The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
The accompanying notes are an
integral part of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 conducts two core businesses
through its wholly-owned subsidiaries MTI Instruments, Inc. ("MTI Instruments"),
which designs, manufactures and markets its products also at the Albany, New
York location, and EcoChain, Inc. ("EcoChain"), which is engaged in
cryptocurrency mining powered by renewable energy.
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 mining 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 cryptocurrency blockchain
network in Washington State. EcoChain focuses on sites that can be powered by
renewable energy sources. In connection with the establishment of the EcoChain
business, MTI 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.
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 $118.5
million as of March 31, 2021. As of March 31, 2021, the Company had working
capital of approximately $2.4 million, no debt, outstanding commitments related
to EcoChain for $1 million for capital expenditures, and approximately $2.7
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 $2.7 million and its projected 2021
cash flow pursuant to management's plans, management believes based on business
developments, including changes in production levels, staffing requirements,
and network infrastructure improvements, we will require additional capital
equipment in the foreseeable future. With respect to MTI and MTI Instruments, we expect
to spend a total of approximately $300 thousand on computer equipment and
software and $1.6 million on research and development during 2021. As we have
done historically, we expect to finance these expenditures and continue funding
of MTI's and MTI Instruments' operations from our current cash position and our
projected 2021 cash flows. If necessary, we may also seek to supplement our
resources by increasing credit facilities to fund operational working capital
and capital expenditure requirements. With respect to EcoChain we expect to fund
growth (additional cryptocurrency mining facilities and miners) through capital
raise activities, including the approximately $13.7 million in net proceeds
from our sale of shares of the Company's common stock completed in May of 2021,
as discussed in the subsequent event footnote, as well as, once such proceeds
have been expended, future capital raises to the extent that we can
successfully raise capital through additional securities sales. Any additional
financing, if required, may not be available to us on acceptable terms or at
all.
2.
Basis of Presentation
In the opinion of management,
the Company's condensed consolidated financial statements reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
statement of the results for the periods presented in accordance with United
States of America's Generally Accepted Accounting Principles ("U.S. GAAP"). The
results of operations for the interim periods presented are not necessarily
indicative of results for the full year.
Certain information and
footnote disclosures normally included in the annual consolidated financial
statements prepared in accordance with U.S. GAAP have been condensed or
omitted. These unaudited condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2020 ("the Annual Report").
The information presented in
the accompanying condensed consolidated balance sheet as of December 31, 2020
has been derived from the Company's audited consolidated financial statements.
All other information has been derived from the Company's unaudited condensed
consolidated financial statements for the three months ended March 31, 2021 and
March 31, 2020.
6
Principles of Consolidation
The
condensed 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.
Change in Par Value
Unless
otherwise noted, all capital values, share and per share amounts in the
condensed consolidated financial statements have been retroactively restated
for the effects of the Company's change in par value from $0.01 to $0.001,
which became effective after the redomestication to the State of Nevada on
March 29, 2021.
3.
Accounts Receivable
Accounts receivables consist of the following at:
(Dollars
in thousands)
|
March
31, 2021
|
|
December
31, 2020
|
|
|
|
|
|
|
U.S.
and State Government
|
$
|
1
|
|
$
|
2
|
Commercial
|
|
722
|
|
|
909
|
Other
|
|
57
|
|
|
64
|
Total
|
$
|
780
|
|
$
|
975
|
For the
three months ended March 31, 2021 and 2020, the largest commercial customer
represented 14.7% and 13.5%, respectively, and the largest governmental agency
represented 17.2% and 11.6%, respectively, of the Company's product revenue. As
of March 31, 2021 and December 31, 2020, the largest commercial receivable
represented 38.8% and 15.9%, respectively, and the largest governmental receivable
represented 0.1% and 0.3%, respectively, of the Company's accounts
receivable.
The
Company's allowance for doubtful accounts was $0 at both March 31, 2021 and
December 31, 2020.
4.
Inventories
Inventories consist of the following at:
(Dollars
in thousands)
|
March 31, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
Finished
goods
|
$
|
334
|
|
$
|
371
|
Work in
process
|
|
249
|
|
|
139
|
Raw materials
|
|
340
|
|
|
318
|
Total
|
$
|
923
|
|
$
|
828
|
5.
Property, Plant and Equipment
Property, plant and equipment consist of the following at:
(Dollars in thousands)
|
March 31, 2021
|
|
December 31,
2020
|
|
|
|
Land
|
$
|
52
|
|
|
$
|
-
|
Leasehold improvements
|
|
262
|
|
|
|
262
|
Computers and related software
|
|
1,847
|
|
|
|
1,603
|
Machinery and equipment
|
|
890
|
|
|
|
885
|
Office furniture and fixtures
|
|
39
|
|
|
|
38
|
|
|
3,090
|
|
|
|
2,788
|
Less: Accumulated depreciation
|
|
2,034
|
|
|
|
1,941
|
|
$
|
1,056
|
|
|
$
|
847
|
|
|
|
|
|
|
|
|
Depreciation expense was $93 thousand and $22 thousand for
the three months ended March 31, 2021 and the three months ended March 31, 2020,
respectively.
7
6.
Income Taxes
During
the three months ended March 31, 2021, the Company's effective income tax rate
was 0%. The projected annual effective tax rate is less than the Federal
statutory rate of 21%, primarily due to the change in the valuation allowance,
as well as changes to estimated taxable income for 2021 and permanent
differences. There was no income tax benefit for the three months ended March
31, 2021 and for the three months ended March 31, 2020, income tax benefit was
$3 thousand.
The Company
provides for recognition of deferred tax assets if the realization of such
assets is more likely than not to occur in accordance with accounting standards
that address income taxes. Significant management judgment is required in
determining the period in which the reversal of a valuation allowance should
occur. The Company has considered all available evidence, both positive and
negative, such as historical levels of income and future forecasts of taxable
income amongst other items, in determining its valuation allowance. In
addition, the Company's assessment requires us to schedule future taxable
income in accordance with accounting standards that address income taxes to
assess the appropriateness of a valuation allowance which further requires the exercise
of significant management judgment.
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. In the event that actual results differ from these
estimates or the Company adjusts these estimates in future periods, the Company
may need to adjust the recorded valuation allowance, which could materially
impact our financial position and results of operations. The valuation
allowance was $9.8 million and $9.7 million at March
31, 2021 and December 31, 2020, respectively. We
will continue to evaluate the ability to realize our deferred tax assets and
related valuation allowance on a quarterly basis.
7.
Stockholders' Equity
Common Stock
The Company has one class of
common stock, par value $0.001. Each share of the Company's common stock is
entitled to one vote on all matters submitted to stockholders. As of March 31,
2021 and December 31, 2020, there were 9,869,357 and 9,734,607 shares of common
stock issued and outstanding, respectively.
Dividends
Dividends are recorded when
declared by the Company's Board of Directors. There were no dividends declared
or paid during 2020 or 2021.
Reservation of Shares
The Company had reserved common
shares for future issuance as follows as of March 31, 2021:
Stock options outstanding
|
351,500
|
|
Restricted stock units
outstanding
|
15,000
|
|
Common stock available for
future equity awards or issuance of options
|
1,378,816
|
|
Number of common shares
reserved
|
1,745,316
|
|
Income (Loss) per Share
The Company computes basic income
(loss) per common share by dividing net income (loss) by the weighted average
number of common shares outstanding during the reporting period. Diluted income
(loss) per share reflects the potential dilution, if any, computed by dividing
income (loss) 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.
Not included in the computation of
earnings per share, assuming dilution, for the three months ended March 31,
2021, were options to purchase 351,500 shares and 15,000 restricted stock units
of the Company's common stock. These potentially dilutive items were excluded
because the Company incurred a loss during the period and their inclusion would
be anti-dilutive.
Not included in the computation
of earnings per share, assuming dilution, for the three months ended March 31,
2020, were options to purchase 577,430 shares of the Company's common stock.
These potentially dilutive items were excluded because the Company incurred a
loss during the period and their inclusion would be anti-dilutive.
8
8.
Commitments and Contingencies
Commitments:
Leases
The Company determines whether
an arrangement is a lease at inception. The Company and its subsidiaries 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 March 31,
2021 and December 31, 2020, 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 three
months ended March 31, total lease costs are comprised of the following:
(Dollars in thousands)
|
|
Three
Months Ended March 31,
|
|
|
2021
|
|
2020
|
Operating lease cost
|
$
|
93
|
$
|
56
|
Short-term lease cost
|
|
-
|
|
-
|
Total net lease cost
|
$
|
93
|
$
|
56
|
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.
Other information related to
leases was as follows:
(Dollars
in thousands, except lease term and discount rate)
(Dollars
in thousands)
|
Three Months Ended
March 31, 2021
|
|
Three Months Ended
March 31, 2020
|
|
|
|
|
|
|
|
|
Weighted
Average Remaining Lease Term (in years):
|
|
|
|
|
|
|
Operating leases
|
|
3.38
|
|
|
4.67
|
|
|
|
|
|
|
|
|
Weighted
Average Discount Rate:
|
|
|
|
|
|
|
Operating leases
|
|
5.13
|
%
|
|
5.85
|
%
|
|
|
|
|
|
|
|
Supplemental
Cash Flows Information:
|
|
|
|
|
|
|
Cash paid
for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
93
|
|
$
|
56
|
|
|
|
|
|
|
|
|
Non-Cash
Activity Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
Operating leases
|
$
|
-
|
|
$
|
-
|
|
Maturities
of noncancellable operating lease liabilities are as follows for the quarter
ending March 31:
(Dollars in thousands)
|
|
|
|
|
2021
|
2021
|
$
|
373
|
2022
|
|
376
|
2023
|
|
314
|
2024
|
|
173
|
2025
|
|
-
|
Total lease payments
|
|
1,236
|
Less: imputed interest
|
|
106
|
Total lease obligations
|
|
1,130
|
Less: current obligations
|
|
322
|
Long-term lease obligations
|
$
|
808
|
|
|
|
As of March 31, 2021, there were no additional operating
lease commitments that had not yet commenced.
9
Warranties
Product warranty liabilities
are included in "Accrued liabilities" in the Condensed Consolidated Balance
Sheets. Below is a reconciliation of changes in product warranty liabilities:
(Dollars in thousands)
|
|
Three Months Ended
March 31,
|
|
|
2021
|
|
2020
|
|
Balance,
January 1
|
|
$
|
22
|
|
$
|
16
|
|
Accruals
for warranties issued
|
|
|
4
|
|
|
4
|
|
Accruals
for pre-existing warranties
|
|
|
-
|
|
|
-
|
|
Settlements
made (in cash or in kind)
|
|
|
(1
|
)
|
|
(1
|
)
|
Balance,
end of period
|
|
$
|
25
|
|
$
|
19
|
|
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
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. 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.
9.
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 March 31, 2021 and December 31, 2020, $323
thousand and $321 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 three months ended
March 31, 2021 and 2020, the Company incurred $8 thousand and $58 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 Technologies, Ltd.
("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, and later EcoChain, 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 EcoChain 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 March 31, 2021, no additional payments have
been made or are 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 would allow EcoChain to mine and sell cryptocurrency. In
that regard, on May 21, 2020, EcoChain acquired the intellectual property of
GigaWatt, Inc. ("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
current 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,
EcoChain loaned Soluna $112 thousand to acquire additional assets from the
bankruptcy trustee for GigaWatt's assets. On the same day, Soluna transferred
title of the assets to EcoChain, which under the terms thereof paid off the
note.
10
On November 19, 2020, EcoChain and Soluna entered into a
second Operating and Management Agreement related to a potential location for a
cryptocurrency mine in the Southeast United States. In accordance with the
terms of the agreement, EcoChain paid Soluna $150 thousand in 2020 and $100
thousand in the first quarter of 2021.
On December 1, 2020, EcoChain and Soluna entered into a
third Operating and Management Agreement with respect to a potential location
for a cryptocurrency mine in the Southwestern United States, pursuant to which
EcoChain paid Soluna $38,000 during 2020; this target location did not meet the
business requirements to continue pursuing the potential acquisition, and as a
result EcoChain will not make any further payments to Soluna under this
agreement.
Each Operating and Management Agreement requires that
Soluna provide project sourcing services to EcoChain, including acquisition
negotiations and establishing an operating model, investments/financing
timeline, and project development path.
Simultaneously with entering into the initial 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. Each preferred share may
be converted at any time and without payment of additional consideration, into
Common shares. 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, 58.8%
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,
without the payment of any consideration by 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
Board and separate legal representation. The transactions were subsequently unanimously
approved by both the independent investment committee and the full Board.
Three of our directors have various affiliations with
Soluna.
Michael Toporek, our Chief Executive Officer and a
director, owns (i) 90% of the equity of Soluna Technologies Investment I, LLC,
which owns 58.8% of Soluna and (ii) 100% of the equity of MJT Park Investors,
Inc., which owns 3.1% of Soluna, in each case on a fully-diluted basis. Mr.
Toporek does not own directly, or indirectly, any equity interest in Tera Joule,
LLC, which owns 8.4% 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.
In addition, one of our directors, Matthew E. Lipman,
serves as a director and as acting Secretary and Treasurer of Soluna. Mr.
Lipman does not directly own any equity interest in Tera Joule, LLC, which owns
8.4% 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.
Finally, our director William P. Phelan serves as an
observer on Soluna's board of directors on behalf of the Company.
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 March 31, 2021, are $56 thousand and $0, respectively.
11
The
Company's investment in Soluna is carried at the cost of investment and is $750
thousand as of March 31, 2021. The Company owns approximately 1.81% of Soluna,
calculated on a converted fully-diluted basis, as of March 31, 2021.
10. Stock Based Compensation
2021 Plan
The Company's 2021
Stock Incentive Plan (the "2021 Plan") was adopted by the Board on February 12,
2021 and approved by the stockholders on March 25, 2021. The 2021 Plan
authorizes the Company to issue shares of common stock upon the exercise of
stock options, the grant of restricted stock awards, and the conversion of
restricted stock units (collectively, the "Awards"). The Compensation
Committee has full authority, subject to the terms of the 2021 Plan, to
interpret the 2021 Plan and establish rules and regulations for the proper
administration of the 2021 Plan. Subject to certain adjustments as provided in
the 2021 Plan, the maximum aggregate number of shares of the Company's common stock
that may be issued under the 2021 Plan (i) pursuant to the exercise of stock
options, (ii) as restricted stock, and (iii) as available pursuant to
restricted stock units shall be limited to (A) during the Company's fiscal year
ending December 31, 2021, 1,460,191 shares of common stock, and (B) beginning
with the Company's fiscal year ending December 31, 2022, 15% of the number of
shares of common stock outstanding. Subject to certain adjustments as provided
in the 2021 Plan, (i) shares of the Company's common stock subject to the 2021
Plan shall include shares of common stock forfeited in a prior year and (ii)
the number of shares of common stock that may be issued under the 2021 Plan may
never be less than the number of shares of the Company's common stock that are
then outstanding under Award grants.
During the three
months ended March 31, 2021, the Company granted options to purchase 30,000
shares of the Company's common stock under the 2021 Plan, 33 1/3% of which will
vest on each of the three anniversaries of the date of the award. The exercise
price of these options is $11.10 per share and was based on the closing market
price of the Company's common stock on the dates of grant. Using a
Black-Scholes Option Pricing Model, the weighted average fair value of these
options was $9.15 per share and was estimated at the date of grant.
During the three
months ended March 31, 2021, the Company awarded 47,500 shares of restricted
common stock under the 2021 Plan, valued at $11.10 per share based on the
closing market price of the Company's common stock on the date of the grant.
The shares will be restricted for one year, with the entire award vesting on
the first anniversary of the award date.
During
the three months ended March 31, 2021, the Company awarded 15,000 restricted
stock units under the 2021 Plan, valued at $11.10 per share based on the
closing market price of the Company's common stock on the date of the grant. 33
1/3% of such restricted stock units will vest on each of the first three anniversaries of the date of the grant.
11. Effect of Recent
Accounting Updates
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.
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.
12
Accounting
Updates Recently Adopted by the Company
On January 1, 2021, the Company
adopted 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 adoption of this
standard did not have a material impact on the Company's consolidated financial
statements.
On January 1, 2021, the Company
adopted 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 improves current GAAP by reducing
diversity in practice and increasing comparability of the accounting for these
interactions. The adoption of this standard did not
have a material impact on the Company's 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.
12.
Segment Information
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 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
|
|
Three months ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
1,337
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
1,337
|
|
Cryptocurrency revenue
|
|
|
-
|
|
|
995
|
|
|
-
|
|
|
|
995
|
|
Research and product development expenses
|
|
|
386
|
|
|
-
|
|
|
-
|
|
|
|
386
|
|
Selling, general and administrative expenses
|
|
|
540
|
|
|
563
|
|
|
734
|
|
|
|
1,837
|
|
Segment profit / (loss) from operations before income
taxes
|
|
|
(402
|
)
|
|
61
|
|
|
(325
|
)
|
|
|
(666
|
)
|
Segment profit / (loss)
|
|
|
(402
|
)
|
|
61
|
|
|
(325
|
)
|
|
|
(666
|
)
|
Total assets
|
|
|
2,504
|
|
|
3,091
|
|
|
3,786
|
|
|
|
9,381
|
|
Capital expenditures
|
|
|
5
|
|
|
296
|
|
|
-
|
|
|
|
301
|
|
Depreciation and amortization
|
|
|
17
|
|
|
76
|
|
|
-
|
|
|
|
93
|
|
13
The following table presents
the details of "Other" segment loss:
(Dollars in
thousands)
|
Three Months Ended
March 31,
|
|
2021
|
|
Corporate and other (expenses) income:
|
|
|
|
Salaries and benefits
|
|
(201
|
)
|
Income tax (expense) benefit
|
|
-
|
|
Other income (expense), net
|
|
(124
|
)
|
Total expense
|
$
|
(325
|
)
|
As of March 31, 2020, the only segment the Company was
operating in was the Test and Measurement Instrumentation segment. EcoChain
did not commence its cryptocurrency mining operations until the second quarter
of 2020, therefore the only period presented above is March 31, 2021.
13.
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 March 31, 2021 and December
31, 2020, there were no amounts outstanding under the line of credit.
14.
Subsequent Events
EcoChain's
wholly-owned subsidiary, EcoChain Block, LLC ("ECB") executed and entered into
a purchase agreement, dated April 11, 2021, providing for the purchase of
equipment that is expected to deliver throughput of 11.2 Pethash in SHA-256
Bitcoin miners and 235 Gigahash in Scrypt Litecoin miners. The total purchase
price payable for these miners was $792 thousand, $585 thousand which was paid,
in cash, and the remaining portion which was paid by the issuance of restricted
shares of the Company's common stock having an aggregate value of $207 thousand.
On April 29, 2021, the Company
closed its firm commitment underwritten public offering of 2,419,355 shares of
its common stock, together with accompanying
warrants to purchase up to 604,839 shares of common stock at a combined public
offering price of $6.20 per unit of common stock and warrant to purchase
.25 of one share of common stock. The gross proceeds to the Company from this
offering were $15 million, resulting in aggregate net proceeds, after
deducting underwriting discounts and other offering expenses, of
approximately $13.7 million.
On May 4, 2021, the Company by
and through ECB, executed a
25-year ground lease with a power-providing cooperative ("Landlord") with
respect to an existing building and certain surrounding land (the "Building
Lease"), and a 25-year ground lease with Landlord with respect to certain
vacant land adjacent thereto, both located in the Southeastern United States
(the "Vacant Land Lease"). In addition, ECB and Landlord have entered into a
Power Supply Agreement whereby Landlord has agreed to supply power to the
building leased under the Building Lease and to the premises leased under the
Vacant Land Lease (the "Vacant Land Premises"), some of which power, under
certain circumstances, may be terminated by Landlord, on at least 6 months
prior notice, any time after 12 months after the Building Commencement Date (as
hereafter defined), in which case Landlord is required to reimburse ECB for all
of its construction costs, subject to certain exceptions, relating to buildings
and other improvements developed by ECB on the Vacant Land Premises. ECB has
agreed to pay rent to Landlord of $500 thousand on the effective date of the
Building Lease (such date, the "Building Commencement Date") and the sum of $4
million in periodic payments. ECB has agreed to cause MTI to issue to Landlord
100,000 shares of its common stock, in connection with the Vacant Land Lease,
upon the effective date of the Vacant Land Lease, which may not occur prior the
Building Commencement Date.
14