Notes
to Condensed Consolidated Financial Statements (Unaudited)
Description
of Business
Mechanical
Technology, Incorporated (“MTI” or “the Company”), 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. The Company conducts two core businesses through
its wholly-owned subsidiaries MTI Instruments, Inc. (“MTI Instruments”), which designs, manufactures and markets its
products also at the Albany, New York location, and EcoChain, Inc. (“EcoChain”), which is engaged in cryptocurrency
mining powered by renewable energy.
MTI
Instruments was incorporated in New York on March 8, 2000 and is a supplier of vibration measurement and balancing systems, precision
linear displacement solutions, and wafer inspection tools. 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, the development and implementation of automated manufacturing and assembly.
EcoChain
was incorporated in Delaware on January 8, 2020. EcoChain has established a new business line focused on cryptocurrency mining
and the blockchain ecosystem. In connection with the creation of the new business line, EcoChain has established a cryptocurrency
mining facility that integrates with the cryptocurrency blockchain network in Washington State. EcoChain focuses on sites that
can be powered by renewable energy sources. In connection with the establishment of the EcoChain business, MTI purchased Class
A Preferred Shares of Soluna Technologies, Ltd. (“Soluna”), a Canadian company that develops vertically-integrated,
utility-scale computing facilities focused on cryptocurrency mining and cutting-edge blockchain applications.
On April 29, 2021, the Company closed a public securities offering
(the “April Offering”), pursuant to which the Company issued and sold 2,419,355
shares of the Company’s common stock and warrants to purchase up to 604,839
shares of common stock for gross proceeds of $15,000,001,
less underwriting discounts of
7.0% ($1,050,000)
and other offering expenses, resulting in aggregate net proceeds to the Company of $13,725,001.
In addition, on May 27, 2021, the underwriter, exercised its over-allotment option, in full, in connection with the
April Offering, pursuant to which the Company issued and sold an additional 362,903
shares of common stock and warrants to purchase up to an additional 90,726
shares of common stock, on the same terms as the securities sold in the April Offering, resulting in additional
aggregate gross proceeds of approximately $2,250,000,
less underwriter discounts of 7.0%
($157,500)
and other offering expenses, resulting in net proceeds to the Company of $2,029,999.
The Company’s
aggregate net proceeds in relation to the April Offering, including the over-allotment option, was $15,755,000. The
warrants have an initial exercise price of $8.24, subject to certain adjustments, per whole share of common stock and expire
five years from their date of issuance. In connection with the April Offering, the Company also issued to the underwriter, as
a portion of its compensation, warrants to purchase up to 139,113 shares of Common Stock, at an initial exercise price
of $6.82 per share, subject to certain adjustments. The Company also incurred additional expenses of $351,850 in
conjunction with the April Offering resulting in total Common Stock of $2,782 and Additional-Paid-in-Capital of
$15,400,367.
On
May 4, 2021, EcoChain Block, LLC, a Delaware limited liability company (“ECB”), a wholly-owned subsidiary of EcoChain,
executed a 25-year ground lease with a power-providing cooperative with respect to an existing building and certain surrounding
land (the “Building Lease”), and a 25-year ground lease with the same landlord with respect to certain vacant land
adjacent thereto, both located in the Southeastern United States (the “Vacant Land Lease”, and together with the Building
Lease, the “Ground Leases”). In addition, ECB and the landlord entered into a Power Supply Agreement (the “Power
Supply Agreement”) whereby the landlord has agreed to supply power to the building leased under the Building Lease (the
“Building Lease Premises”) and to the premises leased under the Vacant Land Lease (the “Vacant Land Premises”),
some of which power, under certain circumstances, may be terminated by the landlord, on at least 6 months prior notice, any time
after 12 months after the Building Commencement Date (as hereafter defined), in which case the landlord is required to reimburse
ECB for all of its construction costs, subject to certain exceptions, relating to buildings and other improvements developed by
ECB on the Vacant Land Premises. As of August 10, 2021, this lease has not commenced.
ECB
has agreed to pay rent to the landlord of $500,000 on the effective date of the Building Lease (such date, the “Building
Commencement Date”) and the sum of $4,000,000 in periodic payments (the “Vacancy Payments”). We executed a guaranty
in favor of the landlord with respect to the Vacancy Payments (the “Guaranty of Rent”). The amount of each Vacancy
Payment is determined based on the percentage of the building that has been vacated by existing tenants and available for use
by ECB. The final Vacancy Payment is due within 60 days after the building has been completely vacated by the existing tenants,
which date is contractually scheduled to be no later than March 31, 2022. ECB has the option of making the Vacancy Payments in
cash or by our issuance of common stock in an amount that equals the Vacancy Payment then due based on the prior day’s closing
price (any such shares, “Vacancy Payment Shares”). If ECB elects to make any payment in Vacancy Payment Shares, then
the landlord has an option to accept such Vacancy Payment Shares or require such shares to be converted to cash as more fully
provided in the Building Lease. The Building Lease also includes provisions relating to the issuance of additional shares of our
common stock, which may be applied as an advance against future Vacancy Payments, all as fully provided in the Building Lease.
We
are required to issue to the landlord 100,000 shares of our common stock, in connection with the Vacant Land Lease, upon the effective
date of the Vacant Land Lease, which may not occur prior the Building Commencement Date. In addition, ECB and the landlord have
entered into a memorandum of understanding providing ECB with a six-month exclusivity period to expand the Vacant Land Premises,
including the obtaining additional power, in connection therewith. ECB and the landlord have not agreed on any of the terms of
such expansion other than the exclusivity period previously described. ECB and the landlord have also entered into a transition
services agreement (the “Transition Services Agreement”) by which the landlord will provide certain transition services
to ECB at a fee to be mutually agreed by the landlord and ECB. The Transition Services Agreement also requires the landlord to
pay ECB an amount approximately equal to the landlord’s net profits received from the landlord’s other
tenants operating out of the Building Lease Premises.
On
June 24, 2021, the Company and American Stock Transfer & Trust Company, LLC entered into Amendment No. 2 to Rights Agreement (the “Amendment”)
to a Rights Agreement, dated as of October 6, 2016, which was amended by Amendment No. 1 to Rights Agreement, dated as of October
20, 2016 (collectively, the “Rights Agreement”), pursuant to which, with the approval of the Board, the Final Expiration
Date (as such term is defined in the Rights Agreement) was amended and accelerated from October 26, 2026 to June 24, 2021, and,
as a result, the Rights Agreement was terminated effective as of June 24, 2021.
As
a result of the termination of the Rights Agreement, certain stockholders of the Company, who, pursuant to the terms of the Rights
Agreement, held certain rights entitling them, under certain circumstances, to be issued additional shares of our common stock
in the event we issued shares of our common stock to any other person resulting in such person acquiring beneficial ownership
of 4.99% or more of our outstanding shares of common stock, are no longer entitled to such rights. These rights were established
in an effort to protect our ability to use our net operating loss carryforwards (“NOLs”). The Board, in connection
with its authorization and approval of the Amendment, determined that keeping the Rights Agreement in effect was placing undue
restrictions on our ability to raise capital, which it determined outweighed any benefits provided to protect the NOLs.
Liquidity
The
Company has historically incurred significant losses primarily due to its past efforts to fund direct methanol fuel cell product
development and commercialization programs and had a consolidated accumulated deficit of approximately $119.6 million as of June
30, 2021. As of June 30, 2021, the Company had working capital of approximately $16.8 million, no debt, outstanding commitments
related to EcoChain for $8.3 million for capital expenditures, and approximately $12.0 million of cash available to fund operations.
Based on recent business developments, including changes in production levels, staffing requirements,
and network infrastructure improvements, the Company will require additional capital equipment in the foreseeable future. With
respect to MTI and MTI Instruments, the Company expects to spend a total of approximately $300 thousand on computer equipment and
software and $1.6 million on research and development during 2021. As the Company has done historically, the Company expects to
finance these expenditures and continue funding of MTI’s and MTI Instruments’ operations from the Company’s current cash position
and the Company’s projected 2021 cash flows. If necessary, the Company may also seek to supplement its resources by increasing credit facilities
to fund operational working capital and capital expenditure requirements. With respect to EcoChain, the Company expects to fund
growth (additional cryptocurrency mining facilities and miners) through capital raise activities to the extent that the Company
can successfully raise capital through additional securities sales. Any additional financing, if required, may not be available
to the Company on acceptable terms or at all.
While
it cannot be assured, management believes that, due in part to the Company’s current working capital level and projected
cash requirements for operations and capital expenditures, its current available cash of approximately $12.0 million, and the
Company’s projected 2021 cash flow pursuant to management’s plans, the Company will have adequate resources to fund
operations and capital expenditures for MTI and MTI Instruments for the year ending December 31, 2021 and through at least the
end of the third quarter of 2022. As noted above, the Company expects to fund capital expenditures for EcoChain through capital
raises, while EcoChain’s operations will be funded through its cash flows. The Company expects to have adequate resources
to fund EcoChain’s operations for the year ending December 31, 2021 and through at least the third quarter of 2022.
In
the opinion of management, the Company’s condensed consolidated financial statements reflect all adjustments, which are
of a normal recurring nature, necessary for a fair statement of the results for the periods presented in accordance with United
States of America’s Generally Accepted Accounting Principles (“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 the Company’s Annual Report
on Form 10-K for the year ended December 31, 2020 (“the Annual Report”).
The
information presented in the accompanying condensed consolidated balance sheet as of December 31, 2020 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, 2021 and June 30, 2020.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, MTI Instruments
and EcoChain. 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.
Accounts
receivables consist of the following at:
(Dollars in thousands)
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
U.S. and State Government
|
|
$
|
53
|
|
|
$
|
2
|
|
Commercial
|
|
|
638
|
|
|
|
909
|
|
Other
|
|
|
89
|
|
|
|
64
|
|
Total
|
|
$
|
780
|
|
|
$
|
975
|
|
For
the three months ended June 30, 2021 and 2020, the largest commercial customer represented 14.2% and 7.1%, respectively, and the
largest governmental agency represented 35.5% and 65.8%, respectively, of the Company’s product revenue. For the six months
ended June 30, 2021 and 2020, the largest commercial customer represented 12.7% and 9.6%, respectively, and the largest governmental
agency represented 27.3% and 42.3%, respectively, of the Company’s product revenue. As of June 30, 2021 and December 31,
2020, the largest commercial customer receivable represented 16.4% and 15.9%, respectively, and the largest governmental customer
receivable represented 6.8% and 0.3%, respectively, of the Company’s accounts receivable.
The
Company's allowance for doubtful accounts was $0 at both June 30, 2021 and December 31, 2020.
Inventories
consist of the following at:
(Dollars in thousands)
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
570
|
|
|
$
|
371
|
|
Work in process
|
|
|
263
|
|
|
|
139
|
|
Raw materials
|
|
|
354
|
|
|
|
318
|
|
Total
|
|
$
|
1,187
|
|
|
$
|
828
|
|
|
5.
|
Property,
Plant and Equipment
|
Property,
plant and equipment consist of the following at:
(Dollars in thousands)
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
Land
|
|
$
|
52
|
|
|
$
|
—
|
|
Leasehold improvements
|
|
|
262
|
|
|
|
262
|
|
Computers and related software
|
|
|
2,639
|
|
|
|
1,603
|
|
Machinery and equipment
|
|
|
902
|
|
|
|
885
|
|
Office furniture and fixtures
|
|
|
39
|
|
|
|
38
|
|
Construction in progress
|
|
|
437
|
|
|
|
—
|
|
|
|
|
4,331
|
|
|
|
2,788
|
|
Less: Accumulated depreciation
|
|
|
2,199
|
|
|
|
1,941
|
|
|
|
$
|
2,132
|
|
|
$
|
847
|
|
Depreciation
expense was $165 thousand and $31 thousand for the three months ended June 30, 2021 and 2020, respectively. Depreciation expense
was $258 thousand and $53 thousand for the six months ended June 30, 2021 and 2020, respectively.
During
the three and six months ended June 30, 2021, the Company’s effective income tax rate was 0.0%. 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 2021 and permanent differences. There was an income tax expense of $3
thousand for the three and six months ended June 30, 2021 and $0 for the three months ended June 30, 2020 and an income tax
benefit of $3 thousand for the six months ended June 30, 2020.
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 $10.2 million and $9.7 million
at June 30, 2021 and December 31, 2020, respectively. We will continue to evaluate the ability to realize our deferred tax assets
and related valuation allowance on a quarterly basis.
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, 2021 and December 31, 2020, there were 12,699,670 and 9,734,607 shares
of common stock issued and outstanding, respectively.
Dividends
Dividends
are recorded when declared by the Company’s Board of Directors. There were no dividends declared or paid during 2020 or
2021.
Reservation
of Shares
The
Company had reserved shares of common stock for future issuance as follows as of June 30, 2021:
|
|
|
|
|
Stock options outstanding
|
|
|
1,010,050
|
|
Restricted stock units outstanding
|
|
|
15,000
|
|
Common stock available for future equity awards or issuance of options
|
|
|
692.616
|
|
Number of common shares reserved
|
|
|
1,717,666
|
|
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.
Not
included in the computation of earnings per share, assuming dilution, for the three months ended June 30, 2021, were options to
purchase 658,550 shares 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. Not included in
the computation of earnings per share, assuming dilution, for the 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.
Not
included in the computation of earnings per share, assuming dilution, for the three months ended June 30, 2020, were options to
purchase 491,430 shares of the Company’s common stock. These potentially dilutive items were excluded because the average
market price of the shares of common stock exceeded the exercise price of the options. Not included in the computation of earnings
per share, assuming dilution, for the six months ended June 30, 2021, were options to purchase 491,430 shares of the Company’s
common stock. These potentially dilutive items were excluded because the average market price of the shares of common stock exceeded
the exercise price of the options.
|
8.
|
Commitments
and Contingencies
|
Commitments:
Leases
The
Company determines whether an arrangement is a lease at inception. The Company and its 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, 2021 and December 31, 2020, the Company has 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,
total lease costs are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
93
|
|
|
$
|
66
|
|
|
$
|
187
|
|
|
$
|
121
|
|
Short-term lease cost
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
Total net lease cost
|
|
$
|
93
|
|
|
$
|
68
|
|
|
$
|
187
|
|
|
$
|
123
|
|
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:
|
|
Six Months Ended June 30, 2021
|
|
|
|
|
|
Weighted Average Remaining Lease Term (in years):
|
|
|
|
|
Operating leases
|
|
|
3.64
|
|
|
|
|
|
|
Weighted Average Discount Rate:
|
|
|
|
|
Operating leases
|
|
|
5.51
|
%
|
(Dollars in thousands)
|
|
Six Months Ended June 30, 2021
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
Supplemental Cash Flows Information:
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
187
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Activity Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
—
|
|
|
$
|
387
|
|
Maturities
of noncancellable operating lease liabilities are as follows for the quarter ending June 30:
(Dollars in thousands)
|
|
|
|
|
|
2021
|
|
2021
|
|
$
|
374
|
|
2022
|
|
|
376
|
|
2023
|
|
|
290
|
|
2024
|
|
|
103
|
|
2025
|
|
|
—
|
|
Total lease payments
|
|
|
1,143
|
|
Less: imputed interest
|
|
|
(91
|
)
|
Total lease obligations
|
|
|
1,052
|
|
Less: current obligations
|
|
|
(327
|
)
|
Long-term lease obligations
|
|
$
|
725
|
|
As
of June 30, 2021, except for the ground lease entered into as described in Note 1, there were no additional operating lease
commitments that had not yet commenced.
Warranties
Product
warranty liabilities are included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets. Below is
a reconciliation of changes in product warranty liabilities:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Balance, January 1
|
|
$
|
22
|
|
|
$
|
16
|
|
Accruals for warranties issued
|
|
|
8
|
|
|
|
10
|
|
Accruals for pre-existing warranties
|
|
|
—
|
|
|
|
—
|
|
Settlements made (in cash or in kind)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
Balance, end of period
|
|
$
|
26
|
|
|
$
|
23
|
|
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.
|
9.
|
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, 2021 and December 31, 2020, $325 thousand and $321 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, 2021, the Company incurred $7 thousand and $15 thousand, respectively, to Couch White,
LLP for legal services associated with contract review. During the three and six months ended June 30, 2020, the Company incurred
$19 thousand and $77 thousand, respectively, to Couch White, LLP for legal services associated with contract review. A partner
at Couch White, LLP is an immediate family member of one of our Directors.
Soluna
Transactions
On
January 8, 2020, the Company formed EcoChain 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, EcoChain 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
EcoChain and Soluna Technologies, Ltd. (“Soluna”), a Canadian company that develops vertically-integrated, utility-scale
computing facilities focused on cryptocurrency mining and cutting-edge blockchain applications, Soluna assisted the Company, and
later EcoChain, in developing, and is now operating, the cryptocurrency mining facility. The Operating and Management Agreement
requires, among other things, that Soluna provide developmental and operational services, as directed by EcoChain, with respect
to the cryptocurrency mining facility in exchange for EcoChain’s payment to Soluna of a one-time management fee of $65 thousand
and profit-based success payments in the event EcoChain achieves explicit profitability thresholds. Once aggregate earnings before
interest, taxes, depreciation and amortization of the mine exceeds the total amount of funding provided by EcoChain to Soluna
(whether pursuant to this agreement or otherwise) for the purposes of creating, developing, assembling, and constructing the mine
(the “Threshold”), Soluna is entitled to ongoing success payments of 20.0% of the earnings before interest, taxes,
depreciation and amortization of the mine. As of June 30, 2021, $118 thousand of payments have been made or are due, 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, Soluna gathered and analyzed information with respect to EcoChain's cryptocurrency
mining efforts and produced budgets, financial models, and technical and operational plans, including a detailed business plan,
that it delivered to EcoChain 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 EcoChain’s acceptance of the Deliverables,
which occurred on March 23, 2020, Soluna, on behalf of EcoChain, would commence operations of the cryptocurrency mine in a manner
that would allow EcoChain to mine and sell cryptocurrency. In that regard, on May 21, 2020, EcoChain 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 EcoChain’s
current cryptocurrency mining operation. EcoChain sells for U.S. dollars all cryptocurrency it mines and is not in the business
of accumulating cryptocurrency on its balance sheet for speculative gains. On October 22, 2020, EcoChain loaned Soluna $112 thousand
to acquire additional assets from the bankruptcy trustee for GigaWatt’s assets. On the same day, Soluna transferred title
of the assets to EcoChain, which under the terms thereof paid off the note.
On November 19, 2020, EcoChain and Soluna
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, Soluna is
entitled to ongoing success payments of 20.0% of the earnings before interest, taxes, depreciation and amortization of the mine.
EcoChain paid Soluna $150 thousand in 2020
and $100 thousand in the six months ended June 2021 related to the one-time fees.
On December 1, 2020, EcoChain and Soluna 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, Soluna is entitled to ongoing
success payments of 20.0% of the earnings before interest, taxes, depreciation and amortization of the mine. EcoChain paid Soluna
$38,000 during 2020 in
relation to the one-time fees; this target location did not meet the business requirements to continue pursuing the potential acquisition,
and as a result EcoChain will not make any further payments to Soluna under this agreement.
On February 8, 2021, EcoChain and Soluna
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, Soluna is entitled to ongoing success payments of 20.0% of the earnings before interest, taxes, depreciation
and amortization of the mine. EcoChain paid Soluna $70 thousand during the six months ended June 30, 2021 in relation to the one-time
fees.
Each
Operating and Management Agreement requires that Soluna provide project sourcing services to EcoChain, including acquisition negotiations
and establishing an operating model, investments/financing timeline, and project development path.
Simultaneously
with entering into the initial Operating and Management Agreement with Soluna, the Company, pursuant to a purchase agreement it
entered into with Soluna, made a strategic investment in Soluna by purchasing 158,730 Class A Preferred Shares of Soluna 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 Soluna for
an aggregate purchase price of $250 thousand. The Company also has the right, but not the obligation, to purchase additional equity
securities of Soluna and its subsidiaries (including additional Class A Preferred Shares of Soluna) if Soluna 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 Soluna Technologies Investment I, LLC, a Delaware limited liability company that
owns, on a fully diluted basis, 58.8% of Soluna 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 Soluna in the event Soluna issues additional equity below agreed-upon valuation thresholds.
Several
of Soluna’s equityholders 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 Soluna and also have ownership interest in Soluna. In light of these relationships,
the various transactions by and between the Company and EcoChain, on the one hand, and Soluna, on the other hand, were negotiated
on behalf of the Company and EcoChain via an independent investment committee of Board and separate legal representation. The
transactions were subsequently unanimously approved by both the independent investment committee and the full Board.
Three
of the Company’s directors have various affiliations with Soluna.
Michael
Toporek, our Chief Executive Officer and a director, owns (i) 90% of the equity of Soluna Technologies Investment I, LLC, which
owns 58.8% of Soluna and (ii) 100% of the equity of MJT Park Investors, Inc., which owns 3.1% of Soluna, 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 8.4% of Soluna; 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 Soluna.
In
addition, one of the Company’s directors, Matthew E. Lipman, serves as a director and as acting Secretary and Treasurer of Soluna. Mr. Lipman
does not directly own any equity interest in Tera Joule, LLC, which owns 8.4% of Soluna; 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 Soluna.
Finally,
the Company’s director William P. Phelan serves as an observer on Soluna’s board of directors on behalf of the Company.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 Soluna
through June 30, 2021, were $98 thousand and $0, respectively.
The
Company’s investment in Soluna is carried at the cost of investment and was $750 thousand as of June 30, 2021. The Company
owned approximately 1.83% of Soluna, calculated on a converted fully-diluted basis, as of June 30, 2021. The Company may enter into additional
transactions with Soluna in the future.
10. Stock Based Compensation
2021
Plan
The
Company’s 2021 Stock Incentive Plan (the “2021 Plan”) was adopted by the Board on February 12, 2021 and approved
by the stockholders on March 25, 2021. 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 restricted stock, and (iii) as available pursuant to 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, and (B) beginning
with the Company's fiscal year ending December 31, 2022, 15% of the number of shares of common stock outstanding. Subject to certain
adjustments as provided in the 2021 Plan, (i) shares of the Company’s common stock subject to the 2021 Plan shall include
shares of common stock forfeited in a prior year 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 the Company’s common stock that are then outstanding under outstanding
Awards.
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.
During
the six months ended June 30, 2021, the Company awarded 15,000 restricted stock units 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 grant. 33 1/3% of such restricted
stock units will vest on each of the first three anniversaries of the date of the grant.
11. 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.
Accounting
Updates Recently Adopted by the Company
On
January 1, 2021, the Company adopted ASU 2019-12 (Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes).
This standard removes exceptions to the general principles in Topic 740 for allocating tax expense between financial statement
components, accounting basis differences stemming from an ownership change in foreign investments and interim period income tax
accounting for year-to-date losses that exceed projected losses. The adoption of this standard did not have a material impact
on the Company’s consolidated financial statements.
On
January 1, 2021, the Company adopted ASU 2020-01 (Investments - Equity Securities (Topic 321), Investments - Equity Method and
Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)). This standard clarifies certain interactions between the
guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method
of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under
the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward
contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option
in accordance with Topic 825, Financial Instruments. This standard improves current GAAP by reducing diversity in practice and
increasing comparability of the accounting for these interactions. The adoption of this standard did not have a material impact
on the Company’s consolidated financial statements.
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 its adoption of new accounting pronouncements or changes to its significant accounting policies that were disclosed
in its consolidated financial statements for the fiscal year ended December 31, 2020.
The
Company operates in two business segments, Test and Measurement Instrumentation and Cryptocurrency. The Test and Measurement Instrumentation
segment designs, manufactures, markets and services computer-based balancing systems for aircraft engines, high performance test
and measurement instruments and systems, and wafer characterization tools for the semiconductor and solar industries. The Cryptocurrency
segment is focused on cryptocurrency and the blockchain ecosystem. The Company’s principal operations in both segments are
located in North America.
The
accounting policies of the Test and Measurement Instrumentation and Cryptocurrency segments are similar to those described in
the summary of significant accounting policies herein and in the Annual Report. The Company evaluates performance based on profit
or loss from operations before income taxes, accounting changes, items management does not deem relevant to segment performance,
and interest income and expense. Inter-segment sales and expenses are not significant.
Summarized
financial information concerning the Company’s reportable segments is shown in the following table. The “Other”
column includes corporate related items and items such as income taxes or unusual items, which are not allocated to reportable
segments. In addition, segments’ non-cash items include any depreciation and amortization in reported profit or loss.
(Dollars
in thousands)
|
|
Test and Measurement Instrumentation
|
|
|
Cryptocurrency
|
|
|
Other
|
|
|
Condensed Consolidated Totals
|
|
Three months ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
1,647
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,647
|
|
Cryptocurrency revenue
|
|
|
—
|
|
|
|
1,657
|
|
|
|
—
|
|
|
|
1,657
|
|
Research and product development expenses
|
|
|
406
|
|
|
|
—
|
|
|
|
—
|
|
|
|
406
|
|
Selling, general and administrative expenses
|
|
|
526
|
|
|
|
292
|
|
|
|
2,212
|
|
|
|
3,030
|
|
Segment profit / (loss) from operations before income taxes
|
|
|
(270
|
)
|
|
|
|
|
|
)
|
|
|
)
|
Segment profit / (loss)
|
|
|
(270
|
)
|
|
|
710
|
|
|
|
(1,614
|
)
|
|
|
(1,174
|
)
|
Total assets
|
|
|
2,636
|
|
|
|
3,883
|
|
|
|
19,040
|
|
|
|
25,559
|
|
Capital expenditures
|
|
|
13
|
|
|
|
1,229
|
|
|
|
—
|
|
|
|
1,242
|
|
Depreciation and amortization
|
|
|
17
|
|
|
|
149
|
|
|
|
—
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
2,390
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,390
|
|
Cryptocurrency revenue
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
Research and product development expenses
|
|
|
362
|
|
|
|
—
|
|
|
|
—
|
|
|
|
362
|
|
Selling, general and administrative expenses
|
|
|
437
|
|
|
|
109
|
|
|
|
301
|
|
|
|
847
|
|
Segment profit / (loss) from operations before income taxes
|
|
|
831
|
|
|
|
)
|
|
|
)
|
|
|
|
Segment profit / (loss)
|
|
|
831
|
|
|
|
(73
|
)
|
|
|
(156
|
)
|
|
|
602
|
|
Total assets
|
|
|
3,687
|
|
|
|
1,090
|
|
|
|
2,480
|
|
|
|
7,257
|
|
Capital expenditures
|
|
|
5
|
|
|
|
335
|
|
|
|
—
|
|
|
|
340
|
|
Depreciation and amortization
|
|
|
21
|
|
|
|
9
|
|
|
|
—
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
2,984
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,984
|
|
Cryptocurrency revenue
|
|
|
—
|
|
|
|
2,652
|
|
|
|
—
|
|
|
|
2,652
|
|
Research and product development expenses
|
|
|
792
|
|
|
|
—
|
|
|
|
—
|
|
|
|
792
|
|
Selling, general and administrative expenses
|
|
|
1,066
|
|
|
|
855
|
|
|
|
2,946
|
|
|
|
4,867
|
|
Segment profit / (loss) from operations before income taxes
|
|
|
(672
|
)
|
|
|
|
|
|
)
|
|
|
)
|
Segment profit / (loss)
|
|
|
(672
|
)
|
|
|
771
|
|
|
|
(1,939
|
)
|
|
|
(1,840
|
)
|
Total assets
|
|
|
2,636
|
|
|
|
3,883
|
|
|
|
19,040
|
|
|
|
25,559
|
|
Capital expenditures
|
|
|
18
|
|
|
|
1,525
|
|
|
|
—
|
|
|
|
1,543
|
|
Depreciation and amortization
|
|
|
34
|
|
|
|
224
|
|
|
|
—
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
3,973
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,973
|
|
Cryptocurrency revenue
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
Research and product development expenses
|
|
|
764
|
|
|
|
—
|
|
|
|
—
|
|
|
|
764
|
|
Selling, general and administrative expenses
|
|
|
853
|
|
|
|
180
|
|
|
|
609
|
|
|
|
1,642
|
|
Segment profit / (loss) from operations before income taxes
|
|
|
959
|
|
|
|
)
|
|
|
)
|
|
|
|
Segment profit / (loss)
|
|
|
959
|
|
|
|
(144
|
)
|
|
|
(350
|
)
|
|
|
465
|
|
Total assets
|
|
|
3,687
|
|
|
|
1,090
|
|
|
|
2,480
|
|
|
|
7,257
|
|
Capital expenditures
|
|
|
13
|
|
|
|
335
|
|
|
|
—
|
|
|
|
348
|
|
Depreciation and amortization
|
|
|
44
|
|
|
|
9
|
|
|
|
—
|
|
|
|
53
|
|
The
following table presents the details of “Other” segment loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Corporate and other (expenses) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Benefits
|
|
$
|
(1,279
|
)
|
|
$
|
(119
|
)
|
|
$
|
(1,480
|
)
|
|
$
|
(240
|
)
|
Income tax (expense) benefit
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
3
|
|
Other expense, net
|
|
|
(332
|
)
|
|
|
(37
|
)
|
|
|
(456
|
)
|
|
|
(113
|
)
|
Total income (expense)
|
|
$
|
(1,614
|
)
|
|
$
|
(156
|
)
|
|
$
|
(1,939
|
)
|
|
$
|
(350
|
)
|
On
May 7, 2020, in connection with receipt of the $3.3 million United States Air Force delivery order, MTI Instruments obtained a
$300 thousand secured line of credit from Pioneer Bank that will, among other things, assist with MTI Instruments' timely fulfillment
of the delivery order. The line of credit may be drawn in the discretion of MTI Instruments and bears interest at a rate of Prime
+1% per annum. Accrued interest is due monthly, and principal is payable over a period of 30 days following lender's demand. The
line of credit is secured by the assets of MTI Instruments and is guaranteed by the Company. As of June 30, 2021 and December
31, 2020, there were no amounts outstanding under the line of credit.
Management has evaluated all events and transactions that occurred subsequent to June 30, 2021 through
the date of issuance of these condensed consolidated financial statements. During this period, the Company did not have any significant
subsequent events.