Soluna Holdings - 10-Q quarterly report FY

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431 New Karner Road, Albany, New York 12205

(Address of principal executive offices) (Zip Code)

(518) 533-2200

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 xNo ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

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

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

AND COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

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

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2. Significant Accounting Policies (Continued)

Accounting for Derivative Instruments

On October 1, 2000, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which establishes a new model for accounting for derivatives and hedging activities. These standards required the Company to recognize all derivative instruments as either assets or liabilities in the statement of financial position and measure these instruments at fair value. Fair value is estimated using the Black Scholes Option-Pricing Model.

In September 2000, the EITF issued EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock, which 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. Under the provisions of EITF Issue No. 00-19, 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 must be included within equity, and no fair value adjustments are required.

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

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Income Taxes

The Company accounts for taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable for future years to differences between financial statement and tax bases of existing assets and liabilities. Under SFAS No. 109, the effect of tax rate changes on deferred taxes is

recognized in the income tax provision in the period that includes the enactment date. The provision for taxes is reduced by investment and other tax credits in the years such credits become available. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.

Reclassification

Certain 2003 amounts have been reclassified to conform to the 2004 presentation. The reclassifications have no effect on total revenues, total expenses, net (loss) income or shareholders' equity as previously reported.

The reclassifications impact our condensed consolidated statements of operations in the following way:

• Selling, general and administrative expenses now include amortization of restricted stock compensation previously included in other expenses, net.

The reclassifications impact our condensed consolidated statements of shareholders' equity in the following way:

• Accumulated Other Comprehensive Income now includes an allocation of tax to both realized and unrealized gains (losses) previously allocated to unrealized gains (losses).

3. Accounts Receivable

Included in accounts receivable are the following at:

The balances billed but not paid by customers pursuant to retainage provisions in contracts are due upon completion of the contracts and acceptance by the customer. Based on the Company's experience, most retainage amounts are expected to be collected within the ensuing year.

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Inventories consist of the following at:

Notes receivable consist of the following at:

^(A)On August 13, 2003, the Company converted its existing note receivable to a redeemable subordinated debenture. The debenture accrues interest at the rate of 12% per annum. Repayments are scheduled to begin December 1, 2004 in accordance with the debenture agreement.

During the quarter ended September 30, 2004, the Company wrote this note receivable off against its allowance for bad debts.

Securities available for sale are classified as both current assets and long-term restricted assets and accumulated net unrealized gains are reported in Other Comprehensive Income. In connection with the Company's private

placement consummated on January 29, 2004 and the amendment of the private placement agreement on May 4, 2004, the Company has escrowed 2.7 million shares of Plug Power common stock (see Note 8 - Shareholders' Equity).

The principal components of the Company's securities available for sale consist of the following at:

(Dollars in thousands, except stock price and share data)

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6. Securities Available for Sale (Continued)

The book basis roll forward of Plug Power securities is as follows:

Plug Power - Current

Accumulated unrealized gains related to securities available for sale are as follows:

The Company's effective income tax benefit (expense) rate from operations differed from the Federal statutory rate as follows:

Deferred tax assets and (liabilities) consist of the following tax effects relating to temporary differences and carryforwards:

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

The valuation allowance at September 30, 2004 and December 31, 2003 was $1.836 million. The valuation allowance reflects the estimate that it was more likely than not that certain net operating losses may be unavailable to offset future taxable income.

8. Shareholders' Equity

Common Shares

Changes in common shares issued are as follows:

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Completion of Option Exchange

On December 22, 2003, the Company announced the completion of the first phase of its stock option exchange offer. A total of 757,000 options with an average exercise price of approximately $19 were tendered by

employees and then cancelled by the Company in exchange for the future issuance of options at a one-for-two ratio. New options totaling 341,000 were issued in the final phase of the exchange offer on June 23, 2004 at an exercise price of $6.17 per share to employees and directors who were employed by the Company or served as directors of the Company from December 22, 2003, the acceptance date, through June 23, 2004.

Private Placement

On January 29, 2004, the Company issued to Fletcher International, Ltd., or Fletcher, in a private placement (1) 1,418,842 shares of our common stock for an aggregate purchase price of $10 million, or $7.048 per share, and (2) rights to purchase up to an additional $26 million of our common stock and in certain instances up to 3,000,000 shares of Plug Power Inc. (NASDAQ:PLUG) common stock owned by us, which rights are referred to herein as the additional investment rights.

On May 4, 2004, the Company amended its agreement with Fletcher. This agreement, as amended, ("the 2004 Private Placement") includes a change in the exercise price for the rights to purchase additional shares of MTI common stock to a fixed price $6.34 per share from, in the original agreement, $7.048 per share until December 31, 2005 and the lesser of $7.048 per share or a variable price in 2006. The change to a fixed price substantially reduces the potential for shareholder dilution if shares had been purchased at a variable price in 2006. The price remains subject to adjustment upon the occurrence of certain limited events. The 2004 Private Placement, also includes: (1) an increase in the rights to purchase additional shares of MTI common stock to $28 million from $26 million, (2) a reduction in Fletcher's right to purchase Plug Power common stock escrowed by the Company to a maximum of 2,700,000 shares from a maximum of 3,000,000 shares, (3) an extension of the exercise period for the righ t to purchase Plug Power common stock to one or more purchases between June 1, 2005 and December 31, 2006 from a one-time purchase in June of 2005, (4) an extension of MTI's ability to withdraw Plug Power common stock from escrow through December 31, 2006 instead of through June 30, 2005, and (5) an extension of the exercise period for the right to invest the first $8 million in MTI's common stock to any time prior to December 31, 2004 from any time prior to ninety business days after the effective date of MTI's registration statement.

On May 20, 2004, the Company's registration statement with the SEC became effective for 1,418,842 shares. The registration statement permits Fletcher to re-sell the shares of our common stock issued to them.

Additional Investment Rights

The additional investment rights provide Fletcher with the right, but not the obligation, to purchase up to an additional $8 million of our common stock at any time prior to December 31, 2004, at a price per share equal to $6.34. In addition, in the event Fletcher exercises in full such $8 million investment right, Fletcher shall have

the right, but not the obligation, to purchase, in a single purchase or multiple purchases, up to an additional $20 million of our common stock at any time prior to December 31, 2006 at a price per share equal to $6.34, which date may be extended in the event that we have not satisfied our contractual obligations with respect to the registration for resale of common stock issued or issuable to Fletcher.

The table below illustrates the number of shares Fletcher would receive upon exercise of its $20 million additional investment right at a price per share equal to $6.34 (such exercise price is subject to adjustment as described below under "Adjustment Provisions"). Note that the Company's 2004 Private Placement

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8. Shareholders' Equity (Continued)

agreement with Fletcher provides that the maximum number of shares we could potentially issue to Fletcher is 8,330,411 shares.

The exercise price for the Plug Power investment right is $10,000,000 less the positive difference between $18,000,000 and the product of the sum of 1,418,842 and the quantity of shares purchased in the exercise of the first $8 million of additional investment rights multiplied by the prevailing price per share of our common stock on the date Fletcher elects to exercise such right, all divided by the quotient obtained by dividing 10,000,000 by the prevailing price of Plug Power common stock on the date Fletcher elects to exercise such right. As used herein, a prevailing price is the average of the daily volume-weighted average price per share of common stock during the sixty-business-day period ending three days prior to the date Fletcher elects to exercise such right, provided however that the price may not exceed the average of the

As a result of this exercise price calculation, we may be required to sell shares of Plug Power at a discount to prices we would otherwise obtain in sales at market prices. The table below illustrates such potential discounts based on assumed decreases in our stock price from $6.00 (which, for the purposes of this illustration, serves as an approximation of the price of our common stock as of March 11, 2004, the date we filed Amendment No. 1 to our Registration Statement on Form S-3 (SEC File No. 333-112464)), and an assumed price of Plug Power common stock at the time of exercise. Note that Fletcher's right to purchase Plug Power shares is conditioned on the exercising of Fletcher's first $8 million of additional investment rights.

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three and nine months ended September 30, 2004, options to purchase 3,793,531 shares of common stock at exercise prices ranging from $0.54 to $20.92 per share, additional investment rights to purchase approximately 4,416,405 shares ($28,000,000 divided by $6.34 per share) of common stock with an exercise price of $6.34 per share and warrants to purchase 28,377 shares of common stock with an exercise price of $10.572 per share were outstanding but were not included in the computations of Loss per Share-assuming dilution because the Company incurred losses during this period and inclusion would be anti-dilutive.

For the three and nine months ended September 30, 2003, warrants to purchase 300,000 shares of common stock with an exercise price of $12.56 per share were outstanding but were not included in the computations of EPS-assuming dilution because inclusion would be anti-dilutive. Additionally, under SFAS No. 128, Earnings per Share, 50,000 shares of non-vested restricted common stock, which vest solely upon continued service, were excluded from the computation of basic earnings per share.

The Company sold shares of the following securities and recognized gains and proceeds as follows:

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

11. Cash Flows - Supplemental 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 micro fuel cells ("DMFCs"). The Test and Measurement Instrumentation segment designs, manufactures, markets and services computer-based balancing systems for aircraft engines, high-performance test and measurement instruments and systems, and wafer characterization tools for the semiconductor industry. The Company's principal operations are located in North America.

The accounting policies of the New Energy and Test and Measurement Instrumentation segments are the same as those described in the summary of significant accounting policies in the Company's consolidated financial statements for the year ended December 31, 2003. 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 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 like income taxes or unusual

items, which are not allocated to reportable segments. The "Reconciling Items" column includes minority interests in a consolidated subsidiary. In addition, segments' noncash items include any depreciation and amortization in reported profit or loss. The New Energy segment figures include the Company's micro fuel cell operations, equity securities of Plug Power and SatCon, gains (losses) on the sale of these securities, (losses) gains related to the embedded derivative for the purchase of Plug Power common stock and warrants to purchase SatCon common stock.

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12. Segment Information (Continued)

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12. Segment Information (Continued)

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

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13. Related Party Transactions

In connection with the National Institute of Standards and Technology ("NIST") contract billings and supplier accounts payable, as of September 30, 2004 and December 31, 2003, the Company has a liability to E.I. du Pont de Nemours and Company ("Dupont") (a minority shareholder in MTI Micro) for approximately $53 and $48 thousand, respectively. This liability is included in the financial statement line

On March 29, 2004, the Company acquired 4,762 shares of its common stock from its CEO, Dale Church, in connection with a revised tax liability of Mr. Church resulting from the vesting of restricted stock in October 2003. The Company had previously acquired 15,724 shares in connection with the payment of Mr. Church's original tax liability as reported on October 28, 2003.

14. Effect of Recent Accounting Pronouncements

None.

15. Commitments and Contingencies

Lawrence

On September 9, 1998, Barbara Lawrence, the Lawrence Group, Inc. ("Lawrence"), and certain other Lawrence-related entities ("Plaintiffs") initially filed suit in the Bankruptcy Court and the United States District Court for the Northern District of New York which were subsequently consolidated in the District Court, against First Albany Corporation ("FAC"), Mechanical Technology Incorporated, Dale Church, Edward Dohring, Beno Sternlicht, Alan Goldberg and George McNamee (former Directors of the Company), Marty Mastroianni (former President and Chief Operating Officer of the Company), and 33 other individuals ("Defendants") who purchased a total of 820,909 (2,462,727 shares post split) shares of the Company's common stock from the Plaintiffs. The case concerns the Defendants' 1997 purchase of Mechanical Technology shares from the Plaintiffs at the price of $2.25 per share ($0.75 per share post split). FAC acted as Placement Agent for the Defendants in the negotiati on and sale of the shares and in proceedings before the Bankruptcy Court for the Northern District of New York, which approved the sale in September 1997.

Plaintiffs claim that the Defendants failed to disclose material inside information concerning Plug Power, LLC to the Plaintiffs and therefore the $2.25 per share ($0.75 per share post split) purchase price was unfair. Plaintiffs are seeking damages of $5 million plus punitive damages and costs. In April 1999, Defendants filed a motion to dismiss the amended complaint, which was denied by the Bankruptcy Court. On appeal in October 2000, Plaintiffs' cause of action was dismissed by the United States District Court for the Northern District of New York. In November 2000, Plaintiffs filed an appeal of that dismissal with the United States Court of Appeals for the Second Circuit. In June 2002, the Second Circuit Court of Appeals reversed the District Court decision and remanded the case for further consideration of the Plaintiff's claims as motions to modify the Bankruptcy Court sale order. The Plaintiff's claims have now been referred back to Bankruptcy Court for such consideration. In September 2003, the Bankruptcy Court issued an order permitting Plaintiffs to conduct limited discovery concerning how First Albany formed an opinion about the Company's stock up until the date the Stock Purchase Agreement was executed.

The Company believes the claims have no merit and intends to defend them vigorously. The Company cannot predict the outcome of the claims nor reasonably estimate a range of possible loss given the current status of the litigation. Accordingly, no amounts have been reserved for this matter.

Ling Electronics, Inc.

On July 8, 2003, Donald R. Gililland, Sharon Gililland, Vernon Dunham and Jean Dunham, owners of 4890 E. La

Palma Avenue, Anaheim, CA 92870 ("Plaintiffs"), the former location of Ling Electronics, Inc. ("Ling"), filed

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

15. Commitments and Contingencies (Continued)

suit in the Superior Court of California for Orange County against SatCon Power Systems, Inc., a subsidiary of SatCon Technology Corporation ("SatCon"), and Mechanical Technology. In September 2003, SatCon and the Company filed a joint answer to the complaint. In September 2004, the Company and SatCon each retained independent counsel. The matter is scheduled for trial in January 2005.

The complaint alleges breach of the lease and, among other things, Ling's failure to maintain and repair the premises. Ling was a subsidiary of the Company until it was sold to SatCon Technology Corporation in 1999. The Plaintiffs allege that the correction and repair of the various breaches by SatCon and the Company of their obligations under the lease will exceed $400,000. The building was leased from 1983 through lease expiration in 2003. The Company remained as a guarantor on the lease after the sale of Ling to SatCon.

The Company believes the claims have no merit and intends to defend them vigorously. The Company cannot predict the outcome of the claims nor reasonably estimate a range of possible loss given the current status of the litigation. Accordingly, no amounts have been reserved for this matter.

Leases

The Company and its subsidiaries lease four 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.

Future minimum rental payments required under non-cancelable operating leases are (dollars in thousands): $139 remaining in 2004; $566 in 2005, $446 in 2006, $318 in 2007, $316 in 2008, and $289 thereafter.

Warranties

A reconciliation of changes in product warranty liabilities is as follows:

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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

16. Issuance of Stock by Subsidiary (Continued)

On April 7, 2004, MTI Micro sold 3,218,885 and 215,000 shares of MTI Micro common stock to the Company and a group of private investors, respectively, at a price of $4.66 per share for approximately $15 million and $1 million

respectively. As a result of the Company's investment, it has fully satisfied its remaining investment guaranty under the Gillette Agreement. Further, on May 20, 2004, MTI Micro sold 215,000 shares of MTI Micro common stock to a private investor at a price of $4.66 per share for approximately $1 million.

One component of the Company's paid-in-capital increase in 2004 represents a $344 thousand increase for changes in the Company's equity investment in MTI Micro, which resulted from third-party stock transactions in MTI Micro.

17. Subsequent Events

Sale of Securities Available for Sale

From October 1 through November 5, 2004, the Company sold available for sale securities as follows:

(Dollars in thousands)

Contracts

On October 20, 2004, the Company announced that its subsidiary, MTI Micro, received two contracts to demonstrate energy density advantages and to quantify potential logistical advantages of its direct methanol micro fuel cells ("DMFCs") and fuel refill systems for the United States Armed Forces. The first award, which will be administered by the Army Research, Development and Engineering Command ("RDECOM") as part of its evaluation of new technologies for field-readiness, will total approximately $250,000 over the next ten months.

The second award, a Phase I Small Business Innovative Research ("SBIR") contract from Marine Corp System Command, will provide $70,000 over the next six months to support efforts to analyze and report on current regulations and requirements necessary to field DMFCs and fuel refill systems. An optional three month period could raise the total value of the contract to $100,000.

On August 18, 2004, MTI Micro, entered into an amendment to the multi-year strategic alliance agreement with The Gillette Company ("Gillette") whereby MTI Micro, Gillette and Gillette's Duracell business unit will exclusively develop and commercialize a low-power direct methanol micro fuel cell power system and a compatible fuel refill system to power future mass market, high volume, portable consumer devices. The amendment to the agreement clarified the allocation of deliverables in milestones 3 and 4; added an additional milestone; and changed the due dates for MTI Micro

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

This Item 2 contains forward-looking statements that involve risks and uncertainties, which may cause the Company's actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. See "Statement Concerning Forward-Looking Statements" on page 36.

Overview

The Company is primarily engaged in the development and commercialization of DMFCs through its majority-owned subsidiary MTI Micro and the design, manufacture and sale of high-performance test and measurement instruments and systems through its wholly-owned subsidiary MTI Instruments. The Company also co-founded and retains an interest in Plug Power (NASDAQ: PLUG), a designer and developer of on-site energy systems based on proton exchange membrane fuel cells.

MTI Micro designs and develops DMFCs for portable power applications. A micro fuel cell is a portable power source that converts chemical energy into useable electrical energy. MTI Micro is developing a micro fuel cell

that uses methanol, a common alcohol, as its fuel. The Company believes DMFC systems could potentially have an energy density of five to ten times that of Lithium-Ion "(Li-Ion") batteries. The advantage of DMFC systems is that, when commercialized, they should be able to power a wireless electronic device for longer periods of time than Li-Ion batteries between recharging/refueling. In addition, DMFCs may be instantly refueled without the need for a power outlet or a lengthy recharge.

MTI Micro's fuel cell technology platform can be customized to provide portable power for a number of applications depending on the power level, required run time and size requirements. MTI Micro plans to launch its initial product, a power source for Intermec Technologies Corporation ("Intermec") RFID tag readers, by the end of 2004. MTI Micro has also developed prototype DMFC systems for military customers, including the RF Communications Division of Harris Corporation ("Harris"), a supplier of military communication devices.

MTI Instruments has three product groups: aviation, general gaging and semiconductor. These product groups provide: portable balancing systems for aircraft engines; electronic, computerized general gaging instruments for position, displacement and vibration applications; and semiconductor products for wafer characterization of semi-insulating and semi-conducting wafers. MTI Instruments' strategy is to continue to enhance and expand its product offerings with the goal of increasing market share and profitability. MTI Instruments' largest customers include the U.S. Air Force and industry leaders in the computer, electronic, semiconductor, automotive, aerospace, aircraft and bioengineering fields.

MTI Instruments' Engine Balancing and Vibration Analysis system primarily serves the aviation industry, both in the commercial and military sectors.  These systems perform a number of vibration analysis and engine balancing functions typically for large turbofan engines on the flight-line and in test cells.  In addition, our Engine Balancing and Vibration Analysis system has recently been used for the first time in an industrial turbo machinery application.

The General Instruments product line employs three sensing technologies - capacitance, fiber optics and laser triangulation - to measure displacement, position, thickness, vibration and other dimensional measurement applications.  The advantages of each technology are generally related to the requirements of specific applications, which typically transcend the capabilities of conventional measuring techniques.  The most successful applications have been in data storage, OEMs, semiconductors and the automotive industry.  End-users cover a broad range of industrial markets, as well as research labs, universities and the government agencies.

MTI Instruments' semiconductor tools compete in the wafer metrology segment of the semiconductor equipment market. Product models include manual units, semi-automated units and fully automated systems which measure thickness, total thickness variation, bow, warp, site and global flatness. These metrology and inspection tools cover a broad range of applications both on the front-end and back-end of the manufacturing process. End-users of these tools include both wafer manufacturers (foundries) and device (chip) manufacturers.

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From inception through September 30, 2004, the Company has incurred net losses of $67.4 million and expects to incur losses as it continues micro fuel cell product development and commercialization programs. The Company expects that losses will fluctuate from year to year and that such fluctuations may be substantial as a result of, among other factors, gains on sales of securities available for sale and the operating results of MTI Instruments and MTI Micro.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 1 to the condensed consolidated financial statements includes a summary of the Company's most significant accounting policies. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, inventories, securities available for sale, derivative instruments and income taxes. The Company bases its estimates on historical experience and on various other assumptions 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.

The following critical accounting policies have been newly identified or modified since December 31, 2003:

Derivative Instruments

The Company has held or issued certain derivative instruments and embedded derivative instruments and records these derivatives and embedded derivative instruments separated from the host contract in accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and

Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. These standards require the Company to recognize all derivative instruments as either assets or liabilities on the statement of financial position and measure these instruments at fair value. Fair value is estimated using the Black Scholes Option-Pricing Model.

Revenue Recognition

The Company applies the guidance within SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements ("SAB 104") in the evaluation of its contracts to determine when to properly recognize revenue. Under SAB 104 revenue is recognized when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured.

Product Revenue. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer or distributor has occurred, at which time title generally is passed to the customer or distributor, all of which generally occur upon shipment of the product. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied.

Funded Research and Development Revenue. The Company performs funded research and development for government agencies and commercial companies under both cost reimbursement and fixed-price contracts.  Cost reimbursement contracts provide for the reimbursement of allowable costs.  On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as the services are performed. In each type of contract, the Company receives periodic progress payments or payments upon reaching interim milestones. When the current estimates of total contract revenue for commercial development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in

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performing funded research and development projects are recognized as research and development expense as incurred. As of September 30, 2004, the Company has accrued approximately $114 thousand for anticipated contract losses on commercial contracts. When government agencies are providing funding they do not expect the government to be the only significant end user of the resulting products.  These contracts do not require delivery of products that meet defined performance specifications, but are best efforts arrangements to achieve overall research and development objectives. Included in accounts receivable are billed and unbilled work-in-progress on cost contracts. While the Company's accounting for government contract costs is subject to audit by the sponsoring entity, in the opinion of management, no material adjustments are expected as a result of such audits. Adjustments are recognized in the period made.

Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development arrangements are included in funded research and product development expenses.

Deferred revenue consists of payments received and amounts due from customers in advance of services performed, products shipped, customer acceptance or installation completed.

Results of Operations

Three and Nine Months Ended September 30, 2004 Compared to the Three and Nine Months Ended September 30, 2003

The following is management's discussion and analysis of certain significant factors, which have affected the Company's results of operations for the three and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003.

Product Revenue. Product revenue in the Test and Measurement Instrumentation segment for the three months ended September 30, 2004 increased in comparison to the same period last year by $.044 million or 2.8% to $1.642 million. The three-month increase is primarily the result of increases in semiconductor product sales of $.354 million, which includes the shipment of an AutoScan and a 300 SA wafer metrology tool. This increase has been partially offset by decreases in sales to aviation customers of $.266 million, reflecting a decline in shipments under the existing Air Force retrofit and maintenance contract and other decreases of $.044 million in general gaging product sales.

Product revenue for the first nine months of 2004 increased in comparison to the same period last year by $.148 million or 3.4% to $4.452 million. The nine-month increase is primarily the result of a $.706 million increase in semiconductor product sales, which includes shipments of the first two AutoScans and two 300 SA wafer metrology tools. This increase has been partially offset by decreases in sales to aviation customers of $.465 million, reflecting a decline in shipments under two existing Air Force contracts and other decreases in sales to general gaging customers of $.093 million due to decreased activity from original equipment manufacturer customers.

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

(Dollars in thousands, except contract values)

* Although this contract expired, all open delivery orders under the contract are active.

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Funded Research and Development Revenue. Funded research and development revenue in the New Energy segment for the three months ended September 30, 2004 decreased in comparison to the same period last year by $.135 million to $.175 million, a 43.5% decrease. The three-month decrease is primarily the result of the National Institute of Standards and Technology ("NIST") and New York State Energy Research and Development Authority ("NYSERDA") government contracts contributing $.273 million more revenues in 2003 compared to 2004 due to the completion of the NYSERDA contract in the fourth quarter of 2003 and the wind down of the NIST contract during the third quarter of 2004. This decrease was partially offset by $.138 million in revenues under new contracts with the US Army Research Laboratory ("ARL") for the delivery of micro fuel cell units and Cabot Superior Micropowders ("CSMP") and the U.S. Department of Energy ("DOE") for the advancement of the consumer DMFC platform.

Funded research and development revenue for the first nine months of 2004 decreased in comparison to the same period last year by $.668 million to $.754 million, a 47.0% decrease. The nine-month decrease is the result of the NIST and NYSERDA government contracts contributing $.805 million more revenues in 2003 compared to 2004 due to the completion of the NYSERDA contract in the fourth quarter of 2003 and the wind down of the NIST contract during the third quarter of 2004. Harris revenues of $.175 million were also recorded in 2003. These decreases were partially offset by $.312 million in revenues under new contracts with ARL, CSMP and DOE.

Information regarding government contracts included in funded research and development revenue is as follows:

(Dollars in thousands, except contract values)

* This contract is a joint venture with Dupont. Dupont's share of the contract revenue is $1.3 million.

** This contract is a subcontract with CSMP under NIST.

Cost of Product Revenue. Cost of product revenue in the Test and Measurement Instrumentation segment for the three months ended September 30, 2004 decreased in comparison to the same period last year by $.069 million or 9.1% to $.686 million. The decrease was primarily due to

Gross profit as a percentage of product revenue increased to 58.2% for the three months ended September 30, 2004 from 52.8% in the prior year. The gross profit percentage increased primarily as a result of the sales volume and product mix, which during 2004 includes a higher share of semiconductor product sales.

Cost of product revenue in the Test and Measurement Instrumentation segment for the nine months ended September 30, 2004 increased in comparison to the same period last year by $.088 million or 4.7% to $1.956 million. The increase was primarily due to a higher sales volume.

Gross profit as a percentage of product revenue decreased to 56.1% for the nine months ended September 30, 2004 from 56.6% in the prior year. The gross profit percentage decreased as a result of a slight increase in overhead costs due to a decline in directly applied manufacturing labor stemming from the current year's product mix.

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Funded Research and Product Development Expenses. Funded research and product development expenses in the New Energy segment increased by $.002 million or 0.2% to $.881 million for the three months ended September 30, 2004 in comparison to the same period last year.

Funded research and product development expenses in the New Energy segment increased by $.074 million or 3.0% to $2.576 million for the nine months ended September 30, 2004 in comparison to the same period last year. The

increased costs are attributable to the development of prototypes for Harris and costs incurred under new contracts with ARL for the delivery of micro fuel cell units and CSMP and DOE for the advancement of the consumer DMFC platform. These costs were partially offset by decreased development costs related to the completion of the second NYSERDA contract during 2003 and reduced costs related to the NIST contract as it was winding down during the third quarter of 2004.

Unfunded Research and Product Development Expenses. Unfunded research and product development expenses increased by $1.035 million or 78.6% to $2.352 million for the three months ended September 30, 2004 in comparison to the same period last year. This increase reflects a $1.058 million increase in the New Energy segment internal development costs directed at commercializing micro fuel cells, including costs for the development of our micro fuel cell system for Intermec and development costs in connection with Gillette and potential commercial products. This increase was offset by a $.023 million decrease in product development costs in the Test and Measurement Instrumentation segment related to a staff reduction.

Unfunded research and product development expenses increased by $2.783 million or 78.4% to $6.331 million for the nine months ended September 30, 2004 in comparison to the same period last year. This increase reflects a $2.757 million increase in the New Energy segment reflecting increased internal development costs directed at commercializing micro fuel cells, including costs for the development of our micro fuel cell system for Intermec and

development costs in connection with Gillette and potential commercial products. This increase also includes a $.026

million increase in product development costs in the Test and Measurement Instrumentation segment related to the continued development of the PBS-3300 and MTI-2100. The PBS-3300 is a smaller test cell system used for small turbines and props and the MTI-2100 is the newest version of the fiber-optic based vibration sensor.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $.328 million to $1.526 million for the three months ended September 30, 2004 in comparison to the same period last year, a 17.7% decrease. This decrease is primarily the result of decreased professional fees of approximately $.301 million related to business transactions that occurred during 2003 and other net expense decreases of $.027 million.

Selling, general and administrative expenses increased $.331 million to $4.890 million for the nine months ended September 30, 2004 in comparison to the same period last year, a 7.3% increase. This increase is primarily the result of a net increase of $.154 million in professional fees which includes $.300 million in advisory fees and approximately $.155 million in costs related to the amendment of the Company's private placement transaction in 2004 offset by $.301 million related to business transactions that occurred during 2003 and other net expense increases of $.177 million related to costs associated with commercializing micro fuel cells.

Operating Loss. Operating loss for the three months ended September 30, 2004 in comparison to the same period last year increased by $.731 million to $3.628 million, a 25.2% increase. This increase in operating loss results primarily from increases in research and product development costs and decreases in funded research and development revenue in the New Energy segment partially offset by increases in gross profits from product revenues in the Test and Measurement Instrumentation segment and decreases in selling, general and administrative expenses.

Operating loss for the nine months ended September 30, 2004 in comparison to the same period last year increased by $3.796 million to $10.547 million, a 56.2% increase. This increase in operating loss results primarily from increases in research and product development costs, selling, general and administration expenses and decreases in funded research and development revenue in the New Energy segment partially offset by increases in gross profits from product revenues in the Test and Measurement Instrumentation segment.

Gain on Sale of Securities Available for Sale, Net. Results for the three and nine months ended September 30, 2004 included a $0 and $3.129 million gain on the sale of securities available for sale, respectively, compared to a $4.123

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and $7.483 million gain on the sale of securities available for sale, respectively, for the same period in 2003. The average selling price per share of Plug Power common stock was $9.93 for the nine months ended September 30, 2004. The average selling price per share of Plug Power and SatCon common stock was $4.96 and $2.07,

respectively, for the three months ended September 30, 2003, and $5.07 and $1.75, respectively, for the nine months ended September 30, 2003.

(Loss) Gain on Derivatives. The Company recorded a loss of $2.635 million and a gain of $.002 million on derivative accounting for the three months ended September 30, 2004 and 2003, respectively. Losses of $2.424 million and $.004 million were recorded for the nine months ended September 30, 2004 and 2003, respectively. The 2004 loss relates to the embedded derivative for the purchase of Plug Power common stock, which is part of the private placement transaction, while the gain (loss) in 2003 related to warrants for the purchase of SatCon common stock held by the Company. Changes in derivative fair values for the embedded derivative and the SatCon warrants are calculated using the Black Scholes Option-Pricing Model.

Impairment Losses. For the three and nine months ended September 30, 2003, the Company recorded a $0 and $.418 million charge for impairment losses for other than temporary declines in the value of certain securities available for sale.

Income Tax Benefit (Expense).

Further, as a result of ownership changes in 1996, the availability of $1.014 million of net operating loss carryforwards to offset future taxable income will be limited pursuant to the Internal Revenue Code.

Liquidity and Capital Resources

The Company has incurred significant losses as it continues to fund MTI Micro's DMFC product development

and commercialization programs. The Company expects that losses will fluctuate from year to year and that such fluctuations may be substantial as a result of, among other factors, gains on sales of securities available for sale, the operating results of MTI Instruments and MTI Micro, the availability of equity financing including the

additional investment rights issued in connection with the 2004 Private Placement and the ability to attract

government funding resources to offset research development costs. As of September 30, 2004, the Company had an accumulated deficit of $67.431 million. During the nine months ended September 30, 2004, the Company recognized a loss of $4.998 million and used cash in operating activities totaling $9.133 million. This cash use in 2004 was funded primarily by proceeds from the sale of securities available for sale which totaled $3.804 million, net proceeds of $8.985 million from the 2004 Private Placement transaction and proceeds from subsidiary stock issuances of $2.193 million. The Company expects to continue to incur losses as it develops and commercializes DMFCs and it expects to continue funding its operations from current cash and cash equivalents, the sales of securities available for sale, proceeds, if any, from the exercise of additional investment rights issued in connection with the 2004 Private Placement and government program funding in each case unless other sources of funding can be foun d.

During the remainder of 2004, the Company expects to spend approximately $3.0 million on research and development of DMFCs and $.200 million in research and development on MTI Instruments' products.

The Company anticipates that it will be able to meet the liquidity needs of its operations for the next year from current cash resources, sale of securities available for sale and, to the extent available, equity financings. However, there can be no assurance that the Company will not require additional financing within this time frame or that any additional financing will be available to the Company on terms acceptable to the Company, if at all. Cash used in operations is expected to total approximately $14.3 million for 2004. Further, cash used for capital expenditures is expected to total approximately $3.2 million in 2004. Capital expenditures for 2004 will consist of expenditures for facility expansion, furniture, computer equipment, software and manufacturing and laboratory equipment. The Company believes it will have adequate resources to fund operations and capital expenditures for 2004 and 2005 based on current cash and cash equivalents, current cash flow and revenue projections and the pote ntial sale of unrestricted securities available for sale at current market values. Proceeds from the sale of

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securities available for sale are subject to fluctuations in the market value of Plug Power as well as limitations on the ability to sell shares arising from the escrow of 2,700,000 shares in connection with Fletcher's right to purchase Plug

Power common stock between June 1, 2005 and December 31, 2006, subject to the terms of the agreement with Fletcher. The Company may also seek to provide additional resources through an equity offering. Additional

government revenues and Fletcher's exercise of additional investment rights totaling up to an additional $28 million could also provide additional resources. The Company anticipates that it will have to raise additional equity capital to fund its long-term business plan, regardless of whether Fletcher exercises any or all of its additional investment rights.

Future sales of Plug Power securities will generate taxable income or loss which is different from book income or loss due to the tax basis in these assets being significantly different from their book basis. Book and tax basis as of September 30, 2004 are as follows:

As of September 30, 2004, the Company owned 5,693,227 common shares of Plug Power. In connection with the May 4, 2004 amended private placement agreement with Fletcher, the Company has placed 2,700,000 of its Plug Power shares in escrow and Fletcher may have the right to purchase those shares, potentially at a discount. Plug Power stock is currently traded on the Nasdaq National Market and is therefore subject to stock market

conditions. When acquired, these securities were unregistered. Plug Power securities are considered "restricted

securities" as defined in Rule 144 and may be sold in the future without registration under the Securities Act of 1933 subject to compliance with the provisions of Rule 144.

Working capital was $30.348 million at September 30, 2004 a $12.078 million decrease from $42.426 million at December 31, 2003. This decrease is primarily the result of an increase to current assets for the proceeds from the private placement offset by decreases to current assets related to the restriction of 2,700,000 shares of Plug Power under the escrow agreement pursuant to the Company's amended private placement and the associated decrease to current deferred tax liabilities for the tax impact of the reclassification of these securities from current to long-term assets.

At September 30, 2004, the Company's order backlog was $2.098 million, compared to $.447 million at December 31, 2003.

Inventory and accounts receivable (from product revenues) turnover ratios and their changes for the nine months ended September 30 are as follows:

The changes in the inventory and accounts receivable turnover ratios are the result of the volume and timing of sales. The Test and Measurement Instrumentation segment had higher year to date sales and higher cost of sales during 2004 as compared to 2003.

Cash flow used by operating activities for the nine months ended September 30, 2004 was $9.133 million compared with $6.828 million for the same period in the prior year. This cash use increase of $2.305 million primarily reflects increases in cash expenditures to fund New Energy segment research and development, offset by balance sheet changes which reflect the timing of cash payments and receipts.

Capital expenditures during the first nine months of 2004 were $1.248 million, an increase of $.405 million from the same period of the prior year. Capital expenditures in 2004 included furniture, computer equipment, facilities fit-up, software, and manufacturing and laboratory equipment. Remaining capital expenditures in 2004 are expected to approximate $1.9 million, consisting of expenditures for computer equipment, software, software implementation and

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manufacturing and laboratory equipment. The Company expects to finance these expenditures with current cash and cash equivalents, the sale of securities available for sale, equity financing and other sources, as appropriate.

On January 29, 2004, the Company consummated a private placement to Fletcher International, Ltd. of $10 million of its common stock and certain additional investment rights. This private placement was amended on May 4, 2004, as more fully described in Note 8 - Shareholders' Equity.

As of September 30, 2004, the Company sold 380,000 shares of Plug Power common stock with proceeds totaling $3.804 million and net gains totaling $3.129 million. This gain related to the Company's previously announced strategy to raise additional capital through the sale of its assets and equity offerings in order to fund its micro fuel cell operations. Taxes on the net gains are expected to be offset by the Company's net operating losses. As of September 30, 2004, the Company estimates its remaining net operating loss carryforwards to be approximately $22.4 million.

From October 1 through November 5, 2004, the Company sold available for sale securities as follows:

Cash and cash equivalents were $17.159 million at September 30, 2004 compared to $12.380 million at December 31, 2003.

The launch of MTI Micro's first product for Intermec scheduled for the end of 2004 will have negative gross margins and therefore will be shipped in low volumes. The shipment of the Intermec product will meet key objectives for MTI Micro, including: the development of a product platform which has potential applications in other vertical markets critical to MTI Micro's technology development- the military market; creation of codes and standards; valuable field experience and user feedback; and advancement of product development, design and manufacturing methods.

Contractual Obligations

Contractual obligations as of September 30, 2004, under agreements with non-cancelable terms are as follows:

(A) Once products are sold under the LANL license agreement, royalties will be based on 2% of the first $50 million of net sales, 1% on net sales in excess of $50 million but less than $100 million and .5% on net sales in excess of $100 million. License payments made in any year can be applied against royalties due and total annual fees in any year shall not exceed $1 million.

(B) Under the Strategic Alliance Agreement (the "Agreement"), as amended, with Gillette, if MTI Micro sells fuel refills in the target market after its exclusivity obligations have expired, then MTI Micro will be required to pay Gillette royalties as defined in the Agreement. Portions of the Agreement are subject to confidential treatment as filed with the SEC.

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- our failure to satisfy certain requirements relating to registering the resale of shares issued or issuable to Fletcher pursuant to the securities laws;

- a change in control of our company; and

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In addition, in any event, 8,330,411 shares is the maximum number of shares of our common stock we may be required to issue to Fletcher, which amount includes the 1,418,842 shares issued on January 29, 2004.

In connection with the 2004 Private Placement, as amended, we may have to sell shares of Plug Power common stock at a price below the market value of such shares, which sales would reduce the value of our assets.

Pursuant to our amended agreement with Fletcher, we have deposited 2,700,000 shares of Plug Power common stock in escrow to satisfy our potential obligation to sell such shares to Fletcher. The number of shares Fletcher may purchase and the exercise price for those shares is subject to fluctuation based on the market price of our common stock and the market price of Plug Power stock. Accordingly, Fletcher may, in certain instances, purchase shares of Plug Power common stock either at a price below the fair market value of such shares, thereby reducing the value of our assets, or even if based on the market price of Plug Power shares, at a price at which we would not desire to sell such shares.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and assess on an on-going basis the design and operating effectiveness of our internal control structure and procedures for financial reporting. Our auditors are required to audit both the design and operating effectiveness of our internal controls over financial reporting, and management's assessment of the design and the effectiveness of those controls. Although we are not aware of any material weaknesses at this time, this is the first time that we have undergone a comprehensive internal assessment and external audit of our internal controls over financial reporting. Therefore, it is possible that material weaknesses could be found. If we are unable to remediate those weaknesses before the conclusion of the external audit, the auditors could be required to issue an adverse opinion on our internal controls over f inancial reporting.

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Because opinions on internal controls over financial reporting have not been required in the past, it is uncertain what impact an adverse opinion would have upon our stock price.

Statement Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents we have filed with the Securities and Exchange Commission that are incorporated by reference into this Form 10-Q contain and incorporate forward-looking

statements that involve risks and uncertainties within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements contained, or incorporated by reference, in this Form 10-Q that are not statements of historical fact may be forward-looking statements. When we use the words "anticipates," "plans," "expects," "believes," "should," "could," "may," "will" and similar expressions, we are identifying forward-looking statements. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, among others:

• our need to raise additional financing;

• Fletcher's decision whether to exercise its additional investment rights and the price at which Fletcher purchases shares;

• market acceptance of DMFCs;
• the potential for early termination of our agreement with Gillette and its Duracell division;
• our inability, or Gillette's inability, to develop DMFCs or fuel refills on our planned schedule;
• our dependence on OEMs integrating DMFCs into their devices;
• the need for current regulations to change to permit methanol to be carried onto airplanes for DMFCs to achieve mass market commercialization;
• risks related to the flammable nature of methanol as a fuel source;
• intense competition in the DMFC and instrumentation businesses;
• our dependence on the success of Plug Power Inc.;

• risks related to protection and infringement of intellectual property;
• our history of losses;

• the historical volatility of our stock price;

• the risk we may become an inadvertent investment company;
• general market conditions; and
• other factors referred to under the caption "Risk Factors," which are set forth in our Annual Report on Form 10-K and Form 10-K/A.

Readers should not rely on our forward-looking statements. These and other risks are set forth in greater detail in the "Risk Factors" section of our Annual Report on Form 10-K and Form 10-K/A, which are incorporated herein by reference and under the caption "Additional Information Concerning Risks Related to the 2004 Private Placement Transaction, as Amended" in this quarterly report on Form 10-Q. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of our Annual Report on Form 10-K and Form 10-K/A, which are incorporated herein by reference.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign exchange rates or weak economic conditions in foreign markets. Since our sales are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets. Interest income is sensitive to changes in the general level of U.S. interest rates, particularly since our investments are in cash equivalents. Based on the nature and current levels of our cash equivalents, however, we have concluded that there is no material market risk exposure.

As a result of holding securities available for sale, the Company is exposed to fluctuations in market value. The Company recognizes changes in market value through the balance sheet, however if an other than temporary market decline were to occur, it could have a material impact on the Company's operating results.

The Company's issued derivatives consist of warrants and rights to purchase shares of the Company's common stock and Plug Power common stock owned by the Company. The fair value of the embedded derivative for the right to purchase Plug Power common stock is recorded in the financial statement line titled "Derivative liability." This derivative is valued quarterly using the Black Scholes Option-Pricing Model. The Company's held derivatives consist of warrants to purchase SatCon common stock. The fair value of the warrants to purchase SatCon common stock is based on estimates using the Black Scholes Option-Pricing Model. The Company recognizes changes in fair value through the operating statement line titled "(Loss) gain on derivatives." The Company does not use derivative financial instruments for speculative or trading purposes.