0000064463 false 2022 Q1 --12-31 131960000 15991000 15991000 March 10, 2027 14,004,172 13,754,206 one year five years P2Y1M20D 0000064463 2022-01-01 2022-03-31 0000064463 mkty:CommonStockParValue0.001PerShareMember 2022-01-01 2022-03-31 0000064463 mkty:Sec9.0SeriesCumulativePerpetualPreferredStockParValue0.001PerShareMember 2022-01-01 2022-03-31 0000064463 2022-05-12 0000064463 2022-03-31 0000064463 2021-12-31 0000064463 us-gaap:SeriesAPreferredStockMember 2022-03-31 0000064463 us-gaap:SeriesAPreferredStockMember 2021-12-31 0000064463 mkty:CryptocurrencyRevenueMember 2022-01-01 2022-03-31 0000064463 mkty:CryptocurrencyRevenueMember 2021-01-01 2021-03-31 0000064463 mkty:DataHostingRevenueMember 2022-01-01 2022-03-31 0000064463 mkty:DataHostingRevenueMember 2021-01-01 2021-03-31 0000064463 2021-01-01 2021-03-31 0000064463 us-gaap:PreferredStockMember 2020-12-31 0000064463 us-gaap:CommonStockMember 2020-12-31 0000064463 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0000064463 us-gaap:RetainedEarningsMember 2020-12-31 0000064463 us-gaap:TreasuryStockMember 2020-12-31 0000064463 2020-12-31 0000064463 us-gaap:PreferredStockMember 2021-03-31 0000064463 us-gaap:CommonStockMember 2021-03-31 0000064463 us-gaap:AdditionalPaidInCapitalMember 2021-03-31 0000064463 us-gaap:RetainedEarningsMember 2021-03-31 0000064463 us-gaap:TreasuryStockMember 2021-03-31 0000064463 2021-03-31 0000064463 us-gaap:PreferredStockMember 2021-06-30 0000064463 us-gaap:CommonStockMember 2021-06-30 0000064463 us-gaap:AdditionalPaidInCapitalMember 2021-06-30 0000064463 us-gaap:RetainedEarningsMember 2021-06-30 0000064463 us-gaap:TreasuryStockMember 2021-06-30 0000064463 2021-06-30 0000064463 us-gaap:PreferredStockMember 2021-09-30 0000064463 us-gaap:CommonStockMember 2021-09-30 0000064463 us-gaap:AdditionalPaidInCapitalMember 2021-09-30 0000064463 us-gaap:RetainedEarningsMember 2021-09-30 0000064463 us-gaap:TreasuryStockMember 2021-09-30 0000064463 2021-09-30 0000064463 us-gaap:PreferredStockMember 2021-12-31 0000064463 us-gaap:CommonStockMember 2021-12-31 0000064463 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0000064463 us-gaap:RetainedEarningsMember 2021-12-31 0000064463 us-gaap:TreasuryStockMember 2021-12-31 0000064463 us-gaap:PreferredStockMember 2021-01-01 2021-03-31 0000064463 us-gaap:CommonStockMember 2021-01-01 2021-03-31 0000064463 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-03-31 0000064463 us-gaap:RetainedEarningsMember 2021-01-01 2021-03-31 0000064463 us-gaap:TreasuryStockMember 2021-01-01 2021-03-31 0000064463 us-gaap:PreferredStockMember 2021-04-01 2021-06-30 0000064463 us-gaap:CommonStockMember 2021-04-01 2021-06-30 0000064463 us-gaap:AdditionalPaidInCapitalMember 2021-04-01 2021-06-30 0000064463 us-gaap:RetainedEarningsMember 2021-04-01 2021-06-30 0000064463 us-gaap:TreasuryStockMember 2021-04-01 2021-06-30 0000064463 2021-04-01 2021-06-30 0000064463 us-gaap:PreferredStockMember 2021-07-01 2021-09-30 0000064463 us-gaap:CommonStockMember 2021-07-01 2021-09-30 0000064463 us-gaap:AdditionalPaidInCapitalMember 2021-07-01 2021-09-30 0000064463 us-gaap:RetainedEarningsMember 2021-07-01 2021-09-30 0000064463 us-gaap:TreasuryStockMember 2021-07-01 2021-09-30 0000064463 2021-07-01 2021-09-30 0000064463 us-gaap:PreferredStockMember 2021-01-01 2021-12-31 0000064463 us-gaap:CommonStockMember 2021-01-01 2021-12-31 0000064463 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-12-31 0000064463 us-gaap:RetainedEarningsMember 2021-01-01 2021-12-31 0000064463 us-gaap:TreasuryStockMember 2021-01-01 2021-12-31 0000064463 2021-01-01 2021-12-31 0000064463 us-gaap:PreferredStockMember 2021-10-01 2021-12-31 0000064463 us-gaap:CommonStockMember 2021-10-01 2021-12-31 0000064463 us-gaap:AdditionalPaidInCapitalMember 2021-10-01 2021-12-31 0000064463 us-gaap:RetainedEarningsMember 2021-10-01 2021-12-31 0000064463 us-gaap:TreasuryStockMember 2021-10-01 2021-12-31 0000064463 2021-10-01 2021-12-31 0000064463 us-gaap:PreferredStockMember 2022-01-01 2022-03-31 0000064463 us-gaap:CommonStockMember 2022-01-01 2022-03-31 0000064463 us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-03-31 0000064463 us-gaap:RetainedEarningsMember 2022-01-01 2022-03-31 0000064463 us-gaap:TreasuryStockMember 2022-01-01 2022-03-31 0000064463 us-gaap:PreferredStockMember 2022-03-31 0000064463 us-gaap:CommonStockMember 2022-03-31 0000064463 us-gaap:AdditionalPaidInCapitalMember 2022-03-31 0000064463 us-gaap:RetainedEarningsMember 2022-03-31 0000064463 us-gaap:TreasuryStockMember 2022-03-31 0000064463 us-gaap:PreferredStockMember 2019-12-31 0000064463 us-gaap:PreferredStockMember 2020-01-01 2020-12-31 0000064463 mkty:DatahostingMember 2022-03-31 0000064463 mkty:DatahostingMember 2021-12-31 0000064463 mkty:OtherReceivablesMember 2022-03-31 0000064463 mkty:OtherReceivablesMember 2021-12-31 0000064463 mkty:EmployeeReceivablesMember 2022-03-31 0000064463 mkty:EmployeeReceivablesMember 2021-12-31 0000064463 us-gaap:LandMember 2022-03-31 0000064463 us-gaap:LandMember 2021-12-31 0000064463 us-gaap:LandImprovementsMember 2022-03-31 0000064463 us-gaap:LandImprovementsMember 2021-12-31 0000064463 mkty:BuildingsMember 2022-03-31 0000064463 mkty:BuildingsMember 2021-12-31 0000064463 us-gaap:LeaseholdImprovementsMember 2022-03-31 0000064463 us-gaap:LeaseholdImprovementsMember 2021-12-31 0000064463 us-gaap:VehiclesMember 2022-03-31 0000064463 us-gaap:VehiclesMember 2021-12-31 0000064463 mkty:ComputersAndRelatedSoftwareMember 2022-03-31 0000064463 mkty:ComputersAndRelatedSoftwareMember 2021-12-31 0000064463 us-gaap:MachineryAndEquipmentMember 2022-03-31 0000064463 us-gaap:MachineryAndEquipmentMember 2021-12-31 0000064463 mkty:OfficeFurnitureAndFixturesMember 2022-03-31 0000064463 mkty:OfficeFurnitureAndFixturesMember 2021-12-31 0000064463 us-gaap:ConstructionInProgressMember 2022-03-31 0000064463 us-gaap:ConstructionInProgressMember 2021-12-31 0000064463 mkty:AccumulatedDepreciationMember 2022-03-31 0000064463 mkty:AccumulatedDepreciationMember 2021-12-31 0000064463 srt:MaximumMember 2022-03-31 0000064463 mkty:Merger1Member 2022-01-01 2022-03-31 0000064463 mkty:Merger2Member 2022-01-01 2022-03-31 0000064463 mkty:SolunaMember 2022-03-31 0000064463 mkty:StrategicPipelineContractMember 2022-03-31 0000064463 mkty:AssembledWorkforceMember 2022-03-31 0000064463 us-gaap:PatentsMember 2022-03-31 0000064463 mkty:StrategicPipelineContractMember 2021-12-31 0000064463 mkty:AssembledWorkforceMember 2021-12-31 0000064463 us-gaap:PatentsMember 2021-12-31 0000064463 us-gaap:ConvertibleNotesPayableMember 2022-03-31 0000064463 us-gaap:ConvertibleNotesPayableMember 2021-10-23 2021-10-25 0000064463 2022-01-01 2022-03-03 0000064463 mkty:TrancheOneMember 2022-02-21 2022-02-22 0000064463 mkty:TrancheTwoMember 2022-02-21 2022-02-22 0000064463 mkty:PromissoryNotesMember 2022-02-22 0000064463 2021-09-12 2021-09-13 0000064463 2021-09-13 0000064463 mkty:PromissoryNotesMember mkty:TrancheMember 2022-03-31 0000064463 mkty:PromissoryNotesMember mkty:TrancheMember 2022-01-01 2022-03-31 0000064463 mkty:PromissoryNotesMember mkty:TrancheOneMember 2022-03-31 0000064463 mkty:PromissoryNotesMember mkty:TrancheOneMember 2022-01-01 2022-03-31 0000064463 mkty:PromissoryNotesMember 2022-03-31 0000064463 mkty:SeriesACumulativePreferredStockMember 2022-03-31 0000064463 mkty:SeriesACumulativePreferredStockMember 2021-03-31 0000064463 us-gaap:SeriesAPreferredStockMember 2022-01-01 2022-03-31 0000064463 mkty:DividendMember 2022-01-01 2022-03-31 0000064463 mkty:OptionsMember 2022-01-01 2022-03-31 0000064463 mkty:RestrictedStockUnitsMember 2022-03-31 0000064463 mkty:OptionsMember 2021-01-01 2021-03-31 0000064463 mkty:RestrictedStockUnitsMember 2021-03-31 0000064463 srt:MinimumMember 2022-03-31 0000064463 2021-05-03 2021-05-04 0000064463 mkty:SolunaMember mkty:MEOHPowerIncMember 2022-01-01 2022-03-31 0000064463 mkty:MeOHPowerMember 2022-03-31 0000064463 mkty:MeOHPowerMember 2021-03-31 0000064463 mkty:SolunaMember 2022-01-01 2022-03-31 0000064463 mkty:SolunaMember 2021-01-01 2021-03-31 0000064463 mkty:SolunaMember mkty:OperatingAndManagementAgreement3Member 2021-01-01 2021-12-31 0000064463 mkty:SolunaMember mkty:OperatingAndManagementAgreement3Member 2022-01-01 2022-03-31 0000064463 mkty:HarmattanEnergyLtdMember 2022-01-01 2022-03-31 0000064463 mkty:SolunaMember mkty:ClassAPreferredSharesMember 2020-01-13 0000064463 mkty:SolunaMember mkty:ClassAPreferredSharesMember 2020-03-22 2020-03-23 0000064463 mkty:SolunaMember 2020-01-12 2020-01-13 0000064463 2021-10-28 2021-10-29 0000064463 srt:ChiefExecutiveOfficerMember mkty:MichaelToporekMember 2022-01-01 2022-03-31 0000064463 srt:ChiefExecutiveOfficerMember mkty:MatthewELipmanMember 2022-01-01 2022-03-31 0000064463 srt:ChiefExecutiveOfficerMember mkty:MrBelizaireMember 2022-01-01 2022-03-31 0000064463 mkty:HELMember 2022-01-01 2022-03-31 0000064463 mkty:HELMember 2022-03-31 0000064463 us-gaap:RestrictedStockMember 2022-01-01 2022-03-31 0000064463 mkty:Stock2021PlanMember us-gaap:RestrictedStockMember srt:MinimumMember 2022-03-31 0000064463 mkty:Stock2021PlanMember us-gaap:StockOptionMember 2022-01-01 2022-03-31 0000064463 mkty:Stock2021PlanMember us-gaap:StockOptionMember 2021-01-01 2021-03-31 0000064463 mkty:Stock2021PlanMember us-gaap:RestrictedStockMember 2021-01-01 2021-03-31 0000064463 mkty:Stock2021PlanMember us-gaap:RestrictedStockMember 2021-03-31 0000064463 mkty:Stock2021PlanMember us-gaap:RestrictedStockUnitsRSUMember 2021-01-01 2021-03-31 0000064463 mkty:Stock2021PlanMember us-gaap:RestrictedStockUnitsRSUMember 2021-03-31 0000064463 mkty:MTIInstrumentsMember 2022-01-01 2022-03-31 0000064463 country:US mkty:MTIInstrumentsMember 2022-01-01 2022-03-31 0000064463 country:US mkty:MTIInstrumentsMember 2021-01-01 2021-03-31 0000064463 mkty:MTIInstrumentsMember 2021-01-01 2021-03-31 0000064463 country:US 2022-01-01 2022-03-31 0000064463 country:US 2021-01-01 2021-03-31 0000064463 mkty:ASEANMember 2022-01-01 2022-03-31 0000064463 mkty:ASEANMember 2021-01-01 2021-03-31 0000064463 us-gaap:EMEAMember 2022-01-01 2022-03-31 0000064463 us-gaap:EMEAMember 2021-01-01 2021-03-31 0000064463 country:CA 2022-01-01 2022-03-31 0000064463 country:CA 2021-01-01 2021-03-31 0000064463 mkty:CalvertMember 2022-01-01 2022-03-31 0000064463 mkty:CalvertMember 2021-01-01 2021-03-31 0000064463 us-gaap:ReportableSubsegmentsMember 2022-01-01 2022-03-31 0000064463 us-gaap:ReportableSubsegmentsMember 2021-01-01 2021-03-31 0000064463 us-gaap:SubsequentEventMember 2022-04-10 2022-04-11 0000064463 us-gaap:SubsequentEventMember 2022-04-12 2022-04-13 0000064463 us-gaap:SubsequentEventMember 2022-04-13 0000064463 2022-04-12 2022-04-13 0000064463 us-gaap:SubsequentEventMember mkty:InvestorsMember 2022-04-12 2022-04-13 0000064463 us-gaap:SubsequentEventMember us-gaap:IPOMember 2022-04-25 2022-04-26 0000064463 us-gaap:SubsequentEventMember mkty:UnderwrittenOfferingMember 2022-04-28 2022-04-29 0000064463 us-gaap:SubsequentEventMember mkty:UnderwrittenOfferingMember 2022-04-27 2022-04-29 0000064463 us-gaap:SubsequentEventMember us-gaap:OverAllotmentOptionMember 2022-04-28 2022-04-29 0000064463 us-gaap:SubsequentEventMember mkty:PurchaseAgreementMember 2022-04-28 2022-04-29 0000064463 us-gaap:SubsequentEventMember us-gaap:CommonStockMember us-gaap:IPOMember 2022-04-28 2022-04-29 0000064463 us-gaap:SubsequentEventMember us-gaap:WarrantMember us-gaap:IPOMember 2022-04-28 2022-04-29 0000064463 us-gaap:SubsequentEventMember 2022-04-28 2022-04-29 0000064463 us-gaap:SubsequentEventMember us-gaap:SeriesAPreferredStockMember 2022-04-28 2022-04-29 iso4217:USD xbrli:shares iso4217:USD xbrli:shares xbrli:pure

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to _____

 

Commission File Number: 001-40261

 

Soluna Holdings, Inc. 

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   14-1462255
State or other jurisdiction   (I.R.S. Employer
of incorporation or organization   Identification No.)

 

325 Washington Avenue Extension, Albany, New York 12205

(Address of principal executive offices)                      (Zip Code)

 

(518) 218-2550

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)   Name of each exchange on which
registered
Common Stock, par value $0.001 per share   SLNH   The Nasdaq Stock Market LLC
9.0% Series A Cumulative Perpetual Preferred Stock, par value $0.001 per share   SLNHP   The Nasdaq Stock Market LLC

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒

Smaller reporting company 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of May 12, 2022, the Registrant had 14,040,149 shares of common stock outstanding.

 

 

 

 

 

 

 SOLUNA HOLDINGS, INC. AND SUBSIDIARIES

INDEX

 

PART I. FINANCIAL INFORMATION 2
   
Item 1. Financial Statements 2
   
Condensed Consolidated Balance Sheets
As of March 31, 2022 (Unaudited) and December 31, 2021
2
   
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2022 and 2021
3
   
Condensed Consolidated Statements of Changes in Equity
For the Year Ended December 31, 2021 and the Three Months Ended March 31, 2022 (Unaudited)
4
   
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2022 and 2021
6
   
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
   
Item 4. Controls and Procedures 34
   
PART II. OTHER INFORMATION 34
   
Item 1. Legal Proceedings 34
   
Item 1A. Risk Factors 34
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
   
Item 3. Defaults Upon Senior Securities 34
   
Item 4. Mine Safety Disclosures 34
   
Item 5. Other Information 34
   
Item 6. Exhibits 34
   
SIGNATURES 36

 

1

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

Soluna Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of March 31, 2022 (Unaudited) and December 31, 2021

 

(Dollars in thousands, except per share)            
             
    March 31,     December 31,  
    2022     2021  
Assets      
Current Assets:                
Cash   $ 2,827     $ 10,258  
Accounts receivable     324       531  
Inventories            
Prepaid expenses and other current assets     1,571       977  
Deposits on equipment     14,861       10,188  
Current assets associated with discontinued operations     2,819       3,028  
Total Current Assets     22,402       24,982  
Other assets     1,062       1,121  
Deferred tax asset, net            
Equity investment     750       750  
Property, plant and equipment, net     68,245       44,597  
Intangible assets, net     43,509       45,839  
Operating lease right-of-use assets     369       405  
Total Assets   $ 136,337     $ 117,694  
                 
Liabilities and Stockholders’ Equity                
Current Liabilities:                
Accounts payable   $ 4,363     $ 2,958  
Accrued liabilities     2,173       2,859  
Line of credit     1,000       1,000  
Notes payable     15,991       7,121  
Current portion of debt     7,195        
Deferred revenue     307       316  
Operating lease liability     193       184  
Income taxes payable     2       2  
Current liabilities associated with discontinued operations     1,298       1,243  
Total Current Liabilities     32,522       15,683  
                 
Other liabilities     509       509  
Long term debt     5,802        
Operating lease liability     192       237  
Deferred tax liability, net     9,730       10,277  
Total Liabilities     48,755       26,706  
                 
Commitments and Contingencies (Note 10)                
                 
Stockholders’ Equity:                
9.0% Series A Cumulative Perpetual Preferred Stock, par value $0.001 per share, $25.00 liquidation preference; authorized 3,640,000; 1,319,156 shares issued and outstanding as of March 31, 2022 and 1,252,299 shares issued and outstanding as of December 31, 2021     1       1  
Common stock, par value $0.001 per share, authorized 75,000,000; 15,019,665 shares issued and 14,004,172 shares issued and outstanding as of March 31, 2022 and 14,769,699 shares issued and 13,754,206 shares issued and outstanding as of December 31, 2021     15       15  
Additional paid-in capital     233,290       227,790  
Accumulated deficit     (131,960 )     (123,054 )
Common stock in treasury, at cost, 1,015,493 shares at March 31, 2022 and December 31, 2021     (13,764 )     (13,764 )
Total Stockholders’ Equity     87,582       90,988  
                 
Total Liabilities and Stockholders’ Equity   $ 136,337     $ 117,694  

 

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

 

2

 

 

Soluna Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

For the Three Months Ended March 31, 2022 and 2021

 

(Dollars in thousands, except per share)            
 
    Three Months Ended  
    March 31,  
    2022     2021  
             
Cryptocurrency mining revenue   $ 7,812     $ 995  
Data hosting revenue     1,504        
Total revenue     9,316       995  
Operating costs and expenses:                
Cost of cryptocurrency mining revenue     7,721       328  
Cost of data hosting revenue     1,138        
Selling, general and administrative expenses     7,255       1,298  
Operating loss     (6,798 )     (631 )
Interest expense     (2,881 )      
Other income, net           5  
Loss before income taxes from continuing operations     (9,679 )     (626 )
Income tax benefit from continuing operations     547        
    Net loss from continuing operations     (9,132 )     (626 )

Income (loss) before income taxes from discontinued operations

    226       (40 )
Income tax benefit from discontinued operations            
    Net income (loss) from discontinued operations     226       (40 )

Net loss

  $ (8,906 )   $ (666 )
                 
Basic (loss) earnings per common share:                
Net loss from continuing operations per share (Basic)   $ (0.71 )   $ (0.06 )

Net income (loss) from discontinued operations per share (Basic)

  $ 0.02     $ (0.01 )
      Basic loss per share   $ (0.69 )   $ (0.07 )
                 
Diluted loss per common share:                
Net loss from continuing operations per share (Diluted)   $ (0.71 )   $ (0.06 )
Net income (loss) from discontinued operations per share (Diluted)   $ 0.02     $ (0.01 )

      Diluted loss per share

  $ (0.69 )   $ (0.07 )
                 
Weighted average shares outstanding (Basic & Diluted)     13,870,646       9,796,863  

 

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

 

3

 

 

Soluna Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
For the Year Ended December 31, 2021

And the Three Months Ended March 31, 2022 (Unaudited)

 

(Dollars in thousands, except per share)

                                                         
    Preferred Stock     Common Stock                 Treasury Stock        
                                                       
    Shares     Amount     Shares     Amount     Additional
Paid-in
Capital
    Accumulated
Deficit
    Shares     Amount     Total
Stockholders’
Equity
 
December 31, 2020         $       10,750,100     $ 11     $ 137,462     $ (117,793 )     1,015,493     $ (13,764 )   $ 5,916  
                                                                         
Net loss                                   (666 )                 (666 )
                                                                         
Stock-based compensation                             34                         34  
                                                                         
Issuance of shares – option exercises                 77,250             62                         62  
                                                                         
Issuance of shares – restricted stock                 57,500             49                         49  
                                                                         
March 31, 2021         $       10,884,850     $ 11     $ 137,607     $ (118,459 )     1,015,493     $ (13,764 )   $ 5,395  
                                                                         
Net loss                                   (1,174 )                 (1,174 )
                                                                         
Stock-based compensation                             1,005                         1,005  
                                                                         
Issuance of shares – stock offering                 2,782,258       3       15,400                         15,403  
                                                                         
Issuance of shares – option exercises                 27,650             21                         21  
                                                                         
Issuance of shares – restricted stock                 20,405             207                         207  
                                                                         
June 30, 2021         $       13,715,163     $ 14     $ 154,240     $ (119,633 )     1,015,493     $ (13,764 )   $ 20,857  
                                                                         
Net loss                                   (610 )                 (610 )
                                                                         
Preferred dividends                             (176)                         (176)  
                                                                         
Stock-based compensation                             334                         334  
                                                                         
Issuance of shares – preferred offering     806,585       1                   18,297                         18,298  
                                                                         
Issuance of shares – option exercises                 16,500             18                         18  
                                                                         
Issuance of shares – warrant exercises                 1,050             9                         9  
                                                                         
September 30, 2021     806,585     $ 1       13,732,713     $ 14     $ 172,722     $ (120,243 )     1,015,493     $ (13,764 )   $ 38,730  
                                                                         
Net loss                                   (2,811 )                 (2,811)  
                                                                         
Preferred dividends                             (454)                         (454)  
                                                                         
Stock-based compensation                             648                         648  
                                                                         
Issuance of shares – preferred offering     445,714                         6,759                         6,759  
                                                                         
Issuance of shares – option exercises                 2,000             1                         1  
                                                                         
Issuance of shares- restricted stock                 154,426                                      
                                                                         
Issuance of shares- Notes conversion                 150,000             1,377                         1,377  
                                                                         
Issuance of shares- termination shares                 150,000             1,917                         1,917  
                                                                         
Warrants issued in relation to debt financing                             7,037                         7,037  
                                                                         
Share consideration of asset acquisition                             33,000                         33,000  
                                                                         
Issuance of shares – warrant exercises                 580,560       1       4,783                         4,784  
                                                                         
December 31, 2021     1,252,299     $ 1       14,769,699     $ 15     $ 227,790     $ (123,054 )     1,015,493     $ (13,764 )   $ 90,988  

 

4

 

 

                                                                         
    Shares     Amount     Shares       Amount     Additional
Paid-in
Capital
      Accumulated
Deficit
    Shares       Amount     Total
Stockholders’
Equity
 
December 31, 2021     1,252,299     $ 1       14,769,699     $ 15     $ 227,790     $ (123,054 )     1,015,493     $ (13,764 )   $ 90,988  
                                                                         
Net loss                                   (8,906 )                 (8,906 )
                                                                         
Preferred dividends distribution                             (749)                         (749 )
                                                                         
Stock-based compensation                             955                         955  
                                                                         
Issuance of shares – preferred offering     66,857                         957                         957  
                                                                         
Restricted stock units vested                 14,301                                      
                                                                         
Issuance of shares – warrant exercises                 89,500             738                         738  
                                                                         
Issuance of shares- Notes conversion                 146,165             1,342                         1,342  
                                                                         
Warrants issued in relation to debt financing                                     2,257                                2,257   
March 31, 2022     1,319,156     $ 1       15,019,665     $ 15     $ 233,290     $ (131,960 )     1,015,493     $ (13,764 )   $ 87,582  

 

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

 

5

 

Soluna Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31, 2022 and 2021

(Dollars in thousands)

               
    Three Months Ended
March 31,
 
    2022     2021  
Operating Activities                
Net loss- continuing operations   $ (9,132 )   $ (626 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     6,697       75  
Stock-based compensation     927       29  
Consultant stock compensation     28       25  
Deferred income taxes     (547 )      
Amortization of operating lease asset     50       38  
Amortization of deferred financing costs and discount on notes     2,447        
Changes in operating assets and liabilities:                
Accounts receivable     206       2  
Prepaid expenses and other current assets     (594 )     81  
Other long-term assets     59       (2 )
Accounts payable     1,405       1,149  
Deferred revenue     (9 )      
Operating lease liabilities     (49 )     (37
Accrued liabilities     (687 )     98  
Net cash provided by operating activities     801       832  
 Net cash  provided by operating activities- discontinued operations     510       170  
Investing Activities                
Purchases of equipment     (25,438 )     (296 )
Purchases of intangible assets     (40 )      
Deposits of equipment, net     (2,590 )     (671 )
Net cash used in investing activities     (28,068 )     (967 )
 Net cash used in investing activities- discontinued operations           (5 )
Financing Activities                
Proceeds from preferred offering     1,170        
Proceeds from notes and debt issuance     19,767        
Costs of preferred offering     (155 )      
Costs of notes and short term debt issuance     (1,445 )      
Cash dividend distribution on preferred stock     (749 )      
Proceeds from stock option exercises           62  
Proceeds from common stock warrant exercises     738        
Net cash provided by financing activities     19,326       62  
                 
Decrease in cash-continuing operations     (7,941 )     (73 )
Increase in cash- discontinued operations     510       165  
Cash – beginning of period     10,258       2,630  
Cash – end of period   $ 2,827     $ 2,722  
                 
Supplemental Disclosure of Cash Flow Information                
Noncash equipment financing     4,620        
Interest paid on NYDIG loans     335        
Noncash consultant stock compensation in prepaids and other assets           24  
Warrant consideration in related to promissory notes     2,257        
S-3 fees in accounts payable     (58 )      
Notes converted to common stock     1,342        

 

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

 

6

 

 

Soluna Holdings, Inc.

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1. Nature of Operations

 

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 March 31, 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 consideration paid by the Purchaser to the Company was based on an aggregate enterprise value of approximately $10.75 million.

  

Liquidity

 

The Company has historically incurred significant losses primarily due to our past efforts to fund direct methanol fuel cell product development and commercialization programs and had a consolidated accumulated deficit of approximately $131.9 million as of March 31, 2022. As of March 31, 2022, the Company had negative working capital of approximately $10.1 million, a line of credit outstanding of $1.0 million, $8.2 million outstanding note payable that can be converted to common stock, received additional equipment financing for up to $14.4 million of which $7.1 million was current, as well as received financing of approximately $10.0 million from promissory notes. The Company had outstanding commitments as of March 31, 2022 related to SCI for $37.3 million for capital expenditures, approximately $801 thousand in cash provided by operating activities for continuing operations, and approximately $2.8 million of cash available to fund our operations.

 

7

 

 

During the three months ended March 31, 2022, the Company paid approximately $25.4 million in capital expenditures and had approximately $14.8 million outstanding in deposits for equipment. Subsequent to the three months ended March 31, 2022, the Company received the third tranche of financing of approximately $10.0 million from promissory notes. Please refer to Footnote 16 “Subsequent Events”, for further details.

 

Recently, the Company has seen a decline in the price of Bitcoin due its volatility, which could have material and negative impact to our operations. Management has assessed volatility and has determined that we will have sufficient cash flow to fund operations for the next twelve months.

 

The COVID-19 global pandemic has been unprecedented and unpredictable and our 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. However, the Company is actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and the industry

 

 

2. Basis of Presentation

 

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 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 months ended March 31, 2022 and March 31, 2021.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and our then wholly-owned subsidiaries, MTI Instruments and SCI, as of March 31, 2022. 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 our 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.

 

8

 

 

The following tables present the effects of the correction of the prior period error to the Condensed Consolidated Statement of Equity:

 

                                                                         
    Preferred Stock     Common Stock                     Treasury Stock          
                                                                         
      Shares       Amount       Shares       Amount       Additional
Paid-in
Capital
      Accumulated
Deficit
      Shares       Amount       Total
Stockholders’
Equity
 
                                                                         
September 30, 2021     806,585     $ 1       13,732,713     $ 14     $ 172,898     $ (120,419 )     1,015,493     $ (13,764 )   $ 38,730  
                                                                         
Adjustment for correction of an error-Preferred dividends                             (176 )     176                    
Balance Sep tember 30, 2021-as adjusted     806,585     $ 1       13,732,713     $ 14     $ 172,722     $ (120,243 )     1,015,493     $ (13,764 )   $ 38,730  

December 31, 2021

    1,252,299     $ 1       14,769,699     $ 15     $ 228,420     $ (123,684 )     1,015,493     $ (13,764 )   $ 90,988  
                                                                         
Adjustment for correction of an error-Preferred dividends                             (630 )     630                    
                                                                         
December 31, 2021-as adjusted     1,252,299     $ 1       14,769,699     $ 15     $ 227,790     $ (123,054 )     1,015,493     $ (13,764 )   $ 90,988  

 

 

 

 

3. Accounts Receivable

 

Accounts receivables consist of the following at:

 

(Dollars in thousands)   March 31,
2022
    December 31,
2021
 
Data Hosting   $ 246       450  
Other     78       81  
Total   $ 324     $ 531  

 

The Company’s allowance for doubtful accounts was $0 at both March 31, 2022 and December 31, 2021.

 

Employee Receivables

 

Certain employees have a receivable due to the Company related to the vesting of stock awards, in which $162 thousand and $0 were outstanding as of March 31, 2022 and December 31, 2021, respectively.  The balance is currently included within prepaid and other assets on the condensed financial statements.

 

 

4. Property, Plant and Equipment

 

Property, plant and equipment consist of the following at:

 

(Dollars in thousands)   March 31,
2022
    December 31,
2021
 
Land   $ 52     $ 52  
Land improvements     238       238  
Buildings     6,988       5,650  
Leasehold improvements     317       317  
Vehicles     15       15  
Computers and related software     60,093       30,890  
Machinery and equipment     4,522       2,588  
Office furniture and fixtures     22       22  
Construction in progress     3,090       7,590  
      75,337       47,362  
Less: Accumulated depreciation     (7,092 )     (2,765 )
    $ 68,245     $ 44,597  

 

Depreciation expense was approximately $4.3 million and $75 thousand for the three months ended March 31, 2022 and the three months ended March 31, 2021, respectively.

 

 

  5. Asset Acquisition

 

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.

 

9

 

 

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 (“the Termination Agreement”), on November 5, 2021, 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 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

 

10

 

 

  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 the Board of Directors 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 high probability of 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.

 

 

  6. Intangible Assets

 

Intangible assets consist of the following as of March 31, 2022:

 

(Dollars in thousands)   Intangible
Assets
    Accumulated
Amortization
    Total  
For the year ended March 31, 2022                        
Strategic pipeline contract   $ 46,885     $ 3,906     $ 42,979  
Assembled workforce     500       42       458  
Patents     73       1       72  
Total   $ 47,458     $ 3,949     $ 43,509  

 

Intangible assets consist of the following as of December 31, 2021:

 

(Dollars in thousands)   Intangible
Assets
    Accumulated
Amortization
    Total  
For the year ended December 31, 2021                        
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 March 31, 2021. Amortization expense for the three months ended March 31, 2022 was approximately $2.4 million.

 

11

 

 

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     2022  
2022 (remainder of the year)     $ 7,110  
2023       9,481  
2024       9,481  
2025       9,481  
2026       7,900  
Thereafter       56  
Total     $ 43,509  

 

 

 

7. Income Taxes

 

During the three months ended March 31, 2022 and 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 $547 thousand deferred income tax benefit for the three months ended March 31, 2022 and for the three months ended March 31, 2021, there was no income tax benefit.

 

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 months ended March 31, 2022, the Company amortized $547 thousand.

 

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 $11.9 million at March 31, 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.

 

 

  8. Debt

 

Convertible Notes

 

Debt consists of the following
(dollar in thousands):

 

    Maturity
Date
  Interest Rate     March 31,
2022
    December
31, 2021
 
Convertible Note   October 25, 2022     8 %   $ 13,586     $ 14,927  
Less: debt discount                 610       967  
Less:  discount from issuance of warrants                 3,988       5,747  
Less: debt issuance costs                 758       1,092  
Total convertible notes, net of discount and issuance costs               $ 8,230     $ 7,121  

 

 

12

 

 

On October 25, 2021, pursuant to the 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 “Notes”), which are, subject to certain conditions, convertible at any time by the investors, into an aggregate of 1,776,073 shares (the “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 “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 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, as collateral agent for and the holders of the Notes (the “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 signatory to the SPA (each, a “Subsidiary Guaranty”).

 

The fair value of the 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 Notes and the 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 Notes. For the three months ended March 31, 2022, the Company has recorded amortized debt discount related to the warrants, the amount of $1.8 million which is included in interest expense. The Company has also recorded a debt discount on the 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 $700 thousand has been amortized over the life of the notes. There was also debt issuance costs of approximately $1.3 million and approximately $550 thousand has been amortized over the life of the Notes. All amortized costs are included in interest expense.

 

During the three months ended March 31, 2022 and year ended December 31, 2021, $13.6 million and $14.9 million, respectively, was remaining in the principal balance of the Notes. For the three months ended March 31, 2022, approximately $1.3 million was converted into 146,145 shares of our common stock. Through March 31, 2022, a total of approximately $2.7 million was converted into 296,145 shares of our common stock.

 

Promissory Notes

 

    Maturity Date     Interest Rate     March 31, 2022  
1st tranche promissory note   February 22, 2027       2 %   $ 7,600  
2nd tranche promissory note    March 10, 2027       2 %     2,400  
Less:  debt discount                   (2,220 )
Plus: interest expense accrued                   20  
Less: debt issuance costs                   (39 )
Total promissory notes, net of issuance costs                 $ 7,761  

 

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 Stock Market LLC rules. See Note 16, Subsequent Events, for further information regarding the Third Tranche note and the issuance of the Warrants.

 

13

 

 

The First Tranche Notes have a maturity date of February 22, 2027, the Second Tranche Notes have a maturity date of March 10, 2027 and Third Tranche will have a maturity date five years from the date of issuance (each a “Maturity Date”), upon which dates the Notes shall be payable in full, and accrue interest at a rate of two percent (2%) per annum. The Notes may be repaid, at such Lender’s sole election, either (a) at the applicable Maturity Date or (b) upon the first business day of each month that the Company keeps open a private offering of our Series A Preferred Stock by presenting its Note in whole or in part as legal tender to purchase such shares of Series A Preferred Stock at price per share of Series A Preferred Stock on the date immediately preceding the closing of such subscription, provided that if the Notes are not repaid by May 2, 2022, the Notes shall automatically be subscribed for shares of the Series A Preferred Stock. If any Event of Default 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 Lender’s election, immediately due and payable in cash. The Notes may be prepaid or redeemed upon written notice to the other party.

 

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 fair value of the Warrants for the first and second tranche, as of the issuance date, was $2.26 million and is recorded as equity with the offset recorded as debt discount against the net proceeds. The proceeds of $10.00 million were allocated between the Promissory Notes and the Warrants, in which the discount related to the Warrants are being amortized based on the straight-line method through the date of Maturity. For the three months ended March 31, 2022, the Company has recorded amortized debt discount, related to the Warrants, the amount of $40 thousand, which is included in interest expense. There were also debt issuance costs of approximately $40 thousand as of March 31, 2022 and approximately $1 thousand has been amortized. All amortized costs are included in interest expense. During the three months ended March 31, 2022, $10.0 million is remaining in the principal balance of the Notes.

 

On April 29, 2022, the Company issued in a registered direct offering 1,142,857 shares of 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 concurrent underwritten public offering, in full satisfaction of the Company’s obligations under the outstanding Notes in an aggregate amount of $20 million. See Note 16 for, Subsequent Events, for further information regarding this offering.

  

NYDIG Financing

 

    Maturity Dates   Interest Rate     March  31, 2021  
NYDIG Loans #1-11   April 25, 2023 thru January 25, 2027   12% thru 15% %   $ 14,387  
Less: principal payments               1,074  
Less: debt issuance costs               316  
Total outstanding debt               12,997  
Less current portion of debt               7,195  
Total Long-term debt             $ 5,802  

 

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 a sale/leaseback structure 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.

 

14

 

 

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 (4.25% interest rate as of March 31, 2022). Accrued interest is due monthly and principal is due in full following lender’s demand. As of March 31, 2022, the entire line of credit of $1.0 million was drawn and outstanding. MTI Instruments previously held a secured line of credit with Pioneer Bank in the amount of $300 thousand. The secured line of credit was closed on September 10, 2021 with no outstanding amounts.

 

 

9. Stockholders’ Equity

 

Preferred Stock

 

The Company has one series of preferred stock outstanding, known as the Series A Cumulative Perpetual Preferred Stock, par value $0.001 per share, with a $25.00 liquidation preference. As of March 31, 2022 and December 31, 2021, there were 1,319,156 and 1,252,299 shares of preferred stock issued and outstanding, respectively.

 

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 March 31, 2022 and December 31, 2021, there were 14,004,172 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 of Directors, (or a duly authorized committee of the Board of Directors), will be payable monthly in arrears on the final day of each month, beginning August 31, 2021. During the three months ended March 31, 2022, the Board of Directors declared and paid the Company preferred stock dividend distributions of $749 thousand and for the fiscal year ended December 31, 2021, the Board of Directors declared and the Company paid monthly preferred stock dividends totaling an amount of approximately $630 thousand.

 

Reservation of Shares

 

The Company had reserved shares of common stock for future issuance as follows as of March 31, 2022:

 

         
Stock options outstanding     990,800  
Restricted stock units outstanding     555,847  
Warrants outstanding     2,692,355  
Common stock available for future equity awards or issuance of options     586,732  
Number of common shares reserved     4,825,734  

 

15

 

 

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 months ended March 31, 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 months ended March 31, 2022, were options to purchase 990,800 shares of the Company’s common stock, 555,847 nonvested restricted stock units, 2,692,355 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 months ended March 31, 2021, were options to purchase 351,500 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.

 

 

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 March 31, 2022 and December 31, 2021, 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 months ended March 31, 2022 and 2021 total lease costs are comprised of the following:

 

                 
(Dollars in thousands)   Three Months Ended March 31,  
    2022     2021  
Operating lease cost   $ 50     $ 38  
Short-term lease cost            
Total net lease cost   $ 50     $ 38  

 

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)

  Three Months Ended
March 31, 2022
 
       
Weighted Average Remaining Lease Term (in years):        
     Operating leases     2.14  
         
Weighted Average Discount Rate:        
     Operating leases     3.83 %

 

(Dollars in thousands, except lease term and discount rate)

  Three Months Ended
March 31, 2022
    Three Months Ended
March 31, 2021
 
                 
Supplemental Cash Flows Information:                
 Cash paid for amounts included in the measurement of lease liabilities:                
     Operating cash flows from operating leases   $ 49     $ 36  
                 
Non-Cash Activity Right-of-use assets obtained in exchange for lease obligations:                
     Operating leases   $ 13     $  

 

16

 

 

Maturities of noncancellable operating lease liabilities are as follows for the three months ending March 31:

(Dollars in thousands)      
    2022  
2022 (remainder of year)   $ 153  
2023     164  
2024     85  
Total lease payments     402  
  Less: imputed interest     (17 )
     Total lease obligations     385  
  Less: current obligations     (193 )
     Long-term lease obligations   $ 192  

 

As of March 31, 2022, there were no additional operating lease commitments that had not yet commenced, except for the ground lease noted below.

 

On May 4, 2021, Soluna MC LLC, formerly EcoChain Block, LLC, (“Soluna MC”), a wholly owned subsidiary of SCI, 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, Soluna MC 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 Soluna MC for all of its construction costs, subject to certain exceptions, relating to buildings and other improvements developed by Soluna MC on the Vacant Land Premises. As of March 31, 2022, this lease has not commenced.

 

Soluna MC 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”). The Company 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 Soluna MC. 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. Soluna MC has the option of making the Vacancy Payments in cash or by the Company’s 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 Soluna MC 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 the Company’s common stock, which may be applied as an advance against future Vacancy Payments, all as fully provided in the Building Lease.

 

The Company is required to issue to the landlord 100,000 shares of the Company’s common stock, in connection with the Vacant Land Lease, upon the effective date of the Vacant Land Lease, which may not occur prior to the Building Commencement Date. In addition, Soluna MC and the landlord have entered into a memorandum of understanding providing Soluna MC with a six-month exclusivity period to expand the Vacant Land Premises, including obtaining additional power, in connection therewith. Soluna MC and the landlord have not agreed on any of the terms of such expansion other than the exclusivity period previously described. Soluna MC 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 Soluna MC at a fee to be mutually agreed by the landlord and Soluna MC. The Transition Services Agreement also requires the landlord to pay Soluna MC an amount approximately equal to the landlord’s net profits received from the landlord’s other tenants operating out of the Building Lease Premises.

 

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.

 

17

 

 

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 March 31, 2022 and December 31, 2021, $332 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 months ended March 31, 2022 and 2021, the Company incurred $1 thousand and $8 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.

 

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.

 

18

 

 

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. The Termination Agreement required SHI to file a registration statement with the SEC to register the resale of the Termination Shares which occurred 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 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.

 

19

 

 

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 months ended March 31, 2022 was $0 and $0.

 

John Belizaire and John Bottomley, who were elected to the Company’s Board of Directors 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, the Company’s director William P. Phelan 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 March 31, 2022. The Company owned approximately 1.79% of HEL, calculated on a converted fully-diluted basis, as of March 31, 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 (the “2021 Plan”) was 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. 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 (the “2021 Fiscal Year”), 1,460,191 shares of common stock, and (B) beginning with the Company’s fiscal year ending December 31, 2022 (the “2022 Fiscal Year”), 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 March 31, 2022, the Company awarded 417,924 restricted stock units under the Amended 2021 Plan, valued at $9.25 through $10.79 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 $10.38. 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. 64,494 shares of Common Stock subject to vest as follows: 25% of such restricted stock units shall vest after six months of the award, 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. The remaining 46,930 shares of common stock are performance-based awards that will vest in the following year in January based on approval of the Board of Directors based on achievement of key performance objectives.

 

During the three months ended March 31, 2021, the Company granted options to purchase 30,000 shares of the Company’s common stock under the 2021 Plan, 33 1/3% of which will vest on each of the three anniversaries of the date of the award. The exercise price of these options is $11.10 per share and was based on the closing market price of the Company’s common stock on the dates of award. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options was $9.15 per share and was estimated at the date of grant.

 

20

 

 

During the three months ended March 31, 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 grant. The shares will be restricted for one year, with the entire award vesting on the first anniversary of the award date.

 

During the three months ended March 31, 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.

 

 

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 our 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 $9.25 million in cash. As of March 31, 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.

 

21

 

 

Set forth below are the results of the discontinued operations:

 

(Dollars in thousands)   Three
Months
Ended
March 31,
2022
    Three
Months
Ended

March 31,
2021(*)
 
       
Product revenue   $ 1,640     $ 1,337  
Cost of sales     561       451  
Research and development     369       386  
Selling, general, and administrative     484       540  
Net income (loss) from discontinued operations   $ 226     $ (40 )

 

(*) 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 March 31, 2022 and December 31, 2021:

 

(Dollars in thousands)            
    March 31,     December 31,  
    2022     2021  
Assets held for sale from discontinued operations:                
Accounts receivable   $ 1,001     $ 1,189  
Inventories     1,021       964  
Prepaid expenses and other current assets     40       54  
Property, plant and equipment, net     77       92  
Deferred tax assets, net     101       101  
Operating lease right-of-use assets     579       628  
Total Assets held for sale from discontinued operations   $ 2,819     $ 3,028  
                 
Liabilities held for sale from discontinued operations:                
Accounts payable   $ 191     $ 136  
Accrued liabilities     529       479  
Operating lease liability     578       628  
                 
Total Liabilities held for sale from discontinued operations   $ 1,298     $ 1,243  

 

MTI Instruments sells its products on a worldwide basis with its principal markets listed in the table below where information on product revenue is summarized by geographic area for the Company as a whole for each of the years ended December 31:

 

(Dollars in thousands)   Three
Months
Ended
March 31,
2022
    Three
Months
Ended
March 31,
2021
 
       
Product revenue:                
United States   $ 836     $ 909  
Association of South East Asian Nations (ASEAN)     743       242  
Europe, the Middle East and Africa (EMEA)     57       166  
Americas (Canada, Mexico, South America)     4       20  
                 
Total product revenue   $ 1,640     $ 1,337  

 

Product revenues are attributed to regions based on the location of customers. For the three months ended as of March 31, 2022 and 2021 approximately 49.0% and 32.0%, respectively, of our product revenues was from customers outside of the United States.

 

At MTI Instruments, the largest commercial customer for the 3 months ended March 31, 2022 and 2021 represented 19.0% and 14.7%, respectively and the largest governmental agency represented 0% and 17.2%, respectively of MTI Instruments product revenue.

 

22

 

 

15. Segment Information

 

The Company applies ASC 280, Segment Reporting, in determining its reportable segments. As of March 31, 2022, the Company had two reportable segments in Continuing Operations: Cryptocurrency Mining and Data Center Hosting. Until the sale of MTI Instruments, the Company also had an additional reportable segment: Test and Measurement Instrumentation, which 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 March 31, 2022 and 2021, respectively, approximately 7% and 90% of the Company’s cryptocurrency mining revenue was generated from our operations in East Wenatchee, Washington, 44% and 10% from our operations in Calvert City, Kentucky and 49% and0% 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 three months ended March 31, 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 selling, general and administrative expenses.

 

The following table details revenue and cost of revenues for the Company’s reportable segments for three months ended March 31, 2022 and 2021, and reconciles to net income (loss) on the consolidated statements of operations :

 

(Dollars in thousands)   Three
Months
Ended
March 31,
2022
    Three
Months
Ended
March 31,
2021
 
Reportable segment revenue:                
Cryptocurrency mining revenue   $ 7,812     $ 995  
Data hosting revenue     1,504        
Total segment and consolidated revenue     9,316       995  
Reportable segment cost of revenue:                
Cost of revenues-cryptocurrency mining     7,721       328  
Cost of revenues-data hosting     1,138        
Total segment and consolidated cost of revenues     8,859       328  
Reconciling items:                
Selling, general and administrative expenses     7,255       1,298  
Interest expense     (2,881 )      
Other income           5  

Income tax benefit from continuing operations

    547        
Net loss (continuing operations)     (9,132 )     (626 )
 Income (loss) from discontinued operations before income tax     226       (40 )
 Income tax (expense) benefit from discontinued operations            

Net income (loss) from discontinued operations

    226       (40 )
Net loss     (8,906 )     (666 )
                 
Capital expenditures     25,438       296  
Depreciation and amortization     6,697       75  

 

 

23

 

 

16. Subsequent Events

 

On April 11, 2022, the Company entered into the Stock Purchase Agreement with 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 consideration paid by the Purchaser to the Company was based on an aggregate enterprise value of approximately $10.75 million. In addition, pursuant to the Stock Purchase Agreement, the Purchaser entered into certain employment and restrictive covenant agreements between the Company and certain employees, including MTI Instrument’s president and chief executive officer, Moshe Binyamin. As a result of the Sale, the Company exited the instruments business and expects that it will be focused on developing and monetizing green, zero carbon computing and cryptocurrency mining facilities.

 

On April 13, 2022, the Company issued to certain institutional lenders (the “Lenders”) promissory notes in an aggregate principal amount of $10.0 million for an aggregate purchase price of $10.0 million (the “Notes”). The Company also issued Class D common stock purchase warrants (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. These Notes were the third and final tranche of an aggregate financing of $20.0 million. The Notes have a maturity date five years from the date of issuance (each a “Maturity Date”), upon which dates the Notes shall be payable in full, and accrue interest at a rate of two percent (2%) per annum. The Notes may be repaid, at such Lender’s sole election, either (a) at the applicable Maturity Date or (b) upon the first business day of each month that the Company completes an offering of its shares of the Company’s 9.0% Series A Cumulative Perpetual Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) by presenting its Note in whole or in part as legal tender to purchase such shares of Series A Preferred Stock at price per share of Series A Preferred Stock on the date immediately preceding the closing of such subscription, provided that if the Notes are not repaid by May 2, 2022, the Notes shall automatically be subscribed for shares of the Series A Preferred Stock. If any Event of Default 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 Lender’s election, immediately due and payable in cash. The Notes may be prepaid or redeemed upon written notice to the other party.

 

The Warrants are immediately exercisable for two years upon issuance. 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.

 

On April 26, 2022, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Univest Securities, LLC, as representative of the several underwriters named therein, in connection with the offer and sale to such underwriters, in a firm commitment public offering (the “Underwritten Offering”) of 525,714 shares (the “Underwritten Shares”) of the Company’s 9.0% Series A Cumulative Perpetual Preferred Stock, par value $0.001 per share, with a $25.00 liquidation preference per share. Pursuant to the Underwriting Agreement, the Company also granted the underwriters a 45-day option to purchase up to an additional 78,857 shares (the “Option Shares”) of the Series A Preferred Stock on the same terms as the Shares sold in the Offering (the “Over-Allotment Option”). On April 29, 2022, the Company closed the Underwritten Offering and issued and sold 525,714 shares of Series A Preferred Stock pursuant to the Underwriting Agreement for aggregate gross proceeds of approximately $9.2 million less underwriting discounts of 7.0% ($0.6 million) and other offering fees and expenses, resulting in aggregate net proceeds to the Company of approximately $8.56 million. In the event that the Over-Allotment Option is exercised by the underwriters in full, that would result in additional aggregate gross proceeds of approximately $1.38 million less applicable underwriter discounts and other offering fees and expenses. The Company intends to use the net proceeds from the Offerings (as defined below) primarily for the acquisition, development and growth of data centers, including cryptocurrency mining processors, other computer processing equipment, data storage, electrical infrastructure, software and real property (i.e., land and buildings) and business, and for working capital and general corporate purposes, which include, but are not limited to, operating expenses. 

 

Also pursuant to the Underwriting Agreement, the Company agreed to issue to the Univest Securities, LLC, in connection with the Underwritten Offering, warrants to purchase up to a number of shares of common stock, par value $0.001 per share, of the Company (the “Common Stock”), representing 5% of the Underwritten Shares and any Option Shares sold, at an initial exercise price of $9.152 per share, subject to certain adjustments (the “Underwriter’s Warrants”). On April 29, 2022, the Company issued to Univest Securities, LLC or its designee Underwriter’s Warrants to purchase up to 26,285 shares of Common Stock. In the event all of the Option Shares are sold, the Company will issue additional Underwriter’s Warrants to purchase up to 3,942 shares of Common Stock to Univest Securities, LLC or its designee. 

 

Concurrently with the Underwritten Offering, on April 29, 2022, pursuant to certain outstanding promissory notes in an aggregate principal amount of $20 million issued to certain institutional lenders, which Notes provide the Lenders with an option to elect that such Notes be repaid by the Company in shares of Series A Preferred Stock and subscription agreements, each dated April 29, 2022, by and between the Company and each of the Lenders, the Company issued an aggregate of 1,142,857 shares of Series A Preferred Stock in full satisfaction of the Company’s obligations under the Notes in a registered direct offering.

 

On May 3, 2022, SCI entered into a Bilateral Master Contribution Agreement (the "Contribution Agreement") with Soluna SLC Fund I Projects Holdco LLC, a Delaware limited liability company (“Spring Lane”), pursuant to which Spring Lane has 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 Contribution Agreement outlines the framework for the Spring Lane Commitment; however, neither we nor Spring Lane are obligated to completed 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

 

24

 

 

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

 

Unless the context requires otherwise, 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..

 

The following discussion of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and the related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2021 contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022.

 

In addition to historical information, the following discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements. Important factors that could cause actual results to differ include those set forth in Part I Item 1A-Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and elsewhere in this Quarterly Report on Form 10-Q. Readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q. Please see “Statement Concerning Forward-Looking Statements” below.

 

Overview

 

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 currently 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”). We earn revenue from this business as the mined cryptocurrencies are converted into U.S. dollars. SCI has also began mining operations in fiscal year 2021 in Murray, Kentucky and Calvert City, Kentucky. Each of these locations have a potential 25-megawatt capacity. The mining facility in Calvert City currently performs hosting services and prop mining in which 10 megawatts is used for hosting services and 15 megawatts is used for prop mining. The mining facility in Murray, Kentucky operates fully on prop mining with a capacity of 25 megawatts.

 

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 March 31, 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.

  

Recent Developments and Trends

 

We used the net proceeds of our recent debt financing and preferred stock offerings primarily for the acquisition, development and growth of our cryptocurrency mining facilities in Kentucky, which expanded SCI’s cryptocurrency business for three months ended March 31, 2022, and into the future with an additional facility in Texas planned to launch in in fiscal year 2022 and additional pipelines for the future. We expect to develop and implement a capital strategy consisting of debt and equity to finance new projects, equipment purchases and upgrades in fiscal year 2022.

 

25

 

 

Miner Purchases and Deployments

 

At March 31, 2022, we had purchased, received and/or deployed the following miners:

 

    Number of Miners  
Miners deployed at January 1, 2022     13,240  
Miners received and deployed during the three months ended March 31, 2022     6,761  
Miners received during the three months ended March 31, 2022, but not deployed     1,136  
Miners received in fiscal year 2021, but not deployed     1,986  
Total Miners as of March  31, 2022     23,123  

 

During 2022, we received 7,987 additional miners, and, as of March 31, 2022, we had deployed a total of 20,001 miners in our mining operations.

 

Consolidated Results of Operations

 

Consolidated Results of Operations for the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021.

 

The following table summarizes changes in the various components of our net loss during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

 

(Dollars in thousands)   Three Months Ended
March 31,
2022
    Three Months Ended
March 31,
2021
    $
Change
    %
Change
 
Cryptocurrency mining revenue   $ 7,812     $ 995     $ 6,817       685 %
Data hosting revenue   $ 1,504     $     $ 1,504       100 %
Operating costs and expenses:                                
Cost of cryptocurrency mining revenue   $ 7,721     $ 328     $ 7,393       2,254 %
Cost of data hosting revenue   $ 1,138     $     $ 1,138       100 %
Selling, general and administrative expenses   $ 7,255     $ 1,298     $ 5,957       459 %
Operating loss   $ (6,798 )   $ (631 )   $ (6,167 )     977 %
Other income, net   $     $ 5     $ (5 )     (100 %)
Interest expense   $ (2,881 )   $     $ (2,881 )     (100 %)
Loss before income taxes from continuing operations   $ (9,679 )   $ (626 )   $ (9,053 )     1,446 %
Income tax benefit from continuing operations   $ 547     $     $ 547       100 %
Net loss from continuing operations   $ (9,132 )   $ (626 )   $ (8,506 )     1,359 %
Income (loss) before income taxes from discontinuing operations   $ 226     $ (40 )   $ 266       (665 %)
Income tax (expense) benefit from discontinued operations   $     $     $        
Net income (loss) from discontinued operations   $ 226     $ (40 )   $ 266       (665 %)
Net loss   $ (8,906 )   $ (666 )   $ (8,240 )     1,237 %

 

Cryptocurrency Mining Revenue: Cryptocurrency revenue consists of revenue recognized from SCI’s cryptocurrency mining operations.

 

Cryptocurrency revenue was approximately $7.8 million for the three months ended March 31, 2022 compared to $995 thousand for the three months ended March 31, 2021. SCI did not commence its cryptocurrency mining operations until the second quarter of 2020. We maintained our facility in Washington and in 2021 added two new mining site operations in Murray, Kentucky and Calvert City, Kentucky, however minimal operations were involved in the first three months of 2021. Megawatts deployed increased from approximately 2 megawatts at the end of 2020 and the first quarter of 2021 to approximately 25 megawatts per the 2 facilities in Kentucky at the end of 2021 and the first quarter of 2022. This growth in capacity contributed to the growth in the business for the first three months of 2022.

  

26

 

 

Data Hosting Revenue: In August 2021, SCI began cryptocurrency hosting services in which SCI provides energized space and operating services to third-party mining companies who locate their mining hardware at one of SCI’s mining locations, in which they may receive a fee per miner installed, revenue share and if additional services are rendered, an additional service fee is charged to the outside parties. The Company’s revenue was $1.5 million for the three months ended March 31, 2022, with no comparable services noted for the three months ended March 31, 2021, in which are all attributed to the Kentucky data center location. 

 

Cost of Cryptocurrency Revenue: Cost of cryptocurrency revenue includes direct utility costs, site overhead expenses, depreciation expenses, as well as overhead costs that relate to the operations of SCI’s cryptocurrency mining facilities in Washington and facilities in Kentucky. Going forward, cost of cryptocurrency revenue will include any additional SCI cryptocurrency mining facilities that are part of the Company’s future pipeline.

 

Cost of cryptocurrency revenue was approximately $7.7 million and $328 thousand for the three months ended March 31, 2022 and 2021, respectively, approximately a $7.4 million increase.  As noted above, SCI did not commence cryptocurrency mining operations until the second quarter of 2020, and therefore there was no material cryptocurrency revenue or associated costs the three months ended March 31, 2021. As the Company began increasing their capacity, the associated costs began to increase.

 

Cost of Data Hosting Revenue: As noted above, SCI began hosting services in August 2021 in which expenses are allocated based on the cost driving activity. As such, there were no related charges in the three months ended March 31, 2021.

 

Gross Margin: Gross profit, as a percentage of revenue, decreased to 5% for the three months ended March 31, 2022 compared to 67% for the three months ended March 31, 2021, primarily due to mining operations growth and incurring significant costs in depreciation expense of $4.3 million for the miners that were put in service towards the end of fiscal year 2021 and in service the first quarter of 2022, compared to $75 thousand of depreciation expense as we were just starting our mining operations. Also, with the introduction of two facilities in the third and fourth quarter of 2021, the Companies utility charges have grown to $2.4 million for the first three months of 2022 compared to $108 thousand for the three months ended March 31, 2021.

 

Selling, General and Administrative Expenses: Selling, general and administrative expenses include cash and non-cash compensation, benefits and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, selling and marketing, information technology, and legal services.

 

Selling, general and administrative expenses for the three months ended March 31, 2022 increased by $5.9 million, or 459%, to $7.2 million from $1.3 million for the three months ended March 31, 2021. This increase was a result of both expenses incurred in the three months ended March 31, 2022 for which there was no comparable expense in the quarter ended March 31, 2021, which related to expenses incurred regarding new employees hired in relation to the Soluna Callisto transactions (i.e.: salary, stock compensation) compared to no employees related to SCI for March 31, 2021, as well as from changes in a number of our traditional selling, general and administrative expenses. Also, we incurred approximately $2.4 million in amortization expense for the strategic pipeline contract acquired in the Soluna Callisto acquisition on October 29, 2021, in which there is no comparable expense for the three months ended March 31, 2021.

 

Stock-based compensation costs represented grants of restricted stock units of $743 thousand to members of our Board of Directors and certain Company employees for the three months ended March 31, 2022 and stock options of approximately $212 compared to only $54 thousand for the three months ended March 31, 2021. In addition, there was a $275 thousand increase in consultant fees for the three months ended March 31, 2022 compared to three months ended March 31, 2021 mainly related to consultant expenses related to the Company’s SCI operations and temporary staffing.

   

There was an increase in legal fees of $315 thousand and audit fees of $335 thousand totaling approximately $650 thousand, in which $175 thousand related to legal fees associated with the sale of MTI Instruments, $100 thousand related to higher fees associated with the filing of the Annual Report and other general matters costs, and an increase of approximately $50 thousand of legal fees associated with execution of a facility to begin operations in fiscal year 2022 located in Texas compared to legal fees for the three months ended March 31, 2021 related to legal fees associated with a facility located in Kentucky to begin operations. There was an increase of $335 thousand in audit fees associated with the fiscal year 2021 audit, as well as the nature of the Company’s operations changing from an Instrumentation business to a cryptocurrency mining business.

 

Salaries and benefits expenses increased by $950 thousand during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, approximately $800 thousand related to salary and fringe benefits for new employees of Soluna Callisto in connection with the October 2021 acquisition, as compared to none in prior year in which SCI payroll expenses were charged to selling, general and administrative for SCI in for three months ended March 31, 2022. Approximately $185 thousand related to increase in salary of the Company’s Chief Financial Officer, as well as the hiring of a Corporate Controller (hired in January of 2022), and Financial Reporting Manager (hired in July 2021). The Company had nine corporate headquarter employees as of March 31, 2022 compared to four Corporate employees as of March 31, 2021. The Company saw increases in bonuses for the three months ended March 31, 2022 compared to three months ended March 31, 2021 by $240 thousand due to growth in Company’s operations in the cryptocurrency mining and other operating initiatives set for the three months ended March 31, 2022.

  

27

 

 

Directors and officers insurance premiums increased by $150 thousand during the three months ended March 31, 2022 compared to three months ended March 31, 2021 primarily to our status as an SEC reporting company and the increase in cryptocurrency operations. Public relations expenses also increased approximately $75 thousand due to increased marketing efforts related to the SCI business for the three months ended March 31, 2022 compared to March 31, 2021.

 

The Company expects selling, general and administrative expenses to continue to increase for the remainder of fiscal year 2022 and generally going forward we significantly expands our cryptocurrency operations.

 

Operating Loss: Operating loss increased to $6.8 million for the three months ended March 31, 2022 from $631 thousand during the three months ended March 31, 2021. This $6.2 million loss increase was the result of the factors noted above, that is, significant increases in selling, general and administrative expenses for items not incurred in the prior year, as well as operations for SCI have significantly increased with increases in sales and costs for the year.

   

Interest expense: Interest expense for the three months ended March 31, 2022 was $2.9 million and was primarily related to the $2.4 million of interest expense in relation to the Notes issued at the end of October 2021 and promissory notes issued in February and March of 2022, as well as $365 thousand in interest expenses related to the NYDIG financing in January. The Company did not incur any interest expense for the three months ended March 31, 2021.

 

Income Tax (Expense) Benefit: Income tax benefit for the three months ended March 31, 2022 was $547 compared to $0 for the three months ended March 31, 2021. The increase in income tax benefit for the three months ended March 31, 2022 was related to deferred tax amortization 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 (October 29, 2021), in which was recorded as a deferred tax liability and this amount will be amortized over the life of the asset. For the three months ended March 31, 2022, the Company amortized $547 thousand.

 

Net Loss from continuing operations: Net loss from continuing operations for the three months ended March 31, 2022 was $9.1 million compared to net loss from continuing operations of $626 thousand for the three months ended March 31, 2021. The increase for loss for the three months ended March 31, 2022 were the result of the factors noted above, including expenses not incurred in the prior year period, such as amortization expense for the strategic pipeline contract intangible, depreciation on miners installed, utilities operating in the Company’s two facilities in Kentucky, and noncash compensation expense related to equity awards granted to the board of directors and other members of management, offset with increases sales to the cryptocurrency mining and data hosting revenue.

 

Net Income from discontinued operations: As of March 31, 2022 the Company’s MTI Instrumentation business was reported as discontinued operations held for sale. Net income from discontinued operations for the three months ended March 31, 2022 was $226 thousand compared to a net loss for the three months ended March 31, 2021 of $40 thousand primarily due to an increase in product revenue for the three months ended March 31, 2022 with more sales and shipments to countries outside of the United States, especially to Asia for the portable balance systems increasing $400 thousand as COVID-19 related restrictions were lifted for the three months ended March 31, 2022. The cost of sales didn’t decline as significantly as product sales due to unfavorable mix of the volume of products sales, with more units being sold that had higher gross margins in the for the three months ended March 31, 2022 compared to March 31, 2021.

 

Depreciation and Amortization: Depreciation and amortization expense during the three months ended March 31, 2022 totaled approximately $6.7 million, which is an increase of approximately $6.6 million , as compared to $75 thousand for the three months ended March 31, 2021. This increase was primarily due to higher depreciation recognized of $4.3 million for the two facilities deployed in Kentucky and the associated miners in which began operations in the third quarter of 2021, in addition to amortization expense of approximately $2.4 million related to the strategic pipeline contract that was acquired in October 2021.

 

Net (Loss) Income: Net loss for the three months ended March 31, 2022 was $8.9 million compared to net loss of approximately $670 thousand for the three months ended March 31, 2021, primarily as a result of the factors noted above with the losses incurred in continued operations as noted above as the Company continues to grow and build out their operations for the future.

 

Non-GAAP Measures

 

In addition to financial measures calculated in accordance U.S. generally accepted accounting principles (“GAAP”), we also use “Adjusted EBITDA.” Adjusted EBITDA is a non-GAAP financial measure defined as net income (loss) from continuing operations before interest, taxes, depreciation and amortization (“EBITDA”) adjusted to eliminate the effects of certain non-cash, non-recurring items, that do not reflect our ongoing strategic business operations. Management believes that Adjusted EBITDA results in a performance measurement that represents a key indicator of the Company’s business operations of cryptocurrency mining.

  

28

 

 

We believe Adjusted EBITDA can be an important financial measure because it allows management, investors, and our Board of Directors to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making such adjustments. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that stock-based compensation costs, which is excluded from the non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Similarly, we expect that depreciation and amortization of fixed assets will continue to be a recurring expense over the term of the useful life of the assets.

 

Adjusted EBITDA is provided in addition to, and should not be considered to be a substitute for, or superior to net income, the comparable measure calculated in accordance with U.S. GAAP. Further, Adjusted EBITDA should not be considered as an alternative to revenue growth, net income, diluted earnings per share or any other performance measure calculated in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.

 

Reconciliations of Adjusted EBITDA to net income from continuing operations, the most comparable GAAP financial metric, for historical periods are presented in the table below:

 

(Dollars in thousands)   March 31, 2022     March 31, 2021  
             
Net loss from continuing operations   $ (9,132 )   $ (626 )
Interest expense (income), net     2,880       (1 )
Income tax benefit     (547      
Depreciation and amortization     6,697       75  
 EBITDA     (102 )     (552 )
Adjustments                
Non-cash/ non-recurring  items                
Stock-based compensation costs     955       54  
Exchange registration expenses           250  
Adjusted EBITDA   $ 853     $ (248 )

 

Stock-based compensation costs represented grants of restricted stock units of $743 thousand to members of our Board of Directors and employees for the three months ended March 31, 2022 and grant of stock options of approximately $212 compared to only $54 thousand for the three months ended March 31, 2021.

  

The exchange registration expenses related to non-recurring expenses of approximately $158 thousand associated with the Company’s reincorporation in Nevada in March 2021 and the related special meeting of stockholders we held on March 25, 2021 to approve the reincorporation and the adoption of the 2021 Stock Incentive Plan. In addition, the Company incurred approximately $92 thousand in fees related to the initial listing of our common stock on The Nasdaq Stock Market LLC (“Nasdaq”) and associated legal assistance in connection with our registration matters. There were no comparable exchange registration expenses related for the three months ended March 31, 2022.

 

Liquidity and Capital Resources

 

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

 

(Dollars in thousands)   Three Months Ended or As of     Three Months Ended or As of     Year Ended or As of  
    March 31,     March 31,     December 31,  
    2022     2021     2021  
Cash   $ 2,827     $ 2,722     $ 10,258  
Working capital     (10,120 )     2,405       9,299  
Net loss from continuing operations     (9,132 )     (626 )     (6,388 )
Net income (loss) from discontinued operations     226       (40 )     1,127  
Net cash provided by (used in) operating activities     801       832       4,635  
Net cash provided by operating activities for discontinued operations     510       170       917  
Purchase of property, plant and equipment     (25,438 )     (296 )     (45,792 )
Cash dividends paid on preferred stock     (749 )           (630 )

 

29

 

 

The Company has historically incurred significant losses primarily due to our past efforts to fund direct methanol fuel cell product development and commercialization programs and had a consolidated accumulated deficit of approximately $131.9 million as of March 31, 2022. As of March 31, 2022, the Company had negative working capital of approximately $10.1 million, a line of credit outstanding of $1.0 million, $8.2 million outstanding note payable that can be converted to common stock, received additional equipment financing for up to $14.4 million of which $7.1 million was current, as well as received financing of approximately $10.0 million from promissory notes. The Company had outstanding commitments as of March 31, 2022 related to SCI for $37.3 million for capital expenditures, approximately $801 thousand in cash provided by operating activities for continuing operations, and approximately $2.8 million of cash available to fund our operations

 

Based on business developments, including changes in production levels, staffing requirements, and network infrastructure improvements, we will require additional capital equipment in the foreseeable future. With the Company’s shift in focus of the business, and the sale of the MTI Instruments business that occurred in April 2022, the Company has now exited the instrumentation business and is focused on developing and monetizing green, zero-carbon computing and cryptocurrency mining facilities.

 

As we have done historically, we expect to continue funding operations from our current cash position and our projected 2022 cash flows pursuant to management’s plans. If necessary, we may also seek to supplement our resources by increasing credit facilities to fund operational working capital and capital expenditure requirements. We expect to fund growth (additional cryptocurrency mining facilities and miners) through capital raise activities, to the extent that we can successfully raise capital through sales of additional debt or equity securities. Any additional financing, if required, may not be available to us on acceptable terms or at all.

 

While it cannot be assured, management believes that, due in part to our current EBITDA and projected cash requirements for our existing operations, our current available cash of approximately $2.8 million, and our projected 2022 cash flow pursuant to management’s plans and net proceeds from the sale of MTI Instruments of approximately $9.25 million, which was completed in April 2022 and other capital and financing arrangements in fiscal year 2022, the Company will have adequate resources to fund operations through at least the end of the second quarter of 2023. As noted above, the Company expects to fund capital expenditures associated with managements anticipated growth strategy for SCI through capital raises. The Company has entered into an unsecured line of credit for $1.0 million to assist with possible future financing, which as of March 31, 2022, the entire amount had been drawn upon and was outstanding. In addition, on October 20, 2021, we issued to certain institutional investors secured convertible notes in the aggregate principal amount of approximately $16.3 million for an aggregate purchase price of $15.0 million. The notes are convertible, subject to certain conditions, at any time at the option of the Investors, into an aggregate of 1,776,073 shares of the Company’s common stock. On December 30, 2021, we 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. Subsequently, the parties negotiated the specific terms of each equipment financing transaction as well as the terms upon which the investors would consent to the transactions contemplated by the Master Agreement. On January 14, 2022, we borrowed loans under the Master Agreement in the aggregate principal amount of approximately $4.6 million that will bear interest at 14% and will be repaid over 24 months. On February 22, 2022, we issued to certain institutional lenders promissory notes in an aggregate principal amount of $7.6 million for an aggregate purchase price of $7.6 million as the first tranche of an aggregate financing of $20.0 million. On March 10, 2022, we issued to the lenders a second tranche of an aggregate principal amount of $2.4 million. On April 13, 2022 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 along with Class D common stock purchase warrants to purchase up to an aggregate of 1,000,000 shares of common stock.

 

On April 29, 2022, we closed an underwritten public offering of 525,714 shares of our 9.0% Series A Cumulative Perpetual Preferred Stock, par value $0.001 per share (“Series A Preferred Stock”), with a $25.00 liquidation preference per share, at a public offering price of $17.50 per share, for aggregate gross proceeds of approximately $9.2 million from the underwritten public offering, before deducting underwriting discounts and other estimated offering fees and expenses. In addition, we also closed on such date a concurrent registered direct offering to certain institutional lenders of 1,142,857 shares of Series A Preferred Stock, 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 held by such lenders in an aggregate amount of $20 million.

  

30

 

 

In connection with the underwritten public offering, we granted the underwriters a 45-day option to purchase up to an additional 78,857 shares of Series A Preferred Stock offered in the public offering at the public offering price of $17.50 per share, less underwriting discounts and commissions, to cover over-allotments, if any. 

 

On May 3, 2022, SCI entered into a