Soluna Holdings, Inc annual report, FY2020

Business context and reporting period

The supplied filing is Mechanical Technology, Incorporated’s Form 10-K for the fiscal year ended December 31, 2020, filed March 30, 2021; it is not a filing under the name Soluna Holdings, Inc. The filing reports full-year results, not standalone 2020 fourth-quarter results. The company traded as MKTY and operated two segments: MTI Instruments’ test and measurement business and EcoChain’s cryptocurrency mining business.

MTI Instruments generated 93.8% of 2020 revenue. EcoChain began mining in May 2020 and sold mined cryptocurrency for U.S. dollars. The company also held an approximately 1.86% fully diluted interest in Soluna, recorded at a cost of $750,000.

Financial performance and liquidity

• Revenue increased 46.1% year over year. Product revenue rose 37.0% to $9.004 million; cryptocurrency revenue was $595,000, with no comparable 2019 revenue.
• Product gross margin improved to 70.4% from 66.4%. Cryptocurrency revenue cost $405,000.
• Research and product development expense was $1.491 million, up 8.0%; selling, general and administrative expense was $3.584 million, up 31.5%.
• Investing cash outflow was $1.585 million, including $835,000 of equipment purchases and the $750,000 Soluna investment. Financing cash inflow was $83,000; there were no 2020 dividends.
• The company reported no debt outstanding at year-end. A $300,000 secured bank line was unused. Operating lease liabilities totaled $1.207 million.
• Year-end total assets were $8.647 million and stockholders’ equity was $5.916 million. Accumulated deficit remained $117.793 million.

Changes versus the prior year

Improved results principally reflected higher U.S. Air Force shipments and better MTI Instruments product mix and margins. U.S. Air Force revenue rose to 42.9% of product revenue from 20.8%. The new cryptocurrency business contributed $595,000 of revenue but reported a segment operating loss of $209,000 before income taxes. Higher corporate and EcoChain-related costs, including legal, staffing, and management expenses, contributed to increased SG&A.

Net income also included a $392,000 income tax benefit. A $643,000 partial release of the deferred-tax-asset valuation allowance contributed to that benefit, based on management’s assessment of future taxable income.

Outlook, risks, and unusual items

• Management expected available cash and projected cash flows to fund operations and capital expenditures through at least the end of the first quarter of 2022. The filing also described a planned common-stock offering of up to $11.5 million; proceeds were intended primarily for two additional mining facilities. The filing does not establish that the offering had closed.
• Management expected 2021 R&D spending of about $1.6 million and computer equipment and software spending of about $300,000. SG&A was expected to rise, including from renewed travel, hiring, SEC reporting costs, and an anticipated 17%–20% increase in insurance expense.
• The existing U.S. Air Force contract was due to expire June 30, 2021. Management expected renewal, but it was pending when the filing was made. Backlog declined to $555,000 from $721,000.
• A second cryptocurrency facility in the Southeastern United States was expected to be completed in the third or fourth quarter of 2021. Its power contract uses rates subject to adjustment under arrangements with the provider and TVA.
• Key risks include dependence on a small customer base and the U.S. Air Force, cryptocurrency price and regulatory volatility, mining-equipment obsolescence, power availability and costs, reliance on Soluna and mining pools, and the need for additional financing to expand.
• The filing disclosed an EPA demand seeking approximately $358,000 plus interest for response costs at a Superfund site; management considered a material adverse outcome remote. Soluna arrangements involved director and management affiliations; the company said an independent board committee and separate counsel reviewed them.
• The independent auditor gave an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.

Important facts for investors to verify

• Confirm the issuer and filing: this document is Mechanical Technology, Incorporated’s 2020 Form 10-K, not a Soluna Holdings filing, and it does not provide standalone fourth-quarter figures.
• Check whether the U.S. Air Force contract was renewed and how much revenue and backlog depended on subsequent orders.
• Verify whether the proposed stock offering closed, the net proceeds raised, and any resulting dilution.
• Track the second mining facility’s completion, actual power costs, operating capacity, and profitability against the stated timetable.
• Assess the sustainability of earnings apart from the deferred-tax valuation-allowance release and the unusually high 2020 Air Force shipments.
• Review the related-party Soluna agreements, success-payment terms, and any subsequent changes to the company’s Soluna investment.