UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934

 

Mechanical Technology, Incorporated

(Exact name of registrant as specified in its charter)

__________________

New York

14-1462255

State or other jurisdiction

(IRS Employer

of incorporation or organization

Identification No.)

 

325 Washington Avenue Extension, Albany, New York 12205

(Address of principal executive offices)                                            (Zip Code)

 

(518) 218-2550

(Registrant's telephone number, including area code)

 

Securities to be registered pursuant to Section 12(b) of the Act:

Title of each class to be so registered

Name of each exchange on which each class is to be registered

None

None

 

Securities to be registered pursuant to Section 12(g) of the Act:

Common Stock

($0.01 par value)

(Title of class)

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company   ☑

 

Emerging growth company  ☑

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

 

 

 

 

 

 

 

 

 


 

INDEX TO FORM 10

 

Page

Item 1:                         Business

3
   

Item1A:                       Risk Factors

9
   

Item 2:                         Financial Information

9
   

Item 3:                         Properties

18
   

Item 4:                         Security Ownership of Certain Beneficial Owners and Management

19
   

Item 5:                         Directors and Executive Officers

20
   

Item 6:                         Executive Compensation

21
   

Item 7:                         Certain Relationships and Related Transactions, and Director Independence

25
   

Item 8:                         Legal Proceedings

26
   

Item 9:                         Market Price of and Dividends on the Registrant's Common Equity and Related Shareholder Matters

26
   

Item 10:                       Recent Sales of Unregistered Securities 

28
   

Item 11:                       Description of Registrant's Securities to be Registered

28
   

Item 12:                       Indemnification of Directors and Officers

29
   

Item 13:                       Financial Statements and Supplementary Data

29
   

Item 14:                       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

29
   

Item 15:                       Financial Statements and Exhibits

30

2


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. 

,

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:

 

Product

 

Description

PBS-4100+ Portable Balancing System

 

Provides easy-to-follow solutions for engine vibration and trim balancing

 

 

 

PBS-4100R+ Test Cell Vibration Analysis and Trim Balance System

 

Advanced trim balancing and diagnostics for engine test cells

 

 

 

TSC-4800A Tachometer Signal Conditioner

 

Signal conditioner detects and conditions signals for monitoring, measuring, and indicating engine speeds

 

3


 

Precision Instruments Products: MTI Instruments' precision instruments products are designed to address the needs of process engineers, researchers, designers, product developers, and others who need to measure and monitor what they are working on with precisions down to a nanometer or 1 billionth of a meter - essential to some industries like the semiconductor market, which uses such precision in the manufacturing of products including computer chips and smartphones. These products are also used in general industrial manufacturing applications including measuring dimensions, monitoring thickness, and the vibration of products.    

 

Listed below are selected MTI Instruments' precision instruments product offerings and technologies:

 

Product Line

     

Description

 

Accumeasure ™ Series

 

 

 

High precision capacitive boards and systems offering great stability

 

Microtrak ™ Series

 

 

Single spot laser sensor line equipped with the latest complementary metal oxide semiconductor sensor technology with high sensitivity

 

Fotonic ® Sensor Series

 

 

Fiber-optic-based vibration sensor systems with high frequency response

 

 

Diagnostic Equipment: MTI Instruments offers a portable signal generator - its 1510 Calibrator. A signal, or function, generator is a product that delivers an electronic signal simulating other pieces of equipment or sensors to help the user easily isolate potential problems when testing and calibrating electronic equipment. While the product was originally designed to help customers calibrate PBS products in the field, MTI Instruments now markets this product worldwide to different markets. 

 

Semiconductor and Solar Metrology Systems: MTI Instruments manufactures a family of products that can assist in early defect detection in the manufacturing process of semiconductor products. Some of these semiconductor products include microchips, which are the basis for building the sophisticated electronic devices in common use today, including computers and smartphones. MTI Instruments' semiconductor products help our manufacturer customers identify irregularities in the components of their products earlier in their manufacturing process. For example, for microchip manufacturers, our products allow for the detection of defects at the wafer (the surface, usually made of the chemical element silicon, from which microchips are built) stage of the manufacturing process. This allows our customers to discard defective components before they result in the manufacture of defective products, saving them time and money. 

 

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

 

Product                                                 

     

Description

Proforma 300iSA

 

Semi-automated, non-contact full wafer surface scanning system for thickness, total thickness variation, bow, warp, site and global flatness

Proforma 300i

 

Manual, non-contact measurement of wafer thickness, total thickness variation, and bow

PV 1000

 

In process tool for measuring thickness and bow of solar wafers

 

Marketing 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:

 

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.

5


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.

6


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.  

 

7


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. 

 

__________________________

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:

 

 

9


 

 

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:

 

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.

 

10


Results of Operations

Results of Operations for the Three and Six Months Ended June 30, 2020 Compared to the Three and Six Months Ended June 30, 2019.

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

(Dollars in thousands)

Three Months
Ended
June 30,
2020

 

Three Months
Ended
June 30,
2019

 

$
Change

 

%
Change

Product revenue

$

2,390

 

$

1,810

 

$

580

 

32.0%

Cryptocurrency revenue

$

50

 

$

-

 

$

50

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

$

631

 

$

530

 

$

101

 

19.1%

Research and product development expenses

$

362

 

$

354

 

$

8

 

2.3%

Selling, general and administrative expenses

$

847

 

$

635

 

$

212

 

33.4%

Operating income

$

600

 

$

291

 

$

309

 

106.2%

Other income, net

$

2

 

$

20

 

$

(18

)

(90.0)%

Income before income taxes

$

602

 

$

311

 

$

291

 

93.6%

Income taxes

$

-

 

$

-

 

$

-

 

-

Net income

$

602

 

$

311

 

$

291

 

93.6%

 

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.

(Dollars in thousands)

Six Months
Ended
June 30,
2020

 

Six Months
Ended
June 30,
2019

 

$
Change

 

%
Change

Product revenue

$

3,973

 

$

3,456

 

$

517

 

15.0%

Cryptocurrency revenue

$

50

 

$

-

 

$

50

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

$

1,159

 

$

1,114

 

$

45

 

4.0%

Research and product development expenses

$

764

 

$

659

 

$

105

 

15.9%

Selling, general and administrative expenses

$

1,642

 

$

1,312

 

$

330

 

25.2%

Operating income

$

458

 

$

371

 

$

87

 

23.5%

Other income, net

$

4

 

$

27

 

$

(23)

 

71.4%

Income before income taxes

$

462

 

$

398

 

$

64

 

16.1%

Income tax benefit

$

3

 

$

-

 

$

3

 

 

Net income

$

465

 

$

398

 

$

67

 

16.8%

 

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.

11


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

 

(Dollars in thousands)

 

Revenues for the

Three Months Ended

June 30,

Revenues for the

Six Months Ended

June 30,

Contract
Revenues to
Date June 30,

Total Contract
Orders Received
to Date June 30,

Contract (1)

Expiration

2020

 

2019

 

2020

2019

2020

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$9.74 million U.S. Air Force Systems, Accessories and Maintenance

06/30/2021 (2)

$

1,571

 

$

367

 

$

1,635

$

447

$

7,132

$

8,993

_________________

(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.

 

12


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.

Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018.

The following table summarizes changes in the various components of our net income during the year ended December 31, 2019 compared to the year ended December 31, 2018.

(Dollars in thousands)

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

$
Change

 

%
Change

Product revenue

$

6,571

 

$

8,062

 

$

(1,491)

 

(18.5)%

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

$

2,205

 

$

2,327

 

$

(122)

 

(5.2)%

Research and product development expenses

$

1,381

 

$

1,236

 

$

145

 

11.7%

Selling, general and administrative expenses

$

2,726

 

$

2,976

 

$

(250)

 

(8.4)%

Operating income

$

259

 

$

1,523

 

$

(1,264)

 

(83.0)%

Other income, net

$

36

 

$

21

 

$

15

 

71.4%

Income before income taxes

$

295

 

$

1,544

 

$

(1,249)

 

(80.9)%

Income tax benefit

$

28

 

$

392

 

$

(364)

 

(92.9)%

Net income

$

323

 

$

1,936

 

$

(1,613)

 

(83.3)%

 

13


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:

(Dollars in thousands)

 

 

 

Revenues for the
Year Ended
December 31,

 

Contract
Revenues
to Date
December 31,

 

Total Contract
Orders Received
to Date
December 31,

Contract(1)

 

Expiration

 

2019

 

2018

 

2019

 

2019

 

 

 

 

 

 

 

 

 

 

 

$9.35 million U.S. Air Force Systems, Accessories and Maintenance

 

06/30/2021(2)

 

$

1,286

 

$

2,069

 

$

5,497

 

$

5,497

 

 

 

(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 option extensions.

 

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)%.

14


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.

Liquidity and Capital Resources

Several key indicators of our liquidity are summarized in the following table:

(Dollars in thousands)

Six Months
Ended or
as of

 

Year Ended or
as of

 

Year Ended or
as of

 

June 30,

 

December 31,

 

December 31,

 

2020

     

2019

     

2018

Cash

$

1,351

 

 

$

2,510

 

 

$

5,771

 

Working capital

3,092

 

 

3,093

 

 

6,370

 

Net income

$

465

 

$

323

 

$

1,936

Net cash (used in) provided by operating activities

$

(61

)

 

$

289

 

 

$

1,936

 

Purchase of property, plant and equipment

$

(348

)

 

$

(83

)

 

$

(93

)

Cash dividends on common stock

$

-

 

 

$

(3,541

)

 

$

-

 

 

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.

15


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:

 

 

 

 

 

 

2020

 

2019

 

Change

Inventory turnover

2.1

 

2.8

 

(0.7)

Average accounts receivable days outstanding

40

 

40

 

-

 

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:

 

Years Ended December 31,

 

 

 

2019

 

2018

 

Change

Inventory turnover

2.3

 

3.0

 

(0.7)

Average accounts receivable days outstanding

40

 

43

 

(3)

 

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.

16


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.

17


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.

18


 

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

 

Item 4:          Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the beneficial ownership of our common stock at September 15, 2020 by each of our directors and our executive officer and by our executive officer and all of our directors as a group. We have also included information with respect to persons or groups that, to our knowledge, beneficially own more than 5% of our common stock at September 15, 2020.

 

Shares Beneficially Owned

Name and Address of Beneficial Owner (1)

Number (2)

 

Percent of
Class

Executive Officer

 

 

 

Jessica L. Thomas

-

 

0.0%

 

 

 

 

Non-Employee Directors

 

 

 

Edward R. Hirshfield (6)

1,875

 

*

Matthew E. Lipman (6),(8)

3,751,975

 

39.2%

Thomas J. Marusak (3)

192,185

 

2.0%

David C. Michaels (4)

111,762

 

1.2%

William P. Phelan (5)

214,125

 

2.2%

Michael Toporek (6),(8)

3,751,875

 

39.2%

 

 

 

 

All current directors and executive officer as a group (7 persons) (7)

4,273,797

 

43.9%

 

 

 

 

Persons or Groups Holding More than 5% of the Common Stock

 

 

 

Brookstone Partners Acquisition XXIV, LLC (8)

3,750,000

 

39.2%

*      Less than 1%

 

 

 

 

(1)         Unless otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares of Common Stock beneficially owned by the shareholder.

(2)         The number of shares beneficially owned by each shareholder is determined under rules promulgated by the SEC and includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after September 15, 2020 through the exercise of any warrant, stock option, or other right. The inclusion in this schedule of such shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of such shares. The number of shares of Common Stock outstanding used in calculating the percentage for each listed person includes the shares of Common Stock underlying options held by such person that are exercisable within 60 days of September 15, 2020, but excludes shares of Common Stock underlying options held by any other person.

(3)          Includes 35,125 shares of common stock issuable upon exercise of stock options exercisable within 60 days of September 15, 2020.

(4)          Includes 31,750 shares of common stock issuable upon exercise of stock options exercisable within 60 days of September 15, 2020.

(5)          Includes 89,125 shares of common stock issuable upon exercise of stock options exercisable within 60 days of September 15, 2020.

(6)          Includes 1,875 shares of common stock issuable upon exercise of stock options exercisable within 60 days of September 15, 2020.

(7)          Includes 161,625 shares of common stock issuable upon exercise of stock options exercisable within 60 days of September 15, 2020.

(8)          Representatives of Brookstone Partners Acquisition XXIV, LLC, a Delaware limited liability company ("Brookstone XXIV"), have provided us the following information: As the Manager of Brookstone XXIV, Brookstone Partners I.A.C. may be deemed to beneficially own the shares of common stock owned directly by Brookstone XXIV. Michael Toporek is President of Brookstone Partners I.A.C. and Matthew Lipman is Secretary of Brookstone Partners I.A.C. and share voting and dispositive power over the shares of common stock owned by Brookstone XXIV. The address of each of Brookstone XXIV, Brookstone Partners I.A.C., Michael Toporek, and Matthew Lipman is 232 Madison Avenue, Suite 600, New York, New York 10016.  

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Item 5:          Directors and Executive Officers

Information about Our Directors

Set forth below is certain information about our directors.

Name

 

Age

 

Current Term Ends in:

 

 

 

 

 

Edward R. Hirshfield

 

48

 

2021

Matthew E. Lipman

 

41

 

2022

Thomas J. Marusak

 

70

 

2023

David C. Michaels

 

65

 

2022

William P. Phelan

 

64

 

2021

Michael Toporek

 

55

 

2023

 

 

 

 

 

 

Edward R. Hirshfield has served as a director since October 2016. In 2018, Mr. Hirshfield joined the restructuring group at B Riley FBR, Inc. where he advises stressed and distressed companies and their constituencies. From 2015 until 2018, Mr. Hirshfield served as a partner at Steppingstone Group, LLC, a special situations private equity fund located in New York. Mr. Hirshfield's responsibilities in this role included business development activities, conducting extensive credit analysis on target companies, as well as portfolio management. Mr. Hirshfield began his career as a loan officer at CIT Group Inc. and then became a restructuring advisor at a boutique investment bank, CDG Group. In 2003, Mr. Hirshfield moved over to the buy side and joined Longacre Fund Management, LLC, a $2.5 billion distressed debt fund. Mr. Hirshfield continued as a distressed investor at Del Mar Asset Management, LP, Ramius LLC and most recently CRG, LLC from 2012 through 2014. At CRG, LLC, Mr. Hirshfield was responsible for identifying and managing investments in distressed situations and conducting extensive research on potential investments. Mr. Hirshfield has a B.S. in Applied Mathematics from Union College and an M.B.A. from Fordham University Graduate School of Business. Mr. Hirshfield brings over 20 years of experience understanding and analyzing public and private companies. He has an expertise in providing operational and investment recommendations as well as providing extensive valuation and credit analysis, which the Board believes qualifies him to serve as a director.

Matthew E. Lipman has served as a director since October 2016. Since 2004, Mr. Lipman has served as Managing Director of Brookstone Partners, a lower middle market private equity firm based in New York and an affiliate of Brookstone Partners Acquisition XXIV, LLC. Mr. Lipman's responsibilities at Brookstone Partners include identifying and evaluating investment opportunities, performing transaction due diligence, managing the capital structure of portfolio companies and working with management teams to implement operational and growth strategies. In addition, Mr. Lipman is responsible for executing add-on acquisitions and other portfolio company-related strategic projects. From July 2001 through June 2004, Mr. Lipman was an analyst in the mergers and acquisitions group at UBS Financial Services Inc. responsible for formulating and executing on complex merger, acquisition and financing strategies for Fortune 500 companies in the industrial, consumer products and healthcare sectors. Mr. Lipman currently serves on the Board of Directors of Instone, LLC, Denison Pharmaceuticals, LLC, Virginia Abrasives Corporation, and Capstone Therapeutics Corp. Mr. Lipman has a B.S. in Business Administration from Babson College. Mr. Lipman brings over 18 years of experience working with companies to establish growth strategies and execute acquisitions, is proficient in reading and understanding financial statements, generally accepted accounting principles and internal controls as a direct result of his investment experience evaluating companies for potential investments, the management of financial reporting and capital structure for three portfolio companies, as well as relevant experience in board service, which the Board believes qualifies him to serve as a director.

Thomas J. Marusak has served as a director since December 2004. Since 1986, Mr. Marusak has served as President of Comfortex Corporation, a manufacturer of window blinds and specialty shades. Mr. Marusak was a member of the Advisory Board of Directors for Key Bank of New York from 1996 through 2004 and served on the Board of Directors of the New York Energy Research and Development Authority from 1998 through 2006. In 2019, Mr. Marusak retired from the Board of Directors of the Capital District Physician's Health Plan, Inc., in Albany, where he had served for the prior eight years and had participated as a member of the board's Finance, Compensation, Audit, Investment, and Executive Committees. Mr. Marusak received a B.S. in Engineering from Pennsylvania State University and an M.S. in Engineering from Stanford University. Mr. Marusak brings technical development, manufacturing experience, product development and introduction, financial accounting, and human resources expertise to the Board, as well as relevant experience in committee and board service, which the Board believes qualifies him to serve as a director.

David C. Michaels has served as our Chairman of the Board since January 2017 and as a director since August 2013. Mr. Michaels served as the Chief Financial Officer of the American Institute for Economic Research, Inc., an internationally recognized economics research and education organization, from October 2008 to May 2018. Mr. Michaels served as Chief Financial Officer at Starfire Systems, Inc. from December 2006 to September 2008. Mr. Michaels worked at Albany International Corp. from March 1987 to December 2006 as Vice President, Treasury and Tax and Chief Risk Officer. Mr. Michaels also worked at Veeco Instruments from May 1979 to March 1987 in various roles including Controller and Tax Manager. Mr. Michaels is a member of the Board of Directors and Chair of the Audit Committee of Iverson Genetic Diagnostics, Inc. Mr. Michaels also serves as a member of the Board of Governors and Treasurer of the Country Club of Troy. Mr. Michaels served as the Chairman of the Board of Directors of Starfire Systems, Inc. from January 2009 through December 2009. Mr. Michaels has a Bachelor of Science degree with dual majors in Accounting and Finance and a minor in Economics from the University at Albany. Mr. Michaels completed graduate-level coursework at the C.W. Post campus of Long Island University. Mr. Michaels also completed the Leadership Institute Program at the Lally School of Management & Technology at Rensselaer Polytechnic Institute. Mr. Michaels contributes more than 30 years of international financial and operating experience in a wide variety of roles in both public and private organizations to the Board, which the Board believes qualifies him to serve as a director.

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William P. Phelan has served as a director of MTI since December 2004 and as President of EcoChain since March 2020. Mr. Phelan is the co-founder and Chief Executive Officer of Bright Hub, Inc., a software company founded in 2005, which focuses on the development of online software for commerce. In May 1999, Mr. Phelan founded OneMade, Inc., an electronic commerce marketplace technology systems and tools provider. Mr. Phelan served as Chief Executive Officer of OneMade, Inc. from May 1999 to May 2004, including for a year after it was sold to, and remained a subsidiary of, America Online. Mr. Phelan serves on the Board of Trustees and is a Finance Committee member and an Investment Committee Chair for Capital District Physician's Health Plan, Inc. Mr. Phelan also serves on the Board of Trustees and Chairman of the Audit Committee of the Paradigm Mutual Fund Family. He has also held numerous executive positions at Fleet Equity Partners, Cowen & Company, First Albany Corporation, and UHY Advisors Inc., formerly Urbach Kahn & Werlin, PC. Mr. Phelan has a B.A. in Accounting and Finance from Siena College, an M.S. in Taxation from City College of New York, and is a Certified Public Accountant. Mr. Phelan contributes leadership, capital markets experience, strategic insight as well as innovation in technology to the Board, which the Board believes qualifies him to serve as a director.

Michael Toporek has served as a director since October 2016. Since 2003, Mr. Toporek has served as the Managing General Partner of Brookstone Partners, a lower middle market private equity firm based in New York and an affiliate of Brookstone Partners Acquisition XXIV, LLC. Prior to founding Brookstone Partners in 2003, Mr. Toporek was both an active principal investor and an investment banker. Mr. Toporek began his career in Chemical Bank's Investment Banking Group, later joined Dillon, Read and Co., which became UBS Warburg Securities Ltd. during his tenure, and SG Cowen and Company. Mr. Toporek currently serves on the Board of Trustees of Harlem Academy and on the Board of Directors of Capstone Therapeutics Corp. Mr. Toporek has a B.A. in Economics and an M.B.A. from the University of Chicago. Mr. Toporek brings strategic and financial expertise to the Board as a result of his experience with Brookstone Partners, which the Board believes qualifies him to serve as a director.

Information about Our Executive Officer

Jessica L. Thomas, age 46, joined MTI as our Chief Financial Officer in July 2020. Ms. Thomas supervises the Company's financial reporting, treasury, human resources and risk management. Prior to her employment with the Company, Ms. Thomas served as Director of Optimization for Pregis, LLC, a provider of protective packaging materials, from 2014 through July 2020, where she was responsible for operations, system and financial optimization. From 2009 through 2014, Ms. Thomas worked at Plasan NA as Manager of Budget & Control and FP&A and was also responsible for compliance with government contracting, including DCAA & FAR. From 2007 to 2009, Ms. Thomas was a Senior Staff Auditor at Cruden & Company, CPA's PLLC. Ms. Thomas has also held positions in the banking industry as an officer at Key Bank and a Bank Branch Manager at M&T Bank. Ms. Thomas received a bachelor's degree in Business Administration and Accounting from Siena College and an M.B.A. in Finance & International Finance from Northeastern University. Ms. Thomas obtained her Certified Public Accountant license in May 2009, has been a member of the American Institute of Certified Public Accountants (AICPA) since 2005, and holds the Chartered Global Management Accountant (CGMA) designation.

There are no family relationships among any of our directors or our executive officer.

Item 6:          Executive Compensation

Compensation Philosophy

The primary objectives of our compensation policies are to attract, retain, motivate, develop, and reward our management team for executing our strategic business plan, thereby enhancing shareholder value, while recognizing and rewarding individual and Company performance. These compensation policies include: (i) an overall management compensation program that is competitive with companies of similar size or within our industry; and (ii) long-term incentive compensation in the form of stock-based compensation that is aimed towards encouraging management to continue to focus on shareholder returns. Our executive compensation program ties a substantial portion of our executive's overall compensation to key strategic, financial, and operational goals, including: establishing and maintaining customer relationships; signing original equipment manufacturer agreements; meeting revenue targets and profit and expense targets; introducing new products; progressing products towards manufacturing; and improving operational efficiency.

21


We believe that potential equity ownership in our Company is important to provide executive officers with incentives to build value for our shareholders. We believe that equity awards provide executives with a strong link to our short-term and long-term performance while creating an ownership culture to maintain the alignment of interests between our executives and our shareholders. When implemented responsibly, we also believe these equity incentives can function as a powerful executive retention tool.

Our Compensation Committee, consisting entirely of independent directors, administers our compensation plans and policies, including the establishment of policies that govern base salary as well as short-term and long-term incentives for our executive management team.

Summary of Cash and Other Compensation

The following table sets forth the total compensation received for services rendered in all capacities to the Company during the fiscal years ended December 31, 2019 and December 31, 2018 by our sole "named executive officer," namely Frederick W. Jones, who served as our Chief Executive and Chief Financial Officer during 2019 and 2018. We had no other executive officers during these years.

SUMMARY COMPENSATION TABLE

Name and Principal Position

 

Year

 

Salary

 

Option
Awards
(2)

 

Non-Equity
Incentive
Plan
Compensation ($)
(3)

 

All Other
Compensation
(4)

 

Total

Frederick W. Jones (1)

 

2019

 

192,995

 

-

 

25,000

 

7,720

 

225,715

Chief Executive, Chief Financial
Officer and Secretary

 

2018

 

187,400

 

18,500

 

100,000

 

7,496

 

313,396

 

 (1)         Mr. Jones resigned from the Company effective September 11, 2020.

(2)          The amounts shown in this column represent the grant date fair values of any stock option awards awarded in each of the past two years. The assumptions we used in calculating these amounts are discussed in Note 11 to our consolidated financial statements for the years ended December 31, 2019 and 2018 in this Form 10.

(3)          The amounts shown in this column represent accruals made pursuant to the successful completion of certain performance objectives.

(4)          "All Other Compensation" consists of matching contributions to our 401(k) plan.

Base Salary and Cash Incentives of our Chief Executive Officer and Chief Financial Officer

On May 5, 2017, the Company entered into an employment agreement with Mr. Jones to serve as its Chief Executive Officer and Chief Financial Officer. The agreement provided for an initial term ending December 31, 2018, and, unless either party provided written notice that the agreement would not be renewed, was renewed for an additional year on December 31, 2018 and each subsequent December 31; such non-renewal could be for any or for no stated reason. Mr. Jones resigned from the Company and provided notice of non-renewal on August 24, 2020.

The agreement provided that Mr. Jones would receive an annual base salary of $182,310 or such higher figure as may be agreed upon from time to time by the Board. Mr. Jones was also eligible to receive an annual bonus in accordance with MTI's executive bonus program, which is established annually by the Board at its sole discretion, and also could have received, at MTI's sole discretion, an additional, discretionary bonus in connection with his annual evaluation by the Board. Mr. Jones was also eligible to receive options to purchase MTI's common stock or other equity awards under MTI's equity incentive plans in such amounts as determined by the Board, and was entitled to such employee benefits, if any, as are generally provided to MTI's full-time employees.

The agreement also contained non-disparagement, non-solicitation, and confidentiality provisions.

In January 2019, the Compensation Committee increased Mr. Jones' annual base salary to $193,125. The Compensation Committee approved a $25,000 payment for Mr. Jones for his additional responsibilities and duties relative to the Company's initiative to establish EcoChain and associated investment in the field of vertically integrated energy production and crypto mining. As such, we accrued for Mr. Jones, as of December 31, 2019, a $25,000 payment. This accrual was paid in full during January 2020.

In January 2018, the Compensation Committee increased Mr. Jones' annual base salary to $187,500. The Compensation Committee approved a $100,000 payment for Mr. Jones under our executive bonus program based on the criteria the Board established under this program for 2018. As such, we accrued for Mr. Jones, as of December 31, 2018, a $100,000 payment. This accrual was paid in full during February 2019.

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In addition to base salary compensation, we consider short-term cash incentives to be an important tool in motivating and rewarding near-term performance against established short-term goals. We do not utilize a specific formula, but executive management is eligible for cash awards contingent upon achievement of individual, financial, or Company-wide performance criteria. The criteria are established to ensure that a reasonable portion of an executive's total annual compensation is performance-based.

We believe that the higher an executive's level of responsibility, the greater the portion of that executive's total earnings potential should be tied to the achievement of critical technological, operational and financial goals. We believe this strategy places the desired proportionate level of risk and reward on performance by the Chief Executive Officer and Chief Financial Officer and, when applicable, our other executive officers.

While performance targets are established at levels that are intended to be achievable, we believe that we have structured these incentives so that maximum bonus payouts would require a substantial level of both individual and Company performance.

Long-Term Equity Incentive Compensation

Equity awards typically take the form of stock options, although the Company has the ability to award restricted stock grants under its equity compensation plan and did so in January 2020. Authority to make equity awards to executive officers rests with our Compensation Committee. In determining the size of awards for new or current executives, we consider the competitive market, strategic plan performance, contribution to future initiatives, benchmarking of comparative equity ownership for executives in comparable positions at similar companies, individual option history, and recommendations of our Chief Executive Officer and Chairman.

We generally base our criteria for performance-based equity awards on one or more of the following long-term measurements:

These performance measurements support various initiatives identified by the Board as critical to our future success, and are either expressed as absolute in terms of success or failure, or will be measured in more qualitative terms.

The timing of all equity awards for our named executive officers have coincided with either employment anniversary dates or our annual meeting dates, or such equity awards are granted at the next scheduled meeting of the Compensation Committee following the completion or assignment of the applicable objectives. We do not time option grants to our executives in coordination with the release of material non-public information, nor do we impose any equity ownership guidelines on our executives.

The following table sets forth certain information regarding the options held and value of our named executive officer's unexercised options as of December 31, 2019.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2019

Name

 

Option Grant Date

 

Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable (1)

 

Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable

 

Option
Exercise
Price ($)

 

Option
Expiration
Date

Frederick W. Jones

 

03/12/2014

 

25,000

 

-

 

1.08

 

03/12/2024

 

 

03/05/2015

 

25,000

 

-

 

1.20

 

03/04/2025

 

 

01/14/2016

 

26,000

 

-

 

0.78

 

01/14/2026

 

 

12/12/2018

 

3,125

 

9,375 (2)

 

0.90

 

12/12/2028

 

 

12/12/2018

 

3,125

 

9,375 (2)

 

0.90

 

12/12/2028

 

 (1)        These options remain exercisable for 90 days after September 11, 2020, the effective date of Mr. Jones' resignation from the Company.

(2)         The options vest at the rate of 25% on each of the first four anniversaries of the date of the award, with first vest occurring on December 12, 2019, becoming fully exercisable on December 12, 2022. The options that were unvested as of September 11, 2020, the effective date of Mr. Jones' resignation from the Company, were terminated.

23


At December 31, 2019, there were no unvested stock awards held by our named executive officer.

Equity Awards to Officers

Equity awards were not granted during 2019.

 

MTI Equity Incentive Plans

As of December 31, 2019, we had three equity compensation plans: 1) the Amended and Restated 2006 Equity Incentive Plan; 2) the Amended and Restated 2012 Equity Incentive Plan; and 3) the 2014 Equity Incentive Plan. The Compensation Committee administers all of our equity compensation plans and has the authority to determine the terms and conditions of the awards granted under equity plans.

2006 Equity Incentive Plan

The 2006 Equity Incentive Plan, or 2006 Plan, was adopted by the Board on March 16, 2006 and approved by our shareholders on May 18, 2006. The 2006 Plan was amended and restated by the Board in 2009 to increase the number of shares of Common Stock issuable under the 2006 Plan from 250,000 shares to 600,000 shares, in 2011 to increase such number of shares issuable under thereunder to 1,200,000, and in 2016 to allow for the award agreement or another agreement entered into between the Company and the award grantee to vary the method of exercise of options issued under the 2006 Plan. The number of shares that could be awarded under the 2006 Plan and any outstanding awards has been adjusted for stock splits and other similar events. In connection with seeking shareholder approval of the 2012 Plan, the Company agreed not to make further awards under the 2006 Plan. As of December 31, 2019, options to purchase 23,000 shares of Common Stock were outstanding under the 2006 Plan, all of which were exercisable, with no shares reserved for future grants under the 2006 Plan.

2012 Equity Incentive Plan

The 2012 Equity Incentive Plan, or 2012 Plan, was adopted by the Board on April 14, 2012 and approved by our shareholders on June 14, 2012. The 2012 Plan was amended and restated by the Board effective October 20, 2016 to (i) permit the award agreement or another agreement entered into between the Company and the award grantee to vary the method of exercise of options issued under the 2012 Plan and (ii) permit another agreement entered into between the Company and the award grantee, in addition to the award agreement, to vary the provisions governing expiration of options or other awards under the 2012 Plan following termination of the award recipient's service with the Company. The 2012 Plan provides an aggregate of 600,000 shares of Common Stock that may be awarded or issued pursuant to the 2012 Plan. The number of shares that may be awarded under the 2012 Plan and awards outstanding may be subject to adjustment on account of any recapitalization, reclassification, stock split, reverse stock split and other dilutive changes in Common Stock. Under the 2012 Plan, the Board is authorized to issue stock options (incentive and nonqualified), stock appreciation rights, restricted stock, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisors of the Company and its subsidiaries. Incentive stock options may only be granted to employees of the Company and its subsidiaries. As of December 31, 2019, options to purchase 203,375 shares of Common Stock were outstanding under the 2012 Plan, of which 146,625 were exercisable, with 67,930 shares reserved for future grants of equity awards under the 2012 Plan.

2014 Equity Incentive Plan

The 2014 Equity Incentive Plan, or 2014 Plan, was adopted by the Board on March 12, 2014 and approved by our shareholders on June 11, 2014. The 2014 Plan provides an aggregate number of 500,000 shares of Common Stock that may be awarded or issued under the 2014 Plan. The number of shares that may be awarded under the 2014 Plan and awards outstanding may be subject to adjustment on account of any stock dividend, spin-off, stock split, reverse stock split, split-up, recapitalization, reclassification, reorganization, combination or exchange of shares, merger, consolidation, liquidation, business combination, exchange of shares or the like. Under the 2014 Plan, the Board-appointed administrator of the 2014 Plan is authorized to issue stock options (incentive and nonqualified), stock appreciation rights, restricted stock, restricted stock units, phantom stock, performance awards and other stock-based awards to employees, officers and directors of, and other individuals providing bona fide services to or for, the Company or any affiliate of the Company. Incentive stock options may only be granted to employees of the Company and its subsidiaries. As of December 31, 2019, options to purchase 301,500 shares of Common Stock were outstanding under the 2014 Plan, of which 222,750 were exercisable, with 1,000 shares reserved for future grants of equity awards under the 2014 Plan.

Perquisites and Other Benefits

Our executive officers are eligible to participate in similar benefit plans available to all our other employees including medical, dental, vision, group life, disability, accidental death and dismemberment, paid time off, and 401(k) plan benefits.

24


 

We also maintain a standard directors and officers liability insurance policy with coverage similar to the coverage typically provided by other small publicly held technology companies.

Potential Payments upon Termination

The following table sets forth a breakdown of termination payments and the net realizable value of stock options if Mr. Jones' employment with MTI Instruments had been terminated without cause and in connection with a change of control as of December 31, 2019; as noted above, Mr. Jones resigned from the Company effective September 11, 2020. The information assumes a price of $0.67 per share of our common stock as of December 31, 2019. Severance payments would have been made either on a salary continuation basis paid over the severance period or on a lump sum basis payable upon a fixed date subsequent to termination of employment.

Name

 

Severance
Term

 

Salary

 

Accrued
Vacation

 

Total
Potential
Payment

Frederick W. Jones

 

Twelve months salary & benefits

 

$193,125

 

$18,941

 

$212,066

 

Directors' Compensation

Directors who are also our employees, if any, are not compensated for serving on the Board.

On January 14, 2019, the Compensation Committee authorized non-employee directors to continue to receive cash compensation of $10,000 per year, with additional consideration for the Lead Independent Director of $5,000 per year. The Committee reviewed and reaffirmed the Board's prior approval of stock option compensation for board members, our Chief Executive Officer and Chief Financial Officer, and select professional staff.

Future director compensation will be determined by the Compensation Committee.

DIRECTOR COMPENSATION FOR FISCAL YEAR 2019

Name

Fees Earned or Paid in Cash/Total

Edward R. Hirshfield (1)

$10,000

Matthew E. Lipman (2)

$10,000

Thomas J. Marusak (3)

$10,000

David C. Michaels (4)

$15,000

William P. Phelan (5)

$10,000

Michael Toporek (6)

$10,000

 

(1)     As of December 31, 2019, Mr. Hirshfield had 7,500 options outstanding, 1,875 of which were exercisable.

(2)     As of December 31, 2019, Mr. Lipman had 7,500 options outstanding, 1,875 of which were exercisable.

(3)     As of December 31, 2019, Mr. Marusak had 44,500 options outstanding, 35,125 of which were exercisable.

(4)     As of December 31, 2019, Mr. Michaels had 43,000 options outstanding, 31,750 of which were exercisable.

(5)     As of December 31, 2019, Mr. Phelan had 98,500 options outstanding, 89,125 of which were exercisable.

(6)     As of December 31, 2019, Mr. Toporek had 7,500 options outstanding, 1,875 of which were exercisable.

Item 7:          Certain Relationships and Related Transactions, and Director Independence

The following is a summary of transactions among related parties that occurred since January 1, 2019, and any ongoing related party relationships:

Legal Services

During the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company incurred $84 thousand and $54 thousand, respectively, to Couch White, LLP for legal services associated with contract review. A partner at Couch White, LLP is an immediate family member of Thomas J. Marusak, one of our Directors. We expect to continue using Couch White for certain legal services during the remainder of 2020 and for the foreseeable future as well.

Soluna Transactions

We have entered into relationships with Soluna and a Soluna-affiliated entity, as discussed in the Business section of this Form 10.  Three of our directors have various affiliations with Soluna.

25


Director Michael Toporek (i) owns 90% of the equity of Soluna Technologies Investment I, LLC, which owns 62.5% of Soluna and (ii) owns 100% of the equity of MJT Park Investors, Inc., which owns 3.2% of Soluna, in each case on a fully-diluted basis. Mr. Toporek does not own directly, or indirectly, equity interest in Tera Joule, LLC, which owns 3.2% of Soluna; however, as a result of his 100% ownership of Brookstone IAC, Inc., which is the manager of Tera Joule, LLC, he has dispositive power over the equity interests that Tera Joule owns in Soluna.

Director Matthew E. Lipman serves as a director and as acting Secretary and Treasurer of Soluna. Mr. Lipman does not own directly, or indirectly, equity interest in Tera Joule, LLC, which owns 3.2% of Soluna; however, as a result of his position as a director and officer of Brookstone IAC, Inc., which is the manager of Tera Joule, LLC, he has dispositive power over the equity interests that Tera Joule owns in Soluna.

As a result, the approximate dollar value of the amount of Mr. Toporek's and Mr. Lipman's interest in the Company's transactions with Soluna through June 30, 2020, are $485 thousand and $0, respectively.

The Company's investment in Soluna is carried at the cost of investment and is $750 thousand as of September 30, 2020. The Company owns approximately 2.0% of Soluna's stock, calculated on a fully-diluted basis, as of September 30, 2020. 

Director William P. Phelan serves as a director of Soluna.

Director Independence

The Board has determined that Messrs. Hirshfield, Marusak, and Michaels are "independent directors," as defined by the listing standards of The Nasdaq Stock Market LLC.

Item 8:          Legal Proceedings

At any point in time, we may be involved in various lawsuits or other legal proceedings. Such lawsuits could arise from the sale of products or services or from other matters relating to our regular business activities, compliance with various governmental regulations and requirements, or other transactions or circumstances.

We have been named as a party in the December 19, 2019 United States Environmental Protection Agency (EPA) Demand Letter regarding the Malta Rocket Fuel Area Superfund Site ("Site") located in Malta and Stillwater, New York, in connection with an alleged release of hazardous materials into the environment. The EPA is seeking reimbursement of response costs from all named parties in the amount of approximately $358,000 plus interest in connection with the investigation and disposal activities associated with the various drum caches discovered at the Site, issuance of the Explanation of Significant Differences ("ESD") of the Site, and implementation of the work contemplated by the ESD. We consider the likelihood of a material adverse outcome with respect to this matter to be remote and do not currently anticipate that any expense or liability that we may incur as a result of this matter in the future will be material to the Company's business or financial condition.

Item 9:          Market Price of and Dividends on the Registrant's Common Equity and Related Shareholder Matters

Market Information

Our common stock is quoted on the OTC Markets Group quotation system on the OTC Pink - Current Information tier under the symbol "MKTY"; prior to March 20, 2018, our common stock was quoted on the OTC Markets' OTCQB venture stage marketplace for early stage and developing U.S. and international companies. Investors can find Real-Time quotes and market information for the Company on www.otcmarkets.com. The following table sets forth the high and low bid information for our common stock as reported on the OTC Market Group quotation system for the periods indicated:

 

High

Low

Fiscal Year Ended December 31, 2020

 

 

 

 

First Quarter

$

0.94

$

0.70

Second Quarter

 

0.51

 

0.43

 

 

 

 

 

Fiscal Year Ended December 31, 2019

 

 

 

 

First Quarter

$

1.56

$

0.80

Second Quarter

 

1.30

 

0.95

Third Quarter

 

1.08

 

0.74

Fourth Quarter

 

0.90

 

0.64

 

 

 

 

 

Fiscal Year Ended December 31, 2018

 

 

 

 

First Quarter

$

1.01

$

0.66

Second Quarter

 

-

 

-

Third Quarter

 

-

 

-

Fourth Quarter

 

-

 

-

26


 

The bid information set forth above was obtained from OTC Markets Group and reflects inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.

Holders

We have one class of common stock, par value $.01, and are authorized to issue 75,000,000 shares of common stock. At September 15, 2020, there were 9,570,677 shares of common stock issued and outstanding. At September 15, 2020, there were approximately 267 shareholders of record of the Company's common stock. The number of shareholders of record does not reflect the number of persons whose shares are held in nominee or "street" name accounts through brokers.

Dividends

Dividends are recorded when declared by our Board of Directors. During 2019, we declared and paid a special dividend of $3.4 million or $0.37 per common share. A portion of dividends were charged against paid in capital because the Company does not have sufficient retained earnings.

Other than 2019, we have never declared or paid dividends on our common stock and do not anticipate or contemplate paying cash dividends on our common stock in the foreseeable future. We currently intend to use all available funds to develop our business. We can give no assurance that we will ever have excess funds available to pay dividends. Any future determination as to the payment of dividends will depend upon critical requirements and limitations imposed by our credit agreements, if any, and such other factors as our Board of Directors may consider.

Equity Compensation Plans

We have three equity compensation plans, each of which was originally approved by our shareholders; the Mechanical Technology Incorporated 2006 Equity Incentive Plan (the "2006 Plan"), the Mechanical Technology Incorporated 2012 Equity Incentive Plan and the Mechanical Technology Incorporated 2014 Equity Incentive Plan (collectively, the "Plans"). The 2006 Plan was amended and restated and approved by our Board of Directors in 2011 and 2009. See "Item 6. Executive Compensation - MTI Equity Incentive Plans" and Note 11 of our consolidated financial statements for the years ended December 31, 2019 and 2018 in this Form 10 for a description of the Plans.

The following table presents information regarding these plans as of December 31, 2019:

Plan Category

Number of securities to be
issued upon exercise of outstanding
options, warrants and rights(1)
(a)

Weighted average exercise
price of outstanding
options, warrants and rights
(b)

Number of securities remaining
available for future issuance
under
equity compensation plans
(excluding securities reflected in
column (a))(2)
(c)

Equity compensation plans
approved by security holders

504,875

$              0.90

68,930

 

 

 

 

Equity compensation plans
not approved by security holders(3)

23,000

0.59

-0-

 

 

 

 

Total

527,875

 

68,930

___________________

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(1)      The securities available under the Plans for issuance and issuable pursuant to exercises of outstanding options may be adjusted in the event of a change in outstanding stock by reason of stock dividend, stock splits, reverse stock splits, etc.

(2)      No awards can currently be made out of the 2006 Plan.

(3)      Includes options outstanding under the 2006 Plan, which was amended by our Board of Directors without shareholder approval in 2009 and 2011 to increase the number of shares available for issuance thereunder. Under the 2006 Plan, the Board of Directors is authorized to issue stock options, stock appreciation rights, restricted stock, and other stock-based incentives to officers, employees, and others.

Item 10:      Recent Sales of Unregistered Securities

Not applicable.

Item 11:      Description of Registrant's Securities to be Registered

General

The Company is authorized to issue up to 75,000,000 shares of common stock, $0.01 par value. As of December 31, 2019, the Company had outstanding 9,570,677 shares of common stock. The holders of the Company's common stock are entitled to one vote per share held and have the right and power to vote on all matters on which a vote of shareholders is taken. Shareholders do not have cumulative voting rights in the election of directors.  The election of directors of the Company is decided by plurality vote and all other questions are decided by majority vote of shareholders present in person or by proxy, except as otherwise required by the New York Business Corporation Law ("NYBCL") or the Company's certificate of incorporation.  The Company's certificate of incorporation provides that, except in instances of removal for cause, the shareholders of the Corporation may only remove a director of the Company from service as a director after the affirmative vote of 75% or more of outstanding shares of stock. The NYBCL provides, among other things, that (1) the above discussed provision regarding removal of Company directors may only be altered, amended, or repealed by the affirmative vote of more than 75% of the outstanding shares of stock, (2) a plan of merger or consolidation involving the Company must be approved by two-thirds of all the outstanding shares of stock, (3) a sale or disposition of substantially all of the assets of the Company must be approved by two-thirds of all the outstanding shares of stock, and (4) any dissolution of the Company must be approved by two-thirds of all the outstanding shares of stock.

The Board of Directors of the Company is divided into three classes, with each class consisting, as nearly as may be possible, of one-third of the total number of directors, with the terms of the classes scheduled to expire in successive years. At each annual meeting of the shareholders of the Company, the shareholders elect the members of a single class of directors for three-year terms.

Holders of the Company's common stock are entitled to receive dividends when, as, and if declared by the Board of Directors of the Company, out of funds legally available therefore. Upon liquidation, dissolution, or the winding up of the Company, common shareholders are entitled to receive any remaining assets of the Company in proportion to the respective number of shares held after payment of and reservation for Company liabilities. The holders of shares of our common stock do not have any preemptive right to subscribe for or purchase any shares of any class of stock of the Company. The outstanding shares of common stock are not subject to redemption by the Company and are fully paid and non-assessable. To the extent that the Company issues additional shares of common stock, the relative interest in the Company of existing shareholders will likely be diluted.

Certain Provisions of Our Restated Certificate of Incorporation, Amended and Restated By-Laws

Our certificate of incorporation, our By-Laws, and a Section 382 Rights Plan of the Company, dated October 6, 2016 ("Rights Plan"), contain provisions and terms that may delay, defer, or prevent a tender offer or change in control of the Company that a shareholder might consider to be in his, her, or its best interests, including attempts that might result in a premium being paid over the market price for our shares. The Company expects that such provisions and terms will operate to discourage extraordinary corporate transactions with respect to the Company, such as takeover bids, and will instead encourage any potential acquiror of the Company to first correspond with the Company's Board of Directors.  The Rights Plan is additionally intended to preserve the Company's net operating loss carryforwards ("NOLs") and to act as a deterrent to any person (together with all affiliates and associates of such person) acquiring beneficial ownership of 4.99% or more of outstanding shares of common stock of the Company without approval of the Board of Directors of the Company (such person, an "Acquiring Person").  These provisions and terms include:

28


Item 12:      Indemnification of Directors and Officers

The NYBCL generally provides that a New York corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding by reason of the fact that such person was a director or officer of the corporation against judgments, fines, amounts paid in settlement, and reasonable expenses, including attorneys' fees actually and necessarily incurred, if such director or officer acted in good faith, for a purpose which he or she reasonably believed to be in the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his or her conduct was unlawful.  In connection with actions by or in right of a corporation, the NYBCL prohibits such indemnification for (1) pending or threatened actions that are settled or otherwise disposed of and (2) any claim, issue, or matter for which the applicable person is adjudged to be liable to the corporation (in each case, unless a court of competent jurisdiction determines such person is fairly and reasonably entitled to indemnification). The NYBCL further provides that any such indemnifiable person who has been successful on the merits in the defense of an applicable action or proceeding shall be affirmatively entitled to the foregoing indemnity. The NYBCL additionally permits a corporation to advance expenses incurred by a director or officer in defending an action or proceeding prior to final disposition upon receipt of an undertaking by the applicable person to repay such advanced amount if the advancement is ultimately found to not be permitted by law or otherwise.

In addition to the above, the Company, pursuant to its certificate of incorporation, has determined to indemnify any person made, or threatened to be made, a party to an action or proceeding (including if in the right of the Company) by reason of the fact that such person was a director or officer of the corporation against judgments, fines, amounts paid in settlement, and expenses, including attorneys' fees actually incurred, if such director or officer acted in good faith for a purpose which he or she reasonably believed to be in or not opposed to the best interests of the Company and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his or her conduct was unlawful. Despite the foregoing, this specific indemnity from the Company is not available to such a director or officer if a judgment or other final adjudication adverse to the director or officer establishes that his or her acts were in bad faith or were the result of active and deliberate dishonesty and were material to the applicable cause of action, or that he or she personally gained a financial profit or other advantage to which he or she was not legally entitled. The Company's certificate of incorporation also states that director of the Company shall not be liable to the Company or its shareholders for any breach of duty unless (1) a judgement or other final adjudication establishes that his or her acts or omissions involved bad faith, intentional misconduct, a knowing violation of law, or the personal gain of a financial profit or other advantage to which he or she was not legally entitled or (2) the acts involved certain declaration of dividends, purchase of Company shares, distribution of Company assets, or making of loans prohibited by the NYBCL.

Item 13:      Financial Statements and Supplementary Data

Our Consolidated Financial Statements begin on page F-1 and are incorporated in this Item 13 by reference.

Item 14:      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

29


Item 15:      Financial Statements and Exhibits

15(a) Financial Statements: The financial statements filed herewith are set forth on the Index to Consolidated Financial Statements on page F-1 of the separate financial section which accompanies this Form 10, which is incorporated herein by reference.

15(b) Exhibits: The exhibits listed in the Exhibit Index below are filed as part of this Form 10.

Exhibit
Number      

Description

3.1

Certificate of Incorporation of the registrant, as amended and restated (Incorporated by reference from Exhibit 3.1 of the Company's Form 10-K Report for the year ended December 31, 2007).

3.2

Certificate of Amendment of the Certificate of Incorporation of the registrant (Incorporated by reference from Exhibit 3.2 of the Company's Form 8-K Report filed May 15, 2008).

3.3

Certificate of Correction of Restated Certificate of Incorporation of Mechanical Technology, Incorporated as of October 17, 2016 and Certificate of Correction of Certificate of Amendment of the Certificate of Incorporation of Mechanical Technology Incorporated, as of October 17, 2016 (Incorporated by reference from Exhibit 3.1 of the Company's Form 8-K Report filed October 21, 2016).

3.4

Amended and Restated By-Laws of the registrant (Incorporated by reference from Exhibit 3.3 of the Company's Form 8-K Report filed December 14, 2007).

4.1

Rights Agreement, dated as of October 6, 2016, between Mechanical Technology, Incorporated and American Stock Transfer & Trust Company, LLC, as Rights Agent (Incorporated by reference from Exhibit 4.1 of the Company's Form 8-K Report filed October 6, 2016).

4.2

Amendment No. 1 dated as of October 20, 2016, to the Rights Agreement, dated as of October 6, 2016, between Mechanical Technology, Incorporated and American Stock Transfer & Trust Company, LLC, as Rights Agent (Incorporated by reference from Exhibit 4.2 of the Company's Form 8-K Report filed October 21, 2016).

10.1

Mechanical Technology, Incorporated Amended and Restated 2006 Equity Incentive Plan (Incorporated by reference from Exhibit 10.1 of the Company's Form 10-K Report for the year ended December 31, 2016).*

10.2

Form of Restricted Stock Agreement for Mechanical Technology, Incorporated Amended and Restated 2006 Equity Incentive Plan (Incorporated by reference from Exhibit 10.2 of the Company's Form 8-K Report filed July 11, 2011).*

10.3

Mechanical Technology, Incorporated Amended and Restated 2012 Equity Incentive Plan (Incorporated by reference from Exhibit 10.3 of the Company's Form 10-K Report for the year ended December 31, 2016).*

10.4

Form of Restricted Stock Agreement Notice for Board of Directors and Employees for Mechanical Technology, Incorporated 2012 Equity Incentive Plan (Incorporated by reference from Exhibit 10.2 of the Company's Form 10-Q Report for the quarter ended June 30, 2012).*

10.5

Form of Incentive Stock Option Notice for Employees for Mechanical Technology, Incorporated 2012 Equity Incentive Plan (Incorporated by reference from Exhibit 10.3 of the Company's Form 10-Q Report for the quarter ended June 30, 2012).*

10.6

Form of Non-Qualified Stock Option Notice for Employees for Mechanical Technology, Incorporated 2012 Equity Incentive Plan (Incorporated by reference from Exhibit 10.4 of the Company's Form 10-Q Report for the quarter ended June 30, 2012).*

10.7

Form of Non-Qualified Stock Option Notice for Board of Directors for Mechanical Technology, Incorporated 2012 Equity Incentive Plan (Incorporated by reference from Exhibit 10.5 of the Company's Form 10-Q Report for the quarter ended June 30, 2012).*

10.8

Form of Restricted Stock Award Agreement under the Mechanical Technology, Incorporated Amended and Restated 2012 Equity Incentive Plan (Incorporated by reference from Exhibit 10.8 of the Company's Registration Statement on Form 10 filed March 4, 2020).*

10.9

Mechanical Technology, Incorporated 2014 Equity Incentive Plan (Incorporated by reference to Exhibit A to the Registrant's Proxy Statement on Schedule 14A filed with the Commission on April 25, 2014). *

10.10

Form of Restricted Stock Grant Agreement under the Mechanical Technology, Incorporated 2014 Equity Incentive Plan (Incorporated by reference from Exhibit 10.10 of the Company's Registration Statement on Form 10 Report filed March 4, 2020).*

10.11

Form of Nonstatutory Stock Option Grant Agreement under the Mechanical Technology, Incorporated 2014 Equity Incentive Plan (Incorporated by reference from Exhibit 4.3 of the Company's Registration Statement on Form S-8 (File No. 333-196989) filed with the Commission on June 24, 2014). *

10.12      

Form of Incentive Stock Option Grant Agreement under the Mechanical Technology, Incorporated 2014 Equity Incentive Plan (Incorporated by reference from Exhibit 4.4 of the Company's Registration Statement on Form S-8 (File No. 333-196989) filed with the Commission on June 24, 2014). *

10.13

Lease dated August 10, 1999 between Carl E. Touhey and Mechanical Technology, Inc. (Incorporated by reference from Exhibit 10.38 of the Company's Form 10-K Report for the fiscal year ended September 30, 1999).

10.14

Amendment No. 1 to Lease Agreement Between Mechanical Technology Inc. and Carl E. Touhey dated September 29, 2009 (Incorporated by reference from Exhibit 10.166 of the Company's Form 10-K Report for the year ended December 31, 2009).

30


 

 

10.15

Amendment No. 2 to Lease Agreement Between MTI Instruments Inc. and Carl E. Touhey dated May 2, 2014 (Incorporated by reference from Exhibit 10.1 of the Company's Form 10-Q Report for the quarter ended March 31, 2014).

10.16

Amendment No. 3 to Lease Agreement Between MTI Instruments Inc. and CETF Properties, LLC dated January 1, 2018.

10.17

Amendment No. 4 to Lease Agreement Between MTI Instruments Inc. and CETF Properties, LLC dated December 4, 2019.

10.18#

Contract dated July 1, 2016 between Mechanical Technology, Incorporated and the U.S. Air Force (Incorporated by reference from Exhibit 10.1 of the Company's Form 10-Q Report for the quarter ended June 30, 2016).

10.19

Securities Purchase Agreement dated as of October 21, 2016, by and between Mechanical Technology, Incorporated and Brookstone Partners Acquisition XXIV, LLC (Incorporated by reference from Exhibit 10.22 of the Company's Form 8-K Report filed October 21, 2016).

10.20

Registration Rights Agreement dated as of October 21, 2016, by and between Mechanical Technology, Incorporated and Brookstone Partners Acquisition XXIV, LLC (Incorporated by reference from Exhibit 10.23 of the Company's Form 8-K Report filed October 21, 2016).

10.21

Form of Option Exercise and Stock Transfer Restriction Agreement between the Company and its Chief Executive Officer, Chief Financial Officer and Non-Employee Directors (Incorporated by reference from Exhibit 10.24 of the Company's Form 8-K Report filed October 21, 2016).

10.22

Operating and Management Agreement between Soluna Technologies, Ltd. and EcoChain, Inc. dated January 13, 2020 (Incorporated by reference from Exhibit 10.20 of the Company's Registration Statement on Form 10 Report filed March 4, 2020).

10.23

Class A Preferred Share Purchase Agreement dated January 13, 2020, among Soluna Technologies, Ltd., Mechanical Technology, Incorporated, and the other investors set forth on Exhibit A thereto (Incorporated by reference from Exhibit 10.21 of the Company's Registration Statement on Form 10 Report filed March 4, 2020).

10.24

Contingent Rights Agreement dated January 13, 2020, by and between Soluna Technologies, Ltd. and Mechanical Technology, Incorporated (Incorporated by reference from Exhibit 10.22 of the Company's Registration Statement on Form 10 Report filed March 4, 2020).

10.25

Side Letter Agreement dated January 13, 2020, by and between Soluna Technologies, Ltd. and Mechanical Technology, Incorporated (Incorporated by reference from Exhibit 10.23 of the Company's Registration Statement on Form 10 Report filed March 4, 2020).

10.26

Executive Employment Agreement, dated May 5, 2017, by and between Mechanical Technology, Incorporated and Frederick Jones (Incorporated by reference from Exhibit 10.1 of the Company's Form 8-K Report filed May 5, 2017). *

10.27

Commercial Line of Credit Agreement and Note dated May 7, 2020, by and between MTI Instruments Inc. and Pioneer Bank.

10.28

Business Loan Agreement dated May 7, 2020, by and between MTI Instruments Inc. and Pioneer Bank.

10.29

Commercial Loan Settlement Statement dated May 7, 2020, by and between MTI Instruments Inc. and Pioneer Bank.

10.30

Commercial Security Agreement dated May 7, 2020, by and between MTI Instruments Inc. and Pioneer Bank.

10.31

Unlimited Continuing Guaranty dated May 7, 2020, by and between MTI Instruments Inc. and Pioneer Bank.

10.32

Sale Order dated May 18, 2020, by and between GigaWatt, Inc. and the United States Bankruptcy Court Eastern District of Washington.

10.33

Bill of Sale dated May 20, 2020, by and between Mark D. Waldron, as Chapter 11 Trustee and EcoChain, Inc.

10.34

Assignment and Assumption Agreement (Tangible Property) dated May 20, 2020, by and between Mark D. Waldron, as Chapter 11 Trustee and EcoChain, Inc.

10.35

Intellectual Property Assignment Agreement dated May 20, 2020, by and between Mark D. Waldron, as Chapter 11 Trustee and EcoChain, Inc.

10.36

Agreement for Transfer of Responsibility for Telecommunication Services dated May 19, 2020, by and between Mark D. Waldron, as Chapter 11 Trustee and EcoChain, Inc.

10.37

Assignment of Lease Agreements dated February 4, 2020, by and between, on the one hand, David M. Carlson, Dorrinda M. Carlson, Enterprise Focus, Inc. and, on the other hand, Mark D. Waldron, in his capacity as the Chapter 11 Trustee.

10.38

Commercial Lease dated August 1, 2018, by and between TNT Business Complexes, LLC and Enterprise Focus, Inc. and Dave Carlson.

10.39

Commercial Lease dated November 14, 2014, by and between TNT Business Complexes, LLC and Dave Carlson /Enterprise Focus, Inc.

10.40

October 21, 2019 Certified Letter Regarding Option to Extend Commercial Lease dated November 14, 2014, by and between TNT Business Complexes, LLC and Dave Carlson /Enterprise Focus, Inc.

31


 

 

10.41

Amendment of Commercial Lease Agreement dated January 28, 2020, by and between Mark Waldron, as Chapter 11 Trustee and TNT Business Complexes, LLC.

21

Subsidiaries of the Registrant (Incorporated by reference from Exhibit 21 of the Company's Registration Statement on Form 10 Report filed March 4, 2020).

All exhibits for which no other filing information is given are filed herewith.

# Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been filed with the Securities and Exchange Commission pursuant to our application for confidential treatment. The items are identified in the exhibit with "**".

*              Represents management contract or compensation plan or arrangement.

 

 

 

 

32


 

 

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MECHANICAL TECHNOLOGY, INCORPORATED

 

 

 

Date: September 30, 2020

By:

/s/ Jessica Thomas

 

 

Jessica Thomas

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

33


MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX

Condensed Consolidated Balance Sheets As of June 30, 2020 (Unaudited) and December 31, 2019

F-2
   

Condensed Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2020 and 2019

F-3
   

Condensed Consolidated Statements of Changes in Equity For the Year Ended December 31, 2019 and the Six Months Ended June 30, 2020 (Unaudited)

F-4
   

Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2020 and 2019

F-5
   

Notes to Condensed Consolidated Financial Statements (Unaudited)

F-6
   

Report of Independent Registered Public Accounting Firm

F-16
   

Consolidated Balance Sheets As of December 31, 2019 and 2018

F-17
   

Consolidated Statements of Operations For the Years Ended December 31, 2019 and 2018

F-18
   

Consolidated Statements of Changes in Equity For the Years Ended December 31, 2019 and 2018

F-19
   

Consolidated Statements of Cash Flows For the Years Ended December 31, 2019 and 2018

F-20
   

Notes to Consolidated Financial Statements

F-21
 

F-1


 

Mechanical Technology, Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets

As of June 30, 2020 (Unaudited) and December 31, 2019

 

(Dollars in thousands, except per share)

June 30,

 

December 31,

 

 

2020

 

2019

 

Assets

 

Current Assets:

 

 

 

 

 

 

   Cash

$

1,351

 

$

2,510

 

   Equity investment

 

750

 

 

-

 

   Accounts receivable - less allowances of $0 in 2020 and 2019

 

1,256

 

 

745

 

   Inventories

 

1,422

 

 

924

 

   Prepaid expenses and other current assets

 

88

 

 

56

 

   Total Current Assets

 

4,867

 

 

4,235

 

Other assets

 

289

 

 

-

 

Deferred income taxes, net

 

395

 

 

395

 

Property, plant and equipment, net

 

466

 

 

174

 

Operating lease right-of-use assets

 

1,240

 

 

947

 

   Total Assets

$

7,257

 

$

5,751

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

Current Liabilities:

 

 

 

 

 

 

   Accounts payable

$

605

 

$

210

 

   Accrued liabilities

 

887

 

 

761

 

   Operating lease liability

 

283

 

 

171

 

      Total Current Liabilities

 

1,775

 

 

1,142

 

 

 

 

 

 

 

 

Other liabilities

 

203

 

 

-

 

Operating lease liability

 

957

 

 

776

 

      Total Liabilities

 

2,935

 

 

1,918

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

  Common stock, par value $0.01 per share, authorized 75,000,000; 10,586,170 issued in 2020 and 2019

 

106

 

 

106

 

  Additional paid-in capital

 

137,254

 

 

137,230

 

  Accumulated deficit

 

(119,274

)

 

(119,739

)

  Common stock in treasury, at cost, 1,015,493 shares in both 2020 and 2019

 

(13,764

)

 

(13,764

)

   Total Stockholders' Equity

 

4,322

 

 

3,833

 

   Total Liabilities and Stockholders' Equity

$

7,257

 

$

5,751

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-2


  Mechanical Technology, Incorporated and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

 

(Dollars in thousands, except per share)

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2020

 

2019

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

$

2,390

 

$

1,810

 

$

3,973

 

$

3,456

Cryptocurrency revenue

 

50

 

 

-

 

 

50

 

 

-

     Total revenue

 

2,440

 

 

1,810

 

 

4,023

 

 

3,456

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

     Cost of product revenue

 

631

 

 

530

 

 

1,159

 

 

1,114

     Research and product development expenses

 

362

 

 

354

 

 

764

 

 

659

     Selling, general and administrative expenses

 

847

 

 

635

 

 

1,642

 

 

1,312

Operating income

 

600

 

 

291

 

 

458

 

 

371

Other income, net

 

2

 

 

20

 

 

4

 

 

27

Income before income taxes

 

602

 

 

311

 

 

462

 

 

398

Income tax benefit

 

-

 

 

-

 

 

3

 

 

-

     Net income

$

602

 

$

311

 

$

465

 

$

398

 

 

 

 

 

 

 

 

 

 

 

 

Income per share (Basic)

$

.06

 

$

.03

 

$

.05

 

$

.04

Income per share (Diluted)

$

.06

 

$

.03

 

$

.05

 

$

.04

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (Basic)

 

9,570,677

 

 

9,570,677

 

 

9,570,677

 

 

9,525,875

Weighted average shares outstanding (Diluted)

 

9,651,615

 

 

9,655,100

 

 

9,655,514

 

 

9,603,291

 

 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-3


 Mechanical Technology, Incorporated and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

For the Year Ended December 31, 2019

and the Six Months Ended June 30, 2020 (Unaudited)

 

(Dollars in thousands,
except per share)

 

Common Stock

 

 

 

Treasury Stock

 

 

 

 

 

Shares

 

 

 

Amount

 

Additional Paid-
in Capital

 

 Accumulated
Deficit

 

 

 

Shares

 

 

 

Amount

Total  
Stockholders'
Equity
(Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2019

10,452,670

$

105

 

$

139,067

 

$

(118,462

)

1,015,493

$

(13,764

)

$

6,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

-

 

-

 

 

-

 

 

323

 

-

 

-

 

 

323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

-

 

-

 

 

31

 

 

-

 

-

 

-

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares - option exercises

133,500

 

1

 

 

73

 

 

-

 

-

 

-

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends

-

 

-

 

 

(1,941

)

 

(1,600

)

-

 

-

 

 

(3,541

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

10,586,170

$

106

 

$

137,230

 

$

(119,739

)

1,015,493

$

(13,764

)

$

3,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

-

 

-

 

 

-

 

 

465

 

-

 

-

 

 

465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

-

 

-

 

 

24

 

 

-

 

-

 

-

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

10,586,170

$

106

 

$

137,254

 

$

(119,274

)

1,015,493

$

(13,764

)

$

4,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-4


  Mechanical Technology, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30, 2020 and 2019

 

(Dollars in thousands)

Six Months Ended June 30,

 

2020

 

2019

 

Operating Activities

 

 

   

 

 

 

Net income

$

465

 

$

398

 

Adjustments to reconcile net income to net cash (used) provided by operating activities:

 

 

 

 

 

 

   Depreciation

 

53

 

 

44

 

  Provision for bad debts

 

-

 

 

3

 

   Stock based compensation

 

24

 

 

12

 

   Provision for excess and obsolete inventories

 

-

 

 

11

 

   Loss on disposal of equipment

 

3

 

 

3

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

   Accounts receivable

 

(511

)

 

(7

)

   Inventories

 

(498

)

 

(127

)

   Prepaid expenses and other current assets

 

(32

)

 

17

 

  Other assets

 

(289

)

 

-

 

   Accounts payable

 

395

 

 

4

 

  Other liabilities

 

203

 

 

-

 

   Accrued liabilities

 

126

 

 

(144

)

Net cash (used) provided by operating activities

 

(61

)

 

214

 

Investing Activities

 

 

 

 

 

 

 Purchases of equipment

 

(348

)

 

(23

)

 Purchase of stock in equity investment

 

(750

)

 

-

 

Net cash used in investing activities

 

(1,098

)

 

(23

)

Financing Activities

 

 

 

 

 

 

  Cash dividends on common stock

 

-

 

 

(3,541

)

  Proceeds from stock option exercises

 

-

 

 

74

 

Net cash used by financing activities

 

-

 

 

(3,467

)

Decrease in cash

 

(1,159

)

 

(3,276

)

Cash - beginning of period

 

2,510

 

 

5,771

 

Cash - end of period

$

1,351

 

$

2,495

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 F-5


 

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, was incorporated in 1961 and is headquartered in Albany, New York. The Company's core business is conducted through MTI Instruments, Inc. (MTI Instruments), a wholly-owned subsidiary, which designs, manufactures and markets its products also at the Albany, New York location. The Company has also recently formed EcoChain, Inc. ("EcoChain"), a wholly-owned subsidiary, to conduct a new line of business associated with cryptocurrency mining operations, and also purchased Class A Preferred Shares of Soluna Technologies, Ltd. ("Soluna"), a Canadian company that develops vertically-integrated, utility-scale computing facilities focused on cryptocurrency mining and cutting-edge blockchain applications.

MTI Instruments was incorporated in New York on March 8, 2000 and is a supplier of vibration measurement and balancing systems, precision linear displacement solutions, and wafer inspection tools. Our products consist of engine vibration analysis systems for both military and commercial aircraft and electronic gauging instruments for position, displacement and vibration application within the industrial manufacturing markets, as well as in the research, design and process development markets. These systems, tools and solutions are developed for markets and applications that require consistent operation of complex machinery and the precise measurements and control of products, processes, and the development and implementation of automated manufacturing, assembly.

EcoChain was incorporated in Delaware on January 8, 2020. EcoChain is establishing a new business line focused on cryptocurrency and the blockchain ecosystem. In connection with the creation of the new business line, EcoChain is developing a cryptocurrency mining facility to integrate with the bitcoin blockchain network. On May 21, 2020, EcoChain closed its acquisition of the intellectual property of Giga Watt, Inc. ("GigaWatt") and certain other property and rights of GigaWatt associated with GigaWatt's operation of a crypto-mining operation located in Washington State. The acquired assets will form the cornerstone of EcoChain's new cryptocurrency mining operation in Washington.

Liquidity

The Company has historically incurred significant losses primarily due to its past efforts to fund direct methanol fuel cell product development and commercialization programs and had a consolidated accumulated deficit of approximately $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 our operations. 

Based on the Company's 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, management believes it will have adequate resources to fund operations and capital expenditures for the remainder of 2020 and through the end of the third quarter of 2021. If cash generated from operations is insufficient to satisfy the Company's operational working capital and capital expenditure requirements, the Company may utilize the $300 thousand line of credit at MTI Instruments to fund these initiatives. The Company has no other formal commitments for funding future needs of the organization at this time and any additional financing during 2020 and through the third quarter of 2021, 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 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 for the year ended December 31, 2019.

The information presented in the accompanying condensed consolidated balance sheet as of December 31, 2019 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 and six months ended June 30, 2020 and June 30, 2019.

 

F-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.

Cryptocurrency Revenue Recognition

Cryptocurrency revenue consists of revenue recognized from EcoChain's' cryptocurrency mining facility. Revenue is recognized at the cryptocurrency's realized cash value based upon the rates at cryptocurrency exchanges where we are registered.

Equity Investment

The equity investment in Soluna is carried at the cost of investment and is $750 thousand as of June 30, 2020. The Company owns approximately 2.0% of Soluna's stock, calculated on a fully-diluted basis, as of June 30, 2020.

3.             Accounts Receivable

Accounts receivables consist of the following at:

 

(Dollars in thousands)

June 30, 2020

 

December 31, 2019

 

 

 

 

 

 

 

 

U.S. and State Government

$

770

        

$

57

 

Commercial

 

467

 

 

653

 

Allowance for doubtful accounts

 

-

 

 

-

 

Other

 

19

 

 

35

 

  Total

$

1,256

 

$

745

 

For the six months ended June 30, 2020 and 2019, the largest commercial customer represented 9.6% and 18.4%, respectively, and the largest governmental agency represented 42.3% and 13.5%, respectively, of the Company's product revenue. As of June 30, 2020 and December 31, 2019, the largest commercial receivable represented 7.1% and 22.1%, respectively, and the largest governmental receivable represented 62.2% and 8.0%, respectively, of the Company's accounts receivable. 

4.             Inventories

Inventories consist of the following at:

 

(Dollars in thousands)

June 30, 2020

      

December 31, 2019

 

 

 

 

 

 

 

 

Finished goods

$

244

 

$

302

 

Work in process

 

754

 

 

279

 

Raw materials

 

424

 

 

343

 

  Total

$

1,422

 

$

924

 

5.             Property, Plant and Equipment

Property, plant and equipment consist of the following at:

(Dollars in thousands)  

June 30, 2020

   

December 31, 2019

Leasehold improvements

$

219

 

$

39

Computers and related software

 

1,173

 

 

1,026

Machinery and equipment

 

883

 

 

915

Office furniture and fixtures

 

38

 

 

40

 

 

2,313

 

 

2,020

Less: Accumulated depreciation

 

1,847

 

 

1,846

 

$

466

 

$

174

In conjunction with the May 21, 2020 acquisition of the intellectual property of GigaWatt and certain other property and rights of GigaWatt, the Company obtained $180 thousand in leasehold improvements to support and form the cornerstone of EcoChain's new cryptocurrency mining operation. EcoChain intends to sell certain acquired equipment that is determined to be excess in nature so as to reduce EcoChain's overall transaction costs. EcoChain purchased the subject GigaWatt assets for cash consideration of $200 thousand and will be assuming certain contractual obligations of GigaWatt related to existing leases and utility power supply.

Depreciation expense was $53 thousand and $87 thousand for the six months ended June 30, 2020 and the year ended December 31, 2019, respectively.

 

F-7


 6.             Income Taxes

During the three and six months ended June 30, 2020, 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 2020 and permanent differences. For the three and six months ended June 30, 2019, the Company's effective income tax rate was 0%. Income tax benefit for the three and six months ended June 30, 2020 was $0 and $3 thousand, respectively. There was no income tax expense for the three and six months ended June 30, 2019.

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 at June 30, 2020 and December 31, 2019 was $10.3 million and $10.3 million, 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 $.01.  Each share of the Company's common stock is entitled to one vote on all matters submitted to stockholders. As of June 30, 2020 and December 31, 2019, there were 9,570,677 shares of common stock issued and outstanding.

Dividends

Dividends are recorded when declared by the Company's Board of Directors. During 2019, the Company declared and paid a special dividend of $3.4 million or $0.37 per common share. A portion of dividends were charged against paid in capital because the Company did not have sufficient retained earnings.

Reservation of Shares

The Company had reserved common shares for future issuance as follows as of June 30, 2020

Stock options outstanding

 

            542,430

 

Common stock available for future equity awards or issuance of options

 

              54,375

 

Number of common shares reserved

 

            596,805

 

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.

 

F-8


 

Not included in the computation of earnings per share, assuming dilution, for the six months ended June 30, 2020, were options to purchase 491,430 shares of the Company's common stock. These potentially dilutive items were excluded because the average market price of the common stock exceeded the exercise prices of the options. Not included in the computation of earnings per share, assuming dilution, for the three months ended June 30, 2020, were options to purchase 491,430 shares of the Company's common stock. These potentially dilutive items were excluded because the average market price of the common stock exceeded the exercise prices of the options.

Not included in the computation of earnings per share, assuming dilution, for the six months ended June 30, 2019, were options to purchase 249,000 shares of the Company's common stock. These potentially dilutive items were excluded even though the average market price of the common stock exceeded the exercise prices for a portion of the options because the calculation of incremental shares resulted in an anti-dilutive effect. Not included in the computation of earnings per share, assuming dilution, for the three months ended June 30, 2019, were options to purchase 249,000 shares of the Company's common stock. These potentially dilutive items were excluded even though the average market price of the common stock exceeded the exercise prices for a portion of the options because the calculation of incremental shares resulted in an anti-dilutive effect.

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 June 30, 2020 and December 31, 2019, the Company has no assets recorded under finance leases.

 Lease expense for these leases is recognized on a straight-line basis over the lease term. Total lease costs were comprised of the following:

(Dollars in thousands)

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2020

 

2019

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

$

66

 

$

56

 

$

121

 

$

111

Short-term lease cost

 

2

 

 

-

 

 

2

 

 

-

     Total net lease cost

$

68

 

$

56

 

$

123

 

$

111

 

 

 

 

 

 

 

 

 

 

 

 

Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases.

Supplemental cash flows information related to leases was as follows:

(Dollars in thousands)

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2020

 

2019

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Operating cash flows from operating leases

$

65

 

$

56

 

$

121

 

$

111

 

 

 

 

 

 

 

 

 

 

 

 

Non-Cash Activity Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

 

 

 

 

 

    Operating leases

$

387

 

$

-

 

$

387

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 F-9


Supplemental balance sheet information related to leases was as follows:

(Dollars in thousands, except lease term and discount rate)

June 30, 2020

 

December 31, 2019

 

 

 

 

 

 

 

 

Operating leases:

 

 

 

 

 

 

     Operating lease ROU asset

$

1,240

 

$

947

 

 

 

 

 

 

 

 

     Current operating lease liabilities

$

283

 

$

171

 

     Non-current operating lease liabilities

 

957

 

 

776

 

       Total operating lease liabilities

$

1,240

 

$

947

 

 

 

 

 

 

 

 

Operating leases:

 

 

 

 

 

 

     ROU assets

$

1,353

 

$

1,164

 

     Less: accumulated amortization

 

(113

)

 

(217

)

     ROU assets, net

$

1,240

 

$

947

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term (in years):

 

 

 

 

 

 

     Operating leases

 

4.12

 

 

4.92

 

 

 

 

 

 

 

 

Weighted Average Discount Rate:

 

 

 

 

 

 

     Operating leases

 

5.23

%

 

5.85

%

 

 

 

 

 

 

 

Maturities of operating lease liabilities are as follows as of June 30:

 (Dollars in thousands)

 

 

 

 

 

 

 

2020

 

2020

 

$

 341

 

2021

 

 

342

 

2022

 

 

342

 

2023 

 

 

256

 

2024

 

 

 103

 

Total lease payments

 

 

1,384

 

  Less: imputed interest

 

 

(144

)

     Total lease obligations

 

 

1,240

 

  Less: current obligations

 

 

283

 

     Long-term lease obligations

 

957 

 

 

 

 

 

 

As of June 30, 2020, there were no additional operating lease commitments that had not yet commenced.

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)

Six Months Ended
June 30,

 

2020

 

2019

 

Balance, January 1

$

16

 

$

24

 

Accruals for warranties issued

 

10

 

 

9

 

Settlements made (in cash or in kind)

 

(3

)

 

(2

)

Balance, end of period

$

23

 

$

31

 

Employment Agreement

On May 5, 2017, the Company entered into an employment agreement with one employee. The agreement provides for an initial term ending December 31, 2018, and, unless either party provides written notice that the agreement will not be renewed, is renewed for an additional year on December 31, 2018 and each subsequent December 31; such non-renewal may be for any or for no stated reason. The agreement provides for certain payments upon termination of employment under certain circumstances. As of June 30, 2020, the Company's potential minimum obligation to this employee was approximately $228 thousand.

 

F-10


 Contingencies:

 Legal

We are subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. When applicable, we accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.

The Company has been named as a party in the December 19, 2019 United States Environmental Protection Agency (EPA) Demand Letter regarding the Malta Rocket Fuel Area Superfund Site (Site) located in Malta and Stillwater, New York in connection with an alleged release of hazardous materials into the environment. The EPA is seeking reimbursement of response costs from all named parties in the amount of approximately $358,000 plus interest in connection with the investigation and disposal activities associated with the various drum caches discovered at the Site, issuance of the Explanation of Significant Differences ("ESD") of the Site, and implementation of the work contemplated by the ESD. The Company considers the likelihood of a material adverse outcome to be remote and does not currently anticipate that any expense or liability it may incur as a result of these matters in the future will be material to the Company's financial condition. 

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 June 30, 2020 and December 31, 2019, $317 thousand and $312 thousand, respectively, of principal and interest are available to convert into shares of common stock of MeOH Power, Inc. Any adjustments to the allowance are recorded as miscellaneous expense during the period incurred.

Legal Services

During the three and six months ended June 30, 2020, the Company incurred $19 thousand and $77 thousand, respectively, to Couch White, LLP for legal services associated with contract review. During the three and six months ended June 30, 2019, the Company incurred $7 thousand and $14 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. EcoChain is establishing a new business line focused on cryptocurrency and the blockchain ecosystem. In connection with the creation of the new business line, EcoChain is developing a cryptocurrency mining facility that it intends to integrate with the bitcoin blockchain network. Pursuant to an Operating and Management Agreement dated January 13, 2020, by and between EcoChain and Soluna, a Canadian company that develops vertically-integrated, utility-scale computing facilities focused on cryptocurrency mining and cutting-edge blockchain applications. Soluna is assisting the Company in developing the cryptocurrency mining facility, which Soluna will operate. 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 fee of $65 thousand and revenue-based success payments in the event EcoChain achieves profitability. Pursuant to the Operating and Management Agreement, during the developmental phase of the cryptocurrency mining facility, Soluna will gather and analyze information with respect to EcoChain's cryptocurrency mining efforts and otherwise produce budgets, financial models, and technical and operational plans for delivery to EcoChain (the "Deliverables"), that can assist with the efficient construction of a cryptocurrency mine. Following the conclusion of the developmental phase of the project and EcoChain's acceptance of the Deliverables on March 23, 2020, the agreement provides that Soluna, on behalf of EcoChain, will commence operations of the cryptocurrency mine in a manner that will allow EcoChain to mine and sell cryptocurrency. EcoChain plans to sell for U.S. dollars all cryptocurrency it mines and will not be in the business of accumulating cryptocurrency on its balance sheet for speculative gains.   

 

F-11


 

Simultaneously with the entering into of the Operating and Management Agreement, the Company made a strategic investment in Soluna by purchasing 158,730 Class A Preferred Shares of Soluna for an aggregate purchase price of $500 thousand. After acceptance of the Deliverables on March 23, 2020, the Company purchased an additional 79,365 Class A Preferred Shares of Soluna for an aggregate purchase price of $250 thousand. The Company also has the right, but not the obligation, to purchase additional equity securities of Soluna and its subsidiaries (including additional Class A Preferred Shares of Soluna) if Soluna secures certain levels or types of project financing with respect to its own wind power generation facilities. The Company has additionally entered into a Side Letter Agreement, dated January 13, 2020, with Soluna Technologies Investment I, LLC, a Delaware limited liability company that owns, on a fully diluted basis, 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. The Company's two Brookstone-affiliated directors also serve as directors and, in one case, as an officer, of Soluna and also have ownership interest in Soluna. In light of these relationships, the various transactions by and between the Company and EcoChain, on the one hand, and Soluna, on the other hand, were negotiated on behalf of the Company and EcoChain via an independent investment committee of the Company's board of directors and separate legal representation. The transactions were subsequently unanimously approved by both the independent investment committee and the full board of directors of the Company.

Two of our directors have various affiliations with Soluna.

Director Michael Toporek (i) owns 90% of the equity of Soluna Technologies Investment I, LLC, which owns 62.5% of Soluna and (ii) owns 100% of the equity of MJT Park Investors, Inc., which owns 3.2% of Soluna, in each case on a fully-diluted basis. Mr. Toporek does not own directly, or indirectly, equity interest in Tera Joule, LLC, which owns 3.2% 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 Tera Joule owns in Soluna.

Director Matthew E. Lipman serves as a director and as acting Secretary and Treasurer of Soluna. Mr. Lipman does not own directly, or indirectly, equity interest in Tera Joule, LLC, which owns 3.2% 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 Tera Joule owns in Soluna.

As a result, the approximate dollar value of the amount of Mr. Toporek's and Mr. Lipman's interest in the Company's transactions with Soluna are $485 thousand and $0, respectively.

The Company's investment in Soluna is carried at cost and is $750 thousand as of June 30, 2020. The Company owns approximately 2.0% of Soluna's outstanding common stock as of June 30, 2020.

10.          Stock Based Compensation

Restricted Stock

On January 14, 2020, the Company awarded to members of the Company's Investment Committee and to the Company's CEO special one-time restricted stock awards totaling 68,930 shares of Common Stock (67,930 from the Company's 2012 Equity Incentive Plan and 1,000 from the Company's 2014 Equity Incentive Plan) valued at $0.99 per share based on the closing market price of the Company's common stock on the date of grant. The shares would be restricted for one year, and have a two-year total vesting, with half vesting on the first anniversary of the award date and the remainder vesting on the second anniversary of the award date.

11.          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 high performance test and measurement instruments and systems, wafer characterization tools for the semiconductor and solar industries and computer-based balancing systems for aircraft engines. The Cryptocurrency segment is focused on cryptocurrency and the blockchain ecosystem. The Company's principal operations are located in North America.

The accounting policies of the Test and Measurement Instrumentation and Cryptocurrency segments are similar to those described in the summary of significant accounting policies herein and in the Company's Annual Report. The Company evaluates performance based on profit or loss from operations before income taxes, accounting changes, items management does not deem relevant to segment performance, and interest income and expense. Inter-segment sales and expenses are not significant.

 

F-12


 

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 June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

Product revenue

$

2,390

 

$

-

 

$

-

 

$

2,390

Cryptocurrency revenue

 

-

 

 

50

 

 

-

 

 

50

Research and product development expenses

 

362

 

 

-

 

 

-

 

 

362

Selling, general and administrative expenses

 

437

 

 

109

 

 

301

 

 

847

Segment profit / (loss) from operations before income taxes

 

831

 

 

(73

)

 

(156

)

 

602

Segment profit / (loss) 

 

831

 

 

(73

)

 

(156

)

 

602

Total assets

 

3,687

 

 

1,090

 

 

2,480

 

 

7,257

Capital expenditures

 

5

 

 

335

 

 

-

 

 

340

Depreciation and amortization

 

21

 

 

9

 

 

-

 

 

30

 

(Dollars in thousands)

 

Test and
Measurement
Instrumentation

  

 

Cryptocurrency

  

 

   Other   

  

 

Condensed
Consolidated
Totals

Six months ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

Product revenue

$

3,973

 

$

-

 

$

-

 

$

3,973

Cryptocurrency revenue

 

-

 

 

50

 

 

-

 

 

50

Research and product development expenses

 

764

 

 

-

 

 

-

 

 

764

Selling, general and administrative expenses

 

853

 

 

180

 

 

609

 

 

1,642

Segment profit / (loss) from operations before income taxes

 

959

 

 

(144

)

 

(353

)

 

462

Segment profit / (loss)

 

959

 

 

(144

)

 

(350

)

 

465

Total assets

 

3,687

 

 

1,090

 

 

2,480

 

 

7,257

Capital expenditures

 

13

 

 

335

 

 

-

 

 

348

Depreciation and amortization

 

44

 

 

9

 

 

-

 

 

53

The following table presents the details of "Other" segment loss:

 

(Dollars in thousands)

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2020

 

2020

 

Corporate and other (expenses) income:

 

 

 

 

 

 

 

 

  Salaries and benefits

 

(119

)

 

 

(240

)

 

  Income tax (expense) benefit

 

-

 

 

 

3

 

 

  Other expense, net

 

(37

)

 

 

(113

)

 

Total income (expense)

$

(156

)

 

$

(350

)

 

12.          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 June 30, 2020, there were no amounts outstanding under the line of credit.

 

F-13


13.          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.

In December 2019, the FASB issued ASU 2019-12 (Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes). This standard removes exceptions to the general principles in Topic 740 for allocating tax expense between financial statement components, accounting basis differences stemming from an ownership change in foreign investments and interim period income tax accounting for year-to-date losses that exceed projected losses. The standard will be effective for the Company for annual reporting periods beginning after December 15, 2020 and interim periods within those fiscal years, and while early adoption is permitted, the Company does not expect to elect that option. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. At this time, the Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01 (Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)). This standard clarifies certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. This standard improves current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. The standard will be effective for the Company for annual reporting periods beginning after December 15, 2020 and interim periods within those fiscal years, and while early adoption is permitted, the Company does not expect to elect that option. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. At this time, the Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

 

F-14


 

Accounting Updates Recently Adopted by the Company

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, 2019.

14.          Subsequent Events

In accordance with U.S. GAAP, the Company has evaluated subsequent events for disclosure between the condensed consolidated balance sheet date of June 30, 2020 and September 30, 2020, the date the financial statements were available to be issued.

On July 1, 2020, Jessica Thomas was appointed as the Chief Financial Officer ("CFO") of the Company. Rick Jones, who had served as the Company's CFO since 2009, remained in his current role as President and Chief Executive Officer of the Company until his resignation, which was effective September 11, 2020.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-15


 

INDEPENDENT AUDITOR'S REPORT

 

To the Shareholders and Board of Directors of
Mechanical Technology, Incorporated and Subsidiaries

We have audited the accompanying consolidated financial statements of Mechanical Technology, Incorporated and Subsidiaries (the "Company"), which comprise the consolidated balance sheet as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. 

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. 

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.  We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.  The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control.  Accordingly, we express no such opinion.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mechanical Technology, Incorporated and Subsidiaries as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. 

 

/s/ Wojeski & Company CPAs, P.C.

Albany, New York
February 18, 2020

F-16


 

Mechanical Technology, Incorporated and Subsidiaries

Consolidated Balance Sheets

As of December 31, 2019 and December 31, 2018

 

(Dollars in thousands, except per share)

December 31,

 

December 31,

 

 

2019

 

2018

 

Assets

 

Current Assets:

 

 

 

 

 

 

   Cash

$

2,510

 

$

5,771

 

   Accounts receivable - less allowances of $0 in 2019 and $2 in 2018

 

745

 

 

871

 

   Inventories

 

924

 

 

863

 

   Prepaid expenses and other current assets

 

56

 

 

57

 

   Total Current Assets

 

4,235

 

 

7,562

 

Deferred income taxes, net

 

395

 

 

395

 

Property, plant and equipment, net

 

174

 

 

181

 

Operating lease right-of-use assets

 

947

 

 

-

 

   Total Assets

$

5,751

 

$

8,138

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

Current Liabilities:

 

 

 

 

 

 

   Accounts payable

$

210

 

$

201

 

   Accrued liabilities

 

761

 

 

991

 

   Operating lease liability

 

171

 

 

-

 

      Total Current Liabilities

 

1,142

 

 

1,192

 

 

 

 

 

 

 

 

Operating lease liability

 

776

 

 

-

 

      Total Liabilities

 

1,918

 

 

1,192

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

  Common stock, par value $0.01 per share, authorized 75,000,000; 10,586,170 issued in 2019 and 10,452,670 issued in 2018

 

106

 

 

105

 

  Additional paid-in capital

 

137,230

 

 

139,067

 

  Accumulated deficit

 

(119,739

)

 

(118,462

)

  Common stock in treasury, at cost, 1,015,493 shares in both 2019 and 2018

 

(13,764

)

 

(13,764

)

   Total Stockholders' Equity

 

3,833

 

 

6,946

 

   Total Liabilities and Stockholders' Equity

$

5,751

 

$

8,138

 

 

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

F-17


 

Mechanical Technology, Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Years Ended December 31, 2019 and 2018

 

(Dollars in thousands, except per share)

Years Ended

 

 

December 31,

 

 

2019

 

2018

 

 

 

 

 

 

 

 

Product revenue

$

6,571

 

$

8,062

 

Operating costs and expenses:

 

 

 

 

 

 

     Cost of product revenue

 

2,205

 

 

2,327

 

     Research and product development expenses

 

1,381

 

 

1,236

 

     Selling, general and administrative expenses

 

2,726

 

 

2,976

 

Operating income

 

259

 

 

1,523

 

Other income (expense), net

 

36

 

 

21

 

Income before income taxes

 

295

 

 

1,544

 

Income tax benefit 

 

28

 

 

392

      Net income

$

323

 

$

1,936

 

 

 

 

 

 

 

 

Income per share (Basic)

$

.03

 

$

.21

 

Income per share (Diluted)

$

.03

 

$

.20

 

 

 

 

 

 

 

 

Weighted average shares outstanding (Basic)

 

9,548,460

 

 

9,382,017

 

Weighted average shares outstanding (Diluted)

 

9,602,548

 

 

9,449,852

 

 

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

F-18


Mechanical Technology, Incorporated and Subsidiaries
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2019 and 2018

 

(Dollars in thousands,
except per share)

 

Common Stock

 

 

 

Treasury Stock

 

 

 Shares

 Amount

 Additional
Paid-
in
Capital

 Accumulated

Deficit

 Shares

 Amount

Total  
Stockholders'
Equity
(Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2018

10,378,975

$

104

 

$

139,022

 

$

(120,398

)

1,015,493

$

(13,764

)

$

4,964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

-

 

-

 

 

-

 

 

1,936

 

-

 

-

 

 

1,936

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

-

 

-

 

 

6

 

 

-

 

-

 

-

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares - option exercises

73,695

 

1

 

 

39

 

 

-

 

-

 

-

 

 

40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

10,452,670

$

105

 

$

139,067

 

$

(118,462

)

1,015,493

$

(13,764

)

$

6,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

-

 

-

 

 

-

 

 

323

 

-

 

-

 

 

323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

-

 

-

 

 

31

 

 

-

 

-

 

-

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares - option exercises

133,500

 

1

 

 

73

 

 

-

 

-

 

-

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends

-

 

-

 

 

(1,941

)

 

(1,600

)

-

 

-

 

 

(3,541

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

10,586,170

$

106

 

$

137,230

 

$

(119,739

)

1,015,493

$

(13,764

)

$

3,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

F-19


Mechanical Technology, Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2019 and 2018

(Dollars in thousands)

Year Ended December 31,

 

 

 

2019

 

2018

 

Operating Activities

 

 

 

 

 

 

Net income

$

323

 

$

1,936

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

   Depreciation

 

87

 

 

96

 

  Provision (recovery) for bad debts

 

1

 

 

-

 

  Deferred income taxes

 

-

 

 

(395

)

   Stock based compensation

 

31

 

 

6

 

   Provision (recovery) for excess and obsolete inventories

 

33

 

 

(82

)

   Loss on disposal of equipment

 

3

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

   Accounts receivable

 

125

 

 

535

 

   Inventories

 

(94

)

 

(87

)

   Prepaid expenses and other current assets

 

1

 

 

33

 

   Accounts payable

 

9

 

 

(124

)

   Accrued liabilities

 

(230

)

 

78

 

Net cash provided by operating activities

 

289

 

 

1,996

 

Investing Activities

 

 

 

 

 

 

 Purchases of equipment

 

(83

)

 

(93

)

Net cash used in investing activities

 

(83

)

 

(93

)

Financing Activities

 

 

 

 

 

 

  Cash dividends on common stock

 

(3,541

)

 

-

 

  Proceeds from stock option exercises

 

74

 

 

40

 

Net cash (used) provided by financing activities

 

(3,467

)

 

40

 

(Decrease) increase in cash

 

(3,261

)

 

1,943

 

Cash - beginning of period

 

5,771

 

 

3,828

 

Cash - end of period

$

2,510

 

$

5,771

 

 

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

F-20


Notes to Consolidated Financial Statements

1.                   Nature of Operations

Description of Business

Mechanical Technology, Incorporated (MTI or the Company), a New York corporation, was incorporated in 1961. The Company's core business is conducted through MTI Instruments, Inc. (MTI Instruments), a wholly-owned subsidiary.

MTI Instruments was incorporated in New York on March 8, 2000 and is a supplier of precision linear displacement solutions, vibration measurement and balancing systems, and wafer inspection tools. Our products consist of 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, and engine vibration analysis systems for both military and commercial aircraft. These tools, systems and solutions are developed for markets and applications that require the precise measurements and control of products, processes, and the development and implementation of automated manufacturing, assembly, and consistent operation of complex machinery.

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 $119.7 million as of December 31, 2019. As of December 31, 2019, the Company had working capital of approximately $3.1 million, no debt, $6 thousand in outstanding commitments for capital expenditures, and approximately $2.5 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 $2.5 million and its projected 2020 cash flow pursuant to management's plans, management believes it will have adequate resources to fund operations and capital expenditures for the year ending December 31, 2020 and through the end of the first quarter of 2021. If cash generated from operations is insufficient to satisfy the Company's operational working capital and capital expenditure requirements, 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, if required, may not be available to us on acceptable terms or at all.

2.                   Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, MTI Instruments. All intercompany balances and transactions are eliminated in consolidation.

Use of Estimates

The consolidated financial statements of the Company have been prepared in accordance with United States of America Generally Accepted Accounting Principles (U.S. GAAP), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Inventories

Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. The Company periodically reviews inventory quantities on hand and records a provision for excess, slow moving and obsolete inventory based primarily on our estimated forecast of product demand, as well as based on historical usage. The Company also provides estimated inventory allowances for inventory whose carrying value is in excess of net realizable value. Demand and usage for products and materials can fluctuate significantly. A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. Although the Company makes every effort to assure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and our reported operating results. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, the Company would increase our reserve in the period in which we made such a determination and record a charge to cost of product revenue.

 

F-21


Property, Plant, and Equipment

Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives as follows:

Leasehold improvements

Lesser of the life of the lease or the useful life of the improvement

Computers and related software

3 to 5 years

Machinery and equipment

3 to 10 years

Office furniture, equipment and fixtures

2 to 10 years

Significant additions or improvements extending assets' useful lives are capitalized; normal maintenance and repair costs are expensed as incurred. The costs of fully depreciated assets remaining in use are included in the respective asset and accumulated depreciation accounts. When items are sold or retired, related gains or losses are included in net (loss) income.

Income Taxes

The Company is subject to income taxes in the U.S. (federal and state). As part of the process of preparing our consolidated financial statements, the Company calculates income taxes for each of the jurisdictions in which the Company operates. This involves estimating actual current taxes due together with assessing temporary differences resulting from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities, loss carryforwards and tax credit carryforwards, for which income tax benefits are expected to be realized in future years. A valuation allowance has been established to reduce deferred tax assets, if it is more likely than not that all, or some portion, of such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date.

Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the Company's net deferred tax assets. The Company considers all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income amongst other items in determining the Company's valuation allowance. In addition, the Company's assessment requires the Company to schedule future taxable income in accordance with accounting standards that address income taxes to assess the appropriateness of a valuation allowance, which further requires the exercise of significant management judgment.

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

The Company is currently subject to audit in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in an audit, litigation, or in applicable laws, regulations, administrative practices, principles, and interpretations could have a material effect on the Company's operating results or cash flows in the period or periods in which such developments occur, as well as for prior and in subsequent periods.

Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating the Company's provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. The Company's effective tax rates could be affected by numerous factors, such as intercompany transactions, earnings being lower than anticipated in jurisdictions where the Company has lower statutory rates and higher than anticipated in jurisdictions where the Company has higher statutory rates, the applicability of special tax regimes, losses incurred in jurisdictions for which the Company is not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies, changes to its existing businesses and operations, acquisitions and investments and how they are financed, changes in the Company's stock price, changes in its deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations.

 

F-22


Equity Method Investments

The Company's consolidated net income (loss) will include our proportionate share, if any, of the net income or loss of our equity method investee. When the Company records its proportionate share of net income, it increases equity income (loss), net in our consolidated statements of operations and our carrying value in that investment. Conversely, when the Company records its proportionate share of a net loss, it decreases equity income (loss), net in our consolidated statements of operations and our carrying value in that investment. When the Company's carrying value in an equity method investee company has been reduced to zero, no further losses are recorded in the Company's financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.

The Company records its investment in MeOH Power, Inc. using the equity method of accounting. The fair value of the Company's interest in MeOH Power, Inc. has been determined to be $0 as of December 31, 2019 and December 31, 2018, based on MeOH Power, Inc.'s net position and expected cash flows. As of December 31, 2019, the Company retained its ownership of approximately 47.5% of MeOH Power, Inc.'s outstanding common stock, or 75,049,937 shares. The number of shares of MeOH Power, Inc.'s common stock authorized for issuance is 240,000,000 as of December 31, 2019.

Fair Value Measurement

The estimated fair value of certain financial instruments, including cash, accounts receivable and short-term debt approximates their carrying value due to their short maturities and varying interest rates. "Fair value" is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation methods, the Company is required to provide the following information according to the fair value accounting standards. These standards established a fair value hierarchy as specified that ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities are classified and disclosed in one of the following three categories:

Level 1:       Quoted market prices in active markets for identical assets or liabilities, which includes listed equities.

Level 2:       Observable market-based inputs or unobservable inputs that are corroborated by market data. These items are typically priced using models or other valuation techniques. These models are primarily financial industry-standard models that consider various assumptions, including the time value of money, yield curves, volatility factors, as well as other relevant economic measures.

Level 3:       These use unobservable inputs that are not corroborated by market data. These values are generally estimated based upon methodologies utilizing significant inputs that are generally less observable from objective sources.

Revenue Recognition, 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 the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

If the product requires that the Company provide installation, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance criteria, such as on-site customer acceptance and/or acceptance after install, then revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions is satisfied. The Company may also record unearned revenues, which include payments for other offerings for which we have been paid in advance. The resulting revenue would be earned when we transfer control of the product or service. As of December 31, 2019 and December 31, 2018, the Company had no deferred or unearned revenue.

 

F-23


MTI Instruments currently has distributor agreements in place for the international sale of general instrument and semiconductor products in certain global regions. Such agreements grant a distributor the right of first refusal to act as distributor for such products in the distributor's territory. In return, the distributor agrees to not market other products which are considered by MTI Instruments to be in direct competition with MTI Instruments' products. The distributor is allowed to purchase MTI Instruments' equipment at a price which is discounted off the published domestic/international list prices. Such list prices can be adjusted by MTI Instruments during the term of the distributor agreement. Generally, payment terms with the distributor are standard net 30 days; however, on occasion, extended payment terms have been granted. Title and risk of loss of the product passes to the distributor upon delivery to the independent carrier (standard "free-on-board" factory), and the distributor is responsible for any required training and/or service with the end-user. The sale (and subsequent payment) between MTI Instruments and the distributor is not contingent upon the successful resale of the product by the distributor. Distributor sales are covered by MTI Instruments' standard one-year warranty and there are no special return policies for distributors.

The Company's 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. The Company determines the standalone selling price (SSP) for each distinct performance obligation. Since the Company sells 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 the Company's best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience and current exposures identified. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers. The Company's allowance for doubtful accounts was $0 at December 31, 2019 and $2 thousand December 31, 2018.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of the Company's invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from its customers.

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer, if the Company expects the benefit of those costs to be longer than one year. As of December 31, 2019 and December 31, 2018, the Company has recorded no capitalized costs to obtain a contract.

The Company applies the practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs include our internal sales force compensation programs as we have determined annual compensation is commensurate with annual sales activities.

Cost of Product Revenue

Cost of product revenue includes material, labor, overhead and shipping and handling costs.

Warranty

The Company accrues a warranty liability at the time product revenue is recorded based on historical experience. The liability is reviewed during the year and is adjusted, if appropriate, to reflect new product offerings or changes in experience. Actual warranty claims are tracked by product line. Warranty liability was $16 thousand and $24 thousand at December 31, 2019 and 2018, respectively. Warranty expense was $1 thousand and $33 thousand for 2019 and 2018, respectively.

Long-Lived Assets

The Company accounts for impairment or disposal of long-lived assets in accordance with accounting standards that address the financial accounting and reporting for the impairment or disposal of long-lived assets, specify how impairment will be measured, and how impaired assets will be classified in the consolidated financial statements. On a quarterly basis, the Company analyzes the status of its long-lived assets at each subsidiary for potential impairment. As of December 31, 2019, the Company does not believe that any of its long-lived assets have suffered any type of impairment that would require an adjustment to that asset's recorded value.

 

F-24


Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of less than three months.

Net Income (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.

Share-Based Payments

The Company grants options to purchase our common stock and award restricted stock to our employees and directors under our equity incentive plans. The benefits provided under these plans are share-based payments and the Company accounts for stock-based awards exchanged for employee service in accordance with the appropriate share-based payment accounting guidance. Stock-based compensation represents the cost related to stock-based awards granted to employees and directors. The Company measures stock-based compensation cost at grant date based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis in accordance with the vesting of the options (net of estimated forfeitures) over the option's requisite service period. The Company estimates the fair value of stock-based awards on the grant date using a Black- Scholes valuation model. The Company uses the fair value method of accounting with the modified prospective application, which provides for certain changes to the method for valuing share-based compensation. The valuation provisions apply to new awards and to awards that are outstanding on the effective date and subsequently modified. Under the modified prospective application, prior periods are not revised for comparative purposes. Stock-based compensation expense is recorded in the lines titled "Cost of product revenue," "Selling, general and administrative expenses" and "Research and product development expenses" in the Consolidated Statements of Operations based on the employees' respective functions.

The Company records deferred tax assets for awards that potentially can result in deductions on the Company's income tax returns based on the amount of compensation cost that would be recognized upon issuance of the award and the Company's statutory tax rate. All income tax effects of awards, including excess tax benefits, recognized on stock-based compensation expense are reflected in the Consolidated Statements of Operations as a component of the provision for income taxes on a prospective basis.

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

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

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

 

F-25


Concentration of Credit Risk

Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents and trade accounts receivable. The Company's trade accounts receivable are primarily from sales to commercial customers, the U.S. government and state agencies. The Company does not require collateral and has not historically experienced significant credit losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.

The Company has cash deposits in excess of federally insured limits but does not believe them to be at risk.

Research and Development Costs

The Company expenses research and development costs as incurred. The Company incurred research and development costs of approximately $1.4 million and $1.2 million, which was entirely related to MTI Instruments, for the years ended December 31, 2019 and 2018, respectively.

Advertising Costs

The Company expenses advertising costs as incurred. The Company incurred advertising costs of approximately $45 and $33 thousand, which was entirely related to MTI Instruments, for the years ended December 31, 2019 and 2018, respectively.

Other Comprehensive Income

The Company had no other comprehensive income (loss) items for the years ended December 31, 2019 and 2018.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets and operating lease liability on our condensed consolidated balance sheets. The Company did not have any finance leases as of December 31, 2019 or December 31, 2018.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU assets also include any lease payments made and excludes lease incentives and initial direct costs incurred. The Company's lease terms may include options to extend or terminate its leases when it is reasonably certain that the Company will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, the Company accounts for lease components together with non-lease components (e.g. common-area maintenance).

Accounting Updates Not Yet Effective

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (the FASB) in the form of accounting standard updates (ASUs) to the FASB's Accounting Standards Codification (ASC). The Company considered the applicability and impact of all ASUs. ASUs not mentioned below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

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 and ASU 2019-11, 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.

 

F-26


In December 2019, the FASB issued ASU 2019-12 (Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes). This standard removes exceptions to the general principles in Topic 740 for allocating tax expense between financial statement components, accounting basis differences stemming from an ownership change in foreign investments and interim period income tax accounting for year-to-date losses that exceed projected losses. The standard will be effective for the Company for annual reporting periods beginning after December 15, 2020 and interim periods within those fiscal years, and while early adoption is permitted, the Company does not expect to elect that option. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. At this time, the Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

Accounting Updates Recently Adopted by the Company

On January 1, 2019, the Company adopted ASU 2016-02 (Leases (Topic 842)) and its subsequent amendments to the initial guidance within ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20, ASU 2019-01, respectively (collectively, Topic 842). Topic 842 was issued to increase transparency and comparability among organizations by requiring lessees to recognize most leases on the balance sheet (other than leases that meet the definition of a short-term lease). Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. For income statement purposes, this standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). Topic 842 includes disclosures that are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The Company elected the available practical expedients and adopted this standard on a cumulative effect adjustment approach, which required prospective application at the adoption date. As of January 1, 2019, the impact on the consolidated balance sheet was the recognition of operating ROU asset of $198 thousand and operating lease liabilities of $198 thousand. The adoption of this standard did not change the recognition, measurement or presentation of lease expense within the Company's consolidated statements of operations or the consolidated statements of cash flows.

The Company did not have any finance leases as of December 31, 2019 or December 31, 2018. See Note 12 for further information.

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, 2018.

3.                   Accounts Receivable

Accounts receivables consist of the following at:

 

(Dollars in thousands)

December 31, 2019

        

December 31, 2018

 

 

 

 

 

 

 

 

U.S. and State Government

$

57

 

$

69

 

Commercial

 

653

 

 

804

 

Allowance for doubtful accounts

 

-

 

 

(2

)

Other

 

35

 

 

-

 

  Total

$

745

 

$

871

 

 

F-27


4.                   Inventories

Inventories consist of the following at:

 

(Dollars in thousands)

December 31, 2019

     

December 31, 2018

 

 

 

 

 

 

 

 

Finished goods

$

302

 

$

285

 

Work in process

 

279

 

 

241

 

Raw materials

 

343

 

 

337

 

  Total

$

924

 

$

863

 

5.                   Property, Plant and Equipment

Property, plant and equipment consist of the following at:

(Dollars in thousands)

December 31, 2019

     

December 31, 2018

 

 

Leasehold improvements

$

39

 

$

39

Computers and related software

 

1,026

 

 

1,025

Machinery and equipment

 

915

 

 

912

Office furniture and fixtures

 

40

 

 

34

 

 

2,020

 

 

2,010

Less: Accumulated depreciation

 

1,846

 

 

1,829

 

$

174

 

$

181

Depreciation expense was $87 thousand and $96 thousand for the years ended December 31, 2019 and 2018, respectively. Repairs and maintenance expense was $18 thousand and $21 thousand for the years ended December 31, 2019 and 2018, respectively.

6.                   Income Taxes

Income tax benefit (expense) for each of the years ended December 31 consists of the following:

 

 (Dollars in thousands)

 

2019

     

 

2018

 

 

Federal

$

33

 

 

$

-

 

State

 

(5

)

 

 

(3

)

Deferred

 

-

 

 

 

395

 

Total

$

28

 

 

$

392

The significant components of deferred income tax benefit (expense) from operations for each of the years ended December 31 consists of the following:

 

(Dollars in thousands)

    

2019

     

 

2018

 

 

Deferred tax (expense) benefit

$

(101

 

$

(420

Net operating loss carry forward

 

(74

 

 

(320

Valuation allowance

 

175

 

 

 

1,135

 

 

$

-

 

 

$

395

 

 

F-28


The Company's effective income tax rate from operations differed from the Federal statutory rate for each of the years ended December 31 as follows:

 

 

2019

 

 

2018

Federal statutory tax rate

 

21

%

 

 

21

%

Change in valuation allowance

 

(54

)

 

 

(74

)

State taxes, net of federal benefit

 

1

 

 

 

-

 

Expiration of stock option

 

14

 

 

 

2

 

Federal tax benefits, R&D

 

9

 

 

 

25

 

Tax rate

 

(9

)%

 

 

(26

)%

Deferred Tax Assets:

Deferred tax assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates. Temporary differences, net operating loss carryforwards and tax credit carryforwards that give rise to deferred tax assets and liabilities are summarized as follows as of December 31:

 

(Dollars in thousands)

 

2019

     

 

2018

 

 

Deferred tax assets:

 

 

 

 

 

 

 

     Inventory valuation

$

43

 

 

$

49

 

     Inventory capitalization

 

-

 

 

 

1

 

     Vacation pay

 

 22

 

 

 

18

 

     Warranty and other sale obligations

 

3

 

 

 

5

 

     Deferred revenue

 

10

 

 

 

-

 

     Allowance for related party note receivable

 

65

 

 

 

63

 

     Net operating loss

 

10,518

 

 

 

10,592

 

     Property, plant and equipment

 

(10

 

 

(18

     Stock options

 

72

 

 

 

106

 

     Research and development tax credit

 

32

 

 

 

60

 

     Alternative minimum tax credit

 

-

 

 

 

54

 

 

 

10,755 

 

 

 

10,930

 

Valuation allowance

 

(10,360

)

 

 

(10,535

)

Net deferred tax assets

$

395

 

 

$

395

 

Valuation Allowance:

The Company believes that the accounting estimate for the valuation of deferred tax assets is a critical accounting estimate, because judgment is required in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. The Company based the estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes.

As a result of its assessment in 2018, the Company released a portion of its valuation allowance against its deferred tax assets. The partial release of the valuation allowance caused an incremental tax benefit of $395 thousand to be recognized in the fourth quarter of 2018. The release of a portion of the valuation allowance was based upon the Company's recent cumulative income history causing the Company to evaluate what portion of the Company's deferred tax assets it believes are more likely than not to be realized. The Company has determined that it will generate sufficient levels of pre-tax earnings in the future to realize the net deferred tax assets recorded on the balance sheet as of December 31, 2019. The Company has projected such pre-tax earnings utilizing a combination of historical and projected results, taking into consideration existing levels of permanent differences, non-deductible expense and the reversal of significant temporary differences.

 

F-29


The valuation allowance at December 31, 2019 and 2018 was $10.4 million and $10.5 million, respectively. Activity in the valuation allowance for deferred tax assets is as follows as of December 31:

 

(Dollars in thousands) 

 

2019

     

 

2018

 

 

Valuation allowance, beginning of year

$

10,535

 

 

$

11,670

 

Allowance for related party note receivable

 

 3

 

 

 

3

 

Inventory

 

(7

)

 

 

(12

)

Net operating (loss) income

 

(74

)

 

 

(323

)

Property, plant and equipment

 

7

 

 

 

-

Stock options

 

(35

)

 

 

(20

)

Research and development credit carryforward

 

(82

)

 

 

(390

)

Deductions resulting in income tax benefit

 

-

 

 

(395

)

Warranty and other sales obligations

 

(2

)

 

 

-

 

Deferred revenue

 

10

 

 

 

-

 

Accrued compensation

 

5

 

 

 

2

Valuation allowance, end of year

$

10,360

 

 

$

10,535

 

Net operating losses:

At December 31, 2019, the Company has unused Federal net operating loss carryforwards of approximately $50 million. Of these, approximately $300 thousand will expire in 2020, with the remainder expiring through 2035.

The Company's and/or its subsidiaries' ability to utilize their net operating loss carryforwards may be significantly limited by Section 382 of the IRC of 1986, as amended, if the Company or any of its subsidiaries undergoes an "ownership change" as a result of changes in the ownership of the Company's or its subsidiaries' outstanding stock pursuant to the exercise of the warrants or otherwise.

Unrecognized tax benefits:

The Company has $824 thousand unrecognized tax benefits at December 31, 2019 and 2018. These unrecognized tax benefits relate to former subsidiaries of the Company and a prior investment in a partnership.

In future periods, if these unrecognized benefits become supportable, the Company may not recognize a change in its effective tax rate as long as it remains in a partial valuation allowance position. Additionally, the Company does not have uncertain tax positions that it expects will increase or decrease within twelve months of this reporting date. The Company recognizes interest and penalties related to uncertain tax positions as a component of tax expense. The Company did not recognize any interest or penalties in 2019 and 2018.

The Company files income tax returns, including returns for its subsidiaries, with federal and state jurisdictions. The Company is no longer subject to IRS or state examinations for any periods prior to 2016, although carryforward attributes that were generated prior to 2016 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period.

7.                   Accrued Liabilities

Accrued liabilities consist of the following at:

 

(Dollars in thousands)

December 31, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

Salaries, wages and related expenses

$

238

     

$

334

 

Liability to shareholders for previous acquisition

 

                    363

 

 

                    363

 

Legal and professional fees

 

65

 

 

53

 

Warranty and other sale obligations

 

16

 

 

24

 

Commissions

 

3

 

 

40

 

Other

 

76

 

 

177

 

  Total

$

                  761

 

$

                  991

 

 

F-30


8.                   Stockholders' Equity

Common Stock

The Company has one class of common stock, par value $.01. Each share of the Company's common stock is entitled to one vote on all matters submitted to stockholders. As of December 31, 2019 and 2018, there were 9,570,677 and 9,437,177 shares of common stock issued and outstanding, respectively.

Dividends

Dividends are recorded when declared by the Company's Board of Directors. During 2019, the Company declared and paid a special dividend of $3.4 million or $0.37 per common share. A portion of dividends are charged against paid in capital because the Company does not have sufficient retained earnings.

Reservation of Shares

The Company had reserved common shares for future issuance as follows as of December 31, 2019:

Stock options outstanding

527,875

 

Common stock available for future equity awards or issuance of options

68,930

 

Number of common shares reserved

596,805

 

9.                   Retirement Plan

The Company maintains a voluntary savings and retirement plan under IRC Section 401(k) covering substantially all employees. Employees must complete six months of service and have attained the age of twenty-one prior to becoming eligible for participation in the plan. The Company plan allows eligible employees to contribute a percentage of their compensation on a pre-tax basis and the Company matches employee contributions, on a discretionary basis, currently in an amount equal to 100% of the first 3% and 50% of the next 2% of the employee's salary, subject to annual tax deduction limitations. Effective January 1, 2017, Company matching contributions are vested immediately. Company matching contributions were $81 thousand and $83 thousand for 2019 and 2018, respectively. The Company may also make additional discretionary contributions in amounts as determined by management and the Board of Directors. There were no additional discretionary contributions by the Company for the years 2019 or 2018.

10.                Income (Loss) per Share

The following table sets forth the reconciliation of the numerators and denominators of the basic and diluted per share computations for continuing operations for the years ended December 31:

(Dollars in thousands, except shares)

2019

 

2018

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

Net income

$

323

 

 

$

1,936

 

Denominator:

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

Common shares outstanding, beginning of period

 

9,437,177

 

 

 

9,363,482

 

Weighted average common shares issued during the period

 

111,283

 

 

 

18,535

 

Denominator for basic earnings per common shares -

 

 

 

 

 

 

 

Weighted average common shares

 

9,548,460

 

 

 

9,382,017

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

Common shares outstanding, beginning of period

 

9,437,177

 

 

 

9,363,482

 

Common stock equivalents - options

 

54,088

 

 

 

67,835

 

Weighted average common shares issued during the period

 

111,283

 

 

 

18,535

 

Denominator for diluted earnings per common shares -

 

 

 

 

 

 

 

Weighted average common shares

 

9,602,548

 

 

 

9,449,582

 

 

 

 

 

 

 

 

 

 

F-31


Not included in the computation of earnings per share, assuming dilution, for the year ended December 31, 2019, were options to purchase 313,000 shares of the Company's common stock. These potentially dilutive items were excluded even though the average market price of the common stock exceeded the exercise prices for a portion of the options because the calculation of incremental shares resulted in an anti-dilutive effect.

Not included in the computation of earnings per share, assuming dilution, for the year ended December 31, 2018, were options to purchase 430,749 shares of the Company's common stock. These potentially dilutive items were excluded even though the average market price of the common stock exceeded the exercise prices for a portion of the options because the calculation of incremental shares resulted in an anti-dilutive effect.

11.                Stock Based Compensation

Stock-based incentive awards are provided to employees and directors under the terms of the Company's 2006 Equity Incentive Plan (2006 Plan), which was amended and restated effective June 30, 2011, September 16, 2009 and October 20, 2016, 2012 Equity Incentive Plan (the 2012 Plan), which was amended and restated as of October 20, 2016, and 2014 Equity Incentive Plan (the 2014 Plan) (collectively, the Plans). Awards under the Plans have generally included at-the-money options and restricted stock grants.

Stock options are awards which allow holders to purchase shares of the Company's common stock at a fixed price. Stock options issued to employees and non-employee members of the MTI Board of Directors generally vest at a rate of 25% on each of the first four anniversaries of the date of the award. Certain options granted may be fully or partially exercisable immediately, may vest on other than a four year schedule or vest upon attainment of specific performance criteria. Restricted stock awards generally vest one year after the date of grant; however, certain awards may vest immediately or vest upon attainment of specific performance criteria. Option exercise prices are generally equivalent to the closing market price of the Company's common stock on the date of grant. Unexercised options generally terminate either seven or ten years after date of grant.

The 2006 Plan was adopted by the Company's Board of Directors on March 16, 2006 and approved by stockholders on May 18, 2006. The 2006 Plan was amended and restated by the Board of Directors effective September 16, 2009, June 30, 2011 and October 20, 2016. The September 16, 2009 amendment increased the initial aggregate number of 250,000 shares of common stock that may be awarded or issued to 600,000, the June 30, 2011 amendment increased the aggregate number of shares of common stock that may be awarded or issued under the 2006 Plan to 1,200,000, and the October 2016 amendment allowed for the award agreement or another agreement entered into between the Company and the award grantee to vary the method of exercise of options issued under the 2006 Plan and the provisions governing expiration of options or other awards under the 2006 Plan following termination of the award recipient. The number of shares that may be awarded under the 2006 Plan and awards outstanding has been adjusted for stock splits and other similar events. Under the 2006 Plan, the Board of Directors is authorized to issue stock options, stock appreciation rights, restricted stock, and other stock-based incentives to officers, employees and others. In connection with seeking stockholder approval of the 2012 Plan, the Company agreed not to make further awards under the 2006 Plan.

The 2012 Plan was adopted by the Company's Board of Directors on April 14, 2012 and approved by its stockholders on June 14, 2012. The 2012 Plan was amended and restated by the Board of Directors effective October 20, 2016. The October 2016 amendment allowed for the award agreement or another agreement entered into between the Company and the award grantee to vary the method of exercise of options issued under the 2012 Plan and an agreement entered into between the Company and the award grantee to vary the provisions governing expiration of options or other awards under the 2012 Plan following termination of the award recipient. The 2012 Plan provides an initial aggregate number of 600,000 shares of common stock that may be awarded or issued. The number of shares that may be awarded under the 2012 Plan and awards outstanding may be subject to adjustment on account of any recapitalization, reclassification, stock split, reverse stock split and other dilutive changes in our common stock. Under the 2012 Plan, the Board of Directors is authorized to issue stock options (incentive and nonqualified), stock appreciation rights, restricted stock, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisors of the Company and its subsidiaries. Incentive stock options may only be granted to employees of the Company and its subsidiaries.

The 2014 Plan was adopted by the Company's Board of Directors on March 12, 2014 and approved by its stockholders on June 11, 2014. The 2014 Plan provides an initial aggregate number of 500,000 shares of common stock that may be awarded or issued. The number of shares that may be awarded under the 2014 Plan and awards outstanding may be subject to adjustment on account of any stock dividend, spin-off, stock split, reverse stock split, split-up, recapitalization, reclassification, reorganization, combination or exchange of shares, merger, consolidation, liquidation, business combination, exchange of shares or the like. Under the 2014 Plan, the Board-appointed administrator of the 2014 Plan is authorized to issue stock options (incentive and nonqualified), stock appreciation rights, restricted stock, restricted stock units, phantom stock, performance awards and other stock-based awards to employees, officers and directors of, and other individuals providing bona fide services to or for, the Company or any affiliate of the Company. Incentive stock options may only be granted to employees of the Company and its subsidiaries.

 

F-32


 

In connection with the sale of shares of common stock to Brookstone, the Company entered into an Option Exercise and Stock Transfer Restriction Agreement (collectively, the Option and Transfer Agreements) with its Chief Executive Officer, its Chief Financial Officer and each of its non-employee directors (collectively, the Insiders). The Option and Transfer Agreements amend the stock option grant agreements between the Company and each Insider with respect to an option granted under, and modify the terms of any option to purchase Common Stock held by each such Insider (collectively, Options) granted under, the Plans. The Option and Transfer Agreements restrict the aggregate amount of shares of Common Stock for which the Insiders may exercise Options during calendar years 2016, 2017, 2018 and 2019, and provide for a modified procedure for exercising Options in order to ensure the limit on the aggregate amount of Options that may be exercised in any such year is not exceeded. Such amendments and modifications also operate to, except with respect to the termination of Options in connection with an Insider's termination of employment or service in connection with misconduct as described in the Option and Transfer Agreements, (i) remove all references to an expiration of the exercisability of such Options within a special, delineated time period following the termination of service to or employment by the Company, and (ii) provide that all vested Options are exercisable by the Insider until default expiration under the applicable Plan (i.e., ten years from the date of grant). If an Option and Transfer Agreement is terminated, the limitations on Option exercises described above will terminate, but the exercisability of the Insider's vested Options until default expiration under the applicable Plan and stock option agreement (i.e., ten years from the date of grant) will survive indefinitely.

During 2019, the Company granted options to purchase 15,000 shares of the Company's common stock from the 2014 Plan, which generally vest 25% on each of the first four anniversaries of the date of the award. The exercise price of these options is $0.83 per share and was based on the closing market price of the Company's common stock on the day prior to the date of grant. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options is $0.66 per share and was estimated at the date of grant.

During 2018, the Company granted options to purchase 85,000 shares of the Company's common stock from the 2014 Plan, which generally vest 25% on each of the first four anniversaries of the date of the award. The exercise price of these options is $0.90 per share and was based on the closing market price of the Company's common stock on the date of grant. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options is $0.74 per share and was estimated at the date of grant.

During 2018, the Company granted options to purchase 75,000 shares of the Company's common stock from the 2012 Plan, which generally vest 25% on each of the first four anniversaries of the date of the award. The exercise price of these options is $0.90 per share and was based on the closing market price of the Company's common stock on the date of grant. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options is $0.74 per share and was estimated at the date of grant.

Stock-based compensation expense for the years ended December 31, 2019 and 2018 was generated from stock option awards. Stock options are awards that allow holders to purchase shares of the Company's common stock at a fixed price. Under the 2014 and 2012 Plans, stock options issued to employees generally vest 25% over four years. Options issued to non-employee members of the MTI Board of Directors generally vest 25% over four years. Certain options granted may be fully or partially exercisable immediately, may vest on other than a four year schedule or vest upon attainment of specific performance criteria. Restricted stock awards generally vest one year after the date of grant, although certain awards may vest immediately or vest upon attainment of specific performance criteria. Option exercise prices are generally equivalent to the closing market value price of the Company's common stock on the date of grant. Unexercised options generally terminate ten years after date of grant.

The following table presents the weighted-average assumptions used for options granted under the 2014 Plan:

 

2019

 

2018

Option term (years)

 

6.26

 

 

 

6.25

 

Volatility

 

99.99

%

 

 

102.79

%

Risk-free interest rate

 

1.37

%

 

 

2.77

%

Dividend yield

 

0

%

 

 

0

%

Weighted-average fair value per option granted

$

0.66

 

 

$

0.74

 

The following table presents the weighted-average assumptions used for options granted under the 2012 Plan:

 

2018

Option term (years)

 

6.25

 

Volatility

 

102.79

%

Risk-free interest rate

 

2.77

%

Dividend yield

 

0

%

Weighted-average fair value per option granted

$

0.74

 

 

F-33


 

Share-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, therefore, awards are reduced for estimated forfeitures. The revised accounting standard requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Total share-based compensation expense, related to all of the Company's share-based awards, recognized for the years ended December 31, was comprised as follows:

 

 2019

 

 2018

(Dollars in thousands, except eps)

 

 

 

 

 

Cost of product revenue

$

1

 

$

-

Research and product development

 

4

 

 

1

Selling, general and administrative

 

26

 

 

5

Share-based compensation expense

$

31

   

$

6

Impact on basic EPS

$

0.00

 

$

0.00

Impact on diluted EPS

$

0.00

 

$

0.00

Total unrecognized compensation costs related to non-vested awards as of December 31, 2019 and December 31, 2018 is $96 thousand and $93 thousand, respectively, and is expected to be recognized over a weighted-average remaining vesting period of approximately 3.02 years and 3.94 years, respectively.

Presented below is a summary of the Company's stock option plans' activity for the years ended December 31:

 

2019

    

2018

Shares under option, beginning

720,624

 

 

766,339

 

Granted

15,000

 

 

160,000

 

Exercised

(133,500

)

 

(73,695

)

Forfeited

-

 

 

-

Expired/canceled

(74,249

)

 

(132,020

)

Shares under option, ending

527,875

 

 

720,624

 

Options exercisable

392,375

 

 

559,624

 

Remaining shares available for granting of options

68,930

 

 

24,681

 

The weighted average exercise price for the Plans is as follows for each of the years ended December 31:

 

2019

    

2018

    

Shares under option, beginning

$ 0.86

 

$ 0.82

 

Granted

$ 0.83

$ 0.90

 

Exercised

$ 0.56

 

$ 0.54

 

Forfeited

-

 

-

 

Expired/canceled

$ 1.15

 

$ 0.90

 

Shares under option, ending

$ 0.89

 

$ 0.86

 

Options exercisable, ending

$ 0.89

 

$ 0.84

 

The following table summarizes information for options outstanding and exercisable for the Plans as of December 31, 2019:

                                                  Outstanding Options

 

Options Exercisable

 

 

 

Weighted Average

 

Weighted

 

 

 

Weighted

Exercise

 

 

Remaining

 

Average

 

 

 

Average

Price Range

Number

    

Contractual Life

    

Exercise Price

    

Number 

    

Exercise Price

$0.29 - $1.08

453,875

 

6.17

 

$

0.84

 

     318,375

 

            $

0.81

$1.09 - $1.20

74,000

 

5.17

 

$

1.20

 

       74,000

 

              $

1.20

 

 

 

 

 

 

 

 

 

 

 

 

 

527,875

 

6.03

 

$

0.89

 

     392,375

 

              $

0.89

 

F-34


 

The aggregate intrinsic value (i.e. the difference between the closing stock price and the price to be paid by the option holder to exercise the option) is $10 thousand for the Company's outstanding options and $10 thousand for the exercisable options as of December 31, 2019. The amounts are based on the Company's closing stock price of $.67 as of December 31, 2019.

There were no unvested restricted stock grants for the year ended December 31, 2019 and 2018.

Non-vested options activity is as follows for the year ended December 31:

 

 

2019

Options

 

 

2019 Weighted

Average Exercise

Price

 

Non-vested options balance, beginning January 1

161,000

 

 

                  $0.90

 

Non-vested options granted

15,000

 

 

$0.83

 

Vested options

(40,500

 

                  $0.90

 

Non-vested options forfeited

-

 

 

             -

 

Non-vested options balance, ending December 31

135,500

 

 

                  $0.89

 

12.                Commitments and Contingencies

Commitments:

Leases

The Company determines whether an arrangement is a lease at inception. The Company and its subsidiary have operating leases for certain manufacturing, laboratory, office facilities and certain equipment. The leases have remaining lease terms of less than one year to less than five years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of December 31, 2019 and December 31, 2018, the Company has no assets recorded under finance leases.

Lease expense for these leases is recognized on a straight-line basis over the lease term. For the twelve months ended December 31, 2019, total lease costs is comprised of the following:

(Dollars in thousands)

 

 

 

 

2019

Operating lease cost

$

222

Short-term lease cost

 

-

Total net lease cost

$

222

Short-term lease cost represents leases that were not capitalized as the lease term as of January 1, 2019 was less than 12 months.

Other information related to leases for the twelve months ended December 31 was as follows: 

 (Dollars in thousands, except lease term and discount rate)

 

 

 

 

 

2019

 

Supplemental Balance Sheet Information:

 

 

 

 Operating leases:

 

 

 

     Operating lease ROU asset

947 

 

 

 

 

 

     Current operating lease liabilities

$

171

 

     Non-current operating lease liabilities

 

776

 

       Total operating lease liabilities

$

947

 

 

 

 

 

 Operating leases:

 

 

 

      ROU assets

$

1,164

 

      Asset lease expense

 

(217

)

        ROU assets, net

$

947

 

 

 

 

 

 Weighted Average Remaining Lease Term (in years):

 

 

 

      Operating leases

 

                 4.92

 

 

 

 

 

 Weighted Average Discount Rate:

 

 

 

      Operating leases

 

5.85

%

 

 

 

 

Supplemental Cash Flows Information:

 

 

 

 Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

$

222

 

 

 

 

 

 Non-Cash Activity Right-of-use assets obtained in exchange for lease obligations:

 

 

 

Operating leases

 

966

 

 

 

 

 

 

F-35


 

Maturities of lease liabilities are as follows for the year ending December 31:

 (Dollars in thousands)

 

 

 

 

 

2019

 

2020

$

 222

 

2021

 

222

 

2022

 

222

 

2023 

 

222

 

2024

 

 204

 

Total lease payments

 

1,092

 

  Less: imputed interest

 

(145

)

     Total lease obligations

 

947

 

  Less: current obligations

 

171

 

     Long-term lease obligations

776 

 

 

 

 

 

As of December 31, 2019, there were no additional operating lease commitments that had not yet commenced.

Future minimum lease payments under leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2018, based on the former accounting guidance for leases, were: $5 thousand in 2019 and $3 thousand in 2020. The Company incurred operating lease expense of $226 thousand for the year ended December 31, 2018.

Warranties

Product warranty liabilities are included in "Accrued liabilities" in the Consolidated Balance Sheets. Below is a reconciliation of changes in product warranty liabilities:

(Dollars in thousands)

Twelve Months Ended
December 31,

 

2019

 

2018

 

Balance, January 1

$

24

 

$

14

 

Accruals for warranties issued

 

16

 

 

33

 

Accruals for pre-existing warranties

 

(15

)

 

-

Settlements made (in cash or in kind)

 

(9

)

 

(23

)

Balance, end of period

$

16

 

$

24

 

Employment Agreement

On May 5, 2017, the Company entered into an employment agreement with one employee. The agreement provides for an initial term ending December 31, 2018, and, unless either party provides written notice that the agreement will not be renewed, is renewed for an additional year on December 31, 2018 and each subsequent December 31; such non-renewal may be for any or for no stated reason. The agreement provides for certain payments upon termination of employment under certain circumstances. As of December 31, 2019, the Company's potential minimum obligation to this employee was approximately $212 thousand.

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.

 

F-36


The Company has been named as a party in the December 19, 2019 United States Environmental Protection Agency (EPA) Demand Letter regarding the Malta Rocket Fuel Area Superfund Site (Site) located in Malta and Stillwater, New York in connection with an alleged release of hazardous materials into the environment. The EPA is seeking reimbursement of response costs from all named parties in the amount of approximately $358,000 plus interest in connection with the investigation and disposal activities associated with the various drum caches discovered at the Site, issuance of the Explanation of Significant Differences ("ESD") of the Site, and implementation of the work contemplated by the ESD. The Company considers the likelihood of a material adverse outcome to be remote and does not currently anticipate that any expense or liability it may incur as a result of these matters in the future will be material to the Company's financial condition.

13.                Related Party Transactions

MeOH Power, Inc.

On December 18, 2013, MeOH Power, Inc. and the Company executed a Senior Demand Promissory Note (the Note) in the amount of $380 thousand to secure the intercompany amounts due to the Company from MeOH Power, Inc. upon the deconsolidation of MeOH Power, Inc. Interest accrues on the Note at the Prime Rate in effect on the first business day of the month, as published in the Wall Street Journal. At the Company's option, all or part of the principal and interest due on this Note may be converted to shares of common stock of MeOH Power, Inc. at a rate of $0.07 per share. Interest began accruing on January 1, 2014. The Company recorded a full allowance against the Note. As of December 31, 2019 and December 31, 2018, $312 thousand and $298 thousand, respectively, of principal and interest are available to convert into shares of common stock of MeOH Power, Inc. Any adjustments to the allowance are recorded as miscellaneous expense during the period incurred.

Legal Services

During the years ended December 31, 2019 and December 31, 2018, the Company incurred $54 thousand and $10 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.

14.                Geographic and Segment Information

The Company sells its products on a worldwide basis with its principal markets listed in the table below where information on product revenue is summarized by geographic area for the Company as a whole for each of the years ended December 31:

(Dollars in thousands) 

2019

    

2018

    

 

 

Product revenue:

 

 

 

 

 

 

United States

$

4,248

 

$

5,540

 

Association of South East Asian Nations (ASEAN)

 

1,714

 

 

2,015

 

Europe, the Middle East and Africa (EMEA)

 

463

 

 

384

 

North America

 

129

 

 

120

 

South America

 

17

 

 

3

 

 

 

 

 

 

 

 

Total product revenue

$

6,571

 

$

8,062

 

Revenues are attributed to regions based on the location of customers. In 2019 and 2018, approximately 35.3% and 31.3%, respectively, of our product revenues was from customers outside of the United States.

Long-lived assets of $174 thousand and $181 thousand at December 31, 2019 and 2018, respectively consist of property, plant and equipment all located within the United States.

At MTI Instruments, the largest commercial customer in 2019 was U.S. manufacturer of support solutions to the aerospace and energy markets, which accounted for 11.0% of total product revenue. At MTI Instruments, the largest commercial customer in 2018 was a manufacturer of semiconductor equipment in Asia, which accounted for 11.1% of total product revenue. The U.S. Air Force continues to be the largest government customer, accounting for 20.8% and 28.0% of total product revenue in 2019 and 2018, respectively.

The Company operates in one segment and therefore segment information is not presented.

 

F-37


15.                Subsequent Events

In accordance with U.S. GAAP, the Company has evaluated subsequent events for disclosure between the consolidated balance sheet date of December 31, 2019 and February 18, 2020, the date the financial statements were available to be issued.

On January 17, 2020, the Company announced the formation of a new wholly-owned subsidiary named EcoChain and its entry into the cryptocurrency and blockchain ecosystem. The Company is forming a new business line focusing on cryptocurrency mining and in connection with that has entered into a long-term strategic relationship with Soluna Technologies, Ltd. ("Soluna"), a Canadian company focused on powering the blockchain economy with clean, low-cost renewable energy. Soluna develops vertically integrated, utility-scale computing facilities focused on cryptocurrency mining and cutting-edge blockchain applications. The Company made a strategic investment in Soluna and formed EcoChain as a wholly-owned subsidiary to own and operate the Company's renewable-energy powered cryptocurrency mining operations. Soluna will construct and operate EcoChain's facilities. The Company will also have the ability to elect to make additional equity investments in Soluna and its projects on a go-forward basis. In addition, William P. Phelan, a member of the Company's Board of Directors, will join Soluna's Board of Directors.

Effective January 13, 2020, EcoChain and Soluna entered into an Operating and Management Agreement providing that, in exchange for a one-time fee and revenue-based payments, Soluna will assist EcoChain with developing means to efficiently and effectively mine cryptocurrency.

The Company invested $500,000 in Soluna through the purchase of Class A Preferred Shares of Soluna. The Company also entered into a Contingent Rights Agreement with Soluna pursuant to which the Company (i) is obligated to purchase an additional $250,000 worth of Soluna Class A Preferred Shares following Soluna's achievement of certain development milestones with respect to EcoChain, and (ii) has the option to purchase additional Class A Preferred Shares following Soluna's securing of certain levels of project financing with respect to wind power generation facilities it is developing.

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. Certain Brookstone-affiliated directors that serve on the board of directors of the Company also serve as directors or officers of Soluna. The various transactions described above were negotiated on behalf of the Company and EcoChain via an independent investment committee of the Company's board of directors and the separate legal representation of Couch White, LLP, a New York-based law firm, and Dentons, an international law firm with offices in Canada. The transactions were subsequently unanimously approved by both the independent investment committee and the full board of directors of the Company.

 

F-38

EXHIBIT 10.16

AMENDMENT NO. 3 TO LEASE AGREEMENT

THIS AMENDMENT NO. 3 TO LEASE AGREEMENT ("Amendment") is made and entered into effective as of January 1, 2018 (the "Effective Date"), between CETF PROPERTIES, LLC, a New York limited liability company (the "Landlord") and MTI INSTRUMENTS INC., a New York incorporated company (the "Tenant").

RECITALS

WHEREAS, Carl E. Touhey and Tenant entered into a lease agreement dated as of August 10, 1999 (the "Lease") and amended on September 29, 2009 and May 2, 2014.

WHEREAS, Carl E. Touhey assigned the Lease to Landlord as of January 1, 2018, which assignment necessitates an amendment of the Lease providing for Tenant's direct procurement of cleaning and janitorial services for the leased premises (the "Lease").

WHEREAS, the parties have agreed to amend the Lease as set forth herein.

NOW, THEREFORE, for One Dollar ($1.00) and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and Tenant hereby agree, as follows:

1.   Recitals. The foregoing recitals are incorporated herein as if set forth at length. Capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Lease. All references herein to the Lease shall include the Lease as modified by this Amendment.

2.    Modification of Lease Terms.

a.        The base rate for the lease term shall be:

1/1/2018 - 11/30/2018 - $196,020.00/year; $16,335.00/month; $11.25/square foot

12/1/2018 - 11/30/2019 - $200,376.00/year; $16,698.00/month; $11.50/square foot

b.        The following paragraph is added to Article 9:

Tenant, as a requirement of this Lease, will engage GPM Services, LLC pursuant to the agreement attached as Schedule A (the "GPM Agreement") to provide the following services at the Premises: (1) janitorial service and waste disposal; (2) daily cleaning services on weekdays (including restrooms in Tenant's premises); (3) restroom supplies; (4) window washing with reasonable frequency, as determined by Landlord but no less than Spring and Fall; and (5) lighting replacement during business hours (for building standard lights, but not for any special tenant lights, which will be replaced at Tenant's sole cost and expense). Tenant is required to engage GPM Services, LLC at all times during the term of the Lease. For the convenience of the Tenant, Tenant may make all payments due under the GPM Agreement directly to Landlord, as nominee for GPM Services, LLC, on a monthly basis with its regular monthly rental payment. Landlord agrees to remit such payments to GPM Services, LLC on a timely basis.

c.         Section 16.2 of the Lease is deleted in its entirety and replaced with the following:

The Landlord will furnish the premises, at Landlord's cost, with those services customarily provided in comparable office buildings in the vicinity of the project, including (1) water and sewer; and (2) snow and ice removal on sidewalks, parking lot and loading dock area. Landlord may provide, but will not be obligated to provide, any such services on holidays or weekends. Landlord will not provide cleaning or janitorial services at the Premises.

d.         Section 19 (d) is deleted in its entirety and replaced with the following:

Supply any service to be provided by Landlord to Tenant according to this lease; or

 


 

e.       Exhibit D, Item 4 of the Rules and Regulations is deleted in its entirety and replaced with the following:

No Tenant will employ any person or persons other than GPM Services, LLC for the purpose of cleaning the premises, unless otherwise agreed to by Landlord in writing. Any breach by GPM Services, LLC of its obligations under the new Agreement will be considered as a breach of the Landlord under the modified lease and subject to Lease section 24.4. The Tenant upon 60 day written notice to Landlord, may elect to provide for cleaning services. In such case the Landlord shall provide a monthly rent abatement of $1,815.00.

f.          Exhibit E of the Lease is deleted in its entirety.

3.   Ratification. Except as amended by this Amendment, the Lease is hereby ratified, confirmed and approved in all respects.

4.   Provisions Binding. All rights and liabilities given to or imposed upon either of the parties to this Amendment shall extend to and are binding upon the parties hereto and their respective successors and assigns.

5.   Entire Agreement. This Amendment (a) together with the Lease contains the entire agreement between the Landlord and Tenant with respect to the subject matter hereof and supersedes all prior agreements and understandings, whether oral or written, between the parties, (b) may not be modified or amended except by written agreement signed by the parties, (c) will be governed by the laws of New York, without regard to principles of conflicts of laws and (d) may be executed by facsimile signature and in one or more counterparts, each of which will be deemed an original, and all of which when taken together will constitute one and the same instrument.

[Balance of Page is Blank. Next Page is Signatures]

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

 

 


Schedule A

Janitorial Service Agreement

This agreement for janitorial services between MTI Instruments Inc. ("Client") and GPM Services, LLC ("Provider") is made and entered into as of 01/01/2018.

Client's property located at 325 Washington Ave. Ext., Albany, NY as identified in a Lease with CETF Properties, LLC, as amended, ("Property") will be serviced by Provider in accordance with the following terms.

1.  SCOPE OF SERVICE

Provider will provide cleaning services every weekday, excluding holidays. The Provider will continue to provide its services in a manner and to a standard of quality as provided to the Client previously by the original landlord.

2.  TERM

Provider will begin cleaning services on 01/01/2018. This agreement shall terminate coincidental with the termination of the lease with CETF Properties, LLC, as amended.

3.  PAYMENT

Payment in the amount of:

$21,780.00/year; $1,815.00/month; $1.25/square foot.

shall be made monthly, without an invoice from Provider.

4.  ACCESS REQUIREMENT

Client will provide Provider access to the Property, and to all areas of the Property scheduled to be cleaned at the scheduled time.

5.  APPLICABLE LAW AND VENUE

The terms of this agreement will be governed by the laws of the State of New York.

6.  ASSIGNMENT

The rights and obligations created for Client under this agreement may not be assigned to any other party without the written consent of the Client, which shall not be unreasonably withheld.

7.  INDEMNIFICATION

Each party agrees to indemnify and hold harmless the other party and its employees, members, landlord, successors, and assigns, from any claims, liabilities, losses, damages, and expenses asserted against the other party and arising out of the indemnifying party's negligence, willful misconduct, and negligent performance of, or failure to perform, any of its duties or obligations under this agreement. The provisions of this indemnification are solely for the benefit of the parties hereto and not intended to create or grant any rights, contractual or otherwise, to another person or entity.

8.  FORCE MAJEURE

Provider and any of its employees or agents shall not be deemed to be in breach of this agreement for any delay or failure in performance caused by reasons out of its reasonable control, including acts of God or a public enemy; natural calamities; failure of a third party to perform; changes in the laws or regulations; actions of any civil, military or regulatory authority; power outage or other disruptions of communication methods or any other cause which would be out of the reasonable control of Provider.

 

 

9. SEVERANCE

In the event that one or more of the provisions of this agreement shall be found unenforceable, illegal or invalid, it shall not affect any other provisions of this agreement, and this agreement shall be construed as if the provision found to be unenforceable, illegal or invalid had never been contained in the agreement, or the unenforceable, illegal or invalid provision shall be construed, amended and/or reformed to be made enforceable, legal and valid.

10. WAIVER OF CONTRACTUAL RIGHT

The failure of either party to enforce any provision of this agreement shall not be construed as a waiver or limitation of that party's right to subsequently enforce and compel strict compliance with every provision of this agreement.

11. ENTIRE AGREEMENT

This agreement contains the entire agreement of the parties, and there are no other promises or conditions in any other agreement whether oral or written concerning the subject matter of this agreement. This agreement supersedes any prior written or oral agreements between the parties.

IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed by their duly authorized representatives as of the date first above written.

 

EXHIBIT 10.17

 

AMENDMENT NO. 4

TO LEASE AGREEMENT

BETWEEN

MTI INSTRUMENTS INC.

AND

CETF PROPERTIES, LLC

This Amendment to Lease is made and entered into this 4th day of December 2019 by and between MTI Instruments Inc. ("Tenant"), and CETF Properties, LLC ("Landlord").

Whereas, Tenant and the Landlord entered into a Lease on August 10, 1999 with respect to a portion of the building known as 325 Washington Avenue Extension, Albany, NY 12205 (the "Lease"), as amended on September 29, 2009, May 2, 2014 and January 1, 2018.

Whereas, the parties hereto wish to further amend the Lease as hereinafter provided.

Now, therefore, in consideration of One Dollar ($1.00) each to the other paid, receipt of which is hereby acknowledged, the Lease is amended as follows:

1)      The Lease term shall be extended for five (5) years from December 1, 2019 - November 30, 2024.

2)      The Tenant shall pay monthly rent to the Landlord according to the following schedule:

12/1/2019 - 11/30/2024 - $200,376.00/year; $16,698.00/month; $11.50/sf

3)        Landlord agrees to perform the improvements outlined in Exhibit B at no cost to the Tenant.

Whereas the parties have entered into a Janitorial Service Agreement on 1/1/2018, the term of that Agreement is extended to coincide with this Amendment. The payment amount is:

12/1/2019 - 11/30/2024: $21,780.00/year; $1,815.00/month; $1.25/square foot

In all other respects the Lease, as amended, shall remain in full force and effect, and is hereby ratified and confirmed.

 

 

 


 

 

EXHIBIT A

 

2

 


 

EXHIBIT B

WORKLETTER

This Exhibit is attached to and forms a part of the certain Amendment dated December 4, 2019 ("the Amendment") pursuant to which the Landlord has leased to Tenant space in the building known as 325 Washington Avenue Extension, Albany, NY 12205:

The Landlord will make, at Landlord's sole cost, the following alterations to the premises:

 

 

 

 

 

 

3

EXHIBIT 10.27

 

COMMERCIAL LINE OF CREDIT
AGREEMENT AND NOTE

 

 

   AGREEMENT DATE

CREDIT LIMIT

 

      May 7, 2020

$300,000.00

 

LOAN PURPOSE: Working Capital

BORROWER INFORMATION
MTI INSTRUMENTS INC
325 WASHINGTON AVE EXT
ALBANY, NY 12205

LINE OF CREDIT AGREEMENT AND NOTE. This Commercial Line of Credit Agreement and Note will be referred to in this document as the "Agreement."

LENDER. "Lender" means Pioneer Bank whose address is 652 Albany Shaker Road, Albany, New York 12211, its successors and assigns.

BORROWER. "Borrower" means each person or legal entity identified above in the BORROWER INFORMATION section who signs this Agreement.

PROMISE TO PAY. For value received, receipt of which is hereby acknowledged, the Borrower promises to pay, on demand by Lender, the principal amount of Three Hundred Thousand and 00/100 Dollars ($300,000.00) or such lesser amount as shall have been advanced by Lender, from time to time, to or on behalf of Borrower under the terms of this Agreement, and all interest on the outstanding principal balance and any other charges, including service charges, to the order of Lender at its office at the address noted above or at such other place as Lender may designate in writing. The Borrower will make all payments in lawful money of the United States of America.

PAYMENT SCHEDULE. This Agreement will be paid according to the following required payment schedule: Beginning on June 1, 2020, monthly payments of accrued and unpaid interest . The unpaid principal balance of this Note, together with all accrued interest and charges owing in connection therewith, shall be due and payable on demand. All payments received by the Lender from the Borrower for application to this Agreement may be applied to the Borrower's obligations under this Agreement in such order as determined by the Lender. The Borrower shall fully repay to the Bank all amounts outstanding respecting this Loan for a period of 30 consecutive days in each year.

INTEREST RATE AND SCHEDULED PAYMENT CHANGES. Interest will begin to accrue on May 7, 2020. The initial variable interest rate on this Agreement will be 4.250% per annum. This interest rate may change on May 7, 2020. Each date on which the interest rate may change is called the "Change Date." Beginning with the first Change Date, Lender will calculate the new interest rate based on Wall Street Prime Daily in effect on the Change Date (the "Index") plus 1.000 percentage points (the "Margin"). The interest rate will never be less than 4.000%. If the Index is not available at the time of the Change Date, Lender will choose a new Index which is based on comparable information. The Index is used solely to establish a base from which the actual rate of interest payable under the Agreement will be calculated, and is not a reference to any actual rate of interest charged by any lender to any particular borrower. Nothing contained herein shall be construed as to require the Borrower to pay interest at a greater rate than the maximum allowed by law. If, however, from any circumstances, Borrower pays interest at a greater rate than the maximum allowed by law, the obligation to be fulfilled will be reduced to an amount computed at the highest rate of interest permissible under applicable law and if, for any reason whatsoever, Lender ever receives interest in an amount which would be deemed unlawful under applicable law, such interest shall be automatically applied to amounts owed, in Lender's sole discretion, or as otherwise allowed by applicable law. Interest shall be calculated on the basis of actual number of days elapsed and a 360-day year. The outstanding principal balance of this loan shall, while any Event of Default exists under this Agreement or any other agreement related to the loan, be subject to a default rate of interest equal to “Default Rate” means a rate per annum equal to four percent (4.00%) above the rate of interest applicable to this Note.

LATE PAYMENT CHARGE. If any required payment is more than 14 days late, then at Lender's option, Lender will assess a late payment charge of 6% of the amount past due.

LINE OF CREDIT TERMS. The advances under this Agreement are discretionary. The Borrower acknowledges and agrees that although the Borrower may from time to time request an advance under this Agreement up to a maximum amount equal to the Line of Credit Limit, the Lender in no way is obligated to make such advance, Lender may at any time, with or without cause, refuse to extend credit, and all advances will be made by Lender in its sole and absolute discretion and subject to the terms and conditions of this Agreement.

Advances.

Suspension and Termination. Subject to Lender's right to make any advances under this Agreement in its sole and absolute discretion, advances under this Agreement will be available until the earliest of any date or event described below occurs: (a) demand by the Lender, (b) the Line of Credit is canceled by Borrower, or (c) the occurrence of an Event of Default.

GUARANTY. In support of this transaction, a Guaranty dated May 7, 2020 has been executed by MECHANICAL TECHNOLOGY INCORPORATED.

 

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RIGHT OF SET-OFF. To the extent permitted by law, Borrower agrees that Lender has the right to set-off any amount due and payable under this Agreement, whether matured or unmatured, against any amount owing by Lender to Borrower including any or all of Borrower's accounts with Lender. This shall include all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. Such right of set-off may be exercised by Lender against Borrower or against any assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor of Borrower, or against anyone else claiming through or against Borrower or such assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off has not been exercised by Lender prior to the making, filing or issuance or service upon Lender of, or of notice of, assignment for the benefit of creditors, appointment or application for the appointment of a receiver, or issuance of execution, subpoena or order or warrant. Lender will not be liable for the dishonor of any check when the dishonor occurs because Lender set-off a debt against Borrower's account. Borrower agrees to hold Lender harmless from any claim arising as a result of Lender exercising Lender's right to set-off.

PAYABLE ON DEMAND. This is a demand note. Payment is due upon Lender's demand.

RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, security agreements, mortgages, deeds of trust, deeds to secure debt, business loan agreements, construction loan agreements, resolutions, guaranties, environmental agreements, subordination agreements, assignments, and any other documents or agreements executed in connection with the indebtedness evidenced hereby this Agreement whether now or hereafter existing, including any modifications, extensions, substitutions or renewals of any of the foregoing. The Related Documents are hereby made a part of this Agreement by reference thereto, with the same force and effect as if fully set forth herein.

DEFAULT. Upon the occurrence of any one of the following events (each, an "Event of Default" or "default" or "event of default"), Lender's obligations, if any, to make any advances will, at Lender's option, immediately terminate and Lender, at its option, may declare all indebtedness of Borrower to Lender under this Agreement immediately due and payable without further notice of any kind notwithstanding anything to the contrary in this Agreement or any other agreement: (a) Borrower's failure to make any payment on time or in the amount due; (b) any default by Borrower under the terms of this Agreement or any other Related Documents; (c) any default by Borrower under the terms of any other agreement between Lender and Borrower; (d) the death, dissolution, or termination of existence of Borrower or any guarantor; (e) Borrower is not paying Borrower's debts as such debts become due; (f) the commencement of any proceeding under bankruptcy or insolvency laws by or against Borrower or any guarantor or the appointment of a receiver; (g) any default under the terms of any other indebtedness of Borrower to any other creditor; (h) any writ of attachment, garnishment, execution, tax lien or similar instrument is issued against any collateral securing the loan, if any, or any of Borrower's property or any judgment is entered against Borrower or any guarantor; (i) any part of Borrower's business is sold to or merged with any other business, individual, or entity; (j) any representation or warranty made by Borrower to Lender in any of the Related Documents or any financial statement delivered to Lender proves to have been false in any material respect as of the time when made or given; (k) if any guarantor, or any other party to any Related Documents terminates, attempts to terminate or defaults under any such Related Documents; (l) Lender has deemed itself insecure or there has been a material adverse change of condition of the financial prospects of Borrower or any collateral securing the obligations owing to Lender by Borrower. Upon the occurrence of an event of default, Lender may pursue any remedy available under any Related Document, at law or in equity.

GENERAL WAIVERS. To the extent permitted by law, the Borrower severally waives any required notice of presentment, demand, acceleration, intent to accelerate, protest, and any other notice and defense due to extensions of time or other indulgence by Lender or to any substitution or release of collateral. No failure or delay on the part of Lender, and no course of dealing between Borrower and Lender, shall operate as a waiver of such power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right.

JOINT AND SEVERAL LIABILITY. If permitted by law, each Borrower executing this Agreement is jointly and severally bound.

SEVERABILITY. If a court of competent jurisdiction determines any term or provision of this Agreement is invalid or prohibited by applicable law, that term or provision will be ineffective to the extent required. Any term or provision that has been determined to be invalid or prohibited will be severed from the rest of this Agreement without invalidating the remainder of either the affected provision or this Agreement.

SURVIVAL. The rights and privileges of the Lender hereunder shall inure to the benefits of its successors and assigns, and this Agreement shall be binding on all heirs, executors, administrators, assigns, and successors of Borrower.

ASSIGNABILITY. Lender may assign, pledge or otherwise transfer this Agreement or any of its rights and powers under this Agreement without notice, with all or any of the obligations owing to Lender by Borrower, and in such event the assignee shall have the same rights as if originally named herein in place of Lender. Borrower may not assign this Agreement or any benefit accruing to it hereunder without the express written consent of the Lender.

DUTY TO NOTIFY. Borrower agrees to notify Lender if there is any change in the beneficial ownership information provided to Lender. Additionally, Borrower agrees to provide Lender with updated beneficial ownership information in the event there is any change in the beneficial ownership information provided to Lender.

ORAL AGREEMENTS DISCLAIMER. This Agreement represents the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

GOVERNING LAW. This Agreement is governed by the laws of the state of New York except to the extent that federal law controls.

HEADING AND GENDER. The headings preceding text in this Agreement are for general convenience in identifying subject matter, but have no limiting impact on the text which follows any particular heading. All words used in this Agreement shall be construed to be of such gender or number as the circumstances require.

ATTORNEYS' FEES AND OTHER COSTS. Borrower agrees to pay all of Lender's costs and expenses in connection with the enforcement of this Agreement including, without limitation, reasonable attorneys' fees, to the extent permitted by law.

WAIVER OF JURY TRIAL. All parties to this Agreement hereby knowingly and voluntarily waive, to the fullest extent permitted by law, any right to trial by jury of any dispute, whether in contract, tort, or otherwise, arising out of, in connection with, related to, or incidental to the relationship established between them in this Agreement or any other instrument, document or agreement executed or delivered in connection with this Agreement or the Related Documents.

 

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By signing this Agreement, Borrower acknowledges reading, understanding, and agreeing to all its provisions and receipt hereof.

MTI INSTRUMENTS INC

/s/ FREDERICK W JONES                               
By: FREDERICK W JONES
Its: PRESIDENT & CEO/CFO

LENDER: Pioneer Bank

/s/ JASON URSCHEL                                       
By: JASON URSCHEL
Its: BUSINESS BANKING RELATIONSHIP MANAGER

 

 

 

 

 

 

 

 

 

 

 

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EXHIBIT 10.28

BUSINESS LOAN AGREEMENT
AGREEMENT DATE    
   May 7, 2020    

 

BORROWER INFORMATION  
MTI INSTRUMENTS INC Type of Business Entity: Corporation
325 WASHINGTON AVE EXT State of Organization/Formation: New York
ALBANY, NY 12205  
 
GUARANTOR INFORMATION  
MECHANICAL TECHNOLOGY INCORPORATED Type of Business Entity: Corporation
325 WASHINGTON AVE EXT State of Organization/Formation: New York
ALBANY, NY 12205  

AGREEMENT. This Business Loan Agreement will be referred to in this document as the "Agreement." This Agreement is made by Pioneer Bank (Lender), MTI INSTRUMENTS INC (Borrower) and MECHANICAL TECHNOLOGY INCORPORATED (Guarantor). The consideration is the promises, representations, and warranties made in this Agreement and the Related Documents.

DEFINITIONS. These definitions are used in this Agreement.

"Collateral" means the Property that any Party to this Agreement or the Related Documents may pledge, mortgage, or give Lender a security interest in, regardless of where the Property is located and regardless of when it was or will be acquired, together with all replacements, substitutions, proceeds, and products of the Property.

"Events of Default" means any of the events described in the "Events of Default" section of this Agreement.

"Financial Statements" mean the balance sheets, earnings statements, and other financial information that any Party has, is, or will be giving to Lender.

"Indebtedness" means the Loan and all other loans and indebtedness of Borrower to Lender, including but not limited to Lender's payments of insurance or taxes, all amounts Lender pays to protect its interest in the Collateral, overdrafts in deposit accounts with Lender, and all other indebtedness, obligations, and liabilities of Borrower to Lender, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, due or to become due, now existing or hereafter arising.

"Loan" means any loan or loans and all other indebtedness, obligations, and liabilities of Borrower to Lender, due or to become due, now existing or hereafter arising, as well as any and all amendments, modifications, extensions, and renewals thereof.

"Parties" means any Borrower and Guarantor signing this Agreement.

"Party" means any Borrower and Guarantor signing this Agreement.

"Property" means the Parties' assets, regardless of what kind of assets they are.

"Related Documents" means all documents, promissory notes, security agreements, leases, mortgages, construction loan agreements, assignments of leases and rents, guaranties, pledges, and all other documents or agreements executed in connection with this Agreement as such documents may be modified, amended, substituted, or renewed from time to time. The term includes both documents existing at the time of execution of this Agreement and documents executed after the date of this Agreement.

 

BORROWER'S REPRESENTATIONS AND WARRANTIES. The statements made in this section will continue and remain in effect until all of the Indebtedness is fully paid to Lender. Each Borrower represents and warrants to Lender the following:

Borrower's Existence and Authority. Each Borrower is duly formed and in good standing under all laws governing the Borrower and the Borrower's business, and each Borrower executing this Agreement has the power and authority to execute this Agreement and the Related Documents and to bind that Borrower to the obligation created in this Agreement and the Related Documents.

Financial Information and Filing. All Financial Statements provided to Lender have been prepared and will continue to be prepared in accordance with generally accepted accounting principles, consistently applied, and fully and fairly present the financial condition of each Borrower, and there has been no material adverse change in Borrower's business, Property, or condition, either financial or otherwise, since the date of Borrower's latest Financial Statements. Each Borrower has filed all federal, state, and local tax returns and other reports and filings required by law to be filed before the date of this Agreement and has paid all taxes, assessments, and other charges that are due and payable prior to the date of this Agreement. Each Borrower has made reasonable provision for these types of payments that are accrued but not yet payable. The Borrower does not know of any deficiency or additional assessment not disclosed in the Borrower's books and records.

All financial statements or records submitted to Lender via electronic means, including, but not limited to, facsimile, open internet communications or other telephonic or electronic methods, including, but not limited to, documents in Tagged Image Format Files ("TIFF") and Portable Document Format ("PDF") shall be treated as originals, and will be fully binding with full legal force and effect. Parties waive any right they may have to object to such treatment. Lender may rely on all such records in good faith as complete and accurate records produced or maintained by or on behalf of the Party submitting such records.

 

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Title and Encumbrances. Borrower has good title to all of the Borrower's assets. All encumbrances on any part of the Property were disclosed to Lender in writing prior to the date of this Agreement.

Compliance with General Law. Each Borrower is in compliance with and will conduct its business and use its assets in compliance with all laws, regulations, ordinances, directives, and orders of any level of governmental authority that has jurisdiction over the Borrower, the Borrower's business, or the Borrower's assets.

Environmental Laws. Each Borrower is in compliance with all applicable laws and rules of federal, state, and local authorities affecting the environment, as all have been or are amended.

No Litigation/No Misrepresentations. There are no existing or pending suits or proceedings before any court, government agency, arbitration panel, administrative tribunal, or other body, or threatened against Borrower that may result in any material adverse change in the Borrower's business, property, or financial condition, and all representations and warranties in this Agreement and the Related Documents are true and correct and no material fact has been omitted.

 

COVENANTS. On the date of this Agreement and continuing until the Indebtedness is repaid and Borrower's obligations are fully performed, Borrower covenants as follows.

- Annual submission of corporate tax returns (including schedules) within 120 days of calendar year end or extension thereof for Mechanical Technology, Inc and MTI Instruments, Inc.

- Annual submission of accounts receivable and accounts payable aging reports.

- Annual submission of interim financial statements including Balance Sheet, Income Statement, Accounts Receivable/Accounts Payable aging, Work in Progress reports, etc.

 

EVENTS OF DEFAULT. The occurrence of any of the following events will be an Event of Default.

Noncompliance with Lender Agreements. Default by Borrower or Guarantor under any provision of this Agreement, the Related Documents, or any other agreement with Lender.

False Statements. If a Party made or makes a false or misleading misrepresentation in this Agreement, in the Related Documents, in any supporting material submitted to Lender or to third parties providing reports to Lender, or in Financial Statements given or to be given to Lender.

Material Adverse Change. Any material adverse change in the Borrower's business, financial condition, or the Property has occurred or is imminent; if the full performance of the obligations of any Party is materially impaired; or if the Collateral and its value or Lender's rights with respect thereto are materially impaired in any way. The existence or reasonable likelihood of litigation, governmental proceeding, default, or other event that may materially and adversely affect a Party's business, financial condition, or the Property.

Insolvency or Liquidation. A Party voluntarily suspends transaction of its business or does not generally pay debts as they mature. If a Party has or will make a general assignment for the benefit of creditors or will file, or have filed against it, any petition under federal bankruptcy law or under any other state or federal law providing for the relief of debtors if the resulting proceeding is not discharged within thirty days after filing. If a receiver, trustee, or custodian is or will be appointed for a Party.

Default on Unrelated Debt. If Borrower or Guarantor materially defaults under a provision of an agreement with a third party or if the indebtedness under such an agreement is accelerated.

Judgments or Attachments. If there is entered against a Party a judgment that materially affects the Borrower's business, financial condition, or the Property, or if a tax lien, levy, writ of attachment, garnishment, execution, or similar item is or will be issued against the Collateral or which materially affects Borrower's business, financial condition, or the Property, and which remains unpaid, unstayed on appeal, undischarged, unbonded, or undismissed for thirty days after it was issued.

Collateral Impairment. Lender has a good-faith belief that Lender's rights in the Collateral are or will soon be impaired or that the Collateral itself is or soon will be impaired.

Termination of Existence or Change in Control. If Borrower or Borrower's business is sold or merged or if Borrower or Borrower's business suspends business or ceases to exist.

Insecurity. If Lender has a good-faith belief that any Party is unable or will soon be unable to perform that Party's duties under this Agreement or under the Related Documents.

Death. The death of an individual who is a Party, a partner in a partnership that is a Party, a member in a limited liability company that is a Party, an officer of a corporation that is a Party, or an individual of similar position in any other type of business organization that is a Party.

 

REMEDIES ON DEFAULT.

Remedies, No Waiver. The remedies provided for in this Agreement, the Related Documents, and by law are cumulative and not exclusive. Lender reserves the right to exercise some, all, or none of its rights and reserves the right to exercise any right at any time that Lender has the right, without regard to how much time has passed since the right arose. Lender may exercise its rights in its sole, absolute discretion.

Acceleration, Setoff. Upon an Event of Default, the Loan and the Indebtedness may, at Lender's sole option, be declared immediately due and payable. Lender may apply the Parties' bank accounts and any other property held by Lender against the Indebtedness.

CROSS COLLATERALIZATION. It is the intent of all Parties to cross collateralize all of its Indebtedness and obligations to Lender, howsoever arising and whensoever incurred, except any obligation existing or arising against the principal dwelling of any Party.

ATTORNEYS' FEES AND OTHER COSTS. Borrower agrees to pay all of Lender's costs and expenses incurred in connection with the enforcement of this Agreement, including without limitation, reasonable attorneys' fees, to the extent permitted by law.

 

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EXPENSES. The Parties agree to pay all of Lender's reasonable expenses incidental to perfecting Lender's security interests and liens, all insurance premiums, Uniform Commercial Code search fees, and all reasonable fees incurred by Lender for audits, inspection, and copying of the Parties' books and records. The Parties also agree to pay all reasonable costs and expenses of Lender in connection with the enforcement of Lender's rights and remedies under this Agreement, the Related Documents, and any other agreement between one or more Parties and Lender, and in connection with the preparation of all amendments, modifications, and waivers of consent with respect to this Agreement, including reasonable attorneys' fees.

GOVERNING LAW/PARTIAL ILLEGALITY. This Agreement and the Related Documents are and will be governed by, and the rights of the Parties will be determined by the laws of the state of New York except to the extent that federal law controls. If any part, term, or provision of this Agreement is determined to be illegal or in conflict with state or federal law, the validity of the remaining portion or provisions of this Agreement will not be affected, unless the stricken portion or provision adversely affects Lender's risk of realizing Lender's anticipated return, in which case Lender may, in its sole discretion, deem the Loan matured.

NOTICES. All notices required under this Agreement must be in writing and will be considered given: (i) on the day of personal delivery, or (ii) one business day after deposit with a nationally recognized overnight courier service, or (iii) three business days after deposit with the United States Postal Service sent certified mail, return receipt requested. Any of these methods may be used to give notice. All notices must be sent to the party or parties entitled to notice at the addresses first set forth in this Agreement. Any Party may change its address for notice purposes on five days prior written notice to the other Parties.

INTEGRATION AND AMENDMENT. This Agreement and other written agreements among the Parties, including but not limited to the Related Documents, are the entire agreement of the Parties and will be interpreted as a group, one with the others. None of the Parties will be bound by anything not expressed in writing, and this Agreement cannot be modified except by a writing executed by those Parties burdened by the modification.

FURTHER ACTION. The Parties will, upon request of Lender, make, execute, acknowledge, and deliver to Lender the modified and additional instruments, documents, and agreements, and will take the further action that is reasonably required, to carry out the intent and purpose of this transaction.

CONTINUING EFFECT. Unless superseded by a later Business Loan Agreement, this Agreement will continue in full force and effect until all of the Parties' obligations to Lender are fully satisfied and the Loan and Indebtedness are fully repaid.

HEADINGS. All headings in this Agreement are included for reference only and do not have any effect on the interpretation of this Agreement.

COUNTERPARTS. This Agreement may be executed by the Parties using any number of copies of the Agreement. All executed copies taken together will be treated as a single Agreement.

TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement.

TRANSFERS. Borrower may not assign or transfer its rights or obligations under this Agreement without Lender's prior written consent. Lender may transfer its interest in Lender's sole discretion. Borrower waives all rights of offset and counterclaim Borrower has against Lender. The purchaser of a participation in the loan may enforce its interest regardless of any claims or defenses Borrower has against Lender.

JURISDICTION. The Parties agree to waive any objection to jurisdiction or venue on the ground that the Parties are not residents of Lender's locality. The Parties authorize any action brought to enforce the Parties' obligations to be instituted and prosecuted in any state court having jurisdiction or in the United States District Court for the District that includes Lender's location as set forth at the beginning of this Agreement. The Parties authorize Lender to elect the court at Lender's sole discretion.

WAIVER OF JURY TRIAL. All parties to this Agreement hereby knowingly and voluntarily waive, to the fullest extent permitted by law, any right to trial by jury of any dispute, whether in contract, tort, or otherwise, arising out of, in connection with, related to, or incidental to the relationship established between them in this Agreement or any other instrument, document or agreement executed or delivered in connection with this Agreement or the Related Documents.

ORAL AGREEMENTS DISCLAIMER. This Agreement represents the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

By signing this Agreement, Borrower acknowledges reading, understanding and agreeing to all its provisions and receipt of a copy hereof.

MTI INSTRUMENTS INC

/s/  FREDERICK W JONES            
By: FREDERICK W JONES
Its: PRESIDENT & CEO/CFO

 

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AGREEMENT OF GUARANTOR

Guarantor (i) acknowledges reading and understanding this Agreement; (ii) consents to the provisions of this Agreement relating to Borrower; (iii) agrees to furnish the Financial Statements to Lender that Lender reasonably requests; (iv) agrees to those portions of this Agreement that apply to Guarantor; (v) acknowledges that this Agreement has been freely executed without duress and after an opportunity to consult with counsel; and (vi) confirms that Guarantor received a copy of this Agreement, the Guaranty, and the other documents Guarantor requested.

MECHANICAL TECHNOLOGY INCORPORATED

/s/ FREDERICK W JONES                    
By: FREDERICK W JONES
Its: PRESIDENT & CEO/CFO

LENDER: Pioneer Bank

/s/ JASON URSCHEL                           
By: JASON URSCHEL
Its: BUSINESS BANKING RELATIONSHIP MANAGER

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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EXHIBIT 10.29

 

COMMERCIAL LOAN SETTLEMENT STATEMENT

 

   AGREEMENT DATE

   

      May 7, 2020

   

COLLATERAL DESCRIPTION:    ALL ASSETS

BORROWER INFORMATION
MTI INSTRUMENTS INC
325 WASHINGTON AVE EXT
ALBANY, NY 12205


BORROWER. The term "Borrower" means each person or legal entity identified above in the BORROWER INFORMATION section.

LENDER. "Lender" is Pioneer Bank whose address is 652 Albany Shaker Road, Albany, New York 12211.

TOTAL LOAN AMOUNT

$300,000.00

 

DISBURSEMENTS

   

AMOUNT GIVEN DIRECTLY TO BORROWER

$0.00

   TOTAL FUNDS PAID TO OTHERS

$0.00

TOTAL FUNDS DISBURSED

$0.00
   

REMAINING FUNDS NOT DISBURSED

$300,000.00

By signing this Settlement Statement, each Borrower acknowledges reading, understanding and receiving a copy of a completed copy of this statement.

MTI INSTRUMENTS INC

/s/ FREDERICK W JONES                      
By: FREDERICK W JONES
Its: PRESIDENT & CEO/CFO

 

 

 

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EXHIBIT 10.30

 

COMMERCIAL SECURITY AGREEMENT

AGREEMENT DATE

   

   May 7, 2020

   

BORROWER INFORMATION
MTI INSTRUMENTS INC
325 WASHINGTON AVE EXT
ALBANY, NY 12205


COLLATERAL OWNER INFORMATION

MTI INSTRUMENTS INC
325 WASHINGTON AVE EXT
ALBANY, NY 12205


AGREEMENT. For purposes of this document, the term "Agreement" is used when reference is made to this Commercial Security Agreement.

LENDER. "Lender" means Pioneer Bank whose address is 652 Albany Shaker Road, Albany, New York 12211, its successors and assigns.

DEBTOR. For purposes of this Agreement, "Debtor" refers to any party to this Agreement, whose name and address is recited above, and who executes this Agreement.

SECURITY INTEREST GRANT. Debtor, in consideration of the Obligations to Lender, as defined in the "OBLIGATIONS" provision below, hereby agrees to all of the terms of this Agreement and further hereby specifically grants Lender a continuing security interest in the Collateral as defined in the "DESCRIPTION OF COLLATERAL" provision below. Debtor further grants Lender a security interest in the proceeds of said Collateral; the proceeds of hazard insurance and eminent domain or condemnation awards involving the Collateral; all products of, and accessions to, such Collateral or interests therein; any and all deposits or other sums at any time credited by or due from Lender to Debtor; and any and all instruments, documents, policies, and certificates of insurance, securities, goods, accounts receivable, choses in action, chattel paper, cash, property, and the proceeds thereof (whether or not the same are Collateral or proceeds thereof hereunder), owned by Debtor or in which Debtor has an interest which are now or at any time hereafter in possession or control of Lender, or in transit by mail or carrier to or from Lender, or in possession of any third party acting on Lender's behalf, without regard to whether Lender received the same in pledge, for safekeeping, as agent or otherwise, or whether Lender has conditionally released the same. Debtor's grant of a continuing security interest in the foregoing described Collateral secures to Lender the payment of all loans, advances, and extensions of credit from Lender to Borrower, including all renewals and extensions thereof, and any and all obligations of every kind whatsoever, whether heretofore, now, or hereafter existing or arising between Lender and Borrower and howsoever incurred or evidenced, whether primary, secondary, contingent, or otherwise.

OBLIGATIONS. As used in this Agreement, the term "Obligations" shall mean any and all of Debtor's obligations to Lender, whether they arise under this Agreement or the note, loan agreement, guaranty, or other evidence of debt executed in connection with this Agreement, or under any other mortgage, trust deed, deed of trust, security deed, security agreement, note, lease, instrument, contract, document, or other similar writing heretofore, now, or hereafter executed by the Borrower to Lender, including any renewals, extensions and modifications thereof, and including oral agreements and obligations arising by operation of law. The Obligations shall also include all expenditures that Lender may make under the terms of this Agreement or for the benefit of Borrower or Debtor, all interest, costs, expenses, and attorneys' fees accruing to or incurred by Lender in enforcing the Obligations or in the protection, maintenance, preservation, or liquidation of the Collateral, and any of the foregoing that may arise after the filing of any petition by or against Borrower or Debtor under the Bankruptcy Code, irrespective of whether the obligations do not accrue because of the automatic stay under Bankruptcy Code Section 362 or otherwise.

RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, security agreements, prior mortgages, prior deeds of trust, prior deeds to secure debt, business loan agreements, construction loan agreements, resolutions, guaranties, environmental agreements, subordination agreements, assignments of leases and rents and any other documents or agreements executed in connection with this Agreement whether now or hereafter existing, including any modifications, extensions, substitutions or renewals of any of the foregoing. The Related Documents are hereby made a part of this Agreement by reference thereto, with the same force and effect as if fully set forth herein.

DESCRIPTION OF COLLATERAL. The collateral covered by this Agreement (the "Collateral") is all of Debtor's assets including, without limitation, documents, documents of title (including, without limitation, warehouse receipts and bills of lading), "As-Extracted Collateral," "Fixtures," "Goods," and all of the Debtor's property described below which the Debtor now owns or may hereafter acquire or create and all proceeds and products thereof, whether tangible or intangible, including proceeds of insurance and which may include, but shall not be limited to, any items listed on any schedule or list attached hereto.

Equipment. "Equipment" shall consist of ALL ASSETS.

Accounts. "Accounts" consist of the Debtor's right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of; (ii) for services rendered or to be rendered; (iii) for a policy of insurance issued or to be issued; (iv) for a secondary obligation incurred or to be incurred; (v) for energy provided or to be provided; (vi) for the use or hire of a vessel under a charter or other contract; (vii) arising out of the use of a credit card or charge card or information contained on or for use with the card; (viii) as winnings in a lottery or other game of chance operated or sponsored by

 

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a state, governmental unit of a state, or person licensed or authorized to operate the game by a state or governmental unit of a state; or (ix) for health-care-insurance receivables.

Inventory. "Inventory" consists of all inventory and goods, other than farm products, which (i) are leased by Debtor as lessor, (ii) are held by Debtor for sale or lease or to be furnished under a contract of service, (iii) are furnished by Debtor under a contract of service, or (iv) consist of raw materials, work in process, or materials used or consumed in business.

Instruments. "Instruments" consist of all negotiable instruments and other writings owned or acquired by the Debtor that evidence a right to the payment of a monetary obligation, and are of a type that in the ordinary course of business are transferred by delivery with all necessary endorsements or assignments. Instruments are not themselves security agreements or leases. The term does not include investment property, letters of credit, or writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card.

General Intangibles. "General Intangibles" shall consist of all personal property now owned or hereafter acquired by the Debtor, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, goods, instruments, investment property, letter of credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. General Intangibles shall also include all payment intangibles now held or hereafter acquired by Debtor and all software now owned or hereafter acquired by Debtor, which is not encompassed by the term "Goods," and all supporting information pertaining or relating thereto. General Intangibles include, but are not limited to, intellectual property, rights that arise under a license of intellectual property, including the right to exploit the intellectual property without liability for infringement, and the right to payment of a loan of funds that is not evidenced by chattel paper or an instrument.

Investment Property. "Investment Property" shall consist of all securities, whether certificated or uncertificated, security entitlements, securities accounts, commodities contracts, and commodities accounts now held or hereafter acquired by the Debtor, together with all contracts, instruments, and general intangibles related thereto and all monies, income, proceeds, and benefits attributable or accruing to said property, including, but not limited to, all stock rights, options, rights to subscribe, dividends, liquidating dividends, stock dividends, dividends paid in stock, new securities, and the properties and benefits to which the Debtor is, or may hereafter become, entitled to receive on account of said property.

Chattel Paper. "Chattel Paper" shall consist of all records now held or hereafter acquired by Debtor that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods. In this paragraph, "monetary obligation" means a monetary obligation secured by the goods or owed under a lease of the goods and includes a monetary obligation with respect to software used in the goods. The term does not include (i) charters or other contracts involving the use or hire of a vessel, or (ii) records that evidence a right to payment arising out of the use of a credit card or charge card of information contained on or for use with the card. If a transaction is evidenced by records that include an instrument or series of instruments, the group of records taken together constitutes chattel paper. The definition of chattel paper includes electronic chattel paper. Debtor agrees that it will assist Lender in obtaining control of electronic chattel paper by (i) creating a single authoritative copy of the record(s) existing which is unique and identifiable, (ii) ensuring that the authoritative copy identifies the Lender as the assignee of the record(s), and (iii) ensuring that the authoritative copy is communicated to and maintained by the Lender or its designated custodian. Copies or revisions that add or change an identified assignee of the authoritative copy can be made only with the participation of the Lender. Debtor agrees that each copy or authoritative copy and any copy of a copy shall be readily identifiable as a copy that is not the authoritative copy, and any revision of any authoritative copy is readily identifiable as an authorized or unauthorized revision.

Titled Vehicle. "Titled Vehicle" consists of any and all vehicle(s) and all additions and accessions to the vehicle(s), and any replacements and substitutions of the vehicle(s). It also includes all documents of title related to the vehicle(s) as well as all products, rents, and proceeds of the vehicle(s).

Deposit Accounts. "Deposit Accounts" shall consist of all demand, time, savings, passbook, and similar deposit accounts which are now or are hereafter held by the Debtor in Lender's institution, or maintained in another bank ("Bank") and for which Debtor, Lender and Bank have entered into a duly executed Control Agreement (as used herein, the term "Bank" means an organization that is engaged in the business of banking, and includes banks, savings banks, savings and loan associations, credit unions, and trust companies), unless the deposit is a type of qualifying tax-deferred account as defined in the Internal Revenue Code, as currently in effect and amended from time to time (e.g., Individual Retirement Arrangements, qualified retirement plans, Health Savings Accounts, etc.).

Specific Collateral. "Specific" refers to the specific property, together with all related rights, described below.

        SPECIFIC COLLATERAL DESCRIPTION: ALL ASSETS

WARRANTIES. The Debtor warrants the following: Debtor has or will acquire free and clear title to all of the Collateral, unless otherwise provided herein; the security interest granted to the Lender shall be a first security interest unless the Lender specifically agrees otherwise, and the Debtor will defend same to the Lender against the claims and demands of all persons; the Debtor will fully cooperate in placing, perfecting, or maintaining Lender's lien or security interest; the Debtor agrees to take whatever actions requested by Lender to perfect and continue Lender's security interest on the Collateral; the Debtor agrees not to allow or permit any lien, security interest, adverse claim, charge, or encumbrance of any kind against the Collateral or any part thereof, without the Lender's prior written consent; all of the Collateral is located in the state of the Debtor's address specified at the beginning of this Agreement, unless otherwise certified to and agreed to by the Lender, or, alternatively, is in possession of the Lender; the Debtor will not remove or change the location of any Collateral without the Lender's prior written consent; the Debtor will use the Collateral only in the conduct of its own business, in a careful and proper manner; the Debtor will not use the Collateral or permit it to be used for any unlawful purpose; except as otherwise provided in this Agreement with respect to inventory, Debtor will not, without the Lender's prior written consent, sell, assign, transfer, lease, charter, encumber, hypothecate, or dispose of the Collateral, or any part thereof, or any interest therein, nor will Debtor offer to sell, assign, transfer, lease, charter, encumber, hypothecate, or dispose of the Collateral, or any part thereof, or any interest therein; the Debtor will not conduct business under any name other than that given at the beginning of this Agreement,

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nor change, nor reorganize the type of business entity as described, except upon the prior written approval of the Lender, in which event the Debtor agrees to execute any documentation of whatsoever character or nature demanded by the Lender for filing or recording, at the Debtor's expense, before such change occurs; the information regarding Debtor's state of organization or formation as set forth in the Resolution is correct, and Debtor further warrants that Debtor will not change Debtor's state of organization or formation without Lender's prior written consent and will assist Lender with any changes to any documents, filings, or other records resulting or required therefrom; the Debtor will keep all records of account, documents, evidence of title, and all other documentation regarding its business and the Collateral at the address specified at the beginning of this Agreement, unless notice thereof is given to the Lender at least ten (10) days prior to the change of any address for the keeping of such records; the Debtor will, at all times, maintain the Collateral in good condition and repair and will not sell or remove same except as to inventory in the ordinary course of business; all financial information and statements delivered by the Debtor to the Lender to obtain loans and extensions of credit are true and correct and are prepared in accordance with generally accepted accounting principles; there has been no material adverse change in the financial condition of the Debtor since it last submitted any financial information to the Lender; there are no actions or proceedings, including set-off or counterclaim, which are threatened or pending against the Debtor which may result in any material adverse change in the Debtor's financial condition or which might materially affect any of the Debtor's assets; and the Debtor has duly filed all federal, state, municipal, and other governmental tax returns, and has obtained all licenses, permits, and the like which the Debtor is required by law to file or obtain, and all such taxes and fees for such licenses and permits required to be paid, have been paid in full.

INSURANCE. The Debtor agrees that it will, at its own expense, fully insure the Collateral against all loss or damage for any risk of whatsoever nature in such amounts, with such companies, and under such policies as shall be satisfactory to the Lender. All policies shall expressly provide that the Lender shall be the loss payee or, alternatively, if requested by Lender, mortgagee. The Lender is granted a security interest in the proceeds of such insurance and may apply such proceeds as it may receive toward the payment of the Obligations, whether or not due, in such order as the Lender may in its sole discretion determine. The Debtor agrees to maintain, at its own expense, public liability and property damage insurance upon all its other property, to provide such policies in such form as the Lender may approve, and to furnish the Lender with copies of other evidence of such policies and evidence of the payments of the premiums thereon. All policies of insurance shall provide for a minimum 10 days' written notice of cancellation to Lender. At the request of Lender, such policies of insurance shall be delivered to and held by Lender. Debtor agrees that Lender is authorized to act as attorney for Debtor in obtaining, adjusting, settling, and canceling such insurance and endorsing any drafts or instruments issued or connected with such insurance. Debtor specifically authorizes Lender to disclose information obtained in conjunction with this Agreement and from policies of insurance to prospective insurers of the Collateral. If the Debtor at any time fails to obtain or to maintain any of the insurance required above or pay any premium in whole or in part relating thereto, the Lender, without waiving any default hereunder, may make such payment or obtain such policies as the Lender, in its sole discretion, deems advisable to protect the Debtor's property. All costs incurred by the Lender, including reasonable attorneys' fees, court costs, expenses, and other charges thereby incurred, shall become a part of the Obligations and shall be payable on demand.

ACCOUNTS. As of the time any account becomes subject to the security interest (or pledge or assignment as applicable) granted hereby, Debtor shall be deemed further to have warranted as to each and all of such accounts as follows: (a) each account and all papers and documents relating thereto are genuine and in all respects what they purport to be; (b) each account is valid and subsisting and arises out of a bona fide sale of goods sold and delivered to, or out of and for services theretofore actually rendered by Debtor to, the account debtor named in the account or other bona fide transaction; (c) the amount of the account represented as owing is the correct amount actually and unconditionally owing except for normal cash discounts and is not subject to any setoffs, credits, defenses, or countercharges; and (d) Debtor is the owner thereof free and clear of any charges, liens, security interests, adverse claims, and encumbrances of any and every nature whatsoever.

Lender shall have the right in its own name or in the name of the Debtor, whether before or after default, to require Debtor: (1) to transmit all proceeds of collection of accounts to Lender; (2) to notify any and all account debtors to make payments of the accounts directly to Lender; (3) to demand, collect, receive, receipt for, sue for, compound, and give acquittal for, any and all amounts due or to become due on the accounts and to endorse the name of the Debtor on all commercial paper given in payment or part payment thereof; and (4) in Lender's discretion, to file any claim or take any other action or proceeding that Lender may deem necessary or appropriate to protect and preserve and realize upon the accounts and related Collateral.

Unless and until Lender elects to collect accounts, and the privilege of Debtor to collect accounts is revoked by Lender in writing, Debtor shall continue to collect accounts, account for same to Lender, shall not commingle the proceeds of collections of accounts with any funds of the Debtor, and shall deposit such proceeds in an account with Lender. In order to assure collection of accounts in which Lender has an interest hereunder, Lender may notify the post office authorities to change the address for delivery of mail addressed to Debtor to such address as Lender may designate, open and dispose of such mail, and receive the collections of accounts included therewith. Lender shall have no duty or obligation whatsoever to collect any account or to take any other action or preserve or protect the Collateral; however, should Lender elect to collect any account or take possession of the Collateral, Debtor releases Lender from any claim or claims for loss or damage arising from any act or omission in connection therewith, and costs of collection incurred by Lender shall be an obligation secured hereby and constitute a portion of the Obligations.

Upon request by Lender, whether before or after default, Debtor shall take such action and execute and deliver such documents as Lender may reasonably request in order to identify, confirm, mark, segregate, and assign accounts and to evidence Lender's interest in same. Without limiting the foregoing Debtor, upon request, agrees to assign accounts to Lender, identify and mark accounts as being subject to the security interest for pledge (or assignment as applicable) granted hereby, mark Debtor's books and records to reflect such assignments, and forthwith to transmit to Lender in the form as received by Debtor any and all proceeds of collection of such accounts.

Debtor will deliver to Lender, prior to the 10th day of each month, or with such other frequency as Lender may request, a written report in form and content satisfactory to Lender, showing a listing and aging of accounts and such other information as Lender may request from time to time. Debtor shall immediately notify Lender of the assertion by any account debtor of any setoff, defense, or claim regarding an account or any other matter adversely affecting an account.

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Returned or repossessed goods arising from or relating to any accounts included within the Collateral shall, if requested by Lender, be held separate and apart from any other property. Debtor, on request by Lender, but not less than weekly even though no request has been made, shall report to Lender identifying information with respect to any such goods relating to accounts included in transactions under this Agreement.

INVENTORY. Debtor will deliver to Lender prior to the 10th day of each month, or on such other frequency as Lender may request, a written report in form and content satisfactory to Lender, with respect to the preceding month or other applicable period showing Debtor's opening inventory, inventory acquired, inventory sold, inventory returned, inventory used in Debtor's business, closing inventory, and other inventory not with the preceding categories, and such other information as Lender may request from time to time. Debtor shall immediately notify Lender of any matter adversely affecting the inventory, including, without limitation, any event causing loss or depreciation in the value of the inventory and the amount of such possible loss or depreciation.

Debtor will promptly notify Lender in writing of any addition to, change in, or discontinuance of its place(s) of business as shown in this Agreement, and the location of the office where it keeps its records. All Collateral will be located at the place(s) of business shown herein, as modified by any written notice(s) given pursuant hereto.

Unless and until the privilege of Debtor to use inventory in the ordinary course of Debtor's business is revoked by Lender in the event of default or if Lender deems itself insecure, Debtor may use the inventory in any manner not inconsistent with this Agreement, may sell that part of the Collateral consisting of inventory provided that all such sales are in the ordinary course of business, and may use and consume any raw materials or supplies that are necessary in order to carry on Debtor's business. A sale in the ordinary course of business does not include a transfer in partial or total satisfaction of a debt.

All accounts that arise from the sale of the inventory included within the Collateral shall be subject to all of the terms and provisions hereof pertaining to accounts.

Debtor shall take all action necessary to protect and preserve the inventory.

INSTRUMENTS. Debtor shall immediately deliver to Lender all instruments included in the Collateral. Negotiable instruments shall be endorsed to the order of Lender. With respect to other writing(s) evidencing a right to the payment of money that, in the ordinary course of business, is transferred by delivery with any necessary endorsement or assignment, Debtor shall deliver to Lender and to any third-party issuer a document of assignment in a form and content satisfactory to Lender assigning the Debtor's rights in the said writing(s), and the third-party issuer shall acknowledge receipt of notice of the assignment.

Debtor agrees that Lender may, at any time (whether before or after default) and in its sole discretion, surrender for payment and obtain payment of any portion of the Collateral.

Any and all replacement instruments and other benefits and proceeds related to the Collateral that are received by the Debtor shall be held by Debtor in trust for lender and immediately delivered to Lender to be held as part of the Collateral.

DEPOSIT ACCOUNTS. Debtor shall immediately deliver to Lender all certificated certificates of deposit included in the Collateral. Negotiable certificates of deposit shall be endorsed to the order of Lender. Debtor shall execute any and all other documents necessary to provide an appropriate security interest in any account with Lender. With respect to deposit accounts held in another Bank, Debtor shall deliver to Lender a control agreement ("Control Agreement") in a form and content satisfactory to Lender assigning the Debtor's rights in the deposit account to Lender, and the Bank shall acknowledge receipt of the Control Agreement. The Control Agreement must be in a form that provides that the Bank will comply with any instruction originated by the Lender directing disposition of funds in the Deposit Account without further consent of the Debtor. The form of Control Agreement must be in a form satisfactory to the Lender, and must provide that said Bank will comply with a directive originated by the Lender and will not comply with any directive of the Debtor without the additional written consent of the Lender.

Debtor agrees that Lender may, at any time (whether before or after default) and in its sole discretion, surrender for payment and obtain payment of any portion of the Collateral, whether such have matured or the exercise of the Lender's rights results in a loss of interest or principal or other penalty on such deposits, and, in connection therewith, cause payments to be made directly to Lender.

Any and all replacement or renewal certificates and other benefits and proceeds related to the Collateral that are received by the Debtor shall be held by Debtor in trust for Lender and immediately delivered to Lender to be held as part of the Collateral.

Without limiting the foregoing, it is specifically understood and agreed that Lender shall have no responsibility for ascertaining any maturities or similar matters relating to any of the Collateral or for informing Debtor with respect to any such matters (irrespective of whether lender actually has, or may be deemed to have, knowledge thereof).

INVESTMENT PROPERTY. Immediately upon the execution of this Agreement or Debtor's acquiring rights in the Collateral, Debtor shall: (a) If the Collateral includes certificated securities to Lender and if the certificate is in registered form, register it in the name of Lender or deliver to Lender with the certificate a stock power satisfactory in form and substance to Lender. (b) If the Collateral includes uncertificated securities directly held by Debtor, transfer such securities from Debtor to Lender on the books of the issuer or cause the issuer to enter into and deliver to Lender a control agreement with Debtor and Lender, having a form and substance satisfactory to Lender, providing that issuer will comply with instructions originated by Lender without further consent of the registered owner and issuer will not follow instructions originated by Debtor without the Lender's written consent. (c) If the Collateral includes security entitlements, security accounts, or commodity accounts, cause the Lender to become the holder of the entitlements or accounts or cause the securities intermediary and/or the commodity intermediary to enter into and deliver to Lender an agreement with Debtor and Lender, in a form and substance satisfactory to Lender, providing that said intermediary will comply with entitlements or orders originated by Lender without further consent by Debtor and will not comply with orders originated by Debtor without Lender's written consent. (d) If the Collateral includes commodity contracts, cause the commodity intermediary to enter into and deliver to Lender an agreement with Debtor and Lender, in a form and substance satisfactory to Lender, that said intermediary will apply any value distributed on account of the commodity contract as directed by Lender without further consent by the commodity customer and will not comply with orders originated by Debtor without Lender's written consent.

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Upon demand by Lender, Debtor shall execute, assign, and endorse all proxies, applications, acceptances, stock powers, chattel paper, documents, instruments, or other evidence of payment or writing constituting or relating to any of the Collateral, all in such form and substance as may be satisfactory to Lender.

Lender shall also have a security interest in all investment property, rights, and interest of every description at any time issued or issuable as an addition to, in substitution of exchange for, or with respect to the Collateral, including, without limitation, shares issued as dividends or as the result of any reclassifications, merger, spin-off, or other reorganization. Debtor shall deliver promptly to Lender in the exact form received, any such securities or other property which come into the possession, custody, or control of Debtor, and shall with respect to such property transfer control to Lender in accord with the paragraphs above.

In its discretion and without notice to Debtor, the Lender may take any one or more of the following actions, without liability except to account for the property actually received: (a) transfer or register in its name or the name of its nominee any of the Collateral, with or without liability except to account for the property actually received; (b) transfer or register in its name or the name of its nominee any of the Collateral, with or without identification of the security interest herein created, and whether or not so transferred or registered, receive the income, dividends and other distributions thereon and hold them to apply them to the Obligations in any order of priority; (c) to the fullest extent possible under applicable law, exercise or cause to be exercised all voting and corporate powers with respect to any of the Collateral, including all rights of conversion, exchange, subscription, and any other rights, privileges, or options pertaining to such Collateral, as if the absolute owner thereof; (d) exchange any of the Collateral for other property upon a reorganization, recapitalization, or other readjustment and, in connection therewith, deposit any of the Collateral with any committee or depository upon such terms as the Lender may determine; and (e) in its absolute discretion to exercise or to withhold the exercise of any of the rights, powers, privileges, and options expressly or implicitly granted to the Lender in this Agreement, without duty to do so and without responsibility for any failure to do so or to delay in so doing.

Without limiting any other right of Lender, on default the Lender may, to the fullest extent permitted by applicable law, without notice, advertisement, hearing, or process of law of any kind, sell any or all of the Collateral, free of all rights and claims of the Debtor therein or thereto, on any recognized market or exchange at any price reasonably consistent with the market price occurring at the time of the sale of the Collateral and, notwithstanding any recent or current decreases or increases in that market price, the sale of the Collateral on such recognized market or exchange shall be deemed reasonable if conducted under ordinary terms regardless of how soon after default the Lender sells such Collateral.

ADDITIONAL COLLATERAL. In the event that Lender should, at any time, determine that the Collateral or Lender's security interest in the Collateral is impaired, insufficient, or has declined or may decline in value, or if Lender should deem that payment of the Obligations is insecure, time being of the very essence, then Lender may require, and Debtor agrees to furnish, additional Collateral that is satisfactory to Lender. Lender's request for additional collateral may be oral or in writing delivered by United States mail addressed to Debtor and shall not affect any other subsequent right of the Lender to request additional Collateral.

FINANCING STATEMENT(S) AND LIEN PERFECTION. Lender is authorized to file a conforming financing statement or statements to perfect its security interest in the Collateral, as provided in Revised Article 9, Uniform Commercial Code - Secured Transactions. Debtor agrees to provide such information, supplements, and other documents as Lender may from time to time require to supplement or amend such financing statement filings, in order to comply with applicable state or federal law and to preserve and protect the Lender's rights in the Collateral. The Debtor further grants the Lender a power of attorney to execute any and all documents necessary for the Lender to perfect or maintain perfection of its security interest in the Collateral, and to change or correct any error on any financing statement or any other document necessary for proper placement of a lien on any Collateral which is subject to this Agreement.

LANDLORD'S WAIVER. Upon request, Debtor shall furnish to Lender, in a form and upon such terms as are acceptable to Lender, a landlord's waiver of all liens with respect to any Collateral covered by this Agreement that is or may be located upon leased premises.

RELATIONSHIP TO OTHER AGREEMENTS. This Agreement and the security interests (and pledges and assignments, as applicable) herein granted are in addition to (and not in substitution, novation or discharge of) any and all prior or contemporaneous security agreements, security interest, pledges, assignments, mortgages, liens, rights, titles, or other interests in favor of Lender or assigned to Lender by others in connection with the Obligations. All rights and remedies of Lender in all such agreements are cumulative.

TAXES, LIENS, ETC. The Debtor agrees to pay all taxes, levies, judgments, assessments, and charges of any nature whatsoever relating to the Collateral or to the Debtor's business. If the Debtor fails to pay such taxes or other charges, the Lender, at its sole discretion, may pay such charges on behalf of the Debtor; and all sums so dispensed by the Lender, including reasonable attorneys' fees, court costs, expenses, and other charges relating thereto, shall become a part of the Obligations and shall be payable on demand.

ENVIRONMENTAL HAZARDS. Debtor certifies that as to any real estate which has been, is now, or will be in the future owned or occupied by Debtor, that such real estate has not in the past, nor will now or in the future be allowed in any manner to be exposed to or contain hazardous or environmentally harmful substances as may be defined or regulated by any local, state or federal law or regulation which impacts, in any way, such substances, except to the extent the existence of such substances has been presently disclosed in writing to Lender, and Debtor will immediately notify Lender in writing of any assertion made by any party to the contrary. Debtor indemnifies and holds Lender and Lender's directors, officers, employees, and agents harmless from any liability or expense of whatsoever nature, including reasonable attorneys' fees, incurred directly or indirectly as a result of Debtor's involvement with hazardous or environmentally harmful substances as may be defined or regulated as such under any local, state or federal law or regulation or Debtor's ownership or occupation of any real estate upon which any hazardous or environmentally harmful substance is or was previously located.

PROTECTION OF COLLATERAL. Debtor agrees that Lender may, at Lender's sole option, whether before or after any event of default, and without prior notice to Debtor, take the following actions to protect Lender's interest in the Collateral: (a) pay for the maintenance, preservation, repair, improvement, or testing of the Collateral; (b) pay any filing, recording, registration, licensing, certification, or other fees and charges related to the Collateral; or (c) take any other action to preserve and protect the Collateral or Lender's rights and remedies under this Agreement, as Lender may deem necessary or appropriate from time to time. Debtor agrees that Lender is not obligated and has no duty whatsoever to take

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the foregoing actions. Debtor further agrees to reimburse Lender promptly upon demand for any payment made or any expenses incurred by Lender pursuant to this authorization. Payments and expenditures made by Lender under this authorization shall constitute additional Obligations, shall be secured by this Agreement, and shall bear interest thereon from the date incurred at the maximum rate of interest, including any default rate, if one is provided, as set forth in the notes secured by this obligation.

INFORMATION AND REPORTING. The Debtor agrees to supply to the Lender such financial and other information concerning its affairs and the status of any of its assets as the Lender, from time to time, may reasonably request. The Debtor further agrees to permit the Lender, its employees, and agents, to have access to the Collateral for the purpose of inspecting it, together with all of the Debtor's other physical assets, if any, and to permit the Lender, from time to time, to verify Accounts, if any, as well as to inspect, copy, and to examine the books, records, and files of the Debtor.

CROSS-COLLATERALIZATION. Debtor agrees that any security interest provided in Collateral under this Agreement or any Collateral provided in connection with any and all other indebtedness of Debtor to Lender, whether or not such indebtedness is related by class or claim and whether or not contemplated by the parties at the time of executing each evidence of indebtedness, shall act as Collateral for all said indebtedness. This cross-collateralization provision shall not apply to any Collateral that is/are household goods or a principal dwelling.

DEFAULT. The occurrence of any of the following events shall constitute a default of this Agreement: (a) the non-payment, when due (whether by acceleration of maturity or otherwise), of any amount payable on any of the Obligations or any extension or renewal thereof; (b) the failure to perform any agreement of the Debtor contained herein or in any other agreement Debtor has or may have with Lender; (c) the publication of any statement, representation, or warranty, whether written or oral, by the Debtor to the Lender, which at any time is untrue in any respect as of the date made; (d) the condition that any Debtor becomes insolvent or unable to pay debts as they mature, or makes an assignment for the benefit of the Debtor's creditors, or conveys substantially all of its assets, or in the event of any proceedings instituted by or against any Debtor alleging that such Debtor is insolvent or unable to pay debts as they mature (failure to pay being conclusive evidence of inability to pay); (e) Debtor makes application for appointment of a receiver or any other legal custodian, or in the event that a petition of any kind is filed under the Federal Bankruptcy Code by or against such Debtor and the resulting proceeding is not discharged within thirty days after filing; (f) the entry of any judgment against any Debtor, or the issue of any order of attachment, execution, sequestration, claim and delivery, or other order in the nature of a writ levied against the Collateral; (g) the death of any Debtor who is a natural person, or of any partner of any Debtor that is a partnership; (h) the dissolution, liquidation, suspension of normal business, termination of existence, business failure, merger, or consolidation or transfer of a substantial part of the property of any Debtor which is a corporation, limited liability company, partnership, or other non-individual business entity; (i) the Collateral or any part of the Collateral declines in value in excess of normal wear, tear, and depreciation or becomes, in the judgment of Lender, impaired, unsatisfactory, or insufficient in character or value, including but not limited to the filing of a competing financing statement; breach of warranty that the Debtor is the owner of the Collateral free and clear of any encumbrances (other than those encumbrances disclosed by Debtor or otherwise made known to Lender, and which were acceptable to Lender at the time); sale of the Collateral (except in the ordinary course of business) without Lender's express written consent; failure to keep the Collateral insured as provided herein; failure to allow Lender to inspect the Collateral upon demand or at reasonable time; failure to make prompt payment of taxes on the Collateral; loss, theft, substantial damage, or destruction of the Collateral; and, when Collateral includes inventory, accounts, chattel paper, or instruments, failure of account debtors to pay their obligations in due course; or (j) the Lender in good faith, believes the Debtor's ability to repay the Debtor's indebtedness secured by this Agreement, any Collateral, or the Lender's ability to resort to any Collateral, is or soon will be impaired, time being of the very essence.

REMEDY. Upon the occurrence of an event of default, Lender, at its option, shall be entitled to exercise any one or more of the remedies described in this Agreement, in all documents evidencing the Obligations, in any other agreements executed by or delivered by Debtor for benefit of Lender, in any third-party security agreement, mortgage, pledge, or guaranty relating to the Obligations, in the Uniform Commercial Code of the state in which Lender is located, and all remedies at law and equity, all of which shall be deemed cumulative. The Debtor agrees that, whenever a default exists, all Obligations may (notwithstanding any provision in any other agreement), at the sole option and discretion of the Lender and without demand or notice of any kind, be declared, and thereupon immediately shall become due and payable; and the Lender may exercise, from time to time, any rights and remedies, including the right to immediate possession of the Collateral, available to it under applicable law. The Debtor agrees, in the case of default, to assemble, at its own expense, all Collateral at a convenient place acceptable to the Lender. The Lender shall, in the event of any default, have the right to take possession of and remove the Collateral, with or without process of law, and in doing so, may peacefully enter any premises where the Collateral may be located for such purpose. Debtor waives any right that Debtor may have, in such instance, to a judicial hearing prior to such retaking. The Lender shall have the right to hold any property then in or upon said Collateral at the time of repossession not covered by the security agreement until return is demanded in writing by Debtor. Debtor agrees to pay all reasonable costs of the Lender in connection with the collecting of the Obligations and enforcement of any rights connected with retaking, holding, testing, repairing, improving, selling, leasing, or disposing of the Collateral, or like expenses. These expenses, together with interest thereon from the date incurred until paid by Debtor at the maximum post-default rate stated in the notes secured hereby, which Debtor agrees to pay, shall constitute additional Obligations and shall be secured by and entitled to the benefits of this Agreement. The Lender may sell, lease, or otherwise dispose of the Collateral, by public or private proceedings, for cash or credit, without assumption of credit risk. Unless the Collateral is perishable or threatens to decline speedily in value or of a type customarily sold on a recognized market, Lender will send Debtor reasonable notice of the time and place of any public sale or of the time after which any private sale or other disposition will be made. Any notification of intended disposition of the Collateral by the Lender shall be deemed to be reasonable and proper if sent United States mail, postage prepaid, electronic mail, facsimile, overnight delivery or other commercially reasonable means to the Debtor at least ten (10) days before such disposition, and addressed to the Debtor either at the address shown herein or at any other address provided to Lender in writing for the purpose of providing notice. Proceeds received by Lender from disposition of the Collateral may be applied toward Lender's expenses and other obligations in such order or manner as Lender may elect. Debtor shall be entitled to any surplus if one results after lawful application of the proceeds. If the proceeds from a sale of the Collateral are insufficient to extinguish the Obligations of the Debtor hereunder, Debtor shall be liable for a deficiency. Lender shall have the right, whether before or after default, to collect and receipt for, compound, compromise, and settle, and give releases, discharges, and acquittances with respect to, any and all amounts owed by any person or entity with respect to the Collateral. Lender may remedy any default and may waive any default without waiving the default remedied and without waiving any other prior or

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subsequent default. The rights and remedies of the Lender are cumulative, and the exercise of any one or more of the rights or remedies shall not be deemed an election of rights or remedies or a waiver of any other right or remedy.

FUTURE ADVANCES AND AFTER-ACQUIRED PROPERTY. Future advances may be made at any time by the Lender under this Agreement to the extent allowed by law. The security interest grant contained in this Agreement also applies to any Collateral of the type(s) identified in this Agreement that the Debtor acquires after this Agreement is executed, except that no security interest attaches to after-acquired consumer goods unless the Debtor acquires rights in such goods within 10 days of Lender giving value. In anticipation of future advances by Lender, the Debtor authorizes Lender to file any necessary financing statements to protect Lender's security interest.

EXERCISE OF LENDER'S RIGHTS. Any delay on the part of the Lender in exercising any power, privilege, or right hereunder, or under any other document executed by Debtor to the Lender in connection herewith, shall not operate as a waiver thereof, and no single or partial exercise thereof or any other power, privilege, or right shall preclude other or further exercise thereof. The waiver by the Lender of any default of the Debtor shall not constitute a waiver of subsequent default.

CONTINUING AGREEMENT. This is a continuing agreement and the security interest (and pledge and assignment, as applicable) hereby granted and all of the terms and provisions of this Agreement shall be deemed a continuing agreement and shall remain in full force and effect until the Obligations are paid in full. In the event that Lender should take additional Collateral, or enter into other security agreements, mortgages, guarantees, assignments, or similar documents with respect to the Obligations, or should Lender enter into other such agreements with respect to other obligations of Debtor, such agreements shall not discharge this Agreement, which shall be construed as cumulative and continuing and not alternative and exclusive.

Any attempted revocation or termination shall only be effective if explicitly confirmed in a signed writing issued by Lender to such effect and shall in no way impair or affect any transactions entered into or rights created or liabilities incurred or arising prior to such revocation or termination, as to which this Agreement shall be truly operative until same are repaid and discharged in full. Unless otherwise required by applicable law, Lender shall be under no obligation to issue a termination statement or similar document unless Debtor requests same in writing, and providing further, that all Obligations have been repaid and discharged in full and there are no commitments to make advances, incur any obligations, or otherwise give value.

ABSENCE OF CONDITIONS OF LIABILITY. This Agreement is unconditional. Lender shall not be required to exhaust its remedies against Debtor, other collateral, or guarantors, or pursue any other remedies within Lender's power before being entitled to exercise its remedies hereunder. Lender's rights to the Collateral shall not be altered by the lack of validity or enforceability of the Obligations against Debtor, and this Agreement shall be fully enforceable irrespective of any counterclaim which the Debtor may assert on the underlying debt and notwithstanding any stay, modification, discharge, or extension of Debtor's Obligation arising by virtue of Debtor's insolvency, bankruptcy, or reorganization, whether occurring with or without Lender's consent.

NOTICES. Any notice or demand given by Lender to Debtor in connection with this Agreement, the Collateral, or the Obligations, shall be deemed given and effective upon deposit in the United States mail, postage prepaid, electronic mail, facsimile, overnight delivery or other commercially reasonable means addressed to Debtor at the address designated at the beginning of this Agreement, or such other address as Debtor may provide to Lender in writing from time to time for such purposes. Actual notice to Debtor shall always be effective no matter how such notice is given or received.

WAIVERS. Debtor waives notice of Lender's acceptance of this Agreement, defenses based on suretyship, and to the fullest extent permitted by law, any defense arising as a result of any election by Lender under the Bankruptcy Code or the Uniform Commercial Code. Debtor and any maker, endorser, guarantor, surety, third-party pledgor, and other party executing this Agreement that is liable in any capacity with respect to the Obligations hereby waive demand, notice of intention to accelerate, notice of acceleration, notice of nonpayment, presentment, protest, notice of dishonor, and any other similar notice whatsoever.

WAIVER OF JURY TRIAL. All parties to this Agreement hereby knowingly and voluntarily waive, to the fullest extent permitted by law, any right to trial by jury of any dispute, whether in contract, tort, or otherwise, arising out of, in connection with, related to, or incidental to the relationship established between them in this Agreement or any other instrument, document or agreement executed or delivered in connection with this Agreement or the Related Documents.

JOINT AND SEVERAL LIABILITY. To the extent permitted by law, each Debtor executing this Agreement is jointly and severally bound.

SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law; but, in the event any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity and shall be severed from the rest of this Agreement without invalidating the remainder of such provision or the remaining provisions of this Agreement.

SURVIVAL. The rights and privileges of the Lender hereunder shall inure to the benefits of its successors and assigns, and this Agreement shall be binding on all heirs, executors, administrators, assigns, and successors of Debtor.

ASSIGNABILITY. Lender may assign, pledge, or otherwise transfer this Agreement or any of its rights and powers under this Agreement without notice, with all or any of the Obligations, and in such event the assignee shall have the same rights as if originally named herein in place of Lender. Debtor may not assign this Agreement or any benefit accruing to it hereunder without the express written consent of the Lender.

GOVERNING LAW. This Agreement has been delivered in the State of New York and shall be construed in accordance with the laws of that state.

HEADINGS AND GENDER. The headings preceding text in this Agreement are for general convenience in identifying subject matter, but have no limiting impact on the text which follows any particular heading. All words used in this Agreement shall be construed to be of such gender or number as the circumstances require.

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MISCELLANEOUS. Time is of the essence of this Agreement. Except as otherwise defined in this Agreement, all terms herein shall have the meanings provided by the Uniform Commercial Code as it has been adopted in the state of New York. All rights, remedies, and powers of the Lender hereunder are irrevocable and cumulative, and not alternative or exclusive, and shall be in addition to all rights, remedies, and powers given hereunder or in or by any other instruments or by the provision of the Uniform Commercial Code as adopted in the state where the Lender is located, or any other laws, now existing or hereafter enacted. The Debtor specifically agrees that, if it has heretofore or hereafter executed any loan agreement in conjunction with the Agreement, any ambiguities between this Agreement and any such loan agreement shall be construed under the provisions of the loan agreement, to the extent that it may be necessary to eliminate any such ambiguity. Debtor releases Lender from any liability which might otherwise exist for any act or omission of Lender related to the collection of any debt secured by this Agreement or the disposal of any Collateral, except for the Lender's willful misconduct.

ORAL AGREEMENTS DISCLAIMER. This Agreement represents the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

ACKNOWLEDGMENT. Debtor acknowledges agreeing to all of the provisions in this Agreement, and further acknowledges receipt of a true and complete copy of this Agreement.

IN WITNESS WHEREOF, Debtor has executed this Agreement on the date and year shown below.

MTI INSTRUMENTS INC

/s/ FREDERICK W JONES                            
By: FREDERICK W JONES
Its: PRESIDENT & CEO/CFO

LENDER: Pioneer Bank

/s/ JASON URSCHEL                                    
By: JASON URSCHEL
Its: BUSINESS BANKING RELATIONSHIP MANAGER

 

 

 

 

 

 

 

 

 

 

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EXHIBIT 10.31

 

UNLIMITED CONTINUING GUARANTY

 

GUARANTY DATE

   

   May 7, 2020

   

GUARANTOR INFORMATION

 

MECHANICAL TECHNOLOGY INCORPORATED

Type of Business Entity: Corporation

325 WASHINGTON AVE EXT

State of Organization/Formation: New York

ALBANY, NY 12205

 
 

BORROWER INFORMATION

 

MTI INSTRUMENTS INC

Type of Business Entity: Corporation

325 WASHINGTON AVE EXT

State of Organization/Formation: New York

ALBANY, NY 12205

 
 

UNLIMITED CONTINUING GUARANTY. This Unlimited Continuing Guaranty will be referred to in this document as the "Guaranty."

LENDER. "Lender" means Pioneer Bank whose address is 652 Albany Shaker Road, Albany, New York 12211 , its successors and assigns.

BORROWER. "Borrower" means each party identified above to whom Lender has extended credit and financial accommodations.

GUARANTOR. "Guarantor" means the party identified above that is undertaking certain liabilities to the Lender, as specified herein.

OBLIGATIONS. "Obligations" means any and all indebtedness, obligations, undertakings, covenants, agreements, and liabilities of the Borrower to the Lender, and all claims of the Lender against the Borrower, now existing or hereafter arising, direct or indirect (including participations or any interest of the Lender in indebtedness of the Borrower to others), acquired outright, conditionally, or as collateral security from another, absolute or contingent, joint or several, secured or unsecured, matured or not matured, monetary or nonmonetary, arising out of contract or tort, liquidated or unliquidated, arising by operation of law or otherwise and all extensions, renewals, refundings, replacements, and modifications of any of the foregoing.


NOTICE TO GUARANTOR. Lender has agreed to extend credit and financial accommodations to Borrower pursuant to a promissory note executed on even date herewith (the "Note"), and all agreements, instruments, and documents executed or delivered in connection with the foregoing or otherwise related thereto (together with any amendments, modifications, or restatements thereof, the "Related Documents"). Guarantor is affiliated with Borrower, and as such, shall be benefited directly by the transaction contemplated by the Related Documents, and shall execute this Guaranty in order to induce Lender to enter the transaction.

In consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby guarantees, promises and undertakes, both jointly and severally, as follows:

UNLIMITED CONTINUING GUARANTY. Guarantor hereby unconditionally, absolutely, and irrevocably guarantees to Lender the full and prompt payment and performance when due (whether at the maturity date or by required prepayment, acceleration, or otherwise) of all Obligations of the Borrower to the Lender (notwithstanding the fact that from time to time there may be no indebtedness outstanding), however created, of every kind and description, whether now existing or hereafter arising and whether direct or indirect, due or which may become due, absolute or contingent, primary or secondary, liquidated or unliquidated, whether originated with Lender or owed to others and acquired by Lender by purchase, assignment, or otherwise, and including without limitation all loans, advances, indebtedness, and each and every other obligation arising under the Related Documents, and all agreements, instruments, and documents evidencing, guarantying, securing or otherwise executed in connection with any of the foregoing, together with any amendments, modifications, and restatements thereof, plus Expenses (as that term is defined below).

This Guaranty is an absolute, present, unconditional, and continuing guaranty of payment and performance that shall remain in full force and effect and shall continue in effect until the effective date of Guarantor's written notice of termination; provided that this Guaranty shall continue in effect thereafter with respect to all guaranteed indebtedness in existence on the effective date of such termination (including all extensions and renewals thereof and all subsequent accruing interest and other charges thereon) until all such indebtedness shall be fully paid to Lender. The effective date of such notice from the Guarantor will be 30 days after the written communication from the Guarantor of such termination is delivered to the Lender. Delivery of this communication may be made by any of the following means: (a) hand delivery, (b) registered or certified mail, postage prepaid, with return receipt requested, (c) first class or express mail, postage prepaid, (d) Federal Express, or like overnight courier service or (e) facsimile, telex or other wire transmission with request for assurance of receipt in a manner typical with respect to communications of that type. Notice made in accordance with this section shall be deemed delivered on receipt if delivered by hand or wire transmission, on the third business day after mailing if mailed by first class, registered, or certified mail, or on the next business day after mailing or deposit with an overnight courier service if delivered by express mail or overnight courier.

To the extent permitted by law, if any settlement, discharge, payment, grant of security or transfer of property relating to discharging any duty or liability created under or guaranteed by this Guaranty is rescinded or avoided by virtue of any provision of any bankruptcy, insolvency, or other similar law affecting creditors' rights, Lender will be entitled to recover the value or amount of any such settlement, discharge, payment, grant of security or transfer of property from Guarantor as if such settlement, discharge, payment, grant of security or transfer of property had not occurred.

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EXPENSES . Guarantor hereby agrees, to the extent permitted by law, to pay any and all expenses incurred in enforcing any rights under this Guaranty. Without limiting the foregoing, Guarantor agrees that whenever any attorney is used by the Lender to obtain payment hereunder, to enforce this Guaranty, to adjudicate the rights of the parties hereunder, or to advise the Lender of its rights, the Lender shall be entitled to recover reasonable attorneys' fees, all court costs, and expenses attributable thereto (the "Expenses").

CONSENT. The Guarantor consents to all extensions, renewals, and modifications made by the Lender for, or on account of, any indebtedness of Borrower to Lender. Lender may proceed directly against Guarantor in the event of any default by Borrower without resorting to any other persons, to the assets of Borrower, to any collateral security granted by Borrower to Lender, or the liquidation of any collateral security given hereunder to secure this Guaranty. Furthermore, to the extent permitted by law, Guarantor hereby agrees and consents that the Lender may from time to time without notice to Guarantor and without affecting the liability of Guarantor (a) release, impair, sell or otherwise dispose of any security or collateral, (b) release or agree not to sue any guarantor or surety, (c) fail to perfect its security interest in or realize upon any security or collateral, (d) fail to realize upon any of the obligations of Borrower or to proceed against Borrower or any guarantor or surety, (e) renew or extend the time of payment, (f) increase or decrease the rate of interest, (g) accept additional security or collateral, (h) determine the allocation and application of payments and credits and accept partial payments, (i) determine what, if anything, may at any time be done with reference to any security or collateral, and (j) settle or compromise the amount due or owing or claimed to be due or owing from any Borrower, guarantor, or surety, which settlement or compromise shall not affect the undersigned's liability for the full amount of the guaranteed obligations. To the extent permitted by law, Guarantor expressly consents to and waives notice of all of the above.

REPRESENTATIONS. Guarantor represents and warrants that Guarantor has established adequate means of obtaining from sources other than Lender, on a continuing basis, financial and other information pertaining to Borrower's financial condition, and the status of Borrower's performance of obligations imposed by the loan documents, and Guarantor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Guarantor's risks hereunder, and Lender has made no representation to Guarantor as far as any such matters. Guarantor further represents and warrants that (i) neither this Guaranty nor any other Related Document to which Guarantor is a party will violate any provision of law, rule, or regulation, or any order of any court or other governmental agency to which Guarantor is subject, any provision of any agreement or instrument to which the Guarantor is a party or by which the Guarantor or any of the Guarantor's assets are bound, or be in conflict with, result in a breach of, or constitute a default under any such agreement or instrument; and (ii) no action, approval, filing, or registration with any governmental public body or authority, nor the consent of any other person or entity, nor any other legal formality, is required in connection with the entering into, performance, or enforcement of this Guaranty, except such as have already been obtained or taken and with respect to which a copy or other satisfactory evidence has been provided to Lender.

SUBROGATION. If the Guarantor shall make payment to the Lender of all or any part of the Obligations and all the Obligations shall be paid in full, the Lender will, at the Guarantor's request, execute and deliver to the Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to the Guarantor of an interest in the Obligations resulting from such payment by the Guarantor. Notwithstanding any payment or payments made by the Guarantor hereunder, the Guarantor will not exercise any rights of the Lender against the Borrower, nor shall the Guarantor seek contribution from any other Guarantor until all the Obligations shall have been paid and performed in full. If any amount shall be paid to the Guarantor on account of such subrogation rights at any time when all the Obligations will not have been paid in full, such amount shall be held in trust for the benefit of the Lender and shall forthwith be paid to the Lender to be credited and applied to the Obligations, whether matured or unmatured.

GENERAL WAIVERS. Guarantor, to the extent permitted by law, hereby waives (a) notice of acceptance of this Guaranty and all notice of the creation, extension or accrual of any of the Obligations, (b) diligence, presentment, protest, demand for payment, notice of dishonor, notice of intent to accelerate, and notice of acceleration, (c) notice of any other nature whatsoever to the extent permitted by law, (d) any requirement that the Lender take any action whatsoever against the Borrower or any other party or file any claim in the event of the bankruptcy of the Borrower, or (e) failure to protect, preserve, or resort to any collateral, and (f) any and all defenses that could be asserted by Borrower or Guarantor, including, but not limited to, any defenses arising out of failure of consideration, breach of warranty, fraud, payment, statute of frauds, bankruptcy, lack of capacity, statute of limitations, lender liability, unenforceability of any loan document, accord and satisfaction, or usury. Guarantor, to the extent permitted by law, further waives and agrees not to assert any and all rights, benefits, and defenses that might otherwise be available under the provisions of the governing law that might operate, contrary to Guarantor's agreements in this Guaranty, to limit Guarantor's liability under, or the enforcement of, this Guaranty, including all defenses of suretyship.

LENDER'S RIGHTS. Any delay, failure, omission, or lack on the part of the Lender to enforce, assert, or exercise any provision or take any action pursuant to the Related Documents, including any right, power, or remedy conferred on Lender in any of the Related Documents or any action on the part of Lender granting indulgence or extension in any form Guaranty or any Related Documents does not operate as a waiver of the Lender's ability to exercise all of its rights. The Lender may choose to partially exercise rights under this Guaranty and any Related Documents, but that does not prevent the Lender from fully exercising these rights.

SURVIVAL. This Guaranty is binding on all heirs, executors, personal representatives, administrators, assigns, and successors of the Guarantor.

ASSIGNABILITY. The Lender may, without notice, assign the Obligations, in whole or in part, and each successive assignee of the Obligations so assigned may enforce this Guaranty for its own benefit with respect to the Obligations so assigned. In the event that any person other than the Lender shall become a holder of any of the Obligations, the reference to the Lender shall be construed to refer to each such holder.

RIGHT OF SET-OFF. To the extent permitted by law, Guarantor gives Lender the right to set-off any of Guarantor's accounts or property which may be in Lender's possession against any amount owed under this Guaranty. This right of set-off does not extend to any Keogh account, IRA, or similar tax deferred deposit. Further, the Lender shall have available all remedies under applicable state and federal laws, including the garnishment of wages, to the extent permitted by law.

WAIVER OF JURY TRIAL. All parties to this Guaranty hereby knowingly and voluntarily waive, to the fullest extent permitted by law, any right to trial by jury of any dispute, whether in contract, tort, or otherwise, arising out of, in connection with, related to, or

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incidental to the relationship established between them in this Guaranty or any other instrument, document or agreement executed or delivered in connection with this Guaranty or the Related Documents.

SEVERABILITY. If a court of competent jurisdiction determines any term or provision of this Guaranty is invalid or prohibited by applicable law, that term or provision will be ineffective, but only to the extent required to make it lawful. Any term or provision that has been determined to be invalid or prohibited will be severed from the rest of this Guaranty without invalidating the remainder of the provisions of this Guaranty.

GOVERNING LAW. This Guaranty shall be governed by and construed in accordance with the laws of the State of New York except to the extent that federal law controls.

HEADINGS AND GENDER. The headings in this Guaranty are for convenience in identifying subject matter. The headings have no limiting effect on the text that follows any particular heading. As the context herein requires, the singular shall include the plural and one gender shall include one or both other genders.

ORAL AGREEMENTS DISCLAIMER. This Agreement represents the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

ACKNOWLEDGMENT. Guarantor hereby acknowledges that: (a) the Obligations hereunder shall be joint and several; (b) the liabilities undertaken by Guarantor in this Guaranty are complex in nature; and (c) numerous possible defenses to the enforceability of these liabilities may presently exist and/or may arise hereafter. As part of Lender's consideration for entering into this transaction, Lender has specifically bargained for the waiver and relinquishment by Guarantor of all such defenses, and Guarantor has had the opportunity to seek and receive legal advice from skilled legal counsel in the area of financial transactions of the type contemplated herein. Given all of the above, Guarantor does hereby represent and confirm to Lender that Guarantor is fully informed regarding, and that Guarantor does thoroughly understand: (i) the nature of all such possible defenses, and (ii) the circumstances under which such defenses may arise, and (iii) the benefits which such defenses might confer upon Guarantor, and (iv) the legal consequences to Guarantor of waiving such defenses. Guarantor acknowledges that Guarantor makes this Guaranty with the intent that this Guaranty and all of the informed waivers herein shall each and all be fully enforceable by Lender, and that Lender is induced to enter into this transaction in material reliance upon the presumed full enforceability thereof.

By signing this Guaranty, Guarantor acknowledges reading, understanding, and agreeing to all its provisions.

MECHANICAL TECHNOLOGY INCORPORATED

/s/ FREDERICK W JONES                                    
By: FREDERICK W JONES
Its: PRESIDENT & CEO/CFO

LENDER: Pioneer Bank

/s/ JASON URSCHEL                                           
By: JASON URSCHEL
Its: BUSINESS BANKING RELATIONSHIP MANAGER

 

 

 

 

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EXHIBIT 10.32

 

So Ordered

Dated: May 18th, 2020

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF WASHINGTON

 

In re:

Case No. 18-03197 FPC 11

   

GIGA WATT, Inc., a Washington
corporation,

The Honorable Frederick P. Corbit

Debtor.

ORDER APPROVING: (I) SALE OF
TNT FACILITY AND TRAILER
EQUIPMENT FREE AND CLEAR
OF ALL LIENS, CLAIMS AND
INTERESTS, RELATED
OVERBIDDING AND NOTICE
THEREOF; (II) ASSUMPTION AND
ASSIGNMENT OF LEASES AND
POWER CONTRACT; AND (III)
GRANTING REQUEST FOR
SHORTENED NOTICE THEREON

This matter came to be heard on the Chapter 11 Trustee's Motion for Order Approving: (i) Sale of TNT Facility and Trailer Equipment Free and Clear of All Liens, Claims and Interests, Subjecting to Overbidding, and Approving Notice Thereof; (ii) Assumption and Assignment of Leases and Power Contract, and (iii)

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Shortening Time Thereon , (the "Motion") on May 13, 2020 at 1:30 p.m. (the "Hearing"). The Court has considered the Motion and completed the Hearing as provided for under sections 105,363, and 365 of the Bankruptcy Code and Rules 2002, 6004, 6006, and 9014 of the Federal Rules of Bankruptcy Procedure and L.B.R. 2002-1, 6004-1, and 6006-1. Based upon the Motion, the record before the Court, the testimony and arguments made and heard at the Hearing and in the filings with the Court, the Court stated its findings of fact and conclusions of law at the Hearing and those findings of fact and conclusions of law are incorporated herein by reference as if set forth fully herein as provided in Rule 7052 of the Federal Rules of Bankruptcy Procedure.

ACCORDINGLY, IT IS HEREBY ORDERED THAT THE MOTION IS GRANTED AND FURTHER ORDERED THAT

1.               The Purchase and Sale Agreement between the Trustee and EcoChain, Inc. ("EcoChain") dated April 30, 2020 (the "Agreement") is approved. Unless otherwise defined herein, capitalized terms used in this Order have the meanings ascribed to them in the Agreement.

2.               Notice of the Agreement and the transactions contemplated by the Agreement complied with the requirements of the Bankruptcy Code.

3.               The objections filed to the Motion are overruled, except with respect to the District's objection, which is granted, as set forth in paragraph 7 hereof.

4.               EcoChain is not an insider or affiliate of the Trustee or the Debtor as those terms are defined in 11 USC §101. The Agreement was negotiated by the Trustee and EcoChain at arm's length and EcoChain has acted in good faith and

 

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without collusion or fraud of any kind. Neither party to the Agreement has engaged in any conduct that would prevent the application of 11 USC § 363(m) or cause the application of 11 USC § 363(n) with respect to the consummation of the transactions contemplated by the Agreement. EcoChain is purchasing the Purchased Assets in good faith within the meaning of 11 USC §363(m) and EcoChain is entitled to the protections of 11 USC §363(m).

5.                 The Trustee is authorized to sell the TNT Equipment and the Trailer Equipment to EcoChain pursuant to the Agreement.

6.                 The Trustee is authorized to assume the TNT Leases and the Power Contract pursuant to the Agreement.

7.                 The Trustee is hereby authorized to assign to EcoChain the TNT Leases, the Power Contract, and the Trailer Oral Lease pursuant to the Agreement; provided that the assignment of the Power Contract to EcoChain is subject to EcoChain's compliance with the District's policies for new customers and specifically, EcoChain is required to provide to the District:

a.      a Service Order in the form of the exemplar attached hereto as Exhibit 1;

b.     an energy requirements forecast as detailed in Section 16 of the Power Contract;

c.      a proof of lease for the TNT Facility to confirm that the lease matches the Point of Delivery locations listed on Exhibit B of the Power Contract;

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d.       the fully executed Assumption and Assignment Agreement (Tangible Property) assigning the Power Contract from the Trustee to EcoChain; and

e.       a deposit in the amount of two (2) months projected usage as determined by the District based on historical usage and the energy requirements forecast submitted to the District by Eco-Chain, payable in the form of 50% cash and 50% letter of credit.

8.            The Sale of the Purchased Assets to EcoChain is free and clear of all liens, encumbrances, claims and/or interests pursuant to sections 363(f)(4) and (5) of title 11 of the United States Code.

9.            EcoChain is not a successor to the Debtor or the bankruptcy estate and is released from any potential liability in connection with the purchase of the Purchased Assets.

10.          The Bidding Procedures as proposed in the Motion are approved.

11.          The Break-Up Fee as proposed in the Motion is approved.

12.          The 14-day stay provided by Rule 6004(h) and Rule 6006(d) of the Federal Rules of Bankruptcy are waived.

13.          This Order is without prejudice to the administrative claim asserted by the Ad Hoc Creditors' Committee of WTT Token Holders and Miners on behalf of its members, filed in this Court on April 1, 2020 [Doc. 547] and is further without prejudice to the issue of who owns the proceeds.

 

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14.      This Order shall be valid and fully effective immediately upon its entry.

/// END OF ORDER ///

APPROVED AS TO FORM: 

U.S. TRUSTEE'S OFFICE

/s/ James D. Perkins                                         
James D. Perkins, WSBA No. 25105
Attorney for U.S. Trustee

SALISH SEA LEGAL

/s/ Benjamin Ellison                                           
Benjamin Ellison, WSBA No. 48315
Attorneys for the Official Committee of
Unsecured Creditors

PAINE HAMBLEN LLP

/s/ Kathryn McKinley                                        
Kathryn McKinley, WSBA No. 25105
Attorneys for the Public Utility District
No. 1 of Douglas County, Washington

EISENHOWER, CARLSON PLLC

/s/ Samuel Dart                                                      
Samuel Dart, WSBA No. 47871
Attorneys for the Ad Hoc Non-Profit Creditors'
Committee of WTT Token Holders & Owners

 

PRESENTED BY:

POTOMAC LAW GROUP, PLLC
/s/ Pamela M. Egan                                                 
Pamela M. Egan, WSBA No. 54736
Attorneys for Mark D. Waldron, as
Chapter 11 Trustee

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EXHIBIT 1

(TNT Sale Approval Order)

 

 

 

 

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Douglas County PUD
1151 Valley Mall Parkway
East Wenatchee, WA 98802
Ph: (509)884-7191 Fax: (509)884-0553

MOVE IN SERVICE ORDER
 

SERVICE ORDER INFORMATION

 

Date:  

Ordered By:

Issued By:

Scheduled Date: 

Service Order Number

 

Initials:__________

 

CUSTOMER INFORMATION

 

Customer Number:

Name:

Address:

City:

Employer:

DL #:

Phone:

Other Phone:

 Birth Date:

 Email: _________________________

Addl Contact:

 

Initials:__________

 

ACCOUNT INFORMATION

 

Account Number:

Address:

City: 

Description:

Meter:

Lights:

 

 

 

BILLING INFORMATION

 

Occupancy Charge: $ 10.00

Deposit:

DCCN:

Auto Pay:    Yes           No

SmartHub:__________

 

Residential accounts are subject to a deposit of $150 up to $300 if account is not consistently paid over time.

Commercial accounts are subject to a deposit of up to two (2) times the estimated average monthly power bill. Initials:______

In accordance with RCW 19.29A.060, Public Utility District No. 1 of Douglas County is required to disclose the fuel mix used to generate electricity serving their local load. Douglas PUD is proud to disclose that 100 percent of the power used to serve local customers comes from clean, renewable hydropower.

I hereby apply for electric service subject to the Customer Service Policies of PUD No. 1 of Douglas County, for which I agree to pay. I agree to abide by the Customer Service Policies. These policies are on file with the District, available for customer information and customers are urged to read them. They are subject to revision, amendment, deletion or change without no ice.

Customer Signature: _______________________________________________________________________

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EXHIBIT 10.33

 

Bill of Sale

 

For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Mark D. Waldron, in his capacity as Chapter 11 Trustee in the bankruptcy case of  Giga Watt, Inc., pending in the U.S. Bankruptcy Court for the Eastern District of Washington and assigned Case No. 18-03197, ("Seller"), does hereby grant, bargain, transfer, sell, assign, convey and deliver to EcoChain, Inc., a Delaware Corporation ("Buyer"), all of its right, title, and interest in and to the TNT Equipment and the Trailer Equipment, as such terms are defined in the Purchase and Sale Agreement, dated as of April 30, 2020 (the "Purchase Agreement"), by and between Seller and Buyer, to have and to hold the same unto Buyer, its successors and assigns, forever.

Buyer acknowledges that Seller makes no representation or warranty with respect to the assets being conveyed hereby except as specifically set forth in the Purchase Agreement.

 

 

 

 

 

 

 

 

 

 

 

 

4828-5445-7787, v. 1

EXHIBIT 10.34

 

ASSIGNMENT AND ASSUMPTION AGREEMENT (TANGIBLE PROPERTY)

This Assignment and Assumption Agreement - Tangible Property (the "Agreement"), effective as of May 20th, 2020 (the "Effective Date"), is by and between. Mark D. Waldron, as Chapter 11 Trustee in the bankruptcy case of Giga Watt, Inc., pending in the U.S. Bankruptcy Court for the Eastern District of Washington and assigned case no. 18-03197 ("Seller"), and EcoChain Inc., a Delaware corporation ("Buyer").

WHEREAS, Seller and Buyer have entered into a certain Purchase and Sale Agreement, dated as of April 30, 2020 (the "Purchase Agreement"), pursuant to which, among other things, Seller has agreed to assume, under 11 U.S.C. § 365, and assign all of its rights, title and interests in, and Buyer has agreed to assume all of Seller's duties and obligations under the TNT Leases, the TNT Power Contract, and the Trailer Oral Lease as defined in the Purchase Agreement.

NOW, THEREFORE, in consideration of the mutual covenants, terms and conditions set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1.        Definitions. All capitalized terms used in this Agreement but not otherwise defined herein are given the meanings set forth in the Purchase Agreement.

        2.        Assignment and Assumption. Seller hereby sells, assigns, grants, conveys and transfers to Buyer all of Seller's right, title and interest in and to the TNT Leases, the TNT Power Contract and the Trailer Oral Lease, provided that, subject to the terms of the Purchase Agreement, Seller is not transferring to Buyer, and Buyer is not acquiring from Seller any right, title, or interest in the TNT Power Deposit. Buyer hereby accepts such assignment after Seller's assumption of same under 11 U.S.C. § 365, and assumes all of Seller's duties and obligations under the TNT Leases, the TNT Power Contract and the Trailer Oral Lease and agrees to pay, perform and discharge, as and when due, all of the obligations of Seller under the TNT Leases, the TNT Power Contract, and the Trailer Oral Lease accruing on and after the Effective Date.

3.        Terms of the Purchase Agreement.. The terms of the Purchase Agreement are incorporated herein by this reference. The parties hereto acknowledge and agree that the representations, warranties, covenants, and agreements contained in the Purchase Agreement shall not be superseded hereby but shall remain in full force and effect to the full extent provided therein. In the event of any conflict or inconsistency between the terms of the Purchase Agreement and the terms hereof, the terms of the Purchase Agreement shall govern.

4.        Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Washington and sections 101, et seq. of title 11 of the United States Code, without giving effect to any choice or conflict of law provision or rule (whether of the State of Washington or any other jurisdiction).

 

5.        Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by facsimile, email or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the date first above written.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

EXHIBIT 10.35

 

INTELLECTUAL PROPERTY ASSIGNMENT AGREEMENT

This INTELLECTUAL PROPERTY ASSIGNMENT AGREEMENT ("IP Assignment"), dated as of May 20th, 2020, is made by Mark D. Waldron, in his official capacity as the Chapter 11 Trustee, acting on behalf of the estate (the "Estate") in the bankruptcy case commenced by Giga Watt, Inc. in the U.S. Bankruptcy Court for the Eastern District of Washington and assigned Case No. 18-03197 (the "Bankruptcy Case") and whose office is located at 6711 Regents Blvd. W, Ste. B, Tacoma, Washington 98466 ("Seller"), in favor of EcoChain, Inc., a Delaware Corporation, located at 325 Washington Ave., Extension, Albany, N.Y. 12205 ("Purchaser"), the purchaser of certain assets of Seller pursuant to the Purchase and Sale Agreement between Purchaser and Seller dated as of April 30, 2020 (the "Purchase Agreement").

WHEREAS, under the terms of the Purchase Agreement, Seller has conveyed, transferred, and assigned to Purchaser, among other assets, the intellectual property of Seller, and has agreed to execute and deliver this IP Assignment to the Purchaser so that the Purchaser may, in its discretion, record this IP Assignment with the United States Patent and Trademark Office and the United States Copyright Office;

NOW THEREFORE, the parties agree as follows:

1.        Assignment. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller hereby irrevocably conveys, transfers, and assigns to Purchaser, and Purchaser hereby accepts, all of Seller's right, title, and interest in and to:

(a)               any trademark and trademark registration by Giga Watt, Inc. (the "Trademarks"), together with the goodwill of the business connected with the use of, and symbolized by, the Trademarks.

(b)               any copyright and copyright registration by Giga Watt, Inc. and all issuances, extensions, and renewals thereof (the "Copyrights").

(c)               all other intellectual property of Giga Watt, including its name, trade names, phone numbers, web sites, social media assets, internet domain names, logos, advertising copy, or artwork.

(d)               all rights of any kind whatsoever of Seller accruing under any of the foregoing provided by applicable law of any jurisdiction, by international treaties and conventions, and otherwise throughout the world.

(e)               any and all royalties, fees, income, payments, and other proceeds now or hereafter due or payable with respect to any and all of the foregoing.

(f)                any and all claims and causes of action, with respect to any of the foregoing, whether accruing on or after the date hereof, including all rights to and claims for damages, restitution, and injunctive and other legal and equitable relief for present and future infringement, dilution, misappropriation, violation, misuse, breach, or default,

1-Page

 

with the right but no obligation to sue for such legal and equitable relief and to collect, or otherwise recover, any such damages.

2.                  Trustee's Right to Use Assigned IP. The Trustee has the right to use the Assigned IP as is reasonably necessary to administer the Bankruptcy Case.

3.                  Recordation and Further Actions. Seller hereby authorizes the Commissioner for Trademarks in the United States Patent and Trademark Office and the Register of Copyrights in the United States Copyright Office to record and register this IP Assignment upon request by Purchaser. Following the date hereof, upon Purchaser's reasonable request, and at Purchaser's sole cost and expense, Seller shall take such steps and actions, and provide such cooperation and assistance to Purchaser and its successors, assigns, and legal representatives, including the execution and delivery of any affidavits, declarations, oaths, exhibits, assignments, powers of attorney, or other documents, as may be reasonably necessary to effect, evidence, or perfect the assignment of the Assigned IP to Purchaser, or any assignee or successor thereto.

4.                  Terms of the Purchase Agreement; The patties hereto acknowledge and agree that this IP Assignment is entered into pursuant to the Purchase Agreement, to which reference is made for a further statement of the rights and obligations of Seller and Purchaser with respect to the Assigned IP. The representations, warranties, covenants, agreements, and indemnities contained in the Purchase Agreement shall not be superseded hereby but shall remain in full force and effect to the full extent provided therein. In the event of any conflict or inconsistency between the terms of the Purchase Agreement and the terms hereof, the terms-of the Purchase Agreement shall govern.

5.                  Counterparts. This IP Assignment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed one and the same agreement. A signed copy of this IP Assignment delivered by facsimile, e-mail, or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this IP Assignment.

6.                  Successors and Assigns. This IP Assignment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.

7.                  Governing Law. This IP Assignment and any claim, controversy, dispute, or cause of action (whether in contract, tort, or otherwise) based upon, arising out of, or relating to this IP Assignment and the transactions contemplated hereby shall be governed by, and construed in accordance with, the laws of the United States, including, title 11 of the United States Code, and the State of Washington, without giving effect to any choice or conflict of law provision or rule (whether of the State of Washington or any other jurisdiction).

[SIGNATURE PAGE FOLLOWS]

 

IN WITNESS WHEREOF, SELLER HAS DULY EXECUTED AND DELIVERED THIS IP ASSIGNMENT AS OF THE DATE FIRST ABOVE WRITTEN.

 

 

 

 

4831-0539-5131, v. 1

EXHIBIT 10.36

 

EXHIBIT 10.37

 

ASSIGNMENT OF LEASE AGREEMENTS

THIS ASSIGNMENT OF LEASE AGREEMENT ("Lease Assignment") is made and entered into this 4th day of February, 2020, by and between, on the one hand, David M. Carlson, Dorrinda M. Carlson, Enterprise Focus, Inc., a Washington corporation, and Clever Capital, LLC, a Washington limited liability company (collectively, "Carlson" or "Assignor") and, on the other hand, Mark D. Waldron, in his capacity as the Chapter 11 Trustee (the "Trustee" or "Assignee") acting on behalf of and representing the estate (the "Estate") in the bankruptcy case (the "Bankruptcy Case") of Giga Watt, Inc., ("Giga Watt" or the "Debtor") which is pending in the U.S. Bankruptcy Court for the Eastern District of Washington (the "Bankruptcy Court") and assigned Case No. 18-03197.

RECITALS

WHEREAS, in January 2020, Carlson and the Trustee (also referred to herein collectively as the "Parties" and each individually as a "Party") entered into that certain Settlement Agreement and General Release of Claims (the "Settlement Agreement").

WHEREAS, pursuant to the Settlement Agreement, and subject to Bankruptcy Court approval of the Settlement Agreement and of this Lease Assignment, Carlson has agreed to assign to the Trustee any right, title or interest that Carlson has, claims to have, or may have with respect to any leasehold interest in the premises commonly known as 474 Highline Drive, East Wenatchee, Washington (the "TNT Facility"), including, but not limited to:

Building A Lease. That certain agreement entitled, Commercial Lease Agreement, dated June 24, 2015 and Addendum to Commercial Lease Agreement, dated July 1, 2015, by and between TNT Business Complexes, LLC, on the one hand, and David M. Carlson and Enterprise Focus, Inc., on the other hand, pursuant to which TNT Business Complexes LLC ("TNT") leased Building A of the TNT Facility to David M. Carlson and Enterprise Focus, Inc. or one or more of their affiliates (the "Building A Lease").

Building C Lease. That certain agreement entitled, Commercial Lease Agreement, dated November 14, 2014 and the Addendum, dated November 18, 2014, by and between TNT, on the one hand, and David M. Carlson and Enterprise Focus, Inc., on the other hand, pursuant to which TNT leased Building C of the TNT Facility to David M. Carlson and Enterprise Focus, Inc., or one or more of their affiliates (the "Building C Lease").

Buildings B & H Lease. That certain agreement entitled, Commercial Lease Agreement, dated June 21, 2013, by and between Darel E. Thompson and Patricia C. Thompson d/b/a TNT Business and Warehouse Complex, on the one hand, and David M. Carlson and Enterprise Focus, Inc., on the other hand; that certain Lease Addendum, dated June 21, 2013, by and between Darel E. and Patricia C. Thompson d/b/a TNT Business Warehouse Complex, on the one hand, and David M. Carlson, on the other; that certain Leases Addendum to Building H, dated September 1, 2013, by and between Darel E. Thompson and Patricia C. Thompson d/b/a TNT Business Warehouse Complex, on the

4839-3432-1838, v. 3



one hand, and David M. Carlson, on the other; that certain agreement entitled, Commercial Lease Agreement, dated February 7, 2014, by and between TNT Business Complexes LLC, on the one hand, and David M. Carlson and Enterprise Focus, Inc., on the other; that certain Addendum to Commercial Lease Agreement, dated February 8, 2014, by and between TNT Business Complexes LLC and David M. Carlson; and that certain agreement entitled, Commercial Lease, dated August 1, 2018, by and between TNT, on the one hand, and David M. Carlson and Enterprise Focus, Inc., on the other hand (collectively, the "Buildings B and H Lease").

WHEREAS, pursuant to that certain agreement, entitled Commercial Lease, dated November 16, 2018, by and between Clever Capital, LLC, on the one hand, and Giga Watt, on the other, Clever Capital, LLC purported, inter alia, to lease to Giga Watt Buildings A, B and H of the TNT Facility (the "November 16 Agreement").

WHEREAS, pursuant to the Settlement Agreement, the Parties wish to resolve the disputes between them including, but not limited to, disputes relative to the TNT Facility.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, the parties hereto agree as follows.

1.          Assignment. Subject to entry of an Order of the Bankruptcy Court approving the Settlement Agreement, Carlson hereby assigns to the Trustee any and all of Carlson's right, title and interest in and to any leasehold interest in the TNT Facility, of any kind, including, but not limited to (i) any leasehold interest in the TNT Leases, including any and all prepaids, deposits and other rights or entitlements of Assignor under the TNT Leases and (ii) any leasehold interest that the November 16 Agreement purported to grant to Carlson, including any and all prepaids, deposits and other rights or entitlements of Assignor under the November 16 Agreement.

[Signatures follow on the next page.]

 

4839-3432-1838, v. 3


 

IN WITNESS WHEREOF, the Parties have executed this Settlement Agreement as of the date and year indicated below.

 

4839-3432-1838, v. 3

EXHIBIT 10.38

 

COMMERCIAL LEASE

DATE:

August 1, 2018

 

LANDLORD:

TNT BUSINESS COMPLEXES, LLC
380 Leslie Way
East Wenatchee, WA 98802

 

TENANT:

ENTERPRISE FOCUS, INC. and DAVE CARLSON
2504 Columbia NW
East Wenatchee, WA 98802

 

RECITALS:

WHEREAS, in 2013 and 2014, Dave Carlson/Enterprise Focus entered into a lease with Landlord leasing the Leased Premises ("Carlson Lease"). The Leased Premises means buildings B and H located on the Real Property, together with related improvements, landscaped areas, and parking facilities

WHEREAS, in 2013 and 2014, Dave Carlson/Enterprise Focus submitted $75,000 as alteration deposits ("Deposits") for the Leased Premises as a condition of the Carlson Lease.

•    Building H: $65,000.00
•    Building B: $10,000.00

WHEREAS, Due to the nature of Tenant's business, significant alterations are necessary to meet Tenant's objectives. More specifically, the Deposits are held for rebuilding the front and rear walls of each building (where ventilation holes have been placed), to remove the electrical grids and wiring back to the main sub panels, and removing the HVAC system installed in building B.

WHEREAS, labor and material costs have increased in the past several years. The Deposits have become insufficient to cover the costs of restoration of the Leased Premises and portions of the Real Property affected by Tenant's alterations.

WHEREAS, as a condition of Landlord leasing the Leased Premises to Tenant, Landlord requires an increase in the original alteration deposits of $32,000. The increase of funds is described as follows:

•  Rock Steel Structures Inc. bid to make restorations increase: $25,875.00
•  Estimated increase of electrical and HVAC removal: $6,125.00

COMMERCIAL LEASE - 1

 

WHEREAS, the following alteration projects were done to the Leased Premises that were never approved nor were alteration deposits submitted:

•  A bathroom removed in building H;
•  Security systems upgraded in buildings B and H; and
•  Electrical system components installed after original 2014 alteration deposits.

Landlord and Tenant hereby agree to the estimated alteration cost of $15,000 to cover these alterations.

WHEREAS, Landlord requires an amount equal to four (4) months lease payments in reserve to repair the Leased Premises if Tenant is unable to continue business through the full 5 years of the Lease. This portion of the alteration deposits is calculated as follows:

•  4 months x $7,350.00 = $29,400.00

WHEREAS, Landlord and Tenant hereby agree to an alteration deposit that has been delivered to Landlord on July 31, 2018 to cover the additional alteration deposits set forth above of $76,400.00, which shall be applied to all alterations made to the Leased Premises on or before July 31, 2018. The alteration deposit is calculated as follows:

•  $32,000.00 + $15,000.00 + $29,400.00 = $76,400.00

Landlord hereby acknowledges receipt of the additional alteration deposit. Landlord hereby also acknowledges that Tenant has paid, in total, $151,400.00 ($75,000.00 + $76,400.00) for alteration deposits for the Leased Premises.

LOCATION OF LEASED PREMISES. The Leased Premises is located at 474 Highline Dr., East Wenatchee, Washington, on the Real Property legally described on Exhibit A attached hereto, and incorporated as if fully set forth herein. The Lease is subject to all easements, restrictions, agreements of record, mortgages and deeds of trust, and zoning and building laws.

DESCRIPTION OF LEASED PREMISES. The Leased Premises shall consist only of buildings B and H located on the Real Property, together with related improvements, landscaped areas, and parking facilities. The locations of said buildings are diagramed on the map attached as Exhibit B, which is incorporated as if fully set forth herein.

LANDLORD AND TENANT IMPROVEMENTS. Landlord has delivered the Leased Premises and every part or portion thereof with all systems included in Leased Premises cleaned, serviced, working, and free from leaks and/or defects and infestations as of the commencement of the Carlson Lease. These systems include and are not limited to the roof, rain gutters, plumbing, electrical wiring, conduits, plumbing, and heating/furnaces and the parking area. Landlord is required to keep the structure and the structural systems including the roof and rain gutters of the Leased Premises in good repair and free of leaks or infestations (cockroaches, rodents, termites, etc.). All repairs made by Landlord due to damage caused by Tenant shall be reimbursed by Tenant within Thirty (30) days of Landlord completing the repairs. Tenant shall be responsible to keep all

 

COMMERCIAL LEASE - 2

 

other aspects of the Leased Premises in good repair at its sole cost. Upon occupancy of the Leased Premises, Tenant shall be responsible, at its sole cost and expense, for any and all alterations or improvements to the Leased Premises necessary to accommodate Tenant's business authorized in this Lease. Any and all alterations to the Leased Premises made by Tenant shall be in strict accordance with the provisions of Paragraph 6.4 herein, whether made before or after the Lease Commencement Date. Tenant, by taking occupancy of the Leased Premises, acknowledges that all improvements (if any) promised by Landlord have been completed to Tenant's satisfaction and Tenant accepts the Leased Premises in its then present condition "AS IS."

AGREEMENT. LANDLORD HEREBY LEASES TO TENANT AND TENANT DOES HEREBY AGREE TO LEASE FROM LANDLORD THE ABOVE-DESCRIBED LEASED PREMISES UPON THE FOLLOWING TERMS AND CONDITIONS:

1.             TERM.

1.1       Original Term. The Original Lease Term shall be for a period of Five (5) years, commencing on August 1, 2018 (the "Date of Commencement") and shall terminate on July 31, 2023 at 5:00 p.m. (PDT). If Tenant occupies the Leased Premises prior to the Commencement Date, Tenant's occupancy of the Leased Premises shall be subject to all provisions of this Lease. Early occupancy of the Leased Premises shall not advance the expiration date of this Lease.

1.2       Renewal of Initial Lease Term. Provided the Tenant shall be in compliance with the terms of this Lease at the time of exercising same, and subject to the terms set forth in Paragraph 2.2 herein, the Tenant shall have a single five (5) year renewal option to be exercised, if at all, by the Tenant giving notice in writing to Landlord of Tenant's intent to exercise such option not less than 90 calendar days prior to the Expiration of the Original Lease Term set forth in Section 1.1 above. In the event Tenant opts to renew this Lease, Rent shall be increased for such renewal per Section 2.2 below. Tenant and Landlord agree that prior to the renewal of the Lease, the parties shall agree to new initial base Rent and any adjustments to Rent for the renewal term in writing.

2.             RENT

2.1.     Rent. Beginning August 1, 2018, Tenant shall pay Landlord Rent in the amount of Seven Thousand Seven Hundred Fifty and 00/100 Dollars ($7,750.00) per month ("Rent"), payable in advance in equal monthly installments on or before the first day of each calendar month during the Term of this Lease and any extensions thereof.

2.2      Adjustment to Rent. For the first two years of the Lease, the rent shall remain fixed as set forth in Section 2.1. At the commencement of the third year of the Lease, the payments shall be increased by two and one half percent (2.5%).

In year four and each subsequent year, including any renewal term under Section 1.2, the payments shall be increased by an amount tied to the Consumer Price Index (CPI), based on the then-current un-adjusted, 12-months, all items indicator. By way of example, in year three, if no other increases are made to the rent payments per Sections 2.3 or 4.3.1, the rent would be increased from $7,750.00 to $7,943.75; in year four, assuming a CPI of 2.5%,the rent would be increased from $7,943.75 to

 

COMMERCIAL LEASE - 3

 

$8,142.34; and in year five, assuming a 2.5% CPI, the rent would be increased from $8,142.34 to $8,345.90The CPI examples are for illustration only and are not indicative of the actual CPI amounts in future years.

2.3          Late Charges and Interest.

2.3.1. Tenant acknowledges that late payment of any rent required by this Lease, or renewal thereof, from Tenant to Landlord will result in collection costs to Landlord, the extent of which additional cost is extremely difficult and, economically impractical to ascertain. Tenant therefore agrees that if Tenant fails to make any rent payment required by this Lease to Landlord within ten (10) calendar days of the date when it is due, Landlord shall impose a late charge of twelve percent (12%) of the Rent due to be added to the delinquent payment. If Tenant is delinquent in paying Rent two (2) times in any given six (6) month period, a service charge of ten percent (10%) per month thereafter shall be paid to Landlord in addition to Rent. Delinquent Rent is defined as payment not made within thirty (30) days of its due date. Tenant agrees that the late charge is a reasonable estimate of the costs to Landlord of collecting the overdue payment. Landlord may levy and collect the late charge in addition to all other remedies available for Tenant's default, and collection of a late charge shall not waive the breach caused by the late payment.

2.3.2 All payments required under this Lease, including any late charge imposed under Paragraph 2.3.1 herein, not paid when due shall bear interest at a rate of eighteen percent (18.0 %) per annum. Landlord may levy and collect this interest charge in addition to all other remedies available for Tenant's default, and collection of a late charge shall not waive the breach caused by the late payment.

2.4         Document Preparation Fee.  N/A

2.5         Alteration Deposit. Landlord acknowledges receipt of an additional Seventy Six Thousand Four Hundred and 00/100 Dollars ($76,400.00), as set forth in the recitals above, to hold the Leased Premises and agrees that this shall be applied to the original alteration deposit of $75,000.00 thereby making the alteration deposit of $151,400.00 paid in full. This deposit is for work done as of July 31, 2018. Any projects after July 31, 2018, shall require a written estimate for removal, permission and alteration deposits as set forth below.

This alteration deposit is not intended to cover any lease payments. All lease payments will continue while regular business operations are maintained or while repairs of the buildings are ongoing. If Tenant violates any alteration provision of this Lease, Landlord may, but shall not be obligated to, apply all or any part of the alteration deposit to remedy such violation. If any portion of the deposit is so applied, Tenant shall immediately deposit with Landlord cash in an amount sufficient to restore the alteration deposit to its original amount.

If Tenant fully and faithfully performs each and every provision of this Lease regarding the alteration and restoration of the Leased Premises and any portions of the Real Property affected by the Tenant's alterations , and the Real Property and the Leased Premises is returned to Landlord in the same condition it was in prior to the Carlson Lease in 2013, any excess deposit monies shall be refunded back to Tenant without accrued interest. If Tenant for any reason terminates this

 

COMMERCIAL LEASE - 4

 

Lease early without an agreement with Landlord, Tenant shall remain responsible for the renovation of Leased Premises and any portions of the Real Property affected by the Tenant's alterations substantially the same condition it was in prior to the Carlson Lease in 2013 and will have these deposits refunded in increments to pay for repairs. If the deposits fall short of completing all repairs, Tenant shall be responsible for the reasonable difference to satisfy the renovation of the Leased Premises and any portions of the Real Property affected by the Tenant's alterations.

If Tenant vacates the Leased Premises for any reason, except as provided below in Section 7.2, without first completing all restoration of the Leased Premises to the reasonable satisfaction of the Landlord, Tenant shall not be entitled to a refund of any unused alteration deposit, and Tenant shall be responsible for the reasonable difference to satisfy the renovation of the Leased Premises should the alteration deposits not be sufficient to restore the Leased Premises and any portions of the Real Property affected by the Tenant's alterations to the same condition it was in prior to the Carlson Lease.

3.         BUSINESS PURPOSE AND USE

3.1          Permitted Use. Tenant shall use the Leased Premises only for the purpose of operating a cryptocurrency server farm business in compliance with applicable law, and activities reasonably related thereto, and for no other purpose without the written consent of Landlord, which consent may be withheld or conditioned in Landlord's sole, unfettered discretion.

3.2       Compliance with Laws. In connection with its use, Tenant shall comply, at its expense, with all applicable laws, regulations and requirements of any public authority, including those regarding maintenance, operation and use of the Leased Premises and any appliances on the Leased Premises (including signs). Without limiting the generality of the foregoing, after the Commencement Date of this Lease, should the government require alterations to the interior, exterior or structure of the building necessitated by changes in applicable building codes, handicapped access laws or similar regulations, these changes will be the sole responsibility of Tenant. If the expenses are unreasonably high, then Tenant and Landlord may negotiate in an attempt to resolve the issue in a matter that is financially acceptable to both parties. In the event any such negotiations do not result in resolution by agreement between the parties within thirty (30) calendar days, either party may terminate the Lease upon notice to the other party.

3.3       Supervision. Tenant shall keep the Leased Premises clean and orderly and will cause its employees, agents, and invitees to conduct themselves in a professional manner. Tenant will supervise its employees and cause Tenant's agents, independent contractors, employees, customers, suppliers, and invitees to conduct their activities in such a manner as to comply with the requirements of this Lease and the rules and regulations described herein.

3.4       Storage, Trash. Tenant shall not store anything outside the building except in strict compliance with requirements of applicable governmental authority, and all such materials (if allowed) shall be reasonably site-screened from public roads. Tenant shall dispose of trash and other matter in a manner acceptable to Landlord.

COMMERCIAL LEASE - 5

 

4.                UTILITIES AND TAXES

   4.1    Payment. Tenant shall pay directly to the appropriate supplier all charges for electricity, garbage collection, gas, internet and telephone supplied to the Leased Premises. Payment for water and sewer shall be paid by Landlord in the amount of $76.00 per month for sewer and $138.00 every two months for water ("Estimated Utilities"). In the event Tenant's water and/or sewer is above the Estimated Utilities, Landlord shall provide an invoice of the overage to Tenant via email at the address listed below in Section 15.4, and Tenant shall have ten (10) days to reimburse Landlord ("Overage"). Failure to timely pay all utilities within (30) days of its due date constitutes an event of default. Failure to timely pay an Overage by its due date constitutes an event of default.

  4.2     Interruption of Service. Landlord shall not be liable for any failure or interruption of utilities or services to the Leased Premises, unless caused by the sole negligence of Landlord or its agents.

  4.3     Taxes and Assessments

4.3.1   Taxes and Other Payments. Landlord shall timely pay all real property taxes, other charges, and assessments properly levied against the Leased Premises. Should Tenant's use or any subtenant's use of the Leased Premises cause increases in property taxes, Landlord may adjust the Rent by the increase in the property taxes due. By way of example, rent is initially set at $7,750.00 per month and the real estate tax increases from $1,200.00 to $2,400.00 per year, or a $1,200.00 increase. Landlord may adjust the rent to $7,850.00 per month to reflect the increase of the real estate taxes.

4.3.2   Personal Property Taxes. Tenant shall pay, before delinquency, any and all taxes levied or assessed on, or as a result of, Tenant's leasehold improvements, equipment, furniture, fixtures and any other personal property located on the Leased Premises. In the event any or all of Tenant's leasehold improvements, equipment, furniture, fixtures, and other personal property shall be assessed and taxed with the Real Property, Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant from Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's property.

5.                INSURANCE AND INDEMNITY PROVISIONS

   5.1    Property Insurance. Landlord shall procure and maintain a Property insurance policy covering loss or damage to the building in which the Leased Premises is located, including all existing improvements, in an amount that will adequately cover repairing and/or rebuilding the structure as a result of damage from fire, casualty, peril, storm or otherwise. The Property Insurance required by this paragraph shall be for the benefit of Landlord and shall have Landlord as the sole named insured. Tenant shall be responsible for insuring all of its equipment, inventory, trade fixtures and contents located on or within the Leased Premises.

  5.2     Liability Insurance. Tenant or any and all subtenants, at its expense, shall obtain and keep in force during the entire term of this Lease a policy of Commercial General

COMMERCIAL LEASE - 6

 

Liability insurance insuring Landlord and Tenant against all liability arising out of the ownership, use, occupancy, or maintenance of the Leased Premises and all areas appurtenant thereto. Such policy or policies shall provide for liability coverage with minimum combined single limits for bodily injury and property damage per occurrence in amounts not less than one million dollars ($1,000,000). The limits of liability insurance required by this paragraph shall not, however, limit the liability of Tenant hereunder. To the extent any deductible is permitted or allowed as part of any insurance policy carried by Tenant in compliance with this Section 5, Tenant shall be deemed to be covering the amount of such deductible under an informal plan of self-insurance; provided, however, that in no event shall any deductible exceed One Thousand Dollars ($1,000.00). All such insurance policies shall name Landlord as an additional insured and shall be with companies and with loss-payee clauses reasonably satisfactory to Landlord. Copies of all policies or certificates evidencing such insurance shall be delivered to Landlord by Tenant within ten (10) calendar days after this Lease is executed. All policies shall bear endorsements requiring thirty (30) days written notice to Landlord prior to any change or cancellation.

5.3        Waiver of Subrogation. Tenant and Landlord each waive any and all rights of recovery against the other, or against the employees, agents and representatives of the other, for loss of or damage to such waiving party, property, or property of others under its control, where such loss or damage is insured against under any insurance policy in force at the time of such loss or damage. Landlord and Tenant shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carriers that the foregoing mutual Waiver of Subrogation is contained in this Lease. The foregoing Waiver shall not apply if it would have the effect, but only to the extent of such effect, of invalidating any insurance coverage of Landlord or Tenant.

5.4        Indemnity of Landlord. Tenant shall defend, indemnify, and hold Landlord harmless from any and all costs, claims or liability arising from (1) Tenant's use of the Leased Premises; (2) the conduct of Tenant's business or anything else done or permitted by Tenant to be done in or about the Leased Premises; (3) any breach or default in the performance of Tenant's obligations under this Lease; (4) any misrepresentation or breach of warranty by Tenant under this Lease; or (5) other acts or omissions of Tenant.

The indemnity set forth in this paragraph is intended to specifically cover actions brought by Tenant's own employees, and with respect to acts or omissions during the Lease Term, shall survive termination or expiration of this Lease. Tenant's indemnities set forth in this Lease are specifically and expressly intended to constitute a waiver by Tenant of its immunity, if any, under Washington's Industrial Insurance Act, RCW Title 51, et seq., to the extent necessary to provide Landlord with a full and complete indemnity from claims made by Tenant and/or its employees to the full extent of its negligence. Tenant shall promptly notify Landlord of any casualties or accidents occurring in or about the Leased Premises that may give rise to Tenant's indemnity obligation set forth herein.

6.         MAINTENANCE, REPAIRS AND ALTERATIONS

6.1        Landlord's Obligations. Landlord has delivered the Leased Premises and every part or portion thereof with all systems included in Leased Premises cleaned, serviced,

COMMERCIAL LEASE - 7

 

working, and free from leaks and/or defects and infestations as of the commencement of the Carlson Lease. These systems include and are not limited to the roof, rain gutters, plumbing, electrical wiring, conduits, plumbing, and heating /furnaces. Landlord is required to keep the roof, rain gutters, and the parking area of the Leased Premises in good repair and free of leaks or infestations (cockroaches, rodents, termites, etc.). Landlord shall be responsible for the snow removal of the main paved driveways and landscaping.

  6.2       Tenant's Obligations. Tenant, at Tenant's expense, shall keep in good order, condition, and repair the Leased Premises, including interior and all interior and exterior repainting and refinishing, as needed. Tenant shall also be responsible to maintain and keep in a good working state of repair all doors, windows, window casings, HVAC, plumbing, and electrical wiring and conduits, and all ice and snow removal from walkways and parking areas in surrounding Buildings B and H. If any portion of the Leased Premises, or any major system or equipment on the Leased Premises, cannot be fully repaired or restored, Tenant shall protect the Leased Premises from damage and shall promptly repair any damage from burglary or attempted burglary. Tenant shall keep the glass on all windows and doors clean and presentable, replace immediately all broken glass on the Leased Premises; make any necessary repairs to, or replacements of, all doors and door closure apparatus and mechanisms; keep all plumbing clean and in a good state of repair, including pipes, drains, toilets, basins, water heaters and those portions of the heating system within the walls of the Leased Premises; and shall keep all utilities, including the circuit breakers, panel boxes and meters in a good state of repair. Additionally, it shall be Tenant's responsibility to maintain and repair any and all improvements installed by Tenant.

  6.3       Surrender of Leased Premises. On the last day of the term of this Lease, or on any sooner termination, Tenant shall surrender the Leased Premises to Landlord in good condition, ordinary wear and tear excepted. Tenant shall repair any damage to the Leased Premises occasioned by Tenant's use thereof or by the removal of Tenant's trade fixtures, furnishings, and equipment, which repair shall include the patching and filling of holes and repair of any structural damage. Tenant shall renovate the Leased Premises, returning it substantially to its original condition prior to the Carlson Lease.

  6.4       Alterations and Additions. Tenant shall make no alterations, additions, or improvements in, on, to, or about the Leased Premises without Landlord's prior written consent, which consent may be withheld or conditioned in Landlord's sole discretion. Prior to making alterations, Tenant shall provide to Landlord an additional alteration deposit, which sum shall be a good faith estimate, approved by Landlord in writing, of the cost to renovate the Leased Premises to its original condition. In addition to obtaining Landlord's written consent and providing Landlord with an additional alteration deposit, prior to making alterations, Tenant shall obtain any and all necessary permits from the city and/or county required to make the proposed alterations to the Leased Premises and provide a copy of all permits to Landlord. At the termination of the Lease, Tenant shall remove any alterations, improvements, additions, or utility installations at the expiration of the Lease Term and restore the Leased Premises substantially to its prior condition. Should Landlord not require the removal of a specific alteration, improvement, or addition that may be made on the Leased Premises, said alteration, improvement, or addition shall become the

 

COMMERCIAL LEASE - 8

 

property of Landlord, and remain upon and be surrendered with the Leased Premises at the expiration of the Lease Term. Notwithstanding the foregoing, Tenant's machinery, equipment, and trade fixtures shall remain the property of Tenant and may be removed by Tenant subject to the provisions of Paragraph 6.3 herein.

6.5       Entry and Inspection. Landlord or its agents may enter the Leased Premises at any reasonable time to determine Tenant's compliance with this Lease, to make necessary repairs, or to show the Leased Premises to prospective tenants or purchasers. Landlord shall not unreasonably interfere with Tenant's business operations when exercising the entry and inspection rights set forth in this paragraph. Tenant shall provide Landlord with a key and code to access all buildings. Landlord shall only enter buildings with permission from Tenant or Tenant's employees, PROVIDED however that Landlord may enter without permission in the event of an emergency or if Landlord does not receive a response from Tenant or Tenant's employees within 24 hours.

7.             RECONSTRUCTION AND RESTORATION

7.1       Minor Damage. If during the Term hereof the Leased Premises is damaged by fire, casualty, peril, or otherwise, and such damage is not "substantial" (as defined in Paragraph 7.2 herein), Landlord shall promptly repair such damage at Landlord's expense after the application of all insurance proceeds, if any, including, but not limited to, those provided for in Section 5 hereof, and this Lease shall continue in full force and effect, provided, however, that the requirement to rebuild and restore the Leased Premises shall not extend to any furnishings, fixtures or equipment that Tenant has previously installed in the Leased Premises, whether or not title to such items had passed to Landlord under other provisions of this Lease. Notwithstanding the foregoing, if there are insufficient insurance proceeds available to Landlord to rebuild and restore the Leased Premises damaged by fire, casualty, peril, or otherwise (unless Tenant, at its option, agrees to pay the deficiency), Landlord shall have the right, at its option, to terminate this Lease. In addition, Tenant shall be obligated to pay for the costs of rebuilding or restoration arising out of an act or omission of Tenant, its agents, or employees to the extent such items are not covered by insurance maintained in accordance with this Lease.

7.2       Substantial Damage. If during the Term of this Lease, the Leased Premises is destroyed or damaged by fire, casualty, peril, or otherwise, and the damage is "substantial," then Landlord may elect to terminate this Lease by giving Tenant written notice of such termination within sixty (60) days after the date of such damage or destructive event. For purposes of this paragraph, damage shall be "substantial" if (i) twenty percent (20%) or more of the floor area of a building on the Leased Premises is rendered untenantable, (ii) if repairs are estimated to exceed twenty-five percent (25%) of the full construction/replacement cost of a building on the Leased Premises, or (iii) if, regardless of the estimated amount of the repairs, the Leased Premises is reasonably estimated to remain untenantable for Tenant's authorized use set forth in this Lease for a period exceeding ninety (90) days. Otherwise, Landlord shall proceed with reasonable diligence to restore the Leased Premises to a condition comparable to that existing prior to the damage. Tenant shall cooperate with Landlord during the period of repair and vacate all or any part of the Leased Premises to the extent necessary for the performance of the required work. If the improvements on Leased Premises are not rebuilt or restored, the insurance proceeds for loss of

 

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Landlord's building, property, and loss of rent shall become the sole property of Landlord, and the Lease shall terminate effective as of the date of such damage or destruction.

7.3       Repair of Tenant's Property. Repair, replacement, or restoration of Tenant's improvements, fixtures, equipment, and personal property shall be the responsibility of Tenant.

7.4       Damage Caused by Tenant. Notwithstanding any other provision herein, the cost to repair any and all damage or destruction to the Leased Premises caused by Tenant, Tenant's employees, Tenant's improvements, or Tenant's personal property shall be the sole responsibility of Tenant.

8.               ASSIGNMENT AND SUBLETTING. Tenant shall not (voluntarily or by operation of law) assign, mortgage, pledge or encumber the Leased Premises or Tenant's leasehold estate or sublet any portion of the Leased Premises, or otherwise transfer any interest in the Leased Premises (including the right to possession) without Landlord's prior written consent in each instance, which consent shall not be unreasonably withheld. Any transfer by Tenant to an approved transferee shall not act to release Tenant (or its guarantors) from its obligations under this Lease and Tenant shall remain primarily liable for the performance for each and every Term and Condition of this Lease. Except as otherwise set forth herein, any and all sublessees of the Leased Premises shall be subject to at least the same terms and conditions as Tenant, however Tenant may impose stricter deadlines, bases for default, or other obligations. In the event Tenant is not available, Landlord shall have the authority to communicate directly with sublessees with respect to any issues arising from this Lease, emergencies, violations of municipal, state or federal statutes, or any other issues related to the Leased Premises.

9.                CONDEMNATION

9.1       Entire or Substantial Taking. If all or any "substantial portion" of the Leased Premises shall be taken under the power of eminent domain (sometimes hereinafter referred to as "Condemnation"), Landlord or Tenant shall have the right at its option to terminate this Lease effective on the date the condemning authority takes possession. Upon such termination, Tenant shall surrender possession of the Leased Premises to Landlord. Landlord or Tenant may exercise their termination rights by notifying the other party in writing of its option to terminate the Lease within sixty (60) days following the date on which the parties receive notice of the proposed taking. For purposes of this paragraph, a sale by Landlord to any authority with power of eminent domain, either under threat of Condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain under this paragraph.

9.2       "Substantial" Taking. For purposes of this paragraph, a Condemnation of substantial portion of the Leased Premises shall mean any of the following:

9.2.1   If any portion of the floor area of Tenant's leased space in a building located on the Leased Premises is taken in the Condemnation;

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9.2.2   If twenty-five percent (25%) or more of the value of the Leased Premises is taken in the Condemnation; or

9.2.3   If, regardless of the value of the amount of the Leased Premises taken, the cost of repairing and restoring the remainder of the Leased Premises for Tenant's authorized use exceeds twenty-five percent (25%) of the value of the entire Leased Premises prior to Condemnation.

9.3     Partial Taking. In the event of any Condemnation that does not result in a termination of this Lease, this Lease shall remain unaffected except the Base Rent shall be equitably abated to the extent that Tenant is deprived of use of the Leased Premises. In the event the Lease is not terminated following a Condemnation, Landlord will, at its expense, restore with reasonable diligence the remaining portions of the Leased Premises to as near its former condition as is reasonably possible; provided, however, that there are sufficient condemnation proceeds available to Landlord to restore the Leased Premises, and provided further that the requirement to restore the Leased Premises shall not extend to any furnishings, fixtures, or equipment that Tenant had previously installed in the Leased Premises, whether or not title of such items had passed to Landlord under other provisions of this Lease.

9.4     Awards. Any award for taking of all or any part of the Leased Premises under the power of eminent domain shall be the property of Landlord, whether such award shall be made as compensation for diminution in value of the leasehold or for taking of the fee. Nothing, however, shall be deemed to preclude Tenant from obtaining, or to give Landlord an interest in, any award to Tenant for loss of, damage to, cost of removal of Tenant's trade fixtures and removable personal property, or for damages for cessation or interruption of Tenant's business.

10.          SIGNS. No signs or advertising shall be erected or placed on the exterior of the Leased Premises or anywhere else on the Leased Premises without the prior written approval of Landlord, which approval shall not be unreasonably withheld. Any and all signs approved by Landlord must be installed and maintained in compliance with the requirements of any governmental authorities having jurisdiction, and Tenant shall obtain and keep in force any licenses required for such signage. All such signage shall be at the sole cost and expense of Tenant. Upon the expiration or termination of this Lease, Tenant, at its sole cost and expense, shall remove all interior and exterior signs, logos, and advertising, and shall repair any and all damage caused by their removal (i.e., patching and filling of holes, painting of walls, etc.).

11.           OTHER OBLIGATIONS OF PARTIES

11.1   Liens. Tenant shall pay as due all claims for work done on the Leased Premises or for services rendered or materials furnished to the Leased Premises and shall keep the Leased Premises free from any liens other than liens created by Landlord. Failure by Tenant to have liens released by a contractor, sub-contractor or any individual or entity placing a lien on the Leased Premises shall constitute a default of the Lease. If Tenant fails to pay such claim or to discharge any lien, Landlord may do so and collect such amount as Additional Rent. Amounts paid by Landlord shall bear interest and be repaid by Tenant as provided in Paragraph 13.3 herein. Such

 

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payment by Landlord shall not constitute a waiver of any right or remedy Landlord may have because of Tenant's default.

11.2   Holding Over. If Tenant does not vacate the Leased Premises at the time required, Landlord shall have the option to treat Tenant as a tenant from month-to-month, subject to all of the provisions of this Lease (except that the term will be month-to-month and the initial minimum month rent will be one hundred twenty-five percent (125%) of the Rent then being paid by Tenant, as may have been adjusted pursuant to Paragraph 2.3 herein), or to eject Tenant from the Leased Premises and recover damages caused by wrongful hold over.

11.3   Non-Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of the Landlord, terminate any existing subtenancies, or may, at the option of Landlord, operate as an assignment to it of any and all such subtenancies.

11.4   Priority of Lease. This Lease shall be subject and subordinate at all times to the lien of all mortgages and deeds of trust subsequently placed upon the Leased Premises, all without the necessity of having further instruments executed on the part of Tenant to effectuate such subordination. Provided, however, the subordination of Tenant's rights hereunder is conditioned upon the mortgagee or beneficiary under any deed of trust agreeing that Tenant's peaceable possession of the Leased Premises and its rights under this Lease will not be disturbed so long as Tenant is not in default under this Lease. If any party providing financing or funding to Landlord requires, as a condition of such financing or funding, that Tenant send such party written notice of any default by Landlord under this Lease, giving such party the right to cure such default until it has completed foreclosure and prevent Tenant from terminating this Lease unless such default remains uncured after foreclosure has been completed, Tenant will execute and deliver any agreement required by such party in order to accomplish this purpose.

11.5   Landlord's Liability; Sale. In the event the original Landlord hereunder, or any successor owner of the Leased Premises, shall sell or convey the Leased Premises, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease accruing thereafter shall terminate, and thereupon all such liabilities and obligations shall be binding upon the new owner. Tenant agrees to attorn to such new owner.

11.6   Rules and Regulations. Tenant agrees to comply with all reasonable, rules and regulations for the Leased Premises adopted and published by Landlord from time to time and to cause Tenant's sub-lessees, customers, employees, and invitees to abide by such rules and regulations.

11.7   Parking. Tenant's employees, agents, customers, and invitees may use the parking areas of the Leased Premises for the temporary parking of automobiles and other vehicles. No vehicle may be parked in the same location for more than a forty eight (48) hour period. The parking areas, loading areas, and sidewalks of the Leased Premises shall not be used for any purpose other than parking, loading, and unloading of commercial vehicles and pedestrian traffic, respectively.

 

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12.            ENVIRONMENTAL PROVISIONS

12.1   Restrictions on Hazardous Substances. Tenant shall not cause or permit any Hazardous Substance to be brought upon, used, stored, generated, or disposed of on or in the Leased Premises by Tenant, its agents, employees, contractors, or invitees, except for such Hazardous Substances as are necessary to Tenant's authorized business. Any Hazardous Substance permitted on the Leased Premises, and all containers therefore, shall be used, kept, stored, and disposed of in a manner that complies with all federal, state, and local laws or regulations applicable to the particular Hazardous Substance. Tenant shall not release or permit to be released by any Hazardous Substance in violation of federal, state or local environmental laws or regulations, or which may adversely affect (a) the health, welfare, or safety of persons, whether located on the Leased Premises or elsewhere, or (b) the condition, use, or enjoyment of the Leased Premises or any other real or personal property.

12.2   Indemnity. Tenant hereby agrees that it shall be responsible for all costs and expenses relating to the use, storage, and disposal of Hazardous Substances kept on the Leased Premises by Tenant, and Tenant shall give immediate notice to Landlord of any violation or potential violation of the provisions of this paragraph, or any other state, federal or local environmental law or regulation. Tenant shall defend, indemnify, and hold Landlord and its agents harmless from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs, or expenses (including without limitation, a decrease in value of the Leased Premises, damages caused by loss or restriction of rentable or useable space, or any damages caused by adverse impact on marketing of the Leased Premises and any and all sums paid for settlement of claims, attorney fees, consultant and expert fees), of whatever kind or nature, known, unknown, contingent or otherwise arising out of or in any related to (a) the release of a Hazardous Substance arising out of an act or omission of Tenant or its agents; (b) the presence, disposal, release, or threatened release of any such Hazardous Substance that is on, from, or affecting the soil, water, vegetation, buildings, personal property, persons, animals, or otherwise; (c) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to that Hazardous Substance; (d) any lawsuit brought or threatened, settlement reached or government order relating to that Hazardous Substance; or (e) any violation of any state, local or federal environmental laws applicable to such Hazardous Substance. The provision of this paragraph shall be in addition to any other obligations and liabilities Tenant may have to Landlord at law or equity, and shall survive the transactions contemplated within this Lease, and shall survive the termination of this Lease.

12.3  Definition of Hazardous Substances. For purposes of this paragraph, the term "Hazardous Substances" means any substance that is toxic, ignitable, reactive, or corrosive, or that is regulated by any local government, the State of Washington, or the United States government according to environmental laws or regulations now in effect, or which may hereafter be enacted.

13.            DEFAULTS; REMEDIES

13.1   Default. The following shall be events of default:

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13.1.1   Payment Default. Failure of Tenant to make any Rent payment under this Lease within ten (10) days after such payment is past due.

13.1.2   Unauthorized Transfer. Tenant makes any transfer without Landlord's prior written consent as required under Paragraph 8.

13.1.3   Abandonment of Leased Premises. Tenant fails to occupy or use the Leased Premises for the purposes permitted by this Lease for a total of twenty (20) consecutive business days or more during the Lease Term, unless such failure is excused under other provisions of this Lease.

13.1.4   Default in Other Covenant. Failure of Tenant to comply with any other Term or Condition or fulfill any other obligation of this Lease within ten (10) calendar days after written notice by Landlord specifying the nature of the default with reasonable particularity. No notice and no opportunity to cure shall be required if Landlord has previously given Tenant notice of failure to comply with such Term or Condition, or fulfill such other obligation of this Lease during the preceding calendar year.

13.1.5   Insolvency Defaults. Dissolution, termination and existence, insolvency on a balance sheet basis, or business failure of Tenant; the commencement by Tenant of a voluntary case under the federal bankruptcy laws or under any other federal or state law relating to Tenant's insolvency or debtor's relief; the entry of a decree or order for relief against Tenant in an involuntary case under the federal bankruptcy laws, or under any other applicable federal or state law relating to Tenant's insolvency or debtor's relief; the appointment of or the consent by Tenant to the appointment of a receiver, trustee or custodian of Tenant; an assignment for the benefit of creditors by Tenant; Tenant's failure generally to pay its debts as such debts become due; the making or suffering by Tenant of a fraudulent transfer under applicable federal or state law; concealment by Tenant of any of its property in fraud of creditors; the making or suffering by Tenant of a preference within the meaning of federal bankruptcy law; or the imposition of a lien through legal proceedings or distraint upon any of the property of Tenant, except for Tenant's ownership in Giga Watt, Inc., which is not discharged or bonded. During any period in which there is a guarantor(s) of this Lease, each reference to "Tenant" in this paragraph shall be deemed to refer to "guarantor or tenant," separately.

13.2   Remedies on Default. Upon default, Landlord may exercise any one or more of the following remedies, or any other remedy available under applicable law:

13.2.1   Termination of Lease. Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder. In the event that Landlord shall elect to terminate this Lease, Landlord may recover from Tenant: (i) the amount of any unpaid rent which has been earned at the time of such termination; plus (ii) the amount by which the unpaid rent which would have been earned after termination and, for the balance of the Lease term, exceeds the amount of such rental loss that Tenant proves that could have been reasonably avoided; plus (iii) any interest charged on delinquent rent; plus any other amount to compensate Landlord for the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease.

 

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13.2.2   Retake Possession. To the extent permitted by law, Landlord may re-enter and retake possession of the Leased Premises, on three (3) days advance notice, either by summary proceedings or any other applicable action or proceeding, or otherwise. Landlord may use the Leased Premises for Landlord's own purposes or relet it upon any reasonable terms without prejudice to any other remedies that Landlord may have by reason of Tenant's default. None of these actions will be deemed an acceptance or surrender by Tenant.

13.2.3   Relet the Leased Premises. Landlord, at its option, may relet the whole or any part of the Leased Premises, from time to time, either in the name of Landlord or otherwise, to such tenants, for such terms ending before, on or after the expiration date of the Lease term, at such rentals and upon such other conditions (including concessions and free rent periods) as Landlord, in its sole discretion, may reasonably determine to be appropriate. Landlord, at its option, may make such physical changes to the Leased Premises as Landlord, in its sole discretion, considers advisable or necessary in connection with any such reletting or proposed reletting without relieving Tenant of any liability under this Lease or otherwise affecting Tenant's liability. In the event Landlord elects to relet the Leased Premises, rent received by Landlord for such reletting shall be applied; first, to the payment of any cost of reletting; second, to pay the cost of any alterations or repairs to the Leased Premises; third, to the payment of indebtedness other than rent owed by Tenant to Landlord; and fourth, to the payment of rent due and unpaid under the Lease, and the residue, if any, shall be held by Landlord and applied to the payment of future rent as the same may become due and payable. Should rent received from the reletting of the Leased Premises during any month be less than the rent payable under the terms of the Lease by Tenant, then Tenant shall pay the deficiency to Landlord immediately upon demand.

13.2.4   Damages for Default. Whether or not Landlord retakes possession or relets the Leased Premises, Landlord may recover all damages caused by the default (including, but not limited to unpaid rent, attorney's fees relating to the default, and costs of reletting). Landlord may sue periodically to recover damages as they accrue during the remainder of the Lease term without barring a later action for further damages. Upon the occurrence of a payment default, Landlord may bring an action for accrued damages plus damages for the remaining Lease Term equal to the difference between the rent specified in this Lease and the reasonable rental value of the Leased Premises for the remainder of the Term, discounted to the time of judgment at the rate of three percent (3%) per annum.

13.3   Cure of Default. Without prejudice to any other remedy for default, Landlord may perform any obligation or make any payment required to cure a default by Tenant. The cost of performance, including attorney's fees and all disbursements, shall immediately be repaid by Tenant upon demand, together with interest from the date of expenditure until fully paid at the same rate as the Bank Prime Loan Rate as published by The Federal Reserve Bank (https://www.federalreserve.gov/releases/h15/) currently at 3.50%.

13.4   Remedies Cumulative. Any right or remedy Landlord may have under this Lease arising out of Tenant's breach of any covenant of this Lease shall be in addition to any other right or remedy for such breach provided by law.

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14           TENANT IMPROVEMENTS.  Except as set forth in this Lease or in a separate written agreement between Landlord and Tenant, Tenant shall be solely responsible. at its cost and expense, to perform all work required to ready the Leased Premises for Tenant's use and occupancy. All work to be performed by Tenant to ready the Leased Premises for occupancy shall be subject to and conducted in accordance with the provisions of Paragraph 6.4 of this Lease.

15.           MISCELLANEOUS

15.1   Waivers. No waiver by Landlord of performance of any provision of this Lease shall waive or prejudice Landlord's right to otherwise require performance of the same provision or any other provision, and Landlord's acceptance of Rent or Additional Rent shall not waive or prejudice Landlord's remedies for Tenant's default, including the right to repossess the Leased Premises or to forfeit or terminate the Lease.

15.2    Recording. Tenant shall not record this Lease without the prior written consent of Landlord, which consent Landlord may withhold in its sole discretion.

15.3   Neighboring Businesses. Tenant understands and agrees that neighboring business activity may affect its business operations and shall not be a basis for Tenant to breach the terms of this Lease or seek revision of said terms. Should Tenant have issues with neighboring tenants, Tenant shall first discuss any issues with Landlord to determine the proper remedy, if any. Neither Tenant nor Tenant's employees shall harass any other neighboring tenant or business. Any harassment by Tenant or Tenant's employees shall constitute a default.

15.4   Notices. All notices provided for or permitted to be given pursuant to this Lease, except those for Overages under Section 4.1, shall be in writing and shall be delivered in person or sent by registered or certified United States mail, postage prepaid, return receipt requested, or by overnight courier, to the addresses set out herein or to such other addresses as are specified by no less than ten (10) days prior written notice delivered in accordance herewith:

To Landlord:

 

To Tenant:

TNT Business Complexes, LLC
380 Leslie Way
East Wenatchee, WA 98802

Dave Carlson/Enterprise Focus Inc.
2504 Columbia NW
East Wenatchee, WA 98802

 

All such notices shall be deemed effectively given and delivered three (3) days after the postmark date of mailing, the day after delivery to the overnight courier, or, if delivered personally, when received. Rejection or other refusal to accept or the inability to deliver because of a changed address of which no notice was given in accordance with the time period provided herein shall be deemed to be receipt of the notice sent.

Notices under Section 4.1 regarding Overages shall be sent to the following email address:

BuzzDavenow@gmail.com

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15.5   Construction. (a) This Lease shall be construed and governed by the laws of the State of Washington; (b) the invalidity or unenforceability of any provision hereof shall not affect or impair any other provision hereof; (c) this Lease constitutes the entire agreement of the parties and supersedes all prior agreements or understandings between the parties with respect to the subject matter hereof; (d) this Lease may not be modified or amended except by written agreement signed and acknowledged by both parties; (e) if there is more than one tenant, the obligations hereunder imposed upon Tenant shall be joint and several; (f) time is of the essence of this Lease in each and every provision hereof; and (g) nothing contained herein shall create the relationship of principal and agent or of partnership or of joint venture between the parties hereto and no provisions contained herein shall be deemed to create any relationship other than that of Landlord and Tenant.

15.6    Successor. Subject to any limitations on assignments herein, all of the provisions of this Lease shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto.

15.7   Attorney's Fees. In the event of any dispute arising out of or relating to this Lease, whether or not suit or other proceeding is commenced, and whether in mediation, arbitration, at trial, on appeal, in administrative proceedings, or in bankruptcy (including, without limitation, any adversary proceeding or contested matter in any bankruptcy case), the prevailing party shall be entitled to its costs and litigation expenses incurred, including its reasonable attorney fees. Venue shall be in Douglas County, Washington.

15.8    No Offer. This Lease is submitted to Tenant on the understanding that it will not be considered an offer and will not bind Landlord in any way until (a) Tenant has duly executed and delivered the original to Landlord, and (b) Landlord has executed and delivered one copy to Tenant.

 

 

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EXHIBIT A

 

Legal Description

A part of Tract 40 of the East Wenatchee Land Company's Plat of Section Thirteen (13), Township Twenty-Two (22) North, Range Twenty (20), East of the Willamette Meridian, Douglas County, Washington, more particularly described as follows:

Commencing at the Easterly corner of said Tract 40; thence North 43°25'20" West along the Northeasterly boundary of said Tract 40, which is the Northeasterly Right-of-Way Limit of Highline Drive, for 274.00 feet; Thence South 46° 34'40" West for 30.00 feet to a point on the Southwesterly Right-of-Way Limit of said Highline Drive, the True Point of Beginning for this description; Thence continuing South 46° 34'40" West for 570.0 feet; Thence South 43° 25'20" East for 87.00 feet; Thence North 46° 34'40" East for 570.00 feet to the aforesaid Southwesterly Right-of-Way Limit of Highline Drive; Thence North 43° 25'20" West along said Right-of-Way Limit for 87.00 feet to the True Point of Beginning; TOGETHER WITH:

Lot 1, Emmet Johnson Short Plat as recorded in Book E of Plats at Page 79, records of Douglas County, Washington.

APN. 402-000-040-12

 

 

 

 

 

 

 

 

 

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EXHIBIT B

 

Location of Buildings B and H

 

 

 

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EXHIBIT 10.39

 

COMMERCIAL LEASE AGREEMENT

THIS LEASE AGREEMENT, made this 14th day of November, 2014 by and between TNT BUSINESS COMPLEXES L.L.C. hereafter referred to as "Lessor and Dave Carlson / Enterprise Focus Inc. hereinafter referred to as "Lessee", is made in consideration of the mutual promises and covenants hereinafter set forth:

WITNESSETH:

Description. Lessor hereby leases to Lessee, and Lessee hereby rents from Lessor, a portion of that certain building located at'474 Highline Dr. East Wenatchee, WA Building C  of the Lessor containing approximately 2200 square feet located in Douglas County, Washington.

1.   Business Purpose. The premises are to be used for the purposes of Data Center Lessee agrees that Lessee will not use said premises for any other purpose without written consent, and Lessor agrees said consent will not be unreasonably withheld.

2.   Term. The term of this lease shall be for 5 years, commencing on the first day of December 2014 and terminating on the last day of November 2019 Lessee shall have the option to extend this lease for one 5 year term by providing Lessee with thirty (30) day written notice of said intent.

3.   Rent. Lessee agrees to pay Lessor the sum of $1525.00 per month rental for the first 12 months and increases to $1650.00 per month for the remaining 4 years, in advance, payable on the 1st day of each month during the first 5 years of the lease. If rental payment is submitted after the 10th of the month a 12% late payment penalty shall be added for the payment that is due.

Any installment or rent required to be paid hereunder which shall be in default for a period of thirty (30) days shall be considered delinquent and a service charge of ten (10) percent per month thereafter shall be paid Lessor in addition to the rental installments due.

4.   Repairs and Upkeep. Lessee agrees to accept the property in "as-is" condition. Lessee will at all times keep the premises in as neat, clean and sanitary condition as when received from Lessor, and Lessee will replace any glass or windows or doors that may be cracked or broken, except for reasonable wear and tear and damage by fire or other unavoidable casualties. Lessee will at all times preserve said premises in as good of repair as when received reasonable wear and tear accepted. All repairs shall be at Lessee's sole cost and expense, except outside walls, roof and foundation. Lessee agrees upon the expiration or sooner termination of this Lease, Lessee will quit and surrender said premises without notice, and in as neat and clean of condition when received, and will surrender up all keys belonging to said premises to the Lessor or Lessor's agents. Lessee agrees to store any and all toxic materials in a manner consistent with the requirements of the United States Government, the State of Washington and

 

COMMERCIAL LEASE AGREEMENT -2

Douglas County with regard to storage and disposition to toxic wastes as said requirements may be established by statute rule or regulation. Lessee further agrees to, at Lessee's cost, clean up any and all toxic waste or damage, which may be done to the property as a result of Lessee's use.

5.     Trade Fixtures. Lessee will not make or allow to be made any alterations of said premises, or any part thereof, without the written consent of Lessor first had and obtained, Lessor agreeing that said consent will not be unreasonably withheld. Any additions to or alterations of, the said premises, except movable furniture and trade fixtures, shall become at once part of the realty and belong to Lessor. It is intended that the construction, alterations and repairs done to the premises belong to the Lessor and that trade fixtures, furniture and other additions which are not part of the structure of the building, caused to be done by Lessee, remain the property of the Lessee, provided that Lessee agrees to repair or pay for the repair of any damage which is done to the building or any part thereof by the removal of trade fixtures by Lessee or Lessee's agent.

6.     Abandonment. Lessee shall not vacate or abandon the premises at anytime during the primary or renewal terms hereof unless otherwise provided herein, and if Lessee shall abandon, vacate or surrender said premises to be dispossessed by process of the law; or otherwise, any personal property belonging to Lessee left upon the premises may, at Lessor's option, be placed in storage, Lessee agreeing to pay reasonable storage costs associated with said storage.

7.     Repairs of Structure. Lessor agrees at his sole cost and expense to keep and maintain the building in which the premises is located, including water lines, waste lines, or drain, exterior walls, roof, outside doors in a good and sanitary condition and repair, provided that, Lessee agrees to reimburse Lessor for the costs associated with the removing any blockage to said drain lines resulting from the discharge from Lessee's business. It is agreed between the parties and intended, however, that Lessee is responsible for maintaining sinks, faucets, toilets, or any other fixtures above the waste lines or drains. It is further understood that the Lessee is responsible for keeping those waste lines and drains clear and free from obstructions caused by waste or other matter coming from Lessee's premises. Lessor shall be responsible for the maintenance and upkeep of the ceiling of the premises. Lessor's responsibility and liability with respect to said ceiling shall be limited to the repair and maintenance of the ceiling and Lessor shall not be liable for any damages or claims arising from the disrepair of said ceiling resulting in any damage to Lessee's equipment, furnishing or business; provided, however, in the event the ceiling damage is the result of Lessor's failure to maintain the roof and the roof has leaked causing said damage to ceiling and/or property of Lessee, then Lessor shall have liability for said consequences.

8.     Liens caused by Lessee. Lessee shall keep the demised premises and the property on which the demised premises are situated, free from liens arising out of any

 

COMMERCIAL LEASE AGREEMENT -3

work performance, materials, or obligations incurred by Lessee, and agrees to hold Lessor harmless and indemnify Lessor from any such claims or liens.

9.   Municipal Law. Lessee shall at his sole cost and expense comply with the requirements of Municipal, State, and Federal authorities now in force or which may hereafter be in force, pertaining to said premises, and shall faithfully observe, in the use of the premises, all Municipal ordinances and State and Federal statues now in force or which may hereafter be in force. A judgment of any Court of competent jurisdiction or the admission of Lessee in any action or proceeding against Lessee, whether Lessee be a party thereto or not, that Lessee has violated any such ordinances or statute in the use of the premises, shall be conclusive of the fact as between Lessor and Lessee. The Lessee shall not use the premises for any illegal purpose.

10. Insurance Coverage. Lessor shall at his expense, during the primary and any or all renewal terms of this lease, keep and maintain insurance on the building and all other improvements on said leased premises in an amount not less than the full insurable value of said building and improvements, which policy of insurance shall insure against fire and other casualty covered by a standard fire policy with an endorsement for extended coverage. Said fire insurance policy shall be acquired and thereafter maintained in Lessor's name with Lessee as additional insured and loss payee.

Lessee shall at his expense, during the primary and renewal terms of this Lease, keep and maintain insurance on all of the Lessee's personal property situated inside the building on said leased premises.

If any activity of the Lessee or any stock of goods maintained or personal property kept on the premises by Lessee shall cause an increase in the fire insurance carried by Lessor, then Lessee promises and agrees to pay the increase in any insurance premiums paid by Lessor.

Lessee shall during the entire term of the Lease, keep in full force and effect a policy of public liability and property damage insurance with respect to the premises, and the businesses operated on the premises by the Lessee. Lessee's policy limits for public liability shall not be less than $100,000 per person and $300,0000 per accident and for the property damage liability shall not be less than $200,000 per accident. The policy shall name the Lessor as well as the Lessee as insured and shall contain a clause that the insurer will not cancel or change the insurance without giving Lessor at least ten (10) days prior written notice. Such insurance shall be with a reputable insurance company admitted to do practice in the State of Washington, and Certificates of Insurance shall be delivered to the Lessor.

Access. Lessee shall allow Lessor or Lessor's agents free access at all reasonable times to said premises for the purpose of inspection of or making repairs, additions or alterations to the premises or any property owned by or under the control of Lessor; but this right shall not be construed as an agreement on the part of Lessor to make any repairs other than those mentioned above. The Lessor shall

 

COMMERCIAL LEASE AGREEMENT -4

have the right to place and maintain "For Rent" signs in a conspicuous place on said premises for sixty (60) days prior to the expiration of this Lease.

11.  Utilities. Lessor shall provide for and pay for sewer and water. Lessee shall provide and pay for electricity, and other utilities necessary for Lessee's operation of the premises.

12. Destruction by Fire or Other Casualty. In the event of a partial destruction of the said premises during the said term, from any cause, Lessor shall forthwith repair same, provided such repairs are made within sixty (60) days under the laws and regulations of State, Federal, County or Municipal authorities but such partial destruction shall in no way annul or void this Lease, except that Lessee shall be entitled to a proportionate deduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by Lessee in the said premises. If such repair cannot be made in sixty (60) days, Lessor may, at his option, make same within a reasonable time, this Lease continuing in full force and effect and the rent to be proportionately rebated as aforesaid in this paragraph provided. In the event that Lessor does not so elect to make such repairs that cannot be made in sixty (60) days, or such repairs cannot be made under such laws or regulations, this Lease may be terminated at the option of either party. Upon the happening of any damage or destruction of any portion of the Lessee's premises, the Lessee shall give written notice to the Lessor of such damage. Lessor agrees to notify Lessee in writing within fifteen (15) days of his notification of the partial destruction, as to whether or not the Lessor shall make repairs by reason of the damage. Lessor shall make all repairs as promptly as possible. In the event that the building in which the leased premises may be situated be destroyed to the extent of not less than fifty (50%) percent of the replacement cost thereof, Lessor or Lessee may elect to terminate this lease, whether the leased premises are injured or not. A total destruction of the building in which the said premises may be situated shall terminate this Lease. In the event of any dispute between the Lessor and Lessee relative to the provisions of this paragraph, they shall each select a third arbitrator and the three (3) arbitrators so selected shall hear and determine the controversy, within fifteen (15) days, and their decision thereon shall be final and binding upon both Lessor and Lessee, who shall bear the costs of such arbitration equally between themselves.

13. Breach by Insolvency. Either (a) the appointment of a receiver to take possession of all or substantially all of the assets of the Lessee, or (b) a general assignment by Lessee for the benefit of creditors, or (c) any action taken or suffered by Lessee under any insolvency or bankruptcy act shall constitute a breach of this Lease by Lessee.

Waiver of Subrogation. For and in consideration of the execution hereof by each of the parties, each party does herein release and relieve the other, and waive his entire claim of recovery against the other for loss or damage to property arising out of or incident to fire, lighting and the perils included the extended coverage endorsement, in, on or about the said premises, even though caused by the negligence or any of said parties, their agents or employees or otherwise.

 

COMMERCIAL LEASE AGREEMENT -5

Lessor and Lessee agree to maintain insurance which will allow for the release and waiver specified above. This agreement shall be inapplicable if it would have the effect, but only to the extent that it would have the effect, of invalidating any insurance coverage of the Lessor or Lessee.

14. Notice. Any notice required to be served in accordance with the terms of this Lease shall be sent by certified mail, with return receipt requested, delivered to addressee only, the notice from the Lessee to be sent to Lessor or Lessor's agent, at 380 Leslie Way, East Wenatchee, WA 98802 and any notice from the Lessor to be sent to Lessee at 6780 Osprey Lane Cashmere, WA / 1250 N Wenatchee  Ave Suite H #147 Wenatchee, WA 98801

15. Government Fees. Any fees or licenses due the City, County, or State on account of any inspection made on said leased premises on account of any business or activity run by Lessee or allowed by Lessee to be done on the leased premises shall be paid by Lessee.

16. Default and Re-entry. Time is of the essence of this agreement. Lessee shall be in default under this Lease if (1) he abandons or vacates the premises prior to the expiration of the term without written consent of Lessor; (2) fails to pay the monthly rental as it becomes due; (3) fails to perform and abide to the terms and conditions of the Lease; (4) or file voluntary bankruptcy proceedings or has involuntary proceedings instituted against him. Provided, however, Lessor shall notify the Lessee in writing of any breach of the provisions of this Lease and Lessee shall have thirty (30) days within which to correct the defaults from the date of receipt of the notice. In the event of any breach of this lease by Lessee or Lessor, having given a thirty (30) day notice to Lessee to cure the breach, besides other rights or remedies he may have, shall have the right to re-enter and may remove all persons and property from the premises and such property may be removed and stored in a public warehouse or elsewhere at a cost of and for the account of Lessee. Should Lessor elect to re-enter, as herein provided, or should he take possession pursuant to any notice provided by law, he may either terminate this Lease, or he may from time to time, without terminating this Lease, re-let said premises or any part thereof for the un-expired portion of their primary or renewal term upon reasonable terms and conditions; upon such re-letting Lessee shall be immediately liable to pay to Lessor, in addition to any indebtedness other than rent due hereunder the amount, if any, by which the unpaid rent is reserved in this lease for the primary or renewal term exceeds the amount to be paid under the re-letting agreement as rent for the demised premises for the un-expired portion of said primary or renewal term. In the event that Lessee chooses to remedy any defaults Lessee shall also be liable to Lessor for any attorney fees incurred by way of sending notice to Lessee of any default.

17. Mutual Cancellation. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subleases or sub-tenancy or may, at the option of Lessor, operate as an assignment to him of any or all such subleases or sub-tenancies.

 

COMMERCIAL LEASE AGREEMENT -6

18.  Attorney's Fees and Costs. It is mutually agreed and understood that in the event it shall become necessary to employ attorneys to enforce the provisions of this Lease, party found in default shall reimburse the prevailing party its reasonable attorney's fees and court costs. It is agreed between the parties that the venue and jurisdiction of any legal action between the parties shall be laid in Chelan County, State of Washington.

19.  Non-waiver of Breach. The failure of the Lessor to insist upon strict performance of any of the covenants and agreements of this Lease, or to exercise any option herein conferred in any one or more circumstances, shall not be construed to be a waiver or relinquishment of any such, or any other covenants or agreements, but the same shall be and shall remain in full force.

20.  Heirs and Successors. Subject to the provisions herein pertaining to assignments and sub-letting, the covenants and agreements of this Lease shall be binding on the heirs, legal representatives, successors and assigns of any or all of the parties hereto.

21.  Holdover. If the Lessee shall, with the written consent of Lessor, hold over after the expiration of the term of this Lease, such tenancy shall be for an indefinite period of time on a month-to-month tenancy, which may be terminated as provided by the laws of the State of Washington. During such tenancy Lessee agrees to pay Lessor the same rate of rental as would be required during an extended term in the event this Lease is extended, and to be bound by all other terms, covenants and conditions as herein specified, so far as applicable.

22.  Personal Property Taxes. Lessor shall pay the Real Estate Property Tax. Lessee shall be responsible and pay any and all taxes and assessments caused by reason of his business or by reason of the stock of goods or other personal property kept on the premises.

IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and the year first above written.


Addendum

Any and all additions, upgrades and expenses to Building C are the sole responsibility of the lessee unless otherwise agreed upon in writing. Any and all additions, ventilation openings and upgrades to Building C will require permission from TNT Business Complexes LLC, repair estimates and a refundable deposit for the repair of all upgrades before each is started. All building and electrical permits shall be acquired before doing any upgrades. The return of deposit shall be dispersed by TNT Business Complexes to tenant as repairs are accomplished at the end of lease. All lease requirements shall be met at end of occupancy for the complete damage deposit to be returned.

EXHIBIT 10.40

 

Law Offices of Mark D. Waldron, PLLC

MARK D. WALDRON

 

   (mark@mwaldronlaw.com)

6711 Regents Blvd. W., Suite B

 

Tacoma, WA 98466

Paralegals:

 

DIANA L. ATKINS

Telephone:253.565.5800

   (diana@mwaldronlaw.com)

website: mwaldronlaw.com

TERESA J. VANNICE

 

   (teresa@mwaldronlaw.com)

 

October 21, 2019

SENT BY CERTIFIED MAIL; RETURN RECEIPT REQUESTED

Mr. Kelly Thompson
TNT Business Complexes, LLC
380 Leslie Way
East Wenatchee, WA 98802

Re: In re Giga Watt, Inc., Case No. 18-03197, U.S. Bankruptcy Court for the Eastern District of Washington (the “Bankruptcy Case”); Waldron v. Carlson, et al., Case No. 19-80012, pending in the Bankruptcy Case (the “Adversary Proceeding”)

Dear Mr. Thompson:

     Reference is made to that certain Order Granting Preliminary Injunction, dated June 5, 2019, entered in the above-referenced Adversary Proceeding [AP ECF No. 70] (the “Preliminary Injunction”). Reference is further made to that certain Commercial Lease Agreement, dated November 14, 2014 between TNT Business Complexes LLC and Dave Carlson / Enterprise Focus, Inc. (the “TNT Building C Lease”).

     Pursuant to the authority that the Preliminary Injunction granted to me, as Trustee, and further pursuant to the option right set forth in Paragraph 2 of the TNT Building C Lease, I hereby exercise the option to extend the TNT Building C Lease for one five (5) year term. The exercise of this option extends the term of the TNT Building C Lease from December 1, 2019 to December 1, 2024.


Mr. Kelly Thompson / TNT Business Complexes, LLC
Re: Giga Watt, Inc.
October 21, 2019; Page 2

     This letter satisfies the 30-day notice requirement and the manner of notice requirements set forth in Paragraphs 2 and 14 of the TNT Building C Lease.

Very truly yours,
 
 
 
 
/s/ Mark D. Waldron,
Mark D. Waldron, Chapter 11 Trustee
for the Estate of Giga Watt, Inc.

MDW/dla
cc: Jason Piskel, Esq.
      Pamela M. Egan, Esq.

EXHIBIT 10.41

 

Amendment of Commercial Lease Agreement

 

This Amendment of Commercial Lease Agreement made this 28th day of January 2020, by and between Mark Waldron, in his capacity as the duly appointed Chapter 11 bankruptcy Trustee of GigaWatt, Inc., (hereinafter "Tenant") and TNT Business Complexes LLC, (hereinafter "Landlord"), is made in consideration of the mutual promises and covenants set forth hereafter:

A.           Landlord and Tenant hereby acknowledge and agree that Mark Waldron, in his capacity as the duly appointed Chapter 11 bankruptcy Trustee for the Tenant, undertook the Commercial Lease Agreement attached hereto as Exhibit A and thereafter exercised Tenant's option to extend the Commercial Lease Agreement through the last day of November 2024.

B.            Landlord and Tenant further agree that paragraph three (3) of Exhibit A shall be replaced in its entirety with the following effective February 1, 2020:

3.       Rent: Tenant agrees to pay Landlord $1,950.00 per month in rent for the months of February 2020 through November 2020. Rent shall thereafter increase on an annual basis as follows:

December 2020 through November 2021: $2,000 per month
December 2021 through November 2022: $2,050 per month
December 2022 through November 2023: $2,100 per month
December 2023 through November 2024: $2,150 per month

Rent is payable at the outset of each month, i.e., rent shall be payable no later than the 1st day of each month. If Tenant has failed to pay rent by the 1st day of the month, Tenant hereby agrees to pay a late fee of $100 and agrees that interest shall begin accruing on the delinquent rent at a rate of 12% per annum, with interest accruing from date rent was due and continuing to accrue until the delinquent rent is paid. The late fee and accrued interest must be paid by Tenant to cure any delinquency in the payment of rent.

C.            The parties agree that all other terms and provisions in Exhibit A shall remain in effect and unchanged. This Agreement shall be subject to Bankruptcy Court approval, which the Trustee agrees to undertake and Landlord agrees to support. The parties acknowledge that Bankruptcy Court approval cannot be obtained prior to February 1, 2020, based upon notice requirements, however the parties agree that the Bankruptcy Estate of Giga Watt, Inc. shall commence payments as described above effective February 1, 2020.

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