MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Mechanical Technology, Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets

As of June 30, 2015March 31, 2016 (Unaudited) and December 31, 2014

Mechanical Technology, Incorporated and Subsidiaries2015

Condensed Consolidated Statements of Operations (Unaudited)

For the Three and Six Months Ended June 30, 2015 and 2014

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

Mechanical Technology, Incorporated and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

For the Three Months Ended March 31, 2016 and 2015

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

MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Equity

For the Year Ended December 31, 20142015

and the SixThree Months Ended June 30, 2015March 31, 2016 (Unaudited)

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

MECHANICAL TECHNOLOGY, INCORPORATED AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the SixThree Months Ended June 30,March 31, 2016 and 2015 and 2014

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

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.             Nature of Operations

Description of Business

Mechanical Technology, Incorporated (MTI or the Company), a New York corporation, 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 system balancing systems, and wafer inspection tools, consisting of electronic gauging instruments for position, displacement and vibration application within the industrial manufacturing/production markets, as well as the research, design and process development market; tensile stage systems for materials testing at academic and industrial research settings; 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.

LiquidityLiquidity; Going Concern

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 hashad an accumulated deficit of approximately $118.4$121.2 million and working capital of approximately $2.2 million$810 thousand at June 30, 2015.March 31, 2016. As of March 31, 2016, we had no debt and $24 thousand in commitments for capital expenditures. 

Based on the Company’s projected cash requirements for operations and capital expenditures, for 2015, its current available cash of approximately $1.5 million, the $2.5 million available from its existing credit facilities, current$336 thousand and our projected 2016 cash flow requirements and revenue and expense projections,pursuant to management’s current plan, management believes it will have adequate resources to fund operations and capital expenditures for the remainder of the year. If cash generated from operations is insufficient to satisfy the Company’s working capital and capital expenditure requirements, the Company may be required to sell additional equity or obtain credit facilities. The Company has no other formal commitments for funding future needs of the organization at least the next twelve months.this time and any additional financing during 2016, if required, may not be available to us on acceptable terms or at all. 

The Company’s financial statements have been prepared assuming the Company will continue as a going concern, which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. If the going concern basis were not appropriate for these financial statements, adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used. 

The Company’s history of operating cash flow deficits, its current cash position and lack of access to capital may raise doubt about its ability to continue as a going concern and its continued existence could be dependent upon several factors, including its ability to raise revenue levels and control costs to generate positive cash flows, to sell additional shares of the Company’s common stock to fund operations and to obtain credit facilities. Selling additional shares of the Company’s common stock and obtaining credit facilities may be more difficult as a result of limited access to equity markets and the tightening of credit markets. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount of or classification of liabilities that might be necessary as a result of this uncertainty. 

The Company believes that the current lack of liquidity and “going concern” opinion resulted primarily from delays in entering into a new agreement with the U.S. Air Force (as discussed in our Annual Report on Form-K for the year ended December 31, 2015 in Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in a product order it is expecting but has not yet been placed, as well as the Company’s cancellation of its existing lines of credit on March 24, 2016, as further discussed in Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in the Annual Report and this Form 10-Q. While the Company believes that it will enter into a new agreement with the U.S. Air Force during the second quarter of 2016 and that the new order it is expecting will also be received, there can be no assurance that these events will happen; if these do not occur or the Company’s business strategy is not successful in addressing its current financial issues, substantial doubt exists about the Company’s ability to continue as a going concern.

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) and with the instructions to Form 10-Q in Article 10 of the Securities and Exchange CommissionsCommission’s (SEC) Regulation S-X.  The results of operations for the interim periods presented are not necessarily indicative of results for the full year.

Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.2015.

The information presented in the accompanying condensed consolidated balance sheet as of December 31, 20142015 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, 2015March 31, 2016 and June 30, 2014.March 31, 2015.

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.

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 June 30, 2015March 31, 2016 and December 31, 2014,2015, based on MeOH Power, Inc.’s net position and expected cash flows. AsAs of June 30, 2015,March 31, 2016, the Company retained its ownership of approximately 47.5% of MeOH Power, Inc.’s outstanding common stock, or 75,049,937 shares, and 54.8%55.7% of the common stock and warrants issued, which includes 31,904,136 warrants outstanding.

3.             Accounts Receivable

Accounts receivables consist of the following at:

For the sixthree months ended June 30,March 31, 2016 and 2015, and 2014, the largest commercial customer represented 6.7%15.7% and 14.0%10.2%, respectively, and the largest governmental agency represented 3.6%1.4% and 22.5%3.7%, respectively, of the Company’s product revenue. As of June 30, 2015March 31, 2016 and December 31, 2014,2015, the largest commercial receivable represented 16.6%14.3% and 9.1%13.8%, respectively, and the largest governmental receivable represented 1.2%0.5% and 0.2%1.6%, respectively, of the Company’s accounts receivable.

4.             Inventories

Inventories consist of the following at:

5.             Property, Plant and Equipment

Property, plant and equipment consist of the following at:

Depreciation expense was $39$20 thousand and $83$80 thousand for the sixthree months ended June 30, 2015March 31, 2016 and the year ended December 31, 2014,2015, respectively.

6.             Income Taxes

During the three and six months ended June 30, 2015,March 31, 2016, the Company’s effective income tax rate was 4.8% and 1.7%, respectively.0%. The projected annual effective tax rate is less than the Federal statutory rate of 34%, primarily due to permanent differences, the change in the valuation allowance and changes to estimated taxable income for 2015.2016.  For the three and six months ended June 30, 2014,March 31, 2015, the Company’s effective income tax rate was 0%, respectively. Income. There was no income tax expense of $10 thousand for the three and six months ended June 30, 2015, respectively, related to an adjustment of the prior period estimated tax accrual.March 31, 2016 or 2015.

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.

TheAlthough the Company has determined that it expects to generate sufficient levels of pre-tax earnings in the future, the Company decided to realize the netre-establish a full valuation allowance at December 31, 2015 for its deferred tax assets recorded on the balance sheet at June 30, 2015. The Company has projected such pre-tax earnings utilizingassets. This decision was based upon actual results differing from those estimates used as a combination of historical and projected results, taking into consideration existing levels of permanent differences, non-deductible expense and the reversal of significant temporary differences. We project that our taxable incomebasis for the next three years is adequate to ensure the realizabilityprevious partial valuation of the $1.3 million of deferred tax assets recorded on our balance sheet at June 30, 2015. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. We will continue to evaluate the ability to realize our deferred tax assets and related valuation allowance on a quarterly basis.asset.

The Company believes that the accounting estimate for the valuation of deferred tax assets is a critical accounting estimate, because judgment is required in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. The Company based the estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, the Company may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. The valuation allowance was $16.9$18.7 million at June 30, 2015March 31, 2016 and $16.7$18.5 million at December 31, 2014. The Company2015. We will continue to evaluate the ability to realize itsour deferred tax assets and related valuation allowancesallowance 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, 2015March 31, 2016 and December 31, 2014,2015, there were 5,248,482 and 5,258,883 shares of common stock, respectively, issued and outstanding.

Treasury Stock

On June 11, 2015, the Company’s Board of Directors approved the repurchase of up to 525,000 shares of the Company’s outstanding shares of common stock. The Company previously entered into a stock purchase plan with a registered broker-dealer in accordance with Rule 10b5-1 under the Exchange Act, pursuant to which the broker-dealer had authority to purchase shares on the Company’s behalf pursuant to the Board’s authorization. Following the termination of the Company’s credit lines, discussed in Note 9 below, the Company terminated the stock repurchase plan effective March 24, 2016. During the quarter, 10,401 shares of common stock were repurchased by the Company. As of March 31, 2016 and December 31, 2015, there were 1,015,493 and 1,005,092 shares, respectively, held in treasury.

Reservation of Shares

The Company had reserved common shares for future issuance as follows as of June 30, 2015:March 31, 2016:

EarningsIncome (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, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of windfall tax benefits that would be recorded in additional paid-in capital, if any, when the stock option is exercised are assumed to be used to repurchase shares in the current period.

Not included in the computation of earnings per share, assuming dilution, for the three and six months ended June 30, 2015,March 31, 2016, were options to purchase 942,6891,177,251 shares of the Company’s common stock. These potentially dilutive items were excluded because the Company incurred a loss during the periods and their inclusion would be anti-dilutive.

Not included in the computation of earnings per share, assuming dilution, for the three months ended June 30, 2014,March 31, 2015, were options to purchase 176,566 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, which includes the unrecognized compensation expense, resulted in an anti-dilutive effect. Not included in the computation of earnings per share, assuming dilution, for the six months ended June 30, 2014, were options to purchase 713,566942,908 shares of the Company’s common stock. These potentially dilutive items were excluded because the Company incurred a loss during this periodthe periods and their inclusion would be anti-dilutive.

8.             Commitments and Contingencies

Commitments:

Leases

The Company and its subsidiary lease certain manufacturing, laboratory and office facilities. The lease provides for the Company to pay its allocated share of insurance, taxes, maintenance and other costs of the leased property. Under the May 2, 2014 agreement, MTI Instruments has an option to terminate the lease as of December 1, 2016. If MTI Instruments terminates the lease prior to November 2019, MTI Instruments is required to reimburse the landlord for all unamortized costs that the landlord incurred for renovations to the leased space in conjunction with the lease renewal.

Future minimum rental payments required under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2015 are (dollars in thousands): $111March 31, 2016 are: $169 thousand remaining in 2015, $222 in 2016, $224$227 thousand in 2017, $218$221 thousand in 2018 and $204$207 thousand in 2019.

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:

Employment Agreement

The Company has an employment agreement with one employee that provides certain payments upon termination of employment under certain circumstances, as defined in the agreement. As of June 30, 2015,March 31, 2016, the Company’s potential minimum obligation to this employee was approximately $76$67 thousand.

Contingencies:

Legal

We are subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. WeWhen 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.

9.             Debt

On June 16, 2015,During the Companyfirst quarter of 2016, we entered into a Loan Agreement (the Loan)discussions with Bank of America, N.A. (the Bank) to replace its previous linestrengthen the lines of credit and re-align their terms to be more consistent with our current business plan. During such discussions, the Bank discussed below. The Loan contains three different credit facilities for our use in future capital requirements and strategic initiatives. All the credit facilities under the Loan are available until July 31, 2016 and may be renewed subject to all the terms and conditions as set forth in the Loan. Except as otherwise stated in the Loan, all interest and fees, if any, will be computed on the basis of a 360-day year and the actual number of days elapsed. The Loan is secured by equipment and fixtures, inventory and receivables owned byinformed the Company and guaranteed by MTI Instruments. The Loan requiresthat based on its results for 2015 it was not in compliance with certain financial covenants of the lines. Since an agreement on new covenants could not be reached, the Company to provide specified financial information within 120 days ofdecided that the fiscal year end and maintain on a consolidated basis a Debt Service Coverage Ratio of at least 1.25 to 1.0. The Company is also subject to other restrictions as set forth in the Loan.

The Company may borrow under the Facility No. 1 Commitment revolving linelines of credit from time to time up to $1 million. This facility is similar to the line of credit that was entered into in May 2014. The Facility No. 1 Commitment is payable no later than the expiration date of the Loancould not be utilized and interest is payabletherefore terminated them on the last day of each month beginning on June 30, 2015 and until payment has been made in full. The interest rate on funds borrowed under the Facility No. 1 Commitment is equal to the LIBOR Daily Floating Rate plus 2.50%.

The Company may borrow under the Facility No. 2 Commitment non-revolving line of credit from time to time up to $1 million. Any amount borrowed under the Facility No. 2 Commitment permanently reduces the amount remaining available to borrow under this line of credit. Any principal borrowed under the Facility No. 2 Commitment is payable in equal installments beginning on August 31, 2016, and on the same day of each month thereafter, and ending on July 31, 2021 (the Repayment Period) and may be prepaid in full or in part at any time. The interest rate on funds borrowed under the Facility No. 2 Commitment is equal to the LIBOR Rate (Adjusted Periodically) plus 2.50% and will be adjusted on the first day of the month of every month (the Adjustment Date) and remain fixed until the next Adjustment Date. This facility provides for payment of any accrued interest on June 30, 2015, and then on the last day of each month thereafter until payment in full of any principal outstanding under this facility.Each prepayment of an amount bearing interest must be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee. During the Repayment Period, the Company has a one-time option to convert the interest rate on the loan from the rate specified above to a fixed rate, provided no event of default exists.

The Company may borrow under the Facility No. 3 Commitment non-revolving line of credit from time to time up to $500 thousand. Any amount borrowed under the Facility No. 3 Commitment permanently reduces the amount remaining available to borrow under this line of credit. Any principal borrowed under the Facility No. 3 Commitment is payable in equal installments beginning on August 31, 2016, and on the same day of each month thereafter, and ending on July 31, 2021 (the Repayment Period) and may be prepaid in full or in part at any time. The interest rate on funds borrowed under the Facility No. 3 Commitment is equal to the LIBOR Rate (Adjusted Periodically) plus 2.50% and will be adjusted on the first day of the month of every month (the Adjustment Date) and remain fixed until the next Adjustment Date. This facility provides for payment of any accrued interest on June 30, 2015, and then on the last day of each month thereafter until payment in full of any principal outstanding under this facility.Each prepayment of an amount bearing interest must be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee. During the Repayment Period, the Company has a one-time option to convert the interest rate on the loan from the rate specified above to a fixed rate, provided no event of default exists.

As of June 30, 2015, thereMarch 24, 2016. There were no amounts outstanding under thesethe credit facilities.facilities at the time of cancellation.

On May 5, 2014, the Company entered into a revolving line of credit with the Bank. The Company was allowed to borrow under the line of credit from time to time up to $1 million to support its working capital needs. The line of credit was available until July 31, 2015. The loan was payable no later than the expiration date of the loan and interest was payable on the last day of each month beginning on May 30, 2014 and until payment was made in full. The interest rate on funds borrowed under the line of credit was equal to the LIBOR Daily Floating Rate plus 2.75%. The loan was secured by equipment and fixtures, inventory and receivables owned by the Company and guaranteed by MTI Instruments. The Company was required to hold a balance of $0 for 30 consecutive days during the period from May 5, 2014 through July 31, 2015, and each subsequent one-year period of the loan, if any. Upon the occurrence of an event of default, the Bank was allowed to set off against our repayment obligations any amounts we maintained at the Bank. The Company was also subject to other restrictions as set forth in the loan. As of June 30, 2015 and December 31, 2014, there were no amounts outstanding under this line of credit.

10.          Stock Based Compensation

TheDuring 2016, the Company granted 261,000 options to purchase the Company’s common stock from the Mechanical Technology Incorporated 2014 Equity Incentive Plan (the2014 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 $0.78 per share and was adopted bybased on the closing market price of 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 numberon the date of shares that may be awarded undergrant. Using a Black-Scholes Option Pricing Model, the 2014 Planweighted average fair value of these options is $0.74 per share and awards outstanding may be subject to adjustment on accountwas estimated at the date 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.grant. 

TheDuring 2016, the Company granted 2,000 options to purchase the Company’s common stock from the Mechanical Technology Incorporated 2012 Equity Incentive Plan, (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 $0.78 per share and was adopted bybased on the closing market price of the Company’s Board of Directors on April 14, 2012 and approved by stockholders on June 14, 2012. The 2012 Plan provides an initial aggregate number of 600,000 shares of common stock which may be awarded or issued. The numberon the date of shares which may be awarded undergrant. Using a Black-Scholes Option Pricing Model, the 2012 Planweighted average fair value of these options is $0.74 per share and awards outstanding can be subject to adjustment on accountwas estimated at the date of any recapitalization, reclassification, stock split, reverse stock split and other dilutive changes in 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.grant. 

During 2015, the Company granted 140,000 options to purchase 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 grants wasoptions is $1.20 per share and was based on the closing market price of the Company’s common stock on the datesdate of grant. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options wasis $1.14 per share and was estimated at the date of grant. 

During 2014, the Company granted 140,000 options to purchase 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 grants was $1.08 per share and was based on the closing market price of the Company’s common stock on the dates of grant. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options was $1.07 per share and was estimated at the date of grant. 

During 2014, the Company granted 102,000 options to purchase 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 grants was $0.85 per share and was based on the closing market price of the Company’s common stock on the dates of grant. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options was $0.84 per share and was estimated at the date of grant. 

11.          Related Party Transactions

MeOH Power, Inc.

As of June 30, 2015,March 31, 2016, the Company owned an aggregate of approximately 47.5% of MeOH Power, Inc.’s outstanding common stock, or 75,049,937 shares, and 54.8%55.7% of the common stock and warrants issued, which includes 31,904,136 warrants outstanding. The number of shares of MeOH Power, Inc.’s common stock authorized for issuance is 240,000,000 as of June 30, 2015.March 31, 2016.

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. At December 31, 2013, theThe Company recorded a full allowance against the Note. In 2014, $115 thousand was received from MeOH Power, Inc. in principle and interest and an additional $20 thousand was released from the allowance in advance of a January 2015 payment from MeOH Power, Inc. As of June 30, 2015March 31, 2016 and December 31, 2014, $2622015, $268 thousand and $278$266 thousand, respectively, of principal and interest are available to convert into shares of common stock of MeOH Power, Inc.Inc. Any adjustments to the allowance are recorded as miscellaneous expense during the period incurred.

12.          NewRecent Accounting Pronouncements

Standards or Updates Not Yet Effective

The Company considered the applicability and impact of all accounting standard updates (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 May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (Revenue from Contracts with Customers) toclarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The standard is principles-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard, as amended, will be effective for the Company for annual and interim reporting periods beginning after December 15, 2017. This standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Early adoption is permitted, but no earlier than calendar 2017. This standard could impact the timing and amounts of revenue recognized. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15 (Presentation of Financial Statements – Going Concern), which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. This standard will be effective for the Company for annual and interim reporting periods ending after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. This standard allows for either a full retrospective or modified retrospective transition method. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02 (Consolidation (Topic 810): Amendments to the Consolidation Analysis), which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This standard became effective for the Company beginning in the first quarter of 2016. The adoption of this standard had no impact on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11 (Inventory (Topic 330): Simplifying the Measurement of Inventory), which applies to inventory that is measured using first-in, first-out (FIFO) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out (LIFO). This standard will be effective for the Company for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period.  The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17 (Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes) as part of its ongoing simplification initiative, with the objective of reducing complexity in accounting standards. The amendments in this standard require entities that present a classified balance sheet to classify all deferred tax liabilities and assets as a noncurrent amount. This guidance does not change the offsetting requirements for deferred tax liabilities and assets, which results in the presentation of one amount on the balance sheet. Additionally, the amendments in this standard align the deferred income tax presentation with the requirements in International Accounting Standards (IAS) 1 (Presentation of Financial Statements.) This standard will be effective for the Company for annual and interim reporting periods beginning on or after December 15, 2016. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01 (Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities) the main objective of which is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information and address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This standard will be effective for the Company for annual and interim reporting periods beginning on or after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 (Leases (Topic 842)) the main objective of which requires lessees to put most leases on their balance sheet but recognize expenses on their income statement in a manner similar to current accounting requirements. This standard will be effective for the Company for annual and interim reporting periods beginning on or after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09 (Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting),which simplifies several aspects related to the accounting for employee share-based payment transactions. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for the Company for annual and interim reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10 (Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing),which clarifies the identification of performance obligations and the licensing implementation guidance. This standard is expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. This standard will be effective for the Company for annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, the terms “we,” “us,” and “our” refer to Mechanical Technology, Incorporated, a New York Corporation, and “MTI Instruments” refers to MTI Instruments, Incorporated, a New York corporation and our wholly-owned subsidiary.

The following discussion of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and the related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 20142015 contained in our 20142015 Annual Report on Form 10-K.

In addition to historical information, the following discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements.  Important factors that could cause actual results to differ include those set forth in Part I Item 1A-Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014,2015, as filed on March 5, 2015,30, 2016, and elsewhere in this Quarterly Report on Form 10-Q. Readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q. Please see “Statement Concerning Forward-Looking Statements” below.

Overview

MTI’s core business is conducted through MTI Instruments, Inc., a wholly-owned subsidiary. MTI Instruments is a supplier of precision linear displacement solutions, vibration measurement and system balancing solutions, precision tensile measurement systems and wafer inspection tools, serving markets that require 1) the precise measurements and control of products and processes in automated manufacturing, assembly, and consistent operation of complex machinery, 2) metrology tools for semiconductor and solar wafer characterization, 3) tensile stage systems for materials testing and precision linear displacement gauges all for use in academic and industrial research and development settings, and 3)4) engine balancing and vibration analysis systems for both military and commercial aircraft.

We are continuously working on ways to increase our sales reach, including expanded worldwide sales coverage and enhanced internet marketing.  

Recent Developments

On June 11, 2015, the Board of Directors of the Company approved a share repurchase program of up to 525,000 shares of its outstanding shares of common stock. Stock may be purchased from time to time, in the open market or through private transactions, as market conditions warrant. Such stock repurchases, if and when commenced, may be suspended or discontinued at any time. Any repurchased shares will be held as treasury stock and available for general corporate purposes. 

On June 16, 2015, the Company entered into a Loan Agreement (the Loan) with Bank of America, N.A. (the Bank) to replace its previous line of credit with the Bank. The Loan contains three different credit facilities for our use in future capital requirements and strategic initiatives. All the credit facilities under the Loan are available until July 31, 2016 and may be renewed subject to all the terms and conditions as set forth in the Loan. Except as otherwise stated in the Loan, all interest and fees, if any, will be computed on the basis of a 360-day year and the actual number of days elapsed. The Loan is secured by equipment and fixtures, inventory and receivables owned by the Company and guaranteed by MTI Instruments. The Loan requires the Company to provide specified financial information within 120 days of the fiscal year end and maintain on a consolidated basis a Debt Service Coverage Ratio of at least 1.25 to 1.0. The Company is also subject to other restrictions as set forth in the Loan. As of June 30, 2015, there were no amounts outstanding under these credit facilities. For additional information, see Note 9 to the condensed consolidated financial statements included in this report.

Consolidated Results of Operations

Consolidated Results of Operations for the Three and Six Months Ended June 30, 2015March 31, 2016 Compared to the Three and Six Months Ended June 30, 2014.March 31, 2015.

MTI Instruments, Inc.The following table summarizes changes in the various components of our net loss during the three months ended March 31, 2016 compared to the three months ended March 31, 2015.

Product Revenue:Product revenue consists of revenue recognized from the MTI Instruments’ product lines.

Product revenue for the three months ended June 30, 2015March 31, 2016 decreased by $527$411 thousand, or 21.3%25.1%, to $2.0$1.2 million from $2.5$1.6 million during the three months ended June 30, 2014. ThisMarch 31, 2015. The decrease in product revenue wasis attributable to delays in capital spending by our target clients, continued softness in the economies in Asian markets and the lack of repeated sales from a decreaseEuropean distributor and shipments related to application development projects in government purchases from the U.S. Air Force.Further contributing to the variability between the periods was a delay in the receipt of an expected order in our turbo-machinery business, which was not received until the final day of the quarter and, therefore, could not be filled and booked as revenue during the quarter. For the three months ended June 30,March 31, 2016, the largest commercial customer for the segment was an Asian distributor, which accounted for 15.7% of the first quarter 2016 revenue. In 2015, the largest commercial customer for the segment was a system integrator in the U.S., manufacturer of jet engines, which accounted for $242 thousand, or 12.4%,10.2% of the secondfirst quarter 2015 revenue. In 2014, the largest commercial customer for the segment was an Asian customer, which accounted for $540 thousand, or 21.8%, of the second quarter 2014 revenue. The U.S. Air ForceArmy was the largest government customer for the three months ended June 30, 2015 and 2014,March 31, 2016, accounting for $67 thousand, or 3.4%, and $770 thousand, or 31.1%, respectively,1.4% of revenue forrevenue. During the three month periodsperiod ended June 30,March 31, 2015, and 2014.

Product revenue for the six months ended June 30, 2015 decreased by $273 thousand, or 7.1%, to $3.6 million from $3.9 million during the six months ended June 30, 2014. This decrease in product revenue was attributable to a decrease in government purchases from the U.S. Air Force. For the six months ended June 30, 2015, the largest commercial customer for the segment was a system integrator in the U.S., which accounted for $242 thousand, or 6.7%, of the year-to-date 2015 revenue. In 2014, the largest commercial customer for the segment was an Asian customer, which accounted for $540 thousand, or 14.0%, of the revenue during the six months ended June 30, 2014. The U.S. Air Force was the largest government customer and accounted for the six months ended June 30, 2015 and 2014, accounting for $127 thousand, or 3.6%, and $870 thousand, or 22.5%, respectively,3.7% of revenue for the six month periods ended June 30, 2015 and 2014.revenue. 

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

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On March 16, 2016, we received the 2015 solicitation request for proposal by the U.S. Air Force as a follow up to the two maintenance and systems contracts that had previously expired, as noted in the above table. This current solicitation is for a five year supply of contract placementthe PBS 4100+ and may not be representative4100R+ systems, accessories and maintenance. We submitted our proposal to the U.S. Air Force on March 18, 2016, and we expect the U.S. Air Force to make a decision in this regard, and that we will enter into a new agreement with the U.S. Air Force, during the second quarter of actual results.

(2)Date represents expiration of contract, including the exercise of option extensions. At this time, no additional orders are expected under any of these specific contracts. 2016.

Cost of Product Revenue: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 products we sell. In addition, 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 at MTI Instrumentsremained relatively flat when comparing quarter over quarter results, decreasing $1 thousand for the three months ended June 30, 2015 decreased by $264 thousand, or 26.5%,March 31, 2016 versus the same period in 2015. Costs remained flat on 25.1% lower sales due to $733 thousand from $997 thousand during the three months ended June 30, 2014. Costa one-time charge for potentially surplus amounts of product revenue at MTI Instruments for the six months ended June 30, 2015 decreased by $205 thousand, or 13.0%, to $1.4 million from $1.6 million during the six months ended June 30, 2014. These decreases are primarilyinventory. In accordance with Company policy, potentially surplus amounts of inventory were written down as a resultconsequence of the recently decreased sales as discussed above under Product Revenue.volumes. Gross profit, as a percentage of product revenue, increaseddecreased to 62.4% for48.0% in the three month2016 period and 61.8% for the six month period ending June 30, 2015, compared to 59.8% and 59.2%, respectively, for61.0% in the same periods in 2014. The enhancement in gross margin percentage is 2015 period due to the current customer mix consistingone-time charge to write down the value of potentially surplus inventory. Without this one-time charge, gross profit as a higher percentage of domestic sales, along with on going efforts to reduce manufacturing costs and improve inventory management.product revenue would have been 59.9%.

Unfunded Research and Product Development Expenses: Unfunded researchResearch and product development expenses (meaning research and development that we conduct that is not reimbursed by customers) 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.activities, to the extent not reimbursed by our customers.

Unfunded researchResearch and product development expenses at MTI Instruments for the three months ended June 30, 2015 increased by $7 thousand, or 2.0%, to $378 thousand from $371decreased $41 thousand during the three months ended June 30, 2014. Unfunded research and product development expenses at MTI Instruments forMarch 31, 2016 compared to the six months ended June 30,comparable 2015 increased by $22 thousand, or 2.9%, to $754 thousand from $732 thousand during the six months ended June 30, 2014. These increases wereperiod due to higher labor costs, partially offset by a decrease indecreased material spending on current development projects.projects and reduced staffing. 

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.