Soluna Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts are in millions unless stated otherwise. Soluna’s continuing business focuses on cryptocurrency mining and data-center hosting; MTI Instruments was sold in April 2022 and is reported as discontinued operations.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $6.37 | $3.12 | $24.36 | $5.78 |
| Net loss from continuing operations | $(56.14) | $(0.93) | $(79.38) | $(2.95) |
| Consolidated net loss | $(56.16) | $(0.61) | $(71.63) | $(2.45) |
| Operating cash flow, continuing operations | Not separately presented for Q3 | $(5.12) | $2.38 |
- Q3 mining revenue was $5.39 million and hosting revenue $0.99 million. For the nine-month period, mining revenue was $20.70 million and hosting revenue $3.67 million.
- Mining and hosting cost of revenue, including mining depreciation, exceeded revenue by $4.82 million in Q3 and $5.79 million for the nine months. The resulting approximate gross margins were negative 75.6% and negative 23.8%, respectively.
- Q3 operating loss was $41.72 million; nine-month operating loss was $57.95 million. Major charges included fixed-asset impairment of $28.09 million in Q3 and $28.84 million year to date, and a $12.32 million debt extinguishment/revaluation loss year to date. Nine-month depreciation and amortization was $23.00 million.
- At September 30, cash was $1.08 million, working capital was negative $21.43 million, total assets were $109.73 million, and total liabilities were $40.42 million. Debt carrying amounts included $13.28 million of notes payable, $10.30 million of NYDIG debt net of discounts and costs, and a $0.65 million line of credit.
- Nine-month investing cash outflow was $53.02 million, including $61.87 million of equipment purchases, partly offset by equipment-sale proceeds and deposit movements. Financing provided $39.59 million. Cash fell from $10.26 million at year-end 2021 to $1.08 million.
Material changes and unusual items
- Revenue increased substantially year over year as mining capacity expanded and the Murray, Kentucky site began operating. However, mining costs, depreciation, impairments, corporate expenses, and financing costs drove sharply higher losses.
- The company impaired active and stored miners after Bitcoin price declines and other market factors; it also fully impaired its $0.75 million investment in HEL. Equipment disposals generated a $2.61 million loss for the nine months.
- MTI Instruments’ April sale generated a $7.58 million gain. Nine-month discontinued-operations income was $7.75 million; Q3 included a $0.02 million sale-related loss.
- Debt amendments extended the secured notes’ maturity to April 25, 2023, increased principal, and created conversion/redemption and escrow provisions. The company recorded the $12.32 million extinguishment and revaluation loss. NYDIG financing carries stated rates of 12%–15%; the company received temporary interest-only payment waivers for September and October while seeking revised repayment terms.
- The Series A preferred stock carries a 9% cumulative dividend; $3.85 million in preferred dividends were paid during the first nine months. The Series B preferred stock carries a 10% accruing dividend and has conversion and anti-dilution terms.
Outlook, liquidity, and risks
- Management disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the statements. Soluna reported inadequate cash, negative working capital, continuing losses, and dependence on additional financing. Management said it was evaluating equity, project-level financing, debt, partnerships, and other options; no assurance of successful or timely financing was given.
- Project Dorothy in Texas is planned for up to 100 MW, with initial 50 MW energization anticipated in Q1 2023, subject to ERCOT approval. Spring Lane committed up to $12.5 million for the project, of which $4.3 million had been contributed by September 30; contributions depend on conditions and milestones. The broader project-financing framework contemplated up to $35 million.
- After quarter-end, Soluna raised approximately $1.63 million net in an October 2022 common-stock offering at $1.44 per share. The Spring Lane $0.85 million note converted into 593,065 shares at that offering price. The filing says proceeds are intended for data-center development and general corporate purposes.
- Key risks include Bitcoin-price volatility, power availability and cost, access to financing, debt maturities and secured-creditor remedies, dilution and warrant repricing, preferred dividends, inflation and interest rates, and execution and approval risks for Project Dorothy.
- Management concluded disclosure controls were not effective at September 30, 2022 because a complex, late-quarter debt amendment required a material adjustment identified during the quarterly review. Remediation was underway; management stated the financial statements were fairly stated in all material respects.
- The filing reports an EPA demand seeking approximately $358,000 plus interest for response costs at a Superfund site; management considered a material adverse outcome remote. No other material litigation was identified.
Important facts for investors to verify
- Whether Soluna obtained enough financing and liquidity to meet operating needs, capital commitments, and near-term debt obligations after September 30.
- Current cash, working capital, debt principal, repayment schedules, escrow requirements, and any further NYDIG waivers or amendments.
- Project Dorothy’s ERCOT approval, construction and energization schedule, costs, and conditions for Spring Lane funding.
- Mining economics: active miner utilization, power costs, Bitcoin prices, impairment assumptions, and whether revenue can cover operating costs and depreciation.
- Potential dilution from preferred conversions, warrants, note conversions, and subsequent equity offerings, including the October offering’s impact on Series B warrant pricing.
- Progress and effectiveness of remediation for the disclosed material weakness in financial-reporting controls.