Soluna Holdings, Inc. (registrant: Mechanical Technology, Incorporated) — Q1 2021 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2021, with comparisons to Q1 2020. The registrant operated two businesses: MTI Instruments, selling measurement and testing products, and EcoChain, mining cryptocurrency using a Washington State facility. Cryptocurrency mining began in Q2 2020. The company redomesticated from New York to Nevada on March 29, 2021.
Financial performance and position
- Revenue: $2.332 million, up 47.3% from $1.583 million. Product revenue fell 15.5% to $1.337 million; new cryptocurrency revenue was $995,000.
- Margins: Product gross margin was 66.2%, versus 66.7% a year earlier. Cryptocurrency revenue less its reported direct costs was $667,000, a 67.0% contribution margin; this is not a consolidated operating margin.
- Profitability: Operating loss was $671,000, compared with $142,000. Net loss was $666,000, or $0.07 per basic and diluted share, versus a $137,000 loss, or $0.01 per share. SG&A rose 131.1% to $1.837 million.
- Cash flow: Operating activities provided $331,000, compared with $333,000 used in Q1 2020. Investing activities used $301,000, primarily for equipment; financing provided $62,000 from option exercises. Cash increased $92,000 to $2.722 million.
- Liquidity and debt: Working capital was $2.405 million, down from $3.142 million at December 31, 2020. Total liabilities were $3.986 million. The company reported no debt and no amounts drawn on its $300,000 secured line of credit; it had $1.0 million in EcoChain capital-expenditure commitments.
- Other metrics: Total assets were $9.381 million and stockholders’ equity was $5.395 million. Backlog was $408,000, down from $555,000 at year-end. Accumulated deficit was $118.5 million.
Material changes versus Q1 2020
- Total revenue increased because EcoChain contributed $995,000 for the first time in the comparable quarter, partly offset by lower product sales.
- Product revenue declined amid COVID-19-related travel and business restrictions, particularly affecting Asian sales. Increased U.S. Air Force sales partly offset the decline.
- SG&A increased by $1.042 million, including legal and investor-relations costs associated with the new facility, Nevada redomestication, Nasdaq listing and public-company reporting. Management identified approximately $400,000 of legal costs and $120,000 of investor-relations costs as expected one-time expenditures.
- Cash from operations improved, substantially reflecting a $1.214 million increase in accounts payable; prepaid expenses and other current assets used $585,000 of cash.
Outlook, commentary, risks and unusual items
- Management expected MTI and MTI Instruments to spend approximately $300,000 on computer equipment and software and $1.6 million on R&D in 2021. It believed resources would support those businesses through at least Q2 2022, subject to projected cash flows and spending plans.
- EcoChain growth was expected to be funded through capital raises. In April 2021, the company bought mining equipment for $792,000. In May, it completed an offering that generated approximately $13.7 million in net proceeds. Management cautioned that further financing might not be available on acceptable terms or at all.
- In May 2021, EcoChain entered into 25-year ground leases and a power-supply agreement for a planned Southeast U.S. facility. The agreements involve $500,000 rent at commencement, $4 million in periodic payments, and 100,000 shares to the landlord. The leases were subject to conditions; the filing describes interim hosting arrangements and potential additional operating costs.
- Risks include cryptocurrency price and operating-cost volatility, scaling and profitability uncertainty, dependence on the landlord for power, and potential U.S. government forfeiture proceedings involving the leased properties. Seizure could interrupt operations and require significant spending. The filing also cites COVID-19 effects, customer concentration and dependence on government contracts.
- The U.S. Air Force contract, with an expiration date of June 30, 2021, accounted for $230,000 of Q1 product revenue. Management expected renewal and said it did not anticipate a material impact from the pending expiration; renewal was not assured in the filing.
- The EPA sought approximately $358,000 plus interest from named parties, including the company, in connection with a Superfund site. Management assessed a material adverse outcome as remote and did not expect a material liability.
- Soluna-related agreements and the company’s $750,000 investment in Soluna involve director and executive affiliations. The filing says transactions were reviewed and approved by an independent investment committee and the board.
Important facts for investors to verify
- Whether the Air Force contract was renewed and how much revenue and backlog it subsequently generated.
- Whether the Southeast facility leases became effective, the timing and cost of operations, power availability, and any property-forfeiture developments.
- How the May offering proceeds and subsequent miner purchases and facility commitments affected cash, share count and dilution.
- Whether EcoChain generated sustainable cash flow as cryptocurrency prices, mining difficulty, energy costs and capacity utilization changed.
- Whether the reported improvement in operating cash flow was sustainable, given the substantial contribution from higher accounts payable.
- How Q1 customer concentration, COVID-related sales impacts, and related-party arrangements evolved after the reporting period.