---

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  ______________ FORM 10-Q  ______________




x
            
            QUARTERLY REPORT PURSUANT TO SECTION 13
      OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934FOR THE QUARTERLY PERIOD ENDED March 31,
      2010ORo
            
            TRANSITION REPORT PURSUANT TO SECTION 13
      OR 15(d) OF THE SECURITIES EXCHANGEACT OF
1934


FOR THE TRANSITION PERIOD FROM ____
TO ______


______________









Mechanical Technology, Incorporated (Exact name of registrant as specified in its
charter)


______________




New York
            0-6890
            14-1462255(State or Other
      Jurisdiction
            (Commission File
Number)
            (IRS Employerof Incorporation)
            
            Identification
  No.)


431 New Karner Road, Albany, New York 12205 (Address of registrant’s principal executive
office)




(518) 533-2200 (Registrant’s telephone number, including area code)




Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No o




Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files). Yes o No o




Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of “large
accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule
12b-2 of the Exchange Act (check one):




Large accelerated filero
            Accelerated filero
            Non-accelerated filero
            Smaller reporting company
      x(Do not check if a small reporting
      company)


Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12B-2 of the Act).
Yes o No x




The number of shares
of common stock, par value of $0.01 per share, outstanding as of May 12, 2010
was 4,771,658.




---



MECHANICAL TECHNOLOGY, INCORPORATED AND
SUBSIDIARIESINDEX




PART I. FINANCIAL
      INFORMATION
            2Item 1. Financial
      Statements
            2Condensed Consolidated Balance Sheets as of December 31, 2009 and March
      31, 2010 (Unaudited)
            2Condensed Consolidated Statements of Operations
    (Unaudited)For
      the Three Months Ended March 31, 2009 and 2010
            3Condensed Consolidated Statements of Stockholders’ Equity (Deficit) and
      Comprehensive Loss (Unaudited)For
      the Three Months Ended March 31, 2009 and 2010
            4Condensed Consolidated Statements of Cash Flows
    (Unaudited)For
      the Three Months Ended March 31, 2009 and 2010
            5Notes to Condensed Consolidated Financial Statements
      (Unaudited)
            6Item 2. Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            16Item 4. Controls and
      Procedures
            22PART II. OTHER
    INFORMATION
            22Item 1.
            Legal
Proceedings
            22Item 1A.
            Risk Factors
            22Item 5.
            Other
Information
            24Item 6.
            Exhibits
            24SIGNATURES
            25


1




---



PART I. FINANCIAL INFORMATION Item 1.
Financial Statements




Mechanical Technology, Incorporated and
Subsidiaries Condensed Consolidated Balance Sheets as of December 31, 2009 and March
31, 2010 (Unaudited)




(Dollars in thousands)
            
            December 31,
            
            March 31,2009
            
            2010AssetsCurrent Assets:Cash and cash equivalents
            
            $
            785
            
            
            $
            991Accounts receivable, less
      allowance for doubtful accounts ($92 in 2009 and 2010)
            
            
            1,142
            
            
            
            892Inventories, net
            
            
            789
            
            
            
            748Prepaid expenses and other
      current assets
            
            
            166
            
            
            
            340Total Current Assets
            
            
            2,882
            
            
            
            2,971Property, plant and equipment,
      net:
            
            
            859
            
            
            
            741Total Assets
            
            $
            3,741
            
            
            $
            3,712Current Liabilities:Accounts payable
            
            $
            323
            
            
            $
            478Accrued liabilities
            
            
            1,290
            
            
            
            1,464Deferred revenue
            
            
            16
            
            
            
            16Income taxes payable
            
            
            20
            
            
            
            20Total Current Liabilities
            
            
            1,649
            
            
            
            1,978Long-Term Liabilities:Derivative liability
            
            
            70
            
            
            
            68Total Long-Term-Liabilities
            
            
            70
            
            
            
            68Total Liabilities
            
            
            1,719
            
            
            
            2,046Stockholders’ Equity
      (Deficit):Common stock, par value $0.01 per share, authorized 75,000,000; 5,776,750
      issued inboth 2009 and 2010
            
            
            58
            
            
            
            58Paid-in-capital
            
            
            133,286
            
            
            
            134,190Accumulated deficit
            
            
            (120,724
            )
            
            
            (121,958
            )Common stock in treasury, at
      cost, 1,005,092 shares in both 2009 and 2010
            
            
            (13,754
            )
            
            
            (13,754
            )Total MTI stockholders’ deficit
            
            
            (1,134
            )
            
            
            (1,464
            )Noncontrolling
    interest
            
            
            3,156
            
            
            
            3,130Total Equity
            
            
            2,022
            
            
            
            1,666Total Liabilities and Stockholders’ Equity
            
            $
            3,741
            
            
            $
            3,712


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




2




---



Mechanical Technology, Incorporated and
Subsidiaries Condensed Consolidated Statements of Operations
(Unaudited)For the Three Months Ended March 31, 2009 and 2010




(Dollars in thousands, except per share)
            
            Three Months Ended March
      31,2009
            
            2010Product revenue
            
            $
            1,549
            
            
            $
            1,267Funded research and development revenue
            
            
            —
            
            
            
            357Total revenue
            
            
            1,549
            
            
            
            1,624Operating costs and expenses:Cost of product revenue
            
            
            665
            
            
            
            544Research and product
      development expenses:Funded research and product development
            
            
            —
            
            
            
            770Unfunded research and product development
            
            
            976
            
            
            
            360Total research and product development expenses
            
            
            976
            
            
            
            1,130Selling, general and
      administrative expenses
            
            
            1,377
            
            
            
            1,856Operating loss
            
            
            (1,469
            )
            
            
            (1,906
            )Interest expense
            
            
            (43
            )
            
            
            —Gain on derivatives
            
            
            18
            
            
            
            2Other (expense) income, net
            
            
            21
            
            
            
            (16
            )Loss before income taxes and noncontrolling interest
            
            
            (1,473
            )
            
            
            (1,920
            )Income tax benefit (expense)
            
            
            194
            
            
            
            —Net
      loss, net of tax
            
            
            (1,279
            )
            
            
            (1,920
            )Plus: Net loss attributed to non-controlling interest
            
            
            35
            
            
            
            686Net loss attributed to
      MTI
            
            $
            (1,244
            )
            
            $
            (1,234
            )Loss per Share (Basic and
      Diluted):Loss per share
            
            $
            (0.26
            )
            
            $
            (0.26
            )


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




3




---



MECHANICAL TECHNOLOGY, INCORPORATED AND
SUBSIDIARIES Condensed Consolidated Statements of Stockholders’ Equity (Deficit) and
Comprehensive Loss (Unaudited) For the Three Months Ended March 31, 2009 and
2010




(Dollars in thousands)
            
            Three Months EndedMarch 31,2009
            
            2010Common StockBalance, beginning
            
            $
            58
            
            
            $
            58Balance, ending
            
            $
            58
            
            
            $
            58Paid-In CapitalBalance, beginning
            
            $
            132,781
            
            
            $
            133,286Stock-based compensation
            
            
            161
            
            
            
            904Balance, ending
            
            $
            132,942
            
            
            $
            134,190Accumulated DeficitBalance, beginning
            
            $
            (117,570
            )
            
            $
            (120,724
            )Net loss
            
            
            (1,244
            )
            
            
            (1,234
            )Balance, ending
            
            $
            (118,814
            )
            
            $
            (121,958
            )Treasury StockBalance, beginning
            
            $
            (13,754
            )
            
            $
            (13,754
            )Balance, ending
            
            $
            (13,754
            )
            
            $
            (13,754
            )Noncontrolling Interest
      (NCI)Balance, beginning
            
            $
            11
            
            
            $
            3,156Equity contribution
            
            
            —
            
            
            
            660Net loss attributed to NCI
            
            
            (35
            )
            
            
            (686
            )Balance, ending
            
            $
            (24
            )
            
            $
            3,130Total Stockholders’
    EquityBalance, ending
            
            $
            408
            
            
            $
            1,666Total Comprehensive
    (Loss)Net
      loss
            
            $
            (1,244
            )
            
            $
            (1,234
            )Other comprehensive (loss)
            
            
            —
            
            
            
            —Total comprehensive
      (loss)
            
            $
            (1,244
            )
            
            $
            (1,234
            )


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




4




---



MECHANICAL TECHNOLOGY, INCORPORATED AND
SUBSIDIARIES Condensed Consolidated Statements of Cash Flows
(Unaudited)For the Three Months Ended March 31, 2009 and 2010




(Dollars in thousands)
            
            Three Months Ended March
      31,2009
            
            2010Operating ActivitiesNet (loss)
            
            $
            (1,279
            )
            
            $
            (1,920
            )Adjustments to reconcile net loss to net cash used by operating
      activities:(Gain) loss on derivatives
            
            
            (18
            )
            
            
            (2
            )Depreciation and
      amortization
            
            
            175
            
            
            
            131Stock based compensation
            
            
            161
            
            
            
            904Changes in operating assets and liabilities:Accounts receivable
            
            
            (26
            )
            
            
            250Inventories
            
            
            94
            
            
            
            41Prepaid expenses and other current assets
            
            
            (110
            )
            
            
            (174
            )Accounts payable
            
            
            38
            
            
            
            155Income taxes payable
            
            
            (213
            )
            
            
            —Deferred revenue
            
            
            4
            
            
            
            —Accrued liabilities
            
            
            (194
            )
            
            
            174Net cash used by operating activities
            
            
            (1,368
            )
            
            
            (441
            )Investing ActivitiesPurchases of property, plant
      and equipment
            
            
            —
            
            
            
            (13
            )Net cash provided by investing
      activities
            
            
            —
            
            
            
            (13
            )Financing ActivitiesNet borrowings on related party
      debt
            
            
            500
            
            
            
            —Proceeds from capital raise and warrants issued
            
            
            —
            
            
            
            660Net cash provided by financing
      activities
            
            
            500
            
            
            
            660Increase (Decrease) in cash and cash equivalents
            
            
            (868
            )
            
            
            206Cash and cash equivalents - beginning of
      period
            
            
            1,662
            
            
            
            785Cash and cash
      equivalents - end of period
            
            $
            794
            
            
            $
            991


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




5




---



MECHANICAL TECHNOLOGY,
INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)




Notes to Condensed Consolidated Financial
Statements (Unaudited)




1. Description of Business




Mechanical
Technology, Incorporated, (“MTI” or the “Company”), a New York corporation, was
incorporated in 1961. MTI operates in two segments, the New Energy segment which
is conducted through MTI MicroFuel Cells Inc. (“MTI Micro”), a majority owned
subsidiary, and the Test and Measurement Instrumentation segment, which is
conducted through MTI Instruments, Inc. (“MTI Instruments”), a wholly owned
subsidiary.




MTI Micro was
incorporated in Delaware on March 26, 2001, and is developing Mobion®, a handheld
energy-generating device to replace current lithium-ion and similar rechargeable
battery systems in many handheld electronic devices for the military and
consumer markets. Mobion® handheld generators
are based on direct methanol fuel cell (DFMC) technology, which has been
recognized as enabling technology for advanced portable power sources by the
scientific community and industry analysts. As the need for advancements in
portable power increases, MTI Micro is developing Mobion® as a solution for
advancing current and future electronic device power needs and addressing the
multi-billion dollar portable electronics market. As of March 31, 2010, the
Company owned approximately 57.35% of MTI Micro’s outstanding common stock.




MTI Instruments was
incorporated in New York on March 8, 2000. MTI Instruments is a worldwide
supplier of precision non-contact physical measurement solutions, condition
based monitoring systems, portable balance equipment and wafer inspection tools.
MTI Instrument’s products use a comprehensive array of technologies to solve
complex, real world applications in numerous industries including manufacturing,
semiconductor, solar, commercial and military aviation, automotive and data
storage. Our products consist of electronic gauging instruments for position,
displacement and vibration application within the design,
manufacturing/production, test and research market; wafer characterization of
semi-insulating and semi-conducting wafers within both the semiconductor and
solar industries; and engine vibration analysis systems for both military and
commercial aircraft.




2. Liquidity and Going Concern




The Company has
incurred significant losses as it continued to fund the direct methanol fuel
cell product development and commercialization programs of its majority owned
subsidiary, MTI Micro, and had a consolidated accumulated deficit of $122
million and working capital of $993 thousand at March 31, 2010. Because of these
losses, limited current cash and cash equivalents, negative cash flows and
accumulated deficit, there is substantial doubt about the Company’s ability to
continue as a going concern. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




At present, the
Company does not expect to continue to fund MTI Micro on a long-term basis. The
Company has projected positive cash flows to meet future cash requirements for
operations and capital expenditures exclusive of MTI Micro, and has cash and
cash equivalents of $991 thousand at March 31, 2010. Management believes that
MTI Instruments will continue to generate positive cash flows and be able to
fund its current operations. However, no assurance can be provided regarding MTI
and MTI Instrument’s ability to continue as a going concern given the level of
uncertainty involved with the parent company’s operations.




Since the Company
will no longer fund MTI Micro on a long-term basis, the subsidiary has sought
other sources of funding. In September 2008, MTI Micro closed on $2.2 million of
funding in the form of convertible secured notes (the “Bridge Notes”) to
investors (the “Bridge Investors”), including MTI, Dr. Walter L. Robb, a member
of the Company’s and MTI Micro’s Boards of Directors, and Counter Point Ventures
Fund II, LP (Counter Point). Counter Point is a venture capital fund sponsored
and managed by Dr. Walter L. Robb. General Electric Pension Trust, an employee
benefit plan trust, is a passive limited partner in Counter Point. In February
2009, MTI Micro issued additional bridge notes to Counter Point in the amount of
$500 thousand. On April 15, 2009, MTI Micro, Counter Point and an additional
investor agreed to additional bridge notes in the amount $800 thousand to be
drawn down in increments not to exceed $165 thousand monthly. The final
principal draw down occurred on December 4, 2009. The Bridge Notes carried an
annual interest rate of 10%. On December 9, 2009, these bridge notes with the
aggregate principal and accrued interest amount of $3,910,510 outstanding were
converted into an aggregate of 55,864,425 shares of Common Stock of MTI Micro
using a conversion price per share of $0.070 (the “Negotiated
Conversion”).




On January 11, 2010,
MTI Micro entered into a Common Stock and Warrant Purchase Agreement (the
“Purchase Agreement”) with Counter Point. Through March 31, 2010, $660 thousand
has been drawn against this Purchase Agreement. See Note 9 for further
discussion of this transaction.




6




---



On April 16, 2009,
MTI Micro was awarded a cost share funding grant of $2.4 million from the United
States Department of Energy (DOE) as part of DOE’s $41.9 million in American
Recovery and Reinvestment Act funding for fuel cell technology. As of March 31,
2010, $2.37 million has been billed and paid by the DOE under this grant. On
April 30, 2010, MTI Micro was approved for an extension of this grant to
December 31, 2010, with additional funds available of $594 thousand under this
program.




In order to continue
full commercialization of its micro fuel cell solution, MTI Micro will need to
do one or more of the following to raise additional resources, or reduce its
cash requirements:


- obtain additional government or
  private funding of the Company’s direct methanol fuel cell research,
  development, manufacturing readiness and commercialization;
- secure additional debt or equity
  financing; or
- further reduce its current
  expenditure run-rate.

There is no guarantee
that resources will be available to MTI Micro on terms acceptable to it, or at
all, or that such resources will be received in a timely manner, if at all, or
that MTI Micro will be able to reduce its expenditure run-rate further without
materially and adversely affecting its business. MTI Micro had cash and cash
equivalents as of March 31, 2010 of $214 thousand. Subsequent to March 31, 2010,
MTI Micro has drawn down an additional $330 thousand under the Purchase
Agreement with an additional $1.01 million of available borrowing capacity
through the Purchase Agreement. However, the funds available through the
Purchase Agreement are only available to us at increments of $330 thousand
bi-monthly. Our next available draw down is July 2010. In addition, subsequent
to March 31, 2010, MTI Micro received $349 thousand from the DOE for billings
relative to work performed through March 31, 2010, and has an additional $437
thousand under the extension as work is performed. In order to conserve cash and
extend operations while we pursue any additional necessary financing, we have
reduced operating expenses in the first quarter of 2010. Without other
resources, management currently believes it will have adequate funds to operate
MTI Micro through the end of 2010.




3. Basis of Presentation




In the opinion of
management, our 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 U.S. Generally Accepted Accounting
Principles (GAAP) and with the instructions to Form 10-Q in Article 10 of 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 accounting principles generally accepted
in the United States of America (“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, 2009.




The information
presented in the accompanying condensed consolidated balance sheet as of
December 31, 2009 has been derived from the Company’s audited consolidated
financial statements but does not include all disclosures required by U.S. GAAP.
All other information has been derived from the Company’s unaudited condensed
consolidated financial statements for the three months ended March 31, 2010.




4. Recently Adopted Accounting Standards




In January 2010, the
FASB issued guidance that requires reporting entities to make new disclosures
about recurring or nonrecurring fair-value measurements, including significant
transfers into and out of Level 1 and Level 2 fair-value measurements and
information on purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair-value measurements. The guidance is effective
for reporting periods beginning after December 15, 2009, except for Level 3
reconciliation disclosures that are effective for periods beginning after
December 15, 2010. Our adoption of the currently effective portion of this
guidance did not have a material effect on the financial statements.




7




---



5. Accounts Receivable and Allowance for
Doubtful Accounts




Receivable balances
consist of the following at:




(Dollars in thousands)
            
            
            
            
            Test andMeasurement
            
            ConsolidatedNew Energy
            
            Instrumentation
            
            TotalsDecember 31, 2009U.S. and State Government
            
            $
            143
            
            $
            —
            
            
            $
            143Commercial
            
            
            —
            
            
            1,091
            
            
            
            1,091Total Accounts Receivable
            
            
            143
            
            
            1,091
            
            
            
            1,234Less: Allowance for Doubtful Accounts
            
            
            —
            
            
            (92
            )
            
            
            (92
            )Total
            
            $
            143
            
            $
            999
            
            
            $
            1,142March
      31, 2010U.S. and State Government
            
            $
            191
            
            $
            7
            
            
            $
            198Commercial
            
            
            —
            
            
            786
            
            
            
            786Total Accounts
      Receivable
            
            
            191
            
            
            793
            
            
            
            984Less: Allowance for Doubtful
      Accounts
            
            
            —
            
            
            (92
            )
            
            
            (92
            )Total
            
            $
            191
            
            $
            701
            
            
            $
            892


For the three months
ended March 31, 2009 and 2010, a single commercial customer represented 11.1%
and 12.1%, respectively, and a U.S. governmental agency represented 22.7% and
1.1%, respectively, of the Company’s instrumentation segment product revenue. As
of December 31, 2009 and March 31, 2010, this commercial customer represented
0.0% and 18.3%, respectively, and this U.S. governmental agency represented 0.0%
and 0.9%, respectively, of the Company’s instrumentation segment accounts
receivable.




As of December 31,
2009 and March 31, 2010, 100% of the accounts receivable of the new energy
segment is due from a U.S. governmental agency.




6. Inventories, net




Inventories, net
consist of the following at:




(Dollars in thousands)
            
            Dec. 31,
            
            March 31,2009
            
            2010Finished goods
            
            $
            465
            
            $
            263Work in process
            
            
            193
            
            
            218Raw materials, net
            
            
            131
            
            
            267$
            789
            
            $
            748


7. Income Taxes




The Company’s
effective income tax (expense) rate from operations differed from the federal
statutory rate for each of the three months ended March 31 as follows:




(Dollars in thousands)
            
            2009
            
            2010Federal statutory tax rate
            
            34.00
            %
            
            34.00
            %State taxes, net of federal tax effect
            
            6.07
            
            
            6.01Change in valuation allowance
            
            (40.46
            )
            
            (40.05
            )Reversal of Uncertain Tax Position for NYS Settlement
            
            13.17
            
            
            —Permanent tax difference on derivative
      valuation
            
            0.42
            
            
            0.04Tax Rate
            
            13.20
            %
            
            0.00
            %


8




---



Income tax (expense)
benefit for the three months ended March 31 consists of the following:




(Dollars in thousands)2009
            
            2010Operations before noncontrolling interestFederal
            
            $
            —
            
            $
            —State
            
            
            194
            
            
            —Deferred
            
            
            —
            
            
            —Total
            
            $
            194
            
            $
            —


The valuation
allowance at December 31, 2009 and March 31, 2010 was $26.4 million and $27.2
million, respectively, and represents a full valuation allowance. The valuation
allowance reflects the estimate that it is more likely than not that the net
deferred tax assets in excess of deferred tax liabilities may not be realized.




At March 31, 2010,
the Company had unused Federal net operating loss carry forwards of
approximately $66.4 million. Of these carry forwards, $1.3 million represents
windfall tax benefits from stock option transactions, the tax effect of which
are not included in the Company’s net deferred tax assets. Additionally, it is
estimated that $6.69 million of these carryforwards will expire prior to
utilization due to IRC Section 382 limitation described below. This net
operating loss limited by IRC Section 382 is not reflected in the Company’s
deferred tax asset as of March 31, 2010. The Federal net operating loss carry
forwards, if unused, will begin to expire in 2010.




The Company's and/or
its subsidiaries’ ability to utilize their net operating loss carryforwards may
be significantly limited by Section 382 of the Internal Revenue Code 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. A corporation generally undergoes an “ownership change” when the
ownership of its stock, by value, changes by more than 50 percentage points over
any three-year testing period. In the event of an ownership change, Section 382
imposes an annual limitation on the amount of post-ownership change taxable
income a corporation may offset with pre-ownership change net operating loss
carryforwards and certain recognized built-in losses. As of March 31, 2010,
although no formal Section 382 study has been performed, the Company does not
appear to have had an ownership change for Section 382 purposes. However, as
noted below, it appears that as a result of MTI Micro’s conversion of the Bridge
Notes (combined with the Company’s ownership changes) MTI Micro appears to have
had an ownership change for Section 382 purposes, which places limitations on
the utilization of MTI Micro’s separate company net operating loss
carryforwards.




As a result of the
conversion of the Bridge Notes, MTI no longer maintains an 80% or greater
ownership in MTI Micro. Thus, MTI Micro will no longer be included in Mechanical
Technology, Inc. and Subsidiaries' consolidated federal and combined New York
State tax returns, effective December 9, 2009. Additionally, as the result of
conversion, MTI Micro may have experienced a Section 382 ownership change which
subjects MTI Micro's separate company net operating losses to an annual Section
382 limitation.




Pursuant to the
Internal Revenue Service's consolidated tax return regulations (IRS Regulation
Section 1.1502 -36), upon MTI Micro leaving the Mechanical Technology, Inc. and
Subsidiaries consolidated group, MTI is permitted to elect to reduce a portion
of its stock tax basis in MTI Micro by "reattributing" a portion of MTI Micro's
net operating loss carry forwards to MTI, for an amount equivalent to its built
in loss amount in MTI's investment in MTI Micro's stock.




As the result of MTI
anticipating that it will make this election with its December 31, 2009 tax
return, MTI will reattribute approximately $45.2 million of MTI Micro's net
operating losses (reducing its tax basis in MTI Micro's stock by the same
amount), leaving MTI Micro with approximately $13 million of separate company
net operating loss carry forwards at the time of conversion of the Bridge Notes.
However, as noted above, as the result of a Section 382 limitation, caused by
the conversion, it is estimated that $6.69 million of these net operating losses
will expire prior to utilization.




As of March 31, 2010,
it is estimated that MTI had net operating loss carryforwards of approximately
$52.4 million and MTI Micro has net operating loss carryforwards of
approximately $14.0 million (with a portion, as noted above, being subject to
IRC Section 382 limitation).




On February 2, 2009,
the New York State Department of Taxation and Finance notified the Company that
it was no longer going to pursue the issue associated with potentially not
permitting the Company to file combined tax returns for the period 2002 through
2004. The Company had recorded a $213 thousand long-term liability for this
issue. In settlement of this issue, the Company paid New York State
approximately $19 thousand, and recognized the benefit of the reversal of this
liability of $194 thousand in the first quarter of 2009.




9




---



8. Stockholders’ Equity (Deficit)




Changes in common
shares issued and treasury stock outstanding are as follows:




Year Ended
            
            Three Months EndedDec. 31, 2009
            
            March 31, 2010Common SharesBalance, beginning
            
            5,776,750
            
            5,776,750Balance, ending
            
            5,776,750
            
            5,776,750


Warrants/Derivatives




On December 20, 2006,
the Company issued warrants to investors to purchase 378,472 shares of the
Company’s common stock at an exercise price of $18.16 per share.




The Company held or
has outstanding the following derivative financial instruments:




Dec. 31,
            
            March 31,2009
            
            2010
            
            ExpirationDerivatives issued:Warrants, exercisable beginning June 20,
      2007, to purchase the Company’scommon stock issued to three investors at a purchase price of $18.16
      pershare
            
            378,472
            
            378,472
            
            12/19/2011


The estimated fair
value of this warrant at time of issue was determined using a Black-Scholes
Option Pricing model and assumptions similar to those used for valuing the
Company’s employee stock-based compensation.




On January 1, 2009,
we adopted a newly issued accounting standard regarding disclosure of derivative
instruments. We recognize all derivatives as either assets or liabilities in the
statement of financial position and measure these instruments at fair value. The
fair value of the derivative is recorded in the “Derivative liability” line on
the financial statements, and is valued quarterly using the Black-Scholes Option
Pricing Model. The significant assumptions used for the valuations are as
follows:




Dec. 31,
            
            March 31,2009
            
            2010Expected life of option (number of
      days)
            
            730
            
            
            639Risk-free interest rate
            
            1.14
            %
            
            1.02
            %Expected volatility of stock
            
            162.7
            %
            
            177.0
            %Expected dividend yield
            
            None
            
            
            None


The fair value of the
warrants at December 31, 2009 and March 31, 2010 was $70 thousand and $68
thousand, respectively. Gains on derivatives are included in “Gain on
derivatives” in the Consolidated Statement of Operations. During the three month
periods ending March 31, 2009 and 2010 the Company recognized a gain on
derivatives of $18 thousand and $2 thousand, respectively.




The Company accounts
for derivative instruments and embedded derivative instruments in accordance
with ASC 815, Derivatives and Hedging . The standard requires freestanding contracts
that are settled in a company's own stock, including common stock warrants, to
be designated as an equity instrument, asset or a liability. A contract
designated as an asset or a liability must be carried at fair value, with any
changes in fair value recorded in the results of operations. A contract
designated as an equity instrument can be included in equity, with no fair value
adjustments required. Based on the terms and conditions of the warrants
discussed above, the instrument does not qualify to be designated as an equity
instrument and is therefore recorded as a derivative liability.




Reservation of Shares




The Company has reserved common shares for
future issuance as of March 31, 2010 as follows:




Stock options outstanding
            
            704,527Stock options available for issuance
            
            322,466Warrants outstanding
            
            378,472Number of common shares reserved
            
            1,405,465


10




---



On September 19,
2009, the Company amended its 2006 Equity Incentive Plan to increase the shares
authorized for issuance by 350,000 shares.




Loss per Share




The following table
sets forth the reconciliation of the numerators and denominators of the basic
and diluted per share computations for the three months ended March 31:





(Dollars in thousands, except shares)


2009
            
            2010Numerator:Net loss
            
            $
            (1,244
            )
            
            $
            (1,234
            )Denominator:Basic EPS:Common shares outstanding, beginning of
      period
            
            
            4,772,359
            
            
            
            4,771,658Less weighted average non-vested restricted stock
            
            
            —
            
            
            
            —Denominator for basic earnings per
      common shares –Weighted average common shares
            
            
            4,772,359
            
            
            
            4,771,658Diluted EPS:Common shares outstanding, beginning of
      period
            
            
            4,772,359
            
            
            
            4,771,658Less weighted average non-vested restricted stock due to
      anti-dilutive effect
            
            
            —
            
            
            
            —Denominator for diluted earnings per
      common shares –Weighted average common shares
            
            
            4,772,359
            
            
            
            4,771,658


Not included in the
computation of earnings per share, assuming dilution for the three months ended
March 31, 2009, were options to purchase 702,864 shares of the Company’s common
stock, warrants to purchase 378,472 shares of the Company’s common stock, and
options to purchase 22,668 shares of MTI Micro’s common stock. These potentially
dilutive items were excluded because the Company incurred a loss for this period
and their inclusion would be anti-dilutive.




Not included in the
computation of earnings per share, assuming dilution for the three months ended
March 31, 2010, were options to purchase 704,527 shares of the Company’s common
stock, warrants to purchase 378,472 shares of the Company’s common stock, and
options to purchase 28,311,801 shares of MTI Micro’s common stock. These
potentially dilutive items were excluded because the Company incurred a loss for
this period and their inclusion would be anti-dilutive.




9. Issuance of Stock, Warrants and Stock
Options by Subsidiary




Common Stock Issued – MTI Micro




MTI Micro was formed
on March 26, 2001, and as of March 31, 2010, the Company owned approximately
57.35% of MTI Micro’s outstanding common stock.




On January 11, 2010,
MTI Micro entered into a Common Stock and Warrant Purchase Agreement (the
“Purchase Agreement”) with Counter Point Ventures Fund II, L.P. (“Counter
Point”). Counter Point is managed by Dr. Walter L. Robb, a member of the Board
of Directors of the Company and MTI Micro, and is a current stockholder of MTI
Micro. Dr. Robb and Counter Point beneficially held approximately 29.5% of the
fully-diluted common stock of MTI Micro of December 31, 2009, and as of March
31, 2010 hold an aggregate of approximately 34.2% of the fully-diluted common
stock of MTI Micro.




Pursuant to the
Purchase Agreement, MTI Micro may issue and sell to Counter Point up to
28,571,429 shares of common stock, par value $0.01 per share (the “Micro Common
Stock”), at a purchase price per share of $0.070, over a period of twelve (12)
months, and warrants (“Warrants”) to purchase shares of Micro Common Stock equal
to 20% of the shares of Micro Common Stock purchased under the Purchase
Agreement at an exercise price of $0.070 per share. The sale and issuance of the
Micro Common Stock and Warrants shall occur over multiple closings (each, a
“Closing”) occurring over two (2) one month closing periods and five (5)
two-month closing periods (each, a “Closing Period”). Three Closings occurred
through March 31, 2010, with MTI Micro raising $660 thousand from the sale of
9,428,571 shares of Micro Common Stock and Warrants to purchase 1,885,714 shares
of Micro Common Stock to Counter Point. One Closing occurred on May 12, 2010,
with MTI Micro raising an additional $330 thousand from the sale of 4,714,286
shares of Micro Common Stock and Warrants to purchase 942,857 shares of Micro
Common Stock to Counter Point. Subsequent Closings may occur thereafter at MTI
Micro’s sole discretion during the Closing Periods upon delivery of written
notice by MTI Micro to Counter Point of its desire to consummate a Closing, and
Counter Point’s acceptance of such offer under the Purchase Agreement on the
terms agreed upon with MTI Micro. In the event the terms and conditions of the
Purchase Agreement no longer reflect current market conditions or otherwise,
either party may elect not to participate in a Subsequent Closing(s) or the
parties may amend the Purchase Agreement on mutually agreeable terms with
respect to such Subsequent Closing(s). If MTI Micro was to issue and sell the
remainder of the 28,571,429 shares under the Purchase Agreement, the remainder
of the 5,714,286 warrants under the Purchase Agreement were exercised, as well
as all warrants currently outstanding as detailed below, the Company would
continue to hold an aggregate of 55.8% of the fully-diluted capital stock of MTI
Micro. Further dilution to the Company’s ownership percentage could occur if and
when MTI Micro Stock Options are exercised.




11




---



The following table
represents all MTI Micro common stock shares issued.




MTI
            
            Non Controlling
InterestAverage
            
            
            
            Ownership
            
            
            
            OwnershipPrice
            
            Shares
            
            %
            
            Shares
            
            %
            
            Total SharesBalance at 12/31/2007
            
            
            
            46,030,453
            
            96.3
            
            1,750,345
            
            3.7
            
            47,780,798Stock issued for MTI Options to MFC
      Employees
            
            $0.45
            
            31,469
            
            
            
            
            
            
            
            31,469Transfer of Plug Power securities to MFC
            
            $0.35
            
            7,319,181
            
            
            
            
            
            
            
            7,319,181Conversion of Loan Receivable
            
            $0.24
            
            10,416,667
            
            
            
            
            
            
            
            10,416,667Balance at 12/31/08
            
            
            
            63,797,770
            
            97.3
            
            1,750,345
            
            2.7
            
            65,548,115Stock issued for MTI Options to MFC
      Employees
            
            $0.14
            
            10,501
            
            
            
            
            
            
            
            10,501Conversion of Bridge Loan
            
            $0.07
            
            11,241,666
            
            
            
            44,622,759
            
            
            
            55,864,425Balance at 12/31/09
            
            
            
            75,049,937
            
            61.8
            
            46,373,104
            
            38.2
            
            121,423,041Common Stock issued under Purchase Agreement
            
            $0.07
            
            
            
            
            
            9,428,571
            
            
            
            9,428,571Balance at
      03/31/10
            
            
            
            75,049,937
            
            57.35
            
            55,801,675
            
            42.65
            
            130,851,612


Warrants Issued – MTI Micro




On December 9, 2009,
MTI Micro issued warrants to the current shareholders of MTI Micro, including
the Company, without consideration, to purchase 32,779,310 shares of MTI Micro
Stock at an exercise price of $0.07 per share. The warrants become exercisable
on December 9, 2010 and expire on December 8, 2017. The warrants have been
accounted for as an equity distribution of $2,030 thousand, including warrants
to the Company with a value of $1,974 thousand that were eliminated in
consolidation.




On December 9, 2009,
MTI Micro issued warrants to the Bridge Investors of MTI Micro, including the
Company, to purchase 5,081,237 shares of MTI Micro Stock at an exercise price of
$0.07 per share. The Warrants became exercisable on December 9, 2009 and will
expire on the earlier of: (i) April 15, 2014; (ii) immediately prior to a change
in control; or (iii) immediately prior to an initial public offering of MTI
Micro. The warrants were issued without consideration and were accounted for as
equity and a loss on extinguishment of debt was recorded in the amount of $289
thousand, including warrants to the Company with a value of $57 thousand that
were eliminated in consolidation.




On January 11,
February 11 and March 4, 2010, MTI Micro issued warrants to Counter Point to
purchase 471,429, 471,429, and 942,857 shares, respectively, of MTI Micro Stock
at an exercise price of $0.07 per share, under the Purchase Agreement. The
warrants become exercisable on the date of issuance and will expire on the
earlier of (a) the five (5) year anniversary of the Date of Issuance of the
Warrant; (b)  immediately prior to a Change of Control; or
(c) the closing of a firm commitment underwritten public offering pursuant to a
registration statement  under the
Securities Act. The warrants were accounted for as equity.




Stock Based Compensation




On February 10, 2010
MTI Micro granted 28,296,800 options to its employees from the 2009 Micro Stock
Option Plan. The options vest 50% on the grant date and 50% ratably on a
quarterly basis on the last day of each calendar quarter over the next three
years. The fair value of these stock options granted was estimated at the date
of grant using a Black-Scholes Option Pricing model consistent with the
accounting standards.




12




---



The key inputs and
assumptions used to estimate the fair value of these stock options were as
follows:




Option term
            
            5 yearsVolatility
            
            115%Risk-free interest rate
            
            2.39%Dividend yield
            
            0%Fair value per option granted
            
            $0.07


The amount of expense
recognized for this grant was $833 thousand for the three month period ending
March 31, 2010. Share-based compensation expense recognized in the Consolidated
Statement of Operations is based on awards ultimately expected to vest,
therefore, awards are reduced for estimated forfeitures. The 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. The Company has assumed a forfeiture rate of 5% for this
grant.




10. Fair Value Measurement




The estimated fair
value of certain financial instruments, including cash, cash equivalents 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 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.





In determining the
appropriate levels, the Company performs a detailed analysis of financial assets
and liabilities. At each reporting period, all assets and liabilities for which
the fair value measurements are based upon significant unobservable inputs are
classified as Level 3. The derivative liability is valued using the Black-Sholes
Option Pricing Model which is based upon unobservable inputs.




The following is a
summary of the Company’s fair value instruments categorized by their associated
fair value input level:




(Dollars in thousands)Balance atMarch 31,Balance Sheet
      Classification
            
            Level 1
            
            Level 2
            
            Level
      3
            
            2010Financial Liabilities:Derivative liability
            
            $
            —
            
            $
            —
            
            $
            68
            
            $
            68Total fair value of liabilities
            
            $
            —
            
            $
            —
            
            $
            68
            
            $
            68


The following is a
rollforward of Level 3 fair value instruments for the twelve months ended
December 31, 2009:




(Dollars in thousands)Total (Gains) /Beginning
            
            Losses
            
            Purchases,
            
            EndingBalance as of
            
            Realized and
            
            Issuances, Sales
            
            Balance as ofInstrument
            
            Jan. 1, 2009
            
            Unrealized
            
            and Settlements
            
            Dec. 31, 2009Derivative liability
            
            $
            41
            
            $
            29
            
            $
            —
            
            $
            70Total Level 3 instruments
            
            $
            41
            
            $
            29
            
            $
            —
            
            $
            70


13




---



The following is a
rollforward of Level 3 fair value instruments for the three months ended March
31, 2010:




(Dollars in thousands)Total (Gains) /Beginning
            
            Losses
            
            Purchases,
            
            EndingBalance as of
            
            Realized and
            
            Issuances, Sales
            
            Balance as ofInstrument
            
            Jan. 1, 2010
            
            Unrealized
            
            and Settlements
            
            March 31, 2010Derivative liability
            
            $
            70
            
            $
            (2
            )
            
            $
            —
            
            $
            68Total Level 3 instruments
            
            $
            70
            
            $
            (2
            )
            
            $
            —
            
            $
            68


11. Segment Information




The Company operates
in two business segments,  New
Energy  and Test and Measurement Instrumentation. The
New Energy segment is focused on commercializing direct methanol fuel cells. 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 Company’s principal
operations are located in North America.




The accounting
policies of the New Energy and Test and Measurement Instrumentation segments are
similar to those described in the summary of significant accounting policies in
the Company’s Annual Report on Form 10-K. The Company evaluates performance
based on profit or loss from operations before income taxes, accounting changes,
items management does not deem relevant to segment performance, and interest
income and expense. Inter-segment sales and expenses are not significant.




Summarized financial
information concerning the Company’s reportable segments is shown in the
following table. The “Other” column includes corporate related items and items
such as income taxes or unusual items, which are not allocated to reportable
segments. The “Reconciling Items” column includes noncontrolling interests in a
consolidated subsidiary. In addition, segments’ non-cash items include any
depreciation and amortization in reported profit or loss.




(Dollars in thousands)
            
            
            
            
            
            Test and
            
            
            
            
            
            
            
            CondensedMeasurement
            
            
            
            
            
            Reconciling
            
            ConsolidatedNew Energy
            
            Instrumentation
            
            Other
            
            Items
            
            TotalsThree months ended March 31,
      2009Product revenue
            
            $
            —
            
            
            $
            1,549
            
            
            $
            —
            
            
            $
            —
            
            $
            1,549Funded research and development revenue
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            —Research and product development
      expenses
            
            
            690
            
            
            
            286
            
            
            
            —
            
            
            
            —
            
            
            976Selling, general and administrative expenses
            
            
            513
            
            
            
            483
            
            
            
            381
            
            
            
            —
            
            
            1,377Gain on sale of securities available for
      sale
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            —Segment loss from operations before income taxesand noncontrolling
      interest
            
            
            (1,297
            )
            
            
            (7
            )
            
            
            (169
            )
            
            
            —
            
            
            (1,473
            )Segment (loss) profit
            
            
            (1,292
            )
            
            
            (7
            )
            
            
            25
            
            
            
            30
            
            
            (1,244
            )Total assets
            
            
            1,383
            
            
            
            2,226
            
            
            
            901
            
            
            
            —
            
            
            4,510Depreciation and amortization
            
            
            134
            
            
            
            28
            
            
            
            13
            
            
            
            —
            
            
            175Three months ended March 31,
      2010Product revenue
            
            $
            —
            
            
            
            1,267
            
            
            
            —
            
            
            
            —
            
            
            1,267Funded research and development revenue
            
            
            357
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            357Research and product development
      expenses
            
            
            868
            
            
            
            262
            
            
            
            —
            
            
            
            —
            
            
            1,130Selling, general and administrative expenses
            
            
            1,108
            
            
            
            472
            
            
            
            276
            
            
            
            —
            
            
            1,856Segment (loss) / profit from operations
      beforeincome taxes and noncontrolling interest
            
            
            (1,621
            )
            
            
            (135
            )
            
            
            (150
            )
            
            
            —
            
            
            (1,906
            )Segment (loss) profit
            
            
            (1,635
            )
            
            
            (135
            )
            
            
            (150
            )
            
            
            686
            
            
            (1,234
            )Total assets
            
            
            1,068
            
            
            
            1,623
            
            
            
            1,021
            
            
            
            —
            
            
            3,712Securities available for sale
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            —Capital expenditures
            
            
            —
            
            
            
            13
            
            
            
            —
            
            
            
            —
            
            
            13Depreciation and amortization
            
            
            103
            
            
            
            23
            
            
            
            5
            
            
            
            —
            
            
            131


14




---



The following table
presents the details of “Other” segment (loss) profit:




(Dollars in thousands)
            
            Three Months EndedMarch 31,2009
            
            2010Corporate and other (expenses) income:Depreciation and amortization
            
            $
            (13
            )
            
            $
            (5
            )Interest income
            
            
            18
            
            
            
            —Gain on derivatives
            
            
            18
            
            
            
            2Income tax (expense)
      benefit
            
            
            194
            
            
            
            —Other expense, net
            
            
            (192
            )
            
            
            (147
            )Total income
      (expense)
            
            $
            25
            
            
            $
            (150
            )


12. Commitments and Contingencies




Leases




The Company and its
subsidiaries lease certain manufacturing, laboratory and office facilities. The
leases generally provide for the Company to pay either an increase over a base
year level for taxes, maintenance, insurance and other costs of the leased
properties or the Company’s allocated share of insurance, taxes, maintenance and
other costs of leased properties. The leases contain renewal provisions.




The Company’s future
minimum rental payments required under non-cancelable operating leases are
(dollars in thousands): $312 remaining in 2010, $271 in 2011 and $273 in 2012
and $283 in 2013 and $270 for 2014 and thereafter.




Warranties




Below is a
reconciliation of changes in product warranty liabilities:




(Dollars in thousands)
            
            Three Months EndedMarch 31,2009
            
            2010Balance, January 1
            
            $
            31
            
            
            $
            21Accruals for warranties issued
            
            
            8
            
            
            
            6Settlements made (in cash or in
      kind)
            
            
            (4
            )
            
            
            (3
            )Balance, end of period
            
            $
            35
            
            
            $
            24


Licenses




Under a 2002 NYSERDA
contract, MTI Micro agreed to pay NYSERDA a royalty of 5.0% of the sales price
of any product sold incorporating IP developed pursuant to the NYSERDA contract.
If the product is manufactured by a New York State manufacturer, this royalty is
reduced to 1.5%. Total royalties are subject to a cap equal to two times the
total contract funds paid by NYSERDA to MTI Micro, and may be reduced to reflect
any New York State jobs created by MTI Micro.




Employment Agreements




The Company has
employment agreements with certain employees that provide severance payments,
certain other payments, accelerated vesting and exercise extension periods of
certain options upon termination of employment under certain circumstances, as
defined in the applicable agreements. As of March 31, 2010, the Company’s
potential minimum cash obligation to these employees was approximately $693
thousand.




15




---



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, “MTI Micro” refers to MTI MicroFuel Cells Inc., a Delaware
corporation and our majority owned subsidiary, and “MTI Instruments” refers to
MTI Instruments, Inc., a New York corporation and our wholly owned subsidiary.
We have a registered trademark in the United States for “Mobion.” Other
trademarks, trade names, and service marks used in this Quarterly Report on Form
10-Q are the property of their respective owners.




The following discussion of our financial
condition and results of operations should be read in conjunction with the
condensed consolidated financial statements and the 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 notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2009 contained in our 2009 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 discussed in Part II, Item 1A “Risk Factors” and
elsewhere in this Quarterly Report on Form 10-Q.




Overview




MTI operates in two
segments, the New Energy segment conducted through MTI MicroFuel Cells, Inc.
(MTI Micro) and the Test and Measurement Instrumentation segment, through MTI
Instruments, Inc. (MTI Instruments).




New Energy Segment - MTI Micro is developing and commercializing
off-the-grid power solutions for various portable electronic devices. Our
patented proprietary direct methanol fuel cell technology platform called
Mobion, converts 100% methanol fuel to usable electricity capable of providing
continuous power as long as necessary fuel flows are maintained. Our proprietary
fuel cell power solution consists of two primary components integrated in an
easily manufactured device: the direct methanol fuel cell power engine, which we
refer to as our Mobion Chip, and methanol fuel cartridges. Our current Mobion
Chip weighs less than one ounce and is small enough to fit in the palm of one’s
hand. The methanol used by the technology is fully biodegradable. We have
demonstrated power density of over 84 mW/cm 2 , while producing more than 1,800 Wh/kg or 1.4
Wh/cc of fuel from its direct methanol fuel feed. For these reasons, we believe
our technology offers a superior power solution compared to current lithium-ion
and similar rechargeable battery systems currently used by original equipment
manufacturers and branded partners, or OEMs, in many handheld electronic
devices, such as smart phones, mobile phone accessories, digital cameras,
portable gaming devices, e-readers and other portable devices. We believe our
platform will facilitate further developments of numerous electronic product
advantages, including smaller size, environmental friendliness, greatly extended
run-time of current portable devices and simplicity of design, all critical for
commercialization in the consumer market, and can be implemented as three
different product options: a handheld power generator for consumer electronic
devices, a snap-on or attached power accessory, or an embedded fuel cell in
handheld devices. We have strategic agreements with a global Japanese consumer
electronics company, with a U.S. based developer and marketer of universal
chargers, with a global power tool manufacturer, and a letter of intent with
Duracell, part of the Procter & Gamble Company. Our goal is to become the
leading provider of portable power for various types of electronic devices and,
assuming available financing, we intend to commercialize Mobion products in
2010.




Our Mobion technology
is protected by a patent portfolio that includes 55 patents and 69 active U.S.
patent applications covering five key technologies and manufacturing areas, one
of which is the process that eliminates the need for active water recirculation
pumps or the inclusion of water as a fuel dilutant. The water required for the
electrochemical process is transferred internally within the Mobion Chip from
the site of water generation on the air-side of the cell. This internal flow of
water takes place without the need for any pumps, complicated re-circulation
loops or other micro-plumbing tools.




Test and Measurement
Segment – MTI Instruments
is a worldwide supplier of metrology, portable balancing equipment and
inspection systems for semiconductor wafers. Our products use state-of-the-art
technology to solve complex real world applications in numerous industries
including automotive, semiconductor, solar cell manufacturing, commercial and
military aviation and data storage. We are continuously working on ways to
expand our sales reach, including more sales coverage in Europe and the Far
East, as well as a focus on internet marketing. We have industry recognized
customer service and have worked with hundreds of companies
worldwide.




Our test and
measurement segment has three product groups: general dimensional gauging,
semiconductor/solar and aviation. Our products consist of electronic,
computerized gauging instruments for position, displacement and vibration
applications for the design, manufacturing and test markets; metrology tools for
wafer characterization of semiconductor and solar wafers; and engine balancing
and vibration analysis systems for both military and commercial aircraft.




16




---



Liquidity




Our cash requirements
depend on numerous factors, including completion of our portable power source
products development activities, our ability to commercialize our portable power
source products, market acceptance of our portable power source products, and
other factors.




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




Three Months Ended(Dollars in thousands)
            
            March 31,2009
            
            2010Cash and cash equivalents
            
            $
            794
            
            
            $
            991Securities available for sale
            
            
            —
            
            
            
            —Working capital (deficit)
            
            
            (922
            )
            
            
            993Net loss
            
            
            (1,244
            )
            
            
            (1,234
            )Net cash used in operating
      activities
            
            
            (1,368
            )
            
            
            (441
            )Purchase of property, plant and equipment
            
            
            —
            
            
            
            13


From inception
through March 31, 2010, we have incurred an accumulated deficit of $122 million,
and we expect to incur losses for the foreseeable future as we continue micro
fuel cell product development and commercialization programs. We expect that
losses will fluctuate from year to year and that such fluctuations may be
substantial as a result of, among other factors, our operating results, the
availability of equity financing, and the ability to attract government funding
resources to offset research and development costs.




At present, the
Company does not expect to continue to fund over the long-term MTI Micro’s
development and commercialization of its portable power source products. MTI
Micro had cash and cash equivalents as of March 31, 2010 of $214
thousand.




On January 11, 2010,
MTI Micro entered into a Common Stock and Warrant Purchase Agreement (the
“Purchase Agreement”) with Counter Point Ventures Fund II, L.P. (“Counter
Point”). Counter Point is managed by Dr. Walter L. Robb, a member of the Board
of Directors of the Company and MTI Micro, and is a current stockholder of MTI
Micro. Dr. Robb and Counter Point beneficially held approximately 29.5% of the
fully-diluted common stock of MTI Micro of December 31, 2009, and as of March
31, 2010 hold an aggregate of approximately 34.17% of the fully-diluted common
stock of MTI Micro.




Pursuant to the
Purchase Agreement, MTI Micro may issue and sell to Counter Point up to
28,571,429 shares of common stock, par value $0.01 per share (the “Micro Common
Stock”), at a purchase price per share of $0.070, over a period of twelve (12)
months, and warrants (“Warrants”) to purchase shares of Micro Common Stock equal
to 20% of the shares of Micro Common Stock purchased under the Purchase
Agreement at an exercise price of $0.070 per share. The sale and issuance of the
Micro Common Stock and Warrants shall occur over multiple closings (each, a
“Closing”) occurring over two (2) one month closing periods and five (5)
two-month closing periods (each, a “Closing Period”). Three Closings have
occurred through March 31, 2010, with MTI Micro raising $660,000 from the sale
of 9,428,571 shares of Micro Common Stock and Warrants to purchase 1,885,714
shares of Micro Common Stock to Counter Point. Subsequent Closings may occur
thereafter at MTI Micro’s sole discretion during the Closing Periods upon
delivery of written notice by MTI Micro to Counter Point of its desire to
consummate a Closing, and Counter Point’s acceptance of such offer under the
Purchase Agreement on the terms agreed upon with MTI Micro. In the event the
terms and conditions of the Purchase Agreement no longer reflect current market
conditions or otherwise, either party may elect not to participate in a
Subsequent Closing(s) or the parties may amend the Purchase Agreement on
mutually agreeable terms with respect to such Subsequent Closing(s). If MTI
Micro were to issue and sell the remainder of the 28,571,429 shares under the
Purchase Agreement, the Company would continue to hold an aggregate of 55.8% of
the fully-diluted capital stock of MTI Micro.




Subsequent to March
31, 2010, MTI Micro has drawn down an additional $330 thousand under the
Purchase Agreement with an additional $1.01 million of available borrowing
capacity through the Purchase Agreement. However, the funds available through
the Purchase Agreement are only available to us at increments of $330 thousand
bi-monthly. Our next available draw down is July 2010. In addition, subsequent
to March 31, 2010, MTI Micro received $349 thousand from the DOE for billings
relative to work performed through March 31, 2010, and has an additional $437
under the extension as work is performed. MTI Micro will be required to raise
additional funds through issuance of its equity or debt, government funding
and/or explore other strategic alternatives including but not limited to the
sale of assets and/or the company. If MTI Micro is unable to raise additional
financing, it may be required to discontinue or severely reduce its business
operations.




17




---



As part of a cash
conservation program at MTI Micro, all MTI Micro employee salaries were reduced
by 20% starting April 12, Peng Lim, the CEO of MTI Micro, voluntarily reduced
the portion of his monthly salary that is allocated to MTI Micro from $9,722.22
to $2,430.56, and in an effort to focus on commercialization, MTI Micro further
streamlined its organization. These reductions will continue until such time as
MTI Micro secures additional financing. There is no assurance that funds raised
in any such a financing will be sufficient, that the financing will be available
on terms favorable to us or to existing stockholders and at such times as
required, or that we will be able to obtain the additional financing required
for the continued operation and growth of our business. During the sixteen
months ended March 31, 2010, MTI Micro has raised $3.1 million in external debt
and equity financing. If we raise additional funds by issuing equity securities,
MTI Micro’s stockholders will experience further dilution. Additional debt
financing, if available, may involve restrictive covenants. Any debt financing
or additional equity financing may contain terms that are not favorable to us or
our stockholders. If we raise additional funds through collaboration and
licensing arrangements with third parties, it may be necessary to relinquish
some rights to our technologies or our products, or grant licenses on terms that
are not favorable to us. If we are unable to raise adequate funds, we may have
to liquidate some or all of our assets or delay, reduce the scope of or
eliminate some or all of our research and development programs, or discontinue
our portable power source business. Without other resources, management
currently believes it will have adequate funds through the end of
2010.




Management believes
that MTI Instruments will continue to generate positive cash flow and would be
able to fund its current operations. However, no assurances can be provided on
this subsidiary’s ability to continue as a going concern given the level of
uncertainty involved with the parent company’s operations.




Results of Operations




Results of Operations for the Three Months
Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009.




Product Revenue. Revenue in our test and measurement instrumentation business decreased by
$282 thousand, or 18.2%, from $1.55 million for the three months ended March 31,
2009 to $1.27 million for the three months ended March 31, 2010. This decline
was attributed to a $335 thousand decline in activity with the US Air Force,
stemming from the timing of delivery orders under existing contracts. Last year,
the U.S. Air Force was the top customer for the segment; accounting for 22.7% of
product revenue in the first three months of 2009, yet only accounted for 1.2%
of the total product revenue to date in 2010. For the first three months of
2010, a single U.S. based commercial customer accounted for 12.1% of total
product revenue, versus the first three months of 2009 when a single Japanese
based commercial distributor accounted for 11.2% of total product
revenue.




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




(Dollars in thousands)
            
            
            
            
            
            
            
            
            
            
            
            
            Total ContractRevenues for the
            
            Revenue
            
            Orders ReceivedThree Months Ended March
      31,
            
            Contract to Date
            
            to DateContract (1)
            
            Expiration
            
            2009
            
            2010
            
            March 31, 2010
            
            March 31, 2010$2.3 million Air Force New
      PBS-4100Systems
            
            07/28/2010
            (2)
            
            $
            285
            
            $
            —
            
            $
            2,109
            
            $
            2,109$8.8 million Air Force Retrofit andMaintenance of
    PBS-4100Systems
            
            06/19/2008
            (3)
            
            $
            50
            
            $
            —
            
            $
            8,009
            
            $
            8,009$6.5 million Air Force Retrofit
      andMaintenance of PBS-4100Systems
            
            9/27/2014
            (4)
            
            $
            —
            
            $
            4
            
            $
            443
            
            $
            443


(1)
            
            Contract values represent maximum potential values and may not be
      representative of actual results.(2)
            
            Date
      represents expiration of contract, including all three potential option
      extensions.(3)
            
            The
      contract expiration date has passed; however, one delivery order remains
      open under the contract.(4)
            
            Date
      represents expiration of contract, including all four potential option
      extensions.





Funded Research and Development Revenue. Funded research and development revenue in our
new energy business for the three months ended March 31, 2010 increased in
comparison to the same period in 2009 by $357 thousand. The DOE contract was not
approved until May of 2009, thus no billings occurred in the first quarter of
2009. Revenue for the three months ending March 31, 2010 represents two full
months of DOE billings. March work will be recognized in the second quarter of
2010, due to the delay in approval of the extension.




18




---



Information regarding
our contract included in funded research and development revenue is as follows:




(Dollars in thousands)Revenue
            
            
            
            
            Revenue
            
            
            
            
            RevenueThree Months
            
            
            
            
            Three Months
            
            
            
            
            Contract toEnded
            
            % of 2009
            
            Ended
            
            % of 2010
            
            DateContract
            
            Expiration (1)
            
            March 31, 2009
            
            Total
            
            March 31, 2010
            
            Total
            
            March 31, 2010$2.9 million DOE (2)
            
            12/31/10
            
            $
            —
            
            —
            %
            
            $
            357
            
            100
            %
            
            $
            2,
400


(1)
            
            Dates
      represent expiration of contract, not date of final billing.(2)
            
            The
      DOE contract is a cost share contract.





Cost of Product Revenue. Cost of product revenue in our test and
measurement instrumentation business decreased by $121 thousand, or 18.2%, to
$544 thousand for the first three months of 2010, compared to $665 thousand for
the first three months of 2009. The decrease corresponded to the aforementioned
18.2% decline in product revenue. Gross profit, as a percentage of product
revenue, was 57% for the first three months of 2010, which is equivalent to the
57% gross profit recognized during the first three months of 2009.




Funded Research and Product Development Expenses. Funded research and
product development expenses in our new energy business increased by $770
thousand in comparison to the same period in 2009. This change was the result of
the increase in billings under the current DOE contract, as mentioned above in
Funded Research and Development Revenue, and the related increase in recognition
of the expenses as Funded Research and Product Development Expenses.




Unfunded Research and Product Development
Expenses . Unfunded research
and product development expenses decreased by $616 thousand, or 63.01%, to $360
thousand for the three months ended March 31, 2010 from $976 thousand for the
three months ended March 31, 2009. This decrease is attributable to continued
cost reductions by management.




Selling, General and Administrative Expenses . Selling, general
and administrative expenses increased by $479 thousand, or 34.79% to $1.86
million for the three months ended March 31, 2010 from $1.4 million for the
three months ended March 31, 2009. This increase was primarily the result the
recognition of the stock option expense in relation to options granted to MTI
Micro employees in the first quarter of 2010 equaling $833 thousand, which was
partially offset by continued cost reductions by management, as well as no
allocation in 2009 of expenses incurred for the fulfillment of the DOE contract,
due to the approval for funding in 2009 not occurring until May of
2009.




Operating Loss. Operating loss increased by $437 thousand, or 29.75%, to $1.9 million
through the three months ended March 31, 2010 compared with the three months
ended March 31, 2009 loss of $1.5 million as a result of the factors noted
above.




Gain on Derivatives. Our gain on derivatives related to the
freestanding warrants issued in conjunction with our December 2006 capital raise
decreased by $16 thousand, or 87.9%, to $2 thousand for the three months ended
March 31, 2010 compared with $18 thousand for the three months ended March 31,
2009. The decrease in derivative gain was attributable to valuation changes of
the underlying warrants using the Black-Scholes pricing model.




Income Tax (Expense) Benefit. Our effective income tax rate for the three
months ended March 31, 2010 was 0.00% and our income tax rate for the three
months ended March 31, 2009 was 13.2%. These tax rates were primarily the result
of losses generated by operations, changes in the valuation allowance, and
permanent differences for derivative valuations. Additionally, the March 31,
2009 tax rate was impacted by the reversal of the uncertain tax position for NYS
settlement.




The valuation
allowance against our deferred tax assets at March 31, 2010 was $27.2 million
and at December 31, 2009 was $26.4 million. We determined that it was more
likely than not that ultimate recognition of certain deferred tax assets would
not be realized.




19




---



Capital Resources




Our working capital
was $993 thousand at March 31, 2010, comparable to $1.2 million at December 31,
2009.




At March 31, 2010,
our order backlog was $614 thousand compared to $419 thousand at December 31,
2009.




Our
inventory turnover ratios and accounts receivable days sales outstanding for the
trailing twelve month periods and their changes at March 31, 2009 and 2010 are
as follows:




2009
            
            2010
            
            ChangeInventory turnover
            1.5
            
            2.3
            
            .8Average accounts receivable days sales
      outstanding
            41
            
            42
            
            1


The increase in
inventory turnover is attributed to a 33% decrease in average inventory balances
on a comparable sales volume.




The average accounts
receivable days sales outstanding for the last twelve months compared to the
previous twelve months, only increasing by one day.




Net cash used by
operating activities was $441 thousand for the three months ended March 31, 2010
compared with $1.4 million in 2009. This cash use decrease of $927 thousand
reflects a net decrease in cash expenditures to fund operations, decreases in
inventory levels, together with net balance sheet changes reflecting the timing
of cash payments and receipts, particularly recognition of deferred revenue and
the accrual of certain accrued liabilities.




There were $13
thousand in capital expenditures during the three months ended March 31, 2010,
with no capital expenditures in the same period for 2009. There were no
outstanding commitments for capital expenditures as of March 31, 2010. We expect
to finance any potential future expenditures with current cash and cash
equivalents as appropriate and to the extent available.




Off-Balance Sheet Arrangements




There were no off
balance sheet arrangements.




Contractual Payment Obligations




We have entered into
various agreements that result in contractual payment obligations in future
years. These contracts include financing arrangements for current manufacturing,
laboratory and office facility lease agreements. The following table summarizes
cash payments that we are committed to make under the existing terms of
contracts to which we are a party as of March 31, 2010. This table does not
include contingencies.




Less
            
            
            
            
            
            
            
            MoreContractual Payment
      Obligations
            
            Than 1
            
            1-3
            
            3-5
            
            Than 5(in thousands)
            
            Year
            
            Years
            
            Years
            
            Years
            
            TotalOperating Leases / Total Contractual Payment Obligations
            
            $
            312
            
            $
            827
            
            $
            270
            
            $
            —
            
            $
            1,409


Critical Accounting Policies and Significant
Judgments and Estimates




The discussion and
analysis of our financial condition and results of operations are 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
to the consolidated financial statements in our Annual Report on Form 10-K for
the year ended December 31, 2009 includes a summary of our most significant
accounting policies. There have been no material changes to the critical
accounting policies previously disclosed in our 2009 Annual Report on Form 10-K.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
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, securities available for sale, income taxes,
stock-based compensation and derivatives. Management bases its estimates on
historical experience and on various other factors that are believed to be
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, we review our
critical accounting estimates with the Audit Committee of our Board of
Directors.




20




---



Statement Concerning Forward-Looking Statements




This Quarterly Report
on Form 10-Q contains forward-looking statements that involve risks and
uncertainties within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Any statements contained in this Form 10-Q 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. Forward-looking statements involve risks, uncertainties, estimates
and assumptions which 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:


- our need to raise additional
  financing for our New Energy segment;
- our history of recurring net
  losses and the risk of continued net losses;
- our independent auditors have
  included a going concern paragraph in their opinion;
- sales revenue growth of our test
  and measurement instrumentation business may not be achieved;
- the dependence of our test and
  measurement instrumentation business on a small number of customers and
  potential loss of government funding;
- our ownership position in MTI
  Micro may be further reduced as a result of our plans to seek external
  financing for MTI Micro’s operations:
- risks related to developing Mobion
  direct methanol fuel cells and whether we will ever successfully develop
  reliable and commercially viable Mobion fuel cell solutions;
- our portable power source products
  or our customers’ products that utilize our portable power source products may
  not be accepted by the market;
- our inability to build and
  maintain relationships with our customers;
- our limited experience in
  manufacturing fuel cell systems on a commercial basis;
- our dependence on others for our
  production requirements for our portable power source products;
- our dependence on our
  manufacturing subcontractors to maintain high levels of productivity and
  satisfactory delivery schedules for our portable power source products;
- our dependence on third-party
  suppliers for most of the manufacturing equipment necessary to produce our
  portable power source products;
- our inability to obtain sufficient
  quantities of components and other materials, including platinum and
  ruthenium, necessary for the production of our portable power source products;
- our dependence on OEMs integrating
  Mobion fuel cell systems into their devices;
- our lack of long-term purchase
  commitments from our customers and the ability of our customers to cancel,
  reduce, or delay orders for our products;
- risks related to protection and
  infringement of intellectual property;
- our new technologies may not
  result in customer or market acceptance;
- our inability to commercialize our
  proposed portable power source solutions and develop new product solutions on
  a timely basis;
- our inability to develop and
  utilize new technologies that address the needs of our customers;
- intense competition in the direct
  methanol fuel cell and instrumentation businesses;
- change in policies by U.S. or
  foreign governments that hinder, disrupt or economically disadvantage
  international trade;
- the impact of future exchange rate
  fluctuations;
- the uncertainty of the U.S.
  economy;
- the historical volatility of our
  stock price;
- the cyclical nature of the
  electronics industry;
- failure of our strategic alliances
  to achieve their objectives or perform as contemplated and the risk of
  cancellation or early termination of such alliance by either party;
- product liability or
  defects;
- risks related to the flammable
  nature of methanol as a fuel source;
- the loss of services of one or
  more of our key employees or the inability to hire, train, and retain key
  personnel;
- significant periodic and seasonal
  quarterly fluctuations in our results of operations;
- our dependence on sole suppliers
  or a limited group of suppliers for both business segments;
- risks related to the limitation of
  the use of our net operating losses in the event of certain ownership changes;
  and
- other factors discussed under the
  heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year
  ended December 31, 2009 and in Part II, Item 1A of this Quarterly Report on
  Form 10-Q.

21




---



Forward-looking
statements speak only as of the date they are made. You should not put undue
reliance on any forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in assumptions, or
changes in other factors affecting forward-looking information, except to the
extent required by applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking statements.




Item 4. Controls and Procedures




The certifications of
our Chief Executive Officer and Acting Chief Financial Officer attached as
Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in
paragraph 4 of such certifications, information concerning our disclosure
controls and procedures and internal control over financial reporting. Such
certifications should be read in conjunction with the information contained in
this Item 4 for a more complete understanding of the matters covered by such
certifications.




(a) Evaluation of Disclosure Controls and
Procedures




Our management, with
the participation of our chief executive officer and our acting chief financial
officer evaluated the effectiveness of MTI’s disclosure controls and procedures
as of March 31, 2010. The term “disclosure controls and procedures,” as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and
other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. We recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and we necessarily apply our judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the valuation of our
disclosure controls and procedures as of March 31, 2010, our chief executive
officer and acting chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance
level.




(b) Changes in Internal Control Over Financial
Reporting




There have been no
changes in our internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our
fiscal quarter ended March 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




PART II. OTHER INFORMATION




Item 1. 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 do not
believe there are any such proceedings presently pending that could have a
material adverse effect on our financial condition. See Note 12 to our Condensed
Consolidated Financial Statements for further information.




Item 1A. Risk Factors




Our Annual Report on
Form 10-K for the year ended December 31, 2009 contains a detailed discussion of
our risk factors. In addition, information regarding risk factors appears in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Statement Concerning Forward Looking Statements”. These risk
factors could cause our actual results to differ materially from those stated in
forward-looking statements contained in this document and elsewhere. Pursuant to
the instructions to this Quarterly Report on Form 10-Q, we have provided below
only those risk factors that are new or that have been materially amended since
the time that we filed our 2009 Annual Report on Form 10-K. Accordingly, the
information presented below should be read in conjunction with the risk factors
and information disclosed in our 2009 Annual Report on Form 10-K.




We have incurred recurring net losses and anticipate continued net losses
as we execute our commercialization plan for our portable power source
business.




We have incurred
recurring net losses, including net losses of $1.2 million for both the three
months ended March 31, 2009 and the three months ended March 31, 2010. As a
result of ongoing operating losses, we had an accumulated deficit of $122
million as of March 31, 2010. Subject to cash availability, we expect to
continue to make significant expenditures and incur substantial expenses as we
develop and commercialize our proposed portable power source products; develop
our manufacturing, sales, and distribution networks; implement internal systems
and infrastructure; and hire additional personnel.




22




---



As a result, we
expect to continue to incur significant losses as we execute our plan to
commercialize our portable power source business and may never achieve or
maintain profitability. We will be unable to satisfy our current obligations
solely from cash generated from operations or become profitable until we
successfully commercialize our portable power source business. If we continue to
incur substantial losses and are unable to secure additional financing, we could
be forced to discontinue or curtail our business operations; sell assets at
unfavorable prices; or merge, consolidate, or combine with a company with
greater financial resources in a transaction that may be unfavorable to us.




At present, the
Company does not expect to continue to fund MTI Micro on a long-term basis.
Based on the Company’s projected cash requirements for operations and capital
expenditures and its current cash and cash equivalents of $991 thousand at March
31, 2010, management believes it will have adequate resources to fund its
current operations, excluding MTI Micro operations, but there can be no
assurance. Since the company will no longer fund MTI Micro on a long-term basis,
the subsidiary has sought other sources of funding, but there is no assurance
that such funding will be available on acceptable terms, if at all.




We currently do not have sufficient funds to commercialize our portable
power source products.




In order to continue
full commercialization of its micro fuel cell solution, MTI Micro will need to
do one or more of the following to raise additional resources, or reduce its
cash requirements:


- obtain additional government or
  private funding of the Company’s direct methanol fuel cell research,
  development, manufacturing readiness and commercialization;
- secure additional debt or equity
  financing; or
- further reduce its current
  expenditure run-rate.

There is no guarantee
that resources will be available to MTI Micro on terms acceptable to it, or at
all, or that such resources will be received in a timely manner, if at all, or
that MTI Micro will be able to reduce its expenditure run-rate without
materially and adversely affecting its business. MTI Micro had cash and cash
equivalents as of March 31, 2010 of $214 thousand. Subsequent to March 31, 2010,
MTI Micro has drawn down an additional $330 thousand under the Purchase
Agreement with an additional $1.01 million of available borrowing capacity
through the Agreement. However, the funds available through the Agreement are
only available to us at increments of $330 thousand bi-monthly. Our next
available draw down is July 2010. In addition, subsequent to March 31, 2010, MTI
Micro received $349 thousand from the DOE for billings relative to work
performed through March 31, 2010, and has an additional $437 under the extension
as work is performed.




In order to conserve
cash and extend operations while we pursue any additional necessary financing,
we have made reductions to operating expenses in the first quarter of 2010.
There is no assurance that funds raised in any such a financing will be
sufficient, that the financing will be available on terms favorable to us or to
existing stockholders and at such times as required, or that we will be able to
obtain the additional financing required for the continued operation and growth
of our business. During the last sixteen months, MTI Micro has raised $3.1
million in external debt and equity financing. If we raise additional funds by
issuing equity securities, MTI Micro’s stockholders will experience further
dilution. Additional debt financing, if available, may involve restrictive
covenants. Any debt financing or additional equity financing may contain terms
that are not favorable to us or our stockholders. If we raise additional funds
through collaboration and licensing arrangements with third parties, it may be
necessary to relinquish some rights to our technologies or our products, or
grant licenses on terms that are not favorable to us. If we are unable to raise
adequate funds, we may have to liquidate some or all of our assets or delay,
reduce the scope of or eliminate some or all of our research and development
programs, or discontinue our portable power source business. Management
currently believes it will have adequate resources to fund its MTI Micro
operations through the end of 2010, however, there can be no assurance that MTI
Micro will not require funding before then to continue operations.




Our ownership position in MTI Micro may be reduced as a result of
external financing for MTI Micro's operations, which could limit our ability to
control the operations.




As of March 31, 2010,
we owned approximately 57.35% or 63.28% on a fully-diluted basis. On January 11,
2010, MTI Micro entered into a Common Stock and Warrant Purchase Agreement (the
“Purchase Agreement”) with Counter Point Ventures Fund II, L.P. (“Counter
Point”). Pursuant to the Purchase Agreement, MTI Micro may issue and sell to
Counter Point up to 28,571,429 shares of common stock of Micro at a purchase
price per share of $0.070, over a period of twelve months, and warrants
(“Warrants”) to purchase shares of Micro Common Stock equal to 20% of the shares
of Micro Common Stock purchased under the Purchase Agreement at an exercise
price of $0.070 per share. If MTI Micro was to issue and sell all of the
28,571,429 shares under the Purchase Agreement, the remainder of the 5,714,286
warrants under the Purchase Agreement were exercised, as well as all warrants
currently outstanding were exercised, the Company would continue to hold an
aggregate of 55.8% of the fully-diluted capital stock of MTI Micro.




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In addition, we do
not currently expect to advance additional long-term resources to MTI Micro to
fund its continued direct methanol fuel cell development and commercialization
programs. Instead, MTI Micro will seek additional capital from external sources
to fund future development and operations. Depending on the valuation of MTI
Micro at the time of future financings, if any, our ownership position could be
substantially diluted, and we may no longer have sufficient equity to control
the operations of MTI Micro. If MTI Micro is unable to secure the necessary
additional external financing, we may be forced to substantially downsize or
eliminate its operations.




We may experience an ownership change which would result in a limitation
of the use of our net operating losses.




As of March 31, 2010,
we had approximately $66 million of net operating loss, or NOL, carryforwards.
As a result of the conversion of the Bridge Notes, MTI no longer maintains an
80% or greater ownership of MTI Micro. Thus MTI Micro will no longer be included
in the MTI and subsidiaries consolidated federal and combined New York State tax
returns, effective December 9, 2009. A reattribution of a portion of MTI Micro’s
NOLs is expected with the filing of the 2009 tax returns, which will reduce MTI
Micro’s NOLs as of the date of the Bridge Conversion to approximately $13
million, and MTI’s balance will be approximately $52 million. Also as a result
of the conversion of the Bridge Note, MTI Micro may have experienced a Section
382 ownership change, which would further reduce their NOLs by an estimated $6.7
million. Our ability to utilize both the MTI and MTI Micro NOL carryforwards,
including any future NOL carryforwards that may arise, may be limited by Section
382 of the Internal Revenue Code of 1986, as amended, if we or MTI Micro undergo
any further “ownership changes” as a result of subsequent changes in the
ownership of our outstanding common stock pursuant to the exercise of the
warrants, the conversion of the MTI Micro’s bridge notes, or otherwise. A
corporation generally undergoes an “ownership change” when the ownership of its
stock, by value, changes by more than 50 percentage points over any three-year
testing period. In the event of an ownership change, Section 382 imposes an
annual limitation on the amount of post-ownership change taxable income a
corporation may offset with pre-ownership change NOL carryforwards and certain
recognized built-in losses. As of March 31, 2010, it is estimated that MTI has
NOL carryforwards of approximately $52 million and MTI Micro has NOL
carryforwards of approximately $14 million, with a portion, as noted above,
being subject to IRC Section 382 limitations.




Item 5. Other Information




None




Item 6. Exhibits




Exhibit No.
            
            Description10.1
            
            Common Stock and
      Warrant Purchase Agreement, dated January 11, 2010, by and between MTI
      MicroFuel Cells Inc. and Counter Point Ventures Fund II, L.P.
  (1)10.2
            
            Form of Common Stock Warrant
    (1)31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002, of Peng K. Lim31.2
            
            Rule 13a-14(a)/15d-14(a) Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Frederick W.
      Jones32.1
            
            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, of Peng K. Lim32.2
            
            Certification Pursuant to 18 U.S.C.
      Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002, of Frederick W. Jones


Certain exhibits were
previously filed (as indicated below) and are incorporated herein by reference.
All other exhibits for which no other filing information is given are filed
herewith.




(1) Filed as an
Exhibit to the registrant’s Form 8-K Report dated January 14, 2010.




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






Mechanical Technology,
  IncorporatedDate: May 17, 2010
            By:
            /S/ PENG K.
      LIMPeng K.
      LimChief Executive
      OfficerBy:
            /S/ FREDERICK W.
      JONESFrederick W.
      JonesActing Chief
      Financial Officer




25




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