Soluna Holdings, Inc quarterly report, Q3 FY2011

Business context and reporting period

This is Mechanical Technology, Incorporated’s unaudited Form 10-Q for the quarter ended September 30, 2011—not a filing under the name Soluna Holdings, Inc. The company reported two segments: Test and Measurement Instrumentation, operated by MTI Instruments, and New Energy, operated by MTI Micro. MTI consolidated MTI Micro as a variable interest entity despite owning approximately 48% of its common shares.

Key financial results

Amounts are in U.S. dollars; financial statement amounts below are in thousands unless stated otherwise.

• Product revenue was $2.326 million in Q3, up 41.3%; nine-month product revenue was $7.005 million, up 54.3%. Funded R&D revenue fell to zero for Q3 and $13,000 for the nine-month period, as grant work wound down.
• Test and Measurement generated operating profit of $462,000 in Q3 and $1.442 million for the first nine months. New Energy reported operating losses of $213,000 and $1.320 million, respectively.
• Test and Measurement product gross margin was 63.0% in Q3 and 62.2% for the nine months, compared with 60.0% and 57.4% in the respective 2010 periods. Consolidated operating margin was approximately negative 9.1% in Q3 and negative 11.6% year to date.
• At September 30, cash was $1.586 million; working capital was $2.190 million; total assets were $4.152 million; and current liabilities were $1.699 million. No borrowings were outstanding under the new $400,000 line of credit. The filing reports no other debt balance.
• Nine-month cash flow included $125,000 of capital expenditures and $563,000 of financing proceeds; cash increased by $468,000. Backlog was $2.4 million, versus $2.1 million at December 31, 2010.

Changes versus prior period

Revenue growth and lower operating expenses reduced the operating loss materially. MTI attributed the revenue increase primarily to aviation balancing systems and capacitance products. The reduction in New Energy’s R&D spending and grant revenue reflected completion of DOE and NYSERDA-funded work; lower New Energy overhead also reflected cost-cutting and lease changes. Corporate SG&A increased, including higher salaries and benefits. Consolidated net loss improved year over year, while the nine-month loss attributable to MTI narrowed to $4,000.

Outlook, risks and unusual items

• Liquidity and going concern: The company disclosed an accumulated deficit of $122.5 million and noted that its 2010 auditor’s report expressed substantial doubt about the company’s ability to continue as a going concern. Management expected MTI Instruments’ cash generation and cost reductions to support parent and instrument operations, but did not expect to fund MTI Micro long term.
• MTI Micro funding risk: MTI Micro had only $28,000 of cash at September 30 and needed external funding, a purchase order, grants, or further expense reductions to continue. Management said it might have to discontinue MTI Micro operations before the end of Q4 2011 if adequate financing could not be obtained. MTI Micro continued to reduce spending and staff.
• Subsequent financing: Under an agreement with Counter Point, MTI Micro raised $42,000 in October and a further $21,000 on November 3, 2011. Additional closings depended on the parties’ actions; funding adequacy was not assured.
• Commercialization: DoD testing of the Mobion fuel-cell charger resumed in October 2011. Approval could lead to a commercialization contract or purchase orders; further requested changes or lack of approval could lead MTI Micro to reconsider testing or operations. No quantified company-wide earnings or revenue guidance was provided.
• Dilution and control: MTI Micro’s external financings reduced MTI’s common-stock ownership to approximately 48%; further financing or exercise of warrants and options could dilute MTI and affect its influence.
• Other obligations: Operating lease commitments totaled $940,000; potential minimum severance obligations to certain employees were approximately $578,000. MTI Instruments’ line of credit is payable on demand, secured by its assets, and guaranteed by MTI. The company reported no material pending legal proceedings or off-balance-sheet arrangements.
• Management concluded disclosure controls were effective as of September 30, 2011 and reported no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

• Confirm the registrant and corporate identity: this filing names Mechanical Technology, Incorporated, not Soluna Holdings, Inc.
• Track MTI Micro’s actual funding, cash runway, subsequent closings, and whether operations continued beyond Q4 2011.
• Assess whether Test and Measurement revenue growth, margins, backlog, and customer and government-contract activity were sustained.
• Review MTI Micro’s consolidation and ownership treatment, including effects of future financing and warrant or option exercises.
• Evaluate the going-concern uncertainty, available liquidity, and the terms and potential use of the demand line of credit.