Notes
to Condensed Consolidated Financial Statements (Unaudited)
Description
of Business
Unless
the context requires otherwise in these notes to the consolidated financial statements, the terms “SHI,” the “Company,”
“we,” “us,” and “our” refer to Soluna Holdings, Inc. together with its consolidated subsidiaries,
“SCI” refers to Soluna Computing, Inc., formerly known as EcoChain, Inc., and “MTI Instruments”
refers to MTI Instruments, Inc.
SHI
currently conducts our business through our wholly-owned subsidiary, SCI. SCI is engaged in the mining of cryptocurrency through
data centers that can be powered by renewable energy sources. Recently, SCI has built, and intends to continue to develop and
build, modular data centers that are used for cryptocurrency mining and that in the future can be used for computing intensive,
batchable applications, such as artificial intelligence and machine learning, with the goal of providing a cost-effective alternative
to battery storage or transmission lines. Headquartered in Albany, New York, the Company uses technology and intentional design
to solve complex, real-world challenges.
SCI
incorporated in Delaware on January 8, 2020 as EcoChain, Inc., which operates a cryptocurrency mining facility that integrates
with the cryptocurrency blockchain network in the State of Washington. Through the October 2021 acquisition by EcoChain, Inc.
of an entity at the time named Soluna Computing, Inc., SCI also has a pipeline of certain cryptocurrency mining projects
previously owned by Harmattan Energy, Ltd. (“HEL”) (formerly known as Soluna Technologies, Ltd.), a Canadian
corporation incorporated under the laws of the Province of British Colombia that develops vertically-integrated, utility-scale
computing facilities focused on cryptocurrency mining and cutting-edge blockchain applications. Following such acquisition, on
November 15, 2021, SCI completed its conversion and redomicile to Nevada and changed its name from “EcoChain, Inc.”
to “Soluna Computing, Inc.”. The following day, the acquired entity, Soluna Computing, Inc., changed its name to “Soluna
Callisto Holdings Inc.” (“Soluna Callisto”).
Until
the April 11, 2022 sale described below, we also operated though our wholly owned subsidiary, MTI Instruments, an instruments
business engaged in the design, manufacture and sale of vibration measurement and system balancing solutions, precision linear
displacement sensors, instruments and system solutions, and wafer inspection tools. MTI Instruments was incorporated in New York
on March 8, 2000. MTI Instruments’ products consist of engine vibration analysis systems for both military and commercial
aircraft and electronic gauging instruments for position, displacement and vibration application within the industrial manufacturing
markets, as well as in the research, design and process development markets. These systems, tools and solutions are developed
for markets and applications that require consistent operation of complex machinery and the precise measurements and control of
products, processes, and the development and implementation of automated manufacturing and assembly. On December 17, 2021, we
announced that we had entered into a non-binding letter of intent with a potential buyer (the “Buyer”) regarding the
potential sale of MTI Instruments (the “LOI”) to an unrelated third party. Pursuant to the LOI, the Buyer would acquire
100% of the issued and outstanding common stock of MTI Instruments (the “Sale”). As a result of the foregoing, the
MTI Instruments business was reported as discontinued operations in our consolidated financial statements as of December 31, 2021
and prior periods included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March
31, 2022 (our “Annual Report”), as well as in these consolidated financial statements as of June 30, 2022 and prior
periods. On April 11, 2022, we consummated the Sale, MTI Instruments ceased to be our wholly-owned subsidiary and, as a result,
we have exited the instruments business. See Note 14 for additional information on the Sale.
Soluna
Holdings, Inc., formerly known as Mechanical Technology, Incorporated was incorporated in Nevada on March 24, 2021, and is the
successor to Mechanical Technology, Inc., which was incorporated in the State of New York in 1961, as a result of a merger which
became effective on March 29, 2021, and is headquartered in Albany, New York. Effective November 2, 2021, the Company changed
its name from “Mechanical Technology, Incorporated” to “Soluna Holdings, Inc.”
On
April 11, 2022, SHI entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with NKX Acquiror, Inc.
(the “Purchaser”), pursuant to which the Company sold on such date all of the issued and outstanding shares of capital
stock of its wholly-owned subsidiary, MTI Instruments for approximately $9.25 million in cash, subject to certain adjustments
as set forth in the Stock Purchase Agreement (the “Sale”). The consideration paid by the Purchaser to the Company
was based on an aggregate enterprise value of approximately $10.75 million. The Company recognized a gain on sale of approximately
$7.6 million.
Going
Concern and Liquidity
The
Company’s financial statements as of June 30, 2022 have been prepared using generally accepted accounting principles
in the United States of America (“U.S. GAAP”) applicable to a going concern, which contemplates the realization
of assets and liquidation of liabilities in the normal course of business. As shown in the
accompanying financial statements, the Company did not generate sufficient revenue to generate net income, and has negative
working capital as of June 30, 2022. In addition, the Company has seen a decline in the price of Bitcoin due its
volatility, which could have material and negative impact to our operations. These factors,
among others indicate that there is substantial doubt about the Company’s ability to continue as a going concern
within one year after issuance of these financial statements as of June 30, 2022, or August 15, 2022.
The
ability to continue as a going concern is
dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its
obligations and repay its liabilities arising from normal business operations when they come due. In the near term, management is evaluating and
implementing different strategies to obtain financing to fund the Company’s expenses and growth to achieve a level of revenue
adequate to support the Company’s current cost structure. Financing strategies may include, but are not limited to, stock
issuance, project level equity, debt borrowings, partnerships and/or collaborations.
In addition, as discussed above and further in Notes 14, and 15, the Company sold the MTI Instruments business in April 2022 to focus
on developing and monetizing green, zero-carbon computing and cryptocurrency mining facilities. The Company received approximately
$9.0 million in cash, net of transaction costs, from the Sale and expects to receive another $0.2 million following Purchaser’s
approval of the final working capital.
Following June 30, 2022, to further implement management’s strategy, the Company entered into various transactions as further described in Note 17 to
recapitalize and negotiate revised terms with senior secured lenders, which released collateral (thus enabling execution of the
project financing strategy) and to provide a means for holders of the secured obligations to reduce their debt through the equity
markets, including entering into the Addendum (as defined
in Note 17) to allow the Company to convert $3.3 million in notes payable to common stock and redeem
up to $6.6 million of notes payable, the issuance and sale of $5.0 million in a new series of preferred stock. In addition, also
as further described in Note 17, in May 2022, SCI entered into a structural understanding
with Soluna SLC Fund I Projects Holdco LLC, a Delaware limited liability company (“Spring Lane”), pursuant
to which Spring Lane agreed to provide up to $35.0 million in project financing subject to various
milestones and conditions precedent and following the recapitalization and restructuring discussed above, in August 2022, the
Company entered into an agreement with Spring Lane for an initial funding of up to $12.5 million of the up to $35.0 million commitment
for the Company’s development site in Texas. Management will continue to evaluate different
strategies to obtain financing to fund operations, but believes that these transactions, and the availability of up to $7.1 million
in additional equipment financing with a third party lender, together with the Company’s cash on hand of approximately $4.6
million as of June 30, 2022 and proceeds from potential capital raising activities and/or increasing the available under our credit
facilities, will allow the Company to meet its outstanding commitments relating to capital expenditures as of June 30, 2022 of
$1.5 million and other operational needs. However, management cannot provide any assurances that the Company will be successful
in accomplishing any of its plans. These financial statements do not include any adjustments related to the recoverability and
classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
The
COVID-19 global pandemic has been unprecedented and unpredictable and the impact is likely
to continue to result in significant national and global economic disruption, which may adversely affect our business. Although
the Company has experienced some minor changes to our miner shipments due to disruptions in the global supply chain, the Company
does not expect any material impact on our long-term strategic plans, our operations, or our liquidity due to the impacts of COVID-19.
Further, various macroeconomic factors could adversely affect our business and the
results of our operations and financial condition, including changes in inflation, interest rates and overall
economic conditions. For instance, inflation could negatively impact the Company by increasing our labor costs, through higher
wages and higher interest rates. If inflation or other factors were to significantly increase our business costs, our ability
to develop our current projects may be negatively affected. Interest rates, the liquidity of the credit markets and the volatility
of the capital markets could also affect the operation of our business and our ability to raise capital in order to fund our operations.
However, the Company is actively monitoring this situation and the possible effects on our financial condition, liquidity, operations,
suppliers, and the industry.
In
the opinion of management, the Company’s condensed consolidated financial statements reflect all adjustments, which are
of a normal recurring nature, necessary for a fair statement of the results for the periods presented in accordance with U.S.
GAAP. The results of operations for the interim periods presented are not necessarily indicative of results for the full year.
Certain
information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements and notes thereto included in our Annual Report.
The
information presented in the accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from the
Company’s audited consolidated financial statements. All other information has been derived from the Company’s unaudited
condensed consolidated financial statements for the three and six months ended June 30, 2022 and June 30, 2021.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary, SCI, as of June
30, 2022 and for the three and six months ended June 30, 2022 and 2021, also includes the accounts of our then wholly-owned subsidiary,
MTI Instruments. All intercompany balances and transactions are eliminated in consolidation.
Change
in Par Value
Unless
otherwise noted, all capital values, share and per share amounts in the condensed consolidated financial statements have been
retroactively restated for the effects of the Company’s change in par value from $0.01 to $0.001, which became effective
after the redomestication to the State of Nevada on March 29, 2021.
Reclassification
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect
on the reported results of operations or net assets. The reclassifications relate to the presentation of discontinued operations
and a correction of an error.
Correction
of an Error
The
Company recorded cash preferred dividend distributions of $630 thousand in the Annual Report presentation as an increase within
accumulated deficit. However, in the absence of retained earnings, cash dividends should generally be charged to Additional-Paid-in
Capital (“APIC”). This treatment is supported by Accounting Standards Codification (“ASC”) 480-10-S99-2,
which requires accretion of redeemable preferred stock to be charged to APIC in the absence of retained earnings. As the Company
did not have accumulated profit (i.e.: absence of retained earnings), the preferred cash dividends should have been charged to
APIC.
The
following tables present the effects of the correction of the prior period error to the Condensed Consolidated Statement of Equity:
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Preferred
Stock |
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Common
Stock |
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Treasury
Stock |
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Shares |
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Amount |
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Shares |
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|
Amount |
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Additional
Paid-in
Capital |
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|
Accumulated
Deficit |
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|
Shares |
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|
Amount |
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Total
Stockholders’
Equity |
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September
30, 2021 |
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806,585 |
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$ |
1 |
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|
13,732,713 |
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|
$ |
14 |
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|
$ |
172,898 |
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$ |
(120,419 |
) |
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1,015,493 |
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$ |
(13,764 |
) |
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$ |
38,730 |
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Adjustment
for correction of an error-Preferred dividends |
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— |
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— |
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— |
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— |
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(176 |
) |
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|
176 |
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|
— |
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— |
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—
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Balance
September 30, 2021-as adjusted |
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|
806,585 |
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|
$ |
1 |
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|
13,732,713 |
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|
$ |
14 |
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|
$ |
172,722 |
|
|
$ |
(120,243 |
) |
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|
1,015,493 |
|
|
$ |
(13,764 |
) |
|
$ |
38,730 |
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December
31, 2021 |
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|
1,252,299 |
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|
$ |
1 |
|
|
|
14,769,699 |
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|
$ |
15 |
|
|
$ |
228,420 |
|
|
$ |
(123,684 |
) |
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|
1,015,493 |
|
|
$ |
(13,764 |
) |
|
$ |
90,988 |
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Adjustment
for correction of an error-Preferred dividends |
|
|
— |
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|
— |
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— |
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|
— |
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|
(630 |
) |
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|
630 |
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— |
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— |
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—
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December
31, 2021-as adjusted |
|
|
1,252,299 |
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|
$ |
1 |
|
|
|
14,769,699 |
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|
$ |
15 |
|
|
$ |
227,790 |
|
|
$ |
(123,054 |
) |
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|
1,015,493 |
|
|
$ |
(13,764 |
) |
|
$ |
90,988 |
Accounts
receivables consist of the following at:
(Dollars in thousands) | |
June 30, 2022 | | |
December 31, 2021 | |
Data Hosting | |
$ | 72 | | |
| 450 | |
Other receivable | |
| 616 | | |
| 81 | |
Total | |
$ | 688 | | |
$ | 531 | |
The
Company’s allowance for doubtful accounts was $0 as of June 30, 2022 and December 31, 2021. The Company had a $484 thousand balance
as of June 30, 2022 in other receivable related to a reimbursement fee for a project that is being developed in Texas. There were
no such receivables as of December 31, 2021.
Employee
Receivables
Certain
employees have a receivable due to the Company related to the vesting of stock awards, in which $135 thousand and $0 were outstanding
as of June 30, 2022 and December 31, 2021, respectively. The balance is currently included within prepaid and other assets
on the condensed consolidated financial statements.
| 4. | Property,
Plant and Equipment |
Property,
plant and equipment consist of the following at:
(Dollars in thousands) | |
June 30, 2022 | | |
December 31, 2021 | |
Land | |
$ | 52 | | |
$ | 52 | |
Land improvements | |
| 488 | | |
| 238 | |
Buildings | |
| 7,188 | | |
| 5,650 | |
Leasehold improvements | |
| 366 | | |
| 317 | |
Vehicles | |
| 15 | | |
| 15 | |
Computers and related software | |
| 66,773 | | |
| 30,890 | |
Machinery and equipment | |
| 4,753 | | |
| 2,588 | |
Office furniture and fixtures | |
| 22 | | |
| 22 | |
Construction in progress | |
| 19,489 | | |
| 7,590 | |
| |
| 99,146 | | |
| 47,362 | |
Less: Accumulated depreciation | |
| (12,098 | ) | |
| (2,765 | ) |
| |
$ | 87,048 | | |
$ | 44,597 | |
Depreciation
expense was $5.5 million and $149 thousand for the three months ended June 30, 2022 and 2021, respectively. Depreciation expense
was $9.9 million and $225 thousand for the six months ended June 30, 2022 and 2021, respectively.
The
Company incurred a $1.6 million loss for the three and six months ended June 30, 2022 in connection with the disposal of miners
with a net book value of approximately $2.1 million in which the Company received proceeds of $465 thousand. There were no such
disposals on equipment for the three and six months ended June 30, 2021.
During
the three and six months ended June 30, 2022, the Company concluded that there were impairment indicators on property, plant
and equipment associated with the S-9 miners. As a result, a quantitative impairment analysis was required as of June 30, 2022.
As such, the Company reassessed its estimates and forecasts as of June 30, 2022, to determine the fair values of the S-9 miners.
As a result of the analysis, as of June 30, 2022, the Company concluded the carrying amount of the property, plant and equipment
associated with the S-9 miners exceeded its fair value, which resulted in impairment charges of $750 thousand on the condensed
consolidated statements of operations for the three and six months ended June 30, 2022.
As
discussed above, on October 29, 2021, we completed the Soluna Callisto acquisition pursuant to an Agreement and Plan of Merger
dated as of August 11, 2021, by and among the Company, SCI and Soluna Callisto (the “Merger Agreement”). The purpose
of the transaction was for SCI to acquire substantially all of the assets (other than those assets physically located in Morocco)
formerly held by HEL, which assets consisted of Soluna Callisto’s existing pipeline of certain cryptocurrency mining projects
that HEL previously transferred to Soluna Callisto and to provide SCI with the opportunity to directly employ or retain the services
of four individuals whose services it had retained through HEL prior to the merger. As a result of the merger, each share of common
stock of Soluna Callisto issued and outstanding immediately prior to the effective time of the merger, other than shares owned
by the Company or any of our subsidiaries, was cancelled and converted into the right to receive a proportionate share of up to
2,970,000 shares (the “Merger Shares”) of the Company’s common stock payable upon the achievement of certain
milestones within five years after the effective date in the merger, as set forth in the merger agreement and the schedules thereto
(the “Merger Consideration”). See Note 11 for further information regarding our relationship with HEL.
The
acquisition was accounted for, for purposes of U.S. GAAP, using the asset acquisition method of accounting under the ASC 805-50.
We determined that we acquired in the acquisition a group of similar identifiable assets (primarily, the “strategic pipeline
contract” of certain cryptocurrency mining projects), which it classified as an intangible asset for accounting purposes.
As a result, our acquisition of the set of assets and activities constituted an asset acquisition, as opposed to a business acquisition,
under ASC 805. ASC 805-50 provides that assets acquired in an asset acquisition are measured based on the costs of the acquisition,
which is the consideration that the acquirer transfers to the seller, and includes direct transaction costs related to the acquisition.
We include Soluna Callisto’s results of operations in our results of operations beginning on the effective date of the acquisition.
Termination
Consideration
In
connection with the Soluna Callisto acquisition, effective as of October 29, 2021, pursuant to the terms of a termination agreement
dated as of August 11, 2021 by and among the
Company, SCI, and HEL, on November 5, 2021, (the “Termination Agreement”), SCI paid HEL
$725,000 and SHI issued to HEL 150,000 shares of our common stock (the “Termination Shares”). SCI also reimbursed
HEL $75,000 for transaction-related fees and expenses. SHI included the termination costs as part of asset acquisition per ASC
805-50. Based on the closing price of the SHI common stock on The Nasdaq Stock Market LLC (“Nasdaq”)
on November 5, 2021, SHI has valued the aggregate termination consideration at approximately $1.9 million.
Merger
Consideration
The
fair value of the Merger Consideration includes various assumptions, including those related to the allocation of the estimated
value of the maximum number of Merger Shares (2,970,000) issuable as Merger Consideration, which issuance is contingent on the
achievement of certain milestones of generating active Megawatts from Qualified Projects in which the Cost Requirement is satisfied
within five years after the effective date of
the merger, as set forth in the Merger Agreement and the schedules thereto, as set forth below. The
Merger Consideration and the timing of the payment thereof is subject to the following qualifications and limitations:
| 1a) | Upon
buyer achieving each one active MegaWatts (“Active MWs”) from the projects
in which the cost requirement is satisfied, this will cause SHI to issue to HEL 19,800
shares for each one MW up to a maximum 150 Active MW. |
|
i. |
If,
on or before June 30, 2022, SCI or Soluna Callisto directly or indirectly achieves at least 50 active MWs from one or more
of three current projects as set forth in the Merger Agreement that satisfy the Cost Requirement as defined within the Merger
Agreement, then the Merger Shares will be issued at an accelerated rate of 29,700 Merger Shares for each of such first 50
Active MW, such that the Merger Shares in respect of the remaining 100 Active MWs (if any) will be issued at a reduced rate
of 14,850 Merger Shares per Active MW; |
|
ii. |
If,
by June 30, 2023, SCI or Soluna Calisto fail to achieve directly or indirectly (other than pursuant to a Portfolio Acquisition)
at least 50 Active MW from Projects that satisfy the Cost Requirement, then the maximum aggregate number of Merger Shares
shall be reduced from 2,970,000 to 1,485,000; |
|
iii. |
No
Merger Shares will be issued to HEL without our prior written consent; |
|
iv. |
Issuance
of the Merger Shares will also be subject to the continued employment with or engagement by SCI or the surviving corporation
of (A) John Belizaire and (B) at least two of Dipul Patel, Mohammed Larbi Loudiyi, (through ML&K Contractor), and Phillip
Ng at the time that such Merger Shares are earned. If both (A) and (B) cease to be satisfied on or prior to the date that
all Merger Shares are earned (such date, a “Trigger Date”), then “Qualified Projects” for purposes
of determining Merger Shares shall only apply to those Qualified Projects that are in the pipeline as of the Trigger Date.
For these purposes, if any such individual’s employment or service relationship with SCI is terminated without cause,
as a result of his death or disability, or with good reason (as such terms are defined in the employment and consulting agreements),
such individual shall be deemed to continue to be employed or engaged by SCI for these purposes; |
|
v. |
If
SHI or SCI consummates a Change of Control before the fifth anniversary of the date of the closing of the merger, then we
will be obligated to issue all of the unissued Merger Shares (subject to (ii) and (iii) above). The Merger Agreement defines
“Change of Control” as (A) the sale, exchange, transfer, or other disposition of all or substantially all of the
assets of us or SCI, (B) our failure to continue to own (directly or indirectly) 100% of the outstanding equity securities
of SCI and/or the surviving corporation, or (C) a merger, consolidation, or other transaction in which the holders of SHI’s,
SCI’s, or the surviving corporation’s outstanding voting securities immediately prior to such transaction own,
immediately after such transaction, securities representing less than 50% of the voting power of the corporation or other
entity surviving such transaction (excluding any such transaction principally for bona fide equity financing purposes, so
long as, in the case of SHI or SCI (but not the surviving corporation) such transactions, individually and in the aggregate,
do not result in a change in membership of such entity’s board of directors so that the persons who were members of
the board of directors immediately prior to the first such transaction constitute less than 50% of the board membership at
any time after such transaction(s) are consummated). Notwithstanding the foregoing, a transaction shall not constitute a Change
of Control if its sole purpose is to change the state of SHI’s or SCI’s incorporation or to create a holding company
that will be owned in the same proportions by the persons who held SHI’s or SCI’s securities immediately prior
to such transaction; and |
|
vi. |
if
on any of the fifth anniversary of the effective time of the merger, June 30, 2022 or June 30, 2023, a facility has not become
a Qualified Facility and therefore is not taken into consideration in the calculation of Active MW because any of the elements
set forth in the definition of “Qualified Facility” as defined in the Merger Agreement have not been met for reasons
beyond the reasonable control of SCI’s management team, but SCI’s management team is then actively engaged in
the process of completing and is diligently pursuing the completion of the missing elements, then (A) the target dates set
forth above shall be extended for an additional 90 days, and (B) additional extensions of time may be granted by our Board
of Directors (the “Board”) in its commercially reasonable discretion, in each case for the purpose of enabling
SCI’s management team to complete the steps needed to qualify the facility as a Qualified Facility. |
The
number of Merger Shares is also subject to customary anti-dilution adjustments in the event of any stock split, stock consolidation,
stock dividend, or similar event involving the shares of our common stock. Based on the assessment performed, the fair value of
the merger consideration as of October 29, 2021 was approximately $33.0 million.
Based
on management’s evaluation, management concluded that due to the high volatility of its share price, the low probability
of not achieving the MW targets, and the fact the value associated with meeting the performance measures are not intended to drive
the number of shares to be issued, but rather act as a proxy for and driver of share value, the monetary value of the obligation
at inception is predominantly a function of equity shares. As such, the consideration will be treated as equity as ASC
480-10-25-14 is not applicable since the monetary value of the Merger Shares is not (1) fixed, or (2) dependent on (i) variations
in something other than the fair value of the Company’s equity shares, or (ii) variations inversely related to changes in
the fair value of the Company’s equity shares and is instead exposed to changes in the fair value of the Company’s
share price, and as such does not represent a liability under ASC 480. The economic risks and characteristics of the share consideration
are clearly and closely related to a residual equity interest since the underlying (i.e., the incremental shares of common stock
delivered upon achievement of each MW target) will participate in the increase in value of the common equity of the Company, similar
to a call option on common stock. Based on guidance in ASC 815-40-25-7 through 25-35, the share consideration is considered to
be indexed to the Company’s stock and meets the additional criteria for equity classification.
Intangible
assets consist of the following as of June 30, 2022:
(Dollars in thousands) | |
Intangible
Assets | | |
Accumulated
Amortization | | |
Total | |
| |
| | |
| | |
| |
Strategic pipeline contract | |
$ | 46,885 | | |
$ | 6,251 | | |
$ | 40,634 | |
Assembled workforce | |
| 500 | | |
| 67 | | |
| 433 | |
Patents | |
| 112 | | |
| 1 | | |
| 111 | |
Total | |
$ | 47,497 | | |
$ | 6,319 | | |
$ | 41,178 | |
Intangible
assets consist of the following as of December 31, 2021:
(Dollars in thousands) | |
Intangible
Assets | | |
Accumulated
Amortization | | |
Total | |
| |
| | |
| | |
| |
Strategic pipeline contract | |
$ | 46,885 | | |
$ | 1,562 | | |
$ | 45,323 | |
Assembled workforce | |
| 500 | | |
| 17 | | |
| 483 | |
Patents | |
| 33 | | |
| — | | |
| 33 | |
Total | |
$ | 47,418 | | |
$ | 1,579 | | |
$ | 45,839 | |
There
were no intangible assets or amortization expense as of June 30, 2021. Amortization expense for the three and six months ended
June 30, 2022 was approximately $2.4 million and $4.7 million, respectively.
The
strategic pipeline contract relates to supply of a critical input to our digital mining business. The Company has analyzed this
strategic pipeline contract similar to a permit for future benefit. The strategic pipeline contract relates to potential renewable
energy datacenters that fit in the alignment of the Company structure to expand operations of the Company’s new focus in
their business.
The
Company expects to record amortization expense of intangible assets over the next five years and thereafter as follows:
(Dollars in thousands) |
|
|
|
|
Year
ending December 31, |
|
|
|
|
2022 (remainder of the year) |
|
|
$ |
4,741 |
|
2023 |
|
|
|
9,482 |
|
2024 |
|
|
|
9,482 |
|
2025 |
|
|
|
9,482 |
|
2026 |
|
|
|
7,903 |
|
Thereafter |
|
|
|
88 |
|
Total |
|
|
$ |
41,178 |
|
During
the three and six months ended June 30, 2022, the Company’s effective income tax rate on the tax benefit was 1.75%
and 3.32%,
and for each of the three and six months ended June 30, 2021, the Company’s effective income tax rate was 0%. The projected annual effective tax rate is less than the Federal statutory rate of 21%,
primarily due to the change in the valuation allowance, as well as changes to estimated taxable income for 2022 and permanent
differences. There was $251
thousand and $797
thousand deferred income tax benefit for the three and six months ended June 30, 2022 and for the three and six months ended
June 30, 2021, there was an income tax expense of $3
thousand.
In
connection with the strategic contract pipeline acquired in the Soluna Callisto acquisition as further discussed in Note 5, ASC
740-10-25-51 requires the recognition of a deferred tax impact of acquiring an asset in a transaction that is not a business combination
when the amount paid exceeds the tax basis on the acquisition date. As such, the Company is required to adjust the value of the
strategic contract pipeline by approximately $10.9 million at inception date, in which was recorded as a deferred tax liability
and this amount will be amortized over the life of the asset. For the three and six months ended June 30, 2022, the Company amortized
$547 thousand and approximately $1.1 million, respectively.
The
Company provides for recognition of deferred tax assets if the realization of such assets is more likely than not to occur in
accordance with accounting standards that address income taxes. Significant management judgment is required in determining the
period in which the reversal of a valuation allowance should occur. The Company has considered all available evidence, both positive
and negative, such as historical levels of income and future forecasts of taxable income amongst other items, in determining its
valuation allowance. In addition, the Company’s assessment requires us to schedule future taxable income in accordance with
accounting standards that address income taxes to assess the appropriateness of a valuation allowance which further requires the
exercise of significant management judgment.
The
Company believes that the accounting estimate for the valuation of deferred tax assets is a critical accounting estimate because
judgment is required in assessing the likely future tax consequences of events that have been recognized in our financial statements
or tax returns. The Company based the estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain
cases, business plans and other expectations about future outcomes. In the event that actual results differ from these estimates
or the Company adjusts these estimates in future periods, the Company may need to adjust the recorded valuation allowance, which
could materially impact our financial position and results of operations. The valuation allowance was $16.5 million and $11.9
million as of June 30, 2022 and December 31, 2021, respectively. We will continue to evaluate the ability to realize our deferred
tax assets and related valuation allowance on a quarterly basis.
Convertible
Notes
Debt
consists of the following
(dollar in thousands):
| |
Maturity Date | |
Interest Rate | | |
June 30, 2022 | | |
December 31, 2021 | |
Convertible Note | |
October 25, 2022 | |
| 8 | % | |
$ | 13,585 | | |
$ | 14,927 | |
Less: debt discount | |
| |
| | | |
| 349 | | |
| 967 | |
Less: discount from issuance of warrants | |
| |
| | | |
| 2,408 | | |
| 5,747 | |
Less: debt issuance costs | |
| |
| | | |
| 424 | | |
| 1,092 | |
Total convertible notes, net of discount and issuance costs | |
| |
| | | |
$ | 10,404 | | |
$ | 7,121 | |
On
October 25, 2021, pursuant to a Securities Purchase Agreement (the “October SPA”),
the Company issued to certain accredited investors (i) secured convertible notes in an aggregate principal amount of $16.3 million
for an aggregate purchase price of $15 million (collectively, the “October Notes”), which are, subject to certain
conditions, convertible at any time by the investors, into an aggregate of 1,776,073 shares (the “October Conversion Shares”)
of the Company’s common stock, at a price per share of $9.18 (the “Fixed Conversion Price”) and (ii) Class A,
Class B and Class C common stock purchase warrants (collectively, the “October Warrants”) to purchase up to an aggregate
of 1,776,073 shares of common stock, at an exercise price $12.50, $15 and $18 per share, respectively. The October Warrants are
legally detachable and can be separately exercised immediately for five years upon issuance, subject to applicable Nasdaq rules.
The
Notes, subject to an original issue discount of 8%, have a maturity date of October 25, 2022 (the “Maturity Date”),
upon which the Notes shall be payable in full. Commencing on the Maturity Date and also five (5) days after the occurrence of
any Event of Default (as defined in the Notes), interest on the Notes will accrue at an interest rate equal to the lesser of 18%
per annum or the maximum rate permitted under applicable law. If any Event of Default or a Fundamental Transaction (as defined
in the Notes) or a Change of Control (as defined in the Notes) occurs, the outstanding principal amount of the Notes, liquidated
damages and other amounts owing in respect thereof through the date of acceleration, will become, at the Investor’s election,
immediately due and payable in cash at the Mandatory Default Amount (as defined in the Notes). The Notes may not be prepaid, redeemed
or mandatory converted without the consent of the Investors. The obligations of the Company pursuant to the Notes are (i) secured
to the extent and as provided in the Security Agreement, dated as of October 25, 2021, by and among the Company, MTI Instruments
and SCI, Soluna MC, LLC and Soluna SW, LLC (both of which are wholly owned subsidiaries of SCI, and together with MTI Instruments
and SCI, the “Subsidiary Guarantors”), and Collateral Services LLC (the “Collateral Agent”), as collateral
agent for and the holders of the Notes (the “October Security Agreement”); and (ii) guaranteed jointly and severally
by the Subsidiary Guarantors pursuant to each Subsidiary Guaranty, dated as of October 25, 2021, by and among each Subsidiary
Guarantor and the purchasers (the “October Purchasers”) signatory
to the SPA (each, a “Subsidiary Guaranty”). On July 19, 2022, the Company entered into an Addendum with the Collateral
Agent and the October Purchasers to amend certain terms of the October SPA and the October Security Agreement (the “Addendum”). See
Note 17. Subsequent Events for additional information on the Addendum.
The
fair value of the October Warrants, as of the issuance date, was $7.0 million and is recorded as equity with the offset recorded
as debt discount against the net proceeds. The proceeds of $15.0 million were allocated between the October Notes and the October
Warrants, in which the discount related to the warrants are being amortized based on the straight-line method over the twelve
months term of the October Notes. For the three and six months ended June 30, 2022, the Company has recorded amortized debt discount
related to the warrants, the amount of $1.6 million and $3.4 million which is included in interest expense. The Company has also
recorded a debt discount on the October Notes as the difference between the face amount of the notes payable of $16.3 million
and purchase price of $15.0 million of $1.3 million in which approximately $950 thousand has been amortized over the life of the
notes. There was also debt issuance costs of approximately $1.3 million and approximately $900 thousand has been amortized over
the life of the October Notes. All amortized costs are included in interest expense.
During
the six months ended June 30, 2022 and year ended December 31, 2021, $13.6 million and $14.9 million, respectively, was remaining
in the principal balance of the October Notes. For the six months ended June 30, 2022, approximately $1.3 million was converted
into 146,165 shares of our common stock, respectively. Through June 30, 2022, a total of approximately $2.7 million was converted
into 296,165 shares of our common stock, respectively.
Promissory
Notes
On
February 22, 2022, the Company issued to certain institutional lenders (the “Lenders”) promissory notes in an aggregate
principal amount of $7.6 million for an aggregate purchase price of $7.6 million (collectively, the “First Tranche Notes”).
The Notes were issued as the first tranche of an aggregate financing of $20.0 million. On March 10, 2022, the Company has issued
to the lenders a second tranche of an aggregate principal amount of $2.4 million (the “Second Tranche Notes”). The
Company issued to the Lenders a third tranche of promissory notes in an aggregate principal amount of $10.0 million for an aggregate
purchase price of $10.0 million (the “Third Tranche Notes” and, together with the First Tranche Notes and Second Tranche
Notes, the “Notes”) along with Class D common stock purchase warrants (collectively, the “Warrants”) to
purchase up to an aggregate of 1,000,000 shares of common stock of the Company, at an exercise price of $11.50 per share on April
13, 2022. The Warrants are immediately exercisable for two years upon issuance, subject to applicable Nasdaq rules.
The
exercise of the Warrants is subject to beneficial ownership limitations such that the Lenders may not exercise the Warrants to
the extent that such exercise would result in each of the Lenders being the beneficial owner in excess of 4.99% (or, upon election
of such Lender, 9.99%) of the number of shares of the common stock outstanding immediately after giving effect to the issuance
of shares of common stock issuable upon such exercise, which beneficial ownership limitation may be increased or decreased up
to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following
notice to the Company.
The
total fair value of the Warrants, as of the issuance date, was $4.8 million and is recorded as equity with the offset recorded
as debt discount against the net proceeds. The proceeds of $20.00 million were allocated between the Promissory Notes and the
Warrants, in which the discount related to the warrants is being amortized based on the straight-line method through the date
of Maturity. None of the Warrants have been exercised and exchanged for the Company’s common stock as of June 30, 2022.
On
April 29, 2022, the Company issued in a concurrent registered direct offering 1,142,857 shares of Series
A Cumulative Perpetual Preferred Stock, par value $0.001 per share, of the Company (the “Series
A Preferred Stock”) to the Lenders, at an offering price of $17.50 per share, the same price as the public offering price
of the shares of Series A Preferred Stock in the underwritten public offering, in full satisfaction of the Company’s
obligations under the outstanding Notes in an aggregate amount of $20 million. The only remaining balance as of June 30, 2022
was $46 thousand in interest payable to the lenders.
NYDIG
Financing
| |
Maturity Dates | |
Interest Rate | |
June 30, 2022 | |
NYDIG Loans #1-11 | |
April 25, 2023
thru January 25, 2027 | |
12% thru 15% | |
$ | 14,387 | |
Less: principal payments | |
| |
| |
| 2,590 | |
Less: debt issuance costs | |
| |
| |
| 289 | |
Total outstanding debt | |
| |
| |
| 11,508 | |
Less: current portion of debt | |
| |
| |
| 7,526 | |
Total Long term debt | |
| |
| |
$ | 3,982 | |
On
December 30, 2021, Soluna MC Borrowing 2021-1 LLC (“Borrower”), an indirect wholly owned subsidiary of the Company
entered into a Master Equipment Finance Agreement (the “Master Agreement”) with NYDIG ABL LLC (“NYDIG”)
as lender, servicer and collateral agent. The Master Agreement outlined the framework for a financing up to approximately $14.4
million in aggregate equipment financing. Subsequently, the parties negotiated the specific terms of each equipment financing
transaction as well as the terms upon which the investors in our October 2021 Senior Secured Convertible Notes (the “Convertible
Investors”) would consent to the transactions contemplated by the Master Agreement.
On
January 14, 2022, the Borrower effected an initial drawdown under the Master Agreement in the aggregate principal amount of approximately
$4.6 million that bore interest at 14% and will be repaid over 24 months. On January 26, 2022, the Borrower had a subsequent drawdown
of $9.6 million. As part of the transactions contemplated under the Master Agreement, (i) the Company’s indirect wholly
owned subsidiary, Soluna MC LLC, formerly EcoChain Block LLC (“Guarantor”), which is the owner of 100% of the equity
interests of Borrower, executed a Guaranty Agreement in favor of NYDIG, as lender, dated as of December 30, 2021 (the “Guaranty
Agreement”), (ii) Borrower has granted a lien on, and security interest in, all of its assets to NYDIG, as collateral agent,
(iii) Guarantor entered into an equipment financing arrangement on assets purchased with the borrowed funds, (iv) Borrower will
borrow from NYDIG the loans as forth in certain loan schedules (the “Specified Loans”), and (v) Borrower has executed
a Digital Asset Account Control Agreement (the “ACA Wallet Agreement”) with NYDIG, as collateral agent and secured
party, and NYDIG Trust Company LLC, as custodian, dated as of December 30, 2021, as well as such other agreements related to the
foregoing as mutually agreed (collectively, the “NYDIG Transactions”).
In
connection with the NYDIG Transactions, on January 13, 2022, the Company entered into a Consent and Waiver Agreement, dated as
of January 13, 2022 (the “Consent”), with the Convertible Investors, in connection with the SPA, pursuant to which
the Convertible Investors agreed to waive any lien on, and security interest in, certain
assets, provided various contingencies are fulfilled, and each Investor who acquired on the Closing Date Notes having a
principal amount of not less than $3,000,000 agreed to waive its rights under Section 4.17 of the SPA to participate in Subsequent
Financings with respect to the NYDIG Transactions and any additional loans under the MEFA that only finance the purchase of equipment
from NYDIG, in order to consent to the NYDIG Transactions. Pursuant to the Consent, the Investors also waived the current requirement
of the SPA and the other Transaction Documents (collectively, the “SPA Documents”) that the Borrower become an Additional
Debtor (as defined in the Security Agreement) and execute an Additional Debtor Joinder (as defined in the Security Agreement)
for so long as the Specified Loans are outstanding, and NYDIG not entering into a subordination or intercreditor agreement with
respect to the Guaranty. Further, pursuant to the Consent, the Purchasers waived the right to accelerate the Maturity Date of
the Notes and the right to charge a default rate of interest on such Notes, in each case, with respect to certain changes in names
of, and jurisdiction of incorporation, of the Debtors (as defined in the SPA Documents), which waiver does not waive any other
Event of Default (as defined in any of the SPA Documents), known or unknown, as of the date of Consent.
Promptly
after the date of the Consent, the Company issued warrants to purchase up to 85,000 shares of common stock to the Convertible
Investor holding the largest outstanding principal amount of Notes as of the date of the Consent. Such warrants are substantially
in form similar to the other Warrants held by the Convertible Investors. Such warrants are exercisable for three years from the
date of the Consent at an exercise price per share of the Company’s common stock, equal to 130% of the closing price per
share of the common stock as of the date of the Consent.
Line
of Credit
On
September 13, 2021, the Company entered into a $1.0 million unsecured line of credit with KeyBank National Association, that will,
among other things, allow the Company to request loans and to use the proceeds of such loans for working capital and other general
corporate purposes. The line of credit may be drawn at the discretion of the Company, and bears interest at a rate of Prime +
0.75% per annum (5.5% interest rate as of June 30, 2022). Accrued interest is due monthly and principal is due in full following
lender’s demand. As of June 30, 2022 and December 31, 2021, the entire line of credit of $1.0 million was drawn and outstanding.
Preferred
Stock
As
of August 15, 2022, the Company has two series of preferred stock outstanding: the
Series A Preferred Stock, with a $25.00 liquidation preference; and the Series B Convertible
Preferred Stock, par value $0.001 per share, with a stated value equal to $100.00
(the “Series B Preferred Stock”). As of June 30, 2022 and December 31, 2021, there were 3,061,245 and 1,252,299
shares of Series A Preferred Stock issued and outstanding, respectively, and no shares of Series
B Preferred Stock issued and outstanding.
Common
Stock
The
Company has one class of common stock, par value $0.001. Each share of the Company’s common stock is entitled to one vote
on all matters submitted to stockholders. As of June 30, 2022, and December 31, 2021, there were 14,104,145 and 13,754,206 shares
of common stock issued and outstanding, respectively.
Dividends
Pursuant
to the Certificate of Designations, Preferences and Rights of 9.0% Series A Cumulative Perpetual Preferred Stock of the Company,
dividends, when, as and if declared by the Board (or a duly authorized committee of the Board), will be payable monthly in arrears
on the final day of each month, beginning August 31, 2021. During the three and six months ended June 30, 2022, the Board declared
and paid the Company aggregate dividends on the shares of Series A Preferred Stock of approximately $1.4 million and $2.1 million,
respectively.
Reservation
of Shares
The
Company had reserved shares of common stock for future issuance as follows as of June 30, 2022:
| |
| | |
Stock options outstanding | |
| 898,600 | |
Restricted stock units outstanding | |
| 773,861 | |
Warrants outstanding | |
| 3,217,315 | |
Common stock available for future equity awards or issuance of options | |
| 524,449 | |
Number of common shares reserved | |
| 5,414,225 | |
Income
(Loss) per Share
The
Company computes basic income (loss) per common share by dividing net income (loss) by the weighted average number of common shares
outstanding during the reporting period. Diluted income (loss) per share reflects the potential dilution, if any, computed by
dividing income (loss) by the combination of dilutive common stock equivalents, comprised of shares issuable under outstanding
investment rights, warrants and the Company’s stock-based compensation plans, and the weighted average number of shares
of common stock outstanding during the reporting period. Dilutive common stock equivalents include the dilutive effect of in-the-money
stock options, which are calculated based on the average share price for each period using the treasury stock method. Under the
treasury stock method, the exercise price of a stock option and the amount of compensation cost, if any, for future service that
the Company has not yet recognized are assumed to be used to repurchase shares in the current period.
The
Company notes as continuing operations was in a Net loss position for the three and six months ended June 30, 2022 and 2021, as
such basic and diluted Earnings-per-share (“EPS”) is the same amount as continuing operations acts as the control
amount in which would cause antidilution. Not included in the computation of earnings per share, assuming dilution, for the three
and six months ended June 30, 2022, were options to purchase 898,600 shares of the Company’s common stock, 773,861 nonvested
restricted stock units, 3,217,315 outstanding warrants not exercised, and 1,479,908 shares of convertible notes outstanding. These
potentially dilutive items were excluded because the calculation of incremental shares resulted in an anti-dilutive effect.
Not
included in the computation of earnings per share, assuming dilution, for the three and six months ended June 30, 2021, were options
to purchase 1,010,050 shares of the Company’s common stock and 15,000 restricted stock units of the Company’s common
stock. These potentially dilutive items were excluded because the Company incurred a loss during the period and their inclusion
would be anti-dilutive.
| 10. | Commitments
and Contingencies |
Commitments:
Leases
The
Company determines whether an arrangement is a lease at inception. The Company and our subsidiaries have operating leases for
certain manufacturing, laboratory, office facilities and certain equipment. The leases have remaining lease terms of less than
one year to less than five years. Our lease agreements do not contain any material residual value guarantees or material restrictive
covenants. As of June 30, 2022 and December 31, 2021, the Company had no assets recorded under finance leases.
Lease
expense for these leases is recognized on a straight-line basis over the lease term. For the three and six months ended June 30,
2022 and 2021, total lease costs are comprised of the following:
| |
|
|
|
|
|
| | |
|
|
|
|
|
| |
(Dollars in thousands) | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Operating lease cost | |
$ | 50 | | |
$ | 38 | | |
$ | 100 | | |
$ | 76 | |
Short-term lease cost | |
| — | | |
| — | | |
| — | | |
| — | |
Total net lease cost | |
$ | 50 | | |
$ | 38 | | |
$ | 100 | | |
$ | 76 | |
Short-term
leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and
does not record a related lease asset or liability for such leases.
Other
information related to leases was as follows:
(Dollars in thousands, except lease term and discount rate) (Dollars in thousands) | |
Six Months Ended
June 30, 2022 | |
| |
| |
Weighted Average Remaining Lease Term (in years): | |
| | |
Operating leases | |
| 1.88 | |
| |
| | |
Weighted Average Discount Rate: | |
| | |
Operating leases | |
| 3.83 | % |
(Dollars in thousands, except lease term and discount rate) (Dollars in thousands) | |
Six Months Ended
June 30, 2022 | | |
Six Months Ended
June 30, 2021 | |
| |
| | |
| |
| |
| | |
| |
Supplemental Cash Flows Information: | |
| | | |
| | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows from operating leases | |
$ | 98 | | |
$ | 73 | |
| |
| | | |
| | |
Non-Cash Activity Right-of-use assets obtained in exchange for lease obligations: | |
| | | |
| | |
Operating leases | |
$ | 13 | | |
$ | — | |
Maturities
of noncancellable operating lease liabilities are as follows for the six months ending June 30:
(Dollars in thousands) | |
| |
| |
2022 | |
2022 (remainder of year) | |
$ | 103 | |
2023 | |
| 164 | |
2024 | |
| 84 | |
Total lease payments | |
| 351 | |
Less: imputed interest | |
| (13 | ) |
Total lease obligations | |
| 338 | |
Less: current obligations | |
| (196 | ) |
Long-term lease obligations | |
$ | 142 | |
As
of June 30, 2022, there were no additional operating lease commitments that had not yet commenced.
Contingencies:
Legal
We
are subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. When applicable, we accrue
for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted
as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.
The
Company has been named as a party in the December 19, 2019 United States Environmental Protection Agency (“EPA”) Demand
Letter regarding the Malta Rocket Fuel Area Superfund Site (“Site”) located in Malta and Stillwater, New York in connection
with an alleged release of hazardous materials into the environment. The EPA is seeking reimbursement of response costs from all
named parties in the amount of approximately $358 thousand plus interest in connection with the investigation and disposal activities
associated with the various drum caches discovered at the Site, issuance of the Explanation of Significant Differences (“ESD”)
of the Site, and implementation of the work contemplated by the ESD. The Company considers the likelihood of a material adverse
outcome to be remote and does not currently anticipate that any expense or liability it may incur as a result of these matters
in the future will be material to the Company’s financial condition.
| 11. | Related
Party Transactions |
MeOH
Power, Inc.
On
December 18, 2013, MeOH Power, Inc. and the Company executed a Senior Demand Promissory Note (the “Note”) in the amount
of $380 thousand to secure the intercompany amounts due to the Company from MeOH Power, Inc. upon the deconsolidation of MeOH
Power, Inc. Interest accrues on the Note at the Prime Rate in effect on the first business day of the month, as published in the
Wall Street Journal. At the Company’s option, all or part of the principal and interest due on this Note may be converted
to shares of common stock of MeOH Power, Inc. at a rate of $0.07 per share. Interest began accruing on January 1, 2014. The Company
recorded a full allowance against the Note. As of June 30, 2022 and December 31, 2021, $334 thousand and $329 thousand, respectively,
of principal and interest are available to convert into shares of common stock of MeOH Power, Inc. Any adjustments to the allowance
are recorded as miscellaneous expense during the period incurred.
Legal
Services
During
the three and six months ended June 30, 2022, the Company incurred $1 thousand and $2 thousand, respectively, to Couch White,
LLP for legal services associated with contract review. During the three and six months ended June 30, 2021, the Company incurred
$7 thousand and $15 thousand, respectively. A partner at Couch White, LLP is an immediate family member of one of our Directors.
HEL
Transactions
On
January 8, 2020, the Company formed SCI as a wholly-owned subsidiary to pursue a new business line focused on cryptocurrency and
the blockchain ecosystem. In connection with this new business line, SCI established a facility to mine cryptocurrencies and integrate
with the blockchain network. Pursuant to an Operating and Management Agreement dated January 13, 2020, by and between SCI and
HEL, HEL assisted the Company, and later SCI, in developing, and is now operating, the cryptocurrency mining facility. The Operating
and Management Agreement requires, among other things, that HEL provide project sourcing services to SCI, including acquisition
negotiations and establishing an operating model, investments/financing timeline, and a project development path, as well as developmental
and operational services, as directed by SCI, with respect to the applicable cryptocurrency mining facility in exchange for SCI’s
payment to HEL of a one-time management fee ranging from $65,000 to $350,000 and profit-based success payments in the event that
SCI achieves explicit profitability thresholds. These agreements also provided that once aggregate earnings before interest, taxes,
depreciation, and amortization of the applicable mine exceeded the total amount of funding provided by SCI to HEL (whether pursuant
to the applicable agreement or otherwise) for the purposes of creating, developing, assembling, and constructing the mine, HEL
was entitled to ongoing success payments of 20.0% of the earnings before interest, taxes, depreciation, and amortization of the
mine. $237 thousand of payments had been made for fiscal year 2021, as certain Thresholds have been achieved.
Pursuant
to the Operating and Management Agreement, during the developmental phase of the cryptocurrency mining facility, which ended on
March 14, 2020, HEL gathered and analyzed information with respect to SCI’s cryptocurrency mining efforts and produced budgets,
financial models, and technical and operational plans, including a detailed business plan, that it delivered to SCI in March 2020
(the “Deliverables”), all of which was designed to assist with the efficient implementation of a cryptocurrency mine.
The agreement provided that, following SCI’s acceptance of the Deliverables, which occurred on March 23, 2020, HEL, on behalf
of SCI, would commence operations of the cryptocurrency mine in a manner that would allow SCI to mine and sell cryptocurrency.
In that regard, on May 21, 2020, SCI acquired the intellectual property of GigaWatt, Inc. (“GigaWatt”) and certain
other property and rights of GigaWatt associated with GigaWatt’s operation of a crypto-mining operation located in Washington
State. The acquired assets formed the cornerstone of SCI’s current cryptocurrency mining operation. SCI sells for U.S. dollars
all cryptocurrency it mines and is not in the business of accumulating cryptocurrency on our balance sheet for speculative gains.
On October 22, 2020, SCI loaned HEL $112 thousand to acquire additional assets from the bankruptcy trustee for GigaWatt’s
assets. On the same day, HEL transferred title of the assets to SCI, which under the terms thereof paid off the note.
On
November 19, 2020, SCI and HEL entered into a second Operating and Management Agreement related to a potential location for a
cryptocurrency mine in the Southeast United States. In accordance with the terms of the agreement, which are consistent with
the first Operating and Management agreement noted above, HEL is entitled to ongoing success payments of 20.0% of the earnings
before interest, taxes, depreciation and amortization of the mine. SCI paid HEL $221 thousand for the fiscal year ended December
31, 2021 related to the one-time fees.
On
December 1, 2020, SCI and HEL entered into a third Operating and Management Agreement with respect to a potential location for
a cryptocurrency mine in the Southwestern United States. In accordance with the terms of the agreement, which are consistent with
the first Operating and Management agreement noted above, HEL is entitled to ongoing success payments of 20.0% of the earnings
before interest, taxes, depreciation and amortization of the mine. SCI did not make any payments in 2021 as this target location
did not meet the business requirements to continue pursuing the potential acquisition, and as a result SCI did not make any further
payments to HEL under this agreement.
On
February 8, 2021, SCI and HEL entered into a fourth Operating and Management Agreement related to a potential location for a cryptocurrency
mine in the Southeast United States. In accordance with the terms of the agreement, which are consistent with the first Operating
and Management agreement noted above, HEL is entitled to ongoing success payments of 20.0% of the earnings before interest, taxes,
depreciation and amortization of the mine. SCI paid HEL $544 thousand for the fiscal year ended December 31, 2021 in relation
to the one-time fees.
For
the fiscal year ended December 31, 2021, the Company paid $245 thousand in expense reimbursements and other related fees in addition
to the Operating and Management payments.
Each
Operating and Management Agreement, all of which were terminated effective November 5, 2021, pursuant to the Termination Agreement,
among other things, required that HEL provide project sourcing services to SCI, including acquisition negotiations and establishing
an operating model, investments/financing timeline, and project development path. The Company made one final payment
to HEL in 2022 of $50 thousand to settle all final Operating and Management Agreements.
Simultaneously
with entering into the initial Operating and Management Agreement with HEL, the Company, pursuant to a purchase agreement it entered
into with HEL, made a strategic investment in HEL by purchasing 158,730 Class A Preferred Shares of HEL for an aggregate purchase
price of $500 thousand on January 13, 2020. After acceptance of the Deliverables, as required by the terms of the purchase agreement,
on March 23, 2020, the Company purchased an additional 79,365 Class A Preferred Shares of HEL for an aggregate purchase price
of $250 thousand. The Company also has the right, but not the obligation, to purchase additional equity securities of HEL and
its subsidiaries (including additional Class A Preferred Shares of HEL) if HEL secures certain levels or types of project financing
with respect to its own wind power generation facilities. Each preferred share may be converted at any time and without payment
of additional consideration, into Common shares. The Company has additionally entered into a Side Letter Agreement, dated January
13, 2020, with HEL Technologies Investment I, LLC, a Delaware limited liability company that owns, on a fully diluted basis, 57.9%
of HEL and is controlled by a Brookstone Partners-affiliated director of the Company. The Side Letter Agreement provides for the
transfer to the Company, without the payment of any consideration by the Company, of additional Class A Preferred Shares of HEL
in the event HEL issues additional equity below agreed-upon valuation thresholds.
As
discussed above, on October 29, 2021, we completed the Soluna Callisto acquisition pursuant to the Merger Agreement. The purpose
of the transaction was for SCI to acquire substantially all of the assets (other than those assets physically located in Morocco)
formerly held by HEL, which assets consisted of SCI’s existing pipeline of certain cryptocurrency mining projects that HEL
previously transferred to SCI, which was formed expressly for this purpose, and to provide SCI with the opportunity to directly
employ or retain the services of four individuals whose services it had retained through HEL prior to the merger. As a result
of the merger, each share of common stock of Soluna Callisto issued and outstanding immediately prior to the effective time of
the merger, other than shares owned by the Company or any of our subsidiaries, was cancelled and converted into the right to receive
a proportionate share of the Merger Consideration.
In
connection with the Soluna Callisto acquisition, effective as of October 29, 2021, upon
and subject to the terms and conditions of the Termination Agreement, on November 5, 2021: (1) the existing Operating and Management
Agreements between HEL and SCI were terminated in all respects; and (2)(A) SCI paid HEL $725,000, (B) SHI issued to HEL the Termination
Shares, and (C) HEL and SHI entered into an Amended and Restated Contingent Rights Agreement that, among other things, amended
the existing Contingent Rights Agreement by and between HEL and SHI, dated January 13, 2020, to provide SHI the right to invest
directly in certain cryptocurrency mining opportunities being pursued by HEL. SHI filed a registration statement with the SEC
to register the resale of the Termination Shares on February 14, 2022.
Please
see Note 5 for additional information regarding the Soluna Callisto acquisition and related transactions.
Several
of HEL’s equity holders are affiliated with Brookstone Partners, the investment firm that holds an equity interest in the
Company through Brookstone Partners Acquisition XXIV, LLC. The Company’s two Brookstone-affiliated directors also serve
as directors and, in one case, as an officer, of HEL and also have ownership interest in HEL. In light of these relationships,
the various transactions by and between the Company and SCI, on the one hand, and HEL, on the other hand, were negotiated on behalf
of the Company and SCI via an independent investment committee of the Board and separate legal representation. The transactions
were subsequently unanimously approved by both the independent investment committee and the full Board.
Five
of the Company’s directors have various affiliations with HEL.
Michael
Toporek, our Chief Executive Officer and a director, owns (i) 90% of the equity of Soluna Technologies Investment I, LLC, which
owns 57.9% of HEL and (ii) 100% of the equity of MJT Park Investors, Inc., which owns 3.1% of HEL, in each case on a fully-diluted
basis. Mr. Toporek does not own directly, or indirectly, any equity interest in Tera Joule, LLC, which owns 9.2% of HEL; however,
as a result of his 100% ownership of Brookstone IAC, Inc., which is the manager of Tera Joule, LLC, he has dispositive power over
the equity interests that Tera Joule owns in HEL.
In
addition, one of the Company’s directors, Matthew E. Lipman, serves as a director and currently acting as President of HEL.
Mr. Lipman does not directly own any equity interest in Tera Joule, LLC, which owns 9.2% of HEL; however, as a result of his position
as a director and officer of Brookstone IAC, Inc., which is the manager of Tera Joule, LLC, he has dispositive power over the
equity interests that Tera Joule owns in HEL. As a result, the approximate dollar value of the amount of Mr. Toporek’s and
Mr. Lipman’s interest in the Company’s transactions with HEL for the three and six months ended June 30, 2022 was
$0 and $0.
John
Belizaire and John Bottomley, who were elected to the Board upon the effective time of SCI’s acquisition of Soluna Callisto,
serve as directors of HEL. In addition, Mr. Belizaire is the beneficial owner of 1,317,567 shares of common stock of HEL and 102,380
Class Seed Preferred shares, which are convertible into 86,763 shares of common stock of HEL. These interests give Mr. Belizaire
an ownership of 10.54% in HEL. Mr. Belizaire also owns an interest in HEL indirectly through his 5.0139% interest of Tera Joule,
LLC’s 965,945 Class Seed Preferred shares, which are convertible into 818,596 shares of common stock of HEL. Mr. Bottomley
is the beneficial owner of 96,189, or approximately 0.72%, of the outstanding shares of common stock of HEL.
Finally,
William P. Phelan, Chairman of the Board, served as an observer on HEL’s board of directors on behalf of the Company through
March 2021.
The
Company’s investment in HEL is carried at the cost of investment and was $750 thousand as of June 30, 2022. The Company
owned approximately 1.79% of HEL, calculated on a converted fully-diluted basis, as of June 30, 2022. The Company may enter into
additional transactions with HEL in the future.
| 12. | Stock-Based
Compensation |
2021
Plan
The
Company’s 2021 Stock Incentive Plan was initially adopted by the Board on February 12, 2021 and approved by the stockholders
on March 25, 2021. The 2021 Plan was amended and restated effective as of October 29, 2021 and as of May 27, 2022 (as amended
and restated, the “2021 Plan”). The 2021 Plan authorizes the Company to issue shares of common stock upon the exercise
of stock options, the grant of restricted stock awards, and the conversion of restricted stock units (collectively, the “Awards”).
The Compensation Committee has full authority, subject to the terms of the 2021 Plan, to interpret the 2021 Plan and establish
rules and regulations for the proper administration of the 2021 Plan. Subject to certain adjustments as provided in the 2021 Plan,
the maximum aggregate number of shares of the Company’s common stock that may be issued under the 2021 Plan (i) pursuant
to the exercise of stock options, (ii) as unrestricted or restricted stock, and (iii) in settlement of restricted stock units
shall be limited to (A) during the Company’s fiscal year ending December 31, 2021, 1,460,191 shares of common stock, which
is equal to 15% of the number of shares of common stock outstanding on January 1, 2021, (B) for the period from January 1, 2022
to June 30, 2022, fifteen percent (15%) of the number of shares of common stock outstanding as of January 3, 2022, which was the
first trading day of 2022, and (C) beginning with the third quarter of the Company’s fiscal year ending December 31, 2022
(or July 1, 2022), 15% of the number of shares of common stock outstanding as of the first trading day of each quarter. Subject
to certain adjustments as provided in the 2021 Plan, (i) shares of common stock subject to the 2021 Plan shall include shares
of common stock which reverted back to the 2021 Plan pursuant to the paragraph below in a prior quarter or fiscal year, as applicable,
and (ii) the number of shares of common stock that may be issued under the 2021 Plan may never be less than the number of shares
of common stock that are then outstanding under (or available to settle existing) Award grants.
In
the event that, prior to the date on which the 2021 Plan shall terminate, any Award granted under the 2021 Plan expires unexercised
or unvested or is terminated, surrendered, or cancelled without the delivery of shares of common stock, or any Awards are forfeited
back to the Company, then the shares of common stock subject to such Award may be made available for subsequent Awards under the
terms of the 2021 Plan.
During
the three months ended June 30, 2022, the Company awarded 58,442 restricted stock units under the 2021 Plan, valued at $4.96 through
$10.85 per share based on the closing market price of the Company’s common stock on the date of the grant, with a weighted
average fair value of $7.55. 58,442 shares of common stock subject to vest as follows: 25% of such restricted stock
units shall vest on the first anniversary, and the remaining shares shall vest ratably over the succeeding 36-month period, with
(1/36) of such vesting on the last day of each such calendar month.
During
the six months ended June 30, 2022, the Company awarded 480,207 restricted stock units under the 2021 Plan, valued at $4.96 through
$10.85 per share based on the closing market price of the Company’s common stock on the date of the grant, with a weighted
average fair value of $10.03. 306,500 shares of common stock subject vesting as follows: 37% vests 12 months from the
date of the grant, 33% vests 24 months from the date of the grant, and 30% vests 36 months from the date of the grant, in each
case subject to the reporting person remaining in the service of the issuer on each such vesting date. 126,777 shares of
common stock subject to vest as follows: 25% of such restricted stock units shall vest on the first anniversary, and the
remaining shares shall vest ratably over the succeeding 36-month period, with (1/36) of such vesting on the last day of each such
calendar month. 46,498 shares of common stock are performance-based awards that will vest in the following year in January
based on approval of the Board based on achievement of key performance objectives. The remaining 432 shares of common stock are
performance-based awards that were granted and vested during January 2022 as approved by the Board based on the achievement of
key performance objectives during the prior year.
During
the three months ended June 30, 2021, the Company granted options to purchase 686,200 shares of the Company’s common stock
under the 2021 Plan, of which 186,200 shares immediately vested with an exercise price of $7.52 per share, based on the closing
price plus 10% of the Company’s common stock on the date of the grant. The remaining 500,000 shares will vest in equal installments
of 33 1/3% on each of the three anniversaries of the date of grant, the exercise price of these awards are $6.84 per share. Using
a Black-Scholes Option Pricing Model, the weighted average fair value of these options was $4.86 per share and was estimated at
the date of grant.
During
the six months ended June 30, 2021, the Company granted options to purchase 716,200 shares of the Company’s common stock
under the 2021 Plan, of which 186,200 shares immediately vested with an exercise price of $7.52 per share, based on the closing
price plus 10% of the Company’s common stock on the date of the grant. The remaining 530,000 shares will vest in equal installments
of 33 1/3% on each of the three anniversaries of the date of the grant. The weighted exercise price of these options is $7.08
per share and was based on the closing market price of the Company’s common stock on the dates of grant. Using a Black-Scholes
Option Pricing Model, the weighted average fair value of these options was $5.04 per share and was estimated at the date of grant.
During
the six months ended June 30, 2021, the Company awarded 47,500 shares of restricted common stock under the 2021 Plan, valued at
$11.10 per share based on the closing market price of the Company’s common stock on the date of the award. The shares will
be restricted for one year, with the entire award vesting on the first anniversary of the award date.
| 13. | Effect
of Recent Accounting Updates |
Accounting
Updates Not Yet Effective
Changes
to U.S. GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of accounting standard
updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considered
the applicability and impact of all ASUs. ASUs not mentioned below were assessed and determined to be either not applicable or
are expected to have minimal impact on our consolidated financial position or results of operations.
In
June 2016, the FASB issued ASU 2016-13 (Financial Instruments - Credit Losses (Topic 326)) and its subsequent amendments to the
initial guidance within ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2020-02, respectively (collectively,
Topic 326). Topic 326 changes how entities will measure credit losses for most financial assets and certain other instruments
that are not accounted for at fair value through net income. This standard replaces the existing incurred credit loss model and
establishes a single credit loss framework based on a current expected credit loss model for financial assets carried at amortized
cost, including loans and held-to- maturity debt securities. The current expected loss model requires an entity to estimate credit
losses expected over the life of the credit exposure upon initial recognition of that exposure when the financial asset is originated
or acquired, which will generally result in earlier recognition of credit losses. This standard also requires expanded credit
quality disclosures. For available-for-sale debt securities, entities will be required to record allowances rather than reduce
the carrying amount, as they do today under the other-than-temporary impairment model. This standard also simplifies the accounting
model for purchased credit-impaired debt securities and loans. This standard will affect loans, debt securities, trade receivables,
net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded
from the scope that have the contractual right to receive cash. ASU 2018-19 clarifies that receivables arising from operating
leases are accounted for using lease guidance and not as financial instruments. ASU 2019-04 clarifies
that equity instruments without readily determinable fair values for which an entity has elected the measurement alternative should
be remeasured to fair value as of the date that an observable transaction occurred. ASU 2019-05 provides an option to irrevocably
elect to measure certain individual financial assets at fair value instead of amortized cost. This standard should be applied
on either a prospective transition or modified-retrospective approach depending on the subtopic. This standard will be effective
for the Company for annual and interim reporting periods beginning on or after December 15, 2022, and while early adoption is
permitted, the Company does not expect to elect that option. The Company is currently evaluating the impact of the adoption of
this standard on its consolidated financial statements, including assessing and evaluating assumptions and models to estimate
losses. Upon adoption of this standard on January 1, 2023, the Company will be required to record a cumulative effect adjustment
to retained earnings for the impact as of the date of adoption. The impact will depend on the Company’s portfolio composition
and credit quality at the date of adoption, as well as forecasts at that time.
There
have been no other significant changes in the Company’s reported financial position or results of operations and cash flows
as a result of our adoption of new accounting pronouncements or changes to our significant accounting policies that were disclosed
in its consolidated financial statements for the fiscal year ended December 31, 2021 (the “2021 Fiscal Year”).
|
14. |
Discontinued Operations |
As
described in Note 1, the Company entered into a Stock Purchase Agreement with Purchaser, pursuant to which the Company sold on
April 11, 2022 all of the issued and outstanding shares of capital stock of its wholly-owned subsidiary, MTI Instruments for approximately
$9.0 million in cash, net of transaction costs. As of June 30, 2022, our Instrumentation business segment was classified as discontinued
operations in our financial statements for all periods presented. Our consolidated balance sheets and consolidated statements
of operations report discontinued operations separate from continuing operations. Our consolidated statements of equity and statements
of cash flows combine continuing and discontinuing operations.
Set
forth below are the results of the discontinued operations:
| |
|
|
|
|
|
| | |
|
|
|
|
|
| |
(Dollars in thousands) | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
2021 (*) | | |
2022 | | |
2021 (*) | |
| |
| | |
| | |
| | |
| |
Product revenue | |
$ | 160 | | |
$ | 1,647 | | |
$ | 1,799 | | |
$ | 2,984 | |
Cost of sales | |
| 166 | | |
| 502 | | |
| 728 | | |
| 954 | |
Research and development | |
| 30 | | |
| 406 | | |
| 398 | | |
| 792 | |
General and administrative expenses | |
| 89 | | |
| 526 | | |
| 573 | | |
| 1,066 | |
Other income | |
| - | | |
| (4 | ) | |
| - | | |
| (5 | ) |
(Loss) income from discontinued operations before gain on disposal and income taxes | |
| (125 | ) | |
| 217 | | |
| 100 | | |
| 177 | |
Pretax gain on sale of MTI Instruments | |
| 7,602 | | |
| - | | |
| 7,602 | | |
| - | |
Deferred tax benefit | |
| 70 | | |
| - | | |
| 70 | | |
| - | |
Net income from discontinued operations | |
$ | 7,547 | | |
$ | 217 | | |
$ | 7,772 | | |
$ | 177 | |
(*) | | Reclassified to
conform with the current period presentation |
The
following table summarizes information about assets and liabilities from discontinued operations held for sale as of June 30,
2022 and December 31, 2021:
(Dollars in thousands) | |
| | |
| |
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Assets held for sale from discontinued operations: | |
| | | |
| | |
Accounts receivable | |
$ | - | | |
$ | 1,189 | |
Inventories | |
| - | | |
| 964 | |
Prepaid expenses and other current assets | |
| - | | |
| 54 | |
Property, plant and equipment, net | |
| - | | |
| 92 | |
Deferred tax assets, net | |
| - | | |
| 101 | |
Operating lease right-of-use assets | |
| - | | |
| 628 | |
Total Assets held for sale from discontinued operations | |
$ | - | | |
$ | 3,028 | |
| |
| | | |
| | |
Liabilities held for sale from discontinued operations: | |
| | | |
| | |
Accounts payable | |
$ | - | | |
$ | 136 | |
Accrued liabilities | |
| - | | |
| 479 | |
Operating lease liability | |
| - | | |
| 628 | |
| |
| | | |
| | |
Total Liabilities held for sale from discontinued operations | |
$ | - | | |
$ | 1,243 | |
As
described in Note 1, the Company entered into a Stock Purchase Agreement with Purchaser, pursuant to which the Company sold on
April 11, 2022 all of the issued and outstanding shares of capital stock of our wholly-owned subsidiary, MTI Instruments for an
all-cash purchase price of $10.75 million, subject to working capital and certain other adjustments as set forth in the Stock
Purchase Agreement. The purchase price did not include specified debt of MTI Instruments, which is the responsibility of the Company.
This debt was transferred to the Purchaser at the date of Sale and is included in the closing balance sheet as shown below, which
resulted in a reduction in the consideration payable to the Company.
The
following table presents the gain associated with the sale.
(Dollars in thousands) | |
| |
| |
As of April 11, | |
| |
2022 | |
Consideration received | |
$ | 10,750 | |
Plus: closing cash | |
| 1 | |
Less: transaction costs | |
| (998 | ) |
Less: closing indebtedness | |
| (483 | ) |
Plus: new working capital adjustments | |
| (40 | ) |
Adjusted consideration received | |
| 9,230 | |
| |
| | |
Cash | |
| 1 | |
Accounts receivable, net | |
| 1,119 | |
Inventories | |
| 888 | |
Prepaid expense and other current assets | |
| 42 | |
Operating lease right-of-use assets | |
| 579 | |
Deferred tax assets | |
| 171 | |
Property, plant and equipment, net | |
| 76 | |
Total assets | |
| 2,876 | |
| |
| | |
Accounts payable | |
| 122 | |
Accrued liabilities | |
| 547 | |
Operating lease liability | |
| 579 | |
Total liabilities | |
| 1,248 | |
| |
| | |
Net assets transferred | |
| 1,628 | |
| |
| | |
Gain on sale | |
$ | 7,602 | |
The
Company applies ASC 280, Segment Reporting, in determining its reportable segments. As of June 30, 2022, the Company
had two reportable segments in Continuing Operations: Cryptocurrency Mining and Data Center Hosting. The Company notes
that previously there was an additional segment: Test and Measurement Instrumentation, however as discussed in Notes 1, 14, and 15,
the Company sold MTI Instruments in April 2022, and therefore has classified as discontinued operations. The guidance requires
that segment disclosures present the measure(s) used by the Chief Operating Decision Maker (“CODM”) to decide how
to allocate resources and for purposes of assessing such segments’ performance. The Company’s CODM is comprised of
several members of its executive management team who use revenue and cost of revenues of both reporting segments to assess the
performance of the business of our reportable operating segments.
No
operating segments have been aggregated to form the reportable segments. The Company does not allocate all assets to the reporting
segments as these are managed on an entity-wide basis. Therefore, the Company does not separately disclose the total assets of
its reportable operating segments.
The
Cryptocurrency Mining segment generates revenue from the cryptocurrency the Company earns through its mining activities. The Data
Center Hosting segment generates revenue from contracts for the provision/consumption of electricity and operation of the data
center from the Company’s high performance computing facility in Calvert City, Kentucky.
For
the three months ended June 30, 2022 and 2021, respectively, approximately 6% and 60% of the Company’s cryptocurrency mining
revenue was generated from our operations in East Wenatchee, Washington, 41% and 40% from our operations in Calvert City, Kentucky
and 53% and 0% from our operations in Murray, Kentucky. For the six months ended June 30, 2022 and 2021, respectively, approximately
6% and 71% of the Company’s cryptocurrency mining revenue was generated from our operations in East Wenatchee, Washington,
43% and 29% from our operations in Calvert City, Kentucky and 51% and 0% from our operations in Murray, Kentucky. 100% of the
Company’s data center hosting revenue was generated from the facility in Calvert City, Kentucky from hosting with two customers
for the three and six months ended June 30, 2022.
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.
Non-cash items of depreciation and amortization are included within both costs of sales and general and administrative
expenses.
The
following table details revenue and cost of revenues for the Company’s reportable segments for three and six months ended
June 30, 2022 and 2021, and reconciles to net loss on the consolidated statements of operations :
(Dollars in thousands) | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Reportable segment revenue: | |
| | | |
| | | |
| | | |
| | |
Cryptocurrency mining revenue | |
$ | 7,497 | | |
$ | 1,657 | | |
$ | 15,309 | | |
$ | 2,652 | |
Data hosting revenue | |
| 1,179 | | |
| - | | |
| 2,683 | | |
| - | |
Total segment and consolidated revenue | |
| 8,676 | | |
| 1,657 | | |
| 17,992 | | |
| 2,652 | |
Reportable segment cost of revenue: | |
| | | |
| | | |
| | | |
| | |
Cost of cryptocurrency mining revenue, inclusive of depreciation | |
| 9,134 | | |
| 545 | | |
| 16,854 | | |
| 875 | |
Cost of data hosting revenue | |
| 975 | | |
| - | | |
| 2,114 | | |
| - | |
Total segment and consolidated cost of revenues | |
| 10,109 | | |
| 545 | | |
| 18,968 | | |
| 875 | |
Reconciling items: | |
| | | |
| | | |
| | | |
| | |
General and administrative expenses | |
| 7,249 | | |
| 2,503 | | |
| 14,504 | | |
| 3,799 | |
Impairment on fixed assets |
|
|
750 |
|
|
|
- |
|
|
|
750 |
|
|
|
- |
|
Interest expense | |
| 3,305 | | |
| - | | |
| 6,185 | | |
| - | |
Loss on sale of fixed assets | |
| 1,618 | | |
| - | | |
| 1,618 | | |
| - | |
Other income, net | |
| - | | |
| (3 | ) | |
| - | | |
| (8 | ) |
Income tax (benefit) expense from continuing operations | |
| ) | |
| | |
| ) | |
| |
Net loss from continuing operations | |
| (14,104 | ) | |
| (1,391 | ) | |
| (23,236 | ) | |
| (2,017 | ) |
Income before income tax from discontinued operations (including gain on sale of MTI Instruments of $7,602 for the three and six months ended June 30, 2022) | |
| 7,477 | | |
| 217 | | |
| 7,702 | | |
| 177 | |
Income tax benefit from discontinued operations | |
| | |
| - | | |
| | |
| - | |
Net income from discontinued operations | |
| 7,547 | | |
| 217 | | |
| 7,772 | | |
| 177 | |
Net loss | |
$ | (6,557 | ) | |
$ | (1,174 | ) | |
$ | (15,464 | ) | |
$ | (1,840 | ) |
| |
| | | |
| | | |
| | | |
| | |
Capital expenditures
| |
| 27,180 | | |
| 1,023 | | |
| 52,618 | | |
| 1,319 | |
Depreciation and amortization | |
| 7,914 | | |
| 149 | | |
| 14,611 | | |
| 225 | |
October
SPA Addendum
On
July 19, 2022, the Company entered into the Addendum to amend certain terms of the October SPA and the October Security Agreement.
Pursuant to the Addendum, among other things, the assets of the Company related to the Company’s development site in Texas which
secure the Company’s obligations under the October Security Agreement will be released in three tranches in connection with three
tranches of conversions or redemptions of the October Notes. In connection with the first tranche, $1,100,000 of October Notes
was converted to common stock between July 25, 2022 and August 1, 2022; in connection with the second tranche, $1,100,000 of October
Notes will be converted to common stock; and in connection with the third tranche, $1,100,000 of October Notes will be converted
to common stock (each, the “Required Conversion Amount”), in each case at the then in effect Conversion Price. Prior
to each conversion the Conversion Price of the Note will be reduced (but not increased) to a 20% discount to the 5-day volume-weighted
average price (“VWAP”) of the common stock. The Conversion Price for the first tranche is $3.75. In addition, the
October Purchasers may require the Company to redeem up to $2,200,000 worth of October Notes in connection with each tranche at
a rate of $1.20 for every $1.00 owed, less the amount of October Notes converted during such tranche, not including the Required
Conversion Amount if the October Purchasers are unable to convert out of such amount of the Notes in each tranche. Each tranche
is equal to $3,300,000 of the October Notes and the Addendum contemplates that at least $9,900,000 of the October Notes may be
reduced under the terms of the Addendum. The first tranche begins upon receipt of Nasdaq’s approval of the transaction (which
was received) and ends 50 trading days thereafter, the subsequent tranches will begin upon the later of five days after the previous
tranche and receipts of any necessary approvals of Nasdaq and the Company’s shareholders of the transaction and ends 45
trading days thereafter. The second and third tranches are subject to delay as set forth in the Addendum. The Company is required
to deposit up to $1,950,000 in an escrow account in connection with each tranche to satisfy any redemptions. The Company has undertaken
to obtain shareholder approval, if necessary under Nasdaq rules, to be able to complete the second and third tranches.
Pursuant
to the Addendum, the exercise price of the Class A Warrants and Class B Warrants and 85,000 warrants to purchase common stock
issued to the October Purchasers on January 13, 2022 was reduced to $9.50 a share. In addition, the Company agreed to exchange
the Class C Warrants for 296,013 shares of common stock, which exchanges were completed between July 25, 2022 and August 1, 2022.
Except
under certain circumstances, the Company is prohibited from engaging in any capital raising transactions without the consent of
the October Purchasers until the Company’s obligations under the October Security Agreement have been paid in full.
Series
B Convertible Preferred Stock Private Placement
Securities
Purchase Agreement
On
July 19, 2022, the Company entered into a Securities Purchase Agreement (the “Series B SPA”) with an accredited investor
(the “Series B Investor”) pursuant to which the Company issued to the Series B Investor 62,500 shares of Series B
Preferred Stock, for a purchase price of $5,000,000, on July 20, 2022 (the “Series B Closing”), which are initially
convertible into 1,155,268 shares of our common stock (the “Series B Conversion Shares”), at a price per share of
$5.41 (“Conversion Price”), a 20% premium to the close of the common stock on July 18, 2022, subject to adjustment
as set forth in the Certificate of Designation (as defined below) governing the terms of the Preferred Stock. In addition on July
19, 2022, the Company issued to the Series B Investor common stock purchase warrants (collectively, the “Series B Warrants”)
to purchase up to an aggregate of 1,000,000 shares of common stock at an initial exercise price of $10.00 per share of common
stock (the “Series B Warrant Shares” and collectively with the Series B Preferred Stock, the Series B Conversion Shares,
and the Series B Warrants, the “Series B Securities”). In addition, at the Series B Closing, the Investor delivered
to the Company a warrant to acquire 1,000,000 shares of common stock at an exercise price of $11.50 per share for cancellation.
Until
the earlier of (i) three years after the Series B Closing or (ii) if in excess of $500,000 of Series B Preferred Stock or at least
100,000 Series B Warrants remain outstanding, the Company agreed not to (a) issue any common stock, common stock equivalents,
preferred stock or other equity securities at a price that is less than the highest price per share of the Series B Securities,
(b) file any registration statement, with certain exceptions, or (c) enter into an equity line of credit or at the market offering.
In addition, the Company may buy out the rights of the Series B Investor under the preceding sentence for $10,000,000 less any
Profit (as defined in the Series B SPA) the Series B Investor has earned from the Series B Securities, including pursuant to any
amount paid for waiver under the following sentences. The Series B Investor has a right of first refusal with respect to the offerings
described in the first sentence of this paragraph for a period of three years beginning on the later of (i) January 1, 2023 and
(ii) the date the October Notes have been fully redeemed or converted. The Company can obtain the Series B Investor’s waiver
to the right of first refusal by delivering to the Series B Investor 10% of the amount raised by the Company in any such offering
in cash or in the same securities issued by the Company. The Series B Investor also has a right to participate in up to 35% of
any such offerings for the same three year period.
At
the written request of the Investor, at any time after the October Notes have been fully redeemed or converted and for a period
of one year thereafter, the Company agreed to file a registration statement to register the Series B Preferred Stock and the Series
B Conversion Shares.
The
conversion of the Series B Preferred Stock and the exercise of the Series B Warrants are each subject to beneficial ownership
limitations such that the Investor may not convert the Preferred Stock or exercise the Series B Warrants to the extent that such
conversion or exercise would result in the Investor being the beneficial owner in excess of 4.99% (or, upon election of such Series
B Investor, 9.99%) of the number of shares of the common stock outstanding immediately after giving effect to the issuance of
shares of common stock issuable upon such conversion or exercise, which beneficial ownership limitation may be increased or decreased
up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following
notice to the Company.
Certificate
of Designation
On
July 20, 2022, the Company filed a Certificate of Designations of Preferences, Rights and Limitations for the Series B Preferred
Stock with the Secretary of State of Nevada (the “Certificate of Designation”) and designated
187,500 shares of its authorized and unissued preferred stock as Series B Convertible Preferred Stock. Each share of Series
B Preferred Stock has a par value of $0.0001 per share and a stated value equal to $100.00 (the “Stated Value”).
The Series B Preferred Stock will initially be issued in a physical certificate.
The subscription price for each share of Preferred Stock is $80.00 per share. The Series
B Preferred Stock shares can vote with the shares of common stock, on an as-converted to common stock basis, with respect
to all matters on which the holders of common stock are entitled to vote, subject to any applicable Beneficial Ownership Limitations
(as defined in the Certificate of Designation).
The
Certificate of Designation provides that the Series B Preferred Stock includes a
10% accruing dividend compounded daily for 12 months from the original issue date (the “Dividend Termination Date”)
that may be paid in cash or stock at the Company’s option at the earlier of (i) the date the Preferred Stock is converted,
or (ii) the Dividend Termination Date.
In
the event of the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of
shares the Series B Preferred Stock are entitled to be paid out of the Company’s assets legally available for distribution
to its stockholders, the greater of (i) the Stated Value, or (ii) the amount holder would have received if the Series B Preferred
Stock was fully converted to common stock, plus any amount equal to any accumulated and unpaid dividends to the date of payment.
Each
share of Series B Preferred Stock is convertible at any time at the option of the
holder after the later of a date that is (i) 180 days after the original issue date or (ii) the date on which October Notes have
been fully redeemed or converted (the “Note Release Date”) into a number of shares of common stock determined by dividing
the Stated Value by the conversion price then in effect (the “Series B Conversion Price”). The initial Series B Conversion
Price is $5.41, subject to adjustment as set forth in the Certificate of Designation. The Series B Conversion Price is also subject
to adjustment as follows: (i) upon the United States Securities and Exchange Commission (the “SEC”) declaring effective
the resale registration statement referred to in Series B SPA (the “Series B Resale Registration Statement”), the
Series B Conversion Price will be equal to 90% of the average VWAP reported on Nasdaq for the five consecutive trading dates after
the effective date of the Series B Resale Registration Statement, and (ii) in the event that the Company undertakes a public offering
of its common stock or common stock equivalents, upon the completion of the public offering (the “Public Offering”),
the Series B Conversion Price will be equal to 90% of the average VWAP reported on Nasdaq for the five consecutive trading dates
after the completion date of the Public Offering. The Series B Conversion Price for the Series B Preferred Stock will be rounded
down to the nearest $0.01 and will in no event be lower than $1.08.
The
Series B Preferred Stock has no stated maturity date and is not subject to any mandatory
redemption or sinking fund. Provided no shares of the Series A Preferred Stock is outstanding, either the Company or the holder
of the Series B Preferred Stock may at any time after the later of (i) the third
anniversary of the original issue date, or (ii) the Note Release Date, redeem the Series
B Preferred Stock, in whole or part, for the Stated Value. The Certificate of Designation also provides that the Series
B Preferred Stock is subject to a call pursuant to which the Company, upon ten days prior notice to the holder, may demand
that the holder convert the Series B Preferred Stock and Series B Warrants issued
pursuant to the SPA, in whole or in part, if the closing bid price of the common stock equals or exceeds $12.98 less Profit (as
defined in the Series B SPA) divided by the number of shares of common stock into which the Series
B Preferred Stock is convertible on the date of such notice, subject to any price adjustments, for twenty (20) consecutive
trading days. If the holder fails to convert the remaining stated value of the Series B Preferred Stock in its entirety within
thirty (30) trading days after receiving the Company’s notice, the Company may redeem such remaining balance and the Series
B Warrants at the remaining Stated Value plus accrued dividends.
The
Series B Preferred Stock will, as to dividend rights and rights as to the distribution of assets upon the Company’s liquidation,
dissolution or winding-up, rank senior to all classes or series of common stock and to all other capital stock issued by the Company
expressly designated as ranking junior to the Series B Preferred Stock. Without the consent of the holders of the Series B Preferred
Stock, the Company may not issue any capital stock that is (i) senior to the preferred stock in respect of dividend rights and
rights as to the distribution of assets upon the Company’s liquidation, dissolution or winding-up, except that the Series
B Preferred Stock will be parri passu with respect to the Series A Preferred Stock, or (ii) parri passu with respect to dividend
rights and rights as to the distribution of assets upon the Company’s liquidation, dissolution or winding-up.
Series
B Warrants
The
Series B Warrants have an issue date of July 19, 2022. The Series
B Warrants have an initial exercise price of $10.00 per share of common stock, subject to adjustment as set forth in the
Series B Warrants. The holder is entitled to exercise the Series
B Warrants at any time on or after the date that is 180 days following the issue date and on or prior to January 19, 2028.
On the closing date of the next public offering of the common stock or other securities, the exercise price of the Series
B Warrants adjusts to a price equal to the lower of (a) the exercise price then in effect, or (b) the price of the warrants
issued in the Company’s next public offering, or if no warrants are issued in the Company’s next public offering,
110% of the price per share of the common stock issued in the Company’s next public offering.
The
Series B Preferred Stock and the Series B
Warrants were issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), based
on the exemption from registration afforded by Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder. The
Company did not engage in general solicitation or advertising with regard to the issuance and sale of the Securities. The Series
B Investor represented that he/she/it is an accredited investor and purchased the Series
B Securities for investment and not with a view to distribution.
Leak-Out
Agreement
On
July 19, 2022, the Company and the Series B Investor entered into a Leak-Out Agreement
(the “Leak-Out Agreement”). The Leak-Out Agreement remains in effect so long as any Series
B Preferred Stock or shares of Series A Preferred Stock remain outstanding, unless otherwise expressly extended in writing
by the Series B Investor (the “Leak Out Period”), at which time the Series
B Investor shall no longer be subject to the Leak Out restrictions. Pursuant to the Leak-Out Agreement, the Series
B Investor agreed during the Leak-Out Period not to sell, dispose or otherwise transfer on any trading day, in the aggregate,
more than 15% of the composite daily trading volume of the common stock as reported by Bloomberg, LP. The Series
B Investor also agreed to execute any lock-up agreement reasonably requested by an underwriter in connection with an underwritten
offering of the Company’s securities.
Appointment
of New Chief Financial Officer
On
July 28, 2022, the Board appointed Philip F. Patman, Jr. to assume the role of Chief Financial Officer, Secretary and Treasurer
of the Company, effective as of August 16, 2022.
Mr.
Patman, 54, most recently has been Vice President and Head of Renewable Fuels M&A and Strategy at Ameresco, Inc., a cleantech
technology integrator with a comprehensive portfolio of energy efficiency and renewable energy supply solutions, and has been
employed by Ameresco since August 2021. Prior to that, Mr. Patman was with Huron Consulting Group, Inc., a global consultancy
firm providing management consulting services to small- and mid-cap businesses primarily in the oil, gas, and diversified energy
sectors, from May 2020 through June 2021, most recently serving as Managing Director. From April 2017 through March 2019, Mr.
Patman was the Chief Financial Officer of VAALCO Energy, Inc. (NYSE:EGY), an oil operator that owns and operates shallow water
offshore platforms in Gabon, West Africa. From 2012 to March 2017, he served PTT Exploration and Production Public Company, Ltd.
(“PTTEP”), one of the largest publicly traded companies in the Kingdom of Thailand, as Senior Vice President, Business
Development, for The Americas region (2012-16) and later as Senior External Advisor (2016-17); he had primary responsibility for
leading PTTEP’s mergers and acquisitions activities in the US, Canada and Brazil. Cumulatively, Mr. Patman has more than
25 years of experience in finance operations, capital formation, and M&A / corporate development for companies engaged in
global energy and infrastructure markets, including the above-described companies as well as AES Corporation, Franklin Templeton
Investments, Globeleq Limited, Marathon Oil Corporation, and Enron Corp. Mr. Patman received a Bachelor of Arts degree in 1990
from the University of Texas at Austin through its Plan II Honors Program, and a J.D. from the University of Houston Law Center
in 1993. He is currently a licensed attorney in the state of Texas.
In
connection with Mr. Patman’s appointment as the Company’s Chief Financial Officer, Secretary and Treasurer, the Company
and Mr. Patman entered into an employment agreement (the “Agreement”), dated July 29, 2022, providing for his employment,
effective as of August 15, 2022, and continuing for a two-year term, which shall continue thereafter on an “at-will”
basis (the “Employment Term”). Pursuant to the Agreement, the Company has agreed to pay Mr. Patman an annual salary
of $350,000 (the “Base Salary”), payable in accordance with the Company’s customary payroll practices. The Agreement
further provides that Mr. Patman is eligible for the following cash bonuses, as determined and based upon annual criteria set
by the Board or the compensation committee of the Board (the “Compensation Committee”): (a) commencing August 15,
2022 and through December 31, 2022, Mr. Patman is eligible to receive a cash bonus in an amount up to 50% of his Base Salary paid
to Mr. Patman during such period; and (b) commencing upon the 2023 calendar year and during the Employment Term, Mr. Patman is
eligible to receive an annual cash bonus equal to an amount up to 50% of the then-current Base Salary, with each bonus payable
in accordance with the Company’s standard payment practices.
In
addition, pursuant to the Agreement, the Company has agreed to grant to Mr. Patman, within sixty (60) calendar days following
August 15, 2022, subject to certain conditions, a one-time award of a number of restricted stock units (“RSUs”) equal
to $175,000, divided by the thirty (30)-day trailing volume weighted average price as of August 15, 2022. Further pursuant to
the Agreement, the Company has agreed to grant to Mr. Patman, commencing in calendar year 2023 and subject to such approvals specified
by the Compensation Committee, an annual equity award consisting of a number of RSUs in an amount equal to $125,000. Mr. Patman
is also entitled to other benefits normally available to other similarly situated employees of the Company.
Under
the Agreement, the Employment Term is terminable by the Company upon 30 days’ prior written notice or by Mr. Patman upon
60 days’ prior written notice. As described in the Agreement, Mr. Patman is entitled to severance, in certain circumstances
up to a total of six (6) months of base salary plus a pro-rata portion of his annual cash bonus.
Spring
Lane Initial Funding
On
May 3, 2022, SCI entered into a Bilateral Master Contribution Agreement (the “Bilateral Contribution Agreement”) with Spring
Lane, pursuant to which Spring Lane agreed, pursuant to the terms and conditions of such agreement, to make one or more capital
contributions to, and in exchange for equity in, SCI or one of its subsidiaries up to an aggregate amount of $35 million to fund
certain projects to develop green data centers co-located with renewable energy assets (the “Spring Lane Commitment”).
We anticipate that these capital contributions, once deployed into the projects, will help develop three behind-the-meter (BTM)
projects designed to convert wasted renewable energy into clean computing services such as bitcoin mining and artificial intelligence.
The Bilatera Contribution Agreement outlines the framework for the Spring Lane Commitment; however, neither we nor Spring Lane are obligated
to complete any projects under such agreement and any actual capital contributions are subject to various conditions precedent,
including the receipt of requisite lender and other consents, acceptance by Spring Lane of specific projects and negotiations
of agreements regarding those projects, including milestones and structure. In partial consideration of the amendment to the October
notes discussed above, the investors agreed to release certain collateral covered by their security agreement to permit the Company
to proceed forward with the initial phase of the development site in Texas, which we expect to be partially funded by Spring Lane,
which the Company expects to complete in the near future.
On
August 5, 2022, the Company entered into a Contribution Agreement (the
“Dorothy Contribution Agreement”)with Spring Lane, Soluna
DV Devco, LLC (“Devco”), an indirect wholly-owned subsidiary of SCI, and Soluna DVSL ComputeCo, LLC (“DVSL”)
an entity formed in order to further the Company’s development project in Texas, (each, a “Party” and, together,
the “Parties”) . Pursuant to the Dorothy Contribution Agreement, the Company
committed to a capital contribution of up to approximately $26.3 million to DVSL (the “Company Commitment”), and on
August 5, 2022, the Company was deemed to have contributed approximately $8.1 million, through payment of capital expenditures
and development costs made on behalf of DVSL by the Company prior to August 5, 2022. Further under the Agreement, Spring Lane
committed to a capital contribution of up to $12.5 million to DVSL (the “Spring Lane Dorothy Commitment”), and on
August 5, 2022, Spring Lane contributed approximately $3.9 million. Under the Dorothy Contribution Agreement, the Company and
Spring Lane have committed to make subsequent contributions, up to their respective Company Commitment and Spring Lane Dorothy
Commitment amounts, on a pro rata basis, upon receipt of a contribution request from DVSL, as set forth in the Dorothy Contribution
Agreement and subject to the satisfaction of certain conditions described therein. The proceeds of any subsequent commitments
will be applied to pay project costs in accordance with the project budget.
In
exchange for their contributions, the Company and Spring Lane were issued 67.8% and 32.2% of the Class B Membership Interests
in DVSL, respectively, and were admitted as Class B members of DVSL. Further pursuant to the Agreement, DVSL issued 100% of its
Class A Membership Interests to Devco. The Dorothy Contribution Agreement contains customary indemnification provisions, liquidation
provisions and governance provisions with respect to DVSL. The Parties also entered into an Amended and Restated Limited Liability
Company Agreement of DVSL providing for the governance of DVSL.