Soluna Holdings, Inc 10-K for FY2021
Soluna Holdings, Inc (SLNH)
About this 10-K
Soluna Holdings, Inc filed this 10-K on March 31, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $14.35M
- up 2310.9% from $595K a year earlier
- Net loss
- $5.26M
- compared with net income of $1.95M a year earlier
- Diluted EPS
- -$0.50
- compared with $0.20 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For
the fiscal year ended | ||
OR
| ||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from _____to _____ | ||
Commission
File Number:
(Exact name of registrant as specified in its charter)
| State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization | Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name
of each exchange on which registered | ||
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
Smaller
reporting company
Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
The
aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2021 (based on the closing
price of $7.50 per share on the Nasdaq Stock Market LLC for that date) was $
As of March 28, 2022, the Registrant had shares of common stock outstanding.
Documents incorporated by reference: Portions of the registrant’s Proxy Statement for its 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
INDEX TO FORM 10-K
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Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including the discussion in this section, contains forward-looking statements that involve risks and uncertainties. Any statements herein that are not statements of historical fact may be forward-looking statements. When we use the words “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” “should,” “could,” “may,” “will,” and similar words or phrases, we are identifying forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding:
| ● | management’s strategy and planned initiatives, including anticipated growth; |
| ● | management’s belief that it will have adequate resources to fund the Company’s operations and capital expenditures for the year ending December 31, 2022 and through at least the end of the first quarter of 2023; |
| ● | future capital expenditures and spending on research and development; |
| ● | our ability to develop and utilize new products and technologies that address the needs of our customers; |
| ● | our realization of income tax benefits in future years; |
| ● | expected funding of future cash expenditures; |
| ● | our expectations with respect to pending legal proceedings; |
| ● | our expected operations and any adverse impacts on our business, operating results and financial condition; |
| ● | failure of our strategic alliances to achieve their objectives or perform as contemplated and the risk of cancellation or early termination of such alliance by either party |
| ● | our expectations regarding increases in certain selling, general and administrative expenses; |
| ● | potential dispositions or acquisitions, including but not limited to, the potential sale of our MTI Instruments business; |
| ● | the expected impact of pending accounting updates; the dependence of our MTI Instruments business on a small number of customers, suppliers and service providers, including but not limited to, our contractual arrangements with the U.S. government; |
| ● | general economic conditions and the uncertainty of the U.S. and global economy, particularly in light of the continuing COVID-19 pandemic, the impact of recent inflation in the U.S. and the impacts of the pandemic, and the foreign and domestic government sanctions imposed on Russia as a result of its recent invasion of Ukraine; |
| ● | anticipated cryptocurrency mining facility plans and operations; and |
| ● | fluctuating valuations of cryptocurrency. |
Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements and we assume no obligation to update any forward-looking statements contained in this registration statement. Thus, assumptions should not be made that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.
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PART I
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.
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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.
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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.
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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.
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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.
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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.
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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. |
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| ● | 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. |
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| ● | 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. |
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
Item 1B: Unresolved Staff Comments
Not applicable.
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.
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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.
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.
Item 4: Mine Safety Disclosures
Not applicable.
PART II
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.
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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.
Item 6: Selected Financial Data
Not applicable.
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.
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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 | 617 | |||
| 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, 2021 |
Year Ended December 31, 2020 |
$ Change |
% Change | ||||||||||||
| Cryptocurrency mining revenue | $ | 10,932 | $ | 595 | $ | 10,337 | 1,737 | % | ||||||||
| Data hosting revenue | $ | 3,413 | $ | — | $ | 3,413 | 100 | % | ||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of cryptocurrency mining revenue | $ | 5,626 | $ | 405 | $ | 5,221 | 1,289 | % | ||||||||
| Cost of data hosting revenue | $ | 2,444 | $ | — | $ | 2,444 | 100 | % | ||||||||
| Selling, general and administrative expenses | $ | 10,751 | $ | 1,832 | $ | 8,919 | 487 | % | ||||||||
| Operating (loss) income | $ | (4,476 | ) | $ | (1,642 | ) | $ | (2,834 | ) | 173 | % | |||||
| Other income, net | $ | 11 | $ | 100 | $ | (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 | ) | $ | 332 | $ | (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 | $ | 40 | $ | 60 | $ | (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.
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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.
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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.
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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) | 44 | (332 | ) | |||||
| Depreciation and amortization | 3,703 | 81 | ||||||
| EBITDA | (777 | ) | (1,477 | ) | ||||
| Adjustments | ||||||||
| Non-cash/ non-recurring items | ||||||||
| Stock-based compensation costs | 1,941 | 40 | ||||||
| Exchange registration expenses | 293 | — | ||||||
| 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) | 2021 | 2020 | ||||||
| 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 | 917 | 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.
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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.
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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.
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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.
39
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.
40
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8: Financial Statements and Supplementary Data
The Company’s Consolidated Financial Statements begin on page F-1 and are incorporated in this Item 8 by reference.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
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.
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(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.
Item 9B: Other Information
Not applicable
Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not
applicable
42
PART III
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.
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.
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.
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.
43
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.
44
PART IV
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 F-1 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 |
|
| 3.1 |
|
| 3.2 |
|
| 3.3 |
|
| 3.4 |
|
| 3.5 |
|
| 3.6 |
|
| 4.1 |
|
| 4.2 |
|
| 4.3 |
|
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| 4.4 |
|
| 4.5 |
|
| 4.6 |
|
| 4.7 |
|
| 4.8 |
|
| 4.9 |
|
| 4.10 |
|
| 4.11 |
|
| 4.12 | Form of Class D Common Stock Purchase Warrants. |
| 4.13 | Description of Securities. |
| 10.1+ |
|
| 10.2+ |
|
| 10.3+ |
|
| 10.4+ |
|
| 10.5+ |
|
46
| 10.6+ |
|
| 10.7+ |
|
| 10.8+ |
|
| 10.9+ |
|
| 10.10+ |
|
| 10.11+ |
|
| 10.12+ |
|
| 10.13+ |
|
| 10.14+ |
|
| 10.15 |
|
| 10.16 |
|
| 10.17 |
|
| 10.18 |
|
47
| 10.19 |
|
| 10.20 |
|
| 10.21# |
|
| 10.22 |
|
| 10.23 |
|
| 10.24 |
|
| 10.25 |
|
| 10.26 |
|
| 10.27 |
|
| 10.28 |
|
| 10.29 |
|
| 10.30 |
|
| 10.31 |
|
48
49
50
| 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.
51
Item 16: Form 10-K Summary
None.
52
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SOLUNA HOLDINGS, INC. | ||
| Date: March 31, 2022 | By: | /s/ Michael Toporek |
| Michael Toporek | ||
Chief Executive Officer | ||
| Date: March 31, 2022 | By: | /s/ Jessica L. Thomas |
| Jessica L. Thomas | ||
| Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| /s/ Michael Toporek | Chief Executive Officer, Director |
|
| Michael Toporek | (Principal Executive Officer) | March 31, 2022 |
| /s/ Jessica L. Thomas | Chief Financial Officer |
|
| Jessica L. Thomas | (Principal Financial and Accounting Officer) | March 31, 2022 |
| /s/ William Phelan | Chairman | |
| William Phelan | March 31, 2022 | |
| /s/ Edward R. Hirshfield | Director | |
| Edward R. Hirshfield | March 31, 2022 | |
| /s/ Matthew E. Lipman | Director | |
| Matthew E. Lipman | March 31, 2022 | |
| /s/ Thomas J. Marusak | Director | |
| Thomas J. Marusak | March 31, 2022 | |
| /s/ David C. Michaels | Director | |
| David C. Michaels | March 31, 2022 | |
| /s/ William Hazelip | Director | |
| William Hazelip | March 31, 2022 | |
| /s/ Alykhan Madhavji | Director | |
| Alykhan Madhavji | March 31, 2022 | |
| /s/ John Belizaire | Director | |
| John Belizaire | March 31, 2022 | |
| /s/ John Bottomley | Director | |
| John Bottomley | March 31, 2022 |
53
SOLUNA HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Soluna Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Soluna Holdings, Inc. and Subsidiaries (the Company) as of December 31, 2021, and the related consolidated statements of operations, changes in equity, and cash flows for the year then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Accounting for Asset Acquisition
Description of the Matter
As discussed in Note 5 to the financial statements, the Company completed its acquisition of Soluna Callisto during 2021 for merger consideration of approximately $33.0 million, including contingent consideration measured at $33.0 million and treated as equity. This transaction was accounted for as an asset acquisition.
We identified the assessment of the accounting for the Soluna Callisto transaction as a critical audit matter because interpretation and application of the relevant accounting literature required significant auditor judgment. Specifically, the accounting for the transaction as an asset acquisition versus business combination, and the accounting for the particular terms of contingent consideration and their impact on the classification. Furthermore, auditing the Company's accounting for its acquisition of Soluna Callisto was complex due to its identification and valuation of acquired assets as well as the significant estimates required in its estimate of the fair value of contingent consideration, which comprises the cost of the identified strategic pipeline contract intangible asset of $36.5 million, including direct transaction costs. The determination of the contingent consideration’s fair value required management to make significant judgments, including the appropriateness of the valuation model and the reasonableness of estimates and assumptions included in the forecasts of future MegaWatt targets and the Company’s share price. Changes in these estimates and assumptions could have a significant impact on the fair value of the contingent consideration. Auditing these elements involved especially challenging auditor judgment due to the subjectivity and the nature and extent of audit effort required to address the matter, including the extent of specialized skills or knowledge needed.
The significant estimation was primarily due to sensitivity of the fair value to underlying assumptions about future MegaWatt targets and the Company’s volatile share price used in the Company’s valuation model used to measure the contingent consideration, which is the basis for strategic pipeline contract intangible asset. These significant assumptions included the likelihood of various scenarios, the change in the Company share price and estimated volatility, and the discount rate.
How We Addressed the Matter in Our Audit
We gained an understanding of certain internal controls over the Company’s process to account for the SCI transaction, including controls related to the Company’s accounting considerations for asset purchases versus business combinations, and the contingent consideration. For example, we gained an understanding of controls over the estimation process supporting the recognition and measurement of the strategic pipeline contract intangible asset, which included controls over management’s review of assumptions used in its contingent consideration valuation model.
We assessed the accounting treatment of the Soluna Callisto transaction through:
| ● | evaluating the Company’s accounting memoranda and other documentation, including application of the relevant accounting guidance; |
| ● | comparing the underlying terms of the relevant documents and agreements to the Company’s accounting memoranda; and |
| ● | independently interpreting and applying the accounting literature to the transaction, considering alternative accounting treatments and evaluating the relative merits of the possible alternatives. |
To test the estimated fair value of the contingent consideration, we performed audit procedures that included, among others, evaluating the valuation methodology and the significant assumptions used by the Company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the estimated fair value. We utilized our firm’s valuation specialists to assist with the evaluation of the methodology used by management and significant assumptions included in the fair value estimate, including testing the likelihood of various scenarios, the growth rate of the Company share price and estimated volatility, and the discount rate. For example, we compared the significant assumptions to current industry, market and economic trends, to assumptions used to value similar assets in other acquisitions, to the historical results of the acquired assets, and to the Company’s budgets and forecasts. We performed a sensitivity analysis over these assumptions. We also evaluated the adequacy of the Company’s disclosures included in Note 5 and Note 15 in relation to this transaction.
Assessment of the measurement of fair value of the Warrants
Description of the Matter
As discussed in Note 9 to the financial statements, the Company entered into a securities purchase agreement for an aggregate financing of $15.0 million with certain accredited investors by issuing secured convertible notes of $16.3 million and Class A, B, and C common stock purchase warrants (the “Warrants”). The fair value of the Warrants, as of the issuance date, was $7.0 million and is recorded as equity with the offset recorded as debt discount against the net proceeds. The Company uses option pricing models to estimate the fair value of the Warrants using various market-based inputs.
We identified the assessment of the measurement of fair value of the Warrants as a critical audit matter. Specifically, there was a high degree of subjectivity and judgment in evaluating the determination of the expected volatility inputs used in the option pricing models for the Warrants. Historical, implied, and peer group volatility levels provide a range of possible expected volatility inputs and the fair value estimates for the Warrants are sensitive to the expected volatility inputs.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included gaining an understanding of certain internal controls over the Company’s process to measure the fair value of the Warrants. This included controls related to the evaluation of observable market information used in the determination of the expected volatility inputs. We also involved our firm’s valuation professionals with specialized skills and knowledge, who assisted in:
| ● | evaluating the expected volatility inputs by comparing them against a volatility range that was independently developed in consideration of historical, implied, and peer group volatility information; and |
| ● | developing an estimate of the Warrants’ fair value using the independently developed volatility range and comparing it to the value calculated by the Company. |
Realizability of deferred tax assets
Description of the Matter
As described in Note 7 to the financial statements, the Company's deferred tax asset balance was approximately $469,000, net of valuation allowances as of December 31, 2021. The ultimate realization of deferred tax assets is dependent upon generating sufficient future taxable income during the periods in which the temporary differences become deductible or before net operating loss and tax credit carryforwards expire. The Company records a valuation allowance to reduce deferred tax assets to an amount that is "more likely than not" to be realized. Evaluating the need for and quantifying the valuation allowance often requires significant judgment and extensive analysis of all the weighted positive and negative evidence available to the Company in order to determine whether all or some portion of the deferred tax assets will not be realized. In performing this analysis, the Company's forecasted income, and the existence of potential prudent and feasible tax planning strategies that would enable the Company to utilize some or all of its deferred tax assets, are taken into consideration.
We identified the evaluation of the Company’s assessment on the realizability of the deferred tax assets is a critical audit matter due to the significant judgment used by management when evaluating the estimates and assumptions used in the projection of future taxable income. This led to a high degree of auditor judgment and subjectivity in performing procedures on management's assessment of the tax planning strategies to enable utilization of deferred tax assets. The evaluation of audit evidence available to support the realizability of tax loss and tax credit carryforwards was complex and subjective, and therefore required significant auditor judgment.
How We Addressed the Matter in Our Audit
We gained an understanding of certain internal controls over the Company’s tax provision process, including controls related to the interpretation of tax law, its application in the liability estimation process, and the review of activity that could result in changes to the Company’s deferred tax assets. Since tax law is complex and often subject to interpretations, we involved our firm’s tax professionals with specialized skills and knowledge, who assisted in:
| ● | evaluating the reasonableness of management's assessment of tax planning strategies and the amount that is "more likely than not" to be realized; |
| ● | testing the completeness and accuracy of tax loss and tax credit carryforwards; |
| ● | evaluating the appropriateness of the realizability of net operating loss and credit carryforwards relevant to the deferred tax assets recognized; and |
| ● | evaluating the completeness, accuracy and sufficiency of disclosures. |
/s/
We have served as the Company’s auditor since 2021.
March 31, 2022
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Mechanical Technology, Incorporated and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mechanical Technology, Incorporated and Subsidiaries (the Company) as of December, 2020 and 2019, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Realizability of the deferred tax assets
As described in Note 6 to the financial statements, the Company’s deferred tax asset balance was $759 thousand net of valuation allowances as of December 31, 2020. The ultimate realization of deferred tax assets depends upon generating sufficient future taxable income during the periods in which the temporary differences become deductible or before net operating loss and tax credit carryforwards expire. The Company records a valuation allowance to reduce deferred tax assets to an amount that is “more likely than not” to be realized. Evaluating the need for and quantifying the valuation allowance often requires significant judgment and extensive analysis of all the weighted positive and negative evidence available to the Company in order to determine whether all or some portion of the deferred tax assets will not be realized. In performing this analysis, the Company’s forecasted income, and the existence of potential prudent and feasible tax planning strategies that would enable the Company to utilize some or all of its deferred tax assets, are taken into consideration.
The principal considerations for our determination that performing procedures relating to the realizability of the deferred tax assets is a critical audit matter is due to the significant judgment used by management when evaluating the estimates and assumptions used in the projection of future taxable income. This led to a high degree of auditor judgment and subjectivity in performing procedures on management’s assessment of the tax planning strategies to enable utilization of deferred tax assets. The evaluation of audit evidence available to support the realizability of tax loss and tax credit carryforwards was complex and subjective, and therefore required significant auditor judgment.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others, (i) evaluating the reasonableness of management’s assessment of tax planning strategies and the amount that is “more likely than not” to be realized, (ii) testing the completeness and accuracy of tax loss and tax credit carryforwards, (iii) evaluating the appropriateness of the realizability of net operating loss and credit carryforwards relevant to the deferred tax assets recognized, and (iv) evaluating the completeness, accuracy and sufficiency of disclosures.
/s/ Wojeski & Company, CPAs, P.C.
We have served as the Company’s auditor since 2018.
Albany, New York
March 30, 2021
F - 3
Soluna Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2021 and December 31, 2020
| (Dollars in thousands, except per share) | ||||||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Deposits on equipment | ||||||||
| Current assets associated with discontinued operations | ||||||||
| Total Current Assets | ||||||||
| Other assets | ||||||||
| Deferred tax asset, net | ||||||||
| Equity investment | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Long-term assets associated with discontinued operations | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Line of credit | ||||||||
| Notes payable | ||||||||
| Deferred revenue | ||||||||
| Operating lease liability | ||||||||
| Income taxes payable | ||||||||
| Current liabilities associated with discontinued operations | ||||||||
| Total Current Liabilities | ||||||||
| Other liabilities | ||||||||
| Operating lease liability | ||||||||
| Deferred tax liability, net | ||||||||
| Long-term liabilities associated with discontinued operations | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| 9.0%
Series A Cumulative Perpetual Preferred Stock, par value $ per share, $ | ||||||||
| Common stock, par value $ per share, authorized ; issued and outstanding as of December 31, 2021 and issued and outstanding as of December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Common stock in treasury, at cost, shares in both 2021 and 2020 | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
Soluna Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2021 and 2020
| (Dollars in thousands, except per share) | ||||||||
| Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cryptocurrency mining revenue | $ | $ | ||||||
| Data hosting revenue | ||||||||
| Total revenue | ||||||||
| Operating costs and expenses: | ||||||||
| Cost of cryptocurrency mining revenue | ||||||||
| Cost of data hosting revenue | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ||||||
| Other income, net | ||||||||
| Loss before income taxes from continuing operations | ( | ) | ( | ) | ||||
| Income tax (expense) benefit from continuing operations | ( | ) | ||||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Income before income taxes from discontinued operations | ||||||||
| Income tax benefit from discontinued operations | ||||||||
| Net income from discontinued operations | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Basic (loss) earnings
per common share: | ||||||||
| Net loss from continuing operations per share (Basic) | $ | ( | ) | $ | ( | ) | ||
| Net Income from discontinued operations per share (Basic) | $ | $ | ||||||
| Basic (loss) earnings per share | $ | ( | ) | $ | ||||
| Diluted (loss) earnings
per common share: | ||||||||
| Net loss from continuing operations per share (Diluted) | $ | ( | ) | $ | ( | ) | ||
| Net Income from discontinued operations per share (Diluted) | $ | $ | ||||||
| Diluted (loss) earnings per share | $ | ( | ) | $ | ||||
| Weighted average shares outstanding (Basic & Diluted) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
Soluna
Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2021 and 2020
(Dollars in thousands, except per share)
| Preferred Stock | Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional
Paid-in Capital | Accumulated
Deficit | Shares | Amount | Total
Stockholders’ Equity | ||||||||||||||||||||||||||||
| December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of shares – option exercises | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of shares – restricted stock | — | ( | ) | — | ||||||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||
| Preferred dividends | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of shares – preferred offering | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of shares – stock offering | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of shares – option exercises | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of shares – warrant exercises | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of shares- Notes conversion | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of shares- termination shares | — | — | ||||||||||||||||||||||||||||||||||
| Warrants issued in relation to debt financing | — | — | — | |||||||||||||||||||||||||||||||||
| Share consideration of asset acquisition | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of shares – restricted stock | — | — | ||||||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
Soluna
Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2021 and 2020
| (Dollars in thousands) | Year Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Operating Activities | ||||||||
| Net loss- continuing operations | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock based compensation | ||||||||
| Consultant stock compensation | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Amortization of operating lease asset | ||||||||
| Amortization on deferred financing costs and discount on notes | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other long-term assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Deferred revenue | ||||||||
| Income taxes and uncertain tax positions | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Other liabilities | ||||||||
| Accrued liabilities | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Net cash provided by operating activities- discontinued operations | ||||||||
| Investing Activities | ||||||||
| Purchases of equipment | ( | ) | ( | ) | ||||
| Purchases of intangible assets | ( | ) | ||||||
| Deposits of equipment, net | ( | ) | ( | ) | ||||
| Purchase of stock in equity investment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Net cash used in investing activities- discontinued operations | ( | ) | ( | ) | ||||
| Financing Activities | ||||||||
| Proceeds from equity offering | ||||||||
| Proceeds from preferred offering | ||||||||
| Proceeds from notes issuance | ||||||||
| Costs of equity offering | ( | ) | ||||||
| Costs of preferred offering | ( | ) | ||||||
| Costs of notes issuance | ( | ) | ||||||
| Cash dividends on preferred stock | ( | ) | ||||||
| Borrowings under line of credit | ||||||||
| Proceeds from stock option exercises | ||||||||
| Proceeds from common stock warrant exercises | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase (decrease) in cash-continuing operations | ( | ) | ||||||
| Increase in cash- discontinued operations | ||||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Purchase of miner equipment using restricted stock | ( | ) | ||||||
| Termination shares issued in conjunction with merger for intangible assets | ||||||||
| S-3 fees in accounts payable | ( | ) | ||||||
| Warrants exercised prior to year-end not received until subsequent period | ||||||||
| Share consideration in relation to strategic pipeline contract | ||||||||
| Deferred tax liability in relation to strategic pipeline contract | 10,934 | — | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F - 7
Notes to Consolidated Financial Statements
1. | Nature of Operations |
Description of Business
Unless the context requires otherwise in these notes to the consolidated financial statements, 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..
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 consolidated financial statements as of December 31, 2021 and prior periods and until it is sold, we will continue to operate the MTI Instruments business.
On
April 29, 2021, the Company closed a public securities offering (the “April Offering”), pursuant to which the Company
issued and sold shares of the Company’s common stock and warrants to purchase up to shares of common stock
for gross proceeds of approximately $
F - 8
On May 4, 2021, Soluna MC LLC , formally EcoChain Block, LLC, (“Soluna MC”), a wholly owned subsidiary of SCI, executed a ground lease with a power-providing cooperative with respect to an existing building and certain surrounding land (the “Building Lease”), and a 25-year ground lease with the same landlord with respect to certain vacant land adjacent thereto, both located in the Southeastern United States (the “Vacant Land Lease”, and together with the Building Lease, the “Ground Leases”). In addition, Soluna MC and the landlord entered into a Power Supply Agreement (the “Power Supply Agreement”) whereby the landlord has agreed to supply power to the building leased under the Building Lease (the “Building Lease Premises”) and to the premises leased under the Vacant Land Lease (the “Vacant Land Premises”), some of which power, under certain circumstances, may be terminated by the landlord, on at least 6 months prior notice, any time after 12 months after the Building Commencement Date (as hereafter defined), in which case the landlord is required to reimburse Soluna MC for all of its construction costs, subject to certain exceptions, relating to buildings and other improvements developed by Soluna MC on the Vacant Land Premises. As of December 31, 2021, this lease has not commenced.
Soluna
MC has agreed to pay rent to the landlord of
$
The Company is required to issue to the landlord shares of the Company’s common stock, in connection with the Vacant Land Lease, upon the effective date of the Vacant Land Lease, which may not occur prior to the Building Commencement Date. In addition, Soluna MC and the landlord have entered into a memorandum of understanding providing Soluna MC with a six-month exclusivity period to expand the Vacant Land Premises, including obtaining additional power, in connection therewith. Soluna MC and the landlord have not agreed on any of the terms of such expansion other than the exclusivity period previously described. Soluna MC and the landlord have also entered into a transition services agreement (the “Transition Services Agreement”) by which the landlord will provide certain transition services to Soluna MC at a fee to be mutually agreed by the landlord and Soluna MC. The Transition Services Agreement also requires the landlord to pay Soluna MC an amount approximately equal to the landlord’s net profits received from the landlord’s other tenants operating out of the Building Lease Premises.
On
August 23, 2021, the Company issued and sold pursuant to a firm commitment public offering (the “August Preferred Offering”)
720,000 shares of a new series of the Company’s preferred shares known as the
On
December 28, 2021,
F - 9
Liquidity
The Company has historically incurred significant losses
primarily due to our past efforts to fund direct methanol fuel cell product development and commercialization programs and had
a consolidated accumulated deficit of approximately $ million as of December 31, 2021. As of December 31, 2021, the Company
had working capital of approximately $
During the year ended December 31,
2021, the Company paid approximately $
The COVID-19 global pandemic has been unprecedented and unpredictable and our impact is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Although the Company has experienced some minor changes to its miner shipments due to disruptions in the global supply chain, the Company however does not expect any material impact on its long-term strategic plans, our operations, or our liquidity due to the impacts of COVID-19. However, the Company is actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and the industry.
| 2. | Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, SCI and MTI Instruments. All intercompany balances and transactions are eliminated in consolidation.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations or net assets. The reclassifications relate to the presentation of discontinued operations.
Use of Estimates
The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Inventories
The Company notes that Inventory is included in Current assets associated with discontinued operations. Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. The Company periodically reviews inventory quantities on hand and records a provision for excess, slow moving and obsolete inventory based primarily on our estimated forecast of product demand, as well as based on historical usage. The Company also provides estimated inventory allowances for inventory whose carrying value is in excess of net realizable value. Demand and usage for products and materials can fluctuate significantly. A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. Although the Company makes every effort to assure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and our reported operating results. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, the Company would increase our reserve in the period in which we made such a determination and record a charge to cost of product revenue.
F - 10
Property, Plant, and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives as follows:
Schedule of Useful Lives
| Leasehold improvements | |
| Computers and related software | to years |
| Cryptocurrency miners | years |
| Machinery and equipment | to years |
| Office furniture, equipment and fixtures | to years |
| Buildings | - years |
| Purchased modular buildings | - years |
Significant additions or improvements extending assets’ useful lives are capitalized; normal maintenance and repair costs are expensed as incurred. The costs of fully depreciated assets remaining in use are included in the respective asset and accumulated depreciation accounts. When items are sold or retired, related gains or losses are included in net (loss) income.
Intangible assets
Intangible assets include the Strategic Pipeline Contract with an estimated useful life of years, assembled workforce of individuals included as part of the asset acquisition with an estimated useful life of years and patents with an estimated useful life of - years. The Company amortizes the intangible assets over their estimated useful lives on a straight-line basis. The Company does not recognize internally developed patents as intangible assets, however legal costs associated with defending such patents are capitalized as long-lived assets.
Income Taxes
The Company is subject to income taxes in the U.S. (federal and state). As part of the process of preparing our consolidated financial statements, the Company calculates income taxes for each of the jurisdictions in which the Company operates. 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. A valuation allowance has been established to reduce deferred tax assets, if it is more likely than not that all, or some portion, of such deferred tax assets 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 the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the Company’s net deferred tax assets. The Company considers all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income amongst other items in determining the Company’s valuation allowance. In addition, the Company’s assessment requires the Company 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.
The Company accounts for taxes in accordance with the asset and liability method of accounting for income taxes. Under this method, the Company 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 the Company’s reassessment of its tax positions for these standards did not have a material impact on its results of operations, financial condition, or liquidity.
The Company is 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 the Company’s operating results or cash flows in the period or periods in which such developments occur, as well as for prior and in subsequent periods.
F - 11
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 the Company’s 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. The Company’s effective tax rates could be affected by numerous factors, such as intercompany transactions, earnings being lower than anticipated in jurisdictions where the Company has lower statutory rates and higher than anticipated in jurisdictions where the Company has higher statutory rates, the applicability of special tax regimes, losses incurred in jurisdictions for which the Company is not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies, changes to its existing businesses and operations, acquisitions and investments and how they are financed, changes in the Company’s stock price, changes in its deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations.
Equity Investment – HEL
The
Company owns approximately
Equity Investments without Readily Determinable Fair Values
Our equity investment in HEL is accounted for under the measurement alternative. Equity securities measured and recorded using the measurement alternative are recorded at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Adjustments resulting from impairments and observable price changes are recorded in the income statement. There was no impairment of investment recognized in 2021 and 2020.
Equity Method Investments
The Company’s consolidated net income will include our proportionate share, if any, of the net income or loss of our equity method investee. When the Company records its proportionate share of net income, it increases equity income (loss), net in our consolidated statements of operations and our carrying value in that investment. Conversely, when the Company records its proportionate share of a net loss, it decreases equity income (loss), net in our consolidated statements of operations and our carrying value in that investment. When the Company’s carrying value in an equity method investee company has been reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
As
of December 31, 2021, the Company owned approximately
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. |
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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.
On October 25, 2021, pursuant to a securities purchase agreement dated October 20, 2021 (the “SPA), the Company issued to certain accredited investors Class A, Class B and Class C common stock purchase warrants (collectively, the “Warrants”) to purchase up to an aggregate of shares of common stock (the “Warrant Shares”), at an exercise price $, $ and $ per share, respectively. 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.
The fair value of the Warrants was determined to be $per Class A Warrant, $per Class B warrant, and $ per Class C warrant as of the valuation date, using Monte Carlo simulations and certain Level 3 inputs. Inherent in a Monte Carlo simulation are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock warrants based on implied volatility from its traded warrants and historical volatility of select peers’ common stock with a similar expected term of the Warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield on the grant date with a maturity similar to the expected remaining term of the warrants. The expected term of the Warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company expects to remain at zero.
The following table provides quantitative information regarding the inputs to the fair value measurement of the Warrants as of the valuation date:
| Input | 2021 | |||
| Risk-free interest rate | % | |||
| Expected term (years) | ||||
| Expected volatility | % | |||
Consistent
with the guidance in purchase accounting, the value of the pipeline of certain cryptocurrency mining projects previously owned
by HEL acquired in the Soluna Callisto acquisition in October 2021 as of the acquisition date was estimated using an expected
value approach, which probability-weights various future outcomes and uses certain Level 3 inputs. Including in those inputs are
the following key assumptions: expected growth in share price at a risk-free rate in the risk-neutral framework based on U.S.
Treasury Rates as of the valuation date, volatility of share price based on historical equity volatilities of comparable companies
over a lookback period, and assessment associated with qualified projects based on assessment on timing of payments and assessment
of active megawatt scenarios and the associated probabilities. The resulting amounts are then discounted to present value through
use of a discount rate that considers, among other things, the risk of the payments, credit risk of the Company, and overall weighted
average cost of capital of the acquired business. The resulting calculations resulted in an estimated fair value of the acquired
assets and consideration paid in common stock of approximately $
Revenue Recognition
Cryptocurrency Mining Revenue
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principles of the revenue standard is that a company should recognize revenue to depict the transfer of promised good or services to customers in an amount that reflects the consideration to which the company expects to be entitled for those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify the contract with the customer
● Step 2: Identify the performance obligations in the contract
● Step 3: Determine the transaction price
● Step 4: Allocate the transaction price to the performance obligations in the contract
● Step 5: Recognize revenue when the Company satisfies a performance obligation
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In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
● Variable consideration
● Constraining estimates of variable consideration
● The existence of a significant financing component in the contract
● Noncash consideration
● Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as “solving a block”) is an output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency where the Company is registered at the time of receipt. The mined cryptocurrency is immediately paid to the Coinbase wallet. Cryptocurrency is converted to U.S. dollars daily, as SCI is not in the business of accumulating cryptocurrency on its balance sheet.
Data center hosting
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. 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 respective 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.
Deferred revenue is primarily from advance monthly payments received and revenue is recognized when service is completed.
Product Revenue
The Company notes that product revenue is included within Net income from discontinued operations for the year ended December 31, 2021 and 2020. Product revenue consists of revenue recognized from MTI Instruments’ product lines. In general, the Company determines revenue recognition by: (1) identifying the contract, or contracts, with the customer; (2) identifying the performance obligations in the contract; (3) determining the contract price; (4) allocating the transaction price to performance obligations in the contract; and (5) recognizing revenue when, or as, the performance obligations are satisfied by transferring the promised goods or services. Based on past experience, the Company reasonably estimates its returns and warranty reserves. Revenue is presented net of discounts and allowances, which are determined when the sale is negotiated. The nature of the Company’s contracts do not give rise to variable consideration. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.
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If the product requires that the Company provide installation, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance criteria, such as on-site customer acceptance and/or acceptance after install, then revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions is satisfied. The Company may also record unearned revenues, which include payments for other offerings for which we have been paid in advance. The resulting revenue would be earned when we transfer control of the product or service. As of December 31, 2021 and December 31, 2020 the Company had no deferred or unearned revenue.
MTI Instruments currently has distributor agreements in place for the international sale of general instrument and semiconductor products in certain global regions. Such agreements grant a distributor the right of first refusal to act as distributor for such products in the distributor’s territory. In return, the distributor agrees to not market other products which are considered by MTI Instruments to be in direct competition with MTI Instruments’ products. The distributor is allowed to purchase MTI Instruments’ equipment at a price which is discounted off the published domestic/international list prices. Such list prices can be adjusted by MTI Instruments during the term of the distributor agreement. Generally, payment terms with the distributor are standard net 30 days; however, on occasion, extended payment terms have been granted. Title and risk of loss of the product passes to the distributor upon delivery to the independent carrier (standard “free-on-board” factory), and the distributor is responsible for any required training and/or service with the end-user. The sale (and subsequent payment) between MTI Instruments and the distributor is not contingent upon the successful resale of the product by the distributor. Distributor sales are covered by MTI Instruments’ standard one-year warranty and there are no special return policies for distributors.
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Shipping and handling charges billed to customers is a pass-through from the freight forwarder and is included in product revenue.
Cost of Cryptocurrency Mining and Data Center Hosting Revenue
Cost of cryptocurrency mining and data center hosting revenue includes direct utility costs as well as overhead costs that relate to the operations of SCI’s cryptocurrency mining facility.
Cost of Product Revenue
Cost of product revenue includes material, labor, overhead and shipping and handling costs.
Accounts Receivable and Allowance for Doubtful Accounts
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 the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience and current exposures identified. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers. The Company’s allowance for doubtful accounts was $0 at both December 31, 2021 and December 31, 2020.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 20 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from its customers.
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer, if the Company expects the benefit of those costs to be longer than one year. As of December 31, 2021 and December 31, 2020, the Company has recorded no capitalized costs to obtain a contract.
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Deposits on Equipment
As
of December 31, 2021 and 2020, the Company had approximately $
Warranty
The
Company notes that warranty liability is included in current liabilities associated with discontinued operations for the year ended December 31, 2021
and 2020. The Company accrues a warranty liability at the time product revenue is recorded based on historical experience. The
liability is reviewed during the year and is adjusted, if appropriate, to reflect new product offerings or changes in experience.
Actual warranty claims are tracked by product line. Warranty liability was $
Long-Lived Assets
The Company accounts for impairment or disposal of long-lived assets in accordance with accounting standards that address the financial accounting and reporting for the impairment or disposal of long-lived assets, specify how impairment will be measured, and how impaired assets will be classified in the consolidated financial statements. On a quarterly basis, the Company analyzes the status of its long-lived assets at each subsidiary for potential impairment. As of December 31, 2021, the Company does not believe that any of its long-lived assets have suffered any type of impairment that would require an adjustment to that asset’s recorded value.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of less than three months.
The Company computes basic income (loss) per common share by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted income (loss) per share reflects the potential dilution, if any, computed by dividing income (loss) by the combination of dilutive common share equivalents, comprised of shares issuable under outstanding investment rights, warrants and the Company’s share-based compensation plans, and the weighted average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money stock options, which are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of a stock option and the amount of compensation cost, if any, for future service that the Company has not yet recognized are assumed to be used to repurchase shares in the current period.
Share-Based Payments
The Company grants options to purchase our common stock and awards restricted stock to our employees and directors under our equity incentive plans. The benefits provided under these plans are share-based payments and the Company accounts 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. The Company measures stock-based compensation cost at grant date based on the estimated fair value of the award and recognizes 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. The Company estimates the fair value of stock-based awards on the grant date using a Black- Scholes valuation model. The Company uses the fair value method of accounting, 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. Under the modified prospective application, prior periods are not revised for comparative purposes. Stock-based compensation expense is recorded in the lines titled “Cost of revenue,” and “Selling, general and administrative expenses” in the Consolidated Statements of Operations based on the employees’ respective functions.
The Company records deferred tax assets for awards that potentially can result in deductions on the Company’s income tax returns based on the amount of expense that is recognized and the Company’s statutory tax rate. All income tax effects of awards, including excess tax benefits, recognized on stock-based compensation expense are reflected in the Consolidated Statements of Operations as a component of the provision for income taxes on a prospective basis.
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The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s 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, the Company uses the historical volatility of its 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.
The fair value of restricted stock awards is based on the market close price per share on the grant date. The Company expenses the compensation cost of these awards as the restriction period lapses, which is typically a one- to three-year service period to the Company. The shares represented by restricted stock awards are outstanding at the grant date, and the recipients are entitled to voting rights with respect to such shares upon issuance.
Notes payable
The Company records notes payable net of any discount or premiums. Discounts and premiums are amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.
Concentration of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents and trade accounts receivable. The Company’s trade accounts receivable are from data hosting revenue with the Company’s two customers. The Company does not require collateral and has not historically experienced significant credit losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.
From time to time, the Company’s cash account balances exceed the balances as covered by the Federal Deposit Insurance System. The Company has never suffered a loss due to such excess balances.
Research and Development Costs
Research and development costs entirely related to the MTI Instruments business and as such was included within Net income from discontinued operations. The Company expenses research and development costs as incurred. The Company incurred research and development costs of approximately $1.5 million and $1.5 million for the years ended December 31, 2021 and 2020, respectively.
Advertising Costs
Advertising costs entirely related to the MTI Instruments business and as such was included within Net income from discontinued operations . The Company expenses advertising costs as incurred. The Company incurred advertising costs of approximately $66 thousand and $39 thousand, for the years ended December 31, 2021 and 2020, respectively.
Other Comprehensive Income
The Company had no other comprehensive income items for the years ended December 31, 2021 and 2020.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liability on our consolidated balance sheets. The Company did not have any finance leases as of December 31, 2021 or December 31, 2020.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The Company’s lease terms may include options to extend or terminate its leases when it is reasonably certain that the Company will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
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The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, the Company accounts for lease components together with non-lease components (e.g. common-area maintenance).
Accounting Updates Not Yet Effective
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standard updates (“ASUs”) to the FASB’s Accounting Standards Codification (ASC). The Company considered the applicability and impact of all ASUs. ASUs not mentioned below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
In June 2016, the FASB issued ASU 2016-13 (Financial Instruments - Credit Losses (Topic 326)) and its subsequent amendments to the initial guidance within ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2020-02, respectively (collectively, Topic 326). Topic 326 changes how entities will measure credit losses for most financial assets and certain other instruments that are not accounted for at fair value through net income. This standard replaces the existing incurred credit loss model and establishes a single credit loss framework based on a current expected credit loss model for financial assets carried at amortized cost, including loans and held-to- maturity debt securities. The current expected loss model requires an entity to estimate credit losses expected over the life of the credit exposure upon initial recognition of that exposure when the financial asset is originated or acquired, which will generally result in earlier recognition of credit losses. This standard also requires expanded credit quality disclosures. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. This standard also simplifies the accounting model for purchased credit-impaired debt securities and loans. This standard will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. ASU 2019-04 clarifies that equity instruments without readily determinable fair values for which an entity has elected the measurement alternative should be remeasured to fair value as of the date that an observable transaction occurred. ASU 2019-05 provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. This standard should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This standard will be effective for the Company for annual and interim reporting periods beginning on or after December 15, 2022, and while early adoption is permitted, the Company does not expect to elect that option. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements, including assessing and evaluating assumptions and models to estimate losses. Upon adoption of this standard on January 1, 2023, the Company will be required to record a cumulative effect adjustment to retained earnings for the impact as of the date of adoption. The impact will depend on the Company’s portfolio composition and credit quality at the date of adoption, as well as forecasts at that time.
Accounting Updates Recently Adopted by the Company
On January 1, 2021, the Company adopted ASU 2019-12 (Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes). This standard removes exceptions to the general principles in Topic 740 for allocating tax expense between financial statement components, accounting basis differences stemming from an ownership change in foreign investments and interim period income tax accounting for year-to-date losses that exceed projected losses. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
On January 1, 2021, the Company adopted ASU 2020-01 (Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)). This standard clarifies certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. This standard improves current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
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On January 1, 2021, the Company early adopted ASU 2020-06 (Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 simplifies the guidance in Accounting Standards Codification (ASC) 470-20, Debt - Debt with Conversion and Other Options. Under ASU 2020-06, convertible instruments with embedded conversion features, that are not required to be accounted for as a derivative or that do not result in a substantial premium, are no longer required to be separated from the host contract thereby eliminating the cash conversion and beneficial conversion feature model. Instead, these convertible debt instruments will be accounted for as a single liability measured at amortized cost under the traditional convertible debt accounting model. ASU 2020-06 also requires the if-converted method to be applied for all convertible instruments when calculating diluted earnings per share. The Company has early adopted this standard for the year ended December 31, 2021. The early adoption of this standard eliminated calculating a beneficial conversion feature in relation to the SPA agreements that were entered into on October 25, 2021. Refer to Note 9 for more details.
There have been no other significant changes in the Company’s reported financial position or results of operations and cash flows as a result of its adoption of new accounting pronouncements or changes to its significant accounting policies that were disclosed in its consolidated financial statements for the fiscal year ended December 31, 2021.
| 3. | Accounts Receivable |
Accounts receivables consist of the following at:
Schedule of accounts receivables
| (Dollars in thousands) | December
31, 2021 | December
31, 2020 | ||||||
| Data Hosting | $ | |||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| 4. | Property, Plant and Equipment |
Property, plant and equipment consist of the following at:
Schedule of Property, Plant and Equipment
| (Dollars in thousands) | December
31, 2021 | December
31, 2020 | ||||||
| Land | $ | $ | ||||||
| Land improvements | ||||||||
| Buildings | ||||||||
| Leasehold improvements | ||||||||
| Vehicles | ||||||||
| Computers and related software | ||||||||
| Machinery and equipment | ||||||||
| Office furniture and fixtures | ||||||||
| Construction in progress | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense was $ and $
| 5. | Asset Acquisition |
As discussed above, on October 29, 2021, we completed 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 “Merger Agreement”). 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 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”). See Note 15 for further information regarding our relationship with HEL.
F - 19
The acquisition was accounted for, for purposes of U.S. GAAP, using the asset acquisition method of accounting under the ASC 805-50. We determined that we 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, our acquisition of the set of assets and activities constituted 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. We include Soluna Callisto’s results of operations in our results of operations beginning on the effective date of the acquisition.
Termination 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,
Merger Consideration
The fair value of the Merger Consideration includes various assumptions, including those related to the allocation of the estimated value of the maximum number of Merger Shares () issuable as Merger Consideration, which issuance is contingent on the achievement of certain milestones of generating active Megawatts from Qualified Projects in which the Cost Requirement is satisfied within five years after the effective date of the merger, as set forth in the Merger Agreement and the schedules thereto, as set forth below. The Merger Consideration and the timing of the payment thereof is subject to the following qualifications and limitations:
| 1a) | Upon buyer achieving each one active MegaWatts (“Active MWs”) from the projects in which the cost requirement is satisfied, this will cause SHI to issue to HEL 19,800 shares for each one MW up to a maximum 150 Active MW. |
| i. | If, on or before June 30, 2022, SCI or Soluna Callisto directly or indirectly achieves at least 50 active MWs from one or more of three current projects as set forth in the Merger Agreement that satisfy the Cost Requirement as defined within the Merger Agreement, then the Merger Shares will be issued at an accelerated rate of 29,700 Merger Shares for each of such first 50 Active MW, such that the Merger Shares in respect of the remaining 100 Active MWs (if any) will be issued at a reduced rate of 14,850 Merger Shares per Active MW; |
| ii. | If, by June 30, 2023, SCI or Soluna Calisto fail to achieve directly or indirectly (other than pursuant to a Portfolio Acquisition) at least 50 Active MW from Projects that satisfy the Cost Requirement, then the maximum aggregate number of Merger Shares shall be reduced from to ; |
| iii. | No Merger Shares will be issued to HEL without our prior written consent; |
| iv. | Issuance of the Merger Shares will also be subject to the continued employment with or engagement by SCI or the surviving corporation of (A) John Belizaire and (B) at least two of Dipul Patel, Mohammed Larbi Loudiyi, (through ML&K Contractor), and Phillip Ng at the time that such Merger Shares are earned. If both (A) and (B) cease to be satisfied on or prior to the date that all Merger Shares are earned (such date, a “Trigger Date”), then “Qualified Projects” for purposes of determining Merger Shares shall only apply to those Qualified Projects that are in the pipeline as of the Trigger Date. For these purposes, if any such individual’s employment or service relationship with SCI is terminated without cause, as a result of his death or disability, or with good reason (as such terms are defined in the employment and consulting agreements), such individual shall be deemed to continue to be employed or engaged by SCI for these purposes; |
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| v. | If
SHI or SCI consummates a Change of Control before the fifth anniversary of the
date of the closing of the merger, then we will be obligated to issue all of the unissued
Merger Shares (subject to (ii) and (iii) above). The Merger Agreement defines “Change
of Control” as (A) the sale, exchange, transfer, or other disposition of all or
substantially all of the assets of us or SCI, (B) our failure to continue to own (directly
or indirectly) |
| vi. | if on any of the fifth anniversary of the effective time of the merger, June 30, 2022 or June 30, 2023, a facility has not become a Qualified Facility and therefore is not taken into consideration in the calculation of Active MW because any of the elements set forth in the definition of “Qualified Facility” as defined in the Merger Agreement have not been met for reasons beyond the reasonable control of SCI’s management team, but SCI’s management team is then actively engaged in the process of completing and is diligently pursuing the completion of the missing elements, then (A) the target dates set forth above shall be extended for an additional 90 days, and (B) additional extensions of time may be granted by the Board of Directors in its commercially reasonable discretion, in each case for the purpose of enabling SCI’s management team to complete the steps needed to qualify the facility as a Qualified Facility. |
The number of Merger Shares is also subject to customary anti-dilution adjustments in the event of any stock split, stock consolidation, stock dividend, or similar event involving the shares of our common stock. Based on the assessment performed, the fair value of the merger consideration as of October 29, 2021 was approximately $33.0 million.
Based on management’s evaluation, management concluded that due to the high volatility of its share price, the low probability of not achieving the MW targets, and the fact the value associated with meeting the performance measures are not intended to drive the number of shares to be issued, but rather act as a proxy for and driver of share value, the monetary value of the obligation at inception is predominantly a function of equity shares. As such, the consideration will be treated as equity as ASC 480-10-25-14 is not applicable since the monetary value of the Merger Shares is not (1) fixed, or (2) dependent on (i) variations in something other than the fair value of the Company’s equity shares, or (ii) variations inversely related to changes in the fair value of the Company’s equity shares and is instead exposed to changes in the fair value of the Company’s share price, and as such does not represent a liability under ASC 480. The economic risks and characteristics of the share consideration are clearly and closely related to a residual equity interest since the underlying (i.e., the incremental shares of common stock delivered upon achievement of each MW target) will participate in the increase in value of the common equity of the Company, similar to a call option on common stock. Based on guidance in ASC 815-40-25-7 through 25-35, the share consideration is considered to be indexed to the Company’s stock and meets the additional criteria for equity classification.
| 6. | Intangible Assets |
Intangible assets consist of the following as of December 31, 2021:
| (Dollars in thousands) | Intangible Assets | Accumulated Amortization | Total | |||||||||
| For the year ended December 31, 2021 | ||||||||||||
| Strategic pipeline contract | $ | $ | $ | |||||||||
| Assembled workforce | ||||||||||||
| Patents | ||||||||||||
| Total | $ | $ | $ | |||||||||
There
were no intangible assets or amortization expense as of December 31, 2020. Amortization expense for the year ended December 31,
2021 was approximately $
The strategic pipeline contract relates to supply of a critical input to our digital mining business. The Company has analyzed this strategic pipeline contract similar to a permit for future benefit. The strategic pipeline contract relates to potential renewable energy datacenters that fit in the alignment of the Company structure to expand operations of the Company’s new focus in their business.
F - 21
The Company expects to record amortization expense of intangible assets over the next five years and thereafter as follows:
| (Dollars in thousands) | |||||
| Year | 2021 | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
| 7. | Income Taxes |
Income tax expense (benefit) for each of the years ended December 31 consists of the following:
Schedule of income tax expense
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Deferred | ( | ) | ||||||
| Total | $ | $ | ( | ) | ||||
The significant components of deferred income tax expense (benefit) from operations for each of the years ended December 31 consists of the following:
Schedule of deferred income tax expense
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Deferred tax (expense) benefit | $ | ( | ) | $ | ( | ) | ||
| Net operating loss carry forward | ( | ) | ||||||
| Valuation allowance | ( | ) | ||||||
| $ | $ | ( | ) | |||||
The Company’s effective income tax rate from operations differed from the Federal statutory rate for each of the years ended December 31 as follows:
Schedule of effective income tax rate
2021 | 2020 | |||||||
| Federal statutory tax rate | % | % | ||||||
| Change in valuation allowance | ( | ) | ( | ) | ||||
| State taxes, net of federal benefit | — | |||||||
| Expiration of stock option | ||||||||
| Intangible amortization | — | |||||||
| Change in UTP | — | |||||||
| Federal tax benefits, R&D | ( | ) | ||||||
| Other Deferred Adjustments | ( | ) | ||||||
| Tax rate | % | ( | )% | |||||
F - 22
Deferred Tax (Liabilities) Assets:
Deferred tax (liabilities) assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates. Temporary differences, net operating loss carryforwards and tax credit carryforwards that give rise to deferred tax assets and liabilities are summarized as follows as of December 31:
Schedule of deferred tax assets
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Deferred tax assets: | ||||||||
| Vacation accrual | $ | $ | ||||||
| Allowance for related party note receivable | ||||||||
| Net operating loss | ||||||||
| Property, plant and equipment | ||||||||
| Stock options | ||||||||
| Research and development tax credit | ||||||||
| Deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net of valuation allowance | ||||||||
| Deferred tax liabilities: | ||||||||
| Property, plant and equipment | ( | ) | ||||||
| Intangibles | ( | ) | ||||||
| Deferred tax liabilities | ( | ) | ||||||
| Deferred tax (liabilities) assets | $ | ( | ) | $ | ||||
In connection
with the strategic contract pipeline acquired in the Soluna Callisto acquisition as further discussed in Note 6, ASC 740-10-25-51
requires the recognition of a deferred tax impact of acquiring an asset in a transaction that is not a business combination when
the amount paid exceeds the tax basis on the acquisition date. As such, the Company is required to adjust the value of the strategic
contract pipeline by approximately $
Valuation Allowance:
The Company believes that the accounting estimate for the valuation of deferred tax assets is a critical accounting estimate because judgment is required in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. The Company based the estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes.
As a result of its assessment in 2021, the Company increased its valuation allowance against its deferred tax assets. The increase in the valuation allowance caused incremental tax expense of $
The valuation allowance at December 31, 2021 and 2020 was $11.9 million and $9.7 million, respectively. Activity in the valuation allowance for deferred tax assets is as follows as of December 31:
Schedule of deferred tax asset valuation allowance
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Valuation allowance, beginning of year | $ | $ | ||||||
| Allowance for related party note receivable | ( | ) | ||||||
| Inventory | ||||||||
| Net operating (loss) income | ( | ) | ||||||
| Property, plant and equipment | ( | ) | ||||||
| Stock options | ( | ) | ||||||
| Research and development credit | ( | ) | ||||||
| Warranty and other sales obligations | ||||||||
| Deferred revenue | ( | ) | ||||||
| Accrued compensation | ( | ) | ||||||
| Valuation allowance, end of year | $ | $ | ||||||
Net operating losses:
At
December 31, 2021, the Company has unused Federal net operating loss carryforwards of approximately $
F - 23
The Company’s and/or its subsidiaries’ ability to utilize their net operating loss carryforwards may be significantly limited by Section 382 of the IRC of 1986, as amended, if the Company or any of its subsidiaries undergoes an “ownership change” as a result of changes in the ownership of the Company’s or its subsidiaries’ outstanding stock pursuant to the exercise of the warrants or otherwise.
Unrecognized tax benefits:
The
Company has unrecognized tax benefits of $
Additionally, the Company does not have uncertain tax positions that it expects will increase or decrease within twelve months of this reporting date. The Company recognizes interest and penalties related to uncertain tax positions as a component of tax expense. The Company did not recognize any interest or penalties in 2021 and 2020.
The Company files income tax returns, including returns for its subsidiaries, with federal and state jurisdictions. The Company is no longer subject to IRS or state examinations for any periods prior to 2018, although carryforward attributes that were generated prior to 2018 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period.
| 8. | Accrued Liabilities |
Accrued liabilities consist of the following at:
Schedule of accrued liabilities
| (Dollars in thousands) | December 31, 2021 | December 31, 2020 | ||||||
| Salaries, wages and related expenses | $ | $ | ||||||
| Liability to shareholders for previous acquisition | ||||||||
| Legal, audit, tax and professional fees | ||||||||
| Sales tax accrual | - | |||||||
| Development fees | - | |||||||
| Hosting and utility fees | - | |||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| 9. | Debt |
Convertible Notes
Debt
consists of the following
(dollar in thousands):
| Maturity Date | Interest Rate | December 31, 2021 | ||||||||
| Convertible Note | % | $ | ||||||||
| Less: debt discount | ||||||||||
| Less: discount from issuance of warrants | ||||||||||
| Less: debt issuance costs | ||||||||||
| Total convertible notes, net of discount and issuance costs | $ | |||||||||
F -24
On
October 25, 2021, pursuant to the SPA,
The
Notes, subject to an original issue discount of
The
fair value of the Warrants, as of the issuance date, was $
During the year ended December 31, 2021, $14.9 million is remaining in the principal balance of the Notes and approximately $1.4 million was converted into 150,000 shares of the Company’s common stock.
Line of Credit
On
September 13, 2021, the Company entered into a $
| 10. | Stockholders’ Equity |
Preferred Stock
The Company has one series of preferred stock outstanding, known as the Series A Cumulative Perpetual Preferred Stock, par value $ per share, with a $ liquidation preference. As of December 31, 2021 and December 31, 2020, there were and shares of preferred stock issued and outstanding, respectively.
Common Stock
The Company has one class of common stock, par value $. Each share of the Company’s common stock is entitled to one vote on all matters submitted to stockholders. As of December 31, 2021 and December 31, 2020, there were and shares of common stock issued and outstanding, respectively.
F - 25
Dividends
Pursuant
to the Certificate of Designations,
There were no dividends declared or paid on either the common or preferred stock during 2020.
Reservation of Shares
Schedule of reserved common shares for future issuance
| Stock options outstanding | ||||
| Restricted stock units outstanding | ||||
| Warrants outstanding | ||||
| Common stock available for future equity awards or issuance of options | ||||
| Number of common shares reserved | ||||
| 11. | Retirement Plan |
The
Company maintains a voluntary savings and retirement plan under IRC Section 401(k) covering substantially all employees. Employees
must complete six months of service and have attained the age of twenty-one prior to becoming eligible for participation in the
plan. The Company plan allows eligible employees to contribute a percentage of their compensation on a pre-tax basis and the Company
matches employee contributions, on a discretionary basis, currently in an amount equal to 100% of the first 3% and 50% of the
next 2% of the employee’s salary, subject to annual tax deduction limitations. Effective January 1, 2017, Company matching
contributions are vested immediately. Company matching contributions were $
| 12. | Net (loss) income per Share |
| (Dollars in thousands, except shares) | 2021 | 2020 | ||||||
| Numerator: | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Net income from discontinuing operations | ||||||||
| Net (Loss) Income | $ | ( | ) | $ | ||||
| Less: Preferred Dividend | ( | ) | - | |||||
| Balance | $ | ( | ) | $ | ||||
| Denominator: | ||||||||
| Basic and Diluted EPS: | ||||||||
| Common shares outstanding, beginning of period | ||||||||
| Weighted average common shares issued during the period | ||||||||
| Denominator for basic earnings per common shares — | ||||||||
| Weighted average common shares | ||||||||
F - 26
The Company notes as continuing operations was in a Net loss for fiscal year 2021 and 2020, as such basic and diluted EPS is the same balance as continuing operations acts as the control amount in which would cause antidilution. Not included in the computation of earnings per share, assuming dilution, for the year ended December 31, 2021, were options to purchase shares of the Company’s common stock, nonvested restricted stock units, outstanding warrants not exercised, and shares of convertible notes outstanding. These potentially dilutive items were excluded because the calculation of incremental shares resulted in an anti-dilutive effect.
Not included in the computation of earnings per share, assuming dilution, for the year ended December 31, 2020, were options to purchase shares of the Company’s common stock. These potentially dilutive items were excluded even though the average market price of the common stock exceeded the exercise prices for a portion of the options because the calculation of shares resulted in an anti-dilutive effect.
| 13. | Stock Based Compensation |
Stock-based incentive awards are provided to employees and directors under the terms of the Company’s 2012 Equity Incentive Plan (the 2012 Plan), which was amended and restated as of October 20, 2016, 2014 Equity Incentive Plan (the 2014 Plan), and the 2021 Equity Incentive Plan, which was amended and restated effective as of October 29, 2021, (collectively, the Plans). Awards under the Plans have generally included at-the-money options and restricted stock grants.
The 2012 Plan was adopted by the Company’s Board of Directors on April 14, 2012 and approved by its stockholders on June 14, 2012. The 2012 Plan was amended and restated by the Board of Directors effective October 20, 2016. The October 2016 amendment allowed for the award agreement or another agreement entered into between the Company and the award grantee to vary the method of exercise of options issued under the 2012 Plan and an agreement entered into between the Company and the award grantee to vary the provisions governing expiration of options or other awards under the 2012 Plan following termination of the award recipient. The 2012 Plan provides an initial aggregate number of shares of common stock that may be awarded or issued. The number of shares that may be awarded under the 2012 Plan and awards outstanding may be subject to adjustment on account of any recapitalization, reclassification, stock split, reverse stock split and other dilutive changes in our common stock. Under the 2012 Plan, the Board of Directors is authorized to issue stock options (incentive and nonqualified), stock appreciation rights, restricted stock, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisors of the Company and its subsidiaries. Incentive stock options may only be granted to employees of the Company and its subsidiaries.
The 2014 Plan was adopted by the Company’s Board of Directors on March 12, 2014 and approved by its stockholders on June 11, 2014. The 2014 Plan provides an initial aggregate number of shares of common stock that may be awarded or issued. The number of shares that may be awarded under the 2014 Plan and awards outstanding may be subject to adjustment on account of any stock dividend, spin-off, stock split, reverse stock split, split-up, recapitalization, reclassification, reorganization, combination or exchange of shares, merger, consolidation, liquidation, business combination, exchange of shares or the like. Under the 2014 Plan, the Board-appointed administrator of the 2014 Plan is authorized to issue stock options (incentive and nonqualified), stock appreciation rights, restricted stock, restricted stock units, phantom stock, performance awards and other stock-based awards to employees, officers and directors of, and other individuals providing bona fide services to or for, the Company or any affiliate of the Company. Incentive stock options may only be granted to employees of the Company and its subsidiaries.
The Company’s 2021 Plan was adopted by the Board on February 12, 2021 and approved by the stockholders on March 25, 2021. The 2021 Plan was amended and restated effective as of October 29, 2021. The 2021 Plan authorizes the Company to issue shares of common stock upon the exercise of stock options, the grant of restricted stock awards, and the conversion of restricted stock units (collectively, the “Awards”). The Compensation Committee has full authority, subject to the terms of the 2021 Plan, to interpret the 2021 Plan and establish rules and regulations for the proper administration of the 2021 Plan. Subject to certain adjustments as provided in the 2021 Plan, the maximum aggregate number of shares of the Company’s common stock that may be issued under the 2021 Plan (i) pursuant to the exercise of stock options, (ii) as restricted stock, and (iii) as available pursuant to restricted stock units shall be limited to (A) during the Company’s fiscal year ending December 31, 2021 (the “2021 Fiscal Year”), shares of common stock, and (B) beginning with the Company’s fiscal year ending December 31, 2022 (the “2022 Fiscal Year”), 15% of the number of shares of common stock outstanding. Subject to certain adjustments as provided in the 2021 Plan, (i) shares of the Company’s common stock subject to the 2021 Plan shall include shares of common stock forfeited in a prior year and (ii) the number of shares of common stock that may be issued under the 2021 Plan may never be less than the number of shares of the Company’s common stock that are then outstanding under outstanding Awards.
F - 27
During the fiscal year ended December 31, 2021, the Company granted options to purchase shares of the Company’s common stock under the 2021 Plan, of which shares immediately vested with an exercise price of $ per share, based on the closing price plus % of the Company’s common stock on the date of the grant. The remaining shares will vest in equal installments of 33 1/3% on each of the three anniversaries of the date of the grant. The weighted exercise price of these options is $ per share and was based on the closing market price of the Company’s common stock on the dates of grant. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options was $ per share and was estimated at the date of grant.
During the fiscal year ended December 31, 2021, the Company awarded shares of restricted common stock under the 2021 Plan, shares of valued at $ per share and 154,426 shares valued at $12.23 per share based on the closing market price of the Company’s common stock on the date of the award. 47,500 of the shares will be restricted for one year, with the entire award vesting on the first anniversary of the award date. For the remaining 154,426 shares, 33 1/3% of the shares will vest on the first anniversary of the award date, and the remaining shares shall vest ratably over the succeeding 24 month period, with (1/24) of such remaining shares vesting on the last day of each calendar month.
During the fiscal year ended December 31, 2021, the Company awarded restricted stock units under the 2021 Plan, valued ranging from $-$ per share based on the closing market price of the Company’s common stock on the date of the grant. For restricted stock units, 33 1/3% of such restricted stock units will vest on each of the first three anniversaries of the date of the grant. For 121,822 restricted stock units, 25% of the grant shares shall vest on the first anniversary of the effective time, and the remaining 75% shall vest over the succeeding 36 month period, with (1/36) of such remaining grant shares vest on the last day of the calendar month. For 14,782 shares, 25% of such restricted stock units shall vest after six months of the award, and the remaining shares shall vest ratably over the succeeding 36 month period, with (1/36) of such vesting on the last day of each such calendar month. For 8,869 shares, they are performance based awards that will vest in the following year in January based on approval of the Board of Directors based on achievement of key performance objectives.
In connection with the sale of shares of common stock to Brookstone, the Company entered into an Option Exercise and Stock Transfer Restriction Agreement (collectively, the Option and Transfer Agreements) with its Chief Executive Officer, its Chief Financial Officer and each of its non-employee directors (collectively, the Insiders). The Option and Transfer Agreements amend the stock option grant agreements between the Company and each Insider with respect to an option granted under and modify the terms of any option to purchase common stock held by each such Insider (collectively, Options) granted under, the Plans. The Option and Transfer Agreements restrict the aggregate amount of shares of common stock for which the Insiders may exercise Options during calendar years 2016, 2017, 2018 and 2019, and provide for a modified procedure for exercising Options in order to ensure the limit on the aggregate amount of Options that may be exercised in any such year is not exceeded. Such amendments and modifications also operate to, except with respect to the termination of Options in connection with an Insider’s termination of employment or service in connection with misconduct as described in the Option and Transfer Agreements, (i) remove all references to an expiration of the exercisability of such Options within a special, delineated time period following the termination of service to or employment by the Company, and (ii) provide that all vested Options are exercisable by the Insider until default expiration under the applicable Plan (i.e., ten years from the date of grant). If an Option and Transfer Agreement is terminated, the limitations on Option exercises described above will terminate, but the exercisability of the Insider’s vested Options until default expiration under the applicable Plan and stock option agreement (i.e., ten years from the date of grant) will survive indefinitely.
On January 14, 2020, the Company awarded to members of the Company’s Investment Committee and to the Company’s CEO special one-time restricted stock awards totaling shares of common stock ( from the 2012 Plan and from the 2014 Plan) valued at $ per share based on the closing market price of the Company’s common stock on the date of grant. The shares will be restricted until vested and vest in two annual installments, with half vesting on the first anniversary of the award date and the remainder vesting on the second anniversary of the award date.
During 2020, the Company granted options to purchase shares of the Company’s common stock from the 2014 Plan, which generally vest 25% on each of the first four anniversaries of the date of the award. The exercise price of these options is $ per share and was based on the closing market price of the Company’s common stock on the day prior to the date of grant. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options is $ per share and was estimated at the date of grant.
During 2020, the Company granted options to purchase shares of the Company’s common stock from the 2012 Plan, which generally vest 25% on each of the first four anniversaries of the date of the award. The exercise price of these options is $ per share and was based on the closing market price of the Company’s common stock on the date of grant. Using a Black-Scholes Option Pricing Model, the weighted average fair value of these options is $ per share and was estimated at the date of grant.
On December 21, 2020, the Company awarded to its CFO and the President of MTI Instruments restricted stock awards totaling shares of common stock from the 2014 Plan valued at $ per share based on the closing market price of the Company’s common stock on the date of grant. The shares will be restricted until vested and vest in three annual installments beginning on the first anniversary of the award date.
F - 28
Stock-based compensation expense for the years ended December 31, 2021 and 2020 was generated from stock option and restricted stock awards. Stock options are awards that allow holders to purchase shares of the Company’s common stock at a fixed price. Certain options granted may be fully or partially exercisable immediately, may vest on other than a four-year schedule or vest upon attainment of specific performance criteria. Restricted stock awards generally vest one to three years after the date of grant, although certain awards may vest immediately or vest upon attainment of specific performance criteria. Option exercise prices are generally equivalent to the closing market value price of the Company’s common stock on the date of grant. Unexercised options generally terminate ten years after date of grant.
| 2021 | ||||
| Option term (years) | ||||
| Volatility | % | |||
| Unvested forfeiture rate | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value per option granted | $ | |||
The following table presents the weighted-average assumptions used for options granted under the 2014 Plan:
| 2020 | ||||
| Option term (years) | ||||
| Volatility | % | |||
| Unvested forfeiture rate | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value per option granted | $ | |||
No options were granted under the 2014 Plan for the year ended December 31, 2021.
The following table presents the weighted-average assumptions used for options granted under the 2012 Plan:
| 2020 | ||||
| Option term (years) | ||||
| Volatility | % | |||
| Unvested forfeiture rate | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value per option granted | $ | |||
No options were granted under the 2012 Plan for the year ended December 31, 2021.
Share-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, therefore, awards are reduced for estimated forfeitures. The accounting standard requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
| 2021 | 2020 | |||||||
| (Dollars in thousands) | ||||||||
| Cost of cryptocurrency revenue | $ | $ | ||||||
| Selling, general and administrative | ||||||||
| Share-based compensation expense | $ | $ | ||||||
Total unrecognized compensation costs related to non-vested stock options as of December 31, 2021 and December 31, 2020 is approximately $ and $ thousand, respectively, and is expected to be recognized over a weighted-average remaining vesting period of approximately years and years, respectively.
F - 29
| 2021 | 2020 | |||||||
| Shares under option, beginning | ||||||||
| Granted | ||||||||
| Exercised | ( | ) | ( | ) | ||||
| Forfeited | ( | |||||||
| Expired/canceled | ( | ) | ||||||
| Shares under option, ending | ||||||||
| Options exercisable | ||||||||
| Remaining shares available for granting of options | ||||||||
The weighted average exercise price for the Company’s stock option activity for the Plans is as follows for each of the years ended December 31:
| 2021 | 2020 | |||||||
| Shares under option, beginning | $ | $ | ||||||
| Granted | $ | $ | ||||||
| Exercised | $ | $ | ||||||
| Forfeited | $ | $ | ||||||
| Expired/canceled | $ | $ | ||||||
| Shares under option, ending | $ | $ | ||||||
| Options exercisable, ending | $ | $ | ||||||
| Outstanding | Exercisable | ||||||||||||||||||||||||
| Weighted Average | Weighted | Weighted Average | Weighted | ||||||||||||||||||||||
| Exercise | Remaining | Average | Remaining | Average | |||||||||||||||||||||
| Price Range | Number | Contractual Life | Exercise Price | Number | Contractual Life | Exercise Price | |||||||||||||||||||
| $0.29 - $1.08 | $ | 165,600 | $ | 0.86 | |||||||||||||||||||||
| $1.09 - $1.20 | $ | 34,000 | $ | 1.20 | |||||||||||||||||||||
| $6.84 - $11.10 | $ | $ | 7.52 | ||||||||||||||||||||||
| $ | 385,800 | $ | 4.10 | ||||||||||||||||||||||
The aggregate intrinsic value (i.e. the difference between the closing stock price and the price to be paid by the option holder to exercise the option) is approximately $ for the Company’s outstanding options and approximately $ for the exercisable options as of December 31, 2021. The amounts are based on the Company’s closing stock price of $ as of December 31, 2021.
| 2021 | 2020 | |||||||
| Non-vested restricted stock balance, beginning January 1 | ||||||||
| Non-vested restricted stock granted | ||||||||
| Vested restricted stock | ||||||||
| Non-vested restricted stock exercised | ( | ) | ||||||
| Non-vested restricted stock forfeited/expired | ( | ) | ||||||
| Non-vested restricted stock balance, ending December 31 | ||||||||
F - 30
| 2021 | 2020 | |||||||
| Restricted stock, beginning | $ | $ | ||||||
| Granted | $ | $ | ||||||
| Exercised | $ | $ | ||||||
| Forfeited/ expired | $ | $ | ||||||
| Restricted stock, ending | $ | $ | ||||||
At December 31, 2021 and 2020, there was approximately $ and $ thousand of unrecognized compensation cost related to restricted stock plans. This cost is expected to be recognized over a remaining period of years and years, respectively.
Stock Warrants:
| Number of Warrant Shares | Weighted Average Exercise Price ($) | |||||||
| Balance, December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited/ Expired | ||||||||
| Balance, December 31, 2021 | $ | |||||||
As of December 31, 2021, the outstanding warrants have a weighted average remaining term of years.
| 14. | Commitments and Contingencies |
Commitments:
Leases
The Company determines whether an arrangement is a lease at inception. The Company has operating leases for certain manufacturing, laboratory, office facilities and certain equipment. The leases have remaining lease terms of less than to less than . Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of December 31, 2021 and December 31, 2020, the Company has no assets recorded under finance leases.
Lease expense for these leases is recognized on a straight-line basis over the lease term. For the twelve months ended December 31, total lease costs are comprised of the following:
| (Dollars in thousands) | ||||||||
| 2021 | 2020 | |||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | ||||||||
| Total net lease cost | $ | $ | ||||||
Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases.
Supplemental cash flows information related to leases for the twelve months ended December 31 was as follows:
| (Dollars in thousands) | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Non-Cash Activity Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | $ | $ | ||||||
F - 31
Supplemental balance sheet information for the twelve months ended December 31 was as follows:
| (Dollars in thousands, except lease term and discount rate) | ||||||||
| 2021 | 2020 | |||||||
| Operating leases: | ||||||||
| Operating lease ROU asset | $ | $ | ||||||
| Current operating lease liabilities | $ | $ | ||||||
| Non-current operating lease liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Operating leases: | ||||||||
| ROU assets | $ | $ | ||||||
| Asset lease expense | ( | ) | ( | ) | ||||
| ROU assets, net | $ | $ | ||||||
| Weighted Average Remaining Lease Term (in years): | ||||||||
| Operating leases | ||||||||
| Weighted Average Discount Rate: | ||||||||
| Operating leases | % | % | ||||||
Maturities of operating lease liabilities are as follows for the year ending December 31:
| (Dollars in thousands) | ||||
| 2021 | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Total lease obligations | ||||
| Less: current obligations | ||||
| Long-term lease obligations | $ | |||
As of December 31, 2021, except for the ground lease entered into as described in Note 1, there were no additional operating lease commitments that had not yet commenced.
Contingencies:
Legal
We are subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. When applicable, we accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.
The Company has 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
$
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| 15. | Related Party Transactions |
MeOH Power, Inc.
On December 18, 2013, MeOH Power, Inc.
and the Company executed a Senior Demand Promissory Note (the “Note”) in the amount of $
Legal Services
During the years ended December 31, 2021
and December 31, 2020, the Company incurred $
HEL Transactions
On January 8, 2020, the Company formed SCI as a wholly owned
subsidiary to pursue a new business line focused on cryptocurrency and the blockchain ecosystem. In connection with this new business
line, SCI established a facility to mine cryptocurrencies and integrate with the blockchain network. Pursuant to an Operating and
Management Agreement dated January 13, 2020, by and between SCI and HEL, HEL assisted the Company, and later SCI, in developing,
and is now operating, the cryptocurrency mining facility. The Operating and Management Agreement requires, among other things,
that HEL provide project sourcing services to SCI, including acquisition negotiations and establishing an operating model, investments/financing
timeline, and a project development path, as well as developmental and operational services, as directed by SCI, with respect to
the applicable cryptocurrency mining facility in exchange for SCI’s payment to HEL of a one-time management fee ranging from
$
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 would allow SCI to mine and sell cryptocurrency. In that regard, on May 21, 2020, SCI acquired the intellectual
property of GigaWatt, Inc. (“GigaWatt”) and certain other property and rights of GigaWatt associated with GigaWatt’s
operation of a crypto-mining operation located in Washington State. The acquired assets formed the cornerstone of SCI’s current
cryptocurrency mining operation. SCI sells for U.S. dollars all cryptocurrency it mines and is not in the business of accumulating
cryptocurrency on its balance sheet for speculative gains. On October 22, 2020, SCI loaned HEL $
On November 19, 2020, SCI and HEL entered
into a second Operating and Management Agreement related to a potential location for a cryptocurrency mine in the Southeast United
States. In accordance with the terms of the agreement, which are consistent with the first Operating and Management agreement
noted above, HEL is entitled to ongoing success payments of 20.0% of the earnings before interest, taxes, depreciation and amortization
of the mine. SCI paid HEL $
On December 1, 2020, SCI and HEL entered
into a third Operating and Management Agreement with respect to a potential location for a cryptocurrency mine in the Southwestern
United States. In accordance with the terms of the agreement, which are consistent with the first Operating and Management agreement
noted above, HEL is entitled to ongoing success payments of
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On February 8, 2021, SCI and HEL entered
into a fourth Operating and Management Agreement related to a potential location for a cryptocurrency mine in the Southeast United
States. In accordance with the terms of the agreement, which are consistent with the first Operating and Management agreement
noted above, HEL is entitled to ongoing success payments of 20.0% of the earnings before interest, taxes, depreciation and amortization
of the mine. SCI paid HEL $
As of December 31, 2021 and 2020, the Company
paid $
Each Operating and Management Agreement, all of which were terminated effective November 5, 2021, pursuant to the Termination Agreement, among other things, required that HEL provide project sourcing services to SCI, including acquisition negotiations and establishing an operating model, investments/financing timeline, and project development path.
Simultaneously with entering into the initial
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 Class A Preferred Shares of HEL for an aggregate purchase price of $
As discussed above, on October 29, 2021, we completed the Soluna Callisto acquisition pursuant to the Merger Agreement. 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 SCI’s existing pipeline of certain cryptocurrency mining projects that HEL previously transferred to SCI, which was formed expressly for this purpose, 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 the Merger Consideration.
In connection
with the Soluna Callisto acquisition, effective as of October 29, 2021, upon and subject to the terms and conditions of
the Termination Agreement, on November 5, 2021: (1) the existing Operating and Management Agreements between HEL and SCI were terminated
in all respects; and (2)(A) SCI paid HEL $
Please see Note 5 for additional information regarding the Soluna Callisto acquisition and related transactions.
Several of HEL’s equityholders are affiliated with Brookstone Partners, the investment firm that holds an equity interest in the Company through Brookstone Partners Acquisition XXIV, LLC. The Company’s two Brookstone-affiliated directors also serve as directors and, in one case, as an officer, of HEL and also have ownership interest in HEL. In light of these relationships, the various transactions by and between the Company and SCI, on the one hand, and HEL, on the other hand, were negotiated on behalf of the Company and SCI via an independent investment committee of Board and separate legal representation. The transactions were subsequently unanimously approved by both the independent investment committee and the full Board.
Five of the Company’s directors have various affiliations with HEL.
Michael Toporek, our Chief Executive Officer
and a director, owns
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In addition, one of the Company’s
directors, Matthew E. Lipman, serves as a director and currently acting as President of HEL. Mr. Lipman does not directly own any
equity interest in Tera Joule, LLC,
John Belizaire and John Bottomley, who
were elected to the Company’s Board of Directors upon the effective time of SCI’s acquisition of Soluna Callisto, serve
as directors of HEL. In addition, Mr. Belizaire is the beneficial
Finally, the Company’s director William P. Phelan served as an observer on HEL’s board of directors on behalf of the Company through March 2021.
The Company’s investment in HEL is
carried at the cost of investment and was $
| 16. | Discontinued Operations-Held for Sale |
As described in Note 1, the Company entered into the nonbinding LOI with the Buyer regarding the potential Sale of MTI Instruments business segment. As of December 31, 2021, our Instrumentation business segment met the held for sale criteria and is reflected as discontinued operations in our financial statements for all periods presented. Our consolidated balance sheets and consolidated statements of operations report discontinued operations separate from continuing operations. Our consolidated statements of equity and statements of cash flows combine continuing and discontinuing operations. As discussed in Footnote 9, MTI Instruments potential sale will need approval of the holders of the Notes prior to the sale of MTII.
Set forth below are the results of the discontinued operations:
| (Dollars in thousands) | 2021 | 2020(*) | ||||||
| Product revenue | $ | $ | ||||||
| Cost of sales | ||||||||
| Research and development | ||||||||
| Selling, general, and administrative | ||||||||
| Other income, net | ||||||||
| Income tax benefit | | |||||||
| Net income from discontinued operations | $ | $ | ||||||
| (*) |
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The following table summarizes information about assets and liabilities from discontinued operations held for sale as of December 31, 2021 and 2020:
| (Dollars in thousands) | ||||||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets held for sale from discontinued operations: | ||||||||
| Accounts receivable | $ | $ | ||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Deferred tax assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total Assets held for sale from discontinued operations | $ | $ | ||||||
| Liabilities held for sale from discontinued operations: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Operating lease liability-current | ||||||||
| Operating lease liability-noncurrent | - | |||||||
| Total Liabilities held for sale from discontinued operations | $ | $ | ||||||
MTI Instruments sells its products on a worldwide basis with its principal markets listed in the table below where information on product revenue is summarized by geographic area for the Company as a whole for each of the years ended December 31:
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Product revenue: | ||||||||
| United States | $ | $ | ||||||
| Association of South East Asian Nations (ASEAN) | ||||||||
| Europe, the Middle East and Africa (EMEA) | ||||||||
| Americas (Canada, Mexico, South America) | ||||||||
| Total product revenue | $ | $ | ||||||
Product revenues are attributed to regions
based on the location of customers. In 2021 and 2020, approximately
At MTI Instruments, the largest commercial
customer in 2021 was a Singapore manufacturer and distributer of industrial and technology product and services of support solutions
to the aerospace and energy markets, which accounted for 13.0% of total product revenue. At MTI Instruments, the largest commercial
customer in 2020 was a U.S. supplier that builds and executes custom solutions for industry and government markets, which accounted
for
17. Segment Information
The Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has reportable segments: Cryptocurrency Mining and Data Center Hosting. The Company notes that previously there was an additional segment: Test and Measurement Instrumentation, however as discussed in Note 1, the Company intends to sell that reportable segment within a year, and therefore classify as discontinued operations. The guidance requires that segment disclosures present the measure(s) used by the Chief Operating Decision Maker (“CODM”) to decide how to allocate resources and for purposes of assessing such segments’ performance. The Company’s CODM is comprised of several members of its executive management team who use revenue and cost of revenues of both reporting segments to assess the performance of the business of our reportable operating segments.
No operating segments have been aggregated to form the reportable segments. The Company does not allocate all assets to the reporting segments as these are managed on an entity-wide basis. Therefore, the Company does not separately disclose the total assets of its reportable operating segments.
The Cryptocurrency Mining segment generates revenue from the cryptocurrency the Company earns through its mining activities. The Data Center Hosting segment generates revenue from contracts for the provision/consumption of electricity and operation of the data center from the Company’s high performance computing facility in Calvert City, Kentucky.
For the year ended December 31, 2021,
approximately
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The Company evaluates performance based on profit or loss from operations before income taxes, accounting changes, items management does not deem relevant to segment performance, and interest income and expense. Inter-segment sales and expenses are not significant. Non-cash items of depreciation and amortization are included within both costs of sales and selling, general and administrative expenses.
The following table details revenue and cost of revenues for the Company’s reportable segments for the years ended December 31, 2021 and 2020, and reconciles to net income (loss) on the consolidated statements of operations :
| (Dollars in thousands) | December 31, 2021 | December 31, 2020 | ||||||
| Reportable segment revenue: | ||||||||
| Cryptocurrency mining revenue | $ | $ | ||||||
| Data hosting revenue | ||||||||
| Total segment and consolidated revenue | ||||||||
| Reportable segment cost of revenue: | ||||||||
| Cost of revenues-cryptocurrency mining | ||||||||
| Cost of revenues-data hosting | ||||||||
| Total segment and consolidated cost of revenues | ||||||||
| Reconciling items: | ||||||||
| Selling, general and administrative expenses | ||||||||
| Interest expense | ( | ) | — | |||||
| Other income | ||||||||
| Income tax (expense) benefit from continuing operations | ( | ) | ||||||
| Net loss (continuing operations) | ( | ) | ( | ) | ||||
| Income from discontinued operations before income tax | ||||||||
| Income tax (expense) benefit from discontinued operations | ||||||||
| Net income from discontinued operations | ||||||||
| Net loss | ( | ) | ||||||
| Capital expenditures | ||||||||
| Depreciation and amortization | ||||||||
18. Subsequent Events
In accordance with U.S. GAAP, the Company has evaluated subsequent events for disclosure between the consolidated balance sheet date of December 31, 2021 and March 31, 2022, the date the financial statements were available to be issued.
NYDIG Financing
On
December 30, 2021, Soluna MC Borrowing 2021-1 LLC (“Borrower”), an indirect wholly owned subsidiary of the Company
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 $
On January 14,
2022, Borrower effected an initial drawdown under the Master Agreement in the aggregate principal amount of approximately
$
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In connection
with the NYDIG Transactions, on January 13, 2022, the Company entered into a Consent and Waiver Agreement, dated as of January
13, 2022 (the “Consent”), with the Convertible Investors, in connection with the SPA, pursuant to which the Convertible
Investors agreed to waive any lien on, and security interest in, certain assets, provided
various contingencies are fulfilled, and each Investor who acquired on the Closing Date Notes having a principal amount of not
less than $
Promptly after the date of the Consent, the Company warrants to purchase up to shares of common stock to the Convertible Investor holding the largest outstanding principal amount of Notes as of the date of the Consent. Such warrants are substantially in form similar to the other Warrants held by the Convertible Investors. Such warrants are exercisable for three years from the date of the Consent at an exercise price per share of the Company’s common stock, equal to 130% of the closing price per share of the common stock as of the date of the Consent.
Promissory Notes
On February 22,
2022,
The First Tranche
Notes have a maturity date of February 22, 2027,
The exercise of the Warrants will be subject
to beneficial ownership limitations such that the Lenders may not exercise the Warrants to the extent that such exercise would
result in each of the Lenders being the beneficial owner in excess of
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Exhibit 4.12
FORM OF CLASS D COMMON STOCK PURCHASE WARRANT
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAS BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN ACCREDITED INVESTOR AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.
CLASS D COMMON STOCK PURCHASE WARRANT
SOLUNA HOLDINGS, INC.
| Warrant Shares: [__________] | Initial Exercise Date: [_______], 2022 |
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, [___________] or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to 5:00 p.m. (New York City time) on February [ ],2024 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, a Nevada corporation (the “Company”), up to [__________] shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
Section 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain promissory note, dated February [ ], 2022, between the Company and the lender referenced therein (the “Note” and together with this Warrant and any other agreement executed and delivered in connection with either of the foregoing documents, are hereinafter referred to as the “Transaction Documents”).
Section 2. Exercise.
a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed facsimile copy or PDF copy submitted by e-mail (or e-mail attachment) of the Notice of Exercise in the form annexed hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined in Section 2(d)(i) herein) following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice. Notwithstanding the foregoing, with respect to any Notice(s) of Exercise delivered on or prior to 4:00 p.m. (New York City time) on the Trading Date prior to the Initial Exercise Date, the Company agrees to deliver the Warrant Shares subject to such notice(s) by 4:00 p.m. (New York City time) on the Initial Exercise Date and the Initial Exercise Date shall be the Warrant Share Delivery Date for purposes hereunder, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received by such Warrant Share Delivery Date. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
1
b) Exercise Price. The exercise price per share of Common Stock under this Warrant shall be $11.50, subject to adjustment hereunder (the “Exercise Price”).
c) Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = as applicable: (i) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 2(a) hereof on a Trading Day prior to the opening of “regular trading hours” (as defined in Rule 600(b)(68) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) at the option of the Holder, either (y) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise or (z) the Bid Price of the Common Stock on the principal Trading Market as reported by Bloomberg L.P. (“Bloomberg”) as of the time of the Holder’s execution of the applicable Notice of Exercise if such Notice of Exercise is executed during “regular trading hours” on a Trading Day and is delivered within two (2) hours thereafter (including until two (2) hours after the close of “regular trading hours” on a Trading Day) pursuant to Section 2(a) hereof or (iii) the VWAP on the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 2(a) hereof after the close of “regular trading hours” on such Trading Day;
2
(B) = the Exercise Price of this Warrant, as adjusted hereunder; and
(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the characteristics of the Warrants being exercised, and the holding period of the Warrant Shares being issued may be tacked on to the holding period of this Warrant. The Company agrees not to take any position contrary to this Section 2(c).
“Bid Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the bid price of the Common Stock for the time in question (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on The Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers of a majority in interest of the Securities then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in The Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers of a majority in interest of the Securities then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
Notwithstanding anything herein to the contrary, on the Termination Date, unless the Holder notifies the Company otherwise, if there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder and the Exercise Price is greater than the VWAP on the Trading Day immediately preceding the date on which the Warrant would otherwise expire, then this Warrant shall be automatically exercised via cashless exercise pursuant to this.
3
d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144 (assuming cashless exercise of the Warrants), and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earliest of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise, (ii) one (1) Trading Day after delivery of the aggregate Exercise Price to the Company and (iii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.
ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
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v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that, in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
vii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
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e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within one Trading Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
f) Issuance Restrictions. If the Company has not obtained shareholder approval, and such shareholder approval is required pursuant to the rules of the principal Trading Market, then the Company may not issue any Warrant Shares in excess of the amount permitted under the rules of the principal Trading Market.
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g) Call Provision. If, at any time after the Initial Exercise Date, (i) the VWAP of the Common Stock on the principal Trading Market as reported by Bloomberg L.P. exceeds a $10.00 premium to the Exercise Price in effect for twenty (20) consecutive Trading Days (the “Measurement Period”); (ii) the aggregate value of the shares of the Company’s common stock traded on its principal Trading Market as reported by Bloomberg, L.P. on each day during the Measurement Period exceeds $2,000,000, (iii) there is an effective registration statement under the Securities Act of 1933, as amended covering the resale of the shares of Common Stock issuable upon exercise of this Warrant, (iv) the Holder is not in possession of any information provided by the Company that constitutes material nonpublic information, (v) [reserved], and (vi) no Event of Default (as defined in the Note or any other Transaction Document, which has not been timely cured or an event which with the passage of time or giving notice could become an Event of Default is pending, then the Company may call for cancellation of that portion of this Warrant for which an Exercise Notice has not yet been delivered as of the date of the Call Notice (as defined below) for consideration equal to $0.001 per Warrant Share up to one-half, in the aggregate, of the Warrant Shares issuable upon full exercise of this Warrant. The Company shall deliver to the Holder a written notice (a “Call Notice”) of any call for cancellation of the Warrants pursuant to this Section 2(g) within three (3) Trading Days following the last day of the Measurement Period. The Call Notice must be personally delivered to Holder, unless Holder acknowledges in writing or electronically receipt of the Call Notice if not delivered personally. On the twentieth (20th) Trading Day after the date of the Call Notice (the “Call Date”), the portion of this Warrant for which an Exercise Notice shall not have been received by the Call Date will be cancelled at 5:30 p.m. (local time in New York City, New York). In furtherance of the foregoing, the Company covenants and agrees that it will honor all Exercise Notices that are tendered on or before 5:29 p.m. (local time in New York City, New York) on the Call Date. A Call Notice may not be given to the Holder with respect to any Warrants which if exercised pursuant to Section 2(a) would cause such Holder to exceed the Beneficial Ownership Limitation. Unless otherwise agreed to by the Holder of this Warrant, a Call Notice must be given to all other holders of Warrants issued pursuant to the Note in proportion to the amount of Warrants held by all such Holders on the date of the Call Notice without giving effect to the Beneficial Ownership Limitation. A Call Notice with respect to any “Warrants” issued pursuant to the terms hereof may not be given more frequently than one (1) time each twenty (20) Trading Days.
Section 3. Certain Adjustments.
a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
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b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, that, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
c) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, that, to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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d) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company (or any Subsidiary), directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off, merger or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction (or, if later, the date of the public announcement of the applicable Fundamental Transaction), purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value (as defined below) of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction; provided, however, that, if the Fundamental Transaction is not within the Company's control, including not approved by the Company's Board of Directors, Holder shall only be entitled to receive from the Company or any Successor Entity the same type or form of consideration (and in the same proportion), at the Black Scholes Value of the unexercised portion of this Warrant, that is being offered and paid to the holders of Common Stock of the Company in connection with the Fundamental Transaction, whether that consideration be in the form of cash, stock or any combination thereof, or whether the holders of Common Stock are given the choice to receive from among alternative forms of consideration in connection with the Fundamental Transaction; provided, further, that if holders of Common Stock of the Company are not offered or paid any consideration in such Fundamental Transaction, such holders of Common Stock will be deemed to have received common stock of the Successor Entity (which Entity may be the Company following such Fundamental Transaction) in such Fundamental Transaction. “Black Scholes Value” means the value of this Warrant based on the Black-Scholes Option Pricing Model obtained from the “OV” function on Bloomberg determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg (determined utilizing a 365 day annualization factor) as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the greater of (i) the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (ii) the highest VWAP during the period beginning on the Trading Day immediately preceding the announcement of the applicable Fundamental Transaction (or the consummation of the applicable Fundamental Transaction, if earlier) and ending on the Trading Day of the Holder’s request pursuant to this Section 3(e) and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date and (E) a zero cost of borrow. The payment of the Black Scholes Value will be made by wire transfer of immediately available funds (or such other consideration) within the later of (i) five Business Days of the Holder’s election and (ii) the date of consummation of the Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant and the other Transaction Documents in accordance with the provisions of this Section 3(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.
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e) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
f) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company (or any of its Subsidiaries) is a party, any sale or transfer of all or substantially all of its assets, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
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Section 4. Transfer of Warrant.
a) Transferability. Subject to compliance with any applicable securities laws, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date on which the Holder delivers an assignment form to the Company assigning this Warrant in full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Initial Exercise Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company and its transfer agent for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
d) Transfer Restrictions. [Reserved].
e) Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.
Section 5. Miscellaneous.
a) No Rights as Stockholder Until Exercise; No Settlement in Cash. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3. Without limiting any rights of a Holder to receive Warrant Shares on a “cashless exercise” pursuant to Section 2(c) or to receive cash payments pursuant to Section 2(d)(i) and Section 2(d)(iv) herein, in no event shall the Company be required to net cash settle an exercise of this Warrant.
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b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.
d) Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
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e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant and the other Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of Nevada, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in Clark County, Nevada. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in Clark County, Nevada for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any action, suit or proceeding, any claim that any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
IN ANY ACTION, SUIT, OR PROCEEDING IN ANY JURISDICTION BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY, THE PARTIES EACH KNOWINGLY AND INTENTIONALLY, TO THE GREATEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY ABSOLUTELY, UNCONDITIONALLY, IRREVOCABLY AND EXPRESSLY WAIVES FOREVER TRIAL BY JURY.
f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the other Transaction Documents, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Note.
i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
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j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.
m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
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(Signature Page Follows)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized effective as of the date first above indicated.
SOLUNA HOLDINGS, INC. |
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| By: | |||
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Name: Michael Toporek Title: CEO |
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NOTICE OF EXERCISE
To: SOLUNA HOLDINGS, INC.
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
_______________________________
The Warrant Shares shall be delivered to the following DWAC Account Number:
_______________________________
_______________________________
_______________________________
(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.
[SIGNATURE OF HOLDER]
Name of Investing Entity: _________________________________________________________________________________________
Signature of Authorized Signatory of Investing Entity: __________________________________________________________________
Name of Authorized Signatory: ____________________________________________________________________________________
Title of Authorized Signatory: _____________________________________________________________________________________
Date: ________________________________________________________________________________________________________
EXHIBIT B
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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| Address: | |||
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Phone Number:
Email Address:
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(Please Print)
______________________________________
______________________________________
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Dated: _______________ __, ______
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Holder’s Signature:_______________________________
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| Holder’s Address:________________________________ |
Exhibit 4.13
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12
OF THE SECURITIES EXCHANGE ACT OF 1934
Soluna Holdings, Inc., or the Company, we, us or our, has two classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, common stock, $0.001 par value per share, or common stock, and 9.0% Series A Cumulative Perpetual Preferred Stock, par value $0.001 per share, or Series A Preferred Stock. Our common stock and Series A Preferred Stock are listed on The Nasdaq Stock Market LLC, or Nasdaq.
DESCRIPTION OF SHARES OF COMMON STOCK AND PREFERRED STOCK
The following description of the terms of our shares of common and preferred stock is a summary only. This summary is not complete and is qualified in its entirety by reference to the Company’s Articles of Incorporation, as amended, and Bylaws, the Certificate of Designation, Preferences and Rights of the Series A Preferred Stock, or the Certificate, and applicable Nevada law. The Company’s Articles of Incorporation and Bylaws and the Certificate are filed as exhibits to this Annual Report on Form 10-K.
General
Our Articles of Incorporation authorizes us to issue up to 85,000,000 shares of stock, consisting of 75,000,000 shares of common stock and 10,000,000 shares of preferred stock.
Under our Articles of Incorporation, our Board of Directors, or the Board, without stockholder approval, is authorized to provide for the issuance of shares of common stock or preferred stock in one or more classes or series, to establish the number of shares in each class or series, and to fix the terms thereof.
Common Stock
Voting rights. The holders of our common stock are entitled to one vote per share held and have the right and power to vote on all matters on which a vote of stockholders is taken. Stockholders do not have cumulative voting rights in the election of directors. The election of directors of the Company is decided by plurality vote and all other questions are decided by majority vote of stockholders present in person or by proxy, except as otherwise required by the NRS or our Articles of Incorporation. Our Articles of Incorporation provide that notwithstanding any other provision of our Articles of Incorporation or our Bylaws (and notwithstanding the fact that some lesser percentage may be specified by law, the Articles of Incorporation, or the Bylaws), any director or the entire Board of Directors may be removed at any time, but only for cause or after the affirmative vote of 75% or more of the outstanding shares of capital stock entitled to vote for the election of directors at a meeting called for that purpose or after the affirmative vote of 75% of the entire Board.
The Board is divided into three classes, with each class consisting, as nearly as may be possible, of one-third of the total number of directors, with the terms of the classes scheduled to expire in successive years. At each annual meeting of the Company’s stockholders, the stockholders elect the members of a single class of directors for three-year terms.
Dividends. The holders of our common stock are entitled to receive dividends when, as, and if declared by the Board, out of funds legally available therefor.
Liquidation. Upon liquidation, dissolution, or the winding up of the Company, holders of our common stock are entitled to receive any remaining assets of the Company in proportion to the respective number of shares held after payment of and reservation for Company liabilities.
Preemptive Rights. The holders of shares of our common stock do not have any preemptive right to subscribe for or purchase any shares of any class of stock of the Company.
Redemption Rights. The outstanding shares of common stock are not subject to redemption by the Company. To the extent that the Company issues additional shares of common stock, the relative interest in the Company of existing stockholders will likely be diluted.
Series A Preferred Stock
The following is a summary of some general terms and provisions of our Series A Preferred Stock. Because it is a summary, it does not contain all of the information that may be important to you. If you want more information, you should read our Articles of Incorporation and Bylaws and the Certificate, copies of which are filed as exhibits to this Annual Report on Form 10-K.
General. Our Articles of Incorporation authorize the Board, without obtaining stockholder approval, to issue up to 10,000,000 shares of preferred stock, par value $0.001 per share, from time to time, in one or more series, and to fix the number of shares and determine for each such series such voting powers, designations, preferences, and relative participating, optional, or other rights and such qualifications, limitations, or restrictions thereof. The Board is also expressly authorized to increase or decrease (but not below the number of such series then outstanding) the number of shares of any series subsequent to the issuance of shares of that series. If the number of shares of any series is decreased, the shares no longer designated as shares of such series will resume the status of “blank check” preferred stock and may be designated, again, as a new series of Preferred Stock by the Board.
As of December 31, 2021, 3,640,000 shares of our preferred stock were designated as Series A Preferred Stock. The number of authorized shares of Series A Preferred Stock may from time to time be further increased (but not in excess of the total number of authorized shares of our preferred stock, less all shares of any other series of our preferred stock authorized at the time of such increase) or decreased (but not below the number of shares of the Series A Preferred Stock then outstanding) by resolution of the Board (or a duly authorized committee of the Board), without the vote or consent of the holders of the Series A Preferred Stock. Shares of the Series A Preferred Stock that are redeemed, repurchased or otherwise acquired by the Company will be cancelled and revert to authorized but unissued shares of our preferred stock undesignated as to series. We have the authority to issue fractional shares of the Series A Preferred Stock and reserve the right to further re-open this series and issue additional shares of the Series A Preferred Stock either through public or private sales at any time and from time to time without notice to or the consent of holders of the Series A Preferred Stock.
No Maturity or Mandatory Redemption. The Series A Preferred Stock has no maturity date and the Company is not required to redeem the Series A Preferred Stock at any time. Accordingly, the Series A Preferred Stock will remain outstanding indefinitely, unless the Company decides, at our option, to exercise our redemption right or, under circumstances as described in “Limited Conversion Rights,” where the holders of Series A Preferred Stock have a conversion right, such holders convert the Series A Preferred Stock into Common Stock. The Series A Preferred Stock is not subject to any sinking fund.
Ranking. The Series A Preferred Stock, as to dividend rights and rights as to the distribution of assets upon the Company’s liquidation, dissolution or winding up, rank:
| (1) | senior to all classes or series of the Company’s common stock and to all other capital stock issued by the Company expressly designated as ranking junior to the Series A Preferred Stock; |
| (2) | on parity with any future class or series of the Company’s capital stock expressly designated as ranking on parity with the Series A Preferred Stock; |
| (3) | junior to any future class or series of the Company’s capital stock expressly designated as ranking senior to the Series A Preferred Stock; and |
| (4) | junior to all the Company’s existing and future indebtedness (including subordinated indebtedness and any indebtedness convertible into our common stock or preferred stock) and other liabilities with respect to assets available to satisfy claims against the Company and structurally subordinated to the indebtedness and other liabilities of (as well as any preferred equity interests held by others in) existing or future subsidiaries of the Company. |
We may issue junior capital stock described in (1) above and parity capital stock described in (2) above at any time and from time to time in one or more series without the consent of the holders of the Series A Preferred Stock. Our ability to issue any senior capital stock described in (3) above is limited as described under “Limited Voting Rights.”
Dividends. Subject to the preferential rights, if any, of the holders of any class or series of capital stock of the Company ranking senior to the Series A Preferred Stock as to dividends, the holders of the Series A Preferred Stock are entitled to receive, when, as and if declared by the Board (or a duly authorized committee of the Board), only out of funds legally available for the payment of dividends, cumulative cash dividends at the annual rate of 9.0% of the $25.00 liquidation preference per year (equivalent to $2.25 per year). A “Dividend Period” is the period from and including a Dividend Payment Date (as defined herein and continuing to, but excluding, the next succeeding Dividend Payment Date. Dividends on the Series A Preferred Stock will accumulate and be cumulative from, and including, August 23, 2021, or the Original Issue Date; except that shares of the Series A Preferred Stock issued after the Original Issue Date will accrue dividends from the later of the Original Issue Date and the Dividend Payment Date immediately prior to the original issue date of such additional shares for which full cumulative dividends have been paid.
Dividends, when, as and if declared by the Board (or a duly authorized committee of the Board), will be payable monthly in arrears on the final day of each month, provided that if any dividend payment date is not a Business Day (as defined below), then such date will nevertheless be a dividend payment date but the dividend which would otherwise have been payable on that Dividend Payment Date, when, as and if declared, will be paid on the next succeeding Business Day and no interest, additional dividends or other sums will accumulate on the amounts so payable for the period from and after that dividend payment date to that next succeeding Business Day. “Business Day” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close.
Any dividend, including any dividend payable on the Series A Preferred Stock for any Dividend Period (or portion thereof) will be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends are payable to holders of record of Series A Preferred Stock as they appear in the records of the Transfer Agent at the close of business on the applicable record date, which will be the date designated by the Board (or a duly authorized committee of the Board) for the payment of a dividend that is not more than thirty (30) nor less than ten (10) days prior to the applicable dividend payment date.
The Board (or a duly authorized committee of the Board) will not authorize, pay or set apart for payment by the Company any dividend on the Series A Preferred Stock at any time that: (i) the terms and provisions of any of the Company’s agreements, including any agreement relating to the Company’s indebtedness, prohibits such authorization, payment or setting apart for payment; (ii) the terms and provisions of any of the Company’s agreements, including any agreement relating to the Company’s indebtedness, provides that such authorization, payment or setting apart for payment thereof would constitute a breach of, or a default under, such agreement; or (iii) the law restricts or prohibits the authorization or payment. Notwithstanding the foregoing, dividends on the Series A Preferred Stock will accumulate whether or not the terms and provisions of any of the Company’s agreements relating to our indebtedness prohibit such authorization, payment or setting apart for payment, the Company has earnings, there are funds legally available for the payment of the dividends, or the dividends are authorized. Accordingly, if the Board (or a duly authorized committee of the Board) does not declare a dividend on the Series A Preferred Stock payable in respect of any Dividend Period before the related Dividend Payment Date, such dividend will accumulate and an amount equal to such accumulated dividend will become payable out of funds legally available therefor upon the liquidation, dissolution or winding up of the Company’s affairs (or earlier redemption of such Series A Preferred Stock), to the extent not paid prior to such liquidation, dissolution or winding up or earlier redemption, as the case may be. No interest, or sums in lieu of interest, will be payable in respect of any dividend payment or payments on the Series A Preferred Stock, which may be in arrears, and holders of the Series A Preferred Stock will not be entitled to any dividends in excess of the full cumulative dividends described above. Any dividend payment made on the Series A Preferred Stock will first be credited against the earliest accumulated but unpaid dividends due with respect to those shares.
Restrictions on Dividends, Redemption and Repurchases. So long as any share of the Series A Preferred Stock remains outstanding, unless the Company also has either paid or declared and set apart for payment full cumulative dividends on the Series A Preferred Stock for all past completed Dividend Periods, the Company will not during any Dividend Period:
| (1) | pay or declare and set apart for payment any dividends or declare or make any distribution of cash or other property on common stock or other capital stock that ranks junior to or on parity with the Series A Preferred Stock with respect to dividend rights and rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up (other than, in each case, (a) a dividend paid in common stock or other stock ranking junior to the Series A Preferred Stock with respect to dividend rights and rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up or (b) any declaration of a common stock dividend in connection with any stockholders’ rights plan, or the issuance of rights, stock or other property under any stockholders’ rights plan, or the redemption or repurchase of rights pursuant to the plan); |
| (2) | redeem, purchase or otherwise acquire common stock or other capital stock that ranks junior to or on parity with the Series A Preferred Stock (other than the Series A Preferred Stock) with respect to dividend rights and rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up (other than (a) by conversion into or exchange for common stock or other capital stock ranking junior to the Series A Preferred Stock with respect to dividend rights and rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up, (b) the redemption of shares of capital stock pursuant to the provisions of the Articles of Incorporation relating to the restrictions upon ownership and transfer of our capital stock, (c) a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series A Preferred Stock and any other capital stock that ranks on parity with the Series A Preferred Stock with respect to dividend rights and rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up, (d) purchases, redemptions or other acquisitions of shares of the Company’s capital stock ranking junior to the Series A Preferred Stock with respect to dividend rights and rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up pursuant to any employment contract, dividend reinvestment and stock purchase plan, benefit plan or other similar arrangement with or for the benefit of employees, officers, directors, consultants or advisors, (e) through the use of the proceeds of a substantially contemporaneous sale of stock ranking junior to the Series A Preferred Stock with respect to dividend rights and rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up, or (f) purchases or other acquisitions of shares of the Company’s capital stock pursuant to a contractually binding stock repurchase plan existing prior to the preceding dividend payment date on which dividends were not paid in full); or |
| (3) | redeem, purchase or otherwise acquire Series A Preferred Stock (other than (a) by conversion into or exchange for common stock or other capital stock ranking junior to the Series A Preferred Stock with respect to dividend rights and rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up, (b) a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series A Preferred Stock or (c) with respect to redemptions, a redemption pursuant to which all shares of Series A Preferred Stock are redeemed). |
Notwithstanding the foregoing, if the Board (or a duly authorized committee of the Board) elects to declare only partial instead of full dividends for a Dividend Payment Date and related Dividend Period on the shares of the Series A Preferred Stock or any class or series of the Company’s capital stock that ranks on parity with the Series A Preferred Stock with respect to dividends, then, to the extent permitted by the terms of the Series A Preferred Stock and each outstanding class or series of the Company’s capital stock that ranks on parity with the Series A Preferred Stock with respect to dividends, such partial dividends will be declared on shares of the Series A Preferred Stock and class or series of the Company’s capital stock that ranks on parity with the Series A Preferred Stock with respect to dividends, and dividends so declared will be paid, as to any such Dividend Payment Date and related Dividend Period, in amounts such that the ratio of the partial dividends declared and paid on each such series to full dividends on each such series is the same. As used herein, “full dividends” means, as to any class or series of the Company’s capital stock that ranks on parity with the Series A Preferred Stock with respect to dividends that bears dividends on a cumulative basis, the amount of dividends that would need to be declared and paid to bring such class or series of the Company’s capital stock that ranks on parity with the Series A Preferred Stock with respect to dividends current in dividends, including undeclared dividends for past Dividend Periods. To the extent a Dividend Period with respect to the Series A Preferred Stock or any class or series of the Company’s capital stock that ranks on parity with the Series A Preferred Stock with respect to dividends (in either case, the “first series”) coincides with more than one Dividend Period with respect to another series as applicable (in either case, a “second series”), then, for purposes of this paragraph, the Board (or a duly authorized committee of the Board) may, to the extent permitted by the terms of each affected series, treat such Dividend Period for the first series as two or more consecutive Dividend Periods, none of which coincides with more than one Dividend Period with respect to the second series, or may treat such Dividend Period(s) with respect to any class or series of the Company’s capital stock that ranks on parity with the Series A Preferred Stock with respect to dividends and Dividend Period(s) with respect to the Series A Preferred Stock for purposes of this paragraph in any other manner that it deems to be fair and equitable in order to achieve ratable payments of dividends on such class or series of the Company’s capital stock that ranks on parity with the Series A Preferred Stock with respect to dividends and the Series A Preferred Stock.
Subject to the foregoing, dividends (payable in cash, stock or otherwise) as may be determined by the Board (or a duly authorized committee of the Board) may be declared and paid on the common stock or other stock ranking junior to the Series A Preferred Stock with respect to dividend rights and rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up from time to time out of any funds legally available therefor, and the shares of the Series A Preferred Stock shall not be entitled to participate in any such dividend.
Liquidation Preference. In the event of the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, holders of shares of Series A Preferred Stock are entitled to be paid out of the assets of the Company legally available for distribution to our stockholders (i.e., after satisfaction of all the Company’s liabilities to creditors, if any) and, subject to the rights of holders of any shares of each other class or series of capital stock ranking, as to rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up, senior to the Series A Preferred Stock, a liquidation preference of $25.00 per share, plus an amount equal to any accumulated and unpaid dividends to the date of payment (whether or not declared), before any distribution or payment may be made to holders of shares of the common stock or any other class or series of the Company’s capital stock ranking, as to rights to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up, junior to the Series A Preferred Stock, or the liquidation preference.
If, upon such voluntary or involuntary liquidation, dissolution or winding up of the Company’s affairs, the assets of the Company legally available for distribution to the Company’s stockholders are insufficient to pay the full amount of the liquidation preference on all outstanding shares of Series A Preferred Stock and the corresponding amounts payable on all shares of each other class or series of capital stock of the Company ranking, as to rights to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up, on parity with the Series A Preferred Stock, then the holders of the Series A Preferred Stock and each such other class or series of capital stock of the Company ranking, as to rights to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up, on parity with the Series A Preferred Stock will share ratably in any distribution of assets in proportion to the full liquidation preference to which they would otherwise be respectively entitled. In any such distribution, the liquidation preference of any holder of the Company’s capital stock other than the Series A Preferred Stock means the amount otherwise payable to such holder in such distribution (assuming no limitation on the Company’s assets available for such distribution), including an amount equal to any declared but unpaid dividends in the case of any holder or stock on which dividends accrue on a non-cumulative basis and, in the case of any holder of stock on which dividends accrue on a cumulative basis, an amount equal to any unpaid, accrued, cumulative dividends, whether or not earned or declared, as applicable.
Holders of Series A Preferred Stock are entitled to written notice of any voluntary or involuntary liquidation, dissolution or winding up of the Company, no fewer than thirty (30) days and no more than sixty (60) days prior to the payment date.
If the liquidation preference has been paid in full to all holders of the Series A Preferred Stock and each such other class or series of capital stock ranking, as to rights to the distribution of assets any voluntary or involuntary liquidation, dissolution or winding up, on parity with the Series A Preferred Stock, holders of shares of the Series A Preferred Stock and each such other class or series of capital stock ranking, as to rights to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up, on parity with the Series A Preferred Stock will have no right or claim to any of the Company’s remaining assets and the holders of shares of common stock or any class or series of capital stock ranking, as to rights to the distribution of assets any voluntary or involuntary liquidation, dissolution or winding up, junior to the Series A Preferred Stock, will be entitled to receive all of the Company’s remaining assets according to their respective rights and preferences.
The consolidation, merger or other business combination of the Company with or into any other entity or the sale, lease, transfer or conveyance of all or substantially all of the assets, property or business of the Company will not be deemed to constitute a liquidation, dissolution or winding up of the Company.
Redemption. The Series A Preferred Stock is not redeemable by us prior to August 23, 2026, except as described below under “Optional Redemption” and “Special Optional Redemption.”
Optional Redemption. On or after August 23, 2026, the Series A Preferred Stock may be redeemed at the Company’s option, in whole or in part, from time to time, at a redemption price of $25.00 per share of Series A Preferred Stock, plus all dividends accumulated and unpaid (whether or not declared) on the Series A Preferred Stock up to, but not including, the date of such redemption, or the Redemption Date, upon the giving of notice, as provided below under “Redemption Procedures.”
Special Optional Redemption. During any period of time (whether before or after August 23, 2026) that both (i) the Series A Preferred Stock are no longer (a) listed on Nasdaq, the New York Stock Exchange LLC, or the NYSE, or the NYSE American LLC, or the NYSE AMER, or (b) listed or quoted on an exchange or quotation system that is a successor to Nasdaq, the NYSE or the NYSE AMER, and (ii) we are not subject to the reporting requirements of the Exchange Act, but any Series A Preferred Stock is still outstanding (collectively, a “Delisting Event”), we may, at our option, redeem the Series A Preferred Stock, in whole or in part and within ninety (90) days after the date of the Delisting Event, or the Delisting Event Redemption Period, by paying $25.00 per share of Series A Preferred Stock, plus all dividends accumulated and unpaid (whether or not declared) on the Series A Preferred Stock up to, but not including, the Redemption Date.
During any period of time (whether before or after August 23, 2026), upon the occurrence of a Change of Control (as defined below), the Company may, at our option, redeem the Series A Preferred Stock, in whole or in part and within one hundred twenty (120) days after the first date on which such Change of Control occurred, or the Change of Control Redemption Period, by paying $25.00 per share of Series A Preferred Stock, plus all dividends accumulated and unpaid (whether or not declared) on the Series A Preferred Stock up to, but not including, the date of such redemption.
If, prior to the Delisting Event Conversion Date or Change of Control Conversion Date (each as defined below), as applicable, the Company has provided or provides notice of redemption with respect to the Series A Preferred Stock (whether pursuant to our optional redemption right in “Optional Redemption” or our special optional redemption rights in “Special Optional Redemption” as described above), the holders of Series A Preferred Stock will not be permitted to exercise the conversion rights in “Limited Conversion Rights” below in respect of their shares called for redemption.
A “Change of Control” is when, after the Original Issue Date, the following have occurred and are continuing:
| (1) | the acquisition by any person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of shares of the Company’s stock entitling that person to exercise more than 50% of the total voting power of all shares of the Company’s stock entitled to vote generally in elections of the Company’s directors (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and |
| (2) | following the closing of any transaction referred to in (1) above, neither the Company nor any acquiring or surviving entity (or, if, in connection with such transaction shares of common stock are converted into or exchanged for (in whole or in part) common capital stock of another entity, such other entity) has a class of common securities (or American Depositary Receipts representing such securities) (x) listed on Nasdaq, the NYSE, or the NYSE AMER or (y) listed or quoted on an exchange or quotation system that is a successor to Nasdaq, the NYSE or the NYSE AMER. |
Redemption Procedures. In the event the Company elects to redeem Series A Preferred Stock, notice of redemption will be mailed to each holder of record of Series A Preferred Stock called for redemption at such holder’s address as it appears on the Company’s stock transfer records, not less than thirty (30) nor more than sixty (60) days prior to the Redemption Date. Any notice mailed as provided in this paragraph shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series A Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series A Preferred Stock. Notwithstanding the foregoing, if the shares of Series A Preferred Stock are issued in book-entry form through The Depository Trust Company, or DTC, or any other similar facility, notice of redemption may be given to the holders of Series A Preferred Stock at such time and in any manner permitted by such facility.
The notice will notify the holder of the election to redeem the shares and will state at least the following: (i) the Redemption Date; (ii) the redemption price; (iii) the number of shares of Series A Preferred Stock to be redeemed (and, if fewer than all the shares are to be redeemed, the number of shares to be redeemed from such holder or the method for determining such number); (iv) the place(s) where holders may surrender certificates, if any, evidencing the Series A Preferred Stock for payment; (v) if applicable, that the Series A Preferred Stock is being redeemed pursuant to the Company’s special optional redemption right in connection with the occurrence of a Delisting Event or Change of Control, as applicable, and a brief description of the transaction or transactions or circumstances constituting such Delisting Event or Change of Control, as applicable; (vi) if applicable, that the holders of the Series A Preferred Stock to which the notice relates will not be able to convert such shares of Series A Preferred Stock in connection with the Delisting Event or Change of Control, as applicable, and each share of Series A Preferred Stock tendered for conversion that is selected, prior to the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable, for redemption will be redeemed on the related date of redemption instead of converted on the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable; and (vii) that dividends on such shares of Series A Preferred Stock will cease to accumulate on the date prior to the Redemption Date.
If fewer than all of the outstanding shares of Series A Preferred Stock are to be redeemed, the shares to be redeemed will be determined pro rata (as nearly as practicable without creating fractional shares) or by lot. So long as all shares of Series A Preferred Stock are held of record by the nominee of DTC, the Company will give notice, or cause notice to be given, to DTC of the number of Series A Preferred Stock to be redeemed, and DTC will determine the number of Series A Preferred Stock to be redeemed from the account of each of its participants holding such shares in its participant account. Thereafter, each participant will select the number of shares to be redeemed from each beneficial owner for whom it acts (including the participant, to the extent it holds Series A Preferred Stock for its own account). A participant may determine to redeem Series A Preferred Stock from some beneficial owners (including the participant itself) without redeeming Series A Preferred Stock from the accounts of other beneficial owners. Subject to the provisions hereof, the Board (or a duly authorized committee of the Board) shall have full power and authority to prescribe the terms and conditions on which shares of Series A Preferred Stock shall be redeemed from time to time. If the Company shall have issued certificates for the Series A Preferred Stock and fewer than all shares represented by any certificates are redeemed, new certificates shall be issued representing the unredeemed shares without charge to the holders thereof.
On or after the Redemption Date, each holder of Series A Preferred Stock to be redeemed that holds a certificate other than through DTC book entry as described below must present and surrender the certificates evidencing the shares of Series A Preferred Stock at the place designated in the notice of redemption and shall be entitled to the redemption price and any accumulated and unpaid dividends payable upon the redemption following the surrender.
From and after the Redemption Date or, if notice of redemption has been duly given, and if on or before the Redemption Date specified in the notice, all funds necessary for the redemption have been set aside by the Company, separate and apart from the Company’s other funds, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available for that purpose, then, in each case unless the Company defaults in payment of the redemption price: (i) all dividends on the shares designated for redemption in the notice will cease to accumulate on or after the Redemption Date; (ii) all rights of the holders of the shares, except the right to receive the redemption price thereof (including all accumulated and unpaid dividends up to the date prior to the Redemption Date), will cease and terminate; and (iii) the shares designated for redemption in the notice will be deemed to not be outstanding for any purpose whatsoever.
Any funds held in trust and unclaimed at the end of two years from the Redemption Date, to the extent permitted by law, shall be released from the trust so established and may be commingled with the Company’s other funds, and after that time the holders of the shares so called for redemption shall look only to the Company for payment of the redemption price of such shares.
Notwithstanding the foregoing, any declared but unpaid dividends payable on a Redemption Date that occurs subsequent to the applicable record date for a Dividend Period shall not be paid to the holder entitled to receive the redemption price on the Redemption Date, but rather shall be paid to the holder of record of the redeemed shares on such record date relating to the applicable Dividend Payment Date.
Limited Conversion Rights. The shares of Series A Preferred Stock are not convertible into or exchangeable for any other property or securities of the Company or any other entity, except as provided below.
Upon the occurrence of a Delisting Event or a Change of Control, as applicable, each holder of Series A Preferred Stock will have the right, unless, prior to the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable, the Company has provided or provides notice of our election to redeem the Series A Preferred Stock pursuant to “Optional Redemption” or “Special Optional Redemption,” to convert some or all of the shares of Series A Preferred Stock held by such holder (the “Delisting Event Conversion Right” or “Change of Control Conversion Right,” as applicable) on the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable, into a number of shares of common stock (or equivalent value of alternative consideration) per share of Series A Preferred Stock, or the Common Stock Conversion Consideration, equal to the lesser of: (i) the quotient obtained by dividing (1) the sum of (x) the $25.00 liquidation preference per share of Series A Preferred Stock plus (y) the amount of any accumulated and unpaid dividends to, but not including, the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable (unless the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable, is after a record date for a Series A Preferred Stock dividend payment and prior to the corresponding Series A Preferred Stock Dividend Payment Date, in which case no additional amount relating to such record date will be included in this sum) by (2) the Common Stock Price (as defined herein); and (ii) 7.04225352, or the Share Cap, subject to certain adjustments described below.
The Share Cap is subject to pro rata adjustments for any share splits (including those effected pursuant to a distribution of shares of common stock to existing holders of common stock), subdivisions or combinations (in each case, a “Share Split”) with respect to common stock as follows: the adjusted Share Cap as the result of a Share Split will be the number of shares of common stock that is equivalent to the product obtained by multiplying (i) the Share Cap in effect immediately prior to such Share Split by (ii) a fraction, the numerator of which is the number of shares of common stock outstanding after giving effect to such Share Split and the denominator of which is the number of shares of common stock outstanding immediately prior to such Share Split.
In the case of a Delisting Event or Change of Control, as applicable, pursuant to, or in connection with, which shares of common stock will be converted into cash, securities or other property or assets (including any combination thereof), or the Alternative Form Consideration, a holder of Series A Preferred Stock electing to exercise its Delisting Event Conversion Right or Change of Control Conversion Right, as applicable, will receive upon conversion of such Series A Preferred Stock the kind and amount of Alternative Form Consideration which such holder would have owned or been entitled to receive upon the Delisting Event or Change of Control, as applicable, had such holder held a number of shares of common stock equal to the common stock Conversion Consideration immediately prior to the effective time of the Delisting Event or Change of Control, as applicable (the “Alternative Conversion Consideration;” and the Common Stock Conversion Consideration or the Alternative Conversion Consideration, as may be applicable to a Delisting Event or Change of Control, as applicable, is referred to herein as the “Conversion Consideration”).
If the holders of common stock have the opportunity to elect the form of consideration to be received in the Delisting Event or Change of Control, as applicable, the Conversion Consideration that the holders of Series A Preferred Stock will receive will be the form and proportion of the aggregate consideration elected by the holders of common stock who participate in the determination (based on the weighted average of elections) and will be subject to any limitations to which all holders of common stock are subject, including, without limitation, pro rata reductions applicable to any portion of the consideration payable in, or in connection with, the Delisting Event or Change of Control, as applicable.
The Company will not issue fractional shares of common stock upon the conversion of the Series A Preferred Stock. In the event that the conversion would result in the issuance of fractional shares of common stock, the Company will pay the holder of Series A Preferred Stock the cash value of such fractional shares in lieu of such fractional shares.
Within fifteen (15) days following the expiration of the Delisting Event Redemption Period or the Change of Control Redemption Period, as applicable, (or, if the Company waives our right to redeem the Series A Preferred Stock prior to the expiration of the Delisting Event Redemption Period or the Change of Control Redemption Period, as applicable, within fifteen (15) days following the date of such waiver) the Company will provide to holders of Series A Preferred Stock a notice of occurrence of the Delisting Event or Change of Control, as applicable, that describes the resulting Delisting Event Conversion Right or Change of Control Conversion Right, as applicable. This notice will state the following:
| (i) | the events constituting the Delisting Event or Change of Control, as applicable; | |
| (ii) | the date of the Delisting Event or Change of Control, as applicable; | |
| (iii) | the date on which the Delisting Event Redemption Period or the Change of Control Redemption Period, as applicable, expired or was waived; | |
| (iv) | the last date on which the holders of Series A Preferred Stock may exercise their Delisting Event Conversion Right or Change of Control Conversion Right, as applicable; | |
| (v) | the method and period for calculating the Common Stock Price (as defined below); | |
| (vi) | the “Delisting Event Conversion Date” or “Change of Control Conversion Date”, as applicable, which will be a Business Day fixed by the Board that is not fewer than twenty (20) days nor more than thirty-five (35) days after the date on which the Company provides the notice pursuant to this section to holders of the Series A Preferred Stock; | |
| (vii) | if applicable, the type and amount of Conversion Consideration entitled to be received per share of Series A Preferred Stock; | |
| (viii) | the name and address of the paying agent and the conversion agent; | |
| (ix) | the procedures that the holders of Series A Preferred Stock must follow to exercise the Delisting Event Conversion Right or Change of Control Conversion Right, as applicable; and | |
| (x) | the last date on which holders of Series A Preferred Stock may withdraw shares surrendered for conversion and the procedures that such holders must follow to effect such a withdrawal. |
The Company will issue a press release for publication on the Dow Jones & Company, Inc., Business Wire, PR Newswire or Bloomberg Business News (or, if these organizations are not in existence at the time of issuance of the press release, such other news or press organization as is reasonably calculated to broadly disseminate the relevant information to the public), or post notice on the Company’s website, in any event prior to the opening of business on the first Business Day following any date on which the Company provides notice pursuant to the notice requirement as described above to the holders of Series A Preferred Stock.
To exercise the Delisting Event Conversion Right or Change of Control Conversion Right, as applicable, each holder of Series A Preferred Stock will be required, on or before the close of business on the Business Day preceding the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable, to notify the Company of the number of Series A Preferred Stock to be converted and otherwise to comply with any applicable procedures contained in the notice described above or otherwise required by the Transfer Agent or DTC for effecting the conversion.
The “Common Stock Price” for any Change of Control will be: (i) if the consideration to be received in the Change of Control by the holders of common stock is solely cash, the amount of cash consideration per share of common stock; and (ii) if the consideration to be received in the Change of Control by holders of our common stock is other than solely cash (x) the average of the closing prices per share of our common stock on the principal U.S. securities exchange on which our common stock is then traded (or, if no closing sale price is reported, the average of the closing bid and ask prices per share or, if more than one in either case, the average of the average closing bid and the average closing ask prices per share) for the ten consecutive trading days immediately preceding, but not including, the date on which such Change of Control occurred as reported on the principal U.S. securities exchange on which our common stock is then traded, or (y) the average of the last quoted bid prices for our common stock in the over-the-counter market as reported by OTC Markets Group, Inc. or similar organization for the ten consecutive trading days immediately preceding, but not including, the date on which such Change of Control occurred, if our common stock is not then listed for trading on a U.S. securities exchange. The “Common Stock Price” for any Delisting Event will be the average of the closing price per share of our common stock on the ten (10) consecutive trading days immediately preceding, but not including, the effective date of the Delisting Event.
Holders of the Series A Preferred Stock may withdraw any notice of exercise of a Delisting Event Conversion Right or Change of Control Conversion Right, as applicable (in whole or in part), by a written notice of withdrawal delivered to the Transfer Agent prior to the close of business on the third Business Day preceding the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable. The notice of withdrawal must state: (i) the number of withdrawn shares of Series A Preferred Stock; (ii) if certificated shares of Series A Preferred Stock have been issued, the receipt or certificate numbers of the withdrawn shares of Series A Preferred Stock; and (iii) the number of shares of Series A Preferred Stock, if any, which remain subject to the conversion notice.
Notwithstanding the foregoing, if the shares of Series A Preferred Stock are held in global form, the conversion notice and/or the notice of withdrawal, as applicable, must comply with applicable procedures of DTC.
Shares of Series A Preferred Stock as to which the Delisting Event Conversion Right or Change of Control Conversion Right, as applicable, has been properly exercised and for which the conversion notice has not been properly withdrawn will be converted into the applicable Conversion Consideration in accordance with the Delisting Event Conversion Right or Change of Control Conversion Right, as applicable, on the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable, unless, prior to the Delisting Event Conversion Date or Change of Control Conversion Date, as applicable, the Company has provided or provides notice of our election to redeem such shares of Series A Preferred Stock, whether pursuant to “Optional Redemption” or “Special Optional Redemption.” If the Company elects to redeem shares of Series A Preferred Stock that would otherwise be converted into the applicable Conversion Consideration on a Delisting Event Conversion Date or Change of Control Conversion Date, as applicable, such shares of Series A Preferred Stock will not be so converted and the holders of such shares will be entitled to receive on the applicable Redemption Date $25.00 per share, plus all dividends accumulated and unpaid (whether or not declared) on the Series A Preferred Stock up to, but not including, the Redemption Date. See “Optional Redemption” and “Special Optional Redemption.”
The Company will take commercially reasonable efforts to deliver the applicable Conversion Consideration no later than the third (3rd) Business Day following the Delisting Event Conversion Date or the Change of Control Conversion Date, as applicable.
In connection with the exercise of any Delisting Event Conversion Right or Change of Control Conversion Right, as applicable, we will comply with all applicable federal and state securities laws and stock exchange rules in connection with any conversion of Series A Preferred Stock into our common stock.
The Delisting Event Conversion Right or Change of Control Conversion Right, as applicable, may make it more difficult for a third party to acquire us or discourage a party from acquiring us.
Shares of the Series A Preferred Stock are not convertible into or exchangeable for any other securities or property, except as provided above.
Limited Voting Rights. Holders of the Series A Preferred Stock do not have any voting rights, except as described below or as otherwise required by law.
In any matter in which the Series A Preferred Stock may vote (as expressly provided herein or as may be required by law), each share of Series A Preferred Stock is entitled to one vote per $25.00 of liquidation preference; provided that if the Series A Preferred Stock and any other stock ranking on parity to the Series A Preferred Stock as to dividend rights and rights as to the distribution of assets upon the Company’s liquidation, dissolution or winding up are entitled to vote together as a single class on any matter, the holders of each will vote in proportion to their respective liquidation preferences.
So long as any shares of Series A Preferred Stock remain outstanding, the Company will not, without the consent or the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock and each other class or series of preferred stock entitled to vote thereon (voting together as a single class), given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose:
| (i) | authorize, create or issue, or increase the number of authorized or issued number of shares of, any class or series of capital stock ranking senior to the Series A Preferred Stock with respect to payment of dividends or the distribution of assets upon the liquidation, dissolution or winding up of the Company or reclassify any authorized capital stock of the Company into any such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or | |
| (ii) | amend, alter or repeal the provisions of the Articles of Incorporation, as amended, including the terms of the Series A Preferred Stock, whether by merger, consolidation, transfer or conveyance of all or substantially all of the Company’s assets or otherwise, so as to materially and adversely affect the rights, preferences, privileges or voting powers of the Series A Preferred Stock, taken as a whole. |
If any event described in paragraph (ii) above would materially and adversely affect the rights, preferences, privileges or voting powers of the Series A Preferred Stock, taken as a whole, disproportionately relative to any other class or series of voting preferred stock (as defined below), the affirmative vote of the holders of at least two-thirds of the outstanding shares of the Series A Preferred Stock, voting as a separate class, will also be required. Furthermore, if holders of shares of the Series A Preferred Stock receive the $25.00 per share of the Series A Preferred Stock liquidation preference plus all accrued and unpaid dividends thereon or greater amounts pursuant to the occurrence of any of the events described in paragraph (ii) above, then such holders shall not have any voting rights with respect to the events described in such paragraph. As used herein, “voting preferred stock” means any other class or series of the Company’s preferred stock ranking equally with the Series A Preferred Stock as to dividends (whether cumulative or non-cumulative) and the distribution of the Company’s assets upon liquidation, dissolution or winding up and upon which like voting rights to the Series A Preferred Stock have been conferred and are exercisable.
The following actions are not deemed to materially and adversely affect the rights, preferences, powers or privileges of the Series A Preferred Stock:
| (i) | any increase in the amount of authorized shares of the Company’s common stock or preferred stock or the creation or issuance of capital stock or any class or series ranking, as to dividends (whether cumulative or not) or the distribution of assets upon the Company’s liquidation, dissolution or winding up, on parity with, or junior to, the Series A Preferred Stock; or |
| (ii) | the amendment, alteration or repeal or change of any provision of the Articles of Incorporation including the Certificate of Designations, as a result of a merger, consolidation, reorganization or other business combination, if (x) the shares of the Series A Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Company is not the surviving or resulting entity, the shares of Series A Preferred Stock are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (y) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and restrictions and limitations thereof, of the Series A Preferred Stock, taken as a whole, immediately prior to such consummation. |
| (iii) | Without the consent of the holders of the Series A Preferred Stock, the Company may amend, alter, supplement or repeal any terms of the Series A Preferred Stock: |
| (iv) | to cure any ambiguity, or to cure, correct or supplement any provision contained in the Certificate of Designations that may be defective or inconsistent, so long as such action does not materially and adversely affect the rights, preferences, privileges and voting powers of the Series A Preferred Stock, taken as a whole; |
| (v) | to conform the Certificate of Designations to the Description of the Series A Preferred Stock set forth in the Company’s final prospectus related to the Series A Preferred Stock, dated December 16, 2021; or |
| (vi) | to make any provision with respect to matters or questions arising with respect to the Series A Preferred Stock that is not inconsistent with the provisions of the Certificate of Designations. |
The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which the vote would otherwise be required shall be effected, all outstanding shares of the Series A Preferred Stock have been redeemed or called for redemption on proper notice and sufficient funds have been set aside by the Company for the benefit of the holders of the Series A Preferred Stock to effect the redemption within ninety (90) days unless all or a part of the outstanding shares of the Series A Preferred Stock are being redeemed with the proceeds from the sale of shares of, any class or series of stock ranking senior to the Series A Preferred Stock with respect to payment of dividends or the distribution of assets upon the Company’s liquidation, dissolution or winding up.
The rules and procedures for calling and conducting any meeting of the holders of the Series A Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the Board (or a duly authorized committee of the Board), in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Articles of Incorporation, Bylaws, applicable law and any national securities exchange or other trading facility on which the Series A Preferred Stock may be listed or traded at the time.
Holders of the Series A Preferred Stock do not have any voting rights with respect to, and the consent of the holders of the Series A Preferred Stock is not required for, the taking of any corporate action, including any merger or consolidation involving the Company or a sale of all or substantially all of the Company’s assets, regardless of the effect that such merger, consolidation or sale may have upon the powers, preferences, voting power or other rights or privileges of the Series A Preferred Stock, except as described above.
No Preemptive Rights. No holders of the Series A Preferred Stock, as holders of Series A Preferred Stock, have any preemptive rights to purchase or subscribe for the common stock or any other security.
Exclusion of Other Rights. The shares of the Series A Preferred Stock do not have any voting powers, preferences or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth in the Certificate of Designations or in our articles of incorporation, as amended.
Certain Provisions of Our Articles of Incorporation Bylaws
Our Articles of Incorporation and our Bylaws contain provisions and terms that may delay, defer, or prevent a tender offer or change in control of the Company that a stockholder might consider to be in his, her, or its best interests, including attempts that might result in a premium being paid over the market price for our shares of common stock. We expect that such provisions and terms will operate to discourage extraordinary corporate transactions with respect to the Company, such as takeover bids, and will instead encourage any potential acquiror of the Company to first correspond with our Board. These provisions and terms include:
| ● | Special meetings of stockholders may only be called by the Chief Executive Officer, President, or Secretary of the Company or otherwise by resolution of the Board; stockholders have no right to call special meetings thereof. |
| ● | The Company maintains a classified Board that is divided into three classes serving for respective three-year terms. As a result, it would take at least two successive annual meetings of stockholders to replace a majority of our Board. |
| ● | Vacancies on the Board may be filled only by majority vote of remaining directors then in office, even if less than a quorum, with the individual elected to serve for the remainder of the unexpired term. |
| ● | Except in instances of removal for cause, a director of the Company may be removed from service as a director only after the affirmative vote of 75% or more of outstanding shares of stock or 75% of the entire Board. |
| ● | Our Articles of Incorporation authorize us to issue up to 75,000,000 shares of common stock. Under Nevada law, our Board is permitted, in its discretion, at any time, and from time to time, without any action by our stockholders, to issue shares of our common stock (except to the extent such issuance would be violative of fiduciary duties, so dilutive to existing holders that it would be the equivalent of a sale of the Company, or otherwise prohibited by select provisions of the NRS). The issuance of shares of authorized but unissued stock could, under certain circumstances, have an anti-takeover effect, for example, by diluting the stock ownership of a person seeking to effect a change in the composition of our Board or contemplating a tender offer or other transaction for the acquisition of the Company. |
Nevada Anti-Takeover Statutes
We are subject to Sections 78.411 – 78.444 of the NRS, relating to combinations with interested stockholders. These provisions prohibit an “interested stockholder” from entering into a “combination” with the Company unless certain conditions are met. An “interested stockholder” is a person who, together with affiliates and associates, beneficially owns (or within the prior two years, did beneficially own) 10% or more of the Company’s capital stock entitled to vote.
Section 78.416 of the NRS defines “combination” to include the following:
| ● | any merger or consolidation involving the Company (or its subsidiary) and (i) the interested stockholder or (ii) any other entity that is, or after and as a result of the merger or consolidation would be, an affiliate or associate of the interested stockholder; |
| ● | any sale, transfer, pledge, or other disposition of the assets of the Company (or its subsidiary) involving the interested stockholder or its affiliate or associate where the assets transferred: (i) have an aggregate market value equal to more than 5% of the aggregate market value of all of the Company’s assets, on a consolidated basis; (ii) have an aggregate market value equal to more than 5% of the aggregate market value of all outstanding voting shares of the Company; or (ii) represent more than 10% of the earning power or net income of the Company, on a consolidated basis; |
| ● | subject to certain exceptions, any transaction that results in the issuance or transfer by the Company of any stock of the corporation with a market value of 5% or more of the value of the outstanding shares of the Company; |
| ● | the adoption of any plan or proposal for the liquidation or dissolution of the Company under any agreement, arrangement, or understanding with the interested stockholder, or its affiliate or associate; |
| ● | any transaction involving the Company that has the effect of increasing the proportionate share of the stock of any class or series of the Company beneficially owned by the interested stockholder, or its affiliate or associate; or |
| ● | the receipt by the interested stockholder, or its affiliate or associate, of the benefit of any loans, advances, guarantees, pledges, or other financial benefits provided by or through the Company. |
In addition, Sections 78.378 through 78.3793 of the NRS limit the voting rights of certain acquired shares in a Nevada corporation, or an issuing corporation, that (i) has 200 or more stockholders, at least 100 of which are Nevada residents, and (ii) conducts business in Nevada. Specifically, if the acquisition results in ownership of: (i) 20% or more but less than 33%; (ii) 33% percent or more but less than 50%; or (iii) 50% or more, as applicable, of the issuing corporation’s then-outstanding voting power with respect to the election of directors, then the securities acquired in such acquisition are denied voting rights unless the acquisition is approved by (i) the holders of a majority of the issuing corporation’s voting power and (ii) the holders of a majority of each class or series of stock if the acquisition would adversely affect or change any preference of any relative or other right given to any such class or series. Unless an issuing corporation’s articles of incorporation or bylaws then in effect provide otherwise (i) not less than all of the voting securities of the issuing corporation acquired by the acquiring person may be redeemable by an issuing corporation at the average price paid for the securities within 30 days if (x) the acquiring person has not given a timely offeror’s statement to the issuing corporation in accordance with Section 78.3789 of the NRS or (y) the issuing corporation’s stockholders vote not to grant voting rights to the acquiring person’s securities, and (ii) if the issuing corporation’s stockholders vote to accord voting rights to the securities acquired by acquiring person, then any stockholder of the issuing corporation who voted against granting voting rights to the acquiring person may demand the purchase from an issuing corporation, for fair value, all or any portion of his securities.
We expect the existence of these provisions to have an anti-takeover effect with respect to transactions that our Board does not approve in advance and could result in making it more difficult to accomplish transactions that our stockholders may see as beneficial such as: (i) discouraging business combinations that might result in a premium over the market price for the shares of our common stock; (ii) discouraging hostile takeovers that could inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts; and (iii) preventing changes in our management.
Our Board believes that the provisions described above are, however, prudent and will reduce vulnerability to takeover attempts and certain other transactions that are not negotiated with and approved by the Board. Our Board believes that these provisions are in our best interests and the best interests of our stockholders. In the Board’s judgment, the Board is in the best position to determine our true value and to negotiate more effectively for what may be in the best interests of our stockholders. Accordingly, our Board believes that it is in our best interests and in the best interests of our stockholders to encourage potential acquirers to negotiate directly with the Board and that these provisions will encourage such negotiations and discourage hostile takeover attempts.
Listing
Our shares of common stock and Series A Preferred Stock are listed on Nasdaq under the symbols “SLNH” and “SLNHP”, respectively.
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock and Series A Preferred Stock is American Stock Transfer & Trust Company, LLC, or the Transfer Agent. The Transfer Agent’s address is 6201 15th Avenue, Brooklyn, NY 11219.
Exhibit 10.12
SOLUNA HOLDINGS, INC.
2021 Amended and Restated Stock Incentive Plan
Option Agreement
This Option Agreement (this “Agreement”) for the award of an Option, pursuant to the Soluna Holdings, Inc. 2021 Amended and Restated Stock Incentive Plan, as amended and in effect from time to time (the “Plan”), is made as of date set forth below (the “Grant Date”), by and between Soluna Holdings, Inc. (the “Company”) and the individual identified below the optionee (the “Optionee”). Initially capitalized terms not otherwise defined in this Agreement shall have the meanings given to those terms in the Plan. The Terms and Conditions attached hereto are also a part hereof.
| Name of the Optionee: | |
| Grant Date: | |
| Number of shares of the Company’s Common Stock (the “Option Shares”) available pursuant to the Option granted pursuant to this Agreement: | |
| Exercise Price: | |
| Grant Type: | Nonstatutory Option |
Vesting Schedule:
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| Date of expiration of option (“Expiration Date”) |
SOLUNA HOLDINGS, INC. |
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| Signature of Optionee | By: | |||
| Name: | ||||
| [Name | Title: | |||
| Address] | ||||
SOLUNA HOLDINGS, INC.
Option Agreement – Terms and Conditions
Soluna Holdings, Inc. (the “Company”) agrees to award to the Optionee, and the Optionee agrees to accept from the Company, and Option for the number of Option Shares specified on the cover page hereof, on the following terms:
1. Grant Under Plan. Option Agreement (the “Agreement”) is made pursuant to and is governed by the Company’s Amended and Restated 2021 Stock Incentive Plan, as amended and in effect from time to time (the “Plan”). Capitalized terms used in this Agreement (including, but not limited to, the cover page hereof) but not defined herein have the respective meanings specified in the Plan or the Employment Agreement, as applicable.
2. Term and Exercisability of Option. This Option shall expire at 5:00 p.m. Eastern Time on the Expiration Date shown on the cover page hereof, unless the Option expires earlier pursuant to this Section 2 or any provision of the Plan. At any time before its expiration, this Option may be exercised to the extent vested, as shown on the cover page hereof, provided that:
(a) the Optionee’s Business Relationship must be in effect on a given date in order for any scheduled increment in vesting, as set forth in the Vesting Schedule shown in on the to become effective;
(b) this Option may not be exercised after following the date of termination of the Business Relationship between the Optionee and the Company;
(c) in the event the Business Relationship is terminated for any reason (whether voluntary or involuntary), (i) the Optionee’s right to vest in the Option will, except as explicitly provided by the Committee or the Board, terminate as of the date of termination of the Business Relationship (and such right shall not be extended by any notice period mandated under local law), (ii) the Optionee’s continuing right (if any) to exercise the Option after termination of the Relationship will be measured from the date of termination of the Business Relationship (and such right will not be extended by any notice period mandated under local law) and (iii) the Committee or the Board shall have the exclusive discretion to determine when the Business Relationship has terminated for purposes of this Option (including determining when the Optionee is no longer considered to be providing active service while on a leave of absence).
For purposes of this Section 2, (i) the term “Company” refers to the Company and its subsidiaries (each a “Subsidiary” and collectively, the “Subsidiaries”) and (ii) “Business Relationship” means service to the Company or its successor in the capacity of an employee, officer, director, consultant or advisor. For purposes hereof, a Business Relationship shall not be considered as having terminated during any military leave, sick leave, or other leave of absence if approved in writing by the Company and if such written approval, or applicable law, contractually obligates the Company to continue the Business Relationship of the Optionee after the approved period of absence (an “Approved Leave of Absence”). In the event of an Approved Leave of Absence, vesting of Options shall be suspended (and all subsequent vesting dates shall be postponed by the length of the period of the Approved Leave of Absence) unless otherwise provided in the Company’s written approval of the leave of absence that specifically refers to this Agreement. A Business Relationship shall also include a consulting arrangement between the Optionee and the Company that immediately follows termination of employment, but only if so stated in a written consulting agreement executed by the Company that specifically refers to this Agreement.
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It is the Optionee’s responsibility to be aware of the date that the Option expires.
(d) Acceleration. The Committee or Board may at any time provide that all or any portion of this Option awarded pursuant to this Agreement shall become free of some or all restrictions, or otherwise realizable in full or in part, as the case may be, despite the fact that the foregoing actions may cause the application of Sections 280G and 4999 of the Code if a change in control of the Company occurs.
(e) Notwithstanding the other sections of this Section 2, if there is a Change of Control (as defined herein), all remaining unvested portions of this Option award shall be immediately vested upon the Change of Control. “Change in Control” shall mean a merger or consolidation in which securities constituting more than 50% of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons that do not own more than 50% of the combined voting power of the Company’s securities immediately prior to such transaction, or the sale, transfer or other disposition of all or substantially all of the Company’s assets to a non-affiliate of the Company.
3. Method of Exercise. Prior to its expiration and to the extent that the right to purchase Option Shares has vested hereunder, this Option may be exercised in whole or in part from time to time by notice provided in a manner consistent with the requirements of Section 5(d) of the Plan, accompanied by payment in full of the Exercise Price by means of payment acceptable to the Company in accordance with Section 5(f) of the Plan.
As soon as practicable after its receipt of notice, the Company shall, without transfer or issue tax to the Optionee (or other person entitled to exercise this Option), (a) deliver to the Optionee (or other person entitled to exercise this Option), at the principal executive offices of the Company or such other place as shall be mutually acceptable, a stock certificate or certificates for such Option Shares out of theretofore authorized but unissued shares or treasury shares of its Common Stock as the Company may elect or (b) issue shares of its Common Stock in book entry form; provided, however, that the time of delivery or issuance may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any applicable requirements of law; and provided, further, that any Option Shares delivered or issued shall remain subject to any applicable securities laws or trading restrictions imposed pursuant to the terms of this Agreement and the Plan.
If the Optionee (or other person entitled to exercise this Option) fails to pay for and accept delivery of all of the Option Shares specified in the notice upon tender of delivery thereof, his or her right to exercise this Option with respect to such Option Shares not paid for may be terminated by the Company.
4. Withholding Taxes. The Company may withhold any and all applicable taxes, as required connection with the grant and/or exercise of the Option by the Optionee, as provided in Section 10(e) of the Plan.
5. Non-assignability of Option. This Option shall not be assignable or transferable by the Optionee except by will or by the laws of descent and distribution or as permitted by the Committee or the Board in its discretion pursuant to the terms of the Plan. During the life of the Optionee, this Option shall be exercisable only by him or her, by a conservator or guardian duly appointed for him or her by reason of the Optionee’s incapacity or by the person appointed by the Optionee in a durable power of attorney acceptable to the Company’s counsel.
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6. Compliance with Securities Act; Lock-Up Agreement. The Company shall not be obligated to sell or issue any Option Shares or other securities pursuant to the exercise of this Option unless the Option Shares or other securities with respect to which this Option is being exercised are at that time effectively registered or exempt from registration under the Securities Act and applicable state or provincial securities laws/any applicable securities laws. In the event Option Shares or other securities shall be issued that shall not be so registered, the Optionee hereby represents, warrants and agrees that he or she will receive such Option Shares or other securities for investment and not with a view to their resale or distribution, and will execute an appropriate investment letter satisfactory to the Company and its counsel. The Optionee further hereby agrees that as a condition to the purchase of Option Shares upon exercise of this Option, he or she will execute an agreement in a form acceptable to the Company to the effect that the Option Shares shall be subject to any underwriter’s lock-up agreement in connection with a public offering of any securities of the Company that may from time to time apply to shares held by officers and employees of the Company, and such agreement or a successor agreement must be in full force and effect.
7. Legends. The Optionee hereby acknowledges that the stock certificate or certificates (or entries in the case of book entry form) evidencing Option Shares or other securities issued pursuant to any exercise of this Option may bear a legend (or provide a restriction) setting forth the restrictions on their transferability described in Section 6 hereof, if such restrictions are then in effect.
8. Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Option Shares until the date of issuance of a stock certificate (or appropriate entry is made in the case of book entry form) to him or her for such Option Shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued (or appropriate entry is made in the case of book entry form).
9. Effect upon Employment and Performance of Services. Nothing in this Agreement or the Plan shall be construed to impose any obligation upon the Company or any affiliate to employ or utilize the services of the Optionee or to retain the Optionee in its employ or to engage or retain the services of the Optionee.
10. Time for Acceptance. Unless the Optionee shall evidence his or her acceptance of this Option by electronic or other means prescribed by the Committee or the Board within sixty (60) days after its delivery, the Option shall be null and void (unless waived by the Committee or the Board).
11. Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Optionee consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
12. Nature of Award. By accepting this Option, the Optionee acknowledges, understands and agrees that:
(a) the Plan is established voluntarily by the Company, is discretionary in nature and may be modified, amended, suspended or terminated by the Company at any time, to the extent permitted by the Plan and this Agreement;
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(b) the grant of this Option is voluntary and occasional and does not create any contractual or other right to receive future awards under the Plan or benefits in lieu of Plan awards, even if Options or other Plan awards have been granted in the past;
(c) all decisions with respect to future Option grants or Plan awards will be at the sole discretion of the Committee or the Board;
(d) he or she is voluntarily participating in the Plan;
(e) the future value of Option Shares underlying the Option is unknown and cannot be predicted with certainty;
(f) if the Option Shares do not increase in value, the Option, as measured by the difference between the Fair Market Value of the Option Shares and the Grant Price, will have no value;
(g) if the Optionee exercises the Option and acquires Option Shares, the value of such Option Shares may increase or decrease in value;
(h) if the Optionee resides and/or works outside the United States, the following additional provisions shall apply:
(i) the Option and any Option Shares acquired under the Plan do not replace any pension or retirement rights or compensation;
(ii) the Option and any Option Shares acquired under the Plan (including the value attributable to each) do not constitute compensation of any kind for services of any kind rendered to the Company and/or any Subsidiary thereof and are outside the scope of the Optionee’s employment contract, if any;
(iii) the Option and any Option Shares acquired under the Plan (including the value attributable to each) are not part of normal or expected compensation or salary, including, but not limited to, for purposes of calculating any severance, resignation, termination, redundancy, dismissal, end-of-service payments, bonuses, service awards, pension or retirement or welfare benefits or similar payments unless such other arrangement explicitly provides to the contrary;
(iv) no claim or entitlement to compensation or damages shall arise from forfeiture of the Option resulting from a termination of the Business Relationship for any reason and in consideration of the grant of the Option, the Optionee irrevocably agrees never to institute a claim against the Company and/or any Subsidiary, waives his or her ability to bring such claim and releases the Company and/or its Subsidiaries from any claim; if, notwithstanding the foregoing, such claim is allowed by a court of competent jurisdiction, then by accepting this Option, the Optionee is deemed irrevocably to have agreed not to pursue such claim and agrees to execute any and all documents necessary to request dismissal or withdrawal of such claims; and
(i) the Company shall not be liable for any foreign exchange rate fluctuation between the Optionee’s local currency and the United States dollar that may affect the value of the Option or any amounts due pursuant to the exercise of the Option or the subsequent sale of any shares of Common Stock acquired upon settlement.
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13. Section 409A of the Internal Revenue Code. The Options granted hereunder are intended to avoid the potential adverse tax consequences to the Optionee of Section 409A of the Internal Revenue Code of 1986, as amended, and the Committee or the Board may make such modifications to this Agreement as it deems necessary or advisable to avoid such adverse tax consequences.
14. General Provisions.
(a) Amendment; Waivers. This Agreement, including the Plan, contains the full and complete understanding and agreement of the parties hereto as to the subject matter hereof, and except as otherwise permitted by the express terms of the Plan, this Agreement and applicable law, it may not be modified or amended nor may any provision hereof be waived without a further written agreement duly signed by each of the parties; provided, however, that a modification or amendment that does not materially diminish the rights of the Optionee hereunder, as they may exist immediately before the effective date of the modification or amendment, shall be effective upon written notice of its provisions to the Optionee, to the extent permitted by applicable law. The waiver by either of the parties hereto of any provision hereof in any instance shall not operate as a waiver of any other provision hereof or in any other instance. The Optionee shall have the right to receive, upon request, a written confirmation from the Company information set forth in the table on the cover page of this Agreement.
(b) Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, representatives, successors and assigns.
(c) Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.
(c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada, without regard to the principles of conflicts of law.
(d) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth herein.
(e) Construction. This Agreement is to be construed in accordance with the terms of the Plan. In case of any conflict between the Plan and this Agreement, the Plan shall control. The titles of the sections of this Agreement and of the Plan are included for convenience only and shall not be construed as modifying or affecting their provisions. The masculine gender shall include both sexes; the singular shall include the plural and the plural the singular unless the context otherwise requires. Capitalized terms not defined herein shall have the meanings given to them in the Plan.
(f) Data Privacy. By entering into this Agreement and except as otherwise provided in any data transfer agreement entered into by the Company, the Optionee: (i) authorizes the Company, and any agent of the Company administering the Plan or providing Plan recordkeeping services, to disclose to the Company such information and data as the Company shall request in order to facilitate the grant of options and the administration of the Plan; (ii) waives any data privacy rights he or she may have with respect to such information; and (iii) authorizes the Company to store and transmit such information in electronic form. For purposes of this Section 13(f), the term “Company” refers to the Company, its Subsidiaries and any other affiliate.
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(g) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, if to the Optionee, to the address set forth on the cover page of this Agreement or at the address shown on the records of the Company, and if to the Company, to the Company’s principal executive offices, attention of the Corporate Secretary.
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EXHIBIT A
Soluna Holdings, Inc. Amended and Restated 2021 Stock Incentive Plan
Attached
Exhibit 10.13
SOLUNA HOLDINGS, INC.
Amended and Restated 2021 Stock Incentive Plan
Restricted Stock Agreement
Soluna Holdings, Inc. (the “Company”) hereby enters into this Restricted Stock Agreement, dated as of the date set forth below, with the Recipient named herein (the “Agreement”) and grants to the Recipient the shares of Restricted Stock specified herein pursuant to the Soluna Holdings, Inc. Amended and Restated 2021 Stock Incentive Plan, as amended and in effect from time to time. The Terms and Conditions attached hereto are also a part hereof.
| Name of recipient (the “Recipient”): | |
| Date of this Restricted Stock grant: | |
| Number of shares of Restricted Stock granted pursuant to this Agreement: | |
| Vesting Start Date: | |
| Number of shares of Restricted Stock that are vested on the Vesting Start Date: | |
| Number of shares of Restricted Stock that are unvested on the Vesting Start Date: | |
| Consideration payable for shares of Restricted Stock, if any: | |
| Right to Repurchase Unvested shares of Restricted Stock |
Vesting Schedule:
| First Vesting Date: | |
| Next Vesting Date: | |
| Next Vesting Date: |
SOLUNA HOLDINGS, INC. |
||||
| Signature of Recipient | By: | |||
| Name: | ||||
| [Name | Title: | |||
| Address] | ||||
SOLUNA HOLDINGS, INC.
Restricted Stock Agreement – Terms and Conditions
Soluna Holdings, Inc. (the “Company”) agrees to award to the recipient specified on the cover page hereof (the “Recipient”), and the Recipient agrees to accept from the Company, the number of shares of Restricted Stock on the following terms:
1. Grant Under Plan. This Restricted Stock Agreement (the “Agreement”) is made pursuant to and is governed by the Company’s Amended and Restated 2021 Stock Incentive Plan, as amended and in effect from time to time (the “Plan”). Capitalized terms used in this Agreement (including, but not limited to, the cover page hereof) but not defined herein have the respective meanings specified in the Plan or Employment Agreement, as applicable.
2. Vesting if Business Relationship Continues.
(a) Vesting Schedule. If the Recipient has maintained continuously a Business Relationship with the Company through each date specified on the cover page hereof, a portion of the Restricted Stock shall vest on such date in such amounts as are set forth opposite each such date on the cover page hereof. If the Recipient’s Business Relationship with the Company is terminated by the Company or by the Recipient for any reason, whether voluntarily or involuntarily, no additional shares of Restricted Stock shall become vested under any circumstances with respect to the Recipient. Any determination under this Agreement as to Business Relationship status or other matters referred to above shall be made in good faith by the Committee or Board, whose decision shall be final and binding on all parties.
“Business Relationship” means service to the Company or its successor in the capacity of an employee, officer, director, consultant or advisor.
(b) Termination of Business Relationship. For purposes hereof, a Business Relationship shall not be considered as having terminated during any military leave, sick leave, or other leave of absence if approved in writing by the Company and if such written approval, or applicable law, contractually obligates the Company to continue the Business Relationship of the Recipient after the approved period of absence (an “Approved Leave of Absence”). In the event of an Approved Leave of Absence, vesting of shares of Restricted Stock shall be suspended (and all subsequent vesting dates shall be postponed by the length of the period of the Approved Leave of Absence) unless otherwise provided in the Company’s written approval of the leave of absence that specifically refers to this Agreement. A Business Relationship shall also include a consulting arrangement between the Recipient and the Company that immediately follows termination of employment, but only if so stated in a written consulting agreement executed by the Company that specifically refers to this Agreement.
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(c) Acceleration. The Committee or Board may at any time provide that all or any portion of the shares of Restricted Stock awarded pursuant to this Agreement shall become free of some or all restrictions, or otherwise realizable in full or in part, as the case may be, despite the fact that the foregoing actions may cause the application of Sections 280G and 4999 of the Code if a change in control of the Company occurs.
(d) Notwithstanding the other sections of this Section 2, if there is a Change of Control (as defined herein), all remaining unvested shares of Restricted Stock shall be immediately vested upon the Change of Control. “Change in Control” shall mean a merger or consolidation in which securities constituting more than 50% of the total combined voting power of the Company's outstanding securities are transferred to a person or persons that do not own more than 50% of the combined voting power of the Company's securities immediately prior to such transaction, or the sale, transfer or other disposition of all or substantially all of the Company's assets to a non-affiliate of the Company.
3. Restrictions on Transfer. The Recipient shall not sell, assign, transfer, pledge, encumber or dispose of all or any of his or her shares of Restricted Stock.
4. Rights as a Stockholder. Upon receipt of a Restricted Stock award the Recipient shall have all rights as a stockholder of the Company as provided in Section 6(c) of the Plan.
5. Withholding Taxes. The Company may withhold any and all applicable taxes required to be by the Company, in connection with the issuance or vesting of the shares of Restricted Stock to the Recipient, as provided in the Plan.
Recipient further agrees to take any further actions and execute any additional documents as may be necessary to effectuate the provisions of this Section 5 and the Recipient hereby grants the Company an irrevocable power of attorney to sign such additional documents on the Recipient’s behalf if the Company is unable after reasonable efforts to obtain Recipient’s signature on such additional documents. This power of attorney is coupled with an interest and is irrevocable by the Recipient.
6. Provision of Documentation to Recipient. By signing the cover page of this Agreement, the Recipient acknowledges receipt of a copy of this entire Agreement, a copy of the Plan, and a copy of the Plan’s related prospectus.
7. Section 409A of the Internal Revenue Code. The shares of Restricted Stock granted hereunder are intended to avoid the potential adverse tax consequences to the Recipient of Section 409A of the Internal Revenue Code of 1986, as amended, and the Committee or Board may make such modifications to this Agreement as it deems necessary or advisable to avoid such adverse tax consequences.
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8. Miscellaneous.
(a) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, if to the Recipient, to the address set forth on the cover page hereof or at the address shown on the records of the Company, and if to the Company, to the Company’s principal executive offices, attention of the Corporate Secretary.
(b) Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties’ signatories to this Agreement. In the event of a conflict between the terms of this Agreement and the Plan, the terms of the Plan shall control.
(c) Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.
(d) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth herein.
(e) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of Nevada without giving effect to the principles of the conflicts of laws thereof.
(g) Construction. This Agreement is to be construed in accordance with the terms of the Plan. In case of any conflict between the Plan and this Agreement, the Plan shall control. The titles of the sections of this Agreement and of the Plan are included for convenience only and shall not be construed as modifying or affecting their provisions. The masculine gender shall include both sexes; the singular shall include the plural and the plural the singular unless the context otherwise requires. Capitalized terms not defined herein shall have the meanings given to them in the Plan.
(g) Data Privacy. By entering into this Agreement and except as otherwise provided in any data transfer agreement entered into by the Company, the Recipient: (i) authorizes the Company, and any agent of the Company administering the Plan or providing Plan recordkeeping services, to disclose to the Company such information and data as the Company shall request in order to facilitate the issuance of Restricted Stock and the administration of the Plan; (ii) waives any data privacy rights he or she may have with respect to such information; and (iii) authorizes the Company to store and transmit such information in electronic form. For purposes of this Section 13(f), the term “Company” refers to the Company, its Subsidiaries and any other affiliate.
(h) No Obligation to Continue Business Relationship. Neither the Plan, nor this Agreement, nor any provision hereof imposes any obligation on the Company to continue a Business Relationship with the Recipient.
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Exhibit 10.14
SOLUNA HOLDINGS, INC.
Amended and Restated 2021 Stock Incentive Plan
Restricted
Stock Unit Agreement
Soluna Holdings, Inc. (the “Company”) hereby enters into this Restricted Stock Unit Agreement, dated as of the date set forth below, with the Recipient named herein (the “Agreement”) and grants to the Recipient the Restricted Stock Units (“RSUs”) specified herein pursuant to the Soluna Holdings, Inc. Amended and Restated 2021 Stock Incentive Plan, as amended and in effect from time to time. The Terms and Conditions attached hereto are also a part hereof.
| Name of recipient (the “Recipient”): | |
| Date of this RSU grant: | |
| Number of shares of the Company’s Common Stock (the “Underlying Shares”) underlying the equivalent number of restricted stock units (the “RSUs”) granted pursuant to this Agreement: | |
| Additional Consideration Payable upon Grant of RSUs, if any: | |
| Right to Dividends during Deferral Period: | The Committee may on or after the date of grant, authorize the payment of dividends or other distribution equivalents on Shares in cash or additional Shares on a current, deferred or contingent basis. |
Deferral Period:
| [_____] Underlying Shares | [Date] |
| [ ] Underlying Shares | [Date] |
| [ ] Underlying Shares | [Date] |
SOLUNA HOLDINGS, INC. |
||||
| Signature of Recipient | By: | |||
| Name: | ||||
| [Name | Title: | |||
| Address] | ||||
SOLUNA HOLDINGS, INC.
Restricted Stock Unit Agreement – Terms and Conditions
Soluna Holdings, Inc. (the “Company”) agrees to award to the recipient specified on the cover page hereof (the “Recipient”), and the Recipient agrees to accept from the Company, the number of restricted stock units (the “RSUs”) specified on the cover page hereof representing an equivalent number of shares of the Company’s Common Stock (the “Underlying Shares”), on the following terms:
1. Grant Under Plan. This Restricted Stock Unit Agreement (this “Agreement”) is made pursuant to and is governed by the Company’s Amended and Restated 2021 Stock Incentive Plan, as amended and in effect from time to time (the “Plan”). Capitalized terms used in this Agreement (including, but not limited to, the cover page hereof) but not defined herein have the respective meanings specified in the Plan or the Employment Agreement, as applicable.
2. Vesting of Deferral Period if Business Relationship Continues.
(a) Vesting Schedule. The RSUs and Underlying Shares shall vest as provided on the cover page hereof provided that the Recipient has maintained continuously a Business Relationship with the Company through the applicable vesting date. Except as specifically provided in Section 2(c) below, if the Recipient’s Business Relationship with the Company is terminated by the Company or by the Recipient for any reason, whether voluntarily or involuntarily, no additional RSUs shall become vested RSUs under any circumstances with respect to the Recipient. Any determination under this Agreement as to Business Relationship status or other matters referred to above shall be made in good faith by the Committee or the Board, whose decision shall be final and binding on all parties.
“Business Relationship” means service to the Company or its successor in the capacity of an employee, officer, director, consultant or advisor.
(b) Termination of Business Relationship. For purposes hereof, a Business Relationship shall not be considered as having terminated during any military leave, sick leave, or other leave of absence if approved in writing by the Company and if such written approval, or applicable law, contractually obligates the Company to continue the Business Relationship of the Recipient after the approved period of absence (an “Approved Leave of Absence”). In the event of an Approved Leave of Absence, vesting of RSUs shall be suspended (and all subsequent vesting dates shall be postponed by the length of the period of the Approved Leave of Absence) unless otherwise provided in the Company’s written approval of the leave of absence that specifically refers to this Agreement. A Business Relationship shall also include a consulting arrangement between the Recipient and the Company that immediately follows termination of employment, but only if so stated in a written consulting agreement executed by the Company that specifically refers to this Agreement.
(c) Acceleration. The Committee or Board may at any time provide that all or any portion of the RSUs awarded pursuant to this Agreement shall become free of some or all restrictions, or otherwise realizable in full or in part, as the case may be, despite the fact that the foregoing actions may cause the application of Sections 280G and 4999 of the Code if a change in control of the Company occurs.
(d) Notwithstanding the other sections of this Section 2, if there is a Change of Control (as defined herein), all remaining unvested shares of RSUs shall be immediately vested upon the Change of Control. “Change in Control” shall mean a merger or consolidation in which securities constituting more than 50% of the total combined voting power of the Company's outstanding securities are transferred to a person or persons that do not own more than 50% of the combined voting power of the Company's securities immediately prior to such transaction, or the sale, transfer or other disposition of all or substantially all of the Company's assets to a non-affiliate of the Company.
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3. Issuance of Underlying Shares. With respect to any RSUs that become vested RSUs pursuant to Section 2, subject to Section 5, the Company shall issue to the Recipient, as soon as practicable following the applicable vesting date specified on the cover page hereof, the number of Underlying Shares equal to the number of RSUs vesting on such vesting date, provided that, if the vesting date of any portion of the RSUs shall occur during either a regularly scheduled or special “blackout period” of the Company wherein Recipient is precluded from selling shares of the Company’s Common Stock, the receipt of the corresponding Underlying Shares issuable with respect to such vesting date pursuant to this Agreement shall be deferred until after the expiration of such blackout period. The Underlying Shares the receipt of which was deferred as provided above shall be issued to Recipient as soon as practicable after the expiration of the blackout period.
4. Restrictions on Transfer. The Recipient shall not sell, assign, transfer, pledge, encumber or dispose of all or any of his or her RSUs.
5. Withholding Taxes. The Company may withhold any and all applicable taxes required to be by the Company, in connection with the vesting or issuance of the RSUs and Underlying Shares to the Recipient, as provided in the Plan.
Recipient further agrees to take any further actions and execute any additional documents as may be necessary to effectuate the provisions of this Section 5 and the Recipient hereby grants the Company an irrevocable power of attorney to sign such additional documents on the Recipient’s behalf if the Company is unable after reasonable efforts to obtain the Recipient’s signature on such additional documents. This power of attorney is coupled with an interest and is irrevocable by the Recipient.
6. Provision of Documentation to Recipient. By signing the cover page of this Agreement, the Recipient acknowledges receipt of a copy of this Agreement, a copy of the Plan, and a copy of the Plan’s related prospectus.
7. Section 409A of the Internal Revenue Code. The RSUs granted hereunder are intended to avoid the potential adverse tax consequences to the Recipient of Section 409A of the Internal Revenue Code of 1986, as amended, and the Committee or the Board may make such modifications to this Agreement as it deems necessary or advisable to avoid such adverse tax consequences.
8. Rights as Stockholder. The Recipient shall have no rights as a stockholder of the Company with respect to any RSUs covered by this Agreement until the issuance of the Underlying Shares.
9. Miscellaneous.
(a) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, if to the Recipient, to the address set forth on the cover page hereof or at the address shown on the records of the Company, and if to the Company, to the Company’s principal executive offices, attention of the Corporate Secretary.
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(b) Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement (other than the Employment Agreement). This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties’ signatories to this Agreement. In the event of a conflict between the terms of this Agreement and the Plan, the terms of the Plan shall control.
(c) Fractional RSUs or Underlying Shares. All fractional RSUs or Underlying Shares resulting from the adjustment provisions contained in the Plan shall be rounded down to the nearest whole unit or share.
(d) Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.
(e) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth herein.
(f) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of Nevada without giving effect to the principles of the conflicts of laws thereof.
(g) Construction. This Agreement is to be construed in accordance with the terms of the Plan. In case of any conflict between the Plan and this Agreement, the Plan shall control. The titles of the sections of this Agreement and of the Plan are included for convenience only and shall not be construed as modifying or affecting their provisions. The masculine gender shall include both sexes; the singular shall include the plural and the plural the singular unless the context otherwise requires. Capitalized terms not defined herein shall have the meanings given to them in the Plan.
(h) Data Privacy. By entering into this Agreement and except as otherwise provided in any data transfer agreement entered into by the Company, the Recipient: (i) authorizes the Company, and any agent of the Company administering the Plan or providing Plan recordkeeping services, to disclose to the Company such information and data as the Company shall request in order to facilitate the grant of RSUs or the issuance of Shares in connection with RSUs and the administration of the Plan; (ii) waives any data privacy rights he or she may have with respect to such information; and (iii) authorizes the Company to store and transmit such information in electronic form. For purposes of this Section 13(f), the term “Company” refers to the Company, its Subsidiaries and any other affiliate.
(i) No Obligation to Continue Business Relationship. Neither the Plan, nor this Agreement, nor any provision hereof imposes any obligation on the Company to continue a Business Relationship with the Recipient.
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Exhibit 10.20
AMENDMENT NO. 5
TO LEASE AGREEMENT
BETWEEN
MTI INSTRUMENTS INC.
AND
CETF PROPERTIES, LLC
This Amendment to Lease is made and entered into this 30th day of June 2021 by and between MTI Instruments Inc. (“Tenant”), and CETF Properties, LLC (“Landlord”).
Whereas, Tenant and the Landlord entered into a Lease on August 10, 1999 with respect to a portion of the building known as 325 Washington Avenue Extension, Albany, NY 12205 (the “Lease”), as amended on September 29, 2009, May 2, 2014, January 1, 2018 and December 4, 2019.
Whereas, the parties hereto wish to further amend the Lease as hereinafter provided.
Now, therefore, in consideration of One Dollar ($1.00) each to the other paid, receipt of which is hereby acknowledged, the Lease is amended as follows:
| 1) | As of August 1, 2021, the Landlord agrees to lease an additional 3,478 square feet of contiguous space to Tenant for a term to be coterminous with existing lease. See Exhibit A. |
| 2) | Article 2 shall be amended to read: |
As of August 1, 2021, the premises will consist of approximately 20,902 square feet of space in the building known as 325 Washington Avenue Extension, Albany, NY 12205
| 3) | Article 3.1 shall be amended to read: |
The lease term shall be extended for one (1) month from December 1, 2024 —December 31, 2024.
| 4) | The Base Rent in Article 4.1 shall be: |
08/1/2021 - 10/31/2021: $16,407.60/month; $11.30/sf
11/1/2021 - 12/31/2024: $236,192.60/year; $19,682.72/month; $11.30/sf
| 5) | Article 5.2 shall be amended to read: |
As of August 1, 2021, the Tenant’s proportionate share is 79.57% and is calculated as follows: Tenant’s square feet, 20,902, divided by the total square feet in the building, 26,268.
| 6) | Landlord shall make the following improvements to the additional space at Landlord’s expense: |
| - | Paint the walls in the new office space to match the existing office space. |
| - | Install new carpet tiles in the new office space to match the existing office space. |
| - | Remove the closet and open the hallway wall between the existing space and additional space. |
Whereas the parties have entered into a Janitorial Service Agreement on 1/1/2018, effective August 1, 2021 the payment amount is:
08/1/2021 - 10/31/2021: $2,105.40/month; $1.45/square foot
11/1/2021 - 12/31/2024: $30,307.90/year; $2,525.66/month; $1.45/square foot
If the August 1, 2021 commencement date is not met, Tenant will receive a daily credit of $112.15, based on the date the additional 3,478 SF is complete. The credit will be applied to the November 1, 2021 rent payment.
In all other respects the Lease, as amended, shall remain in full force and effect, and is hereby ratified and confirmed.
| LANDLORD: | |||||
| CETF PROPERTIES, LLC | |||||
| By: | /s/ Charles Touhey | ||||
| Witness | Charles Touhey, Manager | ||||
| TENANT: | |||||
| MTI INSTRUCMENTS INC. | |||||
| By: | /s/ Jessica Thomas | ||||
| Witness | |||||
| Its: | CFO | ||||
2
Exhibit 10.26
EXECUTION COPY
AMENDED AND RESTATED CONTINGENT RIGHTS AGREEMENT
This AMENDED AND RESTATED CONTINGENT RIGHTS AGREEMENT (this “Agreement”), dated October 29, 2021 (the “Effective Date”), is entered into by and between Harmattan Energy Ltd., a British Columbia corporation, formerly known as Soluna Technologies, Ltd. (“HEL”), and Mechanical Technology, Incorporated, a New York corporation (the “MKTY”). HEL and MKTY are sometimes referred to herein, individually, as a “party” and, collectively, as the “parties”.
R E C I T A L S:
WHEREAS, prior to the execution of this Agreement, HEL and MKTY entered into a certain Contingent Rights Agreement dated January 13, 2020 that granted MKTY specific investment and subscription rights in both Soluna and certain wind power generation and data processing projects that were contemplated to be developed by HEL and its Affiliates (the “Original Contingent Rights Agreement”);
WHEREAS, around or about the execution of this Agreement, HEL and its shareholders consummated a reorganization pursuant to which a new, distinct legal entity incorporated in Delaware was created and empowered to carry on a business previously being established by HEL of developing modular datacenter operations based in the United States connected with electric power generation sources, and HEL continues to develop windfarm generation project(s) globally, and notably including a project in Morocco (the “Soluna Reorganization”); and
WHEREAS, in connection with the Soluna Reorganization, MKTY and HEL agreed to terminate the Original Contingent Rights Agreement and to replace it with this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants contained herein, including Ten and 00/100 United States Dollars ($10.00), cash-in-hand paid, and intending hereby to be legally bound, HEL and MKTY hereby agree and stipulate as follows:
ARTICLE I
DEFINITIONS; INTERPRETATION
1.1 Definitions. As used in this Agreement, the following terms have the respective meanings set forth below or set forth in the Sections referred to below.
“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with, such Person. For the purposes of this Agreement, “control,” when used with respect to any specified Person, means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities or partnership or other ownership interests, by contract or otherwise; and the terms “controlling” and “controlled” shall have correlative meanings.
“Agreement” has the meaning set forth in the Preamble.
“Applicable Law” means, as to any Person, any federal, state, municipal and local law, statute, ordinance, regulation, order, directive, policy and decision rendered by any Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject or pertaining to any or all of the transactions contemplated or referred to herein, including, in the case of MKTY, any requirements of the Securities Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder which shall be in effect from time to time.
“Business Day” means a day other than a Saturday, a Sunday or a day that is a nationally recognized holiday in the United States.
“Development Equity Preemptive Notice” has the meaning set forth in Section 2.2(a).
“Development Equity Purchase Price” has the meaning set forth in Section 2.2(a).
“Effective Date” means the date set forth in the Preamble.
“Governmental Authority” means the government of any nation, state, city, locality or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
“MKTY” has the meaning set forth in the Preamble.
“Original Contingent Rights Agreement” has the meaning set forth in the Recitals.
“party” or “parties” has the meaning set forth in the Preamble.
“Person” means any individual, joint venture, general partnership, limited partnership, limited liability company, corporation, trust, business trust, cooperative, association or other incorporated or unincorporated entity, and the heirs, executors, administrators, legal representatives, successors and assigns of that person where the context so admits.
“Phase I of the Project” means the development of the initial 100 MW of energy capacity and accompanying data center(s) associated with the Project (i.e., 0 MW – 100 MW of the Project).
“Phase I Project Financing” means a bona fide project financing supporting Phase I of the Project.
“Phase I–III Project Financing” means a bona fide project financing supporting Phase I of the Project, Phase II of the Project or Phase III of the Project.
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“Phase I–III Project Financing Equity” means any capital stock, membership interest, units or other similar securities of any type whatsoever (other than debt securities not convertible into equity securities) of a Project SPV, whether authorized now or in the future, and any rights, options or warrants to purchase any such capital stock, membership interest, units or other securities of a Project SPV, including Stock Equivalents and any such rights that may become convertible into or exchangeable or exercisable for any such capital stock, membership interest, units or other securities of a Project SPV, to the extent the foregoing are issued to fund the equity portion of a Phase I–III Project Financing, including, without limitation, any equity co-investment or similar right that accompanies the debt financing associated with a project financing of a Project SPV, that is not allocated to the single lead investor or debt financing providers in respect of the applicable Phase I–III Project Financing.
“Phase II of the Project” means the development of the next successive 200 MW of energy capacity and accompanying data center(s) associated with the Project, following Phase I of the Project (i.e., 100 MW – 300 MW of the Project) .
“Phase II Project Financing” means a bona fide project financing supporting Phase II of the Project.
“Phase II–III Development Equity” means any capital stock, membership interest, units or other similar securities of any type whatsoever (other than debt securities not convertible into equity securities) of a Project SPV, whether authorized now or in the future, and any rights, options or warrants to purchase any such capital stock, membership interest, units or other securities of a Project SPV, including Stock Equivalents and any such rights that may become convertible into or exchangeable or exercisable for any such capital stock, membership interest, units or other securities of a Project SPV, to the extent the foregoing are issued for the purposes of raising pre-construction capital needed for Project-specific development and planning activities (e.g., feasibility studies, due diligence, permitting), other than equity funding of the developer of the Project, with respect to Phase II of the Project or Phase III of the Project prior to the Phase II Project Financing or Phase III Project Financing, as applicable; for further certainty, it is understood and agreed that the Phase II-III Development Equity is not intended to provide participation to the investor in any development fee, profit participation “promote” or similar amount payable to the developer of the Project.
“Phase III of the Project” means the development of the next successive 300 MW of energy capacity and accompanying data center(s) associated with the Project following Phase II of the Project (i.e., 300 MW – 600 MW of the Project).
“Phase III Project Financing” means a bona fide project financing supporting Phase III of the Project.
“Project” means a wind power generation project and the related data processing center(s), each as sponsored by HEL or its Affiliates, including all equipment, improvements and assets associated therewith, currently contemplated to be sited on land with respect to which HEL has acquired development rights located in the city of Dakhla, region of Oued-Ed-Dahab, Kingdom of Morocco.
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“Project Finance Equity Purchase Price” has the meaning set forth in Section 2.1(a).
“Project Financing Preemptive Notice” has the meaning set forth in Section 2.1(a).
“Project SPV” means a Subsidiary of HEL formed or acquired for the purpose of owning, financing and/or constructing any portion of the Project; for further certainty, it is understood and agreed that any entity that acts as the “developer” of the Project and is intended to be the recipient of any development fee, profit participation “promote” or similar amount payable to the developer of the Project shall not be a Project SPV for the purposes of this Agreement.
“Public Offering” means any underwritten public offering pursuant to a registration statement filed in accordance with the Securities Act.
“Qualified Public Offering” means the sale, in a firm commitment underwritten Public Offering led by a nationally recognized underwriting firm pursuant to an effective registration statement under the Securities Act, of common stock of HEL having an aggregate offering value (net of underwriters’ discounts and selling commissions) of at least Fifty Million and 00/100 United States Dollars ($50,000,000.00).
“Securities Act” means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations thereunder, which shall be in effect at the time.
“HEL” has the meaning set forth in the Preamble.
“Soluna Reorganization” has the meaning set forth in the Recitals.
“Stock Equivalents” means any security or obligation that is by its terms, directly or indirectly, convertible into or exchangeable or exercisable for or with a value derived in whole or part from applicable capital stock, membership interest, units or other securities, and any option, warrant or other right to subscribe for, purchase or acquire the foregoing.
“Subsidiary” means, with respect to any Person, any other Person of which a majority of the outstanding shares or other equity interests having the power to vote for directors or comparable managers are owned, directly or indirectly, by the first Person.
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1.2 Interpretation. Unless the context requires otherwise: (a) the gender (or lack of gender) of all words used in this Agreement includes the masculine, feminine and neuter; (b) references to “Articles” and “Sections” refer to articles and sections of this Agreement; (c) unless expressly set forth to the contrary, references to “Exhibits” refer to the exhibits attached to this Agreement, each of which is made a part hereof for all purposes; (d) references to laws or agreements refer to such laws or agreements as they may be amended from time to time, and references to particular provisions of a law include any corresponding provisions of any succeeding law; (e) the terms defined herein include the plural as well as the singular and vice versa; and (f) references to money refer to legal currency of the United States of America.
5
ARTICLE II
PRE-EMPTIVE RIGHT ON EQUITY ISSUANCES
2.1 Pre-emptive Right of Subscription for Phase I–III Project Financing Equity. In the event that, at any time, a Project SPV shall decide to undertake an issuance of Phase I–III Project Financing Equity, HEL shall, or shall cause such Project SPV to, confer in good faith with MKTY to discuss (x) the nature and structure of the applicable project financing to which the Phase I–III Project Financing Equity relates and (y) the division of relative value, asset break-out and project financing pricing in such Phase I–III Project Financing Equity as between wind power generation and data processing components. HEL shall, absent MKTY written consent to the contrary, establish two (2) separate Project SPVs to conduct the financing of the wind power generation and data processing components, respectively, of the phase of the Project to which the financing relates. Promptly following the conclusion of such discussions, HEL shall deliver to MKTY written notice of the applicable Project SPVs’ decision to undertake an issuance of Phase I–III Project Financing Equity. Such written notice shall describe (i) the amount, type and terms of such Phase I–III Project Financing Equity, (ii) the purchase price per security for such Phase I–III Project Financing Equity (the “Project Finance Equity Purchase Price”) to be paid by the purchasers of such Phase I–III Project Financing Equity, (iii) the identity of any single lead investor in the applicable Phase I–III Project Financing, and (iv) all other material terms upon which the Project SPVs’ have decided to issue the Phase I–III Project Financing Equity including the expected timing of such issuance, which shall in no event be less than thirty (30) days after the date upon which such notice is given (the “Project Financing Preemptive Notice”). MKTY shall have ten (10) Business Days from the date on which the Project Financing Preemptive Notice is given to agree (in MKTY’s sole and absolute discretion), by written notice to HEL, that MKTY and/or its Affiliates shall purchase (A) up to fifty percent (50%) of such Phase I–III Project Financing Equity related to the wind power generation components of the Project and/or (B) at least fifty percent (50%) and up to one hundred percent (100%) of such Phase I–III Project Financing Equity related to data processing components of the Project, all upon the general terms specified in the Project Financing Preemptive Notice and stating therein the applicable quantities of Phase I–III Project Financing Equity to be purchased by MKTY and/or its Affiliates. For the avoidance of doubt, neither MKTY nor its Affiliates shall have an obligation to purchase the foregoing Phase I–III Project Financing Equity if MKTY does not deliver written notice as provided above. In the event that in connection with such a proposed issuance of Phase I–III Project Financing Equity, MKTY shall not give such written notice to HEL within such ten (10) Business Day period, MKTY and its Affiliates shall, for all purposes of this Section 2.1(a), be deemed to have refused (in that particular instance only) to purchase any of such Phase I–III Project Financing Equity and to have waived (in that particular instance only) all of its rights under this Section 2.1(a) to purchase any of such Phase I–III Project Financing Equity. Any Phase I–III Project Financing Equity issued pursuant to this Section 2.1 shall be acquired by MKTY and/or its Affiliates (as applicable) making payment to the appropriate Project SPV(s), as applicable, therefor at the closing with respect to the project financing to which the Phase I–III Project Financing Equity relates.
(b) In the event and to the extent that such Phase I–III Project Financing Equity contemplated by this Section 2.1 is not acquired by MKTY or its Affiliates, the applicable Project SPVs shall be free to issue such Phase I–III Project Financing Equity to any Person; provided, that (x) the price per security of Phase I–III Project Financing Equity at which such Phase I–III Project Financing Equity is being issued to and purchased by such Person is equal to or greater than the Project Finance Equity Purchase Price and (y) the other terms and conditions pursuant to which such Person purchases such Phase I–III Project Financing Equity are not more favorable to the investor, in the aggregate, than the terms set forth in the Project Financing Preemptive Notice.
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(c) Notwithstanding anything in this Section 2.1 to the contrary, the following shall apply with respect to any purchase or contemplated purchase of Phase I–III Project Financing Equity by MKTY or its Affiliates pursuant to this Section 2.1: In the event MKTY and/or its Affiliates agree to purchase Phase I–III Project Financing Equity pursuant to Section 2.1(a) and the closing with respect to MKTY’s or the Affiliate’s purchase thereof is not consummated within one hundred eighty (180) days after the date of the Project Financing Preemptive Notice, then following such one hundred eighty (180) day period MKTY and/or its Affiliate(s) (as applicable) may, by written notice to HEL, unilaterally terminate the applicable election to purchase the relevant Phase I–III Project Financing Equity. Following any such termination, MKTY and/or its Affiliates (as applicable) shall have no obligation or liability to HEL or any Project SPV with respect to the applicable Phase I–III Project Financing Equity previously elected to be purchased by MKTY and/or its Affiliates.
2.2 Pre-emptive Right of Subscription for Phase II–III Development Equity.
(a) In the event that, at any time, a Project SPV shall decide to undertake an issuance of Phase II–III Development Equity, HEL shall, or shall cause such Project SPV to, confer in good faith with MKTY to discuss the nature and structure of the applicable financing to which the Phase II–III Development Equity relates. Promptly following the conclusion of such discussions, HEL shall deliver to MKTY written notice of the applicable Project SPVs’ decision to undertake an issuance of Phase II–III Development Equity. Such written notice shall describe (i) the amount, type and terms of such Phase II–III Development Equity, (ii) the purchase price per security for such Phase II–III Development Equity (the “Development Equity Purchase Price”) to be paid by the purchasers of such Phase II–III Development Equity, (iii) the identity of any prospective or desired lead investor in the applicable Phase II–III Development Equity, and (iv) all other material terms upon which the Project SPVs have decided to issue the Phase II–III Development Equity including the expected timing of such issuance, which shall in no event be less than thirty (30) days after the date upon which such notice is given (the “Development Equity Preemptive Notice”). MKTY shall have ten (10) Business Days from the date on which the Development Equity Preemptive Notice is given to agree (in MKTY’s sole and absolute discretion) by written notice to HEL that MKTY and/or its Affiliates shall purchase at least fifty percent (50%) and up to one hundred percent (100%) of such Phase II–III Development Equity upon the general terms specified in the Development Equity Preemptive Notice, stating therein the applicable quantities of Phase II–III Development Equity to be purchased by MKTY and/or its Affiliates. For the avoidance of doubt, neither MKTY nor its Affiliates shall have an obligation to purchase the foregoing Phase II–III Development Equity if MKTY does not deliver written notice as provided above. In the event that in connection with such a proposed issuance of Phase II–III Development Equity, MKTY shall not give such written notice to HEL within such ten (10) Business Day period, MKTY and its Affiliates shall, for all purposes of this Section 2.2(a), be deemed to have refused (in that particular instance only) to purchase any of such Phase II–III Development Equity and to have waived (in that particular instance only) all of its rights under this Section 2.2(a) to purchase any of such Phase II–III Development Equity. Any Phase II–III Development Equity issued pursuant to this Section 2.2 shall be acquired by MKTY and/or its Affiliates (as applicable) making payment to the appropriate Project SPV(s), as applicable, therefor at the closing with respect to the financing to which the Phase II–III Development Equity relates.
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(b) In the event and to the extent that such Phase II–III Development Equity contemplated by this Section 2.2 is not acquired by MKTY or its Affiliates, the applicable Project SPVs shall be free to issue such Phase II–III Development Equity to any Person; provided, that (x) the price per security of Phase II–III Development Equity at which such Phase II–III Development Equity is being issued to and purchased by such Person is equal to or greater than the Development Equity Purchase Price and (y) the other terms and conditions pursuant to which such Person purchases such Phase II–III Development Equity are not more favorable to the investor, in the aggregate, than the terms set forth in the Development Equity Preemptive Notice.
(c) Notwithstanding anything in this Section 2.2 to the contrary, the following shall apply with respect to any purchase or contemplated purchase of Phase II–III Development Equity by MKTY and/or its Affiliates pursuant to this Section 2.2: In the event MKTY and/or its Affiliates agree to purchase Phase II–III Development Equity pursuant to Section 2.2(a) and the closing with respect to MKTY’s or the Affiliate’s purchase thereof is not consummated within one hundred eighty (180) days after the date of the Development Equity Preemptive Notice, then following such one hundred eighty (180) day period MKTY and/or its Affiliates (as applicable) may, by written notice to HEL, unilaterally terminate the applicable election to purchase the relevant Phase II–III Development Equity. Following any such termination, MKTY and/or its Affiliates (as applicable) shall have no obligation or liability to HEL or any Project SPV with respect to the applicable Phase II–III Development Equity previously elected to be purchased by MKTY and/or its Affiliates.
ARTICLE III
TERMINATION OF PRIOR AGREEMENT
3.1 Termination of Original Contingent Rights Agreement. The Original Contingent Rights Agreement is hereby terminated and replaced with this Agreement.
ARTICLE IV
MISCELLANEOUS PROVISIONS
4.1 Project SPVs. Notwithstanding anything else herein to the contrary, HEL shall and shall cause its Affiliates to, absent MKTY consent to the contrary, conduct all Project-specific debt and equity financings and issuances with respect to Phase I of the Project, Phase II of the Project and Phase III of the Project through Project SPVs so as to properly effectuate the purpose and intent of this Agreement. The foregoing shall include all issuances of Phase I–III Project Financing Equity and Phase II–III Development Equity, but for greater certainty shall not include any equity or debt financing needed for the general operations of the entity or entities that acts as developer of the Project (and, accordingly, will receive any development fee, profit participation “promote” or similar amount payable to the developer of the Project).
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4.2 Governing Law; Severability. THIS AGREEMENT IS GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION. If any provision of this Agreement or the application thereof to either party or any circumstance is held invalid or unenforceable to any extent, (a) the remainder of this Agreement and the application of that provision to the other party or other circumstances is not affected thereby, and (b) the parties shall negotiate in good faith to replace that provision with a new provision that is valid and enforceable and that puts the parties in substantially the same economic, business and legal position as they would have been in if the original provision had been valid and enforceable.
4.3 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, permitted successors and assigns.
4.4 Waiver. No waiver by either party of any default by the other party in the performance of any provision, condition or requirement herein shall be deemed to be a waiver of, or in any manner a release of the other party from, performance of any other provision, condition or requirement herein, nor deemed to be a waiver of, or in any manner a release of the other party from, future performance of the same provision, condition or requirement; nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right or any like right accruing to it thereafter.
4.5 Amendment. This Agreement may not be modified or amended except by written agreement of the parties.
4.6 Headings. The headings contained in this Agreement are for convenience of reference only and do not constitute part of this Agreement.
4.7 Further Assurances. Each of the parties agrees to use all reasonable efforts to take, or to cause to be taken, all actions, and to do, or to cause to be done, all things necessary, proper or advisable under Applicable Law to consummate and make effective the transactions contemplated by this Agreement.
4.8 Assignment. Either party may transfer its rights and obligations hereunder to another entity only with the prior written consent of the other party, which consent shall not be unreasonably withheld; provided, that MKTY may transfer its rights and obligations hereunder to an Affiliate upon written notice to HEL, without the prior written consent of HEL.
4.9 Entire Agreement. This Agreement constitutes the entire agreement of the parties relating to the relationship hereunder and supersede all provisions and concepts contained in all prior contracts or agreements between the parties with respect to such relationship, whether oral or written.
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4.10 Counterparts. This Agreement may be executed by electronic signature in multiple counterparts, each of which, when executed, shall be deemed an original, and all of which shall constitute but one and the same instrument.
4.11 Remedies. Except as expressly provided herein, the remedies created by this Agreement are cumulative and in addition to any other remedies otherwise available at law or in equity. The parties agree that irreparable damage would occur if any provision of this Agreement (including, without limitation, Section 4.1) were not performed in accordance with the terms hereof and that the parties shall be entitled to equitable relief, including injunctive relief or specific performance of the terms hereof, in addition to any other remedy to which they are entitled at law or in equity.
4.12 Survival. This Agreement, and the terms and provisions hereof, shall survive until the consummation of a Qualified Public Offering by HEL.
[signature page follows]
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first set forth in this Agreement.
| HEL: | |||
| HARMATTAN ENERGY LTD. | |||
| By: | |||
| Name: | Matthew Lipman | ||
| Title: | President | ||
| MKTY: | |||
| MECHANICAL TECHNOLOGY, INCORPORATED | |||
| By: | |||
| Name: | Michael Toporek | ||
| Title: | Chief Executive Officer | ||
[Signature Page to Amended and Restated Contingent Rights Agreement]
Exhibit 10.52
BAKER DRAFT 10/22/21
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this “Agreement”) between EcoChain, Inc., a Delaware corporation (the “Company”), and John Belizaire (“Executive”) is contingent upon, and effective as of the date of, the consummation of that proposed transaction (the “Transaction”, and the date of consummation of the Transaction, the “Effective Date”) by and among Mechanical Technology, Incorporated, a Nevada corporation (“MTI”), SCI Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company, and Soluna Computing, Inc. (“SCI”), a Delaware corporation, pursuant to an Agreement and Plan of Merger dated as of August 11, 2021 (as amended from time to time, the “Merger Agreement”).
WHEREAS, the execution and delivery of this Agreement, a Proprietary Rights and Restrictive Covenants Agreement between the Company and Executive, and a Confirmatory Assignment by Executive dated October ____, 2021 (the “Confirmatory Assignment”) (among other items) are conditions precedent to the closing of the Transaction; and
WHEREAS, the Company desires to secure the services of Executive, Executive desires to commence employment with the Company, and each desires to enter in an agreement to provide the terms of such employment as set forth herein.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. As used herein, the following terms shall have the following meanings:
“Board” means the Company’s Board of Directors.
“Cause” means any of the following: (i) Executive’s theft, dishonesty, fraud, embezzlement, willful misconduct, breach of fiduciary duty or material falsification of any Group Company documents or records; (ii) Executive’s material failure to abide by a Group Company’s code of conduct or other policies (including policies relating to confidentiality and reasonable workplace conduct) made available to the Executive; (iii) Executive’s unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of a Group Company (including the Executive’s improper use or disclosure of a Group Company’s confidential or proprietary information); (iv) any misconduct, moral turpitude, gross negligence or malfeasance of Executive that has or, in the good faith judgment of the Board, could reasonably be expected to have, a material detrimental effect on a Group Company’s reputation or business; (v) Executive’s repeated willful failure to perform Executive’s assigned duties after written notice from the Board of such failure; (vi) any material breach by Executive of this Agreement (including, for the avoidance of doubt, the “PRRCA”, as defined further below); or (vii) Executive’s conviction (including any plea of guilty or nolo contendere) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or that materially and permanently impairs the Executive’s ability to perform his duties with a Group Company; provided that in order for the Company’s termination or other claim based upon Cause to be effective hereunder with respect to any failure or violation that the Board reasonably determines to be susceptible of cure, Executive must have failed to cure such failure or violation during a period of thirty (30) days after Executive receives notice from the Company of such failure or violation.
“Change of Control” has the meaning specified in the Merger Agreement.
“Code” means the United States Internal Revenue Code of 1986, as amended, and any applicable regulations and administrative guidelines.
“Committee” means the compensation committee of the MTI Board.
“Disability” means Executive’s inability to perform the essential duties, responsibilities and functions of Executive’s position with the Company for a continuous period of ninety (90) days as a result of any mental or physical disability or incapacity, with or without reasonable accommodation, all as determined by the Board in its reasonable discretion. Executive shall cooperate in all respects with the Company if a question arises as to whether Executive has become Disabled (including, subject to restrictions under any applicable law, submitting to an examination by a medical doctor or other health care specialists the Company selects and authorizing such medical doctor or such other health care specialist to provide an opinion to the Company as to whether or not Executive’s condition falls within the definition of “Disability”, but without disclosing any details of Executive’s medical or psychological condition). Executive shall have the right to challenge any such opinion with a medical opinion of Executive’s own medical doctor or health care specialist. In the event that the conclusions reached by such medical doctors or healthcare specialists as to the question of whether or not Executive has a Disability differ, then the two medical doctors or health care specialists providing the opinions shall agree on a third medical doctor or health care specialist, who shall examine Executive and whose determination as to whether Executive has become disabled shall be binding on the parties.
“Good Reason” means the occurrence of one or more of the following without Executive’s express written consent:
(i) the Company demotes Executive from the position set forth in Section 2(b)(i) or materially reduces Executive’s responsibilities (including reporting responsibilities) in a manner inconsistent with Executive’s position, other than temporarily while Executive is physically or mentally incapacitated to a degree that would constitute a Disability if it continued for the requisite number of days, or as required by applicable law;
(ii) the Company materially breaches this Agreement, including, without limitation, by materially reducing Executive’s compensation hereunder, including any material benefits or material reimbursements to be provided to Executive hereunder (in each case, other than in connection with an across the board reduction of such compensation, benefits or reimbursements applicable to senior executives of MTI and the Company generally);
(iii) the Company causes Executive to report to a Person other than the Board or a committee thereof; or
(iv) the Company changes Executive’s place of work to a location more than thirty (30) miles from the principal location from which he works as of the Effective Date, and such change increases Executive’s one-way commute;
provided, in each case, that Executive delivers written notice detailing the specific circumstance alleged to constitute Good Reason to the Company within thirty (30) days after Executive has actual knowledge of the initial existence of such circumstance, the Company fails to remedy such circumstance within thirty (30) days after it receives such notice from Executive, and Executive actually terminates his employment within sixty (60) days following the expiration of the Company’s cure period described above. Otherwise, any claim of such circumstance as “Good Reason” shall be deemed irrevocably waived by Executive.
“Group Company” means the Company and each of its parent entities, subsidiary entities, and other affiliates.
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“Key Performance Objectives” means those Company and/or personal performance objectives proposed by the MTI CEO, reviewed by the Committee, and approved by the MTI Board within forty-five (45) days after the beginning of each calendar year during the Employment Period, or, for the calendar year that contains the Effective Date, within forty-five (45) days after the Effective Date.
“MTI CEO” means the individual having the title of Chief Executive Officer of MTI.
“MTI Board” means the board of directors of MTI.
“Person” means an individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization, a governing body of any of the foregoing, or a governmental entity or any department, agency or political subdivision thereof.
2. Employment.
(a) Employment; Termination. The Company agrees to employ Executive, and Executive hereby accepts employment with the Company, effective as of the Effective Date, upon the terms and conditions set forth in this Agreement. Executive’s employment under this Agreement shall commence on the Effective Date and shall continue for thirty-six (36) calendar months (the “Initial Term”). Effective upon the expiration of the Initial Term and of each “Additional Term” (as defined below), Executive’s employment under this Agreement will be automatically extended, upon the same terms and conditions, for an additional twelve (12)-month period (each, an “Additional Term”), unless, at least ninety (90) calendar days prior to the expiration of the Initial Term or such Additional Term, as applicable, either Executive or the Company notifies the other party hereto in writing that such extension will not take effect. Notwithstanding the foregoing, Executive’s employment under this Agreement, and the Initial Term or any Additional Term, as applicable, shall terminate upon the earlier occurrence of any of the following:
(i) immediately upon Executive’s death;
(ii) immediately upon the determination that Executive is Disabled as set forth above;
(iii) upon thirty (30) days’ advance written notice from Executive to the Company of Executive’s voluntary resignation of his employment with the Company other than for Good Reason (which the Company may, in its sole discretion, make effective earlier than any notice date);
(iv) immediately upon written notice from Executive to the Company of the Executive's resignation for Good Reason, subject to compliance with the applicable notice and cure requirements in Section 1;
(v) immediately upon written notice from the Company to Executive of the termination of Executive's employment for any reason other than Cause (which, for the avoidance of doubt, will not include any termination described in clauses (i) or (ii) above); and
(vi) immediately upon written notice from the Company to Executive of the termination of Executive's employment for Cause, subject to compliance with the applicable notice and cure requirements in Section 1.
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As used in this Agreement, the phrase “Employment Period” means Executive’s period of employment from the Effective Date until the date Executive’s employment ends for any reason. The effective date of any termination of the Employment Period, and of Executive’s employment hereunder, is hereinafter referred to as the “Termination Date.” Effective upon any Termination Date, this Agreement shall automatically terminate and shall be of no further force or effect, except as otherwise provided in Section 7(a) hereof, and Executive shall immediately resign, in writing, from all positions then held by Executive with the Company and its affiliates unless otherwise requested by the Company and agreed to by Executive.
For the avoidance of doubt, Executive’s employment is at-will and either Executive or the Company may terminate the Employment Period at any time, for any or no reason. The provisions in Section 2(d) shall govern the amount of compensation and benefits, if any, to be provided to Executive upon termination of the Employment Period and of Executive’s employment hereunder, and do not alter the Company’s right to terminate Executive’s employment at any time.
(b) Position and Duties.
(i) Position. Commencing on the Effective Date and continuing during the Employment Period, Executive shall serve as the President and Chief Executive Officer of the Company and shall report directly to the Board or a committee thereof.
(ii) Responsibilities. In Executive’s capacity set forth in Section 2(b)(i), Executive will provide strategic and tactical leadership to the Company, driving financial performance, managing the leadership team, and working with the Board or a committee thereof to create value for constituents and elevate the Company’s reputation with all constituents, including current and prospective partners, and will have such other and further duties and responsibilities as are customarily exercised by an individual serving in Executive’s capacity at an entity of the Company’s size and nature, including but not limited to direct supervision of and reporting from all other Company senior executives. Executive shall also perform and have all such other and further duties and responsibilities commensurate with Executive’s position as and to the extent directed or assigned by the Board or a committee thereof, and shall have such power and authority as shall reasonably be required to enable him to perform such duties and responsibilities hereunder. Executive will also have such other duties and responsibilities, consistent with Executive’s position, as are set forth in the Company’s organizational documents from time to time, and Executive will faithfully perform all of Executive’s duties hereunder to the best of Executive’s ability. The MTI Board or the Committee will provide a performance review to Executive on no less than an annual basis.
(iii) Time to be Devoted to Employment. Except for vacation in accordance with Company policy, absences due to temporary illness and other absences resulting from a Disability, Executive shall (A) devote substantially all of Executive’s business time, attention, energy and skill to the Company’s business, subject, however, to such reasonable time and effort as the Executive shall be required to devote to those efforts and activities set forth in Exhibit A (the “Outside Responsibilities”); provided that Executive’s Outside Responsibilities shall not, individually or in the aggregate, materially interfere with the Executive’s ability to discharge his duties and responsibilities hereunder; (B) use Executive’s best efforts to promote the success of the Company’s businesses, and (C) cooperate fully with the Board or a committee thereof in advancing the Company’s best interests. During the Employment Period, other than with respect to any of the Outside Responsibilities, Executive shall not engage in any other business activity which, in the Board’s reasonable judgment, would conflict with Executive’s ability to perform his duties hereunder, whether or not such activity is pursued for gain, profit or other pecuniary advantage.
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(iv) Work Location. Executive’s principal place of work shall be located in New York City, New York, or such other location as Executive and the Company agree upon from time to time.
(v) Policies. Executive will be subject to, and will comply with, the policies, standards and procedures generally applicable and made available to the Company’s senior management employees from time to time.
(c) Base Salary and Benefits.
(i) Base Salary. During the Employment Period, the Company shall pay to Executive a base salary (the “Base Salary”) at the annual rate of Three Hundred Fifty Thousand Dollars ($350,000). The Company shall pay the Base Salary in regular installments in accordance with the Company’s general payroll practices, subject to customary withholding, payroll and other taxes. The Base Salary will be subject to annual review by the MTI Board or the Committee during the Employment Period and, at the MTI Board’s or the Committee’s sole option, may be increased, provided that at a minimum there shall be annual cost of living increases proportionate to annual increases in the consumer price index published by the U.S. Bureau of Labor Statistics, and following any such increase for all purposes hereunder such changed amount shall be Executive’s “Base Salary.”
(ii) Performance Bonus. In addition to the Base Salary, for each calendar year ending during the Employment Period (each, a “Bonus Year”), Executive shall be eligible to receive an annual bonus based on Executive's performance with respect to the Key Performance Objectives in such Bonus Year (the “Performance Bonus”). Following the completion of each Bonus Year, the MTI Board or the Committee shall determine, in good faith, whether Executive has achieved the Key Performance Objectives for such year. Executive’s target Performance Bonus for each Bonus Year will be a cash bonus equal to One Hundred Seventy-Five Thousand Dollars ($175,000), unless the MTI Board or the Committee and Executive agree on a different target amount for such Bonus Year within forty-five (45) days after the start of such Bonus Year. The Performance Bonus shall be prorated on a proportionate basis if Executive achieves at least 75%, but less than 100%, of the applicable Key Performance Objectives (it being understood that no Performance Bonus shall be paid if Executive fails to achieve at least 75% of the applicable Key Performance Objectives). No portion of the Performance Bonus is guaranteed but, if awarded based on achievement of all or a portion of the applicable Key Performance Objectives, shall be earned by and paid to Executive by no later than March 15 of the calendar year next following the Bonus Year to which it relates, contingent on Executive’s continued employment with the Company through the last day of such Bonus Year, except as otherwise contemplated in Section 2(d)(ii)(3). The Performance Bonus shall be prorated for any partial Bonus Year. The Performance Bonus shall be determined and paid in such a manner as qualifies for the “short-term deferral” exemption from “Section 409A” (as defined below).
(iii) Sign-On Equity Award. Subject to Executive’s continued employment with the Company through the “Grant Date” (as defined below), within sixty (60) calendar days following the Effective Date, MTI shall grant (the actual date of such grant, the “Grant Date”) Executive a one-time award of restricted stock units under an incentive equity plan maintained by MTI with an aggregate ninety (90)-day trailing volume weighted average price as of the Grant Date equal to Eight Hundred Eleven Thousand Four Hundred Ten Dollars ($811,410) (the “Sign-On Equity Award”). The Sign-On Equity Award shall be subject to all of the terms and conditions of an incentive equity plan, an individual award agreement to be entered into by Executive and MTI (the form of which is attached as Exhibit B hereto), and any other ancillary agreements that Executive may be required to enter into as a condition of the award (collectively, the “Sign-On Equity Documents”). In the event of any conflict between any terms of this Agreement and any terms of the Sign-On Equity Documents, the terms of the Sign-On Equity Documents shall prevail, except to the extent otherwise expressly provided in the Sign-On Equity Documents.
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(iv) Annual Equity Awards. Within thirty (30) days after January 1, 2022, and within thirty (30) days after each subsequent January 1 during the Employment Period (the “Annual Equity Award Grant Date”), subject to such approvals as are necessary to effectuate the grants contemplated by this paragraph, and Executive’s continued employment with the Company through each applicable Annual Equity Award Grant Date, Executive shall be granted an annual equity award in the form of restricted stock units under an incentive equity plan maintained by MTI (each an “Annual Equity Award”), subject to vesting based on achievement of the applicable Key Performance Objectives as provided below. Executive also shall receive an Annual Equity Award for 2021 within five (5) days after the Effective Date (the “2021 Annual Equity Award”). Each Annual Equity Award shall have an aggregate grant date fair value based on the aggregate ninety (90)-day trailing volume weighted average price as of the January 1 coinciding with or immediately preceding the Annual Equity Award Grant Date (or, in the case of the 2021 Annual Equity Award, the grant date thereof) of One Hundred Seventy-Five Thousand Dollars ($175,000) (provided that the number of shares underlying an Annual Equity Award and all other annual equity awards issued during the same calendar year to John Belizaire, Dipul Patel, Phillip Ng, and Mohammed Larbi Loudiyi (or their affiliates and assigns, including, without limitation, ML&K Contractor), in the aggregate, shall not exceed 2.5% of the then-issued and outstanding shares of MTI’s common stock (the “Annual Limitation”), and to the extent there would be an excess, such Annual Equity Award, along with such other annual equity awards, shall be proportionately reduced so as not to exceed the Annual Limitation). In addition, Annual Equity Awards (including, but not limited to, the 2021 Annual Equity Award) shall be prorated for any partial fiscal year.
Following the first anniversary of each Annual Equity Award Grant Date (or, in the case of the 2021 Annual Equity Award, after January 1, 2022), the MTI CEO shall determine, in good faith, subject to approval of the MTI Board or the Committee, whether Executive has achieved the Key Performance Objectives for the corresponding Annual Equity Award. An Annual Equity Award will be fully vested to the extent Executive has achieved 100% of such Key Performance Objectives. An Annual Equity Award will be partially vested (with the remainder of such Annual Equity Award forfeited) on a proportionate basis if Executive achieves at least 75%, but less than 100%, of such Key Performance Objectives. An Annual Equity Award shall be 100% forfeited if Executive fails to achieve at least 75% of such Key Performance Objectives. In addition, any unvested Annual Equity Award shall become fully vested (A) upon the consummation of a Change of Control, provided that Executive remains in employment with the Company through the Change of Control date; and (B) upon a termination of Executive’s employment by the Company without Cause or by Executive with Good Reason.
Each Annual Equity Award shall be subject to all of the terms and conditions of an incentive equity plan, an individual award agreement to be entered into by Executive and MTI, and any other ancillary agreements that Executive may be required to enter into as a condition of the award (collectively, the “Annual Equity Documents”). In the event of any conflict between any terms of this Agreement and any terms of the Annual Equity Documents, the terms of the Annual Equity Documents shall prevail, except to the extent otherwise expressly provided in the Annual Equity Documents.
Notwithstanding the foregoing, in the event the MTI Board or the Committee determines, in its sole and absolute discretion, that all necessary or appropriate approvals for the grant of a given Annual Equity Award cannot be obtained, that an Annual Equity Award will be reduced due to the Annual Limitation under the first paragraph of this clause (iv) above, or that any other circumstance makes the grant of an Annual Equity Award impracticable or inadvisable, the Company, subject to the approval of the MTI Board or the Committee, shall issue Executive, in lieu of such Annual Equity Award (or, in the event of a reduction due to the Annual Limitation under the first paragraph of this clause (iv) above, in lieu of the portion of such Annual Equity Award reduced thereunder), at the time and subject to the grant conditions set forth in the preceding paragraph, a cash-based award or debt note (such note to carry interest at the then-applicable federal funds rate from the later of the date on which the award vests and the date on which the award must be paid to Executive pursuant to its terms, to the date on which the note is settled), as determined by the MTI Board or the Committee, with pre-tax economic value substantially equivalent to the pre-tax economic value of such Annual Equity Award or portion thereof and, to the extent practicable and permitted by applicable law, on substantially the same terms, as such Annual Equity Award.
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(v) Business Expenses. The Company shall reimburse Executive for all reasonable expenses that he incurs in performing his duties hereunder during the Employment Period, in each case subject to the terms and conditions of the Company’s policies in effect from time to time with respect to travel, entertainment and other business expenses. Executive shall furnish the Company with evidence relating to such expenses as the Company reasonably requires to substantiate such expenses.
(vi) Employee Benefits. Executive will be eligible for all customary and usual employee benefits generally available to the Company’s executives subject to the terms and conditions of the Company’s benefit plan documents. The Company reserves the right to change or eliminate its employee benefits arrangements on a prospective basis, at any time and without notice. Executive will be eligible for vacation time during the Employment Period in accordance with the Company’s vacation policy. Following the Termination Date, Executive may have the right to continue coverage under the Company’s health insurance plan for a period of time in accordance with and subject to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”).
(vii) Tax Withholding. To the extent then permitted under the terms of the governing incentive equity plan, Executive will be permitted to elect to have any required tax withholding with respect to the Sign-On Equity Award or Annual Equity Awards satisfied by having MTI withhold restricted stock units otherwise deliverable to Executive with respect to such Sign-On Equity Award or Annual Equity Awards, as the case may be.
(d) Effect of Termination.
(i) If the Employment Period, and Executive’s employment hereunder, is terminated (A) due to non-renewal of the Employment Period by either party under Section 2(a), (B) by the Company for Cause under Section 2(a)(vi) or due to Executive’s Disability under Section 2(a)(ii), (C) by reason of Executive’s death under Section 2(a)(i), or (D) by Executive’s resignation other than for Good Reason under Section 2(a)(iii), Executive or his estate, as the case may be, shall be entitled to the following (collectively, the payments and benefits described in Sections 2(d)(i)(1) through 2(d)(i)(4) hereof shall be hereafter referred to as the “Accrued Benefits”):
(1) all previously earned and accrued but unpaid Base Salary through the Termination Date, paid on the next regularly scheduled date for the Company to make payroll payments following Termination Date or such earlier date as may be required by applicable law;
(2) subject to Section 2(c)(v), all previously approved but unreimbursed expenses incurred by the Executive through the Termination Date, paid within sixty (60) days following Termination Date or such earlier date as may be required by applicable law or as set forth in the Company’s expense reimbursement policy;
(3) any accrued but unused paid vacation time, paid subject to and in accordance with Company policy; and
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(4) all other payments and benefits to which Executive shall be entitled under the terms of any employee benefit plan of the Company, paid or provided subject to and in accordance with the terms of such plan.
(ii) If the Employment Period, and Executive’s employment hereunder, is terminated (A) by the Company other than for Cause under Section 2(a)(v) or (B) by Executive for Good Reason under Section 2(a)(iv), Executive shall be entitled to the Accrued Benefits and, subject to Executive’s compliance with the Release Condition in Section 2(d)(iv), may also receive the following additional payments:
(1) a severance payment in an amount equal to Executive’s Base Salary for six (6) months (the “Severance Period”), paid in equal monthly installments on regular Company payroll dates over the Severance Period following the Termination Date (the “Severance Payment”); provided that the first installment of the Severance Payment will be paid on the first regular Company payroll date next following the sixtieth (60th) calendar day following the Termination Date and will include payment of any installment payments that were otherwise due prior thereto;
(2) the Performance Bonus (if any) earned for the most recently-completed Bonus Year preceding the Termination Date in accordance with Section 2(c)(ii) based on actual attainment of the applicable Key Performance Objectives for such year, to the extent unpaid as of the Termination Date, paid in a single lump sum in cash on the first regular Company payroll date next following the sixtieth (60th) calendar day following the Termination Date (the “Prior Year Bonus”);
(3) the Performance Bonus (if any) earned for the Bonus Year containing the Termination Date in accordance with Section 2(c)(ii) based on actual attainment of the applicable Key Performance Objectives for such year, which shall be paid in its entirety if the applicable Key Performance Objectives were achieved prior to the end of the Employment Period, and which otherwise shall be prorated based on the ratio of the number of days employed during such year to three hundred sixty-five (365) (the “Current Year Bonus”), in each case paid in a single lump sum in cash when annual bonuses for such Bonus Year are paid to other executives, but in no event later than the next following March 15.
(4) subject to (x) Executive’s eligibility for and timely election of continuation coverage under COBRA, and (y) Executive’s continued copayment of premiums at the same level and cost to Executive as if Executive were an employee of the Company (excluding, for purposes of calculating cost, an employee’s ability to pay premiums with pre-tax dollars), continued copayment by the Company for Executive’s coverage under the Company’s group health plan during the eighteen (18)-month period following the Termination Date to the same extent that the Company paid for such coverage immediately prior to the Termination Date, in a manner intended to avoid any excise tax under Section 4980D of the Code, subject to the eligibility requirements and other terms and conditions of such insurance coverage (the “COBRA Subsidy”).
(iii) The treatment of the Sign-On Equity Award, each Annual Equity Award, and any other equity or equity-based award upon any termination of Executive’s employment hereunder shall be subject to the documents and agreements governing such awards.
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(iv) Executive shall be eligible to receive the Severance Payment, the Prior Year Bonus, the Current Year Bonus, and the COBRA Subsidy only if (A) Executive remains in compliance with Section 3 at all times, and (B) Executive has executed and delivered to the Company a general release of claims in the form then provided by the Company to Executive (the “General Release”), which General Release has become effective and irrevocable according to its terms no later than 60 days following the Termination Date, and only so long as Executive has not revoked or breached any of the provisions of the General Release and does not subsequently breach any such provisions (the “Release Condition”). To the extent that any amount under Section 2(d) constitutes “deferred compensation” for purposes of Section 409A, any payment of such amount scheduled to occur during the first sixty (60) days following the Termination Date shall not be made until the Company’s first regularly scheduled pay period next following the sixtieth (60th) day after the Termination Date and shall include payment of all amounts that were otherwise scheduled to be paid prior thereto.
(v) The payments and benefits described in this Section 2(d) shall be in full and complete satisfaction of Executive’s rights and entitlements under this Agreement and any other claims that Executive may have in respect of Executive’s employment with the Company or any of its affiliates, and Executive acknowledges that such amounts are fair and reasonable, and are Executive’s sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of Executive’s employment hereunder or any breach of this Agreement. As of the date of the final payment described in this Section 2(d), the Company shall not have any further obligation to Executive under this Agreement or otherwise, except as may be required by law.
(vi) The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not Executive obtains other employment.
(e) Indemnification; D&O Coverage.
(i) The Company will indemnify Executive to the full extent required under the Company’s Certificate of Incorporation and Bylaws, and under applicable law.
(ii) MTI or the Company will maintain a directors’ and officers’ liability insurance policy (or policies) providing coverage for Executive that is no less favorable to him in any respect (including as to the length of any post-employment tail coverage) than the coverage then being provided to any other officer or director of MTI.
3. Proprietary Rights and Restrictive Covenants. Concurrently herewith, Executive shall enter into a Proprietary Rights and Restrictive Covenants Agreement with the Company in the form attached as Exhibit C hereto (the “PRRCA”), which is hereby made a part hereof, and hereby agrees to comply in full with all of the terms and conditions thereof.
4. Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when delivered personally, the third Business Day after having been mailed by certified or registered mail, return receipt requested and postage prepaid, or the first Business Day after the date sent via a nationally recognized overnight courier. “Business Day” is any day other than a Saturday, Sunday or a day on which banks in California are required or authorized to be closed. Such notices, demands and other communications will be sent to the address indicated below:
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To the Company:
EcoChain, Inc.
Attention: Board of Directors
325 Washington Ave. Extension
Albany NY 12205
With a copy (which shall not constitute notice) to:
Jackson Lewis P.C.
Attention: Kenneth C. Weafer, Attorney at Law
677 Broadway, 9th Floor
Albany, NY 12207
To Executive:
To Executive at Executive’s most recent address in the Company’s records
or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party.
5. Dispute Resolution.
(a) Agreement to Arbitrate. Any dispute, claim, or controversy between the parties arising out of or in connection with this Agreement, or the employment relationship, shall be settled by binding arbitration under the Employment Arbitration Rules of the American Arbitration Association then in effect, provided, however, either party may request provisional, injunctive or extraordinary relief from a court of competent jurisdiction, under applicable law of the State of New York, if necessary to preserve the status quo pending arbitration. The arbitrator shall have the exclusive authority to resolve any dispute relating to the arbitrability of any individual claim or the enforceability or formation of this Agreement. The arbitration proceeding shall be conducted in English, before a single arbitrator, and any hearing shall be held in New York City, New York. The cost of such arbitration shall be borne by the Company; however, each party shall be responsible for its own attorney fees. This arbitration clause shall survive the termination of this Agreement. This Agreement to arbitrate disputes is governed by the Federal Arbitration Act (9 U.S.C. Sections 1, et seq.). The arbitrator shall apply the substantive law relating to all claims and defenses to be arbitrated the same as if the matter had been heard in court, including with respect to the award of any remedy or relief on an individual basis and any award of costs and attorneys’ fees to the prevailing party. The decision of the arbitrator shall be binding, and judgment thereon may be entered by any court of competent jurisdiction. Any type of class, collective claims or multi-party claims are expressly prohibited, and the arbitrator will have no authority to alter the parties’ agreement in this regard. In the event of any legal proceeding between the Company and Executive relating to this Agreement, neither party may claim the right to a trial by jury, and both parties waive any right they may have under applicable law or otherwise to a trial by jury. To the extent permitted by applicable law, the arbitration shall be kept confidential and the existence of the arbitration proceeding and any element of it (including but not limited to any pleadings, briefs or other documents submitted and exchanged and testimony or other oral submissions and any awards made) shall not be disclosed beyond the arbitrator, the parties hereto, their counsel and any person to whom disclosure is necessary to the conduct of the proceeding. Nothing in this Agreement prevents Executive from reporting good faith allegations of unlawful employment practices to appropriate federal, state or local agencies; reporting any good faith allegation of criminal conduct to any appropriate federal, State, or local official; participating in a proceeding with any appropriate federal, State, or local government agency enforcing discrimination laws; making any truthful statements or disclosures required by law, regulation, or legal process; or requesting or receiving confidential legal advice.
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(b) Consideration. The mutual promise by the Company and Executive to arbitrate all disputes between them, rather than to litigate them before the courts or other bodies, provides the consideration for this agreement to arbitrate. The Company’s offer of employment to Executive and the Company’s agreement to pay all fees and costs unique to arbitration serve as additional consideration.
6. Clawback. All amounts paid or provided to Executive hereunder shall be subject to any clawback or recoupment policy that may be maintained by the Company from time to time, and the requirements of any law or regulation applicable to the Company and governing the clawback or recoupment of executive compensation, or as set forth in any final non-appealable order by any court of competent jurisdiction or arbitrator.
7. Miscellaneous.
(a) Survival. Sections 2(d), and 3 through 7 shall survive and shall continue in full force and effect in accordance with their respective terms notwithstanding any expiration or termination of the Employment Period and/or this Agreement.
(b) Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, together with its exhibits and attachments, and the Confirmatory Assignment, embodies the parties’ complete agreement and understanding regarding the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or between the parties, as well as by or between the Executive and SCI, written or oral, which may have related to the subject matter hereof in any way.
(d) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective heirs, executors, successors, assigns and legal representatives; provided, that the services provided by Executive hereunder are of a personal nature and the rights and obligations of Executive hereunder shall not be assignable. Notwithstanding the foregoing, the Company may assign this Agreement, and its rights and obligations hereunder, to any successor to all or substantially all of the business and/or assets of the Company, provided that the Company shall require such successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place (and any such successor shall thereafter become the “Company” for purposes of this Agreement), and provided further that nothing herein shall modify any rights Executive has pursuant to this Agreement that are triggered by a Change of Control (or similar term).
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(e) Governing Law and Forum Selection Clause. Except as provided in Section 5, the law of the State of New York shall govern all questions concerning the construction, validity, interpretation and enforceability of this Agreement, and the performance of the obligations imposed by this Agreement, without giving effect to any choice of law or conflict of law rules or provisions. Each party submits to the jurisdiction of the state and federal courts located in New York City, New York in any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. Each party also agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Each party waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of the other party with respect thereto. A party may make service on the other party by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for the giving of notices in Section 4. Nothing in this Section 7(e), however, shall affect a party’s right to serve legal process in any other manner permitted by law or at equity. Each party agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law or at equity.
(f) Executive’s Cooperation. During the Employment Period and thereafter Executive shall cooperate with the Company and its affiliates in any internal investigation or administrative, regulatory or judicial proceeding as reasonably requested by the Company (including Executive being available to the Company upon reasonable notice for interviews and factual investigations, appearing at the Company's request to give testimony without requiring service of a subpoena or other legal process, volunteering to the Company all pertinent information and turning over to the Company all relevant documents which are or may come into Executive's possession, all at times and on schedules that are reasonably consistent with Executive's other permitted activities and commitments). Such services will be without additional compensation if Executive is then employed by the Company and for reasonable compensation if Executive is not then employed by the Company. The provisions of this Section 7(f) shall not apply to legal actions between Executive and the Company.
(g) Consent and Waiver by Third Parties. Executive represents and warrants that his employment with the Company on the terms and conditions set forth herein and his execution and performance of this Agreement do not constitute a breach or violation of any other agreement, obligation or understanding with any third party. Executive represents that he is not bound by any agreement or any other existing or previous business relationship which conflicts with, or may conflict with, the performance of his obligations hereunder or prevent the full performance of his duties and obligations hereunder, and that, upon the execution and delivery of this Agreement by the parties, this Agreement shall be a valid and binding obligation of Executive, enforceable against Executive in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.
(h) Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior written consent of the Company and Executive. No waiver shall be effective unless in a writing signed by the person against whom such waiver is sought to be enforced. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.
(i) No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against either party.
(j) Tax Matters.
(1) Tax Withholding. The Company shall withhold from any compensation and benefits payable under this Agreement all applicable federal, state, local, or other taxes, and any other applicable withholdings.
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(2) Section 409A.
(i) The parties intend for payments and benefits hereunder to either comply with, or be exempt from, Section 409A of the Code and the regulations promulgated thereunder (collectively “Section 409A”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted and construed consistent with such intent. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to Executive and the Company of the applicable provision without violating the provisions of Section 409A. Notwithstanding the foregoing, the Company does not guarantee any particular tax result, and in no event whatsoever shall the Company, its affiliates, or their respective officers, directors, employees, counsel or other service providers be liable for any tax, interest or penalty that may be imposed on Executive by Section 409A or damages for failing to comply with Section 409A.
(ii) To the extent that reimbursements or other in-kind benefits hereunder constitute “deferred compensation” for purposes of Section 409A, (x) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by Executive, (y) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, and (z) no such reimbursement, expenses eligible for reimbursement, or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.
(iii) For purposes of Section 409A, Executive’s right to receive installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment hereunder specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be within the sole discretion of the Company.
(iv) Any other provision of this Agreement to the contrary notwithstanding, in no event shall any payment or benefit hereunder that constitutes “deferred compensation” for purposes of Section 409A be subject to offset by any other amount unless otherwise permitted by Section 409A.
(v) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A, and, for purposes of any such provision, all references in this Agreement to Executive’s “termination”, “termination of employment” and like terms shall mean Executive’s “separation from service” with the Company.
(vi) Notwithstanding any other provision of this Agreement to the contrary, if, at the time of Executive’s separation from service, Executive is a “Specified Employee”, then the Company will defer the payment or commencement of any nonqualified deferred compensation subject to Section 409A payable upon separation from service (without any reduction in such payments or benefits ultimately paid or provided to Executive) until the date that is six (6) months following separation from service or, if earlier, the earliest other date as is permitted under Section 409A (and any amounts that otherwise would have been paid during this deferral period will be paid in a lump sum on the day after the expiration of the six (6) month period or such shorter period, if applicable). Executive will be a “Specified Employee” for purposes of this Agreement if, on the date of Executive’s separation from service, Executive is an individual who is, under the method of determination adopted by the Company, designated as, or within the category of employees deemed to be, a “Specified Employee” within the meaning and in accordance with Treasury Regulation Section 1.409A-1(i). The Company shall determine in its sole discretion all matters relating to who is a “Specified Employee” and the application of and effects of the change in such determination.
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(k) Parachute Payments. In the event that any payments and other benefits provided for in this Agreement or otherwise payable to Executive constitute “parachute payments” within the meaning of Section 280G of the Code, and, but for this paragraph, would be subject to the excise tax imposed by Section 4999 of the Code, then any post-termination severance payments and benefits payable under this Agreement or otherwise will be either (1) delivered in full or (2) delivered as to such lesser extent which would result in no portion of such payments and benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999 of the Code, results in the receipt by Executive, on an after-tax basis, of the greatest amount of payments and benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. If a reduction in Executive’s payments and benefits is necessitated by the preceding sentence, such reduction will occur in the following order: (i) any cash severance based on a multiple of base salary or annual bonus, (ii) any other cash amounts payable to Executive, (iii) benefits valued as parachute payments, and (iv) acceleration of vesting of any equity awards. Unless the Company and Executive otherwise agree in writing, any determination required under this paragraph will be made in writing by the Company’s or its affiliates’ independent public accountants (the “Firm”), whose determination will be conclusive and binding upon Executive and the Company. For purposes of making the calculations required by this paragraph, the Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive will furnish to the Firm such information and documents as the Firm may reasonably request in order to make a determination under this paragraph. The Company will bear all costs the Firm may incur in connection with any calculations contemplated by this paragraph.
(l) Headings. Section headings are used herein for convenience of reference only and shall not affect the meaning of any provision of this Agreement.
(m) Counterparts; Facsimile Signatures. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. Facsimile, PDF, and electronic counterpart signatures to and versions of this Agreement shall be acceptable and binding on the parties.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed this Agreement on or as of the ____ day of ____________, 2021.
| EcoChain, INC. | |||
| By: | |||
| Name: | |||
| Its: | |||
| EXECUTIVE | |||
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EXHIBIT A
OUTSIDE RESPONSIBILITIES
[Executive to provide proposed list, if any.]
EXHIBIT B
FORM OF SIGN-ON EQUITY AWARD AGREEMENT
EXHIBIT C
PROPRIETARY RIGHTS AND RESTRICTIVE COVENANTS AGREEMENT
Exhibit 10.53
FORM OF Promissory Note (2022)
Soluna Holdings, Inc.
Promissory Note
| Face Amount: $__,000,000.00 | , 2022 |
New York, NY
FOR VALUE RECEIVED, the undersigned Soluna Holdings, Inc., a Nevada corporation (the “Borrower”), promises to pay to the order of [____], its successors or assigns (the “Lender”), [_____] MILLION DOLLARS ($__,000,000) (the “Face Amount”) by , 2027 (the “Maturity Date”) as provided herein or on such earlier date as this Note is required or permitted to be repaid as provided hereunder.
Section 1. Maturity; Interest. The Face Amount shall be repaid in cash at the Maturity Date; provided, that this Note may be prepaid in whole or in part at any time and from time-to-time upon three (3) prior business days’ written notice, without penalty. This Note shall bear interest at the annual rate of two percent (2%) per annum.
Section 2. Repayment. Repayment of the Note may occur as follows: (a) at the Maturity Date or (b) upon the first business day of each month that the Borrower keeps open a private offering of its 9.0% Series A Cumulative Perpetual Preferred Stock (the “Preferred Stock”), at the Lender’s sole election upon written notice to Borrower, the Lender shall have the right but not the obligation to subscribe for shares of Preferred Stock by presenting this Note in whole or in part as legal tender to purchase such shares of Preferred Stock at price per share of Preferred Stock on the date immediately preceding the closing of such subscription. So long as no Event of Default has occurred, such repayment shall satisfy Borrower’s obligations pursuant to this Note in full and this Note shall be of no further force and effect. Notwithstanding anything herein to the contrary, if this Note is not repaid by May 2, 2022, then this Note shall automatically without any further action by either the Borrower or Lender be subscribed for the Preferred Stock.
Section 3. Transferability. This Note and any of the rights granted hereunder are freely transferable or assigned by Lender, in whole or in part, in its sole discretion; provided, there is notice to the Borrower.
Section 4. Event of Default.
(a) In the event that any one of the following events shall occur (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body), it shall be deemed an Event of Default:
(i) Any default in the payment of the principal of, interest on or other charges in respect of this Note, or any other note issued by the Borrower for the benefit of the Lender or any other creditor, as and when the same shall become due and payable;
(ii) Borrower shall fail to observe or perform any other material covenant, agreement or warranty contained in, or otherwise commit any breach or default of any provision of this Note or any other agreement between the Borrower and the Lender or any other creditor;
(iii) There shall be a breach of any of the representations and warranties set forth in this Note or any transaction document executed contemporaneously herewith; or
(iv) Borrower, shall commence, or there shall be commenced against Borrower any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or Borrower commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Borrower or there is commenced against Borrower any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of sixty (60) days; or Borrower is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or Borrower suffers any appointment of any custodian, private or court appointed receiver or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of sixty (60) days; or Borrower makes a general assignment for the benefit of creditors; or Borrower shall fail to pay or shall state that it is unable to pay or shall be liable to pay, its debts as they become due or by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Borrower for the purpose of effecting any of the foregoing.
(b) Upon the occurrence of an Event of Default, the Lender shall give the Borrower notice of such occurrence, at which time the Borrower shall have five (5) business days from receipt of such notice to pay the outstanding amount of the Note in full. In the event that full payment is not made upon the expiry of the five (5) day period, a default penalty equal to 0.666% of the Face Amount per month during the period of Default (the “Default Penalty”). Lender may then, at its sole discretion declare the entire then outstanding Face Amount of this Note and any accrued but unpaid interest due hereunder immediately due and payable (a “Default Declaration”), in which event the Lender may, at its sole discretion take any action it deems necessary to recover amounts due under this Note.
(c) Upon the occurrence of an Event of Default, the Lender shall be entitled to receive, in addition to the Face Amount of the Note and any accrued but unpaid interest due hereunder,, the Lender shall be entitled to recover all of its costs, fees (including without limitation, reasonable attorney’s fees and disbursements), and expenses relating collection and enforcement Note, including all costs and expenses incurred by it in enforcing its rights under the Note and any transaction document entered into contemporaneously herewith.
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(d) The failure of Lender to exercise any of its rights hereunder in any particular instance shall not constitute a waiver of the same or of any other right in that or any subsequent instance with respect to Lender or any subsequent holder. BORROWER ACKNOWLEDGES THAT THE LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL TRANSACTION. BORROWER FURTHER WAIVES DILIGENCE, DEMAND, PRESENTMENT FOR PAYMENT, NOTICE OF NONPAYMENT, PROTEST AND NOTICE OF PROTEST, AND NOTICE OF ANY RENEWALS OR EXTENSIONS OF THIS NOTE. BORROWER ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF RAMIFICATION THIS WAIVER WITH ITS ATTORNEYS. Lender may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. The remedies available to the Lender upon the occurrence of an Event of Default shall be cumulative.
Section 5. Notices. Any and all notices, service of process or other communications or deliveries required or permitted to be given or made pursuant to any of the provisions of this Note shall be deemed to have been duly given or made for all purposes when hand delivered or sent by certified or registered mail, return receipt requested and postage prepaid, overnight mail or courier as follows:
If to Lender, at:
[____]
Attn:
Or such other address as may be given to the Borrower from time to time
If to Borrower, at:
Soluna Holdings, Inc.
325 Washington Avenue Extension
Albany, New York 12205
Attn: Michael Toporek, CEO
Or such other address as may be given to the Lender from time to time
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Section 6. Usury. This Note is hereby expressly limited so that in no event whatsoever, whether by reason of acceleration of maturity of the loan evidenced hereby or otherwise, shall the amount paid or agreed to be paid to the Lender hereunder for the loan, use, forbearance or detention of money exceed that permissible under applicable law. If at any time the performance of any provision of this Note or of any other agreement or instrument entered into in connection with this Note involves a payment exceeding the limit of the interest that may be validly charged for the loan, use, forbearance or detention of money under applicable law, then automatically and retroactively, ipso facto, the obligation to be performed shall be reduced to such limit, it being the specific intent of the Borrower and the Lender that all payments under this Note are to be credited first to interest as permitted by law, but not in excess of (i) the agreed rate of interest set forth herein or therein or (ii) that permitted by law, whichever is the lesser, and the balance toward the reduction of principal. The provision of this Section 6 shall never be superseded or waived and shall control every other provision of this Note and all other agreements and instruments between the Borrower and the Lender entered into in connection with this Note. To the extent permitted by applicable law, Borrower waives any right to assert the defense of usury.
Section 7. Governing Law; Waiver of Jury Trial. This Note and the provisions hereof are to be construed according to and are governed by the laws of the State of Nevada, without regard to principles of conflicts of laws thereof. Borrower agrees that the state and federal courts sitting in Clark County, Nevada shall have exclusive jurisdiction in connection with any dispute concerning or arising out of this Note or otherwise relating to the parties relationship. In any action, lawsuit or proceeding brought to enforce or interpret the provisions of this Note and/or arising out of or relating to any dispute between the parties, Lender shall be entitled to recover all of its costs and expenses relating collection and enforcement of this Note (including without limitation, reasonable attorney’s fees and disbursements) in addition to any other relief to which Lender may be entitled and all costs of collection, including any legal fees associated with this Note will be paid by the Borrower. Each party agrees that any process or notice to be served or delivered in connection with any action, lawsuit or proceeding brought hereunder may be accomplished in accordance with the notice provisions set forth above or as otherwise provided by applicable law. BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS NOTE.
Section 8. Successors and Assigns. Subject to applicable laws, this Note and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of Borrower and the successors and assigns of Lender.
Section 9. Amendment. This Note may be modified or amended or the provisions hereof waived only with the written consent of Lender and Borrower.
Section 10. Severability. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Note.
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Section 11. Issuance of Warrants. Borrower will issue to Lender a three-year Class D Warrant for 1,000,000 shares of Borrower’s Common Stock.
[SIGNATURE
PAGE TO FOLLOW]
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IN WITNESS WHEREOF, Borrower has caused this Promissory Note to be duly authorized officer and/or such individual borrower as of the date first above indicated.
Soluna Holdings, Inc. |
||
| By: | ||
| Name: Michael Toporek | ||
| Title: Chief Executive Officer | ||
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Exhibit 10.54
COMMERCIAL SECURITY AGREEMENT
| Principal | Loan Date | Maturity | Loan No | Call/Coll | Account | Officer | Initials |
| $1,000,000.00 | 09-15-2021 | On Demand | 11001 | 402 / 326 | N9015196621 | JXD9P | |
| References in the boxes above are for Lender’s use only and do not limit the applicability of this document to any particular loan or item Any item above containing “**” has been omitted due to text length limitations. | |||||||
| Grantor: | Mechanical
Technology, Incorporated
|
Lender: | KeyBank
National Association NY62224F NY-KEY PLAZA CBB 66 S. Pearl Street Albany, NY 12207 |
THIS COMMERCIAL SECURITY AGREEMENT dated September 15, 2021, is made and executed between Mechanical Technology, Incorporated (“Grantor”) and KeyBank National Association (“Lender”).
GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law.
COLLATERAL DESCRIPTION. The word “Collateral” as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement:
All inventory, equipment, accounts (including but not limited to all health-care-insurance receivables), chattel paper, instruments (including but not limited to all promissory notes), letter-of-credit rights, letters of credit, documents, deposit accounts, investment property, money, other rights to payment and performance, and general intangibles (including but not limited to all software and all payment intangibles); all oil, gas and other minerals before extraction; all oil, gas, other minerals and accounts constituting as-extracted collateral; all fixtures; all timber to be cut; all attachments, accessions, accessories, fittings, increases, tools, parts, repairs, supplies, and commingled goods relating to the foregoing property, and all additions, replacements of and substitutions for all or any part of the foregoing property; all insurance refunds relating to the foregoing property; all good will relating to the foregoing property; all records and data and embedded software relating to the foregoing property, and all equipment, inventory and software to utilize, create, maintain and process any such records and data on electronic media; and all supporting obligations relating to the foregoing property; all whether now existing or hereafter arising, whether now owned or hereafter acquired or whether now or hereafter subject to any rights in the foregoing property; and all products and proceeds (including but not limited to all insurance payments) of or relating to the foregoing property.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 2 |
In addition, the word “Collateral” also includes all the following, whether now owned, or hereafter acquired, whether now existing or hereafter arising, and wherever located:
| (A) | All accessions, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether added now or later. |
| (B) | All products and produce of any of the property described in this Collateral section. |
| (C) | All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other disposition of any of the property described in this Collateral section. |
| (D) | All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party’s insurer, whether due to judgment, settlement or other process. |
| (E) | All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor’s right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. |
CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Grantor’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 3 |
GRANTOR’S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that:
Perfection of Security Interest. Grantor agrees to take whatever actions are requested by Lender to perfect and continue Lender’s security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender.
Notices to Lender. Grantor will promptly notify Lender in writing at Lender’s address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor’s name; (2) change in Grantor’s assumed business name(s); (3) change in the management of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor’s principal office address; (6) change in Grantor’s state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor’s name or state of organization will take effect until after Lender has received notice.
No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender’s prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 4 |
Location of the Collateral. Except in the ordinary course of Grantor’s business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor’s address shown above or at such other locations as are acceptable to Lender. Upon Lender’s request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor’s operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located.
Removal of the Collateral. Except in the ordinary course of Grantor’s business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender’s prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Nevada, without Lender’s prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral.
Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor’s business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor’s business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender’s rights in the Collateral against the claims and demands of all other persons.
Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 5 |
Inspection of Collateral. Lender and Lender’s designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located.
Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized in Lender’s sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys’ fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized.
Compliance with Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender’s interest in the Collateral, in Lender’s opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor’s due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify and defend shall survive the payment of the Indebtedness and the satisfaction of this Agreement.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 6 |
Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days’ prior written notice to Lender and not including any disclaimer of the insurer’s liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses “single interest insurance,” which will cover only Lender’s interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral if the estimated cost of repair or replacement exceeds $5000.00, whether or not such casualty or loss is covered by insurance. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor’s sole responsibility.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 7 |
Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral.
Financing Statements. Grantor authorizes Lender to file a UCC financing statement, or alternatively, a copy of this Agreement to perfect Lender’s security interest. At Lender’s request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue Lender’s security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement.
GRANTOR’S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor’s right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender’s security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender’s sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 8 |
LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor’s failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes, with the exception of insurance premiums paid by Lender with respect to motor vehicles, but including the payment of attorneys’ fees and expenses, will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.
DEFAULT. Default will occur if payment of the Indebtedness in full is not made immediately upon demand.
RIGHTS AND REMEDIES ON DEFAULT. If Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Nevada Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies:
Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor.
Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession.
Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender’s own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person’s right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 9 |
Appoint Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender’s right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver.
Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender’s discretion transfer any Collateral into Lender’s own name or that of Lender’s nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise.
Election of Remedies. Except as may be prohibited by applicable law, all of Lender’s rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor’s failure to perform, shall not affect Lender’s right to declare a default and exercise its remedies.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 10 |
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.
Attorneys’ Fees; Expenses. Grantor agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.
Governing Law. With respect to procedural matters related to the perfection and enforcement of Lender’s rights against the Collateral, this Agreement will be governed by federal law applicable to Lender and to the extent not preempted by federal law, the laws of the State of Nevada. In all other respects, this Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of New York without regard to its conflicts of law provisions. However, if there ever is a question about whether any provision of this Agreement is valid or enforceable, the provision that is questioned will be governed by whichever state or federal law would find the provision to be valid and enforceable. The loan transaction that is evidenced by the Note and this Agreement has been applied for, considered, approved and made, and all necessary loan documents have been accepted by Lender in the State of New York.
No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender’s rights or of any of Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 11 |
Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor’s current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors.
Power of Attorney. Grantor hereby appoints Lender as Grantor’s irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender’s security interest in the Collateral.
Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.
Successors and Assigns. Subject to any limitations stated in this Agreement on transfer of Grantor’s interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor’s successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness.
Survival of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor’s Indebtedness shall be paid in full.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 12 |
Time is of the Essence. Time is of the essence in the performance of this Agreement.
Waive Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.
DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code:
Agreement. The word “Agreement” means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time.
Borrower. The word “Borrower” means Mechanical Technology, Incorporated and includes all co-signers and co-makers signing the Note and all their successors and assigns.
Collateral. The word “Collateral” means all of Grantor’s right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement.
Default. The word “Default” means the Default set forth in this Agreement in the section titled “Default”.
Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.
Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.
Grantor. The word “Grantor” means Mechanical Technology, Incorporated.
| COMMERCIAL SECURITY AGREEMENT | |
| (Continued) | |
| Loan No. 11001 | Page 13 |
Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.
Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Specifically, without limitation, Indebtedness includes all amounts that may be indirectly secured by the Cross-Collateralization provision of this Agreement.
Lender. The word “Lender” means KeyBank National Association, its successors and assigns.
Note. The word “Note” means the Note dated September 15, 2021 and executed by Mechanical Technology, Incorporated in the principal amount of $1,000,000.00, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.
Property. The word “Property” means all of Grantor’s right, title and interest in and to all the Property as described in the “Collateral Description” section of this Agreement.
Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.
GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER 15, 2021.
GRANTOR:
MECHANICAL TECHNOLOGY, INCORPORATED
| By: | /s/Jessica Thomas | |
| Jessica Thomas, CFO of Mechanical Technology, Incorporated |
Exhibit 10.55
PROMISSORY NOTE
| Principal | Loan Date | Maturity | Loan No | Call/Coll | Account | Officer | Initials |
| $1,000,000.00 | 09-15-2021 | On Demand | 11001 | 402 / 326 | N9015196621 | JXD9P | |
| References in the boxes above are for Lender’s use only and do not limit the applicability of this document to any particular loan or item Any item above containing “**” has been omitted due to text length limitations. | |||||||
| Borrower: | Mechanical
Technology, Incorporated
|
Lender: | KeyBank
National Association NY62224F NY-KEY PLAZA CBB 66 S. Pearl Street Albany, NY 12207 | |
| Principal Amount: $1,000,000.00 | Date of Note: September 15, 2021 | |||
PROMISE TO PAY. To repay Borrower’s loan, Mechanical Technology, Incorporated (“Borrower”) promises to pay to KeyBank National Association (“Lender”), or order, in lawful money of the United States of America, on demand, the principal amount of One Million & 00/100 Dollars (S1,000,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in full immediately upon Lender’s demand. Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning October 1, 2021, with all subsequent interest payments to be due on the same day of each month after that. Unless otherwise agreed or required by applicable law, payments will be applied to first pay interest accrued to the day Lender receives the payment, then to bring principal current, then to pay any late fees, and then Lender will apply any remaining balance to reduce principal. Borrower will pay Lender at Lender’s address shown above or at such other place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the Prime Rate announced by Lender (the “Index”). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. Lender will tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not occur more often than each day that the Index changes. The interest rate will change automatically and correspondingly on the date of each announced change of the Index by Lender. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 3.250% per annum. Interest on the unpaid principal balance of this Note will be calculated as described in the “INTEREST CALCULATION METHOD” paragraph using a rate of 0.750 percentage points over the Index (the “Margin”), adjusted if necessary for any minimum and maximum rate limitations described below, resulting in an initial rate of 4.000% per annum based on a year of 360 days. If Lender determines, in its sole discretion, that the Index has become unavailable or unreliable, either temporarily, indefinitely, or permanently, during the term of this Note, Lender may amend this Note by designating a substantially similar substitute index. Lender may also amend and adjust the Margin to accompany the substitute index. The change to the Margin may be a positive or negative value, or zero. In making these amendments, Lender may take into consideration any then-prevailing market convention for selecting a substitute index and margin for the specific Index that is unavailable or unreliable. Such an amendment to the terms of this Note will become effective and bind Borrower 10 business days after Lender gives written notice to Borrower without any action or consent of the Borrower. NOTICE: Under no circumstances will the interest rate on this Note be less than 3.000% per annum or more than the maximum rate allowed by applicable law.
| PROMISSORY NOTE | |
| (Continued) | |
| Loan No. 11001 | Page 2 |
INTEREST CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note is computed using this method.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked “paid in full”, “without recourse”, or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender’s rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: KeyBank National Association, NY62224F NY-KEY PLAZA CBB, 66 S. Pearl Street, Albany, NY 12207.
LATE CHARGE. If a regularly scheduled interest payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $25.00, whichever is greater. If Lender demands payment of this loan, and Borrower does not pay the loan in full within 10 days after Lender’s demand, Borrower also will be charged either 5.000% of the unpaid portion of the sum of the unpaid principal plus accrued unpaid interest or $25.00, whichever is greater.
INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, the interest rate on this Note shall be increased by adding an additional 3.000 percentage point margin (“Default Rate Margin”). The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied had there been no default. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.
| PROMISSORY NOTE | |
| (Continued) | |
| Loan No. 11001 | Page 3 |
LENDER’S RIGHTS. Upon Lender’s demand, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.
ATTORNEYS’ FEES; EXPENSES. Borrower agrees to pay all costs and expenses Lender incurs to collect this Note. This includes, subject to any limits under applicable law, Lender’s reasonable attorneys’ fees and Lender’s legal expenses whether or not there is a lawsuit, including reasonable attorneys’ fees and expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.
JURY WAIVER. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other.
GOVERNING LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of New York without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of New York.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower’s loan and the check or preauthorized charge with which Borrower pays is later dishonored.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account and whether evidenced by a certificate of deposit). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested either orally or in writing by Borrower or as provided in this paragraph. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender’s office shown above. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower’s accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender’s internal records, including daily computer print-outs.
ANNUAL ADMINISTRATIVE FEE. Borrower will pay an annual administrative fee of $1,000.00 on the date of the Note and $1,000.00 on each subsequent anniversary date of the Note. This fee does not constitute the commitment of Lender to make advances under the Note.
| PROMISSORY NOTE | |
| (Continued) | |
| Loan No. 11001 | Page 4 |
DEMAND LINE OF CREDIT. Borrower understands that Lender is authorized to make an annual (or more frequent) credit review based upon Borrower’s current financial condition in determining whether to continue the line of credit. Nevertheless, Lender may, at any time, with or without cause, refuse to advance funds or extend credit under the line of credit.
AUTHORIZATION TO CHARGE DEPOSIT ACCOUNT FOR LOAN PAYMENTS. Borrower hereby authorizes Lender automatically to deduct from Borrower’s designated deposit account (“Account”), payments due on the loan on the date each payment is due.
Borrower authorizes Lender to deduct amounts subject to change without prior notification to Borrower of the new amount to be deducted due to: (1) late charges assessed; (2) delinquent amounts due or (3) any other payment amount required under the terms of the loan. If the funds in the Account are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. Lender shall not be liable for dishonoring checks or other items due to insufficient funds caused by the honoring of this Authorization.
Borrower may terminate this authorization by giving not less than three (3) days prior written notice to the Loan Services Department. This authorization may be terminated at any time by Lender.
SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower’s heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender’s security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.
| PROMISSORY NOTE | |
| (Continued) | |
| Loan No. 11001 | Page 5 |
BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.
BORROWER:
MECHANICAL TECHNOLOGY, INCORPORATED
| By: | /s/ Jessica Thomas | |
| Jessica Thomas, CFO of Mechanical Technology, Incorporate |
Exhibit 21
SUBSIDIARIES OF SOLUNA HOLDINGS, INC.
| Subsidiary Name | Jurisdiction of Incorporation or Organization |
| Soluna Computing, Inc. | Nevada |
| MTI Instruments, Inc. | New York |
SUBSIDIARIES OF SOLUNA COMPUTING, INC.
| Subsidiary Name | Jurisdiction of Incorporation or Organization |
| Soluna MC, LLC | Nevada |
| Soluna SW, LLC | Nevada |
| Soluna Callisto Holdings, Inc. | Delaware |
| Soluna DV ComputeCo, LLC | Delaware |
| Soluna DV Services, LLC | Nevada |
| Soluna DVSL ComputeCo, LLC | Delaware |
SUBSIDIARIES OF SOLUNA MC, LLC
| Subsidiary Name | Jurisdiction of Incorporation or Organization |
| Soluna MC Borrowings, LLC 2021-1 | Delaware |
Exhibit 23.1
Independent Registered Public Accounting Firm’s Consent
We consent to the incorporation by reference in the Registration Statement No. 333-262594 on Form S-3, the Registration Statement No. 333-261427 on Form S-3, and the Registration Statement No. 333–260614 on Form S-8 of our report dated March 30, 2021, relating to the financial statements of Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, appearing in this Annual Report on Form 10-K for the year ended December 31, 2021.
| /s/ Wojeski & Company CPAs, P.C. | |
| Albany, NY | |
| March 31, 2022 |
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement No. 333-262594 on Form S-3, the Registration Statement No. 333-261427 on Form S-3, and the Registration Statement No. 333–260614 on Form S-8 of our report dated March 31, 2022, with respect to our audit of the financial statements of Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated, as of December 31, 2021 and for the year then ended, which appears in this Annual Report on Form 10-K for the year ended December 31, 2021.
/S/ UHY LLP
Albany, New York
March 31, 2022
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Michael Toporek, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Soluna Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| March 31, 2022 | /s/ Michael Toporek | |
| Michael Toporek | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
Exhibit 31.2
CERTIFICATION
OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Jessica L. Thomas, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Soluna Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| March 31, 2022 | /s/ Jessica L. Thomas | |
| Jessica L. Thomas | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
Exhibit 32.1
Soluna
Holdings, Inc.
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
In connection with the Annual Report on Form 10-K of Soluna Holdings, Inc. (the “Company”) for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Toporek, Chief Executive Officer of the Company, certify, pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. Sections 1350(a) and (b)), that, to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. | |
March 31, 2022
| /s/ Michael Toporek | ||
| Michael Toporek | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
This certification is made solely for the purpose of 18 U.S.C. Section 1350, and is not being filed as part of the Report or as a separate disclosure document, and may not be disclosed, distributed or used by any person for any reason other than as specifically required by law.
Exhibit 32.2
Soluna
Holdings, Inc.
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
In connection with the Annual Report on Form 10-K of Soluna Holdings, Inc. (the “Company”) for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jessica L. Thomas, Chief Financial Officer of the Company, certify, pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. Sections 1350(a) and (b)), that, to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. | |
March 31, 2022
| /s/ Jessica L. Thomas | ||
| Jessica L. Thomas | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
This certification is made solely for the purpose of 18 U.S.C. Section 1350, and is not being filed as part of the Report or as a separate disclosure document, and may not be disclosed, distributed or used by any person for any reason other than as specifically required by law.