UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the quarterly period 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 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 (§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 is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
As of May 10, 2023, the Registrant had shares of common stock outstanding.
SOLUNA COMPUTING, INC. AND SUBSIDIARIES
INDEX
| 1 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Soluna Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of March 31, 2023 (Unaudited) and December 31, 2022
(Dollars in thousands, except per share)
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Deposits on equipment | ||||||||
| Total Current Assets | ||||||||
| Other assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Line of credit | ||||||||
| Convertible notes payable | ||||||||
| Current portion of debt | ||||||||
| Deferred revenue | ||||||||
| Operating lease liability | ||||||||
| Total Current Liabilities | ||||||||
| Other liabilities | ||||||||
| Operating lease liability | ||||||||
| Deferred tax liability, net | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 10) | ||||||||
| Stockholders’ Equity: | ||||||||
| Series B Preferred Stock, par value $ per share, authorized ; shares issued and outstanding as of March 31, 2023 and December 31, 2022 | ||||||||
| Common stock, par value $ per share, authorized ; shares issued and shared outstanding as of March 31, 2023 and shares issued and shares outstanding as of December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Common stock in treasury, at cost, shares at March 31, 2023 and December 31, 2022 | ( | ) | ( | ) | ||||
| Total Soluna Holdings, Inc. Stockholders’ Equity | ||||||||
| Non-Controlling Interest | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
Soluna Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2023 and 2022
(Dollars in thousands, except per share)
| For the three months ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cryptocurrency mining revenue | $ | $ | ||||||
| Data hosting revenue | ||||||||
| Total revenue | ||||||||
| Operating costs: | ||||||||
| Cost of cryptocurrency mining revenue, exclusive of depreciation | ||||||||
| Depreciation costs associated with cryptocurrency mining | ||||||||
| Total cost of cryptocurrency mining revenue | ||||||||
| Cost of data hosting revenue | ||||||||
| Operating expenses: | ||||||||
| General and administrative expenses, exclusive of depreciation and amortization | ||||||||
| Depreciation and amortization associated with general and administrative expenses | ||||||||
| Total general and administrative expenses | ||||||||
| Impairment on fixed assets | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Gain on debt revaluation, net | ||||||||
| Loss on sale of fixed assets | ( | ) | ||||||
| Other income, net | ||||||||
| Loss before income taxes from continuing operations | ( | ) | ( | ) | ||||
| Income tax 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 | ( | ) | ( | ) | ||||
| (Less) Net loss attributable to non-controlling interest | ||||||||
| Net loss attributable to Soluna Holdings, Inc. | $ | ( | ) | $ | ( | ) | ||
| Basic and Diluted (loss) earnings per common share: | ||||||||
| Net loss from continuing operations per share (Basic & Diluted) | $ | ( | ) | $ | ( | ) | ||
| Net income from discontinued operations per share (Basic & Diluted) | $ | $ | ||||||
| Basic & Diluted loss per share | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding (Basic and Diluted) | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
Soluna Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
For the Year Ended December 31, 2022
And the Three Months Ended March 31, 2023 (Unaudited)
(Dollars in thousands, except per share)
| Preferred Stock | Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
Series A Shares | Amount | Series B Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Shares | Amount | Non-Controlling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Preferred dividends distribution | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares – preferred offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares – warrant exercises | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares- Notes conversion | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Warrants issued in relation to debt financing | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Preferred dividends distribution | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares – option exercises | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares – preferred offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares-restricted stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares – warrant exercises | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Promissory note conversion to preferred shares | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Warrants issued in relation to debt financing | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Treasury Shares conversion | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | —— | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Preferred dividends distribution | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares – option exercises | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares – preferred offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares-restricted stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Surrender of warrants for common shares | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Issuance of shares- notes conversion | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Warrants and valuation issued in relation to debt financing | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares in relation to preferred offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Contribution to Non-Controlling interest | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | —— | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Preferred dividends- Series B | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares – Securities Purchase offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares –common offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares-restricted stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares- promissory note conversion | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares in relation to common offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Contribution to Non-Controlling interest | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||
| 4 |
| Preferred Stock | Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
Series A Shares | Amount | Series B Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Shares | Amount | Non- Controlling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| January 1, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Preferred dividends-Series B | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares – securities purchase offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares- Notes conversion | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Contribution to Non-Controlling interest | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares-restricted stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| March 31,, 2023 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Soluna Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2023 and 2022
(Dollars in thousands)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net income from discontinued operations | ( | ) | ||||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization expense | ||||||||
| Stock-based compensation | ||||||||
| Consultant stock compensation | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Impairment on fixed assets | ||||||||
| Amortization of operating lease asset | ||||||||
| Gain on debt revaluation, net | ( | ) | ||||||
| Amortization on deferred financing costs and discount on notes | ||||||||
| Loss on sale of fixed assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other long-term assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Other liabilities | ||||||||
| Accrued liabilities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Net cash provided by operating activities- discontinued operations | ||||||||
| Investing Activities | ||||||||
| Purchases of property, plant, and equipment | ( | ) | ( | ) | ||||
| Purchases of intangible assets | ( | ) | ( | ) | ||||
| Proceeds from disposal on property, plant, and equipment | ||||||||
| Deposits of equipment, net | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities- discontinued operations | ||||||||
| Financing Activities | ||||||||
| Proceeds from preferred offerings | ||||||||
| Proceeds from common stock securities purchase agreement offering | ||||||||
| Proceeds from notes and debt issuance | ||||||||
| Costs of preferred offering | ( | ) | ||||||
| Costs of common stock securities purchase agreement offering | ( | ) | ||||||
| Costs of notes and short-term debt issuance | ( | ) | ||||||
| Cash dividend distribution on preferred stock | ( | ) | ||||||
| Payments on NYDIG loans and line of credit | ( | ) | ( | ) | ||||
| Contributions from non-controlling interest | ||||||||
| Proceeds from common stock warrant exercises | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase (decrease) in cash & restricted cash-continuing operations | ( | ) | ||||||
| Increase in cash & restricted cash- discontinued operations | ||||||||
| Cash & restricted cash – beginning of period | ||||||||
| Cash & restricted cash – end of period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Noncash equipment financing | ||||||||
| Interest paid on NYDIG loans and line of credit | ||||||||
| Noncash disposal of NYDIG collateralized equipment | ||||||||
| Notes converted to common stock | ||||||||
| Warrant consideration in relation to promissory notes and convertible notes | ||||||||
| Promissory note and interest conversion to common shares | ||||||||
| Registration fees in prepaids and accounts payable | ( | ) | ||||||
| Noncash non-controlling interest contributions | ||||||||
| Series B preferred dividend in accrued expense | ( | ) | ||||||
| Noncash activity right-of-use assets obtained in exchange for lease obligations | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 business through our wholly-owned subsidiary, Soluna Computing, Inc. (“SCI”). SCI is engaged in mining of cryptocurrency through data centers that can be powered by renewable energy sources. Recently, SCI has built modular data centers that are used for cryptocurrency mining though proprietary mining and hosting business models. SCI intends to continue to develop and build, modular data centers that use wasted renewable energy for cryptocurrency mining and in the future can be used for intensive, batchable computing 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 operates cryptocurrency mining facilities that performs proprietary
mining and data hosting services that integrates with the cryptocurrency blockchain network. 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”). We earn revenue from this business as the mined cryptocurrencies are converted into U.S. dollars. In fiscal year 2021,
SCI began mining operations in Murray, Kentucky, (“Project Sophie”) and Calvert City, Kentucky, (“Project Marie”).
Project Marie had performed hosting services and proprietary mining in which 10 megawatts were used for hosting services and 10 megawatts
was used for proprietary mining through the end of February 2023, at which time the facility had shut down. As of March 31, 2023, Project
Sophie operated fully on proprietary mining with a capacity of 25 megawatts. On April 6, 2023, Project Sophie entered into a 25 MW hosting
contract with a Bitcoin miner, in which will shift the Company’s business model at the Company’s modular data centers at
Project Sophie from proprietary mining to hosting Bitcoin miners for the customer. The Company plans to sell its existing Bitcoin miners
at the Project Sophie site and redeploy capital. On September 17, 2022, SCI sold specified assets consisting mainly of mining equipment
and other general equipment items to a buyer at its Wenatchee, Washington location, (“Project Edith”). Soluna has committed
to providing certain facilities contracts at cost plus a markup to facilitate the continued operations for the sold mining assets, on
behalf of the new ownership. We have a development site in Texas (“Project Dorothy”) for a potential of up to 100 megawatts
to be built at a wind farm with initial energization of 50 megawatts, in which the Company has obtained approval from the Electric Reliability
Council of Texas (“ERCOT”) and expects to begin energization in fiscal year 2023. The Company as of March 31, 2023, has a
Until
the Sale (as defined below), we also operated though our wholly owned subsidiary, MTI Instruments, an instruments business 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. MTI Instruments was incorporated in New York on March 8, 2000. MTI Instruments’
products consisted 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 were developed for markets and applications that require consistent
operation of complex machinery and the precise measurements and control of products, processes, and 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
| 7 |
On
April 11, 2022, SHI entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with NKX Acquiror, Inc. (the
“Purchaser”), pursuant to which the Company sold on such date all of the issued and outstanding shares of capital stock of
its wholly-owned subsidiary, MTI Instruments, for approximately $
Going Concern and Liquidity
The Company’s condensed financial statements as of March 31, 2023 have been prepared using generally accepted accounting principles in the United States of America (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As shown in the accompanying condensed financial statements, the Company did not generate sufficient revenue to generate net income and has negative working capital as of March 31, 2023. In addition, the Company has ceased operations for Project Marie in February 2023 due to the termination of the Management and Hosting Services agreement with CC Metals and Alloys, LLC (“CCMA”) and repossession of collateral for miners as discussed further below. These factors, among others indicate that there is substantial doubt about the Company’s ability to continue as a going concern within one year after issuance of these condensed unaudited financial statements as of March 31, 2023, or May 15, 2023.
Soluna
MC Borrowing 2021-1, received a Notice of Acceleration and Repossession (the “NYDIG Notice”)
from NYDIG ABL LLC (“NYDIG”) with respect to the Master Equipment Finance Agreement, dated as of December 30, 2021 (the “MEFA”),
by and between Borrower and NYDIG. The NYDIG Notice states that (a) Borrower failed to observe or perform certain covenants, conditions
or agreements contained in the MEFA and such failure continued unremedied for a period of ten days after Borrower’s knowledge of
such breach, which resulted in an event of default under the MEFA, and (b) Borrower defaulted under the guaranty, collateral agreement,
or other support agreement, which resulted in an event of default under the MEFA. In addition, the NYDIG Notice states that Borrower
failed to pay certain payments of principal and interest under the MEFA when due, which failure also constituted an event of default
under the MEFA. As a result of the foregoing events of default, and pursuant to the MEFA, NYDIG (x) declared the principal amount of
all loans due and owing under the MEFA and all accompanying Loan Documents (as defined in the MEFA) to be due and immediately payable,
(y) imposed a default rate of interest on any outstanding principal amount of each loan (together with all then unpaid interest accruing
thereon) and all other obligations under the MEFA and the Loan Documents, and (z) demanded the return of all equipment subject to the
MEFA and the Loan Documents. The obligations of Borrower under the MEFA and reflected in the NYDIG
Notice were ring-fenced to Borrower and its direct parent company, Soluna MC LLC. On February 23, 2023, NYDIG proceeded to foreclose
on all of the collateral securing the MEFA, which resulted in a reportable disposition of all of the Company’s mining assets at
the site and certain of the operating assets of Project Marie. The total net book value of the collateralized assets that were repossessed
totaled $
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. In the near term, management is evaluating and implementing different strategies to obtain financing to fund the Company’s expenses and growth to achieve a level of revenue adequate to support the Company’s current cost structure. Financing strategies may include, but are not limited to, stock issuances, project level equity, debt borrowings, partnerships and/or collaborations. If the Company is unable to meet its financial obligations, it could be forced to restructure or refinance, seek additional equity capital or sell its assets. The Company might then be unable to obtain such financing or capital or sell its assets on satisfactory terms. There can be no assurance that additional financing will be available to the Company when needed or, if available, that it can be obtained on commercially reasonable terms. If the Company is not able to obtain the additional financing on a timely basis, if and when it is needed, it will be forced to delay or scale down some or all of its development activities or perhaps even cease the operation of its business.
To
further implement management’s strategy, in May 2022, SCI entered into a structural understanding with Soluna SLC Fund I Projects
Holdco LLC (“Spring Lane”), a Delaware limited liability company, pursuant to which Spring Lane agreed to provide up to $
In addition, on May 9, 2023, the
Company’s indirect subsidiary Soluna DV ComputeCo, LLC (“DV”) completed a strategic partnership and financing with
a special purpose vehicle, Navitas West Texas Investments SPV, LLC, (“Navitas”) organized by Navitas Global, to
complete the second phase of the Dorothy Project (“Dorothy 1B”). Under a Contribution Agreement among the parties, the
Company owned a substantially complete 25MW data center under construction, in which the Company had contributed capital
expenditures for the data center. Navitas has initially contributed the initial installment of $
| 8 |
During
the first quarter of 2023, the Company has entered into six separate promissory notes for a total of $
For
the first three months ended March 31, 2023, the Company has sold under-utilized miners and equipment, and continues to evaluate opportunities
to sell more miners and equipment for fiscal year 2023. In addition to the proceeds from the foregoing transactions and together with
the Company’s cash on hand for available use of approximately $
The COVID-19 global pandemic has been unprecedented and unpredictable, and the 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 impacts to the Project Dorothy builds due to disruptions in the global supply chain, the Company does not expect any material impact on our long-term strategic plans, our operations, or our liquidity due to the impacts of COVID-19. Further, various macroeconomic factors could adversely affect our business and the results of our operations and financial condition, including changes in inflation, interest rates and overall economic conditions. For instance, inflation could negatively impact the Company by increasing our labor costs, through higher wages and higher interest rates. If inflation or other factors were to significantly increase our business costs, our ability to develop our current projects may be negatively affected. Interest rates, the liquidity of the credit markets and the volatility of the capital markets could also affect the operation of our business and our ability to raise capital in order to fund our operations. However, the Company is actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and the industry.
2. Basis of Presentation
In the opinion of management, the Company’s condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the periods presented in accordance with United States of America’s Generally Accepted Accounting Principles (“U.S. GAAP”). The results of operations for the interim periods presented are not necessarily indicative of results for the full year.
Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“the Annual Report”).
The information presented in the accompanying condensed consolidated balance sheet as of December 31, 2022 has been derived from the Company’s audited consolidated financial statements. All other information has been derived from the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and March 31, 2022.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, SCI. 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.
| 9 |
3. Accounts Receivable
Accounts receivables consist of the following at:
| (Dollars in thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Data hosting | $ | |||||||
| Related party receivable | | |||||||
| Other | ||||||||
| Total | $ | $ | ||||||
The
Company’s allowance for doubtful accounts was $
4. Property, Plant and Equipment
Property, plant and equipment consist of the following at:
| (Dollars in thousands) | March 31, 2023 | December 31, 2022 | ||||||
| Land | $ | $ | ||||||
| Land improvements | ||||||||
| Buildings | ||||||||
| Leasehold improvements | ||||||||
| Vehicles | ||||||||
| Computers and related software | ||||||||
| Machinery and equipment | ||||||||
| Office furniture and fixtures | ||||||||
| Equipment held for sale | ||||||||
| Construction in progress | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense was approximately $
On
February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, which resulted in a reportable disposition
of all of the Company’s mining assets at the site and certain of the operating assets of Project Marie. The total net book value
of the collateralized assets that were repossessed totaled approximately $
In
January 2023, the Company sold M20 and M21 miners for a loss on sale of equipment of approximately $
During
the three months ended March 31, 2023, the Company had impairment charges of approximately $
Prior
to March 31, 2023, the Company had a business opportunity to sell the M31 miners, in which were subsequently sold in April 2023, as such
the Company recorded the net book value of $
| 10 |
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,
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, SCI paid HEL $
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) |
| i. |
|
| ii. |
|
| 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; |
| 11 |
| 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) 100% of the outstanding equity securities of SCI and/or the surviving corporation, or (C) a merger, consolidation, or other transaction in which the holders of SHI’s, SCI’s, or the surviving corporation’s outstanding voting securities immediately prior to such transaction own, immediately after such transaction, securities representing less than 50% of the voting power of the corporation or other entity surviving such transaction (excluding any such transaction principally for bona fide equity financing purposes, so long as, in the case of SHI or SCI (but not the surviving corporation) such transactions, individually and in the aggregate, do not result in a change in membership of such entity’s board of directors so that the persons who were members of the board of directors immediately prior to the first such transaction constitute less than 50% of the board membership at any time after such transaction(s) are consummated). Notwithstanding the foregoing, a transaction shall not constitute a Change of Control if its sole purpose is to change the state of SHI’s or SCI’s incorporation or to create a holding company that will be owned in the same proportions by the persons who held SHI’s or SCI’s securities immediately prior to such transaction; and
|
| vi. | if on any of the fifth anniversary of the effective time of the merger, 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. |
On April 11, 2023, the Board has reviewed and approved the progress of SCI’s management team in qualifying facilities as Qualified Facilities and discussed an extension of the date in Section 2.7(a)(ii)(A) of the Merger Agreement to December 31, 2023, and an extension of the date in Section 2.7(a)(ii)(B) of the Merger Agreement to June 30, 2024.
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 $
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 March 31, 2023:
| (Dollars in thousands) | Intangible Assets | Accumulated Amortization | Total | |||||||||
| Strategic pipeline contract | $ | $ | $ | |||||||||
| Assembled workforce | ||||||||||||
| Patents | ||||||||||||
| Total | $ | $ | $ | |||||||||
Intangible assets consist of the following as of December 31, 2022:
| (Dollars in thousands) | Intangible Assets | Accumulated Amortization | Total | |||||||||
| Strategic pipeline contract | $ | $ | $ | |||||||||
| Assembled workforce | ||||||||||||
| Patents | ||||||||||||
| Total | $ | $ | $ | |||||||||
| 12 |
Amortization
expense for the three months ended March 31, 2023 and March 31, 2022 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.
The Company expects to record amortization expense of intangible assets over the next five years and thereafter as follows:
(Dollars in thousands)
| Year | 2023 | |||
| 2023 (remainder of the year) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
7. Income Taxes
During
the three months ended March 31, 2023 and 2022, the Company’s effective income tax rate was
In
connection with the strategic contract pipeline acquired in the Soluna Callisto acquisition as further discussed in Note 5, 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 $
The Company provides for recognition of deferred tax assets if the realization of such assets is more likely than not to occur in accordance with accounting standards that address income taxes. Significant management judgment is required in determining the period in which the reversal of a valuation allowance should occur. The Company has 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 its valuation allowance. In addition, the Company’s 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.
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. In the event that actual results differ from these estimates, or the Company adjusts these
estimates in future periods, the Company may need to adjust the recorded valuation allowance, which could materially impact our financial
position and results of operations. The valuation allowance was $
| 13 |
8. Debt
Convertible Notes Payable
Debt consists of the following
(dollar in thousands):
| Maturity Date | Interest Rate | March 31, 2023 | December 31, 2022 | |||||||||||
| Convertible Note | ** | * | % | $ | $ | |||||||||
| Less: debt discount | ||||||||||||||
| Less: discount from issuance of warrants | ||||||||||||||
| Less: debt issuance costs | ||||||||||||||
| Total convertible notes, net of discount and issuance costs | $ | $ | ||||||||||||
| * | |
| ** |
On
October 25, 2021, pursuant to a Securities Purchase Agreement (the “October SPA”),
the Company issued to certain accredited investors (the “Noteholders”) (i) secured convertible notes in an aggregate principal
amount of $
The
October Secured Notes, subject to an original issue discount of
On
July 19, 2022, the Company entered into an addendum to the October SPA (the “Addendum”), pursuant to which a portion of the
October Secured Notes would be converted and may be redeemed in three tranches, with each tranche of $ required to be converted
into common stock in each case at the then in effect conversion price of the October Secured Notes, with such price, prior to each conversion,
to be reduced (but not increased) to a
| 14 |
On
September 13, 2022, the Company and the Noteholders entered into an agreement further amending the Addendum (the “Addendum Amendment”),
which among other matters, extended the Maturity Date of the October Secured Notes by six months to April 25, 2023, and increased the
principal amount of the October Secured Notes by an aggregate of $
Pursuant
to the Addendum, between July 21, 2022 to August 3, 2022, the October Secured Notes with an aggregate principal amount of $
For
the three months ended March 31, 2023, the Company had approximately $
On April 24, 2023, the Company reached agreement with the holders of the outstanding Convertible Notes to extend the maturity thereof until May 25, 2023. On May 11, 2023, the Company entered into a Second Amendment Agreement (the “Second Amendment”) with the holders of its October Secured Notes to extend the maturity date of the October Secured Notes to July 25, 2024.
In connection with the Second Amendment, the Company paid an extension
fee of $
Following the debt extinguishment on July 19, 2022 as noted further above, the Convertible Notes will be accounted for under the fair value method on a recurring basis upon issuance (e.g., upon execution of the Addendum) per guidance within ASC 480, and at each subsequent reporting period, with changes in fair value reported in earnings. Although the Notes are not being accounted for under 825-10, the substance of the debt is considered to be the same and is therefore considered outside the scope of ASC 470-60. As such, the Company performed a fair value analysis of the Convertible Notes. For the year-ended December 31, 2022 and quarter-ended March 31, 2023, the Company had Monte Carlo simulations run-out for the expected conversion dates of the Convertible Notes using risk free rates, annual volatility, daily trading volumes, likely conversion profiles, and other assumptions based on principal and accrued interest as of the period ends. The Company determined the fair value of the Convertible Notes uses certain Level 3 inputs.
Changes in Level 3 Financial Liabilities Carried at Fair Value
| (in thousands) | ||||
| Balance, July 19, 2022 (date of Addendum of convertible notes) | $ | |||
| Conversions of debt | ( | ) | ||
| Total revaluation loss | ||||
| Balance, September 13, 2022 | ||||
| Total revaluation gains | ( | ) | ||
| Balance, December 31, 2022 | $ | |||
| Conversions of debt (January 2023- March 2023) | ( | ) | ||
| Total revaluation gains | ( | ) | ||
| Balance March 31, 2023 | $ | |||
| 15 |
In
accordance with the most favored nation provision (“MFN Provision”), following the issuance of the December 2022 Shares and
the December 2022 Warrants, we reduced the conversion price of the October Secured Notes to $
In
connection with the December 2022 Offering,
The
events of default stated in the Notice of Acceleration and Repossession defined below with NYDIG Financing constituted a cross-default
under the terms of secured convertible notes issued to the Noteholders. In addition to such cross-default, the failure of the Company
pursuant to the Addendum dated as of July 19, 2022, to escrow an aggregate amount of $
Promissory Notes
| Maturity Dates | Interest Rate | March 31, 2023 | ||||||||
| Promissory note issuances | % | $ | ||||||||
| Less: principal promissory note repayment | ( | ) | ||||||||
| Outstanding principal outstanding as of March 31, 2023 | ||||||||||
| Plus: interest expense accrued | ||||||||||
| Total promissory notes, including accrued interest expense outstanding | $ | |||||||||
The
Company has issued six promissory notes to certain holders totaling an aggregate principal balance of $
Subsequent
to three months ended March 31, 2023, on April 4, 2023, the Company issued to the holders of the promissory notes on February 3, 2023
and February 10, 2023, shares of common stock in satisfaction of the February 3, 2023 promissory note and partial satisfaction
of the February 10, 2023 promissory note a total repayment of $
| 16 |
NYDIG Financing
| Maturity Dates | Interest Rate | March 31, 2023 | December 31, 2022 | |||||||||
| NYDIG Loans #1-11 | % | $ | $ | |||||||||
| Less: principal payments | ||||||||||||
| Less: repossession of collateralized assets | ||||||||||||
| Total outstanding debt | $ | $ | ||||||||||
| * |
On
December 30, 2021, Soluna MC Borrowing 2021-1 LLC (the “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 “NYDIG facility”). The Master Agreement outlined the framework for a financing up to approximately
$
On
January 14, 2022, the Borrower effected an initial drawdown under the Master Agreement in the aggregate principal amount of approximately
$
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 Noteholders, in connection with the October SPA, pursuant to which the Noteholders agreed
to waive any lien on, and security interest in, certain assets, provided various contingencies
are fulfilled, and each Noteholder who acquired October Secured Notes having a principal amount of not less than $
Promptly
after the date of the Consent, the Company issued warrants to purchase up to
The
Company, through the Borrower, was required to make average monthly principal and interest payments to NYDIG of approximately $
| 17 |
On December 20, 2022, the Borrower received a Notice of Acceleration and Repossession (the “NYDIG Notice”) from NYDIG with respect to the Master Agreement, by and between Borrower and NYDIG. The obligations of Borrower under the Master Agreement and reflected in the NYDIG Notice are ring-fenced to Borrower and its direct parent company, Soluna MC LLC. The Company is not a party to any guaranty, collateral agreement or other support agreement with or for the benefit of NYDIG.
The
NYDIG Notice states that (a) Borrower failed to observe or perform certain covenants, conditions or agreements contained in the Master
Agreement and such failure continued unremedied for a period of ten days after Borrower’s knowledge of such breach, which resulted
in an event of default under the Master Agreement, and (b) Borrower defaulted under the guaranty, collateral agreement, or other support
agreement, which resulted in an event of default under the Master Agreement. In addition, the NYDIG Notice states that Borrower failed
to pay certain payments of principal and interest under the Master Agreement when due, which failure also constituted an event of default
under the Master Agreement. As a result of the foregoing events of default, and pursuant to the Master Agreement, NYDIG (x) declared
the principal amount of all loans due and owing under the Master Agreement and all accompanying Loan Documents (as defined in the Master
Agreement) to be due and immediately payable, (y) imposed a default rate of interest on any outstanding principal amount of each loan
(together with all then unpaid interest accruing thereon) and all other obligations under the Master Agreement and the Loan Documents,
and (z) demanded the return of all equipment subject to the Master Agreement and the Loan Documents. As such,
Line of Credit
On
September 15, 2021, the Company entered into a $
9. Stockholders’ Equity
Preferred Stock
The
Company has two series of preferred stock outstanding: the Series A Preferred Stock, with
a $
Series B Preferred Stock
On
July 19, 2022, the Company entered into a Securities Purchase Agreement (the “Series B SPA”) with an accredited investor
(the “Series B Investor”) pursuant to which the Company sold to the Series B Investor shares of Series B Preferred
Stock, for a purchase price of $
In
addition, on July 19, 2022, the Company issued to the Series B Investor common stock purchase warrants (the “Series B Warrants”)
to purchase up to an aggregate of
| 18 |
Common Stock
The
Company has one class of common stock, par value $ per share.
Dividends
Pursuant
to the Certificate of Designations,
The
Company’s Series B Preferred Stock includes a
Reservation of Shares
| 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 |
The Company also notes that as of March 31, 2023, there are Series A preferred stock available for future equity awards under the 2021 Plan.
Income (Loss) per Share
The Company computes basic income (loss) per common share by dividing net income (loss) 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.
The Company notes as continuing operations was in a Net loss for the three months ended March 31, 2023 and 2022, 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 three months ended March 31, 2023, were options to purchase shares of the Company’s common stock, nonvested restricted stock units, and outstanding warrants not exercised. 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 three months ended March 31, 2022, 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.
| 19 |
10. Commitments and Contingencies
Commitments:
Leases
The
Company determines whether an arrangement is a lease at inception. The Company and its subsidiaries have operating leases for certain
manufacturing, laboratory, office facilities and certain equipment. The leases have remaining lease terms
Lease expense for these leases is recognized on a straight-line basis over the lease term. For the three months ended March 31, total lease costs are comprised of the following:
| (Dollars in thousands) | Three Months Ended March 31, | |||||||
| 2023 | 2022 | |||||||
| 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.
Other information related to leases was as follows:
| (Dollars in thousands, except lease term and discount rate) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||
| Weighted Average Remaining Lease Term (in years): | ||||||||
| Operating leases | ||||||||
| Weighted Average Discount Rate: | ||||||||
| Operating leases | % | % | ||||||
| Supplemental Cash Flows Information: | ||||||||
| 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 | $ | $ | ||||||
Maturities of noncancellable operating lease liabilities are as follows for the quarter ending March 31:
| (Dollars in thousands) | ||||
| 2023 | ||||
| 2023 (remainder of year) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Total lease obligations | ||||
| Less: current obligations | ||||
| Long-term lease obligations | $ | |||
As of March 31, 2023, there were no additional operating lease commitments that had not yet commenced.
| 20 |
Contingencies:
Spring Lane Capital Contingency
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 $
NYDIG filed a complaint against a subsidiary of Company, Soluna MC Borrowing 2021-1, LLC (“Borrower”) and Soluna MC, LLC, as Guarantor (“Guarantor”), and together with Borrower, (“Defendants”) in Marshall Circuit Court of the Commonwealth of Kentucky on December 29, 2022 regarding a series of loans made by NYDIG to Borrower pursuant to a master equipment finance agreement that were secured by certain assets of Borrower and guaranteed by Guarantor pursuant to a written guaranty agreement executed by Guarantor. The Court issued on February 15, 2023 an agreed order granting NYDIG’s motion for writ of possession which, among other things, ordered parties to provide NYDIG access to the collateral described therein and preserved the rights of NYDIG to pursue a deficiency judgment against the Defendants. Also on February 15, 2023, the Defendants filed their answer and affirmative defenses in this proceeding. The Defendants believe that NYDIG has liquidated some of the collateral securing the loans and anticipate that NYDIG will complete the liquidation of collateral and continue to prosecute the complaint to obtain a judgment against the Defendants. Additionally, NDYIG has stated its intention to pursue SCI, the parent company of Guarantor, under a piercing of the corporate veil claim relating to Defendants’ debts and liabilities under the loan documents. SCI denies any such liability and has filed a complaint for a declaratory judgment against NYDIG in the Eighth Judicial District Court in Clark County, Nevada on March 16, 2023 seeking a declaratory judgment as to such matter
11. 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 three months ended March 31, 2023 and 2022, the Company incurred $
Employee Receivables
Certain
employees have a receivable due to the Company based on their stock-based awards, in which $
| 21 |
HEL Transactions
As discussed above, on October 29, 2021, the Company 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 equity holders 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 the Board and separate legal representation. The transactions were subsequently unanimously approved by both the independent investment committee and the full Board.
Four of the Company’s directors have various affiliations with HEL.
Michael
Toporek, the former Chief Executive Officer, and current Executive Director of the Company, owns
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
John
Belizaire and John Bottomley, who were elected to the Board upon the effective time of SCI’s acquisition of Soluna Callisto, serve
as directors of HEL.
The
Company’s investment in HEL was initially carried at the cost of investment and was $
The
Company owned approximately
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2023 Plan
The 2023 Plan was adopted by the Board on February 10, 2023 and approved by the stockholders on March 10, 2023. The 2023 Plan sets the number of shares of our Common Stock reserved for issuance thereunder, on a quarterly basis, to of the shares of our Common Stock outstanding on the measurement date. Subject to certain adjustments as provided in the 2023 Plan, the maximum aggregate number of shares of our Common Stock that may be issued under the 2023 Plan (excluding the number of shares of our Common Stock subject to Specified Awards (as defined below)) (i) pursuant to the exercise of stock options, (ii) as unrestricted or restricted Common Stock, and (iii) in settlement of RSUs shall be limited to, beginning with the first quarter of our fiscal year ending December 31, 2023 (or January 1, 2023), of the number of shares of our Common Stock outstanding as of the first trading day of each quarter. Subject to certain adjustments as provided in the 2023 Plan, (i) shares of our Common Stock subject to the 2023 Plan shall include shares of our Common Stock which revert back to the 2023 Plan in a prior quarter pursuant to the paragraph below, and (ii) the number of shares of our Common Stock that may be issued under the 2023 Plan may never be less than the number of shares of our Common that are then outstanding under (or available to settle existing) 2023 Plan Award grants.
2021 Plan
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, and May 27, 2022, respectively. 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 options, (ii) as shares or restricted stock and (iii) in settlement of RSUs shall be limited to (A) during the Company’s fiscal year ending December 31, 2021 (the “2021 Fiscal Year”), Shares, (B) for the period from January 1, 2022 to June 30, 2022, fifteen percent (15%) of the number of Shares outstanding on January 3, 2022, which was the first trading day of 2022, and (C) beginning with the third quarter of the Company’s fiscal year ending December 31, 2022 (the “2022 Fiscal Year”), fifteen percent (15%) of the number of Shares outstanding as of the first trading day of each quarter, net of any Shares awarded in the previous quarter(s). Subject to certain adjustments as provided in the 2021 Plan, (i) shares subject to the 2021 Plan shall include shares reverted back to the Company pursuant the 2021 Plan in a prior year or quarter, as applicable, as provided herein and (ii) the number of shares that may be issued under the 2021 Plan may never be less than the number of shares that are then outstanding under (or available to settle existing) Awards. For purposes of determining the number of shares available under the 2021 Plan, shares withheld by the Company to satisfy applicable tax withholding or exercise price obligations pursuant to the 2021 Plan shall be deemed issued under this Plan. In the event that, prior to the date on which the 2021 Plan shall terminate, any Award granted under the 2021 Plan expires unexercised or unvested or is terminated, surrendered, or cancelled without the delivery of shares of common stock, or any Awards are forfeited back to the Company, then the shares of common stock subject to such Award may be made available for subsequent Awards under the terms of the 2021 Plan.
On March 10, 2023, at the Special Shareholder Meeting, the Third Amended and Restated 2021 Stock Incentive Plan was approved. The exclusion of Specified Awards from the determination of the maximum aggregate number of shares of our Common Stock available for issuance under the Third Amended and Restated 2021 Plan could have material effect on the number of shares of our Common Stock available for issuance thereunder and could have a material dilutive effect on our stockholders.
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During the three months ended March 31, 2023, the Company awarded restricted stock units under the 2021 Plan, valued at $ per share based on the closing market price of the Company’s common stock on the date of the grant. The restricted stock units will vest during May 2023.
During the three months ended March 31, 2022, the Company awarded restricted stock units under the Amended 2021 Plan, valued at $ through $ per share based on the closing market price of the Company’s common stock on the date of the grant, with a weighted average fair value of $. shares of Common Stock subject vest as follows: shares of Common Stock subject to vest as follows:
13. Effect of Recent Accounting Updates
Accounting Updates Effective for fiscal year 2023
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (the “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. This standard has been adopted as of January 1, 2023, and did not have any impact for the Company’s operations. The Company will continue to evaluate if any changes occur subsequently in fiscal year 2023 and properly record and disclose in relation to Topic 326.
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 condensed consolidated financial statements for the three months ended March 31, 2023.
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14. Discontinued Operations
As
described in Note 1, the Company entered into a Stock Purchase Agreement with Purchaser, pursuant to which the Company sold on April
11, 2022 all of the issued and outstanding shares of capital stock of its wholly-owned subsidiary, MTI Instruments for approximately
$ million in cash, net of transaction costs. For fiscal year 2022 and 2023, our Instrumentation business segment was classified as
discontinued operations in our financial statements for all periods presented. The Company incurred approximately a $
Set forth below are the results of the discontinued operations:
| (Dollars in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||
| Product revenue | $ | $ | ||||||
| Cost of sales | ||||||||
| Research and development | ||||||||
| Selling, general, and administrative | ||||||||
| Net income (loss) from discontinued operations | $ | $ | ||||||
MTI Instruments Sale
As
described in Note 1, the Company entered into a Stock Purchase Agreement with Purchaser, pursuant to which the Company sold on April
11, 2022 all of the issued and outstanding shares of capital stock of our wholly-owned subsidiary, MTI Instruments for an all-cash purchase
price of $
The following table presents the gain associated with the Sale.
(Dollars in thousands)
| As of April 11, | ||||
| 2022 | ||||
| Consideration received | $ | |||
| Plus: closing cash | ||||
| Less: transaction costs | ( | ) | ||
| Less: closing indebtedness | ( | ) | ||
| Plus: new working capital adjustments | ||||
| Adjusted consideration received | ||||
| Cash | ||||
| Accounts receivable, net | ||||
| Inventories | ||||
| Prepaid expense and other current assets | ||||
| Operating lease right-of-use assets | ||||
| Deferred tax assets | ||||
| Property, plant and equipment, net | ||||
| Total assets | ||||
| Accounts payable | ||||
| Accrued liabilities | ||||
| Operating lease liability | ||||
| Total liabilities | ||||
| Net assets transferred | ||||
| Gain on sale | $ | |||
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15. Project Marie
As previously disclosed in Footnotes 4 and 8, on December 20, 2022, Soluna MC Borrowing 2021-1 LLC (“Borrower”), an indirect wholly owned subsidiary of Soluna Holdings, Inc. (the “Company”), received a Notice of Acceleration and Repossession (the “NYDIG Notice”) from NYDIG ABL LLC (“NYDIG”) with respect to the Master Equipment Finance Agreement, dated as of December 30, 2021 (the “MEFA”), by and between Borrower and NYDIG. The NYDIG Notice states that (a) Borrower failed to observe or perform certain covenants, conditions or agreements contained in the MEFA and such failure continued unremedied for a period of ten days after Borrower’s knowledge of such breach, which resulted in an event of default under the MEFA, and (b) Borrower defaulted under the guaranty, collateral agreement, or other support agreement, which resulted in an event of default under the MEFA. In addition, the NYDIG Notice states that Borrower failed to pay certain payments of principal and interest under the MEFA when due, which failure also constituted an event of default under the MEFA. As a result of the foregoing events of default, and pursuant to the MEFA, NYDIG (x) declared the principal amount of all loans due and owing under the MEFA and all accompanying Loan Documents (as defined in the MEFA) to be due and immediately payable, (y) imposed a default rate of interest on any outstanding principal amount of each loan (together with all then unpaid interest accruing thereon) and all other obligations under the MEFA and the Loan Documents, and (z) demanded the return of all equipment subject to the MEFA and the Loan Documents.
The
assets which secure the MEFA represent substantially all of the Company’s mining assets at the site and certain of the operating
assets of Project Marie, a 20 MW facility located in Kentucky. The obligations of Borrower under the MEFA and reflected in the NYDIG
Notice are ring-fenced to Borrower and its direct parent company, Soluna MC LLC. The Company is not a party to any guaranty, collateral
agreement or other support agreement with or for the benefit of NYDIG. For the year ended December 31, 2022, the principal balance of
$
On
February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, which resulted in a reportable disposition
of all of the Company’s mining assets at the site and certain of the operating assets of Project Marie. The total net book value
of the collateralized assets that were repossessed totaled $
With
the notice of termination of the Management and Hosting Services from CCMA, the Company notes that this event triggered the impairment
of the remaining fixed assets at the Marie facility for the year ended December 31, 2022. Based on the closure of operations on Project
Marie, the Company performed an impairment analysis and determined that approximately $
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For the first quarter of 2023, the Company assessed whether the abandonment of the Project Marie facility qualified for the classification of discontinued operations under ASC 205-20-45-1B and 1C. A disposal of a component of an entity or a group of components of an entity shall be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs:
a. The component of an entity or group of components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale.
b. The component of an entity or group of components of an entity is disposed of by sale.
c. The component of an entity or group of components of an entity is disposed of other than by sale in accordance with paragraph 360-10-45-15 (for example, by abandonment or in a distribution to owners in a spinoff).
As such, the Company deemed that criteria c was applicable as the Project Marie facility was abandoned and ceased further operations beginning on February 23, 2023. However, to qualify for reporting as discontinued operations, it must represent a strategic shift. Per ASC 205-20-45-1C, examples of a strategic shift that has (or will have) a major effect on an entity’s operations and financial results could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. A strategic shift implies that the disposal must result from a change in the way management had intended to run the business. Management does not believe the closure of Project Marie represented a strategic shift as the Company still fully intends to manage operations through data hosting with customers and proprietary mining arrangements for future pipelines, as such the strategic shift criteria was not met and will not qualify as discontinued operations.
However, per ASC 360-10-50-3A, in addition to the disclosures in paragraph 360-10-50-3, if a long-lived asset (disposal group) includes an individually significant component of an entity that either has been disposed of or is classified as held for sale and does not qualify for presentation and disclosure as discontinued operation, a public business entity shall disclose the pretax profit or loss of the individually significant component of an entity for the period in which it is disposed of or is classified as held for sale and for all prior period that are presented in the statement where net income is reported in accordance with ASC 205-20-45-6 through 45-9.
Set forth below are the results of Project Marie:
| (Dollars in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||
| Cryptocurrency mining revenue | $ | $ | ||||||
| Data hosting revenue | ||||||||
| Total revenue | ||||||||
| Operating costs: | ||||||||
| Cost of cryptocurrency mining revenue, exclusive of depreciation | ||||||||
| Depreciation costs associated with cryptocurrency mining | ||||||||
| Data hosting costs | ||||||||
| General and administrative expense | ||||||||
| Impairment on fixed assets | ||||||||
| Operating (loss) gain | ( | ) | ||||||
| Interest expense | ( | ) | ( | ) | ||||
| Gain on sale of fixed assets | ||||||||
| Net loss before income taxes | $ | ( | ) | $ | ( | ) | ||
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16. VARIABLE INTEREST ENTITY
On
January 26, 2022, DVSL was created in order to construct, own, operate and maintain variable data centers in order to support the mining
of cryptocurrency assets, batch processing and other non-crypto related activities (collectively, the “Project”). On May
3, 2022, SCI entered into a Bilateral Master Contribution Agreement (the “Bilateral Contribution Agreement”) with Spring
Lane Capital, pursuant to which Spring Lane agreed, pursuant to the terms and conditions of such agreement, to make one or more capital
contributions to, and in exchange for equity in, SCI or one of its subsidiaries up to an aggregate amount of $
On
August 5, 2022, the Company entered into a Contribution Agreement (the “Dorothy Contribution Agreement”) with Spring Lane,
Soluna DV Devco, LLC (“Devco”), an indirect wholly-owned subsidiary of SCI, and DVSL
an entity formed in order to further the Company’s development for the first 25 MW of Project Dorothy, (each, a “Party”
and, together, the “Parties”).
In
exchange for their contributions, the Company and Spring Lane were issued
Soluna evaluated this legal entity under ASC 810, Consolidations and determined that DVSL is a variable interest entity that should be consolidated into Soluna, with a non-controlling interest recorded to account for Spring Lane’s equity ownership of the Company. Soluna has a variable interest in DVSL. The entity was designed by Soluna to create an entity for outside investors to invest in specific projects. The creation of this entity resulted in Soluna, through its equity interest in DVSL, absorbing operational risk that the entity was created to create and distribute, resulting in Soluna having a variable interest in DVSL.
On March 10, 2023, the Company along with Devco, and Soluna DVSL ComputeCo, LLC, a Delaware limited liability company (the “Project Company”) entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with Soluna SLC Fund I Projects Holdco, LLC, a Delaware limited liability company (“Spring Lane”) that is wholly owned indirectly by Spring Lane Management LLC. The Project Company is constructing a modular data center with a peak demand of 25 megawatts (the “Dorothy Phase 1A Facility”).
Under
a series of transactions in February 2023 and March 2023, culminating in the March 10, 2023 Purchase and Sale Agreement, the Company
sold to Spring Lane certain Class B Membership Interests for a purchase price of $
Concurrently with the Sale, the Company, Spring Lane, Devco and the Project Company entered into (a) the Fourth Amended and Restated Limited Liability Company Agreement of the Project Company, dated as of March 10, 2023 (the “Fourth A&R LLCA”), an amendment and restatement of the Third Amended and Restated Limited Liability Company Agreement of the Project Company dated as of March 3, 2023, and (b) the Amended and Restated Contribution Agreement, dated as of March 10, 2023 (the “A&R Contribution Agreement”), an amendment and restatement of the Contribution Agreement dated as of August 5, 2022. The Fourth A&R LLCA provides for certain updates in respect of Spring Lane’s majority ownership. The A&R Contribution Agreement reflects updated pro rata member funding percentages as a result of the Sale as well as updated contribution caps for each of the Company and Spring Lane.
| 28 |
As of January 1, 2023, there were no changes in the Limited Liability Agreement of the Company other than those related to incorporating the new investment and the purpose and design of the Company has not changed. The Company evaluated the power and benefits concepts under ASC 810 to determine whether the change in investment of Class B memberships would change the consolidation of the DVSL, and the Company concluded that, after the additional investment by Spring Lane, Soluna continues to have a controlling financial interest in DVSL. In addition, the Company continues to have the power and benefits associated with DVSL and therefore will continue to consolidate.
The carrying amount of the VIE’s assets and liabilities was as follows:
March 31, 2023 | December 31, 2022 | |||||||
| Current assets: | ||||||||
| Cash and restricted cash | $ | $ | ||||||
| Other receivable-current | ||||||||
| Total current assets | ||||||||
| Property, plant, and equipment | ||||||||
| Total assets | $ | $ | ||||||
| Current liabilities: | ||||||||
| Due from – intercompany | $ | $ | ||||||
| Accounts payable | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
The summarized operating results of the VIE’s are as follows:
| For the three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cost of sales | $ | $ | ||||||
| General and administrative expense | ||||||||
| Net loss | $ | $ | ||||||
Effective,
January 1, 2023, the Company’s Class B membership in DVSL was reduced from
17. Segment Information
The Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has two 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 sold MTI Instruments in April 2022, and therefore has classified 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.
| 29 |
For
the three months ended March 31, 2023 and 2022, approximately
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 three months ended March 31, 2023 and 2022, and reconciles to net income (loss) on the consolidated statements of operations:
| (Dollars in thousands) | For the Three Months Ended March 31, | |||||||
| 2023 | 2022 | |||||||
| Reportable segment revenue: | ||||||||
| Cryptocurrency mining revenue | $ | $ | ||||||
| Data hosting revenue | ||||||||
| Total segment and consolidated revenue | ||||||||
| Reportable segment cost of revenue: | ||||||||
| Cost of cryptocurrency mining revenue, inclusive of depreciation | ||||||||
| Cost of data hosting revenue | ||||||||
| Total segment and consolidated cost of revenues | ||||||||
| Reconciling items: | ||||||||
| General and administrative expenses | ||||||||
| Impairment on fixed assets | ||||||||
| Impairment on equity investment | ||||||||
| Interest expense | ||||||||
| Gain on debt revaluation | ( | ) | ||||||
| Loss on sale of fixed assets | ||||||||
| Other income, net | ( | ) | ||||||
| Income tax (benefit) expense from continuing operations | ( | ) | ( | ) | ||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Income before income tax from discontinued operations | ||||||||
| Income tax benefit from discontinued operations | ||||||||
| Net income from discontinued operations | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| (Less) Net loss attributable to non-controlling interest | ||||||||
| Net loss attributable to Soluna Holdings, Inc. | $ | ( | ) | $ | ( | ) | ||
| Capital expenditures | ||||||||
| Depreciation and amortization | ||||||||
18. Subsequent Events
Chief Financial Officer and Chief Executive Officer Resignation and Appointments
Philip Patman, Jr. has resigned from his position as Chief Financial Officer of the Company, effective April 21, 2023. The Company has appointed David C. Michaels, a current director of the Company, to serve as interim Chief Financial Officer of the Company, effective as of April 21, 2023. Mr. Michaels has served as a member of the Board since August 2013 and as the Lead Independent Director since June 2016 and served as our Chairman of the Board from January 2017 to January 2022. Mr. Michaels has more than 30 years of finance experience at public and private companies, including CFO roles at the American Institute for Economic Research, Inc. and Starfire Systems, Inc. and Vice President of Treasury, Tax and Chief Risk Officer at Albany International Corp. (NYSE: AIN).
Effective as of May 1, 2023, Michael Toporek resigned as Chief Executive Officer of Soluna Holdings, Inc. The Company has appointed John Belizaire, the Chief Executive Officer of SCI and a current director of the Company, to serve as the Chief Executive Officer of the Company, effective as of May 1, 2023. In connection with the succession plan, Mr. Toporek was elected as Executive Chairman of the Board of Directors.
The Company noted that the resignation of Philip Patman, Jr. and Michael Toporek were not a result of any disagreements with the Company on any matter relating to the Company’s operations, policies or practices.
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Dorothy 1B Financing
On May 9, 2023, the Company’s indirect subsidiary Soluna DV ComputeCo, LLC (“DV”) completed a strategic partnership and financing with a special purpose vehicle, Navitas West Texas Investments SPV, LLC, (“Navitas”), organized by Navitas Global to complete the second phase of the Dorothy Project (“Dorothy 1B”).
The Dorothy Project is a 100MW Soluna modular data center co-located at the Briscoe Wind Farm in Silverton, Texas. It was acquired as part of the merger with Soluna Callisto in October 2021. The initial 50MW phase of the project includes 44 modular data center buildings in two sub-phases, Dorothy 1A and Dorothy 1B. Each of these phases is 25 MW each. Dorothy is the second modular data center built using Soluna’s proprietary design and software. The facility is designed to consume the wasted electricity from the wind farm and the grid.
Under
a Contribution Agreement among the parties, the Company owned a substantially complete 25MW data center under construction, in which
capital expenditures had been contributed by the Company to the data center. Navitas has initially contributed $
As
a part of the transaction, Navitas provided a two-year loan of $
As a result of these transactions, the Dorothy 1B project is fully financed and will no longer require an outlay of capital resources from the Company.
Convertible Note Amendment and Extension
On May 11, 2023, the Company entered into a Second Amendment Agreement (the “Second Amendment”) with the holders of its October 2021 Convertible Notes (the “October Secured Notes”) to extend the maturity date of the October Secured Notes to July 25, 2024. The October Secured Notes were originally due April 25, 2023 which was subsequently extended to May 25, 2023 to provide additional time to negotiate the terms of the Second Amendment.
In
connection with the Second Amendment, the Company paid an extension fee of $
Subject
to the Equity Conditions (as defined below), upon each trigger set forth below, the Company is allowed, once per trigger, require the
Note holders to convert up to
| (i) | the
Company’s Common Stock trades for | |
| (ii) | the
Company’s Common Stock trades for | |
| (iii) | the
Company’s Common Stock trades for |
The
Equity Condition is met if all of the following conditions have been met: (i) the shares of Common Stock issuable upon the conversion
are either registered under the Securities Act of 1933 or resellable under Rule 144 thereunder without any volume restrictions, (ii)
the number of shares issuable to each Note holder are below
| 31 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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..
The following discussion of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and the related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2022 contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023.
In addition to historical information, the following discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements. Important factors that could cause actual results to differ include those set forth in Part I Item 1A-Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and elsewhere in this Quarterly Report on Form 10-Q. Readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q. Please see “Statement Concerning Forward-Looking Statements” below.
Overview
SHI currently conducts our business through our wholly-owned subsidiary, Soluna Computing, Inc. (“SCI”). SCI is engaged in the mining of cryptocurrency through data centers that can be powered by renewable energy sources. Recently, SCI has built modular data centers that are used for cryptocurrency mining though proprietary mining and hosting business models. SCI intends to continue to develop and build modular data centers that use wasted renewable energy for cryptocurrency mining and in the in the future can be used for intensive, batchable computing 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. The Company’s data centers are operated through certain projects noted below: Project Edith, Project Sophie, Project Marie, and Project Dorothy.
Project Edith
The Edith project is a project permitted to consume up to 3.3 MegaWatts (“MW”) located in Wenatchee, Washington. The data center was acquired from the estate of the GigaWatt bankruptcy in May 2020. The project operates in a district with increasing power rates. In the first quarter of 2022, the ETH (“Ethereum”) foundation made it clear that the merge to proof-of-stake was happening and graphics processing unit (“GPU”) mining was going to be challenged going forward. In the early summer of 2022, Soluna began to seek a buyer for the assets. Soluna ultimately sold the GPU mining assets and other mining equipment in September 2022 for $790 thousand. Soluna has committed to providing certain facilities contracts at cost plus a markup to facilitate the continued operations for the mining assets for the new ownership.
Project Marie
The Marie Project was Soluna’s 20 MW co-location facility based in Kentucky. This facility was Soluna’s first project in Kentucky, prior to building the Sophie greenfield project. The site is powered by the Tennessee Valley Authority (“TVA”) grid and was designed to operate 24/7 less mandatory TVA curtailment windows.
On December 30, 2021, Soluna MC Borrowing 2021-1 LLC (the “Borrower”), an indirect wholly owned subsidiary of the Company entered into a Master Equipment Finance Agreement (the “MEFA”) with NYDIG ABL LLC (“NYDIG”) as lender, servicer and collateral agent (the “NYDIG facility”). The Master Agreement outlined the framework for a financing up to approximately $14.4 million in aggregate equipment financing.
In January 2022, Soluna began investing capital into Project Marie to upgrade the facility to support 20 MW of power consumption and create power efficiencies in the main leased building. These upgrades were completed in February of 2022. In January, Soluna completed the roll out of legacy hosting customers at the facility to be replaced with proprietary mining equipment.
In March and April of 2022, the facility experienced several unplanned outages due to issues with electrical infrastructure owned by CCMA. Despite these setbacks, the facility was able to recover and continue to run at a steady hashrate throughout the course of the year. When the Bitcoin downturn hit, the Marie facility took initiative to ensure maximum efficiency of the miner inventory and also took action to reduce site-level expenses.
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Project Marie power was impacted by increased Financial Conduit Authority (“FCA”) changes in late summer which were at levels not seen in many years. To further reduce risk to contribution margin, the company began contract negotiations with the 10 MW hosting customer at the site whose renewal was due in September. These negotiations resulted in a more favorable fee structure that positioned the company to better navigate the FCA volatility and the broader Bitcoin economics.
With the decline in the price of Bitcoin that occurred during 2022, by September 2022, the cashflows from Marie became inadequate to fully service the NYDIG loan. After discussions with NYDIG, two separate monthly waivers of payments for September and October 2022 were agreed. By November 2022, however, the Borrower failed to make its payment, and subsequently, on December 20, 2022, the Borrower received a Notice of Acceleration and Repossession (the “NYDIG Notice”) from NYDIG with respect to the MEFA, by and between Borrower and NYDIG. The obligations of Borrower under the MEFA and reflected in the NYDIG Notice are ring-fenced to Borrower and its direct parent company, Soluna MC LLC. The Company is not a party to any guaranty, collateral agreement or other support agreement with or for the benefit of NYDIG. Borrower had entered into a dialogue with NYDIG to resolve the matters set forth in the NYDIG Notice.
The NYDIG Notice states that (a) Borrower failed to observe or perform certain covenants, conditions or agreements contained in the MEFA and such failure continued unremedied for a period of ten days after Borrower’s knowledge of such breach, which resulted in an event of default under the MEFA, and (b) Borrower defaulted under the guaranty, collateral agreement, or other support agreement, which resulted in an event of default under the MEFA. In addition, the NYDIG Notice states that Borrower failed to pay certain payments of principal and interest under the MEFA when due, which failure also constituted an event of default under the MEFA. As a result of the foregoing events of default, and pursuant to the MEFA, NYDIG (x) declared the principal amount of all loans due and owing under the MEFA and all accompanying Loan Documents (as defined in the MEFA) to be due and immediately payable, (y) imposed a default rate of interest on any outstanding principal amount of each loan (together with all then unpaid interest accruing thereon) and all other obligations under the MEFA and the Loan Documents, and (z) demanded the return of all equipment subject to the MEFA and the Loan Documents.
On February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, which resulted in a reportable disposition of all of the Company’s mining assets at the site and certain of the operating assets of Project Marie. Additionally, NDYIG has stated its intention to pursue SCI, the parent company of Guarantor, under a piercing of the corporate veil claim relating to Defendants’ debts and liabilities under the loan documents. SCI denies any such liability and has filed a complaint for a declaratory judgment against NYDIG in the Eighth Judicial District Court in Clark County, Nevada on March 16, 2023 seeking a declaratory judgment as to such matter. In a related development, also on February 23, 2023, the Borrower received a notice of termination of the Management and Hosting Services Agreement with CC Metals and Alloys, LLC. As a result of this action and certain other characteristics of the facility, the Company elected to shut down the Marie facility, and has impaired certain property, plant, and equipment assets that were at the Marie facility. The Company believes it will maximize its profits and return on assets by concentrating its personnel and capital on its Dorothy Facility.
Project Sophie
The Sophie Project is Soluna’s 25 MW modular data center based in Kentucky. This facility is the first site based on Soluna’s modular design, electrical design, and powered by its proprietary software Maestro OS (™). The site is powered by the TVA grid and is designed to operate during off-peak hours to help Western Kentucky Rural Electric Cooperative (“WKRECC”) manage its excess energy consumption. During 2022, power prices at the site, after the full ramp-up of activities, were approximately 4.0 cents per kWh on average.
By April 8, 2022, older machines (Bitmain S9s) at Sophie were replaced with newer models growing the hashrate and a power usage effectiveness and consuming over 20 MW of energy. In May of 2022, the Project Sophie team moved into the completed offices, added a new asphalt road, and upgraded the network infrastructure on the site. In June and July of 2022, the site exceeded its previous mining hashrate by installing new Bitmain S19s and replacing S9 machines. Project Sophie has also hosted a series of demonstrations with leading renewable energy companies and capital providers.
On April 6, 2023, Project Sophie entered into a 25 MW hosting contract with a Bitcoin miner, in which will shift the Company’s business model at the Company’s modular data center at Project Sophie from proprietary mining to hosting Bitcoin miners for the customer. The Company plans to sell its existing Bitcoin miners at the site and redeploy capital.
Project Dorothy
The Dorothy Project is a 100 MW Soluna modular data center co-located at the Briscoe Wind Farm in Silverton, Texas. It was acquired as part of the merger with Soluna Callisto in October 2021, discussed in further details on Footnote 5 on the condensed consolidated financial statements. The initial 50MW phase of the project includes 44 modular data center buildings in two sub-phases, Dorothy 1A and Dorothy 1B. Each of these phases is 25 MW each. Dorothy is the second modular data center built using Soluna’s proprietary design and software. The facility is designed to consume the wasted electricity from the wind farm and the grid. It incorporates learnings and enhancements from the Sophie project.
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Permitting and Construction:
In March 2022, Soluna began site level construction via an early access agreement with the landowner and Briscoe Wind Farm, LLC., to place the concrete pad and erection of the site’s main warehouse. In April of 2022, the procurement of internet service providers began. By May 2022, the company began erecting the prefabricated modular data center buildings and trenching for underground electrical conduits.
On June 15, 2022, the Electric Reliability Council of Texas (“ERCOT”), the Texas independent system operator, formed a new taskforce, Large Flexible Load Interconnection Taskforce (“LTLTF” of “LFL”) to deal with the overwhelming increase in new load interconnection requests related to Bitcoin Mining. The new task force’s charter focused on studying the systems impact of these data centers and to establish a new interim process for approval. The new process included the addition of new technical studies and modeling to ensure the reliability of the electrical system. Briscoe, Oncor and Soluna collaborated on completing the required technical studies throughout the summer and early fall of 2022.
On October 31, 2022, after the completion of required studies, the Briscoe Wind Farm submitted a revised Resource Asset Registration Forms (“RARF”) to ERCOT requesting the addition of the Dorothy Project as a 100 MW behind-the-meter load and to initiate the modeling process. On December 8, 2022, the Briscoe/Soluna project was approved by the ERCOT modeling team. On December 19, 2022, all required studies were approved and the Dorothy Project received a “Met Planning” approval from ERCOT LFL.
While these ERCOT approvals were being obtained, through the summer and fall of 2022, Soluna continued the construction of Dorothy erecting more buildings, installing power infrastructure, completing the warehouse and office buildings, including ancillary HVAC and power. From September to December 2022, all mechanical and electrical construction was completed for Dorothy 1A. On October 15, 2022, Dorothy 1B’s construction was officially paused. In March 2023, the data center’s substation interconnection was completed, and Dorothy 1B’s construction was resumed and the site’s network and Supervisory Control and Data Acquisition systems were installed.
Project-level Financing:
On April 22, 2022, SCI signed definitive agreements with funds managed by Spring Lane Capital (“SLC”) to provide a $35 million pool of capital for financing Soluna projects co-located with renewable energy projects. At least $12.5 million of the pool was earmarked for the Dorothy Project. In July 2022, Soluna began drawing down on the SLC capital to finance Dorothy construction and return capital to the Company for past funding. In exchange for SLC’s contributions, the Company and Spring Lane were issued approximately 68% and 32% of the Class B Membership Interests in Soluna DVSL ComputeCo, LLC (“DVSL”). The Company consolidated the accounts of DVSL, a Variable Interest Entity (“VIE”), as of December 31, 2022.
On March 10, 2023, SCI completed the final tranche of a series of project-level agreements for $7.5 million of capital to fund the first 25 MW of the Dorothy Facility and corporate expenses from funds managed by SLC. This additional capital will be used to help complete the substation interconnection and the final stages of the Dorothy Facility, and corporate operations of Soluna. SLC has been a strategic partner for Soluna at the project and corporate levels of the business since 2022. In this series of transactions, SLC has increased its stake in DVSL from approximately 32% to 85% and has in turn reduced SHI’s ownership from 68% to 15%. After SLC realizes an 18% Internal Rate of Return hurdle on its investments, Soluna retains the right to 50% of the profits on Soluna DVSL ComputeCo.
The second 25 MW being developed as part of the Dorothy Facility, the ownership of which is held within Soluna DV ComputeCo, LLC (“DV”), as of March 31, 2023 remained indirectly wholly owned by the Company. On May 9, 2023, the Company entered into an investment partnership with Navitas for its Project Dorothy 1B data center in Texas.
The proprietary-mining focused joint venture brings Navitas into Project Dorothy 1B as an investor and equity partner. Navitas will provide investment capital for the final stages of the infrastructure build out of Project Dorothy 1B and 25 MW of Bitcoin miners. Navitas has initially contributed $4.5 million for a 26.5% ownership in DV,and has a commitment of approximately $10.8 million in cash for the purchase of proprietary mining equipment. Once the funding is completed, Navitas will have a 49% membership interest in Project Dorothy 1B. The deal also includes a $2 million loan to complete construction. Soluna will provide operations and maintenance expertise and will remain an owner of 51% of Dorothy 1B. This partnership is a capstone to the recent deals at Dorothy 1A and Project Sophie, in which will help put the company on a positive trajectory.
Operating Definitive Agreements with Counter Parties:
Throughout 2022 SCI’s corporate development continued to negotiate the definitive documents with Golden Spread Electric Cooperative, Inc., a Texas cooperative corporation (“GSEC”) and Lighthouse Electric Cooperative, Inc., a Texas cooperative corporation (“LHEC”), Oncor Electric Delivery, LLC (“Oncor”) and Briscoe Wind Farm, LLC’s various sponsors and financing parties (“Briscoe”). These agreements were finalized in March 2023 (see below).
On March 2, 2023, Soluna DV Services, LLC, a Nevada limited liability company (“ServeCo”) and an indirect wholly-owned subsidiary of the Company, entered into a series of agreements with Briscoe, (b) GSEC, and (c) LHEC. All the agreements were effective as of February 24, 2023 (the “Effective Date”). The Company is developing a modular data center in phases (the “Dorothy Facility”). The two phases of the Dorothy Facility will have a peak demand of 50 megawatts, and if, upon mutual agreement, all four phases are completed, the data center will have an estimated peak demand of 150 megawatts. The Dorothy Facility will be located next to, and supplied energy from, Briscoe’s 150-megawatt wind farm located at or near Briscoe and Floyd Counties, Texas (the “Briscoe Wind Farm”). Under the agreements, LHEC and GSEC will supply the Dorothy Facility with energy from the Briscoe Wind Farm and the ERCOT market.
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ServeCo and LHEC entered into an Agreement for Electric Service to Soluna DV Services, LLC (the “Retail Agreement”) for resale of energy supplied from the Briscoe Wind Farm and the ERCOT market delivered by GSEC for service to the energy load of the Dorothy Facility. As noted above, GSEC has by separate agreement arranged to purchase power at wholesale from Briscoe or to deliver and purchase power from the ERCOT market to serve LHEC with electric power and energy for resale to ServeCo for service to the Dorothy Facility. The initial term of the Retail Agreement is five years, with up to five extension terms of one year each unless terminated by LHEC or ServeCo.
ServeCo and Briscoe also entered into a Cooperation Agreement (the “Cooperation Agreement”), pursuant to which Briscoe and ServeCo agreed to certain rights, obligations, and restrictions with respect to the real property of the Dorothy Facility and the construction, interconnection, permitting, operation, maintenance, removal, and decommissioning of the Dorothy Facility and applicable credit support. Soluna DV ComputeCo, LLC, a Delaware limited liability company and an indirect wholly-owned subsidiary of the Company and Soluna DVSL ComputeCo, LLC, a Delaware limited liability company and an indirect wholly-owned subsidiary of the Company became parties to the Cooperation Agreement by each entering into a Joinder Agreement on the Effective Date. Unless terminated sooner in accordance with its terms, the term of the Cooperation Agreement is from the Effective Date until the expiration or termination of the Power Purchase Agreement, by and between Briscoe and GSEC, dated as of the Effective Date (the “PPA”).
ServeCo, Briscoe, LHEC, and GSEC also entered into a Performance and Net Energy Security Agreement (the “PSA”), pursuant to which ServeCo will provide certain credit support to LHEC in connection with its obligations under the Retail Agreement and the other transaction agreements. The PSA is effective on the Effective Date and will remain in effect for 18 months following the later of the termination of the Retail Agreement or the termination of the PPA.
On the Effective Date, ServeCo and Alice Fay Grabbe (“Owner”) entered into a Lease Agreement (the “Lease”) to lease certain real property located in Briscoe County, Texas for the Dorothy Facility. Unless terminated sooner in accordance with its terms, the initial term of the Lease is five years. The initial term of the Lease will automatically extend for five additional one-year periods, unless terminated by ServeCo or Owner.
Commercialization of Dorothy 1A:
On April 26, 2023, Soluna DVSL ComputeCo, LLC signed a 5 MW 2-year Master Enterprise Hosting Services Agreement with Compass Mining, Inc. (the “Compass MHSA”). Compass Mining is one of the world’s first and largest online marketplace for Bitcoin mining hardware and hosting. Through its network of partners with mining facilities located in the US and Canada, Compass facilitates both large and small miner deployments on behalf of its end-users. On May 5, 2023, Soluna DVSL ComputeCo, LLC signed a 2-year 20 MW Services Framework Agreement with a Strategic Hosting Partner. The partner will deploy over 5,000 miners at Dorothy 1A.
Discontinued Operations:
Until the Sale (as defined below), we also operated though our wholly-owned subsidiary, MTI Instruments, an instruments business 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. MTI Instruments was incorporated in New York on March 8, 2000. MTI Instruments’ products consisted 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 were developed for markets and applications that require consistent operation of complex machinery and the precise measurements and control of products, processes, and 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. On April 11, 2022, we consummated the sale of MTI Instruments, (‘the Sale”)., MTI Instruments ceased to be our wholly-owned subsidiary, and, as a result, we have exited the instruments business. As a result of the foregoing, the MTI Instruments business was reported as discontinued operations in the consolidated financial statements as of December 31, 2022 and prior periods within our Annual Report on Form 10-K for the year ended December 31, 2022, as was filed with the SEC on March 31, 2023.
On April 11, 2022, SHI entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with NKX Acquiror, Inc. (the “Purchaser”), pursuant to which the Company sold on such date all of the issued and outstanding shares of capital stock of its wholly-owned subsidiary, MTI Instruments, for approximately $9.4 million in cash, subject to certain adjustments as set forth in the Stock Purchase Agreement (the “Sale”). The consideration paid by the Purchaser to the Company was based on an aggregate enterprise value of approximately $10.75 million. The Company recognized a gain on the sale of approximately $7.8 million.
Recent Developments and Trends
We have used the net proceeds of the Spring Lane project level financing, debt financing, sale of miners and equipment, and subsequent closings of our common stock December 5th Securities Purchase agreement primarily for the construction of Project Dorothy, which is anticipated to launch in the second quarter of fiscal year 2023, and operational expenses for our SHI parent and SCI business unit.
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Consolidated Results of Operations
Consolidated Results of Operations for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022.
The following table summarizes changes in the various components of our net loss during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
| (Dollars in thousands) |
Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | $ Change | % Change | ||||||||||||
| Cryptocurrency mining revenue | $ | 2,796 | 7,812 | (5,016 | ) | (64 | )% | |||||||||
| Data hosting revenue | $ | 286 | 1,504 | (1,218 | ) | (81 | )% | |||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of cryptocurrency mining revenue, exclusive of depreciation | $ | 2,299 | 3,397 | (1,098 | ) | (32 | )% | |||||||||
| Depreciation costs associated with cryptocurrency mining | $ | 625 | 4,324 | (3,699 | ) | (86 | )% | |||||||||
| Cost of data hosting revenue | $ | 214 | 1,138 | (924 | ) | (81 | )% | |||||||||
| General and administrative expenses, exclusive of depreciation and amortization | $ | 4,370 | 4,882 | (512 | ) | (10 | )% | |||||||||
| Depreciation and amortization associated with general and administrative expenses | $ | 2,377 | 2,373 | 4 | -% | |||||||||||
| Impairment on fixed assets | $ | 209 | - | 209 | 100 | % | ||||||||||
| Operating loss | $ | (7,012 | ) | (6,798 | ) | (214 | ) | 3 | % | |||||||
| Other income, net | $ | 12 | - | 12 | 100 | % | ||||||||||
| Interest expense | $ | (1,374 | ) | (2,881 | ) | 1,507 | 52 | % | ||||||||
| Loss on sale of fixed assets | $ | (78 | ) | - | (78 | ) | (100 | )% | ||||||||
| Gain on debt revaluation, net | $ | 473 | - | 473 | 100 | % | ||||||||||
| Loss before income taxes from continuing operations | $ | (7,979 | ) | (9,679 | ) | 1,700 | (18 | )% | ||||||||
| Income tax benefit from continuing operations | $ | 547 | 547 | - | -% | |||||||||||
| Net loss from continuing operations | $ | (7,432 | ) | (9,132 | ) | 1,700 | (19 | )% | ||||||||
| Income before income taxes from discontinued operations | $ | - | 226 | (226 | ) | (100 | )% | |||||||||
| Income tax benefit from discontinued operations | $ | - | - | - | -% | |||||||||||
| Net income from discontinued operations | $ | - | 226 | (226 | ) | (100 | )% | |||||||||
| Net loss | $ | (7,432 | ) | (8,906 | ) | 1,474 | (17 | )% | ||||||||
| Net loss attributable to non-controlling interest | $ | (370 | ) | - | (370 | ) | (100 | )% | ||||||||
| Net loss attributable to Soluna Holdings, Inc. | $ | (7,062 | ) | (8,906 | ) | 1,844 | (21 | )% | ||||||||
Cryptocurrency Mining Revenue: Cryptocurrency revenue consists of revenue recognized from SCI’s cryptocurrency mining operations.
Cryptocurrency revenue was approximately $2.8 million for the three months ended March 31, 2023 compared to $7.8 million for the three months ended March 31, 2022. We noted the significant decrease of approximately $5.0 million related to the average price of Bitcoin decreased approximately 45% from the first three months of March 2022 compared to the first three months of March 2023. In addition, as discussed in Note 15, Project Marie operations were stopped in February 2023 with the CCMA termination and NYDIG repossession of collateralized assets. The Company saw a $2.7 million decline for Project Marie due to not having a month and half of operations in the first three months of March 2023 and the Bitcoin price decline between periods.
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. Data hosting revenue was approximately $286 thousand for the three months ended March 31, 2023 compared to $1.5 million for the three months ended March 31, 2022. The significant decline in the data hosting revenue of $1.2 million was primarily related the average Bitcoin price decline as noted above for the Cryptocurrency mining revenue, as well as in the comparative prior quarter, 100% of the data hosting was done at Project Marie, in which as noted above and in Note 15, the Project Marie operations were shut down in February 2023, as such, no further revenue was generated for a month and half for the three months ended March 31, 2023.
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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, exclusive of depreciation costs was approximately $2.3 million and $3.4 million for the three months ended March 31, 2023 and 2022, respectively, approximately a $1.1 million decrease. As noted above, as production volume declined due to the ceasing of operations at Project Marie and lower revenue generated from Bitcoin pricing, the cost of cryptocurrency also declined, but not as dramatically as revenue due to certain overhead and direct costs remaining consistent as prior comparative periods.
Depreciation costs associated with cryptocurrency revenue was approximately $625 thousand for the three months ended March 31, 2023 compared to $4.3 million for the three months ended March 31, 2022. The significant decline between the comparative periods related to the Company had a higher net book value in property, plant, and equipment as of March 31, 2022 of approximately $68.3 million compared to $39.0 million as of March 31, 2023. In fiscal year 2022, the Company impaired approximately $47 million of property, plant and equipment mainly in the third and fourth quarter of fiscal year 2022, in which in turn resulted in lower net book value of property, plant and equipment as of March 31, 2023 and a decline in depreciation costs for the period.
Cost of Data Hosting Revenue: As noted above, the average Bitcoin price had declined by approximately 45% for comparative periods, as well as Marie operations were stopped in which the hosting contract with CCMA was terminated. As such, we saw a significant decline in cost of data hosting revenue by approximately $924 thousand.
General and Administrative Expenses: 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, information technology, and legal services.
General and administrative expenses for the first three months ended March 31, 2023 was approximately $4.4 million compared to $4.9 million for the three months ended March 31, 2022, a decrease of approximately $512 thousand or 10%. This decrease was mainly related decreases to salaries, benefits, and other employee expenses, consulting and professional fees and other outside charges, offset with an increase in investor relation expenses.
Salaries, benefits, and other employee expenses decreased by approximately $281 thousand due to employee recruitment fees decreased by approximately $133 thousand as in the first quarter of 2023 as the Company was actively recruiting for new employees for the Company, as well as there were no bonus expenses for first three months of 2023, compared to having a bonus expense of $250 thousand for the first three months of 2022. The decrease in salaries and benefits was slightly offset by an unfavorable cost of headcount changes by approximately $105 thousand.
Consulting and professional fees decreased by approximately $190 thousand for the first three months ended March 31, 2023 compared to first three months ended March 31, 2022. This was due to public relations and marketing charges were stronger in the first quarter of 2022 by approximately $47 thousand as the Company was looking to grow and build out the market for the Soluna brand, whereas in the first quarter of 2023, the Company was looking to conserve marketing and public relation expenses. Also, consulting fees for various complex accounting transactions were higher for the first quarter of 2022 due to the accounting for the asset acquisition transaction and other valuations by approximately $60 thousand compared to the first quarter of 2023. Also, the Company had approximately higher consulting fees of approximately $80 thousand related to executive fees related to business growth and development of the business.
Other outside services decreased by approximately $311 thousand for the first three months ended March 31, 2023 compared to the first three months ended March 31, 2022, due to expenses that were incurred in the first three months ended March 31, 2023 that were not incurred in the first three months ended March 31, 2022. Those costs included property tax advisors and ERCOT market support fees of $88 thousand that were one-time costs in 2022, as well as the Company cancelling services with two vendors that contributed $125 thousand of services in 2022, and lastly for the first quarter of 2022, the Company paid out one final charge of $50 thousand to HEL to close out management and operating services.
Investor relations increased by approximately $294 thousand for first three months ended March 31, 2023 compared to March 31, 2022. This was due Company’s investment in investor reach out efforts, as well as expenses associated with the Special Meeting held in March 2023.
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Depreciation and Amortization associated with general and administrative expenses: Depreciation and amortization expense was comparable for the three months ended March 31, 2023 and the three months ended March 31, 2022 in which the balances totaled approximately $2.4 million, respectively. The balances mainly related to amortization expense related to the strategic pipeline contract that was acquired in October 2021.
Impairment on Fixed Assets: During the three months ended March 31, 2023 the Company had impairment charges of approximately $209 thousand in which related to impairment of approximately $166 thousand power supply units (PSUs) at their Sophie location and $43 thousand for M31 miners in which were subsequently sold in April 2023, in which the Company wrote down the net book value to subsequent sale price. There were no impairment charges for the three months ended March 31, 2022.
Operating Loss: Operating loss increased by $214 thousand as a result of the factors noted above, which was decreases in revenue due to decline in Bitcoin and shutting down the Marie operations offset with decline in cost of revenue for depreciation and other utility and general costs of operations and expenses, in addition to the impairment of fixed assets of $209 thousand.
Interest expense: Interest expense for the three months ended March 31, 2023 was $1.4 million and related to default and continuing interest expense relating to the NYDIG loan of approximately $377 thousand, interest and other charges of approximately $220 thousand for the promissory notes issued in January and February of 2023, and interest on amortization of warrants for the convertible debt of approximately $360 thousand, as well as default interest charged through March 10, 2023 for the convertible holders of approximately $420 thousand. Interest expense for the three months ended March 31, 2022 was $2.9 million and was primarily related to the $2.4 million of interest expense in relation to the convertible notes issued at the end of October 2021 and promissory notes issued in February and March of 2022, as well as $365 thousand in interest expenses related to the NYDIG financing in January.
Gain on Debt Revaluation: During the third quarter of fiscal year 2022, the Company entered into the Addendum and Addendum Amendment in the which per guidance in ASC 470 the October Secured Notes were treated as a debt extinguishment in our consolidated financial statements. The Company did a fair value assessment of the Notes as of March 31, 2023 in which a gain on fair value revaluation of $473 thousand was recognized for the three months ended March 31, 2023. The Company did not incur a debt extinguishment or revaluation of debt for the three months ended March 31, 2022. See Note 8.
Loss on Sale of Fixed Assets: The Company incurred a $78 thousand loss for the three months ended March 31, 2023 in connection with mainly the sale of their M20 and M21 miners in which contributed to a loss on sale of equipment of approximately $82 thousand in which they received proceeds of $213 thousand for their M20 and M21 miners, in which had a net book value of $295 thousand prior to the sale. There were additional proceeds of $36 thousand from sale on equipment in March 2023, in which resulted in a gain of approximately $3 thousand of scrap and other equipment. There were no such disposals on equipment for the three months ended March 31, 2022.
Income Tax (Expense) Benefit: Income tax benefit for the three months ended March 31, 2023 and March 31, 2022 was $547 thousand. The balance related to deferred tax amortization 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 $10.9 million at inception date (October 29, 2021), in which was recorded as a deferred tax liability and this amount will be amortized over the life of the asset. For the three months ended March 31, 2023 and March 31, 2022, the Company amortized $547 thousand.
Net Loss from continuing operations: Net loss from continuing operations for the three months ended March 31, 2023 was $7.4 million compared to a net loss of $9.1 million for the three months ended March 31, 2022. The decrease for the loss were the result of were the result of the factors noted above, in which the main differences related to lower interest expense incurred and gain on revaluation of debt, offset with an impairment of fixed assets that didn’t occur for the three months ended March 31, 2022. As discussed above, the Company’s operating loss was comparable between periods as noted above.
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 three months ended March 31, 2022 was $226 thousand. The Company sold MTI Instruments in fiscal year 2022 and did not incur any additional gains or costs for the three months ended March 31, 2023.
Net (Loss) Income: Net loss for the three months ended March 31, 2023 was $7.4 million compared to net loss of approximately $8.9 million compared to net loss of for the three months ended March 31, 2022, primarily as a result of the factors noted above with the losses incurred in continued operations as noted above with declines in revenue offset with declines in cost of sales and general and administrative expenses, in addition to less interest expense incurred and a gain on revaluation of debt.
Net Loss attributable to non-controlling interest: Net loss attributable to non-controlling interest for the three months ended March 31, 2023 was $370 thousand in relation to the Company’s DVSL entity. There was no comparable balance for the three months ended March 31, 2022.
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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 (“EDITDA”) adjusted to eliminate the effects of certain non-cash, non-recurring items, which do not reflect our ongoing strategic business operations. Management believes that Adjusted EBITDA results in a performance measurement that represents a key indicator of the Company’s business operations of cryptocurrency mining.
We believe Adjusted EBITDA can be an important financial measure because it allows management, investors, and our Board of Directors to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making such adjustments. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that stock-based compensation costs, which is excluded from the non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Similarly, we expect that depreciation and amortization of fixed assets will continue to be a recurring expense over the term of the useful life of the assets.
Adjusted EBITDA is provided in addition to, and should not be considered to be a substitute for, or superior to net income, the comparable measure calculated in accordance with U.S. GAAP. Further, Adjusted EBITDA should not be considered as an alternative to revenue growth, net income, diluted earnings per share or any other performance measure calculated in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.
Reconciliations of Adjusted EBITDA to net income from continuing operations, the most comparable GAAP financial metric, for historical periods are presented in the table below:
| (Dollars in thousands) | March 31, 2023 | March 31, 2022 | ||||||
| Net loss from continuing operations | $ | (7,432 | ) | $ | (9,132 | ) | ||
| Interest expense, net | 1,374 | 2,880 | ||||||
| Income tax benefit | (547 | ) | (547 | ) | ||||
| Depreciation and amortization | 3,002 | 6,697 | ||||||
| EBITDA | (3,603 | ) | (102 | ) | ||||
| Adjustments- Non-cash items | ||||||||
| Stock-based compensation costs | 879 | 955 | ||||||
| Impairment on fixed assets | 209 | - | ||||||
| Loss on sale of fixed assets | 78 | - | ||||||
| Gain on debt revaluation, net | (473 | ) | - | |||||
| Adjusted EBITDA | $ | (2,910 | ) | $ | 853 | |||
Stock based compensation costs represented $687 thousand non-cash restricted stock units and $192 thousand non-cash stock options for the three months ended March 31, 2023 to members of our Board of Directors and certain Company employees compared to non-cash restricted stock units of $735 thousand to members of our Board of Directors and certain Company employees for the three months ended March 31, 2022 and non-cash stock options of approximately $220 thousand for the three months ended March 31, 2022.
Liquidity and Capital Resources
Several key indicators of our liquidity are summarized in the following table :
| (Dollars in thousands) | Three Months Ended or as of | Three Months Ended or As of | Year Ended or As of | |||||||||
| March 31, | March 31, | December 31, | ||||||||||
| 2023 | 2022 | 2022 | ||||||||||
| Cash | $ | 4,553 | $ | 2,827 | $ | 1,136 | ||||||
| Restricted cash | 493 | - | 685 | |||||||||
| Working capital | (17,218 | ) | (10,120 | ) | (24,874 | ) | ||||||
| Net loss from continuing operations | (7,432 | ) | (9,132 | ) | (107,016 | ) | ||||||
| Net income from discontinued operations | - | 226 | 7,921 | |||||||||
| Net cash (used in) provided by operating activities | (3,053 | ) | 801 | (6,118 | ) | |||||||
| Net cash provided by operating activities for discontinued operations | - | 510 | 369 | |||||||||
| Purchase of property, plant and equipment | (860 | ) | (25,438 | ) | (63,684 | ) | ||||||
| Cash dividends paid on preferred stock | - | (749 | ) | (3,852 | ) | |||||||
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The Company had a consolidated accumulated deficit of approximately $228.8 million as March 31, 2023. As of March 31, 2023, the Company had negative working capital of approximately $17.2 million, a line of credit outstanding of $135 thousand, $11.6 million outstanding principal in notes payable that may be converted to common stock, and a subsidiary of the Company that defaulted on equipment financing and has a current outstanding loan of $7.2 million, and $600 thousand outstanding in principal for promissory notes. The Company had outstanding commitments as of March 31, 2023, related to SCI for $0.2 million in capital expenditures, and approximately $4.6 million of cash available to fund its 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 sale of the MTI Instruments business that occurred in April 2022, the Company has now exited the instrumentation business and is focused on developing and monetizing green, zero-carbon computing and cryptocurrency mining facilities, as well as facilities capable of hosting customers engaged in cryptocurrency mining.
We plan to continue funding operations from our current cash position and our projected 2023 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, including additional development and build-outs of data centers through project-level capital raising and equity sale activities, to the extent that we can successfully raise capital through sales of additional debt or equity securities, as well as a variety of project specific funding options. Any additional financing, if required, may not be available to us on acceptable terms or not at all.
As shown in the accompanying financial statements, the Company did not generate sufficient revenue to generate net income and has negative working capital as of March 31, 2023. These factors, among others, indicate that there is substantial doubt about the Company’s ability to continue as a going concern within one year after issuance of the condensed financial statements as of March 31, 2023, or May 15, 2023.
Further, various macroeconomic factors could adversely affect our business and the results of our operations and financial condition, including changes in inflation, interest rates and overall economic conditions. For instance, inflation could negatively impact the Company by increasing our labor costs, through higher wages and higher interest rates. If inflation or other factors were to significantly increase our business costs, our ability to develop our current projects may be negatively affected. Interest rates, the liquidity of the credit markets and the volatility of the capital markets could also affect the operation of our business and our ability to raise capital in order to fund our operations. 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 plans 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; alternatively, the Company may be required to obtain credit facilities or other loans, if available, to fund these initiatives. However, the Company is actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and the industry.
Operating Activities
Net cash used in operations for continuing operations was approximately $3.1 million during the three months ended March 31, 2023. The Company had a net loss for the three months ended March 31, 2023 of $7.4 million. Non-cash items included $632 thousand of depreciation expense and $2.4 million of amortization expenses, as well as amortization on discount on notes payable of approximately $500 thousand, $879 thousand of stock compensation expenses, and $209 thousand of impairment of fixed assets. These non-cash items were offset with a deferred tax benefit of $547 thousand and revaluation gain on debt of $473 thousand. The change in asset and liabilities of $675 thousand related to increase in accounts payable of $1.4 million in which Spring Lane made noncash contributions to pay off approximately $1.1 million that was outstanding as of December 31, 2022, offset by increases in other long term liabilities related to electricity deposits to Western Kentucky and Washington state, and a decrease in deferred revenue of $453 thousand in which the balance had been written off as of March 31,2023. The other changes in assets and liabilities were not material.
Net cash provided by operating activities from continuing operations was approximately $800 thousand during the three months ended March 31, 2022. Cash was provided from operations by a net loss of $9.1 million, less non-cash items of $9.5 million, consisting primarily of $6.7 million of amortization and depreciation expense for the year for the intangible asset acquired and significant additions in fixed assets, approximately $950 thousand in stock-based compensation expense, and $2.4 million for amortization of deferred financing costs and discount on notes payables issued during the year, offset with approximately $547 thousand in deferred tax benefits. The change in asset and liabilities of $380 thousand consisted primary of increase in accounts payable and a decrease of accounts receivable of $1.6 million offset by $1.2 million with increases in prepaids and other assets, and a decrease in accrued liabilities.
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Investing Activities
Net cash used in investing activities during the three months ended March 31, 2023 was approximately $435 thousand consisting mainly of capital expenditures of $860 thousand less cash proceeds from sale of equipment and $200 thousand net change in deposits on equipment. Net cash used in investing activities during the three months ended March 31, 2022 was approximately $28 million which mainly consisted of $25.4 million worth of capital expenditures and a net change of $2.6 million in deposits on equipment.
Financing Activities
Net cash provided by financing activities was approximately $6.7 million during the three months ended March 31, 2023, which consisted of cash contributions for non-controlling interest of approximately $6.0 million. The Company also received net proceeds from debt issuances of $900 thousand less costs of $215 thousand. During the three months ended March 31, 2022, net cash provided by financing activities was approximately $19.3 million, which consisted of the preferred stock raises that totaled approximately $1.0 million in net proceeds. The Company also received proceeds from a notes and debt issuance of $19.8 million less costs associated of $620 thousand and made principal payments of $980 thousand on the NYDIG debt. The Company also exercised warrants totaling approximately $738 thousand. The Company also made cash dividend payments to preferred stockholders of around $749 thousand.
Debt
On September 15, 2021, the Company entered into a $1.0 million unsecured line of credit with KeyBank National Association (“KeyBank”), 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 “KeyBank facility”). The line of credit bears interest at a rate of Prime + 0.75% per annum (8.5% interest rate as of March 31, 2023). Accrued interest is due monthly and principal is due in full following KeyBank’s demand. As of January 1, 2022, the entire line of credit of $1.0 million was drawn and outstanding. As of March 31, 2023 $865 thousand of the original $1.0 million outstanding balance has been paid down; therefore $135 thousand of the amount drawn under the line of credit remained outstanding. The Company has been repaying weekly principal on the KeyBank facility each week since the beginning of September 2022. The Company does not plan to draw down on the line of credit in the foreseeable future. In addition, future drawdowns may require pre-approval by KeyBank.
On October 25, 2021, the Company 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 July 19, 2022, the Company entered into the Addendum with the Noteholders to amend the terms the October Secured Notes. Pursuant to the Addendum, a portion of the October Secured Notes would be converted and may be redeemed in three tranches, with each tranche of $1,100,000 required to be converted into common stock in each case at the then in effect conversion price of the October Secured Notes, with such price, prior to each conversion, to be reduced (but not increased) to a 20% discount to the 5-day VWAP of the Company’s common stock. In addition, the Noteholders may require the Company to redeem up to $2,200,000 worth of October Secured Notes in connection with each tranche at a rate of $1.20 for every $1.00 owed, less the amount of October Secured Notes converted during such tranche, not including the required conversion amount if the Noteholders are unable to convert out of such amount of the October Secured Notes in each tranche. The Company is also required to deposit up to $1,950,000 in an escrow account in connection with each tranche to satisfy any redemptions, except with respect to the first tranche as provided in the Addendum Amendment. The Addendum also provides the right for the Company to pause the commencement of the conversion of the second and third tranches each for 45 days in the event the Company pursues an equity financing. Since inception, the Company has converted down approximately $3.8 million on the convertible debt. On September 13, 2022, the Company entered into the Addendum Amendment with the Noteholders to amend the terms to extend the maturity date to April 25, 2023, and increase the principal amount of the October Secured Notes by approximately $520 thousand for a total outstanding principal amount of approximately $13 million. The events of default stated in the Notice of Acceleration and Repossession defined below with NYDIG constituted a cross-default under the terms of secured convertible notes issued to the Noteholders. In addition to such cross-default, the failure of the Company pursuant to the Addendum dated as of July 19, 2022, to escrow an aggregate amount of $950,000 for the benefit of the Noteholders by December 21, 2022, constitutes an event of default under the Notes. Due to the defaults noted, the Company did not enter into the second and third tranche of conversions. As such, beginning on November 30, 2022, the Company had been accruing interest of 18% per annum on the outstanding principal amount due to the default. On March 10, 2023, the Company entered into a Second Addendum Amendment with the Noteholders, in which the Company paid approximately $617 thousand through the Company’s restricted escrow accounts and contemporaneously with the payment, the Noteholders waived all existing events of default arising under the convertible notes. For the three months ended March 31, 2023, the Noteholders have converted approximately $1.4 million of the convertible notes and have an outstanding principal balance outstanding of approximately $11.6 million as of March 31, 2023. On May 11, 2023, the Company entered into a Second Amendment Agreement with the holders of its October Secured Notes to extend the maturity date of the October Secured Notes to July 25, 2024. The October Secured Notes were originally due April 25, 2023 which was subsequently extended to May 25, 2023 to provide additional time to negotiate the terms of the Second Amendment Agreement.
In connection with the Second Amendment Agreement, the Company paid an extension fee of $250,000 and increased the principal amount of the outstanding October Secured Notes by 14%. The Company also issued 6,000,000 new Class A warrants exercisable at $0.50 and 2,000,000 new Class B warrants exercisable at $0.80.
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On January 14, 2022, the Company effected an initial drawdown under the Master Equipment Finance Agreement with NYDIG in the aggregate principal amount of approximately $4.6 million that bore interest at 14%. On January 26, 2022, the Company had a subsequent drawdown of $9.6 million. On December 20, 2022, Soluna MC Borrowing 2021-1 LLC (“Borrower”) received a Notice of Acceleration and Repossession (the “NYDIG Notice”) from NYDIG with respect to the Master Agreement, by and between Borrower and NYDIG. The obligations of Borrower under the Master Agreement and reflected in the NYDIG Notice are ring-fenced to Borrower and its direct parent company, Soluna MC LLC. The Company is not a party to any guaranty, collateral agreement or other support agreement with or for the benefit of NYDIG. As such, the principal balance of $10.5 million as of December 31, 2022 became due immediately and the Borrower shall bear interest, at a rate per annum equal to 2.0% plus the rate per annum otherwise applicable to such obligations set forth in the Master Agreement. As of March 31, 2023, the Borrower incurred accrued interest and penalty of approximately $651 thousand.
On May 3, 2022, SCI entered into the Contribution Agreement with Spring Lane, pursuant to which Spring Lane agreed, pursuant to the terms and conditions of such agreement, to the Spring Lane Commitment. We anticipate that these capital contributions, once deployed into the projects, will help develop up to three behind-the-meter (BTM) projects designed to convert wasted renewable energy into clean computing services such as Bitcoin mining and artificial intelligence. The Contribution Agreement outlines the framework for the Spring Lane Commitment; however, neither we nor Spring Lane are obligated to complete any projects under such agreement and any actual capital contributions are subject to various conditions precedent, including the receipt of requisite lender and other consents, acceptance by Spring Lane of specific projects and negotiations of agreements regarding those projects, including milestones and structure. In partial consideration of the amendment to the October notes discussed above, the investors agreed to release certain collateral covered by their security agreement to permit the Company to proceed forward with the initial first 25 MW phase of Project Dorothy, which has been extensively funded by Spring Lane, which the Company expects to complete in the near future. On August 5, 2022, the Company entered into the Dorothy Contribution Agreement with Spring Lane for an initial funding of up to $12.5 million for Project Dorothy. SCI completed a final tranche of a series of project-level agreements for $7.5 million on March 10, 2023 of capital to fund the first 25 MW of Project Dorothy and corporate expenses from funds managed by Spring Lane Capital. Concurrently with the Sale for $7.5 million, the Company, Spring Lane, Devco and the Project Company entered into (a) the Fourth Amended and Restated Limited Liability Company Agreement of the Project Company, dated as of March 10, 2023, which is an amendment and restatement of the Third Amended and Restated Limited Liability Company Agreement of the Project Company dated as of March 3, 2023, and (b) the Amended and Restated Contribution Agreement, dated as of March 10, 2023 an amendment and restatement of the Contribution Agreement dated as of August 5, 2022. The Fourth Amended and Restated Limited Liability Company Agreement provides for certain updates in respect of Spring Lane’s majority ownership. The Amended and Restated Contribution Agreement reflects updated pro rata member funding percentages as a result of the Sale as well as updated contribution caps for each of the Company and Spring Lane.
On May 9, 2023, the Company entered into an investment partnership with Navitas for its Project Dorothy 1B data center in Texas. The proprietary-mining focused partnership brings Navitas into Project Dorothy 1B as an investor and equity partner. Navitas will provide investment capital for the final stages of the infrastructure build out of Project Dorothy 1B and 25 MW of Bitcoin miners. Navitas has initially contributed $4.5 million for a 26.5% ownership in Dorothy 1B, and has a commitment of approximately $10.8 million in cash for the purchase of proprietary mining equipment. Once the funding is completed, Navitas will have a 49% membership interest in Project Dorothy 1B. The deal also includes a 2 year $2.0 million loan to complete construction. Soluna will provide operations and maintenance expertise and will remain an owner of 51% of Dorothy 1B.
Critical Accounting Policies and Significant Judgments and Estimates
The above 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 accounting principles generally accepted in the United States of America. Note 2, Accounting Policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022 includes a summary of our most significant accounting policies. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, 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, fair value measurements, and stock-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.
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Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act. Any statements contained in this Form 10-Q 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; | |
| ● | future capital expenditures; | |
| ● | 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 general and administrative expenses; | |
| ● | general economic conditions and the uncertainty of the U.S. and global economy; | |
| ● | anticipated cryptocurrency mining facility plans and operations; | |
| ● | fluctuating valuations of cryptocurrency; and | |
| ● | other factors discussed under the heading “Risk Factors” in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. |
Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
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 and (iii) hosting revenues whereby the Company provides electrical power and network connectivity to cryptocurrency mining customers, and the customers pay a stated amount and rate.
Our revenues are directly impacted by changes in the market value of Bitcoin. For example, the average Bitcoin price for 2020 and 2021 was $11,057 and $47,385, respectively. Bitcoin price generally declined throughout 2022. As of December 31, 2022, the price of Bitcoin was $16,526. Although the price of Bitcoin has increased to $28,478 as of March 31, 2023, that is significantly less than the price of Bitcoin of $45,539 as of March 31, 2022. Furthermore, 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 April 2024. The halving events happen without any regard to ongoing demand, meaning that if the ongoing demand remains the same after a halving event, whatever demand was being met by new supply will be restricted, which may necessitate an adjustment of the price of Bitcoin, though there is no definitive evidence of a causal link between Bitcoin’s programmatic decrease in supply and broadening demand. Once the halving occurs, we expect that it could have a negative impact on our revenues as the reward for each Bitcoin mines will be reduced.
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. These changes could have an indirect effect on our revenues from hosted customers engaging in cryptocurrency mining.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
The certifications of our Chief Executive Officer and Chief Financial Officers are attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of such certification, information concerning our disclosure controls and procedures and internal control over financial reporting. Such certification should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certification.
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of SHI’s disclosure controls and procedures as of March 31, 2023. 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 U.S. Securities and Exchange Commission’s (the “SEC”) 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 March 31, 2023, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(b) 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 March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. 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.
NYDIG filed a complaint against Soluna MC Borrowing 2021-1 LLC (“Borrower”) and Soluna MC LLC (“Guarantor”, and together with Borrower, “Defendants”) in Marshall Circuit Court of the Commonwealth of Kentucky on December 29, 2022 regarding a series of loans made by NYDIG to Borrower pursuant to a master equipment finance agreement that were secured by certain assets of Borrower and guaranteed by Guarantor pursuant to a written guaranty agreement executed by Guarantor. The Court issued on February 15, 2023, an agreed order granting NYDIG’s motion for writ of possession which, among other things, ordered parties to provide NYDIG access to the collateral described therein and preserved the rights of NYDIG to pursue a deficiency judgment against the Defendants. Also on February 15, 2023, the Defendants filed their answer and affirmative defenses in this proceeding. The Defendants believe that NYDIG has liquidated some of the collateral securing the loans and anticipate that NYDIG will complete the liquidation of collateral and continue to prosecute the complaint to obtain a judgment against the Defendants. Additionally, NDYIG has stated its intention to pursue SCI, the parent company of Guarantor, under a piercing of the corporate veil claim relating to Defendants’ debts and liabilities under the loan documents. SCI denies any such liability and has filed a complaint for a declaratory judgment against NYDIG in the Eighth Judicial District Court in Clark County, Nevada on March 16, 2023, seeking a declaratory judgment as to such matter.
Item 1A. Risk Factors
Part II, Item 1A (Risk Factors) of our most recently filed Annual Report on Form 10-K with the SEC, filed on March 31, 2023, sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Except as to the risk factors set forth below and to the extent that information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters described in Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations – Statement Concerning Forward Looking Statements), there have been no material changes to our risk factors disclosed in our most recently filed Annual Report on Form 10-K. Those risk factors continue to be relevant to an understanding of our business, financial condition and operating results, however, and, accordingly, you should review and consider such risk factors in making any investment decision with respect to our securities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 1, 2023, the Company granted 35,000 shares of common stock to two consultants for Team Sova, LLC at a price basis of $0.4136 per share as compensation for consulting advisory services. The shares were granted pursuant to the Consultant Agreement dated as of February 1, 2023 by Team Sova, LLC and the Company. The shares were issued in reliance upon an exemption pursuant to Section 4(a)(2) of the Securities Act.
On March 10, 2023, the Company effectively issued 78,750 and 431,014 for a total of 509,764 shares of common stock to Univest, at a price basis of $0.76 and $1.80 per share. These shares were granted pursuant to the Placement Agency Agreement dated as of December 5, 2022 by Univest and the Company as partial compensation for Univest’s services as placement agent, in which were subject to shareholder approval which occurred at the Special Meeting on March 10, 2023. The shares of common stock were issued in reliance upon the exemption from the registration requirements in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.
On March 10, 2023 and March 24, 2023, the Company effectively issued 112,500 and 113,158 shares of common stock to the Series B Holder at a price basis of $0.76 and $0.30. These shares were issued pursuant to Section 4(e) of the Securities Purchase Agreement of the Series B Agreement, the Holder’s consent to such to the Offering shall be deemed as received by the Company if the Holder receive at the closing of such Offering 10% of the amount of the capital raised by the Company to be paid, in the Company’s discretion, in cash or the same securities issued by the Company. The shares of common stock were issued in reliance upon the exemption from the registration requirements in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.
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Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
All other exhibits for which no other filing information is given are filed herewith.
# Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. Such information is both not material and is the information that the registrant customarily and actually treats as private or confidential. The omitted information is identified in the exhibit with brackets and “**”.
* Submitted electronically herewith. Attached as Exhibit 101 are the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in eXtensible Business Reporting Language (XBRL) and tagged as blocks of text and including detailed tags: (i) Condensed Consolidated Balance Sheets at March 31, 2023 and December 31, 2022; (ii) Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022; (iii) Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022; and (iv) related notes.
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SIGNATURES
Pursuant to the requirements 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: May 15, 2023 |
By: | /s/ John Belizaire |
John Belizaire Chief Executive Officer | ||
| By: | /s/ David Michaels | |
David Michaels Chief Financial Officer | ||
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Exhibit 4.17
EXHIBIT B1
CLASS A
COMMON STOCK PURCHASE WARRANT
Soluna Holdings, INC.
| Warrant Shares: _______ | Issue Date: May [*], 2023 |
| Initial Exercise Date: November [*], 2023 |
THIS CLASS A 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 set forth above (the “Initial Exercise Date”) and on or prior to 5:00 p.m. (New York City time) on ______________1 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Soluna Holdings, Inc., a Delaware 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 Securities Purchase Agreement (the “Purchase Agreement”), dated December 5, 2022, among the Company and the purchasers signatory thereto.
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 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 Warrant 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 as soon as reasonably practicable following 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) Trading Day of receipt of such notice. 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.
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b) Exercise Price. The exercise price per share of Common Stock under this Warrant shall be $0.50, 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 issuance or resale of the Warrant Shares to or 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) 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. 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; | |
| (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. |
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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 registered 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 L.P. (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 holders 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 L.P. (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 holders 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.
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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) this Warrant is being exercised via cashless exercise, 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 by the Warrant Share Delivery Date. 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 the Warrant Share Delivery Date) 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.
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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 (subject to receipt of the aggregate exercise price for the applicable exercise (other than in the case of a cashless exercise)), 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.
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. In addition to the beneficial ownership limitations provided in this Warrant, prior to obtaining Shareholder Approval, the sum of the number of shares of Common Stock that may be issued under this Warrant shall be limited to 19.9% of the issued and outstanding shares of Common Stock of the Company at the Initial Closing, less any Shares issued at the Initial Closing and at the Subsequent Closings and Warrant Shares previously issued. The Share Issuance Limitation shall be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split (including forward and reverse), or other similar transaction. The limitations contained in this Section 2(e) shall apply to a successor holder of this Warrant.
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Section 3. Certain Adjustments.
a) Adjustment Upon Issuance of Shares of Common Stock. If and whenever on or after the date hereof, including at Subsequent Closings, the Company issues or sells, or in accordance with this Section 3 is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding any Exempt Issuance issued or sold or deemed to have been issued or sold) for a consideration per share (the “New Issuance Price”) less than a price equal to the Exercise Price in effect immediately prior to such issue or sale or deemed issuance or sale (such Exercise Price then in effect is referred to as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the Exercise Price then in effect shall be reduced to the New Issuance Price. For all purposes of the foregoing (including, without limitation, determining the adjusted Exercise Price and consideration per share under this Section 3(e)), the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants or sells any options (other than options that qualify as Exempt Issuances) and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such option or upon conversion, exercise or exchange of any Common Stock Equivalents issuable upon exercise of any such option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such option for such price per share. For purposes of this Section 3(a)(i), the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such options or upon conversion, exercise or exchange of any Common Stock Equivalents issuable upon exercise of any such option” shall be equal to (1) the lower of (x) the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of such option, upon exercise of such option and upon conversion, exercise or exchange of any Common Stock Equivalent issuable upon exercise of such option and (y) the lowest exercise price set forth in such option for which one share of Common Stock is issuable upon the exercise of any such options or upon conversion, exercise or exchange of any Common Stock Equivalents issuable upon exercise of any such option minus (2) the sum of all amounts paid or payable to the holder of such option (or any other Person) upon the granting or sale of such option, upon exercise of such Option and upon conversion, exercise or exchange of any Common Stock Equivalent issuable upon exercise of such option plus the value of any other consideration received or receivable by, or benefit conferred on, the holder of such option (or any other Person). Except as contemplated below, no further adjustment of the Exercise Price shall be made upon the actual issuance of such shares of Common Stock or of such Common Stock Equivalents upon the exercise of such options or upon the actual issuance of such shares of Common Stock upon conversion, exercise or exchange of such Common Stock Equivalents.
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(ii) Issuance of Common Stock Equivalents. If the Company in any manner issues or sells any Common Stock Equivalents (other than Common Stock Equivalents that qualify as Exempt Issuances) and the lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Common Stock Equivalents for such price per share. For the purposes of this Section 3(a)(ii), the “lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange thereof” shall be equal to (1) the lower of (x) the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the Common Stock Equivalent and upon conversion, exercise or exchange of such Common Stock Equivalent and (y) the lowest conversion price set forth in such Common Stock Equivalent for which one share of Common Stock is issuable upon conversion, exercise or exchange thereof minus (2) the sum of all amounts paid or payable to the holder of such Common Stock Equivalent (or any other Person) upon the issuance or sale of such Common Stock Equivalent plus the value of any other consideration received or receivable by, or benefit conferred on, the holder of such Common Stock Equivalent (or any other Person). Except as contemplated below, no further adjustment of the Exercise Price shall be made upon the actual issuance of such shares of Common Stock upon conversion, exercise or exchange of such Common Stock Equivalents, and if any such issue or sale of such Common Stock Equivalents is made upon exercise of any options for which adjustment of this Warrant has been or is to be made pursuant to other provisions of this Section 3(a), except as contemplated below, no further adjustment of the Exercise Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any options, the additional consideration, if any, payable upon the issue, conversion, exercise or exchange of any Common Stock Equivalents, or the rate at which any Common Stock Equivalents are convertible into or exercisable or exchangeable for shares of Common Stock increases or decreases at any time, the Exercise Price in effect at the time of such increase or decrease shall be adjusted to the Exercise Price which would have been in effect at such time had such options or Common Stock Equivalents provided for such increased or decreased purchase price, additional consideration or increased or decreased conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 3(a)(iii), if the terms of any option or Common Stock Equivalent that was outstanding as of the date of issuance of this Warrant are increased or decreased in the manner described in the immediately preceding sentence, then such option or Common Stock Equivalent and the shares of Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such increase or decrease.
No adjustment pursuant to this Section 3(a) shall be made if such adjustment would result in an increase of the Exercise Price then in effect.
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b) Calculation of Consideration Received. If any option and/or Common Stock Equivalent is issued in connection with the issuance or sale or deemed issuance or sale of any other securities of the Company (as determined by the Holder, the “Primary Security”, and such option and/or Common Stock Equivalent, the “Secondary Securities”), together comprising one integrated transaction, the consideration per share of Common Stock with respect to such Primary Security shall be deemed to be equal to the difference of (x) the lowest price per share for which one share of Common Stock was issued in such integrated transaction (or was deemed to be issued pursuant to Section 3(a)(i) or 3(a)(ii) above, as applicable) solely with respect to such Primary Security, minus (y) with respect to such Secondary Securities, the sum of (I) the Black Scholes Consideration Value of each such option, if any, and (II) the fair market value (as determined by the Holder) of such Common Stock Equivalent, if any, in each case, as determined on a per share basis in accordance with this Section 3(b). If any shares of Common Stock, options or Common Stock Equivalents are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor (for the purpose of determining the consideration paid for such Common Stock, option or Common Stock Equivalent, but not for the purpose of the calculation of the Black Scholes Consideration Value) will be deemed to be the net amount of consideration received by the Company therefor. If any shares of Common Stock, options or Common Stock Equivalents are issued or sold for a consideration other than cash (for the purpose of determining the consideration paid for such Common Stock, option or Common Stock Equivalent, but not for the purpose of the calculation of the Black Scholes Consideration Value), the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of publicly traded securities, in which case the amount of consideration received by the Company for such securities will be the arithmetic average of the VWAPs of such security for each of the five (5) Trading Days immediately preceding the date of receipt. If any shares of Common Stock, options or Common Stock Equivalents are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity (for the purpose of determining the consideration paid for such Common Stock, option or Common Stock Equivalent, but not for the purpose of the calculation of the Black Scholes Consideration Value), the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such shares of Common Stock, options or Common Stock Equivalents, as the case may be. The fair value of any consideration other than cash or publicly traded securities (for the purpose of determining the consideration paid for such Common Stock, option or Common Stock Equivalent, but not for the purpose of the calculation of the Black Scholes Consideration Value) will be determined jointly by the Company and the Holder. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such consideration will be determined within five (5) Trading Days after the tenth (10th) day following such Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Holder. The determination of such appraiser shall be final and binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.
c) 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(c) 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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d) Subsequent Rights Offering. If the Company, at any time while the Warrant is outstanding, shall issue rights, options or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock (the “Purchase Rights”), then, upon any exercise of this Warrant, the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights that the Holder could have acquired if the Holder had held the number of Warrant Shares issued upon such exercise of this Warrant 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, 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). For the term of the Warrant, the Company shall hold such Purchase Rights for the benefit of the Holder until the Holder exercises this Warrant or any portion thereof.
e) Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (a “Distribution”), then, upon any exercise of this Warrant, 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 Warrant Shares issued upon such exercise of this Warrant immediately before the date on which a record is taken for such Warrant, 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. For the term of the Warrant, the Company shall hold such Distribution for the benefit of the Holder until the Holder exercises this Warrant or any portion thereof.
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f) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company (and all of its Subsidiaries, taken as a whole), 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, 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. 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(d) 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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g) 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.
h) 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 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 (and all of its Subsidiaries, taken as a whole) is a party, any sale or transfer of all or substantially all of the assets of the Company, 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 email to the Holder at its last 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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i) Voluntary Adjustment By Company. Subject to the rules and regulations of the Trading Market, the Company may at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the board of directors of the Company.
Section 4. Transfer of Warrant.
a) Transferability. 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 Issue Date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
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c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company 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.
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.
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 reasonable 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).
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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.
e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement.
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 Purchase Agreement, 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.
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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 Purchase Agreement.
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.
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.
********************
(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 as of the date first above indicated.
Soluna Holdings , inc. |
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| By: | ||
| Name: | ||
Title: |
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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:
_______________________________
_______________________________
_______________________________
[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
| Name: | |
| (Please Print) | |
| Address: | |
| (Please Print) | |
| Phone Number: | |
| Email Address: | |
| Dated: _______________ __, ______ | |
| Holder’s Signature:__________________________ | |
| Holder’s Address:___________________________ |
Exhibit 4.18
EXHIBIT B2
CLASS B
COMMON STOCK PURCHASE WARRANT
Soluna Holdings, INC.
| Warrant Shares: _______ | Issue Date: May [*], 2023 |
| Initial Exercise Date: November [*], 2023 |
THIS CLASS B 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 set forth above (the “Initial Exercise Date”) and on or prior to 5:00 p.m. (New York City time) on ______________1 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Soluna Holdings, Inc., a Delaware 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 Securities Purchase Agreement (the “Purchase Agreement”), dated December 5, 2022, among the Company and the purchasers signatory thereto.
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 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 Warrant 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 as soon as reasonably practicable following 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) Trading Day of receipt of such notice. 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.
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b) Exercise Price. The exercise price per share of Common Stock under this Warrant shall be $0. 80, 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 issuance or resale of the Warrant Shares to or 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) 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. 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; | |
| (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. |
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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 registered 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 L.P. (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 holders 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 L.P. (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 holders 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.
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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) this Warrant is being exercised via cashless exercise, 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 by the Warrant Share Delivery Date. 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 the Warrant Share Delivery Date) 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.
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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 (subject to receipt of the aggregate exercise price for the applicable exercise (other than in the case of a cashless exercise)), 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.
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. In addition to the beneficial ownership limitations provided in this Warrant, prior to obtaining Shareholder Approval, the sum of the number of shares of Common Stock that may be issued under this Warrant shall be limited to 19.9% of the issued and outstanding shares of Common Stock of the Company at the Initial Closing, less any Shares issued at the Initial Closing and at the Subsequent Closings and Warrant Shares previously issued. The Share Issuance Limitation shall be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split (including forward and reverse), or other similar transaction. The limitations contained in this Section 2(e) shall apply to a successor holder of this Warrant.
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Section 3. Certain Adjustments.
a) Reserved.
b) Reserved.
c) 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(c) 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.
d) Subsequent Rights Offering. If the Company, at any time while the Warrant is outstanding, shall issue rights, options or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock (the “Purchase Rights”), then, upon any exercise of this Warrant, the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights that the Holder could have acquired if the Holder had held the number of Warrant Shares issued upon such exercise of this Warrant 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, 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). For the term of the Warrant, the Company shall hold such Purchase Rights for the benefit of the Holder until the Holder exercises this Warrant or any portion thereof.
e) Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (a “Distribution”), then, upon any exercise of this Warrant, 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 Warrant Shares issued upon such exercise of this Warrant immediately before the date on which a record is taken for such Warrant, 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. For the term of the Warrant, the Company shall hold such Distribution for the benefit of the Holder until the Holder exercises this Warrant or any portion thereof.
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f) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company (and all of its Subsidiaries, taken as a whole), 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, 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. 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(d) 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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g) 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.
h) 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 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 (and all of its Subsidiaries, taken as a whole) is a party, any sale or transfer of all or substantially all of the assets of the Company, 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 email to the Holder at its last 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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i) Voluntary Adjustment By Company. Subject to the rules and regulations of the Trading Market, the Company may at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the board of directors of the Company.
Section 4. Transfer of Warrant.
a) Transferability. 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 Issue Date of this Warrant 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 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.
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.
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.
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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 reasonable 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 shall be determined in accordance with the provisions of the Purchase Agreement.
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 Purchase Agreement, 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 Purchase Agreement.
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.
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.
********************
(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 as of the date first above indicated.
| Soluna Holdings , inc. | ||
| By: | ||
| Name: | ||
| Title: | ||
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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:
_______________________________
_______________________________
_______________________________
[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
| Name: | |
| (Please Print) | |
| Address: | |
| (Please Print) | |
| Phone Number: | |
| Email Address: | |
| Dated: _______________ __, ______ | |
| Holder’s Signature:_____________________ | |
| Holder’s Address:______________________ |
Exhibit 10.70
SECOND AMENDMENT AGREEMENT
THIS SECOND AMENDMENT AGREEMENT, dated as of May 11, 2023, (this “Agreement”), is by and among and each purchaser identified on Schedule A hereto (each, including its successors and permitted assigns, a “Purchaser” and collectively, the “Purchasers”), and Soluna Holdings, Inc. (f/k/a Mechanical Technology, Incorporated), a Nevada corporation (the “Company” and together with the Purchasers each a “Party” and collectively the “Parties”).
W I T N E S S E T H:
WHEREAS, the Company and Purchasers entered into a Securities Purchase Agreement dated October 25, 2021 (the “SPA”), pursuant to which the Company issued to the Purchaser, as set forth on Schedule A, secured convertible notes in the original aggregate principal amount of $16,304,348 (collectively, the “Notes”), Class A, Class B and Class C common stock purchase warrants (collectively, the “Warrants”) to purchase up to an aggregate of 1,776,073 shares of Common Stock. Capitalized Terms not defined herein shall have the meaning set forth in the SPA and other Transaction Documents (as defined in the SPA);
WHEREAS, on July 19, 2022, the Parties entered into an Addendum (the “Addendum”) to memorialize certain agreements between the Parties;
WHEREAS, the Company and the Purchasers entered into an Addendum dated July 19, 2022, which was subsequently amended by the Addendum Amendment dated September 13, 2022 and Second Addendum Amendment dated March 10, 2023;
WHEREAS, on April 24, 2023, the Parties entered into an Extension Agreement (the “Extension”) to memorialize certain agreements between the Parties;
NOW THEREFORE, in consideration of the mutual benefits accruing to Parties hereunder and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows:
AGREEMENTS
1. Notes Amendments. The Maturity Date of the Notes is extended one year to July 25, 2024, and the Principal Amount of each of the Notes shall be increased by fourteen percent (14%) set forth on Schedule A, effect as of the date of this Agreement.
2. New Warrants. The Company will issue 6,000,000 new Class A warrants exercisable at $0.50 and 2,000,000 new Class B warrants exercisable at $0.80 to the Purchasers in the amounts set forth on Schedule A in the form annexed hereto as Exhibit B.
3. Extension Fee. The Company will pay the Purchasers an extension fee of $250,000.00 as set forth on Schedule A. This Document shall be a Joint Instruction to the Escrow Agent under the September 29, 2022, escrow agreement, to release the funds set forth on Schedule A to the Purchasers pursuant to instructions provided by each Purchaser for its portion.
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4. Mandatory Conversion. Subject to the Equity Conditions, upon each trigger set forth below, Company shall be allowed, once per trigger require the Noteholders to convert up to 20% percent of the outstanding amount of the Notes:
| (i) | the Company’s Common Stock trades on its Principal Market for 10 consecutive days at or above $0.50 per share and at least 1,000,000 shares trade on each day. |
| (ii) | the Company’s Common Stock trades on its Principal Market for 10 consecutive days at or above $0.70 per share and at least 1,000,000 shares trade on each day. |
| (iii) | the Company’s Common Stock trades on its Principal Market for 10 consecutive days at or above $0.90 per share and at least 1,000,000 shares trade on each day. |
As used in this section Equity Conditions shall mean that all of the following conditions have been met: (i) the shares of Common Stock issuable upon the conversion are either registered or resellable under Rule 144 without any volume restrictions, (ii) the number of shares issuable to each Purchaser are below the Beneficial Ownership Limitation, (iii) at least 20 Trading Days has elapsed since the previous mandatory conversion, (iv) the Company is current in all the SEC filings, and (v) the Company has obtained all required approvals from NASDAQ, or any successor Trading Market, to list the Common Stock to be issued upon such conversion.
5. Understanding regarding NASDAQ Limitations on Future Priced Securities. Purchasers and Company acknowledge that the number of shares of Common Stock issuable under the Notes is limited to the number of shares issuable at a $.30 per share minimum conversion price under applicable NASDAQ rules (“Issuable Shares Limitation”). Company agrees that the Conversion Price of the Notes pursuant to the Addendum will be at the formula price reflected in the Addendum but any conversions under the Addendum at a price below $.30 per share shall not increase the Issuable Shares Limitation.
6. Prepayment. Upon 10 days prior written notice, during which such time the Noteholder will be allowed to convert all or a portion of its Note, Company will be permitted to prepay up to 30% of the outstanding amount of the Notes at an amount equal 120% of the portion of the Notes being prepaid. Such prepayment must be made pro rata to all the Notes.
7. Public Disclosure. Within one (1) business day after execution of this Agreement, the Company shall file a form 8-K with the Securities and Exchange Commission, disclosing this Agreement, which shall be an exhibit to such filing. The Company shall also file additional form 8-Ks within one (1) Trading Day after the Second Reset and Third Reset.
8. Event of Default. A breach of the terms of this Agreement shall be an Event of Default under the Notes.
9. Representations. The Company warrants and represents that all the warranties and representations of the Company set forth in the Transaction Documents are true and accurate in all material respects as of the date of this Agreement and will be as of the Approval Date, First Reconcile Date and Second Reconcile Date. This Agreement shall be included in the definition of “Transaction Documents” in the SPA.
10. Fees. The Company shall pay $20,000.00 to Grushko & Mittman, P.C. (“G&M”) for its fees and expenses incurred in connection with the transactions contemplated hereby. This Document shall be a Joint Instruction to the Escrow Agent under the September 29, 2022, escrow agreement, to release the fees set forth in this paragraph to G&M from the Escrowed Funds.
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11. Governing Law; Jurisdiction; Waiver of Jury Trial. (a) This Agreement shall be governed by and construed under the laws of the State of New York applicable to contracts made and to be performed entirely within the State of New York. Each Party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the State and County of New York for the adjudication of any dispute hereunder or in connection herewith or therewith or with any transaction contemplated hereby or thereby, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (b) EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES AND AGREES THAT ANY DISPUTE OR CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE BREACH, TERMINATION OR VALIDITY OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS AGREEMENT AND HAS HAD AN OPPORTUNITY TO SEEK SEPARATE COUNSEL OF ITS OWN CHOICE TO REVIEW THIS AGREEMENT, (III) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
12. Injunctive Relief. Each Party acknowledges and agrees that a breach by it of its obligations hereunder will cause irreparable harm to the other and that the remedy or remedies at law for any such breach will be inadequate and agrees, in the event of any such breach, in addition to all other available remedies, the non-breaching party shall be entitled to an injunction restraining any breach and requiring immediate and specific performance of such obligations without the necessity of showing economic loss or the posting of any bond.
13. Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that in such case the parties shall negotiate in good faith to replace such provision with a new provision which is not illegal, unenforceable or void, as long as such new provision does not materially change the economic benefits of this Agreement to the Parties.
14. Independent Nature of Purchasers’ Obligations and Rights. The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance or non-performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Purchaser shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in its review and negotiation of the Transaction Documents. For reasons of administrative convenience only, each Purchaser and its respective counsel have chosen to communicate with the Company through G&M. The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by any of the Purchasers. It is expressly understood and agreed that each provision contained in this Agreement and in each other Transaction Document is between the Company and a Purchaser, solely, and not between the Company and the Purchasers collectively and not between and among the Purchasers.
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15. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Delivery of executed counterparts of this Agreement by facsimile or other electronic format (including via .pdf and DocuSign) shall be effective as an original.
16. Notices. All notices shall be delivered in accordance with the notice provisions of the SPA and Security Agreement.
17. Entire Agreement; Amendments. This Agreement constitutes the entire agreement between the parties with regard to the subject matter hereof and thereof, superseding all prior agreements or understandings, whether written or oral, between or among the parties. Except as specifically modified herein, the Transaction Documents including the Addendum remain in full force and effect without any waivers or modifications. No amendment, modification or other change to this Agreement or waiver of any agreement or other obligation of the parties under this Agreement may be made or given unless such amendment, modification or waiver is set forth in writing and is signed by the Parties. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. As used in this Agreement, any consent of the Purchasers shall be determined in accordance with the terms of the SPA.
[Signatures begin on next page]
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IN WITNESS WHEREOF, the parties have caused this Addendum Amendment to be duly executed as of the day and year first above written.
COMPANY
| Soluna Holdings, Inc. | |
| By: | |
| Its: |
PURCHASERS
| ALPHA CAPITAL ANSTALT | SUPEREIGHT CAPITAL HOLDINGS LTD. | |||
| By: | By: | |||
| Name: | Name: | |||
| Title: | Title: | |||
| 3I, LP | |||
| By: | |||
| Name: | XINIU NIE | ||
| Title: | |||
| AJF Consulting | |||
| By: | |||
| Name: | YI HUA CHEN | ||
| Title: | |||
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Schedule A
| Purchaser | Notes Balance Pre-Addendum Sep 2022 | Pre-Increase Principal Amount of Notes | 14% Increase | New Principal | New A Warrants | New B Warrants | Extension fee | |||||||||||||||||||||
| Alpha Capital Anstalt | $ | 7,879,602.00 | $ | 7,311,715 | $ | 1,023,640 | $ | 8,335,355 | 3,761,918 | 1,253,972 | $ | 156,747.00 | ||||||||||||||||
| Supereight Capital Holdings Ltd. | $ | 165,370.00 | $ | 168,930 | $ | 23,650 | $ | 192,580 | 86,915 | 28,972 | $ | 3,621.00 | ||||||||||||||||
| AJF Consulting | $ | 249,740.00 | $ | 125,646 | $ | 17,590 | $ | 143,236 | 64,645 | 21,548 | $ | 2,693.00 | ||||||||||||||||
| 3i | $ | 3,192,112.00 | $ | 3,014,813 | $ | 422,074 | $ | 3,436,887 | 1,551,138 | 517,046 | $ | 64,631.00 | ||||||||||||||||
| Xiniu Nie | $ | 599,373.00 | $ | 624,347 | $ | 87,409 | $ | 711,756 | 321,230 | 107,077 | $ | 13,385.00 | ||||||||||||||||
| Yi Hua Chen | $ | 399,584.00 | $ | 416,233 | $ | 58,273 | $ | 474,506 | 214,154 | 71,385 | $ | 8,923.00 | ||||||||||||||||
| Total | $ | 12,485,781.00 | $ | 11,661,684 | $ | 1,632,636 | $ | 13,294,320 | 6,000,000 | 2,000,000 | $ | 250,000.00 | ||||||||||||||||
Exhibit B1 and B2
[Form of Warrants]
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Exhibit 10.71
Execution Version
CONTRIBUTION AGREEMENT
By and Among
Navitas West Texas Investments SPV, LLC,
Soluna Computing, Inc.
and
Soluna DV ComputeCo, LLC
Dated as of May 9, 2023
|
| ARTICLE I DEFINITIONS | 1 | |
| Section 1.1 | Definitions | 1 |
| Section 1.2 | Interpretation | 8 |
| ARTICLE II CLOSING; INVESTMENT IN DV | 9 | |
| Section 2.1 | Agreement to Invest; Capital Commitment | 9 |
| Section 2.2 | Capital Contribution | 9 |
| Section 2.3 | Tax Characterization | 10 |
| Section 2.4 | Closing; Fundings | 10 |
| ARTICLE III THE PROJECT; PROJECT DEVELOPMENT AND FINANCING | 11 | |
| Section 3.1 | The Project Company | 11 |
| Section 3.2 | Project Development | 11 |
| ARTICLE IV CONDITIONS TO CLOSING AND FUNDINGS | 12 | |
| Section 4.1 | Closing Conditions | 12 |
| Section 4.2 | Conditions to Each Subsequent Contribution | 13 |
| ARTICLE V COVENANTS | 13 | |
| Section 5.1 | Conduct of Operations | 13 |
| Section 5.2 | Access to Information | 13 |
| ARTICLE VI REPRESENTATIONS AND WARRANTIES AS TO DV | 13 | |
| Section 6.1 | Organization and Validity | 13 |
| Section 6.2 | Pending Litigation | 14 |
| Section 6.3 | Title to Properties | 14 |
| Section 6.4 | Governmental Consent | 14 |
| Section 6.5 | Taxes | 15 |
| Section 6.6 | Full Disclosure | 15 |
| Section 6.7 | Subsidiaries | 15 |
| Section 6.8 | Investments, Guarantees, Contracts, etc. | 15 |
| Section 6.9 | Government Regulations, etc. | 15 |
| Section 6.10 | Business Interruptions | 16 |
| Section 6.11 | Names and Intellectual Property | 16 |
| Section 6.12 | Other Associations | 16 |
| Section 6.13 | Environmental Matters | 16 |
| Section 6.14 | Capital Stock | 17 |
| Section 6.15 | Solvency | 17 |
| Section 6.16 | Anti-Terrorism Laws | 17 |
| ARTICLE VII REPRESENTATIONS AND WARRANTIES AS TO INVESTOR | 18 | |
| Section 7.1 | Navitas | 18 |
| Section 7.2 | Parent | 20 |
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| ARTICLE VIII INDEMNIFICATION | 23 | |
| Section 8.1 | Indemnification | 23 |
| Section 8.2 | Third Party Claims | 24 |
| Section 8.3 | Indemnification Payments | 24 |
| Section 8.4 | Tax Treatment | 25 |
| Section 8.5 | Indemnified Party Negligence or Misconduct; Breach | 25 |
| Section 8.6 | No Consequential Damages | 25 |
| ARTICLE IX MISCELLANEOUS | 25 | |
| Section 9.1 | Amendments | 25 |
| Section 9.2 | Notices | 26 |
| Section 9.3 | Binding Effect; Assignment | 26 |
| Section 9.4 | No Finder’s Fees | 26 |
| Section 9.5 | Entire Agreement | 26 |
| Section 9.6 | Delay and Waiver | 27 |
| Section 9.7 | Severability | 27 |
| Section 9.8 | Governing Law; Jurisdiction and Service of Process | 27 |
| Section 9.9 | Patriot Act | 27 |
| Section 9.10 | Further Assurances | 27 |
| Section 9.11 | Counterpart; Electronic Signatures | 27 |
| EXHIBITS | |
| Exhibit A – Form of Contribution Request | |
| SCHEDULES | |
| Schedule 1 – Insurance | |
| Schedule 6.2 – Litigation | |
| Schedule 6.7 – Subsidiaries | |
| Schedule 6.8(a) – Investments and Loans | |
| Schedule 6.8(b) – Leases | |
| Schedule 6.14 – Capital Stock | |
| Schedule 7.2(e) – Consents |
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CONTRIBUTION AGREEMENT
This CONTRIBUTION AGREEMENT (this “Agreement”) is made and entered into as of May 9, 2023 (the “Effective Date”), by and among Soluna Computing, Inc., a Nevada corporation (“Parent”), Soluna DV ComputeCo, LLC, a Delaware limited liability company (“DV”), and Navitas West Texas Investments SPV, LLC, a Delaware limited liability company (“Navitas”, and together with the Parent and DV, the “Parties”).
| A. | Prior to the execution and delivery of this Agreement, Parent was the sole 100% owner of DV. | |
| B. | Simultaneously with the execution and delivery of this Agreement, Parent and Navitas have entered into the DV Operating Agreement. | |
| C. | Navitas desires to purchase, and the parties desire to cause DV to issue and sell to Navitas Membership Interests in DV on the terms set forth herein and in the DV Operating Agreement. |
NOW THEREFORE, in consideration of the agreements contained herein, the sufficiency of which is hereby acknowledged, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. Terms capitalized herein other than for grammatical reasons and not otherwise defined shall have the meaning established in this Article I. Such terms not defined herein shall have the meanings established in the DV Operating Agreement. “Administrative Services Agreement” means the Administrative Services Contract between the Asset Administrator and DV, dated as of the date hereof, and as the same may be amended or supplemented from time to time.
“Affiliate” means, with respect to any Person, (a) any Person which, directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person, or (b) any Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person, or (iii) any person described in clause (a) above. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (x) to vote 10% or more of the Capital Stock having ordinary voting power for the election of directors (or comparable equivalent) of such Person, or (y) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Control may be by ownership, contract, or otherwise.
“Aggregate Commitment Amount” means the Navitas Commitment.
“Agreement” means this Agreement, as it may be amended from time to time.
“Anti-Terrorism Laws” means any United States statute, treaty, law (including common law), ordinance, regulation, rule, order, opinion, release, injunction, writ, decree or award of any United States Governmental Authority relating to terrorism or money laundering, including Executive Order No. 13224 and the USA Patriot Act.
“Approved Uses” means (a) procurement of miners for the Project and (b) cash collateral backing letters of credit provided with respect to the Project.
“Asset Administrator” means POCo in its capacity as the asset administrator, its successors or permitted assigns, in each case, pursuant to the Administrative Services Agreement.
“Business Day” means any day other than a Saturday, a Sunday or any day that commercial banks in New York, New York are not authorized or required to be closed.
“Capital Commitment Expiration Date” means March 31, 2024.
“Capital Stock” means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all other ownership interests in a Person (including limited liability company membership interests) and any and all warrants or options to purchase any of the foregoing.
“Capitalized Lease Obligations” means any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, consistently applied.
“Closing” means the parties hereto and thereto have duly executed and delivered this Agreement and the other Transaction Documents and the conditions to the First Contribution have been satisfied or waived and the First Contribution has been made.
“Commercial Operation” means, with respect to a Project, that the Project has commenced operating commercially in the manner intended and in accordance with the EPC Agreement.
“Contract” means any agreement, instrument, mortgage, other evidence of indebtedness, license, lease or arrangement of any kind, written or oral, by which a Person is bound under which it has rights.
“Contractor” or “EPC Contractor” means, with respect to the EPC Agreement, the Person identified as such therein, who shall initially be POCo.
“Contribution Date” has the meaning established in Section 2.4(b).
“Contribution Request” means a written request delivered by DV to Parent and Navitas to make a Subsequent Contribution, in the form attached hereto as Exhibit A with appropriate insertions.
“Defense Election” has the meaning established in Section 8.2(b).
“DV” has the meaning established in the preamble.
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“DV Interests” has the meaning established in Section 3.1(a).
“DV Operating Agreement” means the Limited Liability Company Operating Agreement of DV, between Parent and Navitas, dated as of the Effective Date.
“Effective Date” has the meaning established in the preamble.
“Environmental Laws” means any and all federal, foreign, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees and any and all common law requirements, rules and bases of liability regulating, relating to or imposing liability or standards of conduct concerning pollution, protection of the environment, or the impact of pollutants, contaminants or toxic or hazardous substances on human health or the environment, as now or may at any time hereafter be in effect.
“EPC Agreement” means, for the Project, an engineering, procurement and construction contract between the Contractor and DV for the construction and installation of the Project, in a form reasonably acceptable to Navitas, as the same may be amended or supplemented from time to time.
“Executive Order No. 13224” means the Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, as the same has been, or shall hereafter be, renewed, extended, amended or replaced.
“Final Completion” means, in respect of the Project, that the Contractor has satisfied all obligations under the EPC Agreement in accordance with the EPC Agreement.
“Financing Documents” means the “Loan Documents” under and as defined in that certain Loan and Security Agreement, by and between DV and Navitas West Texas Investments SPV, LLC, dated as of the date hereof.
“First Contribution” means Navitas’s initial Contribution to DV in the aggregate amount of $4,500,000.
“GAAP” means the generally accepted accounting principles in the United States of America, as then in effect.
“Governmental Authority” means any federal, state or local government or political subdivision, or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury, or arbitration.
“Hazardous Substances” means any substances defined or designated as hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance or similar term, under any Environmental Law.
“Indebtedness” means, of any Person at any date, all liabilities of such Person, including without duplication (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, (ii) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (iii) all accounts payable and Capitalized Lease Obligations of such Person, (iv) the face amount of all letters of credit issued for the account of such Person and all drafts drawn thereunder, (v) all obligations of other Persons which such Person has guaranteed, and (v) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof.
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“Indemnification Notice” has the meaning established in Section 8.2(a).
“Indemnified Claims” has the meaning established in Section 8.1(b).
“Indemnified Costs” has the meaning established in Section 8.1(b).
“Indemnified Parties” has the meaning established in Section 8.1(b).
“Indemnifying Party” means either a Parent Indemnifying Party or an Investor Indemnifying Party.
“Investor Indemnified Claims” has the meaning established in Section 8.1(a).
“Investor Indemnified Costs” has the meaning established in Section 8.1(a).
“Investor Indemnified Parties” has the meaning established in Section 8.1(a).
“Investor Indemnifying Party” has the meaning established in Section 8.1(b).
“Laws” means all laws, statutes, directives, codes, resolutions, enactments, treaties, ordinances, judgments, decrees, injunctions, writs and orders of any Governmental Authority and rules, regulations, orders, interpretations and approvals in respect thereof.
“Lessor” means POCo.
“Lien” means any interest of any kind or nature in property securing an obligation owed to, or a claim of any kind or nature in property by, a Person other than the owner of the Property, whether such interest is based on the common law, statute, regulation or contract.
“Material Adverse Effect” means, (a) with respect to DV, a material adverse change in, or material adverse effect on the business, operations, Properties, liabilities or financial condition of such Person; (b) a material adverse change in, or material adverse effect on (i) with respect to DV, the ability of such Person to perform any of its material obligations under this Agreement; or (ii) the validity or enforceability of this Agreement; except, in each case, to the extent that such change or effect results from events or conditions affecting the economy generally (provided that such events or conditions do not affect such Person and its subsidiaries, taken as a whole, in a disproportionate manner relative to similarly situated participants in the market or markets in which such Person operates, if any similarly situated participants then exist).
“Membership Interests” has the meaning established in the DV Operating Agreement.
“Navitas” has the meaning established in the preamble.
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“Navitas Commitment” means $11,750,621.52, comprised of $10,808,823.52 in exchange for 49% of the Membership Interests in DV and Navitas’ ratable portion of cash collateral equal to $941,797.00.
“O&M Agreement” means the operations and maintenance agreement between DV and O&M Provider for the operation and maintenance of the Project, in a form reasonably acceptable to Navitas, as the same may be amended or supplemented from time to time.
“O&M Provider” means POCo in its capacity as operator, or its successors or permitted assigns, in each case, pursuant to the O&M Agreement.
“Parent” means Soluna Computing, Inc., a Nevada corporation.
“Parent Indemnified Claims” has the meaning established in Section 8.1(b).
“Parent Indemnified Costs” has the meaning established in Section 8.1(b).
“Parent Indemnified Parties” has the meaning established in Section 8.1(b).
“Parent Indemnifying Party” has the meaning established in Section 8.1(a).
“Parent Parties” means, individually and collectively, Parent and its wholly owned direct or indirect subsidiaries, or any of its Affiliates.
“Patriot Act” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, P.L. 107-56.
“Permitted Indebtedness” means (a) Indebtedness incurred pursuant to the Loan Documents; (b) trade payables incurred in the ordinary course of DV’s business; (c) endorsement of instruments or other payment items for deposit; (d) Indebtedness incurred in the ordinary course of business under performance, surety, statutory, or appeal bonds; (e) Indebtedness owed to any Person providing property, casualty, liability, worker’s compensation, health, disability or other employee benefits insurance, or other insurance to DV, so long as the amount of such Indebtedness is not in excess of the amount of the unpaid cost of, and shall be incurred only to defer the cost of, such insurance for the year in which such Indebtedness is incurred and such Indebtedness is outstanding only during such year; and (f) Indebtedness incurred in the ordinary course of business in respect of credit cards, credit card processing services, debit cards, or cash management services, provided that such Indebtedness shall not exceed Twenty-Five Thousand Dollars ($25,000) in the aggregate at any one time.
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“Permitted Lien” means (a) Liens securing taxes, assessments or governmental charges or levies not yet due; (b) Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance, social security and other like laws; (c) Liens on fixed assets secured by purchase money Indebtedness permitted under this Agreement; provided that, (i) such Lien attached to such assets concurrently, or within 20 days of the acquisition thereof, and only to the assets so acquired, and (ii) a description of the asset acquired is furnished to Navitas; (d) Liens securing DV’s obligations under the Financing Documents; (e) judgment Liens arising solely as a result of the existence of judgments, orders, or awards that do not constitute an “Event of Default” under the Financing Documents; (f) the interests of lessors under operating leases and non-exclusive licensors under license agreements; (g) Liens on cash amounts deposited to secure DV’s obligations in connection with worker’s compensation or other unemployment insurance; (h) Liens on amounts deposited to secure the DV’s obligations in connection with the making or entering into of bids, tenders, or leases in the ordinary course of business and not in connection with the borrowing of money; (i) Liens on amounts deposited to secure DV’s reimbursement obligations with respect to appeal bonds obtained in the ordinary course of business, provided that, such amounts shall not exceed Fifty Thousand Dollars ($50,000) in the aggregate at any one time; (i) with respect to any real property, easements, rights of way, and zoning restrictions that do not materially interfere with or impair the use or operation thereof; (k) non-exclusive licenses of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of business; (1) rights of setoff or bankers’ liens upon deposits of funds in favor of banks or other depository institutions, solely to the extent incurred in connection with the maintenance of such deposit accounts in the ordinary course of business; (m) Liens granted in the ordinary course of business on the unearned portion of insurance premiums securing the financing of insurance premiums to the extent the financing is permitted under the definition of Permitted Indebtedness; and (n) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods.
“Person” means an individual, partnership, corporation, trust, limited liability company, limited liability partnership, unincorporated association or organization, joint venture or any other entity.
“POCo” means Soluna DV Services Co LLC, a Nevada limited liability company.
“Project” means the variable data center engaged in cryptocurrency, batch processing or other non crypto related activities, to be owned by DV that will be located in Briscoe County, Texas at the location more specifically described in the Sublease including, without limitation, the development, design, engineering, permitting, procurement, construction, civil works, installation, integration, commissioning, start-up, testing, completion, financing, operation and maintenance of the same, and any activities similar to any of the foregoing. For the avoidance of doubt, the Project shall not include the Shared Facilities.
“Project Costs” means, for the Project and the Shared Facilities, as applicable and without duplication, all (i) amounts payable by DV under the EPC Agreement; (ii) the amounts payable by DV under the EPC Agreement (Shared Facilities); (iii) amounts payable by DV pursuant to the Sublease and Sublease (Shared Facilities) during construction of the Project and any other real estate rights necessary for the development, construction, installation, commissioning, start up and testing of the Project or the Shared Facilities; (iv) insurance costs (without duplication) incurred by DV related to the design, development, construction, commissioning, start-up, testing and ownership of the Project; (v) all taxes, assessments or charges payable under applicable Law by DV with respect to the construction, installation, and commissioning of the Project; (vi) out-of-pocket costs incurred and payable by DV in respect of professional advisors (including legal counsel), consultants and other experts or otherwise in connection with the design, development, financing, construction, installation and commissioning of the Project; (vii) all amounts payable by DV pursuant to the Shared Facilities Agreement and any Project Document (Shared Facilities); and (viii) all other out-of-pocket costs directly relating to the development, engineering, financing, procurement, construction, permitting, installation, start-up, testing and commissioning of the Project.
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“Project Documents” means, collectively, the Project Documents (Shared Facilities) and the Project Documents (DV).
“Project Documents (Shared Facilities)” means the Shared Facilities Agreement, the Administrative Services Contract (Shared Facilities) (as defined in the Shared Facilities Agreement), the EPC Agreement (Shared Facilities) (as defined in the Shared Facilities Agreement), the O&M Contract (Shared Facilities) (as defined in the Shared Facilities Agreement), the Sublease (Shared Facilities), and each other agreement (if any) required for the ownership, development, engineering, procurement, financing, construction, operation and maintenance of the Shared Facilities.
“Project Documents (DV)” means the EPC Agreement, the Sublease, the O&M Agreement and, as specified herein, each other agreement required for the ownership, development, engineering, procurement, financing, construction, operation and maintenance of the Project (excluding, for the avoidance of doubt, the Shared Facilities), including agreements or other documents covering or otherwise evidencing arrangements with third party developers, engineering, procurement, construction, installation, operation and maintenance, real property rights, and related third party consents and acknowledgements, Permitted Indebtedness, and Permitted Liens. Each Project Document as referred to herein shall mean the Project Document as in effect as of the applicable time.
“Project Site” means the site on which the Project will be constructed and operated, the Shared Facilities and the premises under the Sublease.
“Property” means any interest of DV in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.
“Prospective Project” has the meaning given in Section 3.3(a).
“Right of First Offer” has the meaning given in Section 3.3(b).
“Shared Facilities” has the meaning established in the Shared Facilities Agreement.
“Shared Facilities Agreement” means the Co-Tenancy and Shared Facilities Agreement by and among DV, POCo and the other computing companies having projects adjacent to the Project and sharing the Shared Facilities with DV, dated as of August 5, 2022, as the same may be amended or supplemented from time to time.
“Shared Premises” has the meaning established in the Shared Facilities Agreement.
“Sublease” means the Sublease Agreement pursuant to which Lessor has granted to DV an undivided sub-leasehold interest in the Project Site, as the same may be amended or supplemented from time to time.
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“Sublease (Shared Facilities)” means those provisions in the Shared Facilities Agreement pursuant to which Lessor has granted to DV and other computing companies an undivided interest in the Shared Premises, as the same may be amended or supplemented from time to time.
“Subsequent Contribution” means a capital contribution other than the First Contribution made by Navitas or Parent to DV in accordance with this Agreement.
“Substantial Completion” means (i) substantial completion or any similar term under the EPC Agreement has occurred, and (ii) Commercial Operation has occurred.
“Tax” means all taxes, charges, fees and levies imposed under applicable Law by any Governmental Authority, including any gross or net income, gross receipts, capital gains, franchise, premium, profits, sales, use, value-added, transfer, employment or payroll, ad valorem, environmental, excise, license, occupation, real or personal property, intangible property, minimum, alternative minimum, severance, stamp, withholding, or windfall profits tax, custom, duty or other charge, fee or tax, together with any interest, charge, penalty, addition to tax or additional amount related thereto.
“Third Party Claim” means any claim, action, cause of action or suit, litigation, controversy, assessment, arbitration, investigation, inquiry, hearing, charge, complaint, demand, notice or proceeding initiated by any Person other than a party to this Agreement or any Affiliate of a party to this Agreement, including by or before any Governmental Authority.
“Transaction Documents” means collectively this Agreement, the DV Operating Agreement, the Project Documents and the Financing Documents.
“Transaction Party” means any or all of DV and each Affiliate of DV (other than Navitas) that is party to a Transaction Document.
Section 1.2 Interpretation.
(a) As used in this Agreement and in any certificate or other documents made or delivered pursuant hereto or thereto, financial and accounting terms not defined in this Agreement or in any such certificate or other document, and financial and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under GAAP. To the extent that the definitions of financial and accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under GAAP, the definitions contained in this Agreement or in any such certificate or other document shall control.
(b) This Agreement is the result of the joint efforts of the parties hereto, and each provision hereof has been subject to the mutual consultation, negotiation and agreement of the parties and there is to be no construction against either party based on any presumption of that party’s involvement in the drafting hereof. Any reference to any Law shall be deemed also to refer to all rules and regulations promulgated thereunder and such laws and regulations as amended from time to time, unless the context requires otherwise. Whenever used in this Agreement, except as otherwise expressly provided or unless the context otherwise requires, any noun or pronoun shall be deemed to include the plural as well as the singular and to cover all genders and the terms “include,” “includes” and “including” shall be inclusive and not exclusive and shall be deemed to be followed by the following phrase “without limitation.” Unless otherwise specified, the terms “hereof,” “herein,” “hereunder,” “herewith” and similar terms refer to this Agreement as a whole (including the schedules and exhibits to this Agreement) and references herein to Sections, Articles, Schedules or Exhibits refer to the applicable sections, articles, schedules or exhibits of this Agreement; the words “or” and “any” are not exclusive and shall be interpreted to mean “and/or” and “any and all”, respectively. All references to “dollars” or “$” are to United States dollars.
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(c) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms.
(d) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as amended, restated, supplemented or otherwise modified from time to time, and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein.
(e) Any references to a Person are also to its successors and permitted assigns.
ARTICLE II
CLOSING; INVESTMENT IN DV
Section 2.1 Agreement to Invest; Capital Commitment
. Subject to the terms and conditions of this Agreement and the DV Operating Agreement, Navitas will make Capital Contributions to DV in an aggregate amount up to the Navitas Commitment.
Section 2.2 Capital Contributions.
(a) On the Effective Date, Navitas shall make the First Contribution, and DV shall issue to Navitas 26.5% of the Membership Interests and admit Navitas as a Member of DV.
(b) For each Subsequent Contribution, DV shall submit to the Parent and Navitas a fully completed Contribution Request not less than ten (10) Business Days prior to the proposed date therefor.
(c) At such time as the conditions thereto have been satisfied or waived as provided in Section 4.2, the Parent and Navitas shall make each Subsequent Contribution.
(d) The proceeds of the First Contribution and each Subsequent Contribution shall be applied to Approved Uses then due and payable with respect to the Project.
(e) [Intentionally omitted.]
(f) Unless otherwise agreed upon in writing by the Parent and Navitas, each Capital Contribution (including any Subsequent Contribution) shall be made on a pro rata basis in proportion to the amount of Membership Interests held by Parent and Navitas at the time of any such Capital Contribution.
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(g) At any time after Substantial Completion has occurred, in the event DV is unable to, or does not, pay operating and maintenance expenses, including any overhead and debt servicing costs (collectively, “Applicable Expenses”), for any given month, or the manager(s) of DV, acting in good faith, estimates that DV will not be able to pay the Applicable Expenses in one or more upcoming months, DV shall notify each of Parent and Navitas and include with such notice the calculation of the current and expected shortfall. Notwithstanding anything to the contrary herein or in the DV Operating Agreement, each of Parent and Navitas shall have five (5) days following receipt of such notice to provide a Subsequent Contribution to cover all or part of such shortfall on a pro rata basis in proportion to the amount of their respective Membership Interests, and if Parent or Navitas does not exercise its right to make such Subsequent Contribution, the other shall be permitted to provide all or any portion of the remaining shortfall as a Subsequent Contribution. In the event that Parent or Navitas does not exercise its right to make such Subsequent Contribution, then with respect to the party that does exercise its right to make such Subsequent Contribution pursuant to this Section 2.2(g), the Membership Interests shall be valued at a price equal to (i) the price of the Membership Interests issued to Navitas in respect of the First Contribution multiplied by (ii) ninety percent (90%).
Section 2.3 Tax Characterization.
(a) Prior to the Closing Date, DV is treated as an entity that is disregarded as separate from Parent for federal income Tax purposes.
(b) On the Closing Date, (i) Navitas shall make the First Contribution to DV for their Membership Interests as a capital contribution for purposes of Section 721 of the Code, and (ii) DV shall become a partnership for federal income tax purposes.
(c) On the date of each Subsequent Contribution, Parent and Navitas shall make a Subsequent Contribution to DV as a capital contribution for purposes of Section 721 of the Code.
Section 2.4 Closing; Fundings.
(a) The Closing and the making of each Subsequent Contribution shall take place by the electronic delivery of the applicable duly executed documents on the date on which all of the applicable conditions in Section 4.1 or Section 4.2, as applicable, have been satisfied (or waived as provided therein) or at such other time as the Parties may agree in writing.
(b) Each of the documents and other deliverables to be delivered and the actions to be taken pursuant to Section 4.1 or Section 4.2 in respect of the First Contribution and each Subsequent Contribution shall be deemed to be delivered or to have occurred simultaneously, and no such document or deliverable or action shall be of any force or effect (and to the extent delivered shall be deemed to be held in escrow) until all such documents are delivered and actions are taken and the applicable funds have been delivered by the relevant Party, at which time the respective First Contribution or Subsequent Contribution shall be deemed to occur (each such date, a “Contribution Date”).
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ARTICLE III
THE PROJECT; PROJECT DEVELOPMENT AND FINANCING; RIGHT OF FIRST REFUSAL
Section 3.1 The Project Company.
(a) As of the Closing, DV shall be owned by the Parties in accordance with the DV Operating Agreement, and the Project shall be wholly owned by DV. The Project, the Project Documents, permits, Financing Documents, the Shared Facilities and any assets, equipment, parts, interests or other property (tangible or intangible) related to the Project shall be and at all times shall have been the sole assets of DV.
(b) The capital necessary for the construction and completion of the Project will be, or shall have been, provided by the Parties holding Membership Interests through one or more equity investments (the “Equity Investment(s)”), as determined by Navitas and the Parent, in each case, subject to the terms of this Agreement, including Article IV hereof.
Section 3.2 Project Development.
(a) DV will, and Parent shall use commercially reasonable efforts to ensure that DV, develop the Project and the Shared Facilities in accordance with this Agreement and applicable Law.
(b) If the Project or Shared Facilities fails to reach Substantial Completion by the Capital Commitment Expiration Date, then any related damages payable by any Person in respect thereof, any proceeds from any insurance settlement, any indemnity payment, or any other amounts received by DV shall be repaid to Parent and Navitas as a return of its capital contributed in respect of the Project until fully repaid, subject only to any prior right to such amounts specified in the Financing Documents.
Section 3.3 Right of First Offer.
(a) Subject to the terms and conditions of this Section 3.3, Parent shall offer Navitas the opportunity to review and invest in projects that Parent or any of its Affiliates intends to develop adjacent to the Briscoe wind farm (each a “Prospective Project”). Parent shall notify Navitas in writing reasonably promptly (but in any event within ten (10) Business Days) when its management (or management of its Affiliates) decides to pursue a financing for a Prospective Project, which notice shall include an approximate description of the Prospective Project and the amount and other material terms of the financing sought. Navitas shall have a period of thirty (30) days from receipt of such notification to provide an offer to invest in the Prospective Project.
(b) The right of first offer described in this Section 3.3 (the “Right of First Offer”) shall be subordinate to any similar right of first refusal or offer already granted or to be granted to Soluna SLC Fund I Projects Holdco LLC and its Affiliates with respect to any Prospective Project.
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(c) The Right of First Offer shall be effective during the period beginning on the date of the First Contribution and ending on the date on which Navitas holds no Membership Interests or other interests in DV’s capital securities (including any securities convertible into or exercisable for DV’s capital securities). The provisions of this Section 3.3 shall survive any termination of this Agreement.
ARTICLE IV
CONDITIONS TO CLOSING AND FUNDINGS
Section 4.1 Closing Conditions. The obligation of Navitas to make the First Contribution is subject to the satisfaction by DV, or waiver, with respect to its own funding obligation, by Navitas, as of the Effective Date, of each of the following conditions:
(a) Performance by DV. DV shall have performed and complied with all agreements, covenants and conditions contained herein that are required to be performed or complied with by DV before or at the making of the First Contribution.
(b) Delivery of Transaction Document. DV shall have delivered, or caused to be delivered to Navitas the following:
(i) this Agreement and each of the other Transaction Documents; and
(ii) certified copies of (i) resolutions of DV’s board of directors, members or other governing body authorizing the execution, delivery and performance of this Agreement and each of the other Transaction Documents, and (ii) DV’s certificate of incorporation;
(c) Consents and Approvals. Each of the Transaction Parties shall have obtained all approvals, consents and qualifications necessary to execute, deliver and perform the Transaction Documents to which it is party.
(d) Representations and Warranties. The warranties and representations contained in this Agreement shall be true and correct in all material respects on the date of the First Contribution with the same effect as though made on and as of that date. DV shall not have taken any action or permitted any condition to exist which would have been prohibited by any Section hereof.
(e) Insurance. Navitas shall have received copies of insurance certificates evidencing that the insurance policies in Schedule 1 are in effect.
(f) Site Readiness. The Project Site, the Shared Facilities, and the Property shall be fully energized.
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Section 4.2 Conditions to Each Subsequent Contribution. The obligation of Parent and Navitas to make a Subsequent Contribution is subject to the satisfaction or waiver, with respect to its own obligation to make a Subsequent Contribution, by Parent or Navitas, as applicable, as of the applicable Contribution Date, of each of the following conditions; provided that, a waiver by Navitas of a condition to make a Subsequent Contribution hereunder that was, or is, caused by, or is a direct or indirect result of, any action or inaction by Parent shall also be deemed to be the waiver of Parent of such condition to making such Subsequent Contribution hereunder:
(a) Performance by DV. DV shall have performed and complied with all agreements, covenants and conditions contained herein that are required to be performed or complied with by DV before or at the making of such Subsequent Contribution.
(b) Contribution Request. DV shall have timely delivered to Parent and Navitas a duly executed and completed Contribution Request as to the Subsequent Contribution in accordance with Section 2.2(b), which shall have been reasonably approved by Parent and/or Navitas, as the case may be.
(c) Representations and Warranties. The warranties and representations contained in this Agreement shall be true and correct in all material respects on the date of such Subsequent Contribution with the same effect as though made on and as of that date. DV shall not have taken any action or permitted any condition to exist which would have been prohibited by any Section hereof.
(d) Insurance. Navitas shall have received copies of insurance certificates evidencing that the insurance policies in Schedule 1 are in effect.
ARTICLE V
COVENANTS
Section 5.1 Conduct of Operations.
(a) DV shall conduct its businesses and operations in accordance with all applicable Laws, and the Project Documents and Financing Documents.
(b) DV shall not conduct any business other than in connection with the Project or own any assets other than the Project.
Section 5.2 Access to Information. DV will provide Navitas, its respective counsel, financial advisors, auditors and other authorized representatives reasonable access to the books and records of DV.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES AS TO DV
DV represents and warrants to Parent and Navitas on the Effective Date and, except as otherwise specified, on each Contribution Date, and giving effect to such Contribution, as follows:
Section 6.1 Organization and Validity.
(a) DV is a limited liability company, duly organized and validly existing under the laws of the State of Delaware. DV (i) has the appropriate power and authority to operate its business and to own its Property and (ii) is duly qualified, is validly existing and in good standing and has lawful power and authority to engage in the business it conducts in each state where the nature and extent of its business requires qualification, except where the failure to so qualify does not and could not reasonably be expected to have a Material Adverse Effect.
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(b) The making and performance of this Agreement and the other Transaction Documents will not (i) violate any law, government rule or regulation, court or administrative order or other such order, or DV’s articles of incorporation, bylaws, articles of organization or operating agreement, or (ii) violate or result in a default (immediately or with the passage of time) under any contract, agreement or instrument to which DV is a party, or by which DV is bound which violation has or could reasonably be expected to have a Material Adverse Effect. DV is not in violation of any term of any agreement or instrument to which it is a party or by which it may be bound which violation has or could reasonably be expected to have a Material Adverse Effect, or of its certificate of incorporation or bylaws or articles of organization or operating agreement.
(c) DV has all requisite power and authority to enter into and perform this Agreement, to incur the obligations herein provided for, and has taken all proper and necessary action to authorize the execution, delivery and performance of this Agreement, and the other Transaction Documents, as applicable.
(d) This Agreement and all of the other Transaction Documents, when delivered, will be valid and binding upon DV, and enforceable in accordance with their respective terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles.
Section 6.2 Pending Litigation: Other than as set forth on Schedule 6.2 to this Agreement, there are no judgments or judicial or administrative orders or proceedings pending, or to the knowledge of DV, threatened, against DV in any court or before any Governmental Authority which assert or make claims in excess of One Hundred Thousand Dollars ($100,000) or could reasonably be expected to have a Material Adverse Effect. To the knowledge of DV, there are no investigations (civil or criminal) pending or threatened against DV in any court or before any Governmental Authority which assert or make claims in excess of One Hundred Thousand Dollars ($100,000) or could reasonably be expected to have a Material Adverse Effect. DV is not in default with respect to any order of any Governmental Authority. To the knowledge of DV, no shareholder or executive officer of DV has been indicted in connection with or convicted of engaging in any criminal conduct, or is currently subject to any lawsuit or proceeding or under investigation in connection with any anti-racketeering or other conduct or activity which may result in the forfeiture of any property to any Governmental Authority.
Section 6.3 Title to Properties: DV has good and marketable title in fee simple (or its equivalent under applicable law) to all the Property it purports to own, free from Liens and free from the claims of any other Person, except for Permitted Liens.
Section 6.4 Governmental Consent: Neither the nature of DV or of its business or Property, nor any relationship between DV and any other Person, nor any circumstance affecting DV in connection with the issuance or delivery of this Agreement or any other Transaction Documents is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any Governmental Authority on the part of DV.
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Section 6.5 Taxes: All federal, state and other material tax returns required to be filed by DV in any jurisdiction have been filed, and all taxes, assessments, fees and other governmental charges upon DV, or upon any of its Property, income or franchises, which are shown to be due and payable on such returns have been paid, except for those taxes being contested in good faith with due diligence by appropriate proceedings for which appropriate reserves have been maintained under GAAP and as to which no Lien has been entered. DV is not aware of any proposed additional tax assessment or tax to be assessed against or applicable to DV.
Section 6.6 Full Disclosure: No written statement of DV to Navitas or Parent in connection with the negotiation of this Agreement contains any untrue statement of a material fact. Such statements do not omit a material fact, the omission of which would make the statements contained therein misleading. There is no fact known to DV which has not been disclosed in writing to DV which has or could reasonably be expected to have a Material Adverse Effect.
Section 6.7 Subsidiaries: DV does not have any Subsidiaries, except as shown on Schedule 6.7 attached hereto and made a part hereof.
Section 6.8 Investments, Guarantees, Contracts, etc.:
(a) DV does not own or hold equity or long term debt investments in, or have any outstanding advances to, any other Person. DV has not made a loan or advance to any holder of its Capital Stock except as set forth on Schedule 6.8(a) attached hereto.
(b) DV has not entered into any leases for real or personal Property (whether as landlord or tenant or lessor or lessee), except as set forth on Schedule 6.8(b) attached hereto.
(c) DV is not a party to any contract or agreement, or subject to any charter or other corporate restriction, which has or could reasonably be expected to have a Material Adverse Effect.
(d) Except as otherwise specifically provided in the Financing Documents, DV has not agreed or consented to cause or permit any of its Property whether now owned or hereafter acquired to be subject in the future (upon the happening of a contingency or otherwise), to a Lien not permitted by this Agreement.
Section 6.9 Government Regulations, etc.:
(a) DV has obtained all licenses, permits, franchises or other governmental authorizations necessary for the ownership of its Property and for the conduct of its business.
(b) DV is not in violation of or receipt of written notice that it is in violation of any applicable statute, regulation or ordinance of the United States of America, or of any state, city, town, municipality, county or of any other jurisdiction, or of any agency, or department thereof, (including, without limitation, Environmental Laws or government procurement regulations), a violation of which causes or could reasonably be expected to cause a Material Adverse Effect.
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Section 6.10 Business Interruptions: None of the business, Property or operations of DV have been materially and adversely affected in any way by any casualty, strike, lockout, combination of workers, order of the United States of America, or any state or local government, or any political subdivision or agency thereof, directed against DV. There are no pending or, to DV’s knowledge, threatened labor disputes, strikes, lockouts or similar occurrences or grievances affecting DV.
Section 6.11 Names and Intellectual Property:
(a) DV has not conducted business under or used any other name (whether corporate or assumed).
(b) DV is not in violation of any rights of any other Person with respect to trademarks, service marks, patents or copyrights which DV uses.
(c) DV does not require any copyrights, patents, trademarks or other intellectual property, or any license(s) to use any patents, trademarks or other intellectual property in order to provide services to its customers in the ordinary course of business.
Section 6.12 Other Associations: DV is not engaged and has no interest in any joint venture or partnership with any other Person except as set forth in this Agreement.
Section 6.13 Environmental Matters:
(a) To the best of DV’s knowledge after due inquiry, no Property presently owned, leased or operated by DV contains, or has previously contained, any Hazardous Substances in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could give rise to liability under, any Environmental Law.
(b) To the best of DV’s knowledge after due inquiry, DV is in compliance, and, for the duration of all applicable statutes of limitations periods, has been in compliance with all applicable Environmental Laws, and there is no contamination at, under or about any properties presently owned, leased, or operated by DV or violation of any Environmental Law with respect to such properties which could reasonably be expected to interfere with any of their continued operations or reasonably be expected to impair the fair saleable value thereof.
(c) DV has not received any notice of violation, alleged violation, non- compliance, liability or potential liability regarding environmental matters or compliance assessment with Environmental Laws and DV has no knowledge that any such notice will be received or is being threatened.
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(d) Hazardous Substances have not been transported or disposed of in a manner or to a location which are reasonably likely to give rise to liability of DV under any Environmental Law.
(e) No judicial proceeding or governmental or administrative action is pending, or to the knowledge of DV, threatened under any Environmental Law to which DV is, or to DV’s knowledge will be, named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding, the implementation of which is reasonably likely to have a Material Adverse Effect on any natural resources or on DV’s business, financial condition, Property or prospects under any Environmental Law.
Section 6.14 Capital Stock: The authorized and outstanding Capital Stock of the DV is as shown on Schedule 6.14 attached hereto. All of the Capital Stock of DV has been duly and validly authorized and issued and is fully paid and non-assessable and has been sold and delivered to the holders thereof in compliance with, or under valid exemption from, all federal and state laws and the rules and regulations of all Governmental Authorities governing the sale and delivery of securities. Except as set forth herein and in the Financing Documents or as set forth on Schedule 6.14, there are no subscriptions, warrants, options, calls, commitments, rights or agreements by which DV or any of the shareholders of DV is bound relating to the issuance, transfer, voting or redemption of shares or interests of DV’s Capital Stock or any pre-emptive rights held by any Person with respect to the shares or interests of Capital Stock of DV. Except as set forth herein or set forth on Schedule 6.14, DV has not issued any securities convertible into or exchangeable for shares or interests of its Capital Stock or any options, warrants or other rights to acquire such shares or interests or securities convertible into or exchangeable for such shares or interests.
Section 6.15 Solvency: Immediately after giving effect to the transactions contemplated under this Agreement and at all times thereafter, DV is solvent, is able to pay its debts as they become due, and has capital sufficient to carry on its businesses and all businesses in which it is about to engage. DV will not be rendered insolvent by the execution and delivery of this Agreement or any of the other Transaction Documents executed in connection with this Agreement or by the transactions contemplated hereunder or thereunder.
Section 6.16 Anti-Terrorism Laws:
(a) General. Neither DV nor any Affiliate of DV is in violation of any Anti-Terrorism Law or engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.
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(b) Executive Order No. 13224: DV and each Affiliate of DV, and to DV’s knowledge, each of their respective agents acting or benefiting in any capacity in connection with this Agreement or the transactions hereunder, is not any of the following (each a “Blocked Person”):
(i) a Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224;
(ii) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224;
(iii) a Person with which Navitas or Parent is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;
(iv) a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in the Executive Order No. 13224;
(v) a Person that is named as a “specially designated national” on the most current list published by the U.S. Treasury Department Office of Foreign Asset Control at its official website or any replacement website or other replacement official publication of such list; or
(vi) a Person who is affiliated with a Person listed above.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES AS TO INVESTOR
Section 7.1 Navitas. Navitas represents and warrants to the Parties as of the Effective Date and, except as otherwise provided below, as of each Contribution Date, as follows:
(a) Organization; Powers. Navitas is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware, with all requisite limited liability company power and authority to carry on its business as such business is now conducted, and as proposed to be conducted.
(b) Authority; Enforceability. Navitas has full power and authority to execute and deliver each Transaction Document to which it is a party and to consummate the transactions contemplated thereby. The execution and delivery by Navitas of the Transaction Documents to which it is a party and the consummation by Navitas of the transactions contemplated thereby have been duly authorized by all necessary action required on the part of Navitas. This Agreement and each other Transaction Document to which Navitas is a party have been duly authorized, executed and delivered by Navitas. This Agreement and each Transaction Document to which Navitas is a party constitutes the valid and binding obligation of Navitas, enforceable against Navitas in accordance with its terms except as such terms may be limited by (i) bankruptcy, insolvency or similar laws affecting creditors’ rights generally; or (ii) general principles of equity, whether considered in a proceeding in equity or at law.
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(c) No Violation. The execution, delivery and performance by Navitas of this Agreement and each Transaction Document to which it is a party and the consummation of the transactions contemplated thereby do not and will not (a) violate or conflict with any provision of the governance documents of Navitas; (b) violate or require any filing or notice under any provision or requirement of any federal, state or local law, statute, judgment, order, writ, injunction, decree, award, rule, or regulation of any Governmental Authority applicable to Navitas; (c) violate, result in a breach of, constitute (with due notice or lapse of time or both) a default or cause any obligation, penalty, premium or right of termination to arise or accrue under, any agreement or instruments to which it is a party or by which any of its assets are bound; or (d) result in the creation or imposition of any Lien (including any Permitted Lien), in each case, which violation, breach, default or Lien would materially adversely affect its ability to perform its obligations under the Transaction Documents to which it is a party.
(d) Litigation. There are no claims, actions, suits, investigations or proceedings (including any arbitration proceeding) of any nature, at law or in equity, pending or, to the knowledge of Navitas, threatened in writing by (with a reasonable basis therefor) or against Navitas, or to which Navitas is party, or the directors, officers, employees, agents of Navitas, or any of their Affiliates that is reasonably likely to materially adversely affect Navitas’s ability to execute, deliver and perform each Transaction Document to which it is a party and consummate the transactions contemplated thereby.
(e) No Consents or Approvals. There is no requirement applicable to Navitas to make any filing with, or to obtain the consent or approval of any Person as a condition to the execution, delivery and performance of the Agreement and each Transaction Document to which it is a party or the consummation of the transactions contemplated thereby that has not yet been obtained.
(f) Financial Capacity. Navitas as of the Effective Date has, and will have at all times prior to the Capital Commitment Expiration Date, the financial capacity to pay and perform its obligations under this Agreement, and to make all Contributions contemplated hereby and to otherwise fund the Navitas Commitment (assuming, for the purposes of this representation, that all conditions to each Contribution are satisfied or waived).
(g) Sophisticated Investor; Diligence. Navitas has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in DV and its investment in the Project, and is able to bear the economic risk of such investments for an indefinite period of time. Without limitation of Navitas’s rights and remedies in connection with this Agreement and the other Transaction Document, Navitas has had the opportunity conduct due diligence and to ask questions of its own counsel and of the Parent Parties concerning the Parent Parties and terms and conditions of the transactions contemplated hereby and in each Transaction Document and is satisfied with the results of such diligence and the responses received in respect of such questions. Without derogation of any representation of DV herein, based on the foregoing diligence and in reliance on DV’s representations and warranties herein, Navitas has adequate knowledge regarding all aspects of the business of DV (including its operations, condition (financial or otherwise), cash flows, assets, liabilities, and prospects) as well as information which is sufficient in all respects to make an informed decision to enter into the transactions contemplated by the Transaction Documents and, subject to the terms and conditions applicable thereto, to make Contributions. Navitas is aware that the Membership Interests are subject to the restrictions on transfer imposed by the DV Operating Agreement and the state and Federal securities laws of the United States.
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(h) Securities Laws Compliance. Navitas is an “accredited investor” within the meaning of Rule 501(a) of Regulation D promulgated under the United States Securities Act of 1933, as amended from time to time (the “Securities Act”). The Membership Interests to be acquired by it pursuant to this Agreement are being acquired for its own account and not with a view to any distribution thereof or with any present intention of offering or selling any of such Membership Interests or other securities in DV acquired by Navitas from time to time (the “Navitas Securities”) in a transaction that would violate the Securities Act or the securities laws of any state of the United States of America or any other applicable jurisdiction. Navitas acknowledges and agrees: (A) that the Membership Interests have not been registered under any Securities Act because DV is issuing the Membership Interests in reliance upon the exemptions from the registration requirements of the Securities Acts providing for issuance of securities not involving a public offering and, therefore, the Membership Interests cannot be resold unless they are registered under the Securities Acts or unless an exemption from registration is available, (B) that DV has relied upon the fact that the Membership Interests are to be held by Navitas for investment purposes only and (C) that the exemptions under the Securities Acts which permit DV to sell the Membership Interests to Navitas will not be available if the Navitas Securities are acquired by a person who purchases its interests in DV with a view to distribution. Accordingly, Navitas hereby represents, warrants and covenants to DV that any subsequent transfer of Membership Interests or after acquired interests, regardless of the manner of sale, to any affiliate or any other person, will be made strictly in compliance with DV Operating Agreement, the Securities Act and all other applicable securities laws.
(i) Patriot Act. Navitas is in compliance with (a) the Trading with the Enemy Act, and each of the foreign assets control regulations of the United States Treasury Department and any other enabling legislation or executive order relating thereto, (b) the Patriot Act and (c) other federal or state laws relating to “know your customer” and anti-money laundering rules and regulations. No part of any Contribution was obtained directly or indirectly by the making of any payments to any government official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977.
Section 7.2 Parent. Parent represents and warrants to the Parties as of the Effective Date and, except as otherwise provided below, as of each Contribution Date, as follows:
(a) Organization; Powers. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, with all requisite limited liability company power and authority to carry on its business as such business is now conducted, and as proposed to be conducted.
(b) Authority; Enforceability. Parent has full power and authority to execute and deliver each Transaction Document to which it is a party and to consummate the transactions contemplated thereby. The execution and delivery by Parent of the Transaction Documents to which it is a party and the consummation by Parent of the transactions contemplated thereby have been duly authorized by all necessary action required on the part of Parent. This Agreement and each other Transaction Document to which Parent are a party have been duly authorized, executed and delivered by Parent. This Agreement and each Transaction Document to which Parent is a party constitutes the valid and binding obligation of Parent, enforceable against Parent in accordance with its terms except as such terms may be limited by (i) bankruptcy, insolvency or similar laws affecting creditors’ rights generally; or (ii) general principles of equity, whether considered in a proceeding in equity or at law.
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(c) No Violation. The execution, delivery and performance by Parent of this Agreement and each Transaction Document to which it is a party and the consummation of the transactions contemplated thereby do not and will not (a) violate or conflict with any provision of the governance documents of Parent; (b) violate or require any filing or notice under any provision or requirement of any federal, state or local law, statute, judgment, order, writ, injunction, decree, award, rule, or regulation of any Governmental Authority applicable to Parent; (c) violate, result in a breach of, constitute (with due notice or lapse of time or both) a default or cause any obligation, penalty, premium or right of termination to arise or accrue under, any agreement or instruments to which it is a party or by which any of its assets are bound; or (d) result in the creation or imposition of any Lien (including any Permitted Lien), in each case, which violation, breach, default or Lien would materially adversely affect its ability to perform its obligations under the Transaction Documents to which it is a party.
(d) Litigation. There are no claims, actions, suits, investigations or proceedings (including any arbitration proceeding) of any nature, at law or in equity, pending or, to the knowledge of Parent, threatened in writing by (with a reasonable basis therefor) or against Parent, or to which Parent is party the directors, officers, employees, agents of Parent, or any of their Affiliates that is reasonably likely to materially adversely affect Parent’s ability to execute, deliver and perform each Transaction Document to which it is a party and consummate the transactions contemplated thereby.
(e) No Consents or Approvals. Other than as set forth on Schedule 7.2(e), there is no requirement applicable to Parent to make any filing with, or to obtain the consent or approval of any Person as a condition to the execution, delivery and performance of the Agreement and each Transaction Document to which it is a party or the consummation of the transactions contemplated thereby that has not yet been obtained.
(f) Financial Capacity. Parent, as of the Effective Date has, and will have at all times prior to the Capital Commitment Expiration Date, the financial capacity to pay and perform its obligations under this Agreement, and to make all Contributions contemplated hereby and to otherwise fund the Parent Commitment (assuming, for the purposes of this representation, that all conditions to each Contribution are satisfied or waived).
(g) Sophisticated Investor; Diligence. Parent has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in DV and its investments in the Project, and is able to bear the economic risk of such investments for an indefinite period of time. Without limitation of Parent’s rights and remedies in connection with this Agreement and the other Transaction Documents. Parent has had the opportunity conduct due diligence and to ask questions of its own counsel and of the Parent Parties concerning the Parent Parties and terms and conditions of the transactions contemplated hereby and in each Transaction Document and is satisfied with the results of such diligence and the responses received in respect of such questions. Without derogation of any representation of DV herein, based on the foregoing diligence and in reliance on DV’s representations and warranties herein, Parent has adequate knowledge regarding all aspects of the business of DV (including its operations, condition (financial or otherwise), cash flows, assets, liabilities, and prospects) as well as information which is sufficient in all respects to make an informed decision to enter into the transactions contemplated by the Transaction Documents and, subject to the terms and conditions applicable thereto, to make Contributions. Parent is aware that the Membership Interests are subject to the restrictions on transfer imposed by the DV Operating Agreement and the state and Federal securities laws of the United States.
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(h) Securities Laws Compliance. Parent is an “accredited investor” within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act. The Membership Interests to be acquired by it pursuant to this Agreement are being acquired for its own account and not with a view to any distribution thereof or with any present intention of offering or selling any of such Membership Interests or other securities in DV acquired by Parent from time to time (the “Parent Securities”) in a transaction that would violate the Securities Act or the securities laws of any state of the United States of America or any other applicable jurisdiction. Parent acknowledges and agrees: (A) that the Membership Interests have not been registered under any Securities Act because DV is issuing the Membership Interests in reliance upon the exemptions from the registration requirements of the Securities Acts providing for issuance of securities not involving a public offering and, therefore, the Membership Interests cannot be resold unless they are registered under the Securities Acts or unless an exemption from registration is available, (B) that DV has relied upon the fact that the Membership Interests are to be held by Parent for investment purposes only and (C) that the exemptions under the Securities Acts which permit DV to sell the Membership Interests to Parent will not be available if the Parent Securities are acquired by a person who purchases its interests in DV with a view to distribution. Accordingly, Parent hereby represents, warrants and covenants to DV that any subsequent transfer of Membership Interests or after acquired interests, regardless of the manner of sale, to any affiliate or any other person, will be made strictly in compliance with DV Operating Agreement, the Securities Act and all other applicable securities laws.
(i) Patriot Act. Parent is in compliance with (a) the Trading with the Enemy Act, and each of the foreign assets control regulations of the United States Treasury Department and any other enabling legislation or executive order relating thereto, (b) the Patriot Act and (c) other federal or state laws relating to “know your customer” and anti-money laundering rules and regulations. No part of any Contribution was obtained directly or indirectly by the making of any payments to any government official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977.
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ARTICLE VIII
INDEMNIFICATION
Section 8.1 Indemnification.
(a) Indemnification by Parent. Subject to the terms and conditions of this Article IX, Parent (the “Parent Indemnifying Party”) shall indemnify, defend, reimburse and hold harmless Navitas, and its Affiliates, and its and their respective officers, directors, managers, direct and indirect owners, employees, attorneys, contractors and agents (collectively, the “Investor Indemnified Parties”), from and against any and all claims, actions, causes of action, demands, assessments, losses, damages, liabilities, judgments, settlements, Taxes, penalties, costs and expenses (including reasonable attorneys’ fees and expenses, including such fees and expenses at trial and on any appeal), of any nature whatsoever (collectively, the “Investor Indemnified Costs”), asserted against, resulting from, imposed upon, or incurred by any or all of Investor Indemnified Parties, by reason of or resulting from or in connection with the breach of the representations, warranties, covenants, obligations or other agreements made by DV or Parent in this Agreement (collectively, “Investor Indemnified Claims”).
(b) Indemnification by Investors. Subject to the terms and conditions of this Article X, Navitas (for purposes of this Article IX, Navitas, an “Investor Indemnifying Party”, as the case may be), shall indemnify, defend, reimburse and hold harmless Parent, DV and their respective Affiliates, and their respective officers, directors, managers, direct and indirect owners, employees, attorneys, contractors and agents (collectively, the “Parent Indemnified Parties”; and together with Investor Indemnified Parties, the “Indemnified Parties”), from and against any and all claims, actions, causes of action, demands, assessments, losses, damages, liabilities, judgments, settlements, Taxes, penalties, costs and expenses (including reasonable attorneys’ fees and expenses, including such fees and expenses at trial and on any appeal), of any nature whatsoever (collectively, the “Parent Indemnified Costs”; and together with Investor Indemnified Costs, the “Indemnified Costs”), asserted against, resulting from, imposed upon, or incurred by any or all of the Parent Indemnified Parties, by reason of or resulting from or in connection with the breach by Navitas in any capacity of the representations, warranties, covenants, obligations or other agreements made by Navitas in this Agreement, (collectively, “Parent Indemnified Claims”; and together with Investor Indemnified Claims, the “Indemnified Claims”).
(c) Cap. Notwithstanding anything to the contrary herein, except in the case of fraud, (i) in no event shall Parent Indemnifying Party pay or be liable for Investor Indemnified Costs in excess of an amount equal to one hundred percent (100%) of the aggregate amount of all Contributions actually made by Navitas, and (ii) in no event shall Investor Indemnifying Party pay or be liable for Parent Indemnified Costs in excess of an amount equal to one hundred percent (100%) of the aggregate amount of all Contributions actually made by Parent.
(d) Unless otherwise set forth in this Agreement, the representations and warranties of Navitas and DV contained in or made pursuant to this Agreement shall survive for two years after the date made and shall in no way be affected by any investigation or knowledge of the subject matter thereof made by or on behalf of Navitas or DV.
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Section 8.2 Third Party Claims.
(a) Notice of Claim. Within fifteen (15) days after obtaining actual knowledge of a Third Party Claim in respect of which an Indemnified Party may seek indemnification under Section 8.1, such Indemnified Party shall give written notice of the claim to the Indemnifying Party (“Indemnification Notice”). The Indemnification Notice shall state, to the extent known, the nature, basis and status of the Third Party Claim and the amount of the Indemnified Costs claimed. Any failure to deliver an Indemnification Notice to the Indemnifying Party with respect to a Third Party Claim shall not relieve the Indemnifying Party from its obligations to the Indemnified Party under this Article IX, other than to the extent the failure to give timely notice materially and adversely affects the Indemnifying Party’s ability to defend such claim.
(b) Defense by the Indemnifying Party. The Indemnifying Party shall be entitled to participate in and, subject to Section 8.2(c), to assume the defense of, any Third Party Claim for which an Indemnified Party intends to seek indemnification, with counsel selected by the Indemnifying Party and reasonably satisfactory to the Indemnified Party; provided, that such claim shall be investigated and defended, and such counsel shall be retained, at the Indemnifying Party’s sole expense and, provided, further, that the Indemnified Party shall continue to be entitled to participate in such defense with counsel of its choice at its sole cost and expense unless otherwise specified in this Article IX. Prior to assuming the defense of any Third Party Claim, the Indemnifying Party shall give the Indemnified Party written notice of its election to defend or settle a Third Party Claim (“Defense Election”) within thirty (30) days of receiving an Indemnification Notice with respect to such claim. The Indemnified Party shall cooperate to the extent commercially reasonable with the Indemnifying Party in connection with any defense or negotiation of any such action or claim by the Indemnifying Party. The Indemnifying Party shall keep the Indemnified Party fully apprised at all times as to the status of the defense or any settlement negotiations with respect to the Third Party Claim.
(c) Defense by the Indemnified Party. Notwithstanding the foregoing, in the event that (i) the Indemnifying Party advises an Indemnified Party that the Indemnifying Party will not contest a claim for indemnification hereunder; or (ii) the Indemnifying Party fails to notify the Indemnified Party within thirty (30) days of receipt of an Indemnification Notice, in writing, of its election to defend, settle or compromise, at its sole cost and expense, any such Third Party Claim (or discontinues its defense at any time after it commences such defense), then the Indemnified Party may, at its option, defend, settle or otherwise compromise or pay such Third Party Claim in each case, and all reasonable costs and expenses thereof shall constitute Indemnified Claims hereunder, except to the extent the gross negligence or willful misconduct of the Indemnified Party increased the amount of such Third Party Claim.
(d) No Settlement Without Consent. The Indemnifying Party shall not be liable for any settlement of any action, claim or proceeding in respect of a Third Party Claim effected without its written consent unless such settlement involves only monetary damages; provided, that the Indemnifying Party shall not unreasonably withhold such consent. Notwithstanding anything in this Section 8.2 to the contrary, the Indemnifying Party shall not, without the Indemnified Party’s prior written consent, settle or compromise any claim or consent to entry of judgment in respect thereof that does not include, as an unconditional term of such settlement, the full and complete release of the Indemnified Party.
Section 8.3 Indemnification Payments
. Payments for Indemnified Claims shall be made within ten (10) Business Days (a) after the Indemnifying Party receives notice of the claim or, if later, after resolution of any dispute in respect of the claim in the case of claims under Section 8.1; and (b) promptly after the amount of the claim is (i) finally determined by a court of competent jurisdiction and subject to no further appeal; (ii) agreed upon in a settlement agreement or other compromise with the claimant; or (iii) agreed upon by the Indemnifying Party and the Indemnified Parties, in the case of Third Party Claims under Section 8.2. All payments made pursuant to this Section 8.3 shall be paid by the obligor in immediately available funds.
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Section 8.4 Tax Treatment. Any indemnification payment under this Article IX shall be treated as a nontaxable return of capital to the Indemnified Party for federal income tax purposes unless otherwise required by applicable law. To the extent any indemnification payment made by an Indemnifying Party to an Indemnified Party in respect of any claim pursuant to this Article IX is not treated as a nontaxable return of capital for Tax purposes and instead, is includable as income of the Indemnified Party, the amount of such payment shall be increased by the amount of any federal and applicable state income Tax required to be paid by the Indemnified Party or its Affiliates on the receipt or accrual of such indemnification payment, including, for this purpose, the amount of any such federal and applicable state income Tax required to be paid by the Indemnified Party on the receipt or accrual of the additional amount required to be added to such payment pursuant to this Section 8.4, assuming the full deductibility of such state income taxes for federal income tax purposes, and shall be computed net of any federal or applicable state income tax benefit realized by the Indemnified Party (whether by refund, credit against or reduction in federal or state income Taxes otherwise payable) in the year the Indemnified Costs were incurred or paid (or an earlier year) arising from the incurrence or payment of any such Indemnified Costs. For purposes of the preceding sentence, a Tax benefit realized is a Tax benefit to the extent that it actually results in, or with commercially reasonable steps capable of being taken by the Indemnified Party would actually result in, a refund of, or actual reduction in, Tax.
Section 8.5 Indemnified Party Negligence or Misconduct; Breach. No Indemnified Party shall be indemnified for the Indemnified Costs suffered by such Person to the extent that such Indemnified Costs are attributable to the gross negligence or willful misconduct of such Person or the breach by Parent or DV, or Navitas, as applicable, of its obligations under the Transaction Documents.
Section 8.6 No Consequential Damages
. Indemnified Costs are limited to direct and actual damages, and shall not include, and no Indemnifying Party shall have any obligation to pay any Indemnified Party for or in respect of any punitive, consequential damages (other than actual or direct damages) or exemplary damages of any nature (inclusive of lost profits), other than for any such damages that are included in a Third Party Claim. The Indemnified Costs shall be the exclusive legal remedy in respect of Indemnified Claims, other than in connection with the fraud or willful misconduct of a Party, which shall not be subject to such limitations.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Amendments. Any amendment, modification, supplement to, or waiver of any provision of this Agreement may be made only by a written agreement of all of the Parties.
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Section 9.2 Notices. All notices or other communications required or permitted to be given under this Agreement shall, subject to the provisions of this Section 11.2, be in writing and shall be considered as properly given (a) if delivered in person; (b) if sent by internationally recognized delivery service; or (c) if sent by electronic mail. Notice given by electronic mail will be deemed to have been validly and effectively given on the day (if a Business Day and, if not, on the next following Business Day) on which it is transmitted before 5:00 p.m., recipient’s time, and if transmitted after that time, on the next following Business Day. Any party shall have the right to change its address for notice hereunder to any other location by giving ten (10) days prior written notice to the other parties in the manner set forth herein. Notices required to be given hereunder shall be delivered to the following addresses:
If to DV:
Soluna DV ComputeCo, LLC
325 Washington Ave. Extension
Albany, NY 12205
Attn: CFO
Phone: 518-218-2550
Email: DVnotice@soluna.io
If to Parent:
Soluna Computing, Inc.
325 Washington Ave. Extension
Albany, NY 12205
Attn: CFO
Phone: 518-218-2550
If to Navitas:
Navitas West Texas Investments SPV, LLC
C/O Chad Roach
2329 S Evans Way
Franktown, CO 80116
DVnotice@navitas.global
Phone: 303-956-3455
Section 9.3 Binding Effect; Assignment. The terms and conditions of this Agreement shall be binding upon and inure to the benefit of DV, Parent and Navitas and their respective successors and permitted assigns. In no event shall any party hereto assign this Agreement other than (i) in connection with any permitted assignment under the DV Operating Agreement, (ii) as collateral pursuant to the Financing Documents, or (iii) with the prior written consent of the other parties hereto.
Section 9.4 No Finder’s Fees. For the avoidance of doubt, no party shall have any direct liability for any commission or compensation in the nature of a finder’s or broker’s fee payable in respect of the Project.
Section 9.5 Entire Agreement. This Agreement, together with all schedules and exhibits hereto and the other Transaction Documents, constitute the entire agreement and understanding of the parties with respect to the subject matter hereof and supersede any and all prior negotiations, correspondence, agreements, understandings, duties or obligations between the parties, written or oral, with respect to the subject matter hereof.
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Section 9.6 Delay and Waiver. Except as provided herein, no delay or omission to exercise any right, power or remedy accruing to Party hereunder or under any other Transaction Document shall impair any such right, power or remedy of the Party, nor shall it be construed to be a waiver of any breach or default, or an acquiescence thereof, nor shall any waiver of any single default or other breach be deemed a waiver of any other default or other breach. Any waiver, indulgence, permit, consent or approval of any kind or character by a Party of any event of default or breach under this Agreement or any other Transaction Document, or any waiver by a Party of any provision or condition of this Agreement or any other Transaction Document, must be in a writing expressly referencing this Agreement and shall be effective only to the extent in such writing specifically set forth.
Section 9.7 Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
Section 9.8 Governing Law; Jurisdiction and Service of Process.
(a) Any dispute or other matter arising out of or in connection with this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws or choice of laws.
(b) Each of the parties irrevocably consents to the non-exclusive jurisdiction of the courts of the State of Delaware and of any federal court located therein, in connection with any suit, action or other proceeding arising out of or relating to this Agreement or the transactions contemplated herein, agrees to waive any objection to venue in the State of Delaware. To the extent permitted by law, service of process in connection with any such proceeding may be effected by mailing in the same manner provided in Section 11.2 or by any other manner prescribed or permitted by Applicable Law.
(c) Each party irrevocably waives any and all right to trial by jury in any action or proceeding arising out of or in connection with this Agreement.
Section 9.9 Patriot Act.
(a) Navitas hereby notifies DV that pursuant to the requirements of the Patriot Act, it may be required to obtain, verify and record information that identifies each Transaction Party, and each affiliate thereof, which information includes the name and address of each such Person, and other information that will allow Navitas to identify each Transaction Party in accordance with the Patriot Act, and DV shall cooperate upon Navitas’s request to promptly provide such information.
(b) DV hereby notifies Navitas that pursuant to the requirements of the Patriot Act, it may be required to obtain, verify and record information that identifies each of Navitas and each affiliate thereof, which information includes the name and address of each such person, and other information that will allow DV to identify each such person in accordance with the Patriot Act, and Navitas shall cooperate upon DV’s request to promptly provide such information.
Section 9.10 Further Assurances. Each party shall promptly execute, deliver, file, or record such agreements, instruments, certificates and other documents and to do and perform such other and further acts and things as any other party may reasonably request or as may be otherwise necessary or proper to consummate the transactions contemplated hereby and to carry out the purposes and provisions of this Agreement.
Section 9.11 Counterpart; Electronic Signatures. This Agreement may be executed in any number of counterparts, each of which may be delivered by facsimile transmission or electronically in .PDF format and each of which shall be an original but all of which together will constitute one instrument, binding upon all parties hereto, notwithstanding that all of such parties may not have executed the same counterpart. Delivery of an electronic counterpart shall be effective as manual delivery thereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Contribution Agreement as of the Effective Date.
| Soluna DV ComputeCo, LLC | ||
By: |
||
| By: | ||
| Name: | ||
| Title: | ||
[Signature Page to Contribution Agreement]
| Soluna Computing, Inc. | ||
| By: | ||
| Name: | ||
| Title: | ||
[Signature Page to Contribution Agreement]
| Navitas West Texas Investments SPV, LLC | ||
| By: | ||
| Name: | ||
| Title: | ||
[Signature Page to Contribution Agreement]
EXHIBIT A
Form of Contribution Request
CONTRIBUTION REQUEST
(Delivered pursuant to Section 2.2(b) of the Contribution Agreement)
Date: [ ]
Requested Contribution Date: [ ]
[__________]
c/o [ ]
[ADDRESS]
[CITY, STATE ZIP]
Attn:
Email:
| Re: | Soluna DV ComputeCo, LLC – Contribution Request |
This Contribution Request is delivered to you pursuant to that certain Contribution Agreement dated as of May 9, 2023 (the “Contribution Agreement”) by and among Soluna Computing, Inc., a Nevada corporation (“Parent”), Soluna DV ComputeCo, LLC, a Delaware limited liability company (“DV”), and Navitas West Texas Investments SPV, LLC, a Delaware limited liability company (“Navitas”, and together with Parent and DV, the “Parties”). Capitalized terms used but not otherwise defined in this Contribution Request shall have the meaning assigned to such terms in the Contribution Agreement, and the terms and provisions of Section 1.2 of the Contribution Agreement shall apply as though set forth herein.
DV submits this Contribution Request pursuant to Section 2.2(b) of the Contribution Agreement.
| 1. | The date of the requested Subsequent Contribution is [________]1. | |
| 2. | The aggregate amount of the Subsequent Contribution is [$________]. | |
| 3. | The proceeds of the proposed Subsequent Contribution will be applied to Approved Uses. |
______________________________________________
______________________________________________
______________________________________________
______________________________________________
______________________________________________
______________________________________________
1 NTD: Date must be at least [10] business days after the date of the Contribution Request.
| Exhibit A-1 |
| 4. | We request that [______] disburse the proceeds of the Subsequent Contribution to the following payees in the following amounts: |
Payee:
Payees’ Address:
Credit
Name of Account
Amount:
Bank:
ABA:
Account #:
The undersigned further confirms and certifies to Navitas that, as of the date of the requested Subsequent Contribution:
(a) The conditions precedent to this Subsequent Contribution set forth in Section 4.2 of the Contribution Agreement have been satisfied or waived in accordance with the terms thereof.
(b) The proceeds of the proposed Subsequent Contribution will be applied to Approved Uses.
(c) The amount of the proposed Subsequent Contribution, when aggregated with all other Capital Contributions made under the Contribution Agreement, does not exceed the Navitas Commitment (if applicable).
[Signature page follows.]
| Exhibit A-2 |
IN WITNESS WHEREOF, the undersigned have caused this Contribution Request to be executed and delivered as of the date first above written.
| Soluna DV ComputeCo, LLC | ||
| By: | ||
| Name: | ||
| Title: | ||
| Exhibit B-1 |
SCHEDULE 1
Insurance
Parent and DV Insurance – Construction and Operation Period
Parent and DV, to the extent applicable, will each obtain insurance for itself and each of its Affiliates coverage with responsible insurance providers (as evidenced by an AM best rating of A- I VIII or better) on terms and in amounts sufficient to comply with all Project Documents and any Project Documents and Financing Documents. All policies that are written on a claims made form must be maintained by for at least five (5) years following the termination of this Agreement. The insurance coverage for each shall include, at a minimum but not be limited to, the following:
(a) Workers’ Compensation. Workers’ compensation insurance in compliance with appropriate federal and state laws, and employers liability insurance with limit of not less than $1,000,000 per accident or disease for each employee;
(b) Property Insurance – property insurance in an amount not less than the full replacement cost of all property owned by DV or its Affiliates under commercially reasonable terms and deductibles.
(c) Commercial General Liability.
With respect to construction: Commercial general liability insurance, occurrence form, including, but not limited to, contractual coverage for all of the provisions of this Agreement, with limits of not less than $1,000,000 per occurrence with a $2,000,000 aggregate; and
With respect to operations: Commercial general liability insurance, occurrence form, including, but not limited to, contractual coverage for all of the provisions of this Agreement, with limits of not less than $1,000,000 per occurrence with a $2,000,000 aggregate;
(d) Automobile Liability. On or prior to the commencement of operations, automobile liability insurance, including vehicles owned, hired and non-owned, with a combined single limit of not less than $1,000,000 per accident;
(e) Excess Liability. Excess liability insurance, umbrella form, shall carry coverage in excess of the limits provided for in the above policies except employer’s liability, with a limit of not less than (i) during construction, $10,000,000 and (ii) during operations, $5,000,000;
(f) Builder’s Risk. In an amount at least equal to $57,363,601, which shall cover the Project as well as the project owned by Soluna DV ComputeCo, LLC, with deductible periods and term to be agreed.
(g) Director’s and Officer’s. Coverage in an amount and on terms agreed upon by Navitas and Parent in writing.
(h) Errors and Omissions. To be provided by the EPC Contractor in amounts to be determined by the Soluna’s insurance advisors.
(i) Title Insurance. Coverage in an amount and on terms agreed upon by Navitas and Parent in writing.
(j) Cybersecurity. Coverage in an amount and on terms agreed upon by Navitas and Parent in writing and to the extent available on commercial reasonable terms.
Schedule 6.2
Litigation
None.
Schedule 6.7
Subsidiaries
None.
Schedule 6.8(a)
Investments and Loans
None.
Schedule 6.8(b)
Leases
Sublease Agreement (Shared Facilities), dated as of August 5, 2022, by and among Soluna DV Services, LLC, Soluna DVSL ComputeCo, LLC and Soluna DV ComputeCo, LLC.
Sublease Agreement, dated as of May 9, 2023, by and between Soluna DV Services, LLC and Soluna DV ComputeCo, LLC.
Schedule 6.14
Capital Stock
Annex I of the DV Operating Agreement is incorporated by reference.
Schedule 7.2(e)
Required Parent Consents
| 1. | Consent of the noteholders under the Securities Purchase Agreement dated as of October 20, 2021 between Soluna Holdings, Inc. (f/k/a Mechanical Technology, Incorporated), as amended, supplemented or otherwise modified from time to time, and the secured convertible note issued thereunder. | |
| 2. | Consent of Parent’s Board. |
Exhibit 10.72
Execution Version
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
OF
Soluna DV ComputeCo, LLC
Dated as of May 9, 2023
TABLE OF CONTENTS
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| ARTICLE I | AGREEMENT | 1 |
| Section 1.1 | Definitions | 1 |
| Section 1.2 | Other Definitional Provisions | 10 |
| ARTICLE II | CONTINUATION; OFFICES; TERM | 11 |
| Section 2.1 | Formation of the Company | 11 |
| Section 2.2 | Name, Office and Registered Agent | 11 |
| Section 2.3 | Purpose; No Partnership Intended | 11 |
| Section 2.4 | Term | 12 |
| Section 2.5 | Organizational and Fictitious Name Filings; Preservation of Limited Liability | 12 |
| Section 2.6 | Separateness | 12 |
| ARTICLE III | RIGHTS AND OBLIGATIONS OF THE MEMBERS | 13 |
| Section 3.1 | Members; Membership Interests | 13 |
| Section 3.2 | Actions by the Members | 14 |
| Section 3.3 | Management Rights | 14 |
| Section 3.4 | Other Activities | 14 |
| Section 3.5 | Limitation of Liability of Members | 15 |
| Section 3.6 | Company Property | 15 |
| Section 3.7 | Retirement, Resignation, Expulsion, Incompetency, Bankruptcy or Dissolution of a Member | 16 |
| Section 3.8 | Withdrawal of Capital | 16 |
| Section 3.9 | Representations and Warranties | 16 |
| ARTICLE IV | CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS | 17 |
| Section 4.1 | Capital Contributions | 17 |
| Section 4.2 | Capital Accounts | 18 |
| ARTICLE V | ALLOCATIONS | 19 |
| Section 5.1 | Allocations | 19 |
| Section 5.2 | Adjustments to Comply with Code | 20 |
| Section 5.3 | Special Allocations | 20 |
| Section 5.4 | Transfer or Change in Membership Interest | 20 |
| Section 5.5 | Tax Allocations | 20 |
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| ARTICLE VI | DISTRIBUTIONS; PAYMENTS | 21 |
| Section 6.1 | Distributions | 21 |
| Section 6.2 | Tax Distributions | 22 |
| Section 6.3 | Withholding Taxes | 22 |
| Section 6.4 | Limitation on Distributions | 23 |
| Section 6.5 | No Return of Distributions | 23 |
| ARTICLE VII | ACCOUNTING AND RECORDS | 23 |
| Section 7.1 | Reports; Budget | 23 |
| Section 7.2 | Books and Records and Inspection; Right to Audit and Contest | 24 |
| Section 7.3 | Bank Accounts, Notes and Drafts | 25 |
| Section 7.4 | Financial Statements and Other Reports | 25 |
| Section 7.5 | Partnership Status and Tax Elections | 26 |
| Section 7.6 | Company Tax Returns | 27 |
| Section 7.7 | Tax Matters | 27 |
| Section 7.8 | Cooperation | 28 |
| Section 7.9 | Fiscal Year | 28 |
| Section 7.10 | Member Tax Consistency | 28 |
| ARTICLE VIII | MANAGEMENT | 29 |
| Section 8.1 | Management of the Company | 29 |
| Section 8.2 | Removal of Manager/Changes in Voting | 30 |
| Section 8.3 | Debt | 30 |
| Section 8.4 | Major Decisions | 30 |
| Section 8.5 | Unanimous Decisions | 32 |
| Section 8.6 | Costs and Expenses; Compensation | 33 |
| Section 8.7 | Indemnification and Exculpation | 33 |
| ARTICLE IX | TRANSFERS | 34 |
| Section 9.1 | Prohibited Transfers | 34 |
| Section 9.2 | Conditions Applicable to All Transfers | 34 |
| Section 9.3 | Additional Requirements of Transfer | 35 |
| Section 9.4 | Transfer Expenses | 35 |
| Section 9.5 | Non-Compliant Transfer | 35 |
| Section 9.6 | Transferee Members | 35 |
| Section 9.7 | Drag-Along Rights. | 36 |
| Section 9.8 | Tag-Along Rights. | 36 |
| ARTICLE X | DISSOLUTION AND WINDING-UP | 37 |
| Section 10.1 | Events of Dissolution | 37 |
| Section 10.2 | Distribution of Assets | 37 |
| Section 10.3 | In-Kind Distributions | 38 |
| Section 10.4 | Certificate of Cancellation | 38 |
| ARTICLE XI | MISCELLANEOUS | 39 |
| Section 11.1 | Notices | 39 |
| Section 11.2 | Amendment | 39 |
| Section 11.3 | Partition | 39 |
| Section 11.4 | Waivers and Modifications | 39 |
| Section 11.5 | Severability | 39 |
| Section 11.6 | Successors; No Third-Party Beneficiaries | 40 |
| Section 11.7 | Entire Agreement | 40 |
| Section 11.8 | Governing Law | 40 |
| Section 11.9 | Further Assurances | 40 |
| Section 11.10 | Counterparts | 40 |
| Section 11.11 | Dispute Resolution | 40 |
| Section 11.12 | Confidentiality and Publicity | 41 |
| Section 11.13 | Joint Efforts | 42 |
| Section 11.14 | Recourse Only to Party | 42 |
| Section 11.15 | Rule of Interpretation Regarding Manager Deliveries | 42 |
| Section 11.16 | Effectiveness | 42 |
| Annex 1 | Members and Membership Interests | I-1 |
| Schedule 4.2(d) | Initial Capital Accounts | 1 |
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AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
OF
SOLUNA DV COMPUTECO, LLC
This Amended and Restated Limited Liability Company Agreement of Soluna DV ComputeCo, LLC, a Delaware limited liability company (the “Company”), is dated as of May 9, 2023, by and among the Company, Soluna Computing, Inc., a Nevada corporation (“Soluna” or “Parent”), and Navitas West Texas Investments SPV, LLC, a Delaware limited liability company (collectively with its Affiliates, “Navitas”). Each of the Company, Navitas and Soluna shall be referred to herein as a “Party” and collectively as the “Parties”.
RECITALS
1. The Company was formed by the filing of a Certificate of Formation with the Secretary of State of the State of Delaware on January 26, 2022 (the “Certificate of Formation”).
2. The Company has been formed to construct, own, operate and maintain one or more variable data centers or crypto-mining centers.
3. Soluna entered into a Limited Liability Company Agreement of the Company on July 8, 2022 (the “Existing LLCA”).
4. Soluna and Navitas desire to enter into this Agreement to amend and restate the Existing LLCA, and to describe the respective rights and obligations of Members, and to describe the management of the Company and of the respective project companies.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
AGREEMENT
Section 1.1 Definitions. As used in this Agreement, the following terms have the respective meanings set forth below:
“Act” means the Delaware Limited Liability Company Act, Delaware Code Ann. 6, Sections 18-101, et seq. and any successor statute, as the same may be amended from time to time.
“Adjusted Capital Account” shall mean the balance in a Capital Account maintained for a Member as of the end of each fiscal year as adjusted under Section 5.2, and further (i) increased by any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is treated as being obligated to restore pursuant to Treasury Regulations Section 1.704-1(b)(2)(ii)(c), or is deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) decreased by the items described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
“Adjusted Capital Account Deficit” shall mean, with respect to any Member, the deficit balance, if any, in such Member’s Adjusted Capital Account as of the end of the relevant fiscal year.
“Administrative Services Agreement” has the meaning established in the Contribution Agreement.
“Affiliate” of a specified Person means any Person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such specified Person. As used in this definition of Affiliate, the term “control” of a specified Person including, with correlative meanings, the terms, “controlled by” and “under common control with,” means (a) the ownership, directly or indirectly, of 50% or more of the equity interest in a Person; or (b) the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.
“Agreement” means this Amended and Restated Limited Liability Company Agreement (including all annexes, schedules and exhibits hereto), as the same may be amended, supplemented or replaced from time to time.
“Annual Budget” means, with respect to the Company, a budget in respect of each Fiscal Year, setting forth good faith estimations of income and cost-based estimations of expenses, and, if reasonably requested, specifying reasonable reserves.
“Applicable Laws” means all applicable laws of any Governmental Authority, and any applicable ordinances, judgments, decrees, injunctions, guidance, writs and orders of like actions of any Governmental Authority and rules and regulations of any federal, regional, state, county, municipal or other Governmental Authority.
“Applicable Tax Rate” means the combined effective federal, state and local income tax rate applicable to the Members as determined by the Manager (assuming that all of the Members are individuals paying taxes at the maximum applicable federal income tax rates and a 5% combined state and local income tax rate).
“Asset Administrator” has the meaning in the Contribution Agreement.
“Available Cash Flow” means all cash funds and cash equivalents of the Company from operations, refinancings and other loans, asset sales, capital contributions or other sources, at any particular time available for distribution after reasonable provision for (a) payment of all operating expenses of the Company as of such time, and (b) payment of all outstanding and unpaid current obligations of the Company as of such time.
“Business Day” has the meaning established in the Contribution Agreement.
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“Calculation Dispute” has the meaning established in Section 11.1(b).
“Capital Account” has the meaning established in Section 4.2(a).
“Capital Commitment” means, for any Member, the commitment to contribute capital to the Company as provided herein to the extent, if any, that the conditions for such contributions have been satisfied or waived, as required.
“Capital Contribution” means, with respect to any Member, the amount of cash and the initial Gross Asset Value of any property contributed to the Company with respect to the Membership Interests in the Company held by such Member.
“Certificate of Formation” has the meaning established in the preamble to this Agreement.
“Code” means the Internal Revenue Code of 1986, as amended, or any successor federal tax statute.
“Company” has the meaning established in the introductory paragraph.
“Confidential Information” has the meaning established in Section 11.12(a).
“Contribution Agreement” means that certain Contribution Agreement by and between the Company, Navitas and Parent, dated as of the date hereof and as amended from time to time.
“Contribution Cap” means, with respect to Navitas, the Capital Commitment as provided in the Contribution Agreement.
“Depreciation” means for each Fiscal Year or part thereof, an amount equal to the depreciation, amortization or other cost recovery deduction allowable for federal income tax purposes with respect to an asset, except that if the Gross Asset Value of an asset differs from its adjusted basis at the beginning of such Fiscal Year, then the depreciation, amortization or other cost recovery deduction shall be an amount that bears the same ratio to such Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for the period bears to the adjusted tax basis. If the asset has a zero adjusted tax basis, then the depreciation, amortization or other cost recovery deduction shall be determined under a method reasonably selected by the Manager and the Requisite Members.
“Designated Individual” has the meaning established in Section 7.7(a).
“Dispute” has the meaning established in Section 11.11 (a).
“Disputing Member” has the meaning established in Section 11.11(a).
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“Disqualified Transferee” means any entity that:
| (a) | has, directly or indirectly, its principal/controlling office in a country that is subject to economic/political sanctions imposed by the United States for terrorism, terrorist activity financing, arms proliferation (nuclear, chemical, biological or otherwise), export control violations, narcotics trafficking, money laundering, and other similar reasons, such that the transfer would be unlawful; |
| (b) | the business (or any portion thereof) of which is involved in illegal narcotics, arms or terrorism or the export of technology in violation of export control laws; or |
| (c) | has been convicted of a money laundering offense or terrorist activity financing offense. |
“Dissolution Event” has the meaning established in Section 10.1.
“Distributable Cash” means, as of any Distribution Date, all Available Cash Flow less reserves in respect of expenses of the Company expected to be incurred in the following month not to exceed amounts for such month shown in the applicable Annual Budget or Initial Budget, as applicable, then in effect.
“Distribution Date” means, with respect to each calendar month beginning with the third (3rd) calendar month after the date hereof, the 15th day of the subsequent month (or if such day is not a Business Day, the next Business Day).
“Drag-Along Sellers” has the meaning established in Section 9.7.
“Effective Date” has the meaning established in Section 11.16.
“EPC Agreement” has the meaning established in the Contribution Agreement.
“Equity Interests” means any shares, membership interests, participations, or other equivalent ownership interest in a Person, including any and all options, warrants, rights or convertible securities to purchase or other rights to acquire any of the foregoing.
“Estimated Tax Amount” means, for a Fiscal Year (or fiscal period), a Member’s Tax Amount for such Fiscal Year (or fiscal period) as estimated from time to time by the Manager acting in good faith.
“Fair Market Value” with respect to any asset means the price at which the asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of the relevant facts and taking into account the full useful life of the asset and if installed and operating at the time of determination, as installed and operating. When used in connection with the value of the Company, Fair Market Value shall mean the value of the entire Company as a going concern, and not the liquidation value of its assets.
“Financing Documents” has the meaning established in the Contribution Agreement.
“Fiscal Year” has the meaning established in Section 7.9.
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“For Reason” shall mean (i) fraud, deceit, gross negligence or willful misconduct by the Manager in the conduct of its duties for the Company or any Affiliate of the Company, (ii) breach by Manager of any material term of this Agreement, as determined by the disinterested Requisite Members, or (iii) a proceeding is commenced in respect of the Manager or the Parent relating to bankruptcy, insolvency, reorganization or relief of debtors, or the Manager seeks appointment of a receiver, trustee, custodian or other similar official for all or any part of Manager’s or Parent’s property, and any such action that is not dismissed or terminated within sixty (60) days of commencement; provided, however, that in the case of clause (ii), Manager shall have the opportunity to cure such breach within 30 days of the earlier of (a) receiving written notice from any Member of such breach, and (b) the date on which the Manager was obligated to notify any Member of the circumstances regarding such breach if the Manager has not delivered such notice on or prior to such date as required under the Transaction Documents; provided, further, that if such breach cannot be cured within such period, and the Managing Member is proceeding with diligence to cure such breach, the 30-day cure period shall be extended by an additional 30 days, for a total cure period of 60 days.
“Force Majeure Event” means, solely as to the performance by a Party hereto of its obligations hereunder, any event or circumstance which wholly or partly prevents or delays such Party in the performance of any material obligation arising under this Agreement, but only if and to the extent: (a) such event is not within the reasonable control, directly or indirectly, of the Party claiming such Force Majeure Event; (b) the Party claiming such Force Majeure Event has taken all reasonable precautions and measures in order to prevent or avoid such event or mitigate the effect of such event on its ability to perform its obligations under this Agreement, and which by the exercise of due diligence the Party claiming such Force Majeure Event could not reasonably have been expected to avoid and which by the exercise of due diligence it has been unable to overcome; and (c) such event is not the direct or indirect result of the negligence or the failure of, or caused by, the Party claiming such Force Majeure Event.
“GAAP” means (i) generally accepted accounting principles in the United States of America as in effect from time to time, consistently applied; or (ii) upon agreement of the Parties, internationally recognized generally accepted accounting principles, consistently applied.
“Governmental Authority” has the meaning established in the Contribution Agreement.
“Gross Asset Value” means, with respect to any asset, the asset’s adjusted tax basis for federal income tax purposes, except as follows:
(a) the initial Gross Asset Value of any asset contributed by a Member to the Company shall be the Fair Market Value of such asset as of the date of contribution; provided that the initial Gross Asset Values of the assets contributed to the Company pursuant to Section 4.2(d) shall be as shown in Schedule 4.2(d);
(b) the Gross Asset Values of all Company assets shall be adjusted to equal their respective Fair Market Values at the times described in Section 4.2(c);
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(c) the Gross Asset Value of any item of Company assets distributed to any Member shall be adjusted to equal the Fair Market Value of such asset on the date of distribution;
(d) the Gross Asset Values of all Company assets shall be adjusted to reflect any adjustments to the adjusted basis of such assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are required to be taken into account in determining Capital Accounts pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this subsection (d) to the extent that an adjustment pursuant to subsection (b) is made in connection with a transaction that would otherwise result in an adjustment pursuant to this subsection (d); and
(e) if the Gross Asset Value of an asset has been determined or adjusted pursuant to subsection (a), (b) or (d) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Income and Net Losses.
“Indebtedness” shall have the meaning established in the Contribution Agreement.
“Initial Budget” means, with respect to the Company, a budget in respect of the period beginning on the Substantial Completion Date and ending on December 31, 2023, setting forth good faith estimations of income and expenses, and, if reasonably requested, specifying reasonable reserves.
“IRS” means the Internal Revenue Service or any successor agency.
“Lien” has the meaning established in the Contribution Agreement.
“Major Decisions” has the meaning established in Section 8.4.
“Manager” means Soluna, or if Soluna is replaced pursuant to Section 8.2 or otherwise, any Person appointed in replacement thereof in accordance with this Agreement. The Manager is a manager of the Company within the meaning of the Act.
“Material Adverse Effect” means, (a) with respect to the Company, a material adverse change in, or material adverse effect on the business, operations, properties, liabilities or financial condition of such Person; (b) a material adverse change in, or material adverse effect on (i) with respect to the Company, the ability of such Person to perform any of its material obligations under this Agreement; or (ii) the validity or enforceability of this Agreement; except, in each case, to the extent that such change or effect results from events or conditions affecting the economy generally (provided that such events or conditions do not affect such Person and its subsidiaries, taken as a whole, in a disproportionate manner relative to similarly situated participants in the market or markets in which such Person operates, if any similarly situated participants then exist).
“Member” means parties executing this Agreement as of the date of this Agreement or any Person admitted to the Company as a member as provided in this Agreement (each in the capacity as a member of the Company), but does not include any Person who has ceased to be a member of the Company.
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“Membership Interest” means the entire interest of a Member in the Company, including rights to distributions (liquidating or otherwise), allocations of profits and losses, and to vote, consent or approve or receive information, if any.
“Navitas” has the meaning established in the preamble to this Agreement.
“Net Income” or “Net Losses” shall mean with respect to each fiscal year or other period, an amount equal to the Company’s income or loss for such fiscal year or period determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be separately stated pursuant to Code Section 703(a)(i) shall be included in such taxable income or loss), together with the following adjustments (without duplication):
(a) any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Net Income or Net Losses pursuant to this definition shall be added to such taxable income or loss;
(b) any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulations 1.704-1(b)(2)(iv)(i) and not otherwise taken into account in computing Net Income or Net Losses pursuant to this definition shall be subtracted from such taxable income or loss in the year paid, and shall not be taken into account in any other year; and
(c) in the event the Gross Asset Value of any Company property is adjusted pursuant to paragraphs (b) or (d) of the definition of “Gross Asset Value” above, the amount of such adjustment shall be taken into account as a gain or loss on the disposition of such property for purposes of computing Net Income and Net Loss;
(d) in lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or taxable loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with the definition of Depreciation herein;
(e) gain or loss resulting from any disposition of Company property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the property’s Gross Asset Value, notwithstanding that the adjusted tax basis of such property may differ from its Gross Asset Value; and
(f) notwithstanding any other provision of this definition of Net Income and Net Losses, any items comprising the Company’s Net Income or Net Losses that are allocated pursuant to Section 5.1 shall not be taken into account in computing Net Income or Net Losses.
The amount of the items of Company income, gain, loss or deduction available to be specially allocated pursuant to Section 5.3 shall be determined by applying rules analogous to those set forth in subparagraphs (a) through (f) above.
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“Notice” has the meaning established in Section 11.1.
“O&M Agreement” has the meaning established in the Contribution Agreement.
“Partnership Representative” has the meaning established in Section 7.7(a).
“Percentage Interest” means the percentage interest shown for a Member in Schedule 4.2(d).
“Person” has the meaning established in the Contribution Agreement.
“POCo” has the meaning established in the Contribution Agreement.
“Prohibited Entity” means any entity listed on Schedule 9.2(h) and their controlling owners.
“Project” has the meaning established in the Contribution Agreement.
“Project Documents” has the meaning established in the Contribution Agreement.
“Quarterly Estimated Tax Amount” means, with respect to any quarter of a Fiscal Year, the excess of (i) the product of (A) ¼ in the case of the first quarter of the Fiscal Year, ½ in the case of the second quarter of the Fiscal Year, ¾ in the case of the third quarter of the Fiscal Year, and 1 in the case of the fourth quarter of the Fiscal Year and (B) such Member’s Estimated Tax Amount for such Fiscal Year over (ii) all prior distributions made to such Member for such Fiscal Year (including Quarterly Estimated Tax Amounts for such Fiscal Year).
“Representatives” means, with respect to any Person, the managing members, the officers, directors, employees, representatives or agents (including investment bankers, financial advisors, attorneys, accountants, brokers and other advisors) of such Person, to the extent that such officer, director, employee, representative or agent of such Person is acting in his or her capacity as an officer, director, employee, representative or agent of such Person.
“Requisite Members” means (a) prior to May 31, 2023, the holders of 75% or more of the then outstanding Membership Interests, and (b) on and after May 31, 2023, the holders of 66.6% or more of the then outstanding Membership Interests; provided, however, that in each case, for any matter described in Section 8.1(b)(i), the “Requisite Members” shall mean an affirmative vote of the holders of a majority of the outstanding Membership Interests held by Members other than POCo or Soluna, or their respective Affiliates, or any of their respective transferees or successors, or their respective Affiliates.
“Sale of the Company” shall mean any of the following events: (a) a merger in which the Company is a constituent party, except any such merger involving the Company in which the Membership Interests outstanding immediately prior to such merger continue to represent, or are converted into or exchanged for shares of equity interests that represent, immediately following such merger, at least a majority, by voting power, of the equity interests of (1) the surviving or resulting company or, (2) if the surviving or resulting company is a wholly owned subsidiary of another company immediately following such merger, the parent company of such surviving or resulting company and (b) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Company of all or substantially all the assets of the Company, directly or indirectly, by the Company, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company.
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“Shared Facilities Agreement” has the meaning set forth in the Contribution Agreement.
“Soluna” has the meaning established in the preamble to this Agreement.
“Substantial Completion Date” has the meaning set forth in the EPC Agreement.
“Tag-Along Sellers” has the meaning established in Section 9.8.
“Tangible Net Worth” means with respect to any entity (i) all shareholders’ equity in such entity and its subsidiaries, determined on a consolidated basis in accordance with GAAP (less the value of all assets properly classified as intangible assets under GAAP and minority interests) or (ii) if such entity is a fund or similar entity, (a) partners’ capital (including in the form of shareholder loans to such entity) in such entity (determined in accordance with GAAP, it being understood that the calculation of partners’ capital in such entity is already net of any liabilities of such entity) plus (b) the unfunded/uncalled capital commitments (including in the form of shareholder loan commitments to such entity) of the partners in such entity determined in accordance with such entity’s limited partnership agreement or equivalent constituent documents, other than the unfunded/uncalled capital commitment (including in the form of shareholder loan commitments to such entity) of any defaulting partner or any partner whose commitment cannot be called in respect of the obligations under the Contribution Agreement or any guaranty of those obligations being provided by such entity, less (c) without duplication, the full amount of unfunded obligations of such entity to or related to investments and other activities of such entity (including amounts committed to be funded on a conditional or contingent basis).
“Tax” (and, with correlative meaning, “Taxes” and “Taxable”) means any taxes, customs, duties, charges, fees, levies or other assessments imposed by any federal, state, local or foreign taxing authority, including, but not limited to, income, gross receipts, windfall profit, severance, property, production, sales, use, license, excise, franchise, net worth, employment, occupation, payroll, withholding, social security, alternative or add-on minimum, ad valorem, transfer, stamp, or environmental tax, or any other tax, custom, duty, levy or other like assessment or charge of any kind whatsoever imposed by any federal, state, local or foreign taxing authority, together with any related interest, penalty, addition to tax, or additional amount attributable thereto.
“Tax Amount” means, for a Fiscal Year, the product of (A) the Applicable Tax Rate multiplied by (B) the net taxable income allocated by the Company to such Member for such Fiscal Year.
“Tax Distribution” means the quarterly distribution to each Member of an amount of cash equal to such Member’s Quarterly Estimated Tax Amount for such quarter of the Fiscal Year.
“Tax Proceeding” has the meaning established in Section 7.7(b).
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“Tax Return” means any return, report or similar statement required to be filed with respect to any Taxes (including any attached schedules), including an IRS Form K-1 to be issued to Members, any information return, claim for refund, amended return or declaration of estimated Tax.
“Transaction Documents” means collectively and individually, this Agreement, the Contribution Agreement, the Shared Facilities Agreement, the Administrative Services Agreement, and the other documents, instruments, or certificates delivered under this Agreement or the foregoing agreements or documents.
“Transfer” (and any corollary use thereof) means, with respect to any Membership Interests, a direct or indirect sale, assignment, pledge, encumbrance, abandonment, disposition, alienation, hypothecation, gift or other transfer, whether voluntary, involuntary, or by operation of law, of such Membership Interests.
“Treasury Regulations” means regulations issued under the Code.
“UCC” means the Uniform Commercial Code of any applicable jurisdiction.
“Unanimous Decisions” has the meaning given in Section 8.5.
“Unfunded Commitment” means, as to any Member and as of any date, the excess of such Member’s Capital Commitment over such Member’s Capital Contribution as of such date.
Section 1.2 Other Definitional Provisions.
(a) As used in this Agreement and in any certificate or other documents made or delivered pursuant hereto or thereto, financial and accounting terms not defined in this Agreement or in any such certificate or other document, and financial and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under GAAP. To the extent that the definitions of financial and accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under GAAP, the definitions contained in this Agreement or in any such certificate or other document shall control.
(b) This Agreement is the result of the joint efforts of the parties hereto, and each provision hereof has been subject to the mutual consultation, negotiation and agreement of the parties and there is to be no construction against either party based on any presumption of that party’s involvement in the drafting hereof. Any reference to any Law shall be deemed also to refer to all rules and regulations promulgated thereunder and such laws and regulations as amended from time to time, unless the context requires otherwise. Whenever used in this Agreement, except as otherwise expressly provided or unless the context otherwise requires, any noun or pronoun shall be deemed to include the plural as well as the singular and to cover all genders and the terms “include,” “includes” and “including” shall be inclusive and not exclusive and shall be deemed to be followed by the following phrase “without limitation.” Unless otherwise specified, the terms “hereof,” “herein,” “hereunder,” “herewith” and similar terms refer to this Agreement as a whole (including the schedules and exhibits to this Agreement) and references herein to Sections, Articles, Schedules or Exhibits refer to the applicable sections, articles, schedules or exhibits of this Agreement; the words “or” and “any” are not exclusive and shall be interpreted to mean “and/or” and “any and all”, respectively. All references to “dollars” or “$” are to United States dollars.
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(g) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms.
(h) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as amended, restated, supplemented or otherwise modified from time to time, and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein.
(i) Any references to a Person are also to its successors and permitted assigns.
ARTICLE II
CONTINUATION; OFFICES; TERM
Section 2.1 Formation of the Company. The Members hereby acknowledge the formation of the Company as a limited liability company pursuant to the Act, the Certificate of Formation and this Agreement.
Section 2.2 Name, Office and Registered Agent.
(a) The name of the Company shall be “Soluna DV ComputeCo, LLC” or such other name or names as may be agreed to by the Members from time to time. The principal office of the Company shall be 325 Washington Ave. Extension, Albany, NY 12205, 518-218-2550, Attn: CFO, email: DVnotice@soluna.io. The Manager may at any time change the location of such office to another location; provided that the Manager gives prompt written notice of any such change to the registered agent of the Company.
(b) The registered office of the Company in the State of Delaware is located at 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. The registered agent of the Company for service of process at such address is The Corporation Trust Company. The registered office and registered agent may be changed by the Manager at any time in accordance with the Act; provided that the Manager gives prompt written notice of any such change to all Members. The registered agent’s primary duty as such is to forward to the Company at its principal office and place of business any notice that is served on it as registered agent.
Section 2.3 Purpose; No Partnership Intended.
(a) The nature of the business or purpose to be conducted or promoted by the Company is: (i) to engage in the transactions contemplated by the Transaction Documents, Project Documents and Financing Documents; and (ii) to engage in any lawful act or activity, enter into any agreement and to exercise any powers permitted to limited liability companies formed under the Act that are incidental to or necessary, suitable or convenient for the accomplishment of the purposes specified above. The Company shall exist for the purposes and business specified in this Section 2.3(a).
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(b) This Agreement shall not be deemed to create a partnership under the Delaware Revised Uniform Partnership Act, company, joint venture or other arrangement among the Members with respect to any actions whatsoever other than the purposes and business specified in Section 2.3(a) and the activities related thereto provided, that the Members intend that the Company shall constitute a partnership for all tax purposes.
Section 2.4 Term. The term of the Company commenced on the date of its formation and shall continue until the Company is dissolved in accordance with Article X. Except as provided in Article X, the Company shall not be dissolved.
Section 2.5 Organizational and Fictitious Name Filings; Preservation of Limited Liability. Prior to the Company conducting business in any jurisdiction other than Delaware, the Manager shall, on behalf of the Company, register the Company as a foreign limited liability company and file such fictitious or trade names, statements or certificates in such jurisdictions and offices as necessary or appropriate for the conduct of the Company’s business. The Manager shall take any and all other actions as may be reasonably necessary or appropriate to perfect and maintain the status of the Company as a limited liability company under the laws of Delaware and any other state or jurisdiction other than Delaware in which the Company engages in business and continue the Company as a limited liability company and to protect the limited liability of the Members as contemplated by the Act and as provided herein.
Section 2.6 Separateness. The Company shall maintain its existence separate and distinct from any other Person, including taking the following actions:
(a) maintaining in full effect its existence, rights and franchises as a limited liability company under the laws of the State of Delaware and obtaining and preserving its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement and each other instrument or agreement necessary or appropriate to properly administer this Agreement and permit and effectuate the transactions contemplated hereby and thereby;
(b) maintaining its own deposit accounts, separate from those of any other Person;
(c) conducting all transactions between the Company and any of its Affiliates on an arm’s length basis and on a commercially reasonable basis;
(d) conducting its affairs separately from those of any other Person and maintaining accurate and separate books, records and accounts and financial statements, it being agreed that performance of its obligations under the Transaction Documents, Project Documents and Financing Documents shall not result in the Company contravening this Section 2.6(d);
(e) acting solely in its own limited liability company name and not that of any other Person, and at all times using its own stationery, invoices and checks separate from those of any other Person, any of its officers or any of their respective Affiliates;
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(f) maintaining all of its assets in its own name and not commingling its assets with those of any other Person;
(g) paying its own operating expenses and other liabilities out of its own funds;
(h) observing all limited liability company formalities, including maintaining meeting minutes or records of meetings and acting on behalf of itself only pursuant to due authorization, required hereby and by the Certificate of Formation;
(i) maintaining adequate capital for the normal obligations reasonably foreseeable in light of its contemplated business operations; and
(j) holding itself out to the public as a legal entity separate and distinct from any other Person.
ARTICLE III
RIGHTS AND OBLIGATIONS OF THE MEMBERS
Section 3.1 Members; Membership Interests.
(a) The names of the Members, their addresses, contact information and Membership Interests held are listed on Annex I. Annex I shall be amended from time to time by the Manager without requiring the consent of any Member to reflect the change in a Member’s name, address or contact information, the withdrawal of any Member, the admission of any additional Member, Transfers of Membership Interests or the issuance of additional Membership Interests, in each case, pursuant to, and in accordance with, the terms and conditions of this Agreement. The Manager shall upon each amendment to Annex I, provide each Member, on a confidential basis for informational purposes, with a copy of such amended Annex I.
(b) The authorized Membership Interests consist of 17,010,000 Membership Interests.
(c) As of the Effective Date, 4,500,000 Membership Interests are issued to Navitas and 11,250,000 Membership Interests are issued to Soluna.
(d) On the Effective Date, Navitas is admitted to the Company as a Member, and Soluna is admitted to the Company as a Member.
(e) The Membership Interests shall (i) have the rights and obligations ascribed to such Membership Interests in this Agreement and the Act; (ii) be recorded in a register of Membership Interests, which register the Manager shall maintain; and (iii) be transferable only on recordation of such Transfer in the register of Membership Interest, which recordation the Manager shall make, upon compliance with the provisions of Article IX. The Members hereby specify, acknowledge and agree that all Membership Interests are securities governed by Article 8 of the UCC, and pursuant to the terms of Section 8-103(c) of the UCC, such interests shall be “securities” for all purposes under such Article 8 and under all other provisions of the UCC. The Membership Interests shall not be certificated.
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(f) The Company shall treat the registered holder of a Membership Interest, as shown in the register of Membership Interests referred to in Section 3.1 of this Agreement as a Member for all purposes of this Agreement.
(g) Upon the Transfer by a Member of all of its Membership Interest to another Person pursuant to and in accordance with the terms set forth in Article IX, the transferor shall automatically cease to be a Member.
(h) Subject to Article IX, no Member will have any right to voluntarily resign or otherwise withdraw from the Company without the prior written consent of all remaining Members of the Company which consent may be given or withheld in their sole and absolute discretion.
Section 3.2 Actions by the Members. To the extent that any act or matter requires the vote of the Members, and except as may be otherwise specifically provided herein, such vote shall be by the consent of the Requisite Members. The Manager is hereby authorized by the Members to take any and all actions on behalf of the Company except for (i) any action that is a Major Decision or Unanimous Decision and (ii) any action which is reserved to or requires the approval of the Requisite Members under any provision of this Agreement.
Section 3.3 Management Rights. No Member, in its capacity as such shall have any right, power or authority to take part in the management or control of the business of, or transact any business for, the Company, to sign for or on behalf of the Company or to bind the Company in any manner whatsoever. Except in the case of an exercise by the Members of their rights under Section 8.1(b), the Manager shall not hold out or represent to any third party that any Member, other than the Manager, in its capacity as such, has any such power or right or that any Member is anything other than a member in the Company. The Parties intend that a Member does not control, is not controlling, and is not participating in the control of the Company or the business of the Company by virtue of its possessing or exercising any rights as a Member set forth in this Agreement or the Act or any other agreement relating to the Company.
Section 3.4 Other Activities. Notwithstanding any duty otherwise existing at law or in equity, and except as provided in this Agreement or the other Transaction Documents, any Member may engage in or possess an interest in other business ventures of every nature and description, independently or with others, even if such activities compete directly with the business of the Company, and neither the Company nor any of the Members will have any rights by virtue of this Agreement in and to such independent ventures or any income, profits or property derived from them. Notwithstanding anything to the contrary in this Section 3.4, the foregoing shall not be deemed to limit any requirement to act reasonably or for any such consent or approval to not be unreasonably withheld, conditioned or delayed, in each case wherever expressly stated in this Agreement.
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Section 3.5 Limitation of Liability of Members.
(a) Notwithstanding anything to the contrary and to the fullest extent permitted under Applicable Law, no Member will be liable to the Company, any Member, the Manager, any transferee or any other equity holder in or creditor of the Company for any action taken by or on behalf of the Company, except for such actions as constitute gross negligence, fraud or willful misconduct of such Member. Except as otherwise required by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, will be the debts, obligations and liabilities solely of the Company, and the Members of the Company will not be obligated personally for any of such debts, obligations or liabilities solely by reason of being a Member or Manager of the Company. No Member shall have any personal liability for the repayment of the positive balance in the Capital Account of a Member.
(b) This Agreement is not intended to, and does not, create or impose any fiduciary duty on any Member in its capacity as a member of the Company. Furthermore, each of the Members and the Company hereby waives any and all fiduciary duties of a Member in its capacity as a member of the Company that, absent such waiver, may be implied by Applicable Law, and in doing so, acknowledges and agrees that the duties and obligation of each Member to each other and to the Company are only as expressly set forth in this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of a Member otherwise existing at law or in equity, are agreed by the Members to replace such other duties and liabilities of such Member. To the extent that, at law or in equity, a Member, in its capacity as a member of the Company, has duties (including fiduciary duties) or liabilities relating thereto to the Company or to any Member or other Person bound by this Agreement more expansive than those set forth in Section 3.5(a), such duties and liabilities are hereby limited to the extent permitted under the Act, including to the fullest extent permitted Section 18-1101 of the Act, to those set forth in Section 3.5(a); provided, that this Section 3.5(b) or Section 3.5(a) will not be construed to limit obligations or liabilities expressly provided for in this Agreement (including the obligations with respect to Capital Contributions) or any other Transaction Document. The provisions of this Agreement, including this Section 3.5(b), to the extent that they limit the duties and liabilities of a Member otherwise existing at law or in equity, in its capacity as a member of the Company, are agreed by the Members to replace such other duties and liabilities of such Member.
(c) Whenever in this Agreement a Member, in its capacity as a member of the Company or otherwise (other than in its capacity as a Manager), is permitted or required to make a decision (including a decision that is in such Member’s “discretion” or under a grant of similar authority or latitude), the Member shall be entitled to consider only such interests and factors as such Member desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Company or any other Person. Whenever in this Agreement a Member is permitted or required to make a decision in such Member’s “good faith,” the Member shall act under such express standard and shall not be subject to any other or different standard imposed by this Agreement or any other Applicable Law.
Section 3.6 Company Property. All property owned by the Company, whether real or personal, tangible or intangible and wherever located, will be deemed to be owned by the Company, and no Member, individually, will have any ownership of such property.
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Section 3.7 Retirement, Resignation, Expulsion, Incompetency, Bankruptcy or Dissolution of a Member. The retirement, resignation, expulsion, bankruptcy or dissolution of a Member will not, in and of itself, dissolve the Company. The successors in interest to the bankrupt Member shall, for the purpose of settling the estate, have all of the rights of such Member, including the same rights and subject to the same limitations that such Member would have had under the provisions of this Agreement to Transfer its Membership Interest. A successor in interest to a Member will not become a substituted Member except as provided in Article IX of this Agreement.
Section 3.8 Withdrawal of Capital. No Member will have the right to withdraw capital from the Company or to receive or demand distributions (except as to distributions to which it is entitled under Article VI) or return of its Capital Contributions until the Company is dissolved in accordance with this Agreement and applicable provisions of the Act. No Member will be entitled to demand or receive any interest on its Capital Contributions.
Section 3.9 Representations and Warranties.
(a) The Manager makes the following additional representations and warranties as to the Company to each other Member as of the Effective Date:
(i) Organization, Good Standing, Etc. The Company is a limited liability company duly formed, validly existing and in good standing under the law of the jurisdiction of its formation. The Company has the limited liability company power and authority to own, lease and operate its properties and to carry on its business as now being conducted.
(ii) Authority. The Company has the limited liability company power and authority to enter into the Transaction Documents to which it is a party, to perform its obligations under such Transaction Documents and to consummate the transactions contemplated thereby. Each of the Transaction Documents to which the Company is a party represents a valid and binding obligation of the Company, enforceable against it in accordance with the terms, subject to the effects of bankruptcy, insolvency, reorganization, moratorium and similar laws affecting enforcement of creditors’ rights and remedies generally and to general principles of equity.
(iii) Employee Matters. The Company does not have and has never had any employees and has not maintained, sponsored, administered or participated in any employee benefit plan or arrangement.
(b) Each Member, severally and not jointly, makes the following representations and warranties to the Company and each other Member as of the Effective Date:
(i) Organization, Good Standing, Etc. Such Member is a limited liability company, duly formed, validly existing and in good standing under the laws of the jurisdiction of its formation, and it has the power and authority to own, lease and operate its properties and to carry on its business as now being conducted.
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(ii) Authority. Such Member has the power and authority to enter into the Transaction Documents to which it is a party, to perform its obligations under such Transaction Documents, and to consummate the transactions contemplated thereby. Each of the Transaction Documents to which such Member is a party represents a valid and binding obligation of such Member, enforceable against it in accordance with the terms, subject to the effects of bankruptcy, insolvency, reorganization, moratorium and similar laws affecting enforcement of creditors’ rights and remedies generally and to general principles of equity.
(iii) No Conflicts. The execution and delivery of each of the Transaction Documents to which such Member is a party and the performance by such Member of its obligations thereunder will not (A) violate any constitution, statute, regulation, rule, injunction, order, decree, ruling or other restriction of any Governmental Authority to which such Member is subject, (B) conflict with or cause a breach of any provision in the charter, bylaws or other organizational documents of such Member, (C) cause a breach of, constitute a default under, cause the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any authorization, consent, waiver or approval under any contract, license, instrument, decree, judgment or other arrangement to which such Member is a party or under which it is bound or to which any of its assets are subject (or result in the imposition of a security interest or encumbrance upon any such assets), or (D) require any consent, approval or authorization from, filing or registration with, or notice to any Governmental Authority or Person, unless such requirement has already been satisfied.
(iv) Absence of Litigation. Such Member is not subject to any outstanding injunction, judgment, order, decree, ruling or charge and, to the knowledge of such Member, is not threatened in writing with being made a party to any action, suit, proceeding, hearing or investigation of, in, or before any Governmental Authority or before any arbitrator that could affect its ability to complete the transactions contemplated in the Transaction Documents to which it is a party or could have a material effect on the operation of the Company.
(v) Acknowledgment. Such Member acknowledges that, except with respect to the representations and warranties expressly made by the Manager in the Transaction Documents, the Project Documents or the Financing Documents, the Manager has made no representation or warranty, whether express or implied under the Transaction Documents, to the Members.
ARTICLE IV
CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS
Section 4.1 Capital Contributions.
(a) The initial Capital Contributions of the Members are set forth on Schedule 4.2(d).
(b) Subject to the terms and conditions of the Contribution Agreement, each Member shall make Capital Contributions at such time or times and in such amounts as provided in the Contribution Agreement, up to such Member’s aggregate Contribution Cap. No Member shall have the obligation to make any Capital Contribution hereunder in excess of such Member’s Contribution Cap, respectively.
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(c) Except as may be specifically set forth elsewhere in this Agreement and as provided in Section 2.2 of the Contribution Agreement, no Member shall be required to make any further Capital Contributions after the Capital Commitment Expiration Date.
(d) Except as elsewhere set forth in this Agreement, the Members will have no obligation to make any Capital Contributions other than as described in this Section 4.1.
Section 4.2 Capital Accounts.
(a) A capital account (a “Capital Account”) shall be established and maintained for each Member in the manner required by the Treasury Regulations under Section 704(b) of the Code.
(b) A Member’s Capital Account shall be increased by (i) the amount of cash the Member contributes to the Company, (ii) the net value of any property the Member contributes to the Company (i.e., the Fair Market Value of the property net of liabilities secured by the property that the Company is considered to assume or take subject to under Section 752 of the Code), (iii) the Member’s distributive share of Net Income or other income and gain allocated in accordance with this Agreement, and (iv) the net amount of any Company liabilities that are assumed by such Member or that are secured by any Company assets distributed to such Member. A Member’s Capital Account shall be decreased by (i) the amount of cash distributed to the Member by the Company, (ii) the net value of any property distributed to the Member by the Company (i.e., the Fair Market Value of the property net of liabilities secured by the property that the Member is considered to assume or take subject to under Section 752 of the Code), (iii) the Member’s distributive share of Net Loss or other loss and deduction allocated in accordance with this Agreement, (iv) the net amount of any liabilities of such Member that are assumed by the Company or that are secured by any property contributed by such Member to the Company (without duplication of any liabilities taken into account in determining the amount of any increase in a Member’s Capital Account), and (v) an amount equal to an allocation of downward basis adjustment to such Member as described in Treasury Regulation Section 1.704-1(b)(2)(iv)(j), if any. The Members’ Capital Accounts shall be maintained and adjusted as required by the provisions of Treasury Regulation Sections 1.704-1(b)(2)(iv) and 1.704-1(b)(4), including adjustments to reflect the allocations to the Members of depreciation, depletion, amortization and gain or loss as computed for book purposes rather than the allocation of the corresponding items as computed for tax purposes, as required by Treasury Regulation Section 1.704-1(b)(2)(iv)(g).
(c) The Gross Asset Value of the Company’s property shall be revalued, and the Capital Accounts of the Members shall be reset to reflect a revaluation as directed by Treasury Regulation Section 1.704-1(b)(2)(iv)(f), immediately prior to the following events: (i) if any new or existing Member makes more than a de minimis Capital Contribution in exchange for a new or additional Membership Interest, (ii) if more than a de minimis amount of property is distributed by the Company to a Member to redeem all or any portion of its Membership Interest, or (iii) if the Company is liquidated within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (i) and (ii) above shall be made only if the Manager reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company.
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(d) For federal income tax purposes, each of the initial Members will be treated as acquiring an interest in a new partnership in exchange for its initial Capital Contribution on the Effective Date. The Company will be an entity disregarded as separate from its direct owner prior to the admission of the Members as Members of the Company.
(e) Following the Members’ initial Capital Contributions in accordance with the Contribution Agreement, the Capital Account balance and Percentage Interest of each Member are as shown in Schedule 4.2(d). The Manager shall update Schedule 4.2(d) from time to time. Any such updating will be consistent with the requirements regarding the maintenance of Capital Accounts set forth in this Article IV. Any reference in this Agreement to Schedule 4.2(d) will be treated as a reference to Schedule 4.2(d) as amended and in effect from time to time.
(f) If all or a portion of a Membership Interest in the Company is Transferred in accordance with the terms of this Agreement, then the transferee shall succeed to the Capital Account of the transferor to the extent of the Membership Interest so Transferred.
(g) The Capital Accounts shall be maintained in accordance with Treasury Regulation Sections 1.704-1(b) and the provisions regarding Capital Accounts in this Agreement will be interpreted and applied in a manner consistent with such Treasury Regulation or any successor provision.
ARTICLE V
ALLOCATIONS
Section 5.1 Allocations. Subject to Section 5.2 and Section 5.3, for each Fiscal Year or portion thereof, the Company’s Net Income or Net Losses (and, to the extent necessary, items thereof) shall be allocated among the Members in amounts that, as of the end of such Fiscal Year or other period, would result in Capital Account balances for each Member, increased by such Member’s share of partnership minimum gain (as determined according to Treasury Regulation Section 1.704-2(g)) and such Member’s partner nonrecourse debt minimum gain (as defined in Treasury Regulation Section 1.704-2(i)(2)), equal to all amounts required to be distributed pursuant to Section 10.2(b)(iv) in the priority and manner provided therein on a hypothetical liquidation of the Company. In determining the amounts distributable to the Members under Section 10.2(b)(iv) upon a hypothetical liquidation, it shall be presumed that (i) all of the Company’s remaining assets are sold at their respective Gross Asset Values, (ii) all Company liabilities are satisfied (limited with respect to each nonrecourse liability to the Gross Asset Value securing that liability), (iii) all Membership Interests are vested and (iv) the proceeds of such hypothetical sale are applied and distributed in accordance with Section 6.1(a).
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Section 5.2 Adjustments to Comply with Code. The manner in which Capital Accounts are to be maintained and in which the income, gain, loss, deductions and credits of the Company are to be allocated pursuant to this Agreement are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. If, in the opinion of the Company’s accountants and subject to the consent of the Manager and the Requisite Members, modifications are required in the manner in which Capital Accounts are to be maintained or the manner in which income, gain, deductions or losses, or items included therein, are to be allocated in order to comply with Section 704(b) of the Code and the Treasury Regulations thereunder, then, notwithstanding anything to the contrary contained in this Agreement, such modifications shall be made, provided, however, that any change in the manner of maintaining Capital Accounts or allocating income, gain, deductions or losses, or items included therein, shall not materially alter the economic agreement between or among the Members as set forth in this Agreement.
Section 5.3 Special Allocations. Notwithstanding any other provision of this Agreement, appropriate adjustments shall be made to the allocations to the extent required to comply with the provisions of the Treasury Regulations under Section 704(b) of the Code relating to qualified income offset, minimum gain chargeback, minimum gain chargeback with respect to partner nonrecourse debt, allocations of nonrecourse deductions, allocations with respect to partner nonrecourse debt, limitations on allocations of losses that might cause or increase an Adjusted Capital Account Deficit, corrective allocations with respect to partnership non-compensatory options, and forfeiture allocations with respect to substantially nonvested partnership interests, and such provisions are hereby incorporated by reference and shall be applied to the allocation of profits and losses in the manner provided in the Treasury Regulations. The Manager may, with the consent of the Requisite Members, adjust the subsequent allocations of Net Income and Net Losses to prevent distortion of the economic arrangement of a Member, as otherwise described in this Agreement, due to allocations resulting from the preceding sentence. Nonrecourse deductions (within the meaning of Treasury Regulations Section 1.704-2(b)(1)), tax credits, and other items the allocation of which cannot have economic effect shall be allocated to the Members in accordance with their Percentage Interest. To the extent permitted by such Treasury Regulations, the allocations pursuant to this Section 5.3 in such year and subsequent years shall be further adjusted so that the cumulative effect of all the allocations shall be the same as if all such allocations were made pursuant to the allocation provisions of this Agreement without regard to this Section 5.3.
Section 5.4 Transfer or Change in Membership Interest. If the respective Membership Interests or allocation ratios described in this Article V of the existing Members in the Company change or if a Membership Interest is Transferred in compliance with this Agreement to any other Person, then, for the Fiscal Year or other period in which the change or Transfer occurs, tax items shall be allocated, as between the Members for the Fiscal Year in which the change occurs or between the transferor and transferee, by taking into account their varying interests using any method permitted by Section 706 of the Code and the Treasury Regulations promulgated under Section 706 of the Code (such as an interim closing of the books or a proration method) as determined by the Manager with the consent of the Requisite Members.
Section 5.5 Tax Allocations.
(a) In General. Except as otherwise provided in this Section 5.5, taxable income and loss and all items thereof shall be allocated to the Members to the greatest extent practicable in a manner consistent with the manner set forth in Section 5.1 and Sections 704(b) and (c) of the Code. Allocations pursuant to this Section 5.5 are solely for federal income tax purposes and shall not affect, or in any way be taken into account in computing, any Member’s Capital Account or share of Net Income, Net Losses, other items or distributions pursuant to any provision of this Agreement.
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(b) Section 704(c) of the Code. In accordance with Section 704(c) of the Code, income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for income tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its initial Gross Asset Value.
(c) Adjustments under Section 704(c) of the Code. In the event the Gross Asset Value of any Company asset is adjusted pursuant to paragraph (b) of the definition of “Gross Asset Value,” subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted tax basis of such asset and its Gross Asset Value in the same manner as under Section 704(c) of the Code.
(d) Decisions Relating to Section 704(c) of the Code. Any elections or other decisions relating to allocations under this Section 5.5, including the selection of any allocation method permitted under Treasury Regulation Section 1.704-3, shall be made by the Manager with the consent of the Requisite Members.
ARTICLE VI
DISTRIBUTIONS; PAYMENTS
Section 6.1 Distributions.
(a) Except as provided otherwise in Section 10.2, and subject to Section 6.2, Distributable Cash shall be distributed to the Members pro rata based on the amount of Membership Interests held by such Members.
(b) Distributions required to be made by operation of Section 6.1(a) shall be made by the Company on each Distribution Date, unless otherwise agreed with the consent of the Requisite Members.
(c) Notwithstanding the foregoing, if any Member fails to make a Capital Contribution in accordance with Section 4.1(b) or otherwise is in material breach of any provision in this Agreement (such Member, a “Breaching Member”), and such breach is continuing, such Breaching Member (i) shall not be entitled to and shall forfeit any right to any distributions pursuant to this Section 6.1, and (ii) shall not be entitled to vote on any matters as a Member of the Company with respect to any Membership Interests held by such Breaching Member (for avoidance of doubt, the Membership Interests held by such Breaching Member shall not be included in either the numerator or denominator for determining whether the voting threshold for the Requisite Members has been reached). Upon any breach, a non-Breaching Member shall promptly provide written notice to the Breaching Member and each other Member of such breach (“Breach Notice”). The Breaching Member shall have five (5) Business Days after such Breach Notice has been received by the Breaching Member to challenge such Breach Notice by providing written notice to the non-Breaching Members of such challenge (a “Breach Challenge”). Upon receipt of a Breach Challenge by the non-Breaching Member, the Members shall in good faith collaborate to resolve such dispute set forth in the Breach Challenge. If the Members cannot resolve such dispute within thirty (30) calendar days, the Members shall engage a third party mediator, acceptable to the Members, to resolve the dispute in a timely manner thereafter.
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Section 6.2 Tax Distributions. Notwithstanding anything to the contrary in Section 6.1, to the extent that the Manager, in its reasonable discretion, determines that the Company has sufficient current and projected cash flow to make Tax Distributions, the Company may make Tax Distributions quarterly to each Member. Tax Distributions pursuant to this Section 6.2 shall be treated as advances of distributions to be made pursuant to Section 6.1 (including Section 10.2(b)) and credited against future distributions pursuant to Section 6.1 (including Section 10.2(b)). No Member shall be entitled to any Tax Distributions (or further Tax Distributions, as the case may be) during a Fiscal Year if such Member has already received cumulative distributions during such Fiscal Year pursuant to Section 6.1 or this Section 6.2 equal to or in excess of such Member’s Tax Amount for such Fiscal Year. Notwithstanding the foregoing, no Member shall be liable to return any Tax Distribution, even if the Tax Distributions made to such Member exceed the amount such Member could be entitled to receive under Section 6.1 (including Section 10.2(b)); provided such excess Tax Distribution shall be treated as an advance to such Member with respect to the next distributions in the distribution waterfall pursuant to Section 6.1. If the cumulative distributions made to any Member pursuant to Section 6.1 or this Section 6.2 with respect to a Fiscal Year is less than the Tax Amount of such Member for such Fiscal Year, the Company shall distribute the excess of the Tax Amount over such cumulative distributions to such Member within sixty (60) days following the filing of Internal Revenue Service Form 1065 by the Company for the applicable Fiscal Year; provided, however, such Tax Distributions shall only be made to the extent the Company has sufficient cash and any shortfall in the Tax Distributions for any Fiscal Year shall be included in the Tax Amount used for calculating the Tax Distributions for each subsequent Fiscal Year until all Tax Distributions are paid in full. In determining the amount of any Tax Distribution, the amount of taxable income allocated to each Member for any Fiscal Year shall be reduced by any Net Losses previously allocated to such Member in any prior Fiscal Year provided that no such Net Loss (or partial Net Loss) shall be counted more than once for this purpose. No Tax Distributions shall be made pursuant to this Section 6.2 in connection with a Sale of the Company.
Section 6.3 Withholding Taxes. If the Company is required to withhold Taxes with respect to any allocation or distribution to any Member pursuant to any applicable federal, state or local Tax laws, the Company may, after first notifying the Member and permitting the Member, if legally permitted, to contest the applicability of such Taxes, withhold such amounts and make such payments to Taxing authorities as are necessary to ensure compliance with such Tax laws. Any funds withheld by reason of this Section 6.3 will nonetheless be deemed distributed to the Member in question for all purposes under this Agreement. If the Company did not withhold from actual distributions any amounts it was required to withhold, the Company may, at its option, (a) require the Member to which the withholding was credited to reimburse the Company for such withholding, or (b) reduce any subsequent distributions by the amount of such withholding. This obligation of a Member to reimburse the Company for Taxes that were required to be withheld shall continue after such Member Transfers its Membership Interests in the Company. Each Member agrees to furnish the Company with any representations and forms as will reasonably be requested by the Company to assist it in determining the extent of, and in fulfilling, any withholding obligations it may have.
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Section 6.4 Limitation on Distributions. No distribution shall be made if such distribution would violate any contract or agreement to which the Company is then a party that was approved by the Requisite Members or any Applicable Law then applicable to the Company.
Section 6.5 No Return of Distributions. Any distribution of cash or property pursuant to this Agreement shall be treated as a compromise within the meaning of Section 18-502(b) of the Act and, to the full extent permitted by law, no Member receiving the payment of any such money or distribution of any such property will be required to return any such money or property to any Person, the Company or any creditor of the Company. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Member is obligated to return such money or property, then such obligation will be the obligation of such Member and not of the other Members. Without limiting the generality of the foregoing, a deficit Capital Account of a Member will not be deemed to be a liability of such Member nor an asset or property of the Company.
ARTICLE VII
ACCOUNTING AND RECORDS
Section 7.1 Reports; Budget.
(a) The Manager will promptly notify each Member upon having actual knowledge of any breach, default or event of default by the Company or any other party under any Project Documents, Financing Documents or Transaction Document or any other material contract, including any default by a counterparty under any Contracts or Transaction Document or any other material contract, and shall provide each Member with copies of any notices received or sent by the Manager (or its Affiliates) in connection with such breach, default or event of default.
(b) The Manager will promptly make available copies of each report delivered to the Company pursuant to the O&M Agreement and Administrative Services Agreement, if any.
(c) The Manager shall prepare a proposed Initial Budget no later than the Substantial Completion Date. The Initial Budget will contain a line-item specification of (i) projected revenues, and (ii) expenses (including reserves), and such other line items required by any O&M Agreement, the Administrative Services Agreement or any other agreement that the Company and the Members (or any of their Affiliates) are party to.
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(d) No later than November 15, 2023, the Manager shall prepare its first Annual Budget, and at such time the Manager shall also prepare and provide to the Members the report describing actual (as opposed to projected) expenses referred to in subclause (ii) of Section 7.1(c). Any excess between actual and projected expenses for a given line-item shall accrue to the benefit of the Company and shall reduce any required contributions from the Members pro rata in connection with the succeeding year’s budget. The Manager shall prepare any subsequent proposed Annual Budget no later than November 15 of each Fiscal Year starting with 2024 with respect to the upcoming year. The Members will review promptly each proposed Annual Budget, as presented, and will approve, deny, or request modifications within fifteen (15) days of receipt of such draft. If a proposed Annual Budget is not approved by the Members, the Manager shall prepare and submit a revised budget or portion thereof until the Annual Budget is approved as provided in this Section 7.1(d); provided, that in the event that an Annual Budget for a Fiscal Year is not approved by the first day thereof, the Annual Budget for the immediately preceding Fiscal Year (or the Initial Budget, as applicable) plus 5% shall automatically and without further action be the “Annual Budget” until an Annual Budget is approved.
Section 7.2 Books and Records and Inspection; Right to Audit and Contest.
(a) The Manager will, on behalf of the Company, maintain full and accurate books of account, financial records and supporting documents, which will in all material respects reflect, completely, accurately and in reasonable detail each transaction of the Company, and such other matters as are customarily entered into the records or maintained by Persons engaged in a business of like character or as are required by law. The books of account, financial records, and supporting documents and the other documents and writings of the Company will be kept and maintained by the Manager at the principal office of the Company. The financial records and reports of the Company will be kept in accordance with GAAP and kept on an accrual basis. The Manager shall not delegate its responsibilities in this Section 7.2 to any Person without the consent of the Requisite Members; provided that such consent of the Requisite Members shall be deemed to be given with respect to the delegation to the initial administrator under the Administrative Services Agreement to the extent set forth in such agreement as in effect on the Effective Date; and provided further that such delegation shall not in any way reduce or eliminate the obligations of the Manager under this Agreement, including this Section 7.2.
(b) In addition to and without limiting the generality of Section 7.2(a), the Manager will, on behalf of the Company, maintain at the Company’s principal office:
(i) true and full information regarding the status of the financial condition of the Company, including any financial statements for the three most recent Fiscal Years;
(ii) promptly after filing, a copy of the Company’s federal, state, and local income Tax Returns for each year;
(iii) consents and resolutions of the Members and the Manager with respect to the Company;
(iv) a current list of the name and last known business, residence or mailing address of each Member;
(v) a copy of this Agreement, the Company’s Certificate of Formation, and all amendments thereto, together with executed copies of any written powers of attorney pursuant to which such agreements and Certificate of Formation and all amendments thereto have been executed;
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(vi) true and full information regarding the amount of cash and a description and statement of the agreed value of any other property and services contributed by each Member, and the date upon which each became a Member; and
(vii) copies of records that would enable a Member to determine the Member’s relative shares of the Company’s distributions and the Member’s relative voting rights.
(c) Upon at least five (5) Business Days prior notice to the Manager, all books and records of the Company and its subsidiaries will be open to inspection and copying by any of the Members or their Representatives during business hours and at such Member’s expense, for any purpose reasonably related to such Member’s interest in the Company; provided that any such inspection or copying is conducted in a manner which does not unreasonably interfere with the Company’s business, and each Member shall be entitled to visit and inspect the Company’s properties of the Company and its subsidiaries (if any) and discuss the affairs, finances, and accounts of the Company and its subsidiaries (if any) with the Manager, during normal business hours of the Company as may be reasonably requested by the Member; provided that such Member shall follow all applicable safety, security and site rules and comply with all Applicable Laws when on the Project site.
Section 7.3 Bank Accounts, Notes and Drafts.
(a) The Members acknowledge that the Company may maintain funds in cash, money market funds, certificates of deposit, or other permitted investments as approved by the Requisite Members in excess of the insurance provided by the Federal Deposit Insurance Corporation, or other depository insurance institutions, and that the Manager shall not be accountable or liable for any loss of such funds resulting from failure or insolvency of the institution, so long as any such maintenance of funds is at a federally or state chartered banking institution consented to by the Requisite Members. As an initial matter, the Requisite Members consent to KeyBank.
(b) Checks, notes, drafts and other orders for the payment of money shall be signed by such Persons employed by the Manager or its Affiliate as the Manager from time to time may authorize in writing. When the Manager so authorizes, and subject to Applicable Law, the signature of any such Person may be given electronically.
Section 7.4 Financial Statements and Other Reports.
(a) The Company shall maintain true and proper books, records, reports, and accounts in which shall be entered all transactions of the Company. The Company shall also maintain all schedules to this Agreement and shall update such schedules promptly upon receipt of new information relating thereto.
(b) As soon as available, but in any event not later than May 31 of each Fiscal Year, the Company shall furnish each Member a copy of the audited consolidated balance sheet of the Company and its subsidiaries (if any) as at the end of such year and the related audited statements of income, retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year and a comparison between the audited balance sheet of the Company and its subsidiaries (if any) and the related statements of operations, shareholders’ equity and cash flows referred to above, all such financial statements audited and certified by independent public accountants acceptable to the Requisite Members. Such financial statement shall be prepared on a consolidated basis if the Company has any subsidiaries during any relevant period of time.
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(c) As soon as practicable, but in any event within sixty (60) days after the end of each of the first three (3) quarters of each Fiscal Year, Company shall furnish to each Member unaudited statements of income and cash flows of the Company and its subsidiaries (if any) for such fiscal quarter, and an unaudited balance sheet and a statement of members’ equity of the Company and its subsidiaries (if any) as of the end of such fiscal quarter, all prepared in accordance with GAAP (except that such financial statements may (i) be subject to normal year-end audit adjustments; and (ii) not contain all or any notes thereto that may be otherwise required by GAAP). Such financial statement shall be prepared on a consolidated basis if the Company has any subsidiaries during any relevant period of time.
(d) The Company shall deliver draft Schedule K-1s to the Members prior to March 1 of each Fiscal Year and final Schedule K-1s to the Members prior to March 15 of each Fiscal Year.
Section 7.5 Partnership Status and Tax Elections.
(a) The Members intend that the Company will be taxed as a partnership for United States federal, state and local income tax purposes. No Member shall elect to be excluded from the application of Subchapter K of Chapter 1 of Subtitle A of the Code or any similar state statute nor elect for the Company to be treated as a corporation, or an association taxable as a corporation, under the Code or any similar state statute.
(b) The Company shall make the following elections or applications on the appropriate Tax Returns or other documentation:
(i) to the extent permitted under Section 706 of the Code, to adopt as the Company’s fiscal year a year that ends on December 31 as long as such fiscal year remains the Company’s “majority interest taxable year,” as defined in Treasury Regulations Section 1.706-1(b)(2);
(ii) to adopt the accrual method of accounting;
(iii) if a distribution of the Company’s property as described in Section 734 of the Code occurs or a transfer of Membership Interest as described in Section 743 of the Code occurs, on request in writing from any Member, to elect, at such Member’s cost, pursuant to Section 754 of the Code to adjust the basis of the Company’s properties;
(iv) to elect to amortize the organizational expenses of the Company ratably over a period of 180 months as permitted by Section 709(b) of the Code;
(v) to make an election out of bonus depreciation pursuant to Section 168(k)(7) of the Code; and
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(vi) any other election the Manager and the Members agree to be appropriate.
Section 7.6 Company Tax Returns. The Manager shall prepare all Tax Returns of the Company in accordance with the Code, provided that the income Tax Returns of the Company shall be subject to the review and approval of the Requisite Members, as provided in this Section 7.6, and the Manager shall retain a regionally recognized accounting firm to advise on such preparation and review. The Manager shall deliver a draft of all income Tax Returns of the Company to the Members not less than thirty (30) calendar days prior to the deadline for filing (taking into account any extensions). The Members may propose revisions to such Tax Returns not more than five (5) Business Days after the date of delivery, and the Manager shall consider and shall incorporate any such revisions so long the revisions are in compliance with Applicable Laws and this Agreement, and no Member is disadvantaged by any such revisions without its written consent. To the extent that any Tax Returns are not prepared in a timely manner as a result of the breach by the Manager of its obligations under this Agreement, the Requisite Members may elect to assume the preparation of any such Tax Return on behalf of and at the expense of the Company, and the Company and Manager shall provide access to all information necessary or useful in such preparation. The Manager may extend the time for filing any Tax Returns as provided for under Applicable Laws, provided that prior notice thereof is given to the Members. Each Member shall provide such information, if any, as may be reasonably needed by the Company for purposes of preparing such Tax Returns; provided that such information is readily available or reasonably can be obtained from regularly maintained accounting records.
Section 7.7 Tax Matters.
(a) (i) the Manager shall be designated as the “Partnership Representative” within the meaning of Section 6223(a) of the Code (the “Partnership Representative”) and the Manager shall be authorized to take any actions necessary under Treasury Regulations or other guidance to be designated as the Partnership Representative; (ii) subject to Section 7.7(b), the Company and each Member agree that they shall be bound by the actions taken by the Partnership Representative, as described in Section 6223(b) of the Code; (iii) the election set forth in Section 6226(a) of the Code shall be made as provided in Section 7.7(b), and the Members agree to take any action, and furnish the Company, the Manager, and the Partnership Representative with any information necessary, to give effect to such election if made in accordance with such section; and (iv) any imputed underpayment imposed on the Company pursuant to Section 6232 of the Code (and any related interest, penalties or other additions to tax) that the Partnership Representative reasonably determines is attributable to one or more Members (including any former Members), shall be promptly paid by such Members (including any former Members) to the Company (pro rata in proportion to their respective shares of such underpayment) within fifteen (15) days following the Company’s request for payment (and any failure to pay such amount shall result in a subsequent reduction in distributions otherwise payable to such Member); provided, that the Company shall provide the Members with its calculation of the portion of any imputed underpayment applicable to each of the Members and an opportunity to review and comment, which comments shall be considered in good faith by the Company. If the Partnership Representative is not an individual, the Partnership Representative shall appoint a “designated individual” in accordance with Treasury Regulations Section 301.6223-1(b)(3) (the “Designated Individual”).
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(b) The Partnership Representative shall (i) keep all Members reasonably and contemporaneously apprised regarding all tax audits, examinations, proceedings and other material tax matters related to the Company or any of its direct or indirect subsidiaries (a “Tax Proceeding”) and (ii) promptly furnish to all Members copies of any and all material documents and correspondence sent or received in connection with any such Tax Proceeding. All Members shall be entitled to be present at, and participate in, any and all meetings and conference calls with respect to any Tax Proceeding. The Partnership Representative shall not settle or otherwise agree to, or cause or permit the Company or any of its direct or indirect subsidiaries to settle or agree to, any matter, determination or outcome without the prior written consent of the Requisite Members, if such resolution would have an adverse effect on any Member or the Company. Notwithstanding the foregoing, unless otherwise agreed to by the Partnership Representative and the Requisite Members, the Partnership Representative shall cause the Company to make an election pursuant to Section 6226 of the Code with respect to any “imputed underpayment” (within the meaning of Section 6225 of the Code) to make the provisions of Section 6225 of the Code inapplicable to such imputed underpayment (a “Section 6226 Election”) to the extent the Company is eligible to make such election; provided, however, that if any Member objects in writing to such Section 6226 Election, and provides an alternative to such Section 6226 Election that is materially more favorable to such Member and no less favorable to the other Members or the Company (as determined by the written consent of the Requisite Members, such consent not to be unreasonably withheld), then the Company shall in good faith pursue such alternative so long as it can be implemented without jeopardizing the Members’ rights to the Section 6226 Election.
(c) The Company shall indemnify and reimburse the Partnership Representative for all reasonable out-of-pocket expenses, including reasonable legal and accounting fees (including tax preparation fees), claims, liabilities, losses and damages, incurred in connection with the exercise of its duties as Partnership Representative (other than as a result of the Partnership Representative’s gross negligence or intentional misconduct).
Section 7.8 Cooperation. Subject to the provisions of this Article VII, each Member shall, at the requesting Member’s expense, provide the other Members with such assistance as may reasonably be requested by such other Members in connection with the preparation of any Tax Return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to the liability for any Taxes with respect to the operations of the Company.
Section 7.9 Fiscal Year. The fiscal year of the Company (the “Fiscal Year”) shall be a year that ends on December 31. The taxable year of the Company will be a year that ends on December 31 as long as such taxable year remains the Company’s “majority interest taxable year,” as defined in Treasury Regulations Section 1.706-1(b)(2), or such other date as required by federal income tax law.
Section 7.10 Member Tax Consistency. Each Member agrees that on such Member’s federal, state, local, foreign, and other income tax returns, such Member shall not take any position with regard to any Company item that is inconsistent with the treatment of such item on the Company’s return, unless otherwise required by applicable law, in which case such Member shall provide prior written notice to the Company of such inconsistency.
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ARTICLE VIII
MANAGEMENT
Section 8.1 Management of the Company.
(a) Subject to Section 8.2 and this Section 8.1, the Manager will have responsibility, control and supervision over the day-to-day operation of the Company and all actions with respect to the management and operation of the Company that are those necessary, convenient or incidental for the accomplishment of the purposes of the Company set out in Section 2.3(a) that are not (i) Major Decisions pursuant to Section 8.4 or Unanimous Decisions pursuant to Section 8.5 or (ii) decisions reserved to, or subject to the consent of, the Requisite Members, including pursuant to this Section 8.1 and Section 8.5. The Manager shall devote such time to the business and affairs of the Company as is necessary to carry out the Manager’s duties set forth in this Agreement. The Manager shall perform their managerial duties (i) in good faith, (ii) in a manner it believes in good faith to be in the best interests of the Company, (iii) in a manner it believes in good faith to represent the care as an ordinarily prudent person in a like position would exercise under similar circumstances, (iv) without intentional misconduct or a knowing violation of law; and (v) without engaging in any transaction for which it receives a personal benefit in violation or breach of any provision of this Agreement.
(b) Notwithstanding any other provision of this Agreement, (i) in connection with (A) any payment being made to any Affiliate of the Company (including POCo) that is not contemplated in the Initial Budget, the Annual Budget, the Shared Facilities Agreement or any other Project Document, (B) any default by POCo under the Shared Facilities Agreement (including the enforcement of any remedies thereunder or the waiver of any such default) or any other Project Document, (C) any consent, approval, waiver, or other material decision pertaining to POCo (including with regard to termination for cause) under the Shared Facilities Agreement or any other Project Document, (D) any matter subject to Section 8.2.2 of the Shared Facilities Agreement or similar provisions in any other Project Document, or (E) matters arising under or affecting any Transaction Documents between the Company on the one hand and its Affiliates on the other hand, or under any Project Document (each, an “Affiliate Contract”) (for purposes of this clause (c)(i)(E), other than those addressed in clauses (A), (B), (C) and (D) of this Section 8.1(b)) between the Company and POCo, including in its capacity as a Member or Manager hereunder, and including the enforcement, prosecution, waiver, or conduct of any claims, disputes or material rights thereunder or with respect thereto, then, in each case, the Requisite Members shall have the sole right and power to exercise decisions on behalf of the Company, and each Member acknowledges, solely for the avoidance of doubt and not in derogation of any right of indemnity or otherwise of the Members hereunder, that the Manager shall have any responsibility or liability of any kind whatsoever for actions taken by the Requisite Members in the exercise of its rights under this Section 8.1(b); provided that, for the avoidance of doubt, in no event shall this Section 8(c) be deemed to limit Soluna’s voting rights with respect to any matter falling under the Shared Facilities Agreement or any other Project Document to the extent pertaining to the need for or the nature and substance of any services that happen to be provided by POCo (such as upgrades to the Shared Facilities), as opposed to pertaining directly to POCo (and POCo’s performance) itself; provided that Soluna shall be recused from any decision regarding the price paid to POCo with respect to any such services, and (ii) other than in the event of an operational emergency that requires the Company to take an action within twenty four hours (in which event, the Members shall be promptly notified), the Requisite Members shall have the sole right and power to approve or consent or to refrain from approving or consenting to any amendment, supplement, extension, waiver or other modification to or deviation from any Project Document, excepting from the foregoing requirements under clause (ii) the following: immaterial waivers or modifications, and waivers or modifications to the extent solely affecting the administration, operations or logistics of the Company such that the Company is in a substantially equivalent position consistent with the terms of the applicable Project Document without materially expanding the liabilities of the Company or any Member.
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(c) Notwithstanding anything herein (x) the Manager shall be entitled to reimbursement for any of its own funds expended in carrying out its duties and obligations under this Agreement, and (y) the Manager shall not be liable for any failure to perform any of its duties or obligations hereunder to the extent that such failure was due to (i) failure of the Members (or the Company, to the extent caused by the Members) to make funds available for such performance as required hereunder, (ii) a Force Majeure Event, or (iii) the breach by any other Person of a Contract where such compliance was inherently a predicate for the performance by Manager of its obligations hereunder; provided, for the avoidance of doubt, that the foregoing exception to Manager’s obligation to perform shall not relieve the other Person of any liability for any such breach.
Section 8.2 Removal of Manager/Changes in Voting. The Requisite Members shall have the right to remove the Manager as Manager at any time upon notice to the Manager and the other Members and replace the Manager with a designee of the Requisite Members selected in a commercially reasonable manner, which may be a Member, if the Manager, Soluna or POCo, or their respective successors or assigns, or any of their respective Affiliates, is terminated as a service provider under any of the Project Documents. In addition, the Requisite Members shall have the right to remove the Manager For Reason, and upon such removal For Reason, any Membership Interest of the removed Manager shall convert automatically into a non-voting membership interest (including that the consent of such Member shall not be required pursuant to Section 8.4); provided that, for the avoidance of doubt, notwithstanding such conversion the Member shall continue to be entitled to the economic rights provided in Articles V and VI (which economic rights shall be reduced by the amount of any Losses attributable to the Manager’s conduct resulting in a removal For Reason to the extent such Losses have not be recovered through insurance, indemnity payments or other means).
Section 8.3 Debt. Except as otherwise provided in the Act or by Applicable Law, no Member will be obligated personally for any debt, obligation or liability of the Company or other Members, whether arising in contract, tort or otherwise, solely by reason of being a Member.
Section 8.4 Major Decisions. In addition to any other approval required by Applicable Laws or this Agreement, the Company shall not, without the consent of the Requisite Members, directly or indirectly take any of the following actions (“Major Decisions”):
(a) amend its limited liability company operating agreement or its certificate of formation, or, subject to Section 8.1(b), materially amend any Project Document;
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(b) except as provided in Article IX, issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, any Membership Interests or interests, or other equity or debt securities (or any securities or instruments convertible or exchangeable into the foregoing) of the Company or any of its subsidiaries (if any);
(c) repurchase any equity or debt securities (or any securities or instruments convertible into the foregoing) of the Company or any of its subsidiaries (if any);
(d) perform any act that could subject the Members to liability in their capacity as Members;
(e) change the general nature of the business activity of the Company, or enter into new lines of business;
(f) execute, modify or terminate, or waive or enforce any material right or claim under, (i) any contract between the Company (or any of its subsidiaries, if any), on the one hand, and the Manager, any Affiliate of the Manager, or employee of the Manager or Affiliate of the Manager, on the other hand, in each case, in which any such Person has a direct or indirect economic interest, or (ii) any Affiliate Contract, unless, in each case, expressly permitted under Section 8.1(b);
(g) create a new subsidiary or invest in or make loans to any other Person;
(h) delegate any power or authority of the Manager to one or more Persons except as otherwise set forth herein;
(i) make any distribution, other than as set forth in Article VI or Article X;
(j) change the tax classification of the Company or make any material tax election (including as regards tax credits) not specifically provided for in this Agreement;
(k) elect the alternative depreciation system or make any change to any material tax depreciation or accounting methods of the Company;
(l) to confess a judgment against the Company, initiate a claim of the Company against a third party (excluding, for the avoidance of doubt, the Manager and its Affiliates), or bring, dismiss, or settle litigation or claims involving the Company (excluding, for the avoidance of doubt, in respect of the Manager and its Affiliates);
(m) engage or terminate an auditing or investment banking firm;
(n) hire or allow for any employees of the Company, or terminate or materially change the compensation of any employees of the Company;
(o) approve, amend or modify the Initial Budget or Annual Budget;
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(p) approve, amend, modify, or incur costs in excess of 7% of the Initial Budget or any Annual Budget in the aggregate, or 7% of any line item in the budget pertaining to the payment of corporate-level employees of POCo (consisting of, as of the date hereof, Jim Reynolds, Head of Operations, and Nick Hagle, Operations Lead, which may be subject to change from time to time);
(q) enter into any merger, consolidation, reorganization or other business combination;
(r) sell, lease, exchange or other disposal of any material assets of the Company (including for the avoidance of doubt, and cryptocurrency mining machines) or enter into any hosting agreement related thereto; provided that (A) the Company may sell products and services in the ordinary course of business as part of its revenue generation pursuant to business operations that are part of the Annual Budget or Initial Budget (as applicable), and (B) the Company may sell, lease, otherwise transfer or dispose of property or assets that (1) are obsolete, damaged or no longer useful for the business of the Company, (2) are not in excess of $500,000 per annum, (3) are cash or cash equivalent investments in a manner consistent with the Annual Budget or Initial Budget (as applicable), or (4) are condemned as a result of the exercise of “eminent domain” or other similar policies to the respective governmental authority or agency that has condemned the same (whether by deed in lieu of condemnation or otherwise);
(s) create, issue, or guarantee, or incur or agree to incur, or enter into any agreement regarding any Indebtedness for borrowed money, other than pursuant to any Financing Documents; and
(t) refinance the Indebtedness and other obligations under the Financing Documents or place Liens on the assets of the Company in connection with such refinancing or otherwise.
Section 8.5 Unanimous Decisions. In addition to any other approval required by Applicable Laws or this Agreement, the Company shall not, without the unanimous consent of the Members, directly or indirectly take any of the following actions (“Unanimous Decisions”):
(a) except as expressly provided elsewhere in this Agreement, dissolve the Company;
(b) file a bankruptcy petition, apply for a receivership, or otherwise institute insolvency proceedings or consent to the institution of bankruptcy, receivership or insolvency proceedings, in each case related to the Company;
(c) enter into, modify, or terminate, waive or enforce any right or claim under any agreement or transaction in which the Manager, any Affiliate of the Manager, any employee of Manager or its Affiliates may have a direct or indirect economic interest other than in its capacity as a Member;
(d) sell, lease or otherwise dispose of all or substantially all of the Company’s assets, on terms acceptable to the Requisite Members;
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(e) enter into or allow the Company to enter into any merger, consolidation or reorganization, and in connection with such transaction terminate the rights and obligations of the Company under any EPC Agreement, O&M Agreement or Administrative Services Agreement, with such termination effective upon payment of the termination payment therefor (if applicable); and
(f) to confess a judgment against the Company, pursue a claim against the Manager or any of its Affiliates, or bring or settle litigation or claims involving the Company or in respect of the Manager or its Affiliates.
Section 8.6 Costs and Expenses; Compensation. All out-of-pocket costs and expenses reasonably incurred by the Manager in performing its duties as Manager hereunder, including travel and the fees, costs and expenses of accountants and other third party service providers engaged directly on behalf of the Company shall be the costs and expenses of the Company and Company shall promptly reimburse the Manager for all such out-of-pocket costs and expenses; provided, that Manager shall not be permitted to pass through any out-of-pocket expense hereunder that (a) Manager has expressly agreed in this Agreement or any other Transaction Document or any Corporate Document to pay on its own account, or (b) that are customary items of overhead (including, without limitation, office supplies, office expenses, office space, employee salaries and benefits, utilities, internet access, cellular phone service, computers, software and tools of the trade used by Manager to perform its management duties) or (c) that are paid pursuant to any Administrative Services Agreement. All out-of-pocket costs and expenses reasonably incurred by the Members in connection with the exercise of their rights and duties pursuant to Section 8.4 or Section 8.5 shall be costs and expenses of the Company, and the Company shall promptly reimburse the Members for all such costs and expenses to the same extent they would be reimbursable to the Manager pursuant to the foregoing sentence.
Section 8.7 Indemnification and Exculpation.
(a) To the fullest extent permitted by Applicable Law, the Company shall exculpate, hold harmless, and indemnify the Manager (only in its capacity as Manager), each Member (only in its capacity as a Member) and their respective members, officers, directors, employees and agents from and against, all claims, suits, demands, injunctions, actions, causes of action, assessments, costs, expenses judgments, awards, liabilities, losses (“Losses”) any of them incur by reason of any act or omission performed or omitted by such Person in good faith, in a manner reasonably believed to be consistent with its rights and obligations under Applicable Law and this Agreement; provided, that this indemnity does not apply to such matters that are attributable to the gross negligence, willful misconduct or fraud, or the material breach of this Agreement by such Person in any capacity.
(b) To the fullest extent permitted by Applicable Law, expenses to be incurred by an indemnified Person under this Section 8.7 shall, from time to time, be advanced by or on behalf of the Company prior to the final disposition of any matter upon receipt by the Company of an undertaking from a Person with sufficient credit capacity to repay such amount if it shall be determined that the indemnified Person is not entitled to be indemnified under this Agreement.
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ARTICLE IX
TRANSFERS
Section 9.1 Prohibited Transfers. Each Member may Transfer only in compliance with this Article IX. Any attempted Transfer that does not comply with this Article IX shall be null and void and of no force or effect whatsoever.
Section 9.2 Conditions Applicable to All Transfers. Except as otherwise provided in this Article IX, all Transfers of Membership Interests must satisfy the following conditions:
(a) The transferring Member must give notice of the proposed Transfer to the Manager and the other Members not less than 10 Business Days prior to the proposed date for the consummation of the proposed Transfer; provided that, with respect to any Transfer by a Member, such Member must also give notice to the Manager and the other Members promptly upon commencing a marketing process in a material respect for the sale of Membership Interests;
(b) The transferring Member and the prospective transferee must each execute, acknowledge and deliver to the Company an assignment and assumption agreement substantially in the form set forth in Exhibit B hereto with respect to such Transfer and such other instruments as are reasonably satisfactory in form and substance to the other Members to effect such Transfer and confirm the transferor’s intention that the transferee become a Member in its place with respect to the Membership Interests so transferred, and the prospective transferee makes the representations, warranties and covenants set forth in Section 3.9 as of the date of such Transfer;
(c) The Transfer will not violate any Applicable Law;
(d) The transferee is not a Disqualified Transferee;
(e) The Transfer will not cause the Company to be classified as a corporation or publicly traded partnership for federal income tax purposes;
(f) The Transfer will not cause the assets of the Company to be treated as tax-exempt use property within the meaning of Section 168(h) of the Code;
(g) For Transfers by any Member, the Member has made all of the contributions contemplated to be made by such Member under the Contribution Agreement; provided that, this restriction shall not apply if the transferee has reasonably demonstrated that they have the ability to make all remaining Capital Contributions required of the transferring Member (an “Eligible Transferee”); provided further that, until a Member has made all of the contributions contemplated to be made by such Member under the Contribution Agreement, any transferee that has (i) a long-term credit rating of at least BBB- by Standard & Poor’s and Baa3 by Moody’s, (ii) a Tangible Net Worth of at least $25,000,000, or (iii) has provided a parent guaranty from an entity that meets the requirements set forth in clause (i) or (ii), which guaranty is in form and substance reasonably acceptable to the other Members, shall be deemed to be an Eligible Transferee; and
(h) For Transfers by any Member, such Transfer is not to a Prohibited Entity.
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Section 9.3 Additional Requirements of Transfer. As additional conditions to the validity of any transfer of a Membership Interest, such transfer shall not: (a) violate the Act, (b) violate the registration provisions of the Securities Act of 1933, as amended from time to time, or the securities laws of any jurisdiction, (c) cause the Company to register as an “investment company” under the Investment Company Act of 1940, as amended from time to time, and the rules and regulations of the Securities and Exchange Commission thereunder, (d) result in the Company being classified as a “publicly traded partnership” under the Code or treated as an entity other than a partnership for federal income tax purposes or (e) be to a “benefit plan investor” (as defined in the Plan Assets Regulation), unless such transfer would not result in all or any portion of the assets of the Company constituting “plan assets” for purposes of ERISA. The Company may require reasonable evidence as to the satisfaction of any of the foregoing conditions, including a favorable opinion of tax counsel on behalf of the transferor Member.
Section 9.4 Transfer Expenses. All reasonable documented, out of pocket costs and expenses incurred by the Members, their Affiliates or the Company for the benefit of all holders of Membership Interests in connection with a Sale of the Company in accordance with the applicable terms hereof (whether or not consummated), including all attorneys’ fees and expenses, all accounting fees and charges and all finders, brokerage or investment banking fees, charges or commissions, will be paid by the Company, and, if not paid by the Company, borne by the Members based upon the pro rata share of the proceeds to which each Member is entitled to receive under Section 6.1(a) such that proceeds from any Sale of the Company will be distributed pursuant to Section 6.1(a) as if they had been distributed after giving effect to such costs and expenses.
Section 9.5 Non-Compliant Transfer. Any proposed Transfer of a Membership Interest that does not satisfy the conditions for such Transfer set forth in this Agreement shall be null and void ab initio and shall not be recognized by the Company for any purpose. Unless and until all of the requirements of this Agreement have been satisfied with respect to a proposed Transfer of a Membership Interest, the Company shall (a) continue to treat the transferor of such Membership Interest as the sole owner of the Membership Interest for all purposes hereunder and incur no liability for allocations or distributions made to such transferor with respect to such Membership Interest, (b) make no allocations or distributions to the proposed transferee with respect to such Membership Interest, (c) not furnish to such transferee any tax, financial or other information regarding the Company with respect to such Membership Interest and (d) not otherwise treat such proposed transferee as the legal or equitable owner of such Membership Interest, except and only to the extent as required by Applicable Law.
Section 9.6 Transferee Members.
(a) A transferee of a Membership Interest that is admitted as a substitute Member in accordance with this Agreement shall succeed to the rights and obligations of the transferor of such Membership Interest under this Agreement and Applicable Law with respect to such Membership Interest as of immediately prior to the effective time of such admission and, as of such effective time, any Unfunded Commitment and the Capital Account of such transferor. The Capital Contributions and the Capital Account balance of the transferee with respect to such Membership Interest shall equal the Capital Contribution and the Capital Account balance of the transferor with respect to such Membership Interest as of immediately prior to such time.
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(b) Any transferee of all or part of any Membership Interests pursuant to a Transfer made in accordance with this Agreement shall be admitted to the Company as a Member only upon its execution of a joinder agreement in form and substance reasonably satisfactory to the other Members.
Section 9.7 Drag-Along Rights.
(a) In the event that a Member agrees to the sale or other Transfer to a Person not Affiliated therewith of such of the Membership Interests as constitutes in excess of seventy percent (70%) of the aggregate Membership Interests of all Members as of such date, such approving and selling Member(s) (the “Drag-Along Sellers”) shall be entitled, by delivery of a fifteen (15) Business Day prior written notice to all of the other Members specifying the name and address of the proposed Transferees to such transaction and the terms and conditions thereof, to require each of the other Members to Transfer the same percentage of the Membership Interests held by such Members to the proposed Transferees for the equivalent consideration per Membership Interest (based on the intrinsic value of the Membership Interests calculated as if the Company were liquidated and the remaining assets were distributed in accordance with Section 10.2) and otherwise upon the same terms and conditions as the Drag-Along Sellers in the proposed transaction. If any Member shall fail to execute any such documents, such Drag-Along Sellers may authorize the Company to execute such documents on behalf of such Member. Notwithstanding anything herein to the contrary, this Section 9.7 shall apply to the Members other than the Drag-Along Sellers only (a) if any representation and warranty or indemnification obligations that relate specifically to a particular holder of equity securities (such as representations and warranties or indemnification therefor given by a holder regarding such holder’s title to and ownership of such equity securities) shall be borne solely by such holder, (b) if such Member shall not be liable under any indemnity or contribution agreement for more than the amount actually received by such party in such transaction except in connection with claims of fraud by the Member, and (c) if all Members will receive the same form and amount of consideration per equity security, and if any Member is given an option as to the form and amount of consideration to be received in respect of its equity securities, all Members will be given the same option.
Section 9.8 Tag-Along Rights.
(a) In the event that a Member or Members agree to the sale or other Transfer to a Person not Affiliated therewith of such of their Membership Interests as constitutes in excess of seventy percent (70%) of the Membership Interests of all Members as of such date, each other Member shall be entitled to sell a pro rata portion of its Membership Interests to the same purchaser on the same terms and conditions and for equivalent consideration (based on the intrinsic value of the Membership Interests calculated as of the Company were liquidated and the remaining assets were distributed in accordance with Section 10.2) as are applicable to the Membership Interests being Transferred. The Members who propose to sell or otherwise Transfer such Membership Interests (the “Tag-Along Sellers”) shall provide the other Members with written notice of the terms and conditions of such proposed Transfer and the identity of the proposed Transferee at least fifteen (15) Business Days prior to the consummation of such proposed Transfer. Each Member receiving such notification shall respond to the Tag-Along Sellers within fifteen (15) Business Days in writing indicating whether or not it is willing to exercise its rights pursuant to this Section 9.8. The closing of any transaction pursuant to this Section 9.8 shall be held at such time and place as the Tag-Along Sellers shall reasonably specify (but in no event sooner than fifteen (15) Business Days after the delivery of the initial notice of sale referred to in this Section 9.8) and the Tag-Along Sellers shall make such representations and warranties and execute such documents as are customary for similar transactions on the basis that all Members are treated equally pursuant to the terms of this Agreement, and the other Members exercising their rights hereunder shall be required only to give a representation and warranty regarding their ownership of their respective Membership Interests. If any Member or Tag-Along Seller shall fail to execute any such documents, the Tag-Along Sellers or Member, as applicable, may authorize the Company to execute such documents on behalf of such Member.
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ARTICLE X
DISSOLUTION AND WINDING-UP
Section 10.1 Events of Dissolution. The Company shall be dissolved upon the first to occur of the following (each a “Dissolution Event”):
(a) the written consent of each of the Members, to dissolve the Company, but only on the effective date of dissolution specified by the Members in such writing at the time of such consent;
(b) entry of a decree of judicial dissolution under Section 18-802 of the Act;
(c) the issuance of a final, nonappealable court order which makes it unlawful for the business of the Company to be carried on; or
(d) the termination of the legal existence of the last remaining Member of the Company or the occurrence of any other event which terminates the continued membership of the last remaining Member of the Company unless the Company is continued in a manner permitted by this Agreement or the Act.
Section 10.2 Distribution of Assets.
(a) The Requisite Members shall appoint a liquidator upon the occurrence of one of the events in Section 10.1 (and any successor liquidator). Upon the occurrence of such an event, the liquidator will proceed diligently to wind up the affairs of the Company and make final distributions as provided herein and in the Act. The liquidator may sell, and will use commercially reasonable efforts to obtain the best possible price for, any or all Company property, including to Members.
(b) Promptly after the termination of the Company, the liquidator shall cause to be prepared and furnished to the Members a statement setting forth the assets and liabilities of the Company as of the date of termination. The liquidator shall liquidate the properties of the Company in an orderly and businesslike manner as promptly as possible and shall apply and distribute the proceeds thereof in the following order of priority:
(i) to the payment of the expenses of liquidation;
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(ii) to payment of the debts and liabilities of the Company;
(iii) to the establishment of such reserves as the liquidator shall deem reasonably necessary for the contingent or unforeseen obligations of the Company, said retained funds to be held by said Company for the purpose of distributing such reserves in payment of the contingent and unforeseen liabilities should they become due and payable, the balance remaining from said retained funds to be distributed to the Members at such time as the liquidator shall deem advisable;
(iv) to the Members as distributions in accordance with Section 6.1(a).
(c) The distribution of cash to a Member in accordance with the provisions of this Section 10.2 constitutes a complete return to the Member of its Capital Contributions and a complete distribution to the Member on its Membership Interests in the Company of all the Company’s property and constitutes a compromise to which all Members have consented within the meaning of Section 18-502(b) of the Act. If the assets of the Company remaining after the payment or discharge of the debts and liabilities of the Company are insufficient to return Capital Contributions of each Member, such Member shall have no recourse against the Company or any other Member.
Section 10.3 In-Kind Distributions. There shall be no distribution of assets of the Company in-kind without the written affirmative consent of each Member.
Section 10.4 Certificate of Cancellation.
(a) When all debts, liabilities and obligations have been paid and discharged or adequate provisions have been made therefor and all of the remaining property and assets have been distributed to the Members, a certificate of cancellation shall be executed and filed by the liquidator with the Secretary of State of the State of Delaware, which certificate shall set forth the information required by Section 18-203 of the Act.
(b) Upon the filing of the certificate of cancellation, the existence of the Company shall cease.
(c) All costs and expenses in fulfilling the obligations under this Article X shall be borne by the Company.
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ARTICLE XI
MISCELLANEOUS
Section 11.1 Notices. Unless otherwise provided herein, any offer, acceptance, election, approval, consent, certification, request, waiver, notice or other communication required or permitted to be given hereunder (collectively referred to as a “Notice”), shall be in writing and delivered (a) in person, (b) by registered or certified mail with postage prepaid and return receipt requested, (c) by recognized overnight courier service with charges prepaid or (d) by facsimile or electronic mail transmission, directed to the intended recipient at the address of such Member set forth on Schedule 4.2(d) attached hereto (as applicable) or at such other address as any Member hereafter may designate to the others in accordance with a Notice under this Section 11.1. Copies of such Notices, which shall not constitute notice for purposes of this Agreement, shall be provided by the means noted above to the persons designated for such copies on such Schedule 4.2(d). A Notice or other communication will be deemed delivered on the earliest to occur of (i) its actual receipt when delivered in person, (ii) the fifth (5th) Business Day following its deposit in registered or certified mail, with postage prepaid, and return receipt requested, (iii) the second (2nd) Business Day following its deposit with a recognized overnight courier service or (iv) the date of receipt of a facsimile or electronic mail or, if such date of receipt is not a Business Day, the next Business Day following such date of receipt, provided the sender can and does provide evidence of successful transmission. Any Notice or other communication received on a day that is not a Business Day or later than 5:00 p.m. on a Business Day shall be deemed to be received on the next Business Day.
Section 11.2 Amendment. Except for an amendment of Schedule 4.2(e) hereto in accordance with the terms of this Agreement, an amendment of Annex I in accordance with Section 3.1(a), and a Transfer of Membership Interests and the admission of a new Member in accordance with the terms of this Agreement, this Agreement may only be amended, restated, supplemented or otherwise modified by an instrument in writing duly executed by each of the Manager and the Requisite Members. Notwithstanding the foregoing, this Agreement may not be amended, modified or terminated and the observance of any term hereof may not be waived with respect to any Member without the written consent of such Member, unless such amendment, modification, termination, or waiver applies to all Members in the same fashion.
Section 11.3 Partition. Each of the Members hereby irrevocably waives, to the extent it may lawfully do so, any right that such Member may have to maintain any action for partition with respect to the Company property.
Section 11.4 Waivers and Modifications. Any waiver or consent, express, implied or deemed, to or of any breach or default by any Person in the performance by that Person of its obligations with respect to the Company or any action inconsistent with this Agreement is not a consent or waiver to or of any other breach or default in the performance by that Person of the same or any other obligations of that Person with respect to the Company or any other such action. Failure on the part of a Person to insist in any one or more instances upon strict performance of any provisions of this Agreement, to take advantage of any of its rights hereunder, or to declare any Person in default with respect to the Company, irrespective of how long that failure continues, does not constitute a waiver by that Person of its rights with respect to that Person or its rights with respect to that default until the applicable statute of limitations period has lapsed. All waivers and consents hereunder shall be in writing duly executed by the mutual consent of the Members and shall be delivered to the other Members in the manner set forth in Section 11.1.
Section 11.5 Severability. Every term and provision of this Agreement is intended to be severable, and if any term or provision of this Agreement is found by a court of competent jurisdiction to illegal or invalid, such illegality or invalidity shall not affect the legality or validity of the remainder of this Agreement.
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Section 11.6 Successors; No Third-Party Beneficiaries. This Agreement is binding on and inures to the benefit of the Members and their respective heirs, legal representatives, successors and permitted assigns. Nothing in this Agreement shall provide any benefit to any third party (other than the Company) or entitle any third party (other than the Company) to any claim, cause of action, remedy or right of any kind, it being the intent of the Members that this Agreement shall not be construed as a third-party beneficiary contract. To the full extent permitted by law, no creditor or other third party having dealings with the Company shall have the right to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and permitted assigns. None of the rights or obligations of the Members herein set forth to make Capital Contributions or loans to the Company shall be deemed an asset of the Company for any purpose by any creditor or other third party.
Section 11.7 Entire Agreement. This Agreement, including the schedules attached hereto or incorporated herein by reference, constitutes the entire agreement of the Members with respect to the matters covered herein. This Agreement supersedes all prior agreements and oral understandings among the parties hereto with respect to such matters. Upon the effectiveness of this Agreement, the Existing LLCA shall be deemed amended and restated and superseded and replaced in its entirety by this Agreement, and shall be of no further force or effect.
Section 11.8 Governing Law. This Agreement and all matters arising out of or in connection herewith shall be governed by and 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 construction of this Agreement to the law of another jurisdiction. The Members irrevocably submit to the non-exclusive jurisdiction of any state or federal court in the State of Delaware with respect to any action or proceeding arising out of or relating to any such Dispute. Each Member irrevocably and unconditionally waives trial by jury in any action, suit or proceeding hereunder.
Section 11.9 Further Assurances. In connection with this Agreement and the transactions contemplated hereby, each Member shall execute and deliver any additional documents and instruments and perform any additional acts that may be reasonably required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the terms hereof.
Section 11.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which may be delivered by facsimile transmission or electronically in .PDF format and each of which shall be an original but all of which together will constitute one instrument, binding upon all parties hereto, notwithstanding that all of such parties may not have executed the same counterpart. Delivery of an electronic counterpart shall be effective as manual delivery thereof.
Section 11.11 Dispute Resolution.
(a) This Section 11.11 shall apply to any dispute arising under or related to this Agreement (whether arising in contract, tort or otherwise, and whether arising at law or in equity), including (a) any dispute regarding the construction, interpretation, performance, validity or enforceability of any provision of this Agreement or whether any Person is in compliance with, or breach of, any provisions of this Agreement, and (b) the applicability of this Section 11.11 to a particular dispute. Any dispute to which this Section 11.11 applies is referred to herein as a “Dispute.” With respect to a particular Dispute, each Member that is a party to such Dispute is referred to herein as a “Disputing Member”.
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(b) If a Dispute arises, the Disputing Members shall attempt to resolve such Dispute through the following procedure: (i) first, the representatives of each of the Disputing Members shall promptly meet (whether by phone or in person) in a good faith attempt to resolve the Dispute; (ii) second, if the Dispute is still unresolved after twenty (20) calendar days following the commencement of the negotiations described in Section 11.11(b)(i), then the designated executive officer of each Disputing Member shall meet (whether by phone or in person) in a good faith attempt to resolve the Dispute; and (iii) third, if the Dispute is still unresolved after ten (10) calendar days following the commencement of the negotiations described in clause (ii), then any Disputing Member may seek any and all remedies available to it at law or in equity; provided, however, that if the subject matter of a Dispute is primarily of an accounting or financial nature, or is related to the calculation of any amounts or the determination of the amount or proportionate allocation of any distribution, any such Dispute (a “Calculation Dispute”) shall be referred for adjudication to a firm of certified public accountants of national or regional repute mutually acceptable to the Members (the “Independent Calculation Agent”), and the determination of the Independent Calculation Agent shall be binding. The fees and expenses of the Independent Calculation Agent shall be borne 50% by the Company and 50% by the Member that is the substantially non-prevailing Party.
Section 11.12 Confidentiality and Publicity.
(a) Confidential Information. Subject to the remaining provisions of this Section 11.12, the Members shall, and shall cause their Affiliates and their respective stockholders, members, subsidiaries and Representatives to, hold confidential all information they may receive from or on behalf of the other Members concerning the Members, the Company, the other parties to the Project Documents, and their respective assets, business, operations or prospects or this Agreement (the “Confidential Information”); provided, that Confidential Information shall not include information that (i) becomes generally available to the public other than as a result of a disclosure by a recipient Member or any of its Representatives, or (ii) becomes available to a recipient Member or any of its Representatives on a non-confidential basis prior to its disclosure by the Company or its Representatives. In addition, each Member acknowledges its obligations under the United States federal securities laws. If a party becomes compelled by legal or administrative process to disclose any Confidential Information, such party shall, to the extent permitted by Applicable Laws, provide the other Members with prompt Notice so that the other Members may seek a protective order or other appropriate remedy or waive compliance with the non-disclosure provisions of this Section 11.12 with respect to the information required to be disclosed. If such protective order or other remedy is not obtained, or such other Members waive compliance with the non-disclosure provisions of this Section 11.12 with respect to the information required to be disclosed, the first party shall furnish only that portion of such information that it is advised, by opinion of counsel, is legally required to be furnished and shall exercise reasonable efforts, at the disclosing Member’s expense, to obtain reasonable assurance that confidential treatment will be accorded such information.
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(b) Disclosure to Representatives. Notwithstanding Section 11.12(a), a Member may disclose Confidential Information received by it to its employees, consultants, legal counsel, lenders or other agents who have a need to know such information in connection with the Transaction Documents; provided that such Member informs each such Person who has access to the Confidential Information of the confidential nature of such Confidential Information, the terms of this Agreement, and that such terms apply to them, and the Member shall be responsible for the disclosure by any such Person in violation of this Section 11.12.
(c) Disclosure by Member. Notwithstanding the other provisions of this Section 11.12 but subject to Section 11.12(d), Members may disclose Confidential Information to any of its Affiliates, its current or prospective direct or indirect investors and equity owners, prospective lenders and, provided such Persons are party to a reasonable non-disclosure agreement, to prospective parties to a Sale of the Company or prospective transferees.
(d) Publicity. No Member shall may make any public announcement or issue any press release respecting the Company, the transaction contemplated by the Transaction Documents, or any Project, that references the other Member or any of its Affiliates without the consent of such other Member.
Section 11.13 Joint Efforts. To the fullest extent permitted by law, neither this Agreement nor any ambiguity or uncertainty herein will be construed against or in favor of any of the parties hereto, whether under any rule of construction or otherwise, by virtue of the fact that such party had primary drafting responsibility for such Agreement. On the contrary, this Agreement has been prepared by the joint efforts of the respective attorneys for, and has been reviewed by, each of the parties hereto.
Section 11.14 Recourse Only to Party. The sole recourse of the Company for performance of the obligations of any party hereto shall be against such party and its assets and not against any assets or property of any present or future stockholder, partner, member, officer, employee, servant, executive, director, agent, authorized representative or Affiliate thereof.
Section 11.15 Rule of Interpretation Regarding Manager Deliveries. Whenever in this Agreement the Manager is required to deliver or “make available” to the Members any draft, report, document, instrument, or copy of any of the foregoing (including any revisions to any of the foregoing) (collectively “deliverables”) the posting of any such deliverable to a secure electronic dataroom maintained by or at the behest of Manager and to which the Members have access, shall in all respects constitute such document having been delivered or made available.
Section 11.16 Effectiveness. Notwithstanding the execution and delivery hereof by the parties hereto, or anything to the contrary set forth herein, the effectiveness of this Agreement is subject to and in all respects conditioned upon the simultaneous (or prior) execution and delivery of the other Transaction Documents (such date the “Effective Date”). Upon the Effective Date, this Agreement shall become effective and binding upon the parties hereto.
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IN WITNESS WHEREOF, the parties have caused this Limited Liability Company Agreement to be signed by their respective duly authorized officers as of the date first above written.
| COMPANY: | ||
| Soluna DV ComputeCo, LLC | ||
| By: | ||
| By: | ||
| Name: | ||
| Title: | ||
SIGNATURE PAGE TO SOLUNA DV COMPUTECO, LLC
LIMITED LIABILITY COMPANY AGREEMENT
IN WITNESS WHEREOF, the parties have caused this Limited Liability Company Agreement to be signed by their respective duly authorized officers as of the date first above written.
| NAVITAS: | ||
| Navitas West Texas Investments SPV, LLC | ||
| By: | ||
| Name: | ||
| Title: | ||
SIGNATURE PAGE TO SOLUNA DV COMPUTECO, LLC
LIMITED LIABILITY COMPANY AGREEMENT
IN WITNESS WHEREOF, the parties have caused this Limited Liability Company Agreement to be signed by their respective duly authorized officers as of the date first above written.
| PARENT: | ||
| SOLUNA COMPUTING, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
SIGNATURE PAGE TO SOLUNA DV COMPUTECO, LLC
LIMITED LIABILITY COMPANY AGREEMENT
Annex I
Members and Membership Interests
| Members | Number of Membership Interests Owned | Percentage of Membership Interests Owned | ||||||
| Name: Navitas West Texas Investments SPV, LLC | 4,500,000 | 26.5 | % | |||||
| Address: | ||||||||
| 2329 S Evans Way, Franktown, CO 80116 | ||||||||
| Attention: Chad Roach, Managing Principal | ||||||||
| Email: chad@navitas.global | ||||||||
| Name: Soluna Computing, Inc. | 11,250,000 | 73.5 | % | |||||
| Address: | ||||||||
| 325 Washington Ave. Extension Albany, NY 12205 518-218-2550 | ||||||||
| Attention: CFO | ||||||||
| Email: DVnotice@soluna.io | ||||||||
| Annex I-1 |
Schedule 4.2(d)
Initial Capital Accounts
| Member Name | Initial Capital Contribution | Capital Account Balance | Percentage Interest | |||||||
| Navitas West Texas Investments SPV, LLC | $ | 4,500,000 | $ | 4,500,000 | 26.5% of the Membership Interests | |||||
| Soluna Computing, Inc. | $ | 11,250,000 | (1) | $ | 11,250,000 | 73.5% of the Membership Interests | ||||
| (1) | $11,250,000 of which has been deemed to be contributed to the Company by Parent through payment of capital expenditures and development costs made on behalf of the Company by Parent prior to the date hereof, including but not limited to costs necessary for full completion of the Project Site and DV Facility (each as defined in the EPC Agreement). |
| Schedule 4.2(d)-1 |
Schedule 9.2(h)
Prohibited Entities
| 1. | Compute North LLC and its Affiliates |
| 2. | Lancium Technologies Corporation and its Affiliates |
| 3. | Priority Power Management, LLC and its Affiliates |
| 4. | Rhodium Enterprises, Inc. and its Affiliates |
| 5. | Marathon Digital Holdings, Inc. and its Affiliates |
| Schedule 4.2(d)-2 |
Exhibit 10.73
Execution Version
LOAN AND SECURITY AGREEMENT
SOLUNA DV COMPUTECO, LLC,
and
NAVITAS WEST TEXAS INVESTMENTS SPV, LLC
Dated as of May 9, 2023
TABLE OF CONTENTS
| Page | |||
| LOAN AND SECURITY AGREEMENT | 1 | ||
| SECTION I. DEFINITIONS AND INTERPRETATION | 1 | ||
| 1.1. | Terms Defined | 1 | |
| 1.2. | Accounting Principles | 7 | |
| 1.3. | Construction | 7 | |
| SECTION II. THE LOAN | 7 | ||
| 2.1. | Term Loan - Description | 7 | |
| 2.2. | Advances and Payments | 8 | |
| 2.3. | Interest | 8 | |
| 2.4. | Additional Interest Provisions | 8 | |
| 2.5. | Payments | 9 | |
| 2.6. | Use of Proceeds | 9 | |
| SECTION III. COLLATERAL | 9 | ||
| 3.1. | Collateral | 9 | |
| 3.2. | Lien Documents | 11 | |
| 3.3. | Other Actions | 11 | |
| 3.4. | Searches, Certificates | 11 | |
| 3.5. | Landlord’s and Warehouseman’s Waivers | 12 | |
| 3.6. | Filing Security Agreement | 12 | |
| 3.7. | Power of Attorney | 12 | |
| SECTION IV. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES | 12 | ||
| 4.1. | Resolutions and Other Documents | 12 | |
| 4.2. | Absence of Certain Events | 13 | |
| 4.3. | Warranties and Representations at Closing | 13 | |
| 4.4. | Compliance with this Agreement | 13 | |
| 4.5. | Closing | 13 | |
| 4.6. | No Waiver of Rights | 13 | |
| SECTION V. REPRESENTATIONS AND WARRANTIES | 14 | ||
| 5.1. | Organization and Validity | 13 | |
| 5.2. | Pending Litigation | 14 | |
| 5.3. | Title to Properties | 14 | |
| 5.4. | Governmental Consent | 14 | |
| 5.5. | Taxes | 15 | |
| 5.6. | Full Disclosure | 15 | |
| 5.7. | Subsidiaries | 15 | |
| 5.8. | Investments, Guarantees, Contracts, etc. | 15 | |
| 5.9. | Government Regulations, etc. | 15 | |
| 5.10. | Business Interruptions | 15 | |
| 5.11. | Names and Intellectual Property | 16 | |
| 5.12. | Other Associations | 16 | |
| 5.13. | Environmental Matters | 16 | |
| 5.14. | Capital Stock | 17 | |
| 5.15. | Solvency | 17 | |
| 5.16. | Perfection and Priority | 17 | |
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| 5.17. | Deposit Accounts | 17 | |
| 5.18. | Anti-Terrorism Laws | 17 | |
| 5.19. | ERISA | 18 | |
| 5.20. | Continuation of Representations and Warranties | 18 | |
| SECTION VI. BORROWER’S AFFIRMATIVE COVENANTS | 18 | ||
| 6.1. | Payment of Taxes and Claims | 18 | |
| 6.2. | Maintenance of Properties and Corporate Existence | 19 | |
| 6.3. | Compliance with Laws | 20 | |
| 6.4. | Business Conducted | 20 | |
| 6.5. | Schedules | 20 | |
| 6.6. | Material Adverse Developments | 20 | |
| 6.7. | Places of Business | 20 | |
| 6.8. | Contracts; Material Project Documents; Notices | 20 | |
| 6.9. | Contract Assignments | 20 | |
| SECTION VII. BORROWER’S NEGATIVE COVENANTS: | 21 | ||
| 7.1. | Merger, Consolidation, Dissolution or Liquidation | 21 | |
| 7.2. | Acquisitions; Subsidiaries | 21 | |
| 7.3. | Liens and Encumbrances | 21 | |
| 7.4. | Transactions With Affiliates or Subsidiaries | 21 | |
| 7.5. | Permitted Indebtedness; Guarantees | 21 | |
| 7.6. | Loan; Investments; Dividends | 21 | |
| 7.7. | Miscellaneous Covenants | 22 | |
| 7.8. | Jurisdiction of Organization | 22 | |
| 7.9. | Convertible Notes Indebtedness; Convertible Notes Documents | 22 | |
| 7.10. | Borrower Operating Agreement | 22 | |
| 7.11. | Material Project Documents | 22 | |
| SECTION VIII. DEFAULT | 22 | ||
| 8.1. | Events of Default | 22 | |
| 8.2. | Rights and Remedies on Default | 24 | |
| 8.3. | Nature of Remedies | 25 | |
| 8.4. | Set-Off | 25 | |
| SECTION IX. MISCELLANEOUS | 25 | ||
| 9.1. | Governing Law | 25 | |
| 9.2. | Integrated Agreement | 25 | |
| 9.3. | Waiver | 26 | |
| 9.4. | Indemnity; Expenses | 26 | |
| 9.5. | Time | 27 | |
| 9.6. | Brokerage | 27 | |
| 9.7. | Notices | 27 | |
| 9.8. | Headings | 28 | |
| 9.9. | Survival; Reinstatement | 28 | |
| 9.10. | Successors and Assigns | 28 | |
| 9.11. | Duplicate Originals; Effect of Facsimile and Photocopied Signatures | 29 | |
| 9.12. | Modification | 29 | |
| 9.13. | Signatories | 29 | |
| 9.14. | Third Parties | 29 | |
| 9.15. | Discharge of Taxes, Borrower’s Obligations, Etc. | 29 | |
| 9.16. | Consent to Jurisdiction | 29 | |
| 9.17. | Additional Documentation | 29 | |
| 9.18. | Waiver of Jury Trial | 29 | |
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LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (“Agreement”) is dated this [8th] day of May, 2023, between and among SOLUNA DV COMPUTECO, LLC, a Delaware limited liability company (“Borrower”), and NAVITAS WEST TEXAS INVESTMENTS SPV, LLC (“Lender”).
RECITALS
A. Borrower desires to establish financing arrangements with Lender and Lender is willing to make a term loan to Borrower under the terms and provisions hereinafter set forth.
B. The parties desire to define the terms and conditions of their relationship in writing.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:
SECTION I. DEFINITIONS AND INTERPRETATION
1.1. Terms Defined: As used in this Agreement, the following terms have the following respective meanings:
“Account” - All the “accounts” (as that term is defined in the UCC) of Borrower, whether now existing or hereafter arising.
“Account Debtor” - Any Person obligated on any Account owing to Borrower.
“Advances” - Any and all amounts drawn under the Term Loan.
“Affiliate” - With respect to any Person, (a) any Person which, directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person, or (b) any Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person, or (iii) any person described in clause (a) above. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (x) to vote 10% or more of the Capital Stock having ordinary voting power for the election of directors (or comparable equivalent) of such Person, or (y) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Control may be by ownership, contract, or otherwise.
“Anti-Terrorism Laws” - Any United States statute, treaty, law (including common law), ordinance, regulation, rule, order, opinion, release, injunction, writ, decree or award of any United States Governmental Authority relating to terrorism or money laundering, including Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 (66 Fed. Reg. 49079), the USA Patriot Act, the Currency and Foreign Transactions Reporting Act of 1970 (31 U.S.C. 5311 et. seq., (the Bank Secrecy Act)), as amended by Title III of the Patriot Act, the Trading with the Enemy Act, any other enabling legislation, executive order or regulations issued pursuant or relating thereto and other applicable federal or state laws relating to “know your customer” or anti-money laundering rules and regulations.
“Asset Sale” - The sale, transfer, lease, license, or other disposition by Borrower to any Person other than another Borrower, of any Property now owned, or hereafter acquired, of any nature whatsoever in any transaction or series of related transactions other than in the ordinary course of business. An Asset Sale includes, but is not limited to, a merger, consolidation, division, conversion, dissolution or liquidation.
“Authorized Officer” - Any officer (or comparable equivalent) of a Borrower authorized by such Borrower to execute this Agreement and the other Loan Documents.
“Bankruptcy Code” - Title 11 of the United States Code entitled “Bankruptcy”, as now or hereinafter in effect, or any successor statute.
“Borrower Operating Agreement” – That certain Amended and Restated Limited Liability Company Agreement of Soluna DV ComputeCo, LLC, dated as of the date of this Agreement, as the same may be amended, modified or supplemented in accordance with Section 7.10 of this Agreement.
“Blocked Person” – Has the meaning given in Section 5.23 hereof.
“Business Day” - A day other than Saturday or Sunday when Lender is open for business in New York, New York.
“Capital Stock” - Any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all other ownership interests in a Person (including limited liability company membership interests) and any and all warrants or options to purchase any of the foregoing.
“Capitalized Lease Obligations” - Any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, consistently applied.
“Convertible Note Holders” - The holders of the Convertible Notes Indebtedness.
“Convertible Notes Documents” – Individually and collectively, (a) that certain Securities Purchase Agreement, dated October 20, 2021 between, on the one hand, (i) Borrower and/or Soluna Holdings, Inc., as the case may be, as successors to Mechanical Technology, Inc., a Nevada corporation, as Company, and (ii) on the other hand, each purchaser party thereto from time to time, as Purchaser (as amended, amended and restated, modified or supplemented and in effect as of the Closing Date, the “Convertible Notes Purchase Agreement”), (b) the “Notes” (as defined in the Convertible Notes Purchase Agreement) and (c) the other “Transaction Documents” (as defined in the Convertible Notes Purchase Agreement), in each case, (a) through (c), as in effect on the Closing Date or as may be modified in accordance with the terms and provisions of Section 7.9 of this Agreement.
“Convertible Notes Indebtedness” – Any and all Indebtedness, liabilities, payment and/or performance obligations owing by Borrower and/or Soluna Holdings, Inc., as successors to Mechanical Technology, Incorporated, a Nevada corporation, as Company or otherwise, under the Convertible Notes Documents.
“Change of Control” - The result caused by the occurrence of any event which results in the Permitted Holders as of the Closing Date collectively owning (beneficially, legally or otherwise), directly or indirectly, less than fifty one percent (51%) of any class of the issued and outstanding Capital Stock of the Borrower entitled to vote.
“Closing” – Has the meaning set forth in Section 4.6.
“Closing Date” - Has the meaning set forth in Section 4.6.
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“Collateral” - All of the Property and interests in Property described in Section 3.1 of this Agreement and all other Property and interests in Property that now or hereafter secure payment of the Obligations and satisfaction by Borrower of all covenants and undertakings contained in this Agreement and the other Loan Documents.
“Collateral Assignment of Material Project Documents” – means a collateral assignment with respect to all Material Project Documents in favor of the Lender, in the form of Exhibit A.
“Default” - Any event, act, condition or occurrence which with notice, or lapse of time or both, would constitute an Event of Default hereunder.
“Dorothy 1B” – means the collocated 25MW cryptocurrency mining sites owned by Borrower and located at or around 9985 County Rd F; Silverton TX, 79257 and further depicted in Exhibit B.
“Environmental Laws” - Any and all Federal, foreign, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees and any and all common law requirements, rules and bases of liability regulating, relating to or imposing liability or standards of conduct concerning pollution, protection of the environment, or the impact of pollutants, contaminants or toxic or hazardous substances on human health or the environment, as now or may at any time hereafter be in effect.
“ERISA” - The Employee Retirement Income Security Act of 1974, as the same may be amended, from time to time.
“Event of Default” - Has the meaning set forth in Section 8.1.
“Executive Order No. 13224” - The Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, as the same has been, or shall hereafter be, renewed, extended, amended or replaced.
“Excluded Property” - Any “intent-to-use” United States trademark applications to the extent that an amendment to allege use or statement of use has not been filed under 15 U.S.C. §1051(c) or 15 U.S.C. §1051(d), respectively, or if filed, has not been deemed in conformity with 15 U.S.C. §1051(a) or (c), it being agreed that for purposes of this Agreement and the Loan Documents, no Lien granted to Lender on any “intent-to-use” United States trademark applications is intended to be a present assignment thereof.
“Expenses” - Has the meaning set forth in Section 9.6.
“GAAP” - United States generally accepted accounting principles in the United States of America as in effect from time to time, consistently applied.
“Governmental Authority” - Any federal, state or local government or political subdivision, or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury, or arbitration.
“Hazardous Substances” - Any substances defined or designated as hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance or similar term, under any Environmental Law.
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“Indebtedness” - Of any Person at any date, all liabilities of such Person, including without duplication (i) all indebtedness of such Person for borrowed money (including with respect to Borrower, the Obligations) or for the deferred purchase price of property or services, (ii) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (iii) all accounts payable and Capitalized Lease Obligations of such Person, (iv) the face amount of all letters of credit issued for the account of such Person and all drafts drawn thereunder, (v) all obligations of other Persons which such Person has guaranteed, and (v) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof.
“In-Service Date”- The date on which Dorothy 1B is put into full operation following the planned ramp-up period.
“Interest Payment Date” - Has the meaning set forth in Section 2.3(a).
“Interest Period” - Has the meaning set forth in Section 2.3(a).
“Interest Rate” - Has the meaning set forth in Section 2.3(a).
“Inventory” - All of the “inventory” (as that term is defined in the UCC) of Borrower, whether now existing or hereafter acquired or created.
“Investments” - Any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person.
“IRS” - Internal Revenue Service.
“Lien” - Any interest of any kind or nature in property securing an obligation owed to, or a claim of any kind or nature in property by, a Person other than the owner of the Property, whether such interest is based on the common law, statute, regulation or contract.
“Loan Documents” - Collectively, this Agreement, the Note, the Notes Intercreditor, the Collateral Assignment of Material Project Documents and all agreements, instruments and documents executed and/or delivered in connection therewith, all as may be supplemented, restated, superseded, amended or replaced from time to time.
“Material Adverse Effect” – A material adverse effect on (i) the business, assets, operations, or financial or other condition of Borrower, (ii) Borrower’s ability to pay or perform the Obligations under this Agreement or the other Loan Documents in accordance with the terms thereof, (iii) any material portion of the Collateral or the Lien of Lender on the Collateral or the priority of any such Lien, or (iv) any of Lender’s material rights and remedies under this Agreement and the other Loan Documents.
“Material Project Documents” – means all material contracts and documents regarding the operations of Dorothy 1B, including, without limitation, those set forth on Schedule A.
“Note” – A promissory note evidencing the Term Loan in the form of Exhibit C.
“Notes Intercreditor” - the intercreditor agreement, dated the date hereof between Lender and the agent for the Convertible Noteholders governing their respective rights and remedies with respect to the Convertible Notes Indebtedness, Convertible Notes Documents and certain related matters.
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“Obligations” - All existing and future debts, liabilities and obligations of every kind or nature at any time owing by Borrower to Lender, whether under this Agreement, or any other existing or future instrument, document or agreement, between Borrower or Lender or any other Lender Affiliate, whether joint or several, related or unrelated, primary or secondary, matured or contingent, due or to become due (including debts, liabilities and obligations obtained by assignment), and whether principal, interest, fees, indemnification obligations hereunder or Expenses (specifically including interest accruing after the commencement of any bankruptcy, insolvency or similar proceeding with respect to Borrower, whether or not a claim for such post-commencement interest is allowed), including, without limitation, debts, liabilities and obligations in respect of the Term Loan and any extensions, modifications, substitutions, increases and renewals thereof; the payment of all amounts advanced by Lender or any other Lender Affiliate to preserve, protect and enforce rights hereunder and in the Collateral. Without limiting the generality of the foregoing, Obligations shall include any other debts, liabilities or obligations owing to Lender or any other Lender Affiliate in connection with any lockbox, cash management, or other services (including electronic funds transfers or automated clearing house transactions) provided by Lender or any other Lender Affiliate to Borrower, as well as any other loan, advances or extension of credit, under any existing or future loan agreement, promissory note, or other instrument, document or agreement between Borrower and Lender or any other Lender Affiliate.
“Permitted Distributions” - means (a) at all times, distributions to Permitted Holders in an amount equal to and when required to permit Permitted Holders to pay their respective allocable portion of all taxes actually due and payable with respect to the income of the Borrower; and (b) (i) at all times prior to the In-Service Date, no other distributions shall be made or permitted to be made; and (ii) from and after the In-Service Date, additional distributions may be made to the Permitted Holders in accordance with the terms of the Borrower Operating Agreement, so long as the Borrower is in compliance with all payment and performance obligations of Borrower under this Agreement, including, without limitation, Section 2.5(a) of this Agreement; provided, however that after the occurrence and during the continuance of an Event of Default solely distributions of the sort needed to pay the taxes described in clause (a) of this definition of “Permitted Distributions” and distributions needed to pay principal and interest to the Lender as contemplated by Section 2.5(a) of this Agreement shall be permitted, and no other distributions whatsoever shall be made or permitted without the Lender’s prior written consent.
“Permitted Holders” – means Navitas West Texas Investments SPV, LLC and/or its Affiliates, Soluna Holdings, Inc., and, subject to the terms of the Notes Intercreditor, also the Convertible Noteholders, collectively.
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“Permitted Indebtedness” - (a) Indebtedness to Lender in connection with the Term Loan or otherwise pursuant to the Loan Documents; (b) trade payables incurred in the ordinary course of Borrower’s business; (c) purchase money Indebtedness (including Capitalized Lease Obligations) hereafter incurred by Borrower to finance the purchase of fixed assets; provided that, (i) the Lender shall have consented to the incurrence thereof in writing in advance in its sole discretion, (ii) the amount of such Indebtedness shall not exceed Five Million Dollars ($5,000,000) in the aggregate, (iii) such Indebtedness shall not exceed the purchase price of the assets funded and (iv) no such Indebtedness may be refinanced for a principal amount in excess of the principal amount outstanding at the time of such refinancing; (d) endorsement of instruments or other payment items for deposit; (e) Indebtedness incurred in the ordinary course of business under performance, surety, statutory, or appeal bonds; (f) Indebtedness owed to any Person providing property, casualty, liability, worker’s compensation, health, disability or other employee benefits insurance, or other insurance to the Borrower, so long as the amount of such Indebtedness is not in excess of the amount of the unpaid cost of, and shall be incurred only to defer the cost of, such insurance for the year in which such Indebtedness is incurred and such Indebtedness is outstanding only during such year; (g) Indebtedness incurred in the ordinary course of business in respect of credit cards, credit card processing services, debit cards, or cash management services, provided that such Indebtedness shall not exceed Twenty-Five Thousand Dollars ($25,000) in the aggregate at any one time; (h) Indebtedness owed to Lender or any Affiliate of Lender and (i) solely after the occurrence and during the continuance of a 2021 Lien Triggering Event, Indebtedness owed to the Convertible Noteholders as a direct result thereof.
“Permitted Investments” - (a) Investments existing on the Closing Date and shown on Schedule B; and (b) Investments consisting of cash equivalents.
“Permitted Liens” - (a) Liens securing taxes, assessments or governmental charges or levies not yet due; (b) Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance, social security and other like laws; (c) Liens on fixed assets secured by purchase money Indebtedness permitted under Section 7.6; provided that, (i) such Lien attached to such assets concurrently, or within 20 days of the acquisition thereof, and only to the assets so acquired, and (ii) a description of the asset acquired is furnished to Lender; (d) Liens in favor of Lender securing the Obligations; (e) judgment Liens arising solely as a result of the existence of judgments, orders, or awards that do not constitute an Event of Default under Section 8.1 of this Agreement; (f) the interests of lessors under operating leases and non-exclusive licensors under license agreements; (g) Liens on cash amounts deposited to secure the Borrower’s obligations in connection with worker’s compensation or other unemployment insurance; (h) Liens on amounts deposited to secure the Borrower’s obligations in connection with the making or entering into of bids, tenders, or leases in the ordinary course of business and not in connection with the borrowing of money; (i) Liens on amounts deposited to secure the Borrower’s reimbursement obligations with respect to appeal bonds obtained in the ordinary course of business, provided that, such amounts shall not exceed Fifty Thousand Dollars ($50,000) in the aggregate at any one time; (i) with respect to any real property, easements, rights of way, and zoning restrictions that do not materially interfere with or impair the use or operation thereof; (k) non-exclusive licenses of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of business; (1) rights of setoff or bankers’ liens upon deposits of funds in favor of banks or other depository institutions, solely to the extent incurred in connection with the maintenance of such deposit accounts in the ordinary course of business; (m) Liens granted in the ordinary course of business on the unearned portion of insurance premiums securing the financing of insurance premiums to the extent the financing is permitted under the definition of Permitted Indebtedness; (n) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods and (m) solely after the occurrence and during the continuance of a 2021 Lien Triggering Event, Liens of the Convertible Noteholders (or their collateral agent, as the case may be) against the Borrower.
“Person” - An individual, partnership, corporation, trust, limited liability company, limited liability partnership, unincorporated association or organization, joint venture or any other entity.
“Property” - Any interest of Borrower in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.
“SLNH Cash” - Has meaning given to such term in Section 2.5 hereof.
“Site-level Free Cash Flow” - Means the total revenue of the Borrower minus power costs and all site-level operating expenses as listed in Schedule C hereto.
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“Subsidiary” - With respect to any Person at any time, (i) any corporation more than fifty percent (50%) of whose voting stock is legally and beneficially owned by such Person or owned by a corporation more than fifty percent (50%) of whose voting stock is legally and beneficially owned by such Person; (ii) any trust of which a majority of the beneficial interest is at such time owned directly or indirectly, beneficially or of record, by such Person or one or more Subsidiaries of such Person; and (iii) any partnership, joint venture, limited liability company or other entity of which ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at such time owned directly or indirectly, beneficially or of record, by, or which is otherwise controlled directly, indirectly or through one or more intermediaries by, such Person or one or more Subsidiaries of such Person.
“Term Loan” - The outstanding Term Loan Amount, plus any and all paid-in-kind interest that has been added to the principal balance of thereof in accordance with the terms of this Agreement.
“Term Loan Amount” - The sum of Two Million Fifty Thousand Dollars ($2,050,000).
“Term Loan Maturity Date” – May [8], 2025.
“Term Loan Payment Date” – Has the meaning set forth in Section 2.5(a).
“2021 Lien Triggering Event” – Has the meaning set forth in the Notes Intercreditor.
“UCC” - The Uniform Commercial Code as adopted in the State of New York, as the same may be amended from time to time.
Other Capitalized Terms - Any other capitalized terms used without further definition herein shall have the respective meaning set forth in the UCC.
1.2. Accounting Principles: Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, this shall be done in accordance with GAAP, to the extent applicable, except as otherwise expressly provided in this Agreement.
1.3. Construction: No doctrine of construction of ambiguities in agreements or instruments against the interests of the party controlling the drafting shall apply to any Loan Documents.
SECTION II. THE LOAN
2.1. Term Loan - Description:
a. Lender hereby agrees to advance to Borrower, subject to the terms and conditions of this Agreement, the sum of the Term Loan Amount at the Closing.
b. This Agreement and the Note shall evidence Borrower’s unconditional obligation to repay to Lender the Term Loan with interest as herein provided. The Lender’s books and records shall determine the amount of the outstanding Obligations absent manifest error.
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2.2. Advances and Payments:
a. At the Closing, Lender shall transfer the aggregate proceeds of the Term Loan Amount by wire transfer, in immediately available funds as follows: (i) first, to the Lender in an amount equal to Fifty Thousand Dollars ($50,000) for application towards Lender’s fees and expenses incurred in connection with the negotiation, documentation and closing of this Agreement and the transactions contemplated hereby, which, at Lender’s election, may be accomplished via a net funding mechanism; and (ii) second, in the amounts and to the payees in accordance with the funds flow attached hereto as Exhibit D. Borrower hereby acknowledges and agrees that Lender may make such payments strictly on the basis of the account numbers furnished in Exhibit D. In the event that the account numbers provided by Borrower on Exhibit D are incorrect, Borrower hereby agrees to be fully liable for any and all losses, costs and expenses arising therefrom.
b. Except to the extent otherwise set forth in this Agreement, all payments of principal (including, without limitation, interest on the Term Loan that has been added to principal in accordance with the terms of this Agreement) and all Expenses, fees, indemnification obligations and all other charges and any other Obligations of Borrower, shall be made to Lender by wire transfer at an account designated by Lender in writing, in United States dollars, in immediately available funds.
2.3. Interest:
a. Subject to Sections 2.3(b) and 2.5 of this Agreement, the unpaid principal balance of the Term Loan shall bear interest, subject to the terms hereof, at a per annum rate equal to fifteen percent (15%) (the “Interest Rate”). Borrower shall pay accrued interest on the unpaid balance of the Term Loan monthly in arrears on the last Business Day of each month (each date upon which interest shall be so payable, an “Interest Payment Date”) and the period from each Interest Payment Date to the next Interest Payment Date being referred to as an “Interest Period”). Subject to Section 2.3(b) of this Agreement, all interest payable under this Agreement for each Interest Period shall be paid-in-kind on each Interest Payment Date by being capitalized and added to the outstanding principal balance of the Term Loan. Interest on the Term Loan shall accrue from the date of this Agreement until repayment of the principal and payment of all accrued and unpaid interest in full. Interest shall be computed on the basis of a 360-day year and the number of actual days elapsed.
b. Upon the occurrence and during the continuance of an Event of Default, the principal balance of the Term Loan shall bear interest at a rate equal to the amount set forth in Section 2.3(a) of this Agreement plus 2.00% per annum until such Event of Default is cured or waived. All such default interest shall be paid-in-kind on the next Interest Payment Date by being capitalized and added to the outstanding principal balance of the Term Loan.
2.4. Additional Interest Provisions:
a. All contractual rates of interest chargeable on outstanding principal under the Loan shall continue to accrue and be paid even after Default, an Event of Default, maturity, acceleration, judgment, bankruptcy, insolvency proceedings of any kind or the happening of any event or occurrence similar or dissimilar.
b. In no contingency or event whatsoever shall the aggregate of all amounts deemed interest hereunder and charged or collected pursuant to the terms of this Agreement exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such court determines Lender has charged or received interest hereunder in excess of the highest applicable rate, such rate shall automatically be reduced to the maximum rate permitted by such law.
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2.5. Payments:
a. Beginning on the last Business Day of the month in which the In-Service Date occurs, and continuing on the last Business Day of each month thereafter until the repayment of all Term Loan debt principal and accrued interest occurs (each such day, a “Term Loan Payment Date”), Borrower shall make debt service payments on the Term Loan through a cash sweep with the Site-level Cash Flow otherwise to be distributed to Soluna Holdings, Inc., the ultimate parent entity of Borrower (the “SLNH Cash”) being applied as a repayment of the Loan equal to (i) accrued and unpaid interest that has not yet been added to the principal balance of the Term Loan pursuant to Section 2.3(a), if any, plus (ii) 1/24 of the then outstanding principal balance of the Term Loan, but not to exceed the greater of (x) SLNH Cash times 0.60 and (y) SLNH Cash times 0.33. Any and all monthly debt service amounts so paid to Lender shall be applied first to accrued and unpaid interest that has not yet been added to the principal balance of the Term Loan pursuant to Section 2.3(a), if any, and then to repayment of the then outstanding principal balance of the Term Loan.
b. On the Term Loan Maturity Date, all remaining principal and accrued and unpaid interest that has not yet been added to the principal balance of the Term Loan pursuant to Section 2.3(a), if any, shall become immediately due and owing in full and shall be paid by wire transfer in immediately available funds.
c. Borrower may voluntarily prepay the Term Loan in whole or in part at any time or from time to time. Any voluntary prepayment of the Term Loan shall be in a principal amount not less than $25,000.
d. Any voluntary prepayment of the Term Loan shall be accompanied by all accrued and unpaid interest that has not yet been added to the principal balance of the Term Loan pursuant to Section 2.3(a), if any. Any partial prepayment of the Term Loan shall be applied to installments of the Term Loan due in the inverse order of maturity.
2.6. Use of Proceeds: To partially fund the operation and energization of the Borrower’s site known as Dorothy 1B.
SECTION III. COLLATERAL
3.1. Collateral: As security for the payment of the Obligations, and satisfaction by Borrower of all covenants and undertakings contained in this Agreement and the other Loan Documents, Borrower hereby assigns and grants to Lender, a continuing Lien on and security interest in, upon and to the following Property, all whether now owned or hereafter acquired, created or arising and wherever located:
| 1. | Accounts - All Accounts; | |
| 2. | Cash – All cash and cash equivalents; | |
| 3. | Chattel Paper and Warehouse Receipts - All Chattel Paper and Warehouse Receipts; | |
| 4. | Books and Records – All books and records; | |
| 5. | Commercial Tort Claims – All Commercial Tort Claims, including, without limitation, the Commercial Tort Claims set forth on Schedule 1; | |
| 6. | Contracts – All contract rights, including, without limitation, all contract rights under all Material Project Documents; |
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| 7. | Deposit Accounts – All Deposit Accounts and all funds on deposit thereon, including, without limitation, the Deposit Accounts set forth on Schedule 2; | |
| 8. | Documents - All Documents; | |
| 9. | Equipment - All Equipment; | |
| 10. | Fixtures - All Fixtures; | |
| 11. | General Intangibles - All General Intangibles and all intellectual property, including, without limitation, the United States Trademarks, United States Patents and United States Copyrights set forth on Schedule 3; | |
| 12. | Goods - All Goods; | |
| 13. | Instruments - All Instruments; | |
| 14. | Inventory - All Inventory; | |
| 15. | Investment Property – all Investment Property and all owned equity interests, including, without limitation, the equity interests set forth on Schedule 4; | |
| 16. | Investments – All investments; | |
| 17. | Letter-of-Credit Rights – All Letter-of-Credit Rights, including, without limitation, the Letter-of-Credit Rights set forth on Schedule 5; | |
| 18. | Property in Lender’s Possession - All Property of Borrower, now or hereafter in Lender’s possession; | |
| 19. | Other Assets - All other Assets of Borrower; and | |
| 20. | Supporting Obligations – All Supporting Obligations; and | |
| 21. | Proceeds – To the extent not otherwise included all Proceeds and products of all and any of the foregoing and all collateral security and guarantees given by any Person with respect to the foregoing (including, without limitation, insurance proceeds), whether cash or non-cash, of all of the foregoing property described in clauses (1) through (20). |
Notwithstanding anything to the contrary contained in clauses (1) through (21) above, the security interest created by this Agreement shall not extend to, and the term “Collateral” shall not include, any Excluded Property; provided that, if any Excluded Property would have otherwise constituted Collateral, when such property shall cease to be Excluded Property, such property shall be deemed at all times from and after the date hereof to constitute Collateral.
Borrower and Lender agree that this Agreement creates, and is intended to create, a valid and continuing first priority Lien and security interest upon the Collateral in favor of Lender.
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3.2. Lien Documents: At Closing and thereafter as Lender deems necessary, Borrower shall execute and/or deliver to Lender, or have executed and delivered (all in form and substance satisfactory to Lender and its counsel):
a. Financing Statements pursuant to the UCC, which Lender may file in the state in which the Borrower is organized and any other jurisdictions that Lender deems appropriate; and
b. Any other agreements, documents, instruments and writings, including, without limitation, intellectual property security agreements, required by Lender to evidence, perfect or protect the Liens and security interests in the Collateral or as Lender may reasonably request from time to time.
3.3. Other Actions:
a. In addition to the foregoing, Borrower shall do anything further that may be reasonably required by Lender to secure Lender and effectuate the intentions and objects of this Agreement, including, without limitation, the execution and delivery of security agreements, contracts and any other documents required hereunder and the delivery of motor titles with Lender’s lien noted thereon. At Lender’s reasonable request, Borrower shall also immediately deliver (with execution by Borrower of all necessary documents or forms to reflect, implement or enforce the Liens described herein), or cause to be delivered to Lender all items for which Lender must receive possession to obtain a perfected security interest, including without limitation, all stock powers, letters of credit, certificates and documents of title, Chattel Paper, Warehouse Receipts, Instruments, and any other similar instruments constituting Collateral.
b. Lender is hereby authorized to file financing statements and amendments to financing statements without Borrower’s signature, in accordance with the UCC. Borrower hereby authorizes Lender to file all such financing statements and amendments to financing statements describing the Collateral in any filing office as Lender, in its reasonable discretion may determine, including financing statements listing “All Assets” (or words to similar effect) in the collateral description therein. Borrower agrees to promptly comply with the requests of Lender in order for Lender to have and maintain a valid and perfected first security interest in the Collateral including, without limitation, executing and using commercially reasonable efforts to cause any other Person to execute such documents as Lender may require to obtain Control (as defined in the UCC) over all Deposit Accounts, Letter-of-Credit Rights and Investment Property.
3.4. Searches, Certificates:
a. Lender shall, prior to or at Closing, and thereafter as Lender may determine from time to time, at Borrower’s expense, obtain the following searches (the results of which are to be consistent with the warranties made by Borrower in this Agreement):
i. UCC searches with Delaware Secretary of State; and
ii. Judgment, state and federal tax lien and corporate tax lien searches, in all applicable filing offices of each state where Borrower is organized, maintains its executive office, a place of business, or assets.
b. Borrower shall, prior to or at Closing and at its expense, obtain and deliver to Lender good standing certificates showing Borrower to be in good standing in its state of organization.
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3.5. Landlord’s and Warehouseman’s Waivers: Borrower will promptly, at Lender’s request, cause each owner of any premises occupied by a Borrower or to be occupied by a Borrower and each warehouseman of any warehouse, where, in either event Collateral is held, to execute and deliver to Lender an instrument, in form and substance satisfactory to Lender, under which such owner(s) or warehouseman subordinates its/his/their interests in and waives its/his/their right to distrain on or foreclose against the Collateral and agrees to allow Lender to remain on such premises to dispose of or deal with any Collateral located thereon.
3.6. Filing Security Agreement: A carbon, photographic or other reproduction or other copy of this Agreement or of a financing statement is sufficient as and may be filed in lieu of a financing statement where permitted by law.
3.7. Power of Attorney: Each of the officers of Lender is hereby irrevocably made, constituted and appointed the true and lawful attorney for the Borrower (without requiring any of them to act as such) with full power of substitution to do the following: (a) endorse the name of Borrower upon any and all checks, drafts, money orders and other instruments for the payment of monies that are payable to Borrower and constitute collections on Borrower’s Accounts or proceeds of other Collateral; (b) execute and/or file in the name of Borrower any financing statements, schedules, assignments, instruments, documents and statements that Borrower is obligated to give Lender hereunder or is necessary to perfect (or continue or evidence the perfection of such security interest or Lien) Lender’s security interest or Lien in the Collateral; and (c) upon the occurrence and during the continuation of an Event of Default, do such other and further acts and deeds in the name of Borrower that Lender may reasonably deem necessary or desirable to enforce any Account or other Collateral.
SECTION IV. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES
Closing under this Agreement is subject to the following conditions precedent (all instruments, documents and agreements to be in form and substance satisfactory to Lender and Lender’s counsel):
4.1. Resolutions and Other Documents: Borrower shall have delivered, or caused to be delivered to Lender the following:
a. this Agreement attaching all Schedules and Exhibits hereto, the Notes Intercreditor, and each of the other Loan Documents all properly executed;
b. financing statements, notices of the grant of intellectual property security agreements and each of the other documents to be executed and/or delivered by Borrower or any other Person pursuant to this Agreement;
c. evidence of completion of all other recordings and filings (including UCC-3 termination statements and other Lien release documentation) as may be necessary or, in the opinion of and at the request of Lender, desirable to perfect Lender’s first priority Lien and security interest on the Collateral and to ensure such Collateral is free and clear of other Liens other than Permitted Liens;
d. certified copies of (i) resolutions of the Borrower’s board of directors, members or other governing body authorizing the execution, delivery and performance of this Agreement and each of the other Loan Documents, (ii) the Borrower’s certificate of formation together with all amendments thereto, (iii) the Borrower’s operating agreement together with all amendments thereto, (iv) the Borrower’s good standing certificate in the state of Delaware; (v) the incumbency (with specimen signatures) of each officer of the Borrower that has been authorized to enter into and perform this Agreement and the other Loan Documents; (vi) true, accurate and correct copies of the Convertible Notes Documents; and (vii) true, accurate and correct copies of all Material Project Documents;
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e. evidence of control over Deposit Accounts, Letter-of-Credit Rights and Warehouse Receipts required under Section 3.3(b);
i. searches and certificates required under Section 3.4;
ii. a certificate of an Authorized Officer of Borrower confirming satisfaction with the solvency requirement set forth in Section 5.5 and the requirements set forth in Sections 4.2 and 4.3;
iii. insurance certificates and policies required under Section 6.2;
iv. a duly executed opinion of counsel to Borrower addressing such matters as Lender may request;
f. such other certificates, documents and agreements reasonably required by Lender; and
g. documentation in form and substance satisfactory to Lender evidencing Lender’s equity investment of not less than $5,000,000 in Borrower (and/or its Affiliates), as the case may be.
4.2. Absence of Certain Events: At the Closing Date, no Default or Event of Default hereunder shall have occurred and be continuing.
4.3. Warranties and Representations at Closing: The warranties and representations contained in Section 5 as well as any other Section of this Agreement shall be true and correct in all material respects on the Closing Date with the same effect as though made on and as of that date. Borrower shall not have taken any action or permitted any condition to exist which would have been prohibited by any Section hereof.
4.4. Compliance with this Agreement: Borrower shall have performed and complied with all agreements, covenants and conditions contained herein including, without limitation, the provisions of Sections 6 and 7 hereof, which are required to be performed or complied with by Borrower before or at the Closing Date.
4.5. Closing: Subject to the conditions of this Section, the Loan shall be made available on such date (the “Closing Date”) and at such time and location as may be mutually agreeable to the parties contemporaneously with the execution hereof (“Closing”).
4.6. No Waiver of Rights: By completing the Closing hereunder, or by making Advances hereunder, Lender does not thereby waive a breach of any warranty or representation made by Borrower hereunder or under any agreement, document, or instrument delivered to Lender or otherwise referred to herein, and any claims and rights of Lender resulting from any breach or misrepresentation by Borrower are specifically reserved by Lender.
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SECTION V. REPRESENTATIONS AND WARRANTIES
To induce Lender to complete the Closing and make the Term Loan to Borrower, the Borrower warrants and represents to Lender that:
5.1. Organization and Validity:
a. The Borrower is a limited liability company, duly organized and validly existing under the laws of the State of Delaware. Borrower (i) has the appropriate power and authority to operate its business and to own its Property and (ii) is duly qualified, is validly existing and in good standing and has lawful power and authority to engage in the business it conducts in each state where the nature and extent of its business requires qualification, except where the failure to so qualify does not and could not reasonably be expected to have a Material Adverse Effect.
b. The making and performance of this Agreement, and the other Loan Documents will not (i) violate any law, government rule or regulation, court or administrative order or other such order, or Borrower’s certificate of formation, articles of incorporation, bylaws, articles of organization or operating agreement, or (ii) violate or result in a default (immediately or with the passage of time) under the Convertible Notes Indebtedness, Convertible Notes Documents and/or any other contract, agreement or instrument to which Borrower is a party, or by which Borrower is bound. The Borrower is not in violation of any term of any agreement or instrument to which it is a party or by which it may be bound which violation has or could reasonably be expected to have a Material Adverse Effect, or of its certificate of formation, certificate of incorporation or bylaws or articles of organization or operating agreement.
c. Borrower has all requisite power and authority to enter into and perform this Agreement, to incur the obligations herein provided for, and has taken all proper and necessary action to authorize the execution, delivery and performance of this Agreement, and the other Loan Documents, as applicable.
d. This Agreement, and all of the other Loan Documents, when delivered, will be valid and binding upon Borrower, and enforceable in accordance with their respective terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles.
5.2. Pending Litigation: Other than as set forth on Schedule 6 as of the Closing Date, there are no judgments or judicial or administrative orders or proceedings pending, or to the knowledge of Borrower, threatened, against Borrower in any court or before any Governmental Authority which assert or make claims in excess of One Hundred Thousand Dollars ($100,000) or could reasonably be expected to have a Material Adverse Effect. To the knowledge of Borrower, there are no investigations (civil or criminal) pending or threatened against Borrower in any court or before any Governmental Authority which assert or make claims in excess of One Hundred Thousand Dollars ($100,000) or could reasonably be expected to have a Material Adverse Effect. Borrower is not in default with respect to any order of any Governmental Authority. To the knowledge of Borrower, no shareholder or executive officer of Borrower has been indicted in connection with or convicted of engaging in any criminal conduct, or is currently subject to any lawsuit or proceeding or under investigation in connection with any anti-racketeering or other conduct or activity which may result in the forfeiture of any property to any Governmental Authority.
5.3. Title to Properties: Borrower has good and marketable title in fee simple (or its equivalent under applicable law) to all the Property it purports to own, free from Liens and free from the claims of any other Person, except for Permitted Liens.
5.4. Governmental Consent: Neither the nature of Borrower or of its business or Property, nor any relationship between Borrower and any other Person, nor any circumstance affecting Borrower in connection with the issuance or delivery of this Agreement or any other Loan Documents is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any Governmental Authority on the part of Borrower.
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5.5. Taxes: All federal, state and other material tax returns required to be filed by Borrower in any jurisdiction have been filed, and all taxes, assessments, fees and other governmental charges upon Borrower, or upon any of its Property, income or franchises, which are shown to be due and payable on such returns have been paid, except for those taxes being contested in good faith with due diligence by appropriate proceedings for which appropriate reserves have been maintained under GAAP and as to which no Lien has been entered. Borrower is not aware of any proposed additional tax assessment or tax to be assessed against or applicable to Borrower.
5.6. Full Disclosure: No written statement of Borrower to Lender in connection with the negotiation of the Loan, contain any untrue statement of a material fact. Such statements do not omit a material fact, the omission of which would make the statements contained therein misleading. There is no fact known to Borrower which has not been disclosed in writing to Lender which has or could reasonably be expected to have a Material Adverse Effect.
5.7. Subsidiaries: Borrower does not have any Subsidiaries or Affiliates, except as shown on Schedule 5.7.
5.8. Investments, Guarantees, Contracts, etc.:
a. Borrower does not own or hold equity or long term debt investments in, or have any outstanding advances to, any other Person. Borrower has not made a loan or advance to any holder of its Capital Stock except as disclosed in writing to Lender.
b. Borrower has not entered into any leases for real or personal Property (whether as landlord or tenant or lessor or lessee), except as set forth on Schedule 5.8.
c. Borrower is not a party to any contract or agreement, or subject to any charter or other corporate restriction, which has or could reasonably be expected to have a Material Adverse Effect.
d. Except as otherwise specifically provided in this Agreement, Borrower has not agreed or consented to cause or permit any of its Property whether now owned or hereafter acquired to be subject in the future (upon the happening of a contingency or otherwise), to a Lien not permitted by this Agreement.
5.9. Government Regulations, etc.:
a. Borrower has obtained all licenses, permits, franchises or other governmental authorizations necessary for the ownership of its Property and for the conduct of its business.
b. Borrower is not in violation of or receipt of written notice that it is in violation of any applicable statute, regulation or ordinance of the United States of America, or of any state, city, town, municipality, county or of any other jurisdiction, or of any agency, or department thereof, (including, without limitation, Environmental Laws or government procurement regulations), a violation of which causes or could reasonably be expected to cause a Material Adverse Effect.
5.10. Business Interruptions: None of the business, Property or operations of Borrower have been materially and adversely affected in any way by any casualty, strike, lockout, combination of workers, order of the United States of America, or any state or local government, or any political subdivision or agency thereof, directed against Borrower. There are no pending or, to Borrower’s knowledge, threatened labor disputes, strikes, lockouts or similar occurrences or grievances affecting Borrower.
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5.11. Names and Intellectual Property:
a. Borrower has not conducted business under or used any other name (whether corporate or assumed).
b. Borrower is not in violation of any rights of any other Person with respect to trademarks, service marks, patents or copyrights which Borrower uses.
c. (i) Except as set forth on Schedule 3 on the Closing Date, Borrower does not require any copyrights, patents, trademarks or other intellectual property, or any license(s) to use any patents, trademarks or other intellectual property in order to provide services to its customers in the ordinary course of business; and (ii) Lender will not need any copyrights, patents, trademarks or other intellectual property or any licenses to use the same in order to provide such services after the occurrence of an Event of Default.
5.12. Other Associations: Borrower is not engaged and has no interest in any joint venture or partnership with any other Person except as set forth on Schedule 5.12.
5.13. Environmental Matters:
a. To the best of Borrower’s knowledge after due inquiry, no Property presently owned, leased or operated by Borrower contains, or has previously contained, any Hazardous Substances in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could give rise to liability under, any Environmental Law.
b. Borrower is in compliance, and, for the duration of all applicable statutes of limitations periods, has been in compliance with all applicable Environmental Laws, and, to the best of the Borrower’s knowledge after due inquiry, there is no contamination at, under or about any properties presently owned, leased, or operated by Borrower or violation of any Environmental Law with respect to such properties which could reasonably be expected to interfere with any of their continued operations or reasonably be expected to impair the fair saleable value thereof.
c. Borrower has not received any notice of violation, alleged violation, non- compliance, liability or potential liability regarding environmental matters or compliance assessment with Environmental Laws and Borrower has no knowledge that any such notice will be received or is being threatened.
d. Hazardous Substances have not been transported or disposed of in a manner or to a location which are reasonably likely to give rise to liability of Borrower under any Environmental Law.
e. No judicial proceeding or governmental or administrative action is pending, or to the knowledge of Borrower, threatened under any Environmental Law to which Borrower is, or to Borrower’s knowledge will be, named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding, the implementation of which is reasonably likely to have a Material Adverse Effect on any natural resources or on Borrower’s business, financial condition, Property or prospects under any Environmental Law.
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5.14. Capital Stock: The authorized and outstanding Capital Stock of the Borrower and the owner thereof, is as shown on Schedule 5.14. All of the Capital Stock of Borrower has been duly and validly authorized and issued and is fully paid and non-assessable and has been sold and delivered to the holders thereof in compliance with, or under valid exemption from, all Federal and state laws and the rules and regulations of all Governmental Authorities governing the sale and delivery of securities. Except for the rights and obligations communicated in writing by Borrower to Lender, there are no subscriptions, warrants, options, calls, commitments, rights or agreements by which Borrower or any of the shareholders of Borrower is bound relating to the issuance, transfer, voting or redemption of shares or interests of its Capital Stock or any pre-emptive rights held by any Person with respect to the shares or interests of Capital Stock of Borrower. Except as communicated in writing by Borrower to Lender, Borrower has not issued any securities convertible into or exchangeable for shares or interests of its Capital Stock or any options, warrants or other rights to acquire such shares or interests or securities convertible into or exchangeable for such shares or interests.
5.15. Solvency: Immediately after giving effect to the transactions contemplated under this Agreement and at all times thereafter, the Borrower is solvent, are able to pay its debts as they become due, and has capital sufficient to carry on its business and all businesses in which it is about to engage, and now owns Property having a value both at fair valuation and at present fair salable value greater than the amount required to pay Borrower debts. The Borrower will not be rendered insolvent by the execution and delivery of this Agreement or any of the other Loan Documents executed in connection with this Agreement or by the transactions contemplated hereunder or thereunder.
5.16. Perfection and Priority: This Agreement and the other Loan Documents are effective to create in favor of Lender legal, valid and enforceable first priority Liens and security interest in and to all right, title and interest of Borrower in the Collateral identified in this Agreement and the other Loan Documents, and when financing statements have been filed with the Delaware Secretary of State, Borrower will have granted to Lender, and Lender will have perfected first priority Liens in such Collateral (to the extent such security interest can be perfected by such a filing), superior in right to any and all other Liens, existing or future, subject to Permitted Liens (other than Permitted Liens contemplated by clause (m) of the definition thereof, which, to the extent permitted to exist in accordance with the terms hereof and the Notes Intercreditor, shall have the priority permitted by the Notes Intercreditor).
5.17. Deposit Accounts: All Deposit Accounts of Borrower have been identified on Schedule 2.
5.18. Anti-Terrorism Laws:
a. General: Neither Borrower nor any Affiliate of Borrower is in violation of any Anti-Terrorism Law or engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.
b. Executive Order No. 13224: Borrower and each Affiliate of Borrower, and to Borrower’s knowledge, each of their respective agents acting or benefiting in any capacity in connection with the Loan, Letters of Credit or other transactions hereunder, is not any of the following (each a “Blocked Person”):
i. a Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224;
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ii. a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224;
iii. a Person with which Lender is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;
iv. a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in the Executive Order No. 13224;
v. a Person that is named as a “specially designated national” on the most current list published by the U.S. Treasury Department Office of Foreign Asset Control at its official website or any replacement website or other replacement official publication of such list; or
vi. a Person who is affiliated with a Person listed above.
5.19. Margin Regulations: None of the proceeds of the Term Loan will be used, directly or indirectly by Borrower for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry, any “margin security” or “margin stock” within the meaning of Regulation U (12 C.F.R. Part 221), of the Board of Governors of the Federal Reserve System or for any other purpose which might make the transactions contemplated herein a “purpose credit” within the meaning of Regulation U, or cause this Agreement to violate any other regulation of the Board of Governors of the Federal Reserve System or the Securities Exchange Act of 1934 or the Small Business Investment Act of 1958, as amended, or any rules or regulations promulgated under any of such statutes.
5.19. ERISA: Borrower is in compliance with all funding requirements applicable to Borrower under ERISA and has not permitted a Reportable Event or a Prohibited Transaction, as defined in ERISA, to occur.
5.20. Continuation of Representations and Warranties: All representations and warranties made under this Agreement shall be true and correct at all times until all of the Obligations are paid and satisfied in full and the Term Loan has been terminated, except to the extent any such representations and warranties are expressly limited to an earlier date, in which case, such representations and warranties shall continue to be true and correct as of such specified earlier date.
SECTION VI. BORROWER’S AFFIRMATIVE COVENANTS
Borrower covenants that until all of the Obligations are paid and satisfied in full and the Term Loan has been terminated, that:
6.1. Payment of Taxes and Claims: Borrower shall pay, before they become delinquent, all obligations, taxes, assessments and governmental charges, or levies imposed upon it, or upon Borrower’s Property, and all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other Persons, entitled to the benefit of statutory or common law Liens which, in any case, if unpaid, would result in the imposition of a Lien upon its Property; provided however, that Borrower shall not be required to pay any such tax, assessment, charge, levy, claim or demand if the amount, applicability or validity thereof, shall at the time, be contested in good faith and by appropriate proceedings by Borrower, and if Borrower shall have set aside on its books adequate reserves in respect thereof, if so required in accordance with GAAP; which deferment of payment is permissible so long as no Lien other than a Permitted Lien has been entered and Borrower’s title to, and its right to use, its Property are not materially adversely affected thereby.
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6.2. Maintenance of Properties and Corporate Existence:
a. Property - Borrower shall maintain its Property in good condition (normal wear and tear excepted), make all necessary renewals, replacements, additions, betterments and improvements thereto and will pay and discharge when due the cost of repairs and maintenance to its Property, and will pay all rentals when due for all real estate leased by Borrower.
b. Property Insurance, Public and Products Liability Insurance - Borrower shall maintain insurance (i) on all insurable tangible Property against fire, flood, casualty and such other hazards (including, without limitation, extended coverage, workmen’s compensation, boiler and machinery, with inflation coverage by endorsement) and (ii) against general liability, public liability, product liability and business interruption, in each case in such amounts, with such deductibles and with such insurers as are customarily used by companies of similar size operating in the same industry as Borrower. At or prior to Closing, Borrower shall furnish Lender with duplicate original policies of insurance or such other evidence of insurance as Lender may require, and customary certificates of insurance naming Lender as additional insured on all liability policies and loss payee on all property insurance and business interruption insurance policies. In the event Borrower fails to procure or cause to be procured any such insurance or to timely pay or cause to be paid the premium(s) on any such insurance, Lender may do so for Borrower, but Borrower shall continue to be liable for the same. The policies of all such casualty insurance shall contain standard Lender’s Loss Payable Clauses (and, with respect to liability and interruption insurance, additional insured clauses) issued in favor of Lender under which all losses thereunder shall be paid to Lender as Lender’s interest may appear. Such policies shall expressly provide that the requisite insurance cannot be altered or canceled without thirty (30) days (or such lesser time period as approved by Lender in writing) prior written notice to Lender and shall insure Lender notwithstanding the act or neglect of Borrower. Borrower hereby appoints Lender as Borrower’s attorney-in-fact, exercisable at Lender’s option while an Event of Default has occurred and is continuing to endorse any check which may be payable to Borrower in order to collect the proceeds of such insurance and any amount or amounts collected by Lender pursuant to the provisions of this Section may be applied by Lender, in its sole discretion, to any Obligations or to repair, reconstruct or replace the loss of or damage to Collateral as Lender in its discretion may from time to time determine. Borrower further covenants that all insurance premiums owing under its current policies have been paid. Borrower shall notify Lender, immediately, upon Borrower’s receipt of a notice of termination, cancellation, or non-renewal from its insurance company of any such policy.
c. Financial Records; Financial Reports; Inspection – (i) Borrower shall keep current and accurate books of records and accounts in which full and correct entries will be made of all of its transactions, (ii) Borrower shall provide Lender with (a) copies of Borrower’s monthly financial statements (to the extent prepared), (b) copies of Borrower’s quarterly financial statements, (c) copies of Borrower’s annual audited financial statements and filed tax returns and (d) such other information respecting the business, Property or condition or operations, financial or otherwise, of Borrower as Lender may from time to time reasonably request, and (iii) Borrower shall allow any representative of Lender to visit and inspect the properties, to inspect the Collateral and examine its books of record and account and to discuss its affairs, finances and accounts with any of Borrower’s officers, directors, employees and agents, all upon prior written notice, at such reasonable times and as often as Lender may reasonably request; provided, however, that in the absence of an Event of Default, the costs and expenses of not more than one (1) such inspection may be invoiced to the Borrower in any calendar year.
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d. Corporate Existence and Rights - Borrower shall do (or cause to be done) all things necessary to preserve and keep in full force and effect its existence, good standing, rights and franchises, other than rights or franchises no longer used or useful in the business of Borrower.
6.3. Compliance with Laws: Borrower shall be in compliance in all material respects with any and all laws, ordinances, governmental rules and regulations, and court or administrative orders or decrees to which it is subject, whether federal, state or local, (including, without limitation, ERISA, Environmental Laws and government procurement regulations) and shall obtain and maintain any and all licenses, permits, franchises or other governmental authorizations necessary to the ownership of its Property or to the conduct of its businesses. Borrower shall timely satisfy all assessments, fines, costs and penalties imposed (after exhaustion of all appeals, provided a stay has been put in effect during such appeal) by any Governmental Authority against Borrower or any Property of Borrower. Neither Borrower nor any Subsidiary shall take any action that would result in the debarment or suspension of the Borrower or any Subsidiary from contracting with any Governmental Authority.
6.4. Business Conducted: Borrower shall continue in the business presently operated by it using its best efforts to maintain its customers and goodwill. Borrower shall not engage, directly or indirectly, in any material respect in any line of business substantially different from the businesses conducted by Borrower immediately prior to the Closing Date or then contemplated to be conducted by Borrower after giving effect to the In-Service Date.
6.5. Schedules: Borrower shall provide Lender updated Schedules to this Agreement within five (5) Business Days of any event necessitating a change thereto (or such other period of time specified in this Agreement) to the extent necessary to disclose any new or changed information; provided, that the provision of such updated Schedules shall not waive or deemed to be a waiver of any Default or Event of Default, if any, identified on such updated Schedules.
6.6. Material Adverse Developments: Borrower agrees that immediately upon becoming aware of any development or other information outside the ordinary course of business (excluding matters of a general economic, financial or political nature) which could reasonably be expected to have a Material Adverse Effect it shall give to Lender telephonic notice specifying the nature of such development or information and such anticipated effect. In addition, such verbal communication shall be confirmed by written notice thereof to Lender on the same day such verbal communication is made or the next Business Day thereafter.
6.7. Places of Business: Borrower shall give thirty (30) days prior written notice to Lender of any changes in the location of any of its respective places of business, of the places where records concerning its Accounts or where its Inventory are kept, or the establishment of any new, or the discontinuance of any existing place of business; provided that Borrower may not establish any place of business outside of the United States.
6.8. Contracts; Material Project Documents; Notices: On the first Business Day of each month, Borrower shall provide Lender with a fully-executed copy of (a) each amendment, modification or supplement to any existing contracts and/or Material Project Documents; and (b) each newly executed contract and/or Material Project Document. Borrower shall provide Lender with notice of any notice of default, breach or non-renewal with respect to the Borrower’s contracts, Material Project Documents and/or the Convertible Notes Documents.
6.9. Contract Assignments: Borrower shall execute and deliver to the Lender such assignments and acknowledgments as it shall require with respect to the Borrower’s contracts to provide for receivable payments to be made by Account Debtors directly to the Lender, and the Borrower shall direct all automated clearing house and other electronic payments with respect to the accounts receivable to be made to the Lender.
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SECTION VII. BORROWER’S NEGATIVE COVENANTS:
Borrower covenants that until all of the Obligations are paid and satisfied in full and the Term Loan has been terminated, that:
7.1. Merger, Consolidation, Dissolution or Liquidation:
a. Borrower shall not engage in any Asset Sale other than Equipment that is no longer used or useful in Borrower’s business or is replaced by other equipment of comparable or superior quality and value within ninety (90) days of such Asset Sale.
b. Borrower shall not merge or consolidate with any other Person or commence a dissolution or liquidation.
7.2. Acquisitions; Subsidiaries: Borrower shall not acquire all or a material portion of the Capital Stock or assets of any Person in any transaction or in any series of related transactions or enter into any sale and leaseback transaction.
7.3. Liens and Encumbrances: Borrower shall not: (i) execute a negative pledge agreement with any Person covering any of its Property, or (ii) cause or permit or agree or consent to cause or permit in the future (upon the happening of a contingency or otherwise), its Property (including, without limitation, the Collateral), whether now owned or hereafter acquired, to be subject to a Lien or be subject to any claim except for Permitted Liens.
7.4. Transactions With Affiliates or Subsidiaries:
a. Except as set forth on Schedule 7.4 on the Closing Date, Borrower shall not enter into any transaction with any Subsidiary or other Affiliate, including, without limitation, the purchase, sale, or exchange of Property, or the loaning or giving of funds to any Affiliate or any Subsidiary unless: (i) such Subsidiary or Affiliate is engaged in a business substantially related to the business conducted by Borrower, and the transaction is in the ordinary course of and pursuant to the reasonable requirements of Borrower’s business and upon terms substantially the same and no less favorable to Borrower as it would obtain in a comparable arm’s length transactions with any Person not an Affiliate or a Subsidiary, and so long as such transaction is not prohibited hereunder; or (ii) such transaction is intended for incidental administrative purposes.
b. Borrower shall not create or acquire any Subsidiary.
7.5. Permitted Indebtedness; Guarantees: Excepting the endorsement in the ordinary course of business of negotiable instruments for deposit or collection, Borrower shall not become or be liable, directly or indirectly, primary or secondary, matured or contingent, in any manner, whether as guarantor, surety, accommodation maker, or otherwise, for the existing or future Indebtedness of any kind of any Person other than Permitted Indebtedness.
7.6. Loan; Investments; Dividends:
a. Borrower shall not make or have outstanding Loan, advances, extensions of credit or capital contributions to, or investments in, any Person other than Permitted Investments.
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b. Borrower shall not make or pay any dividends or distributions or payments to redeem, retire or purchase any Capital Stock other than Permitted Distributions.
7.7. Miscellaneous Covenants:
a. Borrower shall not become or be a party to any contract or agreement which at the time of becoming a party to such contract or agreement materially impairs Borrower’s ability to perform under this Agreement, or under any other instrument, agreement or document to which Borrower is a party or by which it is or may be bound.
b. Borrower may not change its name without the prior written consent of Lender.
7.8. Jurisdiction of Organization: Borrower shall not change its jurisdiction of organization without the prior written consent of Lender.
7.9. Convertible Notes Indebtedness; Convertible Notes Documents: Borrower shall not amend, modify, extend or supplement the Convertible Notes Indebtedness or the Convertible Notes Documents without the prior written consent of Lender, except to the extent permitted by and not inconsistent with the terms of the Notes Intercreditor.
7.10. Borrower Operating Agreement: Borrower shall not amend, modify or supplement the Borrower Operating Agreement in any manner adverse to the Lender without the Lender’s prior written consent.
7.11. Material Project Documents: Borrower shall not amend, modify, supplement or terminate any Material Project Documents in any manner adverse to the Lender without the Lender’s prior written consent.
SECTION VIII. DEFAULT
8.1. Events of Default: Each of the following events shall constitute an event of default (“Event of Default”):
a. Payments - if Borrower fails to make any payment of principal or interest, under the Obligations on the date such payment is due and payable; or
b. Other Charges - if Borrower fails to pay any other charges, fees, Expenses or other monetary obligations owing to Lender arising out of or incurred in connection with this Agreement on the date such payment is due and payable and such failure continues unremedied for three (3) Business Days; or
c. Warranties or Representations - if any warranty, representation or other statement by or on behalf of Borrower contained in or pursuant to this Agreement, the other Loan Documents or in any document, agreement or instrument furnished in compliance with, relating to, or in reference to this Agreement, is false, erroneous, or misleading in any material respect when made or deemed to be made; or
d. Covenants – if Borrower fails or neglects to perform, keep or observe any other term, provision, condition, covenant or agreement contained in this Agreement or any Loan Document, and as to any default (other than those specified in other clauses of this Section 8.1) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within twenty (20) days after the occurrence thereof;
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e. Judgments - if any final judgment for the payment of money in excess of Fifty Thousand Dollars ($50,000) in the aggregate (i) which is not fully and unconditionally covered by insurance or (ii) for which Borrower has not established a cash or cash equivalent reserve in the full amount of such judgment, shall be rendered by a court of record against Borrower and such judgment shall continue unsatisfied and in effect for a period of thirty (30) consecutive days without being vacated, discharged, satisfied or bonded pending appeal; or
f. Assignment for Benefit of Creditors, etc. - if Borrower makes or proposes in writing, an assignment for the benefit of creditors generally, offers a composition or extension to creditors, or makes or sends notice of an intended bulk sale of any business or assets now or hereafter owned or conducted by Borrower; or
g. Bankruptcy, Dissolution, etc. - upon the commencement of any action for the dissolution or liquidation of Borrower, or the commencement of any proceeding to avoid any transaction entered into by Borrower, or the commencement of any case or proceeding for reorganization or liquidation of Borrower’s debts under the Bankruptcy Code or any other state or federal law, now or hereafter enacted for the relief of debtors, whether instituted by or against Borrower; provided, however, that Borrower shall have sixty (60) days to obtain the dismissal or discharge of involuntary proceedings filed against it, it being understood that during such sixty day period, Lender shall not be obligated to make Advances hereunder and Lender may seek adequate protection in any bankruptcy proceeding;
h. Liens - if any Lien in favor of Lender shall cease to be valid, enforceable and perfected and prior to all other Liens other than Permitted Liens or if Borrower or any Governmental Authority shall assert any of the foregoing; or
i. Cross-Default - a payment or other default by Borrower under any material loan, lease, guaranty or other material financial obligation to any third party exceeding $250,000 that is not cured or waived within any applicable grace or cure period therefor; or
j. Notes Intercreditor; Relationship with Convertible Noteholders - if the Notes Intercreditor shall for any reason by revoked or invalidated or otherwise cease to be in full force and effect, any Convertible Noteholder shall be in breach thereof or contest in any manner the validity or enforceability thereof, or the Obligations under this Agreement owed to Lender shall for any reason be subordinated or shall not have the priority contemplated by this Agreement; or
k. Default Under Material Project Documents – if there shall occur any default, breach, termination or non-renewal with respect to any Material Project Document.
l. Change of Control – if any Change of Control occurs;
m. Material Adverse Effect – if any other act, omission or occurrence occurs that results in a Material Adverse Effect, as reasonably determined by Lender, in good faith; or
n. Failure to Achieve In-Service Date – if the In-Service Date shall not have occurred on or before September 1, 2023 or such later date as may be consented to by Lender in its sole discretion.
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8.2. Rights and Remedies on Default:
a. In addition to all other rights, options and remedies granted or available to Lender under this Agreement or the Loan Documents (each of which is also then exercisable by Lender), or otherwise available at law or in equity, upon or at any time after the occurrence and during the continuance of an Event of Default Lender may, in its discretion, declare the Obligations immediately accelerated, due and payable, all without demand, notice, presentment or protest or further action of any kind (but if any Event of Default described in Section 8.1(f) or Section 8.1(g) occurs, all Obligations are immediately accelerated, due and payable without any action by Lender).
b. In addition to all other rights, options and remedies granted or available to Lender under this Agreement or the Loan Documents (each of which is also then exercisable by Lender), or otherwise available at law or in equity, upon or at any time after the acceleration of the Obligations following the occurrence and during the continuance of an Event of Default (other than the rights with respect to clause (iv) below which Lender may exercise at any time while an Event of Default exists and regardless of whether there is an acceleration), Lender may, in its discretion, exercise all rights under the UCC and any other applicable law or in equity, and under all Loan Documents permitted to be exercised after the occurrence of an Event of Default, including the following rights and remedies (which list is given by way of example and is not intended to be an exhaustive list of all such rights and remedies):
i. The right to take possession of, send notices regarding and collect directly the Collateral, with or without judicial process (including without limitation the right to notify the United States postal authorities to redirect mail addressed to Borrower to an address designated by Lender); or
ii. By its own means or with judicial assistance, enter Borrower’s premises and take possession of the Collateral, or render it unusable, or dispose of the Collateral on such premises in compliance with the UCC, without any liability for rent, storage, utilities or other sums, and Borrower shall not resist or interfere with such action; or
iii. Sell, lease or otherwise dispose of any or all of the Collateral in a commercially reasonable manner at public or private sale with notice to Borrower (the parties agreeing that thirty (30) days’ prior written notice shall constitute adequate notice of such sale) at such price as it may deem best, for cash, credit, or otherwise, with the right of Lender to purchase and apply the Proceeds to the Obligations (with any excess being refunded to Borrower).
iv. The right to enjoin any violation of Section 7.1, it being agreed that Lender’s remedies at law are inadequate.
c. In addition to all other rights, options and remedies granted or available to Lender under this Agreement or the Loan Documents (each of which is also then exercisable by Lender), or otherwise available at law or in equity, notwithstanding anything to the contrary in the Borrower Operating Agreement, at any time following the occurrence and during the continuance of an Event of Default that has been continuing for a period of ten (10) or more Business Days, then Lender may, in its discretion require that it be appointed as “Manager” (as defined in the Borrower Operating Agreement) under the Borrower Operating Agreement. Upon such election by Lender described in the prior sentence, then (i) the Borrower Operating Agreement shall be and shall be deemed to be amended to reflect the Lender’s appointment as “Manager” (as defined in the Borrower Operating Agreement) under the Borrower Operating Agreement, and (ii) the Borrower shall promptly take any and all actions reasonably requested by Lender to further reflect and evidence such appointment.
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In addition, Borrower shall be liable for any and all unpaid additional sums due hereunder before, after or during the exercise of any of the foregoing remedies; for all reasonable and documented out-of-pocket legal fees and other reasonable and documented out-of-pocket costs and expenses incurred by reason of any Default or of the exercise of Lender’s remedies with respect thereto. No remedy referred to in this Section is intended to be exclusive, but each shall be cumulative, and shall be in addition to any other remedy referred to above or otherwise available at law or in equity, and may be exercised concurrently or separately from time to time. Borrower hereby waives any and all existing or future claims to any offset against the sums due hereunder and agrees to make the payments regardless of any offset or claim which may be asserted by Borrower or on its behalf in connection with this Agreement.
8.3. Nature of Remedies: All rights and remedies granted Lender hereunder and under the Loan Documents, or otherwise available at law or in equity, shall be deemed concurrent and cumulative, and not alternative remedies, and Lender may proceed with any number of remedies at the same time until all Obligations are satisfied in full. The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and Lender, upon or at any time after the occurrence of an Event of Default, may proceed against Borrower, at any time, under any agreement, with any available remedy and in any order.
8.4. Set-Off:
a. In addition to all other rights, options and remedies granted or available to Lender under this Agreement or the Loan Documents (each of which is also then exercisable by Lender), upon or at any time after the occurrence and during the continuance of an Event of Default, Lender (and any participant) shall have and be deemed to have, without notice to Borrower, the immediate right of set-off against any bank account of Borrower with Lender, or of Borrower with any other Lender Affiliate or subsidiary or Affiliate of any participant and may apply the funds or amount thus set-off against any of Borrower’s Obligations hereunder.
b. If any bank account of Borrower with Lender, any other Lender Affiliate or any participant is attached or otherwise liened or levied upon by any third party, Lender (and such participant) shall have and be deemed to have, without notice to Borrower, the immediate right of set-off and may apply the funds or amount thus set-off against any of Borrower’s Obligations hereunder.
SECTION IX. MISCELLANEOUS
9.1. Governing Law: THIS AGREEMENT, AND ALL MATTERS ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND ALL RELATED AGREEMENTS AND DOCUMENTS, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS CONFLICTS OF LAWS PRINCIPLES. THE PROVISIONS OF THIS AGREEMENT AND ALL OTHER AGREEMENTS AND DOCUMENTS REFERRED TO HEREIN ARE TO BE DEEMED SEVERABLE, AND THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION SHALL NOT AFFECT OR IMPAIR THE REMAINING PROVISIONS WHICH SHALL CONTINUE IN FULL FORCE AND EFFECT.
9.2. Integrated Agreement: The other Loan Documents, all related agreements, and this Agreement shall be construed as integrated and complementary of each other, and as augmenting and not restricting Lender’s rights and remedies. If, after applying the foregoing, an inconsistency still exists, the provisions of this Agreement shall constitute an amendment thereto and shall control. This Agreement and all of the other associated Loan Documents represent and represent the final agreement between the parties on the subject matter thereof and may not be contradicted by evidence of prior agreements of the parties whether in writing or oral, none of which, to whatever extent they might exist, survive the execution of this Agreement.
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9.3. Waiver: No omission or delay by Lender in exercising any right or power under this Agreement or any related agreements and documents will impair such right or power or be construed to be a waiver of any Default, or Event of Default or an acquiescence therein, and any single or partial exercise of any such right or power will not preclude other or further exercise thereof or the exercise of any other right, and as to Borrower no waiver will be valid unless in writing and signed by Lender and then only to the extent specified.
9.4. Indemnity; Expenses:
a. Borrower releases and shall indemnify, defend and hold harmless Lender and its respective officers, directors, employees, Affiliates, attorneys and agents, of and from any claims, demands, liabilities, obligations, judgments, injuries, losses, damages and costs and expenses (including, without limitation, reasonable legal fees) resulting from (i) acts or conduct of Borrower under, pursuant or related to this Agreement and the other Loan Documents, (ii) Borrower’s breach or violation of any representation, warranty, covenant or undertaking contained in this Agreement or the other Loan Documents, (iii) Borrower’s failure to comply with any or all laws, statutes, ordinances, governmental rules, regulations or standards, whether federal, state or local, or court or administrative orders or decrees, (including without limitation Environmental Laws, etc.), and (iv) any claim by any other creditor of Borrower or any other Person against Lender arising out of any transaction whether hereunder or in any way related to the Loan Documents and all costs, expenses, fines, penalties or other damages resulting therefrom, other than to the extent resulting from acts or conduct of Lender constituting willful misconduct or gross negligence as determined by a final non-appealable judgment of a court of competent jurisdiction. Promptly after receipt by an indemnified party under subsection (a) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; provided, however, that the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to any indemnified party hereunder.
b. Borrower agrees to pay or reimburse (i) Lender for all reasonable and documented out-of-pocket costs and expenses (including the reasonable and documented out-of-pocket fees and expenses of all counsel, advisors, consultants and auditors retained in connection therewith), incurred in connection with: (A) the preparation, negotiation, execution, delivery, performance and enforcement of the Loan Documents and the preservation of any rights thereunder (including, without limitation, filing or recording fees and taxes); provided, however, that expenses of legal counsel incurred prior to the Closing Date will not reimbursed to the extent of the excess thereof over $50,000 (excluding, for the avoidance of doubt, any filing or service provider costs in connection with any lien filings made pursuant to this Agreement); (B) any amendment, waiver or other modification or waiver of, or consent with respect to, any Loan Document or advice in connection with the administration of the Obligations or the rights thereunder; and (C) any effort (i) to monitor the Obligations, and (ii) to evaluate, observe or assess Borrower or the affairs of such Person; provided, however, that, notwithstanding anything herein to the contrary, the Borrower’s payment and reimbursement obligations under this clause shall be limited to the actual reasonable and documented out-of-pocket fees, charges and disbursements of one counsel for Lender and if reasonably deemed necessary by Lender, of one local counsel in any relevant jurisdiction; and (ii) Lender for all reasonable and documented out-of-pocket costs and expenses (including the reasonable and documented out-of-pocket fees and expenses of all counsel, advisors, consultants and auditors retained in connection therewith), incurred in connection with: (A) collection, including deficiency collections; (B) any litigation, dispute, suit, proceeding or action (whether instituted by or between any combination of Lender, Borrower or any other Person), and an appeal or review thereof, in any way relating to the Collateral, any Loan Document, or any action taken or any other agreements to be executed or delivered in connection therewith, whether as a party, witness or otherwise; and (C) any effort to verify, protect, evaluate, assess, appraise, collect, sell, liquidate or otherwise dispose of the Collateral; provided, however, that, notwithstanding anything herein to the contrary, the Borrower’s payment and reimbursement obligations under this clause shall be limited to the actual reasonable and documented out-of-pocket fees, charges and disbursements of one counsel for Lender and if reasonably deemed necessary by Lender, of one local counsel in any relevant jurisdiction.
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9.5. Time: Whenever Borrower shall be required to make any payment, or perform any act, on a day which is not a Business Day, such payment may be made, or such act may be performed, on the next succeeding Business Day. Time is of the essence in Borrower’s performance under all provisions of this Agreement.
9.6. Brokerage: This transaction was brought about and entered into by Lender and Borrower acting as principals and without any brokers, agents or finders being the effective procuring cause hereof. Borrower represents that it has not committed Lender to the payment of any brokerage fee, commission or charge in connection with this transaction. If any such claim is made on Lender by any broker, finder or agent or other person, Borrower hereby indemnifies, defends and saves such party harmless against such claim and further will defend, with counsel reasonably satisfactory to Lender, any action or actions to recover on such claim, at Borrower’s own cost and expense, including such party’s reasonable counsel fees. Borrower further agrees that until any such claim or demand is adjudicated in such party’s favor, the amount demanded shall be deemed an Obligation of Borrower under this Agreement.
9.7. Notices:
a. Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed given if delivered in person to the person listed below or if sent by telecopy or by nationally recognized overnight courier, as follows, unless such address is changed by written notice hereunder:
| Lender: | Navitas West Texas Investments SPV, LLC | |
| 2388 S Tarryal Way | ||
| Franktown, CO 80116 | ||
| Attention: Chad Roach | ||
| e-mail: chad@navitas.global | ||
| with copy to: | Brown Rudnick LLP | |
| One Financial Center | ||
| Boston, MA 02111 | ||
| Attention: Steven B. Levine, Mary D. Bucci | ||
| Facsimile: 617-856-8201 | ||
| Borrower: | Soluna DV ComputeCo, LLC | |
| c/o Soluna Holdings, Inc.. | ||
| 325 Washington Avenue Extension | ||
| Albany, New York 12205 | ||
| Attention: Jessica Thomas, CAO | ||
| e-mail: jessica@soluna.io |
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| and | ||
| Soluna DV ComputeCo, LLC | ||
| c/o Soluna Holdings, Inc. | ||
| 325 Washington Avenue Extension | ||
| Albany, New York 12205 | ||
| Attention: Jessica Thomas, CAO | ||
| e-mail: jessica@soluna.io | ||
| with copy to: | J.P. Galda | |
| J.P. Galda & Co. | ||
| 40 E. Montgomery Ave., LTW 220 | ||
| Ardmore, PA 19003 | ||
| e-mail: jpgalda@jpgaldaco.com |
b. Any notice sent by Lender, or Borrower by any of the above methods shall be deemed to be given when so received.
c. Lender shall be fully entitled to rely upon any telecopy transmission or other writing purported to be sent by any Authorized Officer (whether requesting an Advance or otherwise) as being genuine and authorized.
9.8. Headings: The headings of any paragraph or Section of this Agreement are for convenience only and shall not be used to interpret any provision of this Agreement.
9.9. Survival; Reinstatement:
a. All warranties, representations, and covenants made by Borrower herein, or in any agreement referred to herein or on any certificate, document or other instrument delivered by it or on its behalf under this Agreement, shall be considered to have been relied upon by Lender, and shall survive the delivery to Lender of this Agreement and the other Loan Documents regardless of any investigation made by Lender or on its behalf. All statements in any such certificate or other instrument prepared and/or delivered for the benefit of Lender shall constitute warranties and representations by Borrower hereunder. Except as otherwise expressly provided herein, all covenants made by Borrower hereunder or under any other agreement or instrument shall be deemed continuing until all Obligations are satisfied in full. All indemnification obligations under this Agreement, including, without limitation, under Sections 2.2, 9.4, 9.7 and 9.9(b), shall survive the termination of this Agreement and payment of the Obligations.
b. The Obligations shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Obligations is rescinded or must be otherwise restored by any holder of any of the Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and Borrower agrees that it will indemnify the Lender on demand for all reasonable, documented, out-of-pocket costs and expenses (including fees and expenses of a single primary outside counsel) incurred by the Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law.
9.10. Successors and Assigns: This Agreement shall inure to the benefit of and be binding upon the parties hereto and the successors and assigns of each of the parties. Borrower may not transfer, assign or delegate any of its duties or obligations hereunder. Borrower acknowledges and agrees that Lender may at any time, and from time to time, (a) sell participating interests in the Loan, and Lender’s rights hereunder to other financial institutions, and (b) sell, transfer, or assign the Obligations and Lender’s rights hereunder, to any one or more additional banks or financial institutions, subject (as to Lender’s rights under this clause (b)) to Borrower’s written consent, which consent shall not be unreasonably withheld; provided that, no consent under this clause (b) shall be required if an Event of Default exists at the time of such sale, transfer or assignment.
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9.11. Duplicate Originals; Effect of Facsimile and Photocopied Signatures: Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement (and the other Loan Documents) may be executed in several counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement, the Loan Documents or any counterpart thereof to produce or account for any of the other counterparts. A copy of this Agreement and the Loan Documents signed by one party and faxed or scanned and emailed to another party (as a PDF or similar image file) shall be deemed to have been executed and delivered by the signing party as though an original. A photocopy or PDF of this Agreement and the other Loan Documents shall be effective as an original for all purposes.
9.12. Modification: No modification hereof or any agreement referred to herein shall be binding or enforceable unless in writing and signed by Borrower and Lender.
9.13. Signatories: Each individual signatory hereto represents and warrants that he is duly authorized to execute this Agreement on behalf of his principal and that he executes the Agreement in such capacity and not as a party.
9.14. Third Parties: No rights are intended to be created hereunder, or under any related agreements or documents for the benefit of any third party donee, creditor or incidental beneficiary of Borrower. Nothing contained in this Agreement shall be construed as a delegation to Lender of Borrower’s duty of performance, including, without limitation, Borrower’s duties under any account or contract with any other Person.
9.15. Discharge of Taxes, Borrower’s Obligations, Etc.: Lender, in its sole discretion, shall have the right at any time, and from time to time, with at least ten (10) days prior notice to Borrower if Borrower fails to do so, to: (a) pay for the performance of any of Borrower’s obligations hereunder, and (b) discharge taxes or Liens, at any time levied or placed on Borrower’s Property in violation of this Agreement unless Borrower is in good faith with due diligence by appropriate proceedings contesting such taxes or Liens and maintaining proper reserves therefor in accordance with GAAP. Expenses and advances shall be added to the Term Loan, and bear interest at the rate applicable to the Term Loan, until reimbursed to Lender. Such payments and advances made by Lender shall not be construed as a waiver by Lender of a Default or Event of Default under this Agreement.
9.16. Consent to Jurisdiction: Borrower and Lender each hereby irrevocably consent to the non-exclusive jurisdiction of the courts of the State of New York in any and all actions and proceedings whether arising hereunder or under any other agreement or undertaking. Borrower waives any objection which Borrower may have based upon lack of personal jurisdiction, improper venue or forum non conveniens. Borrower irrevocably agrees to service of process by certified mail, return receipt requested to the address of the appropriate party set forth herein.
9.17. Additional Documentation: Borrower shall execute and/or re-execute, and cause any Guarantor or other Person party to any Loan Document, to execute and/or re-execute and to deliver to Lender or Lender’s counsel, as may be deemed appropriate, any document or instrument signed in connection with this Agreement in order to correct any manifest error in the drafting thereof, as well as any document or instrument which should have been signed at or prior to the Closing, but which was not so signed and delivered. Borrower agrees to comply with any written request by Lender within ten (10) days after receipt by Borrower of such request.
9.18. Waiver of Jury Trial: BORROWER AND LENDER EACH HEREBY WAIVE ANY AND ALL RIGHTS THEY MAY HAVE TO A JURY TRIAL IN CONNECTION WITH ANY LITIGATION, PROCEEDING OR COUNTERCLAIM ARISING WITH RESPECT TO RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO OR UNDER THE LOAN DOCUMENTS OR WITH RESPECT TO ANY CLAIMS ARISING OUT OF ANY DISCUSSIONS, NEGOTIATIONS OR COMMUNICATIONS INVOLVING OR RELATED TO ANY PROPOSED RENEWAL, EXTENSION, AMENDMENT, MODIFICATION, RESTRUCTURE, FORBEARANCE, WORKOUT, OR ENFORCEMENT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURES TO FOLLOW ON SEPARATE PAGE]
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IN WITNESS WHEREOF, the undersigned parties have executed this Agreement effective as of the day and year first above written.
| BORROWER: | ||
| SOLUNA DV COMPUTECO, LLC, a Delaware limited liability company | ||
| By: | ||
| Name: | ||
| Title: | ||
| LENDER: | ||
| NAVITAS WEST TEXAS INVESTMENTS SPV, LLC | ||
| By: | ||
| Name: | ||
| Title: | ||
[Signature Page to Loan Agreement]
Exhibit A
(Form of Collateral Assignment of Material Project Documents)
COLLATERAL ASSIGNMENT OF MATERIAL PROJECT DOCUMENTS
THIS COLLATERAL ASSIGNMENT OF MATERIAL PROJECT DOCUMENTS (this “Assignment”) is made and entered into as of May [8], 2023, by SOLUNA DV COMPUTECO, LLC, a Delaware limited liability company (“Assignor”), to and for the benefit of NAVITAS WEST TEXAS INVESTMENTS SPV, LLC (in its capacity as “Lender” under the Loan and Security Agreement referenced below, and together with its successors and permitted assigns in such capacity, “Assignee”).
RECITALS:
WHEREAS, Assignor and Assignee have entered into that certain Loan and Security Agreement dated as of the date hereof (as amended, restated, amended and restated, supplemented or otherwise modified and in effect from time to time, the “Loan and Security Agreement”), pursuant to which the Lender agreed, subject to the terms and conditions set forth in the Loan and Security Agreement, to make the Term Loan and certain financial accommodations to Assignor;
WHEREAS, reference hereby is made to the Material Project Documents (as defined in the Loan and Security Agreement), including but not limited to each Material Project Document listed on Schedule I hereto.
WHEREAS, as a condition precedent to the availability of the Term Loan and other financial accommodations under the Loan and Security Agreement, Assignor shall collaterally assign its rights, title and interest (but not its obligations) under the Material Project Documents, and grant a Lien in its rights, title and interest in the Material Project Documents, to Assignee, to secure the Term Loan and other Obligations.
NOW, THEREFORE, in consideration of the foregoing and in order to induce Assignee to make available the Term Loan and other financial accommodations under the Loan and Security Agreement, and for other good and valuable consideration, the receipt, sufficiency and adequacy of which hereby are acknowledged, Assignor hereby agrees with Assignee, as follows:
1. DEFINITIONS. Any capitalized term not otherwise defined herein which is defined in the Loan and Security Agreement shall have the meaning assigned to such terms in the Loan and Security Agreement.
2. ASSIGNMENT.
(a) To secure the payment, performance and observance of the Obligations of Assignor, in its capacity as Borrower under the Loan and Security Agreement, Assignor hereby collaterally assigns to Assignee, all of its rights, title and interest (but not its obligations) under the Material Project Documents, and grants to Assignee, for the benefit of the Assignee, a continuing Lien in and to all of its rights, title and interest in, under, and pursuant to the Material Project Documents and all proceeds thereof, including without limitation each Material Project Document listed on Schedule I hereto.
| Ex. A. - 1 |
(b) Assignee shall not have any obligation or duty to perform any of the obligations of Assignor or any other party to the Material Project Documents, all of which shall remain the sole and exclusive duty and obligation of Assignor or such other party, as applicable and neither this Assignment nor any action taken hereunder, shall cause the Assignee to be under any obligation or to incur any liability in any respect to any party to any Material Project Document for the performance or observance of any of the representations, warranties, conditions, covenants, agreements or terms of any Material Project Document.
(c) The rights assigned hereunder include, without limitation, all rights, and rights of enforcement, regarding any, and all rights, claims and causes of action of Assignor against any party to any Material Project Document arising directly or indirectly in whole or in part from, any breach or violation of such Material Project Document and, following the occurrence and during the continuance of an Event of Default, subject to the applicable provisions of the Loan and Security Agreement, Assignee shall have the right, but not the obligation, to institute action and seek redress directly against any party to any Material Project Document for any such breach or violation; provided, however, so long as no Event of Default has occurred and is continuing, Assignor may enforce all of the rights, claims or causes of action which Assignor may have under such Material Project Document, but only to the extent such enforcement is not prohibited by the Loan and Security Agreement. Assignee shall endeavor in good faith to provide Assignor prompt written notice of any institution of any such action; provided, however, that such failure by Assignee to provide such notice shall not limit or impair any of Assignee’s rights under this Assignment and Assignee shall have no liability as a result of such failure.
(d) The Lien granted hereby has been granted as a supplement to, and not in limitation of, the Lien granted to Assignee, for the benefit of the Assignee, under the Loan and Security Agreement and/or other Loan Documents to which Assignor and Assignee are parties, and such Loan and Security Agreement and other Loan Documents (and all rights and remedies of Assignee thereunder) shall remain in full force and effect in accordance with their respective terms.
3. PAYMENTS TO ASSIGNEE. Without limiting any other provision of this Assignment, upon the occurrence and during the continuance of an Event of Default, Assignor hereby specifically authorizes and directs each applicable counterparty to any Material Project Document upon five (5) Business Days’ prior written notice to it by Assignee to make all payments due under or arising under each Material Project Document directly to Assignee and hereby irrevocably authorizes and empowers Assignee to request, demand, receive, and give acquittance for any and all amounts which may be or become due or payable or remain unpaid at any time and times to Assignor by any applicable counterparty to any Material Project Document under and pursuant to a Material Project Document, and to endorse any checks, drafts or other orders for the payment of money payable to Assignor in payment thereof, and in Assignee’s sole discretion to file any claims or take any action or proceeding, either in its own name or in the name of Assignor or otherwise, which Assignee may deem appropriate for purposes of collecting any such moneys due. Assignee shall endeavor in good faith to provide Assignor prompt written notice of Assignee’s exercise of any of its rights described in the foregoing sentence; provided, however, that such failure by Assignee to provide such notice shall not limit or impair any of Assignee’s rights under this Assignment and Assignee shall have no liability as a result of such failure. It is expressly understood and agreed, however, that Assignee shall not be required or obligated in any manner to make any demand or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or take any other action to collect or enforce the payment of any amounts which may have been assigned to Assignee or to which Assignee may be entitled hereunder at any time or times.
4. ATTORNEY-IN-FACT. The terms of Section 3.7 of the Loan and Security Agreement are incorporated by reference, mutatis mutandis, and the parties hereto agree to such terms.
| Ex. A. - 2 |
5. REMEDIES CUMULATIVE. No right or remedy of Assignee hereunder is exclusive of any other right or remedy hereunder or now or hereafter existing at law or in equity or under the Loan and Security Agreement, any Notes or the other Loan Documents, but is cumulative and in addition thereto and Assignee may recover judgment thereon, issue execution therefor, and resort to every other right or remedy available at law or in equity or under the Loan and Security Agreement, any Notes or the other Loan Documents, without first exhausting or affecting or impairing the security or any right or remedy afforded under this Assignment. No delay in exercising, or omission to exercise, any such right or remedy will impair any such right or remedy or will be construed to be a waiver of any default by Assignor hereunder, or acquiescence therein, nor will it affect any subsequent default hereunder by Assignor of the same or different nature. Every such right or remedy may be exercised independently or concurrently, and when and so often as may be deemed expedient by Assignee. No term or condition contained in this Assignment, may be waived, altered or changed except as evidenced in writing signed by Assignor and Assignee. In case Assignee shall have proceeded to enforce any right under this Assignment and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Assignee, then, and in every such case, Assignor and Assignee shall be restored to their former positions and rights hereunder in respect to the Material Project Documents, and all rights, remedies, and powers of Assignee shall continue as though no such proceedings had been taken.
Each of Assignor and each applicable counterparty to each Material Project Document shall take, after the occurrence and during the continuation of any Event of Default, any action that Assignee may request, in accordance with the terms of the Loan and Security Agreement and/or other Loan Documents, as applicable, in order to enable Assignee to obtain and enjoy the full rights and benefits granted to Assignee hereunder and under the Material Project Documents, including, without limitation, all rights necessary or desirable to obtain, use, sell, assign or otherwise transfer control of the Collateral herein described and to exercise all remedies available to Assignee hereunder and applicable law.
6. MISCELLANEOUS.
A. Notices. All notices required or permitted to be given hereunder shall be given pursuant to the notice provisions of the Loan and Security Agreement.
B. Captions. Captions used in this Assignment are for convenience only and shall not affect the construction of this Assignment.
C. Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. Sections 9.1 (Governing Law), 9.16 (Consent to Jurisdiction) and 9.18 (Waiver of Jury Trial) of the Loan and Security Agreement are incorporated herein by reference mutatis mutandis.
D. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, except that Assignor may not assign its rights or obligations hereunder without the written consent of Assignee.
E. Severability. The illegality or unenforceability of any provision of this Assignment or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Assignment or any instrument or agreement required hereunder.
F. Amendment. This Assignment may not be amended, supplemented, terminated or otherwise modified except by written instrument executed by Assignor and Assignee or otherwise in accordance with the Loan and Security Agreement.
G. Further Assurances. Assignor hereby agrees, subject to the provisions of the Loan and Security Agreement and the other Loan Documents, at any time, and from time to time, after the execution and delivery of this Assignment, that it will promptly execute and deliver such further documents and do such further acts and things as Assignee may request in its reasonable discretion that may be necessary in order to effect fully the purposes of this Assignment.
H. Counterparts. This Assignment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart. Delivery of an executed signature page of this Assignment by facsimile transmission or Electronic Transmission shall be as effective as delivery of a manually executed counterpart hereof.
[Remainder of page intentionally blank; Signature pages follow]
| Ex. A. - 3 |
IN WITNESS WHEREOF, this Assignment has been made by Assignor as of the day and year first written above.
| ASSIGNOR: | ||
| SOLUNA DV COMPUTECO, LLC, a Delaware limited liability company | ||
| By: | ||
| Name: | ||
| Title: | ||
Collateral Assignment of Material Project Documents
| Ex. A. - 4 |
Agreed and acknowledged as of the date above:
| NAVITAS WEST TEXAS INVESTMENTS SPV, LLC, as Assignee | ||
| By: | ||
| Name: | ||
| Title: | ||
| Ex. A. - 5 |
Acknowledgement of Counterparties to Material Project Documents
Each counterparty to any Material Project Document hereby acknowledges the
foregoing Assignment and agrees to be bound by its terms:
| SOLUNA DVSL COMPUTECO, LLC, a Delaware limited liability company | ||
| By: | ||
| Name: | ||
| Title: | ||
| SOLUNA DV SERVICES, LLC, a Nevada limited liability company | ||
| By: | ||
| Name: | ||
| Title: | ||
| Ex. A. - 6 |
SCHEDULE I
Material Project Documents
| 1. | GSEC Briscoe PPA | |
| 2. | Soluna - LHEC Soluna Retail Agreement | |
| 3. | Soluna - Briscoe Cooperation Agreement | |
| 4. | Soluna - Performance Security Agreement | |
| 5. | Soluna - Data Facility Lease | |
| 6. | Soluna - DV Joinder |
| S-I - 1 |
Exhibit B
(Description of Dorothy 1B)
Attached.
| Ex. B. - 1 |
Exhibit C
(Form of Promissory Note)
PROMISSORY NOTE
| $2,050,000.00 | May [8], 2023 |
FOR VALUE RECEIVED, the undersigned (the “Borrower”), hereby promises to pay to NAVITAS WEST TEXAS INVESTMENTS SPV, LLC or its successors and permitted assigns (the “Lender”), in accordance with the provisions of the Loan Agreement (as hereinafter defined), the principal amount of the Term Loan made by the Lender to the Borrower (and not otherwise repaid) under the Loan and Security Agreement dated as of the date hereof (as from time to time amended, supplemented or otherwise modified in accordance with the terms thereof, the “Loan Agreement”) among the Borrower, the Lender and each other Person from time to time party thereto. Unless otherwise defined herein, capitalized terms used in this Promissory Note have the meanings ascribed thereto in the Loan Agreement.
The Borrower promises to pay interest on the unpaid principal amount of Term Loan from the date of such Term Loan until such principal amount is paid in full, at such interest rates, in such form and at such times as provided in the Loan Agreement. All payments of principal (including, without limitation, all interest on the Term Loan that has been paid-in-kind and added to principal in accordance with the terms of the Loan Agreement) shall be made to the Lender in United States Dollars, in immediately available funds when due in accordance with the Loan Agreement. If any amount is not paid in full when due hereunder (after giving effect to applicable grace periods), such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Loan Agreement. The Term Loan may be prepaid in whole or in part without premium or penalty.
This Promissory Note is the Note referred to in the Loan Agreement, is entitled to the benefits thereof and may be prepaid in whole or in part subject to the terms and conditions provided therein. Upon the occurrence and continuation of one or more of the Events of Default specified in the Loan Agreement, all amounts then remaining unpaid on this Promissory Note shall become, or may be declared to be, immediately due and payable all as provided in the Loan Agreement. The Term Loan made by the Lender shall be evidenced by one or more loan accounts or records maintained by the Lender in the ordinary course of business, which shall, in the absence of manifest error, be conclusive evidence of the amount then remaining unpaid on this Promissory Note. The Lender may also attach schedules to this Promissory Note and endorse thereon the date, amount and maturity of the Term Loan and payments with respect thereto.
Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, dishonor and non-payment of this Promissory Note.
THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS CONFLICTS OF LAWS PRINCIPLES.
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
| Ex. C. - 1 |
IN WITNESS WHEREOF, Borrower has caused this Promissory Note to be duly executed by its duly authorized officer as of the day and year first above written.
| BORROWER: | ||
| SOLUNA DV COMPUTECO, LLC, | ||
| By: | ||
| Name: | ||
| Title: | ||
| Ex. C. - 2 |
Exhibit D
(Funds Flow)
Attached.
| Ex. D. - 1 |
Schedule A
(Material Project Documents)
1. Shared Facilities Agreement dated August 5, 2022, by and among Soluna DVSL ComputeCo, LLC, a Delaware limited liability company, Soluna DV ComputeCo, LLC, a Delaware limited liability company, and Soluna DV Services, LLC, a Nevada limited liability company.
2. Administrative Services Agreement (Shared Facilities) dated August 5, 2022, by and among Soluna DVSL ComputeCo, LLC, a Delaware limited liability company, Soluna DV ComputeCo, LLC, a Delaware limited liability company, and Soluna DV Services, LLC, a Nevada limited liability company.
3. EPC Agreement (Shared Facilities) dated August 5, 2022, by and among Soluna DVSL ComputeCo, LLC, a Delaware limited liability company, Soluna DV ComputeCo, LLC, a Delaware limited liability company, and Soluna DV Services, LLC, a Nevada limited liability company.
4. Operation and Maintenance Agreement (Shared Facilities) dated as of August 5, 2022, by and between Soluna DVSL ComputeCo, LLC, a Delaware limited liability company and Soluna DV ComputeCo, LLC, a Delaware limited liability company.
5. Sublease Agreement (Shared Facilities) dated as of August 5, 2022, by and among Soluna DVSL ComputeCo, LLC, a Delaware limited liability company, Soluna DV ComputeCo, LLC, a Delaware limited liability company, and Soluna DV Services, LLC, a Nevada limited liability company.
6. Cooperation Agreement dated as of February 24, 2023, by and among the “Soluna Entities” party thereto and Briscoe Wind Farm, LLC, a Delaware limited liability company.
7. Lease Agreement, dated February 24, 2023 by and between Alice Faye Grabble , as Owner, and Soluna DV Services, LLC, a Nevada limited liability company, as Tenant.
8. Joinder Agreement, dated as of February 24, 2023 made by Soluna DV ComputeCo, LLC, a Delaware limited liability company.
9. Wind Power Purchase Agreement, dated February 24, 2023 between Briscoe Wind Farm, LLC and Golden Spread Electric Cooperative, Inc.
10. Agreement for Electric Service to Soluna DV Services, LLC, dated February 24, 2023 by and between Soluna DV Services, LLC and Lighthouse Electric Cooperative, Inc.
11. Performance and Net Energy Security Agreement, dated February 24, 2023 by and among Briscoe Wind Farm, LLC, a Delaware limited liability company, Lighthouse Electric Cooperative, Inc., a Texas cooperative, Golden Spread Electric Cooperative, Inc., a Texas Cooperative and Soluna DV Services, LLC, a Nevada limited liability company.
12. Administrative Services Agreement dated as of May [8], 2023, by and between Soluna DV ComputeCo, LLC a Delaware limited liability company and Soluna DV Services, LLC, a Nevada limited liability company.
13. EPC Agreement (DV Facility) dated as of May [8], 2023, by and between Soluna DV ComputeCo, LLC, a Delaware limited liability company and Soluna DV Services, LLC, a Nevada limited liability company.
14. Operations and Maintenance Agreement dated as of May [8], 2023, by and among Soluna DV ComputeCo, LLC, a Delaware limited liability company, and Soluna DV Services, LLC a Nevada limited liability company.
15. Sublease Agreement (Shared Facilities) dated May [8], 2023, by and among Soluna DV Services, LLC, a Nevada limited liability company, and Soluna DV ComputeCo, LLC, a Delaware limited liability company.
| S-A - 1 |
Schedule B
(Permitted Investments)
None.
| S-B - 1 |
Schedule C
(Site-level Free Cash Flow)
Attached
| S-C - 1 |
Schedule 1
(Commercial Tort Claims)
None.
| S-1 - 1 |
Schedule 2
(Deposit Accounts)
To ensure proper wire transfer routing, remit currency as follows:
(Field 57)
Beneficiary Bank: KeyBank
Beneficiary ABA: 021300077
Bank Location: 66 S Pearl Street
Albany, NY 12207 United States
(Field 59)
Beneficiary Customer: Soluna DV ComputeCo, LLC
Beneficiary Address: 325 Washington Ave Extension,
Albany, NY 12205
Beneficiary Cust Account Number: 329681395128
Please call with any questions: Key Bank
Wire Transfer Services
1-800-447-3817
| S-2 - 1 |
Schedule 3
(Intellectual Property)
None.
| S-3 - 1 |
Schedule 4
(Investment Property)
None.
| S-4 - 1 |
Schedule 5
(Letter of Credit Rights)
None.
| S-5 - 1 |
Schedule 5.7
(Subsidiaries and Affiliates)
None.
| S-5.7 - 1 |
Schedule 5.8
(Leases)
1. Sublease Agreement (Shared Facilities) dated as of August 5, 2022, by and among Soluna DVSL ComputeCo, LLC, a Delaware limited liability company, Soluna DV ComputeCo, LLC, a Delaware limited liability company, and Soluna DV Services, LLC, a Nevada limited liability company.
2. Lease Agreement, dated February 24, 2023 by and between Alice Faye Grabble , as Owner, and Soluna DV Services, LLC, a Nevada limited liability company, as Tenant.
3. Sublease Agreement (Shared Facilities) dated May [8], 2023, by and among Soluna DV Services, LLC, a Nevada limited liability company, and Soluna DV ComputeCo, LLC, a Delaware limited liability company.
| S-5.8 - 1 |
Schedule 5.13
(Joint Ventures and Partnerships)
None.
| S-5.13 - 1 |
Schedule 5.14
(Capital Stock)
None.
| S-5.14 - 1 |
Schedule 6
(Pending Litigation)
None.
| S-6 - 1 |
Schedule 7.5
(Transactions With Affiliates)
None
| S-7.5 - 1 |
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Belizaire, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q 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 am 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. | |
| May 15, 2023 | /s/ John Belizaire |
| John Belizaire | |
| 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, David Michaels., certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q 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 am 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. | |
| May 15, 2023 | /s/ David Michaels |
| David Michaels | |
| 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 Quarterly Report on Form 10-Q of Soluna Holdings, Inc. (the “Company”) for the three month period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Belizaire, 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. |
May 15, 2023
| /s/ John Belizaire | |
| John Belizaire | |
| 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 Quarterly Report on Form 10-Q of Soluna Holdings, Inc. (the “Company”) for the three month period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Michaels, 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. |
May 15, 2023
| /s/ David Michaels. | |
| David Michaels | |
| 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.