Soluna Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. Unless stated otherwise, financial amounts below are in U.S. dollars. The company develops and operates modular computing facilities, earning revenue from cryptocurrency mining and data hosting, with a focus on facilities using renewable energy. The figures reflect continuing operations unless noted.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2.068 million | $8.676 million | $5.150 million | $17.992 million |
| Operating loss | $7.074 million | $9.432 million | $14.084 million | $16.230 million |
| Net loss from continuing operations | $9.257 million | $14.104 million | $16.689 million | $23.236 million |
| Net loss attributable to Soluna | $8.775 million | $6.557 million | $15.837 million | $15.464 million |
| Adjusted EBITDA (non-GAAP) | $(2.040) million | $0.296 million | $(4.949) million | $1.150 million |
Q2 cryptocurrency mining revenue was $915,000, down 88%; data hosting revenue was $1.153 million, down 2%. Six-month mining and hosting revenue fell 76% and 46%, respectively. Q2 total costs of revenue exceeded revenue by $390,000; the six-month excess was $455,000. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
- Cash flow: Continuing-operations operating cash use was $3.836 million for the first half. Investing cash use was $9.569 million, including $2.895 million of property and equipment purchases and a $7.916 million net increase in equipment deposits and credits. Financing provided $21.828 million, including $19.414 million of non-controlling-interest contributions.
- Liquidity: June 30 cash was $7.464 million and restricted cash was $2.780 million; management cited approximately $7.5 million of cash available for use. Working capital was $6.140 million, versus a $24.579 million deficit at December 31, 2022. Restricted cash is not generally available for immediate business use.
- Debt: The balance sheet reported $8.087 million of current debt, $1.174 million of long-term debt and $10.710 million of convertible notes, or approximately $19.971 million combined. The NYDIG equipment financing was accelerated; after collateral repossession, approximately $7.158 million remained outstanding. The convertible notes carry an 18% stated interest rate, with default interest waived in March 2023; their maturity was extended to July 25, 2024. A separate Navitas term loan had $2.050 million principal at 15% interest, with $829,000 current and $1.174 million long-term after issuance costs.
- Other balance-sheet items: Total assets were $96.647 million and total liabilities $38.026 million. Property, plant and equipment, net, was $37.760 million; intangible assets, net, were $31.735 million. Accumulated deficit was $237.606 million.
Material changes versus the prior comparable period
- Revenue contraction reflected the February 2023 shutdown of Project Marie and the shift at Project Sophie from proprietary mining to hosting. The company attributed additional mining-revenue pressure to lower Bitcoin prices; it reported average Bitcoin prices down approximately 14% for Q2 and 31% for the six-month comparison.
- Q2 continuing-operations loss improved from $14.104 million to $9.257 million, largely alongside lower depreciation and amortization in cost of revenue and lower interest expense. However, Q2 loss attributable to Soluna increased from $6.557 million to $8.775 million because the 2022 comparison included $7.547 million of income from discontinued operations, primarily the MTI Instruments sale gain.
- Depreciation in cost of revenue fell to $539,000 in Q2 from $5.538 million, following substantial 2022 asset impairments and a lower asset base. General and administrative expense, excluding depreciation and amortization, declined 15% in Q2 to $4.136 million; stock-based compensation increased.
- Cash and working capital improved from year-end, supported in part by project-level investor contributions, while operating cash use and substantial project funding needs continued.
Operations, outlook, risks and unusual items
- Project Marie ceased operations in February 2023 after termination of its hosting/management agreement and NYDIG’s foreclosure on its collateral. Soluna said it would concentrate personnel and capital on Project Dorothy.
- Project Sophie entered a 25 MW hosting agreement in April; by the filing date, the company reported 23 MW deployed for the hosting customer and was selling its remaining mining equipment. Dorothy 1A began energizing in May, with 5 MW and 20 MW hosting agreements signed. Management expected Dorothy 1B energization in Q3 2023. Project Kati, a proposed 166 MW project, was in the first of three ERCOT interconnection studies. These are company plans and expectations, not quantified financial guidance.
- Management concluded that substantial doubt existed about the company’s ability to continue as a going concern for one year after issuance of the financial statements. Soluna said it needs profitable operations and/or additional financing; potential sources include equity, project-level funding, debt and partnerships. It warned financing may not be available on acceptable terms and that it may need to delay or scale back development or operations.
- NYDIG foreclosed on collateral with a reported net book value of approximately $3.4 million. NYDIG also indicated it may pursue Soluna Computing under a corporate-veil theory. A Nevada court dismissed, without prejudice, Soluna Computing’s declaratory-judgment complaint in June; the company said it intended to refile. NYDIG may also seek a deficiency judgment against the borrower and guarantor.
- The May 2023 convertible-note amendment generated a reported Q2 debt extinguishment and revaluation loss of $2.054 million; the six-month loss was $1.581 million. The company also recorded a $250,000 extension fee, fixed-asset impairments of $169,000 in Q2 and $377,000 for the first half, and a $48,000 Q2 gain on equipment sales.
- No Series A preferred dividends had been declared since October 2022; reported arrears totaled approximately $5.1 million at June 30. Series B dividends accrued at 10%. After quarter-end, the company satisfied a Series B dividend of approximately $657,000 with common shares and pre-funded warrants.
- Management cited Bitcoin price and mining economics, the anticipated April 2024 block-reward halving, power costs, inflation, interest rates, capital-market access, project execution and partner performance as risks. Controls and procedures were reported effective at a reasonable-assurance level.
Most important facts for investors to verify
- Availability and sufficiency of cash: distinguish $7.464 million of cash from $2.780 million of restricted cash, and assess the company’s near-term financing requirements and going-concern warning.
- NYDIG exposure and legal developments, including the remaining accelerated balance, any deficiency claim and the potential claim against Soluna Computing.
- Project milestones and economics: Dorothy 1B energization, performance and funding obligations under the Navitas and Spring Lane arrangements, and customer deployments at Sophie and Dorothy 1A.
- Convertible-note terms, conversion activity, potential dilution and the large warrant and equity-plan overhang. Common shares outstanding increased from 18.694 million at year-end to 29.746 million at June 30; 23.836 million warrants were outstanding at quarter-end.
- Clarification of NYDIG accrued interest and penalties: the notes report approximately $965,000 at June 30, while the MD&A reports different amounts in separate passages. The filing text does not provide a clear reconciled value.
- Whether equipment credits and sale proceeds are realized as expected; a $975,000 equipment credit was subject to use by March 1, 2024 or forfeiture.