INDEX TO FORM 10

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Item 1:          Business

Unless the context requires otherwise in this Form 10, 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 Form 10 are the property of their respective owners. 

Mechanical Technology, Incorporated, a New York corporation, was incorporated in 1961 and is headquartered in Albany, New York. The Company's core business is conducted through MTI Instruments, Inc., a wholly-owned subsidiary incorporated in New York in 2000. During January 2020 the Company formed a wholly-owned subsidiary, EcoChain, Inc., to conduct a new line of business, cryptocurrency mining, and in this regard also invested 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.

The Company also owns a 47.5% interest, which as of June 30, 2020 has a fair value of $0, in MeOH Power, Inc. (formerly MTI MicroFuel Cells, Inc.), which the Company operated as a subsidiary until December 31, 2013, at which time control of the subsidiary was transferred to a former director of the Company. We do not expect our current interest in MeOH Power, Inc. to have a material impact on our results of operations or financial condition going forward. 

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. 

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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.

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:

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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:

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. 

Listed below are MTI Instruments' semiconductor and solar metrology systems product offerings and technologies:

Marketing and Sales 

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.

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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.

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.

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 TÜVRheinland®, an independent 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 have 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.

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In the precision automated manufacturing market, MTI Instruments faces competition from companies including Omron, Turck, Pepperl Fuchs, Keyence, Micro Epsilon, Schmitt Industries, Capacitec, Microsense, and Motion Tech Automation.

In the R&D and semiconductor markets, we compete with companies involved in wafer inspection including KLA, Micro Epsilon, and E+H Metrology GmbH. Competitors in precision linear displacement include Keyence, Micro Epsilon, Schmitt Industries, Capacitec, Microsense, and Motion Tech Automation.

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.

Significant Customers

All of our product revenues to date during 2020, and all of our revenues during 2019, 2018, and 2017, were earned through MTI Instruments. MTI Instruments' largest customer is the U.S. Air Force. We also have strong relationships with companies in the electronics, aircraft, aerospace, automotive, and semiconductor industries. The U.S. Air Force accounted for 42.3%, 20.8%, 28.0%, and 20.1%, respectively, of our total product revenues during the first half of 2020 and during 2019, 2018, and 2017. Our largest commercial customer during the six months ended June 30, 2020, was a manufacturer of semiconductor equipment in Asia, which accounted for 9.6% of total product revenue. Our largest commercial customer in 2019 was a U.S. manufacturer of test equipment and constructed service facilities to the aerospace and energy markets, which accounted for 11.0% of total product revenue. Our largest commercial customer in 2018 was a manufacturer of semiconductor equipment in Asia, which accounted for 11.1% of total product revenue, and our largest commercial customer in 2017 was a manufacturer of semiconductor equipment located in Asia, which accounted for 10.0% of total product revenue.

Intellectual Property and Proprietary Rights

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

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 $27,500 plus $9,048.20 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. 

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 has 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, 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 located in Washington State. The acquired assets form the cornerstone of EcoChain's new cryptocurrency mining operation.

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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. This assessment and any concomitant facility upgrades are ongoing. The Company intends to rigorously evaluate increasing its investment in the Blockchain and dense computing sector. As of September 15, 2020, the mine is utilizing approximately 60% of its currently available capacity. 

The Operating and Management Agreement with Soluna provides 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 green 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 ten years' experience in the daily management of the mining facility as thus 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. As of September 15, 2020, EcoChain has no employees.

Cryptocurrency Mining Operations

EcoChain's cryptocurrency mining operation in East Wenatchee, Washington, 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, immediately 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 all cryptocurrencies mined for U.S. dollars, as it is not in the business of accumulating cryptocurrency on its balance sheet for speculative gains. 

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 1,000 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. 

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 has purchased software that monitors EcoChain's 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. Mining pools are subject to disruption and downtime, however, and in the event that a pool EcoChain participates in experiences downtime, EcoChain's revenues and profitability could be negatively impacted due to an inability to place blocks on the blockchain. The cryptocurrencies allocated to EcoChain are automatically issued to its Coinbase account, which Coinbase exchanges for U.S. dollars based on standard exchange rates.  

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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. The Company believes that cryptocurrency mining has seen a growing demand due to, among other things, the continuous adoption of cryptocurrency worldwide. Crypto Research estimates, based on their research, that there are more than 40 million cryptocurrency users globally as of July 30, 2020.^[2] Coinbase alone has more than 30 million users, per CoinTelegraph, as of July 22, 2019, adding eight million users from mid-2018 to mid-2019.^[3] The increase is 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.^[4] 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%.^[5] 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.^[6] 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.

Equity investment - Soluna 

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 $500,000 on January 13, 2020. 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, 62.5% 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. Our two Brookstone-affiliated directors also serve as directors and, in one case, as an officer, of Soluna and also have ownership interest in Soluna (See "Item 7. Certain Relationships and Related Transactions, and Director Independence" for additional information on these relationships). 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.

Existing or Probable Governmental Regulations

Test and Measurement Instrumentation Segment

Under the current federal administration, there has been ongoing discussions and activities regarding changes to other U.S. trade policies and treaties, including threats by the United States to withdraw from certain treaties and other countries signing new trade agreements without U.S. participation. These developments may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our access to suppliers or customers and could have a material adverse effect on our business, financial condition, and results of operations. 

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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 Demelza Hays, The Status of Cryptocurrency Adoption, Crypto Research, July 30, 2020, available at https://cryptoresearch.report/crypto-research/the-status-of-cryptocurrency-adoption/.

3 Helen Partz, Coinbase Added 8 Million New Users in the Past Year, July 23, 2019, available at https://cointelegraph.com/news/coinbase-added-8-million-new-users-in-the-past-year.

4 Statis Group, Cryptoasset Market Coverage Initiation: Valuation, August 30, 2018, available at https://research.bloomberg.com/pub/res/d37g1Q1hEhBkiRCu_ruMdMsbc0A.

5 Id.

6 Id.

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In particular, while there has been no impact on MTI to date from recent tariffs, new tariffs are still being considered and, if implemented, could negatively impact MTI in a number of ways. While any steel and aluminum we use in our products is produced solely in the United States, the new tariffs may provide domestic steel and aluminum producers the flexibility to increase their prices, at least to a level where their products would still be priced below foreign competitors once the tariffs are taken into account. Any such price increases, to the extent we did not pass such increases on to our customers, would likely increase our cost of product revenue and, as a result, decrease our gross margins, operating income, and net income, which could have a material adverse effect on our financial condition. On the other hand, if we attempt to pass any such increases on to our customers, that may result in lower sales, which would likely decrease our net income, and could have a material adverse effect on our financial condition. In addition, in response to the new tariffs, a number of other countries are threatening to impose tariffs on U.S. imports that, if implemented, could increase the price of our products in these countries and may result in our customers looking to alternative sources for our products. This would result in decreased sales, which could have a negative impact on our gross margins, net income, and financial condition.

We anticipate possible further changes to current policies by the U.S. government that could affect MTI Instruments' business, including changes in U.S. trade relations with other countries (e.g., China). Our suppliers source some of their raw materials from foreign countries, so any new tariffs imposed by the U.S. government on imports into the United States may increase our cost of product revenue to the extent our suppliers pass some or all of the costs of such tariffs on to their customers and, as a result, decrease our gross margins, operating income, and net income, which could have a material adverse effect on our financial condition. Further, the imposition of such tariffs, and other recent and potential actions of the U.S. government with respect to other countries, may generate negative views of the United States in other countries and make persons in those countries less inclined to purchase products from U.S. companies like us.

The ultimate reaction of other countries to recent and potential additional tariffs, and the impact of these tariffs on the United States, the global economy, and our business, financial condition, and results of operations, cannot be predicted at this time, nor can we predict the impact of any other actions, including U.S. withdrawal from or attempted renegotiation of trade treaties, that may be undertaken by the current administration with respect to global trade and the impact this may ultimately have on our business, operating results, and financial condition. 

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 business or on EcoChain's and, as a result, the Company's, financial condition or results of operations.

Employees

As of September 15, 2020, we had 30 employees including 24 full-time employees.

Item1A:       Risk Factors

Not required due to the Company's status as a smaller reporting company.

Item 2:          Financial Information

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this Form 10.

Cautionary Statement Regarding Forward-Looking Statements

This registration statement, 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:

• anticipated growth;

• statements with respect to management's strategy and planned initiatives;

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• management's belief that it will have adequate resources to fund the Company's operations and capital expenditures for the remainder of the year ending December 31, 2020 and through at least the end of the third quarter of 2021;

• 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, Inc. and the impact on our business, operating results, and financial condition as a result thereof;

• the expected impact of pending accounting updates, including potential updates pertaining to cryptocurrency; and

• the expected impact of our investments in Soluna Technologies Ltd. and MeOH Power, Inc.

Forward-looking statements involve risks, uncertainties, estimates, and assumptions that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by forward-looking statements. Important factors that could cause these differences include the following:

• sales revenue growth may not be achieved or maintained;  

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

• our lack of long-term purchase commitments from our customers and the ability of our customers to cancel, reduce, or delay orders for our products;  

• our inability to build and maintain relationships with our customers;  

• our inability to develop and utilize new technologies that address the needs of our customers;  

• our inability to 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, particularly in light of the COVID-19 pandemic;  

• 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 Form 10.

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.

Overview

MTI's core business is conducted through our wholly-owned subsidiary, MTI Instruments. MTI Instruments is a supplier 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 are continuously working on ways to increase our sales reach, including expanded worldwide sales coverage and enhanced internet marketing.

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The following table summarizes changes in the various components of our net income during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Product Revenue: Product revenue consists of revenue recognized from sales of MTI Instruments' products.

Product revenue for the three months ended June 30, 2020 increased by $580 thousand, or 32.0%, to $2.4 million from $1.8 million during the three months ended June 30, 2019. The primary reason for the increase in product revenue was a $1.2 million increase in shipments to the U.S. Air Force as a result of additional incremental units ordered versus prior year, which offset a $373 thousand decline in commercial sales of our engine vibration balancing systems and accessories resulting primarily from the impacts of COVID-19 on the commercial aviation industry. 

Product revenue for the six months ended June 30, 2020 increased by $517 thousand, or 15.0%, to $4.0 million from $3.5 million during the six months ended June 30, 2019. The primary reason for the increase was a $1.2 million increase in overall shipments to the U.S. Air Force, which offset declines of $335 thousand in commercial sales of our engine vibration balancing systems and accessories, primarily as a result of the impact of COVID-19 on the commercial aviation industry, and $272 thousand in shipments of our semi-automated wafer metrology tools, due to our customers' more conservative spending policies during the 2020 period resulting primarily from COVID-19-related challenges.

As further discussed in "Item 1. Business," we are dependent on a limited number of customers for a significant portion of our sales, including the U.S. Air Force, which accounted for 65.9% and 20.5% of our product revenues for the three months ended June 30, 2020 and 2019, respectively and 42.3% and 13.5%, respectively, of our product revenues for the six months ended June 30, 2020 and 2019. This can cause significant fluctuations in our product sales and, as a result, revenues, from one fiscal period to the next. We may sell a significant amount of our products to one or a few customers for various short-term projects in one period, and then have markedly decreased sales in following periods as these projects end or customers have the products they require for the foreseeable future. The fact that we sell a significant amount of our products to a limited number of customers also results in a customer concentration risk. The loss of any significant portion of such customers or a material adverse change in the financial condition of any one of these customers could have a material adverse effect on our revenues.

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

_________________

(1)      Contract values represent maximum potential values at time of contract placement and may not be representative of actual results.

(2)      Date represents expiration of contract, including the exercise of the option extension.    

Cryptocurrency Revenue: Cryptocurrency revenue consists of revenue recognized from EcoChain's' cryptocurrency mining facility.

Cryptocurrency revenue was $50 thousand for each of the three and six months ended June 30, 2020. As noted above, EcoChain's' cryptocurrency mining facility did not begin operations until the second quarter of 2020, and therefore there was no cryptocurrency revenue for the three and six months ended June 30, 2019. This revenue represents the cash received upon the sale of the various cryptocurrencies mined at our new mining facility during the second quarter of 2020.   

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

Cost of product revenue for the three months ended June 30, 2020 increased by $101 thousand, or 19.1%, to $631 thousand from $530 thousand for the three months ended June 30, 2019. Gross profit, as a percentage of product revenue, increased to 73.6% during the second quarter of 2020 compared to 70.7% for the second quarter of 2019. Cost of product revenue for the six months ended June 30, 2020 increased by $45 thousand, or 4.0%, to $1.2 million from $1.1 million for the six months ended June 30, 2019. Gross profit, as a percentage of product revenue, increased to 70.8% during the six months ended June 30, 2020 compared to 67.8% during the first half of 2019.

The primary reason for the increase in the cost of product revenue during the 2020 periods was the increase in U.S. Air Force shipments, as discussed above in "Product Revenue." The improvement in gross profit during the 2020 periods was primarily attributable to changes in the product mix, with more sales of new engine vibration balancing systems during the 2020 periods compared to greater sales of repaired systems, accessories, and wafer metrology tools, which have higher labor and material components, during the 2019 periods.

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

Research and product development expenses increased $8 thousand and $105 thousand, respectively, during the three and six months ended June 30, 2020 compared to the comparable 2019 periods due primarily to the addition of one full-time employee to the engineering staff in connection with the development of our next generation engine vibration balancing systems and capacitance products. This work is expected to continue at similar spending levels throughout the remainder of 2020 and into 2021 as we introduce these next generation products to the market.

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

Selling, general and administrative expenses for the three months ended June 30, 2020 increased by $212 thousand, or 33.4%, to $847 thousand from $635 thousand for the three months ended June 30, 2019. This increase was primarily a result of spending associated with EcoChain's mining operation, including $25 thousand in additional insurance expenses, legal fees associated with operations of $16 thousand, legal fees associated with the Company's investment in Soluna and the Company's March 2020 Form 10 filing of $125 thousand, $25 thousand of expenses related to the retention of a marketing consultant, and $50 thousand related to salary and benefits of a new executive hired at MTI Instruments.

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Selling, general and administrative expenses for the six months ended June 30, 2020 increased by $330 thousand, or 25.2%, to $1.6 million from $1.3 million for the six months ended June 30, 2019. This increase was primarily a result of spending associated with EcoChain's mining operation, including a $65 thousand one-time management fee we paid to Soluna in January 2020, $133 thousand in legal fees associated with the Company's investment in Soluna and the March 2020 Form 10 filing, and $100 thousand related to the salary and benefits of the new executive hired at MTI Instruments.

The Company has and expects to continue to periodically fund EcoChain with respect to its development and construction of the cryptocurrency mining facility pursuant to budgets agreed upon with Soluna under the Operating and Management Agreement. The Company spent $572 thousand on such funding of EcoChain during the six months ended June 30, 2020, $150 thousand of which is reflected in selling, general and administrative expenses for the period, and expects to spend a total of approximately $750 thousand on such funding during the full-year 2020, a portion of which will be reflected in selling, general and administrative expenses for the full year. This initial $750,000 funding includes a combination of fixed assets and operating expenses pursuant to an investment, operations, and management plan that Soluna is executing on behalf of EcoChain.  

The Company expects selling, general and administrative expenses to continue to increase in 2020 and generally going forward as a result of the re-registration of our common stock under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") and the resulting resumption of filing periodic reports, annual proxy statements, and other filings with the Securities and Exchange Commission (the "SEC").

Operating Income: Operating income was $600 thousand for the three months ended June 30, 2020 compared to $291 thousand for the three months ended June 30, 2019, and $458 thousand for the six months ended June 30, 2020 compared to $371 thousand for the six months ended June 30, 2019. These improvements were the result of the factors noted above, that is, the increased sales and improvement in the profit margin during each period, partially offset by increased research and development and selling, general and administrative expenses.

Other Income: Other income was $2 thousand for the three months ended June 30, 2020 and related to interest income on operating cash balances offset by the disposal of fixed assets. Other income was $20 thousand for the three months ended June 30, 2019 and was primarily related to the disposal of the tensile product line and related three-year royalty agreement and interest income on operating cash balances. Other income was $4 thousand for the six months ended June 30, 2020 and primarily related to interest income on operating cash balances offset by the disposal of fixed assets. Other income was $27 thousand for the six months ended June 30, 2019 and was primarily related to the disposal of the tensile product line and related three-year royalty agreement and interest income on operating cash balances.

Income Taxes: Income taxes were $0 for each of the three-months periods ended June 30, 2020 and June 30, 2019. Income tax benefit for the six months ended June 30, 2020 was $3 thousand and related to a 2018 tax year refund. There was no income tax benefit or expense during the six months ended June 30, 2019. The Company owed no taxes during the relevant periods as it is, and during the relevant periods, was, carrying forward previously- accumulated net operating losses that it can credit against income to reduce or eliminate any taxes that it would otherwise owe.

Net Income: Net income was $602 thousand for the three months ended June 30, 2020 compared to $311 thousand for the three months ended June 30, 2019, and $465 thousand for the six months ended June 30, 2020 compared to $398 thousand for the six months ended June 30, 2019. These improvements were the result of the factors noted above, that is, the increased sales and improvement in the profit margin in each period, offset by increased research and development and selling, general and administrative expenses.

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Product Revenue: Product revenue during the year ended December 31, 2019 compared to 2018 decreased by $1.5 million, or 18.5%, to $6.6 million from $8.1 million. The primary reasons for the decrease in product revenue was a $0.9 million decline in U.S. Air Force purchases caused by federal resources not being apportioned to funded delivery orders under its existing multi-year contract with us, a 12% sales decline in the semiconductor industry, per the Semiconductor Industry Association, which translated into a $0.3 million drop in sales to a manufacturer of semiconductor equipment in Asia, and international trade conditions that made it difficult to ship U.S. products to Asia because of delays in export approvals and Asian customers unwillingness to purchase U.S. products, which resulted in a $0.3 million decline in sales to our Asian distributors. Sales to the U.S. Air Force accounted for 20.8% and 28.0% of our annual product revenues for the years ended December 31, 2019 and 2018, respectively. As discussed above under "Results of Operations for the Three and Six Months Ended June 30, 2020 Compared to the Three and Six Months Ended June 30, 2019," our dependence on a limited number of customers, including the U.S. Air Force, can cause significant fluctuations in our product sales and, as a result, revenue, from one fiscal period to the next. In addition, Air Force sales can change as a result of a potential redeployment of, or cuts in, government funding, as was the case in 2019.

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

Cost of Product Revenue; Gross Margin: Cost of product revenue decreased by $122 thousand, or 5.2%, to $2.2 million during the year ended December 31, 2019, from $2.3 million during the year ended December 31, 2018. The primary reason for the decrease in the cost of product revenue was the reduction in sales of our products during 2019, as discussed above in "Product Revenue." Gross profit as a percentage of product revenue decreased from 71.1% during the year ended December 31, 2018 to 66.4% during the year ended December 31, 2019 due primarily to changes in the product mix, which in 2019 was more concentrated on vibration system accessories and repairs (27% versus 22%) and our capacitance based systems (27% vs 25%), both of which have higher labor and material costs, and, to a lesser extent, $76 thousand in obsolete/slow moving inventory write-offs primarily associated with first generation digital capacitance systems that have been replaced by newer products such that we can no longer sell them and excessive quantities of laser components. 

Research and Product Development Expenses: Research and product development expenses increased $145 thousand during the year ended December 31, 2019 compared to 2018 due primarily to increased staffing driving the current development of our next generation capacitance and engine vibration balancing systems. 

Selling, General and Administrative Expenses: Selling, general and administrative expenses for the year ended December 31, 2019 decreased by $250 thousand, or 8.4%, to $2.7 million in 2019 from $3.0 million in 2018. This decrease is primarily the result of a $77 thousand decrease in the variable portion of executive compensation due to the drop in revenue and profitability during 2019 compared to the prior year, $65 thousand of sales staff resources being allocated to product development initiatives, a $45 thousand reduction in legal fees, which were higher in 2018 due to the de-registration of the Company's common stock under Section 12 of the Exchange Act and the attendant cessation of the filing of periodic and current reports and annual proxy statements with the SEC in 2018, and $40 thousand lower sales commission expense consistent with the decrease in product sales during 2019.

Operating Income: Operating income was $259 thousand for the year ended December 31, 2019 compared to operating income of $1.5 million in 2018. This $1.3 million decrease was a result of the factors noted above, that is, reductions in revenue and gross margins, along with an increase in research and development expenses, partially offset by a decrease in selling, general and administrative expenses.

Other Income: Other income was $36 thousand for the year ended December 31, 2019 and was primarily related to the disposal of the tensile product line and related three-year royalty agreement and interest income on operating cash balances. Other income was $21 thousand for the year ended December 31, 2018 and primarily consisted of interest income on operating cash balances.

Income Tax Benefit: Income tax benefit for the year ended December 31, 2019 was $28 thousand and was primarily a result of a $33 thousand income tax benefit due to a refund associated with the repeal of the federal alternative minimum tax for C corporations. Our effective income tax rate for the year ended December 31, 2019 was (9)%. Income tax benefit for the year ended December 31, 2018 was $392 thousand and was primarily a result of the release of a portion of our valuation allowance against our deferred tax assets. The partial release of the valuation allowance caused us to recognize an incremental tax benefit of $395 thousand in the fourth quarter of 2018. Our effective income tax rate for the year ended December 31, 2018 was (26)%.

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Net Income: Net income for the year ended December 31, 2019 was $323 thousand compared to net income of $1.9 million in 2018. As discussed above, the decrease in net income during 2019 was attributable to reductions in revenue and gross margins, along with an increase in research and development, partially offset by a decrease in selling, general and administrative expenses.

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 $119.3 million as of June 30, 2020. As of June 30, 2020, the Company had working capital of approximately $3.1 million, no debt, no outstanding commitments for capital expenditures, and approximately $1.4 million of cash available to fund its operations.

Based on business developments, including changes in production levels, staffing requirements, and network infrastructure improvements, additional capital equipment may be required in the foreseeable future. We expect to spend a total of approximately $425 thousand on capital equipment and $1.6 million in research and development during 2020. We expect to finance any future expenditures and continue funding our operations from our current cash position and our projected 2020 cash flows pursuant to management's plans. We may also seek to supplement our resources by obtaining credit facilities to fund operational working capital and capital expenditure requirements. Any additional financing, if required, may not be available to us on acceptable terms or at all.

As discussed above, the Company spent $572 thousand during the six months ended June 30, 2020, to fund EcoChain with respect to its development and construction of the cryptocurrency mining facility pursuant to budgets agreed upon with Soluna under the Operating and Management Agreement. The Company expects to spend a total of approximately $750 thousand on such funding of EcoChain during 2020 and to continue to periodically fund such expenses with respect to EcoChain going forward, although under the terms of the Operating and Management Agreement with Soluna it is not obligated to provide any additional funding. This initial $750,000 funding includes a combination of fixed assets and operating expenses pursuant to an investment, operations and management plan that Soluna is executing on behalf of EcoChain. Such expenses have and we intend will continue to be funded from MTI's available cash resources, and expenses funded to date are reflected in the Company's consolidated balance sheet and income statement beginning in the first quarter of 2020.

While it cannot be assured, management believes that, due in part to our current working capital level, projected cash requirements for operations and capital expenditures, its current available cash of approximately $1.4 million, and its projected 2020 cash flow pursuant to management's plans, we will have adequate resources to fund operations and capital expenditures for the remainder of the year ending December 31, 2020 and through at least the end of the third quarter of 2021.

If our revenue estimates are off either in timing or amount, however, or if cash generated from operations is insufficient to satisfy the Company's operational working capital and capital expenditure requirements, the Company may need to implement additional steps to ensure liquidity including, but not limited to, the deferral of planned capital spending and/or delaying existing or pending product development initiatives, or the Company may be required to obtain credit facilities, if available, to fund these initiatives. The Company has no other formal commitments for funding future needs of the organization at this time and any additional financing during 2020 or 2021, if required, may not be available to us on acceptable terms or at all. Such steps, if required, could potentially have a material and adverse effect on our business, results of operations, and financial condition.

Debt

On May 7, 2020, in connection with receipt of a $3.3 million U.S. 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 June 30, 2020, there were no amounts outstanding under the line of credit.

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We had no credit facilities available at either December 31, 2019 or December 31, 2018 and no debt outstanding at June 30, 2020, December 31, 2019, or December 31, 2018.

Backlog, Inventory, and Accounts Receivable

At June 30, 2020, our order backlog was $3.4 million compared to $721 thousand at December 31, 2019. The increase in backlog from December 2019 was primarily due to the receipt of a record $3.2 million order from the U.S. Air Force in April 2020 for 52 new engine balancing systems, as well as an increase in orders for military cable kits for our engine vibration balancing systems. 

The Company's order backlog was $721 thousand at December 31, 2019 compared to $621 thousand at December 31, 2018. The increase at December 31, 2019 was due to orders from our largest European customer during 2019, with scheduled deliveries throughout 2020 and into 2021.

Our inventory turnover ratios and average accounts receivable days outstanding for the trailing 12 month periods and their changes at June 30, 2020 and 2019 are as follows:

The 12-month inventory turns declined during the 2020 period compared to the prior 12-month period due to a 16% increase in average inventory balances corresponding to material purchases and buildup of inventory in advance of deliveries to the U.S. Air Force under the existing multi-year contract.

The average accounts receivable days' outstanding remained the same as during the previous trailing12 months.  

Our inventory turnover ratios and average accounts receivable days outstanding for the years ended December 31, 2019 and 2018 and their changes are as follows:

The decrease in inventory turns is due to a 15% increase in average inventory balances on an 18% decline in comparable annual sales volume due to accelerated inventory purchases made in 2019 for orders that are delayed until 2020.

The average accounts receivable days' outstanding decreased three days during 2019 compared to the prior year due to improved internal collection efforts.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies and Significant Judgments and Estimates

The prior discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 2 of the consolidated financial statements for the years ended December 31, 2019 and 2018 included in this Form 10 includes a summary of our most significant accounting policies. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, income taxes, and share-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Periodically, our management reviews our critical accounting estimates with the Audit Committee of our Board of Directors.

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

Revenue Recognition, Accounts Receivable, and Allowance for Doubtful Accounts. Product revenue consists of revenue recognized from MTI Instruments' product lines. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter 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. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

If a customer requires that that we provide installation of a purchased product, all revenue related to the product is deferred and recognized upon the completion of the installation. If the terms of our contract with the customer or the customer's purchase order requires specific customer acceptance criteria with respect to a product, 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 we can objectively and reliably demonstrate that the criteria specified in the acceptance provisions is satisfied. We 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.

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 products that 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 that 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, but, on occasion, we have granted extended payment terms. 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 of products to our distributors (and their subsequent payment to us) is completed upon delivery and is not contingent upon the distributors' resale of the products. Distributor sales are covered by MTI Instruments' standard one-year warranty and there are no special return policies for distributors.

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We determine the standalone selling price ("SSP") for each distinct performance obligation. Since we sell products and services separately, the SSP is directly observable.

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 our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience and current exposures identified. We review our allowance for doubtful accounts monthly. We review past due balances over 90 days and over a specified amount individually for collectability. We review all other balances on a pooled basis by type of receivable. We charge off account balances against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.

Inventories. We value inventories at the lower of cost (first-in, first-out) or net realizable value. We periodically review inventory quantities on hand and record 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. We also provide 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 we make every effort to assure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and our reported operating results. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to cost of product revenue.

Share-Based Payments. We grant options to purchase our common stock and award restricted stock to our employees and directors under our equity incentive plans. The benefits provided under these plans are share-based payments and we account 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. We measure stock-based compensation cost at grant date based on the estimated fair value of the award, and recognize 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. We estimate the fair value of stock-based awards on the grant date using a Black-Scholes valuation model. We use the fair value method of accounting with the modified prospective application, which provides for certain changes to the method for valuing share-based compensation. The valuation provisions apply to new awards and to awards that are outstanding on the effective date and subsequently modified.

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

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

For purposes of estimating the fair value of stock options granted using the Black-Scholes model, we use the historical volatility of our stock for the expected volatility assumption input to the Black-Scholes model, consistent with the accounting guidance. The risk-free interest rate is based on the risk-free zero-coupon rate for a period consistent with the expected option term at the time of grant. We paid a special dividend during the year ended December 31, 2019 and did not pay any dividends during the six months ended June 30, 2020 or the year ended December 31, 2018. We are required to assume a dividend yield as an input to the Black-Scholes model. Since the 2019 dividend was a special dividend and we do not anticipate paying any cash dividends in the foreseeable future, we therefore use 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.

Income Taxes. We are subject to income taxes in the U.S. (federal and state). As part of the process of preparing our consolidated financial statements, we calculate income taxes for each of the jurisdictions in which we operate. This involves estimating actual current taxes due together with assessing temporary differences resulting from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities, loss carryforwards, and tax credit carryforwards, for which income tax benefits are expected to be realized in future years. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit 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 our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We considered all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income amongst other items in determining our valuation allowance. In addition, our assessment requires us to schedule future taxable income in accordance with accounting standards that address income taxes to assess the appropriateness of a valuation allowance, which further requires the exercise of significant management judgment.

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

We are also 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 our 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 our 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. Our effective tax rates could be affected by numerous factors, such as intercompany transactions, earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, the applicability of special tax regimes, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies, changes to our existing businesses and operations, acquisitions and investments and how they are financed, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations.

Item 3:          Properties

For our MTI corporate office and MTI Instruments subsidiary, we lease approximately 17,400 square feet of office, manufacturing and research and development space at 325 Washington Avenue Extension, Albany, NY 12205. The current lease agreement expires on November 30, 2024.

EcoChain leases approximately 19,000 square feet of space in Buildings A, C, B and H at 474 Highline Dr., East Wenatchee, WA 12205. The space is leased for the purpose of operating EcoChain's cryptocurrency mining business. The lease agreement for Building A expired on June 30, 2020 and was re-negotiated in July 2020. The lease agreements for Building C and Buildings B and H expire on November 30, 2024 and July 31, 2023, respectively.

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We believe our facilities are generally well-maintained and adequate for our current needs and for expansion, if required.