Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes ☐ No
☑
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No☑
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☑ No ☐
Indicate by check mark
whether the registrant has submitted electronically every Interactive Data File
required to be submitted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such files). Yes
☑ No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of "large accelerated filer," "accelerated filer,"
"smaller reporting company," and "emerging growth company" in Rule 12b-2 of the
Exchange Act.
Indicate by check mark whether the registrant has filed a report
on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the
Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the voting and non-voting common
equity held by non-affiliates as of June 30, 2020 (based on the last sale price
of $0.70 per share for such stock reported on the over-the-counter market for
that date) was $3,756,086.
As of March 26, 2021,
the Registrant had 9,821,857 shares of common stock outstanding.
Documents
incorporated by reference: Portions of the registrant's Proxy Statement for its
2021 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Form 10-K.
PART I
Item 1: Business
Unless
the context requires otherwise in this Annual Report on Form 10-K, the terms "MTI,"
the "Company," "we," "us," and "our" refer to Mechanical Technology,
Incorporated, "MTI Instruments" refers to MTI Instruments, Inc., and "EcoChain"
refers to EcoChain, Inc. Other trademarks, trade names, and service marks used
in this Annual Report on Form 10-K are the property of their respective owners.
Overview and
Recent Developments
Mechanical
Technology, Incorporated, was incorporated in New York in 1961 as a
developer and manufacturer of energy-efficient rotating machinery and
instrumentation. Mechanical Technology, Incorporated became a Nevada corporation
on March 29, 2021. Headquartered in Albany, New York, the Company has a rich
history of technological experience in providing technical advances to support
American industry and defense agencies, and in developing related proprietary
products, including gas-lubricated bearings, sensors, compressors, steam turbines,
high-efficiency engines, and fuel cells for industrial equipment and hand-held
devices. During the last four years we have undertaken a process to streamline
our product offerings in order to re-focus on our core business and key product
lines and limit the amount of customer-specific customization of our products,
which has resulted in the Company returning to profitability. We remain,
however, as we have throughout the Company's history, highly dependent on the
financial expertise of our workforce given the highly-technical nature of our products
and businesses.
Today,
the Company's core businesses are conducted through its wholly-owned subsidiaries
MTI Instruments and EcoChain.
MTI
Instruments, incorporated in New York in 2000, is engaged in the design,
manufacture, and sale of vibration measurement and system balancing solutions,
precision linear displacement sensors, instruments and system solutions, and
wafer inspection tools, serving markets that require 1) engine balancing and
vibration analysis systems for both military and commercial aircraft, 2) the
precise measurements and control of products and processes in automated manufacturing,
assembly, and consistent operation of complex machinery, and 3) metrology tools
for semiconductor and solar wafer characterization. We continue to work on ways
to increase our sales reach, including expanded worldwide sales coverage and
enhanced internet marketing, with respect to this business.
EcoChain,
a Delaware corporation incorporated in January 2020, is engaged in cryptocurrency
mining powered by renewable energy. Related to this new core business, we made
a strategic investment, and hold an equity position, in Soluna Technologies,
Ltd. ("Soluna"), a Canadian company that develops vertically-integrated, utility-scale
computing facilities focused on cryptocurrency mining and cutting-edge
blockchain applications, as further discussed below.
Our website is http://www.mechtech.com.
Information contained on our website does not constitute part of and is not
incorporated into this Annual Report.
The current corporate
organizational structure of MTI appears below.
The Company had previously been subject to the reporting
requirements of the Securities Exchange Act of 1934 ("Exchange Act") and filed
reports and other documents with the Securities and Exchange Commission (the "SEC")
thereunder, but had ceased doing so in 2018. The Company filed with the SEC a
Form 10 Registration Statement to re-register its common stock under Section 12
of the Exchange Act initially in March 2020, which was withdrawn and then re-filed
in September 2020 and that became effective in November 2020, making the
Company once again subject to the Exchange Act's reporting requirements.
3
In addition, on March 23, 2020, our common stock commenced
trading on the Nasdaq Stock Market LLC ("Nasdaq").
On March 29, 2021, the Company re-incorporated from
New York to Nevada (the "Redomestication"). To effect the Redomestication, the
Company organized a wholly-owned subsidiary in Nevada named Mechanical
Technology, Incorporated ("MKTY-NV") and the Company merged with and into MKTY-NV
with MKTY-NV as the surviving entity, succeeding to and assuming all rights and
obligations of the Company in accordance with Nevada law. Upon consummation of
the Redomestication, the Company's state of incorporation as a practical
matter changed from New York to Nevada, and each outstanding share of Company
common stock was converted into one share of MKTY-NV common stock. We believe
that reincorporation in Nevada will give us a greater measure of flexibility and
simplicity in corporate governance than is available under New York law and will
increase the marketability of our securities. The Nevada Revised Statutes are
generally recognized as one of the most comprehensive and progressive state
corporate statutes. We believe that by reincorporating the Company in Nevada, it will be better suited to
take advantage of business opportunities as they arise and to provide for its
ever-changing business needs. We believe that the Company's growth can be conducted
to better advantage if the Company is able to operate under Nevada law.
In addition, on March 10, 2021, the Company filed with the SEC
a Registration Statement on Form S-1 with respect to its anticipated sale of up
to $11.5 million worth of its common stock in a firm underwritten offering.
We intend to use the net proceeds of the offering primarily
for the acquisition, development, and growth of two additional cryptocurrency
mining facilities, including cryptocurrency miners, other computer processing
equipment, data storage, electrical infrastructure, software and real property
(i.e. land and buildings), but we also may use a portion of the proceeds to acquire
other entities or businesses in the future that complement our businesses or
are otherwise consistent with our business plan. We may also use a portion
of the net proceeds to pay for the costs associated with our Nasdaq listing application,
which was approved on March 18, 2021.
In connection with our Nasdaq listing application, our Board
of Directors approved (subject to shareholder approval, which was obtained at
the special meeting of shareholders held on March 25, 2021) a grant of discretionary
authority permitting the Board, at any time prior to the Company's 2022 annual
meeting of shareholders, to effect a reverse split of the Company's outstanding
shares of common stock (either before or after the Redomestication) at a
specific whole number ratio within a range from 1-for-2 to 1-for-10.
Subject to shareholder approval, we intend for the Board to effect such reverse
stock split only if and to the extent necessary to remain in compliance with Nasdaq's
continued listing requirements.
In February 2021 we added two new
independent directors to our Board of Directors, William
Hazelip and Alykhan Madhavji, who bring to the Board expertise that will
support EcoChain's cryptocurrency mining business. Mr. Hazelip is an accomplished leader in the energy industry,
with deep experience in utility project development, financing, regulation, and
operations. Mr. Madhavji is the Managing Partner at Blockchain Founders Fund, an
early-stage investment fund specialized in investing in blockchain and emerging
technology projects and venture-builder of top-tier start-ups headquartered in Beijing,
China. To support EcoChain's cryptocurrency mining business, the Company
intends to bolster the Board's expertise in areas vital to this business,
including power generation and transmission business, as well as project finance,
as it continues to grow EcoChain. Messrs. Hazelip and Madhavji have a wealth of
knowledge and experience in these important areas.
Test and Measurement Instrumentation Segment
MTI Instruments, Inc.
MTI
Instruments engages in the design, manufacture, sale, marketing, and support of
metrology, or measurement, products that provide analytical data to help
customers monitor and analyze processes in areas including research and
development, manufacturing, process control, quality control, and troubleshooting
of third-party equipment. In research and development, our products can help
customers collect empirical data that they can use to develop new products or
processes. In manufacturing, our sensors can help engineers understand whether
or not a process is under control. In the quality control area, our products
can help determine if parts in a manufacturing line pass or fail an applicable
quality test. With respect to troubleshooting, our products can provide
diagnostic, and potential solution, information.
Because
of the large number of applications and uses for our products, MTI Instruments'
product mix varies from a single sensor to a large multi-channel system that
contains many different sensors and software, we can provide our customers a
complete solution. In addition, MTI Instruments sells components to original
equipment manufacturers ("OEMs") who, in turn, incorporate our components into
their own products.
MTI Instruments' operations are
headquartered in Albany, New York.
4
Instrumentation Products
MTI
Instruments manufactures a line of products capable of diagnosing vibration and
balancing problems of an aircraft engine and generating a visual map of where
metal weights should be placed for the customer to balance the engine, also
known as "trim balancing." MTI Instruments also specializes in non-contact,
highly-accurate metrology products. The measurements are carried from a
distance while the sensor is tracking the object's movement. These types of
measurement sensors are commonly referred to in the industry as non-contact,
linear displacement measurement sensors. Additionally, MTI Instruments
manufactures a portable signal generator as well as quality control tools for the
semiconductor industry.
Balancing
Systems: MTI Instruments manufactures
computer-based portable balancing systems ("PBS") products that automatically
collect and record aircraft engine vibration data, identify vibration or
balance trouble in an engine, and calculate a solution to the problem on-wing,
which means that customers do not have to disassemble the engine off the plane
to perform this test and correct for the problem, resulting in a significant
reduction of downtime. Major aircraft engine manufacturers and the U.S. Air
Force, other military and commercial airlines, and gas turbine manufacturers use
these products. MTI instruments also manufactures a product with similar
characteristics for test cells. Test cells are dedicated engine facilities outfitted
with instruments to test aircraft engines when taken off aircrafts.
Listed
below are selected MTI Instruments' Balancing Systems product offerings and
technologies:
Product
|
|
Description
|
PBS-4100+ Portable Balancing System
|
|
Provides easy-to-follow solutions for engine vibration
and trim balancing
|
|
|
|
PBS-4100R+ Test Cell Vibration Analysis and Trim Balance
System
|
|
Advanced trim balancing and diagnostics for engine test cells
|
|
|
|
TSC-4800A Tachometer Signal Conditioner
|
|
Signal conditioner detects and conditions signals for monitoring,
measuring, and indicating engine speeds
|
Precision
Instruments Products: MTI Instruments'
precision instruments products are designed to address the needs of process
engineers, researchers, designers, product developers, and others who need to measure
and monitor what they are working on with precisions down to a nanometer or 1
billionth of a meter - essential to some industries like the semiconductor market,
which uses such precision in the manufacturing of products including computer
chips and smartphones. These products are also used in general industrial
manufacturing applications including measuring dimensions, monitoring thickness,
and the vibration of products.
Listed
below are selected MTI Instruments' precision instruments product offerings and
technologies:
Product Line
|
|
Description
|
Accumeasure ™ Series
|
|
High precision capacitive boards and systems offering
great stability
|
Microtrak ™ Series
|
|
Single spot laser sensor line equipped with the latest
complementary metal oxide semiconductor sensor technology with high sensitivity
|
Fotonic Sensor® Series
|
|
Fiber-optic-based vibration sensor systems with high frequency
response
|
Diagnostic
Equipment: MTI Instruments offers a
portable signal generator - its 1510 Calibrator.
A signal, or function, generator is a product that delivers an electronic
signal simulating other pieces of equipment or sensors to help the user easily isolate
potential problems when testing and calibrating electronic equipment. While the
product was originally designed to help customers calibrate PBS products in the
field, MTI Instruments now markets this product worldwide to different markets.
Semiconductor
and Solar Metrology Systems: MTI
Instruments manufactures a family of products that can assist in early defect
detection in the manufacturing process of semiconductor products. Some of these
semiconductor products include microchips, which are the basis for building the
sophisticated electronic devices in common use today, including computers and
smartphones. MTI Instruments' semiconductor products help our manufacturer
customers identify irregularities in the components of their products earlier in
their manufacturing process. For example, for microchip manufacturers, our
products allow for the detection of defects at the wafer (the surface, usually
made of the chemical element silicon, from which microchips are built) stage of
the manufacturing process. This allows our customers to discard defective components
before they result in the manufacture of defective products, saving them time
and money.
5
Listed
below are MTI Instruments' semiconductor and solar metrology systems product offerings
and technologies:
Product
|
|
Description
|
Proforma 300iSA
|
|
Semi-automated, non-contact full wafer surface scanning
system for thickness, total thickness variation, bow, warp, site and global
flatness
|
Proforma 300i
|
|
Manual, non-contact measurement of wafer thickness, total
thickness variation, and bow
|
PV 1000
|
|
In process tool for measuring thickness and bow of solar
wafers
|
Marketing,
Sales and Distribution
MTI Instruments
markets its products and services using selected and specific channels of distribution.
In the Americas, MTI Instruments uses a combination of direct sales and representatives.
Overseas, particularly in Europe and Asia, MTI Instruments uses distributors
and agents specific to our targeted end markets and has our sales staff frequently
(at least once per quarter) visit distributors and customers in these
territories to increase our exposure and sales, although during the current
COVID-19 pandemic these visits are taking place virtually, either through
videoconferences or via webinars. For our balancing systems, MTI Instruments
primarily sells directly to end users.
MTI Instruments
supplements sales efforts with marketing activities across different media
including search engines, targeted newsletters, and purchased customer lists,
and participates in trade shows related to our business in hopes to increase
lead generation, resulting in new customer sales. The Company also maintains
strong working relationships with our existing key customers to continually
promote new product sales.
In
addition, the Company works with existing OEMs and seeks to work with new OEMs
to incorporate our products into their own products or retrofit existing components
with our products. In most cases, these OEMs are looking for a semi-custom sensor
using our products and technologies as the base for development. While the
sales cycle of a new MTI Instruments' product at an OEM can be long, so is the
potential for recurring revenue once an OEM adopts our product.
Product Development
MTI Instruments conducts research
and development efforts to support its existing products and develop new ones according
to its sales and marketing plans. Management believes that our success in our
current business depends to a large extent upon innovation, technological
expertise, and new product development, and in some cases, seeking a
technological advantage in the market. In addition, as noted above MTI
Instruments seeks to work with OEMs to develop semi-custom product
solutions. Below are our most recent product development efforts, all of
which are part of our Accumeasure ™ Series
product line:
-
In the first quarter of 2020, MTI Instruments launched our D200
HD, a high-definition product targeting customers looking for a linear
displacement sensor capable of achieving a resolution in picometers. Resolution
is the minimum detectable change in the position of the object being studied.
For reference, one inch can be divided into 25.4 billion picometers. This
product can detect small distance changes as low as 20 picometers. This product
feature is particularly relevant to companies working in nano-science and nano-technology
applications including the semiconductor, medical instrumentation, and electronics
industries.
-
In 2019, we launched the Digital Accumeasure D Series, Gen 3- the
third generation of this product platform with improvements in linearity down
to 0.01%, while improving resolution. Linearity is a large component of how an
instrument performs and how accurate it is. This product is targeted to customers
looking for a linear displacement sensor with both high accuracy and high
resolution. This product appeals to companies working on tracking positioning
or movement including two-directional moving platform manufacturers, lens
positioning developers, and, in general, the semiconductor industry.
-
In 2016, MTI Instruments
introduced a paper-thin capacitance probe that is non-magnetic, a feature
that allows the probe to conform to and be bonded in a thin gap and
provides accurate measurement within surrounding magnetic fields. This
paper-thin probe, together with the Accumeasure D, is designed to be used
to measure and monitor gaps in high power generators, wind turbines, and
other auxiliary equipment. That year, we also enhanced the PBS-4100+ to accommodate the latest generation of
fuel-efficient aircraft engines.
6
Product
Manufacturing & Operations
While many companies in the
sensor, instrument, and systems markets have manufacturing operations overseas,
MTI Instruments (and its predecessors) is and has always been a U.S.-based
manufacturing company. Products are conceived, developed, tested, and shipped
out from our headquarters in Albany, New York.
Our management believes that there
are inherent advantages in maintaining our operations in the United States, including
reducing the risk of inadvertent technology transfer, the ability to control
manufacturing quality, and a much more effective customer management and satisfaction
process. We have long-term vendor relationships and believe that most raw materials
that we use in our products are readily available from a variety of vendors. These
advantages were particularly acute during the last 12 months as we experienced minimal
supply chain interruptions or other negative effects on our manufacturing processes
as a result of the coronavirus pandemic.
We employ a flexible approach to
manufacturing. While cross-training our employees in operations in different
functional areas, management also implemented and has kept up-to-date lean principles
on the manufacturing floor to increase capacity and productivity when experiencing
high sales volumes.
In April 2020, the Company was
re-certified ISO 9001:2015 compliant. The certification was authorized by TÜV Rheinland®,
an independent testing agency. To initially obtain this certification, which we
did in 2017, we underwent a rigorous five-step process including preparation,
documentation, implementation, internal audit, and final certification. We
believe that operational changes we implemented in accordance with ISO 9001:2015
confirms our commitment to an effective management system and continuous improvement,
a practice that management believes is important for continuous growth.
Competition
We compete with a number of
companies, several of which are substantially larger than MTI Instruments.
In the axial turbo machinery market,
MTI Instruments' PBS product line competes with products from companies including
ACES Systems and Meggitt Sensing Systems (Vibrometer) in the diagnostics of
engine vibration and trim balancing.
In the precision automated
manufacturing market, MTI Instruments faces competition from companies including
Omron Corporation, Turck Inc., Pepperl+Fuchs Inc., Keyence Corporation, Micro-Epsilon
Messtechnik GmbH & Co. KG, Schmitt Industries Inc., Capacitec, Inc., Microsense
LLC, and Motion Tech Automation Inc.
In the R&D
and semiconductor markets, we compete with companies involved in wafer
inspection including KLA Corporation, Micro-Epsilon Messtechnik GmbH & Co.
KG, and E+H Metrology GmbH. Competitors in precision linear displacement include
Keyence Corporation, Micro-Epsilon Messtechnik GmbH & Co. KG, Schmitt
Industries Inc., Capacitec, Inc., Microsense LLC, and Motion Tech Automation
Inc.
The primary competitive considerations
in MTI Instruments' markets are product quality, performance, price, timely delivery,
responsiveness, and the ability to identify, pursue, and obtain new customers.
MTI Instruments believes that its employees, product development skills, sales
and marketing systems, and reputation are competitive advantages.
Raw
Materials
Our
products are made from a wide variety of raw materials and certain
subassemblies that are generally available from multiple sources. While we seek
to have several sources of supply for our raw materials and subassemblies,
however, we do obtain certain materials from a single source or a limited group
of suppliers or from suppliers in a single country. While we believe that we
have established strong vendor relationships to mitigate the risks associated with
single-source suppliers and have not experienced disruptions in our supply
chain to date, disruptions in supply remain a possibility and could result in
delays, increased costs, or reduced operating profits or cash flows.
Dependence on Certain Customers
All of our product revenues (which
constituted 93.8% of our total revenues) during 2020, and all of our revenues during
2019, 2018, and 2017, were earned through MTI Instruments. While we also have
strong relationships with companies in the electronics, aircraft, aerospace, automotive,
and semiconductor industries, MTI Instruments' largest customer is the U.S. Air
Force. The U.S. Air Force accounted for 42.9%, 20.8%, 28.0%, and 20.1%, respectively,
of our total product revenues during 2020, 2019, 2018, and 2017, respectively. While we depend on a relatively small number of commercial
customers for the majority of the balance of our product revenues, sales to the
largest commercial customer during each of the last three fiscal years
accounted for between 9.1% and 11.1% of total product revenue and our
largest commercial customer in each of the last three years was a different company
than in each of the other three years. While we continue
to endeavor to maintain and further expand our customer base, we expect that sales
to a limited number of customers will continue to account for a high percentage
of our revenues for the foreseeable future, and as a result the loss of or significant
reduction in sales to our current customer base could have a material adverse
effect on our business, revenues, ability to remain profitable, and financial condition.
7
Intellectual Property and
Proprietary Rights
We rely on trade secret laws to establish and protect the
proprietary rights of our products. In addition, we enter into standard
confidentiality agreements with our employees and consultants and seek to
control access to and distribution of our proprietary information. Even with
these precautions, however, it may be possible for a third party to copy or
otherwise obtain and use our products or technology without authorization or to
develop similar technology independently. In addition, effective trade secret
protection may be unavailable or limited in certain foreign countries.
Royalty Agreement; Sale of
Business
Pursuant to an Asset Purchase
Agreement by and between MTI Instruments and 5 Twenty-Two Systems, LLC, dated
as of May 10, 2019, we sold all assets related to our former tensile stage
product line to 5 Twenty-Two Systems for an aggregate purchase price comprised
of $28 thousand plus $9 thousand for certain inventory, plus future royalty payments
and 5 Twenty-Two Systems' assumption of certain liabilities. Pursuant to the
Asset Purchase Agreement, 5 Twenty-Two Systems' is required to pay MTI
Instruments, through May 10, 2022, a royalty equal to 3% of 5 Twenty-Two
Systems' gross sales from its sale of products, equipment, or other assets
containing, incorporating, or making use of the assets purchased from MTI
Instruments pursuant to the Asset Purchase Agreement. We have received some royalty
payments under this agreement but to date such amounts have been immaterial.
Cryptocurrency
Segment
EcoChain, Inc.
EcoChain engages in cryptocurrency mining, a process by which
transactions between cryptocurrency users are verified and added to the
blockchain public ledger. Cryptocurrency mining also introduces new cryptocurrency
coins into the existing circulating supply, facilitating a peer-to-peer
decentralized network without the need for a third-party central authority.
In connection with this business line, EcoChain has established
a facility located in East Wenatchee, Washington to mine cryptocurrencies and
integrate with the blockchain network. Pursuant to the January 2020 Operating
and Management Agreement between EcoChain and Soluna, Soluna assisted us in
developing, and is now operating, the cryptocurrency mining facility. The Operating
and Management Agreement requires, among other things, that Soluna provide developmental
and operational services, as directed by EcoChain, with respect to the
cryptocurrency mining facility in exchange for EcoChain's payment to Soluna of
a one-time management fee of $65,000 and profit-based success payments in the
event EcoChain achieves explicit profitability thresholds. Pursuant to the Operating
and Management Agreement, during the developmental phase of the cryptocurrency
mining facility, which ended on March 14, 2020, Soluna gathered and analyzed
information with respect to EcoChain's cryptocurrency mining efforts and produced
budgets, financial models, and technical and operational plans, including a
detailed business plan, that it delivered to EcoChain in March 2020, (the
"Deliverables"), all of which was designed to assist with the efficient
implementation of a cryptocurrency mine. The agreement provided that, following
EcoChain's acceptance of the Deliverables, which occurred on March 23, 2020,
Soluna, on behalf of EcoChain, would commence operations of the cryptocurrency
mine in a manner that will allow EcoChain to mine and sell cryptocurrency. In
that regard, on May 21, 2020, EcoChain acquired the intellectual property of
Giga Watt, Inc. ("GigaWatt") and certain other property and rights of GigaWatt
associated with GigaWatt's operation of a crypto-mining operation. The acquired
assets form the cornerstone of EcoChain's new cryptocurrency mining operation.
The mining facility has electrical
capacity of between 1.5 megawatts and 3 megawatts depending on whether the
Company decides to upgrade certain electrical infrastructure within the
facility. The Company has
upgraded its electrical capacity at the facility to 2.2 megawatts and will
continue to assess the economics of further investing in facility upgrades to
reach 3 megawatts. The Company intends to continue to rigorously evaluate
increasing its investment in the Blockchain and dense computing sector.
The Operating and Management Agreement
with Soluna provides EcoChain with the management expertise in the
cryptocurrency industry that is necessary to operate the mining facility. Soluna
handles the operational management of the mine including making decisions regarding
miner purchases (as further described below), including the make and model thereof,
and management of execution of daily activities. Several members of the Soluna
management team have deep experience in the cryptocurrency industry, including
leveraging energy-efficient power and cutting-edge technology
advancements. EcoChain has engaged a third-party service provider to
handle the day-to-day operational tasks of the mine, including remedial and
preventative maintenance, mine operations and general upkeep of the facility. The
team handling these matters, which works on-site at the mining facility, has 10
years' experience in the daily management of the mining facility as this same
team handled these matters for the facility when it was being operated by
GigaWatt and by its bankruptcy trustee prior to EcoChain's purchase of the mine. The
Company handles the general and administrative functions of the mine through its
corporate office, but otherwise there are no synergies between this business and
MTI Instruments' metrology business. EcoChain has no employees.
8
Cryptocurrency Mining Operations
EcoChain's cryptocurrency mining operation,
operated by Soluna as provided for in the Operating and Management Agreement,
commenced operations and immediately began mining several cryptocurrencies,
including BitCoin, Ethereum, and LiteCoin, upon consummation of the GigaWatt
transaction on May 21, 2020, using the mining equipment we acquired in that
transaction. The mine, which is powered by renewable energy, is housed in approximately 19,000 square feet of
leased space in four separate buildings. Since commencing its mining
operations, EcoChain has acquired additional equipment and initiated improvements
to the acquired facilities to increase the mine's capacity. To maximize space
utilization at the facility and cut down on our operating costs associated with
the facility, EcoChain has entered into a co-location agreement to share both
unused space and facility costs with Navier Incorporated. EcoChain sells on
a daily basis all cryptocurrencies mined for U.S. dollars, as it is not in the
business of accumulating cryptocurrency on its balance sheet for speculative
gains.
On January 14, 2021, EcoChain established a subsidiary,
EcoChain Wind, LLC, a Nevada limited liability company, for the purpose of
acquiring real property in the Southeastern United States for purposes of
building cryptocurrency mining operations at an energy-efficient cryptocurrency
mining facility. EcoChain signed an agreement, dated January 21, 2021, relating
to the acquisition of this property, and closed the acquisition on March 4,
2021.
On February 22, 2021, EcoChain Wind entered into an Industrial
Power Contract with a power-providing cooperative pursuant to which the
cooperative will provide electric power and energy to this new mining facility.
This agreement, and the electric power and energy to be provided to EcoChain
pursuant thereto, will commence upon the completion of the facility, which is
expected to occur in the third or fourth quarter of 2021, for an initial term
of five years, with successive automatic five-year renewals unless EcoChain provides
notice that it does not wish to renew the agreement. The agreement provides
that EcoChain will pay the cooperative for the electric power and energy it provides
the new mining facility in accordance with the applicable monthly rates,
charges, and provisions agreed to from time to time between the cooperative and
the Tennessee Valley Authority ("TVA"), which is subject to modification or
adjustment, from time to time, as agreed to between the power provider and the TVA.
On March 24, 2021, EcoChain established a subsidiary,
EcoChain Block, LLC, a Nevada limited liability company, for the purpose of
acquiring or leasing additional assets in the Southeastern United States.
Cryptocurrency Assets
Cryptocurrency assets, known as
miners, consist of hardware and software that perform the computations needed
to mine cryptocurrencies, as discussed under "Cryptocurrency Revenue" below, and
as such are the source of the associated revenues generated by a cryptocurrency
mine, including EcoChain's. EcoChain has approximately 900 miners in
service, mostly Bitmains, that generate Bitcoin. For a number of reasons, including
the fact that EcoChain purchases miners in the secondary market from a number
of different sellers, and that the price fluctuates because of demand and supply
fluctuations as well as fluctuations in the price of the specific cryptocurrency
that can be mined by the miner purchased, which drives the cost of the miners,
the cost of purchasing these assets fluctuates regularly. As a result, EcoChain
uses dollar cost averaging to flatten the overall cost of purchasing the miners
so that it can consistently purchase miners regardless of the cost on the date
of purchase. This allows EcoChain to replace the miners more consistently
with newer models, which is important because, as miners age, their speed degrades,
usually resulting in decreased computations over the same period and, as a result,
fewer mined cryptocurrencies. In addition, miners are subject to ongoing technical
obsolescence.
Cryptocurrency Revenue
EcoChain recognizes revenue when the
related cryptocurrencies are converted to U.S. dollars through its account with
Coinbase, a cryptocurrency exchange (i.e. a platform that facilitates the
exchange of cryptocurrencies for other assets, such as conventional money or other
digital currencies). EcoChain chooses to exchange cryptocurrency to U.S. dollars
through the Coinbase account daily. The primary cryptocurrencies that EcoChain
mines are Bitcoin and, to a lesser degree, Ethereum and LiteCoin. The type
of cryptocurrency mined is based specifically on the installed miner, as each
miner can mine only one type of cryptocurrency. The miners perform complex
computations at a speed referred to as the "hash rate." EcoChain participates
in mining pools where our miners' computations and those of other miners owned
by other persons and entities are combined to place blocks on the blockchain, which
generates the relevant cryptocurrency (in other words, it is at this point that
more of the relevant cryptocurrency is created, which is memorized in the blockchain
by being represented by new "blocks"). The mining pool operator uses
software to track contributions made by all the miners and allocates the
newly-minted cryptocurrency to the miners based on their pro rata contributions. EcoChain
monitors its inputs into these pools and the resulting distribution of the resulting
cryptocurrency, which allows the Soluna management team to ensure that EcoChain
is being allocated the amounts of cryptocurrency it is entitled to based on the
number of computations it contributes to the pools and the hash rate thereof. The
cryptocurrencies allocated to EcoChain are automatically issued to its Coinbase
account, which Coinbase exchanges for U.S. dollars based on standard exchange rates.
9
Crypto
Currency Mining Market Overview
According to Global Coin
Research,[1] Bitcoin miners achieved
an aggregate of more than $6 billion in revenues through July 2019 on an
annualized basis. According to Glassnode, Bitcoin miner revenue hit a new all-time
high of $52.3 million per day during the week of March 11, 2021.[2]
The Company believes that cryptocurrency mining has seen a growing demand due
to, among other things, the continuous adoption of cryptocurrency worldwide. For
example, in October 2020 PayPal announced that its customers can now buy, sell,
and hold Bitcoin in their PayPal accounts.[3] Crypto.com estimates that
there are approximately 106 million cryptocurrency users globally as of January
2021.[4] According the registration
statement it recently filed with the SEC to become a public company, Cryptocurrency
exchange Coinbase alone has approximately 43 million users as of December 31,
2020, whereas only eight years ago, on December 31, 2012, it had an estimated just
13,000 users. These increases are being fueled by, among other things, the growing
adoption of cryptocurrency by a number of industries including, among others,
online gaming, online gambling, remittances, and digital commerce.[5]
Research estimates that from 2018 through 2028, the compound annual growth rate
(return on investment over a period of time) of the market capitalization for the
crypto asset market will be 36%.[6] Further, according to
Gartner, IDC, and Forrester, the total addressable market (total estimate of
value based on available population of users) is estimated to grow from $63
billion in 2020 to $86 billion in 2028.[7] Based on the estimated
growth in the total addressable market, the Company expects continued demand
downstream to the mining level of cryptocurrencies.
Mining Ecosystem and Competitive
Landscape
There are number of methods that
individuals and organizations use to engage in cryptocurrency mining, and
mining operations run the gamut from individuals using one or more systems to
run mining operations to industrial-scale mining farms with thousands of systems.
The Company believes that the high demand for cryptocurrency is fueling innovation
in all aspects of the mining hardware and the mining process. This includes the
creation of mining pools, discussed above, that permitted the initial mining
operators, which were generally small or individually-owned operations, to pool
their resources to compete with larger entities that entered the mining market as
cryptocurrencies gained wider use and acceptance and, as a result, mining them
became more profitable. The mining business is global
and is not dominated by any particular individual or organization. EcoChain
considers Marathon Patent Group, Riot Blockchain, Inc. CleanSpark, Inc., HIVE
Blockchain Technologies, Ltd., and Hut 8 Mining Corp. to be among its closest
competitors.
Equity investment - Soluna
Simultaneously with entering into
the January 2020 Operating and Management Agreement with Soluna, the Company,
pursuant to a purchase agreement it entered into with Soluna, made a strategic
investment in Soluna by purchasing 158,730 Class A Preferred Shares of Soluna
for an aggregate purchase price of $500,000. After acceptance of the
Deliverables, as required by the terms of the purchase agreement, the Company purchased
an additional 79,365 Class A Preferred Shares of Soluna for an aggregate purchase
price of $250,000. The Company also has the right, but not the obligation, to
purchase additional equity securities of Soluna and its subsidiaries (including
additional Class A Preferred Shares of Soluna) if Soluna secures certain levels
or types of project financing with respect to its own wind power generation
facilities. The Company has additionally entered into a Side Letter Agreement,
dated January 13, 2020, with Soluna Technologies Investment I, LLC, a Delaware
limited liability company that owns, on a fully diluted basis, 61.5% of Soluna
and is controlled by a Brookstone Partners-affiliated director of the Company.
The Side Letter Agreement provides for the transfer to the Company of
additional Class A Preferred Shares of Soluna in the event Soluna issues additional
equity below agreed-upon valuation thresholds.
Several of Soluna's equity holders
are affiliated with Brookstone Partners, the investment firm that holds an
equity interest in the Company through Brookstone Partners Acquisition XXIV,
LLC. One of our Brookstone-affiliated directors serves as a director and as Secretary
and Treasurer of Soluna, and the other Brookstone-affiliated director has an
ownership interest in Soluna. In light of these relationships, the various
transactions by and between the Company and EcoChain, on the one hand, and
Soluna, on the other hand, were negotiated on behalf of the Company and
EcoChain via an independent investment committee of our Board of Directors and separate
legal representation. The transactions were subsequently unanimously approved
by both the independent investment committee and the full Board.
[1] Global Coin Research Team,
Crypto Mining 101 - Overview & Landscape of the Mining Industry, May
5, 2020, available at
https://globalcoinresearch.com/2020/05/05/crypto-mining-101/.
[2] Glassnode,
The Week On-chain (Week 11, 2021), March 15, 2021, available at
https://insights.glassnode.com/the-week-on-chain-week-11-2021-2/.
See also Mathew Di Salvo, Bitcoin Miner
Revenue Hits All-Time High of $52.3 Million in One Day, March 16, 2021, available at https://decrypt.co/61630/bitcoin-miner-revenue-all-time-high.
[3] PayPal Launches New
Service Enabling Users to Buy, Hold and Sell Cryptocurrency, Oct 21, 2020,
available at https://newsroom.paypal-corp.com/2020-10-21-PayPal-Launches-New-Service-Enabling-Users-to-Buy-Hold-and-Sell-Cryptocurrency.
[4] Harry
Robertson, The estimated number of global crypto users has passed 100 million
- and boomers are now getting drawn to bitcoin too, reports find, February
25, 2021, available at
https://markets.businessinsider.com/currencies/news/crypto-users-pass-100-million-boomers-gen-x-bitcoin-btc-ethereum-2021-2-1030122720#:~:text=Around%20106%20million%20people%20are,drawn%20to%20tokens%20like%20bitcoin.
[5] Statis Group,
Cryptoasset
Market Coverage Initiation: Valuation, August 30, 2018, available at
https://research.bloomberg.com/pub/res/d37g1Q1hEhBkiRCu_ruMdMsbc0A.
10
Existing
or Probable Governmental Regulations
Cryptocurrency Segment
While the United States and a number
of other countries are considering how to regulate cryptocurrencies, very little
action has been taken in that regard to date. While we expect that regulation,
particularly in the United States, governing the cryptocurrency arena will be
adopted at some point, there is no certainty at this time when such regulations
may be adopted, what form such regulation will take, or the parts of the
cryptocurrency sector that such regulations will impact. As a result, we cannot
at this time determine or even estimate what the impact of such regulations may
be on EcoChain's operations and financial condition and, as a result, the Company's
financial condition and results of operations.
Human Capital
Resources
At March 26, 2021, we had 33
employees including 29 full-time employees. Of these employees 10 are engaged in
product development, nine in manufacturing, and the remainder in sales and
general and administrative functions. The manufacturing
personnel include both individuals directly involved in the manufacturing of
our products as well as warehouse and operations supervisory personnel. Certain
positions within our organization require industry-specific technical
knowledge. We have been successful in attracting and retaining qualified
technical personnel for these positions. None of our employees are covered by any
collective bargaining agreement.
Our human
capital resources objectives include, as applicable, identifying, recruiting,
retaining, engaging, incentivizing, and integrating our existing and additional
employees. The Company supports its employees through a generous benefits
package and has recently expanded human resource activities to include wellness
activities. In response to the COVID-19 global pandemic, the Company has
implemented procedures to support flexible working arrangements for its workforce
based on business needs. In particular, all employees that can perform work remotely
have been provided with a laptop and remote access, and the Company regularly
holds meetings virtually.
Insurance
The Company maintains insurance policies with reputable
insurers against such risks and in such amounts as management has determined to
be prudent for our operations and that we believe are similar in scope and coverage
in all material respects to insurance policies maintained by other similarly-situated
businesses.
Item
1A: Risk Factors
Factors
Affecting Future Results
This Annual
Report on Form 10-K, including the discussion in this section, contains forward-looking statements that involve risks and uncertainties.
Any statements herein that are not statements of historical fact may be forward-looking
statements. When we use the words "anticipate," "estimate," "plans," "projects,"
"continuing," "ongoing," "expects," "management believes," "we believe," "we intend,"
"should," "could," "may," "will," and similar words or phrases, we are identifying
forward-looking statements. Such forward-looking statements include, but are not
limited to, statements regarding:
-
statements with respect to management's
strategy and planned initiatives, including anticipated growth;
-
management's
belief that it will have adequate resources to fund the Company's operations
and capital expenditures for the year ending December 31, 2021 and through
at least the end of the first quarter of 2022;
-
future
capital expenditures and spending on research and development;
-
expected
funding of future cash expenditures;
-
our
expectations with respect to pending legal proceedings;
-
statements
regarding the expected operations of EcoChain and the impact on our business,
operating results, and financial condition as a result thereof;
-
our
expectations regarding increases in certain selling, general and administrative
expenses;
-
the
expected timing of the completion of EcoChain's second cryptocurrency
mining facility;
-
statements
regarding potential acquisitions;
-
our
expected use of proceeds from our anticipated common stock offering and
the expected net proceeds therefrom;
-
our
expectations regarding the renewal of our contract with the U.S. Air Force
that is set to expire on June 30, 2021;
-
the
expected impact of pending accounting updates; and
-
the
expected impact of our investments in Soluna.
11
Forward-looking
statements involve risks, uncertainties, estimates, and assumptions that may
cause our actual results, performance, or achievements to be materially different
from those expressed or implied by forward-looking statements. Important
factors that could cause these differences include the following:
-
sales revenue
growth may not be achieved or maintained;
-
the dependence of
our business on a small number of customers and potential loss of
government contracts - particularly in light of potential cuts that may be
imposed as a result of U.S. government budget appropriations;
-
our lack of long-term
purchase commitments from our customers and the ability of our customers
to cancel, reduce, or delay orders for our products;
-
our inability to
build and maintain relationships with our customers;
-
our inability to
develop and utilize new products and technologies that address the needs
of our customers;
-
our inability to retain
existing or obtain new credit facilities;
-
the cyclical nature
of the electronics and military industries;
-
the uncertainty of
the U.S. and global economy;
-
the impact of
future exchange rate fluctuations;
-
failure of our
strategic alliances to achieve their objectives or perform as contemplated
and the risk of cancellation or early termination of such alliance by either
party;
-
the loss of services
of one or more of our key employees or the inability to hire, train, and
retain key personnel;
-
risks related to protection
and infringement of intellectual property;
-
our occasional
dependence on sole suppliers or a limited group of suppliers;
-
our ability to generate
income to realize the tax benefit of our historical net operating losses;
-
risks related to the
limitation of the use, for tax purposes, of our net historical operating
losses in the event of certain ownership changes;
-
EcoChain's development
efforts with respect to its current cryptocurrency mining facility may not
lead to construction of additional operational cryptocurrency mines;
-
even if EcoChain's
development of an operational cryptocurrency mine is successful, it still may
not achieve profitability in our expected timeframe or at all depending on
numerous uncertainties, including the costs of operation, the future price
of cryptocurrencies and fluctuations in such prices, government and quasi-government
regulation of cryptocurrencies and their use, restrictions on or regulation
of access to and operation of blockchain networks or similar systems, and
the availability and popularity of other forms or methods of buying and
selling goods and services, including government-backed cryptocurrencies;
-
general economic
conditions;
-
risks related to
scaling the EcoChain cryptocurrency mine to larger-scale cryptocurrency
mining operations;
-
the general risk
that the EcoChain business may not be successful;
-
uncertainty regarding EcoChain's
ability to consistently monetize cryptocurrency;
-
fluctuating valuations of cryptocurrency;
and
-
other risks discussed in this Annual
Report on Form 10-K.
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 this registration statement. Thus,
assumptions should not be made that our silence over time means that actual events
are bearing out as expressed or implied in such forward-looking statements.
Risk Factors
You should
consider carefully the following risks, along with other information contained
in this Annual Report on Form 10-K. The risks and uncertainties described below
are not the only ones that may affect us. Additional risks and uncertainties
also may adversely affect our business and operations including those discussed
in the heading "Factors Affecting Future Results" above. Any of the following
events, should they actually occur, could materially and adversely affect our business
and financial results.
Adverse changes in economic or other market conditions in the
United States and globally may have serious implications for the growth and stability
of our business and could otherwise adversely affect our business, results of
operations, and financial condition.
Our business is
affected by general economic conditions, both inside and outside the U.S. Adverse
changes to and uncertainty in the global economy may lead to decreased demand
for our products, revenue fluctuations, and increased price competition for our
products, and may increase the risk of excess and obsolete inventories and
higher overhead costs as a percentage of revenue. It could also result in a decline
in business forecasts, which could adversely affect our sales in future periods.
Additionally, the financial strength of our customers and suppliers and their ability
to obtain and rely on credit financing may affect their ability to fulfill their
obligations to us and have an adverse effect on our financial results.
12
Revenue growth and continued profitability of our business will continue
to depend significantly on the overall demand for test and measurement
instrumentations in key markets including research and development, automotive,
semiconductor, cryptocurrencies and electronics. If the global economy and
financial markets continue to be unstable (including as a result of the
COVID-19 pandemic) or significantly decline, it may cause consumers, businesses,
and governments to defer purchases in response to tighter credit, decreased
cash availability and declining consumer confidence. Accordingly, demand for
our products could decrease and differ materially from their current
expectations. Further, some of our customers may require substantial financing
in order to fund their operations and make purchases from us. The inability of
these customers to obtain sufficient credit to finance purchases of our
products and meet their payment obligations to us or possible insolvencies of our
customers could result in decreased customer demand, an impaired ability for us
to collect on outstanding receivables, significant delays in receivable
payments, and significant write-offs of accounts receivable, any or all of which
could adversely impact our business and financial results.
The long-term effects of the coronavirus pandemic, or the
impacts of any future pandemics or other health crises, are unknown and may
adversely affect our business, results of operations, financial condition,
liquidity and cash flow.
Our overall performance generally
depends upon domestic and worldwide economic and political conditions. The global
spread of COVID-19 has created volatility, uncertainty, and economic
disruption. The pandemic has caused and may continue to cause a slowdown in
worldwide economic activity, decreased demand for products and services, and
disruptions to global supply chains and financial markets.
While the COVID-19 pandemic, and the changes
to our operations necessitated by governmental and societal actions to contain
it, including social distancing and the closing and/or limits on the business
operations, required us to make certain changes to the way we conduct our business
and operations during the last 12 months, we have been fortunate that, to date,
the pandemic has had a limited impact on our supply chains, distribution
systems, and ability to continue to conduct our business and operations. We cannot,
however, predict the longer-term impacts of the pandemic, or future health emergencies,
on our business, operations, revenues, results of operations, or financial condition.
The ultimate extent of the impact of the current coronavirus pandemic, or any
future epidemic, pandemic, or other outbreak, will depend on future developments,
including how fast effective (or with respect to the current pandemic, additional)
vaccines and treatments are developed, the length of time before such vaccines
are sufficiently distributed (both in the United States and worldwide), new or
continued government actions in response, including with respect to successive
waves or variants of the virus (as well as the extent to which such variants
are more contagious and/or lethal), the extent to which then-current vaccines
and treatments are less effective against any such variants, and whether delays
in such vaccinations allow vaccine-resistant variants to develop and spread,
all of which will impact the current or any future pandemic's or similar outbreak's
ultimate duration and severity as well as and how fast the economy recovers
afterwards. Actions we took to mitigate the impact of the current pandemic may
not be successful if the pandemic continues for a longer period than expected or
in future pandemics or similar emergencies. For example, beginning in March
2020 we replaced our in-person sales meetings with meetings held by videoconference,
telephone calls, webinars, and additional informational website content geared
towards addressing our customers' questions and concerns for both domestic and
overseas customers. Nevertheless, we believe that our inability to hold in-person
meetings, while not significant, did have a negative impact on our product
sales over the last 12 months, and our efforts to mitigate the effects of the
pandemic restrictions on our sales model may not be a viable alternative to
in-person meetings on a longer-term basis or during any future health or other emergency
that engender similar restrictions.
Further, the long-term social and economic impact
of the pandemic, or the acceleration of pre-existing trends as a result thereof,
are still uncertain. It is also unknowable what impacts future pandemics or
health emergencies may bring. In either case, any such developments could materially
and adversely affect our customer base or the demand for our products, which would
have a negative effect on our business, prospects, results of operations, and
financial condition, all of which could have a negative effect on the market
price of our common stock.
General Business Considerations
Our business depends on a small number of customers and the
U.S. Air Force.
Historically, we have had a small number of customers representing
a large percentage of our total revenue. Although we endeavor to maintain and
further expand our customer base, we expect that sales to a limited number of
customers will continue to account for a high percentage of our revenues in any
given period for the foreseeable future, and the loss of even just a couple of
customers, or a significant reduction in sales to our existing customer base, could
have a material adverse effect on our business. In addition, our revenues are
largely dependent upon the ability of our customers to continue to grow or need
services or to develop and sell products that incorporate our services and
products. We also depend on purchases by the U.S. Air Force for a significant
portion of our revenues and the loss of the U.S. Air Force as a customer or a
delay or decline in funding of our existing or future contracts with them, particularly
in light of the potential for declines in military spending that may accompany
the new Presidential administration, could decrease our backlog or adversely affect
our business and prospects, sales, cash flows, and our ability to fund our continued
product development and growth.
13
We do not
have long-term purchase commitments from our customers, and our customers are
also able to cancel, reduce, or delay orders for our products.
We generally do not obtain firm, long-term purchase commitments
from our customers and frequently do not have visibility as to their future demand
for our products and services. Customers also may cancel, change, or delay design,
production or aftermarket service quantities and schedules, or fail to meet
their forecasts for a number of reasons beyond our control. Customer expectations
can also change rapidly, requiring us to take on additional commitments or risks,
and requiring that we 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. Conversely, if our customers unexpectedly and
significantly increase product orders, we may be required to rapidly increase
production, which could strain our resources and reduce our margins. We
typically plan production and inventory levels based on internal forecasts of
customer demand, which can be highly unpredictable and can fluctuate substantially,
leading to excess inventory write-downs and resulting negative impacts on gross
margin and net income. Additionally, and as a result, our revenues may be volatile
from period to period, and we may not achieve the anticipated revenues or may incur
non-recoverable costs as a result of the work we did to address our customers' anticipated
or changed requirements.
Our annual and quarterly operating results may experience
significant fluctuations, which could adversely impact our operations,
financial results, and stock price.
In addition to the variability resulting from the short-term
nature of our customers' commitments, other factors contribute to significant periodic
fluctuations in our results of operations. These factors include:
-
the
cyclicality of the markets we serve;
-
the
timing and size of orders and of recognizing revenue therefrom;
-
the
volume of orders relative to our capacity;
-
product
introductions and market acceptance of new products or new generations of products;
-
evolution
in the life cycles of our customers' products;
-
timing
of expenses in anticipation of future orders;
-
changes
in product mix;
-
availability
of manufacturing and assembly services;
-
changes
in cost and availability of labor and components;
-
the
timing of delivery of products to customers;
-
pricing
and availability of competitive products;
-
fluctuations
in foreign currency exchange rates;
-
introduction
of new technologies into the markets we serve;
-
pressures
on reducing selling prices;
-
our
success in serving new markets; and
-
changes
in economic conditions.
The price of our
common stock could decline substantially in the event that any of these risks
result in our financial performance being below the expectations of analysts
and investors, which are based on historical and predictive models that are not
necessarily accurate representations of the future.
We may not be able to keep pace with technological
innovations or develop new product solutions in a timely manner.
The electronic, semiconductor, solar, automotive, and
general industrial segments are subject to constant technological change. Our
future success will depend on our ability to respond appropriately to changing
technologies and changes in product function and quality. If we rely on
products and technologies that are not attractive to end users, we may not be
successful in capturing or retaining market share. Technological advances, the
introduction of new products, and new design techniques could adversely affect
our business prospects unless we are able to adapt to the changing conditions. Technological
advances could render our products obsolete, and we may not be able to respond
effectively to the technological requirements of evolving markets. As a result,
we will be required to expend substantial funds for and commit significant resources
to:
-
continue
research and development activities on all product lines;
-
hire
additional engineering and other technical personnel; and
-
purchase
advanced design tools and test equipment.
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.
14
Our efforts to continue to develop new products and technologies
may not result in commercial success, which could cause a decline in our revenue
and otherwise harm our business.
We regularly invest substantial amounts in research and
development efforts that pursue advancements in our products and technologies. Our
research and development efforts with respect to our products and technologies
may not result in customer or market acceptance. Some or all of such products and
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 product
or technology, our customers may decide not to introduce or may discontinue
products utilizing the product or technology for a variety of reasons, including,
but not limited to:
-
difficulties
with other suppliers of components for the products;
-
superior
technologies developed by our competitors and unfavorable comparisons of our
solutions with these technologies;
-
price
considerations; and
-
lack
of anticipated or actual market demand for the products.
The nature of our business will require us to make continuing
investments to develop new products and technologies. Significant expenses relating
to one or more new products or 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 products and technologies may prove to be
unsuccessful. If our efforts are unsuccessful, our business could be harmed. Moreover,
when we announce our development of new products, sales of current products may
decrease as customers delay making purchases until such new products are
available, which could adversely affect our business, revenues, and results of
operations.
The cyclical nature of the industries of many of our
existing and target customers may result in fluctuations in our operating
results.
Demand for our products and services in our target markets is
cyclical, and revenues from the sale of our products and services can vary
significantly from one period to the next as a result. We may sell a significant
amount of our products to one or a few customers for various short-term
projects in one period and then have markedly decreased sales in following periods
as these projects end or customers have the products they require for the
foreseeable future.
The electronics and military industries have experienced
significant economic downturns at various times. These downturns are characterized
by diminished product demand, accelerated erosion of average selling prices,
and production overcapacity. We may seek to reduce our exposure to industry
downturns by providing design and production services for leading companies in
rapidly expanding industry segments. We may, however, experience substantial period-to-period
fluctuations in future operating results because of general industry conditions
or events occurring in the general economy.
International sales risks could adversely affect our operating
results. Furthermore, our operating results could be adversely affected by
changes to U.S. policy and fluctuations in the value of the U.S. dollar against
foreign currencies.
Sales outside of the United States accounted for approximately
25.9% of our total revenue in 2020 and 35.3% of our total revenue in 2019. Our
international business may be adversely affected by changing political and economic
conditions in foreign countries. Having a worldwide distribution network for our
products exposes us to various economic, political, and other risks that could
adversely affect our operations and operating results, including:
-
export
restrictions and controls relating to technology;
-
the
burdens and costs of compliance with a variety of existing and new foreign
regulatory requirements and laws, including the General Data Protection
Regulation (GDPR) in the European Union and similar laws in other jurisdictions,
and unexpected changes in such regulatory requirements;
-
laws
and business practices favoring local companies, including tariffs imposed
by other countries on U.S. goods;
-
timing
to meet regulatory requirements;
-
developments
with respect to and any impact of tariffs and other trade barrier restrictions;
-
longer
payment cycles and greater difficulty in enforcing agreements and collecting
receivables through foreign legal systems;
-
potentially
reduced protection for, and difficulties in enforcing, intellectual
property rights; and
-
political
or economic instability in certain parts of the world.
15
These risks or any combination of them could increase our
costs, lengthen our sales cycle, and require significant management attention
and could otherwise negatively affect our business, operating results, financial
condition, and results of operations.
In addition, we transact our business in U.S. dollars and
bill and collect our sales in U.S. dollars. Approximately 25.9% and 35.3% of
our revenue was from customers located outside of the United States in 2020 and
2019, respectively. It is possible that U.S. policy changes and uncertainty
about policy could increase market volatility and currency exchange rate
fluctuations. Market volatility and currency exchange rate fluctuations could impact
our results of operations and financial condition related to transactions
denominated in a foreign currency. A weakening of the dollar could cause our
overseas vendors to require renegotiation of either the prices or currency we
pay for their goods and services. Similarly, a strengthening of the dollar
could cause our products to be more expensive for our international customers,
which could impact price and margins and/or cause the demand for our products,
and thus our revenue, to decline.
In the future, customers may negotiate pricing and make payments
in non-U.S. currencies. If our overseas vendors or customers require us to
transact business in non-U.S. currencies, fluctuations in foreign currency exchange
rates could affect our cost of goods, operating expenses, and operating margins
and could result in exchange losses. In addition, currency devaluation can result
in a loss to us if we hold deposits of that currency. Hedging foreign currencies
can be difficult, especially if the currency is not freely traded. We cannot predict
the impact that future exchange rate fluctuations may have on our operating
results.
We rely on the ability to secure funding via our credit facility
when accepting large orders from certain customers, and if we are not able to
retain our existing credit facility or obtain new ones we may not be able to
accept these large orders, and our business, revenues, and financial condition
could suffer.
For some large customer orders, particularly if the customer
requires unusually long payment terms, we may need to rely on funding from our
credit facility to meet our ongoing funding needs because we may have to pay
for the raw materials needed to manufacture the products for the customer
before the customer pays us. While we had historically not needed to do this,
the possibility following the placement of a large order in 2020 was the reason
we arranged for a credit facility last year. If we are unable to maintain the credit
facility or arrange a replacement facility on satisfactory terms and conditions,
we may not be able to accept these types of customer orders, which could have a
material adverse effect on our business, prospects, revenues, and results of
operations, as well as our ability to continue to fund our operations including
our product development and customer growth activities. We may also need to
obtain a new credit facility to fund our planned expansion of EcoChain's
business. Our ability to maintain or replace our existing credit facility or obtain
new or additional financing will depend on a variety of factors, many of which
are beyond our control, and there can be no assurance that we will be able to
do so in needed quantities, on terms favorable to us, or at all.
Our confidentiality
agreements with employees and others may not adequately prevent disclosure of
our trade secrets and other proprietary information, which could limit our ability
to compete.
We rely on trade secrets to protect our proprietary technology
and processes. Despite such protection, it is possible that a third party could
copy or otherwise obtain and use our proprietary information without our authorization;
further, trade secrets can be difficult to protect. Policing unauthorized use
of our intellectual property and trade secrets is difficult, particularly in light
of the global nature of the Internet and because the laws of other countries
may afford us little or no effective protection of our intellectual property.
Potentially expensive litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the validity
and scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Additionally, we enter into confidentiality and
intellectual property assignment agreements with our employees, consultants,
and other advisors. These agreements generally require that the other party keep
confidential and not disclose to third parties confidential information
developed by the party under such agreements or made known to the party by us
during the course of the party's relationship with us. Our employees, consultants,
and other advisors, however, may not honor these agreements, and enforcing a
claim that a party illegally obtained and is using our trade secrets is
difficult, expensive and time-consuming, and the outcome is unpredictable. Our
failure to obtain and maintain trade secret protection could adversely affect
our competitive position.
We rely on
highly-skilled personnel and the continuing efforts of our Chief Executive Officer
and, if we are unable to retain, motivate, or hire qualified personnel, our
business may be severely disrupted.
Our performance largely depends on the talents, knowledge,
skills, know-how, and efforts of highly-skilled individuals, including our
Chief Executive Officer, Michael Toporek. His absence, were it to occur, would
materially and adversely impact the continued development of our businesses. Our
future success further depends on our continuing ability to identify, hire,
develop, motivate, and retain highly-skilled personnel for all areas of our organization.
The competition for qualified management and key personnel, especially engineers,
is intense. Our continued ability to compete effectively depends on our ability
to motivate and retain our existing, and attract and hire new, engineers and
certain other key employees, particularly technical support personnel and
capable sales and customer-support employees. If Mr. Toporek or other key personnel
are unable or unwilling to continue in their present positions, we may not be
able to replace them readily, if at all. In such case, our business may be
severely disrupted, we may incur additional expenses to recruit and retain new officers
or other key personnel, and our financial condition and results of operations
could be materially adversely affected. We do not currently maintain key life
insurance policies on Mr. Toporek or any key employees. In addition, if
any of our key sales personnel joins a competitor or forms a competing company,
we may lose customers.
16
We may not be successful in locating appropriate
acquisition targets or in integrating any acquired companies into our businesses,
which could materially and adversely affect our financial condition and operating
results.
Part of our strategy
to grow our businesses involves the acquisition of other entities or businesses
in the future that complement our current products, enhance our market coverage
or technical capabilities, or offer growth opportunities. We may not be able, however,
to identify and successfully negotiate suitable acquisitions, obtain any financing
necessary for such acquisitions on satisfactory terms, or otherwise complete any
such acquisitions. Further, any acquisition may require a significant amount of
management's time and financial resources to complete the acquisition and
integrate the acquired business into our existing operations. Even with this
investment of management time and financial resources, an acquisition may not produce
the revenue, earnings, or business synergies anticipated. Acquisitions involve
numerous other risks, including:
-
potential
inability to successfully integrate acquired operations and products or to
realize cost savings or other anticipated benefits from integration;
-
loss
of key employees or customers of acquired companies;
-
difficulty
of assimilating geographically dispersed operations and personnel of the
acquired companies;
-
potential
disruption of our business or the acquired business;
-
unanticipated
expenses;
-
unanticipated
difficulties in conforming business practices, policies, procedures,
internal controls, and financial records of acquisitions with our own;
-
impairment
of relationships with employees, customers, vendors, distributors, or
business partners of either an acquired business or our own;
-
inability
to accurately forecast the performance of recently-acquired businesses,
resulting in unforeseen adverse effects on our operating results;
-
potential
liabilities, including liabilities resulting from known or unknown compliance
or legal issues, associated with an acquired business; and
-
adverse accounting
impact to our results of operations.
Any such effects from acquisitions could be costly and place a
significant strain on our management systems and resources.
We cannot offer any assurance that we will be
able to identify, complete, or successfully integrate any suitable acquisitions.
Even if successfully negotiated and closed, any acquisitions may not yield
expected synergies, may not advance our business strategy as expected, may fall
short of expected return-on-investment targets, or may not prove successful.
Companies that we acquire may operate with different cost and margin
structures, which could further cause fluctuations in our operating results and
adversely affect our business, financial condition, and results of operations.
Brookstone's
ownership of 38.2% of the outstanding shares of our common stock gives it a
controlling interest in the Company.
Brookstone Partners Acquisition, XXIV, LLC ("Brookstone"),
owns approximately 38.2% of the Company's outstanding shares of common stock
and has designated two directors that sit on our eight-member Board.
Accordingly, Brookstone has the ability to exert a significant degree of influence
or actual control over our management and affairs and, as a practical matter,
will continue to control corporate actions requiring shareholder approval,
irrespective of how our other shareholders may vote, including the election of
directors, amendments to our Certificate of Incorporation and Bylaws, and the
approval of mergers and other significant corporate transactions, including a
sale of substantially all of our assets, and Brookstone may vote its shares in
a manner that is adverse to the interests of our minority shareholders. This concentration
of voting control could deprive our investors of an opportunity to receive a
premium for their shares of our common stock as part of a sale of the Company.
Further, Brookstone's control position might adversely affect the market price
of our common stock to the extent investors perceive disadvantages in owning
shares of a company with a controlling shareholder.
Brookstone and
its director designees may acquire interests and positions that could present potential
conflicts with our and our shareholders' interests.
Brookstone and its director designees may make investments
in companies and may, from time to time, acquire and hold interests in
businesses that compete directly or indirectly with us. Brookstone and its
director designees may also pursue, for their own accounts, acquisition
opportunities that may be complementary to our business, and as a result, those
acquisition opportunities might not be available to us. As part of our sale of
3,750,000 shares of our common stock to Brookstone in October 2016 and as
required by Brookstone as a condition to purchasing the shares, our Board of
Directors renounced, to the extent permitted by New York law, the Company's expectancy
with respect to being offered an opportunity to participate in any business
opportunity that is discovered by or presented to a director designee (a
"Business Opportunity"), whether in such director designee's capacity as a
director of the Company or otherwise. Accordingly, the interests of Brookstone
and the designated directors with respect to a Business Opportunity may supersede
ours, and Brookstone or its affiliates or the Brookstone-designated directors
may be involved with businesses that compete with us and may pursue opportunities
for the sole benefit of Brookstone and its affiliates without our involvement, for
which we have limited recourse. Such actions on the part of Brookstone or its director
designees could have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
17
In addition, Michael Toporek, our CEO, serves as the Managing
General Partner of Brookstone. As a result of the potential conflicts inherent
in his serving in both roles, it is possible that Mr. Toporek could make decisions
that benefit Brookstone at the expense of the Company.
Insiders continue to have substantial control over the
Company.
As of March 26, 2021, the Company's directors and executive
officers hold the right to vote approximately 43.5% of the Company's outstanding
voting stock, including the 38.2% of the outstanding common stock owned or
controlled by Brookstone, for which Michael Toporek, the Company's CEO, serves
as Managing General Partner. The Company's directors and executive officers have
the right to acquire an aggregate of an additional 181,250 shares of our common
stock by exercising outstanding stock options granted to them under our equity
compensation plans. As a result, Mr. Toporek acting alone, and/or many of the
Company's officers and directors acting together, may have the ability to exert
significant control over the Company's decisions and control the management and
affairs of the Company, and also to determine the outcome of matters submitted
to shareholders for approval, including the election or removal of a director and
any merger, consolidation, or sale of all or substantially all of the Company's
assets. Accordingly, this concentration of ownership may harm the market price
of our common stock by:
-
Delaying,
deferring, or preventing a change in control of the Company;
-
Impeding
a merger, consolidation, takeover, or other business combination involving
the Company; or
-
Discouraging
a potential acquirer from making a tender offer or otherwise attempting to
obtain control of the Company.
Our Rights Plan may limit the rights of our shareholders
and decrease the trading price of our common stock; our CEO's role as Managing
General Partner of Brookstone could provide Brookstone with further control in
the event our Rights Plan is instituted.
We have adopted a Section 382 Rights Agreement, dated
October 6, 2016, as amended ("Rights Plan"), that is intended to preserve the
Company's net operating loss carryforwards and to act as a deterrent to any
person (together with all affiliates and associates of such person) acquiring
beneficial ownership of 4.99% or more of outstanding shares of our common stock
without the approval of our Board of Directors. The Rights Plan, however, contains
provisions and terms that may delay, defer, or prevent a tender offer or change
in control of the Company that a shareholder might consider to be in his, her,
or its best interests, including attempts that might result in a premium being
paid over the market price for our shares of common stock. The Company expects that
such provisions and terms will operate to discourage extraordinary corporate transactions
with respect to the Company, such as takeover bids, and will instead encourage any
potential acquiror of the Company to first correspond with the Board. Additionally,
since our Chief Executive Officer is also the Managing General Partner of Brookstone,
Brookstone could exert additional control over the Company, even with its
minority equity interest held in the Company, in the event the rights to purchase
common stock provided for in the Rights Plan become exercisable.
We may incur
losses and liabilities in the course of business that could prove costly to
defend or resolve.
We may become subject to a variety of claims and lawsuits in
the ordinary course of business, including personal injury or property claims. Additionally,
we are, at times, involved in commercial disputes with third parties, such as
customers, distributors, vendors, and others. Any such litigation involving an
adverse result could have a material adverse effect on our business and our
financial condition. There is a risk of litigation generally in conducting a commercial
business. These risks often may be difficult to assess or quantify and their
existence and magnitude often remain unknown for substantial periods of time. We
may incur significant legal expenses in defending against litigation.
We may become subject to claims of infringement or misappropriation
of the intellectual property rights of others, which could prohibit us from
selling our products, require us to obtain licenses from third parties or to
develop non-infringing alternatives, and subject us to substantial monetary
damages and injunctive relief.
We may receive notices from third parties that the
manufacture, use, or sale of any products we develop infringes upon one or more
claims of their patents. Moreover, because patent applications can take many
years to issue, there may be currently pending applications, unknown to us,
that may later result in issued patents that materially and adversely affect
our business. Third parties could also assert infringement or misappropriation
claims against us with respect to our future product offerings, if any. We
cannot be certain that we have not infringed the intellectual property rights of
any third parties. Any infringement or misappropriation claim could result in
significant costs, substantial damages, and our inability to manufacture,
market, or sell any of our product offerings that are found to infringe another
person's patent. Even if we were to prevail in any such action, the litigation
could result in substantial cost and diversion of resources that could materially
and adversely affect our business. If a court determined, or if we
independently discovered, that our product offerings violated third-party proprietary
rights, there can be no assurance that we would be able to re-engineer our product
offerings to avoid those rights or obtain a license under those rights on commercially
reasonable terms, if at all. As a result, we could be prohibited from selling products
that are found to infringe upon the rights of others. Even if obtaining a license
were feasible, it may be costly and time-consuming. A court could also enter orders
that temporarily, preliminarily, or permanently enjoin us from making, using,
selling, offering to sell, or importing our products that are found to infringe
on third parties' intellectual property rights, or could enter orders mandating
that we undertake certain remedial actions. Further, a court could order us to
pay compensatory damages for any such infringement, plus prejudgment interest, and
could in addition treble the compensatory damages and award attorneys' fees.
Any such payments could materially and adversely affect our business and
financial condition.
18
If we are unable
to protect our information systems against service interruption or failure,
misappropriation of data, or breaches of security, our operations could be disrupted,
we could be subject to costly government enforcement actions and private litigation,
and our reputation may be damaged.
Our business involves the collection, storage, and transmission
of personal, financial, or other information that is entrusted to us by our
customers and employees. Our information systems also contain the Company's proprietary
and other confidential information related to our business. Our efforts to
protect such information may be unsuccessful due to the actions of third parties,
computer viruses, physical or electronic break-ins, catastrophic events, employee
error or malfeasance, or other attempts to harm our systems. As the techniques
used to obtain unauthorized access, disable or degrade service, or sabotage systems,
change frequently and often are not recognized until launched against a target,
we may be unable to anticipate these techniques or to implement adequate
preventative measures in time. We could also experience a loss of critical data
and delays or interruptions in our ability to manage inventories or process transactions.
Some of our commercial partners, such as those that help us maintain our
website, may receive or store information provided by us or our users through
our website. If these third parties fail to adopt or adhere to adequate
information security practices, or fail to comply with our policies in this
regard, or in the event of a breach of their networks, our customers'
information may be improperly accessed, used, or disclosed.
If our systems are harmed or fail to function properly, we
may need to expend significant financial resources to repair or replace systems
or to otherwise protect against security breaches or to address problems caused
by breaches. If we experience a significant security breach or fail to detect
and appropriately respond to a significant security breach, we could be exposed
to costly legal actions in connection with such incidents, which could result
in orders or judgments forcing us to pay damages or fines or to take certain
actions with respect to our information systems. Any incidents involving
unauthorized access to or improper use of user information, or incidents that
are a violation of our online privacy policies, could harm our brand reputation
and diminish our competitive position. Any of these events could have a material
and adverse effect on our business, reputation, or financial results. Our
insurance policies carry coverage limits, which may not be adequate to reimburse
us for losses caused by security breaches.
Our risk management process may not identify all risks that
we are subject to and will not eliminate all risk.
Our Enterprise Risk Management ("ERM") process seeks to identify
and address significant risks. Our ERM process uses the most recent integrated
risk framework in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission to assess,
manage, and monitor risks. We believe that risk-taking is an inherent aspect of
the pursuit of our growth and performance strategy. Our goals are to proactively
manage risks in a structured approach in conjunction with strategic planning,
with the intent to preserve and enhance shareowner value, and to manage
prudently, rather than wholly avoiding, risks. We can mitigate risks and their
impact on the Company, however, only to a limited extent, and no ERM process
can identify all risks that we may face. Therefore, there may be risks that we
are currently unaware of, that may develop in the future or that we currently consider
immaterial. Further, our management of risks may prove inadequate. The emergence
of risks of which we were unaware or are unable to manage could have a material
adverse effect on our business, prospectus, financial condition and results of
operations.
MTI Instruments' business operations and financial performance
are occasionally reliant on a single supplier or vendor or a limited group of
suppliers and vendors.
We depend on a limited number of suppliers and vendors for
product and services relating to our MTI Instruments business. Specifically,
for the year ended December 31, 2020, Spinnaker Contract Manufacturing, Inc. ("Spinnaker")
supplied 15% of the PC boards used by almost all MTI Instrument products, and SYNNEX
Corporation ("SYNNEX") supplied 26% of the military computers used by MTI Instruments.
In the event it becomes necessary to seek alternative suppliers and vendors, we
may be unable to obtain satisfactory replacement supplies or services on
economically attractive terms, on a timely basis, or at all, which could
increase costs or cause disruptions in the manufacturing of our products or delivery
of our services.
19
Changes in tariffs and other trade policies could increase
the cost of our products sold to our international customers, which could negatively
impact our sales and profitability.
Our
international sales operations are subject to extensive laws, governmental
regulations, and policies, including but not limited to tariffs and other trade
policies, including those governing exports. Trade tensions between the United
States and China, as well as those between the U.S. and Canada, Mexico, and
other countries, have been escalating in recent years, and there have been
significant changes to U.S. trade policies, legislation, treaties, and tariffs during
this time. Trade tensions have led to a series of tariffs imposed by the U.S. on
imports from China, as well as retaliatory tariffs imposed by China on imports
from the U.S. Changes in export regulations could increase the cost of our
products sold as exports to our international customers.
While the tariffs put in place in March 2018 did not have a material
impact on our business or operating results, currently it is unclear how the
recent change in Presidential administrations may impact these issues, if at
all, or what actions the current administration may take in this regard. Any further
changes in U.S. trade policies, tariffs, taxes, export restrictions, or other
trade barriers may decrease our profit margins, reduce the competitiveness of
our products in foreign markets, or inhibit our ability to sell products, any which
could have a material adverse effect on our business, results of operations, and
financial condition.
Risks Related to the EcoChain Business and Cryptocurrency
Security
breaches could result in a loss of our cryptocurrencies.
Security breaches including computer hacking or computer
malware have been a consistent concern in the cryptocurrency industry. This
could involve hacking in which an unauthorized person obtains access to the
systems or information and can cause harm by the transmission of virus or the
corruption of data. These breaches may occur due to an action by an outside
party, or by the error and negligence of an employee. We primarily rely on the
Luxor mining pool and EcoChain's cryptocurrencies are stored with exchanges
such as Coinbase prior to selling them. If any breach were to occur of our
security system, operations or third party platforms, the result could cause a loss
of our cryptocurrencies, loss of confidential or proprietary information, force
the Company to cease operations, or could cause damage to the reputation of the
Company. If an actual or perceived attack were to occur, the market perception
of the Company may be damaged, which could adversely affect potential and
current investments in the Company and reduce demand for our Common Stock and
cause a reduction in our share price.
EcoChain has
a limited operating history and we may not recognize income from the EcoChain line of business in the future.
EcoChain, though a wholly-owned subsidiary of MTI, remains
responsible for its own financing and operations and therefore is subject to
all the risks inherent in a newly-established business venture. EcoChain began
operations in January 2020 and has a limited operating history. It has not yet
been able to confirm that its business model can or will be successful over the
long-term. Our projections for its growth have been developed internally and
may not prove to be accurate. As such, given its start-up status with an unproven
business model, there is a substantial uncertainty regarding EcoChain's ability
to succeed.
Valuations of cryptocurrencies in U.S. dollars are extremely
volatile, and if our mined cryptocurrencies are converted into dollars when
such values are low, we may not recognize the income from the conversion of the
mined cryptocurrencies that we were expecting.
The fluctuating values of cryptocurrencies represent
significant uncertainties for the EcoChain business. The value in U.S. dollars of
Bitcoin, Ether, and other cryptocurrencies have been, and continue to be,
subject to dramatic fluctuations. A variety of factors, known and unknown, may
affect price and valuation, including, but not limited to: (i) the supply of such
cryptocurrencies; (ii) global blockchain asset demand, which can be influenced
by the growth of retail merchants' and commercial businesses' acceptance of
blockchain assets like cryptocurrencies as payment for goods and services, the security
of online cryptocurrency exchanges and networks and digital wallets that hold blockchain
assets, the perception that the use and holding of blockchain assets is safe and
secure, and the regulatory restrictions on their use; (iii) investors' expectations
with respect to the rate of inflation; (iv) changes in the software, software requirements,
or hardware requirements underlying a blockchain network; (v) changes in the rights,
obligations, incentives, or rewards for the various participants in a blockchain
network; (vi) currency exchange rates; (vii) fiat currency withdrawal and deposit
policies of cryptocurrency exchanges and networks and liquidity on such exchanges
and networks; (viii) interruptions in service from or failures of major
cryptocurrency exchanges and networks; (ix) investment and trading activities
of large subscribers, including private and registered investment funds, that
may directly or indirectly invest in blockchain assets; (x) monetary policies of
governments, trade restrictions, and currency devaluations and revaluations; (xi)
regulatory measures, if any, that affect the use of blockchain assets; (xii)
the maintenance and development of the open-source software protocol of the
cryptocurrency networks; (xiii) global or regional political, economic, or
financial events and situations; and (xiv) expectations among blockchain participants
that the value of blockchain assets will soon change. If our mined
cryptocurrencies are converted into dollars when their values are low, we may not
recognize the income from the conversion of the mined cryptocurrencies that we were
expecting. Further, the extreme swings in value can make it difficult for us to
develop reasonable financial plans and projections with respect to EcoChain's
business.
20
EcoChain has an evolving business model that is subject to
various uncertainties.
As cryptocurrency
assets and blockchain technologies become more widely available, we expect the
services and products associated with them to evolve. In order to stay current with
the industry, our business model may need to evolve as well. From time to time,
we may modify aspects of the EcoChain business relating to its models and strategies.
We cannot offer any assurance that these or any other modifications will be
successful or will not result in harm to EcoChain's business. We may not be
able to manage growth effectively, which could damage EcoChain's reputation,
limit its growth, and negatively affect our operating results. Further, we
cannot provide any assurance that we will successfully identify all emerging
trends and growth opportunities in this business sector, and we may lose out on
certain opportunities as a result. Such circumstances could have a material
adverse effect on EcoChain's business, prospects, operations, or financial condition.
If EcoChain fails to keep pace with technological innovations
it will be unable to continue operating its business.
The pace of development
with respect to the computing power of miners has been extraordinary. Within
the space of a few years, the small mining operations that were once common in
the cryptocurrency mining industry have been replaced almost entirely by larger-scale
operations that have the ability to scale and the resources to invest in the
much more powerful mining equipment that is necessary to successfully operate in
the industry today. We may not be able to compete successfully against present or
future competitors, including the various high-profile and well-established operators
that the industry has attracted, some of which have substantially greater liquidity
and financial resources than we do. If we are not able to scale our operations
and do not keep up with technological developments in the industry, we risk our
miners becoming so far less powerful than our competitors' that they become obsolete.
We do not have the resources to compete with the larger cryptocurrency mining operators
at this time. With the limited resources we have available, we may experience
great difficulties in expanding and improving our network of miners to remain
competitive, and we may not be in a position to construct additional operational
cryptocurrency mines.
Competition from
existing and future competitors, particularly the many other North American
companies that have access to more competitively-priced energy, could result in
our inability to secure acquisitions and partnerships that we may need to expand
EcoChain's business in the future. This competition from other entities with
greater resources, experience, and reputations may result in our failure to
maintain or expand EcoChain's business, as we may never be able to successfully
execute our business plan. If we are unable to expand and remain competitive, it
could have a negative effect on our business, results of operations, and
financial condition, which would have an adverse effect on the trading price of
our common stock.
We may be
unable to obtain additional funding to scale the EcoChain cryptocurrency business
to a larger-scale cryptocurrency mining operations.
We are considering
further increasing the processing power of our cryptocurrency mining operations
as we seek to leverage our experience and expertise in this area of operations.
To do so, however, we will need to raise additional financing, and these attempts
may not be successful. Failure to generate adequate cash from our operations or
find sources of funding would require us to scale back or curtail our operations
or expansion efforts, including limiting our ability to expand the EcoChain
cryptocurrency business to a larger-scale cryptocurrency mining operation, and
would have an adverse impact on our business and financial condition.
Regulatory changes
or actions may alter the nature of an investment in us or restrict the use of
cryptocurrencies in a manner that adversely affects EcoChain's business, prospects,
or operations.
As cryptocurrencies
have grown in both popularity and market size, governments around the world
have reacted differently to cryptocurrencies. Some governments have deemed them
illegal, and others have allowed their use and trade without restriction, while
in some jurisdictions, such as in the U.S., cryptocurrencies are subject to extensive,
and in some cases overlapping, unclear, and evolving regulatory requirements. Governments
may in the future curtail or outlaw the acquisition, use or redemption of cryptocurrencies.
Ownership of, holding or trading in cryptocurrencies may then be considered illegal
and subject to sanction. Even if EcoChain's development of an operational
cryptocurrency mine is successful, government and quasi-government regulation
of cryptocurrencies and their use, restrictions on or regulation of access to and
operation of blockchain networks or similar systems, and the availability and
popularity of other forms or methods of buying and selling goods and services,
including government-backed cryptocurrencies, may result in EcoChain still not achieving
profitability in our expected timeframe or at all. Ongoing and future
regulatory actions may impact EcoChain's ability to continue to operate, which
could affect our ability to continue as a going concern or to pursue our new
strategy at all, which could have a material adverse effect on our business,
prospects or operations.
Facebook's proposed development of a
cryptocurrency, as well as the eventual likely development of government-backed
digital currencies and the development of cryptocurrencies by other tech
companies, may adversely affect the value of Bitcoin and other existing, or
even future, cryptocurrencies.
In May 2019, Facebook
announced its plans for a cryptocurrency then called Libra, now Diem, which has
faced significant objections and concerns from governments, legislatures, and
regulators. The massive social network and a number of other partners are
estimating that the Diem digital coin and Facebook's corresponding digital
wallet would be a way to make sending payments around the world as easy as it
is to send a photo. Facebook's significant resources and ability to engage the
world via social media may enable it to bring Diem to market rapidly and to
deploy it across industries more rapidly and successfully than previous
cryptocurrencies. Facebook's size and market share may cause its cryptocurrency
to succeed to the detriment and potential exclusion of existing cryptocurrencies.
Further, in the event that government-backed digital currencies, which
regulators in several countries are already considering or even developing, are
developed and widely adopted, it is likely to have a negative impact on the
existing currencies including larger widespread adoption and potentially
impacting the market share by non-government digital currency. Additional
cryptocurrencies are introduced to the market frequently, and although some have
gained popularity as some features have been different than Bitcoin, Bitcoin
remains the market leader. As cryptocurrency adoption grows the
likelihood that additional cryptocurrencies will be introduced increases and will gain
popularity against Bitcoin, potentially negatively impacting the value of Bitcoin.
21
Our mining operations may experience damages, including
damages that are not covered by insurance.
Our current mining
operation in East Wenatchee, Washington is, and any future mines we establish
will be, subject to a variety of risks relating to physical condition and
operation, including:
-
the
presence of construction or repair defects or other structural or building
damage;
-
any
noncompliance with or liabilities under applicable environmental, health,
or safety regulations or requirements or building permit requirements; and
-
any
damage resulting from natural disasters, such as hurricanes, earthquakes,
fires, floods, and windstorms.
For example, our mine
could be rendered inoperable, temporarily or permanently, as a result of a fire
or other natural disaster or by a terrorist or other attack on the mine. The
security and other measures we take to protect against these risks may not be sufficient.
Additionally, our mine could be materially adversely affected by a power outage,
loss of access to the electrical grid, or loss by the grid of cost-effective
sources of electrical power-generating capacity. Given the amount of power required
to operate a cryptocurrency mine, it would not be feasible to run miners on back-up
power generators in the event of a power outage. Our insurance covers the
replacement cost of any lost or damaged miners but does not cover any interruption
of our mining activities; our insurance therefore may not be adequate to cover
the losses we suffer as a result of any of these events, dependent on the amount
of downtime that is experienced. In the event of an uninsured loss, including
a loss in excess of insured limits, at our current or any future mines, such
mines may not be adequately repaired in a timely manner or at all and we may lose
some or all of the future revenues anticipated to be derived from such mines. At
this time the potential impact of such a loss on our business is magnified as we
are operating only a single mine.
Reliance on
Soluna to operate mining machines may cause delays in production and mining and
could have an impact on our business and financial condition.
EcoChain relies on
Soluna to operate its cryptocurrency mining machinery. While we hold a 2%
equity interest in Soluna and certain principals of the Company have roles in
Soluna, we do not control Soluna or have control over their employees and, except
for restrictions imposed by our contracts with Soluna, we have limited ability to
control the amount or timing of resources that Soluna devotes to our programs. Although
we rely on Soluna to operate our mining machinery, we remain responsible for
the overall mining operations. Soluna may, over time, have relationships with entities
that compete with us. If Soluna does not perform its contractual duties or
obligations, we may need to enter into new arrangements with alternative third
parties. This could be costly, and mining operations may be delayed or terminated.
If our relationship with Soluna terminates, we may not be able to enter into
arrangements with alternative third-party contractors or to do so on
commercially-reasonable terms. Though we carefully manage our relationship with
Soluna, there can be no assurance that we will not encounter challenges or delays
resulting from this arrangement or that any such delays or challenges will not
have a material adverse impact on our business, financial condition, and prospects.
EcoChain's reliance on a third-party mining pool service
provider for our mining revenue payouts may have a negative impact on
EcoChain's operations.
As discussed in "Item
1. Busines," EcoChain participates in mining pools whereby our miners' computations
and those of other, unrelated miners are combined to place blocks on the blockchain,
which generates the applicable cryptocurrency. Should any such mining pool suffer
downtime due to a cyber-attack, software malfunction, or other problems, it will
negatively impact our ability to mine and receive revenue from our mining
activities.
We face risk of failure of our strategic alliances to
achieve their objectives or perform as contemplated and the risk of cancellation
or early termination of such alliance by either party.
We may need to make acquisitions or form strategic
alliances or partnerships in order to remain competitive in our market, and recent
acquisitions, strategic alliances or partnerships could be difficult to integrate,
disrupt our business and dilute shareholder value.
22
For example, in January 2020, the Company formed EcoChain
as its wholly-owned subsidiary to pursue a new business line focused on cryptocurrency
and the blockchain ecosystem. In connection with this new venture, we entered
into a strategic relationship with Soluna, which has assisted us in developing,
and which is now operating, the cryptocurrency mining facility. In the future,
we may acquire or form strategic alliances or partnerships with other businesses
in order to remain competitive or to acquire new technologies. Acquisitions,
alliances, and investments involve numerous risks, including:
-
The
potential failure to achieve the expected benefits of the combination or
acquisition;
-
Difficulties
in and the cost of integrating operations, technologies, services and
personnel;
-
Diversion
of financial and managerial resources from existing operations;
-
Risk
of entering new markets in which we have little or no experience or where
competitors may have stronger market positions;
-
Potential
write-offs of acquired assets or investments, and potential financial and
credit risks associated with acquired customers;
-
Inability
to generate sufficient revenue to offset acquisition or investment costs;
-
Potential
unknown liabilities associated with the acquired businesses;
-
Unanticipated
expenses related to acquired technology and its integration into the
existing business; and
-
Negative
impact to our results of operations because of the depreciation and amortization
of amounts related to acquired intangible assets, fixed assets and deferred
compensation, and the loss of acquired deferred revenue and unbilled deferred
revenue.
Our failure to successfully manage our strategic relationship
with Soluna, or other future acquisitions, strategic alliances or partnerships
could seriously harm our operating results. In addition, our shareholders would
be diluted if we finance the future acquisitions, strategic alliances or
partnerships by incurring convertible debt or issuing equity securities.
Risks Related to our Common Stock
The market price of our common stock is likely be volatile,
which may cause investment losses for our shareholders.
The market price of our common stock has been and is likely
to continue to be volatile, and investors in our common stock may experience a
decrease, which could be substantial, in the value of their common stock or the
loss of their entire investment in the Company for a number of reasons,
including reasons unrelated to our operating performance or prospects. The
market price of our common stock could be subject to wide fluctuations in response
to a broad and diverse range of factors, including those described elsewhere in
this "Risk Factors" section as well as the following:
-
announcements
by us regarding liquidity, significant acquisitions, equity investments
and divestitures, addition or loss of significant customers and contracts,
capital expenditure commitments, and litigation;
-
our
issuance of securities or debt, particularly if in connection with
acquisition activities;
-
the
sale of a significant number of shares of our common stock by shareholders;
-
recent
changes in financial condition or results of operations, such as in
earnings, revenues or other measure of company value;
-
general
market and economic conditions; and
-
announcements
of technological innovations or new product introductions by us or our competitors.
Further, broad market and industry factors may have a material
adverse effect on the market price of our common stock regardless of our actual
operating performance.
In addition, stock markets have experienced in the past and
may in the future experience a high level of price and volume volatility, and
the market prices of equity securities of many companies have experienced in
the past and may in the future experience wide price fluctuations not necessarily
related to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of our common stock.
Finally, our relatively small public float and daily
trading volume have in the past caused, and may in the future result in, significant
volatility in our stock price. At December 31, 2020, we had approximately 5,549,005
million shares outstanding held by non-affiliates. Our daily trading volume for
the year ended December 31, 2020 averaged approximately 13,488 shares.
If we are not able to comply with the applicable
continued listing requirements or standards of Nasdaq, Nasdaq could delist our
common stock or broker-dealers may be discouraged from effecting transactions
in shares of our common stock.
As previously discussed our common stock became listed and commenced
trading on Nasdaq on March 23, 2020. In order to maintain that listing, we must
satisfy minimum financial and other continued listing requirements and
standards, including those regarding director independence and independent
committee requirements, minimum stockholders' equity, minimum share price, and
certain corporate governance requirements. There can be no assurances that we
will be able to comply with such applicable listing standards. If we fail to do
so, Nasdaq may delist our common stock, which would likely have an adverse impact
on the market price and liquidity of our common stock.
23
In addition, our shares of common stock have in the past
constituted, and may again in the future constitute, "penny stock" within the
meaning of Section 3(a)(51) of the Exchange Act and Rule 3a-51-1 thereunder, and
so will be subject to the "penny stock" rules adopted under Section 15(g) (now
15(h)) of the Exchange Act. The penny stock rules generally apply to
companies whose common stock is not listed on a national securities exchange
and trades at less than $5.00 per share, other than companies that have had average
revenue of at least $6,000,000 for the last three years or that have tangible
net worth of at least $5,000,000 ($2,000,000 if the company has been operating
for three or more years). These rules require, among other things, that brokers
who trade penny stocks to persons other than "established customers" complete
certain documentation, make suitability inquiries of investors, and provide
investors with certain information concerning trading in the security, including
a risk disclosure document and quote information under certain circumstances. Many
brokers have decided not to trade penny stocks because of the requirements of
the penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited. If our common stock is
subject to the penny stock rules for any significant period, it could have an
adverse effect on the market, if any, for our common stock. If the common
stock is subject to the penny stock rules, investors will find it more difficult
to dispose of their shares of our common stock.
Raising additional funds through debt or equity financing
could be dilutive and may cause the market price of our common stock to decline.
We still may need to raise additional funding which may not be available on acceptable
terms, or at all. Failure to obtain additional capital may force us to delay,
limit, or terminate our product development efforts or other operations.
To the extent that we raise additional capital through the
sale of equity or convertible debt securities, your ownership interest may be
diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect your rights as a shareholder. Furthermore, any
additional fundraising efforts may divert our management from their day-to-day
activities, which may adversely affect our ability to develop and commercialize
our products and services. In addition, the sale of a significant number of our
shares of common stock, either by us or by our shareholders (in particular Brookstone,
our largest shareholder) could depress the price of our common stock.
We estimate that our current cash and cash equivalents, along
with the net proceeds of our contemplated common stock offering, will be
sufficient for us to fund our operating expenses and capital expenditure requirements
for at least the next 12 months. We may continue to seek funds through equity
or debt financings, collaborative or other arrangements with corporate sources,
or through other sources of financing. Additional funding may not be available
to us on acceptable terms, or at all. Any failure to raise capital as and when
needed, as a result of insufficient authorized shares or otherwise, could have
a negative impact on our financial condition and on our ability to pursue our
business plans and strategies.
Item 1B: Unresolved Staff Comments
Not applicable.
Item 2: Properties
We lease approximately 17,400
square feet of office, manufacturing, and research and development space in Albany,
New York, which houses the corporate offices of MTI and MTI Instruments as well
as MTI Instruments' business operations. The current lease agreement expires on
November 30, 2024.
EcoChain leases approximately 19,000
square feet of space in four buildings in East Wenatchee, Washington. The space
is leased for the purpose of operating EcoChain's cryptocurrency mining
business. The current lease agreements expire for one building on June 30, 2024,
for another on November 30, 2024, and for the remaining two buildings on July 31,
2023.
We believe these facilities are
generally well-maintained and adequate for MTI's and MTI Instruments' current
needs and for expansion, if required.
On March 4, 2021, EcoChain Wind, LLC
acquired a 3.2-acre tract of real property located in the Southeastern United
States on which it intends to build an energy-efficient cryptocurrency mining facility.
Item 3: Legal Proceedings
At any point
in time, we may be involved in various lawsuits or other legal proceedings.
Such lawsuits could arise from the sale of products or services or from other
matters relating to our regular business activities, compliance with various
governmental regulations and requirements, or other transactions or circumstances.
24
We have
been named as a party in the December 19, 2019 United States Environmental
Protection Agency ("EPA") Demand Letter regarding the Malta Rocket Fuel Area
Superfund Site ("Site") located in Malta and Stillwater, New York, in
connection with an alleged release of hazardous materials into the environment.
The EPA is seeking reimbursement of response costs from all named parties in
the amount of approximately $358 thousand plus interest in connection with the
investigation and disposal activities associated with the various drum caches
discovered at the Site, issuance of the Explanation of Significant Differences
("ESD") of the Site, and implementation of the work contemplated by the ESD. We
consider the likelihood of a material adverse outcome with respect to this
matter to be remote and do not currently anticipate that any expense or liability
that we may incur as a result of this matter in the future will be material to
the Company's business or financial condition. Further, we are not presently involved
in any other litigation that we believe is likely, individually or in the
aggregate, to have a material adverse effect on our consolidated financial condition,
results of operations or cash flows.
Item 4: Mine Safety Disclosures
Not applicable.
25
Notes to Consolidated Financial Statements
1.
Nature of Operations
Description of Business
Mechanical
Technology, Incorporated (MTI or the Company), a New York corporation until
redomestication in the State of Nevada on March 29, 2021, was incorporated
in 1961 and is headquartered in Albany, New York. The Company's core business
is conducted through MTI Instruments, Inc. (MTI Instruments), a wholly-owned
subsidiary, which designs, manufactures and markets its products also at the Albany,
New York location. The Company has also recently formed EcoChain, Inc. (EcoChain),
a wholly-owned subsidiary, to conduct a new line of business associated with
cryptocurrency mining operations, and also purchased Class A Preferred Shares of
Soluna Technologies, Ltd. (Soluna), a Canadian company that develops vertically-integrated,
utility-scale computing facilities focused on cryptocurrency mining and cutting-edge
blockchain applications.
MTI Instruments
was incorporated in New York on March 8, 2000 and is a supplier of vibration measurement
and balancing systems, precision linear displacement solutions, and wafer inspection
tools. Our products consist of engine vibration analysis systems for both military
and commercial aircraft and electronic gauging instruments for position, displacement
and vibration application within the industrial manufacturing markets, as well
as in the research, design and process development markets. These systems, tools
and solutions are developed for markets and applications that require consistent
operation of complex machinery and the precise measurements and control of products,
processes, the development and implementation of automated manufacturing and
assembly.
EcoChain
was incorporated in Delaware on January 8, 2020. EcoChain has established a new
business line focused on cryptocurrency and the blockchain ecosystem. In connection
with the creation of the new business line, EcoChain has established a
cryptocurrency mining facility that integrates with the bitcoin blockchain network.
On May 21, 2020, EcoChain closed its acquisition of the intellectual property of
Giga Watt, Inc. (GigaWatt) and certain other property and rights of GigaWatt
associated with GigaWatt's operation of a crypto-mining operation located in Washington
State. EcoChain purchased these assets from Giga Watt's Chapter 11 Trustee in
its bankruptcy case in the United States Bankruptcy Court Eastern District of Washington.
Company management did not consider the assets EcoChain purchased from Giga Watt
to constitute a "business" as substantially all the fair value of the
gross assets acquired is concentrated in a group of similar identifiable
assets. Therefore, management did not consider the acquisition of such assets
to be a "business combination" as defined under ASC 805. The total purchase
price of the assets acquired in the GigaWatt transaction was $200 thousand, of
which $20 thousand was charged back as per the colocation agreement with Navier,
Inc. and the remaining cost of $180 thousand was recorded as a leasehold improvement.
The acquired assets formed the cornerstone of EcoChain's cryptocurrency mining
operation in Washington.
Liquidity
The Company has historically
incurred significant losses primarily due to its past efforts to fund direct
methanol fuel cell product development and commercialization programs and had a
consolidated accumulated deficit of approximately $117.8 million as of December
31, 2020. As of December 31, 2020, the Company had working capital of approximately
$3.1 million, no debt, no outstanding commitments for capital expenditures, and
approximately $2.6 million of cash available to fund our operations.
Based on the Company's projected
cash requirements for operations and capital expenditures, its current available
cash of approximately $2.6 million and its projected 2021 cash flow pursuant to
management's plans, management believes it will have adequate resources to fund
operations and capital expenditures for the year ending December 31, 2021 and through
the end of the first quarter of 2022. If cash generated from operations is insufficient
to satisfy the Company's operational working capital and capital expenditure
requirements, the Company may utilize the $300 thousand line of credit at MTI Instruments
to fund these initiatives. The Company is considering other funding sources,
including debt and equity. However, the Company has no other formal commitments
for funding its future needs at this time and any additional financing we may require
during the year ending December 31, 2021, may not be available to us on acceptable
terms or at all.
2.
Accounting Policies
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries,
MTI Instruments and EcoChain. All intercompany balances and transactions are eliminated
in consolidation.
Use of Estimates
The consolidated financial statements
of the Company have been prepared in accordance with U.S. generally accepted
accounting principles (U.S. GAAP), which require 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.
F-8
Inventories
Inventories are valued at the
lower of cost (first-in, first-out) or net realizable value. The Company periodically
reviews inventory quantities on hand and records a provision for excess, slow
moving and obsolete inventory based primarily on our estimated forecast of product
demand, as well as based on historical usage. The Company also provides estimated
inventory allowances for inventory whose carrying value is in excess of net
realizable value. 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. Although the Company makes every effort to assure the accuracy of our
forecasts of future product demand, any significant unanticipated changes in demand
could have a significant impact on the value of our inventory and our reported
operating results. If changes in market conditions result in reductions in the
estimated net realizable value of our inventory below our previous estimate,
the Company would increase our reserve in the period in which we made such a
determination and record a charge to cost of product revenue.
Property, Plant, and Equipment
Property, plant and equipment are
stated at cost and depreciated using the straight-line method over their estimated
useful 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 is subject to income
taxes in the U.S. (federal and state). As part of the process of preparing our
consolidated financial statements, the Company calculates income taxes for each
of the jurisdictions in which the Company operates. This involves estimating
actual current taxes due together with assessing temporary differences resulting
from differing treatment for tax and accounting purposes that are recorded as
deferred tax assets and liabilities, loss carryforwards and tax credit carryforwards,
for which income tax benefits are expected to be realized in future years. A valuation
allowance has been established to reduce deferred tax assets, if 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 that includes the enactment date.
Significant management judgment
is required in determining the Company's provision for income taxes, deferred tax
assets and liabilities, and any valuation allowance recorded against the Company's
net deferred tax assets. The Company considers all available evidence, both positive
and negative, such as historical levels of income and future forecasts of
taxable income amongst other items in determining the Company's valuation allowance.
In addition, the Company's assessment requires the Company 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.
The Company accounts for taxes in
accordance with the asset and liability method of accounting for income taxes.
Under this method, the Company 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 the
Company's reassessment of its tax positions for these standards did not have a
material impact on its results of operations, financial condition, or liquidity.
The Company is currently subject
to audit in various jurisdictions, and these jurisdictions may assess
additional income tax liabilities against us. Developments in an audit,
litigation, or in applicable laws, regulations, administrative practices, principles,
and interpretations could have a material effect on the Company's operating
results or cash flows in the period or periods in which such developments occur,
as well as for prior and in subsequent periods.
Tax laws, regulations, and administrative
practices in various jurisdictions may be subject to significant change, with
or without notice, due to economic, political, and other conditions, and significant
judgment is required in evaluating and estimating the Company's provision and accruals
for these taxes. There are many transactions that occur during the ordinary course
of business for which the ultimate tax determination is uncertain. The Company's
effective tax rates could be affected by numerous factors, such as intercompany
transactions, earnings being lower than anticipated in jurisdictions where the Company
has lower statutory rates and higher than anticipated in jurisdictions where the
Company has higher statutory rates, the applicability of special tax regimes,
losses incurred in jurisdictions for which the Company is not able to realize
the related tax benefit, changes in foreign currency exchange rates, entry into
new businesses and geographies, changes to its existing businesses and operations,
acquisitions and investments and how they are financed, changes in the Company's
stock price, changes in its deferred tax assets and liabilities and their
valuation, and changes in the relevant tax, accounting, and other laws, regulations,
administrative practices, principles, and interpretations.
F-9
Equity Investment - Soluna
The equity
investment in Soluna is carried at the cost of investment and is $750 thousand
as of December 31, 2020. The Company owns approximately 1.86% of Soluna's stock,
calculated on a fully-diluted basis, as of December 31, 2020.
Equity Investments without Readily Determinable Fair Values
Our equity investment in Soluna
is accounted for under the measurement alternative. Equity securities measured
and recorded using the measurement alternative are recorded at cost minus
impairment, if any, plus or minus changes resulting from qualifying observable
price changes. Adjustments resulting from impairments and observable price
changes are recorded in the income statement. There was no impairment
of investment recognized in 2020.
Equity Method Investments
The Company's consolidated net
income will include our proportionate share, if any, of the net income or loss
of our equity method investee. When the Company records its proportionate share
of net income, it increases equity income (loss), net in our consolidated statements
of operations and our carrying value in that investment. Conversely, when the
Company records its proportionate share of a net loss, it decreases equity income
(loss), net in our consolidated statements of operations and our carrying value
in that investment. When the Company's carrying value in an equity method investee
company has been reduced to zero, no further losses are recorded in the Company's
financial statements unless the Company guaranteed obligations of the investee company
or has committed additional funding. When the investee company subsequently
reports income, the Company will not record its share of such income until it
equals the amount of its share of losses not previously recognized.
The Company records its investment
in MeOH Power, Inc. using the equity method of accounting. The fair value of
the Company's interest in MeOH Power, Inc. has been determined to be $0 as of December
31, 2020 and December 31, 2019, based on MeOH Power, Inc.'s net position and expected
cash flows. As of December 31, 2020, the Company retained its ownership of
approximately 47.5% of MeOH Power, Inc.'s outstanding common stock, or 75,049,937
shares. The number of shares of MeOH Power, Inc.'s common stock authorized for issuance
is 240,000,000 as of December 31, 2020.
Fair Value Measurement
The estimated fair value of
certain financial instruments, including cash, accounts receivable and short-term
debt approximates their carrying value due to their short maturities and varying
interest rates. "Fair value" is the price that would be received to sell an asset
or transfer a liability in an orderly transaction between market participants
at the measurement date. The Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. Based
on the observability of the inputs used in the valuation methods, the Company is
required to provide the following information according to the fair value accounting
standards. These standards established a fair value hierarchy as specified that
ranks the quality and reliability of the information used to determine fair
values. Financial assets and liabilities are classified and disclosed in one of
the following three categories:
Level 1: Quoted market prices in active markets for
identical assets or liabilities, which includes listed equities.
Level 2: Observable market-based inputs or unobservable
inputs that are corroborated by market data. These items are typically priced using
models or other valuation techniques. These models are primarily financial industry-standard
models that consider various assumptions, including the time value of money,
yield curves, volatility factors, as well as other relevant economic measures.
Level 3: These use unobservable inputs that are not corroborated
by market data. These values are generally estimated based upon methodologies utilizing
significant inputs that are generally less observable from objective sources.
Revenue Recognition
Product Revenue
Product revenue consists of
revenue recognized from MTI Instruments' product lines. In general, the Company
determines revenue recognition by: (1) identifying the contract, or contracts,
with the customer; (2) identifying the performance obligations in the contract;
(3) determining the contract price; (4) allocating the transaction price to performance
obligations in the contract; and (5) recognizing revenue when, or as, the performance
obligations are satisfied by transferring the promised goods or services.
Based on past experience, the Company reasonably estimates its returns and warranty
reserves. Revenue is presented net of discounts and allowances, which are
determined when the sale is negotiated. The nature of the Company's contracts
do not give rise to variable consideration. The Company enters into contracts
that can include various combinations of products and services, which are generally
capable of being distinct and accounted for as separate performance obligations.
F-10
If the product requires that
the Company provide installation, all revenue related to the product is deferred
and recognized upon the completion of the installation. If the product requires
specific customer acceptance criteria, such as on-site customer acceptance and/or
acceptance after install, then 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
is satisfied. The Company may also record unearned revenues, which include
payments for other offerings for which we have been paid in advance. The resulting
revenue would be earned when we transfer control of the product or service. As
of December 31, 2020 and December 31, 2019, the Company had no deferred or
unearned revenue.
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. 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.
The
transaction price is determined based on the consideration to which the Company
will be entitled in exchange for transferring services to the customer. If the contract contains a single performance
obligation, the entire transaction price is allocated to the single performance
obligation. Contracts that contain multiple performance obligations require an
allocation of the transaction price to each performance obligation based on a
relative standalone selling price basis unless the transaction price is
variable and meets the criteria to be allocated entirely to a performance
obligation or to a distinct good or service that forms part of a single
performance obligation. The Company determines standalone selling price based
on the price at which the performance obligation is sold separately. If the
standalone selling price is not observable through past transactions, the Company
estimates the standalone selling price taking into account available information
such as market conditions and internally approved pricing guidelines related to
the performance obligations.
Shipping
and handling charges billed to customers is a pass-through from the freight
forwarder and is included in product revenue.
Cost of Product Revenue
Cost of product revenue includes
material, labor, overhead and shipping and handling costs.
Cryptocurrency Revenue
Cryptocurrency
revenue consists of revenue recognized from EcoChain's cryptocurrency mining
facility. Revenue is recognized at the cryptocurrency's realized cash value based
upon the rates at cryptocurrency exchanges where we are registered. Cryptocurrencies
are earned when the miners solve complex computations and cryptocurrency is issued
as a result. The mined cryptocurrency is immediately paid to the Coinbase wallet.
Cryptocurrency is converted to U.S. dollars daily, as EcoChain is not in the
business of accumulating cryptocurrency on its balance sheet for speculative gains.
Cost of Cryptocurrency Revenue
Cost
of cryptocurrency revenue includes direct utility costs as well as overhead
costs that relate to the operations of EcoChain's cryptocurrency mining
facility.
Accounts Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are stated 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. The Company's allowance for doubtful accounts
was $0 at both December 31, 2020 and December 31, 2019.
Payment
terms and conditions vary by contract type, although terms generally include a
requirement of payment within 30 days. In instances where the timing of revenue
recognition differs from the timing of invoicing, we have determined our contracts
generally do not include a significant financing component. The primary purpose
of the Company's invoicing terms is to provide customers with simplified and
predictable ways of purchasing our products and services, not to receive financing
from its customers.
The
Company recognizes an asset for the incremental costs of obtaining a contract with
a customer, if the Company expects the benefit of those costs to be longer than
one year. As of December 31, 2020 and December 31, 2019, the Company has recorded
no capitalized costs to obtain a contract.
F-11
The Company
applies the practical expedient to expense costs as incurred for costs to obtain
a contract when the amortization period would have been one year or less. These
costs include our internal sales force compensation programs as we have determined
annual compensation is commensurate with annual sales activities.
Warranty
The Company accrues a warranty
liability at the time product revenue is recorded based on historical experience.
The liability 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 $22 thousand and $16 thousand as of December
31, 2020 and 2019, respectively. Warranty expense was $11 thousand and $1 thousand
for 2020 and 2019, respectively.
Long-Lived Assets
The Company accounts for impairment
or disposal of long-lived assets in accordance with accounting standards that address
the financial accounting and reporting for the impairment or disposal of long-lived
assets, specify 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, 2020, 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.
Net Income per Share
The Company computes basic
income per common share by dividing net income by the weighted average number of
common shares outstanding during the reporting period. Diluted income per share
reflects the potential dilution, if any, computed by dividing 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 and the amount of compensation cost, if any, for
future service that the Company has not yet recognized are assumed to be used
to repurchase shares in the current period.
Share-Based Payments
The Company grants 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 and the Company accounts for stock-based awards exchanged for
employee service in accordance with the appropriate share-based payment accounting
guidance. 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 on the grant date
using a Black- Scholes valuation model. The Company uses the fair value method
of accounting with the modified prospective application, which provides for
certain changes to the method for valuing share-based compensation. The valuation
provisions apply to new awards and to awards that are outstanding on the effective
date and subsequently modified. Under the modified prospective application, prior
periods are not revised for comparative purposes. Stock-based compensation expense
is recorded in the lines titled "Cost of product revenue," "Selling, general
and administrative expenses" and "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. All income tax
effects of awards, including excess tax benefits, recognized on stock-based compensation
expense are reflected in the Consolidated Statements of Operations as a component
of the provision for income taxes on a prospective basis.
The determination of the fair value
of share-based payment awards on the date of grant using an option-pricing model
is affected by the Company's stock price as well as assumptions regarding a number
of complex and subjective variables. These variables include the Company's 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.
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.
F-12
For purposes of estimating the
fair value of stock options granted using the Black-Scholes model, the Company
uses the historical volatility of its stock for the expected volatility assumption
input to the Black-Scholes model, consistent with the accounting guidance. The risk-free
interest rate is based on the risk-free zero-coupon rate for a period consistent
with the expected option term at the time of grant. The Company paid a special dividend
during the year ended December 31, 2019 and did not pay any dividends during the
year ended December 31, 2020. The Company is required to assume a dividend yield
as an input to the Black-Scholes model. Since the 2019 dividend was a special dividend
and the Company does not anticipate paying any cash dividends in the foreseeable
future, the Company therefore used an expected dividend yield of zero in the option
valuation model. The expected option term is calculated based on our historical
forfeitures and cancellation rates.
The fair
value of restricted stock awards is based on the market close price per share
on the grant date. The Company expenses the compensation cost of these awards
as the restriction period lapses, which is typically a one- to three-year service
period to the Company. The shares represented by restricted
stock awards are outstanding at the grant date, and the recipients are entitled
to voting rights with respect to such shares upon issuance.
Concentration of Credit Risk
Financial instruments that
subject the Company to concentrations of credit risk principally consist of cash
equivalents and trade accounts receivable. The Company's trade accounts receivable
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 from individual
customers or groups of customers in any particular industry or geographic area.
The Company has cash deposits
in excess of federally insured limits but does not believe them to be at risk.
Research and Development Costs
The Company expenses research and
development costs as incurred. The Company incurred research and development costs
of approximately $1.5 million and $1.4 million, which was entirely related to
MTI Instruments, for the years ended December 31, 2020 and 2019, respectively.
Advertising Costs
The Company expenses advertising
costs as incurred. The Company incurred advertising costs of approximately $39 thousand
and $45 thousand, which was entirely related to MTI Instruments, for the years ended
December 31, 2020 and 2019, respectively.
Other Comprehensive Income
The Company had no other comprehensive
income items for the years ended December 31, 2020 and 2019.
Leases
The Company determines if an
arrangement is a lease at inception. Operating leases are included in operating
lease right-of-use ("ROU") assets and operating lease liability on our consolidated
balance sheets. The Company did not have any finance leases as of December 31,
2020 or December 31, 2019.
Operating lease ROU assets and
operating lease liabilities are recognized based on the present value of the future
minimum lease payments over the lease term at commencement date. As most of the
Company's leases do not provide an implicit rate, the Company uses its incremental
borrowing rate based on the information available at commencement date in determining
the present value of future payments. The operating lease ROU assets also include
any lease payments made and excludes lease incentives and initial direct costs
incurred. The Company's lease terms may include options to extend or terminate
its leases when it is reasonably certain that the Company will exercise those options.
Lease expense for minimum lease payments is recognized on a straight-line basis
over the lease term.
The Company has lease agreements
with lease and non-lease components, which are generally accounted for separately.
For real estate leases, the Company accounts for lease components together with
non-lease components (e.g. common-area maintenance).
Accounting Updates Not Yet Effective
Changes to U.S. GAAP are established
by the Financial Accounting Standards Board (the FASB) in the form of accounting
standard updates (ASUs) to the FASB's Accounting Standards Codification (ASC).
The Company considered the applicability and impact of all ASUs. ASUs not mentioned
below were assessed and determined to be either not applicable or are expected to
have minimal impact on our consolidated financial position or results of
operations.
F-13
In June
2016, the FASB issued ASU 2016-13 (Financial Instruments - Credit Losses (Topic
326)) and its subsequent amendments to the initial guidance within ASU 2018-19,
ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2020-02, respectively
(collectively, Topic 326). Topic 326 changes how entities will measure credit
losses for most financial assets and certain other instruments that are not
accounted for at fair value through net income. This standard replaces the
existing incurred credit loss model and establishes a single credit loss framework
based on a current expected credit loss model for financial assets carried at
amortized cost, including loans and held-to- maturity debt securities. The
current expected loss model requires an entity to estimate credit losses expected
over the life of the credit exposure upon initial recognition of that exposure
when the financial asset is originated or acquired, which will generally result
in earlier recognition of credit losses. This standard also requires expanded credit
quality disclosures. For available-for-sale debt securities, entities will be
required to record allowances rather than reduce the carrying amount, as they
do today under the other-than-temporary impairment model. This standard also
simplifies the accounting model for purchased credit-impaired debt securities
and loans. This standard will affect loans, debt securities, trade receivables,
net investments in leases, off balance sheet credit exposures, reinsurance receivables,
and any other financial assets not excluded from the scope
that have the contractual right to receive cash. ASU 2018-19 clarifies that receivables
arising from operating leases are accounted for using lease guidance and not as
financial instruments. ASU 2019-04 clarifies that equity instruments without readily
determinable fair values for which an entity has elected the measurement alternative
should be remeasured to fair value as of the date that an observable transaction
occurred. ASU 2019-05 provides an option to irrevocably elect to measure certain
individual financial assets at fair value instead of amortized cost. This
standard should be applied on either a prospective transition or modified-retrospective
approach depending on the subtopic. This standard will be effective for the
Company for annual and interim reporting periods beginning on or after December
15, 2022, and while early adoption is permitted, the Company does not expect to
elect that option. The Company is currently evaluating the impact of the
adoption of this standard on its consolidated financial statements, including
assessing and evaluating assumptions and models to estimate losses. Upon adoption
of this standard on January 1, 2023, the Company will be required to record a
cumulative effect adjustment to retained earnings for the impact as of the date
of adoption. The impact will depend on the Company's portfolio composition and credit
quality at the date of adoption, as well as forecasts at that time.
In December
2019, the FASB issued ASU 2019-12 (Income Taxes (Topic 740) - Simplifying the
Accounting for Income Taxes). This standard removes exceptions to the general principles
in Topic 740 for allocating tax expense between financial statement components,
accounting basis differences stemming from an ownership change in foreign investments
and interim period income tax accounting for year-to-date losses that exceed projected
losses. The standard will be effective for the Company for annual reporting
periods beginning after December 15, 2020 and interim periods within those fiscal
years, and while early adoption is permitted, the Company does not expect to
elect that option. The Company is currently evaluating the impact of the adoption
of this standard on its consolidated financial statements. At this time, the Company
does not expect the adoption of this standard to have a material impact on its
consolidated financial statements.
In January
2020, the FASB issued ASU 2020-01 (Investments - Equity Securities (Topic 321),
Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and
Hedging (Topic 815)). This standard clarifies certain interactions between the guidance
to account for certain equity securities under Topic 321, the guidance to account
for investments under the equity method of accounting in Topic 323, and the
guidance in Topic 815, which could change how an entity accounts for an equity
security under the measurement alternative or a forward contract or purchased option
to purchase securities that, upon settlement of the forward contract or exercise
of the purchased option, would be accounted for under the equity method of accounting
or the fair value option in accordance with Topic 825, Financial Instruments.
This standard will reduce diversity in practice and increasing comparability of
the accounting for these interactions. The standard will be effective for the Company
for annual reporting periods beginning after December 15, 2020 and interim periods
within those fiscal years, and while early adoption is permitted, the Company
does not expect to elect that option. The Company is currently evaluating the
impact of the adoption of this standard on its consolidated financial statements.
At this time, the Company does not expect the adoption of this standard to have
a material impact on its consolidated financial statements.
Accounting Updates Recently Adopted by the Company
On January 1, 2020, the Company
adopted ASU No. 2018-18 (Collaborative Arrangements (Topic 808): Clarifying the
Interaction Between Topic 808 and Topic 606). A collaborative arrangement is a
contractual arrangement under which two or more parties actively participate in
a joint operating activity and are exposed to significant risk and rewards that
depend on the activity's commercial success. This standard clarifies when
certain transactions between collaborative arrangement participants should be accounted
for under ASC 606 and incorporates unit-of-account guidance consistent with ASC
606 to aid in this determination. The adoption of this standard did not have a
material impact on its consolidated financial statements.
There have been no other significant
changes in the Company's reported financial position or results of operations and
cash flows as a result of its adoption of new accounting pronouncements or changes
to its significant accounting policies that were disclosed in its consolidated
financial statements for the fiscal year ended December 31, 2020.
3.
Accounts Receivable
Accounts receivables consist of the following at:
(Dollars in thousands)
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
U.S.
and State Government
|
$
|
2
|
|
$
|
57
|
Commercial
|
|
909
|
|
|
653
|
Allowance
for doubtful accounts
|
|
-
|
|
|
-
|
Other
|
|
64
|
|
|
35
|
Total
|
$
|
975
|
|
$
|
745
|
F-14
4.
Inventories
Inventories consist of the following at:
(Dollars in thousands)
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
Finished
goods
|
$
|
371
|
|
$
|
302
|
Work in process
|
|
139
|
|
|
279
|
Raw materials
|
|
318
|
|
|
343
|
Total
|
$
|
828
|
|
$
|
924
|
5.
Property, Plant and Equipment
Property, plant and equipment consist of the following at:
(Dollars in thousands)
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
Leasehold improvements
|
$
|
262
|
|
$
|
39
|
Computers and related software
|
|
1,603
|
|
|
1,026
|
Machinery and equipment
|
|
885
|
|
|
915
|
Office furniture and fixtures
|
|
38
|
|
|
40
|
|
|
2,788
|
|
|
2,020
|
Less: Accumulated depreciation
|
|
1,941
|
|
|
1,846
|
|
$
|
847
|
|
$
|
174
|
Depreciation expense was $159
thousand and $87 thousand for the years ended December 31, 2020 and 2019,
respectively. Repairs and maintenance expense was $32 thousand and $18 thousand
for the years ended December 31, 2020 and 2019, respectively.
6.
Income Taxes
Income tax benefit for each of the years ended December 31
consists of the following:
(Dollars in thousands)
|
2020
|
|
2019
|
|
|
Federal
|
$
|
-
|
|
|
$
|
33
|
|
State
|
|
(4
|
)
|
|
|
(5
|
)
|
Deferred
|
|
396
|
|
|
|
-
|
|
Total
|
$
|
392
|
|
|
$
|
28
|
|
The significant components of
deferred income tax benefit from operations for each of the years ended December
31 consists of the following:
(Dollars in thousands)
|
2020
|
|
2019
|
|
|
Deferred tax (expense) benefit
|
$
|
83
|
|
|
$
|
(101
|
)
|
Net operating loss carry forward
|
|
(330
|
)
|
|
|
(74
|
)
|
Valuation allowance
|
|
643
|
|
|
|
175
|
|
|
$
|
396
|
|
|
$
|
-
|
|
F-15
The Company's effective income
tax rate from operations differed from the Federal statutory rate for each of the
years ended December 31 as follows:
|
2020
|
|
2019
|
Federal statutory tax rate
|
21
|
%
|
|
21
|
%
|
Change in valuation allowance
|
(43
|
)
|
|
(54
|
)
|
State taxes, net of federal benefit
|
0
|
|
|
1
|
|
Expiration of stock option
|
1
|
|
|
14
|
|
Federal tax benefits, R&D
|
(3
|
)
|
|
9
|
|
Other Deferred Adjustments
|
(1
|
)
|
|
--
|
|
Tax rate
|
(25
|
)%
|
|
(9
|
)%
|
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:
(Dollars in thousands)
|
2020
|
|
2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Inventory valuation
|
$
|
49
|
|
|
$
|
43
|
|
Vacation pay
|
|
20
|
|
|
|
22
|
|
Bonus Accrual
|
|
-
|
|
|
|
-
|
|
Warranty and
other sale obligations
|
|
5
|
|
|
|
3
|
|
Deferred revenue
|
|
10
|
|
|
|
10
|
|
Allowance
for related party note receivable
|
|
69
|
|
|
|
65
|
|
Net operating
loss
|
|
10,187
|
|
|
|
10,518
|
|
Property,
plant and equipment
|
|
(20
|
)
|
|
|
(10
|
)
|
Stock options
|
|
36
|
|
|
|
72
|
|
Research
and development tax credit
|
|
120
|
|
|
|
32
|
|
|
|
10,476
|
|
|
|
10,755
|
|
Valuation allowance
|
|
(9,717
|
)
|
|
|
(10,360
|
)
|
Net deferred tax assets
|
$
|
759
|
|
|
$
|
395
|
|
Valuation
Allowance:
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 the estimate of deferred tax assets and liabilities on current
tax laws and rates and, in certain cases, business plans and other expectations
about future outcomes.
As a result of
its assessment in 2020, the Company released a portion of its valuation
allowance against its deferred tax assets. The partial release of the valuation
allowance caused an incremental tax benefit of $643 thousand to be recognized in 2020. The release
of a portion of the valuation allowance was based upon the Company's recent
cumulative income history and projected future taxable income causing the Company
to evaluate what portion of the Company's deferred tax assets it believes are more
likely than 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 as of December 31, 2020. 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 differences.
F-16
The valuation allowance at December
31, 2020 and 2019 was $9.9 million and $10.4 million, respectively. Activity in
the valuation allowance for deferred tax assets is as follows as of December
31:
(Dollars in thousands)
|
2020
|
|
2019
|
|
|
Valuation allowance, beginning of year
|
$
|
10,360
|
|
|
$
|
10,535
|
|
Allowance for related party note receivable
|
|
(65
|
)
|
|
|
3
|
|
Inventory
|
|
(43
|
)
|
|
|
(7
|
)
|
Net operating (loss) income
|
|
(406
|
)
|
|
|
(74
|
)
|
Property, plant and equipment
|
|
10
|
|
|
|
7
|
|
Stock options
|
|
(72
|
)
|
|
|
(35
|
)
|
Research and development credit
|
|
(32
|
)
|
|
|
(82
|
)
|
Warranty and other sales obligations
|
|
(3
|
)
|
|
|
(2
|
)
|
Deferred revenue
|
|
(10
|
)
|
|
|
10
|
|
Accrued compensation
|
|
(22
|
)
|
|
|
5
|
|
Valuation allowance, end of year
|
$
|
9,717
|
|
|
$
|
10,360
|
|
Net operating
losses:
At December 31, 2020, the Company
has unused Federal net operating loss carryforwards of approximately $49 million. Of these, none will expire in 2021, with the remainder
expiring through 2035.
The Company's and/or its subsidiaries'
ability to utilize their net operating loss carryforwards may be significantly limited
by Section 382 of the IRC of 1986, as amended, if the Company or any of its
subsidiaries undergoes an "ownership change" as a result of changes in the ownership
of the Company's or its subsidiaries' outstanding stock pursuant to the
exercise of the warrants or otherwise.
Unrecognized tax benefits:
The Company has $710 thousand
unrecognized tax benefits at December 31, 2020 and 2019. These unrecognized tax
benefits relate to former subsidiaries of the Company and a prior investment in
a partnership.
In future periods, if these unrecognized
benefits become supportable, the Company may not recognize a change in its
effective tax rate as long as it remains in a partial valuation allowance
position. Additionally, the Company does not have uncertain tax positions that
it expects will increase or decrease within twelve months of this reporting
date. The Company recognizes interest and penalties related to uncertain tax
positions as a component of tax expense. The Company did not recognize any
interest or penalties in 2020 and 2019.
The Company files income tax
returns, including returns for its subsidiaries, with federal and state jurisdictions.
The Company is no longer subject to IRS or state examinations for any periods
prior to 2017, although carryforward attributes that were generated prior to 2017
may still be adjusted upon examination by the IRS if they either have been or
will be used in a future period.
7.
Accrued Liabilities
Accrued liabilities consist of the following at:
(Dollars in
thousands)
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
Salaries,
wages and related expenses
|
$
|
344
|
|
$
|
238
|
Liability to
shareholders for previous acquisition
|
|
363
|
|
|
363
|
Legal and
professional fees
|
|
146
|
|
|
65
|
Warranty and
other sale obligations
|
|
22
|
|
|
16
|
Commissions
|
|
4
|
|
|
3
|
Other
|
|
140
|
|
|
76
|
Total
|
$
|
1,019
|
|
$
|
761
|
8.
Stockholders' Equity
Common Stock
The Company has one class of common
stock, par value $.01. Each share of the Company's common stock is entitled to one
vote on all matters submitted to stockholders. As of December 31, 2020 and 2019,
there were 9,734,607 and 9,570,677 shares of common stock issued and outstanding,
respectively.
Dividends
Dividends are recorded when
declared by the Company's Board of Directors. During 2019, the Company declared
and paid a special dividend of $3.5 million or $0.37 per common share. A portion
of dividends are charged against paid in capital because the Company does not
have sufficient retained earnings. There were no dividends declared or paid
during 2020.
F-17
Reservation of Shares
The Company had reserved common
shares for future issuance as follows as of December 31, 2020:
Stock
options outstanding
|
398,750
|
|
Common
stock available for future equity awards or issuance of options
|
11,125
|
|
Number
of common shares reserved
|
409,875
|
|
9.
Retirement Plan
The Company maintains a voluntary
savings and retirement plan under IRC 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,
on a discretionary basis, currently in an amount equal to 100% of the first 3% and
50% of the next 2% of the employee's salary, subject to annual tax deduction
limitations. Effective January 1, 2017, Company matching contributions are vested
immediately. Company matching contributions were $77 thousand and $81 thousand
for 2020 and 2019, 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 2020 or 2019.
10.
Net income 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:
(Dollars
in thousands, except shares)
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
1,946
|
|
|
$
|
323
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
Common
shares outstanding, beginning of period
|
|
9,570,677
|
|
|
|
9,437,177
|
|
Weighted average common shares
issued during the period
|
|
11,209
|
|
|
|
111,283
|
|
Denominator
for basic earnings per common shares -
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
9,581,886
|
|
|
|
9,548,460
|
|
|
|
|
|
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
Common shares
outstanding, beginning of period
|
|
9,570,677
|
|
|
|
9,437,177
|
|
Common stock equivalents -
options
|
|
52,617
|
|
|
|
54,088
|
|
Weighted average common shares issued
during the period
|
|
11,209
|
|
|
|
111,283
|
|
Denominator
for diluted earnings per common shares -
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
9,634,503
|
|
|
|
9,602,548
|
|
|
|
|
|
|
|
|
|
Not included in the computation
of earnings per share, assuming dilution, for the year ended December 31, 2020,
were options to purchase 237,000 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, 2019,
were options to purchase 313,000 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.
11.
Stock Based Compensation
Stock-based incentive awards are
provided to employees and directors under the terms of the Company's 2006 Equity
Incentive Plan (2006 Plan), which was amended and restated effective June 30, 2011,
September 16, 2009 and October 20, 2016, 2012 Equity Incentive Plan (the 2012 Plan),
which was amended and restated as of October 20, 2016, and 2014 Equity
Incentive Plan (the 2014 Plan) (collectively, the Plans). Awards under the
Plans have generally included at-the-money options and restricted stock grants.
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 2006 Plan was amended and restated by the Board of Directors effective
September 16, 2009, June 30, 2011 and October 20, 2016. The September 16, 2009 amendment
increased the initial aggregate number of 250,000 shares of common stock that may
be awarded or issued to 600,000, the June 30, 2011 amendment increased the aggregate
number of shares of common stock that may be awarded or issued under the 2006 Plan
to 1,200,000, and the October 2016 amendment allowed for the award agreement or
another agreement entered into between the Company and the award grantee to vary
the method of exercise of options issued under the 2006 Plan and the provisions
governing expiration of options or other awards under the 2006 Plan following termination
of the award recipient. The number of shares that may be awarded under the 2006
Plan and awards outstanding has 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. In connection with seeking stockholder
approval of the 2012 Plan, the Company agreed not to make further awards under
the 2006 Plan.
F-18
The 2012 Plan was adopted by
the Company's Board of Directors on April 14, 2012 and approved by its stockholders
on June 14, 2012. The 2012 Plan was amended and restated by the Board of Directors
effective October 20, 2016. The October 2016 amendment allowed for the award agreement
or another agreement entered into between the Company and the award grantee to
vary the method of exercise of options issued under the 2012 Plan and an
agreement entered into between the Company and the award grantee to vary the
provisions governing expiration of options or other awards under the 2012 Plan
following termination of the award recipient. The 2012 Plan provides an initial
aggregate number of 600,000 shares of common stock that may be awarded or
issued. The number of shares that may be awarded under the 2012 Plan and awards
outstanding may be subject to adjustment on account of any recapitalization, reclassification,
stock split, reverse stock split and other dilutive changes in our common
stock. Under the 2012 Plan, the Board of Directors is authorized to issue stock
options (incentive and nonqualified), stock appreciation rights, restricted stock,
restricted stock units and other stock-based awards to employees, officers, directors,
consultants and advisors of the Company and its subsidiaries. Incentive stock options
may only be granted to employees of the Company and its subsidiaries.
The 2014 Plan was adopted by the
Company's Board of Directors on March 12, 2014 and approved by its stockholders
on June 11, 2014. The 2014 Plan provides an initial aggregate number of 500,000
shares of common stock that may be awarded or issued. The number of shares that
may be awarded under the 2014 Plan and awards outstanding may be subject to
adjustment on account of any stock dividend, spin-off, stock split, reverse stock
split, split-up, recapitalization, reclassification, reorganization,
combination or exchange of shares, merger, consolidation, liquidation, business
combination, exchange of shares or the like. Under the 2014 Plan, the Board-appointed
administrator of the 2014 Plan is authorized to issue stock options (incentive
and nonqualified), stock appreciation rights, restricted stock, restricted
stock units, phantom stock, performance awards and other stock-based awards to
employees, officers and directors of, and other individuals providing bona fide
services to or for, the Company or any affiliate of the Company. Incentive stock
options may only be granted to employees of the Company and its subsidiaries.
In connection with the sale of shares
of common stock to Brookstone, the Company entered into an Option Exercise and
Stock Transfer Restriction Agreement (collectively, the Option and Transfer
Agreements) with its Chief Executive Officer, its Chief Financial Officer and each
of its non-employee directors (collectively, the Insiders). The Option and Transfer
Agreements amend the stock option grant agreements between the Company and each
Insider with respect to an option granted under and modify the terms of any
option to purchase common stock held by each such Insider (collectively, Options)
granted under, the Plans. The Option and Transfer Agreements restrict the
aggregate amount of shares of common stock for which the Insiders may exercise Options
during calendar years 2016, 2017, 2018 and 2019, and provide for a modified procedure
for exercising Options in order to ensure the limit on the aggregate amount of
Options that may be exercised in any such year is not exceeded. Such amendments
and modifications also operate to, except with respect to the termination of Options
in connection with an Insider's termination of employment or service in connection
with misconduct as described in the Option and Transfer Agreements, (i) remove
all references to an expiration of the exercisability of such Options within a
special, delineated time period following the termination of service to or employment
by the Company, and (ii) provide that all vested Options are exercisable by the
Insider until default expiration under the applicable Plan (i.e., ten years from
the date of grant). If an Option and Transfer Agreement is terminated, the
limitations on Option exercises described above will terminate, but the
exercisability of the Insider's vested Options until default expiration under
the applicable Plan and stock option agreement (i.e., ten years from the date of
grant) will survive indefinitely.
On
January 14, 2020, the Company awarded to members of the Company's Investment Committee
and to the Company's CEO special one-time restricted stock awards totaling 68,930
shares of common stock (67,930 from the 2012 Plan and 1,000 from the 2014 Plan)
valued at $0.99 per share based on the closing market price of the Company's
common stock on the date of grant. The shares will be restricted until vested and
vest in two annual installments, with half vesting on the first anniversary of
the award date and the remainder vesting on the second anniversary of the award
date.
During 2020, the Company granted
options to purchase 25,000 shares of the Company's common stock from the 2014 Plan,
which generally vest 25% on each of the first four anniversaries of the date of
the award. The exercise price of these options is $0.70 per share and was based
on the closing market price of the Company's common stock on the day prior to the
date of grant. Using a Black-Scholes Option Pricing Model, the weighted average
fair value of these options is $0.57 per share and was estimated at the date of
grant.
During 2020, the Company granted
options to purchase 25,000 shares of the Company's common stock from the 2012 Plan,
which generally vest 25% on each of the first four anniversaries of the date of
the award. The exercise price of these options is $0.75 per share and was based
on the closing market price of the Company's common stock on the date of grant.
Using a Black-Scholes Option Pricing Model, the weighted average fair value of these
options is $0.61 per share and was estimated at the date of grant.
On December
21, 2020, the Company awarded to its CFO and the President of MTI Instruments restricted
stock awards totaling 15,000 shares of common stock from the 2014 Plan valued
at $3.63 per share based on the closing market price of the Company's common
stock on the date of grant. The shares will be restricted until vested and vest
in three annual installments beginning on the first anniversary of the award
date.
During 2019, the Company granted
options to purchase 15,000 shares of the Company's common stock from the 2014 Plan,
which generally vest 25% on each of the first four anniversaries of the date of
the award. The exercise price of these options is $0.83 per share and was based
on the closing market price of the Company's common stock on the day prior to the
date of grant. Using a Black-Scholes Option Pricing Model, the weighted average
fair value of these options is $0.66 per share and was estimated at the date of
grant.
F-19
Stock-based compensation expense
for the years ended December 31, 2020 and 2019 was generated from stock option and
restricted stock awards. Stock options are awards that allow holders to purchase
shares of the Company's common stock at a fixed price. Under the 2014 and 2012
Plans, stock options issued to employees generally vest 25% over four years. Options
issued to non-employee members of the MTI Board of Directors generally vest 25%
over four years. 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 to
three years after the date of grant, although 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 ten
years after date of grant.
The following table presents the weighted-average assumptions
used for options granted under the 2014 Plan:
|
2020
|
|
2019
|
Option
term (years)
|
|
6.25
|
|
|
|
6.26
|
|
Volatility
|
|
106.22
|
%
|
|
|
99.99
|
%
|
Risk-free
interest rate
|
|
0.31
|
%
|
|
|
1.37
|
%
|
Dividend
yield
|
|
0
|
%
|
|
|
0
|
%
|
Weighted-average
fair value per option granted
|
$
|
0.57
|
|
|
$
|
0.66
|
|
The following table presents the weighted-average
assumptions used for options granted under the 2012 Plan:
|
2020
|
Option
term (years)
|
|
6.25
|
|
Volatility
|
|
106.46
|
%
|
Risk-free
interest rate
|
|
0.28
|
%
|
Dividend
yield
|
|
0
|
%
|
Weighted-average
fair value per option granted
|
$
|
0.61
|
|
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. The 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.
Total share-based compensation
expense, related to the Company's share-based awards, recognized for the years
ended December 31, was comprised as follows:
|
2020
|
|
2019
|
(Dollars
in thousands)
|
|
|
|
|
|
Cost of product
revenue
|
$
|
1
|
|
$
|
1
|
Research
and product development
|
|
7
|
|
|
4
|
Selling,
general and administrative
|
|
46
|
|
|
26
|
Share-based
compensation expense
|
$
|
54
|
|
$
|
31
|
Total unrecognized compensation
costs related to non-vested stock options as of December 31, 2020 and December
31, 2019 is $78 thousand and $96 thousand, respectively, and is expected to be recognized
over a weighted-average remaining vesting period of approximately 2.55 years and
3.02 years, respectively.
Presented below is a summary of
the Company's stock option activity for the Plans for the years ended December
31:
|
2020
|
|
2019
|
Shares under option, beginning
|
527,875
|
|
|
720,624
|
|
Granted
|
50,000
|
|
|
15,000
|
|
Exercised
|
(83,000
|
)
|
|
(133,500
|
)
|
Forfeited
|
(27,750
|
)
|
|
-
|
|
Expired/canceled
|
(68,375
|
)
|
|
(74,249
|
)
|
Shares under option, ending
|
398,750
|
|
|
527,875
|
|
Options exercisable
|
276,000
|
|
|
392,375
|
|
Remaining shares available for
granting of options
|
11,125
|
|
|
68,930
|
|
F-20
The weighted average exercise price for the Company's stock
option activity for the Plans is as follows for each of the years ended December
31:
|
2020
|
|
2019
|
|
Shares under option, beginning
|
$ 0.89
|
|
$ 0.86
|
|
Granted
|
$ 0.73
|
|
$ 0.83
|
|
Exercised
|
$ 1.00
|
|
$ 0.56
|
|
Forfeited
|
$ 0.90
|
|
-
|
|
Expired/canceled
|
$ 0.73
|
|
$ 1.15
|
|
Shares under option, ending
|
$ 0.87
|
|
$ 0.89
|
|
Options exercisable, ending
|
$ 0.89
|
|
$ 0.89
|
|
The following table summarizes information for options outstanding
and exercisable for the Plans as of December 31, 2020:
Outstanding
|
Exercisable
|
|
|
|
Weighted Average
|
|
Weighted
|
|
|
|
Weighted Average
|
|
Weighted
|
Exercise
|
|
|
Remaining
|
|
Average
|
|
|
|
Remaining
|
|
Average
|
Price Range
|
Number
|
|
Contractual Life
|
|
Exercise Price
|
|
Number
|
|
Contractual Life
|
|
Exercise Price
|
$0.29 - $1.08
|
349,750
|
|
6.18
|
|
$
|
0.82
|
|
227,000
|
|
4.84
|
|
$
|
0.82
|
$1.09 - $1.20
|
49,000
|
|
4.17
|
|
$
|
1.20
|
|
49,000
|
|
4.17
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398,750
|
|
5.93
|
|
$
|
0.87
|
|
276,000
|
|
4.72
|
|
$
|
0.89
|
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 $1.5 million for the Company's outstanding
options and $1.1 million for the exercisable options as of December 31, 2020. The
amounts are based on the Company's closing stock price of $4.71 as of December 31,
2020.
Non-vested restricted stock activity
is as follows for the year ended December 31:
|
2020
Restricted
Stock
|
|
|
2020
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested restricted stock balance,
beginning January 1
|
-
|
|
|
$0.00
|
|
Non-vested restricted stock granted
|
83,930
|
|
|
$1.46
|
|
Vested restricted stock
|
-
|
|
|
$0.00
|
|
Non-vested restricted stock forfeited/expired
|
(3,000
|
)
|
|
$0.99
|
|
Non-vested restricted stock balance,
ending December 31
|
80,930
|
|
|
$1.48
|
|
At December 31, 2020, there was
$94 thousand of unrecognized compensation cost related to restricted stock awards.
This cost is expected to be recognized over a remaining period of 2.15 years.
12.
Commitments and Contingencies
Commitments:
Leases
The Company determines whether an
arrangement is a lease at inception. The Company and its subsidiary have operating
leases for certain manufacturing, laboratory, office facilities and certain
equipment. The leases have remaining lease terms of less than one year to less
than five years. Our lease agreements do not contain any material residual value
guarantees or material restrictive covenants. As of December 31, 2020 and December
31, 2019, the Company has no assets recorded under finance leases.
Lease expense for these leases is
recognized on a straight-line basis over the lease term. For the twelve months ended
December 31, total lease costs are comprised of the following:
(Dollars
in thousands)
|
|
|
|
|
2020
|
|
|
2019
|
Operating
lease cost
|
$
|
308
|
|
$
|
222
|
Short-term
lease cost
|
|
2
|
|
|
-
|
Total net lease cost
|
$
|
310
|
|
$
|
222
|
F-21
Short-term
leases are leases having a term of twelve months or less. The Company recognizes
short-term leases on a straight-line basis and does not record a related lease
asset or liability for such leases.
Supplemental cash flows information
related to leases for the twelve months ended December 31 was as follows:
(Dollars
in thousands)
|
|
|
|
|
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement
of
lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
304
|
$
|
222
|
|
|
|
|
|
Non-Cash Activity Right-of-use assets obtained in
exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
504
|
|
966
|
|
|
|
|
|
Supplemental
balance sheet information for the twelve months ended December 31 was as follows:
(Dollars in thousands, except lease term and
discount rate)
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Operating leases:
|
|
|
|
|
|
Operating lease ROU asset
|
$
|
1,203
|
$
|
947
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
$
|
316
|
$
|
171
|
|
Non-current operating lease liabilities
|
|
891
|
|
776
|
|
Total operating lease liabilities
|
$
|
1,207
|
$
|
947
|
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
ROU assets
|
$
|
1,452
|
$
|
1,164
|
|
Asset lease expense
|
|
(249
|
)
|
(217
|
)
|
ROU assets, net
|
$
|
1,203
|
$
|
947
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term (in years):
|
|
|
|
|
|
Operating leases
|
|
3.62
|
|
4.92
|
|
|
|
|
|
|
|
Weighted Average Discount Rate:
|
|
|
|
|
|
Operating leases
|
|
5.12
|
%
|
5.85
|
%
|
|
|
|
|
|
|
Maturities
of operating lease liabilities are as follows for the year ending December 31:
(Dollars
in thousands)
|
|
|
|
|
|
|
2020
|
|
|
2021
|
$
|
371
|
|
|
2022
|
|
375
|
|
|
2023
|
|
337
|
|
|
2024
|
|
245
|
|
|
2025
|
|
-
|
|
|
Total
lease payments
|
|
1,328
|
|
|
Less: imputed interest
|
|
121
|
|
|
Total lease obligations
|
|
1,207
|
|
|
Less: current obligations
|
|
316
|
|
|
Long-term lease obligations
|
$
|
891
|
|
|
|
|
|
|
|
As of December 31, 2020, there were no additional operating
lease commitments that had not yet commenced.
Warranties
Product warranty liabilities
are included in "Accrued liabilities" in the Consolidated Balance Sheets. Below
is a reconciliation of changes in product warranty liabilities:
F-22
(Dollars in thousands)
|
Twelve Months Ended
December 31,
|
|
2020
|
|
2019
|
|
Balance,
January 1
|
$
|
16
|
|
$
|
24
|
|
Accruals
for warranties issued
|
|
22
|
|
|
16
|
|
Accruals
for pre-existing warranties
|
|
(12
|
)
|
|
(15
|
)
|
Settlements
made (in cash or in kind)
|
|
(4
|
)
|
|
(9
|
)
|
Balance,
end of period
|
$
|
22
|
|
$
|
16
|
|
Contingencies:
Legal
We are subject to legal proceedings,
claims and liabilities which arise in the ordinary course of business. When applicable,
we accrue for losses associated with legal claims when such losses are probable
and can be reasonably estimated. These accruals are adjusted as additional information
becomes available or circumstances change. Legal fees are charged to expense as
they are incurred.
The Company has been named as a
party in the December 19, 2019 United States Environmental Protection Agency (EPA)
Demand Letter regarding the Malta Rocket Fuel Area Superfund Site (Site) located
in Malta and Stillwater, New York in connection with an alleged release of hazardous
materials into the environment. The EPA is seeking reimbursement of response
costs from all named parties in the amount of approximately $358,000 plus
interest in connection with the investigation and disposal activities
associated with the various drum caches discovered at the Site, issuance of the
Explanation of Significant Differences ("ESD") of the Site, and implementation
of the work contemplated by the ESD. The Company considers the likelihood of a
material adverse outcome to be remote and does not currently anticipate that
any expense or liability it may incur as a result of these matters in the future
will be material to the Company's financial condition.
13.
Related Party Transactions
MeOH Power, Inc.
On December 18, 2013, MeOH Power,
Inc. and the Company executed a Senior Demand Promissory Note (the Note) in the
amount of $380 thousand to secure the intercompany amounts due to the Company from
MeOH Power, Inc. upon the deconsolidation of MeOH Power, Inc. Interest accrues
on the Note at the Prime Rate in effect on the first business day of the month,
as published in the Wall Street Journal. At the Company's option, all or part
of the principal and interest due on this Note may be converted to shares of
common stock of MeOH Power, Inc. at a rate of $0.07 per share. Interest began
accruing on January 1, 2014. The Company recorded a full allowance against the
Note. As of December 31, 2020 and December 31, 2019, $321 thousand and $312 thousand,
respectively, of principal and interest are available to convert into shares of
common stock of MeOH Power, Inc. Any adjustments to the allowance are recorded as
miscellaneous expense during the period incurred.
Legal Services
During the years ended December 31, 2020 and December 31, 2019, the Company
incurred $95 thousand and $54 thousand,
respectively, to Couch White, LLP for legal services associated with contract review.
A partner at Couch White, LLP is an immediate family member of one of our Directors.
Soluna Transactions
On January 8, 2020, the Company
formed EcoChain as a wholly-owned subsidiary to pursue a new business line
focused on cryptocurrency and the blockchain ecosystem. In connection with this
new business line, EcoChain established a facility to mine cryptocurrencies and
integrate with the blockchain network. Pursuant to an Operating and Management Agreement
dated January 13, 2020, by and between EcoChain and Soluna, a Canadian company
that develops vertically-integrated, utility-scale computing facilities focused
on cryptocurrency mining and cutting-edge blockchain applications, Soluna
assisted the Company in developing, and is now operating, the cryptocurrency mining
facility. The Operating and Management Agreement requires, among other things,
that Soluna provide developmental and operational services, as directed by
EcoChain, with respect to the cryptocurrency mining facility in exchange for
EcoChain's payment to Soluna of a one-time management fee of $65 thousand and
profit-based success payments in the event EcoChain achieves explicit profitability
thresholds. Once aggregate earnings before interest, taxes, depreciation and
amortization of the mine exceeds the total amount of funding provided by the
Company to Soluna (whether pursuant to this agreement or otherwise) for the
purposes of creating, developing, assembling and constructing the mine (the Threshold),
Soluna is entitled to ongoing success payments of 20.0% of the earnings before
interest, taxes, depreciation and amortization of the mine. As of December 31, 2020,
no additional payments have been made or due, as the Threshold has not been achieved.
Pursuant to the Operating and Management Agreement, during the developmental phase
of the cryptocurrency mining facility, which ended on March 14, 2020, Soluna gathered
and analyzed information with respect to EcoChain's cryptocurrency mining efforts
and produced budgets, financial models, and technical and operational plans, including
a detailed business plan, that it delivered to EcoChain in March 2020 (the
"Deliverables"), all of which was designed to assist with the efficient implementation
of a cryptocurrency mine. The agreement provided that, following EcoChain's acceptance
of the Deliverables, which occurred on March 23, 2020, Soluna, on behalf of
EcoChain, would commence operations of the cryptocurrency mine in a manner that
will allow EcoChain to mine and sell cryptocurrency. In that regard, on May 21,
2020, EcoChain acquired the intellectual property of GigaWatt and certain other
property and rights of GigaWatt associated with GigaWatt's operation of a crypto-mining
operation located in Washington State. The acquired assets formed the
cornerstone of EcoChain's cryptocurrency mining operation. EcoChain sells for
U.S. dollars all cryptocurrency it mines and is not in the business of accumulating
cryptocurrency on its balance sheet for speculative gains. On October 22, 2020,
the Company loaned Soluna $112 thousand to acquire additional assets from the
bankruptcy trustee for Giga Watt assets and Soluna further transferred title of
the assets to EcoChain, which satisfied the note. On November 19, 2020 EcoChain
and Soluna entered into an additional Operating and Management agreement related
to a target located in the Southeast United States. In accordance with the terms
of the agreement EcoChain paid to Soluna $150 thousand. On December 1, 2020, EcoChain
and Soluna entered into an additional Operating and Management agreement for a
target located in the West Region, $38 thousand was paid to Soluna in accordance
with this agreement, this target subsequently did not meet the business requirements
to continue pursuing the investment. Each Operating and Management agreement requires
that Soluna shall provide project sourcing services including acquisition negotiations,
establishing an operating model, investments/financing timeline and project development
path.
F-23
Simultaneously
with entering into the Operating and Management Agreement with Soluna, the
Company, pursuant to a purchase agreement it entered into with Soluna, made a strategic
investment in Soluna by purchasing 158,730 Class A Preferred Shares of Soluna
for an aggregate purchase price of $500 thousand on January 13, 2020. After acceptance
of the Deliverables, as required by the terms of the purchase agreement, on
March 23, 2020, the Company purchased an additional 79,365 Class A Preferred Shares
of Soluna for an aggregate purchase price of $250 thousand. The Company also
has the right, but not the obligation, to purchase additional equity securities
of Soluna and its subsidiaries (including additional Class A Preferred Shares of
Soluna) if Soluna secures certain levels or types of project financing with
respect to its own wind power generation facilities. The Company has additionally
entered into a Side Letter Agreement, dated January 13, 2020, with Soluna
Technologies Investment I, LLC, a Delaware limited liability company that owns,
on a fully diluted basis, 61.5% of Soluna and is controlled by a Brookstone
Partners-affiliated director of the Company. The Side Letter Agreement provides
for the transfer to the Company of additional Class A Preferred Shares of Soluna
in the event Soluna issues additional equity below agreed-upon valuation
thresholds.
Several of
Soluna's equityholders are affiliated with Brookstone Partners, the investment
firm that holds an equity interest in the Company through Brookstone Partners Acquisition
XXIV, LLC. The Company's two Brookstone-affiliated directors also serve as
directors and, in one case, as an officer, of Soluna and also have ownership
interest in Soluna. In light of these relationships, the various transactions by
and between the Company and EcoChain, on the one hand, and Soluna, on the other
hand, were negotiated on behalf of the Company and EcoChain via an independent
investment committee of the Company's Board of Directors and separate legal
representation. The transactions were subsequently unanimously approved by both
the independent investment committee and the full Board of Directors of the
Company.
Three of our directors
have various affiliations with Soluna.
Chief
Executive Officer and Director Michael Toporek (i) owns 90% of the equity of
Soluna Technologies Investment I, LLC, which owns 61.5% of Soluna and (ii) owns
100% of the equity of MJT Park Investors, Inc., which owns 3.2% of Soluna, in
each case on a fully-diluted basis. Mr. Toporek does not own directly, or indirectly,
equity interest in Tera Joule, LLC, which owns 8.5% of Soluna; however, as a
result of his 100% ownership of Brookstone IAC, Inc., which is the manager of
Tera Joule, LLC, he has dispositive power over the equity interests that Tera
Joule owns in Soluna.
Director Matthew E. Lipman
serves as a director and as acting Secretary and Treasurer of Soluna. Mr. Lipman
does not own directly, or indirectly, equity interest in Tera Joule, LLC, which
owns 8.5% of Soluna; however, as a result of his position as a director and officer
of Brookstone IAC, Inc., which is the manager of Tera Joule, LLC, he has
dispositive power over the equity interests that Tera Joule owns in Soluna.
As a result, the approximate
dollar value of the amount of Mr. Toporek's and Mr. Lipman's interest in the Company's
transactions with Soluna through December 31, 2020, are $631 thousand and $0,
respectively.
The Company's
investment in Soluna is carried at the cost of investment and is $750 thousand as
of December 31, 2020. The Company owns approximately 1.86%
of Soluna's stock, calculated on a fully-diluted basis, as of December 31,
2020.
William P. Phelan, a director
of the Company, serves as a director of Soluna.
14.
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 is summarized by geographic area for the Company as a whole
for each of the years ended December 31:
(Dollars in thousands)
|
2020
|
|
2019
|
|
Product revenue:
|
|
|
|
|
|
|
United States
|
$
|
6,670
|
|
$
|
4,248
|
|
Association of South East Asian
Nations (ASEAN)
|
|
1,510
|
|
|
1,714
|
|
Europe, the Middle East and Africa
(EMEA)
|
|
713
|
|
|
463
|
|
North America
|
|
111
|
|
|
129
|
|
South America
|
|
-
|
|
|
17
|
|
|
|
|
|
|
|
|
Total product revenue
|
$
|
9,004
|
|
$
|
6,571
|
|
F-24
Revenues are attributed to regions
based on the location of customers. In 2020 and 2019, approximately 25.9% and 35.3%,
respectively, of our product revenues was from customers outside of the United States.
Long-lived assets of $847 thousand
and $174 thousand at December 31, 2020 and 2019, respectively, consist of
property, plant and equipment all located within the United States.
At MTI Instruments,
the largest commercial customer in 2020 was a U.S. supplier that builds and
executes custom solutions for industry and government markets, which accounted
for 9.1% of total product revenue. At MTI Instruments, the largest commercial customer
in 2019 was a U.S. manufacturer of support solutions to the aerospace and energy
markets, which accounted for 11.0% of total product revenue. The U.S. Air Force
continues to be the largest government customer, accounting for 42.9% and 20.8%
of total product revenue in 2020 and 2019, respectively.
The Company operates in two business
segments, Test and Measurement Instrumentation and Cryptocurrency. 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 and solar industries. The Cryptocurrency segment is focused on cryptocurrency
and the blockchain ecosystem. The Company's principal operations in both segments
are located in North America.
The accounting policies of the
Test and Measurement Instrumentation and Cryptocurrency segments are similar to
those described in the summary of significant accounting policies herein and in
the Company's Annual Report. The Company evaluates performance based on profit
or loss from operations before income taxes, accounting changes, items management
does not deem relevant to segment performance, and interest income and expense.
Inter-segment sales and expenses are not significant.
Summarized financial information
concerning the Company's reportable segments is shown in the following table.
The "Other" column includes corporate related items and items such as income taxes
or unusual items, which are not allocated to reportable segments. In addition,
segments' non-cash items include any depreciation and amortization in reported
profit or loss.
(Dollars in thousands)
|
|
Test and
Measurement
Instrumentation
|
|
|
Cryptocurrency
|
|
|
Other
|
|
|
|
Condensed
Consolidated
Totals
|
Year ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
$
|
9,004
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
9,004
|
Cryptocurrency revenue
|
|
-
|
|
|
595
|
|
|
-
|
|
|
|
595
|
Research and product development expenses
|
|
1,491
|
|
|
-
|
|
|
-
|
|
|
|
1,491
|
Selling, general and administrative expenses
|
|
1,752
|
|
|
445
|
|
|
1,387
|
|
|
|
3,584
|
Segment profit / (loss) from operations before
income
taxes
|
|
2,498
|
|
|
(209
|
)
|
|
(735
|
)
|
|
|
1,554
|
Segment profit / (loss)
|
|
2,498
|
|
|
(209
|
)
|
|
(343
|
)
|
|
|
1,946
|
Total assets
|
|
2,676
|
|
|
1,373
|
|
|
4,598
|
|
|
|
8,647
|
Capital expenditures
|
|
30
|
|
|
805
|
|
|
-
|
|
|
|
835
|
Depreciation and amortization
|
|
79
|
|
|
80
|
|
|
-
|
|
|
|
159
|
The following table presents
the details of "Other" segment loss:
(Dollars in thousands)
|
Year Ended
December 31,
|
|
2020
|
Corporate and other (expenses) income:
|
|
|
|
Salaries and benefits
|
|
(608
|
)
|
Income tax (expense) benefit
|
|
392
|
|
Other income (expense), net
|
|
(127
|
)
|
Total expense
|
$
|
(343
|
)
|
15.
Line of Credit
On May 7, 2020, in connection
with receipt of the $3.3 million United States Air Force delivery order, MTI Instruments
obtained a $300 thousand secured line of credit from Pioneer Bank that will, among
other things, assist with MTI Instruments' timely fulfillment of the delivery order.
The line of credit may be drawn in the discretion of MTI Instruments and bears
interest at a rate of Prime +1% per annum. Accrued interest is due monthly, and
principal is payable over a period of 30 days following lender's demand. The
line of credit is secured by the assets of MTI Instruments and is guaranteed by
the Company. As of December 31, 2020, there were no amounts outstanding under
the line of credit.
F-25
16.
Subsequent Events
In accordance with U.S. GAAP,
the Company has evaluated subsequent events for disclosure between the consolidated
balance sheet date of December 31, 2020 and March 30,
2021, the date the financial statements were available to be issued.
On January 14, 2021, EcoChain established
a subsidiary, EcoChain Wind LLC, a Nevada limited liability company, for the purpose
of acquiring real property in the Southeastern United States for purposes of building cryptocurrency mining operations at a green data center (the "Facility").
EcoChain signed an agreement, dated January 21, 2021, relating to the acquisition
of this property, and closed the acquisition on March 4, 2021.
On February 22, 2021, EcoChain executed and entered into an
Industrial Power Contract with a power providing cooperative pursuant to which EcoChain will be provided with electric power and energy for use in the
Facility. This agreement, and the electric power and energy to be provided
to EcoChain, pursuant thereto, will commence upon the completion of the Facility,
which is expected to occur on or around the third or fourth quarter of 2021, and
will continue for an initial term of five years, with automatic renewals
unless EcoChain elects to sooner terminate. EcoChain has agreed to pay the provider
for the electric power and energy provided in accordance with the applicable
monthly rates, charges and provisions agreed to from time to time between the
power provider and the Tennessee Valley Authority ("TVA"), which is subject to
modification or adjustment, from time to time, as agreed to between the power
provider and the TVA.
On February 22, 2021, we filed a definitive proxy statement
on Schedule 14A providing notice of a Special Meeting of Shareholders of the Company
that was held on March 25, 2021 (the "Special Meeting"). The Special Meeting was
held: (i) to approve the Redomestication; (ii) to approve an amendment (the
"Amendment") to the Company's restated certificate of incorporation, as amended
("Certificate of Incorporation") to effect, in the discretion of the Board, a
reverse stock split of the Company's common stock at any time prior to the 2022
annual meeting of shareholders at a reverse split ratio in the range of between
1-for-2 and 1-for-10, which specific ratio will be determined by our Board (the
"Reverse Stock Split"). The Amendment will not be implemented and the Reverse Stock
Split will not occur unless the Board determines that the Reverse Stock Split
is necessary to satisfy the initial or continued listing standards or requirements
of Nasdaq or another national securities exchange and it is in the best interests
of the Company and its shareholders to implement the Reverse Stock Split; and to
approve the adoption of the Company's 2021 Plan.At
the Special Meeting on March 25, 2021, the Company's shareholders approved each
of these matters.
On February 23, 2021, the Board, pursuant to its powers
under the Company's Certificate of Incorporation and amended and restated by-laws
("Bylaws"), appointed William Hazelip as a member of the Board to fill an existing
vacancy in the Board, effective February 23, 2021. Mr. Hazelip will serve with
directors serving on the class of directors whose terms expire in 2023, and until
the 2023 annual meeting of the Company's shareholders, at which time, if nominated,
he will stand for election for a three-year term until the third annual meeting
of the Company's shareholders following his election, or his earlier resignation,
retirement, or other termination of service.
On February 24, 2021, the Board, pursuant to its powers under
the Company's Certificate of Incorporation and Bylaws, appointed Alykhan Madhavji
as a member of the Board to fill an existing vacancy in the Board, effective
February 24, 2021. Mr. Madhavji will serve with directors serving on the class
of directors whose terms expire in 2022, and until the 2022 annual meeting of the
Company's shareholders, at which time, if nominated, he will stand for election
for a three-year term until the third annual meeting of the Company's shareholders
following his election, or his earlier resignation, retirement, or other termination
of service.
F-26