Soluna Holdings, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2021. The company was then named Mechanical Technology, Incorporated; it changed its name to Soluna Holdings, Inc. effective November 2, 2021, after completing its merger with Soluna Computing, Inc. on October 29, 2021. The business comprised cryptocurrency mining and hosting through EcoChain and test-and-measurement products through MTI Instruments. Financial figures below are in U.S. dollars; unless noted, amounts are in millions.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $5.073 | $3.687 | $10.709 | $7.710 |
| Operating income (loss) | $(0.628) | $1.455 | $(2.480) | $1.913 |
| Net income (loss) | $(0.610) | $1.507 | $(2.452) | $1.972 |
| Operating cash flow | Not separately stated | Not separately stated | $(2.778) | $1.516 |
- Revenue mix: Q3 cryptocurrency mining revenue was $2.018 million, data hosting revenue was $1.106 million, and product revenue was $1.949 million. For the first nine months, the respective figures were $4.670 million, $1.106 million, and $4.933 million.
- Margins: Consolidated gross margin, calculated from reported revenue and cost of revenue, was approximately 52.6% in Q3 2021 versus 76.2% in Q3 2020, and 60.5% for the first nine months of 2021 versus 73.6% in 2020. Mix shifted as mining and hosting grew and product sales declined. MTI product cost as a share of product revenue increased to 33% from 24% year to date.
- Balance sheet at September 30: Cash was $15.817 million; working capital was $18.013 million; total assets were $46.608 million; and total liabilities were $7.878 million. The company reported no debt outstanding. It had an undrawn $1 million unsecured line of credit.
- Cash investment and financing: Investing activities used $17.670 million, primarily for equipment. Financing provided $33.635 million, including common and preferred stock offerings. Cash increased from $2.630 million at year-end 2020 to $15.817 million.
- Equity and preferred dividends: The company raised net proceeds through common and preferred offerings during 2021. It had 806,585 Series A preferred shares outstanding at quarter-end; the preferred stock carries a 9% annual dividend rate on a $25 liquidation preference. Common shares outstanding were 13,732,713 at September 30.
Material changes versus the prior comparable period
- Total revenue rose 37.6% in Q3 and 38.9% for the first nine months. Mining revenue increased substantially as operations expanded; hosting revenue began in August 2021 and had no 2020 comparison.
- MTI product revenue fell 44.5% in Q3 and 34.1% year to date, mainly because fewer portable balancing systems were sold to the U.S. Air Force following a large 2020 order. Management said the Air Force contract expired June 30, 2021, was under renewal discussions, and expected renewal by year-end without material impact.
- SG&A increased to $2.893 million in Q3 from $0.990 million and to $7.761 million for the first nine months from $2.632 million. Drivers included stock-based compensation, project and acquisition diligence, legal and investor-relations costs, higher staffing, and public-company compliance expenses.
- The company moved from profit to loss in both comparison periods. Management attributed the change principally to higher SG&A, partially offset by higher EcoChain contribution margins.
- Property, plant and equipment increased to $18.290 million from $0.847 million at December 31, 2020, including $16.402 million of construction in progress. Accumulated deficit was $120.419 million.
Outlook, commentary, risks and unusual items
- Management believed available cash, working capital, projected cash flows and financing would fund SHI and MTI Instruments operations and capital expenditures through at least Q4 2022. It expected EcoChain growth and capital expenditures to be funded through additional capital raises; such financing may not be available on acceptable terms or at all.
- At quarter-end, EcoChain had approximately $6.2 million of commitments for capital expenditures and termination payments. SHI and MTI Instruments had approximately $367,000 of purchase-order commitments. A separate $1 million KeyBank credit facility was available but undrawn.
- The Southeast U.S. ground leases had not commenced as of November 12, 2021. The power arrangement depends on the landlord supplying electricity; interruption could materially disrupt mining operations. The properties are also referenced in pending U.S. government asset-forfeiture proceedings involving parties related to the landlord; seizure could require new power arrangements or substantial spending to secure continued operations.
- Cryptocurrency operations face risks from price volatility, operating costs, regulation, network access, monetization, and the challenge of scaling to additional facilities. Other stated risks include customer concentration, dependence on government contracts, and availability of financing.
- Subsequent financing: In October 2021, the company issued secured convertible notes with $16.304 million aggregate principal for $15 million in proceeds, due October 25, 2022, plus warrants to purchase up to 1,776,073 shares. Conversion and warrant exercise could dilute shareholders; the notes are secured and guaranteed by subsidiaries.
- Merger and related arrangements: The October 29 merger provides for up to 2.97 million common shares upon achievement of project milestones within five years. Separately, the company issued 150,000 shares and EcoChain paid HEL $725,000 under the termination arrangements. These are post-quarter events, not September 30 balances.
- Contingency: The EPA seeks approximately $358,000 plus interest in connection with a Superfund site. Management considered a material adverse outcome remote and did not expect a material liability.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level as of September 30, 2021, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported equipment spending: the cash flow statement reports $17.670 million of equipment purchases, while the MD&A liquidity table lists $11.670 million. Segment disclosures also report $17.877 million of capital expenditures.
- Track EcoChain facility development, lease commencement, power supply arrangements, committed spending and the availability and cost of future capital.
- Confirm the status and terms of the U.S. Air Force contract renewal and assess continued MTI product demand, especially portable balancing systems.
- Review the terms, collateral, conversion provisions, warrants and potential dilution from the October 2021 financing, and the milestone conditions for merger shares.
- Monitor cryptocurrency prices, mining economics, customer concentration, landlord-related forfeiture proceedings and any resulting operational or legal costs.