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..
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.”
SHI
currently conducts our business through our wholly-owned subsidiary, Soluna Computing, Inc. (“SCI”). SCI is engaged in mining
of cryptocurrency through data centers that can be powered by renewable energy sources. Recently, SCI has built modular data centers
that are used for cryptocurrency mining though proprietary mining and hosting business models. SCI intends to continue to develop and
build, modular data centers that use wasted renewable energy for cryptocurrency mining and in the future can be used for intensive, batchable
computing 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
was incorporated in Delaware on January 8, 2020 as EcoChain, Inc., which operates cryptocurrency mining facilities that performs proprietary
mining and data hosting services that integrates with the cryptocurrency blockchain network. 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. In fiscal year 2021,
SCI began mining operations in Murray, Kentucky, (“Project Sophie”) and Calvert City, Kentucky, (“Project Marie”).
Project Marie had performed hosting services and proprietary mining in which 10 megawatts were used for hosting services and 10 megawatts
was used for proprietary mining through the end of February 2023, at which time the facility had shut down. As of March 31, 2023, Project
Sophie operated fully on proprietary mining with a capacity of 25 megawatts. On April 6, 2023, Project Sophie entered into a 25 MW hosting
contract with a Bitcoin miner, in which will shift the Company’s business model at the Company’s modular data centers at
Project Sophie from proprietary mining to hosting Bitcoin miners for the customer. The Company plans to sell its existing Bitcoin miners
at the Project Sophie site and redeploy capital. On September 17, 2022, SCI sold specified assets consisting mainly of mining equipment
and other general equipment items to a buyer at its Wenatchee, Washington location, (“Project Edith”). Soluna has committed
to providing certain facilities contracts at cost plus a markup to facilitate the continued operations for the sold mining assets, on
behalf of the new ownership. We have a development site in Texas (“Project Dorothy”) for a potential of up to 100 megawatts
to be built at a wind farm with initial energization of 50 megawatts, in which the Company has obtained approval from the Electric Reliability
Council of Texas (“ERCOT”) and expects to begin energization in fiscal year 2023. The Company as of March 31, 2023, has a
15% ownership interest in Soluna DVSL ComputeCo, LLC (“DVSL”) in which is included within the Project Dorothy site, as discussed
further in Note 16.
Until
the Sale (as defined 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 consisted 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 were 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. As a result of
the foregoing, the MTI Instruments business was reported as discontinued operations in our consolidated financial statements as of December
31, 2022, and prior periods included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March
31, 2023 (the “Annual Report”). 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.
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 $9.4 million in cash, subject to certain adjustments as set forth in
the Stock Purchase Agreement (the “Sale”). The consideration paid by the Purchaser to the Company was based on an aggregate
enterprise value of approximately $10.75 million. The Company recognized a gain on sale of approximately $7.8 million.
Going
Concern and Liquidity
The
Company’s condensed financial statements as of March 31, 2023 have been prepared using generally accepted accounting principles
in the United States of America (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets
and liquidation of liabilities in the normal course of business. As shown in the accompanying condensed financial statements, the Company
did not generate sufficient revenue to generate net income and has negative working capital as of March 31, 2023. In addition, the Company
has ceased operations for Project Marie in February 2023 due to the termination of the Management and Hosting Services agreement with
CC Metals and Alloys, LLC (“CCMA”) and repossession of collateral for miners as discussed further below. These factors, among
others indicate that there is substantial doubt about the Company’s ability to continue as a going concern within one year after
issuance of these condensed unaudited financial statements as of March 31, 2023, or May 15, 2023.
Soluna
MC Borrowing 2021-1, received a Notice of Acceleration and Repossession (the “NYDIG Notice”)
from NYDIG ABL LLC (“NYDIG”) with respect to the Master Equipment Finance Agreement, dated as of December 30, 2021 (the “MEFA”),
by and between Borrower and NYDIG. The NYDIG Notice states that (a) Borrower failed to observe or perform certain covenants, conditions
or agreements contained in the MEFA and such failure continued unremedied for a period of ten days after Borrower’s knowledge of
such breach, which resulted in an event of default under the MEFA, and (b) Borrower defaulted under the guaranty, collateral agreement,
or other support agreement, which resulted in an event of default under the MEFA. In addition, the NYDIG Notice states that Borrower
failed to pay certain payments of principal and interest under the MEFA when due, which failure also constituted an event of default
under the MEFA. As a result of the foregoing events of default, and pursuant to the MEFA, NYDIG (x) declared the principal amount of
all loans due and owing under the MEFA and all accompanying Loan Documents (as defined in the MEFA) to be due and immediately payable,
(y) imposed a default rate of interest on any outstanding principal amount of each loan (together with all then unpaid interest accruing
thereon) and all other obligations under the MEFA and the Loan Documents, and (z) demanded the return of all equipment subject to the
MEFA and the Loan Documents. The obligations of Borrower under the MEFA and reflected in the NYDIG
Notice were ring-fenced to Borrower and its direct parent company, Soluna MC LLC. On February 23, 2023, NYDIG proceeded to foreclose
on all of the collateral securing the MEFA, which resulted in a reportable disposition of all of the Company’s mining assets at
the site and certain of the operating assets of Project Marie. The total net book value of the collateralized assets that were repossessed
totaled $3.4 million. Additionally, NDYIG has stated its intention to pursue SCI, the parent company of Guarantor, under a piercing of
the corporate veil claim relating to Defendants’ debts and liabilities under the loan documents. SCI denies any such liability
and has filed a complaint for a declaratory judgment against NYDIG in the Eighth Judicial District Court in Clark County, Nevada on March
16, 2023, seeking a declaratory judgment as to such matter.
The
ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining
the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.
In the near term, management is evaluating and implementing different strategies to obtain financing to fund the Company’s expenses
and growth to achieve a level of revenue adequate to support the Company’s current cost structure. Financing strategies may include,
but are not limited to, stock issuances, project level equity, debt borrowings, partnerships and/or collaborations. If the Company is
unable to meet its financial obligations, it could be forced to restructure or refinance, seek additional equity capital or sell its
assets. The Company might then be unable to obtain such financing or capital or sell its assets on satisfactory terms. There can be no
assurance that additional financing will be available to the Company when needed or, if available, that it can be obtained on commercially
reasonable terms. If the Company is not able to obtain the additional financing on a timely basis, if and when it is needed, it will
be forced to delay or scale down some or all of its development activities or perhaps even cease the operation of its business.
To
further implement management’s strategy, in May 2022, SCI entered into a structural understanding with Soluna SLC Fund I Projects
Holdco LLC (“Spring Lane”), a Delaware limited liability company, pursuant to which Spring Lane agreed to provide up to $35.0
million in project financing subject to various
milestones and conditions precedent and in August 2022, the Company entered into an agreement with Spring Lane for an initial funding
of up to $12.5
million from the previously agreed-upon $35.0
million commitment from Spring Lane for Project
Dorothy for a 32%
ownership as of year-end. As of December 31,
2022, the Company had received approximately $4.8
million worth of contributions from Spring Lane.
In February and concluding on March 10, 2023, the Company entered into a series of Purchase and Sale Agreements with Spring Lane for
a total purchase price of $7.5 million for the sale of Series B membership interests owned by SHI. The capital was funded and used to
help complete the substation interconnection and the final stages of Project Dorothy, Soluna’s flagship project in West Texas,
and corporate operations and general expenses of Soluna. In this series of transactions, Spring Lane increased its stake in Soluna DVSL
ComputeCo from approximately 32% to 85% and reduced SHI’s ownership from 68% to 15%.
In addition, on May 9, 2023, the
Company’s indirect subsidiary Soluna DV ComputeCo, LLC (“DV”) completed a strategic partnership and financing with
a special purpose vehicle, Navitas West Texas Investments SPV, LLC, (“Navitas”) organized by Navitas Global, to
complete the second phase of the Dorothy Project (“Dorothy 1B”). Under a Contribution Agreement among the parties, the
Company owned a substantially complete 25MW data center under construction, in which the Company had contributed capital
expenditures for the data center. Navitas has initially contributed the initial installment of $4.5
million of a $10.8
cash commitment for the primary purpose of purchasing proprietary cryptocurrency miners and equipment necessary to put the Dorothy
1B Project into service. As a result of the initial contribution, the Company owns 73.5%
of DV and Navitas owns 26.5%
of DV. The Company expects Navitas to contribute the balance of the committed funds by the end of May 2023. At
the completion of funding, Navitas will have a 49% membership interest in DV, and the Company will have a 51% membership interest in
DV.
During
the first quarter of 2023, the Company has entered into six separate promissory notes for a total of $900 thousand at an interest rate
of 15%. In March 2023, we retired two of these promissory notes for a total of $300 thousand, and an additional $325 thousand was retired
in April of 2023 leaving $275 thousand still outstanding, using proceeds from a subsequent placement of the December 5th Securities
Purchase Agreement Offering.
For
the first three months ended March 31, 2023, the Company has sold under-utilized miners and equipment, and continues to evaluate opportunities
to sell more miners and equipment for fiscal year 2023. In addition to the proceeds from the foregoing transactions and together with
the Company’s cash on hand for available use of approximately $4.6 million as of March 31, 2023, the Company will need additional
capital raising activities, to meet its outstanding commitments relating to capital expenditures as of March 31, 2023 of $0.2 million
and other operational needs, as well as additional needs during 2023 and management continues to evaluate different strategies to obtain
financing to fund operations. However, management cannot provide any assurances that the Company will be successful in accomplishing
additional financing or any of its other plans. These financial statements do not include any adjustments related to the recoverability
and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to
continue as a going concern.
The
COVID-19 global pandemic has been unprecedented and unpredictable, and the impact is likely to
continue to result in significant national and global economic disruption, which may adversely affect our business. Although the Company
has experienced some minor impacts to the Project Dorothy builds due to disruptions in the global supply chain, the Company does not
expect any material impact on our long-term strategic plans, our operations, or our liquidity due to the impacts of COVID-19. Further,
various macroeconomic factors could adversely affect our business and the results of our operations
and financial condition, including changes in inflation, interest rates and overall economic conditions. For instance, inflation could
negatively impact the Company by increasing our labor costs, through higher wages and higher interest rates. If inflation or other factors
were to significantly increase our business costs, our ability to develop our current projects may be negatively affected. Interest rates,
the liquidity of the credit markets and the volatility of the capital markets could also affect the operation of our business and our
ability to raise capital in order to fund our operations. However, the Company is actively monitoring this situation and the possible
effects on our financial condition, liquidity, operations, suppliers, and the industry.
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 Company’s Annual Report on Form 10-K
for the year ended December 31, 2022 (“the Annual Report”).
The
information presented in the accompanying condensed consolidated balance sheet as of December 31, 2022 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, 2023 and March 31, 2022.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, SCI. All intercompany
balances and transactions are eliminated in consolidation.
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.
3.
Accounts Receivable
Accounts
receivables consist of the following at:
Schedule
of Accounts Receivable
| (Dollars in thousands) | |
March 31, 2023 | | |
December 31, 2022 | |
| Data hosting | |
$ | 142 | | |
| 53 | |
| Related party receivable | |
| 310 | | |
| 247 | |
| Other | |
| - | | |
| 20 | |
| Total | |
$ | 452 | | |
$ | 320 | |
The
Company’s allowance for doubtful accounts was $0 at both March 31, 2023 and December 31, 2022.
4.
Property, Plant and Equipment
Property,
plant and equipment consist of the following at:
Schedule
of Plant And Equipment
| (Dollars in thousands) | |
March 31, 2023 | | |
December 31, 2022 | |
| Land | |
$ | 52 | | |
$ | 52 | |
| Land improvements | |
| 490 | | |
| 488 | |
| Buildings | |
| 6,048 | | |
| 6,351 | |
| Leasehold improvements | |
| 18 | | |
| 59 | |
| Vehicles | |
| 15 | | |
| 15 | |
| Computers and related software | |
| 3,686 | | |
| 7,248 | |
| Machinery and equipment | |
| 2,605 | | |
| 3,295 | |
| Office furniture and fixtures | |
| 22 | | |
| 22 | |
| Equipment held for sale | |
| 556 | | |
| 295 | |
| Construction in progress | |
| 26,998 | | |
| 26,175 | |
| Property, plant and equipment gross | |
| 40,490 | | |
| 44,000 | |
| Less: Accumulated depreciation | |
| (1,682 | ) | |
| (1,496 | ) |
| Property, plant and equipment | |
$ | 38,808 | | |
$ | 42,504 | |
Depreciation
expense was approximately $632 thousand and $4.3 million for the three months ended March 31, 2023, and the three months ended March
31, 2022, respectively.
On
February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, which resulted in a reportable disposition
of all of the Company’s mining assets at the site and certain of the operating assets of Project Marie. The total net book value
of the collateralized assets that were repossessed totaled approximately $3.4 million in which were written off the Company’s books
in the first quarter of 2023, offsetting the outstanding loan.
In
January 2023, the Company sold M20 and M21 miners for a loss on sale of equipment of approximately $82 thousand in which we received
proceeds of $213 thousand for our M20 and M21 miners which were previously reported as held for sale as of December 31, 2022, in which
had a net book value of $295 thousand. There were additional proceeds of $36 thousand in March 2023, in which resulted in a gain of approximately
$3 thousand of scrap and other equipment.
During
the three months ended March 31, 2023, the Company had impairment charges of approximately $209
thousand in which related to impairment of approximately $166
thousand power supply units (PSUs) at the Sophie location and $43
thousand for M31 miners in which were subsequently sold in April 2023, in which the Company wrote down the net book value to
subsequent sale price. There were no
impairment charges for the three months ended March 31, 2022.
Prior
to March 31, 2023, the Company had a business opportunity to sell the M31 miners, in which were subsequently sold in April 2023, as such
the Company recorded the net book value of $177 thousand as assets held for sale included within property, plant, equipment on the balance
sheet due to a policy election. In addition, due to the closure of the Marie facility in February 2023, the Company had a net book value
of approximately $379 thousand for tesseracts in which were also included as held for sale noted within property, plant and equipment
as the Company is actively trying to sell the equipment within the next year.
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.
The
acquisition was accounted for, for purposes of U.S. GAAP, using the asset acquisition method of accounting under the ASC 805-50. We determined
that we acquired in the acquisition a group of similar identifiable assets (primarily, the “strategic pipeline contract”
of certain cryptocurrency mining projects), which it classified as an intangible asset for accounting purposes. As a result, our acquisition
of the set of assets and activities constituted an asset acquisition, as opposed to a business acquisition, under ASC 805. ASC 805-50
provides that assets acquired in an asset acquisition are measured based on the costs of the acquisition, which is the consideration
that the acquirer transfers to the seller and includes direct transaction costs related to the acquisition. We include Soluna Callisto’s
results of operations in our results of operations beginning on the effective date of the acquisition.
Termination
Consideration
In
connection with the Soluna Callisto acquisition, effective as of October 29, 2021, pursuant to the terms of a termination agreement dated
as of August 11, 2021 by and among the Company, SCI, and HEL, on November 5, 2021, SCI paid HEL $725,000 and SHI issued to HEL 150,000
shares of SHI 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
the Company 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 (as of March 31, 2023, the Company did not achieve this milestone);
|
| |
ii. |
If,
by June 30, 2023, SCI or Soluna Calisto fail to achieve directly or indirectly (other than pursuant to a Portfolio Acquisition) at
least 50 Active MW from Projects that satisfy the Cost Requirement, then the maximum aggregate number of Merger Shares shall be reduced
from 2,970,000 to 1,485,000;
|
| |
iii. |
No
Merger Shares will be issued to HEL without our prior written consent;
|
| |
iv. |
Issuance
of the Merger Shares will also be subject to the continued employment with or engagement by SCI or the surviving corporation of (A)
John Belizaire and (B) at least two of Dipul Patel, Mohammed Larbi Loudiyi, (through ML&K Contractor), and Phillip Ng at the
time that such Merger Shares are earned. If both (A) and (B) cease to be satisfied on or prior to the date that all Merger Shares
are earned (such date, a “Trigger Date”), then “Qualified Projects” for purposes of determining Merger Shares
shall only apply to those Qualified Projects that are in the pipeline as of the Trigger Date. For these purposes, if any such individual’s
employment or service relationship with SCI is terminated without cause, as a result of his death or disability, or with good reason
(as such terms are defined in the employment and consulting agreements), such individual shall be deemed to continue to be employed
or engaged by SCI for these purposes; |
| |
v. |
If
SHI or SCI consummates a Change of Control before the fifth anniversary of the date of the closing of the merger, then we will be
obligated to issue all of the unissued Merger Shares (subject to (ii) and (iii) above). The Merger Agreement defines “Change
of Control” as (A) the sale, exchange, transfer, or other disposition of all or substantially all of the assets of us or SCI,
(B) our failure to continue to own (directly or indirectly) 100% of the outstanding equity securities of SCI and/or the surviving
corporation, or (C) a merger, consolidation, or other transaction in which the holders of SHI’s, SCI’s, or the surviving
corporation’s outstanding voting securities immediately prior to such transaction own, immediately after such transaction,
securities representing less than 50% of the voting power of the corporation or other entity surviving such transaction (excluding
any such transaction principally for bona fide equity financing purposes, so long as, in the case of SHI or SCI (but not the surviving
corporation) such transactions, individually and in the aggregate, do not result in a change in membership of such entity’s
board of directors so that the persons who were members of the board of directors immediately prior to the first such transaction
constitute less than 50% of the board membership at any time after such transaction(s) are consummated). Notwithstanding the foregoing,
a transaction shall not constitute a Change of Control if its sole purpose is to change the state of SHI’s or SCI’s incorporation
or to create a holding company that will be owned in the same proportions by the persons who held SHI’s or SCI’s securities
immediately prior to such transaction; and
|
| |
vi. |
if
on any of the fifth anniversary of the effective time of the merger, 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. |
On
April 11, 2023, the Board has reviewed and approved the progress of SCI’s management team in qualifying facilities as Qualified
Facilities and discussed an extension of the date in Section 2.7(a)(ii)(A) of the Merger Agreement to December 31, 2023, and an extension
of the date in Section 2.7(a)(ii)(B) of the Merger Agreement to June 30, 2024.
The
number of Merger Shares is also subject to customary anti-dilution adjustments in the event of any stock split, stock consolidation,
stock dividend, or similar event involving the shares of our common stock. Based on the assessment performed, the fair value of the merger
consideration as of October 29, 2021 was approximately $33.0 million.
Based
on management’s evaluation, management concluded that due to the high volatility of its share price, the low probability of not
achieving the MW targets, and the fact the value associated with meeting the performance measures are not intended to drive the number
of shares to be issued, but rather act as a proxy for and driver of share value, the monetary value of the obligation at inception is
predominantly a function of equity shares. As such, the consideration will be treated as equity as ASC 480-10-25-14 is not applicable
since the monetary value of the Merger Shares is not (1) fixed, or (2) dependent on (i) variations in something other than the fair value
of the Company’s equity shares, or (ii) variations inversely related to changes in the fair value of the Company’s equity
shares and is instead exposed to changes in the fair value of the Company’s share price, and as such does not represent a liability
under ASC 480. The economic risks and characteristics of the share consideration are clearly and closely related to a residual equity
interest since the underlying (i.e., the incremental shares of common stock delivered upon achievement of each MW target) will participate
in the increase in value of the common equity of the Company, similar to a call option on common stock. Based on guidance in ASC 815-40-25-7
through 25-35, the share consideration is considered to be indexed to the Company’s stock and meets the additional criteria for
equity classification.
6.
Intangible Assets
Intangible
assets consist of the following as of March 31, 2023:
Schedule
of Intangible Assets
| (Dollars in thousands) | |
Intangible Assets | | |
Accumulated Amortization | | |
Total | |
| | |
| | |
| | |
| |
| Strategic pipeline contract | |
$ | 46,885 | | |
$ | 13,284 | | |
$ | 33,601 | |
| Assembled workforce | |
| 500 | | |
| 142 | | |
| 358 | |
| Patents | |
| 132 | | |
| 4 | | |
| 128 | |
| Total | |
$ | 47,517 | | |
$ | 13,430 | | |
$ | 34,087 | |
Intangible
assets consist of the following as of December 31, 2022:
| (Dollars in thousands) | |
Intangible Assets | | |
Accumulated Amortization | | |
Total | |
| | |
| | |
| | |
| |
| Strategic pipeline contract | |
$ | 46,885 | | |
$ | 10,940 | | |
$ | 35,945 | |
| Assembled workforce | |
| 500 | | |
| 117 | | |
| 383 | |
| Patents | |
| 110 | | |
| 6 | | |
| 104 | |
| Total | |
$ | 47,495 | | |
$ | 11,063 | | |
$ | 36,432 | |
Amortization
expense for the three months ended March 31, 2023 and March 31, 2022 was approximately $2.4 million and $2.4 million.
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)
Schedule of Amortization Expense of Intangible Assets
| Year | |
2023 | |
| 2023 (remainder of the year) | |
$ | 7,113 | |
| 2024 | |
| 9,483 | |
| 2025 | |
| 9,483 | |
| 2026 | |
| 7,904 | |
| 2027 | |
| 6 | |
| Thereafter | |
| 98 | |
| Total | |
$ | 34,087 | |
7.
Income Taxes
During
the three months ended March 31, 2023 and 2022, the Company’s effective income tax rate was 9.66% and 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 2023 and permanent differences. There was $547 and $547 thousand deferred income tax benefit
for the three months ended March 31, 2023 and 2022.
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, 2023 and 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 $31.2 million and $30.7 million on March 31, 2023 and December 31, 2022,
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 Payable
Debt
consists of the following
(dollar
in thousands):
Schedule
of Debt
| | |
Maturity Date | |
Interest Rate | | |
March
31,
2023 | | |
December
31,
2022 | |
| Convertible Note | |
**July 25, 2024 | |
| *18 | % | |
$ | 10,386 | | |
$ | 12,254 | |
| Less: debt discount | |
| |
| | | |
| - | | |
| - | |
| Less: discount from issuance of warrants | |
| |
| | | |
| 116 | | |
| 475 | |
| Less: debt issuance costs | |
| |
| | | |
| - | | |
| 42 | |
| Total convertible notes, net of discount and issuance costs | |
| |
| | | |
$ | 10,270 | | |
$ | 11,737 | |
| * | Default interest
was waived on March 10, 2023 |
| ** | On May 11, 2023, the October Secured Notes were extended to July 25,
2024
|
On
October 25, 2021, pursuant to a Securities Purchase Agreement (the “October SPA”),
the Company issued to certain accredited investors (the “Noteholders”) (i) secured convertible notes in an aggregate principal
amount of $16.3 million for an aggregate purchase price of $15 million (collectively, the “October Secured Notes”), which
were, subject to certain conditions, convertible at any time by the investors, into an aggregate of 1,776,073 shares of the Company’s
common stock, at a price per share of $9.18 and (ii) Class A, Class B and Class C common stock purchase warrants (collectively, the “October
Warrants”) to purchase up to an aggregate of 1,776,073 shares of common stock, at an initial exercise price of $12.50, $15 and
$18 per share, respectively. The October Warrants are legally detachable and can be separately exercised immediately for five years upon
issuance, subject to applicable Nasdaq rules.
The
October Secured Notes, subject to an original issue discount of 8%, had a maturity date (the “Maturity Date”) of October
25, 2022, which was extended to April 25, 2023 pursuant to the Addendum Amendment (as defined below), upon which date the October Secured
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 October Secured Notes), interest on the October Secured 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
October Secured Notes) or a Change of Control (as defined in the October Secured Notes) occurs, the outstanding principal amount of the
October Secured Notes, liquidated damages and other amounts owing in respect thereof through the date of acceleration, will become, at
the Noteholder’s election, immediately due and payable in cash at the Mandatory Default Amount (as defined in the October Secured
Notes). The October Secured Notes may not be prepaid, redeemed or mandatorily converted without the consent of the Noteholders. The obligations
of the Company pursuant to the October Secured Notes are (i) secured to the extent and as provided in the Security Agreement, dated as
of October 25, 2021, by and among the Company, MTI Instruments and SCI, Soluna MC, LLC and Soluna SW, LLC (both of which are wholly owned
subsidiaries of SCI, and together with MTI Instruments and SCI, the “Subsidiary Guarantors”), and Collateral Services LLC
(the “Collateral Agent”), as collateral agent for the Noteholders; 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 Noteholders
signatory to the October SPA, subject to subsequent modifications pursuant to the Addendum, the Addendum Amendment and the NYDIG Transactions.
On
July 19, 2022, the Company entered into an addendum to the October SPA (the “Addendum”), pursuant to which a portion of the
October Secured Notes would be converted and may be redeemed in three tranches, with each tranche of $1,100,000 required to be converted
into common stock in each case at the then in effect conversion price of the October Secured Notes, with such price, prior to each conversion,
to be reduced (but not increased) to a 20% discount to the 5-day volume weighted average price (“VWAP”) of the Company’s
common stock. In addition, the Noteholders may require the Company to redeem up to $2,200,000 worth of October Secured Notes in connection
with each tranche at a rate of $1.20 for every $1.00 owed, less the amount of October Secured Notes converted during such tranche, not
including the required conversion amount if the Noteholders are unable to convert out of such amount of the October Secured Notes in
each tranche. The Company is also required to deposit up to $1,950,000 in an escrow account in connection with each tranche to satisfy
any redemptions, except with respect to the first tranche as provided in the Addendum Amendment (as defined below). The Addendum also
provides the right for the Company to pause the commencement of the conversion of the second and third tranches each for 45 days in the
event the Company pursues an equity financing. Pursuant to the Addendum, the exercise price of the Class A Warrants and Class B Warrants
and certain other warrants to purchase up to 85,000 shares of common stock issued to the Noteholders on January 13, 2022, was reduced
from $13.26 to $9.50 per share. In addition, the Company agreed to exchange the Class C Warrants for 296,013 shares of common stock,
which exchanges were completed between July 25, 2022 and August 1, 2022.
On
September 13, 2022, the Company and the Noteholders entered into an agreement further amending the Addendum (the “Addendum Amendment”),
which among other matters, extended the Maturity Date of the October Secured Notes by six months to April 25, 2023, and increased the
principal amount of the October Secured Notes by an aggregate of $520,241 for a total outstanding principal amount of $13,006,022. Also
pursuant to the Addendum Amendment, $1.0 million previously deposited by the Company and held in escrow pursuant to the Addendum, was
released back to the Company upon signing of the Addendum Amendment; however, on or before October 17, 2022, the Company (i) must deposit
$1,000,000 into escrow as the Third Deposit, (ii) will not be required to make the second deposit of $1,950,000 pursuant to the Addendum
and the Addendum Agreement, or redeem the first tranche of October Secured Notes. Additionally, the First Reconcile Date was extended
to October 12, 2022. The Company gave notice to the Noteholders on October 10, 2022 that the Company would be conducting an equity
financing. This in turn paused the commencement of (a) the Second Conversion and the Second Reconcile Date, and (b) the Third Conversion
and the Third Reconcile Date, in each case, for forty-five (45) Trading Days, each as defined in the Addendum. This also had the effect
of pausing the Company’s requirement to make the Third Deposit of $1,000,000 under the October Purchase Agreement as amended by
the Addendum, for 45 Trading Days. The 45-day trading window opened on December 20, 2022 to allow the Noteholders to apply the 20% discount
to the 5-day VWAP of the Company’s stock. In addition, pursuant to the Addendum Agreement,
the Company issued to the Noteholders (i) 430,564 shares of the common stock (“New Shares”) in exchange for the Class B warrants,
(ii) Class D common stock purchase warrants to purchase up to an aggregate of 1,000,000 shares of common stock at an exercise price of
$3.50 per share, (iii) Class E common stock purchase warrants to purchase up to an aggregate of 1,000,000 shares of common stock at an
exercise price of $4.50 per share, (iv) Class F common stock purchase warrants to purchase up to an aggregate of 1,000,000 shares of
common stock at an exercise price of $5.50 per share, and (v) Class G common stock purchase warrants to purchase up to an aggregate of
1,000,000 shares of common stock at an exercise price of $7.50 per share (together, the “New Warrants”). The New Warrants
are exercisable immediately and have exercise period of 5 years from the issuance date.
Pursuant
to the Addendum, between July 21, 2022 to August 3, 2022, the October Secured Notes with an aggregate principal amount of $1,100,000
converted into 293,350 shares of common stock, at the conversion price of $3.75. Pursuant to the Addendum and Addendum Amendment, the
Company evaluated whether the new addendums qualified as debt modification or debt extinguishment, and based on ASC 470, Debt, the Company
determined the Addendum and Addendum Amendment to fall under Debt Extinguishment and the Company would be required to fair value the
new debt, and in turn write off the existing debt on the books. Based on the Company’s assessment, an extinguishment of debt of
approximately $12.8 million was recorded in July and September of 2022 based on the Addendum and Addendum Amendment, the October Secured
Notes had an aggregate principal amount of approximately $13.0 million and a fair value of approximately $14.1 million outstanding after
the debt extinguishment. The fair value of the New Warrants issued to the Noteholders was approximately $8.6 million and recorded as
part of the loss on extinguishment of debt. The residual fair value of the New Warrants issued to non-lenders was $892 thousand and was
recorded as equity with the offset as debt discount against the residual proceeds, in which $776 thousand has been amortized through
March 31, 2023, in which $358 thousand related to the three months ended March 31, 2023. All the original debt issuance costs were written
off with the extinguishment of the debt, and with the Addendum Amendment. As of the year ended December 31, 2022, the Company had to
fair value the outstanding debt, in which it was determined to be approximately $12.3 million of a principal outstanding balance of approximately
$13.0 million, in which the change in valuation compared to September 2022 when the Company had an extinguishment recorded, was recorded
as a revaluation gain for the year ended December 31, 2022.
For
the three months ended March 31, 2023, the Company had approximately $1.4 million of note conversions with the Noteholders, therefore
reducing the outstanding principal balance to approximately $11.6 million as of March 31, 2023. The Company also performed a fair value
assessment in which the value of the convertible notes was determined to be approximately $10.4 million, therefore a revaluation gain
was recorded for the three months ended March 31, 2023 between the fair value of the notes as of December 31, 2022, less conversions
for the first three months of fiscal year 2023, to fair value as of March 31, 2023.
On
April 24, 2023, the Company reached agreement with the holders of the outstanding Convertible Notes to extend the maturity thereof until
May 25, 2023. On May 11, 2023, the Company entered into a Second Amendment Agreement (the “Second Amendment”) with the holders
of its October Secured Notes to extend the maturity date of the October Secured Notes to July 25, 2024.
In connection with the Second Amendment, the Company paid an extension
fee of $250,000 and increased the principal amount of the outstanding Notes by 14%. The Company also issued 6,000,000 new Class A warrants
exercisable at $0.50 and 2,000,000 new Class B warrants exercisable at $0.80. See Note 18 for further details.
Following
the debt extinguishment on July 19, 2022 as noted further above, the Convertible Notes will be accounted for under the fair value method
on a recurring basis upon issuance (e.g., upon execution of the Addendum) per guidance within ASC 480, and at each subsequent reporting
period, with changes in fair value reported in earnings. Although the Notes are not being accounted for under 825-10, the substance of
the debt is considered to be the same and is therefore considered outside the scope of ASC 470-60. As such, the Company performed a fair
value analysis of the Convertible Notes. For the year-ended December 31, 2022 and quarter-ended March 31, 2023, the Company had Monte
Carlo simulations run-out for the expected conversion dates of the Convertible Notes using risk free rates, annual volatility, daily
trading volumes, likely conversion profiles, and other assumptions based on principal and accrued interest as of the period ends. The
Company determined the fair value of the Convertible Notes uses certain Level 3 inputs.
Changes
in Level 3 Financial Liabilities Carried at Fair Value
Schedule
of Changes in Level
3 Financial Liabilities Carried at Fair Value
| (in thousands) | |
| |
| Balance, July 19, 2022 (date of Addendum of convertible notes) | |
$ | 14,610 | |
| Conversions of debt | |
| (1,100 | ) |
| Total revaluation loss | |
| 597 | |
| Balance, September 13, 2022 | |
| 14,107 | |
| Total revaluation gains | |
| (1,853 | ) |
| Balance, December 31, 2022 | |
$ | 12,254 | |
| Financial liabilities, Beginning balance | |
$ | 12,254 | |
| Conversions of debt (January 2023- March 2023) | |
| (1,395 | ) |
| Conversions of debt | |
| (1,395 | ) |
| Total revaluation gains | |
| (473 | ) |
| Total revaluation (gains) loss | |
| (473 | ) |
| Balance March 31, 2023 | |
$ | 10,386 | |
| Financial liabilities, Ending balance | |
$ | 10,386 | |
In
accordance with the most favored nation provision (“MFN Provision”), following the issuance of the December 2022 Shares and
the December 2022 Warrants, we reduced the conversion price of the October Secured Notes to $0.76 per share. We held a special meeting
on March 10, 2023 of our stockholders for the purpose of obtaining stockholder approval for a reduction in the conversion price of the
October Secured Notes, subject to a conversion price floor of $0.30 per share, which amount represented the closing price of our Common
Stock on the Nasdaq Stock Market on January 3, 2023, the first trading day of the 2023 fiscal year.
In
connection with the December 2022 Offering, we also agreed to amend certain existing warrants to purchase up to an aggregate of: (i)
592,024 shares of our Common Stock at an exercise price of $9.50 per share and an expiration date of October 25, 2026; (ii) 1,000,000
shares of our Common Stock at an exercise price of $3.50 per share and with an expiration date of September 13, 2027; (iii) 1,000,000
shares of our Common Stock at an exercise price of $4.50 per share and with an expiration date of September 13, 2027; (iv) 1,000,000
shares of our Common Stock at an exercise price of $5.50 per share and with an expiration date of September 13, 2027; (v) 1,000,000 shares
of our Common Stock at an exercise price of $7.50 per share and an expiration date of September 13, 2027; and (vi) 85,000 shares of Common
Stock at an exercise price of $9.50 and an expiration date of January 14, 2025, held by the Noteholders (collectively, the “Noteholder
Warrants”) so that the amended Noteholder Warrant would have an exercise price of $0.76 per share. The Company evaluated the warrant
exercise price adjustment from the values noted above to $0.76 noting the total dollar value impact in which the Noteholder Warrant’s
new fair value, as a result of the exercise price revision, exceeded the previous warrant instrument was approximately $370 thousand,
the Company deemed the change in exercise price was in contemplation with the December 2022 offering, as such was recognized as a deferred
cost of the offering against the proceeds.
The
events of default stated in the Notice of Acceleration and Repossession defined below with NYDIG Financing constituted a cross-default
under the terms of secured convertible notes issued to the Noteholders. In addition to such cross-default, the failure of the Company
pursuant to the Addendum dated as of July 19, 2022, to escrow an aggregate amount of $950,000 for the benefit of the Noteholders by December
21, 2022, constituted an event of default under the Notes.
Due to the defaults noted, the Company did not enter into the second and third tranche of conversions. As
such, beginning on November 30, 2022, the Company has been accruing interest of 18% per annum on the outstanding principal amount due
to the default which amounted to $617 thousand as of March 10, 2023. On March 10, 2023, the Company entered into a Second Addendum Amendment
with the Noteholders, in which the Company paid the accumulated default accrued interest of $617 thousand through the Company’s
restricted escrow accounts and contemporaneously with the payment, the Noteholders waived all existing events of default arising under
the convertible notes.
Promissory
Notes
Schedule
of Promissory Notes
| | |
Maturity Dates | |
Interest Rate | | |
March 31, 2023 | |
| Promissory note issuances | |
November 3 & 10, 2023 | |
| 15 | % | |
$ | 900 | |
| Less: principal promissory note repayment | |
| |
| | | |
| (300 | ) |
| Outstanding principal outstanding as of March 31, 2023 | |
| |
| | | |
| 600 | |
| Plus: interest expense accrued | |
| |
| | | |
| 13 | |
| Total promissory notes, including accrued interest expense outstanding | |
| |
| | | |
$ | 613 | |
The
Company has issued six promissory notes to certain holders totaling an aggregate principal balance of $900 thousand in which were issued
in $300 thousand increments on January 13, 2023, February 3, 2023, and February 10, 2023. Each of the promissory notes accrue at an interest
rate of 15% per annum, and each note matures within nine months subsequent its issuance. On March 24, 2023, the Company issued to the
holders of the promissory notes on January 13, 2023, 1,337,916 shares of common stock in satisfaction of the repayment of $300 thousand
in principal plus accrued and unpaid interest of $9 thousand and other charges thereon of $92 thousand in which were included as part
of interest expense, at the same price per share as the agreed upon share price conversion rate noted in relation to the December 5,
2022 SPA amendment on February 9, 2023, and approved during the Special Shareholders Meeting on March 10, 2023.
Subsequent
to three months ended March 31, 2023, on April 4, 2023, the Company issued to the holders of the promissory notes on February 3, 2023
and February 10, 2023, 1,466,710 shares of common stock in satisfaction of the February 3, 2023 promissory note and partial satisfaction
of the February 10, 2023 promissory note a total repayment of $325 thousand in principal plus accrued and unpaid interest of $10 thousand
and other charges thereon of $105 thousand in which were included as part of interest expense, at the same price per share as the agreed
upon share price conversion rate noted in relation to the December 5, 2022 SPA amendment on February 9, 2023, and approved during the
Special Shareholders Meeting on March 10, 2023.
NYDIG
Financing
Schedule
of Financing Debt
| | |
Maturity Dates | |
Interest Rate | |
March 31, 2023 | | |
December 31, 2022 | |
| NYDIG Loans #1-11 | |
April 25, 2023 thru January 25, 2027* | |
12% thru 15 | % |
$ | 10,546 | | |
$ | 14,387 | |
| Loans Payable | |
April 25, 2023 thru January 25, 2027* | |
12% thru 15 | % |
$ | 10,546 | | |
$ | 14,387 | |
| | |
| |
| |
| | | |
| | |
| | |
| |
| |
| | | |
| | |
| Less: principal payments | |
| |
| |
| — | | |
| 3,841 | |
| Less: repossession of collateralized assets | |
| |
| |
| 3,388 | | |
| - | |
| Total outstanding debt | |
| |
| |
$ | 7,158 | | |
$ | 10,546 | |
| * |
|
Due
to event of default- the entire NYDIG Financing became current, see note below. |
On
December 30, 2021, Soluna MC Borrowing 2021-1 LLC (the “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 “NYDIG facility”). 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 Noteholders 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 was to be repaid over 24 months. On January 26, 2022, the Borrower had a subsequent drawdown
of $9.8 million. As part of the transactions contemplated under the Master Agreement, (i) the Company’s indirect wholly owned subsidiary,
Soluna MC LLC, formerly EcoChain Block LLC (“Guarantor”), which is the owner of 100% of the equity interests of Borrower,
executed a Guaranty Agreement in favor of NYDIG, as lender, dated as of December 30, 2021 (the “Guaranty Agreement”), (ii)
Borrower has granted a lien on, and security interest in, all of its assets to NYDIG, as collateral agent, (iii) Guarantor entered into
an equipment financing arrangement on assets purchased with the borrowed funds, (iv) Borrower would borrow from NYDIG the loans as forth
in certain loan schedules (the “Specified Loans”), and (v) Borrower had 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 Noteholders, in connection with the October SPA, pursuant to which the Noteholders agreed
to waive any lien on, and security interest in, certain assets, provided various contingencies
are fulfilled, and each Noteholder who acquired October Secured Notes having a principal amount of not less than $3,000,000 agreed to
waive its rights under Section 4.17 of the October SPA to participate in Subsequent Financings (as defined in the October SPA) 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 Noteholders also waived the current requirement of the October 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 were outstanding, and NYDIG would not have entered into a subordination or intercreditor agreement with respect to the Guaranty.
Further, pursuant to the Consent, the Noteholders waived the right to accelerate the Maturity Date of the October Secured 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 would not waive any other Event of Default (as defined
in any of the SPA Documents), known or unknown, as of the date of Consent.
Promptly
after the date of the Consent, the Company issued warrants to purchase up to 85,000 shares of common stock to the Noteholder holding
the largest outstanding principal amount of October Secured Notes as of the date of the Consent. Such warrants were substantially in
form similar to the other warrants held by the Noteholders. Such warrants were exercisable for three years from the date of the Consent
at an exercise price of $9.50 per share. On December 5, 2022, the exercise price of the warrants were reduced to an exercise price of
$0.76 per share, effective with the closing of the Securities Purchase Agreement Offering on December 5, 2022.
The
Company, through the Borrower, was required to make average monthly principal and interest payments to NYDIG of approximately $730 thousand
on initial drawdown in aggregate principal amount of approximately $4.6 million bearing interest at 14%, and a subsequent drawdown of
$9.8 million.
On
December 20, 2022, the Borrower received a Notice of Acceleration and Repossession (the “NYDIG Notice”) from NYDIG with respect
to the Master Agreement, by and between Borrower and NYDIG. The obligations of Borrower under the Master Agreement and reflected in the
NYDIG Notice are ring-fenced to Borrower and its direct parent company, Soluna MC LLC. The Company is not a party to any guaranty, collateral
agreement or other support agreement with or for the benefit of NYDIG.
The
NYDIG Notice states that (a) Borrower failed to observe or perform certain covenants, conditions or agreements contained in the Master
Agreement and such failure continued unremedied for a period of ten days after Borrower’s knowledge of such breach, which resulted
in an event of default under the Master Agreement, and (b) Borrower defaulted under the guaranty, collateral agreement, or other support
agreement, which resulted in an event of default under the Master Agreement. In addition, the NYDIG Notice states that Borrower failed
to pay certain payments of principal and interest under the Master Agreement when due, which failure also constituted an event of default
under the Master Agreement. As a result of the foregoing events of default, and pursuant to the Master Agreement, NYDIG (x) declared
the principal amount of all loans due and owing under the Master Agreement and all accompanying Loan Documents (as defined in the Master
Agreement) to be due and immediately payable, (y) imposed a default rate of interest on any outstanding principal amount of each loan
(together with all then unpaid interest accruing thereon) and all other obligations under the Master Agreement and the Loan Documents,
and (z) demanded the return of all equipment subject to the Master Agreement and the Loan Documents. As such, the principal balance of
$10.5 million became due immediately and the Borrower was to bear interest, at a rate per annum equal to 2.0% plus the rate per annum
otherwise applicable to such obligations set forth in the Master Agreement. Also, as the Company was not able to obtain a waiver, the
outstanding deferred financing costs were written off. As of December 31, 2022, the Borrower had incurred accrued interest and penalty
of approximately $274 thousand. On February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, and repossessed
the collateralized assets that totaled approximately $3.4 million, in which offset the outstanding loan balance. Additionally, NYDIG
has stated its intention to pursue SCI, the parent company of Guarantor, under a piercing of the corporate veil claim relating to Defendants’
debts and liabilities under the loan documents. SCI denies any such liability and has filed a complaint for a declaratory judgment against
NYDIG in the Eighth Judicial District Court in Clark County, Nevada on March 16, 2023 seeking a declaratory judgment as to such matter.
Line
of Credit
On
September 15, 2021, the Company entered into a $1.0 million unsecured line of credit with KeyBank National Association (“KeyBank”),
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 “KeyBank facility”). The line of credit bears interest at a rate of Prime + 0.75% per annum
(8.5% interest rate as of March 31, 2023). Accrued interest is due monthly and principal is due in full following KeyBank’s demand.
As of January 1, 2022, the entire line of credit of $1.0 million was drawn and outstanding. As of March 31, 2023, $865 thousand of the
original $1.0 million outstanding balance has been paid down; therefore $135 thousand of the amount drawn under the line of credit remained
outstanding. The Company has been repaying weekly principal on the KeyBank facility since the beginning of September 2022. As of the
date of this report, the Company has paid down the remaining $135 thousand that was outstanding. The Company does not plan to draw down
on the line of credit in the foreseeable future. In addition, future drawdowns may require pre-approval by KeyBank.
9.
Stockholders’ Equity
Preferred
Stock
The
Company has two series of preferred stock outstanding: the Series A Preferred Stock, with
a $25.00 liquidation preference; and the Series B Convertible Preferred Stock, par value
$0.0001 per share, with a stated value equal to $100.00 (the “Series B Preferred Stock”).
As of March 31, 2023 and December 31, 2022, there were 3,061,245 shares of Series A Preferred Stock issued and outstanding, respectively,
and as of March 31, 2023 and December 31, 2022 there was 62,500 shares of Series B Preferred
Stock issued and outstanding, respectively.
Series
B Preferred Stock
On
July 19, 2022, the Company entered into a Securities Purchase Agreement (the “Series B SPA”) with an accredited investor
(the “Series B Investor”) pursuant to which the Company sold to the Series B Investor 62,500 shares of Series B Preferred
Stock, for a purchase price of $5,000,000. The shares of Series B Preferred Stock are initially convertible, subject to certain conditions,
into 1,155,268 shares of common stock, at a price per share of $5.41 per share, a 20% premium to the closing price of the common stock
on July 18, 2022, subject to adjustment as set forth in the Certificate of Designations of Preferences, Rights and Limitations for the
Series B Preferred Stock (“Series B Certificate of Designations”).
In
addition, on July 19, 2022, the Company issued to the Series B Investor common stock purchase warrants (the “Series B Warrants”)
to purchase up to an aggregate of 1,000,000 shares of common stock at an initial exercise price of $10.00 per share. The Series B Investor
is entitled to exercise the Series B Warrants at any time on or after the date that is 180
days following the issue date and on or prior to January 19, 2028. On the closing date of the next public offering of the common stock
or other securities, the exercise price of the Series B Warrants is to adjust to a price
equal to the lower of (a) the exercise price then in effect, or (b) the price of the warrants issued in the Company’s next public
offering, or if no warrants are issued in the Company’s next public offering, 110% of the price per share of the common stock issued
in the Company’s next public offering. In addition, upon the Series B Closing, the Series B Investor delivered to the Company for
cancellation an outstanding warrant to acquire 1,000,000 shares of common stock at an exercise price of $11.50 per share previously issued
on April 13, 2022, in connection with the Notes.
Common
Stock
The
Company has one class of common stock, par value $0.001 per share. Each share of the Company’s common stock is entitled to one
vote on all matters submitted to stockholders. As of March 31, 2023 and December 31, 2022, there were 25,414,646 and 18,694,206 shares
of common stock issued and outstanding, respectively.
Dividends
Pursuant
to the Certificate of Designations, Preferences and Rights of 9.0% Series A Cumulative Perpetual Preferred Stock of the Company, dividends,
when, as and if declared by the Board (or a duly authorized committee of the Board), will be payable monthly in arrears on the final
day of each month, beginning August 31, 2021. During the year ended December 31, 2022, the Board declared and paid the Company aggregate
dividends on the shares of Series A Preferred Stock of approximately $3.9 million, respectively. The Board of Directors had not declared
any Series A Preferred Stock dividends beginning October 2022 through the date of this report, as such the Company has accumulated approximately
$1.7 million of dividends in arrears on the Series A Preferred Stock through December 31, 2022. An additional $1.7 million of dividends
in arrears on the Series A Preferred Stock has been accumulated for a total of approximately $3.4 million in dividend in arrears.
The
Company’s Series B Preferred Stock includes a 10% accruing dividend compounded daily for 12 months from the original issue date
of July 20, 2022 that may be paid in cash or stock at the Company’s option at the earlier of (i) the date the Series B Preferred
Stock is converted, or (ii) the Series B Dividend Termination Date. As of March 31, 2023 and December 31, 2022, the Company has accrued
$367 thousand and $236 thousand for dividend payable for the Series B preferred stock.
Reservation
of Shares
The
Company had reserved common shares for future issuance as follows as of March 31, 2023:
Schedule
of Reserved Shares of Common Stock for Future Issuance
| | |
| | |
| Stock options outstanding | |
| 1,309,789 | |
| Restricted stock units outstanding | |
| 1,007,992 | |
| Warrants outstanding | |
| 12,867,338 | |
| Common stock available for future equity awards or issuance of options | |
| 2,656,448 | |
| Number of common shares reserved | |
| 17,841,567 | |
The
Company also notes that as of March 31, 2023, there are 1,100,839 Series A preferred stock available for future equity awards under the
2021 Plan.
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 share equivalents, comprised of shares issuable under outstanding investment rights, warrants and
the Company’s share-based compensation plans, and the weighted average number of common shares outstanding during the reporting
period. Dilutive common share 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 for the three months ended March 31, 2023 and 2022, as such basic and diluted
EPS is the same balance 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, 2023, were options to purchase 1,309,789 shares of the
Company’s common stock, 1,007,992 nonvested restricted stock units, and 12,867,338 outstanding warrants not exercised. 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, 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.
10.
Commitments and Contingencies
Commitments:
Leases
The
Company determines whether an arrangement is a lease at inception. The Company and its subsidiaries have operating leases for certain
manufacturing, laboratory, office facilities and certain equipment. The leases have remaining lease terms one year to less than ten years.
Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of March 31, 2023 and
December 31, 2022, 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, total lease
costs are comprised of the following:
Summary of Lease Expense Recognized
on Straight-line Basis Over Lease Term
| | |
2023 | | |
2022 | |
| (Dollars in thousands) | |
Three Months Ended March 31, | |
| | |
2023 | | |
2022 | |
| Operating lease cost | |
$ | 56 | | |
$ | 50 | |
| Short-term lease cost | |
| — | | |
| — | |
| Total net lease cost | |
$ | 56 | | |
$ | 50 | |
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:
Schedule
of Other Information Related to Leases
| (Dollars in thousands, except lease term and discount rate) | |
Three Months Ended March 31, 2023 | | |
Three Months Ended March 31, 2022 | |
| | |
| | |
| |
| Weighted Average Remaining Lease Term (in years): | |
| | | |
| | |
| Operating leases | |
| 4.43 | | |
| 2.14 | |
| | |
| | | |
| | |
| Weighted Average Discount Rate: | |
| | | |
| | |
| Operating leases | |
| 7.91 | % | |
| 3.83 | % |
| | |
| | | |
| | |
| Supplemental Cash Flows Information: | |
| | | |
| | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
| Operating cash flows from operating leases | |
$ | 54 | | |
$ | 49 | |
| | |
| | | |
| | |
| Non-Cash Activity Right-of-use assets obtained in exchange for lease obligations: | |
| | | |
| | |
| Operating leases | |
$ | 397 | | |
$ | — | |
Maturities
of noncancellable operating lease liabilities are as follows for the quarter ending March 31:
Schedule of Maturity of Operating
Lease Liabilities
| (Dollars in thousands) | |
| |
| | |
2023 | |
| 2023 (remainder of year) | |
$ | 181 | |
| 2024 | |
| 242 | |
| 2025 | |
| 79 | |
| 2026 | |
| 29 | |
| 2027 | |
| 29 | |
| Thereafter | |
| 145 | |
| Total lease payments | |
| 705 | |
| Less: imputed interest | |
| (121 | ) |
| Total lease obligations | |
| 584 | |
| Less: current obligations | |
| 205 | |
| Long-term lease obligations | |
$ | 379 | |
As
of March 31, 2023, there were no additional operating lease commitments that had not yet commenced.
Contingencies:
Spring Lane Capital Contingency
The Company has a potential contingency associated
with an agreement with Spring Lane of up to $250 thousand which would be reduced by a proportion of funding received from Spring Lane
up to the $35.0 million aggregate contribution cap. The Company considers the probability of a payment for the contingency to be
remote.
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.
NYDIG
filed a complaint against a subsidiary of Company, Soluna MC Borrowing 2021-1, LLC (“Borrower”) and Soluna MC, LLC, as Guarantor
(“Guarantor”), and together with Borrower, (“Defendants”) in Marshall Circuit Court of the Commonwealth of Kentucky
on December 29, 2022 regarding a series of loans made by NYDIG to Borrower pursuant to a master equipment finance agreement that were
secured by certain assets of Borrower and guaranteed by Guarantor pursuant to a written guaranty agreement executed by Guarantor. The
Court issued on February 15, 2023 an agreed order granting NYDIG’s motion for writ of possession which, among other things, ordered
parties to provide NYDIG access to the collateral described therein and preserved the rights of NYDIG to pursue a deficiency judgment
against the Defendants. Also on February 15, 2023, the Defendants filed their answer and affirmative defenses in this proceeding. The
Defendants believe that NYDIG has liquidated some of the collateral securing the loans and anticipate that NYDIG will complete the liquidation
of collateral and continue to prosecute the complaint to obtain a judgment against the Defendants. Additionally, NDYIG has stated its
intention to pursue SCI, the parent company of Guarantor, under a piercing of the corporate veil claim relating to Defendants’
debts and liabilities under the loan documents. SCI denies any such liability and has filed a complaint for a declaratory judgment against
NYDIG in the Eighth Judicial District Court in Clark County, Nevada on March 16, 2023 seeking a declaratory judgment as to such matter
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, 2023 and December 31, 2022, $346 thousand and $342 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, 2023 and 2022, the Company incurred $1 thousand and $1 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.
Employee
Receivables
Certain
employees have a receivable due to the Company based on their stock-based awards, in which $120 thousand and $120 was outstanding as
of March 31, 2023 and December 31, 2022. The balance is currently presented as $30 thousand and $26 thousand within Prepaid and other
assets as of March 31, 2023 and December 31, 2022 and $90 thousand and $94 thousand, respectively within Other long-term assets on the
condensed financial statements.
HEL
Transactions
As
discussed above, on October 29, 2021, the Company completed the Soluna Callisto acquisition pursuant to the Merger Agreement. The purpose
of the transaction was for SCI to acquire substantially all of the assets (other than those assets physically located in Morocco) formerly
held by HEL, which assets consisted of SCI’s existing pipeline of certain cryptocurrency mining projects that HEL previously transferred
to SCI, which was formed expressly for this purpose, and to provide SCI with the opportunity to directly employ or retain the services
of four individuals whose services it had retained through HEL prior to the merger. As a result of the merger, each share of common stock
of Soluna Callisto issued and outstanding immediately prior to the effective time of the merger, other than shares owned by the Company
or any of our subsidiaries, was cancelled and converted into the right to receive a proportionate share of the Merger Consideration.
In
connection with the Soluna Callisto acquisition, effective as of October 29, 2021, upon and subject to the terms and conditions of the
Termination Agreement, on November 5, 2021: (1) the existing Operating and Management Agreements between HEL and SCI were terminated
in all respects; and (2)(A) SCI paid HEL $725,000, (B) SHI issued to HEL the Termination Shares, and (C) HEL and SHI entered into an
Amended and Restated Contingent Rights Agreement that, among other things, amended the existing Contingent Rights Agreement by and between
HEL and SHI, dated January 13, 2020, to provide SHI the right to invest directly in certain cryptocurrency mining opportunities being
pursued by HEL. SHI filed a registration statement with the SEC to register the resale of the Termination Shares on February 14, 2022.
Please
see Note 5 for additional information regarding the Soluna Callisto acquisition and related transactions.
Several
of HEL’s equity holders are affiliated with Brookstone Partners, the investment firm that holds an equity interest in the Company
through Brookstone Partners Acquisition XXIV, LLC. The Company’s two Brookstone-affiliated directors also serve as directors and,
in one case, as an officer, of HEL and also have ownership interest in HEL. In light of these relationships, the various transactions
by and between the Company and SCI, on the one hand, and HEL, on the other hand, were negotiated on behalf of the Company and SCI via
an independent investment committee of the Board and separate legal representation. The transactions were subsequently unanimously approved
by both the independent investment committee and the full Board.
Four
of the Company’s directors have various affiliations with HEL.
Michael
Toporek, the former Chief Executive Officer, and current Executive Director of the Company, 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, 2023 was $0 and $0.
John
Belizaire and John Bottomley, who were elected to the Board upon the effective time of SCI’s acquisition of Soluna Callisto, serve
as directors of HEL. In addition, Mr. Belizaire is the beneficial owner of 1,317,567 shares of common stock of HEL and 102,380 Class
Seed Preferred shares, which are convertible into 86,763 shares of common stock of HEL. These interests give Mr. Belizaire an ownership
of 10.54% in HEL. Mr. Belizaire also owns an interest in HEL indirectly through his 5.0139% interest of Tera Joule, LLC’s 965,945
Class Seed Preferred shares, which are convertible into 818,596 shares of common stock of HEL. Mr. Bottomley is the beneficial owner
of 96,189, or approximately 0.72%, of the outstanding shares of common stock of HEL.
The
Company’s investment in HEL was initially carried at the cost of investment and was $750 thousand. Based on evaluation of projections
for the Company’s investment in HEL, the Company fully impaired the equity investment of $750 thousand as of December 31, 2022,
writing it down to $0.
The
Company owned approximately 1.79% of HEL, calculated on a converted fully diluted basis, as of March 31, 2023 and December 31, 2022.
The Company may enter into additional transactions with HEL in the future.
12.
Stock Based Compensation
2023
Plan
The
2023 Plan was adopted by the Board on February 10, 2023 and approved by the stockholders on March 10, 2023. The 2023 Plan sets the number
of shares of our Common Stock reserved for issuance thereunder, on a quarterly basis, to 9.75% of the shares of our Common Stock outstanding
on the measurement date. Subject to certain adjustments as provided in the 2023 Plan, the maximum aggregate number of shares of our Common
Stock that may be issued under the 2023 Plan (excluding the number of shares of our Common Stock subject to Specified Awards (as defined
below)) (i) pursuant to the exercise of stock options, (ii) as unrestricted or restricted Common Stock, and (iii) in settlement of RSUs
shall be limited to, beginning with the first quarter of our fiscal year ending December 31, 2023 (or January 1, 2023), 9.75% of the
number of shares of our Common Stock outstanding as of the first trading day of each quarter. Subject to certain adjustments as provided
in the 2023 Plan, (i) shares of our Common Stock subject to the 2023 Plan shall include shares of our Common Stock which revert back
to the 2023 Plan in a prior quarter pursuant to the paragraph below, and (ii) the number of shares of our Common Stock that may be issued
under the 2023 Plan may never be less than the number of shares of our Common that are then outstanding under (or available to settle
existing) 2023 Plan Award grants.
2021
Plan
The
Company’s 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, and May 27, 2022, respectively. 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 options, (ii) as shares or restricted stock and (iii) in settlement of RSUs shall
be limited to (A) during the Company’s fiscal year ending December 31, 2021 (the “2021 Fiscal Year”), 1,460,191 Shares,
(B) for the period from January 1, 2022 to June 30, 2022, fifteen percent (15%) of the number of Shares outstanding on January 3, 2022,
which was the first trading day of 2022, and (C) beginning with the third quarter of the Company’s fiscal year ending December
31, 2022 (the “2022 Fiscal Year”), fifteen percent (15%) of the number of Shares outstanding as of the first trading day
of each quarter, net of any Shares awarded in the previous quarter(s). Subject to certain adjustments as provided in the 2021 Plan, (i)
shares subject to the 2021 Plan shall include shares reverted back to the Company pursuant the 2021 Plan in a prior year or quarter,
as applicable, as provided herein and (ii) the number of shares that may be issued under the 2021 Plan may never be less than the number
of shares that are then outstanding under (or available to settle existing) Awards. For purposes of determining the number of shares
available under the 2021 Plan, shares withheld by the Company to satisfy applicable tax withholding or exercise price obligations pursuant
to the 2021 Plan shall be deemed issued under this Plan. In the event that, prior to the date on which the 2021 Plan shall terminate,
any Award granted under the 2021 Plan expires unexercised or unvested or is terminated, surrendered, or cancelled without the delivery
of shares of common stock, or any Awards are forfeited back to the Company, then the shares of common stock subject to such Award may
be made available for subsequent Awards under the terms of the 2021 Plan.
On
March 10, 2023, at the Special Shareholder Meeting, the Third Amended and Restated 2021 Stock Incentive Plan was approved. The Third
Amended and Restated 2021 Plan will, among other things, (a) increase the number of shares of our Common Stock reserved for issuance
thereunder, on a quarterly basis, to 18.75% of the shares of our Common Stock outstanding on the measurement date and (b) allow us to
grant awards of shares of our 9.0% Series A Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”) (with and without
restrictions). Subject to certain adjustments as provided in the Third Amended and Restated 2021 Plan, the maximum aggregate number of
shares of our Common Stock that may be issued under the Third Amended and Restated 2021 Plan (excluding the number of shares of our Common
Stock subject to Specified Awards (as defined below)) (i) pursuant to the exercise of stock options, (ii) as unrestricted or restricted
Common Stock, and (iii) in settlement of RSUs shall be limited to, beginning with the first quarter of our fiscal year ending December
31, 2023 (or January 1, 2023), 18.75% of the number of shares of our Common Stock outstanding as of the first trading day of each quarter.
Subject to certain adjustments as provided in the Third Amended and Restated 2021 Plan, the maximum aggregate number of shares of our
Series A Preferred Stock that may be issued under the Third Amended and Restated 2021 Plan as unrestricted or restricted Series A Preferred
Stock shall equal $3,600,000 valued as of the effective date of the Third Amended and Restated 2021 Plan as determined at the lower of
the closing price of our Series A Preferred Stock on Nasdaq on such date or the average of the daily volume weighted average price of
our Series A Preferred Stock on Nasdaq as reported by Bloomberg L.P. for a period of five (5) consecutive trading days ending on such
date. Subject to certain adjustments as provided in the Third Amended and Restated 2021 Plan, (i) shares of our Common Stock and Series
A Preferred Stock, as applicable, subject to the Third Amended and Restated 2021 Plan shall include shares of our Common Stock and Series
A Preferred Stock, as applicable, which revert back to the Third Amended and Restated 2021 Plan in a prior quarter or fiscal year, as
applicable, pursuant to the paragraph below, and (ii) the number of shares of our Common Stock and Series A Preferred Stock, as applicable,
that may be issued under the Third Amended and Restated 2021 Plan may never be less than the number of shares of our Common Stock and
Series A Preferred Stock, as applicable, that are then outstanding under (or available to settle existing) 2021 Plan Award grants. For
purposes of the Third Amended and Restated 2021 Plan, “Specified Awards” means (i) 2021 Plan Awards issued to Eligible Persons
who are not employed or engaged by us or any of our subsidiaries as of the last day of any fiscal quarter, commencing with the fiscal
quarter ending March 31, 2023, and (ii) 2021 Plan Awards that have a grant date at least three (3) years prior to the last day of any
fiscal quarter, commencing with the fiscal quarter ending March 31, 2023. The exclusion of Specified Awards from the determination of
the maximum aggregate number of shares of our Common Stock available for issuance under the Third Amended and Restated 2021 Plan could
have material effect on the number of shares of our Common Stock available for issuance thereunder and could have a material dilutive
effect on our stockholders.
During
the three months ended March 31, 2023, the Company awarded 500,000 restricted stock units under the 2021 Plan, valued at $0.2986 per
share based on the closing market price of the Company’s common stock on the date of the grant. The restricted stock units will
vest during May 2023.
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 vest 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.
13.
Effect of Recent Accounting Updates
Accounting
Updates Effective for fiscal year 2023
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. This standard has been adopted as
of January 1, 2023, and did not have any impact for the Company’s operations. The Company will continue to evaluate if any changes
occur subsequently in fiscal year 2023 and properly record and disclose in relation to Topic 326.
There
have been no other significant changes in the Company’s reported financial position or results of operations and cash flows as
a result of its adoption of new accounting pronouncements or changes to its significant accounting policies that were disclosed in its
condensed consolidated financial statements for the three months ended March 31, 2023.
14.
Discontinued Operations
As
described in Note 1, the Company entered into a Stock Purchase Agreement with Purchaser, pursuant to which the Company sold on April
11, 2022 all of the issued and outstanding shares of capital stock of its wholly-owned subsidiary, MTI Instruments for approximately
$9.0 million in cash, net of transaction costs. For fiscal year 2022 and 2023, our Instrumentation business segment was classified as
discontinued operations in our financial statements for all periods presented. The Company incurred approximately a $7.5 million pretax
gain on sale of MTI Instruments for the year ended December 31, 2022, in which they did not receive until the second quarter of fiscal
year 2022. The Company’s condensed consolidated balance sheets and condensed consolidated statements of operations report discontinued
operations separate from continuing operations. The Company’s condensed consolidated statements of equity and statements of cash
flows combine continuing and discontinued operations.
Set
forth below are the results of the discontinued operations:
Schedule
of Discontinued Operations
| (Dollars in thousands) | |
Three
Months Ended March 31, 2023 | | |
Three Months Ended March 31, 2022 | |
| | |
| |
| Product revenue | |
$ | - | | |
$ | 1,640 | |
| Cost of sales | |
| - | | |
| 561 | |
| Research and development | |
| - | | |
| 369 | |
| Selling, general, and administrative | |
| - | | |
| 484 | |
| Net income (loss) from discontinued operations | |
$ | - | | |
$ | 226 | |
MTI
Instruments Sale
As
described in Note 1, the Company entered into a Stock Purchase Agreement with Purchaser, pursuant to which the Company sold on April
11, 2022 all of the issued and outstanding shares of capital stock of our wholly-owned subsidiary, MTI Instruments for an all-cash purchase
price of $10.75 million, subject to working capital and certain other adjustments as set forth in the Stock Purchase Agreement. The purchase
price did not include specified debt of MTI Instruments, which is the responsibility of the Company. This debt was transferred to the
Purchaser at the date of Sale and is included in the closing balance sheet as shown below, which resulted in a reduction in the consideration
payable to the Company.
The
following table presents the gain associated with the Sale.
(Dollars
in thousands)
Schedule
of Gain on Sale
| | |
As of April 11, | |
| | |
2022 | |
| Consideration received | |
$ | 10,750 | |
| Plus: closing cash | |
| 1 | |
| Less: transaction costs | |
| (908 | ) |
| Less: closing indebtedness | |
| (483 | ) |
| Plus: new working capital adjustments | |
| 19 | |
| Adjusted consideration received | |
| 9,379 | |
| | |
| | |
| Cash | |
| 1 | |
| Accounts receivable, net | |
| 1,119 | |
| Inventories | |
| 888 | |
| Prepaid expense and other current assets | |
| 42 | |
| Operating lease right-of-use assets | |
| 579 | |
| Deferred tax assets | |
| 171 | |
| Property, plant and equipment, net | |
| 76 | |
| Total assets | |
| 2,876 | |
| | |
| | |
| Accounts payable | |
| 122 | |
| Accrued liabilities | |
| 547 | |
| Operating lease liability | |
| 579 | |
| Total liabilities | |
| 1,248 | |
| | |
| | |
| Net assets transferred | |
| 1,628 | |
| | |
| | |
| Gain on sale | |
$ | 7,751 | |
15.
Project Marie
As
previously disclosed in Footnotes 4 and 8, on December 20, 2022, Soluna MC Borrowing 2021-1 LLC (“Borrower”), an indirect
wholly owned subsidiary of Soluna Holdings, Inc. (the “Company”), received a Notice of Acceleration and Repossession (the
“NYDIG Notice”) from NYDIG ABL LLC (“NYDIG”) with respect to the Master Equipment Finance Agreement, dated as
of December 30, 2021 (the “MEFA”), by and between Borrower and NYDIG. The NYDIG Notice states that (a) Borrower failed to
observe or perform certain covenants, conditions or agreements contained in the MEFA and such failure continued unremedied for a period
of ten days after Borrower’s knowledge of such breach, which resulted in an event of default under the MEFA, and (b) Borrower defaulted
under the guaranty, collateral agreement, or other support agreement, which resulted in an event of default under the MEFA. In addition,
the NYDIG Notice states that Borrower failed to pay certain payments of principal and interest under the MEFA when due, which failure
also constituted an event of default under the MEFA. As a result of the foregoing events of default, and pursuant to the MEFA, NYDIG
(x) declared the principal amount of all loans due and owing under the MEFA and all accompanying Loan Documents (as defined in the MEFA)
to be due and immediately payable, (y) imposed a default rate of interest on any outstanding principal amount of each loan (together
with all then unpaid interest accruing thereon) and all other obligations under the MEFA and the Loan Documents, and (z) demanded the
return of all equipment subject to the MEFA and the Loan Documents.
The
assets which secure the MEFA represent substantially all of the Company’s mining assets at the site and certain of the operating
assets of Project Marie, a 20 MW facility located in Kentucky. The obligations of Borrower under the MEFA and reflected in the NYDIG
Notice are ring-fenced to Borrower and its direct parent company, Soluna MC LLC. The Company is not a party to any guaranty, collateral
agreement or other support agreement with or for the benefit of NYDIG. For the year ended December 31, 2022, the principal balance of
$10.5 million became due immediately and the Borrower was to bear interest, at a rate per annum equal to 2.0% plus the rate per annum
otherwise applicable to such obligations set forth in the Master Agreement. As of March 31, 2023, the Company reduced the outstanding
debt by the repossessed collateralized assets net book value of $3.4 million, reducing the debt outstanding to $7.1 million as of March
31, 2023. Also, as the Company was not able to obtain a waiver, the outstanding deferred financing costs were written off. As of March
31, 2023 and December 31, 2022, the Borrower had incurred accrued interest and penalty of approximately $651 thousand and $274 thousand.
On
February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, which resulted in a reportable disposition
of all of the Company’s mining assets at the site and certain of the operating assets of Project Marie. The total net book value
of the collateralized assets that were repossessed totaled $3.4 million in which were written off the Company’s books for the three
months ended March 31, 2023, with an offset to the outstanding loan. Additionally, NDYIG has stated its intention to pursue SCI, the
parent company of Guarantor, under a piercing of the corporate veil claim relating to Defendants’ debts and liabilities under the
loan documents. SCI denies any such liability and has filed a complaint for a declaratory judgment against NYDIG in the Eighth Judicial
District Court in Clark County, Nevada on March 16, 2023 seeking a declaratory judgment as to such matter. In a related development,
also on February 23, 2023, the Borrower received a notice of termination of the Management and Hosting Services Agreement with CC Metals
and Alloys, LLC. As a result of this action and certain other characteristics of the facility, the Company elected to shut down the Marie
facility. The Company believes it will maximize its profits and return on assets by concentrating its personnel and capital on its Dorothy
Facility.
With
the notice of termination of the Management and Hosting Services from CCMA, the Company notes that this event triggered the impairment
of the remaining fixed assets at the Marie facility for the year ended December 31, 2022. Based on the closure of operations on Project
Marie, the Company performed an impairment analysis and determined that approximately $2.4 million of equipment and leasehold approvements
associated with Project Marie that were not attached with the repossession of NYDIG collateralized assets were impaired as of the year-ended
December 31, 2022. As of March 31, 2023, Project Marie had a remaining net book value of $632 thousand relating to the fixed assets not
attached with the NYDIG repossession, in which $557 thousand is held for sale.
For
the first quarter of 2023, the Company assessed whether the abandonment of the Project Marie facility qualified for the classification
of discontinued operations under ASC 205-20-45-1B and 1C. A disposal of a component of an entity or a group of components of an entity
shall be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an
entity’s operations and financial results when any of the following occurs:
a.
The component of an entity or group of components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held
for sale.
b.
The component of an entity or group of components of an entity is disposed of by sale.
c.
The component of an entity or group of components of an entity is disposed of other than by sale in accordance with paragraph 360-10-45-15
(for example, by abandonment or in a distribution to owners in a spinoff).
As
such, the Company deemed that criteria c was applicable as the Project Marie facility was abandoned and ceased further operations beginning
on February 23, 2023. However, to qualify for reporting as discontinued operations, it must represent a strategic shift. Per ASC 205-20-45-1C,
examples of a strategic shift that has (or will have) a major effect on an entity’s operations and financial results could include
a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity.
A strategic shift implies that the disposal must result from a change in the way management had intended to run the business. Management
does not believe the closure of Project Marie represented a strategic shift as the Company still fully intends to manage operations through
data hosting with customers and proprietary mining arrangements for future pipelines, as such the strategic shift criteria was not met
and will not qualify as discontinued operations.
However,
per ASC 360-10-50-3A, in addition to the disclosures in paragraph 360-10-50-3, if a long-lived asset (disposal group) includes an individually
significant component of an entity that either has been disposed of or is classified as held for sale and does not qualify for presentation
and disclosure as discontinued operation, a public business entity shall disclose the pretax profit or loss of the individually significant
component of an entity for the period in which it is disposed of or is classified as held for sale and for all prior period that are
presented in the statement where net income is reported in accordance with ASC 205-20-45-6 through 45-9.
Set
forth below are the results of Project Marie:
Schedule of Results of Project Marie
| (Dollars in thousands) | |
Three Months Ended March 31, 2023 | | |
Three Months Ended March 31, 2022 | |
| | |
| |
| Cryptocurrency mining revenue | |
$ | 769 | | |
$ | 3,488 | |
| Data hosting revenue | |
| 276 | | |
| 1,504 | |
| Total revenue | |
| 1,045 | | |
| 4,992 | |
| Operating costs: | |
| | | |
| | |
| Cost of cryptocurrency mining revenue, exclusive of depreciation | |
| 801 | | |
| 1,332 | |
| Depreciation costs associated with cryptocurrency mining | |
| 122 | | |
| 2,127 | |
| Data hosting costs | |
| 214 | | |
| 1,138 | |
| General and administrative expense | |
| 286 | | |
| 74 | |
| Impairment on fixed assets | |
| 43 | | |
| - | |
| Operating (loss) gain | |
| (421 | ) | |
| 321 | |
| Interest expense | |
| (377 | ) | |
| (366 | ) |
| Gain on sale of fixed assets | |
| 12 | | |
| - | |
| Net loss before income taxes | |
$ | (786 | ) | |
$ | (45 | ) |
16.
VARIABLE INTEREST ENTITY
On
January 26, 2022, DVSL was created in order to construct, own, operate and maintain variable data centers in order to support the mining
of cryptocurrency assets, batch processing and other non-crypto related activities (collectively, the “Project”). On May
3, 2022, SCI entered into a Bilateral Master Contribution Agreement (the “Bilateral Contribution Agreement”) with Spring
Lane Capital, pursuant to which Spring Lane agreed, pursuant to the terms and conditions of such agreement, to make one or more capital
contributions to, and in exchange for equity in, SCI or one of its subsidiaries up to an aggregate amount of $35 million to fund certain
projects to develop green data centers co-located with renewable energy assets (the “Spring Lane Commitment”). We anticipate
that these capital contributions, once deployed into the projects, will help develop up to three behind-the-meter (BTM) projects designed
to convert wasted renewable energy into clean computing services such as Bitcoin mining and artificial intelligence. The Bilateral Contribution
Agreement outlines the framework for the Spring Lane Commitment; however, neither we nor Spring Lane are obligated to complete any projects
under such agreement and any actual capital contributions are subject to various conditions precedent, including the receipt of requisite
lender and other consents, acceptance by Spring Lane of specific projects and negotiations of agreements regarding those projects, including
milestones and structure. In partial consideration of the amendment to the October Secured Notes discussed above, the investors agreed
to release certain collateral covered by their security agreement to permit the Company to proceed forward with the initial phase of
Project Dorothy, which we expect to be partially funded by Spring Lane, which the Company expects to complete in the near future.
On
August 5, 2022, the Company entered into a Contribution Agreement (the “Dorothy Contribution Agreement”) with Spring Lane,
Soluna DV Devco, LLC (“Devco”), an indirect wholly-owned subsidiary of SCI, and DVSL
an entity formed in order to further the Company’s development for the first 25 MW of Project Dorothy, (each, a “Party”
and, together, the “Parties”). Pursuant to the Dorothy Contribution Agreement, the Company committed to a capital
contribution of up to approximately $26.3 million to DVSL (the “Company Commitment”), and on August 5, 2022, the Company
was deemed to have contributed approximately $8.1 million, through payment of capital expenditures and development costs made on behalf
of DVSL by the Company prior to August 5, 2022. Further under the Agreement, Spring Lane committed to a capital contribution of up to
$12.5 million to DVSL (the “Spring Lane Dorothy Commitment”), and as of December 31, 2022, Spring Lane contributed approximately
$4.8 million. Under the Dorothy Contribution Agreement, the Company and Spring Lane have committed to make subsequent contributions,
up to their respective Company Commitment and Spring Lane Dorothy Commitment amounts, on a pro rata basis, upon receipt of a contribution
request from DVSL, as set forth in the Dorothy Contribution Agreement and subject to the satisfaction of certain conditions described
therein. The proceeds of any subsequent commitments will be applied to pay project costs in accordance with the project budget.
In
exchange for their contributions, the Company and Spring Lane were issued 67.8% and 32.2% of the Class B Membership Interests in DVSL,
respectively, and were admitted as Class B members of DVSL. Further pursuant to the Agreement, DVSL issued 100% of its Class A Membership
Interests to Devco. The Dorothy Contribution Agreement contains customary indemnification provisions, liquidation provisions and governance
provisions with respect to DVSL. The Parties also entered into an Amended and Restated Limited Liability Company Agreement of DVSL providing
for the governance of DVSL.
Soluna
evaluated this legal entity under ASC 810, Consolidations and determined that DVSL is a variable interest entity that should be
consolidated into Soluna, with a non-controlling interest recorded to account for Spring Lane’s equity ownership of the Company.
Soluna has a variable interest in DVSL. The entity was designed by Soluna to create an entity for outside investors to invest in specific
projects. The creation of this entity resulted in Soluna, through its equity interest in DVSL, absorbing operational risk that the entity
was created to create and distribute, resulting in Soluna having a variable interest in DVSL.
On
March 10, 2023, the Company along with Devco, and Soluna DVSL ComputeCo, LLC, a Delaware limited liability company (the “Project
Company”) entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with Soluna SLC
Fund I Projects Holdco, LLC, a Delaware limited liability company (“Spring Lane”) that is wholly owned indirectly
by Spring Lane Management LLC. The Project Company is constructing a modular data center with a peak demand of 25 megawatts (the “Dorothy
Phase 1A Facility”).
Under
a series of transactions in February 2023 and March 2023, culminating in the March 10, 2023 Purchase and Sale Agreement, the Company
sold to Spring Lane certain Class B Membership Interests for a purchase price of $7,500,000 (the “Sale”). After giving
effect to the Sale, the Company owned 6,790,537 Class B Membership Interests (constituting 14.6% of the Class B Membership Interests)
and Spring Lane owns 39,791,988 Class B Membership Interests (constituting 85.4% of the Class B Membership Interests). The cash portion
of the purchase price paid by Spring Lane to the Company was $5,770,065, which represented the purchase price of $7,500,000 less the
Company’s pro rata share of certain contributions funded entirely by Spring Lane in the earlier portion of this series of transactions
occurring during February 2023 and March 2023. As a further part of these transactions, the parties agreed that from January 1, 2023
onwards, Soluna would bear only 14.6% of the costs relating to the construction and operation of the Dorothy Phase 1A Facility, compared
to its 67.8% share until that time, including during the calendar year 2022. After Spring Lane Capital realizes an 18% Internal Rate
of Return hurdle on its investments, the Company retains the right to 50% of the profits on Soluna DVSL ComputeCo. In connection with
the Spring Lane transactions and agreements, Soluna DV Services, LLC. will be providing the operations and maintenance services to Soluna
DVSL ComputeCo, LLC. Soluna DV Services, LLC expects to receive a margin of 20% for services rendered.
Concurrently
with the Sale, the Company, Spring Lane, Devco and the Project Company entered into (a) the Fourth Amended and Restated Limited Liability
Company Agreement of the Project Company, dated as of March 10, 2023 (the “Fourth A&R LLCA”), an amendment and
restatement of the Third Amended and Restated Limited Liability Company Agreement of the Project Company dated as of March 3, 2023, and
(b) the Amended and Restated Contribution Agreement, dated as of March 10, 2023 (the “A&R Contribution Agreement”),
an amendment and restatement of the Contribution Agreement dated as of August 5, 2022. The Fourth A&R LLCA provides for certain updates
in respect of Spring Lane’s majority ownership. The A&R Contribution Agreement reflects updated pro rata member funding percentages
as a result of the Sale as well as updated contribution caps for each of the Company and Spring Lane.
As
of January 1, 2023, there were no changes in the Limited Liability Agreement of the Company other than those related to incorporating
the new investment and the purpose and design of the Company has not changed. The Company evaluated the power and benefits concepts under
ASC 810 to determine whether the change in investment of Class B memberships would change the consolidation of the DVSL, and the Company
concluded that, after the additional investment by Spring Lane, Soluna continues to have a controlling financial interest in DVSL. In
addition, the Company continues to have the power and benefits associated with DVSL and therefore will continue to consolidate.
The
carrying amount of the VIE’s assets and liabilities was as follows:
Schedule
of Variable Interest Entities of Assets and Liabilities
| | |
March 31, 2023 | | |
December 31, 2022 | |
| | |
| | |
| |
| Current assets: | |
| | | |
| | |
| Cash and restricted cash | |
$ | 225 | | |
$ | 15 | |
| Other receivable-current | |
| 310 | | |
| 247 | |
| Total current assets | |
| 535 | | |
| 262 | |
| | |
| | | |
| | |
| Property, plant, and equipment | |
| 14,038 | | |
| 13,673 | |
| Total assets | |
$ | 14,573 | | |
$ | 13,935 | |
| | |
| | | |
| | |
| Current liabilities: | |
| | | |
| | |
| Due from – intercompany | |
$ | 388 | | |
$ | 241 | |
| Accounts payable | |
| 5 | | |
| - | |
| Total current liabilities | |
| 393 | | |
| 241 | |
| | |
| | | |
| | |
| Total liabilities | |
$ | 393 | | |
$ | 241 | |
The
summarized operating results of the VIE’s are as follows:
Schedule
of Variable Interest Entities of Operations
| | |
2023 | | |
2022 | |
| | |
For the three months ended March 31, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| Cost of sales | |
$ | 58 | | |
$ | - | |
| General and administrative expense | |
| 375 | | |
| - | |
| Net loss | |
$ | 433 | | |
$ | - | |
Effective,
January 1, 2023, the Company’s Class B membership in DVSL was reduced from 67.8% to 14.6%; see above for details.
17.
Segment Information
The
Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has two reportable segments: Cryptocurrency
Mining and Data Center Hosting. The Company notes that previously there was an additional segment: Test and Measurement Instrumentation,
however as discussed in Note 1, the Company sold MTI Instruments in April 2022, and therefore has classified as discontinued operations.
The guidance requires that segment disclosures present the measure(s) used by the Chief Operating Decision Maker (“CODM”)
to decide how to allocate resources and for purposes of assessing such segments’ performance. The Company’s CODM is comprised
of several members of its executive management team who use revenue and cost of revenues of both reporting segments to assess the performance
of the business of our reportable operating segments.
No
operating segments have been aggregated to form the reportable segments. The Company does not allocate all assets to the reporting segments
as these are managed on an entity-wide basis. Therefore, the Company does not separately disclose the total assets of its reportable
operating segments.
The
Cryptocurrency Mining segment generates revenue from the cryptocurrency the Company earns through its mining activities. The Data Center
Hosting segment generates revenue from contracts for the provision/consumption of electricity and operation of the data center from the
Company’s high performance computing facility in Calvert City, Kentucky.
For
the three months ended March 31, 2023 and 2022, approximately 0% and 7% of the Company’s cryptocurrency mining revenue was generated
from Project Edith (data center located in Wenatchee, Washington), 28% and 44% from Project Marie, and 72% and 49% from Project Sophie
(data center located in Murray, Kentucky), respectively. 96% and 100% of the Company’s data center hosting revenue was generated
from Project Marie from hosting with customers for the three months ended March 31, 2023 and 2022, and 4% of the data hosting revenue
for the three months ended March 31, 2023 was generated from Project Edith.
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, 2023
and 2022, and reconciles to net income (loss) on the consolidated statements of operations:
Schedule
of Segment Reporting Information
| | |
2023 | | |
2022 | |
| | |
| |
| (Dollars in thousands) | |
For the Three Months Ended March 31, | |
| | |
2023 | | |
2022 | |
| Reportable segment revenue: | |
| | | |
| | |
| Cryptocurrency mining revenue | |
$ | 2,796 | | |
$ | 7,812 | |
| Data hosting revenue | |
| 286 | | |
| 1,504 | |
| Total segment and consolidated revenue | |
| 3,082 | | |
| 9,316 | |
| Reportable segment cost of revenue: | |
| | | |
| | |
| Cost of cryptocurrency mining revenue, inclusive of depreciation | |
| 2,924 | | |
| 7,721 | |
| Cost of data hosting revenue | |
| 214 | | |
| 1,138 | |
| Total segment and consolidated cost of revenues | |
| 3,138 | | |
| 8,859 | |
| Reconciling items: | |
| | | |
| | |
| General and administrative expenses | |
| 6,747 | | |
| 7,255 | |
| Impairment on fixed assets | |
| 209 | | |
| — | |
| Impairment on equity investment | |
| - | | |
| — | |
| Interest expense | |
| 1,374 | | |
| 2,881 | |
| Gain on debt revaluation | |
| (473 | ) | |
| — | |
| Loss on sale of fixed assets | |
| 78 | | |
| — | |
| Other income, net | |
| (12 | ) | |
| — | |
| Income tax (benefit) expense from continuing operations | |
| (547 | ) | |
| (547 | ) |
| Net loss from continuing operations | |
| (7,432 | ) | |
| (9,132 | ) |
| Income before income tax from discontinued operations | |
| — | | |
| 226 | |
| Net income from discontinued operations | |
| — | | |
| 226 | |
| Net loss | |
| (7,432 | ) | |
| (8,906 | ) |
| (Less) Net loss attributable to non-controlling interest | |
| 370 | | |
| — | |
| Net loss attributable to Soluna Holdings, Inc. | |
$ | (7,062 | ) | |
$ | (8,906 | ) |
| | |
| | | |
| | |
| Capital expenditures | |
| 860 | | |
| 25,438 | |
| Depreciation and amortization | |
| 3,002 | | |
| 6,697 | |
18.
Subsequent Events
Chief
Financial Officer and Chief Executive Officer Resignation and Appointments
Philip
Patman, Jr. has resigned from his position as Chief Financial Officer of the Company, effective April 21, 2023. The Company has appointed
David C. Michaels, a current director of the Company, to serve as interim Chief Financial Officer of the Company, effective as of April
21, 2023. Mr. Michaels has served as a member of the Board since August 2013 and as the Lead Independent Director since June 2016 and
served as our Chairman of the Board from January 2017 to January 2022. Mr.
Michaels has more than 30 years of finance experience at public and private companies, including CFO roles at the American Institute
for Economic Research, Inc. and Starfire Systems, Inc. and Vice President of Treasury, Tax and Chief Risk Officer at Albany International
Corp. (NYSE: AIN).
Effective
as of May 1, 2023, Michael Toporek resigned as Chief Executive Officer of Soluna Holdings, Inc. The Company has appointed John Belizaire,
the Chief Executive Officer of SCI and a current director of the Company, to serve as the Chief Executive Officer of the Company, effective
as of May 1, 2023. In connection with the succession plan, Mr. Toporek was elected as Executive Chairman of the Board of Directors.
The
Company noted that the resignation of Philip Patman, Jr. and Michael Toporek were not a result
of any disagreements with the Company on any matter relating to the Company’s operations, policies or practices.
Dorothy
1B Financing
On
May 9, 2023, the Company’s indirect subsidiary Soluna DV ComputeCo, LLC (“DV”) completed a strategic partnership and
financing with a special purpose vehicle, Navitas West Texas Investments SPV, LLC, (“Navitas”), organized by Navitas
Global to complete the second phase of the Dorothy Project (“Dorothy 1B”).
The
Dorothy Project is a 100MW Soluna modular data center co-located at the Briscoe Wind Farm in Silverton, Texas. It was acquired as part
of the merger with Soluna Callisto in October 2021. The initial 50MW phase of the project includes 44 modular data center buildings in
two sub-phases, Dorothy 1A and Dorothy 1B. Each of these phases is 25 MW each. Dorothy is the second modular data center built using
Soluna’s proprietary design and software. The facility is designed to consume the wasted electricity from the wind farm and the
grid.
Under
a Contribution Agreement among the parties, the Company owned a substantially complete 25MW data center under construction, in which
capital expenditures had been contributed by the Company to the data center. Navitas has initially contributed $4.5
million in cash for the primary purpose of purchasing proprietary cryptocurrency miners and equipment necessary to put the Dorothy
1B Project into service. As a result of the initial contribution from Navitas, the Company owns 73.5%
of DV and Navitas owns 26.5%
of DV. Per the Contribution Agreement among the parties, Navitas has a commitment of approximately $10.8
million in cash for the purchase of miners and equipment, in which the Company expects Navitas to contribute the remaining
commitment funding in the next several months. At
the completion of funding, Navitas will have a 49% membership interest in DV, and the Company will have a 51% membership interest in
DV.
As
a part of the transaction, Navitas provided a two-year loan of $2.0 million to DV which will be repaid from a portion of distributions
from DV to the Company. With this loan, DV has financed the completion of the Dorothy 1B facility and sufficient funds to put the facility
into service, which is expected in July 2023.
As
a result of these transactions, the Dorothy 1B project is fully financed and will no longer require an outlay of capital resources from
the Company.
Convertible
Note Amendment and Extension
On
May 11, 2023, the Company entered into a Second Amendment Agreement (the “Second Amendment”) with the holders of its October
2021 Convertible Notes (the “October Secured Notes”) to extend the maturity date of the October Secured Notes to July 25,
2024. The October Secured Notes were originally due April 25, 2023 which was subsequently extended to May 25, 2023 to provide additional
time to negotiate the terms of the Second Amendment.
In
connection with the Second Amendment, the Company paid an extension fee of $250,000 and increased the principal amount of the outstanding
October Secured Notes by 14%. The Company also issued 6,000,000 new Class A warrants exercisable at $0.50 and 2,000,000 new Class B warrants
exercisable at $0.80.
Subject
to the Equity Conditions (as defined below), upon each trigger set forth below, the Company is allowed, once per trigger, require the
Note holders to convert up to 20% percent of the outstanding amount of the October Secured Notes as:
| |
(i) |
the
Company’s Common Stock trades for 10 consecutive days at or above $0.50 per share and at least 1,000,000 shares trade on each
day. |
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|
|
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(ii) |
the
Company’s Common Stock trades for 10 consecutive days at or above $0.70 per share and at least 1,000,000 shares trade on each
day. |
| |
|
|
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(iii) |
the
Company’s Common Stock trades for 10 consecutive days at or above $0.90 per share and at least 1,000,000 shares trade on each
day. |
The
Equity Condition is met if all of the following conditions have been met: (i) the shares of Common Stock issuable upon the conversion
are either registered under the Securities Act of 1933 or resellable under Rule 144 thereunder without any volume restrictions, (ii)
the number of shares issuable to each Note holder are below 4.99% of the outstanding shares, (iii) at least 20 trading days has elapsed
since the previous mandatory conversion, (iv) the Company is current in all the SEC filings, and (v) the Company has obtained all required
approvals from NASDAQ, or any successor trading market, to list the Common Stock to be issued upon such conversion.
