 thousand increase in the net liability for uncertain tax positions, which was recorded as an adjustment to the Company’s opening balance of retained earnings on January 1, 2007. Additionally, the same tax position that triggered the Company’s FIN 48 adoption charge caused the Company to reclassify $80 thousand from current income taxes payable to non-current liabilities for uncertain tax positions.benefits:
A reconciliation of the beginning and ending amount of unrecognized tax benefits in accordance with FIN 48accounting standards that address income taxes for 20072011, 2010 and 20082009 is as follows:
| 2007 | 2008 | |||||
| (dollars in thousands) | ||||||
| Balance as of January 1, | $ | 2,024 | $ | 2,044 | ||
| Additions for tax positions related to the current year | — | — | ||||
| Additions for tax positions of prior years | 20 | 5 | ||||
| Reductions for tax positions of prior years | — | — | ||||
| Settlements | — | — | ||||
| Balance as of December 31, | $ | 2,044 | $ | 2,049 | ||
| 2011 | 2010 | 2009 | ||||||
| (dollars in thousands) | ||||||||
| Balance as of January 1, | $ | 1,186 | $ | 1,836 | $ | 2,049 | ||
| Deductions for settlements | — | 650 | 213 | |||||
| Balance as of December 31, | $ | 1,186 | $ | 1,186 | $ | 1,836 | ||
In future periods, if $1,836 thousand$1.2 million of these unrecognized benefits become supportable, the Company may not recognize a change in its effective tax rate as long as it remains in a fullpartial valuation allowance position, $213 thousand of these unrecognized tax benefits would affectposition. Additionally the Company’s effective tax rate if recognized. Included in the balance of unrecognized tax benefits at December 31, 2008 is $213 thousand related toCompany does not have uncertain tax positions for whichthat it is reasonably possible that the total amounts could significantly change during the nextexpects will increase or decrease within twelve months. This amount represents unrecognized tax benefits in connection with state combined reporting.months of this reporting date. In accordance with the Company’s accounting policy, it recognizes interest and penalties related to uncertain tax positions as a component of tax expense. This policy did not change as a result of the adoption of FIN 48. Asaccounting guidance for uncertain tax positions. The Company did not recognize any interest or penalties in 2011 and 2010. For both December 31, 2011 and 2010, the Company had $0 of January 1, 2008, accrued interest included in Uncertain Tax Position Liability totaled $49 thousand. During the year ended December 31, 2008, the Company recognized $5 thousand in potential interest expense onand penalties related to uncertain tax positions, and the Company’s Consolidated Balance Sheet as of that date includes total interest of $54 thousand associated with these positions.
The Company files income tax returns, including returns for its subsidiaries, with federal and state jurisdictions. The Company is no longer subject to IRS examinationor NYS examinations for its federal and state returns for any periods prior to 2005,2008, although carryforward attributes that were generated prior to 20052008 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period. The Company has an ongoing tax examination by New York State for the years 2002 through 2004 for which an amount of $20 thousand is included in current liabilities and $213 thousand is included in long-term liabilities at December 31, 2008.
On February 2, 2009, New York State Department of Taxation and Finance notified the Company that it was no longer going to pursue the issue associated with potentially not permitting the Company to file combined tax returns for the period 2002 through 2004. TheAt December 31, 2008 the Company had recorded a $213 thousand long-term liability for this issue. Therefore, sinceIn the settlement of this issue, the Company paid New York State has accepted the Company's combined tax return filingsapproximately $19 thousand and settled the examination subsequent to year end the Company will recognizerecognized the benefit fromof the reversal of this liability duringof $194 thousand in the first quarter of 2009.
9.7. Accrued Liabilities
Accrued liabilities consist of the following at December 31:
| 2007 | 2008 | 2011 | 2010 | ||||||||
| (dollars in thousands) | (dollars in thousands) | ||||||||||
| Salaries, wages and related expenses | $ | 937 | $ | 746 | $ | 593 | $ | 476 | |||
| Acquisition and disposition costs | 363 | 363 | |||||||||
| Liability to shareholders for previous acquisition | 363 | 363 | |||||||||
| Legal and professional fees | 230 | 212 | 126 | 173 | |||||||
| Warranty and other sale obligations | 72 | 31 | 26 | 36 | |||||||
| Commissions | 95 | 33 | 21 | 36 | |||||||
| Other | 424 | 307 | 109 | 189 | |||||||
| $ | 2,121 | $ | 1,692 | $ | 1,238 | $ | 1,273 | ||||
F-22
10.8. Fair Value Measurement
In determining the appropriate levels, the Company performs a detailed analysis of financial assets and liabilities. At each reporting period, all assets and liabilities for which the fair value measurements are based upon significant unobservable inputs were classified as Level 3. The derivative liability was valued using the Black-Scholes Option Pricing Model which is based upon unobservable inputs. The derivative liability was $0 and $73 thousand as of December 31, 2011 and December 31, 2010, respectively.
F-17
The following is a rollforward of Level 3 fair value instruments for the year ended December 31, 2011:
(Dollars in thousands) | Total (Gains) / | ||||||||||||
| Beginning | Losses | Purchases, | Ending Balance as of December 31, | ||||||||||
| Balance as of | Realized and | Issuances, Sales | |||||||||||
| Instrument | Jan. 1, 2011 | Unrealized | and Settlements | 2011 | |||||||||
| Derivative liability | $ | 73 | $ | (73 | ) | $ | — | $ | — | ||||
| Total Level 3 instruments | $ | 73 | $ | (73 | ) | $ | — | $ | — | ||||
The following is a rollforward of Level 3 fair value instruments for the year ended December 31, 2010:
| (Dollars in thousands) | Total (Gains) / | |||||||||||
| Beginning | Losses | Purchases, | Ending Balance as | |||||||||
| Balance as of | Realized and | Issuances, Sales | of December 31, | |||||||||
| Instrument | Jan. 1, 2010 | Unrealized | and Settlements | 2010 | ||||||||
| Derivative liability | $ | 70 | $ | 3 | $ | — | $ | 73 | ||||
| Total Level 3 instruments | $ | 70 | $ | 3 | $ | — | $ | 73 | ||||
9. Stockholders’ Equity
Common Shares
Changes in common shares are as follows for the years ended December 31:
| 2006 | 2007 | 2008 | ||||||
| Balance, beginning | 4,870,742 | 5,760,585 | 5,777,578 | |||||
| Fractional shares redeemed during reverse stock split | — | — | (203 | ) | ||||
| Issuance of shares for stock option exercises | 89,974 | 10,743 | — | |||||
| Issuance of shares for restricted and unrestricted stock grants | 9,510 | 6,875 | — | |||||
| Issuance of shares for capital raise | 756,945 | — | — | |||||
| Issuance of shares for anti-dilution penalty | 33,414 | — | — | |||||
| Forfeiture of restricted stock grants | — | (625 | ) | (625 | ) | |||
| Balance, ending | 5,760,585 | 5,777,578 | 5,776,750 | |||||
Treasury Stock
Changes in treasuryThe Company has one class of common stock, are as follows forpar value $.01. Each share of the years endedCompany’s common stock is entitled to one vote on all matters submitted to stockholders. As of December 31:31, 2011 and 2010 there were 5,254,883 and 4,771,658, respectively shares of common stock issued and outstanding.
| 2006 | 2007 | 2008 | ||||
| Balance, beginning | 1,005,092 | 1,005,092 | 1,005,092 | |||
| Balance, ending | 1,005,092 | 1,005,092 | 1,005,092 |
Sale of Common Stock
On March 27, 2008, the Company filed a registration statement on Form S-1 with the SEC for a proposed underwritten public offering, with proceeds of up to $30 million, of units consisting of shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock. This registration statement was withdrawn on September 18, 2008.
Capital Raise:On December 15, 2006, the Company entered into agreements with certain investors to sell 756,944 shares of common stock and warrants to purchase 378,472 shares of common stock for an aggregate purchase price of $10,900 thousand.$10.9 million. The common stock and warrants were sold in units, with each unit consisting of 12.5 shares of common stock and a warrant to purchase 6.25 shares of common stock, at an exercise price of $18.16 per share. Each non-certificated unit was sold at a negotiated price of $180.00. The shares of common stock and warrants arewere immediately separable and were issued separately (see Warrants Issued below). The common stock, the warrants and shares issuable upon exercise of the warrants arewere registered with the SEC on the Company’s filedSecurities and effective registration statement.
In connection with the 2006 capital raise, in December 2006, the Company paid Rodman & Renshaw, LLC placement fees, recorded in equity against the proceeds of the capital raise, of $570 thousand.Exchange Commission.
Warrants Issued
On December 20, 2006, the Company issued warrants to investors to purchase 378,472 shares of the Company’s common stock at an exercise price of $18.16 per share. These warrants will be fair valued by the Company until expiration or exercise of the warrants. The warrants became exercisable on June 20, 2007 and expireexpired on December 19, 2011. These warrants were fair valued by the Company until the expiration of the warrants. The fair value of the warrants at December 31, 20072011 and 20082010 was $696 thousand$0 and $41$73 thousand, respectively.
Reservation of Shares
The Company has reserved common shares for future issuance as follows as of December 31, 2008:2011:
| Stock options outstanding | |
| Stock | |
| Number of common shares reserved | |
F-23F-18
10. Issuance of Common Stock, Warrants and Stock Options by MTI Micro
MTI Micro was formed on March 26, 2001, and, as of December 31, 2011, the Company owned approximately 47.6% of MTI Micro’s outstanding common stock, or 75,049,937 shares, and 53.3% of the common stock and warrants issued, which includes 32,904,136 warrants outstanding. The number of shares of MTI Micro common stock authorized for issuance is 240,000,000 as of December 31, 2011.
Common Stock Issued – MTI Micro
On January 11, 2010, MTI Micro entered into a Purchase Agreement with Counter Point. Counter Point is a venture capital fund sponsored and managed by Dr. Walter L. Robb, a member of the Board of Directors of the Company and MTI Micro, and a current stockholder of MTI Micro. Pursuant to the Purchase Agreement, MTI Micro issued and sold to Counter Point 28,571,429 shares of common stock, par value $0.01 per share (the MTI Micro Common Stock), at a purchase price per share of $0.07, over a period of twelve months, and warrants (MTI Micro Warrants) to purchase shares of MTI Micro Common Stock equal to 20% of the shares of MTI Micro Common Stock purchased under the Purchase Agreement at an exercise price of $0.07 per share. The sale and issuance of the MTI Micro Common Stock and MTI Micro Warrants occurred over multiple closings (each, a Closing). Nine Closings occurred through December 31, 2010, with MTI Micro raising $1.9 million from the sale of 26,952,386 shares of MTI Micro Common Stock and MTI Micro Warrants to purchase 5,390,477 shares of MTI Micro Common Stock to Counter Point. The final Closing occurred on January 5, 2011, with MTI Micro raising $113 thousand from the sale of 1,619,043 shares of MTI Micro Common Stock and MTI Micro Warrants to purchase 323,809 shares of MTI Micro Common Stock to Counter Point.
On February 9, 2011, Amendment No. 1 was entered into between MTI Micro and Counter Point. Pursuant to Amendment No. 1, MTI Micro issued and sold to Counter Point 6,428,574 shares of MTI Micro Common Stock at a purchase price per share of $0.07, through December 31, 2011, and MTI Micro Warrants to purchase shares of MTI Micro Common Stock equal to 20% of the shares of MTI Micro Common Stock purchased under Amendment No. 2 at an exercise price of $0.07 per share. The sale and issuance of the MTI Micro Common Stock and MTI Micro Warrants occurred over multiple closings (each, a Closing) occurring over four one-month closing periods (each, a Closing Period). Four Closings occurred through September 30, 2011, with MTI Micro raising $450 thousand from the sale of 6,428,574 shares of MTI Micro Common Stock and MTI Micro Warrants to purchase 1,285,715 shares of MTI Micro Common Stock to Counter Point.
On September 23, 2011, Amendment No. 2 was entered into between MTI Micro and Counter Point. Pursuant to Amendment No. 2, MTI Micro issued and sold to Counter Point 1,200,000 shares of MTI Micro Common Stock at a purchase price per share of $0.07, through December 31, 2011, and MTI Micro Warrants to purchase shares of MTI Micro Common Stock equal to 20% of the shares of MTI Micro Common Stock purchased under Amendment No. 2 at an exercise price of $0.07 per share. The sale and issuance of the MTI Micro Common Stock and MTI Micro Warrants occurred over multiple closings (each, a Closing) occurring over four one-month closing periods (each, a Closing Period). Four Closings occurred through December 31, 2011, with MTI Micro raising $84 thousand from the sale of 1,200,000 shares of MTI Micro Common Stock and MTI Micro Warrants to purchase 240,000 shares of MTI Micro Common Stock to Counter Point.
The following table represents changes in ownership between the Company and non-controlling interests (NCI) in common shares of MTI Micro:
| MTI | Non Controlling Interest | |||||||||||||
| Average | Ownership | Ownership | ||||||||||||
| Price | Shares | % | Shares | % | Total Shares | |||||||||
| Balance at 12/31/2008 | 63,797,770 | 97.3 | 1,750,345 | 2.7 | 65,548,115 | |||||||||
| Stock issued for MTI Options to MFC Employees | $ | 0.14 | 10,501 | 10,501 | ||||||||||
| Conversion of Bridge Loan | $ | 0.07 | 11,241,666 | 44,622,759 | 55,864,425 | |||||||||
| Balance at 12/31/09 | 75,049,937 | 61.8 | 46,373,104 | 38.2 | 121,423,041 | |||||||||
| Stock issued under Purchase Agreement | $ | 0.07 | 26,952,386 | 26,952,386 | ||||||||||
| Balance at 12/31/10 | 75,049,937 | 50.6 | 73,325,490 | 49.4 | 148,375,427 | |||||||||
| Stock issued under Purchase Agreement, 2011 | $ | 0.07 | 1,619,043 | 1,619,043 | ||||||||||
| Balance after Purchase Agreement | 75,049,937 | 50.04 | 74,944,533 | 49.97 | 149,994,470 | |||||||||
| Stock issued under Amendment No. 1 | $ | 0.07 | 6,428,574 | 6,428,574 | ||||||||||
| Stock issued under Amendment No. 2 | $ | 0.07 | 1,200,000 | 1,200,000 | ||||||||||
| Balance at 12/31/11 | 75,049,937 | 47.61 | 82,573,107 | 52.39 | 157,623,044 | |||||||||
F-19
Reservation of Shares
MTI Micro has reserved common shares for future issuance, broken down between the Company and NCI, as follows as of December 31, 2011:
| MTI | NCI | Total | |||
| Stock options outstanding | — | 25,124,220 | 25,124,220 | ||
| Warrants outstanding | 32,904,136 | 12,196,411 | 45,100,547 | ||
| Number of shares reserved for outstanding options and warrants | 32,904,136 | 37,320,631 | 70,224,767 |
In addition, MTI Micro has 12,882,780 stock options available for issuance.
As of December 31, 2011, the Company owned an aggregate of approximately 47.6% of the outstanding shares of MTI Micro or 53.3% of the outstanding common stock and warrants issued of MTI Micro, and Dr. Robb and Counter Point owned approximately 45.2% and 5.1%, respectively of the outstanding shares of MTI Micro or 40.3% and 4.3%, respectively of the outstanding common stock and warrants issued of MTI Micro.
Warrants Issued – MTI Micro
On December 9, 2009, MTI Micro issued warrants to the then current shareholders of MTI Micro, including the Company, without consideration, to purchase 32,779,310 shares of MTI Micro Stock at an exercise price of $0.07 per share. The warrants became exercisable on December 9, 2010 and expire on December 8, 2017. The warrants have been accounted for as an equity distribution of $2.0 million, including warrants to the Company with a value of $2.0 million, which were eliminated in consolidation.
On December 9, 2009, MTI Micro issued warrants to the Bridge Investors of MTI Micro, including the Company, to purchase 5,081,237 shares of MTI Micro Stock at an exercise price of $0.07 per share. The MTI Micro Warrants became exercisable on December 9, 2009 and will expire on the earlier of: (i) April 15, 2014; (ii) immediately prior to a change in control; or (iii) immediately prior to an initial public offering of MTI Micro. The MTI Micro Warrants were issued without consideration and were accounted for as equity and a loss on extinguishment of debt was recorded in the amount of $289 thousand, including warrants to the Company with a value of $57 thousand, which were eliminated in consolidation.
Under the Purchase Agreement entered into on January 11, 2010, MTI Micro issued 5,714,286 MTI Micro Warrants to Counter Point to purchase shares of MTI Micro Common Stock at an exercise price of $0.07 per share. The MTI Micro Warrants became exercisable on the date of issuance and will expire on the earlier of: (a) the five (5) year anniversary of the Date of Issuance of the Warrant; (b)immediately prior to a change in control; or (c) the closing of a firm commitment underwritten public offering pursuant to a registration statementunder the Securities Act. The MTI Micro Warrants were accounted for as equity.
Under Amendment No. 1 entered into on February 9, 2011, MTI Micro issued 1,285,715 MTI Micro Warrants to Counter Point to purchase shares of MTI Micro Common Stock at an exercise price of $0.07 per share. The MTI Micro Warrants became exercisable on the date of issuance and will expire on the earlier of: (a) the five (5) year anniversary of the Date of Issuance of the Warrant; (b)immediately prior to a change in control; or (c) the closing of a firm commitment underwritten public offering pursuant to a registration statementunder the Securities Act. The MTI Micro Warrants were accounted for as equity.
Under Amendment No. 2 entered into on September 23, 2011, MTI Micro issued 240,000 MTI Micro Warrants to Counter Point to purchase shares of MTI Micro Common Stock at an exercise price of $0.07 per share. The MTI Micro Warrants became exercisable on the date of issuance and will expire on the earlier of: (a) the five (5) year anniversary of the Date of Issuance of the Warrant; (b)immediately prior to a change in control; or (c) the closing of a firm commitment underwritten public offering pursuant to a registration statementunder the Securities Act. The MTI Micro Warrants were accounted for as equity.
Refer to Note 17 for further discussion.
11. Retirement Plan
The Company maintains a voluntary savings and retirement plan under Internal Revenue CodeIRC Section 401(k) covering substantially all employees. Employees must complete six months of service and have attained the age of twenty-one prior to becoming eligible for participation in the plan. The Company plan allows eligible employees to contribute a percentage of their compensation on a pre-tax basis and the Company matches employee contributions dollar for dollar up to a discretionary amount, currently 4%, of the employee’s salary, subject to annual tax deduction limitations. Company matching contributions vest at a rate of 25% annually for each year of service completed. Company matching contributions were $269, $283,$99, $107, and $136$141 thousand for 2006, 2007,2011, 2010, and 2008,2009, respectively. The Company may also make additional discretionary contributions in amounts as determined by management and the Board of Directors. There were no additional discretionary contributions by the Company for the years 2006, 2007,2011, 2010, or 2008.2009.
F-20
12. LossIncome (Loss) per Share
The following table sets forth the reconciliation of the numerators and denominators of the basic and diluted per share computations for continuing operations for the years ended December 31:
| 2006 | 2007 | 2008 | ||||||||||
| (dollars in thousands, except shares) | ||||||||||||
| Numerator: | ||||||||||||
| Net loss | $ | (13,667 | ) | $ | (9,575 | ) | $ | (12,504 | ) | |||
| Denominator: | ||||||||||||
| Basic EPS: | ||||||||||||
| Common shares outstanding, beginning of period | 3,865,650 | 4,755,493 | 4,772,486 | |||||||||
| Weighted average common shares issued during the | ||||||||||||
| period | 87,533 | 9,111 | — | |||||||||
| Weighted average restricted shares forfeited during the | ||||||||||||
| period | — | (360 | ) | (323 | ) | |||||||
| Weighted average common shares deemed during the | ||||||||||||
| period in conjunction with the reverse stock split | — | — | (127 | ) | ||||||||
| Effect of non-vested restricted stock | (390 | ) | (697 | ) | 323 | |||||||
| Denominator for basic earnings per common shares — | ||||||||||||
| Weighted average common shares | 3,952,793 | 4,763,547 | 4,772,359 | |||||||||
| Diluted EPS: | ||||||||||||
| Common shares outstanding, beginning of period | 3,865,650 | 4,755,493 | 4,772,486 | |||||||||
| Weighted average common shares issued during the | ||||||||||||
| period | 87,533 | 9,111 | — | |||||||||
| Weighted average restricted shares forfeited during the | ||||||||||||
| period | — | (360 | ) | (323 | ) | |||||||
| Weighted average common shares deemed during the | ||||||||||||
| period in conjunction with the reverse stock split | — | — | (127 | ) | ||||||||
| Effect of non-vested restricted stock due to anti-dilutive | ||||||||||||
| effect | (390 | ) | (697 | ) | 323 | |||||||
| Denominator for diluted earnings per common | ||||||||||||
| shares — Weighted average common shares | 3,952,793 | 4,763,547 | 4,772,359 | |||||||||
| 2011 | 2010 | 2009 | ||||||||
| (dollars in thousands, except shares) | ||||||||||
| Numerator: | ||||||||||
| Net income (loss) | $ | 2,386 | $ | (1,758 | ) | $ | (3,099 | ) | ||
| Denominator: | ||||||||||
| Basic EPS: | ||||||||||
| Common shares outstanding, beginning of period | 4,771,658 | 4,771,658 | 4,771,658 | |||||||
| Weighted average common shares issued during the period | 230,276 | — | — | |||||||
| Denominator for basic earnings per common shares — | ||||||||||
| Weighted average common shares | 5,001,934 | 4,771,658 | 4,771,658 | |||||||
| Diluted EPS: | ||||||||||
| Common shares outstanding, beginning of period | 4,771,658 | 4,771,658 | 4,771,658 | |||||||
| Weighted average common shares issued during the period | 230,276 | — | — | |||||||
| Denominator for diluted earnings per common shares - | ||||||||||
| Weighted average common shares | 5,001,934 | 4,771,658 | 4,771,658 | |||||||
Not included in the computation of earnings per share, assuming dilution for the year ended December, 2011, were options to purchase 797,437 shares of the Company’s common stock. These potentially dilutive items were excluded even though the average market price of the common stock exceeded the exercise prices for a portion of the options because the calculation of incremental shares resulted in an anti-dilutive effect.
Not included in the computation of earnings per share-assuming dilution for the year ended December 31, 20062010 were options to purchase 688,649 shares of the Company’s common stock, 625 unvested restricted878,986 shares of the Company’s common stock and options to purchase 33,668 shares of MTI Micro’s common stock. These potentially dilutive items were excluded because the Company incurred a loss for this period and their inclusion would be anti-dilutive. The MTI options expire between January 4, 2007 and November 9, 2016, while the MTI Micro options expire between September 29, 2012 and September 18, 2015. The Company also has 378,472 warrants outstanding as of December 31, 2006; however, these were excluded in the computation of earnings per share in 2006 and part of 2007 because they were not eligible to be exercised until June 20, 2007.
F-24
Not included in the computation of earnings per share-assuming dilution for the year ended December 31, 2007 were options to purchase 776,696 shares of the Company’s common stock, warrants to purchase 378,472 shares of the Company’s stock, 625 unvested restricted shares of the Company’s common stock and options to purchase 22,668 shares of MTI Micro’s common stock. These potentially dilutive items were excluded because the Company incurred a loss for this period and their inclusion would be anti-dilutive.
Not included in the computation of earnings per share-assuming dilution for the year ended December 31, 20082009 were options to purchase 780,340716,403 shares of the Company’s common stock and warrants to purchase 378,472 shares of the Company’s stock, and options to purchase 15,001 shares of MTI Micro’s common stock. These potentially dilutive items were excluded because the Company incurred a loss for this period and their inclusion would be anti-dilutive.
13. Stock Based Compensation
MTI Option Plans
Stock-based incentive awards are provided to employees and directors under the terms of the Company’s 1996 Stock Incentive Plan (“1996 Plan”)(1996 Plan), 1999 Employee Stock Incentive Plan (“1999 Plan”)(1999 Plan) and 2006 Equity Incentive Plan (“2006 Plan”)(2006 Plan), which was amended and restated effective June 30, 2011 and September 16, 2009, (collectively, the “Plans”)Plans). Awards under the Plans have generally included at-the-money options and restricted stock grants. MTI Micro also issued awards under the MTI MicroFuel Cells Inc. 2001 Employee, Director and Consultant Stock Option Plan (“2001 MTI Micro Plan”). During 2005, MTI Micro ceased making grants under the 2001 MTI Micro Plan and determined that it would make no new awards under this plan in the future.
The 1996 Plan was approved by stockholders during December 1996 and expired during October 2006. The 1996 Plan provided an initial aggregate number of 500,000 shares of common stock to be awarded or issued. The number of shares available to be awarded under the 1996 Plan and awards outstanding were adjusted for stock splits and rights offerings. The total number of shares which may be awarded under the 1996 Plan was 468,352 during 2005. Under the 1996 Plan, the Board of Directors was authorized to issue stock options, stock appreciation rights, restricted stock, and other stock-based incentives to officers, employees and others.
The 1999 Plan was adopted by the Company’s Board of Directors, and approved by stockholders on March 18, 1999.1999 and expired during 2009. The 1999 Plan provides thatprovided an initial aggregate number of 1,000,000 shares of common stock mayto be awarded or issued. The number of shares which mayto be awarded under the 1999 Plan and awards outstanding have beenwere adjusted for stock splits, and during 2005, 2006, and 2007,the total number of shares which maycould be awarded under the 1999 Plan was 562,500 shares. Under the 1999 Plan, the Board of Directors iswas authorized to issue stock-based awards to officers, employees and others.
F-21
The 2006 Plan was adopted by the Company’s Board of Directors on March 16, 2006 and approved by stockholders on May 18, 2006. The plan was amended and restated by the Board of Directors effective September 16, 2009 and June 30, 2011. The September 16, 2009 Amended and Restated 2006 Equity Incentive Plan provides that anincreased the initial aggregate number of 2,000,000250,000 shares of common stock which may be awarded or issued.issued to 600,000, and the June 30, 2011 Amended and Restated 2006 Equity Incentive Plan increased the aggregate number of shares of common stock which may be awarded or issued to 1,200,000. The number of shares which may be awarded under the 2006 Plan and awards outstanding havehas been adjusted for stock splits and other similar events. Under the 2006 Plan, the Board of Directors is authorized to issue stock options, stock appreciation rights, restricted stock, and other stock-based incentives to officers, employees and others. Until stockholder approval is obtained, the Company may not grant further stock options or stock appreciation rights.
Stock-based compensation expense for the year ended December 31, 20082011 was generated from stock options andfully vested restricted stock grants.grants and fully vested stock awards. Stock options are awards which allow holders to purchase shares of the Company’s common stock at a fixed price. Stock options issued to employees generally vest 25% per year beginning one year after grant.50% immediately, and then quarterly over the next three years. Options issued to non-employee members of the MTI Board of Directors generally vest upon grant. Certain options granted may be fully or partially exercisable immediately, may vest on other than a four year schedule or vest upon attainment of specific performance criteria. Restricted stock awards generally vest one year after the date of grant; however, certain awards may vest immediately or vest upon attainment of specific performance criteria. Option exercise prices are generally equivalent to the closing market value price of the Company’s common stock on the date of grant. Unexercised options generally terminate either seven or ten years after date of grant.
Share-Based Compensation Information under FAS 123R
As discussed in Note 2 “Significant Accounting Policies,” effective January 1, 2006, the Company adopted the fair value recognition provisions for stock-based awards granted to employees using the modified prospective application method provided by FAS 123R. Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period.
F-25
The Company estimates the fair value of stock options using a Black ScholesBlack-Scholes valuation model consistent with the provisions of FAS 123R and SAB 107.model. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company’s stock, an appropriate risk-free rate, and the Company’s dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.
During 2011, the Company granted 483,225 restricted stock units, which immediately vested and the stock was issued to holders. The fair value of these grants was based on the closing market value price of the Company’s common stock on the date of grant. The weighed average exercise prices of these grants was $.62 per share.
There were no stock options granted during 2011 and 2009.
The fair value of each 2010 stock option grant was estimated at the date of grant using a Black-Scholes Option Pricing model.Model. The following table presents the weighted-average assumptions used for options granted:granted under the Plans:
| 2007 | 2008 | |||||||
| Option term (years) A | 3.61 | 4.4 | ||||||
| Volatility B | 72.76 | % | 81.72 | % | ||||
| Risk-free interest rate range C | 3.23 - 5.04% | 1.55-3.36% | ||||||
| Dividend yield D | 0 | % | 0 | % | ||||
| Weighted-average fair value per option granted | $ | 6.16 | $ | 1.71 | ||||
| |||
| 2010 | |||
| Option term (years) | 5.03 | ||
| Volatility | 128.3 – 150 | % | |
| Risk-free interest rate range | 1.46 – 2.04 | % | |
| Dividend yield | 0 | % | |
| Weighted-average fair value per option granted | $ | 0.54 | |
Share-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, therefore, awards are reduced for estimated forfeitures. FAS 123RThe revised accounting standard requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Stock-Based Compensation Expense — All Accounting Treatments
Total share-based compensation expense, related to all of the Company’s share-based awards, recognized for the years ended December 31, was comprised as follows:
| 2006 | 2007 | 2008 | ||||||||||
| (dollars in thousands, except eps) | ||||||||||||
| Unfunded research and product development | $ | 512 | $ | 216 | $ | 186 | ||||||
| Selling, general and administrative | 1,894 | 1,342 | 658 | |||||||||
| Share-based compensation expense before taxes | 2,406 | 1,558 | 844 | |||||||||
| Related income tax benefits-A | — | — | — | |||||||||
| Share-based compensation expense, net of taxes | $ | 2,406 | $ | 1,558 | $ | 844 | ||||||
| Impact on basic and diluted EPS | $ | (0.61 | ) | $ | (0.33 | ) | $ | (0.18 | ) | |||
| 2011 | 2010 | 2009 | ||||||||
| (dollars in thousands, except eps) | ||||||||||
| Unfunded research and product development | $ | 18 | $ | 21 | $ | 92 | ||||
| Selling, general and administrative | 370 | 226 | 413 | |||||||
| Share-based compensation expense | $ | 388 | $ | 247 | $ | 505 | ||||
| Impact on basic and diluted EPS | $ | 0.08 | $ | (0.05 | ) | $ | (0.11 | ) | ||
|
As of January 1, 2006, the adoption of FAS 123R resulted in the elimination of unearned compensation related to restricted stock (contra equity account) against additional paid-in capital totaling approximately $80 thousand. Total unrecognized compensation costs related to non-vested awards as of December 31, 2007 and December 31, 20082011 is $1,595$104 thousand, and $744 thousand, respectively and is expected to be recognized over a weighted-average vesting period of approximately 1.31 years0.87 years.
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As a result of the amendments in 2011 and .98 years,2009 of the 2006 Plan, 600,000 and 350,000 additional shares were made available for granting, respectively.
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Presented below is a summary of the Company’s stock option plans’ activity for the years ended December 31:
| 2006 | 2007 | 2008 | 2011 | 2010 | 2009 | |||||||||||
| Shares under option, beginning | 630,155 | 688,649 | 776,696 | 878,986 | 716,403 | 780,340 | ||||||||||
| Granted | 195,594 | 231,719 | 213,039 | — | 216,000 | 171,750 | ||||||||||
| Exercised | (89,974 | ) | (10,743 | ) | — | — | — | — | ||||||||
| Canceled/Forfeited | (21,887 | ) | (65,115 | ) | (58,956 | ) | (4,851 | ) | (8,506 | ) | (89,799 | ) | ||||
| Expired | (25,239 | ) | (67,814 | ) | (150,439 | ) | (76,698 | ) | (44,911 | ) | (145,888 | ) | ||||
| Shares under option, ending | 688,649 | 776,696 | 780,340 | 797,437 | 878,986 | 716,403 | ||||||||||
| Options exercisable | 506,661 | 578,544 | 532,298 | 719,229 | 719,623 | 571,617 | ||||||||||
| Remaining shares available for granting of options | 262,020 | 128,105 | 68,641 | 261,601 | 114,591 | 316,216 | ||||||||||
The weighted average exercise price for the Plans is as follows for each of the years ended December 31:
| 2006 | 2007 | 2008 | 2011 | 2010 | 2009 | |||||
| Shares under option, beginning | 30.08 | 32.32 | 25.92 | 11.41 | 15.97 | 21.56 | ||||
| Granted | 32.32 | 10.96 | 2.80 | — | 0.59 | 1.31 | ||||
| Exercised | 13.20 | 5.60 | — | — | — | — | ||||
| Canceled/Forfeited | 34.32 | 28.40 | 13.10 | 3.23 | 8.85 | 4.09 | ||||
| Expired | 42.40 | 41.04 | 20.57 | 20.73 | 32.64 | 35.91 | ||||
| Shares under option, ending | 32.32 | 25.92 | 21.56 | 10.56 | 11.41 | 15.97 | ||||
| Options exercisable, ending | 32.96 | 28.40 | 28.33 | 11.63 | 13.59 | 18.72 |
The following table summarizes information for options outstanding and exercisable atfor the Plans as of December 31, 2008:2011:
| Outstanding Options | Options Exercisable | ||||||||||||||||||||||
| Outstanding Options | Options Exercisable | ||||||||||||||||||||||
| Weighted Average | Weighted | Weighted | Weighted Average | Weighted | Weighted | ||||||||||||||||||
| Exercise | Remaining | Average | Average | Remaining | Average | Average | |||||||||||||||||
| Price Range | Number | Contractual Life | Exercise Price | Number | Exercise Price | Number | Contractual Life | Exercise Price | Number | Exercise Price | |||||||||||||
| $1.16 - $3.60 | 211,875 | 6.6 | $ | 2.79 | 35,000 | $ | 1.16 | ||||||||||||||||
| $3.61 - $14.24 | 157,208 | 5.2 | $ | 11.20 | 105,404 | $ | 11.63 | ||||||||||||||||
| $14.25 - $22.64 | 91,438 | 3.3 | $ | 19.85 | 90,703 | $ | 19.85 | ||||||||||||||||
| $22.65 - $33.36 | 134,121 | 3.3 | $ | 29.21 | 132,284 | $ | 29.25 | ||||||||||||||||
| $0.00 - $1.15 | 272,211 | 8.38 | $ | 0.72 | 211,569 | $ | 0.75 | ||||||||||||||||
| $1.16 - $3.60 | 214,554 | 5.76 | $ | 1.72 | 197,042 | $ | 1.75 | ||||||||||||||||
| $3.61 - $14.24 | 103,067 | 2.32 | $ | 11.74 | 103,013 | $ | 11.75 | ||||||||||||||||
| $14.25 - $22.64 | 45,289 | 2.22 | $ | 19.39 | 45,289 | $ | 19.39 | ||||||||||||||||
| $22.65 - $33.36 | 58,248 | 2.93 | $ | 30.37 | 58,248 | $ | 30.37 | ||||||||||||||||
| $33.37 - $50.24 | 160,385 | 3.7 | $ | 41.16 | 143,594 | $ | 41.84 | 104,068 | 1.63 | $ | 38.47 | 104,068 | $ | 38.47 | |||||||||
| 797,437 | 5.26 | $ | 10.56 | 719,229 | $ | 11.63 | |||||||||||||||||
| $50.25 - $103.76 | 25,313 | 1.1 | $ | 84.41 | 25,313 | $ | 84.41 | ||||||||||||||||
| 780,340 | 4.6 | $ | 21.56 | 532,298 | $ | 28.33 | |||||||||||||||||
The aggregate intrinsic value (i.e. the difference between the closing stock price and the price to be paid by the option holder to exercise the option) is zero$0 for both the Company’s outstanding options and $0 for the exercisable options as of December 31, 2008.2011. The amounts are based on the Company’s closing stock price of $1.16$0.50 as of December 31, 2008.2011.
The total intrinsic value of options exercised during the years ended December 31, 2006, 2007, and 2008 was $1,307, $44, and zero, respectively. The total cash received by the Company as a result of stock option exercises for the year ended December 31, 2008 was zero. The Company settles employee stock option exercises with newly issued shares of Company common stock.
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The number and weighted average grant-date fair value ofThere were no unvested restricted stock options for the period ended December 31, 2008 is as follows:
| Weighted Average | |||||
| Grant-Date | |||||
| Number | Fair Value | ||||
| Unvested restricted stock, beginning | 625 | $ | 10.72 | ||
| Granted | — | — | |||
| Forfeited | (625 | ) | $ | 10.72 | |
| Vested | — | — | |||
| Unvested restricted stock, ending | — | — | |||
The aggregate intrinsic value of restricted stock vested during the year ended December 31, 2008 was zero.2011.
MTI Micro Option PlanPlans
MTI Micro has two plans for issuing MTI Micro stock-based incentive awards; the MTI MicroFuel Cells Inc. 2001 Employee, Director and Consultant Stock Option Plan (2001 MTI Micro Plan) and the MTI MicroFuel Cells Inc. 2009 Stock Plan (2009 Micro Plan), (collectively, the MTI Micro Plans).
The 2001 MTI Micro Plan was approved by MTI Micro’s stockholders in 2001 and provided an initial aggregate number of 1,766,000 shares of MTI Micro common stock to be awarded. The number of shares which may be awarded under the 2001 MTI Micro Plan and awards outstanding have been adjusted for a 2004 reverse stock split, and during 2005, 2006, and 2007, the total number of shares which may be awarded under the 2001 MTI Micro Plan were 3,416,667 shares. Under the 2001 MTI Micro Plan, the MTI Micro Board of Directors was authorized to award stock options to officers, directors, employees and consultants. No furtherDuring 2005, MTI Micro ceased making grants will be madeunder the 2001 MTI Micro Plan and determined that it would make no new awards under this plan.plan in the future.
Options issued to employees generally vest 25% per year beginning one year after grant. Option exercise prices were determined byThe MTI Micro Board of Directors approved the 2009 Micro Plan on December 8, 2009. This plan provided an initial aggregate number of 38,000,000 shares of MTI Micro’s common stock to be awarded. Under the 2009 Micro Plan, the MTI Micro Board of Directors. UnexercisedDirectors is authorized to award stock options generally terminate ten years after dateto directors, employees, consultants and advisors of grant. Up until January 1, 2006,MTI Micro.
F-23
There were no stock options granted in 2011 and 2009.
On September 15, 2010, MTI Micro followed APB Opinion No. 25granted 6,330,520 options to its employees from the 2009 Micro Plan. The options vest 50% on the grant date and related Interpretations, in accounting for employee stock-based compensation and to provide50% ratably on a quarterly basis over the disclosures required under SFAS No. 123. APB Opinion No. 25 requires no recognitionnext three years. The fair value of compensation expense for most of the stock-based compensation arrangements provided by MTI Micro, namely, broad-based employeethese stock purchase plans and option grants where the exercise price is equal to or not less than the market valueoptions granted was estimated at the date of grant. However, APB Opinion No. 25 requires recognitiongrant using a Black-Scholes Option Pricing Model.
The key inputs and assumptions used to estimate the fair value of these 2010 stock options were as follows:
| Option term | 5 years | ||
| Volatility | 115 | % | |
| Risk-free interest rate | 1.46 | % | |
| Dividend yield | 0 | % | |
| Fair value per option granted | $ | 0.07 | |
The amount of expense recognized for this grant was $52 thousand and $187 thousand for 2011 and 2010, respectively. Share-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, therefore, awards are reduced for variable award plansestimated forfeitures. The accounting standard requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has assumed a forfeiture rate of 5% for this grant.
On February 10, 2010, MTI Micro granted 28,296,800 options to its employees from the 2009 Micro Plan. The options vest 50% on the grant date and 50% ratably on a quarterly basis over the vestingnext three years. The fair value of these stock options granted was estimated at the date of grant using a Black-Scholes Option Pricing Model.
The key inputs and assumptions used to estimate the fair value of these stock options were as follows:
| Option term | 5 years | ||
| Volatility | 115 | % | |
| Risk-free interest rate | 2.39 | % | |
| Dividend yield | 0 | % | |
| Fair value per option granted | $ | 0.07 | |
The amount of expense recognized for this grant was $221 thousand and $1.01 million for 2011 and 2010, respectively. Share-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, therefore, awards are reduced for estimated forfeitures. The accounting standard requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has assumed a forfeiture rate of such plans, based upon the then-current market values of the underlying stock. As of January 1, 2006, MTI Micro is accounting5% for employee stock-based compensation under FAS 123R.this grant.
Presented below is a summary of compensation expense, which is included in the summary of the Company’s compensation expense under all share-based awards above, for the MTI Micro plan:Plans:
| 2006 | 2007 | 2008 | 2011 | 2010 | 2009 | |||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||
| Stock options | $ | 25 | $ | 12 | $ | 2 | ||||||||||
| Stock option compensation expense | $ | 273 | $ | 1,199 | $ | — | ||||||||||
| Total stock-based compensation expense | $ | 25 | $ | 12 | $ | 2 | $ | 273 | $ | 1,199 | $ | — | ||||
Total unrecognized compensation costs related to non-vested awards as of December 31, 2011 is $233 thousand.
Presented below is a summary of the 2001 MTI Micro stock option plansPlans activity for the years ended December 31:
| 2006 | 2007 | 2008 | 2011 | 2010 | 2009 | ||||||||||
| Shares under option, beginning | 78,461 | 33,668 | 22,668 | 33,050,720 | 15,001 | 15,001 | |||||||||
| Granted | — | — | — | — | 34,627,320 | — | |||||||||
| Exercised | — | — | — | — | — | — | |||||||||
| Canceled/Forfeited | (44,793 | ) | (11,000 | ) | (7,667 | ) | (7,926,500 | ) | (1,591,601 | ) | — | ||||
| Shares under option, ending | 33,668 | 22,668 | 15,001 | 25,124,220 | 33,050,720 | 15,001 | |||||||||
| Options exercisable | 17,003 | 18,626 | 15,001 | 20,040,419 | 20,131,783 | 15,001 | |||||||||
| Remaining shares available for granting of options | 3,325,196 | 3,336,196 | 3,343,863 | 12,882,780 | 4,956,280 | 38,000,000 | |||||||||
F-28F-24
The weighted average exercise price for the MTI Micro optionsPlans is as follows for each of the years ended December 31:
| 2006 | 2007 | 2008 | 2011 | 2010 | 2009 | ||||||||||||
| Shares under option, beginning | $ | 3.22 | $ | 3.61 | $ | 3.70 | $ | 0.07 | $ | 3.89 | $ | 3.89 | |||||
| Granted | — | — | — | — | 0.07 | — | |||||||||||
| Exercised | — | — | — | — | — | — | |||||||||||
| Canceled/Forfeited | 2.93 | 3.42 | 3.33 | 0.07 | 0.09 | — | |||||||||||
| Shares under option, ending | 3.61 | 3.70 | 3.89 | 0.07 | 0.07 | 3.89 | |||||||||||
| Options exercisable, ending | 3.57 | 3.63 | 3.89 | 0.07 | 0.07 | 3.89 | |||||||||||
The fair value of MTI Micro options granted in 2005, which is amortized to expense over the option vesting period in determining the pro forma impact, was estimated on the date of grant using the Black-Scholes Option Pricing model with the following weighted average assumptions for the year ended December 31:
The weighted average fair value of MTI Micro options granted for the year ended December 31 is as follows:
| 2005 | ||
| Fair value of each option granted | $ | 3.68 |
| Fair value of all options granted | $ | 930,890 |
In accordance with SFAS No. 123, the weighted average fair value of stock options granted is required to be based on a theoretical statistical model using the preceding Black-Scholes Option Pricing modelModel assumptions.
Outstanding Options Options Exercisable Weighted Average Exercise Remaining WeightedAverage WeightedAverage Price Range Number Contractual Life Exercise Price Number Exercise Price $2.55 - $2.75 2,000 4.2 $ 2.55 2,000 $ 2.55 $2.76 - $3.79 3,334 5.0 $ 2.76 3,334 $ 2.76 $3.80 - $4.65 1,167 3.9 $ 3.80 1,167 $ 3.80 $4.66 - $4.66 8,500 5.2 $ 4.66 8,500 $ 4.66 15,001 4.9 $ 3.89 15,001 $ 3.89
Based upon an estimated common stock price of $.13 at December 31, 2008, the intrinsic value of all MTI Micro’sThe following table summarizes information for options outstanding and exercisable options are zero, since all exercise prices are abovefor the estimated common stock fair value price.
On December 30, 2005, the Company granted options to acquire 1,021,213 shares of MTI common stock, par value $0.01 per share, to certain Optionees. The options have an exercise price per share of $2.80 (the closing price of the Company’s common stock on December 30, 2005). The Company issued the options pursuant to a November 28, 2005 stock option exchange offer. MTI Micro options outstanding for a purchasePlans as of a total of 2,392,947 shares of MTI Micro common stock, par value $0.01 per share, were tendered by the Optionees and then cancelled by MTI Micro as a result of this exchange. Each option is exercisable for one share of MTI common stock. The exchange rate was 0.125 options for each two MTI Micro options, rounded down to the nearest whole option, or if an individual had an MTI Micro option balance in excess of 150,000 options, then at a rate of 0.125 options for each four MTI Micro options in excess of 150,000 options. The exchange was accounted for in accordance with EITF 00-23 Issue 1 and no compensation expense was recorded.December 31, 2011:
F-29
| Outstanding Options | Options Exercisable | ||||||||||
| Weighted Average | Weighted | Weighted | |||||||||
| Exercise | Remaining | Average | Average | ||||||||
| Price Range | Number | Contractual Life | Exercise Price | Number | Exercise Price | ||||||
| $0.07 - $2.54 | 25,117,220 | 8.23 | $ | 0.07 | 20,033,419 | $ | 0.07 | ||||
| $2.55 - $3.79 | 2,000 | 1.25 | $ | 2.55 | 2,000 | $ | 2.55 | ||||
| $3.80 - $4.65 | 1,167 | 0.86 | $ | 3.80 | 1,167 | $ | 3.80 | ||||
| $4.66 - $4.66 | 3,833 | 2.25 | $ | 4.66 | 3,833 | $ | 4.66 | ||||
| 25,124,220 | 8.23 | $ | 0.07 | 20,040,419 | $ | 0.07 | |||||
14. Cash Flows — Supplemental Information
| Years Ended December 31, | |||||||||||
| 2006 | 2007 | 2008 | |||||||||
| (dollars in thousands) | |||||||||||
| Non-Cash Investing and Financing Activities: | |||||||||||
| Change in investment and paid-in capital resulting from other | |||||||||||
| investors’ activity in MTI Micro stock | $ | (1,284 | ) | $ | (521 | ) | $ | (128 | ) | ||
| Cash Payments: | |||||||||||
| Taxes paid (tax refunds), net | 3 | (10 | ) | — | |||||||
| Years Ended December 31, | ||||||||
| 2011 | 2010 | 2009 | ||||||
| (dollars in thousands) | ||||||||
| Non-Cash Financing Activities: | ||||||||
| Change in investment and paid-in capital resulting from other | ||||||||
| investors’ activity in MTI Micro stock | $ | — | $ | — | $ | 3,411 | ||
15. Derivatives
The Company held or hashad outstanding as of December 31, the following derivative financial instruments:instruments as of December 31:
| 2007 | 2008 | Expiration | 2011 | 2010 | Expiration | |||||
| Derivatives issued: | ||||||||||
| Warrants, exercisable beginning June 20, 2007, to purchase the | ||||||||||
| Company’s common stock issued to three investors at a purchase | ||||||||||
| price of $18.16 per share | 378,472 | 378,472 | 12/19/2011 | — | 378,472 | 12/19/2011 | ||||
Warrant Derivative to Purchase MTI Common Stock:The warrants issued during the Company’s December 2006 capital raise were legally freestanding, detachable and transferable by the holders. The features of the warrant allowed both straight cash exercises as well as cashless exercises. Due primarily to a stipulation in the warrant agreement which allowed a potential cash settlement with the holders if the Company was acquired by, or merged with a private company, these warrants were classified as an asset/liability derivative in accordance with SFAS No. 133 (paragraph 11) and EITF 00-19.the accounting guidance.
The estimated fair value of this warrant at the date issued was $10.16$18.16 per share, using a Black-Scholes Option Pricing modelModel and assumptions similar to those used for valuing the Company’s employee share-based compensation. The fair value of the derivative iswas recorded in the “Derivative Liability”liability” line on itsthe consolidated financial statements, and iswas valued quarterly using the Black-Scholes Option Pricing Model. The assumptions used for the valuations as of December 31 were as follows:
| 2007 | 2008 | ||||
| Expected life of option (days) | 1,450 | 1,084 | |||
| Risk-free interest rate | 3.45 | % | 1.55 | % | |
| Expected volatility of stock | 73.46 | % | 93.45 | % | |
| Expected dividend yield | None | None | |||
| 2010 | ||
| Expected life of option (days) | 365 | |
| Risk-free interest rate | 0.29 | % |
| Expected volatility of stock | 219.4 | % |
| Expected dividend yield | None | |
The Company recognizesrecognized changes in fair value in its Consolidated Statements of Operations in the line titled “Gain (loss) on derivatives.”
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16. Commitments and Contingencies
Lawrence LitigationContingencies:
On September 9, 1998, Barbara Lawrence, the Lawrence Group, Inc. (“Lawrence”)Legal
We are subject to legal proceedings, claims and certain other Lawrence-related entities (“Plaintiffs”) initially filed suitliabilities which arise in the United States Bankruptcy Courtordinary course of business. We accrue for the Northern District of New York (“Bankruptcy Court”)losses associated with legal claims when such losses are probable and the United States District Court for the Northern District of New York (“District Court”), which were subsequently consolidated in the District Court, against First Albany Corporation, now knowncan be reasonably estimated. These accruals are adjusted as Broadpoint Capital, Inc. (“BCI”), the Company, Dale Church, Edward Dohring, Beno Sternlicht, Alan Goldberg and George McNamee (Church, Dohring, Sternlicht, Goldberg and McNameeadditional information becomes available or circumstances change. Legal fees are former Directors of the Company), Marty Mastroianni (former President and Chief Operating Officer of the Company) and 33 other individuals (“Defendants”) who purchased a total of 820,909 shares (307,841 post-split) of the Company’s stock from the Plaintiffs. The case concerns the Defendants’ 1997 purchase of the Company’s common stock from the Plaintiffs at the price of $2.25 per share ($6.00 per share post split). BCI actedcharged to expense as Placement Agent in connection with the negotiation and sale of the shares, including in proceedings before the Bankruptcy Court, which approved the sale in September 1997.
Plaintiffs claim that the Defendants failed to disclose material inside information to the Plaintiffs in connection with the sale and that the $2.25 per share ($6.00 per share post split) purchase price was unfair. Plaintiffsthey are seeking damages of $5 million plus punitive damages and costs. In April 1999, Defendants filed a motion to dismiss the amended complaint, which was denied by the Bankruptcy Court. On appeal in October 2000, Plaintiffs’ claims were dismissed by the District Court. In November 2000, Plaintiffs filed an appeal of that dismissal with the United States Court of Appeals for the Second Circuit. In June 2002, the Second Circuit Court of Appeals reversed the District Court decision in part and remanded the case for further consideration of the Plaintiffs’ claims as motions to modify the Bankruptcy Court sale order. The Plaintiffs’ claims have now been referred back to Bankruptcy Court for such consideration. By order and decision dated September 30, 2003, the Bankruptcy Court allowed certain limited discovery to proceed, and this process is still underway.
The Company believes the claims have no merit and intends to defend them vigorously. The Company cannot predict the outcome of the claims nor reasonably estimate a range of possible loss given the current status of the litigation. Accordingly, no amounts have been reserved for this matter.incurred.
Commitments:
Leases
The Company and its subsidiaries lease certain manufacturing, laboratory and office facilities. The leases generally provide for the Company to pay either an increase over a base year level for taxes, maintenance, insurance and other costs of the leased properties or the Company’s allocated share of insurance, taxes, maintenance and other costs of leased properties. The leases contain renewal provisions.
Future minimum rental payments required under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2011 are (dollars in thousands): $601$279 in 2009, $112012, $285 in 2010, $82013 and $266 in 2011 and $0 in 2012.2014. Rent expense under all leases was $745, $685,$307, $528, and $645$564 thousand for 2006, 2007,2011, 2010, and 2008,2009, respectively. Rent expense was reduced during the year ended December 31, 2011 as a result of the Supplemental Lease Extension and Modification Agreement dated September 29, 2011 between Kingfisher, LLC and MTI Micro.
Warranties
Below is a reconciliation of changes in product warranty liabilities at December 31:
| 2007 | 2008 | ||||||
| (dollars in thousands) | |||||||
| Balance, beginning of period | $ | 19 | $ | 72 | |||
| Accruals for warranties issued | 126 | 47 | |||||
| Accruals related to pre-existing warranties (including changes inestimates) | — | (59 | ) | ||||
| Settlements made (in cash or in kind) | (73 | ) | (29 | ) | |||
| Balance, end of period | $ | 72 | $ | 31 | |||
F-31
Licenses
On January 24, 2008, the Company cancelled its non-exclusive licensing agreement with Los Alamos National Laboratory (“LANL”) covering certain direct methanol fuel cell technology. This agreement, which was last amended on May 17, 2006, prescribed annual license fees ranging from $35,000 in 2008 to $100,000 in 2019. The Company paid a one-time fee of $50,000 to cancel the agreement, and no future royalties will be paid. The Company cancelled this agreement because it no longer considers the direct methanol fuel cell technology licensed from LANL to be applicable to its future products.
Under thea 2002 NYSERDA contract, MTI Micro agreed to pay NYSERDA a royalty of 5.0% of the sales price of any product sold incorporating IP developed pursuant to the NYSERDA contract. If the product is manufactured by a New York State manufacturer, this royalty is reduced to 1.5%. Total royalties are subject to a cap equal to two times the total contract funds paid by NYSERDA to MTI Micro, and may be reduced to reflect any New York State jobs created by MTI Micro. As of December 31, 2011 and 2010, there are no amounts accrued in the consolidated balance sheets related to this royalty provision.
Under the 2010 NYSERDA contract, MTI Micro agreed to pay NYSERDA a royalty of 5.0% of the sales price of any product sold incorporating IP developed pursuant to the NYSERDA contract. The obligation commences on the first date of the first sale of these products and is in place for fifteen years. Total royalties are subject to a cap equal to three times the total contract funds paid by NYSERDA to MTI Micro. However, if the product is manufactured by a New York State manufacturer, this royalty is reduced to 1.5% and total royalties are subject to a cap equal to one times the total contract funds paid by NYSERDA to MTI Micro. As of December 31, 2011 and 2010, there are no amounts accrued in the consolidated balance sheets related to this royalty provision.
Employment Agreements
The Company has employment agreements with certain employees that provide severance payments, certain other payments, accelerated vesting and exercise extension periods of certain options upon termination of employment under certain circumstances, as defined in the applicable agreements. As of December 31, 2008,2011, the Company’s potential minimum obligation to these employees was approximately $639$595 thousand.
Contract LossesRoyalty Commitment
During 2005,On January 28, 2010, MTI Instruments entered into an Asset Purchase and Sale Agreement with Ernest F. Fullam, Inc., Peter Fullam and Diane Fullam to acquire the tensile stage line of products from Ernest F. Fullam, Inc, a pioneering microscopy accessories company from Clifton Park, NY. As part of the acquisition, Mr. Peter Fullam joined MTI Instruments as a Product Sales Engineer until September 30, 2011, at which time he became a consultant for MTI Instruments, and MTI Instruments purchased machinery, inventory and the rights to use the Fullam/MTI Instruments product name. Additionally, commencing with the calendar quarter ending March 31, 2010 and ending at the close of the calendar quarter ending December 31, 2012, MTI Instruments will pay Ernest F. Fullam, Inc. a royalty equal to 5% of the Gross Sales achieved on specific Fullam products. Royalty expense related to this agreement was $10 thousand and $12 thousand for the years ended December 31, 2011 and 2010, respectively.
F-26
17. Equity Investments for MTI Micro entered into a fixed price contract with Saft America, Inc. (“SAFT”) under the U.S. Army CECOM contract. The total fixed price to be paid at the completion was amended on November 14, 2006 from $470 thousand to $418 thousand, in recognition of the elimination of Milestone 4. As of December 31, 2006, MTI Micro forecasted costs in excess of this revised contract value of $66 thousand, and accrued this amount for the anticipated cost overrun for this project. The project was completed during February 2007.
17.– Related Party Transactions
Management believes transactions among related parties are as fair to the Company as obtainable from unaffiliated third parties.
During the Company’s December 2006 capital raise, Sidney V. Gold, a stockholder in MTI Micro, purchased 5,000 units consisting of 62,500 shares of the Company’s common stock and warrants exercisable for five years to purchase an additional 31,250 shares of the Company’s common stock at an exercise price of $18.16 per share. The purchase price per unit was $180.00.
In September 2008, MTI Micro issued convertible secured notes to external investors, including Dr. Walter L. Robb, a member of the Company’s Board of Directors, totaling $1,500 thousand. In February 2009, MTI Micro issued a convertible secured note to an external investor, a fund managed by Dr. Walter L. Robb, a member of the Company’s Board of Directors, in the amount of $500 thousand. (See Note18).
18. Secured Convertible Notes and Related Instruments – related party
On September 18, 2008, MTI Micro executed a Convertible Note and Warrant Purchase Agreement, (the “Purchase Agreement”), Secured Convertible Promissory Note Agreements (the “Bridge Notes”)Bridge Notes), Security Agreement (the “Security Agreement’)Security Agreement) and Warrant Agreements (the “Warrants”) withWarrants). The investors (the Bridge Investors) included MTI, in the Company and other accredited investors, includingform of conversion of existing debt of $700 thousand, Dr. Walter L. Robb, a member of the Company’s Boardand MTI Micro’s Boards of Directors, (the “Other Investors”, and together with the Company, the “Investors”)Counter Point Ventures Fund II, LP (Counter Point). Counter Point is a venture capital fund sponsored and managed by Dr. Walter L. Robb. General Electric Pension Trust, an employee benefit plan trust, is a passive limited partner in Counter Point. The Bridge Notes allowallowed MTI Micro to borrow up to an aggregate of $2,200 thousand,$2.2 million, including conversion of the outstanding debt totaling $700 thousand owed to the Company. Under this agreement, MTI Micro closed on $1,500 thousand$1.5 million of funding from Other Investors on September 18, 2008.
On February 20, 2009, MTI Micro and the Investors agreed to, among other things, amend the Bridge Notes (“(Bridge Notes Amendment No. 1”)1) to permit MTI Micro to sell additional Bridge Notes with an additional principal amount of up to $500 thousand to additional investors, and to extend the maturity date from March 31, 2009 to May 31, 2009 (the “Maturity Date”)Maturity Date). No other terms of the Bridge Notes were amended. Following the effectiveness of theBridge Notes Amendment No. 1, MTI Micro borrowed an additional $500 thousand from an existing Bridge Investor, a fund managed by Dr. Walter L. Robb, a member of the Company’s Board of Directors,Counter Point, bringing the aggregate outstanding principal amount borrowed under the Bridge Notes, as amended, to $2,700 thousand,$2.7 million, including conversion of outstanding debt totaling $700 thousand owed to the Company.
F-32
On April 15, 2009, MTI Micro and the Investors agreed to amend the Bridge Notes (Bridge Notes Amendment No. 2) to permit MTI Micro to sell additional Bridge Notes with an additional principal amount of up to $800 thousand to an additional investor and Counter Point, and to extend the maturity date from May 31, 2009 to March 31, 2010 (the Maturity Date). Effective December 4, 2009, MTI Micro had sold all additional Bridge Notes, as amended. The Bridge Notes havehad an interest rate of 10%, compounded annually. Accrued Interest at
On December 31, 2008 was $44 thousand. If MTI Micro’s next equity financing (the “Next Equity Financing”) raises at least $3,500 thousand (including conversion of the Bridge Notes) and occurs before the Maturity Date, the outstanding principal and, at MTI Micro’s option, accrued interest shall be automatically converted into equity securities (which are expected to be Series A Preferred Stock) issued in the Next Equity Financing at the price per share paid by investors in such Next Equity Financing.9, 2009, MTI Micro intendsentered into a Secured Convertible Promissory Note Negotiated Conversion Agreement (the Conversion Agreement) with the Company and the other Bridge Investors. The parties agreed to, useamong other things, convert the proceeds for general corporate purposes, including development and commercialization activities in support of its portable power source products. This financing was a private placement with an accredited investor and was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
If the Next Equity Financing does not occur on or before the Maturity Date, allaggregate principal and accrued interest amount of $3.9 million outstanding under the Bridge Notes shall be converted to equity securitiesinto an aggregate of 55,864,425 shares of Common Stock of MTI Micro based uponusing a valuationconversion price per share of $0.07 (the Negotiated Conversion). Warrants to purchase MTI Micro common stock at $0.07 per share were issued to Bridge Investors for an aggregate of 5,081,237 shares. As an incentive for MTI Micro to be agreedagree to bythe terms of the Negotiated Conversion, MTI Micro, the Company and the holders of a majority in interest of the Bridge Notes within thirty (30) days following the Maturity Date, which valuation and terms shall be negotiated in good faith by the parties (a “Negotiated Conversion”). Depending on the valuation of MTI Micro at the time of conversion, the Company’s ownership position could be substantially diluted, and the Company may no longer have sufficient equity to control the operations of MTI Micro. If MTI Micro and holders of a majority interest of the Bridge Notes cannot agree upon the valuation and terms of a Negotiated Conversion, and do not consummate such Negotiated Conversion within thirty (30) days following the Maturity Date, then all principal and accrued interest outstanding under the Bridge Notes shall be due and payable upon demand by the holders at any time thereafter.
In the event of a change of control of MTI MicroInvestors also agreed that immediately prior to the consummation of the Next Equity Financing,Negotiated Conversion, MTI Micro would issue to each current MTI Micro stockholder (including the Company), without consideration, a negotiated conversion, orwarrant (MTI Micro Warrant) exercisable after one (1) year for up to 50% of the repaymentaggregate number of shares of Common Stock each such MTI Micro stockholder currently held in fullMTI Micro, at $0.07 per share and with a term of allseven (7) years. Accordingly, immediately prior to the consummation of the Negotiated Conversion on December 9, 2009, MTI Micro issued MTI Micro Warrants exercisable for an aggregate of 32,779,310 shares of MTI Micro Common Stock.
As a result of the Negotiated Conversion, the Company converted an aggregate principal and accrued interest amount of $787 thousand outstanding under the Bridge Notes then all unpaid principal and accrued interest shall become immediately due and payable ininto an amount equal to 125%aggregate of the principal amount11,241,666 shares of the Bridge Notes and 100% of the accrued interest then outstanding within thirty (30) days following the consummation of a change in control.
The Bridge Notes contain customary negative covenants for loans of this type, including limitations on MTI Micro’s ability to incur indebtedness, issue securities, and dispose of assets. As of December 31, 2008, MTI Micro was not in default. The Bridge Notes are secured by all of MTI Micro’s assets (including intellectual property), have a first priority security interest in all of MTI Micro’s assets (including intellectual property), and are senior to all other debts and obligationsCommon Stock of MTI Micro, in accordance with the provisions of a Security Agreement among MTI Micro and the Investors.
Warrants
The Investors will also receive Warrants to purchase securities issued in the Next Equity Financing or issued in a Negotiated Conversion, as applicable, having an aggregate exercise price equal to 10% of the principal amount of the outstanding Bridge Notes. The per share exercise price of the Warrants shall be the per share price at which securities are sold or issued in the Next Equity Financing or Negotiated Conversion, as applicable. The Warrants will be net-exercisable and will expire on the earlier of: (i) the fifth anniversary of the Warrant issue date; (ii) immediately prior to a change in control; (iii) thirty days following the Maturity Date if no Negotiated Conversion is consummated; or (iv) immediately prior to an initial public offering of MTI Micro.
Because the Next Equity Financing or a Negotiated Conversion has not yet taken place, the warrant’s exercise price and number of shares are not yet determinable. As such, the warrants have not been measured. When the Next Equity Financing or a Negotiated Conversion does occur, the warrants will be measured and recognized at that time.
As of December 31, 2008, the Company owned approximately 97% of MTI Micro and MTI Micro’s financial results presently consolidated into the Company’s financial information. Conversion of the Bridge Notes and exercise of the Warrants into equity of MTI Micro by the Other Investors besides the Company could result in substantial dilution of the Company’s ownership interest in MTI Micro decreased from approximately 97.3% to approximately 61.8%, or 67.8% on a fully-diluted basis including the MTI Micro Warrants issued to all current MTI Micro stockholders and could result inthe Bridge Warrants. The balance of the Bridge Note payable was $0 as of December 31, 2009.
On January 11, 2010, MTI Micro entered into the Purchase Agreement with Counter Point. Counter Point is a venture capital fund sponsored and managed by Dr. Walter L. Robb, a member of the Board of Directors of the Company deconsolidating future financial resultsand MTI Micro, and a current stockholder of MTI Micro. Pursuant to the Purchase Agreement, MTI Micro issued and sold to Counter Point 28,571,429 shares of common stock, par value $0.01 per share (the MTI Micro Common Stock), at a purchase price per share of $0.07, over a period of twelve months, and warrants (MTI Micro Warrants) to purchase shares of MTI Micro Common Stock equal to 20% of the shares of MTI Micro Common Stock purchased under the Purchase Agreement at an exercise price of $0.07 per share. The sale and issuance of the MTI Micro Common Stock and MTI Micro Warrants occurred over multiple closings (each, a Closing). Nine Closings occurred through December 31, 2010, with MTI Micro raising $1.9 million from the sale of 26,952,386 shares of MTI Micro Common Stock and MTI Micro Warrants to purchase 5,390,477 shares of MTI Micro Common Stock to Counter Point. The final Closing occurred on January 5, 2011, with MTI Micro raising $113 thousand from the sale of 1,619,043 shares of MTI Micro Common Stock and MTI Micro Warrants to purchase 323,809 shares of MTI Micro Common Stock to Counter Point.
On February 9, 2011, Amendment No. 1 was entered into between MTI Micro and Counter Point. Pursuant to Amendment No. 1, MTI Micro issued and sold to Counter Point 6,428,574 shares of MTI Micro Common Stock at a purchase price per share of $0.07, through December 31, 2011, and MTI Micro Warrants to purchase shares of MTI Micro Common Stock equal to 20% of the shares of MTI Micro Common Stock purchased under Amendment No. 1 at an exercise price of $0.07 per share. The sale and issuance of the MTI Micro Common Stock and MTI Micro Warrants occurred over multiple closings (each, a Closing) occurring over four one-month closing periods (each, a Closing Period). Four Closings occurred through September 30, 2011, with MTI Micro raising $450 thousand from the sale of 6,428,574 shares of MTI Micro Common Stock and MTI Micro Warrants to purchase 1,285,715 shares of MTI Micro Common Stock to Counter Point.
F-27
On September 23, 2011, Amendment No. 2 was entered into between MTI Micro and Counter Point. Pursuant to Amendment No. 2, MTI Micro issued and sold to Counter Point 1,200,000 shares of MTI Micro Common Stock at a purchase price per share of $0.07, through December 31, 2011, and MTI Micro Warrants to purchase shares of MTI Micro Common Stock equal to 20% of the shares of MTI Micro Common Stock purchased under Amendment No. 2 at an exercise price of $0.07 per share. The sale and issuance of the MTI Micro Common Stock and MTI Micro Warrants occurred over multiple closings (each, a Closing) occurring over four one-month closing periods (each, a Closing Period). Four Closings occurred through December 31, 2011, with MTI Micro raising $84 thousand from the sale of 1,200,000 shares of MTI Micro Common Stock and MTI Micro Warrants to purchase 240,000 shares of MTI Micro Common Stock to Counter Point.
As of December 31, 2011, the Company owned an aggregate of approximately 47.6% of the outstanding shares of MTI Micro or 53.3% of the outstanding common stock and warrants issued of MTI Micro, and Dr. Robb and Counter Point owned approximately 45.2% and 5.1%, respectively of the outstanding shares of MTI Micro or 40.3% and 4.3%, respectively of the outstanding common stock and warrants issued of MTI Micro.
F-33On December 9, 2011, MTI Instruments purchased laboratory and computer equipment from MTI Micro for a total of $84 thousand, which was funded by the Company.
19.18. Geographic and Segment Information
The Company sells its products on a worldwide basis with its principal markets listed in the table below where information on product revenue and funded research and development revenue is summarized by geographic area for the Company as a whole for each of the years ended December 31:
| 2006 | 2007 | 2008 | 2011 | 2010 | 2009 | |||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||
| Product revenue: | ||||||||||||||||||
| United States | $ | 4,737 | $ | 5,453 | $ | 3,309 | $ | 6,856 | $ | 4,703 | $ | 3,908 | ||||||
| Japan | 1,762 | 2,516 | 904 | |||||||||||||||
| Singapore | 355 | 287 | 112 | 1,066 | 170 | 23 | ||||||||||||
| Hong Kong | 83 | 163 | 502 | 736 | 684 | 251 | ||||||||||||
| Japan | 337 | 238 | 612 | |||||||||||||||
| Korea | 9 | 180 | 103 | |||||||||||||||
| China | 163 | 318 | 13 | |||||||||||||||
| Taiwan | 92 | 231 | 50 | |||||||||||||||
| Malaysia | 53 | 64 | 5 | |||||||||||||||
| Other Pacific Rim | 197 | 143 | 215 | 13 | 13 | — | ||||||||||||
| Germany | 60 | 104 | 162 | 203 | 4 | 12 | ||||||||||||
| United Kingdom | 52 | 20 | 189 | 128 | 58 | 149 | ||||||||||||
| Netherlands | 125 | 164 | 147 | |||||||||||||||
| Austria | 28 | — | — | |||||||||||||||
| France | 57 | 3 | — | |||||||||||||||
| Switzerland | 78 | — | — | |||||||||||||||
| Other Europe | 63 | 37 | 160 | 27 | 43 | 56 | ||||||||||||
| Canada | 36 | 112 | 212 | 125 | 168 | 59 | ||||||||||||
| Middle East | 61 | — | 315 | 34 | 33 | 202 | ||||||||||||
| Russia | 73 | 2 | 3 | |||||||||||||||
| Turkey | 9 | — | 463 | |||||||||||||||
| Rest of World | 261 | 193 | 144 | 68 | 103 | 207 | ||||||||||||
| Total product revenue | $ | 7,667 | $ | 9,028 | $ | 6,224 | $ | 10,280 | $ | 7,179 | $ | 6,263 | ||||||
| Funded research and development revenue: | ||||||||||||||||||
| South Korea | $ | 427 | $ | 448 | $ | 0 | ||||||||||||
| United States | 62 | 1,108 | 1,154 | $ | 13 | $ | 1,234 | $ | 2,043 | |||||||||
| Total funded research and development revenue | $ | 489 | $ | 1,556 | $ | 1,154 | $ | 13 | $ | 1,234 | $ | 2,043 | ||||||
| Total revenue | $ | 8,156 | $ | 10,584 | $ | 7,738 | $ | 10,293 | $ | 8,413 | $ | 8,306 | ||||||
Revenues are attributed to regions based on the location of customers.
The Company operates in two business segments,New Energy and Test and Measurement Instrumentation. TheInstrumentation and New Energy segment is focused on commercializing DMFCs.Energy. The Test and Measurement Instrumentation segment designs, manufactures, markets and services computer-based balancing systems for aircraft engines, high performance test and measurement instruments and systems, and wafer characterization tools for the semiconductor industry.and solar industries, tensile stage systems for materials testing at academic and industrial settings, and computer-based balancing systems for aircraft engines. The New Energy segment is focused on commercializing direct methanol fuel cells. The Company’s principal operations are located in North America.
F-28
The accounting policies of the New Energy and Test and Measurement Instrumentation and New Energy segments are similar to those described in the summary of significant accounting policies (See Note(Note 2). The Company evaluates performance based on profit or loss from operations before income taxes, accounting changes, items management does not deem relevant to segment performance,taxes. Inter-segment sales and interest income and expense. Inter-segment salesexpenses are not significant.
Total product revenues contributed byof the Test and Measurement Instrumentation products segment and their percentage of total product revenues for each of the years ended December 31 are shown below:
| 2006 | 2007 | 2008 | ||||||||||||||||
| Sales | % | Sales | % | Sales | % | |||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| Aviation | $ | 2,990 | 39.00 | % | $ | 3,664 | 40.58 | % | $ | 1,979 | 31.79 | % | ||||||
| General Gauging | 4,165 | 54.32 | 4,489 | 49.72 | 2,980 | 47.87 | ||||||||||||
| Semiconductor | 512 | 6.68 | 875 | 9.70 | 1,266 | 20.34 | ||||||||||||
| Total | $ | 7,667 | 100.00 | % | $ | 9,028 | 100.00 | % | 6,225 | 100.00 | % | |||||||
| Total Foreign-BasedRevenue | $ | 2,930 | 38.22 | % | $ | 3,575 | 39.60 | % | 2,915 | 46.84 | % | |||||||
| 2011 | 2010 | 2009 | ||||||||||||||||
| Sales | % | Sales | % | Sales | % | |||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| Aviation Balancing Systems | $ | 5,359 | 52.1 | % | $ | 3,007 | 41.9 | % | $ | 2,768 | 44.2 | % | ||||||
| Precision Instruments | 3,983 | 38.8 | 2,804 | 39.1 | 2,619 | 41.8 | ||||||||||||
| Semiconductor and Solar Metrology | 938 | 9.1 | 1,368 | 19.0 | 876 | 14.0 | ||||||||||||
| Total | $ | 10,280 | 100.0 | % | $ | 7,179 | 100.0 | % | $ | 6,263 | 100.0 | % | ||||||
F-34
In the Test and Measurement Instrumentation segment, the U.S. Air Force accounted for $1,774 thousand$2.3 million or 23.1%22.4% of total revenue in 2006, $2,375 thousand2011, $1.6 million or 26.3%22.3% of total product revenue in 2007,2010, and $974 thousand$1.2 million or 15.65%19.2% of total product revenue in 2008. Sales to2009. The largest commercial customer in 2011 was a JapaneseSoutheast Asian distributor, who accounted for $2,501 thousand$1.1 million or 27.7%10.7% of total product revenue in 2007, and $8642011. The largest commercial customer in 2010 was a Chinese distributor, who accounted for $560 thousand, or 13.88%7.8% of total product revenue in 2008.2010. The largest commercial customer in 2009 was a domestic US defense contractor, who accounted for $618 thousand or 9.9% of total product revenue in 2009.
In the New Energy segment, the DOE accounted for $63$6 thousand or 12.8%49.7% of total funded research and development revenue in 2006, $6752011, $944 thousand or 43.4%77.0% of total funded research and development revenue in 2007,2010, and $1,154 thousand$2.0 million or 100%100.0% of total funded research and development revenue in 2008. Samsung accounted for $448 thousand or 28.9% of total funded research and development revenue in 2007.2009.
Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “Other” column includes corporate related items and items such as income taxes or unusual items, which are not allocated to reportable segments. The “Reconciling Items” column includes minoritynon-controlling interests in a consolidated subsidiary.entity. In addition, segments’ non-cash items include any depreciation and amortization in reported profit or loss. The New Energy segment figures include the Company’s direct micro fuel cell operations. As a result of the suspension of the MTI Micro operations, equity securitiesthe New Energy segment will continue to be included in these tables during 2012 as long as they remain in our consolidated operations. The activity presented will be reflective of Plug Power, gains on the sale of these securities, and (losses) gains relatedminimal activity anticipated to the embedded derivative for the purchase of Plug Power common stock.be incurred by MTI Micro during 2012.
| Test and | ||||||||||||||||||
| New | Measurement | Reconciling | Consolidated | |||||||||||||||
| (Dollars in thousands) | Energy | Instrumentation | Other | Items | Totals | |||||||||||||
| Year Ended December 31, 2006 | ||||||||||||||||||
| Product revenue | $ | — | $ | 7,667 | $ | — | $ | — | $ | 7,667 | ||||||||
| Funded research and development revenue | 489 | — | — | 489 | ||||||||||||||
| Research and product development expenses | 11,588 | 1,333 | — | 12,921 | ||||||||||||||
| Selling, general and administrative expenses | 2,733 | 2,457 | 4,882 | — | 10,072 | |||||||||||||
| Gain on securities available for sale | 4,289 | — | — | — | 4,289 | |||||||||||||
| Segment (loss) profit from continuing operations | ||||||||||||||||||
| before income taxes, equity in holdings’ | ||||||||||||||||||
| losses and minority interests | (12,847 | ) | 662 | (795 | ) | — | (12,980 | ) | ||||||||||
| Segment (loss) profit | (12,847 | ) | 662 | (2,690 | ) | 1,208 | (13,667 | ) | ||||||||||
| Total assets | 15,565 | 2,782 | 15,464 | — | 33,811 | |||||||||||||
| Securities available for sale | 10,075 | — | — | 10,075 | ||||||||||||||
| Capital expenditures | 1,284 | 200 | 90 | — | 1,574 | |||||||||||||
| Depreciation and amortization | 604 | 94 | 403 | — | 1,101 | |||||||||||||
| Test and | ||||||||||||||||||
| New | Measurement | Reconciling | Consolidated | |||||||||||||||
| (Dollars in thousands) | Energy | Instrumentation | Other | Items | Totals | |||||||||||||
| Year Ended December 31, 2007 | ||||||||||||||||||
| Product revenue | $ | — | $ | 9,028 | $ | — | $ | — | $ | 9,028 | ||||||||
| Funded research and development revenue | 1,556 | — | — | — | 1,556 | |||||||||||||
| Research and product development expenses | 10,115 | 1,650 | — | — | 11,765 | |||||||||||||
| Selling, general and administrative expenses | 1,921 | 2,650 | 4,167 | — | 8,738 | |||||||||||||
| Gain on securities available for sale | 2,549 | — | — | — | 2,549 | |||||||||||||
| Segment (loss) profit from continuing operations | ||||||||||||||||||
| before income taxes, equity in holdings’ | ||||||||||||||||||
| losses and minority interests | (11,189 | ) | 789 | 2,791 | — | (7,609 | ) | |||||||||||
| Segment (loss) profit | (11,189 | ) | 789 | 243 | 582 | (9,575 | ) | |||||||||||
| Total assets | 8,128 | 3,018 | 7,570 | — | 18,716 | |||||||||||||
| Securities available for sale | 4,492 | — | — | — | 4,492 | |||||||||||||
| Capital expenditures | 212 | 177 | 25 | — | 414 | |||||||||||||
| Depreciation and amortization | 715 | 117 | 297 | — | 1,129 | |||||||||||||
| Test and | Condensed | ||||||||||||||||
| (Dollars in thousands) | Measurement | Reconciling | Consolidated | ||||||||||||||
| Instrumentation | New Energy | Other | Items | Totals | |||||||||||||
| Year Ended December 31, 2011 | |||||||||||||||||
| Product revenue | $ | 10,280 | $ | — | $ | — | $ | — | $ | 10,280 | |||||||
| Funded research and development revenue | — | 13 | — | — | 13 | ||||||||||||
| Research and product development expenses | 1,243 | 223 | — | — | 1,466 | ||||||||||||
| Selling, general and administrative expenses | 2,306 | 993 | 1,695 | — | 4,994 | ||||||||||||
| Segment profit (loss) from operations before income | |||||||||||||||||
| taxes and non-controlling interest | 2,476 | (1,460 | ) | (916 | ) | — | 100 | ||||||||||
| Segment profit (loss) | 2,476 | (1,462 | ) | 634 | 738 | 2,386 | |||||||||||
| Total assets | 3,038 | 173 | 3,191 | — | 6,402 | ||||||||||||
| Capital expenditures | 170 | — | 5 | — | 175 | ||||||||||||
| Depreciation | 90 | 210 | 7 | — | 307 | ||||||||||||
F-35F-29
| Test and | |||||||||||||||||||
| New | Measurement | Reconciling | Consolidated | ||||||||||||||||
| (Dollars in thousands) | Energy | Instrumentation | Other | Items | Totals | ||||||||||||||
| Year Ended December 31, 2008 | |||||||||||||||||||
| Product revenue | $ | — | $ | 6,224 | $ | — | $ | — | $ | 6,224 | |||||||||
| Funded research and development revenue | 1,154 | — | — | 1,154 | |||||||||||||||
| Research and product development expenses | 6,614 | 1,650 | — | 8,264 | |||||||||||||||
| Selling, general and administrative expenses | 2,463 | 2,331 | 3,575 | — | 8,369 | ||||||||||||||
| Gain (loss) on securities available for sale | 1,214 | — | (196 | ) | — | 1,018 | |||||||||||||
| Segment (loss) profit from continuing operations | |||||||||||||||||||
| before income taxes, equity in holdings’ | |||||||||||||||||||
| losses and minority interests | (8,961 | ) | (1,415 | ) | (384 | ) | — | (10,760 | ) | ||||||||||
| Segment (loss) profit | (8,961 | ) | (1,415 | ) | (2,388 | ) | 260 | (12,504 | ) | ||||||||||
| Total assets | 2,093 | 2,132 | 1,286 | — | 5,511 | ||||||||||||||
| Securities available for sale | — | — | — | — | — | ||||||||||||||
| Capital expenditures | 105 | 60 | 16 | — | 181 | ||||||||||||||
| Depreciation and amortization | 621 | 128 | 70 | — | 819 | ||||||||||||||
| Test and | Condensed | |||||||||||||||||
| (Dollars in thousands) | Measurement | Reconciling | Consolidated | |||||||||||||||
| Instrumentation | New Energy | Other | Items | Totals | ||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||
| Product revenue | $ | 7,179 | $ | — | $ | — | $ | — | $ | 7,179 | ||||||||
| Funded research and development revenue | — | 1,234 | — | — | 1,234 | |||||||||||||
| Research and product development expenses | 959 | 2,896 | — | — | 3,855 | |||||||||||||
| Selling, general and administrative expenses | 1,984 | 1,950 | 1,086 | — | 5,020 | |||||||||||||
| Segment profit (loss) from operations before income | ||||||||||||||||||
| taxes and non-controlling interest | 886 | (3,639 | ) | (639 | ) | — | (3,392 | ) | ||||||||||
| Segment profit (loss) | 886 | (3,639 | ) | (643 | ) | 1,638 | (1,758 | ) | ||||||||||
| Total assets | 1,751 | 639 | 1,211 | — | 3,601 | |||||||||||||
| Capital expenditures | 47 | — | — | — | 47 | |||||||||||||
| Depreciation | 81 | 385 | 15 | — | 481 | |||||||||||||
| Test and | Condensed | |||||||||||||||||
| (Dollars in thousands) | Measurement | Reconciling | Consolidated | |||||||||||||||
| Instrumentation | New Energy | Other | Items | Totals | ||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||
| Product revenue | $ | 6,263 | $ | — | $ | — | $ | — | $ | 6,263 | ||||||||
| Funded research and development revenue | — | 2,043 | — | — | 2,043 | |||||||||||||
| Research and product development expenses | 965 | 4,479 | — | — | 5,444 | |||||||||||||
| Selling, general and administrative expenses | 1,822 | 105 | 1,357 | — | 3,284 | |||||||||||||
| Segment profit (loss) from operations before income | ||||||||||||||||||
| taxes and non-controlling interest | 381 | (3,171 | ) | (839 | ) | 57 | (3,572 | ) | ||||||||||
| Segment profit (loss) | 381 | (3,171 | ) | (631 | ) | 322 | (3,099 | ) | ||||||||||
| Total assets | 1,949 | 1,061 | 731 | — | 3,741 | |||||||||||||
| Capital expenditures | — | 7 | — | — | 7 | |||||||||||||
| Depreciation | 103 | 496 | 61 | — | 660 | |||||||||||||
The following table presents the details of “Other” segment (loss) profit for each of the years ended December 31:
| 2006 | 2007 | 2008 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Corporate and other (expenses) income: | ||||||||||||
| Depreciation and amortization | $ | (403 | ) | $ | (297 | ) | $ | (70 | ) | |||
| Interest income | 486 | 413 | (106 | ) | ||||||||
| Gain on derivatives | 182 | 2,967 | 655 | |||||||||
| Income tax (expense) benefit | (1,895 | ) | (2,548 | ) | (2,004 | ) | ||||||
| Other expense, net | (1,060 | ) | (292 | ) | (863 | ) | ||||||
| Total (expense) income | $ | (2,690 | ) | $ | 243 | $ | (2,388 | ) | ||||
| 2011 | 2010 | 2009 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Corporate and other (expenses) income: | ||||||||||||
| Depreciation | $ | (7 | ) | $ | (15 | ) | $ | (61 | ) | |||
| Salaries and benefits | (984 | ) | (161 | ) | ||||||||
| Interest income | — | — | 68 | |||||||||
| Gain (loss) on derivatives | 73 | (2 | ) | (29 | ) | |||||||
| Income tax benefit (expense) | 1,550 | (4 | ) | (208 | ) | |||||||
| Other (expense) income, net | 2 | (461 | ) | (401 | ) | |||||||
| Total income (expense) | $ | 634 | $ | (643 | ) | $ | (631 | ) | ||||
19. Line of Credit
On September 20, 2011, MTI Instruments entered into a working capital line of credit with First Niagara Bank, N.A. Pursuant to the Demand Grid Note, MTI Instruments may borrow from time to time up to $400 thousand to support its working capital needs. The note is payable upon demand, and the interest rate on the note is equal to the prime rate with a floor of 4.0% per annum. The note is secured by a lien on all of the assets of MTI Instruments and is guaranteed by the Company. The line of credit is subject to a review date of June 30, 2012. Under the line of credit, MTI Instruments is required to hold a line balance of $0 for 30 consecutive days out during each consecutive year. As of December 31, 2011, there were no amounts outstanding under the line of credit.
20. RestructuringSubsequent Events
In March 2007,The Company has evaluated subsequent events and transactions through the Company announced the suspensiondate of MTI Micro’s high power direct methanol fuel cell program in response to decreased funding and sales opportunitiesthis filing for potential recognition or disclosure in the military market. In connection with this action, the Company accrued restructuring charges of $344 thousand pre-tax, consisting primarily of cash-based employee severanceconsolidated financial statements and benefit costs related to the reduction of 23 positions within its New Energy segment and Corporate staff. Restructuring expenses were classified as selling, general and administrative expenses within the Company’s Consolidated Statements of Operations for the period. All amounts under this plan were settled by March 31, 2008.has noted no subsequent events requiring recognition or disclosure.
In August 2008, the Board of Directors approved a restructuring plan (the “Restructuring”), which was designed to help the Company reduce expenses and preserve cash. As part of the Restructuring, a total of 29 positions across the Company and its subsidiaries were eliminated. The Company accrued and at present expects to incur total severance and other benefit charges of approximately $342 thousand in connection with this plan. Through December 31, 2008, the Company incurred cash expenditures to implement this plan of $273 thousand, and incurred the remaining cash expenditures in the first quarter of 2009.
F-36F-30
