EDGAR 10-K Filing

Company CIK: 64463
Filing Year: 2022
Filename: 64463_10-K_2022_0001753926-22-000384.json

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ITEM 1. BUSINESS
Item 1: Business
Unless the context requires otherwise in this Annual Report on Form 10-K (“Annual Report”), the terms “SHI,” the “Company,” “we,” “us,” and “our” refer to Soluna Holdings, Inc. together with its consolidated subsidiaries, “SCI” refers to Soluna Computing, Inc., formerly known as EcoChain, Inc., and “MTI Instruments” refers to MTI Instruments, Inc. Other trademarks, trade names, and service marks used in this Annual Report on Form 10-K are the property of their respective owners.
Overview and Recent Developments
Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated was incorporated in Nevada on March 24, 2021, and is the successor to Mechanical Technology, Inc., which was incorporated in the State of New York in 1961, as a result of a merger which became effective on March 29, 2021, and is headquartered in Albany, New York. Effective November 2, 2021, the Company changed its name from “Mechanical Technology, Incorporated” to “Soluna Holdings, Inc.”
SHI currently conducts our businesses through our two wholly owned subsidiaries, SCI and MTI Instruments. SCI is presently engaged in the mining of cryptocurrency through data centers that can be powered by renewable energy sources. MTI Instruments is engaged in the design, manufacture, and sale of vibration measurement and system balancing solutions, precision linear displacement sensors, instruments and system solutions, and wafer inspection tools. Recently, SCI has built, and intends to continue to develop and build, modular data centers that are currently used for cryptocurrency mining and that in the future can be used for computing intensive, batchable applications, such as artificial intelligence and machine learning, with the goal of providing a cost-effective alternative to battery storage or transmission lines. Headquartered in Albany, New York, the Company uses technology and intentional design to solve complex, real-world challenges.
SCI was incorporated in Delaware on January 8, 2020 as EcoChain, Inc., which has a cryptocurrency mining facility that integrates with the cryptocurrency blockchain network in the State of Washington. Through the October 2021 acquisition by EcoChain, Inc. of an entity at the time named Soluna Computing, Inc., SCI also has a pipeline of certain cryptocurrency mining projects previously owned by Harmattan Energy, Ltd. (“HEL”) (formerly known as Soluna Technologies, Ltd.), a Canadian corporation incorporated under the laws of the Province of British Colombia that develops vertically-integrated, utility-scale computing facilities focused on cryptocurrency mining and cutting-edge blockchain applications. Following such acquisition, on November 15, 2021, SCI completed its conversion and redomicile to Nevada and changed its name from “EcoChain, Inc.” to “Soluna Computing, Inc.” The following day, the acquired entity, Soluna Computing, Inc., changed its name to “Soluna Callisto Holdings Inc.” (“Soluna Callisto”).
MTI Instruments was incorporated in New York on March 8, 2000 and is a supplier of vibration measurement and balancing systems, precision linear displacement solutions, and wafer inspection tools. MTI Instruments’ products consist of engine vibration analysis systems for both military and commercial aircraft and electronic gauging instruments for position, displacement and vibration application within the industrial manufacturing markets, as well as in the research, design and process development markets. These systems, tools and solutions are developed for markets and applications that require consistent operation of complex machinery and the precise measurements and control of products, processes, the development and implementation of automated manufacturing and assembly.
On December 17, 2021, we announced that we had entered into a non-binding letter of intent with a potential buyer (the “Buyer”) regarding the potential sale of MTI Instruments (the “LOI”) to an unrelated third party. Pursuant to the LOI, the Buyer would acquire 100% of the issued and outstanding common stock of MTI Instruments (the “Sale”). The LOI only represents a mutual indication of interest regarding the Sale and the terms of the Sale are subject to a number of contingencies, including the completion of customary due diligence and the negotiation and execution of definitive agreements. If the Sale is completed, the Company expects that we will exit the instrumentation business and that we will be focused on developing and monetizing green, zero-carbon computing and cryptocurrency mining facilities. As a result of the foregoing, the MTI Instruments business is being held as discontinued operations in our financial statements as of December 31, 2021 and prior periods included in this Annual Report and until it is sold, we will continue to operate the MTI Instruments business.
Our website is http://www.solunacomputing.com. Information contained on our website does not constitute part of and is not incorporated into this Annual Report.
The current corporate organizational structure of SHI appears below.
The Company had previously been subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”) and filed reports and other documents with the Securities and Exchange Commission (the “SEC”) thereunder, but had ceased doing so in 2018. The Company filed with the SEC a Form 10 Registration Statement to re-register its common stock under Section 12 of the Exchange Act initially in March 2020, which was withdrawn and then re-filed in September 2020 and that became effective in November 2020, making the Company once again subject to the Exchange Act’s reporting requirements. In addition, on March 23, 2021, our common stock commenced trading on the Nasdaq Stock Market LLC (“Nasdaq”).
In connection with our Nasdaq listing application, our Board of Directors approved (subject to shareholder approval, which was obtained at the special meeting of shareholders held on March 25, 2021) a grant of discretionary authority permitting the Board, at any time prior to the Company’s 2022 annual meeting of shareholders, to effect a reverse split of the Company’s outstanding shares of common stock (either before or after the Redomestication) at a specific whole number ratio within a range from 1-for-2 to 1-for-10. Subject to shareholder approval, we intend for the Board to effect such reverse stock split only if and to the extent necessary to remain in compliance with Nasdaq’s continued listing requirements.
Soluna Computing, Inc.
SCI engages in cryptocurrency mining, a process by which transactions between cryptocurrency users are verified and added to the blockchain public ledger. Cryptocurrency mining also introduces new cryptocurrency coins into the existing circulating supply, facilitating a peer-to-peer decentralized network without the need for a third-party central authority.
In connection with this business line, SCI has first established a facility located in East Wenatchee, Washington to mine cryptocurrencies and integrate with the blockchain network. In 2020, SCI entered into an Operating and Management Agreement with HEL, in which HEL assisted us in developing and operating the cryptocurrency mining facility. The Operating and Management Agreement with HEL provided SCI with the management expertise in the cryptocurrency industry that was necessary to operate the mining facility. The Operating and Management Agreement required, among other things, that HEL provide developmental and operational services, as directed by SCI, with respect to the cryptocurrency mining facility in exchange for SCI’s payment to HEL. Pursuant to the Operating and Management Agreement, during the developmental phase of the cryptocurrency mining facility, which ended on March 14, 2020, HEL gathered and analyzed information with respect to SCI’s cryptocurrency mining efforts and produced budgets, financial models, and technical and operational plans, including a detailed business plan, that it delivered to SCI in March 2020, (the “Deliverables”), all of which was designed to assist with the efficient implementation of a cryptocurrency mine. The agreement provided that, following SCI’s acceptance of the Deliverables, which occurred on March 23, 2020, HEL, on behalf of SCI would commence operations of the cryptocurrency mine in a manner that will allow SCI to mine and sell cryptocurrency. In that regard, on May 21, 2020, SCI acquired the intellectual property of Giga Watt, Inc. (“GigaWatt”) and certain other property and rights of GigaWatt associated with GigaWatt’s operation of a crypto-mining operation. The acquired assets form the cornerstone of SCI’s new cryptocurrency mining operation.
The mining facility currently runs an electrical capacity of about 2.8 megawatts connected to a hydro power plant to consume energy during peak-energy periods, where demand for power was normally low. The Company has obtained access to a 25 megawatt capacity in Calvert City, Kentucky in which began ramping up production starting in May of 2021, it which it’s powered by a hydroelectric power from the Tennessee Valley Authority (“TVA”) dam, as well as an additional greenfield project of 25 megawatt facility powered by a hydroelectric dam operated by the TVA located in Murray, Kentucky in February of 2021. The Company intends to continue to rigorously evaluate increasing its investment in the Blockchain and dense computing sector.
On October 29, 2021, we completed the acquisition of Soluna Callisto pursuant to which we acquired a pipeline of certain cryptocurrency mining projects previously owned by HEL (the “Projects”). In connection with the acquisition, we also terminated all our existing Operating and Management Agreements with HEL effective as of October 29, 2021. Following our acquisition of Soluna Callisto and certain related employees, we now handle the operational management of the mines. SCI went from having no employees in 2020 to having 13 employees at the end of the fiscal year 2021.
Business Segments
Cryptocurrency Mining Operations
SCI’s cryptocurrency mining operation, formerly operated by HEL as noted above, commenced operations and immediately began mining several cryptocurrencies, including BitCoin, Ethereum, and LiteCoin, upon consummation of the GigaWatt transaction on May 21, 2020, using the mining equipment we acquired in that transaction. The mine, which is powered by renewable energy, is housed in approximately 19,000 square feet of leased space in four separate buildings. Since commencing its mining operations, SCI has acquired additional equipment and initiated improvements to the acquired facilities to increase the mine’s capacity. To maximize space utilization at the facility and cut down on our operating costs associated with the facility, SCI has from time to time entered into co-location agreements to share both unused space and facility costs with unrelated third party mining companies. In fiscal year 2021, we had two such agreements. SCI sells on a daily basis all cryptocurrencies mined for U.S. dollars, as it is not in the business of accumulating cryptocurrency on its balance sheet.
SCI has also began mining operations for fiscal year 2021 in Murray, Kentucky and Calvert City, Kentucky. Each of these locations have a potential 25 megawatt capacity. The mining facility in Calvert City currently performs hosting services and prop mining in which 10 megawatts is used for hosting services (discussed below) and 15 megawatts is used for prop mining. The mining facility in Murray, Kentucky operates fully on prop mining with a capacity of 25 megawatts.
Cryptocurrency Mining Revenue
SCI recognizes revenue when the related cryptocurrencies are converted to U.S. dollars through its account with either Coinbase or Bittrex, cryptocurrency exchanges (i.e. a platform that facilitates the exchange of cryptocurrencies for other assets, such as conventional money or other digital currencies). SCI exchanges cryptocurrency to U.S. dollars through the Coinbase and Bittrex account daily. The primary cryptocurrencies that SCI mines are Bitcoin and, to a lesser degree, Ethereum, Etherium Classic LiteCoin, RavenCoin, Zcash, and Sia. The type of cryptocurrency mined is based specifically on the installed miner, as each miner can mine only one type of cryptocurrency at a time. The miners perform complex computations at a speed referred to as the “hash rate.” SCI participates in mining pools where our miners’ computations and those of other miners owned by other persons are combined to place blocks on the blockchain, which generates the relevant cryptocurrency (in other words, it is at this point that more of the relevant cryptocurrency is created, which is memorized in the blockchain by being represented by new “blocks”). The mining pool operator uses software to track contributions made by all the miners and allocates the newly-minted cryptocurrency to the miners based on their pro rata contributions. SCI monitors its inputs into these pools and the resulting distribution of the resulting cryptocurrency, which allows management to ensure that SCI is being allocated the amounts of cryptocurrency it is entitled to based on the number of computations it contributes to the pools and the hash rate thereof. The cryptocurrencies allocated to SCI are automatically issued to its Coinbase account either daily or based on reaching a threshold level of a mined coin as established by SCI with the pools. Certain coins, such as Sia and Zcash are both converted to BTC by the pool prior to being transferred to SCI’s Coinbase account. Coinbase exchanges for U.S. dollars are initiated daily by SCI. Coinbase converts the coins based on the current coin price at the time based on standard at the time of the transfer. The funds are then withdrawn from SCI’s Coinbase account and transferred to SCI’s bank account multiple times a week.
Cryptocurrency Hosting Services and Revenue
The Company has entered into customer hosting contracts whereby the Company provides electrical power and network connectivity to cryptocurrency mining customers, and the customers pay a stated amount per megawatt-hour (“MWh”) (“Contract Capacity”), a fixed rate, as well as a share of the coins mined. Currently, all hosting services are performed in Calvert City, Kentucky for 2 mining operations in which the Company hosts approximately 10MWs in the facility. The fee is paid monthly in advance. The actual monthly amounts are calculated after the close of each month and reconciled to the monthly advance based on the clauses contained in the ASICrespective contracts. If any shortfalls due to outages are experienced, service level credits may be made to customers to offset outages which prevented them from cryptocurrency mining. Monthly advanced payments and customer deposits are reflected as other liabilities. Customer contract security deposits are made at the time the contract is signed and held until the conclusion of the contract relationship.
Cryptocurrency Assets for both Mining and Hosting services
Cryptocurrency assets, known as miners, consist of hardware and software that perform the computations needed to mine cryptocurrencies, as discussed under “Cryptocurrency Revenue” above, and as such are the source of the associated revenues generated by a cryptocurrency mine, including SCI’s. SCI has several thousand miners in service, mostly Bitmains, that generate Bitcoin. For a number of reasons, including that SCI purchases miners in the secondary market from a number of different sellers, and that the price fluctuates because of supply and demand fluctuations, as well as fluctuations in the price of the specific cryptocurrency that can be mined by the miner purchased, which drives the cost of the miners, the cost of purchasing these assets fluctuates regularly. As a result, SCI uses dollar cost averaging to flatten the overall cost of purchasing the miners so that it can consistently purchase miners regardless of the cost on the date of purchase. This allows SCI to replace the miners more consistently with newer models, which is important because, as miners age, their speed degrades, usually resulting in decreased computations over the same period and, as a result, fewer mined cryptocurrencies. In addition, miners are subject to ongoing technical obsolescence.
Mining Ecosystem and Competitive Landscape
There are number of methods that individuals and organizations use to engage in cryptocurrency mining, and mining operations run the gamut from individuals using one or more systems to run mining operations to industrial-scale mining farms with thousands of systems. The Company believes that the high demand for cryptocurrency is fueling innovation in all aspects of the mining hardware and the mining process. This includes the creation of mining pools, discussed above, that permitted the initial mining operators, which were generally small or individually-owned operations, to pool their resources to compete with larger entities that entered the mining market as cryptocurrencies gained wider use and acceptance and, as a result, mining them became more profitable. The mining business is global and is not dominated by any particular individual or organization. SCI considers Marathon Digital Holdings, Riot Blockchain, Inc. CleanSpark, Inc., Core Scientific, Inc., Cipher Mining, Inc., HIVE Blockchain Technologies, Ltd., and Hut 8 Mining Corp. to be among its closest competitors.
Equity investment - HEL
Simultaneously with entering into the January 2020 Operating and Management Agreement with HEL, the Company, pursuant to a purchase agreement it entered into with HEL, made a strategic investment in HEL by purchasing 158,730 Class A Preferred Shares of HEL for an aggregate purchase price of $500,000. After acceptance of the Deliverables, as required by the terms of the purchase agreement, the Company purchased an additional 79,365 Class A Preferred Shares of HEL for an aggregate purchase price of $250,000. The Company also has the right, but not the obligation, to purchase additional equity securities of HEL and its subsidiaries (including additional Class A Preferred Shares of HEL) if HEL secures certain levels or types of project financing with respect to its own wind power generation facilities. The Company has additionally entered into a Side Letter Agreement, dated January 13, 2020, with Soluna Technologies Investment I, LLC, a Delaware limited liability company that owns, on a fully diluted basis, 61.5% of HEL and is controlled by a Brookstone Partners-affiliated director of the Company. The Side Letter Agreement provides for the transfer to the Company of additional Class A Preferred Shares of HEL in the event HEL issues additional equity below agreed-upon valuation thresholds.
Several of HEL’s equity holders are affiliated with Brookstone Partners, the investment firm that holds an equity interest in the Company through Brookstone Partners Acquisition XXIV, LLC. One of our Brookstone-affiliated directors serves as a director and is currently acting President of HEL, and the other Brookstone-affiliated director has an ownership interest in HEL.
MTI Instruments Segment (Discontinued Operations-Held for Sale)
As discussed above, we have entered into the LOI with a potential Buyer for the MTI Instruments business. As of December 31, 2021, our Instrumentation segment met the held for sale criteria and is currently reflected as discontinued operations-held for sale in our financial statements for all periods presented and until it is sold, we will continue to operate the MTI Instruments business.
MTI Instruments engages in the design, manufacture, sale, marketing, and support of metrology, or measurement, products that provide analytical data to help customers monitor and analyze processes in areas including research and development, manufacturing, process control, quality control, and troubleshooting of third-party equipment. In research and development, our products can help customers collect empirical data that they can use to develop new products or processes. In manufacturing, our sensors can help engineers understand whether or not a process is under control. In the quality control area, our products can help determine if parts in a manufacturing line pass or fail an applicable quality test. With respect to troubleshooting, our products can provide diagnostic, and potential solution, information.
Because of the large number of applications and uses for our products, MTI Instruments’ product mix varies from a single sensor to a large multi-channel system that contains many different sensors and software, we can provide our customers a complete solution. In addition, MTI Instruments sells components to original equipment manufacturers (“OEMs”) who, in turn, incorporate our components into their own products.
MTI Instruments’ operations are headquartered in Albany, New York.
Instrumentation Products
MTI Instruments manufactures a line of products capable of diagnosing vibration and balancing problems of an aircraft engine and generating a visual map of where metal weights should be placed for the customer to balance the engine, also known as “trim balancing.” MTI Instruments also specializes in non-contact, highly-accurate metrology products. The measurements are carried from a distance while the sensor is tracking the object’s movement. These types of measurement sensors are commonly referred to in the industry as non-contact, linear displacement measurement sensors. Additionally, MTI Instruments manufactures a portable signal generator as well as quality control tools for the semiconductor industry.
Balancing Systems: MTI Instruments manufactures computer-based portable balancing systems (“PBS”) products that automatically collect and record aircraft engine vibration data, identify vibration or balance trouble in an engine, and calculate a solution to the problem on-wing, which means that customers do not have to disassemble the engine off the plane to perform this test and correct for the problem, resulting in a significant reduction of downtime. Major aircraft engine manufacturers and the U.S. Air Force, other military and commercial airlines, and gas turbine manufacturers use these products. MTI Instruments also manufactures a product with similar characteristics for test cells. Test cells are dedicated engine facilities outfitted with instruments to test aircraft engines when taken off aircrafts.
Diagnostic Equipment: MTI Instruments offers a portable signal generator - its 1510 Calibrator. A signal, or function, generator is a product that delivers an electronic signal simulating other pieces of equipment or sensors to help the user easily isolate potential problems when testing and calibrating electronic equipment. While the product was originally designed to help customers calibrate PBS products in the field, MTI Instruments now markets this product worldwide to different markets.
Semiconductor and Solar Metrology Systems: MTI Instruments manufactures a family of products that can assist in early defect detection in the manufacturing process of semiconductor products. Some of these semiconductor products include microchips, which are the basis for building the sophisticated electronic devices in common use today, including computers and smartphones. MTI Instruments’ semiconductor products help our manufacturer customers identify irregularities in the components of their products earlier in their manufacturing process. For example, for microchip manufacturers, our products allow for the detection of defects at the wafer (the surface, usually made of the chemical element silicon, from which microchips are built) stage of the manufacturing process. This allows our customers to discard defective components before they result in the manufacture of defective products, saving them time and money.
Marketing, Sales and Distribution
MTI Instruments markets its products and services using selected and specific channels of distribution. In the Americas, MTI Instruments uses a combination of direct sales and representatives. Overseas, particularly in Europe and Asia, MTI Instruments uses distributors and agents specific to our targeted end markets and has our sales staff frequently (at least once per quarter) visit distributors and customers in these territories to increase our exposure and sales, although during the current COVID-19 pandemic these visits are taking place virtually, either through videoconferences or via webinars. For our balancing systems, MTI Instruments primarily sells directly to end users.
MTI Instruments supplements sales efforts with marketing activities across different media including search engines, targeted newsletters, and purchased customer lists, and participates in trade shows related to our business in hopes to increase lead generation, resulting in new customer sales. The Company also maintains strong working relationships with our existing key customers to continually promote new product sales.
In addition, the Company works with existing OEMs and seeks to work with new OEMs to incorporate our products into their own products or retrofit existing components with our products. In most cases, these OEMs are looking for a semi-custom sensor using our products and technologies as the base for development. While the sales cycle of a new MTI Instruments’ product at an OEM can be long, so is the potential for recurring revenue once an OEM adopts our product.
Product Development
MTI Instruments conducts research and development efforts to support its existing products and develop new ones according to its sales and marketing plans. Management believes that our success in our current business depends to a large extent upon innovation, technological expertise, and new product development, and in some cases, seeking a technological advantage in the market. In addition, as noted above MTI Instruments seeks to work with OEMs to develop semi-custom product solutions.
Product Manufacturing & Operations
While many companies in the sensor, instrument, and systems markets have manufacturing operations overseas, MTI Instruments (and its predecessors) is and has always been a U.S.-based manufacturing company. Products are conceived, developed, tested, and shipped out from our headquarters in Albany, New York.
Our management believes that there are inherent advantages in maintaining our operations in the United States, including reducing the risk of inadvertent technology transfer, the ability to control manufacturing quality, and a much more effective customer management and satisfaction process. We have long-term vendor relationships and believe that most raw materials that we use in our products are readily available from a variety of vendors. These advantages were particularly acute during the last 12 months as we experienced minimal supply chain interruptions or other negative effects on our manufacturing processes as a result of the coronavirus pandemic.
We employ a flexible approach to manufacturing. While cross-training our employees in operations in different functional areas, management also implemented and has kept up-to-date lean principles on the manufacturing floor to increase capacity and productivity when experiencing high sales volumes.
Competition
We compete with a number of companies, several of which are substantially larger than MTI Instruments. In the axial turbo machinery market, MTI Instruments’ PBS product line competes with products from companies including ACES Systems and Meggitt Sensing Systems (Vibrometer) in the diagnostics of engine vibration and trim balancing. In the precision automated manufacturing market, MTI Instruments faces competition from companies including Omron Corporation, Turck Inc., Pepperl+Fuchs Inc., Keyence Corporation, Micro-Epsilon Messtechnik GmbH & Co. KG, Schmitt Industries Inc., Capacitec, Inc., Microsense LLC, and Motion Tech Automation Inc. In the R&D and semiconductor markets, we compete with companies involved in wafer inspection including KLA Corporation, Micro-Epsilon Messtechnik GmbH & Co. KG, and E+H Metrology GmbH. Competitors in precision linear displacement include Keyence Corporation, Micro-Epsilon Messtechnik GmbH & Co. KG, Schmitt Industries Inc., Capacitec, Inc., Microsense LLC, and Motion Tech Automation Inc.
The primary competitive considerations in MTI Instruments’ markets are product quality, performance, price, timely delivery, responsiveness, and the ability to identify, pursue, and obtain new customers. MTI Instruments believes that its employees, product development skills, sales and marketing systems, and reputation are competitive advantages.
Raw Materials
Our products are made from a wide variety of raw materials and certain subassemblies that are generally available from multiple sources. While we seek to have several sources of supply for our raw materials and subassemblies, however, we do obtain certain materials from a single source or a limited group of suppliers or from suppliers in a single country. While we believe that we have established strong vendor relationships to mitigate the risks associated with single-source suppliers and have not experienced disruptions in our supply chain to date, disruptions in supply remain a possibility and could result in delays, increased costs, or reduced operating profits or cash flows.
Dependence on Certain Customers
All of our product revenues (which constituted 33.3% of our total revenues) during 2021, and 93.8% of our total revenues in 2020, were earned through MTI Instruments. While we also have strong relationships with companies in the electronics, aircraft, aerospace, automotive, and semiconductor industries, MTI Instruments’ largest customer is the U.S. Air Force. The U.S. Air Force accounted for 18.5% and 42.9%, respectively, of our total product revenues during 2021 and 2020, respectively. While we depend on a relatively small number of commercial customers for the majority of the balance of our product revenues, sales to the largest commercial customer during each of the last two fiscal years accounted for between 9.1% and 13.0% of total product revenue and our largest commercial customer in each of the last two years was a different company than in each of the other two years. While we continue to endeavor to maintain and further expand our customer base, we expect that sales to a limited number of customers will continue to account for a high percentage of our revenues for the foreseeable future, and as a result the loss of or significant reduction in sales to our current customer base could have a material adverse effect on our business, revenues, ability to remain profitable, and financial condition.
Intellectual Property and Proprietary Rights
We rely on trade secret laws to establish and protect the proprietary rights of our products. In addition, we enter into standard confidentiality agreements with our employees and consultants and seek to control access to and distribution of our proprietary information. Even with these precautions, however, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization or to develop similar technology independently. In addition, effective trade secret protection may be unavailable or limited in certain foreign countries.
Existing or Probable Governmental Regulations
Cryptocurrency Segment
While the United States and a number of other countries are considering how to regulate cryptocurrencies, very little action has been taken in that regard to date. While we expect that regulation, particularly in the United States, governing the cryptocurrency arena will be adopted at some point, there is no certainty at this time when such regulations may be adopted, what form such regulation will take, or the parts of the cryptocurrency sector that such regulations will impact. As a result, we cannot at this time determine or even estimate what the impact of such regulations may be on SCI’s operations and financial condition and, as a result, the Company’s financial condition and results of operations.
Human Capital Resources
At March 28, 2022, we had 62 employees, including 54 full-time employees consisting of ten corporate headquarter employees (eight are in finance and two executives), 26 SCI employees and 26 MTI Instruments employees. Of the SCI employees one was in finance, twelve in operations, three in corporate development, six in technology and engineering, two in human resources, one in marketing and one executive. The operations personnel include both individuals directly involved in the strategy of our data centers as well as data center maintenance and supervisory roles. Of the MTI Instruments employees, ten are engaged in product development, eight in manufacturing, and the remainder in sales and general and administrative functions. The manufacturing personnel include both individuals directly involved in the manufacturing of our products as well as warehouse and operations supervisory personnel. Certain positions within our organization require industry-specific technical knowledge. We have been successful in attracting and retaining qualified technical personnel for these positions. None of our employees are covered by any collective bargaining agreement.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, engaging, incentivizing, and integrating our existing and additional employees. The Company supports its employees through a competitive compensation package, including company equity, generous health benefits and a flexible PTO policy. We have a combination of remote and on site employees. The majority of our operations employees are on site at our various data center locations.
Insurance
The Company maintains insurance policies with reputable insurers against such risks and in such amounts as management has determined to be prudent for our operations and that we believe are similar in scope and coverage in all material respects to insurance policies maintained by other similarly-situated businesses.
Risk Factors Summary
In evaluating the Company, its business and any investment in the Company, readers should carefully consider the following factors:
Risks relating to the COVID-19 pandemic, inflation, recent governmental sanctions and global economic uncertainty
● Adverse changes in economic or other market conditions in the United States could have a material adverse effect on our business and results of operations and curtail our ability to raise financing.
● The long-term effects of the COVID-19 pandemic, or the impacts of any future pandemics or other health crises, are unknown and may adversely affect our business, results of operations, financial condition, liquidity and cash flow.
Risks related to our SCI business and cryptocurrency
● SCI has a limited operating history and we may not recognize any operating income from the SCI line of business in the future.
● Prices of cryptocurrencies are extremely volatile, and if our mined cryptocurrencies are converted into dollars when such values are low, we may not recognize the income from the conversion of the mined cryptocurrencies that we were expecting.
● The Company’s business model is evolving and is subject to various uncertainties.
● SCI may not be able to continue to develop its technology and keep pace with technological developments, expand its mining operations, or otherwise compete with other companies.
● There are several new and existing competitors in our industry that are purchasing mining equipment at scale, which may cause delays or difficulty in us obtaining new miners, which could materially and adversely affect our business and results of operations.
● We may be unable to obtain additional funding to scale the SCI cryptocurrency business to a larger-scale cryptocurrency mining operation.
● Regulatory changes or actions may alter the nature of an investment in us or restrict the use of cryptocurrencies in a manner that adversely affects our business, prospects, operations and profitability.
● Security breaches could result in a loss of our cryptocurrencies.
● Incorrect or fraudulent cryptocurrency transactions may be irreversible.
● The impact of geopolitical and economic events on the supply and demand for Bitcoin and other cryptocurrencies is uncertain.
● The failure of cryptocurrencies to become widely accepted and/or used as a medium of exchange and method of payment could adversely affect our business, prospects and financial condition.
● The properties included in our mining network may experience damages, including damages that are not covered by insurance.
● SCI’s reliance on a third-party mining pool service provider for our mining revenue payouts may have a negative impact on SCI’s operations.
● Over time, incentives for Bitcoin miners to continue to contribute processing power to the Bitcoin network may transition from a set reward to transaction fees. If the incentives for Bitcoin mining are not sufficiently high, we may not have an adequate incentive to continue to mine.
● The Bitcoin reward for successfully uncovering a block will halve several times in the future, and Bitcoin’s value may not adjust to compensate us for the reduction in the rewards we receive from our Bitcoin mining efforts.
● We may not be able to realize the benefits of forks, and forks in a digital asset network may occur in the future, which may affect the value of the cryptocurrencies that we mine held by us.
● As the aggregate amount of computing power, or hash rate, in the Bitcoin network increases, the amount of Bitcoin earned per unit of hash rate decreases; as a result, in order to maintain our market share, we may have to incur significant capital expenditures in order to expand our fleet of miners.
● Climate change, and the regulatory and legislative developments related to climate change, may materially adversely affect our business and financial condition.
● Our business plan is heavily dependent upon acquisitions and strategic alliances and our ability to identify, acquire or ally on appropriate terms, and successfully integrate and manage any acquired companies or alliances, will impact our financial condition and operating results.
● In connection with the ground leases for our cryptocurrency mining operations, we rely on the landlord to sell us the power required for our operations, and any failure of the landlord to supply such power, whether as a result of its failure to pay the Tennessee Valley Authority (“TVA”) or otherwise, would materially impact our operations, and the properties on which certain of our ground leases are located are subject to possible forfeiture to the U.S. government, and, if seized, would, in all likelihood, require us to spend significant funds to maintain our cryptocurrency mining rights.
Risks related to the potential sale of MTI Instruments
● We have entered into the LOI with the Buyer for the Sale. There is no assurance that the Sale will be completed on the terms contained in the LOI or otherwise.
● If we sell MTI Instruments, we will be solely reliant on SCI’s business, which is currently focused on cryptocurrency mining and we expect in the future will be focused on green data center development.
Risks relating to our MTI Instruments business
● Our MTI Instruments business depends on a small number of customers, including the U.S. Air Force, and many of them are in industries of a cyclical nature.
● We do not have long-term purchase commitments from our customers, and our customers are also able to cancel, reduce or delay orders for our products.
● Our operating results may experience significant fluctuations, which could adversely impact our operations and financial results.
● We may not be able to keep pace with technological innovations, and our efforts may not result in commercial success and/or may result in delays in development.
● Many of our existing and target customers are in industries of a cyclical nature.
● MTI Instruments’ business operations, financial performance and liquidity are occasionally reliant on a single supplier or vendor or a limited group of suppliers and vendors.
Risks relating to the Company generally
● Our confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information, which could limit our ability to compete.
● We rely on highly-skilled personnel and the continuing efforts of our executive officers and, if we are unable to retain, motivate or hire qualified personnel, our business may be severely disrupted.
● In addition, increased labor costs and the unavailability of skilled workers could hurt our business, financial condition and results of operations.
● Insiders continue to have substantial control over the Company, and the ownership by Brookstone Partners Acquisition, XXIV, LLC (“Brookstone XXIV”) of the outstanding shares of our Common Stock gives it a controlling interest in the Company, and it may acquire interests and positions that could present potential conflicts with our and our stockholders’ interests.
● We are subject to complex environmental, health and safety laws and regulations that may expose us to significant liabilities for penalties, damages or costs of remediations or compliance.
Risks related to the recent acquisition of Soluna Callisto
● We may fail to realize all of the anticipated benefits of our recent acquisition of Soluna Callisto.
● Our operating results will suffer if SHI and SCI do not effectively manage the increased scale of SCI’s operations and its optimization and expansion opportunities.
General Risks
● If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Our business, financial condition and operating results are subject to a number of risk factors, both those that are known to us and identified below and others that may arise from time to time. These risk factors could cause our actual results to differ materially from those suggested by forward-looking statements in this Annual Report on Form 10-K (this “Report”) and elsewhere, and may adversely affect our business, financial condition or operating results. If any of these risk factors should occur, moreover, the trading price of our securities could decline, and investors in our securities could lose all or part of their investment in our securities. These risk factors, along with other information contained in this Report, should be carefully considered in evaluating our prospects.
Risks Relating to the COVID-19 Pandemic, Inflation, Recent Governmental Sanctions and Global Economic Uncertainty
Adverse changes in economic or other market conditions in the United States and globally may have serious implications for the growth and stability of our business and could otherwise adversely affect our business, results of operations and financial condition.
Our business is affected by general economic conditions, both inside and outside of the United States. Adverse changes to and uncertainty in the global economy, particularly in light of (i) the continuing uncertainty regarding the duration and scope of the COVID-19 pandemic, including as a result of the recently-discovered Omicron variant or potential resurgences or the emergence of new variants and (ii) recent inflation in the United States and (iii) foreign and domestic government sanctions imposed on Russia as a result of its recent invasion of Ukraine, may each or collectively cause setbacks in the global economic recovery or trigger future economic slowdowns or recessions, which could lead to decreased demand for our products and for Bitcoin and other cryptocurrencies, revenue fluctuations and increased price competition for our products, and may increase the risk of excess and obsolete inventories and higher overhead costs as a percentage of our revenue. Such events could also result in a decline in business and economic forecasts, which could adversely affect our sales in future periods. Additionally, the financial strength of our customers and suppliers and their ability to obtain and rely on credit financing may affect their ability to fulfill their obligations to us and have an adverse effect on our financial results.
Revenue growth and continued profitability of our MTI Instruments business will significantly depend on the overall demand for test and measurement instrumentations in key markets including research and development, automotive, semiconductor, cryptocurrencies and electronics. The U.S. and global economies have been historically cyclical and market conditions continue to be challenging, which has resulted in companies delaying or reducing expenditures. We believe there is still lingering volatility and uncertainty in domestic and global financial markets, particularly in light of recent resurgences of COVID-19 variants, domestic inflation and foreign and domestic government sanctions. Further changes or disruptions in the national or global financial markets for any reason may cause consumers, businesses and governments to defer purchases in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, demand for our products could decrease and differ materially from their current expectations. Further, some of our customers may require substantial financing in order to fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of our products and meet their payment obligations to us or possible insolvencies of our customers could result in decreased customer demand, an impaired ability for us to collect on outstanding accounts receivable, significant delays in accounts receivable payments and significant write-offs of accounts receivable, each of which could adversely impact our business and our financial results.
The long-term effects of the COVID-19 pandemic, or the impacts of any future pandemics or other health crises, are unknown and may adversely affect our business, results of operations, financial condition, liquidity and cash flow.
Our overall performance generally depends upon domestic and worldwide economic and political conditions. The global spread of COVID-19 has created volatility, uncertainty and economic disruption. Early on, the COVID-19 pandemic caused a slowdown, and, going forward, may cause future slowdowns in worldwide economic activity, decreased demand for products and services and financial markets. Meanwhile, the pandemic has been responsible for macro disruptions to global supply chains, including a global semiconductor chip shortage, which economic upheaval may increase if there are surges in transmission and illness from COVID-19 going forward, including as a result of current or new variants.
While the COVID-19 pandemic, and the changes to our operations necessitated by governmental and societal actions to contain it, including social distancing and the closing and/or limits on the business operations, required us to make certain changes to the way we conduct our business and operations, we have been fortunate that, to date, the COVID-19 pandemic has had a limited impact on our supply chains, distribution systems and ability to continue to conduct our business and operations. We cannot, however, predict the longer-term impacts of the COVID-19 pandemic, or future health emergencies, on our business, operations, revenues, results of operations, or financial condition. The ultimate extent of the impact of the COVID-19 pandemic, or any future pandemic or other health crises, will depend on evolving and future developments.
In addition, while the global supply-chain disruptions and semiconductor shortage noted above have not had a significant impact on our mining operations to date, if these conditions continue, we may not be able to obtain new cryptocurrency mining equipment (“miners”) to replace miners that are no longer functioning, expand our cryptocurrency mining operations, keep up with technological developments or be able to obtain replacement parts for our existing miners in a timely or cost-effective manner. As the cost to produce these miners increases, these costs are passed on to us. and until the global supply chain crisis is resolved and these extraordinary pressures are alleviated, we may continue to incur higher than usual costs to obtain and deploy new miners, this could negatively impact our ability to expand our mining operations and compete in the cryptocurrency mining industry, and otherwise could materially and adversely affect our business and results of operations.
Further, the long-term social and economic impact of the COVID-19 pandemic, or the acceleration of pre-existing trends as a result thereof, are still uncertain, and it is not possible at this time to estimate the full impact that the COVID-19 pandemic will have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. It is also unknowable what impacts future pandemics or health emergencies may bring. In either case, any such developments could materially and adversely affect our customer base or the demand for our products, which would have a negative effect on our business, prospects, results of operations and financial condition, all of which could have a negative effect on the market price of our securities.
Risks Related to our SCI Business and Cryptocurrency
SCI has a limited operating history and we may not recognize operating income from the SCI line of business in the future.
SCI began operations in January 2020 and therefore is subject to all the risks inherent in a newly established business venture in a rapidly developing and changing industry. SCI’s limited operating history also makes it difficult to evaluate SCI’s current business and its future prospects. SCI has not yet been able to confirm that its business model can or will be successful over the long term, and we may not ever continue to recognize operating income from this business. Our projections for its growth have been developed internally and may not prove to be accurate. SCI’s operating results will likely fluctuate moving forward as we focus on increasing its mining operations and as the market prices of Bitcoin and other cryptocurrencies fluctuate. We may need to make business decisions that could adversely affect SCI’s operating results, such as modifications to its business structure or operations. In addition, we expect additional growth in this business, which could place significant demands on SCI’s and the Company’s management and other resources and require us to continue developing and improving our operational, financial and other internal controls. SCI may not be able to address these challenges in a cost-effective manner or at all. If we do not effectively manage SCI’s growth, it may not be able to execute on its business plan, respond to competitive pressures or take advantage of market opportunities, and our business, financial condition and results of operations could be materially harmed.
Given SCI’s start-up status with an unproven business model, there is a substantial risk regarding SCI’s ability to succeed. You should consider our business and prospects in light of these risks and the risks and difficulties that we will encounter as we continue to develop our business model. We may not be able to address these risks and difficulties successfully, which would materially harm our business and operating results, and we could be forced to terminate our business, liquidate our assets and dissolve, and you could lose part or all of your investment.
Prices of cryptocurrencies are extremely volatile, and if our mined cryptocurrencies are converted into dollars when such values are low, we may not recognize the income from the conversion of the mined cryptocurrencies that we were expecting.
The fluctuating prices of cryptocurrencies represent significant uncertainties for SCI’s business. The price of Bitcoin, Ether and other cryptocurrencies are subject to dramatic fluctuations. A variety of factors, known and unknown, may affect price and valuation, including, but not limited to (i) the supply of such cryptocurrencies; (ii) global blockchain asset demand, which can be influenced by the growth of retail merchants’ and commercial businesses’ acceptance of blockchain assets like cryptocurrencies as payment for goods and services, the security of online cryptocurrency exchanges and networks and digital wallets that hold blockchain assets, the perception that the use and holding of blockchain assets is safe and secure, and the regulatory restrictions on their use; (iii) investors’ expectations with respect to the rate of inflation; (iv) changes in the software, software requirements or hardware requirements underlying a blockchain network; (v) changes in the rights, obligations, incentives or rewards for the various participants in a blockchain network; (vi) currency exchange rates; (vii) fiat currency withdrawal and deposit policies of cryptocurrency exchanges and networks and liquidity on such exchanges and networks; (viii) interruptions in service from or failures of major cryptocurrency exchanges and networks; (ix) investment and trading activities of large subscribers, including private and registered investment funds, that may directly or indirectly invest in blockchain assets; (x) monetary policies of governments, trade restrictions, currency devaluations and revaluations; (xi) regulatory measures, if any, that affect the use of blockchain assets; (xii) the maintenance and development of the open-source software protocol of the cryptocurrency networks; (xiii) global or regional political, economic or financial events and situations; (xiv) expectations among blockchain participants that the value of blockchain assets will soon change; and (xv) a decrease in the price of blockchain assets that may have a material adverse effect on SCI’s financial condition and operating results. If our mined cryptocurrencies are converted into dollars when their values are low, we may not recognize the income from the conversion of the mined cryptocurrencies that we were expecting. Further, the extreme swings in value can make it difficult for us to develop reasonable financial plans and projections with respect to SCI’s business.
The Company’s business model is evolving and is subject to various uncertainties.
The likelihood of the Company’s success must be considered in light of our ability to generate revenues by providing relevant services to our partners in an uncertain industry or industries, including the cryptocurrency and blockchain industry in which we currently operate and the data center development industry in which we intend to operate, which, in the Company’s view, creates and will continue to create an uncertain business environment for the Company. As the Company’s business model evolves, it is possible that we will decide to modify our business strategy and commence operations in an entirely different industry than the ones in which the Company currently operates. The Company cannot offer any assurance that these or any other modifications will be successful or will not result in harm to our business. We may not be able to manage our growth effectively, which could damage our reputation, limit our growth, and negatively affect our operating results. Further, the Company cannot provide any assurance that it will successfully identify all emerging trends and growth opportunities in any particular business sector and the Company may lose out on business opportunities. Additionally, current global and regional economic conditions may have a material effect on the demand for the Company’s services, which could also materially affect the Company’s partners. Deterioration in the global macroeconomic environment or in certain regions could impact the Company’s financial condition and operations and, depending upon the severity and duration of these factors, the Company’s profitability and liquidity position could be negatively impacted. All such circumstances could have a material adverse effect on the Company’s business, prospects and/or operations. These risks will be heightened if the Company sells its MTI Instruments business, whether pursuant to the LOI or otherwise.
SCI may not be able to continue to develop its technology and keep pace with technological developments, expand its mining operations or otherwise compete with other companies, some of whom have greater resources and experience.
We do not have the resources to compete with larger cryptocurrency mining entities at this time and may not be able to compete successfully against present or future competitors. The cryptocurrency industry has attracted various high-profile and well-established operators, some of which have substantially greater liquidity and financial resources than we do. With the limited resources we have available, we may experience great difficulties in expanding and improving our network of miners to remain competitive, and we may not be in a position to construct additional operational cryptocurrency mines.
Rapid technological change is a current feature of the cryptocurrency industry, including cryptocurrency mining, and we cannot provide assurance that we will be able to achieve the technological advances, in a timely manner or at all, that may be necessary for us to remain competitive or that certain of our equipment will not become obsolete. Our ability to anticipate and manage changes in technology standards on a timely basis will be a significant factor in our ability to remain competitive. We may not be successful, generally or relative to our competitors, in timely implementing new technology into our systems, or doing so in a cost-effective manner. During the course of implementing any such new technology into our operations, we may experience system interruptions and failures. Further, if due to technological developments we need to replace our miners entirely to remain competitive in the market, there can be no assurance that we will be able to do so on a cost-effective basis or in a timely manner, particularly in light of the long production period to manufacture and assemble cryptocurrency miners, potential large-scale purchases of miners from existing competitors and new entrants into the industry, and the current semiconductor chip shortage. Furthermore, there can be no assurance that we will recognize, in a timely manner or at all, the benefits that we may expect as a result of our implementing new technology into our operations. As a result, our business, prospects, and operations may suffer, and there may be adverse effects on our financial condition and on the market prices of our securities.
In addition, competition from existing and future competitors, particularly the many other North American companies that have access to more competitively-priced energy, could result in our inability to secure acquisitions and partnerships that we may need to expand our business in the future. This competition from other entities with greater resources, experience and reputations may result in our failure to maintain or expand our business, as we may never be able to successfully execute our business plan. If we are unable to expand and remain competitive, our business could be negatively affected which would have an adverse effect on the trading prices of our securities, which in turn would harm investors in our Company.
There are several new and existing competitors in our industry that are purchasing mining equipment at scale, which may cause delays or difficulty in us obtaining new miners, which could materially and adversely affect our business and results of operations.
Many of the competitors in our industry have also been purchasing mining equipment at scale, which has caused a worldwide shortage of mining equipment and extended the corresponding delivery schedules for new miner purchases. There can be no assurance that manufacturers will be able to keep pace with the surge in demand for mining equipment. It is uncertain how manufacturers will respond to this increased global demand. In the event manufacturers are not able to keep pace with demand, we may not be able to purchase miners in sufficient quantities or on the delivery schedules that meet our business needs, which would have a material adverse effect on our business, operations, prospects, operating income and financial condition, which would likely result in a decrease in the market value of our Common Stock.
We may be unable to obtain additional funding to scale the SCI cryptocurrency business to a larger-scale cryptocurrency mining operation.
We are considering further increasing the processing power of our cryptocurrency mining operations as we seek to leverage our experience and expertise in this area of operations. To do so, however, we will need to raise additional debt and/or equity financing, which may not be available to us on acceptable terms or at all. Failure to generate adequate cash from our operations or find sources of funding would require us to scale back or curtail our operations or expansion efforts, including limiting our ability to expand the SCI cryptocurrency business to a larger-scale cryptocurrency mining operation, and would have an adverse impact on our business and financial condition. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the per-share value of our Common Stock could decline. Furthermore, if we engage in additional debt financing, the holders of debt likely would have priority over the holders of Common Stock on order of payment preference. We may be required to accept terms that restrict our ability to incur additional indebtedness or take other actions including terms that require us to maintain specified liquidity or other ratios that could otherwise not be in the interests of our stockholders.
Regulatory changes or actions may alter the nature of an investment in us or restrict the use of cryptocurrencies in a manner that adversely affects our business, prospects or operations and profitability.
As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted, and continue to react, differently to cryptocurrencies; certain governments have deemed them illegal, and others have allowed their use and trade without restriction, while in some jurisdictions, such as in the U.S., cryptocurrencies are subject to extensive, and in some cases overlapping, unclear, and evolving, regulatory requirements. In the United States, Congress and various federal agencies have increased their focus on the cryptocurrency sector during the past year. Moreover, the use of cryptocurrencies, including Bitcoin, as a potential means of avoiding federally-imposed sanctions, such as those imposed in connection with the Russian invasion of Ukraine, may lead to new regulatory requirements. For example, on March 2, 2022, a group of United States Senators sent the Secretary of the United States Treasury Department a letter asking Secretary Yellen to investigate its ability to enforce such sanctions vis-à-vis Bitcoin, and on March 8, 2022, President Biden announced an executive order on cryptocurrencies which seeks to establish a unified federal regulatory regime for cryptocurrencies. We are unable to predict the nature or extent of new and proposed legislation and regulation affecting the cryptocurrency industry. Increasing regulation and regulatory scrutiny may result in increased costs, management having to devote increased time and attention to regulatory matters, having to change aspects of our cryptocurrency mining business, or result in limits on the use cases of cryptocurrencies, which could decrease their value. Regulatory developments may require us to comply with new regulatory requirements, which would increase our operating costs. In addition, ongoing and future regulatory actions could significantly restrict or eliminate the market for or uses of cryptocurrencies and otherwise materially and adversely impact our ability to continue to operate and to continue as a going concern, which could have a material adverse effect on our business, prospects, operations and financial condition, as well as on the value and trading prices of our securities.
Security breaches could result in a loss of our cryptocurrencies.
Security breaches including computer hacking or computer malware have been a consistent concern in the cryptocurrency industry. This could involve hacking in which an unauthorized person obtains access to the systems or information and can cause harm by the transmission of virus or the corruption of data. These breaches may occur due to an action by an outside party or by the error and negligence of an employee. We primarily rely on the Luxor mining pool and SCI’s cryptocurrencies are stored with exchanges such as Coinbase prior to selling them. If any breach were to occur of our security system, operations or third party platforms, the result could cause a loss of our cryptocurrencies, loss of confidential or proprietary information, force the Company to cease operations or could cause damage to the reputation of the Company. If an actual or perceived attack were to occur, the market perception of the Company may be damaged, which could adversely affect potential and current investments in the Company and reduce demand for our securities and cause a reduction in our share prices.
Incorrect or fraudulent cryptocurrency transactions may be irreversible.
It is possible that, through computer or human error, theft or criminal action, our cryptocurrency could be transferred in incorrect amounts or to unauthorized third parties or accounts. In general, cryptocurrency transactions are irreversible, and stolen or incorrectly transferred cryptocurrencies may be irretrievable, and we may have extremely limited or no effective means of recovering any losses as a result of an incorrect transfer or theft. As a result, any incorrectly executed or fraudulent cryptocurrency transactions could adversely affect our business, operating results and financial condition.
The impact of geopolitical and economic events on the supply and demand for Bitcoin and other cryptocurrencies is uncertain.
Geopolitical crises may motivate large-scale purchases of Bitcoin and other cryptocurrencies, which could rapidly increase the price of Bitcoin and other cryptocurrencies. This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing behavior dissipates, adversely affecting the value of the cryptocurrencies that we mine. Alternatively, as an emerging asset class with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage investment in cryptocurrencies as investors focus their investment on less volatile asset classes as a means of hedging their investment risk.
Cryptocurrencies, which are relatively new, are subject to supply and demand forces. How such supply and demand will be impacted by geopolitical events is largely uncertain but could be harmful to us and investors in our securities. Political or economic crises may motivate large-scale acquisitions or sales of cryptocurrencies either globally or locally. Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any cryptocurrencies that we mine.
The failure of cryptocurrencies to become widely accepted and/or used as a medium of exchange and method of payment could adversely affect our business, prospects and financial condition.
The use of cryptocurrencies in the retail and commercial marketplace, despite sporadic adoption, is currently limited. A significant portion of cryptocurrency demand is generated by investors seeking a long-term store of value or speculators seeking to profit from the short- or long-term holding of the asset. Price volatility, slow processing speeds and high transaction costs undermine Bitcoin’s and other cryptocurrencies’ ability to be used as a medium of exchange, as retailers are less likely to accept it as a direct form of payment. Large-scale acceptance of cryptocurrencies as a means of payment has not, and may never, occur.
The relative lack of acceptance of cryptocurrencies in the retail and commercial marketplace, or a reduction of such use, limits the ability of end users to use them to pay for goods and services. Such lack of acceptance or a decline in acceptance could have a material adverse effect on the value of the cryptocurrencies that we mine, the viability of cryptocurrency mining as a business, and our ability to continue as a going concern or to pursue our business strategy, which could have a material adverse effect on our business, prospects, operations and financial condition, as well as on the market value of our securities.
Bitcoin and Bitcoin mining, as well as cryptocurrencies generally, may be made illegal in certain jurisdictions, including the ones we operate in, which could adversely affect our business prospects and operations.
Although we do not anticipate any material adverse regulations on Bitcoin mining in our jurisdictions of operation, it is possible that state or federal regulators may seek to impose harsh restrictions or total bans on cryptocurrency mining which may make it impossible for us to do business without relocating our mining operations, which could be very costly and time consuming. Further, although Bitcoin and Bitcoin mining, as well as cryptocurrencies generally, are largely unregulated in most countries (including the United States), regulators in certain jurisdictions may undertake new or intensify existing regulatory actions in the future that could severely restrict the right to mine, acquire, own, hold, sell, or use cryptocurrency or to exchange it for traditional fiat currency such as the United States Dollar. Such restrictions may adversely affect us as the large-scale use of cryptocurrencies as a means of exchange is presently confined to certain regions globally. Such circumstances could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or other cryptocurrencies we mine, and thus harm our investors.
Our interactions with a blockchain may expose us to specially designated nationals (“SDN”) or blocked persons and new legislation or regulation could adversely impact our business or the market for cryptocurrencies.
The Office of Financial Assets Control (“OFAC”) of the U.S. Department of Treasury requires us to comply with its sanction program and not conduct business with persons named on its SDN list. However, because of the pseudonymous nature of blockchain transactions we may inadvertently and without our knowledge engage in transactions with persons named on OFAC’s SDN list. Our Company’s policy prohibits any transactions with such SDN individuals, but we may not be adequately capable of determining the ultimate identity of the individual with whom we transact with respect to selling cryptocurrency assets. We are unable to predict the nature or extent of new and proposed legislation and regulation affecting the cryptocurrency industry, or the potential impact of the use of cryptocurrencies by SDN or other blocked or sanctioned persons, which could have material adverse effects on our business and our industry more broadly. Further, we may be subject to investigation, administrative or court proceedings, and civil or criminal monetary fines and penalties as a result of any regulatory enforcement actions, all of which could harm our reputation and affect the value of our securities.
Proposed development of a cryptocurrency, as well as the eventual likely development of government-backed digital currencies and the development of cryptocurrencies by other tech companies, may adversely affect the value of Bitcoin and other existing, or even future, cryptocurrencies.
In May 2019, Facebook, now named Meta, announced its plans for a cryptocurrency then called Libra and later called Diem, which faced significant objections and concerns from governments, legislators and regulators. Following such objections and concerns, Diem’s development was abandoned and its assets (including both the technology and intellectual property) sold to Silvergate Capital Corp., the holding company for Silvergate Bank, based in La Jolla, California, on January 31, 2022. Silvergate Capital Corp. reportedly is hoping to issue a new digital currency using these recently purchased assets by the end of this year. If Silvergate Capital is successful in this regard, it may further encourage other financial institutions or even other technology companies and other entities to develop their own cryptocurrencies, which could negatively impact the value of existing cyptocurrencies. Further, in the event that government-backed digital currencies, which regulators in several countries are already considering or even developing, are developed and widely adopted, it is likely to have a negative impact on the existing currencies including larger widespread adoption and potentially impacting the market share by non-government digital currency. Additional cryptocurrencies are introduced to the market frequently, and although some have gained popularity as some features have been different than Bitcoin, Bitcoin remains the market leader. As cryptocurrency adoption grows, the likelihood increases that additional cryptocurrencies will be introduced and gain popularity against Bitcoin, potentially negatively impacting the value of Bitcoin and perhaps other cryptocurrencies.
Because our most of our miners are designed specifically to mine Bitcoin and may not be readily adaptable to mining other cryptocurrencies, a sustained decline in Bitcoin’s value could adversely affect our business and results of operations.
We have invested substantial capital in acquiring miners designed specifically to mine Bitcoin as efficiently and as rapidly as possible on our assumption that we will be able to use them to mine Bitcoin and generate revenue from our operations. Therefore, our mining operations focus primarily on mining Bitcoin, and our mining revenue is largely based on the value of Bitcoin we mine. Accordingly, if the value of Bitcoin declines and fails to recover, for example, because of the development and acceptance of competing blockchain platforms or technologies, including competing cryptocurrencies which our miners may not be able to mine, the revenue we generate from our mining operations will likewise decline. Moreover, we may not be able to successfully repurpose our mining operations in a timely manner, if at all, if we decide to switch to mining a different cryptocurrency (or to another purpose altogether) following a sustained decline in Bitcoin’s value or if Bitcoin is replaced by another cryptocurrency. This could have a material adverse effect on our business, prospects, operations and financial condition, as well as on the market value of our securities.
The properties included in our mining network may experience damages, including damages that are not covered by insurance.
Our current mining operation in East Wenatchee, Washington, Murray, Kentucky, and Calvert City, Kentucky are, and any future mines we establish will be, subject to a variety of risks relating to physical condition and operation, including:
● the presence of construction or repair defects or other structural or building damage;
● any noncompliance with or liabilities under applicable environmental, health or safety regulations or requirements or building permit requirements; and
● any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods and windstorms.
For example, our mine could be rendered inoperable, temporarily or permanently, as a result of a fire or other natural disaster or by a terrorist or other attack on the mine. The security and other measures we take to protect against these risks may not be sufficient. Additionally, our mines could be materially adversely affected by a power outage, loss of access to the electrical grid, or loss by the grid of cost-effective sources of electrical power generating capacity. Given the power requirement, it would not be feasible to run miners on back-up power generators in the event of a power outage. Our insurance covers the replacement cost of any lost or damaged miners, but does not cover any interruption of our mining activities; our insurance therefore may not be adequate to cover the losses we suffer as a result of any of these events. In the event of an uninsured loss, including a loss in excess of insured limits, at any of the mines in our network, such mines may not be adequately repaired in a timely manner or at all and we may lose some or all of the future revenues anticipated to be derived from such mines. The potential impact on our business is currently magnified because we are only operating a single mine.
SCI’s reliance on a third-party mining pool service provider for our mining revenue payouts may have a negative impact on SCI’s operations.
We use a third-party mining pool to receive our mining rewards from the network. Cryptocurrency mining pools allow miners to combine their computing power, increasing their chances of solving a block and getting paid by the network. The rewards are distributed by the pool operator, proportionally to our contribution to the pool’s overall mining power, used to generate each block. Should the pool operator’s system suffer downtime due to a cyber-attack, software malfunction, or similar issues, it will negatively impact our ability to mine and receive revenue. Furthermore, we are dependent on the accuracy of the mining pool operator’s recordkeeping to accurately record the total processing power provided to the pool for a given Bitcoin mining application in order to assess the proportion of that total processing power we provided. While we have internal methods of tracking both our power provided and the total used by the pool, the mining pool operator uses its own recordkeeping to determine our proportion of a given reward. We have little means of recourse against the mining pool operator if we determine that the proportion of the reward that the mining pool operator pays out to us is incorrect, other than leaving the pool. If we are unable to consistently obtain accurate proportionate rewards from our mining pool operator, we may experience reduced reward for our efforts, which would have an adverse effect on our results of operations and financial condition.
Over time, incentives for Bitcoin miners to continue to contribute processing power to the Bitcoin network may transition from a set reward to transaction fees. If the incentives for Bitcoin mining are not sufficiently high, we may not have an adequate incentive to continue to mine.
In general, as the number of Bitcoin rewards awarded for solving a block in a blockchain decreases, our ability to achieve profitability also decreases. Decreased use and demand for Bitcoin rewards may adversely affect our incentive to expend processing power to solve blocks. If the Bitcoin rewards for solving blocks and transaction fees are not sufficiently high, fewer Bitcoin miners will mine. At insufficiently attractive rewards, our costs of operations in total may exceed our revenues from Bitcoin mining.
To incentivize Bitcoin miners to continue to contribute processing power to the Bitcoin network, such network may either formally or informally transition from a set reward to transaction fees earned upon solving a block. This transition could be accomplished either by Bitcoin miners independently electing to record in the blocks they solve only those transactions that include payment of a transaction fee or by the Bitcoin network adopting software upgrades that require the payment of a minimum transaction fee for all transactions. If as a result transaction fees paid for Bitcoin transactions become too high, Bitcoin users may be reluctant to transfer Bitcoin or accept Bitcoin as a means of payment, and existing users may be motivated to hold existing Bitcoin and switch from Bitcoin to another digital asset or back to fiat currency for transactions, diminishing the aggregate amount of available transaction fees for Bitcoin miners. Such reduction would adversely impact our results of operations and financial condition.
The Bitcoin reward for successfully uncovering a block will halve several times in the future, and Bitcoin’s value may not adjust to compensate us for the reduction in the rewards we receive from our Bitcoin mining efforts.
Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a proof of work consensus algorithm. At a predetermined block, the Bitcoin mining reward is cut in half, hence the term “halving.” For Bitcoin, the reward was initially set at 50 Bitcoin currency rewards per block and this was cut in half to 25 on November 28, 2012 at block 210,000, then again to 12.5 on July 9, 2016 at block 420,000. The most recent halving for Bitcoin occurred on May 11, 2020 at block 630,000 and the reward was reduced to 6.25. It is expected that the next halving will likely occur in 2024. This process will reoccur until the total amount of Bitcoin currency rewards issued reaches 21 million, which is expected around the year 2140. While Bitcoin prices have had a history of fluctuations around the halving of its rewards, there is no guarantee that the price change will be favorable or would compensate for the reduction in mining reward. If a corresponding and proportionate increase in the trading prices of Bitcoin or a proportionate decrease in mining difficulty does not follow these anticipated halving events, the revenue we earn from our Bitcoin mining operations could see a corresponding decrease, which could have a material adverse effect on our business and operations.
We may not be able to realize the benefits of forks, and forks in a digital asset network may occur in the future, which may affect the value of the cryptocurrencies that we mine held by us.
To the extent that a significant majority of users and miners on a cryptocurrency network install software that changes the cryptocurrency network or properties of a cryptocurrency, including the irreversibility of transactions and limitations on the mining of new cryptocurrency, the cryptocurrency network would be subject to new protocols and software. If less than a significant majority of users and miners on the cryptocurrency network consent to the proposed modification, however, and the modification is not compatible with the software prior to its modification, a “fork” of the network would occur, with one prong of the network running the pre-modified software and the other running the modified software. The effect of such a fork would be the existence of two versions of the cryptocurrency running in parallel, yet lacking interchangeability and necessitating exchange-type transaction to convert currencies between the two forks. After a fork, it may be unclear which fork represents the original asset and which is the new asset.
If we hold a specific cryptocurrency at the time of a hard fork into two cryptocurrencies, industry standards would dictate that we would be expected to hold an equivalent amount of the old and new assets following the fork. We may not, however, be able to secure or realize the economic benefit of the new asset. Our business may be adversely impacted by forks in an applicable cryptocurrency network.
In addition, historically, speculation over a new “hard fork” in the Bitcoin protocol has resulted in Bitcoin price volatility and future hard forks may occur at any time. A hard fork can lead to a disruption of networks and our information technology systems could be affected by cybersecurity attacks, replay attacks or security weaknesses, any of which can further lead to temporary or even permanent loss of its assets. Such disruption and loss could cause us to be exposed to liability, even in circumstances where we have no intention of supporting an asset compromised by a hard fork. Additionally, a hard fork may result in a scenario where users running the previous protocol will not recognize blocks created by those running the new protocol, and vice versa. This may render our cryptocurrency mining hardware incompatible with the new protocol. Such changes may have a material effect on our operations, financial position and financial performance.
As the aggregate amount of computing power, or hash rate, in the Bitcoin network increases, the amount of Bitcoin earned per unit of hash rate decreases; as a result, in order to maintain our market share, we may have to incur significant capital expenditures in order to expand our fleet of miners.
The aggregate computing power of the global Bitcoin network has generally grown over time and we expect it to continue to grow in the future. To the extent the global hash rate continues to increase, the market share of and the amount of Bitcoin rewards paid to any fixed fleet of miners will decrease. Therefore, in order to maintain our market share, we may be required to expand our mining fleet, which may require significant capital expenditures. If we can’t acquire sufficient numbers of new miners or access sufficient capital to fund our expenditures, our results of operations and financial condition could be adversely materially affected. In addition, such significant capital expenditures could have an adverse effect on our business operations, strategy and financial performance.
Climate change, and the regulatory and legislative developments related to climate change, may materially adversely affect our business and financial condition.
The potential physical impacts of climate change on our operations are highly uncertain and would be particular to the geographic circumstances in areas in which we operate or in which our third-party providers operate. These may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures. The impacts of climate change may materially and adversely impact the cost, production and financial performance of our operations. Further, any impacts to our business and financial condition as a result of climate change are likely to occur over a sustained period of time and are therefore difficult to quantify with any degree of specificity. For example, extreme weather events may result in adverse physical effects on portions of our infrastructure, which could disrupt our supply chain and ultimately our business operations.
In addition, a number of governments or governmental bodies have introduced or are contemplating legislative and regulatory changes in response to the potential impact of climate change. Companies across many industries are facing increasing scrutiny related to their environmental, social, and governance (“ESG”) practices. Investor advocacy groups, certain institutional investors, investment funds and other influential investors are also increasingly focused on ESG practices and in recent years have placed increasing importance on the non-financial impacts of their investments. Given the very significant amount of electrical power required to operate cryptocurrency miners, as well as the environmental impact of mining for the rare earth metals used in the production of mining servers, the cryptocurrency mining industry may become a target for future environmental and energy regulation, and any such regulation may not distinguish between cryptocurrency mining powered by renewable energy, as is SCI’s business, and cryptocurrency mining using traditional (i.e. fossil fuel) sources of energy. Legislation and increased regulation regarding climate change could impose significant costs on us and our suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring and reporting, and other costs to comply with such regulations. Any future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Furthermore, increased public awareness and concern regarding environmental risks, including global climate change, may result in increased public scrutiny of our business and our industry, and our management team may divert significant time and energy away from our operations and towards responding to such scrutiny and reassuring our employees. Given the political significance and uncertainty around the impact of climate change and how it should be addressed, we cannot predict how legislation and regulation will affect our financial condition, operating performance and ability to compete. Any of the foregoing could result in a material adverse effect on our business, prospects and financial condition.
Our business plan is heavily dependent upon acquisitions and strategic alliances and our ability to identify, acquire or ally on appropriate terms, and successfully integrate and manage any acquired companies or alliances will impact our financial condition and operating results.
Part of our strategy to grow our business is dependent on the acquisition of other entities or businesses in the future that complement our current products, enhance our market coverage or technical capabilities or offer growth opportunities. We may also need to form strategic alliances or partnerships in order to remain competitive in our market. We may not be able, however, to identify and successfully negotiate suitable acquisitions alliances, obtain any financing necessary for such acquisitions on satisfactory terms or otherwise complete any such acquisitions or alliances. Further, any acquisition or alliance may require a significant amount of management’s time and financial resources to complete and acquisitions, strategic alliances or partnerships could be difficult to integrate, disrupt our business and dilute stockholder value.
For example, in January 2020, the Company formed SCI as its wholly owned subsidiary to pursue a new business line focused on cryptocurrency and the blockchain ecosystem. In October 2021, Soluna Computing became a wholly owned subsidiary of SCI pursuant to a merger. Prior to the merger, Soluna Computing had assisted us in developing and operating the cryptocurrency mining facility through contractual arrangements. In the future, we may acquire or form strategic alliances or partnerships with other businesses in order to remain competitive or to acquire new technologies. Acquisitions, alliances and investments involve numerous risks, including:
● the potential failure to achieve the expected benefits of the combination, acquisition or alliance;
● difficulties in and the cost of integrating operations, technologies, services and personnel;
● difficulty of assimilating geographically-dispersed operations and personnel of the companies we acquire or ally with;
● impairment of relationships with employees, customers, vendors, distributors or business partners of either an acquired business or our own;
● unanticipated difficulties in conforming business practices, policies, procedures, internal controls and financial records of acquisitions with our own;
● the potential inability to successfully integrate acquired operations and products or to realize cost savings or other anticipated benefits from integration;
● diversion of financial and managerial resources from existing operations;
● risk of entering new markets in which we have little or no experience or where competitors may have stronger market positions;
● potential write-offs of acquired assets or investments and potential financial and credit risks associated with acquired customers;
● inability to generate sufficient revenue to offset acquisition or investment costs;
● the risk of cancellation or early termination of an alliance by either party;
● potential unknown liabilities associated with the acquired businesses;
● unanticipated expenses related to acquired technology and its integration into the existing businesses;
● negative impact to our results of operations because of the depreciation and amortization of amounts related to acquired intangible assets, fixed assets and deferred compensation, and the loss of acquired deferred revenue and unbilled deferred revenue;
● loss of key employees or customers of acquired companies;
● potential disruption of our business or the acquired business;
● inability to accurately forecast the performance of recently acquired businesses, resulting in unforeseen adverse effects on our operating results;
● the tax effects of any acquisitions; and
● Adverse accounting impact to our results of operations.
Our failure to successfully manage our recent acquisition of Soluna Computing or other future acquisitions, strategic alliances or partnerships could seriously harm our operating results. In addition, our stockholders would be diluted if we finance the future acquisitions, strategic alliances or partnerships by incurring convertible debt or issuing equity securities.
We cannot offer any assurance that we will be able to identify, complete or successfully integrate any suitable acquisitions or suitable alliances. Even if successfully negotiated and closed, any acquisitions or alliances may not yield expected synergies, may not advance our business strategy as expected, may fall short of expected return-on-investment targets, or may otherwise fail to achieve their objectives or perform as contemplated and not prove successful. Companies that we acquire may operate with different cost and margin structures, which could further cause fluctuations in our operating results and adversely affect our business, financial condition and results of operations.
In connection with the ground leases for our new cryptocurrency mining operations, we rely on the landlord to sell us the power required for our operations, and any failure of the landlord to supply such power, whether as a result of its failure to pay the TVA or otherwise, would materially impact our operations.
In May 2021, Soluna MC, formerly EcoChain Block LLC, a wholly owned subsidiary of SCI, entered into two ground leases (the “Ground Leases”) for a building located in the Southeast region of the United States that will be SCI’s second cryptocurrency mining facility, which includes surrounding land for potential additional capacity. The Ground Leases will not be effective until certain conditions set forth therein are met. In addition, Soluna MC and the landlord for such building (the “Landlord”) entered into a power supply agreement (the “Power Supply Agreement”), whereby Soluna MC will purchase the power for its cryptocurrency mining operations from the Landlord, who purchases power directly from the TVA. The rates payable by Soluna MC to the Landlord will be at the same pre-negotiated rates paid by the Landlord, which are less than SCI could obtain directly from the TVA. The Landlord’s failure to provide power to SCI, as a result of the termination of such power supply to the Landlord by the TVA, as a result of the Landlord’s failure to pay the TVA for such power, or otherwise, would, in all likelihood, result in our inability to obtain the power we need for our cryptocurrency mining operations, unless and until we were able to obtain such power directly from the TVA, which would result in a significant interruption to our business. We may also incur significant costs associated with negotiating and entering into a new agreement with the TVA to supply power to Soluna MC’s cryptocurrency mining facilities, and with setting up corresponding infrastructure to receive such power directly. Further, there can be no assurance that Soluna MC will be able to negotiate a power supply agreement with the TVA on equally favorable terms as the Landlord, if at all.
The properties on which certain of our ground leases are located are subject to possible forfeiture to the U.S. government, and, if seized, would in all likelihood require us to spend significant funds to maintain our cryptocurrency mining rights.
In August 2020, the United States Department of Justice’s Money Laundering & Asset Recovery Section (“DOJ”), together with the U.S. Attorney’s Office for the Southern District of Florida, filed civil asset forfeiture complaints against parties related to the Landlord (the “Landlord Owners”) in connection with certain real properties, including the real properties that are the subject of the Ground Leases (the “Subject Properties”). The complaints, all of which are currently pending before a federal judge, alleged that the funds used by Landlord Owners to purchase the Subject Properties were traceable to the proceeds of a bank fraud purportedly committed internationally in Ukraine by the Landlord Owners. Though the DOJ has not filed a civil forfeiture action against the Subject Properties, the complaint the government submitted in support of its asset forfeiture requests against certain properties, including the Subject Properties, included a description of the Ukrainian bank fraud and the various properties located in the United States that the DOJ believes were purchased with the proceeds of that international bank fraud, including the Subject Properties. In the event that the Subject Properties are seized by the U.S. government, Soluna MC may be required to negotiate with the U.S. government for the supply of power that SCI was receiving from the Landlord pursuant to the Power Supply Agreement. Additionally, the U.S. government, in all likelihood, would place the Subject Properties for sale at an auction, or otherwise, and we would likely be required to purchase the Subject Properties to assure the continuation of our cryptocurrency mining operations at such facility, all of which would require our expenditure of significant funds and could have a material adverse impact on our results of operations.
We may be affected by price fluctuations in the wholesale and retail power markets.
While the majority of our power and hosting arrangements contain fixed power prices, some also contain certain price adjustment mechanisms in case of certain events. Furthermore, a portion of our power and hosting arrangements includes merchant power prices, or power prices reflecting market movements. Market prices for power, generation capacity and ancillary services, are unpredictable. Over the past year, the market prices for power have generally been increasing, driven in part by the price increases in various commodities, including natural gas. Depending upon the effectiveness of any price risk management activity undertaken by us, an increase in market prices for power, generation capacity, and ancillary services may adversely affect our business, prospects, financial condition, and operating results. Long- and short-term power prices may fluctuate substantially due to a variety of factors outside of our control, including, but not limited to:
● increases and decreases in generation capacity;
● changes in power transmission or fuel transportation capacity constraints or inefficiencies;
● volatile weather conditions, particularly unusually hot or mild summers or unusually cold or warm winters;
● technological shifts resulting in changes in the demand for power or in patterns of power usage, including the potential development of demand-side management tools, expansion and technological advancements in power storage capability and the development of new fuels or new technologies for the production or storage of power;
● federal and state power, market and environmental regulation and legislation; and
● changes in capacity prices and capacity markets.
If we are unable to secure power supply at prices or on terms acceptable to us, it would have a material adverse effect on our business, prospects, financial condition, and operating results.
If federal or state legislatures or agencies initiate or release tax determinations that change the classification of cryptocurrencies as property for tax purposes (in the context of when such cryptocurrencies are held as an investment), such determination could have a negative tax consequence on us.
Current Internal Revenue Service guidance indicates that digital assets such as Bitcoin should be treated and taxed as property, and that transactions involving the payment of bitcoin for goods and services should be treated as barter transactions. While this treatment creates a potential tax reporting requirement for any circumstance where the ownership of a cryptocurrency passes from one person to another, it preserves the right to apply capital gains treatment to those transactions which may adversely affect our results of operations.
Risks Related to the Potential Sale of MTI Instruments
We have entered into a letter of intent with respect to the sale of our MTI Instruments business and there is no assurance that such sale will be completed on the terms contained in such letter of intent or otherwise.
On December 17, 2021, we announced that we entered into the LOI with the Buyer with respect to the Sale. As a result of the pending Sale, we have determined that as of December 31, 2021, the assets and results of operations of the MTI Instruments business meet the qualifications for held for sale and is reflected as discontinued operations in our consolidated financial statements for the year ended December 31, 2021 and prior periods included in this Annual Report. The amount and structure of the consideration could change as a result of subsequent negotiations, due diligence or other factors. Any definitive agreement with respect to the Sale would be subject to approval by the respective parties to the LOI, including approval by our board of directors, and would likely include a number of customary provisions, including without limitation, representations and warranties of MTI Instruments and us, restrictive covenants and indemnification provisions. The LOI is non-binding other than with respect to certain due diligence, solicitation, expenses, non-disclosure and assignment provisions, and the term of the LOI may be extended under certain circumstances. There can be no assurance that the LOI parties will ultimately negotiate and enter into a definitive transaction agreements on the terms contemplated by the LOI or otherwise. In particular, the timing of closing of any such transaction and the aggregate consideration that we may receive may materially differ from that currently contemplated by the LOI. In addition, in the event that the Sale does not occur, we may, in the future, enter into other non-binding or binding letters of intent, as well as definitive documentation relating to the sale of MTI Instruments, however there can be no assurance that we will do so and that any sale of MTI Instruments or our instruments business will occur. If we do not complete the disposition of MTI Instruments pursuant to the LOI, other letters of intent, and any related transaction documentation, we will have incurred expenses without our stockholders realizing any benefit therefrom. Additionally, if we fail to consummate such anticipated Sale, such failure could result in fluctuations to the market prices of our securities, and may have a material adverse impact on our financial condition and results of operations.
In the event that we consummate the Sale pursuant to the LOI and definitive documentation, we will no longer be involved in the instruments business in which MTI Instruments operates and will be solely reliant on SCI’s business, which is currently focused on cryptocurrency mining and which we expect in the future will be focused on green data center development.
In the event that the LOI parties enter into definitive agreements regarding the Sale and then consummate the Sale, the Company will be solely reliant on the business of SCI, which is currently focused on cryptocurrency mining. The Company also expects that we will soon be focused on green data center development and to continue to concentrate our resources on such businesses upon the Sale, including potential acquisitions in the future to support such businesses. SCI has a limited operating history and operates in a volatile industry that currently is and may in the future be dependent on and affected by the cryptocurrency market. Accordingly, any adverse effects experienced by SCI and its line of business will have a greater impact on the Company’s financial condition, results of operations and the value of our securities than such effects may have had prior to the Sale. For further information regarding the risks of this business, please see “Risk Factors - Risks Related to our SCI Business and Cryptocurrency.”
Risks Relating to our MTI Instruments Business
Please note that the risks discussed under this subsection will only be applicable to us (i) insofar as we continue to operate our MTI Instruments business, which is currently held for sale and which business has been classified as discontinued operations, (ii) until the anticipated Sale of MTI Instruments or (iii) if we determine not to, or are unable to, sell MTI Instruments as currently intended.
Our MTI Instruments business depends on a small number of customers including the U.S. Air Force.
Historically, we have had a small number of customers representing a large percentage of our total revenue. Although we endeavor to maintain and further expand our customer base, we expect that sales to a limited number of customers will continue to account for a high percentage of our revenues in any given period for the foreseeable future, and the loss of even just a couple of customers, or a significant reduction in sales to our existing customer base, could have a material adverse effect on our business. In addition, our revenues are largely dependent upon the ability of our customers to continue to grow or need services or to develop and sell products that incorporate our services and products. We also depend on purchases by the U.S. Air Force for a significant portion of our revenues and the loss of the U.S. Air Force as a customer or a delay or decline in funding of our existing or future contracts with them could decrease our backlog or adversely affect our business and prospects, sales, cash flows and our ability to fund our continued product development and growth.
We do not have long-term purchase commitments from our customers, and our customers are also able to cancel, reduce or delay orders for our products.
We generally do not obtain firm, long-term purchase commitments from our customers, and frequently do not have visibility as to their future demand for our products and services. Customers also cancel, change or delay design, production or aftermarket service quantities and schedules, or fail to meet their forecasts for a number of reasons beyond our control. Customer expectations can also change rapidly, requiring us to take on additional commitments or risks, and requiring that we provide rapid product turnaround and respond to short lead times. A variety of conditions, both specific to individual customers and generally affecting the demand for original equipment manufacturers’ products, may cause customers to cancel, reduce or delay orders. Conversely, if our customers unexpectedly and significantly increase product orders, we may be required to rapidly increase production, which could strain our resources and reduce our margins. We typically plan production and inventory levels based on internal forecasts of customer demand, which can be highly unpredictable and can fluctuate substantially, leading to excess inventory write-downs and resulting negative impacts on gross margin and net income. Additionally, and as a result, our revenues may be volatile from period to period, we may not achieve the anticipated revenues from these efforts, or these efforts may result in non-recoverable costs.
Our annual and quarterly operating results may experience significant fluctuations, which could adversely impact our operations and financial results.
In addition to the variability resulting from the short-term nature of our customers’ commitments, other factors contribute to significant periodic fluctuations in our results of operations. These factors include:
● the cyclicality of the markets we serve;
● the timing and size of orders;
● the volume of orders relative to our capacity;
● product introductions and market acceptance of new products or new generations of products;
● evolution in the life cycles of our customers’ products;
● timing of expenses in anticipation of future orders;
● changes in product mix;
● availability of manufacturing and assembly services;
● changes in cost and availability of labor and components;
● timely delivery of product solutions to customers;
● pricing and availability of competitive products;
● introduction of new technologies into the markets we serve;
● pressures on reducing selling prices;
● our success in serving new markets; and
● changes in economic conditions.
The price of our securities could decline substantially in the event that any of these risks result in our financial performance being below the expectations of analysts and investors, which are based on historical and predictive models that are not necessarily accurate representations of the future.
We may not be able to keep pace with technological innovations or develop new product solutions in a timely manner.
The electronic, semiconductor, solar, automotive and general industrial segments are subject to constant technological change. MTI Instruments’ future success will depend on our ability to respond appropriately to changing technologies and changes in product function and quality. If we rely on products and technologies that are not attractive to end users, we may not be successful in capturing or retaining market share. Technological advances, the introduction of new products and new design techniques could adversely affect our business prospects unless we are able to adapt to the changing conditions. Technological advances could render our products obsolete, and we may not be able to respond effectively to the technological requirements of evolving markets. As a result, we will be required to expend substantial funds for and commit significant resources to:
● continue research and development activities on all product lines;
● hire additional engineering and other technical personnel; and
● purchase advanced design tools and test equipment.
Our business could be harmed if we are unable to develop and utilize new technologies that address the needs of our customers, or our competitors do so more effectively than we do.
Our efforts to continue to develop new products and technologies may not result in commercial success, which could cause a decline in our revenue and otherwise harm our business.
Our research and development efforts with respect to our products and technologies may not result in customer or market acceptance. Some or all of such products and technologies may not successfully make the transition from the research and development lab to cost-effective production as a result of technology problems, competitive cost issues, yield problems and other factors. Even when we successfully complete a research and development effort with respect to a particular product or technology, our customers may decide not to introduce or may discontinue products utilizing the product or technology for a variety of reasons, including the following:
● difficulties with other suppliers of components for the products;
● superior technologies developed by our competitors and unfavorable comparisons of our solutions with these technologies;
● price considerations; and
● lack of anticipated or actual market demand for the products.
The nature of MTI Instruments’ business will require us to make continuing investments to develop new products and technologies. Significant expenses relating to one or more new products or technologies that ultimately prove to be unsuccessful for any reason could have a material adverse effect on us. In addition, any investments or acquisitions made to enhance our products and technologies may prove to be unsuccessful. If our efforts are unsuccessful, our business could be harmed. Moreover, when we announce our development of new products, sales of current products may decrease as customers delay making purchases until such new products are available, which could adversely affect our business, revenues and results of operations.
The cyclical nature of the industries of many of MTI Instruments’ existing and target customers may result in fluctuations in our operating results.
Demand for our products and services in our target markets is cyclical, and revenues from the sale of our products and services can vary significantly from one period to the next as a result. We may sell a significant amount of our products to one or a few customers for various short-term projects in one period, and then have markedly decreased sales in following periods as these projects end or customers have the products they require for the foreseeable future.
The electronics and military industries in particular have experienced significant economic downturns at various times. These downturns are characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. We may seek to reduce our exposure to industry downturns by providing design and production services for leading companies in rapidly expanding industry segments. We may, however, experience substantial period-to-period fluctuations in future operating results because of general industry conditions or events occurring in the general economy.
International sales risks could adversely affect our operating results. Furthermore, our operating results could be adversely affected by changes to U.S. policy and fluctuations in the value of the U.S. dollar against foreign currencies.
Sales outside of the United States accounted for approximately 35.9% of our total revenue during the year ended December 31, 2021 and 25.9% of total product revenue during the year ended December 31, 2020. Our international business may be adversely affected by changing political and economic conditions in foreign countries. Having a worldwide distribution network for our products exposes us to various economic, political and other risks that could adversely affect our operations and operating results, including the following:
● export restrictions and controls relating to technology;
● the burdens and costs of compliance with a variety of existing and new foreign regulatory requirements and laws, including the General Data Protection Regulation (GDPR) in the European Union and similar laws in other jurisdictions, and unexpected changes in such regulatory requirements;
● laws and business practices favoring local companies, including tariffs imposed by other countries on U.S. goods;
● timing to meet regulatory requirements;
● developments with respect to and any impact of tariffs and other trade barrier restrictions;
● longer payment cycles and greater difficulty in enforcing agreements and collecting receivables through foreign legal systems;
● potentially reduced protection for, and difficulties in enforcing, intellectual property rights; and
● political or economic instability in certain parts of the world.
These risks or any combination of them could increase our costs, lengthen our sales cycle and require significant management attention and could otherwise negatively affect our business, operating results, financial condition and results of operations.
In addition, we transact our business in U.S. dollars and bill and collect our sales in U.S. dollars. It is possible that U.S. policy changes and uncertainty about policy could increase market volatility and currency exchange rate fluctuations. Market volatility and currency exchange rate fluctuations could impact our results of operations and financial condition related to transactions denominated in a foreign currency. A weakening of the dollar could cause our overseas vendors to require renegotiation of either the prices or currency we pay for their goods and services. Similarly, a strengthening of the dollar could cause our products to be more expensive for our international customers, which could impact price and margins and/or cause the demand for our products, and thus our revenue, to decline.
In the future, customers may negotiate pricing and make payments in non-U.S. currencies. If our overseas vendors or customers require us to transact business in non-U.S. currencies, fluctuations in foreign currency exchange rates could affect our cost of goods, operating expenses and operating margins and could result in exchange losses. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact that future exchange rate fluctuations may have on our operating results.
Risks Related to our Company Generally
Our confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information, which could limit our ability to compete.
While we are currently in the process of applying for patents with respect to SCI’s business, presently we rely on trade secrets to protect our proprietary technology and processes. Despite such protection, however, it is possible that a third party may copy or otherwise obtain and use our U.S. Patent and Trademark Office-registered or other proprietary information without our authorization, and trade secrets can be difficult to protect. Policing unauthorized use of our intellectual property and trade secrets is difficult, particularly in light of the global nature of the Internet and because the laws of other countries may afford us little or no effective protection of our intellectual property. Potentially expensive litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Additionally, we enter into confidentiality and intellectual property assignment agreements with our employees, consultants and other advisors. These agreements generally require that the other party keep confidential and not disclose to third parties confidential information developed by the party under such agreements or made known to the party by us during the course of the party’s relationship with us. Our employees, consultants and other advisors, however, may not honor these agreements and enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time-consuming and the outcome is unpredictable. Our failure to obtain and maintain trade secret protection could adversely affect our competitive position.
We rely on highly-skilled personnel and the continuing efforts of our executive officers and, if we are unable to retain, motivate or hire qualified personnel, our business may be severely disrupted. In addition, increased labor costs and the unavailability of skilled workers could hurt our business, financial condition and results of operations.
Our performance largely depends on the talents, knowledge, skills, know-how and efforts of highly skilled individuals and in particular, the expertise held by our Chief Executive Officer, Michael Toporek. His absence, were it to occur, would materially and adversely impact development and implementation of our projects and businesses. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Our continued ability to compete effectively depends on our ability to attract, among others, new technology developers and to retain and motivate our existing contractors. If one or more of our executive officers or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. In such case, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers or other key personnel. In addition, if any of our executives or key personnel joins a competitor or forms a competing company, we may lose customers.
In addition, we compete with other businesses in our industries and other similar employers to attract and retain qualified personnel with the technical skills and experience required to successfully operate our businesses. The demand for skilled workers is high and the supply is limited, and a shortage in the labor pool of skilled workers or other general inflationary pressures or changes in applicable laws and regulations could make it more difficult for us to attract and retain personnel and could require us to enhance our wage and benefits packages, which could increase our operating costs.
Brookstone XXIV currently has a controlling interest in the Company due to the number of shares of common stock that it beneficially owns and its designation of two of our directors.
As of March 28, 2022, Brookstone XXIV owned approximately 26.9% of the Company’s outstanding shares of Common Stock and has designated two directors that sit on our ten-member Board. Accordingly, Brookstone XXIV has the ability to exert a significant degree of influence or actual control over our management and affairs and, as a practical matter, will control corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election of directors, amendments to our articles of incorporation, as amended (“Articles of Incorporation”) and our bylaws (“Bylaws”), and the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets, and Brookstone XXIV may vote its shares in a manner that is adverse to the interests of our minority stockholders. This concentration of voting control could deprive holders of our Common Stock of an opportunity to receive a premium for their shares of our Common Stock as part of a sale of the Company. Further, Brookstone XXIV’s control position might adversely affect the market prices of our securities to the extent investors perceive disadvantages in owning shares of a company with a controlling stockholder.
Brookstone XXIV and its director designees may acquire interests and positions that could present potential conflicts with our and our stockholders’ interests.
Brookstone XXIV and its director designees may make investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Brookstone XXIV and its director designees may also pursue, for their own accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities might not be available to us. As part of our sale of 3,750,000 shares of our Common Stock to Brookstone XXIV in October 2016 and as required by Brookstone XXIV as a condition to purchasing the shares, our Board renounced, to the extent permitted by applicable law, the Company’s expectancy with respect to being offered an opportunity to participate in any business opportunity that is discovered by or presented to a director designee (a “Business Opportunity”), whether in such director designee’s capacity as a director of the Company or otherwise. Accordingly, the interests of Brookstone XXIV and the designated directors with respect to a Business Opportunity may supersede ours, and Brookstone XXIV or its affiliates or the Brookstone XXIV-designated directors may be involved with businesses that compete with us and may pursue opportunities for the sole benefit of Brookstone XXIV and its affiliates without our involvement, for which we have limited recourse. Such actions on the part of Brookstone XXIV or its director designees could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, Michael Toporek, the Company’s Chief Executive Officer, serves as the Managing General Partner of Brookstone XXIV. As a result of the potential conflicts inherent in his serving in both roles, it is possible that Mr. Toporek could make decisions that benefit Brookstone XXIV at the expense of the Company.
Insiders continue to have substantial control over the Company.
As of March 28, 2022, the Company’s directors and executive officers held the current right to vote approximately 31.1% of the Company’s outstanding voting stock. Of this total, 26.9% was owned or controlled by Brookstone XXIV, for which Michael Toporek, the Company’s Chief Executive Officer, also serves as Managing General Partner. In addition, the Company’s directors and executive officers have the right to acquire additional shares of our Common Stock by exercising their equity awards under our equity compensation plans, which could increase their voting percentage significantly. As a result, Mr. Toporek acting alone, and/or many of the Company’s officers and directors acting together, may have the ability to exert significant control over the Company’s decisions and control the management and affairs of the Company, and also to determine the outcome of matters submitted to stockholders for approval, including the election or removal of a director, and any merger, consolidation or sale of all or substantially all of the Company’s assets. Accordingly, this concentration of ownership may harm the future market prices of our securities by:
● delaying, deferring or preventing a change in control of the Company;
● impeding a merger, consolidation, takeover or other business combination involving the Company; or
● discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.
We are subject to complex environmental, health and safety laws and regulations that may expose us to significant liabilities for penalties, damages or costs of remediation or compliance.
We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These laws and regulations govern matters such as: the emission and discharge of hazardous materials into the ground, air or water; the generation, use, storage, handling, treatment, packaging, transportation, exposure to, and disposal of hazardous and biological materials, including recordkeeping, reporting and registration requirements; and the health and safety of our employees. We may incur significant additional costs beyond those currently contemplated to comply with these regulatory requirements. Further, if we fail to comply with these requirements we may be exposed to fines, penalties and/or interruptions in our operations that could have a material adverse effect on our business, operating results and financial condition. Certain environmental laws may impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released into the environment, even under circumstances where the hazardous substances were released by prior owners or operators or the activities conducted and from which a release emanated complied with applicable law.
Further, existing regulations, particularly in the environmental area, could be revised or reinterpreted, or new laws and regulations could be adopted or become applicable to us or our facilities and future changes in environmental laws and regulations could occur, including potential regulatory and enforcement developments related to air emissions, any of which could result in significant additional costs. Any of the foregoing could have a material adverse effect on our results of operations and financial condition.
Risks Related to the Recent Acquisition of Soluna Callisto
We may fail to realize all of the anticipated benefits of our recent acquisition of Soluna Callisto.
The success of the recent Soluna Callisto acquisition will depend, in part, on the Company’s and SCI’s ability to realize the anticipated benefits and cost savings from combining the businesses of Soluna Callisto and SCI. To realize these anticipated benefits and cost savings, however, we must successfully combine the businesses of Soluna Callisto and SCI. If we are unable to successfully combine the businesses of Soluna Callisto and SCI, the anticipated benefits and cost savings of the transaction may not be realized fully or at all or may take longer to realize than expected.
Until October 29, 2021, Soluna Callisto and SCI operated independently, and we are still in the process of integrating the companies’ operations. It is possible that the integration process could result in the loss of key employees and the disruption of the merged company’s ongoing business, which could have a negative impact on our ability to achieve the anticipated benefits of the merger. Integration efforts between the two companies may, to some extent, also divert management’s attention and resources. These integration matters could have an adverse effect on each SHI and SCI during the current transition period.
Our operating results will suffer if SHI and SCI do not effectively manage the increased scale of SCI’s operations and the optimization and expansion opportunities.
Following its acquisition of Soluna Callisto, SCI is larger and more diverse than it was prior to the acquisition transaction. Its future success will depend, in part, upon its ability to manage its optimization and expansion opportunities, which may pose substantial challenges for SCI to integrate new operations into its existing business in an efficient and timely manner, and upon its ability to successfully monitor its operations, costs and regulatory compliance, and to maintain other necessary internal controls. There is no assurance that SCI’s optimization and expansion opportunities will be successful, or that it will realize its expected operating efficiencies, cost savings, revenue enhancements, synergies or other expected benefits of its acquisition of Soluna Callisto.
General Risk Factors
We are heavily dependent on our senior management, and a loss of a member of our senior management team could cause the market prices of our securities to suffer.
If we lose the services of Michael Toporek, our Chief Executive Officer and a member of our board of directors, Jessica L. Thomas, our Chief Financial Officer, David C. Michaels, our Chairman of the Board, and/or certain key employees, we may not be able to find appropriate replacements on a timely basis, and our business could be adversely affected. We do not currently maintain key life insurance policies on these officers or key employees. Our existing operations and continued future development depend to a significant extent upon the performance and active participation of these individuals and certain key employees. We may not be successful in retaining the services of these individuals, and if we were to lose any of these individuals, we may not be able to find appropriate replacements on a timely basis and our financial condition and results of operations could be materially adversely affected.
We may incur losses and liabilities in the course of business that could prove costly to defend or resolve.
Companies that operate in one or more of the businesses that we operate face significant legal risks. There is a risk that we could become involved in litigation wherein an adverse result could have a material adverse effect on our business and our financial condition. There is a risk of litigation generally in conducting a commercial business, and we are, at times, involved in commercial disputes with third parties, such as customers, distributors and vendors. These risks often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. We may incur significant legal expenses in defending against litigation.
We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from selling our products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief.
We may receive notices from third parties that the manufacture, use or sale of any products we develop infringes upon one or more claims of their patents. Moreover, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, that may later result in issued patents that materially and adversely affect our business. Third parties could also assert infringement or misappropriation claims against us with respect to our future product offerings, if any. We cannot be certain that we have not infringed the intellectual property rights of any third parties. Any infringement or misappropriation claim could result in significant costs, substantial damages and our inability to manufacture, market or sell any of our product offerings that are found to infringe another person’s patent. Even if we were to prevail in any such action, the litigation could result in substantial cost and diversion of resources that could materially and adversely affect our business. If a court determined, or if we independently discovered, that our product offerings violated third-party proprietary rights, there can be no assurance that we would be able to re-engineer our product offerings to avoid those rights or obtain a license under those rights on commercially reasonable terms, if at all. As a result, we could be prohibited from selling products that are found to infringe upon the rights of others. Even if obtaining a license were feasible, it may be costly and time-consuming. A court could also enter orders that temporarily, preliminarily, or permanently enjoin us from making, using, selling, offering to sell or importing our products that are found to infringe on third parties’ intellectual property rights, or could enter orders mandating that we undertake certain remedial actions. Further, a court could order us to pay compensatory damages for any such infringement, plus prejudgment interest, and could in addition treble the compensatory damages and award attorneys’ fees. Any such payments could materially and adversely affect our business and financial condition.
If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged.
Our business involves the collection, storage and transmission of personal, financial or other information that is entrusted to us by our customers and employees. Our information systems also contain the Company’s proprietary and other confidential information related to our business. Our efforts to protect such information may be unsuccessful due to the actions of third parties, computer viruses, physical or electronic break-ins, catastrophic events, employee error or malfeasance or other attempts to harm our systems. As the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or timely implement adequate preventative measures. We could also experience a loss of critical data and delays or interruptions in our ability to manage inventories or process transactions. Some of our commercial partners, such as those that help us maintain our website, may receive or store information provided by us or our users through our website. If these third parties fail to adopt or adhere to adequate information security practices, or fail to comply with our policies in this regard, or in the event of a breach of their networks, our customers’ or employees’ information may be improperly accessed, used or disclosed.
If our systems are harmed or fail to function properly, we may need to expend significant financial resources to repair or replace systems or to otherwise protect against security breaches or to address problems caused by breaches. If we experience a significant security breach or fail to detect and appropriately respond to a significant security breach, we could be exposed to costly legal actions against us in connection with such incidents, which could result in orders or judgments forcing us to pay damages or fines or to take certain actions with respect to our information systems. Any incidents involving unauthorized access to or improper use of user information, or incidents that are a violation of our online privacy policies, could harm our brand reputation and diminish our competitive position. Any of these events could have a material and adverse effect on our business, reputation or financial results. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.
Our risk management process may not identify all risks that we are subject to and will not eliminate all risk.
Our Enterprise Risk Management (“ERM”) process seeks to identify and address significant risks. Our ERM process uses the most recent integrated risk framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to assess, manage and monitor risks. We believe that risk-taking is an inherent aspect of the pursuit of our growth and performance strategy. Our goals are to proactively manage risks in a structured approach in conjunction with strategic planning, with the intent to preserve and enhance shareowner value, and to manage prudently, rather than wholly avoiding, risks. We can mitigate risks and their impact on the Company, however, only to a limited extent, and no ERM process can identify all risks that we may face. Therefore, there may be risks that we are currently unaware of, that may develop in the future or that we currently consider immaterial. Further, our management of risks may prove inadequate. The emergence of risks of which we were unaware or are unable to manage could have a material adverse effect on our business, prospects, financial condition and results of operations.
The Company’s officers and directors are indemnified against certain conduct that may prove costly to defend.
Our Articles of Incorporation and Bylaws generally provide broad indemnification to our officers and directors against judgments, fines, amounts paid in settlement and expenses, including attorneys’ fees actually incurred in connection with most actions or proceedings to which they are or are threatened to be made a party that relates to their service as an officer or director, except as limited as set forth therein. We are also obligated to advance expenses as they are incurred by a director or officer in defending an action or proceeding prior to final disposition upon receipt of an undertaking by the applicable person to repay such advanced amount if the advancement is ultimately found to not be permitted by law or otherwise.
In addition, the Nevada Revised Statutes (the “NRS”) provides that no director or officer is individually liable for damages as a result of an act or failure to act in his or her capacity as a director or officer except if (i) the presumption that such director or officer acted in good faith, on an informed basis and with a view to the interests of the Company is rebutted, and (ii) it is proven that such director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer, and such breach involved intentional misconduct, fraud or a knowing violation of law. Consequently, subject to the applicable provisions of the NRS and to certain limited exceptions in the Articles of Incorporation and Bylaws, the Company’s officers and directors will not be liable to the Company or to its stockholders for monetary damages resulting from their conduct as an officer or director. As a result, we may have to spend significant resources indemnifying our officers and directors or paying for damages caused by their conduct.
We rely on the ability to secure funding via our credit facility when accepting large orders from certain customers, and if we are not able to retain our existing credit facility or obtain new ones we may not be able to accept these large orders, and our business, revenues, and financial condition could suffer.
For some large customer orders, particularly if the customer requires unusually long payment terms, we may need to rely on funding from our credit facility to meet our ongoing funding needs because we may have to pay for the raw materials needed to manufacture the products for the customer before the customer pays us. While we had historically not needed to do this, the possibility following the placement of a large order in 2020 was the reason we arranged for a credit facility last year. If we are unable to maintain the credit facility or arrange a replacement facility on satisfactory terms and conditions, we may not be able to accept these types of customer orders, which could have a material adverse effect on our business, prospects, revenues, and results of operations, as well as our ability to continue to fund our operations including our product development and customer growth activities. We may also need to obtain a new credit facility to fund our business plans. Our ability to maintain or replace our existing credit facility or obtain new or additional financing will depend on a variety of factors, many of which are beyond our control, and there can be no assurance that we will be able to do so in needed quantities, on terms favorable to us, or at all.
The requirements of being a public company may strain our resources and divert management’s attention.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations. The Exchange Act requires, among other things, that we file annual and current reports with the SEC with respect to our business and operating results. Compliance with these rules and regulations increases our legal and financial compliance costs, makes some activities more difficult, time-consuming, or costly, and increases demand on our systems and resources. As a result of disclosure of information in this Report and in filings required of a public company, our business and financial condition is more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert resources of our management and harm our business and operating results.
Risks Related to our Securities
The market price of our securities are likely be volatile, which may cause investment losses for our shareholders.
The market price of our securities has been and is likely to continue to be volatile, and investors in our securities may experience a decrease, which could be substantial, in the value of their securities or the loss of their entire investment in the Company for a number of reasons, including reasons unrelated to our operating performance or prospects. The market price of our securities could be subject to wide fluctuations in response to a broad and diverse range of factors, including those described elsewhere in this “Risk Factors” section as well as the following:
● announcements by us regarding liquidity, significant acquisitions, equity investments and divestitures, addition or loss of significant customers and contracts, capital expenditure commitments and litigation;
● our issuance of securities or debt, particularly if in connection with acquisition activities;
● the sale of a significant number of shares of our common stock by shareholders;
● recent changes in financial condition or results of operations, such as in earnings, revenues or other measure of company value;
● general market and economic conditions; and
● announcements of technological innovations or new product introductions by us or our competitors.
Further, broad market and industry factors may have a material adverse effect on the market price of our securities regardless of our actual operating performance.
In addition, stock markets have experienced in the past and may in the future experience a high level of price and volume volatility, and the market prices of equity securities of many companies have experienced in the past and may in the future experience wide price fluctuations not necessarily related to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our securities.
Finally, our relatively small public float and daily trading volume have in the past caused, and may in the future result in, significant volatility in the price of our securities. At December 31, 2021, we had approximately 9,417,833 million shares of our common stock outstanding held by non-affiliates and 1,252,299 shares of our Series A Preferred Stock. Our daily trading volume for the year ended December 31, 2021 averaged approximately 151,401 shares of common stock and 387,513 shares of Series A Preferred Stock.
Because there has been limited precedent set for financial accounting of Bitcoin and other cryptocurrency assets, the determination that we have made for how to account for cryptocurrency assets transactions may be subject to change.
Because there has been limited precedent set for the financial accounting of cryptocurrencies and related revenue recognition and no official guidance has yet been provided by the FASB or the SEC, it is unclear how companies may in the future be required to account for cryptocurrency transactions and assets and related revenue recognition. A change in regulatory or financial accounting standards could result in the necessity to change our accounting methods and restate our financial statements. Such a restatement could adversely affect the accounting for our newly mined cryptocurrency rewards and more generally negatively impact our business, prospects, financial condition and results of operations. Such circumstances would have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which would have a material adverse effect on our business, prospects or operations as well as and potentially the value of any cryptocurrencies we hold or expect to acquire for our own account and harm our investors.
If we are not able to comply with the applicable continued listing requirements or standards of Nasdaq, Nasdaq could delist our common stock or Series A Preferred Stock or broker-dealers may be discouraged from effecting transactions in shares of our securities.
Our common stock became listed and commenced trading on Nasdaq on March 23, 2020 and our Series A Preferred Stock commenced trading on Nasdaq on August 19, 2021. In order to maintain such listings, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price and certain corporate governance requirements. There can be no assurances that we will be able to comply with such applicable listing standards. If we fail to do so, Nasdaq may delist our common stock and Series A Preferred Stock, which would likely have an adverse impact on the market price and liquidity of such securities.
In addition, our shares of common stock have in the past constituted, and may again in the future constitute, “penny stock” within the meaning of Section 3(a)(51) of the Exchange Act and Rule 3a-51-1 thereunder, and so will be subject to the “penny stock” rules adopted under Section 15(g) (now 15(h)) of the Exchange Act. The penny stock rules generally apply to companies whose common stock is not listed on a national securities exchange and trades at less than $5.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stocks to persons other than “established customers” complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If our common stock is subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our common stock. If the common stock is subject to the penny stock rules, investors will find it more difficult to dispose of their shares of our common stock.
Raising additional funds through debt or equity financing could be dilutive and may cause the market price of our securities to decline. We still may need to raise additional funding which may not be available on acceptable terms, or at all. Failure to obtain additional capital may force us to delay, limit or terminate our product development efforts or other operations.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a shareholder. Furthermore, any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our products and services. In addition, the sale of a significant number of our shares of common stock, either by us or by our shareholders (in particular Brookstone, our largest shareholder) could depress the price of our securities.
We estimate that our current cash and cash equivalents will be sufficient for us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. We may continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital as and when needed, as a result of insufficient authorized shares or otherwise, could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B: Unresolved Staff Comments
Not applicable.

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ITEM 2. PROPERTIES
Item 2: Properties
We lease approximately 20,902 square feet of office, manufacturing, and research and development space in Albany, New York, which houses the corporate offices of SHI and MTI Instruments as well as MTI Instruments’ business operations. The current lease agreement expires on December 31, 2024. When the sale of MTI Instruments occurs, approximately 17,424 square feet will be allocated to MTI Instruments and included as part of the sale, and the remaining 3,478 square feet will remain to house the corporate offices.
SCI leases approximately 19,000 square feet of space in four buildings in East Wenatchee, Washington. The space is leased for the purpose of operating SCI’s cryptocurrency mining business. The current lease agreements expire for one building on June 30, 2024, for another on November 30, 2024, and for the remaining two buildings on July 31, 2023.
On March 4, 2021, Soluna SW, LLC acquired a 3.2-acre tract of real property located in Murray, Kentucky on which it has built an energy-efficient cryptocurrency mining facility that includes 22 buildings for the Company’s miners.
We believe these facilities are generally well-maintained and adequate for the Company’s current needs and for expansion, if required.

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ITEM 3. LEGAL PROCEEDINGS
Item 3: Legal Proceedings
At any point in time, we may be involved in various lawsuits or other legal proceedings. Such lawsuits could arise from the sale of products or services or from other matters relating to our regular business activities, compliance with various governmental regulations and requirements, or other transactions or circumstances.
We have been named as a party in the December 19, 2019 United States Environmental Protection Agency (“EPA”) Demand Letter regarding the Malta Rocket Fuel Area Superfund Site (“Site”) located in Malta and Stillwater, New York, in connection with an alleged release of hazardous materials into the environment. The EPA is seeking reimbursement of response costs from all named parties in the amount of approximately $358 thousand plus interest in connection with the investigation and disposal activities associated with the various drum caches discovered at the Site, issuance of the Explanation of Significant Differences (“ESD”) of the Site, and implementation of the work contemplated by the ESD. We consider the likelihood of a material adverse outcome with respect to this matter to be remote and do not currently anticipate that any expense or liability that we may incur as a result of this matter in the future will be material to the Company’s business or financial condition. Further, we are not presently involved in any other litigation that we believe is likely, individually or in the aggregate, to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4: Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the Nasdaq Capital Market under the trading symbol “SLNH.” The Company’s preferred stock is listed on Nasdaq Capital Market under the trading symbol “SLNHP.”
Holders
We have one class of common stock, par value $.001, and are authorized to issue 75,000,000 shares of common stock. Each share of the Company’s common stock is entitled to one vote on all matters submitted to shareholders. As of December 31, 2021, there were 13,754,206 shares of common stock issued and outstanding. As of March 28, 2022, there were approximately 195 shareholders of record of the Company’s common stock. The number of shareholders of record does not reflect the number of persons whose shares are held in nominee or “street” name accounts through brokers.
Dividends
As of December 31, 2021, we had 1,252,299 shares of our of 9.0% Series A Cumulative Perpetual Preferred Stock outstanding, which pursuant to the Certificate of Designations, Preferences and Rights of 9.0% Series A Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”), of the Company entitle such holders to dividends, when, as and if declared by the board of directors of the Company (the “Board of Directors”) (or a duly authorized committee of the Board of Directors), payable monthly in arrears on the final day of each month, beginning August 31, 2021. During 2021, we declared and paid preferred stock dividends totaling approximately $630 thousand.
The Company does not intend to pay dividends on our common stock and do not anticipate or contemplate paying cash dividends on our common stock in the foreseeable future. We currently intend to use all available funds to develop our business. We can give no assurance that we will ever have excess funds available to pay dividends. Any future determination as to the payment of dividends will depend upon critical requirements and limitations imposed by our credit agreements, if any, and such other factors as our Board of Directors may consider.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6: Selected Financial Data
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including those discussed in Item 1A: “Risk Factors” and elsewhere in this Annual Report.
SHI currently conducts our businesses through our two wholly owned subsidiaries, SCI and MTI Instruments. SCI is presently engaged in the mining of cryptocurrency through data centers that can be powered by renewable energy sources. MTI Instruments is engaged in the design, manufacture, and sale of vibration measurement and system balancing solutions, precision linear displacement sensors, instruments and system solutions, and wafer inspection tools. Recently, SCI has built, and intends to continue to develop and build, modular data centers that are currently used for cryptocurrency mining and that in the future can be used for computing intensive, batchable applications, such as artificial intelligence and machine learning, with the goal of providing a cost-effective alternative to battery storage or transmission lines. Headquartered in Albany, New York, the Company uses technology and intentional design to solve complex, real-world challenges.
SCI was incorporated in Delaware on January 8, 2020 as EcoChain, Inc., which has a cryptocurrency mining facility that integrates with the cryptocurrency blockchain network in the State of Washington. Through the October 2021 acquisition by EcoChain, Inc. of an entity at the time named Soluna Computing, Inc., SCI also has a pipeline of certain cryptocurrency mining projects previously owned by HEL, a Canadian corporation incorporated under the laws of the Province of British Colombia that develops vertically-integrated, utility-scale computing facilities focused on cryptocurrency mining and cutting-edge blockchain applications. We earn revenue from this business as the mined cryptocurrencies are converted into U.S. dollars.
MTI Instruments was incorporated in New York on March 8, 2000 and is a supplier of vibration measurement and balancing systems, precision linear displacement solutions, and wafer inspection tools. MTI Instruments’ products consist of engine vibration analysis systems for both military and commercial aircraft and electronic gauging instruments for position, displacement and vibration application within the industrial manufacturing markets, as well as in the research, design and process development markets. These systems, tools and solutions are developed for markets and applications that require consistent operation of complex machinery and the precise measurements and control of products, processes, the development and implementation of automated manufacturing and assembly. On December 17, 2021, we announced that we had entered into the LOI to an unrelated third party with respect to the Sale. The LOI only represents a mutual indication of interest regarding the Sale and the terms of the Sale are subject to a number of contingencies, including the completion of customary due diligence and the negotiation and execution of definitive agreements. If the Sale is completed, the Company expects that we will exit the instrumentation business and that we will be focused on developing and monetizing green, zero-carbon computing and cryptocurrency mining facilities. As a result of the foregoing, the MTI Instruments business is being held as discontinued operations in our financial statements as of December 31, 2021 and prior periods included in this Annual Report and until it is sold, we will continue to operate the MTI Instruments business.
Recent Developments and Trends
We have used the net proceeds of our recent common stock and preferred stock offerings primarily for the acquisition, development and growth of our cryptocurrency mining facilities in Kentucky, which expanded SCI’s cryptocurrency business for fiscal year 2021, and into the future with an additional facility in Texas planned to launch in in fiscal year 2022 and additional pipelines for the future. We expect to develop and implement a capital strategy consisting of debt and equity to finance new projects, equipment purchases and upgrades in fiscal year 2022.
Miner Purchases and Deployments
At December 31, 2021, we had purchased, received and/or deployed the following miners:
Number of Miners
Miners deployed at January 1, 2021
Miners received and deployed during the year ended December 31, 2021 12,623
Miners received during the year ended December 31, 2021, but not deployed 5,876
Total Miners as of December 31, 2021 19,116
During 2021, we received 18,499 additional miners, and, as of December 31, 2021, we had deployed a total of 13,240 miners in our mining operations. At December 31, 2021, we had approximately $1.4 million payable to KUZU of ASIC miners, which arrived January 2022.
Results of Operations
Results of Operations for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020.
The following table summarizes changes in the various components of our net (loss) income during the year ended December 31, 2021 compared to the year ended December 31, 2020.
(Dollars in thousands)
Year Ended
December 31,
Year Ended
December 31,
$
Change
%
Change
Cryptocurrency mining revenue
$ 10,932
$
$ 10,337
1,737 %
Data hosting revenue
$ 3,413
$ -
$ 3,413
%
Operating costs and expenses:
Cost of cryptocurrency mining revenue
$ 5,626
$
$ 5,221
1,289 %
Cost of data hosting revenue
$ 2,444
$ -
$ 2,444
%
Selling, general and administrative expenses
$ 10,751
$ 1,832
$ 8,919
%
Operating (loss) income
$ (4,476 )
$ (1,642 )
$ (2,834 )
%
Other income, net
$
$
$ (89 )
(89 %)
Interest expense
$ (1,879 )
$ -
$ (1,879 )
(100 %)
(Loss) income before income taxes from continuing operations
$ (6,344 )
$ (1,542 )
$ (4,802 )
(311 %)
Income tax (expense) benefit from continuing operations
$ (44 )
$
$ (376)
(113 %)
Net loss from continuing operations
$ (6,388 )
$ (1,210 )
$ (5,178 )
(428 %)
Income before income taxes from discontinuing operations
$ 1,087
$ 3,096
$ (2,009 )
(65 %)
Income tax (expense) benefit from discontinued operations
$
$
$ (20 )
(33 %)
Net income from discontinued operations
$ 1,127
$ 3,156
$ (2,029)
(64 %)
Net (loss) income
$ (5,261 )
$ 1,946
$ (7,207 )
(370 %)
Cryptocurrency Mining Revenue: Cryptocurrency revenue consists of revenue recognized from SCI’s cryptocurrency mining operations.
Cryptocurrency revenue was approximately $10.9 million for the year ended December 31, 2021 compared to $595 thousand for the year ended December 31, 2020. SCI did not commence its cryptocurrency mining operations until the second quarter of 2020. The Company maintained its facility in Washington and in 2021 added two new mining site operations in Murray, Kentucky and Calvert City, Kentucky. Megawatts deployed increased from approximately 2 megawatts at the end of 2020 to approximately 25 megawatts at the end of 2021. This growth in capacity contributed to the growth in the business in fiscal year 2021.
Data Hosting Revenue: In August 2021, SCI began cryptocurrency hosting services in which SCI provides energized space and operating services to third-party mining companies who locate their mining hardware at one of SCI’s mining locations, in which they may receive a fee per miner installed, revenue share and if additional services are rendered, an additional service fee is charged to the outside parties. The Company’s revenue was $3.4 million for the year ended December 31, 2021, with no comparable services noted for the year ended December 31, 2020, in which are all attributed to the Kentucky data center location.
Cost of Cryptocurrency Revenue: Cost of cryptocurrency revenue includes direct utility costs, site overhead expenses, depreciation expenses, as well as overhead costs that relate to the operations of SCI’s cryptocurrency mining facilities in Washington and facilities in Kentucky. Going forward, cost of cryptocurrency revenue will include any additional SCI cryptocurrency mining facilities that are part of the Company’s future pipeline.
Cost of cryptocurrency revenue was approximately $5.6 million and $405 thousand for the year ended December 31, 2021 and 2020, respectively, approximately a $5.2 million increase. As noted above, SCI did not commence cryptocurrency mining operations until the second quarter of 2020, and therefore there was no material cryptocurrency revenue or associated costs during the year ended December 31, 2020. As the Company began increasing their capacity, the associated costs began to increase.
Cost of Data Hosting Revenue: As noted above, SCI began hosting services in August 2021 in which expenses are allocated based on the cost driving activity. As such, there were no related charges in the year ended December 31, 2020.
Gross Margin: Gross profit, as a percentage of revenue, increased to 44% during 2021 compared to 32% for 2020, primarily due to mining operations having a stronger year for 2021. In fiscal year 2021, the Company began to streamline the mining operations into new facilities as compared fiscal year 2020 when the Company began their mining operations in the second quarter of 2020. The increase in gross profit for 2021 was slightly reduced due to the introduction of data hosting services in 2021, which had a lower gross profit margin of 28% compared to the cryptocurrency mining of 48.5% for fiscal year 2021.
Selling, General and Administrative Expenses: Selling, general and administrative expenses includes cash and non-cash compensation, benefits and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, selling and marketing, information technology, and legal services.
Selling, general and administrative expenses for the year ended December 31, 2021 increased by $8.9 million, or 487%, to $10.7 million from $1.8 million for the year ended December 31, 2020. This increase was a result of both expenses incurred in 2021 for which there was no comparable expense in 2020 as well as from changes in a number of our traditional selling, general and administrative expenses. Expenses for which there was no comparable outlay in 2020 consisted of non-cash stock option grants of $1.3 million to our Chief Executive Officer (“CEO”) and members of our Board of Directors, non-cash stock restricted grants of $630 thousand to certain Company employees and members of our Board of Directors, $1.2 million related to other outside related expenses in conjunction with pipeline acquisition diligence and operating and management agreements with HEL, and $500 thousand in expenses related to investor relations matters. Also, the Company incurred approximately $1.6 million in amortization expense for the strategic pipeline contract acquired in the Soluna Callisto acquisition on October 29, 2021. The increase of $780 thousand in legal fees for the year ended December 31, 2021 was primarily due to $390 thousand of legal fees related to the transaction to lease the building for SCI’s new cryptocurrency mining facility and the surrounding land located in Kentucky, discussed above, as well as other general matters related to the operations of SCI, and $385 thousand in corporate legal expenses mainly related to the Company’s reincorporation in Nevada, the preparation and adoption of the 2021 Stock Incentive Plan (the “Plan”), the Special Meeting of Stockholders we held on March 25, 2021, at which the Company’s stockholders approved (among another matter) the reincorporation and the adoption of the 2021 Plan, the Annual Meeting of Stockholders held in May 2021 and the Special Meeting of Stockholders held on October 29, 2021, the amendment and restatement of the Plan, as well as other due diligence matters. In addition, there was a $135 thousand increase in consultant fees for the year related to CEO and Board of Directors compensation consultation and the annual stockholders meeting, $260 thousand for consultant expenses related to the Company’s SCI operations, $75 thousand for temporary staffing as the Company was expanding operations in the corporate finance division, and $200 thousand for public relations services.
Investor relations expenses incurred during the year ended December 31, 2021, and for which there was no comparable expense during the year ended December 31, 2020, were $500 thousand, consisting primarily of $90 thousand for Nasdaq registration fees in connection with the initial listing of our common stock and preferred stock, $260 thousand related to our retention of an investor relations consulting firm to assist us with creating a more formal investor relations strategy given our status as an SEC reporting and Nasdaq-listed company, $85 thousand related to the Special Meeting of Stockholders held on March 25, 2021 and October 29, 2021, including the fees and expenses of the proxy solicitor we retained in connection therewith, and $50 thousand in conjunction with the Company’s annual stockholders meeting.
Salaries and benefits expenses increased by $1.2 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, $375 thousand of which is related to the salary and benefits of our Chief Financial Officer (hired in July 2020), CEO (hired in November 2020), Compliance Manager (hired in November 2020), and Financial Reporting Manager (hired in July 2021), $510 thousand of which is related to the salary and fringe benefits of 11 new employees of Soluna Callisto in connection with the October 2021 acquisition, as compared to none in prior year in which SCI payroll expenses were charged to selling, general and administrative for SCI in fiscal year 2021. The Company had eight corporate employees at the end of fiscal year 2021 compared to five Corporate employees at year ended December 31, 2020. Also, the Company has a significant increase in bonuses of $250 thousand due to growth in Company’s operations in the cryptocurrency mining and other operating initiatives set for the year ended December 31, 2021.
In addition, compared to the year ended December 31, 2020, travel expenses increased $72 thousand during the year ended December 31, 2021, primarily due to an increase in traveling to oversee the cryptocurrency mining locations, as well as the reduced travel restrictions related to the COVID-19 pandemic. Directors and officers insurance premiums increased by $250 thousand during the year ended December 31, 2021, compared to the year ended December 31, 2020 primarily to our status as an SEC reporting company and the increase in cryptocurrency operations.
The Company expects selling, general and administrative expenses to continue to increase in 2022 and generally going forward as the Company significantly expands their cryptocurrency operations.
Operating Loss: Operating loss increased to $4.5 million for the year ended December 31, 2021 from $1.6 million during the prior year. This $2.9 million loss increase was the result of the factors noted above, that is, significant increases in SGA for items not incurred in the prior year, as well as operations for SCI have significantly increased with increases in sales and costs for the year.
Interest expense: Interest expense for the year ended December 31, 2021 was $1.9 million and was primarily related to the $1.9 million of interest expense in relation to the Notes payable issued at the end of October 2021. The Company did not incur any interest expense for the year ended December 31, 2020.
Other Income, net: Other income for the year ended December 31, 2021 was $11 thousand related to interest income on operating cash balances offset with miscellaneous expenses. Other income for the year ended December 31, 2020 was $100 thousand and was primarily related to income from the sale of SCI’s excess equipment and interest income on operating cash balances.
Income Tax (Expense) Benefit: Income tax expense for the year ended December 31, 2021 was $44 thousand and was primarily a result a change in the valuation allowance for the year offset with temporary timing differences. Our effective income tax rate for the year ended December 31, 2021 was 1.0%. Income tax benefit for the year ended December 31, 2020 was $332 thousand and was primarily related to the increase of the tax asset based on projected future taxable earnings, giving the Company the ability to use prior tax losses. Our effective income tax rate for the year ended December 31, 2020 was (21)%.
Net Loss from continuing operations: Net loss from continuing operations for the year ended December 31, 2021 was $6.3 million compared to net loss from continuing operations of $1.2 million in 2020. The increase for loss for the year were the result of the factors noted above, including expenses not incurred in prior year such as amortization expense for the strategic pipeline contract intangible, depreciation on miners installed, and noncash compensation expense distributed to the board of directors and other members of management, offset with increases sales to the cryptocurrency mining and data hosting revenue.
Net Income from discontinued operations: The Company notes that discontinued operations held for sale relates to the Company’s MTI Instrumentation business. Net income from discontinued operations for the year ended December 31, 2021 was $1.1 million compared to net income of $3.1 million in 2020. The main cause of the decrease in net income was due to product revenue for the year declined about $1.9 million due to a decrease portable balance system product sales in which fewer items were shipped to the United States Air Force compared to 2020, in which a large order was placed in 2020. The cost of sales didn’t decline as significantly as product sales due to unfavorable mix of the volume of products sales, with more units being sold that had higher gross margins in the year ended December 31, 2020 compared to 2021.
Depreciation and Amortization: Depreciation and amortization expense during the year ended December 31, 2021 totaled approximately $3.7 million, which is an increase of approximately $3.6 million , as compared to $80 thousand for the year ended December 31, 2020. This increase is primarily due to higher depreciation recognized of $2.05 million for the two new facilities deployed in Kentucky and the associated miners, in addition to amortization expense of approximately $1.6 million related to the strategic pipeline contract that was acquired in October 2021.
Net (Loss) Income: Net loss for the year ended December 31, 2021 was $5.3 million compared to net income of $1.9 million for the year ended December 31, 2020, primarily as a result of the factors noted above with the losses incurred in continued operations offset with net income for the year in the MTI Instruments business as noted above.
Non-GAAP Measures
In addition to financial measures calculated in accordance U.S. generally accepted accounting principles (“GAAP”), we also use “Adjusted EBITDA.” Adjusted EBITDA is a non-GAAP financial measure defined as net income (loss) from continuing operations before interest, taxes, depreciation and amortization (“EBITDA”) adjusted to eliminate the effects of certain non-cash, non-recurring items, that do not reflect our ongoing strategic business operations. Management believes that Adjusted EBITDA results in a performance measurement that represents a key indicator of the Company’s business operations of cryptocurrency mining.
We believe Adjusted EBITDA can be an important financial measure because it allows management, investors, and our Board of Directors to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making such adjustments. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that stock-based compensation costs, which is excluded from the non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Similarly, we expect that depreciation and amortization of fixed assets will continue to be a recurring expense over the term of the useful life of the assets.
Adjusted EBITDA is provided in addition to, and should not be considered to be a substitute for, or superior to net income, the comparable measure calculated in accordance with U.S. GAAP. Further, Adjusted EBITDA should not be considered as an alternative to revenue growth, net income, diluted earnings per share or any other performance measure calculated in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.
Reconciliations of Adjusted EBITDA to net income from continuing operations, the most comparable GAAP financial metric, for historical periods are presented in the table below:
(Dollars in thousands)
December 31, 2021
December 31, 2020
Net loss from continuing operations
$ (6,388 )
$ (1,210 )
Interest expense (income), net
1,864
(16 )
Income tax expense (benefit)
(332 )
Depreciation and amortization
3,703
EBITDA
(777 )
(1,477 )
Adjustments
Non-cash/ non-recurring items
Stock-based compensation costs
1,941
Exchange registration expenses
-
Adjusted EBITDA
$ 1,457
$ (1,437 )
Stock based compensation costs represented non-cash stock option grants of $1.3 million to our CEO and members of our Board of Directors and non-cash stock restricted grants of approximately $630 thousand to certain Company employees and members of our Board of Directors for the year ending December 31, 2021 compared to only $40 thousand for the year ended December 31, 2020.
The exchange registration expenses related to non-recurring expenses of approximately $189 thousand associated with the Company’s reincorporation in Nevada in March 2021 and the related special meeting of stockholders we held on March 25, 2021 to approve the reincorporation and the adoption of the 2021 Stock Incentive Plan. In addition, the Company incurred approximately $104 thousand in fees related to the initial listing of our common stock on The Nasdaq Stock Market LLC (“Nasdaq”) and associated legal assistance in connection with our registration matters. There were no comparable exchange registration expenses related for the year ended December 31, 2020.
Liquidity and Capital Resources
Several key indicators of our liquidity are summarized in the following table:
Years Ended December 31,
(Dollars in thousands)
Cash
$ 10,258
$ 2,630
Working capital
9,299
3,142
Net loss from continuing operations
(6,388 )
(1,210 )
Net income from discontinued operations
1,127
3,156
Net cash provided by (used in) operating activities
4,635
(1,214 )
Net cash provided by operating activities for discontinued operations
3,115
Purchase of property, plant and equipment
(45,792 )
(805 )
Cash dividends paid on preferred stock
(630 )
-
The Company has historically incurred significant losses primarily due to its past efforts to fund direct methanol fuel cell product development and commercialization programs and had a consolidated accumulated deficit of approximately $123.7 million as of December 31, 2021. As of December 31, 2021, the Company had working capital of approximately $9.3 million, a line of credit outstanding of $1.0 million, $7.1 million outstanding note payable that is convertible into common stock, in certain circumstances, outstanding commitments related to SCI for $16.2 million for capital expenditures, and approximately $10.3 million of cash available to fund our operations.
Based on business developments, including changes in production levels, staffing requirements, and network infrastructure improvements, we will require additional capital equipment in the foreseeable future. With the Company’s shift in focus of the business, and the potential sale of the MTI Instruments business, the Company expects that it will exit the instrumentation business and will be focused on developing and monetizing green, zero-carbon computing and cryptocurrency mining facilities. Although the Company has seen profits in operating activities in the past two years in its discontinued operations-held for sale segment, the Company has seen significant growth in its cryptocurrency business and has focused attention towards that segment.
As we have done historically, we expect to continue funding operations from our current cash position and our projected 2022 cash flows pursuant to management’s plans. If necessary, we may also seek to supplement our resources by increasing credit facilities to fund operational working capital and capital expenditure requirements. We expect to fund growth (additional cryptocurrency mining facilities and miners) through capital raise activities, to the extent that we can successfully raise capital through additional debt or equity sales. Any additional financing, if required, may not be available to us on acceptable terms or at all.
While it cannot be assured, management believes that, due in part to our current working capital level and projected cash requirements for our existing operations, its current available cash of approximately $10.3 million, and our projected 2022 cash flow pursuant to management’s plans and anticipated profits from the sale of MTI Instruments, which we expect to be completed during the year ending December 31, 2022, the Company will have adequate resources to fund its operations through at least the end of the first quarter of 2023. As noted above, the Company expects to fund capital expenditures associated with managements anticipated growth strategy for SCI through capital raises. The Company has entered into an unsecured line of credit for $1.0 million to assist with possible future financing, which as of December 31, 2021, the entire amount had been drawn upon and was outstanding. In addition, on October 20, 2021, we issued to certain institutional investors secured convertible notes in the aggregate principal amount of approximately $16.3 million for an aggregate purchase price of $15.0 million. The notes are convertible, subject to certain conditions, at any time at the option of the Investors, into an aggregate of 1,776,073 shares of the Company’s common stock. On December 30, 2021, we entered into a Master Equipment Finance Agreement (the “Master Agreement”) with NYDIG ABL LLC (“NYDIG”) as lender, servicer and collateral agent. The Master Agreement outlined the framework for a financing up to approximately $14.4 million. Subsequently, the parties negotiated the specific terms of each equipment financing transaction as well as the terms upon which the investors would consent to the transactions contemplated by the Master Agreement. Subsequent to December 31, 2021, on January 14, 2022, we borrowed loans under the Master Agreement in the aggregate principal amount of approximately $4.6 million that will bear interest at 14% and will be repaid over 24 months. On February 22, 2022, we issued to certain institutional lenders promissory notes in an aggregate principal amount of $7.6 million for an aggregate purchase price of $7.6 million as the first tranche of an aggregate financing of $20.0 million. On March 10, 2022, we issued to the lenders a second tranche of an aggregate principal amount of $2.4 million. The Company expects to issue to the lenders a third tranche of promissory notes in an aggregate principal amount of $10.0 million for an aggregate purchase price of $10.0 million along with Class D common stock purchase warrants to purchase up to an aggregate of 500,000 shares of common stock.
If our revenue estimates are off either in timing or amount, or if cash generated from operations is insufficient to satisfy the operational working capital and capital expenditure requirements, the Company may need to implement additional steps to ensure liquidity including, but not limited to, the deferral of planned capital spending and/or delaying existing or pending product development initiatives, or the Company may be required to obtain credit facilities or other loans, if available, to fund these initiatives. The Company has no other formal commitments for funding its future needs at this time and any additional financing we may require during the year ending December 31, 2022, may not be available to us on acceptable terms or at all. Any one or more of such steps, if required, could potentially have a material and adverse effect on our business, results of operations, and financial condition.
Operating Activities
Net cash provided by operating activities from continuing operations was approximately $4.6 million during the year ended December 31, 2021. Cash was provided from operations by a net loss of $6.4 million, less non-cash items of $7.8 million, consisting primarily of $3.7 million of amortization and depreciation expense for the year for the intangible asset acquired and significant additions in fixed assets, approximately $2.0 million in stock-based compensation expense, and $1.9 million for amortization of deferred financing costs and discount on notes payables issued during the year. The change in asset and liabilities of $3.3 million consisted primary of increases in accounts payable and accrued liabilities of $5.0 million offset by $2.2 million with increases in accounts receivable, prepaids and other assets, and other long- term assets.
Net cash used in operating activities from continuing operations was approximately $1.2 million during the year ended December 31, 2020. Cash was consumed from operations by a net loss of $1.2 million, less $81 thousand of depreciation, $40 thousand of stock compensation expense, and $86 thousand for amortization of lease asset. The change in assets and liabilities of $125 thousand was mainly due to increases in the year of accounts payable, accrued liabilities, and other liabilities of $537 thousand offset with increases in accounts receivable and other assets of $335 thousand.
Investing Activities
Net cash used in investing activities during the year ended December 31, 2021 was approximately $57.2 million compared to $1.8 million in for the year ended December 31, 2020. In 2021, the Company had $45.8 million worth of capital expenditures, a net change of $9.9 million in deposits on equipment and $1.6 million of cash purchased on intangible assets in relation to the asset acquisition in the current year. In 2020, the Company only had $805 thousand in capital expenditures, $280 thousand net change in deposits on equipment and $750 thousand for a purchase of stock in equity investment.
Financing Activities
Net cash provided by financing activities was approximately $59.3 million during the year ended December 31, 2021, which consisted of the common stock capital raise and preferred stock raises that totaled approximately $40.7 in net proceeds. The Company also received proceeds from a notes issuance of $15 million less costs associated of $1.3 million. The Company also exercised warrants totaling approximately $4.6 million and had stock option exercises of approximately $100 thousand. The Company borrowed $1.0 million under their line of credit and made cash dividend payments to preferred stockholders of around $630 thousand. During the year ended 2020, the Company only had stock option exercises totaling approximately $83 thousand.
Debt
On September 13, 2021, the Company entered into a $1.0 million unsecured line of credit with KeyBank National Association, that will, among other things, allow the Company to request loans and to use the proceeds of such loans for working capital and other general corporate purposes. The line of credit may be drawn at the discretion of the Company and bears interest at a rate of prime +.75% per annum. Accrued interest is due monthly, and principal is due in full following the lender’s demand. As of December 31, 2021, the entire line of credit of $1.0 million was drawn and outstanding. MTI Instruments, previously held a secured line of credit with Pioneer Bank in the amount of $300 thousand. The secured line of credit was closed on September 10, 2021 with no outstanding amounts.
In addition, on October 20, 2021, the Company issued to certain institution investors secured convertible notes in the aggregate principal amount of approximately $16.3 million for an aggregate purchase price of $15.0 million. The notes are convertible, subject to certain conditions, at any time at the option of the investors, into an aggregate of 1,776,073 shares of the Company’s common stock.
Subsequent to year-end, the Company entered into a Master Financing Agreement with NYDIG for $14.4 million. On February 22, 2022, the Company issued to certain institutional lenders promissory notes in an aggregate principal amount of $7.6 million for an aggregate purchase price of $7.6 million as the first tranche of an aggregate financing of $20.0 million. On March 10, 2022, the Company has issued to the lenders a second tranche of an aggregate principal amount of $2.4 million for an aggregate purchase price of $2.4 million. The Company expects to issue to the lenders a third tranche of promissory notes in an aggregate principal amount of $10.0 million for an aggregate purchase price of $10.0 million.
The COVID-19 Pandemic
In response to the COVID-19 global pandemic, the Company has implemented procedures to support flexible working arrangements for its workforce based on business needs. While these measures have been necessary and appropriate, they may result in additional costs and may adversely impact the Company’s business and financial performance. As the Company’s response to the pandemic evolves, the Company may incur additional costs and will potentially experience adverse impacts to its business, each of which are uncertain at this time.
Critical Accounting Policies and Significant Judgments and Estimates
The prior discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. Note 2 of the Consolidated Financial Statements included in this Annual Report on Form 10-K includes a summary of our most significant accounting policies. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, income taxes and share-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Periodically, our management reviews our critical accounting estimates with the Audit Committee of our Board of Directors.
The significant accounting policies that we believe are most critical to aid in fully understanding and evaluating our consolidated financial statements include the following:
Revenue Recognition, Accounts Receivable, and Allowance for Doubtful Accounts. Cryptocurrency revenue consists of revenue recognized from SCI’s cryptocurrency mining facility. Revenue is recognized at the cryptocurrency’s realized cash value based upon the rates at cryptocurrency exchanges where we are registered. Cryptocurrencies are earned when the miners solve complex computations and cryptocurrency is issued as a result. The mined cryptocurrency is immediately paid to the Coinbase wallet. Cryptocurrency is converted to U.S. dollars on a daily basis. Also, the Company has entered into customer hosting contracts whereby the Company provides electrical power to cryptocurrency mining customers, and the customers pay a stated amount per megawatt-hour (“MWh”) (“Contract Capacity”) as well as a share of the coins mined. The fee is paid monthly in advance. The actual monthly amounts are calculated after the close of each month and reconciled to the monthly advance.
Trade accounts receivable are stated at the invoiced amount billed to customers and do not bear interest. An allowance for doubtful accounts, if necessary, represents our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience and current exposures identified. We review our allowance for doubtful accounts monthly. We review past due balances over 90 days and over a specified amount individually for collectability. We review all other balances on a pooled basis by type of receivable. We charge off account balances against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.
Asset Acquisition.
As the discussed above, on October 29, 2021, we closed the Soluna Callisto acquisition, pursuant to an Agreement and Plan of Merger dated as of August 11, 2021, by and among the Company, SCI and Soluna Callisto.. The purpose of the transaction was for SCI to acquire substantially all of the assets (other than those assets physically located in Morocco) formerly held by HEL, which assets consisted of Soluna Callisto’s existing pipeline of certain cryptocurrency mining projects that HEL previously transferred to Soluna Callisto and to provide SCI with the opportunity to directly employ or retain the services of four individuals whose services it had retained through HEL prior to the merger. As a result of the merger, each share of common stock of Soluna Callisto issued and outstanding immediately prior to the effective time of the merger, other than shares owned by the Company or any of our subsidiaries, was cancelled and converted into the right to receive a proportionate share of up to 2,970,000 shares (the “Merger Shares”) of the Company’s common stock payable upon the achievement of certain milestones within five years after the effective date in the merger, as set forth in the merger agreement and the schedules thereto (the “Merger Consideration”).
In connection with the Soluna Callisto acquisition, effective as of October 29, 2021, pursuant to the terms of a termination agreement dated as of August 11, 2021 by and among the Company, SCI, and HEL, on November 5, 2021, SCI paid HEL $725,000 and SHI issued to HEL 150,000 shares of SHI common stock (the “Termination Shares”). SCI also reimbursed HEL $75,000 for transaction-related fees and expenses. SHI included the termination costs as part of asset acquisition per ASC 805-50. Based on the closing price of the SHI common stock on Nasdaq on November 5, 2021, SHI has valued the aggregate termination consideration at approximately $1.9 million.
The acquisition was accounted for, for purposes of GAAP, using the asset acquisition method of accounting under the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 805-50. SHI determined that it acquired in the acquisition a group of similar identifiable assets (primarily, the “strategic pipeline contract” of certain cryptocurrency mining projects), which it classified as an intangible asset for accounting purposes. As a result, SHI’s acquisition of the set of assets and activities that it acquired will constitute an asset acquisition, as opposed to a business acquisition, under ASC 805. ASC 805-50 provides that assets acquired in an asset acquisition are measured based on the costs of the acquisition, which is the consideration that the acquirer transfers to the seller, and includes direct transaction costs related to the acquisition. SHI includes Soluna Callisto’s results of operations in our results of operations beginning on the effective date of the of the acquisition, October 29, 2021.
Fair Value Measurement.
The estimated fair value of certain financial instruments, including cash, accounts receivable and short-term debt approximates their carrying value due to their short maturities and varying interest rates. “Fair value” is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation methods, the Company is required to provide the following information according to the fair value accounting standards. These standards established a fair value hierarchy as specified that ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities are classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities, which includes listed equities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. These items are typically priced using models or other valuation techniques. These models are primarily financial industry-standard models that consider various assumptions, including the time value of money, yield curves, volatility factors, as well as other relevant economic measures.
Level 3: These use unobservable inputs that are not corroborated by market data. These values are generally estimated based upon methodologies utilizing significant inputs that are generally less observable from objective sources.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company had Warrants included within the SPA agreement as noted in Footnote 9. The Warrants are considered freestanding equity-classified instruments due to their detachable and separately exercisable features and meet the indexation criteria within derivative accounting. Accordingly, the Warrants are presented as a component of Stockholders’ Equity in accordance with derivative accounting.
Consistent with the guidance in purchase accounting, the value of the Strategic Pipeline Contract as of the acquisition date was estimated using an expected value approach, which probability-weights various future outcomes and uses certain Level 3 inputs.
Share-Based Payments. We grant options to purchase our common stock and award restricted stock to our employees and directors under our equity incentive plans. The benefits provided under these plans are share-based payments and we account for stock-based awards exchanged for employee service in accordance with the appropriate share-based payment accounting guidance. Stock-based compensation represents the cost related to stock-based awards granted to employees and directors. We measure stock-based compensation cost at grant date based on the estimated fair value of the award and recognize the cost as expense on a straight-line basis in accordance with the vesting of the options (net of estimated forfeitures) over the employee’s requisite service period. We estimate the fair value of stock-based awards on the grant date using a Black-Scholes valuation model. We use the fair value method of accounting with the modified prospective application, which provides for certain changes to the method for valuing share-based compensation. The valuation provisions apply to new awards and to awards that are outstanding on the effective date and subsequently modified.
The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate, and expected dividends.
Theoretical valuation models and market-based methods are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability, and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization, and testing for adequacy of internal controls.
For purposes of estimating the fair value of stock options granted using the Black-Scholes model, we use the historical volatility of our stock for the expected volatility assumption input to the Black-Scholes model, consistent with the accounting guidance. The risk-free interest rate is based on the risk-free zero-coupon rate for a period consistent with the expected option term at the time of grant. The expected option term is calculated based on our historical forfeitures and cancellation rates.
Income Taxes. We are subject to income taxes in the U.S. (federal and state). As part of the process of preparing our consolidated financial statements, we calculate income taxes for each of the jurisdictions in which we operate. This involves estimating actual current taxes due together with assessing temporary differences resulting from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities, loss carryforwards, and tax credit carryforwards, for which income tax benefits are expected to be realized in future years. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We considered all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income amongst other items in determining our valuation allowance. In addition, our assessment requires us to schedule future taxable income in accordance with accounting standards that address income taxes to assess the appropriateness of a valuation allowance, which further requires the exercise of significant management judgment.
We account for taxes in accordance with the asset and liability method of accounting for income taxes. Under this method, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The impact of our reassessment of our tax positions for these standards did not have a material impact on its results of operations, financial condition, or liquidity.
We are also currently subject to audit in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in an audit, litigation, or in applicable laws, regulations, administrative practices, principles, and interpretations could have a material effect on our operating results or cash flows in the period or periods in which such developments occur, as well as for prior and in subsequent periods.
Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. Our effective tax rates could be affected by numerous factors, such as intercompany transactions, earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, the applicability of special tax regimes, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies, changes to our existing businesses and operations, acquisitions and investments and how they are financed, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations.
Factors Expected to Affect Our Future Results
We expect our revenues to comprise a combination of: (i) block rewards in Bitcoin, which are fixed rewards programmed into the Bitcoin software that are awarded to a miner or a group of miners for solving the cryptographic problem required to create a new block on a given blockchain and (ii) transaction fees in Bitcoin, which are flexible fees earned for verifying transactions in support of the blockchain.
Block rewards are fixed and the Bitcoin network is designed to periodically reduce them through halving. Currently the block rewards are fixed at 6.25 Bitcoin per block, and it is estimated that it will halve again to 3.125 Bitcoin in March 2024.
Bitcoin miners also collect transaction fees for each transaction they confirm. Miners validate unconfirmed transactions by adding the previously unconfirmed transactions to new blocks in the blockchain. Miners are not forced to confirm any specific transaction, but they are economically incentivized to confirm valid transactions as a means of collecting fees. Miners have historically accepted relatively low transaction confirmation fees, because miners have a very low marginal cost of validating unconfirmed transactions; however, unlike the fixed block rewards, transaction fees may vary, depending on the consensus set within the network.
As the use of the Bitcoin network expands and the total number of Bitcoin available to mine and, thus, the block rewards, declines over time, we expect the mining incentive structure to transition to a higher reliance on transaction confirmation fees, and the transaction fees to become a larger proportion of the revenues to miners.
Recent Accounting Pronouncements
A discussion of recently adopted and new accounting pronouncements is included in Note 2 of the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8: Financial Statements and Supplementary Data
The Company’s Consolidated Financial Statements begin on page and are incorporated in this Item 8 by reference.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A: Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of SHI’s disclosure controls and procedures as of December 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. We recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and we necessarily apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Management’s Report on Internal Control Over Financial Reporting
Management of our Company is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control-Integrated Framework (2013 version) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation using the criteria set forth in Internal Control-Integrated Framework, Management has concluded that our internal control over financial reporting was effective as of December 31, 2021.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only Management’s Report in this annual report.
/s/ Michael Toporek
Chief Executive Officer
(Principal Executive Officer) (Principal Executive Officer)
/s/ Jessica L. Thomas
Chief Financial Officer
(Principal Financial Officer)
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our fiscal quarter ended December 31, 2021 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B: Other Information
Not applicable

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10: Directors, Executive Officers and Corporate Governance
Code of Conduct and Ethics: We have adopted a Code of Conduct and Ethics for employees, officers and directors. A copy of the Code of Conduct and Ethics is available on our website at https://www.solunacomputing.com under Investors, Governance Documents.
The remaining information required by this Item 10 is incorporated herein by reference to the information appearing under the captions “Information about our Directors,” “Executive Officers,” “Board of Director Meetings and Committees - Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders to be filed with the SEC on or before April 30, 2022.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11: Executive Compensation
The information required by this Item 11 is incorporated herein by reference to the information appearing under the caption “Executive Compensation” in the Company’s definitive Proxy Statement for our 2022 Annual Meeting of Shareholders to be filed with the SEC on or before April 30, 2022.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plans
As of December 31, 2021, we have three equity compensation plans, each of which was originally approved by our shareholders, the Soluna Holdings, Inc., formerly known as Mechanical Technology Incorporated, 2012 Equity Incentive Plan, the Soluna Holdings, Inc., formerly known as Mechanical Technology Incorporated, 2014 Equity Incentive Plan, and the Amended and Restated Soluna Holdings, Inc., formerly known as Mechanical Technology Incorporated, 2021 Equity Incentive Plan (the “2021 Plan” and collectively, the “Plans”). See Note 13 of our Consolidated Financial Statements in this Annual Report on Form 10-K for a description of the Plans.
The following table presents information regarding these plans as of December 31, 2021:
Number of Securities Remaining
Available for Future Issuance
Number of Securities To Be
Under
Issued Upon Exercise of
Weighted Average Exercise
Equity Compensation Plans
Outstanding
Price of Outstanding
(excluding securities reflected in
Options, Warrants, Rights(1)
Options, Warrants, Rights
column (a))
Plan Category (a)
(b)
(c)
Equity compensation plans
approved by security holders 991,550
$ 5.44
392,717(2)
(1) The securities available under the Plans for issuance and issuable pursuant to exercises of outstanding options may be adjusted in the event of a change in outstanding stock by reason of stock dividend, stock splits, reverse stock splits, etc.
(2) Commencing on January 1, 2022, on the first trading day of each new fiscal year, the number of shares of common stock reserved for issuance under the 2021 Plan will automatically increase by fifteen percent (15%) of the number of shares of common stock outstanding on such date.
The remaining information required by this Item 12 is incorporated herein by reference to information appearing under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders to be filed with the SEC on or before April 30, 2022.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13: Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated herein by reference to the information appearing under the captions “Certain Relationships and Related Transactions” and “Information about our Directors” in our definitive Proxy Statement for the 2022 Annual Meeting of Shareholders to be filed with the SEC on or before April 30, 2022.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14: Principal Accounting Fees and Services
The information required by this Item 14 is incorporated herein by reference to the information appearing under the caption “Independent Registered Public Accounting Firm” in our definitive Proxy Statement for the 2022 Annual Meeting of Shareholders to be filed with the SEC on or before April 30, 2022.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15: Exhibits, Financial Statement Schedules
15(a) (1) Financial Statements: The financial statements filed herewith are set forth on the Index to Consolidated Financial Statements on page of the separate financial section which accompanies this Report, which is incorporated herein by reference.
15(a) (2) Financial Statement Schedules: Financial statement schedules not listed have been omitted because they are either not required, not applicable, or the information has been included elsewhere in the consolidated financial statements or notes thereto.
15(a) (3)
Exhibits: The exhibits listed in the Exhibit Index below are filed as part of this Annual Report on Form 10-K.
Exhibit
Number Description
2.1
Agreement and Plan of Merger dated August 11, 2021, by and among Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, SCI Merger Sub, Inc., and Soluna Callisto Holdings Inc., formerly known as Soluna Computing, Inc. (incorporated by reference from Exhibit 2.1 of the Company’s Form 8-K Report filed August 12, 2021).
3.1
Articles of Incorporation of Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated (incorporated by reference from Exhibit 3.1 of the Company’s Form 10-K Report for the year ended December 31, 2020).
3.2
Articles of Merger filed with the Secretary of State of Nevada (incorporated by reference from Exhibit 3.3 of the Company’s Form 10-K Report for the year ended December 31, 2020).
3.3
Certificate of Merger filed with the Department of State of New York (incorporated by reference from Exhibit 3.4 of the Company’s Form 10-K Report for the year ended December 31, 2020).
3.4
Certificate of Amendment filed with the Secretary of State of Nevada dated June 9, 2021 (incorporated by reference from Exhibit 3.1 of the Company’s Form 8-K Report filed June 15, 2021).
3.5
Certificate of Amendment to Articles of Incorporation filed with the Secretary of State of Nevada on November 2, 2021 (incorporated by reference from Exhibit 3.1 of the Company’s Form 8-K Report filed November 4, 2021).
3.6
Bylaws of the Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, (incorporated by reference from Exhibit 3.2 of the Company’s Form 10-K Report for the year ended December 31, 2020).
4.1
Form of Common Purchase Warrant (incorporated by reference from Exhibit 4.3 of the Company’s Registration Statement on Form S-1/A filed April 12, 2021).
4.2
Form of Underwriters’ Warrant (incorporated by reference from Exhibit 4.4 of the Company’s Registration Statement on Form S-1/A filed April 12, 2021).
4.3
Form of Warrant Agent Agreement between Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, and American Stock Transfer & Trust Company, LLC (incorporated by reference from Exhibit 4.1 of the Company’s Form 8-K Report filed April 29, 2021).
4.4
Certificate of Designations, Preferences and Rights of 9.0% Series A Cumulative Perpetual Preferred Stock filed with the Secretary of State of the State of Nevada on August 18, 2021 (incorporated by reference from Exhibit 4.1 of the Company’s Form 8-A filed August 19, 2021).
4.5
Certificate of Amendment to Certificate of Designations, Preferences and Rights of 9.0% Series A Cumulative Perpetual Preferred Stock, filed with the Secretary of State of the State of Nevada on December 22, 2021 (incorporated by reference from Exhibit 4.1 of the Company’s Form 8-K Report filed December 29, 2021).
4.6
Form of 9.0% Series A Cumulative Perpetual Preferred Stock Certificate (incorporated by reference from Exhibit 4.2 of the Company’s Form 8-K Report filed August 23, 2021).
4.7
Form of Secured Convertible Note issued by the Company pursuant to and in accordance with the Securities Purchase Agreement dated as of October 20, 2021 (incorporated by reference from Exhibit 4.1 of the Company’s Form 8-K Report filed October 25, 2021).
4.8
Form of Class A Common Stock Purchase Warrant issued by the Company pursuant to and in accordance with the Securities Purchase Agreement dated as of October 20, 2021 (incorporated by reference from Exhibit 4.2 of the Company’s Form 8-K Report filed October 25, 2021).
4.9
Form of Class B Common Stock Purchase Warrant issued by the Company pursuant to and in accordance with the Securities Purchase Agreement dated as of October 20, 2021 (incorporated by reference from Exhibit 4.3 of the Company’s Form 8-K Report filed October 25, 2021).
4.10
Form of Class C Common Stock Purchase Warrant issued by the Company pursuant to and in accordance with the Securities Purchase Agreement dated as of October 20, 2021 (incorporated by reference from Exhibit 4.4 of the Company’s Form 8-K Report filed October 25, 2021).
4.11
Form of Representative’s Warrant (incorporated by reference from Exhibit 4.2 of the Company’s Form 8-K Report filed December 29, 2021).
4.12 Form of Class D Common Stock Purchase Warrants.
4.13 Description of Securities.
10.1+
Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, Amended and Restated 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.3 of the Company’s Form 10-K Report for the year ended December 31, 2016).
10.2+
Form of Restricted Stock Agreement Notice for Board of Directors and Employees for Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.2 of the Company’s Form 10-Q Report for the quarter ended June 30, 2012).
10.3+
Form of Incentive Stock Option Notice for Employees for Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.3 of the Company’s Form 10-Q Report for the quarter ended June 30, 2012).
10.4+
Form of Non-Qualified Stock Option Notice for Employees for Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.4 of the Company’s Form 10-Q Report for the quarter ended June 30, 2012).
10.5+
Form of Non-Qualified Stock Option Notice for Board of Directors for Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.5 of the Company’s Form 10-Q Report for the quarter ended June 30, 2012).
10.6+
Form of Restricted Stock Award Agreement under the Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, Amended and Restated 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.8 of the Company’s Registration Statement on Form 10 filed March 4, 2020).
10.7+
Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2014 Equity Incentive Plan (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement on Schedule 14A filed with the Commission on April 25, 2014).
10.8+
Form of Restricted Stock Grant Agreement under the Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2014 Equity Incentive Plan (incorporated by reference from Exhibit 10.10 of the Company’s Registration Statement on Form 10 filed March 4, 2020).
10.9+
Form of Nonstatutory Stock Option Grant Agreement under the Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2014 Equity Incentive Plan (incorporated by reference from Exhibit 4.3 of the Company’s Registration Statement on Form S-8 (File No. 333-196989) filed with the Commission on June 24, 2014).
10.10+
Form of Incentive Stock Option Grant Agreement under the Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2014 Equity Incentive Plan (incorporated by reference from Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (File No. 333-196989) filed with the Commission on June 24, 2014).
10.11+
Amended and Restated Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2021 Stock Incentive Plan (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement on Schedule 14A filed with the Commission on October 7, 2021)
10.12+
Form of Stock Option Agreement under the Amended and Restated Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2021 Stock Incentive Plan
10.13+
Form of Restricted Stock Agreement under the Amended and Restated Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2021 Stock Incentive Plan
10.14+
Form of Restricted Stock Unit Agreement under the Amended and Restated Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, 2021 Stock Incentive Plan
10.15
Lease dated August 10, 1999 between Carl E. Touhey and Soluna Holdings, Inc., formerly known as Mechanical Technology, Inc., (incorporated by reference from Exhibit 10.38 of the Company's Form 10-K Report for the fiscal year ended September 30, 1999).
10.16
Amendment No. 1 to Lease Agreement Between Soluna Holdings, Inc., formerly known as Mechanical Technology Inc., and Carl E. Touhey dated September 29, 2009 (incorporated by reference from Exhibit 10.166 of the Company's Form 10-K Report for the year ended December 31, 2009).
10.17
Amendment No. 2 to Lease Agreement Between MTI Instruments Inc. and Carl E. Touhey dated May 2, 2014 (incorporated by reference from Exhibit 10.1 of the Company's Form 10-Q Report for the quarter ended March 31, 2014).
10.18
Amendment No. 3 to Lease Agreement Between MTI Instruments Inc. and CETF Properties, LLC dated January 1, 2018 (incorporated by reference from Exhibit 10.16 of the Company’s Registration Statement on Form 10 filed September 30, 2020).
10.19
Amendment No. 4 to Lease Agreement Between MTI Instruments Inc. and CETF Properties, LLC dated December 4, 2019 (incorporated by reference from Exhibit 10.17 of the Company’s Registration Statement on Form 10 filed September 30, 2020).
10.20
Amendment No. 5 to Lease Agreement Between MTI Instruments Inc. and CETF Properties, LLC dated June 30, 2021.
10.21#
Contract dated July 1, 2016 between Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, and the U.S. Air Force (incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q Report for the quarter ended June 30, 2016).
10.22
Securities Purchase Agreement dated as of October 21, 2016, by and between Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, and Brookstone Partners Acquisition XXIV, LLC (incorporated by reference from Exhibit 10.22 of the Company’s Form 8-K Report filed October 21, 2016).
10.23
Registration Rights Agreement dated as of October 21, 2016, by and between Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, and Brookstone Partners Acquisition XXIV, LLC (incorporated by reference from Exhibit 10.23 of the Company’s Form 8-K Report filed October 21, 2016).
10.24
Form of Option Exercise and Stock Transfer Restriction Agreement between Soluna Holdings, Inc. and its Chief Executive Officer, Chief Financial Officer and Non-Employee Directors (incorporated by reference from Exhibit 10.24 of the Company’s Form 8-K Report filed October 21, 2016).
10.25
Class A Preferred Share Purchase Agreement dated January 13, 2020, among Harmattan Energy, Ltd., formerly known as Soluna Technologies, Ltd., Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, and the other investors set forth on Exhibit A thereto (incorporated by reference from Exhibit 10.21 of the Company’s Registration Statement on Form 10 filed March 4, 2020).
10.26
Amended and Restated Contingent Rights Agreement dated November 5, 2021, by and between Harmattan Energy, Ltd. and Soluna Holdings, Inc.
10.27
Side Letter Agreement dated January 13, 2020, by and between Harmattan Energy, Ltd., formerly known as Soluna Technologies, Ltd., and Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated (incorporated by reference from Exhibit 10.23 of the Company’s Registration Statement on Form 10 filed March 4, 2020).
10.28
Sale Order dated May 18, 2020, by and between GigaWatt, Inc. and the United States Bankruptcy Court Eastern District of Washington (incorporated by reference from Exhibit 10.32 of the Company’s Registration Statement on Form 10 filed September 30, 2020).
10.29
Intellectual Property Assignment Agreement dated May 20, 2020, by and between Mark D. Waldron, as Chapter 11 Trustee and Soluna Computing, Inc., formerly known as EcoChain, Inc (incorporated by reference from Exhibit 10.35 of the Company’s Registration Statement on Form 10 filed September 30, 2020).
10.30
Assignment of Lease Agreements dated February 4, 2020, by and between, on the one hand, David M. Carlson, Dorrinda M. Carlson, Enterprise Focus, Inc. and, on the other hand, Mark D. Waldron, in his capacity as the Chapter 11 Trustee (incorporated by reference from Exhibit 10.37 of the Company’s Registration Statement on Form 10 filed September 30, 2020).
10.31
Commercial Lease dated August 1, 2018, by and between TNT Business Complexes, LLC and Enterprise Focus, Inc. and Dave Carlson (incorporated by reference from Exhibit 10.38 of the Company’s Registration Statement on Form 10 filed September 30, 2020).
10.32
Commercial Lease dated November 14, 2014, by and between TNT Business Complexes, LLC and Dave Carlson /Enterprise Focus, Inc. (incorporated by reference from Exhibit 10.39 of the Company’s Registration Statement on Form 10 filed September 30, 2020).
10.33
October 21, 2019 Certified Letter Regarding Option to Extend Commercial Lease dated November 14, 2014, by and between TNT Business Complexes, LLC and Dave Carlson /Enterprise Focus, Inc (incorporated by reference from Exhibit 10.40 of the Company’s Registration Statement on Form 10 filed September 30, 2020).
10.34 Amendment of Commercial Lease Agreement dated January 28, 2020, by and between Mark Waldron, as Chapter 11 Trustee and TNT Business Complexes, LLC (incorporated by reference from Exhibit 10.41 of the Company’s Registration Statement on Form 10 filed September 30, 2020).
10.35 Industrial Power Contract dated February 22, 2021, by and between Soluna SW LLC, formerly known as EcoChain Wind, LLC, and a West Kentucky Rural Electric Cooperative Collaboration (incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q Report for the quarter ended June 30, 2021)
10.36 Form of Purchase Agreement dated as of April 11, 2021, by and between Soluna MC LLC, formerly known as EcoChain Block, LLC, and Seller (incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed April 12, 2021).
10.37 Form of Ground Lease Agreement dated as of May 3, 2021, by and between Soluna MC LLC, formerly known as EcoChain Block, LLC, and a power-providing cooperative (incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed May 4, 2021).
10.38 Form of Land Lease Agreement dated as of May 3, 2021, by and between Soluna MC LLC, formerly known as EcoChain Block, LLC, and a power-providing cooperative (incorporated by reference from Exhibit 10.2 of the Company’s Form 8-K Report filed May 4, 2021).
10.39 Form of Power Supply Agreement dated as of May 3, 2021, by and between Soluna MC LLC, formerly known as EcoChain Block, LLC, and a power-providing cooperative (incorporated by reference from Exhibit 10.3 of the Company’s Form 8-K Report filed May 4, 2021).
10.40 Form of Transition Services Agreement dated as of May 3, 2021, by and between Soluna MC LLC, formerly known as EcoChain Block, LLC, and a power-providing cooperative (incorporated by reference from Exhibit 10.4 of the Company’s Form 8-K Report filed May 4, 2021).
10.41 Form of Guaranty of Rent dated as of May 3, 2021, by and between Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, and a power-providing cooperative (incorporated by reference from Exhibit 10.5 of the Company’s Form 8-K Report filed May 4, 2021).
10.42 Termination Agreement dated August 11, 2021, by and among Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, Soluna Computing, Inc., formerly known as EcoChain, Inc., and Harmattan Energy, Ltd. (incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed August 12, 2021).
10.43 Securities Purchase Agreement dated October 20, 2021, by and between Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, and accredited investors (incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed October 25, 2021).
10.44 Registration Rights Agreement dated October 25, 2021, by and between the Company and accredited investors (incorporated by reference from Exhibit 10.2 of the Company’s Form 8-K Report filed October 25, 2021).
10.45
Security Agreement dated October 25, 2021, by and among the Company, MTI Instruments and Soluna Computing, Inc., formerly known as EcoChain, Inc., Soluna MC LLC, formerly known as EcoChain Block LLC, and Soluna SW LLC, formerly known as EcoChain Wind LLC, and Collateral Services LLC (incorporated by reference from Exhibit 10.3 of the Company’s Form 8-K Report filed October 25, 2021).
10.46
Master Equipment Finance Agreement, dated as of December 30, 2021 by and between Soluna MC Borrowing 2021-1 LLC and NYDIG ABL LLC (incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed January 18, 2022).
10.47 Digital Asset Account Control Agreement, effective as of December 30, 2021 by and among Soluna MC Borrowing 2021-1 LLC, NYDIG ABL LLC and NYDIG Trust Company LLC (incorporated by reference from Exhibit 10.2 of the Company’s Form 8-K Report filed January 18, 2022).
10.48 Guaranty Agreement, dated as of December 30, 2021 by Soluna MC LLC, in favor of NYDIG ABL LLC (incorporated by reference from Exhibit 10.3 of the Company’s Form 8-K Report filed January 18, 2022).
10.49 Consent and Waiver Agreement, dated January 13, 2022, by and among the Company and the purchasers signatory to the Securities Purchase Agreement, dated as of October 20, 2021 (incorporated by reference from Exhibit 10.4 of the Company’s Form 8-K Report filed January 18, 2022).
10.50+ Employment Agreement, by and between Soluna Holdings, Inc. and Michael Toporek, dated as of January 14, 2022 (incorporated by reference from Exhibit 10.1 of the Company’s Form 8-K Report filed January 21, 2022).
10.51+
Employment Agreement, by and between MTI Instruments, Inc. and Moshe Binyamin, dated as of January 20, 2022 (incorporated by reference from Exhibit 10.2 of the Company’s Form 8-K Report filed January 21, 2022).
10.52+
Employment Agreement, by and between Soluna Computing, Inc., formerly known as EcoChain, Inc., and John Belizaire, dated as of October 29, 2021.
10.53 Form of Note by and between Soluna Holdings, Inc. and certain institutional lenders.
10.54
Commercial Security Agreement, by and between Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, and KeyBank National Association, dated September 15, 2021.
10.55
Promissory Note, by and between Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, and KeyBank National Association, dated September 15, 2021.
Subsidiaries of Soluna Holdings, Inc.
23.1 Consent of Wojeski & Company CPAs, P.C.
23.2 Consent of UHY LLP.
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
# Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been filed with the Securities and Exchange Commission pursuant to our application for confidential treatment. The items are identified in the exhibit with “**”.
+ Represents management contract or compensation plan or arrangement.