Soluna Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial amounts are in U.S. dollars; unless stated otherwise, figures below are in millions. The company develops and operates modular computing data centers, with revenue from cryptocurrency mining and data-center hosting.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Cryptocurrency mining revenue | $2.796 | $7.812 |
| Data hosting revenue | $0.286 | $1.504 |
| Total revenue | $3.082 | $9.316 |
| Cost of revenue | $3.138 | $8.859 |
| Operating loss | $(7.012) | $(6.798) |
| Net loss | $(7.432) | $(8.906) |
| Net loss attributable to Soluna | $(7.062) | $(8.906) |
| Basic and diluted loss per share | $(0.35) | $(0.69) |
| Adjusted EBITDA, non-GAAP | $(2.910) | $0.853 |
| Net cash used in operating activities | $(3.053) | $0.801 provided |
- Revenue declined 67% year over year. Management attributed the decrease to lower Bitcoin prices and the February shutdown of Project Marie; lower mining and hosting revenue were partly offset by lower costs.
- Cost of revenue exceeded revenue by $56,000, compared with a $457,000 gross profit in Q1 2022. Operating loss widened by $214,000. Net loss improved mainly due to lower interest expense and a $473,000 gain on convertible-note revaluation; Adjusted EBITDA moved from positive to negative.
- Cash was $4.553 million and restricted cash $0.493 million at quarter-end. Working capital was negative $17.218 million. Total assets were $84.241 million, total liabilities $34.062 million, and total equity $50.179 million.
- Current liabilities were $25.037 million, including $10.270 million of convertible notes, $7.758 million current debt, and $2.847 million accrued liabilities. The company reported approximately $11.6 million principal outstanding on convertible notes and $7.2 million of NYDIG debt after collateral repossession. It also had $600,000 principal outstanding on promissory notes at quarter-end. The $135,000 KeyBank line balance at quarter-end was paid after quarter-end.
- Investing activities used $0.435 million, including $0.860 million of capital expenditures. Financing activities provided $6.713 million, including $5.991 million of contributions from non-controlling interests.
Material changes and operating developments
- On February 23, NYDIG foreclosed on collateral securing its equipment financing, repossessing mining and operating assets with a $3.4 million net book value. The outstanding debt was reduced accordingly. Project Marie, a 20 MW facility, ceased operations after NYDIG’s foreclosure and termination of its hosting and management agreement; it was not classified as discontinued operations.
- Project Sophie operated at 25 MW on proprietary mining at quarter-end. On April 6, 2023, it entered a 25 MW hosting contract; the company said it planned to sell its miners there and redeploy capital.
- For Project Dorothy Phase 1A, Soluna sold membership interests to Spring Lane for a stated $7.5 million purchase price, reducing its ownership from approximately 68% to 14.6%. Soluna retains a right to 50% of profits after Spring Lane achieves an 18% investment return hurdle.
- Common shares issued and outstanding increased from 18.7 million at December 31, 2022 to 25.4 million at March 31, 2023. The filing reported 27.0 million outstanding as of May 10. Outstanding warrants and equity awards also represent potential dilution.
Outlook, risks, contingencies, and unusual items
- Going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern for one year after the financial statements were issued. The company has losses, negative working capital, and needs additional capital for operations and commitments. Management is considering equity, project-level financing, debt, partnerships, asset sales, and spending reductions; it gave no assurance that financing will be available.
- Project financing: On May 9, 2023, Navitas initially contributed $4.5 million toward Dorothy Phase 1B and committed approximately $10.8 million for miners and equipment. It also provided a $2 million, two-year loan. Navitas is expected to own 49% and Soluna 51% after funding; the facility was expected to enter service in July 2023. The filing says the project is fully financed, subject to completion of the stated funding.
- Convertible notes: On May 11, holders agreed to extend maturity to July 25, 2024. Soluna paid a $250,000 fee, increased principal by 14%, and issued 8 million warrants with exercise prices of $0.50 and $0.80. The amended terms also provide for potential triggered conversions, subject to conditions.
- NYDIG litigation and default: NYDIG may pursue a deficiency judgment against the borrower and guarantor and stated it may pursue SCI under a corporate-veil theory. SCI denies liability and filed for declaratory relief. The amount of any ultimate deficiency or exposure is not clear from the filing.
- Other risks include Bitcoin price and mining-reward volatility, the expected 2024 Bitcoin halving, energy costs, interest rates, access to capital, and project execution. The filing identifies an EPA reimbursement demand of approximately $358,000 plus interest but says a material adverse outcome is remote.
- Leadership changed after quarter-end: the CFO resigned effective April 21 and a director became interim CFO; the CEO resigned effective May 1 and SCI’s CEO became company CEO, with the former CEO becoming Executive Chairman. The filing says the resignations were not due to disagreements.
- No numerical revenue or earnings guidance is provided. Management described plans to focus resources on Dorothy and expand hosting and renewable-energy-powered computing, including possible AI and machine-learning workloads.
Important facts for investors to verify
- Whether the company can secure sufficient financing and meet obligations despite negative working capital and the disclosed going-concern doubt.
- Current NYDIG debt, any deficiency claim, and the outcome of litigation concerning SCI’s potential liability.
- Completion, funding, costs, ownership economics, customer contracts, and expected operating dates for Dorothy 1A and 1B.
- Execution and economics of the Sophie hosting transition, including proceeds from planned miner sales and any impact on revenue.
- Convertible-note balances and amended terms, including extension costs, potential conversions, warrant issuance, and resulting dilution.
- Bitcoin prices, mining economics, energy costs, and the impact of the 2024 reward halving on revenue and cash needs.