Part I Business MTI operates in test and measurement via MTI Instruments and cryptocurrency mining via EcoChain, recently re-incorporating and planning stock offerings for crypto expansion Overview and Recent Developments - The company's core businesses are conducted through its wholly-owned subsidiaries: MTI Instruments (test and measurement instrumentation) and EcoChain (cryptocurrency mining)101112 - On March 29, 2021, the company re-incorporated from New York to Nevada to gain more flexibility in corporate governance18 - The company plans to sell up to $11.5 million in common stock to fund the acquisition and growth of two additional cryptocurrency mining facilities19 - In February 2021, two new independent directors, William Hazelip and Alykhan Madhavji, were added to the Board to support the EcoChain cryptocurrency business with their expertise in energy and blockchain21 Test and Measurement Instrumentation Segment - MTI Instruments designs, manufactures, and sells metrology products, including aircraft engine balancing systems, precision displacement sensors, and semiconductor wafer inspection tools1122 - The company's manufacturing operations are based in Albany, New York, which management believes provides advantages in controlling quality and protecting technology3839 U.S. Air Force Revenue Concentration | Year | % of Total Product Revenue | | :--- | :--- | | 2020 | 42.9% | | 2019 | 20.8% | | 2018 | 28.0% | | 2017 | 20.1% | - The U.S. Air Force is MTI Instruments' largest customer, accounting for 42.9% of total product revenues in 2020. The company expects sales to a limited number of customers to continue representing a high percentage of revenues47 Cryptocurrency Segment - EcoChain, Inc., established in January 2020, engages in cryptocurrency mining. Its first facility in East Wenatchee, Washington, was developed and is operated with assistance from Soluna Technologies, Ltd125152 - EcoChain's mining operations commenced on May 21, 2020, after acquiring assets from Giga Watt, Inc. The company mines cryptocurrencies like Bitcoin, Ethereum, and Litecoin, and sells all mined assets daily for U.S. dollars5661 - The company is expanding its cryptocurrency operations, having established a subsidiary to acquire property in the Southeastern U.S. for a new energy-efficient mining facility, which was acquired on March 4, 20215758 - The company made a strategic investment in Soluna, purchasing Class A Preferred Shares for a total of $750,000. Several of MTI's directors have affiliations with Soluna and its parent, Brookstone Partners6465 Human Capital and Regulations - As of March 26, 2021, the company had 33 employees, with none covered by a collective bargaining agreement72 - The regulatory landscape for cryptocurrencies is still developing, and the company cannot currently determine the potential impact of future regulations on its EcoChain operations71 Risk Factors The company faces risks from customer concentration, technological obsolescence, international sales, and controlling shareholder influence, alongside significant volatility and regulatory uncertainties in its new cryptocurrency segment General Business and Financial Risks - The business is highly dependent on a small number of customers, particularly the U.S. Air Force, and the loss of such customers could materially harm the business85 - The company's success depends on its ability to innovate and develop new products in technologically dynamic markets; failure to do so could render its products obsolete89 - International sales, which accounted for 25.9% of revenue in 2020, expose the company to risks such as tariffs, regulatory changes, and currency fluctuations9599 - Brookstone Partners owns 38.2% of the company's common stock, giving it a controlling interest and the ability to influence corporate actions, which may be adverse to minority shareholders' interests108 Risks Related to the EcoChain Business and Cryptocurrency - The value of cryptocurrencies is extremely volatile, which creates significant uncertainty for EcoChain's revenue and profitability126 - Future government regulations on cryptocurrencies are uncertain and could restrict their use or adversely affect EcoChain's business operations132 - The cryptocurrency mining industry is highly competitive and subject to rapid technological advancements. If EcoChain fails to keep pace with innovations in mining hardware, its equipment could become obsolete129 - EcoChain relies on its partner, Soluna, to operate its mining machinery. Any failure by Soluna to perform its duties could delay or terminate mining operations136 Risks Related to our Common Stock - The market price of the company's common stock is likely to be volatile due to a small public float and low daily trading volume141143 - Failure to comply with Nasdaq's continued listing requirements could result in the delisting of the company's common stock144 - Raising additional capital through equity or convertible debt could be dilutive to existing shareholders and cause the stock price to decline148 Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable150 Properties The company leases corporate and MTI Instruments space in Albany, NY, and EcoChain leases and acquired property in Washington and the Southeastern U.S. for cryptocurrency mining - MTI and MTI Instruments lease 17,400 sq. ft. of office, manufacturing, and R&D space in Albany, New York, with the lease expiring in November 2024151 - EcoChain leases approximately 19,000 sq. ft. in East Wenatchee, Washington for its cryptocurrency mining operations, with leases expiring between 2023 and 2024152 - On March 4, 2021, an EcoChain subsidiary acquired a 3.2-acre property in the Southeastern U.S. to build a new energy-efficient cryptocurrency mining facility153 Legal Proceedings The company is involved in an EPA demand letter for $358,000 regarding a Superfund site, with management deeming a material adverse outcome remote - The company is a party to a United States Environmental Protection Agency (EPA) Demand Letter regarding the Malta Rocket Fuel Area Superfund Site, with the EPA seeking reimbursement of approximately $358,000156 - Management considers the likelihood of a material adverse outcome from this matter to be remote156 Mine Safety Disclosures The company reports that this item is not applicable - Not applicable157 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is listed on Nasdaq, paid a special dividend in 2019, but does not anticipate future cash dividends, prioritizing business development - The company's common stock is listed on the Nasdaq Capital Market under the trading symbol "MKTY"160 - In 2019, a special dividend of $3.5 million, or $0.37 per common share, was declared and paid161 - The company does not anticipate paying cash dividends in the foreseeable future and intends to use funds for business development162 Selected Financial Data The company reports that this item is not applicable - Not applicable164 Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenue increased by 46% to $9.6 million in 2020, driven by product sales and new cryptocurrency operations, leading to a significant surge in operating and net income, while maintaining a strong liquidity position Results of Operations Comparison of Operations for Years Ended December 31 (in thousands) | Line Item | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product revenue | $9,004 | $6,571 | $2,433 | 37.0% | | Cryptocurrency revenue | $595 | $0 | $595 | 100.0% | | Total Revenue | $9,599 | $6,571 | $3,028 | 46.1% | | Cost of product revenue | $2,669 | $2,205 | $464 | 21.0% | | Cost of cryptocurrency revenue | $405 | $0 | $405 | 100.0% | | R&D expenses | $1,491 | $1,381 | $110 | 8.0% | | SG&A expenses | $3,584 | $2,726 | $858 | 31.5% | | Operating income | $1,450 | $259 | $1,191 | 459.8% | | Net income | $1,946 | $323 | $1,623 | 502.5% | - Product revenue increased by $2.4 million (37.0%) in 2020, primarily due to a $2.7 million increase in shipments to the U.S. Air Force173 - The new cryptocurrency business, which began operations in Q2 2020, generated $595,000 in revenue for the year179 - Gross profit margin on products increased from 66.4% in 2019 to 70.4% in 2020, attributed to a more favorable product mix and manufacturing efficiencies181182 - Selling, general and administrative (SG&A) expenses rose by $858,000 (31.5%), driven by costs associated with the new EcoChain operations, legal fees for SEC filings, and salaries for new executive hires188 Liquidity and Capital Resources Key Liquidity Indicators (in thousands) | Indicator | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash | $2,630 | $2,510 | | Working capital | $3,142 | $3,093 | | Net cash provided by operating activities | $1,622 | $289 | - As of December 31, 2020, the company had $2.6 million in cash, $3.1 million in working capital, and no debt195 - Management believes that current cash and projected cash flow are adequate to fund operations and capital expenditures through at least the end of Q1 2022198 - In May 2020, MTI Instruments obtained a $300,000 secured line of credit, which remained undrawn as of December 31, 2020201 Critical Accounting Policies and Estimates - Key accounting policies requiring significant judgment include revenue recognition, inventory valuation, share-based payments, and accounting for income taxes, particularly the valuation of deferred tax assets206207 - Product revenue is recognized upon transfer of control to the customer. Cryptocurrency revenue is recognized at its realized cash value upon daily conversion to U.S. dollars207212 - The company uses the Black-Scholes model to estimate the fair value of stock-based awards, which requires subjective assumptions about stock price volatility, interest rates, and dividend yield214215 Quantitative and Qualitative Disclosures About Market Risk The company reports that this item is not applicable - Not applicable225 Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements, with the auditor highlighting deferred tax asset realizability as a critical audit matter - This item incorporates by reference the company's Consolidated Financial Statements, which begin on page F-1226 - The independent auditor's report identifies the "Realizability of the deferred tax assets" as a critical audit matter due to the significant judgment required by management in forecasting future taxable income271272273 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - Not applicable228 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020229 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework232 Other Information Shareholders approved reincorporation to Nevada, a potential reverse stock split, and the 2021 Stock Incentive Plan at a special meeting in March 2021 - At a special meeting on March 25, 2021, shareholders approved the reincorporation to Nevada, a potential reverse stock split, and the 2021 Stock Incentive Plan236241 - The reincorporation from New York to Nevada became effective on March 29, 2021237 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement, and the company has adopted a Code of Conduct and Ethics - The company has adopted a Code of Conduct and Ethics, which is available on its website243 - All other information required by this item is incorporated by reference from the 2021 Proxy Statement244 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Shareholders - The information required by this item is incorporated by reference from the 2021 Proxy Statement245 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans as of December 31, 2020, with other security ownership information incorporated by reference from the 2021 Proxy Statement Equity Compensation Plan Information as of December 31, 2020 | Plan Category | Number of Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 398,750 | $0.87 | 11,125 | - Information regarding security ownership of beneficial owners and management is incorporated by reference from the 2021 Proxy Statement248 Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Shareholders - The information required by this item is incorporated by reference from the 2021 Proxy Statement249 Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Shareholders - The information required by this item is incorporated by reference from the 2021 Proxy Statement250 Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and all exhibits filed as part of the Annual Report on Form 10-K, including corporate governance and material contracts - This section contains the index to the Consolidated Financial Statements and a comprehensive list of all exhibits filed with the Form 10-K253254255 Form 10-K Summary No summary is provided in this section of the report - None258
Soluna (SLNH) - 2020 Q4 - Annual Report