Soluna Holdings Inc.

14/08/2024 | Press release | Distributed by Public on 14/08/2024 19:42

Quarterly Report for Quarter Ending June 30, 2024 (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
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: 001-40261

Soluna Holdings, Inc.

(Exact name of registrant as specified in its charter)

Nevada 14-1462255
State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)

325 Washington Avenue Extension, Albany, New York12205

(Address of principal executive offices) (Zip Code)

(516)216-9257

(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
Common Stock, par value $0.001 per share SLNH The NasdaqStock Market LLC
9.0% Series A Cumulative Perpetual Preferred Stock, par value $0.001 per share SLNHP The NasdaqStock Market LLC

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. Yes☒ No ☐

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). Yes☒ No ☐

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 ☐
Non-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. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☒

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of August 9, 2024, the Registrant had 5,755,187shares of common stock outstanding.

SOLUNA HOLDINGS, INC. AND SUBSIDIARIES

INDEX

Glossary of Abbreviations and Acronyms
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Condensed Consolidated Balance Sheets As of June 30, 2024 (Unaudited) and December 31, 2023 4
Condensed Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2024 and 2023 5
Condensed Consolidated Statements of Changes in Equity For the Year Ended December 31, 2023 and the Three and Six Months Ended June 30, 2024 (Unaudited) 6
Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2024 and 2023 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 40
Item 3. Quantitative and Qualitative Disclosures About Market Risk 58
Item 4. Controls and Procedures 58
PART II. OTHER INFORMATION 60
Item 1. Legal Proceedings 60
Item 1A. Risk Factors 61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 61
Item 3. Defaults Upon Senior Securities 61
Item 4. Mine Safety Disclosures 61
Item 5. Other Information 61
Item 6. Exhibits 62
SIGNATURES 63
1

Glossary of Abbreviations and Acronyms for Selected References

The following list defines various abbreviations and acronyms used throughout this report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, the Condensed Consolidated Financial Statements, the Condensed Notes to Consolidated Financial Statements and the Condensed Financial Statement Schedules.

This glossary covers essential terms related to Bitcoin mining, high-performance computing, Artificial Intelligence ("AI") and related fields, providing valuable context for readers of the Form10-Q. A number of cross-references to additional information included throughout this Quarterly Report on Form 10-Q are also utilized throughout this report, to assist readers seeking additional information related to a particular subject.

1. Artificial Intelligence ("AI"): The simulation of human intelligence processes by machines, especially computer systems. These processes include learning (the acquisition of information and rules for using the information), reasoning (using rules to reach approximate or definite conclusions), and self-correction. AI applications include expert systems, natural language processing, speech recognition, and machine vision.

2. Bitcoin: A decentralized digital currency created in 2009 by an unknown person or group of people using the name Satoshi Nakamoto. It operates on a peer-to-peer network, allowing direct transactions without intermediaries. Transactions are verified by network nodes through cryptography and recorded on a publicly distributed ledger called a blockchain.

3. Bitcoin Halving: An event occurring approximately every four years where the reward for mining new Bitcoin blocks is halved. This reduces the number of new Bitcoins generated by miners, impacting their profitability and potentially affecting Bitcoin's value. It's part of Bitcoin's deflationary monetary policy, designed to control supply.

4. Bitcoin Mining: The process of adding new transactions to the Bitcoin blockchain. It involves solving complex cryptographic puzzles to discover a new block, rewarding miners with transaction fees and newly created Bitcoins. This process secures and verifies transactions on the network.

5. Curtailment ("Curtailed" or "Curtailments"): In energy management, the reduction in electrical power supply by power plants to balance the grid or avoid excess generation. In Bitcoin mining or other computing activities, curtailment - pausing computing activities and related energy usage - can occur during peak demand periods or insufficient energy supply.

6. Data Center Colocation: A service where businesses can be provided with services and infrastructure such as electrical power and network connectivity for servers and other computing hardware at a third-party provider's data center. This arrangement allows for cost savings, better infrastructure, and enhanced security compared to private data centers.

7. Electric Reliability Council of Texas ("ERCOT"): An independent system operator that manages the flow of electric power to more than 26 million Texas customers, representing about 90 percent of the state's electric load. ERCOT schedules power on an electric grid that connects more than 46,500 miles of transmission lines and over 680 generation units.

8. Exahash ("EH/s"): A unit of computational power equal to one quintillion (10^18) hashes per second. It is used to measure the hashrate of the most powerful cryptocurrency mining equipment and the overall computational power of the Bitcoin network.

9. Generative AI: Artificial intelligence that can generate new content, such as text, images, or music, based on its training data. It learns from vast amounts of data to create outputs that mimic original human-generated content, often used in creative and analytical applications.

10. Gigawatt ("GW"): A unit of power equal to one billion watts. Often used to measure the capacity of large power plants or the power usage of large operations like data centers and industrial complexes.

11. Grid Demand Response Services: Services provided to support the basic services of generating and delivering electricity to the grid. They help maintain power quality, reliability, and efficiency. In the context of Bitcoin mining, the use of mining facilities to provide grid stabilization services is an emerging concept.

12. Hashprice: The revenue a miner earns for each unit of computational power (hash) over a specific period. It is influenced by factors such as the price of Bitcoin, network difficulty, and transaction fees. A higher hashprice means more profitability for miners.

13. Hashrate: The measure of computational power per second used in cryptocurrency mining. It indicates the number of hash function computations per second by a miner's hardware, with higher hashrates implying greater efficiency and network security.

2

14. High Performance Computing ("HPC"): The use of supercomputers and parallel processing techniques for solving complex computational problems. HPC is used in fields such as scientific research, simulation, and large-scale data analysis.

15. Joules: A unit of energy in the International System of Units (SI). One joule is the energy transferred when one watt of power is exerted for one second. In Bitcoin mining, energy efficiency is often measured in joules per hash.

16. Large Language Models (LLMs): Advanced AI models designed to understand, generate, and respond to human language in a way that mimics human-like understanding. They are trained on vast datasets and can perform a variety of language-based tasks, such as translation, summarization, and question-answering.

17. Machine Learning: A subset of artificial intelligence involving the creation of algorithms that can learn and make decisions or predictions based on data. It enables computers to improve their performance on a specific task with experience and data, without being explicitly programmed.

18. Megawatts ("MW"): A unit of power measurement equivalent to one million watts. Used to measure the electrical power consumption of large operations like data centers and Bitcoin mining rigs.

19. Mining Pool: A group of cryptocurrency miners who combine their computational resources over a network to increase their chances of finding a block and receiving rewards. The rewards are then divided among the pool participants, proportional to the amount of hashing power each contributed.

20. Petahash ("PH/s"): A unit of computational power equal to one quadrillion (10^15) hashes per second. It is used to measure the hashrate of extremely powerful cryptocurrency mining equipment.

21. Power Usage Effectiveness ("PUE"): A ratio that describes how efficiently a computer data center uses energy; specifically, how much energy is used by the computing equipment (in contrast to cooling and other overhead that supports the equipment).

22. Terahash ("TH/s"): A unit of computational power equal to one trillion (10^12) hashes per second. It's a common measure of the performance of cryptocurrency mining hardware, with higher terahash rates indicating more powerful equipment.

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Soluna Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of June 30, 2024 (Unaudited) and December 31, 2023

June 30, December 31,
(Dollars in thousands, except per share) 2024 2023
Assets
Current Assets:
Cash $ 9,558 $ 6,368
Restricted cash 1,951 2,999
Accounts receivable, net (allowance for expected credit losses $244and $0as of June 30, 2024 and December 31, 2023) 3,434 2,948
Notes receivable 48 446
Prepaid expenses and other current assets 12,461 1,416
Equipment held for sale 28 107
Total Current Assets 27,480 14,284
Restricted cash, noncurrent 1,000 1,000
Other assets 2,946 2,954
Deposits and credits on equipment 3,124 1,028
Property, plant and equipment, net 41,472 44,572
Intangible assets, net 22,328 27,007
Operating lease right-of-use assets 325 431
Total Assets $ 98,675 $ 91,276
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,452 $ 2,099
Accrued liabilities 6,286 4,906
Convertible notes payable 7,851 8,474
Current portion of debt 13,008 10,864
Income tax payable 65 24
Warrant liability 314 -
Customer deposits-current 2,391 1,588
Operating lease liability 159 220
Total Current Liabilities 32,526 28,175
Other liabilities 499 499
Customer deposits- long-term - 1,248
Long-term debt 9,028 -
Operating lease liability 169 216
Deferred tax liability, net 6,520 7,779
Total Liabilities 48,742 37,917
Commitments and Contingencies (Note 10)
Stockholders' Equity:
9.0% Series A Cumulative Perpetual Preferred Stock, par value $0.001per share, $25.00liquidation preference; authorized 6,040,000; 4,953,545and 3,061,245shares issued and outstanding as of June 30, 2024 and December 31, 2023
5 3
Series B Preferred Stock, par value $0.0001per share, authorized 187,500; 62,500shares issued and outstanding as of June 30, 2024 and December 31, 2023 - -
Common stock, par value $0.001per share, authorized 75,000,000; 5,272,845shares issued and 5,232,104shares outstanding as of June 30, 2024 and 2,546,361shares issued and 2,505,620shares outstanding as of December 31, 2023 5 3
Additional paid-in capital 305,250 291,276
Accumulated deficit (267,097 ) (250,970 )
Common stock in treasury, at cost, 40,741shares at June 30, 2024 and December 31, 2023 (13,798 ) (13,798 )
Total Soluna Holdings, Inc. Stockholders' Equity 24,365 26,514
Non-Controlling Interest 25,568 26,845
Total Stockholders' Equity 49,933 53,359
Total Liabilities and Stockholders' Equity $ 98,675 $ 91,276


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

Soluna Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

For the Three and Six Months Ended June 30, 2024 and 2023

Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands, except per share) 2024 2023 2024 2023
Cryptocurrency mining revenue $ 4,484 $ 915 $ 10,880 $ 3,711
Data hosting revenue 4,898 1,153 10,176 1,439
Demand response service revenue 293 - 1,168 -
Total revenue 9,675 2,068 22,224 5,150
Operating costs:
Cost of cryptocurrency mining revenue, exclusive of depreciation 1,883 1,160 3,724 3,410
Cost of data hosting revenue, exclusive of depreciation 2,176 759 4,427 1,031
Costs of revenue- depreciation 1,506 539 3,029 1,164
Total costs of revenue 5,565 2,458 11,180 5,605
Operating expenses:
General and administrative expenses, exclusive of depreciation and amortization 5,382 4,136 9,378 8,496
Depreciation and amortization associated with general and administrative expenses 2,403 2,379 4,805 4,756
Total general and administrative expenses 7,785 6,515 14,183 13,252
Impairment on fixed assets - 169 130 377
Operating loss (3,675 ) (7,074 ) (3,269 ) (14,084 )
Interest expense (449 ) (486 ) (873 ) (1,861 )
Loss on debt extinguishment and revaluation, net (5,600 ) (2,054 ) (8,698 ) (1,581 )
(Loss) gain on sale of fixed assets (21 ) 48 (21 ) (30 )
Other expense, net (49 ) (238 ) (25 ) (226 )
Loss before income taxes (9,794 ) (9,804 ) (12,886 ) (17,782 )
Income tax benefit 649 547 1,197 1,093
Net loss (9,145 ) (9,257 ) (11,689 ) (16,689 )
(Less) Net income (loss) attributable to non-controlling interest 1,728 (482 ) 4,438 (852 )
Net loss attributable to Soluna Holdings, Inc. $ (10,873 ) $ (8,775 ) $ (16,127 ) $ (15,837 )
Basic and Diluted loss per common share (1):
Basic & Diluted loss per share $ (2.97 ) $ (9.54 ) $ (5.68 ) $ (19.74 )
Weighted average shares outstanding (Basic and Diluted) 4,563,696 1,126,091 3,683,558 996,228
(1) Prior period results have been adjusted to reflect the Reverse Stock Split of the Common Stock at a ratio of 1-for-25that became effective October 13, 2023. See Note 2, "Basis of Presentation," for details.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

Soluna Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
For the Year Ended December 31, 2023

And the Three and Six Months Ended June 30, 2024 (Unaudited)

(Dollars in thousands, except per share)

Preferred Stock Common Stock Additional Treasury Stock Non- Total
Series A
Shares 		Amount Series B
Shares 		Amount Shares (1) Amount (1) Paid-in Capital (1) Accumulated Deficit Shares (1) Amount Controlling
Interest

Stockholders'
Equity

January 1, 2023 3,061,245 $ 3 62,500 $ - 788,578 $ 1 $ 277,429 $ (221,769 ) 40,741 $ (13,798 ) 4,406 $ 46,272
Net loss - - - - - - - (7,062 ) - - (370 ) (7,432 )
Preferred dividends- Series B - - - - - - (131 - - - - (131 )
Stock-based compensation - - - - - - 865 - - - - 865
Issuance of shares - securities purchase offering - - - - 87,144 - 439 - - - - 439
Restricted stock units vested - - - - 5,769 - - - - - - -
Issuance of shares - restricted stock - - - - 1,400 - 14 - - - - 14
Issuance of shares- Notes conversion - - - - 174,505 - 1,394 - - - - 1,394
Contribution from Non-Controlling interest - - - - - - - - - - 8,758 8,758
March 31, 2023 3,061,245 $ 3 62,500 $ - 1,057,396 $ 1 $ 280,010 $ (228,831 ) 40,741 $ (13,798 ) $ 12,794 $ 50,179
Net loss - - - - - - - (8,775 ) - - (482 ) (9,257 )
Preferred dividends - Series B - - - - - - (252 ) - - - - (252 )
Stock-based compensation - - - - - - 2,232 - - - - 2,232
Issuance of shares - securities purchase offering - - - - 63,978 - 446 - - - - 446
Restricted stock units vested - - - - 25,125 - - - - - - -
Issuance of shares-merger shares - - - - 19,800 - - - - - - -
Issuance of shares- Notes conversion - - - - 64,351 - 400 - - - - 400
Warrants and valuation issued in relation to debt amendment - - - - - - 1,330 - - - - 1,330
Contribution from Non-Controlling interest - - - - - - - - - - 13,543 13,543
June 30, 2023 3,061,245 $ 3 62,500 $ - 1,230,650 $ 1 $ 284,166 $ (237,606 ) 40,741 $ (13,798 ) $ 25,855 $ 58,621
Net (loss) income - - - - - - - (6,662 ) - - 646 (6,016 )
Preferred dividends-Series B - - - - - - (38 ) - - - - (38 )
Stock-based compensation - - - - - - 595 - - - - 595
Issuance of shares - securities purchase offering - - - - 113,502 - 770 - - - - 770
Common Shares and Warrants for Series B dividend payment - - - - 44,000 - 656 - - - - 656
Issuance of shares- notes conversion - - - - 104,577 - 650 - - - - 650
Contribution from Non-Controlling interest - - - - - - - - - - 151 151
September 30, 2023 3,061,245 $ 3 62,500 $ - 1,492,729 $ 1 $ 286,799 $ (244,268 ) 40,741 $ (13,798 ) $ 26,652 $ 55,389
Net (loss) income - - - - - - - (6,702 ) - - 1,705 (4,997 )
Stock-based compensation - - - - - - 602 - - - - 602
Issuance of shares-merger shares - - - - 39,600 - - - - - - -
Issuance of shares -warrants exercise - - - - 81,726 - - - - - - -
True up shares for reverse split - - - - 37,762 - - - - - - -
Restricted stock units vested - - - - 2,299 - - - - - - -
Warrant revaluation - - - - - - 307 - - - - 307
Issuance of shares- notes conversion - - - - 892,245 2 3,568 - - - - 3,570
Distribution to non-controlling interest - - - - - - - - - - (1,520 ) (1,520 )
Contribution from Non-Controlling interest - - - - - - - - - - 8 8
December 31, 2023 3,061,245 $ 3 62,500 $ - 2,546,361 $ 3 $ 291,276 $ (250,970 ) 40,741 $ (13,798 ) $ 26,845 $ 53,359
(1) Prior period results have been adjusted to reflect the Reverse Stock Split of the Common Stock at a ratio of 1-for-25that became effective October 13, 2023. See Note 2, "Basis of Presentation," for details.
Preferred Stock Common Stock Additional Treasury Stock Non- Total
Series A Shares Amount Series B Shares Amount Shares Amount Paid-in Capital Accumulated Deficit Shares Amount Controlling Interest

Stockholders'
Equity

January 1, 2024 3,061,245 $ 3 62,500 $ - 2,546,361 $ 3 $ 291,276 $ (250,970 ) 40,741 $ (13,798 ) $ 26,845 $ 53,359
Net (loss) income - - - - - - - (5,254 ) - - 2,710 (2,544 )
Reverse split adjustment - - - - 17 - - - - - - -
Stock-based compensation - - - - - - 661 - - - - 661
Issuance of shares - warrant exercise - - - - 61,501 - 300 - - - - 300
Restricted stock units vested - - - - 3,780 - - - - - - -
Issuance of shares- Notes conversion - - - - 270,572 - 1,023 - - - - 1,023
Warrant revaluation - - - - - - (1,715 ) - - - - (1,715 )
Distribution to Non-Controlling interest - - - - - - - - - - (2,233 ) (2,233 )
March 31, 2024 3,061,245 $ 3 62,500 $ - 2,882,231 $ 3 $ 291,545 $ (256,224 ) 40,741 $ (13,798 ) $ 27,322 $ 48,851
Net (loss) income - - - - - - - (10,873 ) - - 1,728 (9,145 )
Series A Preferred Stock issuance 1,892,300 2 - - - - (2 ) - - - - -
Stock-based compensation - - - - - - 1,368 - - - - 1,368
Issuance of shares - warrant exercise - - - - 529,354 - 2,004 - - - - 2,004
Issuance of shares- Restricted stock awards - - - - 1,149,767 1 (1 ) - - - - -
Restricted stock units vested - - - - 100 - - - - - - -
Issuance of shares- Notes conversion - - - - 711,393 1 2,688 - - - - 2,689
Warrant revaluation - - - - - - 7,648 - - - - 7,648
Distribution to Non-Controlling interest - - - - - - - - - - (3,482 ) (3,482 )
June 30, 2024 4,953,545 $ 5 62,500 $ - 5,272,845 $ 5 $ 305,250 $ (267,097 ) 40,741 $ (13,798 ) $ 25,568 $ 49,933

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

Soluna Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30, 2024 and 2023

Six Months Ended June 30,
(Dollars in thousands) 2024 2023
Operating Activities
Net loss $ (11,689 ) $ (16,689 )
Adjustments to reconcile net loss to net cash provided by (used in) by operating activities:
Depreciation expense 3,091 1,179
Amortization expense 4,743 4,741
Stock-based compensation 2,029 3,111
Deferred income taxes (1,259 ) (1,094 )
Impairment on fixed assets 130 377
Provision for credit losses 244 -
Amortization of operating lease asset 122 116
Loss (gain) on debt extinguishment and revaluation, net 8,698 1,581
Amortization on deferred financing costs and discount on notes 59 739
Loss on sale of fixed assets 21 30
Changes in operating assets and liabilities:
Accounts receivable (486 ) (924 )
Prepaid expenses and other current assets (10,767 ) (101 )
Other long-term assets 1 (308 )
Accounts payable 353 696
Deferred revenue - 532
Operating lease liabilities (123 ) (111 )
Other liabilities and customer deposits (404 ) 1,294
Accrued liabilities 1,764 995
Net cash used in operating activities (3,473 ) (3,836 )
Investing Activities
Purchases of property, plant, and equipment (278 ) (2,895 )
Purchases of intangible assets (64 ) (44 )
Proceeds from disposal on property, plant, and equipment 215 1,286
Deposits of equipment, net (2,096 ) (7,916 )
Net cash used in investing activities (2,223 ) (9,569 )
Financing Activities
Proceeds from common stock warrant exercises 2,304 -
Proceeds from common stock securities purchase agreement offering - 43
Proceeds from notes and debt issuance 13,220 2,900
Payments on Navitas loan and notes payable (1,910 ) (175 )
Costs of common stock securities purchase agreement offering - (4 )
Payments on NYDIG loans and line of credit - (350 )
Contributions from non-controlling interest - 19,414
Distributions to non-controlling interest (5,776 ) -
Net cash provided by financing activities 7,838 21,828
Increase in cash & restricted cash 2,142 8,423
Cash & restricted cash - beginning of period 10,367 1,821
Cash & restricted cash - end of period $ 12,509 $ 10,244
Supplemental Disclosure of Cash Flow Information
Interest paid on NYDIG loans and line of credit 115 6
Interest paid on Navitas loan 88 -
Warrant consideration in relation to convertible notes and revaluation of warrant liability 7,648 1,330
Notes converted to common stock 3,712 1,794
Noncash membership distribution accrual 456 -
Warrant consideration in relation to Soluna Cloud 314 -
Noncash disposal of NYDIG collateralized equipment - 3,388
Promissory note and interest conversion to common shares - 845
Noncash non-controlling interest contributions - 2,887
Noncash activity right-of-use assets obtained in exchange for lease obligations - 397
Series B preferred dividend in accrued expense - 383

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

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, "SDI" refers to Soluna Digital, Inc. and previously, "SCI" refers to Soluna Computing, Inc., formerly known as EcoChain, Inc.

Soluna Holdings, Inc., formerly known as Mechanical Technology, Incorporated which was originally incorporated in the State of New York in 1961, reincorporated in the State of Nevada on March 24, 2021, and is headquartered in Albany, New York. Effective November 2, 2021, the Company changed its name from "Mechanical Technology, Incorporated" (or "MTI") to "Soluna Holdings, Inc." On October 29, 2021, Soluna Callisto merged into Soluna Computing, Inc. ("SCI"), a private green data center development company. The Company formed a wholly owned subsidiary of SHI on December 31, 2023, Soluna Digital, Inc. ("Soluna Digital", or "SDI"). Effective December 31, 2023, SHI's previously wholly-owned subsidiary, SCI transferred substantially all of its assets to SHI or its subsidiaries. SHI currently conducts its business through its wholly-owned subsidiary, SDI.

The Company formed a wholly owned subsidiary of SHI on March 24, 2024, Soluna Cloud, Inc. ("Soluna Cloud") an operator of cloud, and co-location or data hosting services related to HPC and AI. Soluna Clou delivers a portion of its services through the website SolunaCloud.com. The Company formed a wholly owned subsidiary of SHI on April 2, 2024, Soluna Energy, Inc. ("Soluna Energy", or "SEI") to own and hold its renewable energy power purchase agreements and certain related land leases for data center projects through a series of services subsidiaries.

The Company is a digital infrastructure company specializing in transforming surplus renewable energy into computing resources. Our modular data centers can co-locate with wind, solar, or hydroelectric power plants and support compute intensive applications including Bitcoin Mining, Generative AI, and Scientific Computing. This pioneering approach to data centers helps energize a greener grid while delivering cost-effective and sustainable computing solutions.

In fiscal year 2021, the Company 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 been decommissioned. In the second quarter of fiscal year 2023, Project Sophie entered into hosting contracts with Bitcoin miners, which marked a shift in the Company's business model at the Company's modular data centers at Project Sophie from proprietary mining to hosting Bitcoin miners for the customers at the 25 MW facility. Currently, all of Project Sophie is performing data hosting, including an AI customer pilot during the first half of 2024. The Company has sold all of its existing Bitcoin miners at the Project Sophie site and redeployed capital. On September 17, 2022, the Company 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. Our Texas site ("Project Dorothy") is located at a wind farm and has a potential for up to 100 MWs, of which the Company obtained approval from the ERCOT and energized 25 MW in May 2023 and energized another 25 MW in October 2023. The Company as of June 30, 2024, has a 14.6% ownership interest in Soluna DVSL ComputeCo, LLC ("DVSL"), owner of Project Dorothy 1A, and 55% ownership interest in Soluna DV ComputeCo, LLC ("DVCC"), owner of Project Dorothy 1B, which are included within the Project Dorothy site, as discussed further in Note 15.

On June 18, 2024, Soluna AL CloudCo, LLC, a Delaware limited liability company ("CloudCo"), a subsidiary of Soluna Cloud and indirect wholly owned subsidiary of the Company entered into an HPE Support and Professional Services - Data Privacy and Security Agreement, an HPE & AI Cloud Services Agreement, a related Statement of Work, and related ancillary agreements (collectively, the "HPE Agreement") with Hewlett Packard Enterprise Company ("HPE"). Pursuant to the HPE Agreement, HPE agreed to provide datacenter and cloud services for artificial intelligence and supercomputing processes via Nvidia H100 Graphic Processing Units ("HPE GPUs") to CloudCo in exchange for an aggregate of $34.0million, including an initial pre-payment of $10.3million, included within Prepaid expenses and other current assets on the consolidated condensed balance sheet to be made on or before June 24, 2024. The HPE Agreement has a term of 36 months, during which monthly payments will be made for approximately $667 thousand, and the services thereunder are expandable upon agreement of the parties.

Going Concern and Liquidity

The Company's consolidated condensed financial statements as of June 30, 2024 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 was in a net loss, has negative working capital, and has significant outstanding debt as of June 30, 2024. 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 financial statements as of June 30, 2024, or August 14, 2024.

Soluna MC Borrowing 2021-1 (the "Borrower"), 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.

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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 $3.4million. Additionally, NYDIG has stated its intention to pursue SCI, the parent company of Soluna MC, LLC ("Guarantor"), under a piercing of the corporate veil claim relating to the Guarantor together with Borrower, ("NYDIG 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. NYDIG filed a motion to dismiss in response to SCI's declaratory judgment complaint on April 13, 2023. SCI filed a response in opposition to NYDIG's motion to dismiss on April 27, 2023. The court heard oral arguments on May 16, 2023. On June 22, 2023, the court issued an order granting NYDIG's motion to dismiss, on the basis that the case was not ripe for decision, without prejudice. SCI intends to continue to vigorously defend any allegations regarding liability on account of NYDIG Defendants' debts and liabilities to NYDIG under their loan documents and intends to refile a declaratory judgment complaint against NYDIG. As of June 30, 2024, the Borrower has an outstanding principal balance of approximately $9.2million and accrued interest and penalties of approximately $1.5million. See Note 10 for further information in relation to the NYDIG litigation matter.

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.

In addition to the Company's cash on hand for available use of approximately $9.6million as of June 30, 2024, the Company will need additional capital raising activities, to meet its capital expenditure needs for its current pipeline and other operational needs. The Company in fiscal year 2024 will continue to look to evaluate different strategies to obtain financing to fund operations. However, management cannot provide any assurances that the Company will be successful in accomplishing additional financing or any of its other plans. These financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

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, 2023 ("the Annual Report").

The information presented in the accompanying condensed consolidated balance sheet as of December 31, 2023 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 and six months ended June 30, 2024 and June 30, 2023.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, including the Company's variable interest entities disclosed in Note 15. All intercompany balances and transactions are eliminated in consolidation.

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Reverse Stock Split

On October 11, 2023, the Company filed a Certificate of Change (the "Certificate of Change") effecting a reverse stock split as of 5:00 p.m. Eastern Standard Time on October 13, 2023 with a ratio of 1-for-25(the "Reverse Split"). The Company's common stock began trading on a post-split basis under the Company's existing trading symbol, "SLNH," when the market opened on October 16, 2023. The reverse stock split was approved by the Board of Directors and by shareholders at the annual meeting of the stockholders on June 29, 2023. At the effective time, every 25 issued and outstanding shares of the Company common stock was converted automatically into one share of the Company's common stock without any change in the par value per share. The Reverse Split did not change the number of shares of common stock authorized for issuance. No fractional shares were outstanding following the Reverse Split. Any holder who would have received a fractional share of common stock was automatically entitled to receive an additional fraction of a share of common stock to round up to the next whole share.

The primary goal of the Reverse Stock Split was to increase the per share price of the Common Stock in order to meet the minimum per share price requirement of $1.00for continued listing on the Nasdaq. On October 30, 2023, the Company received a notice of compliance from NASDAQ.

In addition, effective as of the same time as the Reverse Split, proportionate adjustments were made to all then-outstanding equity awards, warrants and convertible securities with respect to the number of shares of common stock subject to such award or security and the exercise or conversion price thereof. Furthermore, the number of shares of common stock available for issuance under the Company's equity incentive plans has been proportionately adjusted for the Reverse Split ratio, such that fewer shares will be subject to such plans. Furthermore, proportionate adjustments were made to the conversion factor at which the Company's Series B Preferred Stock, par value $0.0001per share (the "Series B Preferred Stock"), may be converted to Common Stock. The total number of shares of Series B Preferred Stock of the Company authorized for issuance remained at 187,500.

The effects of the Reverse Stock Split have been reflected in these financial statements and the accompanying footnotes for all periods presented, which includes adjusting the description of any activity that may have been transacted on a pre-Reverse Stock Split basis.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of less than three months.

Restricted Cash

Restricted cash relates to cash that is legally restricted as to withdrawal and usage or is being held for a specific purpose and thus not available to the Company for immediate or general business use. As of June 30, 2024, the Company had restricted cash of approximately $3.0million, in which $2.0million was classified as current and $1.0million was classified as non-current. As of December 31, 2023, the Company had restricted cash of approximately $4.0million, in which $3.0million was classified as current and $1.0million was classified as non-current. The balance in restricted cash relates to funds held in escrow accounts due to sales of equipment that were executed, in which the Company can release to the convertible noteholders only if they request their share of funds. If no funds are distributed to the convertible noteholders from the escrow account by January 24, 2025, the funds may be used for general purposes for the Company. In addition, there was a restricted deposit held with a customer that was for less than 12 months. The Company has a long-term restricted cash balance in relation to a collateralized deposit.

Deposits and Credits on equipment

As of June 30, 2024 and December 31, 2023, the Company had approximately $3.1million and $1.0million, respectively, in deposits and credits on equipment that had not yet been received by the Company. Once the Company receives such equipment in the subsequent period, the Company will reclassify such balance into Property, Plant, and Equipment. Included in these balances is a credit on equipment of $975thousand which is restricted to be used on future purchases by September 1, 2024 ("expiration date"). The Company notes that if an order is not executed by the expiration date, the credit would be forfeited. The Company intends to utilize the full credit balance for future orders prior to the expiration date.

Warrant Liability

Under the guidance in ASC 815, Derivatives and Hedging (ASC 815), certain Company warrants associated with the Fourth Amendment on February 28, 2024 did not meet the criteria for equity treatment, due to being subject to shareholder approval. As such, the warrants were recorded on the balance sheet at fair value. This valuation was subject to re-measurement at each balance sheet date. With each re-measurement, the warrant valuation was adjusted to fair value, with the change in fair value recognized in the Company's condensed consolidated statement of operations. On May 30, 2024, shareholder approval was obtained removing the cap containment provision, and as such, the liability accounting treatment was no longer required. Since all other criteria were met to be treated as an equity, the Company adjusted the warrant liability as of the date of shareholder approval and reclassified balance to equity. As such, the Company accounted for the change in the fair value of the warrant liability as of the date of the shareholder approval (May 30, 2024).

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As discussed in Footnote 8, on June 20, 2024, Soluna AL Cloudco, LLC (the "Company"), a subsidiary of Soluna Cloud, Inc ("Cloud"), entered into a Promissory Note Agreement of $12.5million with an accredited investor. In consideration of entering into the promissory note, Cloud provided warrants to the accredited investor. Since the warrants were determined to not be indexed to the Company's own stock under ASC 815-40-15, and since the warrants to be delivered upon exercise are not readily convertible to cash, they do not meet the net settlement criteria within ASC 815-10-15-83. While Soluna Holdings, Inc is publicly traded, the shares provided are specific to Soluna Cloud, Inc, which is a subsidiary of Soluna Holdings, Inc. The shares of Soluna Cloud, Inc are not publicly traded and therefore the common stock underlying the warrant is not readily convertible to cash. Further evaluation of the Warrants under ASC 815-10 was required to determine if the Warrants meet the definition of a derivative. Since the warrants do not meet the definition of a derivative instrument, the warrants are classified as a liability that are required to be adjusted to fair market value.

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.

Correction of an Error

While preparing the Company's Form 10-K for the year ended December 31, 2023, the Company identified the following errors related to the presentation of basic and diluted Earnings Per Share ("EPS") in its historical filing for the year ended December 31, 2022, and for the quarters ended March 31, 2023, June 30, 2023, and September 30, 2023:

● Inclusion of the net income/loss from noncontrolling interest in the numerator;
● Inclusion of the cumulative undeclared preferred dividends in the numerator;
● Exclusion of shares issued for little or no cash consideration (ie: penny warrants) in the denominator.

In accordance with SEC Staff Accounting Bulletin No. 99, "Materiality," and SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements;" the Company evaluated the errors and has determined that the related impacts were not material to any prior annual or 10-Q report, but that correcting the cumulative impact of such errors would be significant to our EPS for the year ended December 31, 2023. Accordingly, the Company has corrected such immaterial errors by adjusting its December 31, 2022 consolidated statement of operations related to the calculation of earnings per share. The Company also corrected previously reported interim financial information for such immaterial errors in future filings, as applicable. The following summarizes the effect of the revision on each financial statement line item.

The following analysis provides a comparison amongst the basic and diluted EPS as reported on the Form 10-Q for the quarters ended June 30, 2023, and September 30, 2023, and the final revised basic and diluted EPS calculation to correct all identified errors:

For the three months ended
June 30, 2023 		For the six months ended
June 30, 2023
(1) As Reported As Revised Change (1) As Reported As Revised Change
Basic and Diluted net loss per share $ (8.44 ) $ (9.54 ) $ (1.10 ) $ (17.14 ) $ (19.74 ) $ (2.60 )
(1) Prior period results have been adjusted to reflect the Reverse Stock Split of the Common Stock at a ratio of 1-for- 25 that became effective October 13, 2023. See Note 2, "Basis of Presentation," for details.
For the three months ended
September 30, 2023 		For the nine months ended
September 30, 2023
As Reported As Revised Change As Reported As Revised Change
Basic and Diluted net loss per share $ (4.40 ) $ (5.96 ) $ (1.56 ) $ (20.11 ) $ (24.16 ) $ (4.05 )
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3. Accounts Receivable, net

Accounts receivables consist of the following at:

(Dollars in thousands) June 30,
2024 		December 31,
2023
Data hosting $ 1,892 $ 2,456
Related party receivable 8 8
Demand response service receivable 1,436 268
Proprietary mining Coinbase receivable 98 216
Other 244 -
Allowance for expected credit losses (244 ) -
Total $ 3,434 $ 2,948

The Company's allowance for expected credit loss was $244as of June 30, 2024 and $0as of December 31, 2023. In the three months ended June 30, 2024, one of the Company's borrower from a note receivable was having financial difficulty and securing financing, as such the Company fully reserved the note balance and incurred a provision on credit loss of approximately $244thousand.

4. Property, Plant and Equipment

Property, plant and equipment consist of the following at:

(Dollars in thousands) June 30,
2024 		December 31,
2023
Land and land improvements $ 1,553 $ 1,538
Buildings and leasehold improvements 25,361 25,369
Computers and related software 11,456 11,764
Machinery and equipment 9,104 9,054
Office furniture and fixtures 35 28
Construction in progress 817 1,111
48,326 48,864
Less: Accumulated depreciation (6,854 ) (4,292 )
$ 41,472 $ 44,572

Depreciation expense was approximately $1.5million and $547thousand for the three months ended June 30, 2024 and 2023, respectively. Depreciation expense was approximately $3.1million and $1.2million for the six months ended June 30, 2024 and 2023, respectively

The Company had a loss on sale of equipment of approximately $21thousand for both the three and six months ended June 30, 2024, in which related to equipment held for sale and in storage. The Company received proceeds on the sale of equipment $145thousand for the three months ended June 30, 2024, in which the net book value was approximately $166thousand. The Company received proceeds on the sale of equipment of approximately $215thousand for the six months ended June 30, 2024, in which the net book value was approximately $236thousand.

The Company has a gain on sale of equipment of approximately $48thousand for the three months ended June 30, 2023 and a loss on sale of equipment of approximately $31thousand for the six months ended June 30, 2023. In January 2023, the Company sold M20 and M21 miners for a loss on sale of equipment of approximately $82thousand in which the Company received proceeds of $213thousand for our M20 and M21 miners which were previously reported as held for sale as of December 31, 2022, in which had a net book value of $295thousand. There were additional proceeds of $36thousand in March 2023, in which resulted in a gain of approximately $3thousand of scrap and other equipment. This was offset with a gain on sale of approximately $48thousand in relation to the sale of M30 miners in May and June of 2023, which the Company sold the miners for a higher value than the current net book value. The Company received proceeds of approximately $561thousand in which the miners had a net book value of approximately $513thousand. In addition, the Company sold Switchgear and M31 miners for cash proceeds of approximately $476thousand in which nogain or loss was recognized as the switchgear and miners were sold at net book value.

There were noimpairment charges for the three months ended June 30, 2024. During the six months ended June 30, 2024, the Company had impairment charges of approximately $130thousand. This charge related to the sale of S19 miners that occurred in April 2024, whereas the Company wrote down the net book value of the miners to the subsequent sales price. The Company had impairment charges of approximately $169thousand for the three months ended June 30, 2023 due to revaluing the S19 miners to the current market conditions. During the six months ended June 30, 2023, the Company had impairment charges of approximately $377thousand in which related to impairment of approximately $165thousand for power supply units (PSUs) at the Sophie location and $43thousand 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.

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Equipment held for sale

In April 2023, Project Sophie entered into a 25 MW hosting contract with a sustainability-focused Bitcoin miner, which shifted the Company's business model at Project Sophie from proprietary mining to hosting Bitcoin miners for the customer. The Company sold all but approximately $107thousand of the Project Sophie miners during 2023 and, for the six months ended, June 30, 2024, the Company has sold all remaining Sophie assets held for sale for approximately $82thousand. In March 2024, Project Dorothy 1B began to look to sell certain miners due to interest from third parties and sold $133thousand of miners that were included as equipment held for sale as of March 31, 2024, therefore there is no remaining balance related to Dorothy 1B as of June 30, 2024. A balance of approximately $28thousand in remaining outstanding as of June 30, 2024 related to Marie assets.

5. Asset Acquisition

As discussed above, on October 29, 2021, we completed the Soluna Callisto acquisition pursuant to an Agreement and Plan of Merger dated as of August 11, 2021, by and among the Company, SCI and Soluna Callisto (the "Merger Agreement"). The purpose of the transaction was for SCI to acquire substantially all of the assets (other than those assets physically located in Morocco) formerly held by HEL, which assets consisted of Soluna Callisto's existing pipeline of certain cryptocurrency mining projects that HEL previously transferred to Soluna Callisto and to provide SCI with the opportunity to directly employ or retain the services of four individuals whose services it had retained through HEL prior to the merger. As a result of the merger, each share of common stock of Soluna Callisto issued and outstanding immediately prior to the effective time of the merger, other than shares owned by the Company or any of our subsidiaries, was canceled and converted into the right to receive a proportionate share of up to 118,800shares (the "Merger Shares") of the Company's common stock payable upon the achievement of certain milestones within five years after the effective date in the merger, as set forth in the merger agreement and the schedules thereto (the "Merger Consideration"). See Note 11 for further information regarding our relationship with HEL.

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.

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 (118,800) issuable as Merger Consideration, which issuance is contingent on the achievement of certain milestones of generating active Megawatts from Qualified Projects in which the Cost Requirement is satisfied within five years after the effective date of the merger, as set forth in the Merger Agreement and the schedules thereto, as set forth below. The Merger Consideration and the timing of the payment thereof is subject to the following qualifications and limitations:

1a) Upon the Company achieving each one active MegaWatts ("Active MWs") from the projects in which the cost requirement is satisfied, this will cause SHI to issue to HEL 792 shares for each one MW up to a maximum 150 Active MW.
i. If, on or before June 30, 2022, SCI or Soluna Callisto directly or indirectly achieves at least 50 active MWs from one or more of three current projects as set forth in the Merger Agreement that satisfy the Cost Requirement as defined within the Merger Agreement, then the Merger Shares will be issued at an accelerated rate of 1,188 Merger Shares for each of such first 50 Active MW, such that the Merger Shares in respect of the remaining 100 Active MWs (if any) will be issued at a reduced rate of 594 Merger Shares per Active MW (see below for extension and issuance of a proportion of shares);
ii. If, by June 30, 2023, SCI or Soluna Calisto fail to achieve directly or indirectly (other than pursuant to a Portfolio Acquisition) at least 50 Active MW from Projects that satisfy the Cost Requirement, then the maximum aggregate number of Merger Shares shall be reduced from 118,800 to 59,400 (see below for extension and issuance of a proportion of shares);
iii. No Merger Shares will be issued to HEL without the Company's prior written consent;
iv. Issuance of the Merger Shares will also be subject to the continued employment with or engagement by SCI or the surviving corporation of (A) John Belizaire and (B) at least two of Dipul Patel, Mohammed Larbi Loudiyi, (through ML&K Contractor), and Phillip Ng at the time that such Merger Shares are earned. If both (A) and (B) cease to be satisfied on or prior to the date that all Merger Shares are earned (such date, a "Trigger Date"), then "Qualified Projects" for purposes of determining Merger Shares shall only apply to those Qualified Projects that are in the pipeline as of the Trigger Date. For these purposes, if any such individual's employment or service relationship with SCI is terminated without cause, as a result of his death or disability, or with good reason (as such terms are defined in the employment and consulting agreements), such individual shall be deemed to continue to be employed or engaged by SCI for these purposes;
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v. If SHI or SCI consummates a Change of Control before the fifth anniversary of the date of the closing of the merger, then we will be obligated to issue all of the unissued Merger Shares (subject to (ii) and (iii) above). The Merger Agreement defines "Change of Control" as (A) the sale, exchange, transfer, or other disposition of all or substantially all of the assets of us or SCI, (B) our failure to continue to own (directly or indirectly) 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 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 (previously was June 30, 2022), and an extension of the date in Section 2.7(a)(ii)(B) of the Merger Agreement to June 30, 2024 (previously was June 30, 2023). As of June 30, 2024, the Company has met the active 50 MW criteria.

Due to conditions being met within the Merger Agreement in relation to energization and retention of employees, the Company has advised SCI US Holdings LLC, a Delaware limited liability company, who is the sole Effective Time Holder (as defined in the Merger Agreement) of the right to receive the Merger Shares and that 19,800and 39,600Merger Shares were issued on May 26, 2023 and October 10, 2023. SCI US Holdings LLC has consented to the issuance of such Merger Shares as required under the Merger Agreement and has directed the Company to issue such Merger Shares to its affiliate, HEL. Following the issuance of the 59,400Merger Shares, a total of 59,400Merger Shares remains available for possible issuance pursuant to the terms of the Merger Agreement.

The number of Merger Shares is also subject to customary anti-dilution adjustments in the event of any stock split, stock consolidation, stock dividend, or similar event involving the shares of our common stock. Based on the assessment performed, the fair value of the merger consideration as of October 29, 2021 was approximately $33.0million.

6.Intangible Assets

Intangible assets consist of the following as of June 30, 2024:

(Dollars in thousands) Intangible Assets Accumulated
Amortization 		Total
Strategic pipeline contract $ 46,885 $ 25,005 $ 21,880
Assembled workforce 500 267 233
Patents 229 14 215
Total $ 47,614 $ 25,286 $ 22,328
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Intangible assets consist of the following as of December 31, 2023:

(Dollars in thousands) Intangible Assets Accumulated
Amortization 		Total
Strategic pipeline contract $ 46,885 $ 20,317 $ 26,568
Assembled workforce 500 216 284
Patents 165 10 155
Total $ 47,550 $ 20,543 $ 27,007

Amortization expense for the three and six months ended June 30, 2024 and 2023 was approximately $2.4million and $4.7million.

The strategic pipeline contract relates to supply of a critical input to our digital mining and hosting 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 data centers 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 2024
2024 (remainder of the year) $ 4,744
2025 9,488
2026 7,908
2027 11
2028 11
Thereafter 166
Total $ 22,328

7.Income Taxes

During the three and six months ended June 30, 2024, the Company's effective income tax rate was 7.1% and 7.6%, and for the three and six months ended June 30, 2023, the Company's effective tax rate was 4.5% and 6.1%. The projected annual effective tax rate is less than the Federal statutory rate of 21%, primarily due to the change in the valuation allowance, as well as changes to estimated taxable income for 2024 and permanent differences. There was $714thousand and $544thousand deferred income tax benefit for the three months ended June 30, 2024 and 2023, offset with a $65thousand and $0current tax expense for the three months ended June 30, 2024 and 2023. There was $1.3million and $1.1million deferred income tax benefit for the six months ended June 30, 2024 and 2023, offset with a $65thousand and $0current tax expense for six months ended June 30, 2024 and 2023.

In connection with the strategic contract pipeline acquired in the 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 $10.9million at inception date, in which was recorded as a deferred tax liability and this amount will be amortized over the life of the asset. For the three and six months ended June 30, 2024 and 2023, the Company amortized $547thousand and $1.1million.

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 Company has a full valuation allowance for the deferred tax asset of $37.2million and $36.8million on June 30, 2024 and December 31, 2023, respectively. We will continue to evaluate the ability to realize our deferred tax assets and related valuation allowance on a quarterly basis.

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8.Debt

Convertible Notes Payable

Debt consists of the following

(Dollars in thousands): Maturity Date Interest Rate June 30,
2024 		December 31,
2023
Convertible Note January 24, 2025 *18 % $ 7,851 $ 8,474
* Default interest was waived on March 10, 2023, and no further default interest applied on the Convertible Note for the remainder of the year.

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 $16.3million for an aggregate purchase price of $15million (collectively, the "October Secured Notes"), which were, subject to certain conditions, convertible at any time by the investors, into an aggregate of 1,776,073shares of the Company's common stock, at a price per share of $9.18and (ii) Class A, Class B and Class C common stock purchase warrants (collectively, the "October Warrants") to purchase up to an aggregate of 1,776,073shares of common stock, at an initial exercise price of $12.50, $15and $18per share, respectively. The October Warrants are legally detachable and can be separately exercised immediately for five years upon issuance, subject to applicable Nasdaq rules.

The October Secured Notes, subject to an original issue discount of 8%, had a maturity date (the "Maturity Date") of October 25, 2022, which was extended to April 25, 2023pursuant to the Addendum Amendment (as defined below), upon which date the October Secured Notes shall be payable in full. Commencing on the Maturity Date and also five (5) days after the occurrence of any Event of Default (as defined in the October Secured Notes), interest on the October Secured Notes will accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. If any Event of Default or a Fundamental Transaction (as defined in the October Secured Notes) or a Change of Control (as defined in the October Secured Notes) occurs, the outstanding principal amount of the October Secured Notes, liquidated damages and other amounts owing in respect thereof through the date of acceleration, will become, at the Noteholder's election, immediately due and payable in cash at the Mandatory Default Amount (as defined in the October Secured Notes). Under the original terms, the October Secured Notes could not be prepaid, redeemed or mandatorily converted without the consent of the Noteholders. The obligations of the Company pursuant to the October Secured Notes are (i) secured to the extent and as provided in the Security Agreement, dated as of October 25, 2021, by and among the Company, MTI Instruments (a former subsidiary of SHI in which was sold in April 2022), and SCI, Soluna MC, LLC and Soluna SW, LLC (both of which are wholly owned subsidiaries of SCI, and together with MTI Instruments and SCI, the "Subsidiary Guarantors"), and Collateral Services LLC (the "Collateral Agent"), as collateral agent for the Noteholders; and (ii) guaranteed, jointly and severally, by the Subsidiary Guarantors pursuant to each Subsidiary Guaranty, dated as of October 25, 2021, by and among each Subsidiary Guarantor and the Noteholders signatory to the October SPA, subject to subsequent modifications pursuant to the Addendum, the Addendum Amendment and the NYDIG Transactions.

On July 19, 2022 and on September 13, 2022, the Company entered into an Addendum and Addendum Amendment in which adjusted the terms such as maturity date, conversion prices, and the issuance of new warrants to the Noteholders. Pursuant to the Addendum and Addendum Amendment, the Company evaluated whether the new addendums qualified as debt modification or debt extinguishment, and based on ASC 470, Debt, the Company determined the Addendum and Addendum Amendment to fall under Debt Extinguishment and the Company would be required to fair value the new debt, and in turn write off the existing debt on the books.

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, 2023 and quarter-ended June 30, 2024, the Company ran Monte Carlo simulations 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.

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Changes in Level 3 Financial Liabilities Carried at Fair Value

(in thousands)
Balance, January 1, 2023 $ 12,254
Conversions of debt (January 2023- March 31, 2023) (1,395 )
Total revaluation gains (January 2023- March 31, 2023) (473 )
Balance, March 31, 2023 10,386
Conversions of debt (April 1, 2023- June 30, 2023) (400 )
Total revaluation losses (April 1, 2023- June 30, 2023) 724
Balance June 30, 2023 10,710
Conversions of debt (July 1, 2023- December 31, 2023) (4,219 )
Total revaluation losses (July 1, 2023- December 31, 2023) 1,983
Balance December 31, 2023 8,474
Conversions of debt (January 1, 2024- March 31, 2024) (1,023 )
Total revaluation gains (January 1, 2024- March 31, 2024) (1,235 )
Balance March 31, 2024 6,216
Conversions of debt (April 1, 2024- June 30, 2024) (2,689 )
Extension fee 325
Total revaluation losses (April 1, 2024- June 30, 2024) 3,999
Balance June 30, 2024 $ 7,851

For the three and six months ended June 30, 2024, the Company had approximately $2.7million and $3.7million of note conversions with the Noteholders, approximately $4.0million and $2.8million in revaluation losses in relation to fair value assessments of the convertible debt, and a 4% note extension in June increasing the note balance by approximately $325thousand. As of June 30, 2024, the Company had a fair value outstanding balance of approximately $7.9million and a principal outstanding value of approximately $5.3million. For the three and six months ended June 30, 2023, the Company had approximately $400thousand and $1.8million of note conversions with the Noteholders and approximately $724thousand and $251thousand revaluation losses due to fair value assessments of the convertible debt.

The following table represents the significant and subjective fair value assumptions used for Convertible Notes during the six months ended June 30, 2024:

Six months ended

June 30, 2024

Stock price $ 2.88- 6.09
Conversion price $ 3.78
Volatility 90.0- 115 %
Risk-free interest rate 5.31- 5.46 %

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 $950,000for the benefit of the Noteholders by December 21, 2022, constituted an event of default under the Notes. Due to the default, the Company accrued interest at a rate of 18% which amounted to $617thousand as of March 10, 2023. On March 10, 2023, the Company entered into a Second Addendum Amendment with the Noteholders, in which the Company paid the accumulated default accrued interest of $617thousand using the restricted escrow accounts and contemporaneously with the payment, the Noteholders waived all existing events of default arising under the convertible notes.

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 $250,000and increased the principal amount of the outstanding October Secured Notes by 14%. The Company also issued 240,000new Class A warrants exercisable at $12.50and 80,000new Class B warrants exercisable at $20.00.

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 20% percent of the outstanding amount of the October Secured Notes as:

(i) the Company's Common Stock trades for 10consecutive days at or above $12.50per share and at least 40,000shares trade on each day.
(ii) the Company's Common Stock trades for 10consecutive days at or above $17.50per share and at least 40,000shares trade on each day.
(iii) the Company's Common Stock trades for 10consecutive days at or above $22.50per share and at least 40,000shares trade on each day.
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The Equity Condition is met if all of the following conditions have been satisfied: (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 4.99% of the outstanding shares, (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.

On November 20, 2023, the Company and the Noteholders entered into a Third Amendment Agreement to amend the Notes, the October SPA and related agreements (collectively, the "Transaction Documents"). The aim is to facilitate future financings by the Company that may include funds for prepayment of the Notes by permitting the Company to force conversion of up to $1.5million of the Notes under certain circumstances, reduce the prepayment penalty in return for reducing the conversion price of the $4.7million of the Notes and reducing the exercise price of 150,000of the Warrants to $0.01.

As provided in the original terms of the Notes, in the event the Company prepays the amounts owed under Notes, the Company must pay an additional 20% prepayment penalty. Under the new Transaction Documents, in the event the prepayment occurs between February 15, 2024 and July 24, 2024, prepayment penalty is reduced to 10%.

In addition, under the new Transaction Documents, the Company has the right to force the conversion of up to $1.5million of face value of the Notes in whole or in part at any time up to the maturity date of the Notes, provided that at the time of such conversion the share price on the trading market on which the Company's shares is then listed exceeds $5.00and a minimum volume of 50,000traded each trading day for the five trading days immediately prior to such forced conversion.

As consideration for the reduction in the prepayment penalty and the new forced conversion right, the Company agreed that an aggregate $4.7million of the Notes had the conversion price reduced to $3.78per share and 150,000of the Warrants had the exercise price reduced to $0.01(the "Repriced Warrants"), provided that prior to February 1, 2024, for each $31.33in Notes converted by a Noteholder, such Noteholder may exercise one Repriced Warrant and that on February 1, 2024, all Repriced Warrants became immediately exercisable.

On February 28, 2024 the Company and the Purchasers entered into a Fourth Amendment Agreement to amend the Notes, SPA and related agreements to facilitate future financings by the Company by amending the Transaction Documents as follows:

The Company shall be permitted to undertake at-the-market transactions in the future provided:

● No Event of Default shall have occurred and be continuing under the Notes; and
● The market price of the shares of common stock shall be at least the At-the-Market ("ATM") Floor Price. ATM Floor Price means $10 per share initially, which is reduced to $8 per share six months after the ATM is effective and $6 per share 12 months after the after the effective date of the ATM.

In addition, the Company will be permitted to unilaterally extend the maturity date of the Notes for two 3-Month extensions if prior to the then in effect maturity date the Company gives notice to the Purchasers and increases the principal amount of the Notes on the date of each such extension by two percent (2%) the principal amount of the Notes outstanding on the date of this Agreement per each extension.

In consideration of the foregoing, the Company:

● Reduced the conversion price of the Notes to $3.78per share;
● The Purchasers received an aggregate of 850,000three year warrants exercisable at $0.01per share;
● An aggregate of 320,005warrants held by the Purchasers had the exercise price reduced to $3.78per share (the "$3.78Warrants"); and
● An aggregate of 478,951warrants held by the Purchasers had the exercise price reduced to $6.00per share (the "$6.00Repriced Warrants"). For every one $6.00 Repriced Warrant exercised by a Purchaser, such Purchaser shall receive 1.36 new five-year warrants with an exercise price of $0.01, 1.6 new five-year warrants with an exercise price of $4.20, and 1.6 new five-year warrants with an exercise price of $5.70.

In June 2024, pursuant to the Fourth Amendment Agreement, the Company exercised its right to extend the maturity date of the Senior Notes for an additional six months, or until January 24, 2025, in order to enable the Company to continue to pursue its significant project development opportunities for Soluna Cloud, Dorothy 2 and other projects. The extension of the notes caused an increase in the convertible note balance of approximately $325thousand and the extension fee was recorded within "Other Expense, net" for the three and six months ended June 30, 2024.

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The effect of the additional penny warrants, $3.78warrants, and the $6.00repriced warrants including additional warrants if exercised with the Noteholders, created a loss on debt extinguishment of approximately $5.8million due to the fair value associated as of February 28, 2024. Such amounts were recorded as a loss on debt extinguishment and affected the Company's warrant liability and additional paid in capital balance account. Due to the requirement of the shareholder approval associated with the Fourth Amendment, the warrants associated will be treated as a liability and be revalued each quarter. In addition, a warrant revaluation was done at March 31, 2024, which created a gain on revaluation associated with the warrant liability of approximately $1.5million. As of March 31, 2024, the Company had a warrant liability of approximately $6.0million. On May 30, 2024, shareholder approval was obtained removing the cap containment provision for the warrants, and as such, the liability accounting treatment was no longer required. Since all other criteria were met to be treated as equity, the Company adjusted the warrant liability as of the date of shareholder approval and reclassified balance to equity. As such, the Company accounted for the change in the fair value of the warrant liability as of the date of the shareholder approval (May 30, 2024), in connection with its loss on revaluation of the warrant of approximately $1.6million.

Pursuant to additional agreements with holders of another 51,618outstanding warrants, similar adjustments with those warrants, resulted in a total adjustment to 530,569warrants. As the 51,618warrants were not with the Noteholders, the treatment of $6.00repriced warrants was recorded as a deemed dividend and adjusted the Company's earnings per share calculation noted in Footnote 9 for the six months ended June 30, 2024. The fair value associated with the 51,618warrants with non-Noteholders totaled approximately $386thousand. On May 17, 2024, the Company permitted the holders of the Company's Amended Class C Warrants, previously exercisable at $6per share, to exercise such warrants at a reduced exercise price of $4per share, provided that each such holder exercised at least 61.83% of their Amended Class C Warrants by the close of business on May 17, 2024. The Company also agreed to reduce the exercise price on all remaining Amended Class C Warrants. The adjustment in the exercise price, resulted in an additional deemed dividend which amounted to approximately $66thousand for the three months ended June 30, 2024.

On March 5, 2024, one of the Noteholders exercised 50thousand warrants at the $6.00repriced warrant value. As such, the Company issued 68thousand $0.01warrants, 80thousand $4.20warrants, and 80thousand $5.70warrants. As discussed above, the Amended Class C warrants were amended to an exercise price $4.00per share. For the three months ended June 30, 2024, the Noteholders exercised an additional 428,951shares, resulting in additional 583,373shares of $0.01warrants, 686,322shares of $4.20warrants, and 686,322shares of $5.70warrants.

The following table represents the significant fair value assumptions used for warrants issued or repriced during the six months ended June 30, 2024:

Six months ended
June 30, 2024
Stock price $ 2.88- 4.07
Exercise price $ 0.01- 20.00
Expected term in years 2.68- 8.77
Expected dividend yield 0.00 %
Volatility 110.0- 137.50 %
Risk-free interest rate 4.28- 4.44 %

NYDIG Financing

(Dollars in thousands) Maturity Dates Interest Rate January 1, 2024 -
June 30,
2024 		January 1, 2023 -
December 31,
2023
NYDIG Loans #1-11 April 25, 2023 thru January 25, 2027* 12% thru 15% $ 9,183 $ 10,546
Less: repossession of collateralized assets - (1,363 )
Total outstanding debt $ 9,183 $ 9,183
* Due to event of default- the entire NYDIG Financing became current, see note below.

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 $14.4million in aggregate equipment financing. Subsequently, the parties negotiated the specific terms of each equipment financing transaction as well as the terms upon which the Noteholders would consent to the transactions contemplated by the Master Agreement.

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On January 14, 2022, the Borrower effected an initial drawdown under the Master Agreement in the aggregate principal amount of approximately $4.6million that bore interest at 14% and was to be repaid over 24 months. On January 26, 2022, the Borrower had a subsequent drawdown of $9.8million. As part of the transactions contemplated under the Master Agreement, (i) the Company's indirect wholly owned subsidiary, Soluna MC LLC, formerly EcoChain Block LLC ("Guarantor"), which is the owner of 100% of the equity interests of Borrower, executed a Guaranty Agreement in favor of NYDIG, as lender, dated as of December 30, 2021 (the "Guaranty Agreement"), (ii) Borrower has granted a lien on, and security interest in, all of its assets to NYDIG, as collateral agent, (iii) Guarantor entered into an equipment financing arrangement on assets purchased with the borrowed funds, (iv) Borrower would borrow from NYDIG the loans as forth in certain loan schedules (the "Specified Loans"), and (v) Borrower had executed a Digital Asset Account Control Agreement (the "ACA Wallet Agreement") with NYDIG, as collateral agent and secured party, and NYDIG Trust Company LLC, as custodian, dated as of December 30, 2021, as well as such other agreements related to the foregoing as mutually agreed (collectively, the "NYDIG Transactions").

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 $3,000,000agreed to waive its rights under Section 4.17 of the October SPA to participate in Subsequent Financings (as defined in the October SPA) with respect to the NYDIG Transactions and any additional loans under the MEFA that only finance the purchase of equipment from NYDIG, in order to consent to the NYDIG Transactions. Pursuant to the Consent, the Noteholders also waived the current requirement of the October SPA and the other transaction documents (collectively, the "SPA Documents") that the Borrower become an Additional Debtor (as defined in the Security Agreement) and execute an Additional Debtor Joinder (as defined in the Security Agreement) for so long as the Specified Loans were outstanding, and NYDIG would not have entered into a subordination or intercreditor agreement with respect to the Guaranty. Further, pursuant to the Consent, the Noteholders waived the right to accelerate the Maturity Date of the October Secured Notes and the right to charge a default rate of interest on such Notes, in each case, with respect to certain changes in names of, and jurisdiction of incorporation, of the Debtors (as defined in the SPA Documents), which waiver would not waive any other Event of Default (as defined in any of the SPA Documents), known or unknown, as of the date of Consent.

Promptly after the date of the Consent, the Company issued warrants to purchase up to 3,400shares of common stock to the Noteholder holding the largest outstanding principal amount of October Secured Notes as of the date of the Consent. Such warrants were substantially in form similar to the other warrants held by the Noteholders. Such warrants were exercisable for three years from the date of the Consent at an exercise price of $237.50per share. On December 5, 2022, the exercise price of the warrants was reduced to an exercise price of $19.00per share, effective with the closing of the Securities Purchase Agreement Offering on December 5, 2022.

The Company, through the Borrower, was required to make average monthly principal and interest payments to NYDIG of approximately $730thousand on initial drawdown in aggregate principal amount of approximately $4.6million bearing interest at 14%, and a subsequent drawdown of $9.8million.

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, the principal balance of $10.5 million became due immediately and the Borrower was to 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.Also, as the Company was not able to obtain a waiver, the outstanding deferred financing costs were written off. As of December 31, 2022, the Borrower had incurred accrued interest and penalty of approximately $274thousand. On February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, and repossessed the collateralized assets that totaled approximately $3.4million, in which approximately $560thousand was first used to pay off accrued interest and penalty to date. On September 5, 2023, NYDIG provided a letter finalizing the accounting for the repossessed collateralized assets totaling proceeds of approximately $3.4million. This included legal and other expenses associated with the sale of the assets net a modest gain on the estimated net book value of the assets totaling $251thousand that was expensed as a loss on disposition of assets for the year ended December 31, 2023. On December 7, 2023, NYDIG filed its Motion for Summary Judgment seeking entry of a judgment against Soluna in the approximate amount of $10.3million for principal and interest and penalties. On January 12, 2024, Soluna filed its objection to NYDIG's motion for summary judgment on the grounds that NYDIG failed to explain what collateral of which loan was sold and how the sale proceeds were allocated to each loan. A summary judgment motion was performed on February 13, 2024, and was agreed upon by both NYDIG and the Borrower, that the total outstanding loan principal balance would be approximately $9.2million, in which a penalty fee was applied of approximately $1.0million to the repossessed collateralized assets, and outstanding interest and penalty balance would be approximately $936thousand as of December 31, 2023. The Company applied the per diem interest rate agreed upon with the summary judgement for the three and six months ended June 30, 2024 and recorded interest expense of approximately $361thousand and $723thousand and has an outstanding interest and penalty accrual of approximately $1.5million recorded within "Accrued Liabilities" as of June 30, 2024. See Note 10 for further information in relation to the NYDIG litigation matter.

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Loan and Security Agreement

Navitas Term Loan

(Dollars in thousands) Maturity Date Interest Rate January 1, 2024-
June 30,
2024 		May 9, 2023-
December 31,
2023
Term Loan and capitalized interest (excludes debt issuance cost) May 9, 2025 15 % $ 1,707 $ 2,254
Less: principal and capitalized interest payments (1,234 ) (547 )
Less: debt issuance costs (13 ) (25 )
Total outstanding debt $ 460 $ 1,682

On May 9, 2023, DVCC and Navitas West Texas Investments SPV, LLC entered into a 2-year Loan Agreement ("Term Loan") for $2,050,000. The unpaid principal balance of the Term Loan shall bear interest at per annum rate equal to 15%. Beginning on the last Business Day of the month in which the In-Service Date occurs (date Dorothy 1B is put into full operation following the planned ramp-up period), and continuing on the last Business Day of each month thereafter until the repayment of all Term Loan debt principal and accrued interest occurs, DVCC shall make debt service payments on the Term Loan through a cash sweep with the Site-level Free Cash Flow (total revenue of DVCC minus power costs and site level costs listed in Loan and Security agreement), otherwise to be distributed to Soluna Holdings, Inc., the ultimate parent entity of DVCC (the "SLNH Cash") being applied as a permanent repayment of the Loan in an amount equal to the greater of: (i) the sum of (A) the amount of accrued and unpaid interest that has not yet been added to the principal balance of the Term Loan, if any, plus (B) an amount equal to 1/24th of the then outstanding principal balance of the Term Loan; provided that the aggregate amount payable pursuant to this clause (i) shall not exceed SLNH Cash times 0.60; or (ii) 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, if any, and then to repayment of the then outstanding principal balance of the Term Loan. On the Term Loan Maturity Date (May 9, 2025), all remaining principal and accrued and unpaid interest that has not yet been added to the principal balance of the Term Loan, if any, shall become immediately due and owing in full and shall be paid by wire transfer in immediately available funds. As of June 30, 2024 and December 31, 2023, approximately $460thousand and $1.7million is included in the current portion of debt as the Company's expectation is that principal and capitalized interest payments will be made to pay off the Term Loan within one year after quarter or year-end. The Company has paid approximately $1.2million in principal for the six months ended June 30, 2024 and $547thousand in principal and capitalized interest payments for the year ended December 31, 2023. Interest expense related to the Navitas Term Loan for the three and six months ended June 30, 2024 was approximately $37and $100thousand.

Equipment Loan Agreement

On May 16, 2024, SDI SL Borrowing - 1, LLC, an affiliate of Soluna Holdings, Inc. (the "Borrower") entered into a loan agreement (the "Equipment Loan Agreement" or the "Loan") with Soluna2 SLC Fund II Project Holdco LLC (the "Lender", and collectively, the "Parties"). The Equipment Loan Agreement provides for the Company to borrow, from time to time, up to $1.0million to be used to purchase necessary equipment for the progression of Project Dorothy 2. Any loans made under the Equipment Loan Agreement have a maturity date of May 16, 2027, and will bear interest at a rate of 15% per annum. The Equipment Loan Agreement includes customary covenants for loans of this nature, as well as a multiple on invested capital ("MOIC") provision, which requires the Company to pay, in addition to principal and interest, an amount equal to the difference of (i) the greater of (a) the principal amount of the Loan being repaid plus all interest previously paid or simultaneously being paid to Lender in respect of such principal of the Loan, and (b) the principal amount of the Loan being repaid multiplied by three, minus (ii) the sum of the principal amount of the Loan being repaid plus all interest previously paid or simultaneously being paid to Lender in respect of such principal of the Loan.

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On May 16, 2024, the Parties entered into the Security Agreement in connection with the Loan Agreement as described above. The Security Agreement grants a collateral security interest in the equipment purchased under the Equipment Loan Agreement to secure the obligations of the Borrower under said Agreement in the event full performance and payment of the Equipment Loan Agreement becomes due.

On May 17, 2024, the Borrower drew down $720thousand of the equipment loan with the Lender. As of June 30, 2024, the Borrower has an outstanding principal and compounded interest of approximately $734thousand. In addition, the Borrower had deferred financing costs associated with the line of credit of approximately $118thousand. Per ASC 835-30-S45-1, debt issuance costs related to line of credits should be recorded as an asset and amortized over the life of the line of credit agreement. As such, the Company recorded $39thousand within Prepaid expenses and other current assets and $79thousand within Other assets on the condensed balance sheet as of June 30, 2024.

As noted in Footnote 17, on the July 22, 2024, the Borrower satisfied and repaid the Borrowing Amount in full by issuing the Investor Class B Membership Interests in the Dorothy 2 project at three times the value of the Borrowing Amount (i.e., $2.16million).

June 2024 Secured Note Financing

(Dollars in thousands) Maturity Date Interest Rate June 20, 2024-
June 30,
2024
Term Loan and capitalized interest (excludes debt issuance cost) June 20, 2027 9 % $ 12,531
Less: principal and capitalized interest payments -
Less: debt discount (314 )
Less: debt issuance costs (557 )
Total outstanding note 11,660
(Less) Current note outstanding 2,632
Long-term note outstanding $ 9,028

On June 20, 2024, Soluna AL CloudCo, LLC ("CloudCo"), an indirect wholly-owned subsidiary of Soluna Holdings, Inc. (the "Company"), issued a $12.5million secured promissory note to an accredited investor under a Note Purchase Agreement (the "June SPA"). The note accrues 9% interest annually, adjustable upon default, and matures on June 20, 2027. CloudCo's obligations are secured by its assets under a security agreement.

As additional credit support, Soluna Cloud, Inc., CloudCo's parent company, provided a guaranty secured by its assets and a pledge of CloudCo's membership interests. The Company, as Soluna Cloud's sole stockholder, also provided a guaranty secured by its assets and a pledge of its shares in Soluna Cloud.

These arrangements are documented in the "CloudCo Agreements," "Cloud Agreements," and "Holdings Agreements."

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As an inducement for the Investor to purchase the Note, Soluna Cloud will issue a warrant (the " Cloud Warrant") exercisable within three years from June 20, 2024. This Warrant allows the Investor to purchase a number of shares of Soluna Cloud common stock equal to 12.5% of the issued and outstanding common stock as of the Cloud Warrant date divided by 0.875, plus 12.5% of each Qualified Issuance divided by 0.875. In addition, granting of appreciation rights, phantom rights, or other rights with equity features would result in adjustments to the aggregate number of warrants issued.

A "Qualified Issuance" includes any issuance of common stock by Soluna Cloud from the day after the Cloud Warrant date until the earlier of raising an additional $112.5million or December 31, 2024, as well as shares issuable upon exercise or conversion of convertible securities issued during this period, excluding certain equity compensation plan issuances.

On June 20, 2024, the Company recorded the Cloud Warrant as a liability valued at approximately $314thousand and a related debt discount, which will be amortized over the loan's term.

In connection with the June 2024 transactions, the purchasers (collectively, the "Purchasers") of the secured convertible notes ("Senior Notes") issued under the Securities Purchase Agreement dated October 25, 2021 (as amended, the "2021 Purchase Agreement"), along with Collateral Services LLC as collateral agent, consented to the June 2024 transactions. They also agreed to enter into an intercreditor agreement with the Investor regarding these transactions.

For the three and six months ended June 30, 2024, the Company incurred approximately $31thousand in interest expense related to the June SPA.

October 2021 Secured Notes-Extension of Maturity Date

Pursuant to Section 6.a. of the Fourth Amendment Agreement to the 2021 Purchase Agreement, dated as of February 28, 2024, the Company exercised its right to extend the maturity date of the Senior Notes for an additional six months, or until January 24, 2025, in order to enable the Company to continue to pursue its significant project development opportunities for Soluna Cloud, Dorothy 2 and other projects.

Line of Credit

On September 15, 2021, the Company entered into a $1.0million unsecured line of credit with KeyBank National Association ("KeyBank"), that allows 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. Accrued interest is due monthly and principal is due in full following KeyBank's demand. As of January 1, 2023, the Company had drawn on the line of credit and approximately $350thousand of the amount drawn under the line of credit remained outstanding. As of December 31, 2023, the remaining $350thousand had been paid down. The Company does not have any remaining balance outstanding as of December 31, 2023 and June 30, 2024. The Company does not plan to draw down on the line of credit in the foreseeable future. In addition, future drawdowns require pre-approval by KeyBank.

9.Stockholders' Equity

Preferred Stock

The Company has two series of preferred stock outstanding: the Series A Preferred Stock, with a $25.00liquidation preference; and the Series B Convertible Preferred Stock, par value $0.0001per share, with a stated value equal to $100.00(the "Series B Preferred Stock"). As of June 30, 2024 and December 31, 2023, there were 4,953,545and 3,061,245shares of Series A Preferred Stock issued and outstanding, respectively, and as of June 30, 2024 and December 31, 2023 there was 62,500shares of Series B Preferred Stock issued and outstanding, respectively.

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 62,500shares of Series B Preferred Stock, for a purchase price of $5,000,000. The shares of Series B Preferred Stock are initially convertible, subject to certain conditions, into 46,211shares of common stock, at a price per share of $135.25per share, a 20% premium to the closing price of the common stock on July 18, 2022, subject to adjustment as set forth in the Certificate of Designations of Preferences, Rights and Limitations for the Series B Preferred Stock ("Series B Certificate of Designations").

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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 40,000shares of common stock at an initial exercise price of $250.00per share. The Series B Investor is entitled to exercise the Series B Warrants at any time on or after the date that is 180 days following the issue date and on or prior to January 19, 2028. On the closing date of the next public offering of the common stock or other securities, the exercise price of the Series B Warrants is to adjust to a price equal to the lower of (a) the exercise price then in effect, or (b) the price of the warrants issued in the Company's next public offering, or if no warrants are issued in the Company's next public offering, 110% of the price per share of the common stock issued in the Company's next public offering. In addition, upon the Series B Closing, the Series B Investor delivered to the Company for cancellation an outstanding warrant to acquire 40,000shares of common stock at an exercise price of $287.50per share previously issued on April 13, 2022, in connection with the Notes.

Common Stock

The Company has one class of common stock, par value $0.001per share. Each share of the Company's common stock is entitled to one vote on all matters submitted to stockholders.As of June 30, 2024 and December 31, 2023, there were 5,232,104and 2,505,620shares of common stock issued and outstanding, respectively.

Dividends

Pursuant to the Certificate of Designations, Preferences and Rights of 9.0% Series A Cumulative Perpetual Preferred Stock of the Company, dividends, when, as and if declared by the Board (or a duly authorized committee of the Board), will be payable monthly in arrears on the final day of each month, beginning August 31, 2021.The Board of Directors had not declared any Series A Preferred Stock dividends beginning October 2022 through December 31, 2023, as such the Company has accumulated approximately $8.6million of dividends in arrears on the Series A Preferred Stock through December 31, 2023, and an additional $2.6million and $4.3million of dividends in arrears for the three and six months ended June 30, 2024 million, for a total of approximately $12.9million.

The Company's Series B Preferred Stock includes a 10% accruing dividend compounded daily for 12 months from the original issue date of July 20, 2022 that may be paid in cash or stock at the Company's option at the earlier of (i) the date the Series B Preferred Stock is converted, or (ii) the Series B Dividend Termination Date. On August 11, 2023, the Company paid a mandatory dividend on its outstanding Series B Convertible Preferred Stock in the amount of approximately $656thousand. Pursuant to the Certificate of Designation for the Series B Stock, the Company had the option to pay the dividend in cash or shares of Common Stock. Pursuant to a Dividend Payment Agreement, the Company and the holder of the Series B Stock agreed to satisfy the payment of the dividend through the issuance of 44,000shares of its Common Stock and 70,300prefunded warrants (the "Prefunded Warrants").

Each Pre-Funded Warrant has been funded to the amount of $.19999, with $0.00001per share of common stock payable upon exercise, is immediately exercisable, may be exercised at any time until exercised in full and is subject to customary adjustments. The Pre-Funded Warrants may not be exercised if the aggregate number of shares of the Company's common stock beneficially owned by the holder (together with her affiliates) would exceed 4.99% of the Company's outstanding Common Stock immediately after exercise. However, the holder may increase (upon 61 days' prior notice from the holder to the Company) or decrease such percentages, provided that in no event such percentage exceeds 4.99%.

Reservation of Shares

The Company had reserved common shares for future issuance as follows as of June 30, 2024:

Stock options outstanding 3,325
Restricted stock units outstanding 5,692
Warrants outstanding 3,820,152
Common stock available for future equity awards or issuance of options 15,951
Number of common shares reserved 3,845,120

The Company also notes that as of June 30, 2024, there are 14,888Series A preferred stock available for future equity awards under the 2021 Plan.

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Loss per Share

The Company computes basic loss per common share by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted loss per share reflects the potential dilution, if any, computed by dividing 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 following table sets forth the reconciliation of the numerators and denominators of the basic and diluted per share computations for operations for the three and six months ended June 30:

(Dollars in thousands, except shares)

Three Months Ended

June 30,

Six Months Ended

June 30,

2024 2023 2024 2023
Numerator:
Net loss $ (9,145 ) $ (9,257 ) $ (11,689 ) $ (16,689 )
(Less) Net income (loss) attributable to non-controlling interest (1,728 ) 482 (4,438 ) 852
Net loss attributable to Soluna Holdings, Inc. (10,873 ) (8,775 ) (16,127 ) (15,837 )
Less: Preferred dividends or deemed dividends (66 ) (252 ) (452 ) (383 )
Less: Cumulative Preferred Dividends in arrears (2,609 ) (1,722 ) (4,331 ) (3,444 )
Balance $ (13,548 ) $ (10,749 ) $ (20,910 ) $ (19,664 )
Denominator:
Basic and Diluted EPS:
Common shares outstanding, beginning of period, including penny warrants 2,958,851 1,015,255 2,592,454 940,047
Weighted average common shares issued during the period including penny warrants issued and outstanding as of quarter-end 1,594,845 109,436 1,091,104 55,021
Denominator for basic earnings per common shares - 4,563,696 1,126,091 3,683,558 996,228
Weighted average common shares (2.97 ) (9.54 ) (5.68 ) (19.74 )

The Company notes as continuing operations was in a Net loss for the three and six months ended June 30, 2024 and 2023, 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 and six months ended June 30, 2024, were options to purchase 3,325shares of the Company's common stock, 5,692nonvested restricted stock units, and 3,820,152outstanding warrants not exercised which excludes penny warrants that can be potentially 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 and six months ended June 30, 2023, were options to purchase 1,309,789shares of the Company's common stock, 297,680nonvested restricted stock units, and 23,835,852outstanding warrants not exercised. These potentially dilutive items were excluded because the calculation of incremental shares resulted in an anti-dilutive effect.

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 one yearto less than ten years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of June 30, 2024 and December 31, 2023, the Company has no assets recorded under finance leases.

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Lease expense for these leases is recognized on a straight-line basis over the lease term. For the three and six months ended June 30, total lease costs are comprised of the following:

(Dollars in thousands)

Three Months Ended

June 30,

Six Months Ended

June 30,

2024 2023 2024 2023
Operating lease cost $ 61 $ 60 $ 122 $ 116
Short-term lease cost - - - -
Total net lease cost $ 61 $ 60 $ 122 $ 116

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:

Six Months Ended

June 30, 2024

Weighted Average Remaining Lease Term (in years):
Operating leases 4.15
Weighted Average Discount Rate:
Operating leases 7.03 %
(Dollars in thousands)

Six Months Ended

June 30, 2024

Six Months Ended

June 30, 2023

Supplemental Cash Flows Information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 123 $ 111
Non-Cash Activity Right-of-use assets obtained in exchange for lease obligations:
Operating leases $ - $ 397

Maturities of noncancellable operating lease liabilities are as follows for the quarter ending June 30:

(Dollars in thousands) 2024
2024 (remainder of year) $ 124
2025 79
2026 29
2027 29
2028 29
Thereafter 116
Total lease payments 406
Less: imputed interest (78 )
Total lease obligations 328
Less: current obligations 159
Long-term lease obligations $ 169

As of June 30, 2024, there were no additional operating lease commitments that had not yet commenced.

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Contingencies:

Spring Lane Capital Contingency

The Company has a potential contingency associated with an agreement with Spring Lane of up to $250 thousand which would be reduced by a proportion of funding received from Spring Lane up to the $35.0 million aggregate contribution cap. The Company considers the probability of a payment for the contingency to be remote.

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 $358thousand 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. The Company considers the likelihood of a material adverse outcome to be remote and does not currently anticipate that any expense or liability it may incur as a result of these matters in the future will be material to the Company's financial condition.

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, ("NYDIG 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 NYDIG Defendants. Also on February 15, 2023, the NYDIG Defendants filed their answer and affirmative defenses in this proceeding. The NYDIG 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 NYDIG Defendants. Additionally, NYDIG has stated its intention to pursue SCI, the parent company of Guarantor, under a piercing of the corporate veil claim relating to NYDIG 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. NYDIG filed a motion to dismiss in response to SCI's declaratory judgment complaint on April 13, 2023. SCI filed a response in opposition to NYDIG's motion to dismiss on April 27, 2023. The court heard oral arguments on May 16, 2023. On June 22, 2023, the court issued an order granting NYDIG's motion to dismiss, on the basis that the case was not ripe for decision, without prejudice. SCI intends to continue to vigorously defend any allegations regarding liability on account of NYDIG Defendants' debts and liabilities to NYDIG under their loan documents and intends to refile a declaratory judgment complaint against NYDIG.

On February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, and repossessed the collateralized assets that totaled approximately $3.4million, in which approximately $560thousand was first used to pay off accrued interest and penalty to date. On September 5, 2023, NYDIG provided a letter finalizing the accounting for the repossessed collateralized assets totaling proceeds of approximately $3.4million. This included legal and other expenses associated with the sale of the assets net a modest gain on the estimated net book value of the assets totaling $251thousand that was expensed as a loss on disposition of assets for the year ended December 31, 2023. On December 7, 2023, NYDIG filed its Motion for Summary Judgment seeking entry of a judgment against Soluna in the approximate amount of $10.3million for principal and interest and penalties. On January 12, 2024, Soluna filed its objection to NYDIG's motion for summary judgment on the grounds that NYDIG failed to explain what collateral of which loan was sold and how the sale proceeds were allocated to each loan. A summary judgment motion was performed on February 13, 2024, and was agreed upon by both NYDIG and the Borrower, that the total outstanding loan principal balance would be approximately $9.2million, in which a penalty fee was applied of approximately $1.0million to the repossessed collateralized assets, and outstanding interest and penalty balance would be approximately $936thousand as of December 31, 2023. As of June 30, 2024, the Company still has an outstanding principal of approximately $9.2million and outstanding interest and penalty balance of approximately $1.5million. This settlement did not result in the admission of any liability on the part of SHI, whose declaratory judgment remains the subject of litigation. On March 13, 2024, NYDIG served the Company with a post-judgment discovery seeking information regarding the Company's assets and liabilities. Per agreement between NYDIG and the NYDIG Defendants, the deadline to respond to the discovery demands was extended to May 13, 2024 but with rolling weekly production that commenced on April 12, 2024. The Company intends to vigorously defend itself from NYDIG's parent company claims.

In September 2023, Atlas Technology Group LLC ("Atlas") filed a complaint against Soluna MC LLC, Soluna Computing, Inc., and Soluna Holdings, Inc. (collectively, the "Atlas Defendants") in the Supreme Court of New York regarding a co-location services agreement. Atlas alleged that Soluna MC's termination of the agreement was a breach, seeking a return of pre-paid fees of approximately $464thousand, additional damages of at least $7.9million, and reimbursement of legal fees. The complaint also mentioned alter ego liability and corporate veil piercing.

The Atlas Defendants filed a motion to dismiss, and on April 17, 2024, the Court dismissed three of the four counts. The remaining count was answered on May 6, 2024, with counterclaims against Atlas. The Court denied the dismissal of Soluna Computing, Inc. and Soluna Holdings, Inc. as parties, leading to an appeal filed on May 7, 2024.

On June 25, 2024, Atlas and the Atlas Defendants entered into a settlement agreement. Soluna MC recorded a gain on the settlement of approximately $254thousand for the three and six months ended June 30, 2024, in "Other Expense, net" on the condensed consolidated financial statements.

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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 $380thousand to secure the intercompany amounts due to the Company from MeOH Power, Inc. upon the deconsolidation of MeOH Power, Inc. Interest accrues on the Note at the Prime Rate in effect on the first business day of the month, as published in the Wall Street Journal. At the Company's option, all or part of the principal and interest due on this Note may be converted to shares of common stock of MeOH Power, Inc. at a rate of $0.07per share. Interest began accruing on January 1, 2014. The Company recorded a full allowance against the Note. As of June 30, 2024 and December 31, 2023, $374thousand and $363thousand, respectively, of principal and interest are available to convert into shares of common stock of MeOH Power, Inc. Any adjustments to the allowance are recorded as miscellaneous expense during the period incurred.

Legal Services

During the three and six months ended June 30, 2024 and 2023, the Company incurred $1thousand and $2thousand, respectively, to Couch White, LLP for legal services associated with contract review. A partner at Couch White, LLP is an immediate family member of one of our Directors.

Employee Receivables

Certain employees have a receivable due to the Company based on their stock-based awards, in which $109thousand and $110thousand was outstanding as of June 30, 2024 and December 31, 2023, respectively. The balance is currently presented as $13thousand and $13thousand within Notes receivable as of June 30, 2024 and December 31, 2023, and $96thousand and $97thousand, respectively within Other assets.

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 $725thousand, (B) SHI issued to HEL the Termination Shares, and (C) HEL and SHI entered into an Amended and Restated Contingent Rights Agreement that, among other things, amended the existing Contingent Rights Agreement by and between HEL and SHI, dated January 13, 2020, to provide SHI the right to invest directly in certain cryptocurrency mining opportunities being pursued by HEL. SHI filed a registration statement with the SEC to register the resale of the Termination Shares on February 14, 2022.

Due to conditions being met within the Merger Agreement in relation to energization and retention of employees, the Company has advised SCI US Holdings LLC, a Delaware limited liability company, who is the sole Effective Time Holder (as defined in the Merger Agreement) of the right to receive the Merger Shares and that 19,800Merger Shares were issued on May 26, 2023 and 39,600Merger Shares were issued on October 10, 2023. SCI US Holdings LLC has consented to the issuance of such Merger Shares as required under the Merger Agreement and has directed the Company to issue such Merger Shares to its affiliate, HEL. Following the issuance of the 59,400Merger Shares, a total of 59,400Merger Shares remains available for possible issuance pursuant to the terms of the Merger Agreement.

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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 (i) 90% of the equity of Soluna Technologies Investment I, LLC, which owns 57.9% of HEL and (ii) 100% of the equity of MJT Park Investors, Inc., which owns 3.1% of HEL, in each case, on a fully diluted basis. Mr. Toporek does not own directly, or indirectly, any equity interest in Tera Joule, LLC, which owns 9.2% of HEL; however, as a result of his 100% ownership of Brookstone IAC, Inc., which is the manager of Tera Joule, LLC, he has dispositive power over the equity interests that Tera Joule owns in HEL.In addition, one of the Company's directors, Matthew E. Lipman, serves as a director and currently acting as President of HEL. Mr. Lipman does not directly own any equity interest in Tera Joule, LLC, which owns 9.2% of HEL; however, as a result of his position as a director and officer of Brookstone IAC, Inc., which is the manager of Tera Joule, LLC, he has dispositive power over the equity interests that Tera Joule owns in HEL. As a result, the approximate dollar value of the amount of Mr. Toporek's and Mr. Lipman's interest in the Company's transactions with HEL for the six months ended June 30, 2024 was $0and $0.John Belizaire, the Company's Chief Executive Officer, 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. In addition, Mr. Belizaire is the beneficial owner of 1,317,567shares of common stock of HEL and 102,380Class Seed Preferred shares, which are convertible into 86,763shares of common stock of HEL. These interests give Mr. Belizaire an ownership of 10.54% in HEL. Mr. Belizaire also owns an interest in HEL indirectly through his 5.0139% interest of Tera Joule, LLC's 965,945Class Seed Preferred shares, which are convertible into 818,596shares of common stock of HEL. Mr. Bottomley is the beneficial owner of 96,189, or approximately 0.72%, of the outstanding shares of common stock of HEL.

The Company's investment in HEL was initially carried at the cost of investment and was $750thousand. Based on evaluation of projections for the Company's investment in HEL, the Company fully impaired the equity investment of $750thousand as of December 31, 2022, writing it down to $0.

The Company owned approximately 1.79%of HEL, calculated on a converted fully diluted basis, as of June 30, 2024 and December 31, 2023. The Company may enter into additional transactions with HEL in the future.

12.Stock Based Compensation

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 9.75%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), 9.75%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 Stock that are then outstanding under (or available to settle existing) 2023 Plan Award grants.

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On June 29, 2023, at the Annual Shareholder Meeting, the Amended and Restated 2023 Stock Incentive Plan was approved. The Amended and Restated 2023 Plan will, among other things, increase the number of shares of our Common Stock reserved for issuance thereunder, on a quarterly basis, to 23.75%of the shares of our Common Stock outstanding on the measurement date. Subject to certain adjustments as provided herein, the maximum aggregate number of Common Shares that may be issued hereunder (excluding the number of Common Shares subject to Specified Awards (as hereinafter defined)) (i) pursuant to the exercise of Options, (ii) as unrestricted Common Shares or Restricted Stock, and (iii) in settlement of RSUs shall be limited to, beginning with the third quarter of our fiscal year ending December 31, 2023 (or July 1, 2023), 23.75%of the number of Common Shares outstanding as of the first trading day of each quarter. Subject to certain adjustments as provided herein, (A) Common Shares subject to this Plan shall include Common Shares which reverted back to this Plan in a prior quarter, and (B) the number of Common Shares that may be issued under this Plan may never be less than the number of Common Shares that are then outstanding under (or available to settle existing) Awards. For purposes of determining the number of Common Shares available under this Plan, Common Shares withheld by the Company to satisfy applicable tax withholding or exercise price obligations pursuant to Section 10(e) of this Plan shall be deemed issued under this Plan. In the event that, prior to the date this Plan shall terminate, any Award granted under this Plan expires unexercised or unvested or is terminated, surrendered or cancelled without the delivery of Common Shares, or any shares of Restricted Stock are forfeited back to the Company, then the Common Shares subject to such Award may be made available for subsequent Awards under the terms of this Plan. As used in this Plan, "Specified Awards" shall mean (i) Awards to Eligible Persons who are not employed or engaged by the Company or any of its subsidiaries as of the last day of any fiscal quarter of the Company, commencing with the fiscal quarter ending March 31, 2023 and (ii) Awards that have a grant date at least three (3) years prior to the last day of any fiscal quarter of the Company, commencing with the fiscal quarter ending March 31, 2023.

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"), 1,460,191Shares, (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 Third Amended and Restated 2021 Plan will, among other things, (a) increase the number of shares of our Common Stock reserved for issuance thereunder, on a quarterly basis, to 18.75% of the shares of our Common Stock outstanding on the measurement date and (b) allow us to grant awards of shares of our 9.0% Series A Cumulative Perpetual Preferred Stock ("Series A Preferred Stock") (with and without restrictions). Subject to certain adjustments as provided in the Third Amended and Restated 2021 Plan, the maximum aggregate number of shares of our Common Stock that may be issued under the Third Amended and Restated 2021 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), 18.75% 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 Third Amended and Restated 2021 Plan, the maximum aggregate number of shares of our Series A Preferred Stock that may be issued under the Third Amended and Restated 2021 Plan as unrestricted or restricted Series A Preferred Stock shall equal $3,600,000 valued as of the effective date of the Third Amended and Restated 2021 Plan as determined at the lower of the closing price of our Series A Preferred Stock on Nasdaq on such date or the average of the daily volume weighted average price of our Series A Preferred Stock on Nasdaq as reported by Bloomberg L.P. for a period of five (5) consecutive trading days ending on such date. Subject to certain adjustments as provided in the Third Amended and Restated 2021 Plan, (i) shares of our Common Stock and Series A Preferred Stock, as applicable, subject to the Third Amended and Restated 2021 Plan shall include shares of our Common Stock and Series A Preferred Stock, as applicable, which revert back to the Third Amended and Restated 2021 Plan in a prior quarter or fiscal year, as applicable, pursuant to the paragraph below, and (ii) the number of shares of our Common Stock and Series A Preferred Stock, as applicable, that may be issued under the Third Amended and Restated 2021 Plan may never be less than the number of shares of our Common Stock and Series A Preferred Stock, as applicable, that are then outstanding under (or available to settle existing) 2021 Plan Award grants. For purposes of the Third Amended and Restated 2021 Plan, "Specified Awards" means (i) 2021 Plan Awards issued to Eligible Persons who are not employed or engaged by us or any of our subsidiaries as of the last day of any fiscal quarter, commencing with the fiscal quarter ending March 31, 2023, and (ii) 2021 Plan Awards that have a grant date at least three (3) years prior to the last day of any fiscal quarter, commencing with the fiscal quarter ending March 31, 2023. 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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The Board approved amendments to both the 2021 and 2023 Plans on April 15, 2024. The amendments were subsequently approved by the stockholders at the 2024 Annual Meeting on May 30, 2024. Under the Plans, the number of shares of common stock available for awards is limited to, 18.75% for the 2021 Plan and 23.75% for the 2023 Plan of the number of Common Shares outstanding as of the first trading day of each quarter. The amendments to each Plan would change the calculation of this limitation to reflect the applicable percentage to 18.75% and 23.75% respectively, after giving effect to the increase in the number of shares subject to Awards after giving effect to the amount to the increase as of the date of the calculation.

Under the 2023 Plan and 2021 Plan, the Company may grant stock options, restricted stock awards (RSAs) and restricted stock units (RSUs) to executive, management, employees, directors, and certain nonemployee personnel. The awards issued under the Plans can vest immediately, over time or based upon the achievement of market, performance, or service conditions. RSAs and RSUs can vest immediately but generally vest ratably over three years and Performance RSUs generally fully vest after three years, subject to achieving market, service or performance conditions. In addition, the Company recognizes certain Awards held by certain employees and nonemployees that vest upon separation. Each share granted subject to an Award reduces the number of shares available under the 2023 Plan and 2021 Plan by one share.

The fair value of stock options is estimated based on the Black-Scholes model, taking into account the historical volatility of our stock, consistent with the accounting guidance. The risk-free interest rate is based on the risk-free zero-coupon rate for a period consistent with the expected option term at the time of grant. The expected option term is calculated based on our historical forfeitures and cancellation rates.

During April 2024, the Company cancelled certain vested Awards and modified the terms of certain unvested Awards, to permit different settlement outcomes. The service period and vesting terms were changed at the time of modification. All such vested Awards were fully vested as of the cancellation date and all compensation cost had been recognized. All such unvested equity awards were probable of vesting as of the modification date and the change was accounted for as a Type I modification. In a Type I modification, the Company is required to calculate the incremental difference of the awards, which equals the difference of new award value inclusive of estimated forfeitures and the fair value of the original award as of the modification date. As of the modification date, there is no reversal or adjustment of previously recognized stock compensation expense.

Within the 2021 and 2023 Plans, certain master grant agreements were executed on April 15, 2024 that have the potential for future additional grants based on additional stock activity through certain anti-dilution provisions. A mutual understanding of the terms and conditions for the specific awards cannot be obtained until a later date after all stock activity has occurred in the future period and necessary approvals are obtained. When Board approval is obtained and the two grant conditions are met, the grant date will be identified and evidenced through an additional restricted stock agreement. The compensation cost will be recognized per the vesting schedule within the agreement with no catch-up for the reduced period.

The accounting impact resulting from the recognition of this equity-based compensation limits the comparability of the Company's financial statements between periods.

During the three and six months ended June 30, 2024, the Company awarded 391,544restricted stock awards under the 2021 Plan, valued at $1.52per share based on the closing market price of the Company's common stock on the date of the grant. The Company awarded 90,734restricted stock awards under the 2021 Plan, valued at $2.41per share based on the closing market price of the Company's common stock on the date of the grant. The Company awarded 1,892,300preferred A restricted stock awards under the 2021 Plan, valued at $2.50per share based on the closing market price of the Company's preferred A stock on the date of the grant. The Company awarded 610,234restricted stock awards under the 2023 Plan, valued at $1.52per share based on the closing market price of the Company's common stock on the date of the grant. The Company awarded 57,255restricted stock awards under the 2023 Plan, valued at $2.41per share based on the closing market price of the Company's common stock on the date of the grant. 25,309 of the restricted stock awards vest immediately, 2,022,246 of the restricted stock awards vest at separation from the Company, 690,223 of the restricted stock awards vest 33% on June 1 ,2024, 33% on June 1, 2025 and 34% on June 1, 2026, and 304,289 of the restricted stock awards vest 33% on June 1, 2025, 33% on June 1 , 2026 and 34% on June 1, 2027.

During the three months ended June 30, 2023, the Company did not issue any equity awards under its 2021 or 2023 Plans.

During the six months ended June 30, 2023, the Company awarded 500,000restricted stock units under the 2021 Plan, valued at $0.2986per share based on the closing market price of the Company's common stock on the date of the grant. The restricted stock units vested during May 2023.

The Company will recognize the compensation expense on a straight-line basis over the service period for the entire Awards. Accordingly, as of June 30, 2024, the Awards from the Plans are presented at fair value within the stockholders' equity section of the Company's balance sheet.

As of June 30, 2024, unrecognized compensation cost related to unvested Awards was approximately $5.8million. That cost is expected to be recognized over a weighted-average period of approximately 2.4years.

On April 15, 2024, a modification related to the cancellation of 48,547under the water stock options granted to eight board members. The options were replaced with new awards of restricted stock. The amount of incremental compensation cost resulting from the modification was approximately $4.0million. There were no modifications during the three and six months ended June 30, 2023.

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13.Effect of Recent Accounting Updates

Accounting Updates Effective for fiscal year 2024

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.

Accounting Updates Not Yet Effective

Improvements to Reportable Segment Disclosures

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvement to Reportable Segment Disclosures (ASU 2023-07), which requires disclosure of incremental segment information on an annual and interim basis, primarily through enhanced disclosures of significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 and requires retrospective application to all periods presented upon adoption. Early adoption is permitted. The Company is currently evaluating the impact that ASU 2023-07 will have on its condensed consolidated financial statements and disclosures.

Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets

In December 2023, the FASB issued ASU 2023-08, Intangibles - Goodwill and Other - Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, which establishes accounting guidance for crypto assets meeting certain criteria. Bitcoin meets this criteria. The amendments require crypto assets meeting the criteria to be recognized at fair value with changes recognized in net income each reporting period. Upon adoption, a cumulative-effect adjustment is made to the opening balance of retained earnings as of the beginning of the annual reporting period of adoption. ASU 2023-08 is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. The guidance is not expected to have an impact on the Company's condensed consolidated financial statements and disclosures, unless the Company intends to hold crypto assets.

Improvements to Income Tax Disclosures

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09), which requires disclosure of incremental income tax information within the rate reconciliation and expanded disclosures of income taxes paid, among other disclosure requirements. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact that ASU 2023-09 will have on its condensed consolidated financial statements and disclosures.

Stock Compensation

In March 2024, the FASB issued ASU 2024-01, Compensation-Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards ("ASU 2024-01"), to clarify the scope application of profits interest and similar awards by adding illustrative guidance in ASC 718, Compensation-Stock Compensation ("ASC 718"). ASU 2024-01 clarifies how to determine whether profits interest and similar awards should be accounted for as a share-based payment arrangement (ASC 718) or as a cash bonus or profit-sharing arrangement (ASC 710, Compensation-General, or other guidance) and applies to all reporting entities that account for profits interest awards as compensation to employees or non-employees. In addition to adding the illustrative guidance, ASU 2024-01 modified the language in paragraph 718-10-15-3 to improve its clarity and operability without changing the guidance. ASU 2024-01 is effective for fiscal years beginning after December 15, 2024, including interim periods within those annual periods. Early adoption is permitted. The amendments should be applied either retrospectively to all prior periods presented in the financial statements, or prospectively to profits interests and similar awards granted or modified on or after the adoption date. The Company is currently assessing the impacts of adopting ASU 2024-01 on its condensed consolidated financial statements and disclosures.

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14.PROJECT MARIE

As previously disclosed in Footnote 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 $10.5million became due immediately and the Borrower was to 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 December 31, 2023, the Company reduced the outstanding debt by the repossessed collateralized assets net book value of $3.4million less accrued interest that was paid off first when the collateral was repossessed of approximately $740thousand, legal fees of approximately $251thousand, and an additional penalty expense of $1.0million, reducing the debt outstanding to approximately $9.2million as of December 31, 2023. Also, as the Company was not able to obtain a waiver, the outstanding deferred financing costs were written off on September 5, 2023. NYDIG provided a letter finalizing the accounting for the repossessed collateralized assets totaling proceeds of approximately $3.4million. This included legal and other expenses associated with the sale of the assets net a modest gain on the estimated net book value of the assets totaling $251thousand that was expensed as a loss on disposition of assets for the year ended December 31, 2023. On December 7, 2023, NYDIG filed its Motion for Summary Judgment seeking entry of a judgment against Soluna in the approximate amount of $10.3million for principal and interest and penalties. On January 12, 2024, Soluna filed its objection to NYDIG's motion for summary judgment on the grounds that NYDIG failed to explain what collateral of which loan was sold and how the sale proceeds were allocated to each loan. A summary judgment motion was performed on February 13, 2024, and was agreed upon by both NYDIG and the Borrower, that the total outstanding loan principal balance would be approximately $9.2million, in which a penalty fee was applied of approximately $1.0million to the repossessed collateralized assets, and outstanding interest and penalty balance would be approximately $936thousand as of December 31, 2023. As of June 30, 2024, the Company has an outstanding principal balance of approximately $9.2million and an outstanding interest and penalty balance of approximately $1.5million.

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 $3.4million which were written off the Company's books for the three months ended March 31, 2023, with an offset to the outstanding loan. 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. The Company believes it will maximize its profits and return on assets by concentrating its personnel and capital on its Dorothy Facility.

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 $2.4million of equipment and leasehold approvements associated with Project Marie that were not attached with the repossession of NYDIG collateralized assets were impaired as of the year-ended December 31, 2022.

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:

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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. Since the evaluation related to prior quarter, the Company has included comparative pretax loss for Project Marie for the three and six months ended June 30, 2024 and June 30, 2023.

Set forth below are the results of Project Marie:

(Dollars in thousands)

Three Months Ended

June 30,

Six Months Ended

June 30,

2024 2023 2024 2023
Cryptocurrency mining revenue $ - $ - $ $ 769
Operating service revenue-intercompany 2 - 5 -
Data hosting revenue - - - 276
Total revenue 2 - 5 1,045
Operating costs:
Cost of cryptocurrency mining revenue, exclusive of depreciation - - - 801
Cost of revenue- depreciation - 8 - 130
Data hosting (income) costs (10 ) - 205
Operational service costs-intercompany 1 - 2 -
General and administrative expense - 34 (32 ) 319
Impairment on fixed assets - - - 43
Interest expense 361 315 723 692
Gain (loss) on sale of fixed assets - - - 11
Gain on settlement 254 - 254 -
Other income, net 4 - 11 -
Net loss before income taxes $ (102 ) $ (347 ) $ (423 ) $ (1,134 )

For the three and six months ended June 30, 2024, the intercompany service revenue and costs are eliminated within consolidation. Project Marie received a $32thousand refund for- insurance expenses for the six months ended June 30, 2024 and incurs interest expense in relation to the NYDIG default. On June 25, 2024, Soluna MC settled with Atlas for $210thousand and recorded a gain on the Atlas settlement of $254thousand, see further details in Note 10.

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15.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 $35million to fund certain projects to develop green data centers co-located with renewable energy assets (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 Bilateral 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 Secured 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 phase of Project Dorothy, which we expect to be partially funded by Spring Lane, which the Company expects to complete in the near future.

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 Project Dorothy, (each, a "Party" and, together, the "Parties"). Pursuant to the Dorothy Contribution Agreement, the Company committed to a capital contribution of up to approximately $26.3million to DVSL (the "Company Commitment"), and on August 5, 2022, the Company was deemed to have contributed approximately $8.1 million, through payment of capital expenditures and development costs made on behalf of DVSL by the Company prior to August 5, 2022. Further under the Agreement, Spring Lane committed to a capital contribution of up to $12.5 million to DVSL (the "Spring Lane Dorothy Commitment"), and as of December 31, 2022, Spring Lane had actually contributed approximately $4.8million.Under the Dorothy Contribution Agreement, the Company and Spring Lane have committed to make subsequent contributions, up to their respective Company Commitment and Spring Lane Dorothy Commitment amounts, on a pro rata basis, upon receipt of a contribution request from DVSL, as set forth in the Dorothy Contribution Agreement and subject to the satisfaction of certain conditions described therein. The proceeds of any subsequent commitments will be applied to pay project costs in accordance with the project budget.

In exchange for their contributions, the Company and Spring Lane were issued 67.8%and 32.2%of the Class B Membership Interests in DVSL, respectively, and were admitted as Class B members of DVSL. Further pursuant to the Agreement, DVSL issued 100%of its Class A Membership Interests to Devco. The Dorothy Contribution Agreement contains customary indemnification provisions, liquidation provisions and governance provisions with respect to DVSL. The Parties also entered into an Amended and Restated Limited Liability Company Agreement of DVSL providing for the governance of DVSL.

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 $7,500,000(the "Sale"). After giving effect to the Sale, the Company owned 6,790,537Class B Membership Interests (constituting 14.6%of the Class B Membership Interests) and Spring Lane owns 39,791,988Class B Membership Interests (constituting 85.4%of the Class B Membership Interests). The cash portion of the purchase price paid by Spring Lane to the Company was $5,770,065, which represented the purchase price of $7,500,000less the Company's pro rata share of certain contributions funded entirely by Spring Lane in the earlier portion of this series of transactions occurring during February 2023 and March 2023. As a further part of these transactions, the parties agreed that from January 1, 2023 onwards, Soluna would bear only 14.6%of the costs relating to the construction and operation of the Dorothy Phase 1A Facility, compared to its 67.8%share until that time, including during the calendar year 2022. After Spring Lane Capital realizes an 16% Internal Rate of Return hurdle on its investments, the Company retains the right to 50% of the profits on Soluna DVSL ComputeCo. In connection with the Spring Lane transactions and agreements, Soluna DV Services, LLC. will be providing the operations and maintenance services to Soluna DVSL ComputeCo, LLC. Soluna DV Services, LLC expects to receive a margin of 20% for services rendered.

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.

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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:

(Dollars in thousands)

June 30,

2024

December 31,

2023

Current assets:
Cash and restricted cash $ 3,090 $ 2,275
Accounts receivable 1,105 1,201
Other receivable, related party 283 185
Prepaids and other current assets 29 -
Total current assets 4,507 3,661
Other assets- long term, related party 2,192 2,172
Operating lease right-of-use assets 87 90
Property, plant, and equipment 13,195 13,712
Total assets $ 19,981 $ 19,635
Current liabilities:
Accounts payable, related party $ 95 $ -
Accrued expense 1,011 677
Customer deposits-current 1,300 -
Operating lease liability 7 7
Total current liabilities 2,413 684
Operating lease liability 80 83
Customer deposits- long term - 1,190
Other liabilities, related party 224 224
Total liabilities $ 2,717 $ 2,181

Effective, January 1, 2023, the Company's ownership in DVSL was reduced from 67.8%to 14.6%; see above for details.

On May 9, 2023, the Company's indirect subsidiary DVCC 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. Soluna and Navitas amended and restated the Initial LLCA (the "Existing LLCA") to reflect Navitas' contribution of $4,500,000 and its receipt of 4,500 Membership Interests, constituting 26.5% of the outstanding Membership Interests of the Company. On June 2, 2023, Soluna and Navitas amended and restated the Existing LLCA to (a) reflect (i) Navitas's additional capital contribution of $7,596,970 and receipt of an additional 7,597 Membership Interests, for a total of 12,097 Membership Interests and 49% ownership of DVCC, and (ii) Soluna's additional capital contribution of $1,340,000 and receipt of an additional 1,340 Membership Interests, for a total of 12,590 Membership Interests and 51% ownership of DVCC, and (b) describe the respective rights and obligations of the Members and the management of DVCC. As of June 30, 2024, Navitas owns 45% and Soluna owns 55% of DVCC.

Soluna evaluated this legal entity under ASC 810, Consolidations and determined that DVCC is a variable interest entity that should be consolidated into Soluna, with a non-controlling interest recorded to account for Navita's equity ownership of the Company. Soluna has a variable interest in DVCC. 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 DVCC, absorbing operational risk that the entity was created to create and distribute, resulting in Soluna having a variable interest in DVCC.

DVCC is a variable interest entity of Soluna due to DVCC being structured with non-substantive voting rights. This is due to the following two factors being met as outlined in ASC 810-10-15-14 that require the Variable Interest Entity model to be followed.

a. The voting rights of Soluna are not proportional to their obligation to absorb the expected losses of the legal entity. Soluna gave Navitas veto rights over significant decisions, which results in Soluna having fewer voting rights relative to their obligation to absorb the expected losses of the legal entity.
b. Substantially all of DVCC's activities are conducted on behalf of Soluna, which has disproportionally fewer voting rights.
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Also, Soluna is the primary beneficiary due to having the power to direct the activities of DVCC that most significantly impact the performance of DVCC due to its role as the manager handling the day-to-day activities of DVCC as well as majority ownership and the obligation to absorb losses or gains of DVCC that could be significant to Soluna.

Accordingly, the accounts of DVCC are consolidated in the accompanying financial statements.

The carrying amount of the VIE's assets and liabilities was as follows for DVCC:

(Dollars in thousands)

June 30,

2024

December 31,

2023

Current assets:
Cash and restricted cash $ 2,018 $ 2,575
Accounts receivable 98 217
Prepaids and other current assets 29 -
Other receivable, related party 743 476
Total current assets 2,888 3,268
Other assets- long term, related party 2,192 2,172
Operating lease right-of-use assets 87 90
Property, plant, and equipment, net 19,786 22,188
Total assets $ 24,953 $ 27,718
Current liabilities:
Accounts payable, related party $ 1,493 $ 1,259
Accrued expense 1,271 2,213
Operating lease liability 7 7
Current portion of debt 460 1,682
Total current liabilities 3,231 5,161
Operating lease liability 80 83
Total liabilities $ 3,311 $ 5,244

16.Segment Information

The Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has tworeportable segments: Cryptocurrency Mining and Data Center Hosting. 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.

Nooperating 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, which is currently generated from Project Dorothy, and previously from Project Sophie and Marie. The Data Center Hosting segment generated revenue from contracts for the provision/consumption of electricity and operation of the data center from the Company's high performance computing facilities previously at Project Marie and currently from Project Sophie and Project Dorothy.

For the three months ended June 30, 2024 and 2023, approximately 100%and 0%of the Company's cryptocurrency mining revenue was generated from Project Dorothy 1B (data center located in Silverton, Texas), 0%and 100%from Project Sophie (data center located in Murray, Kentucky), respectively. For the six months ended June 30, 2024 and 2023, approximately 100%and 0%of the Company's cryptocurrency mining revenue was generated from Project Dorothy 1B, 0%and 79%from Project Sophie, and 0%and 21%from Project Marie, respectively.

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For three months ended June 30, 2024 and 2023, approximately 73%and 40%of the Company's data center hosting revenue was generated from Project Dorothy 1A and 27%and 60%from Project Sophie. For six months ended June 30, 2024 and 2023, approximately 70% and 32% of the Company's data center hosting revenue was generated from Project Dorothy 1A, 30% and 48% from Project Sophie, 0% and 19% from Project Marie, and 0% and 1% from Project Edith.

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 and six months ended June 30, 2024 and 2023, and reconciles to net income (loss) on the consolidated statements of operations:

(Dollars in thousands)

Three Months Ended

June 30,

Six Months Ended

June 30,

2024 2023 2024 2023
Reportable segment revenue:
Cryptocurrency mining revenue $ 4,484 $ 915 $ 10,880 $ 3,711
Data hosting revenue 4,898 1,153 10,176 1,439
Demand response service revenue 293 - 1,168 -
Total segment and consolidated revenue 9,675 2,068 22,224 5,150
Reportable segment cost of revenue:
Cost of cryptocurrency mining revenue, exclusive of depreciation 1,883 1,160 3,724 3,410
Cost of data hosting revenue, exclusive of depreciation 2,176 759 4,427 1,031
Cost of revenue-depreciation 1,506 539 3,029 1,164
Total segment and consolidated cost of revenues 5,565 2,458 11,180 5,605
Reconciling items:
General and administrative expenses 7,785 6,515 14,183 13,252
Impairment on fixed assets - 169 130 379
Interest expense 449 486 873 1,861
Loss on debt extinguishment and revaluation 5,600 2,054 8,698 1,581
Loss (gain) on sale of fixed assets 21 (48 ) 21 30
Other expense, net 49 238 25 224
Income tax (benefit) from continuing operations (649 ) (547 ) (1,197 ) (1,093 )
Net loss (9,145 ) (9,257 ) (11,689 ) (16,689 )
(Less) Net (income) loss attributable to non-controlling interest (1,728 ) 482 (4,438 ) 852
Net loss attributable to Soluna Holdings, Inc. $ (10,873 ) $ (8,775 ) $ (16,127 ) $ (15,837 )
Capital expenditures 44 2,035 278 2,895
Depreciation and amortization 3,909 2,918 7,834 5,920

17.Subsequent Events

Amendment to June 2024 Secured Note Financing

On July 12, 2024, the Company, CloudCo, Soluna Cloud, and the Existing Investor entered into a First Amendment to the Note Purchase Agreement (the "June SPA Amendment"). This amendment allows CloudCo to issue additional secured promissory notes totaling $1,250,000(the "Additional Notes") to new accredited investors (the "Additional Investors"). These Additional Notes are subject to the same terms and conditions as the June 2024 Secured Note financing and are supported by the Cloud Agreements and the Holdings Agreements.

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To further incentivize the Additional Investors, Soluna Cloud will issue warrants (the "Cloud Additional Warrants") to each Additional Investor. These Cloud Additional Warrants are exercisable within three years from the effective date of the June SPA Amendment. They allow the purchase of a number of shares of Soluna Cloud common stock equal to 1.25% of Soluna Cloud's issued and outstanding common stock as of the Cloud Additional Warrant date, divided by 0.9875, plus 1.25% of each Qualified Issuance, divided by 0.9875.

A "Qualified Issuance" includes any issuance of common stock by Soluna Cloud from the day after the Cloud Additional Warrant date until the earlier of raising an additional $111.25million or December 31, 2024, as well as shares issuable upon exercise or conversion of convertible securities issued during this period, excluding certain equity compensation plan issuances.

Dorothy 2 Project Financing

On July 22, 2024 (the "Effective Date"), Soluna Holdings, Inc. (the "Company") closed financing for the Dorothy 2 project. This project involves Soluna Digital, Inc. (the "Developer") and Soluna DVSL II ComputeCo, LLC (the "ComputeCo"), a special purpose vehicle initially owned solely by the Developer. They are collaborating on the development, design, procurement, and construction of a 48 MW modular data center (the "Project Dorothy 2") in Briscoe County, TX. This facility, located in Silverton, Texas, is owned by ComputeCo and operated by Soluna US Services, LLC, and may engage in cryptocurrency, batch processing, and other non-crypto related activities. It is adjacent to two other Soluna modular data center projects at the same site.

Project Dorothy 2 is financed by Soluna2 SLC Fund II Project Holdco LLC (the "Investor") with a capital contribution of up to $29.98million, and the Developer, as the parent company of ComputeCo, with an initial capital contribution of up to $4.6million. As of the Effective Date, the Company and the Developer became co-owners of ComputeCo.

The Dorothy 2 project allows the Developer to invest in ComputeCo, with the total ownership of the Developer and its affiliates capped at 49% of the Class B Membership Interests. This investment can occur within 30 days after the Effective Date (treated equally to the initial Investor), from day 31 to 180 days after the Effective Date (subject to a purchase price formula with a 20% discount rate), or after 180 days with the initial Investor's approval.

On May 16, 2024, the Company secured $1.0million in financing from the Investor for equipment and machinery for Project Dorothy 2 through an Equipment Loan Agreement (the "ELA") between SDI SL Borrowing - 1, LLC (the "Borrower") and the Investor. On that date, the Investor lent the Borrower $720,000to purchase medium voltage cables and low voltage switchboards. This debt was later assigned to ComputeCo on the Effective Date. Subsequently, the Borrower repaid the $720,000borrowing amount in full by issuing the Investor Class B Membership Interests in the Dorothy 2 project valued at three times the borrowing amount (i.e., $2.16million).

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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, "SDI" refers to Soluna Digital, Inc. and previously "SCI" refers to Soluna Computing, Inc., formerly known as EcoChain, 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, 2023 contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the Securities and Exchange Commission (the "SEC") on April 1, 2024.

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, 2023 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 and Recent Developments

We are a digital infrastructure company specializing in transforming surplus renewable energy into computing resources. Our modular data centers can co-locate with wind, solar, hydroelectric and other renewable power plants and support compute intensive applications including Bitcoin Mining, Generative AI, Scientific Computing and other forms of High Performance Computing (HPC). This pioneering approach to data centers helps energize a greener grid while delivering cost-effective and sustainable computing solutions.

Our mission is to make renewable energy a global superpower using computing as a catalyst.

SHI through its subsidiaries operates across several business lines:

● Bitcoin Mining - we collaborate with project-level financial partners to mine Bitcoin at our proprietary data centers.
● Bitcoin Hosting - we offer data hosting services at our proprietary data centers to prominent Bitcoin Mining companies.
● Demand Response Services - we utilize our data centers to deliver demand response services to grid operators.
● AI Cloud Services and Hosting - we are utilizing our data centers to provide specialized AI Cloud and colocation services to companies seeking to train large language models, tune existing AI models, and deploy advanced AI-powered applications.

Operations and Project Pipeline

We currently operate 75 MW of facilities across two locations. We have another 216 MW of facilities in development or near shovel ready in the United States. In addition, we have a 2 GW long term pipeline of renewable-energy powered projects. A summary of our pipeline, current and anticipated operating locations are as follows (as of June 30, 2024):

Project Name Location MW Status Business Model Power Source
Sophie Murray, KY 25 Operating Bitcoin Hosting Grid / Hydro
Dorothy 1A Silverton, TX 25 Operating Bitcoin Hosting Wind
Dorothy 1B Silverton, TX 25 Operating Bitcoin Mining Wind
Dorothy 2 Silverton, TX 50 Shovel Ready Bitcoin Hosting Wind
Kati Harlington, TX 166 Development Bitcoin Hosting / AI Wind

2023 and 2024 overview and developments

In 2023, we executed on the following four-pronged strategy: (1) Energize Project Dorothy; (2) Cash Flow, Site and Process Optimization; (3) Flagship Expansion; (4) Pipeline growth. In 2024, we continue to execute upon: (1) Optimize Projects; (2) Grow Pipeline; (3) Launch AI; and (4) Finance Opportunities. A summary of our overview and developments in these areas follows below.

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Energize Project Dorothy

We transitioned our flagship data center Project Dorothy from construction to operations. ERCOT approved the energizing of the first 50 MW of our new data center on April 20, 2023. We completed the construction and ramping of the facility starting in the spring of fiscal year 2023, and completed the full ramp by the end of October 2023. The data center is co-located with Briscoe Wind Farm ("Briscoe"), a 150 MW wind power generation facility in Silverton, Texas. The project is comprised of two elements, Project Dorothy 1A ("D1A"), and Project Dorothy 1B ("D1B"), each 25 MW facilities.

D1A is focused on Bitcoin Hosting. On April 26, 2023 we signed a 5 MW 2-year hosting deal with Compass Mining at D1A. On April 24, 2023 we signed a 20 MW 2-year hosting agreement with another strategic hosting partner at Dorothy 1A. In the summer of 2023, we completed the construction of D1A and the installation of approximately 7,700 Bitcoin miners between the two customers, resulting in an installed hashrate of approximately 950 PH/s. From May 2023 through December 31, 2023, D1A has consumed over 11,900 MWh of Curtailed Energy from the co-located power plant and achieved a power usage effectiveness ("PUE") of 1.03. For the three and six months ended June 30, 2024, D1A has consumed over 12,900 MWh and 28,100 MWh of Curtailed Energy from the co-located power plant and has achieved a PUE of 1.01 as of June 30, 2024.

The construction of D1A was made possible by a partnership with Spring Lane Capital ("SLC"), a leading venture capital firm focused on sustainability solutions. On April 22, 2022, we finalized agreements with SLC for a $35 million capital pool to finance Soluna projects alongside renewable energy power plants. Approximately $12.5 million of this was designated for the Dorothy Project. In July 2022, Soluna began tapping into the SLC managed funds to finance Dorothy construction and repay prior funding provided by the Company. In return, SLC received approximately 32% of Class B Membership Interests of D1A. On March 10, 2023, we completed a new series of project-level agreements for $7.5 million from SLC-managed funds. Due to limited liquidity, and access to the capital markets, we sold a portion of our ownership to SLC in 2023. The funds raised aided in the completion of the substation interconnection, and the final stages of project Dorothy. It also provided capital to fund Soluna's corporate operations. SLC, increased its stake in D1A from approximately 32% to 85%, reducing Soluna's ownership from 68% to 15%. After SLC achieves an 18% Internal Rate of Return hurdle, Soluna retains 50% of the profits on D1A.

D1B is focused on Bitcoin Mining through a strategic partnership with Navitas Global ("Navitas"). On May 9, 2023, we consummated a project-level financing with Navitas, which included a $2 million loan to D1B to complete the construction and a $12.1 million equity investment in the project. After consummating the financing, Navitas owned 49% of D1B and Soluna owned 51%. As of March 31, 2024, Navitas owns 46.7% of D1B, and Soluna owns 53.3%. In June 2023, D1B purchased 8,378 Bitmain Antminer S19s, S19j Pro and S19j Pro+ machines for the partnership. The purchase resulted in an estimated 868 PH/s of hashrate with an average efficiency of 29.9 J/TH and at a cost of $10.59 $/TH. As of December 31, 2023, over 7,900 of the miners had been deployed. D1B was fully energized and began ramping in late October 2023. D1B now has an installed hashrate of 817 PH/s. From July 2023 through December 31, 2023, D1B has consumed over 10,600 MWh of Curtailed Energy from the co-located power plant and achieved a power usage effectiveness ("PUE") of 1.03. For the three and six months ended June 30 2024, D1B has consumed over 12,700 and 28,100 MWh of Curtailed Energy from the co-located power plant and achieved a PUE of 1.01 as of June 30, 2024.

Demand Response Services at Dorothy

In November 2023, we completed our registration of Project Dorothy for one of ERCOT's demand response programs establishing the project as a key contributor to intelligent and flexible energy solutions, promoting environmental and economic advantages for the state of Texas. It also allowed us to diversify our revenue. Under the program, we have a single promise to stand ready, on a monthly basis, to deliver a set amount of curtailment (committed capacity) per month when and if called upon by ERCOT. Soluna will be able to generate additional revenue for Project Dorothy by providing this grid resilience support and potentially reduce its power costs, making it among the lowest cost players in the industry. Since November 2023, Project Dorothy has successfully participated and completed in the Winter and Spring demand response periods in ERCOT, and is currently in the summer standby period.

Cash Flow, Site and Process Optimization

In the second quarter of 2023, we shifted our business from primarily proprietary Bitcoin Mining to Bitcoin Hosting. We signed 50 MW of hosting agreements at Dorothy 1A and Sophie.

Sophie

Project Sophie is a 25 MW data center, based in Murray, Kentucky connected to the grid, ("Sophie"). The project has a Power Purchase Agreement ("PPA") that requires the curtailment of the site during certain hours of the day to help balance the Kentucky grid.

The Company owns 100% of the facility and completed its construction in 2021. In the second quarter of fiscal year 2023, we shifted Project Sophie to Data Hosting, signing contracts with leading Bitcoin miners. We sold older, less efficient Bitcoin mining equipment and used the cash to make operational improvements to the site and to fund corporate operations. Throughout 2023, Sophie progressively secured new more profitable hosting contracts. We have deployed over 8,000 mining machines for hosting in 2023 and 2024 at the site. The Data Hosting agreements generate revenue for a combination of a fixed services fee and a profit share component. The cost of power is passed through to customers. Customers at the site now include leading public Bitcoin Miners such as Bit Digital, Compass Mining, and other leading sustainability focused customers. During the second quarter of 2024, Project Sophie's team executed well, mitigating the effects of Kentucky tornadoes. Critical infrastructure optimizations were implemented to prepare for the summer heat to improve efficiency and utilize additional available capacity to prepare for Sophie's AI hosting customer.

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Marie

In February 2023, Project Marie, our 20 MW data center in Kentucky was decommissioned. The decision was sparked by following events:

● NYDIG, our asset-backed-lender on mining and infrastructure equipment, accelerated their loan and repossessed their collateral.
● Our Bitcoin Hosting customer, Atlas Technology Group, LLC ("Atlas"), at the site failed to upgrade and invest in their mining equipment, decreasing the profitability of the site.
● Our landlord, CC Metals and Alloys, LLC, ("CCMA") terminated our lease.

As a result, we disposed of all remaining assets at the site, terminated the Atlas hosting agreement, and decommissioned the site.

Cost Cutting and Process Optimization

In 2023, we implemented a number of cost cutting measures including staff reductions, renegotiations or termination of key advisory agreements. We ramped up a new Financial Planning and Analysis ("FP&A") function to provide our management and operations teams better insight into the financial performance of our data centers. This helped us find opportunities to improve profitability and proactively address critical issues with infrastructure equipment at all sites. Our MaestroOS software platform managed the efficient operations of projects Dorothy and Sophie through record setting temperatures (hot and cold) in both Texas and Kentucky in 2023. In 2024, our Maestro control system has continued to respond to increases in grid demand throughout the summer.

Continuing in 2024, our objective is to achieve operational excellence across all data centers, targeting a budgeted EBITDA and maintaining high customer satisfaction. Our infrastructure optimization efforts have been completed to protect equipment against the severe summer heat to include miner heat shielding, building insulation upgrades, and transformer fan kit installations.

Expand Flagship, Dorothy 2

In 2023, we began the planning process for building out the second 50 MW phase of Project Dorothy - Dorothy 2. We completed the design, established new procurement partners, and submitted an updated approval to ERCOT. In May 2024, the Company partnered with Spring Lane Capital ("SLC") to finance up to $30 million. The financing will facilitate the construction of the Dorothy 2 facility, in which the parties will begin construction with the goal of achieving initial energization and ramp-up by the end of the first quarter of 2025. Dorothy 2 will feature a stronger waterfall structure and enhanced management and development fees compared to Dorothy 1A, allowing Soluna to benefit from substantial current income during operational phase. On July 22, 2024, the financing on the Dorothy 2 project closed. Project Dorothy 2 will be adjacent to two other Soluna modular data center projects co-located at the same site. Project Dorothy 2 is financed by SLC, which will make a capital contribution up to approximately $29.98 million, and the Company, which will make a capital contribution up to approximately $4.6 million, and as of July 22, 2024 became co-owners of ComputeCo with Soluna Digital, Inc.

In addition, we have 2 MW of our Project Dorothy 2 site slated for our Helix Pilot, focused on next generation data centers for AI.

Grow Pipeline

In 2023, we signed a term sheet for a new 166 MW data center called Kati that will be integrated with a 300 MW wind farm that has surplus energy due to increasing curtailment by the grid. We worked throughout 2023 to advance the project through grid operator's, ERCOT planning process, and in 2024 have resubmitted a key study to take into account a change in distance from substation. In May 2024, we announced the signing of a Power Purchase Agreement ("PPA") for Project Kati with EDF Renewables and Abu Dhabi Future Energy Company- Masdar. Project Kati will be co-located at a wind facility owned by EDF Renewables and Masdar. Project Kati will be executed in two phases, with each phase delivering 83 MW of renewable energy capacity to power high-performance computing applications including AI.

For 2024, we aim to double our assets under management to 150 MW by the end of fiscal year 2024 or the beginning of 2025, focusing on constructing and energizing 48 MW of Project Dorothy 2 as noted above, and breaking ground on Project Kati.

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Launch AI

On June 18, 2024, CloudCo entered into an HPE Agreement with Hewlett Packard Enterprise Company ("HPE"). Pursuant to the HPE Agreement, HPE agreed to provide datacenter and cloud services for artificial intelligence and supercomputing processes via Nvidia H100 GPUs to CloudCo in exchange for an aggregate of $34.0 million, including an initial pre-payment of $10.3 million made on June 24, 2024. The HPE Agreement has a term of 36 months, and the services thereunder are expandable upon agreement of the parties. Soluna Cloud will begin offering its services by leveraging HPE's renewable- powered high performance data centers. Their cutting-edge facilities, known for their energy efficiency and sustainability, will support the environmental sustainability of Soluna Cloud's operations. Additionally, this collaboration expands Soluna Cloud's offering beyond just bare-metal infrastructure, making available HPE's comprehensive software solutions for AI pipelines. As an HPE Partner Ready Service Provider partner, Soluna Cloud will offer its advanced cloud solutions to HPE's global customer base demonstrating AI expertise and delivery capabilities.

Soluna's new Helix data centers will serve as the growth pathway for customers, addressing the growing demand for more sustainable data centers for AI powered by renewable energy.

On June 24, 2024, Soluna Cloud closed on a $12.5 million secured credit facility to fund the GPU contract and Soluna Cloud startup costs, and on July 17, 2024, raised an additional $1.25 million secured credit facility enabling Soluna Cloud to continue its innovative approach to sustainable AI clouds and meet the increasing demand for renewable-energy powered, high-performance computing solutions.

Convertible Noteholders

In 2023, the Company negotiated three amendments to the October Convertible Notes. On February 28, 2024, a fourth amendment was executed. These amendments were focused on extending the maturity date of the notes, lowering the conversion price of the notes, adding features to the notes to allow early payoff with predetermined cost, and the repricing of certain warrants to assist the Company in raising capital for operations. Additionally on May 17, 2024, certain warrants were further repriced to assist in raising additional capital.

Finance Opportunities

We plan to raise funds to support our growth initiatives, particularly in our AI hosting business, which we believe is a great fit for our renewable computing data center model.

Recent Developments and Trends

Industry Trends

Soluna's business is influenced by several industry trends, including: (1) challenges in the Bitcoin ecosystem, (2) the Bitcoin Halving, (3) the Inflation Reduction Act, (4) the global Supply Chain, (5) the growth of AI.

Bitcoin Ecosystem

Fiscal years 2022 and 2023 proved challenging for the Bitcoin Mining industry. In 2022, several companies in the ecosystem initiated bankruptcy proceedings due to the severe decline in the price of Bitcoin and, the impact on energy prices of the war in Ukraine. This turmoil continued into most of 2023 with many companies working their way through chapter 11 and flooding the market with equipment sales. The trial of Sam Backman Fried, founder and CEO of FTX, the industry's largest digital asset exchange, dominated the news and continued to compress the value of Bitcoin. Later in the year Changpeng Zhao, the founder of Binance, the largest cryptocurrency exchange in the world, pleaded guilty to money laundering violations. By the end of 2023, tides began to turn for Bitcoin as major asset managers like Black Rock, Greyscale, and Bitwise filed for Bitcoin Spot ETFs. This caused a surge in Bitcoin price beginning in the tail end of 2023 that has benefited revenues in the ecosystem. Consolidation in the space will likely decrease competition on the Bitcoin network, increasing our pro rata share of profits. Our industry leading power prices will allow us to stay on the network longer. Increased regulation of the industry could increase our costs.

Bitcoin Halving

In April 2024, Bitcoin underwent its fourth halving event, occurring approximately every four years or after every 210,000 blocks are mined. During a halving, miners' rewards for validating transactions and creating new blocks on the Bitcoin blockchain are cut in half, reducing the rate of new Bitcoin generation. This event typically triggers anticipation and speculation within the Bitcoin community and among investors, leading to increased market activity. Price volatility tends to rise before and after a halving as the market reacts to perceived supply scarcity. Mining profitability decreases post-halving, potentially prompting some miners to shut down operations. This often sparks consolidations in the space, reducing the number of mining companies. However, the network automatically adjusts mining difficulty to ensure consistent block production. The halving also causes a supply shock, reducing Bitcoin's inflation rate and potentially driving long-term price appreciation, although past performance does not guarantee future outcomes. The 2024 halving was the first to happen during a high interest rate environment, and in the presence of strong institutional demand for Bitcoin driven by ETFs. Reduction in block-reward will represent a short-term reduction in revenue. But, the supply-shock effect and the growth of ETF may lessen the volatility in the long run. A projected rise in Bitcoin price in the months after the halving would increase revenues and increase demand for our low-cost data centers.

Recent events, including the Mt. Gox settlement has significantly impacted Bitcoin's price and supply due to the reintroduction of approximately 141,000 bitcoins into the market, raising concerns about increased selling pressure and market volatility. Despite these concerns, experts believe the market has sufficient liquidity to absorb the selling pressure, and the impact on Bitcoin's value is expected to be temporary. The announcement of repayments led to a notable decline in cryptocurrency prices, with Bitcoin experiencing a 6% drop in a single day and the overall market capitalization decreasing by over $170 billion. However, the long-term investment prospects for Bitcoin remain positive, influenced by broader economic factors such as potential Federal Reserve rate cuts.

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Inflation Rate Act

The Inflation Reduction Act of 2022 ("IRA"), signed into law by President Biden, is a significant investment in climate and energy in the U.S. At the time of its passage, legislators estimated that the bill would allocate $370 billion, primarily in the form of tax credits, to a wide array of decarbonization efforts. Recent private estimates are much higher. In March, the Brookings Institute released a study estimating the spending at $1.2 trillion, which is three times the Congressional estimate. The Act aims to tackle the climate crisis, advance environmental justice, secure America's position as a world leader in clean energy manufacturing, and work towards achieving a net-zero economy by 2050. Since its enactment, the Inflation Reduction Act has driven substantial investment in clean energy projects, with over $110 billion announced in new clean-energy manufacturing investments. This includes investments in electric vehicle supply chains and solar manufacturing. Overall, the IRA stimulates economic growth through renewable energy development and infrastructure reinvestment in the United States. The IRA is accelerating the development of new renewable power plants across the country and extending the tax incentives. This growth is likely to exacerbate the wasted energy problem as grid transmission will not keep pace. In 2024, new guidance was issued allowing eligible taxpayers to sell their energy tax credits to unrelated parties, further incentivizing clean energy investments and potentially increasing the company's long-term project pipeline.

Supply Chain

The global supply chain is facing challenges, particularly in the electric power sector, due to the scarcity of power infrastructure components like transformers. The electric grid component market is experiencing a supply and demand mismatch, leading to an ongoing shortage of transformers and other grid components. Over 70% of transmission and power transformers in the U.S. are over 25 years old, and there is insufficient manufacturing capacity to meet the demand for grid transformers and component parts. Factors contributing to the scarcity include aging infrastructure, increasing demand for electricity, extreme weather events threatening reliability, insufficient domestic manufacturing capacity, and reliance on foreign suppliers. President Biden authorized the use of the Defense Production Act Title III to accelerate domestic production of electric grid transformers and components to address the shortage. Companies are using emergency stocks of components, reviewing scheduled work, substituting materials when possible, improving communication with suppliers, and digitalizing processes to enhance efficiency. The scarcity of power infrastructure components like transformers is a critical issue and efforts are being made to address these challenges through various strategies and actions. Difficult to source equipment could affect our growth. We have developed strategic relationships with key equipment providers with manufacturing facilities in the US and Abroad.

AI

Since the inception of ChatGPT by OpenAI, AI has experienced remarkable growth, transforming the field. Large language models ("LLM"s) have revolutionized AI, fueling interest in generative AI technologies. The introduction of ChatGPT alone has increased AI-related job listings significantly, indicating its impact beyond tech. In 2023, global venture capital investments in AI soared to $50 billion, reflecting confidence in AI's future potential. Funding focus has shifted to mature companies with proven technologies, signaling market maturation. This growth has driven demand for computing resources and attracted enterprise interest. The generative AI market is projected to reach $1.3 trillion by 2032, with significant energy implications. By 2030, AI could comprise 3-4% of global power demand, with Google already attributing 10-15% of its power use to AI technologies. The widespread adoption of generative AI like ChatGPT may substantially increase energy consumption across various applications and services. The energy demands of AI will increase focus on the sustainability of the industry. We expect increasing demand for specialized AI data centers with access to renewable energy. This will likely open opportunities for Soluna to provide AI Cloud and Co-location services to new companies and enterprises investing in AI initiatives.

Since March 2024, developments in generative AI have included advancements in multimodal models that integrate text, image, and audio generation, as well as improvements in model efficiency and scalability. Major tech companies have launched new generative AI tools tailored for specific industries, enhancing productivity and innovation across sectors such as healthcare, finance, and entertainment. These advancements underscore the need for robust, energy-efficient infrastructure to support the growing capabilities and applications of generative AI.

AI Infrastructure is now in increased demand. For example, Core Scientific and CoreWeave forged a partnership in June 2024 worth billions of dollars. This trend bodes well for Soluna's prospects as it expands into the AI Infrastructure space through its subsidiary Soluna Cloud, in collaboration with Hewlett Packard Enterprise.

44

Consolidated Results of Operations

Consolidated Results of Operations for the Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023.

The following table summarizes changes in the various components of our net loss during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

(Dollars in thousands)

Three Months Ended

June 30, 2024

Three Months Ended

June 30, 2023

$

Change

%
Change
Cryptocurrency mining revenue $ 4,484 915 3,569 390 %
Data hosting revenue 4,898 1,153 3,745 325 %
Demand response service revenue 293 - 293 100 %
Operating costs and expenses:
Cost of cryptocurrency mining revenue, exclusive of depreciation 1,883 1,160 723 62 %
Cost of data hosting revenue, exclusive of depreciation 2,176 759 1,417 187 %
Costs of revenue- depreciation 1,506 539 967 179 %
General and administrative expenses, exclusive of depreciation and amortization 5,382 4,136 1,246 30 %
Depreciation and amortization associated with general and administrative expenses 2,403 2,379 24 1 %
Impairment on fixed assets - 169 (169 ) (100 )%
Operating loss (3,675 ) (7,074 ) 3,399 (48 )%
Other expense, net (49 ) (238 ) 189 (79 )%
Interest expense (449 ) (486 ) 37 (8 )%
(Loss) gain on sale of fixed assets (21 ) 48 (69 ) (144 )%
Loss on debt extinguishment and revaluation, net (5,600 ) (2,054 ) (3,546 ) 173 %
Loss before income taxes (9,794 ) (9,804 ) 10 (- )%
Income tax benefit 649 547 102 19 %
Net loss (9,145 ) (9,257 ) 112 (1 )%
Net income (loss) attributable to non-controlling interest 1,728 (482 ) 2,210 (459 )%
Net loss attributable to Soluna Holdings, Inc. $ (10,873 ) (8,775 ) (2,098 ) 24 %

The following table summarizes the balances for the Project sites for cryptocurrency mining revenue, data hosting revenue, cost of cryptocurrency mining revenue, exclusive of depreciation, cost of data hosting revenue, exclusive of depreciation, and cost of depreciation during the three months ended June 30, 2024:

(Dollars in thousands)
Project Dorothy 1B Project Dorothy 1A Project Sophie Project Marie Other Total
Cryptocurrency mining revenue $ 4,484 $ - $ - $ - $ - $ 4,484
Data hosting revenue - 3,567 1,331 - - 4,898
Demand response services - - - - 293 293
Total revenue $ 4,484 $ 3,567 $ 1,331 $ - $ 293 $ 9,675
Cost of cryptocurrency mining, exclusive of depreciation $ 1,883 $ - - - - 1,883
Cost of data hosting revenue, exclusive of depreciation - 1,758 418 - - 2,176
Cost of revenue- depreciation 1,073 282 151 - - 1,506
Total cost of revenue $ 2,956 $ 2,040 $ 569 $ - $ - $ 5,565

The following table summarizes the balances for the Project sites for cryptocurrency mining revenue, data hosting revenue, cost of cryptocurrency mining revenue, exclusive of depreciation, cost of data hosting revenue, exclusive of depreciation, and cost of depreciation during the three months ended June 30, 2023:

(Dollars in thousands)
Project Dorothy 1B Project Dorothy 1A Project Sophie Project Marie Other Total
Cryptocurrency mining revenue $ - $ - $ 915 $ - $ $ 915
Data hosting revenue - 456 692 - 5 1,153
Demand response services - - - - - -
Total revenue $ - $ 456 $ 1,607 $ - $ 5 $ 2,068
Cost of cryptocurrency mining, exclusive of depreciation $ 224 $ - 936 - - 1,160
Cost of data hosting revenue, exclusive of depreciation - 508 251 - - 759
Cost of revenue- depreciation 14 185 332 8 - 539
Total cost of revenue $ 238 $ 693 $ 1,519 $ 8 $ - $ 2,458
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Cryptocurrency Mining Revenue: Cryptocurrency revenue consists of revenue recognized from Soluna's cryptocurrency mining operations. Cryptocurrency revenue was approximately $4.5 million for the three months ended June 30, 2024 compared to $915 thousand for the three months ended June 30, 2023. For the three months ended June 30, 2024, all cryptocurrency mining revenue related to Project Dorothy 1B, which began energization in the fourth quarter of 2023, and has been running at a full 25 MWs. Operations were stopped for Project Marie in February 2023 with the CCMA termination and NYDIG repossession of collateralized assets, and Project Sophie switched to Data Hosting beginning in the second quarter of fiscal year 2023 creating only $915 thousand in cryptocurrency revenue for the three months ended June 30, 2023, as such no revenue was recognized for either Project Marie or Sophie for the three months ended June 30, 2024. In addition to the above, the average price of Bitcoin increased by 134% from the three months ended June 30, 2023 compared to the same period for June 2024.

Data Hosting Revenue: The Company's cryptocurrency hosting services provide energized space and operating services to third-party mining companies who locate their mining hardware at one of our mining locations. Services include fees for hosting the miners which could be fixed fees or profit sharing, as well as potential additional fees for services provided such as installation charges or other services fees. Data hosting revenue was approximately $4.9 million for the three months ended June 30, 2024 compared to $1.2 million for the three months ended June 30, 2023. The significant increase was primarily related to energization and the deployment of hosting customers at Project Dorothy 1A in the second quarter of 2023 creating approximately $3.6 million in data hosting revenue for the second quarter of 2024 compared to approximately $456 thousand for the second quarter of 2023, approximately a $3.1 million increase. In addition, Project Sophie switched their business model from proprietary mining to data hosting in the second quarter of 2023 in which created an additional increase of approximately $639 thousand from approximately $692 thousand in the second quarter of 2023 to approximately $1.3 million.

Demand Response Service: In November 2023, we completed our registration of Project Dorothy for one of ERCOT's demand response programs, in which we began services in December 2023. On a monthly basis we stand ready to deliver a set amount of committed capacity per period when and if called upon by ERCOT. We note that based on the time of the year, certain months and weather create more lucrative rewards. No such services were performed for the three ended June 30, 2023.

Cost of Cryptocurrency Revenue, exclusive of depreciation: Cost of cryptocurrency mining revenue includes direct utility costs, site overhead expenses, and overhead costs that relate to the operations of our cryptocurrency mining facilities in Kentucky and Texas. Going forward, cost of cryptocurrency revenue will include any additional cryptocurrency mining facilities that are part of the Company's future pipeline.

Cost of cryptocurrency revenue, exclusive of depreciation costs was approximately $1.9 million and $1.2 million for the three months ended June 30, 2024 and 2023, respectively, approximately $723 thousand increase. The higher costs during the three months ended June 30, 2024 compared to 2023 were due to the full Project Dorothy 1B site being active the entire quarter of 2024, versus as a start up in 2023. Also noted was that Project Sophie was dropping from being a proprietary mining site in the second quarter of 2023.

Cost of Data Hosting Revenue, exclusive of depreciation: Cost of data hosting revenue includes utility charges, site overhead expenses, and other charges.

Cost of data hosting revenue was approximately $2.2 million for the three months ended June 30, 2024 compared to $759 thousand for the same period in 2023. This increase was due to Project Dorothy 1A which began operations and hosting services in May 2023, creating costs of approximately $1.8 million for the three months ended June 30, 2024, compared to $508 thousand for the three months ended June 30, 2023. Also, the Company began data hosting operations at Project Sophie in mid-April 2023, which created an increase in costs of approximately $166 thousand between the comparable periods.

Cost of revenue- depreciation: Depreciation costs associated with cryptocurrency and data hosting revenue was approximately $1.5 million for the three months ended June 30, 2024 compared to approximately $539 thousand for the three months ended June 30, 2023. The increase related to the capital additions to fixed assets between the second quarter of fiscal year 2023 through the second quarter of 2024. It was noted that Project Marie was discontinued in February of 2023, Project Sophie had sold a majority of its miners in the second quarter of 2023, and the significant additions of capital expenditures at Project Dorothy, causing an increase in depreciation costs period over period. As the Company has begun to invest more in capital expenditures, we expect to see depreciation costs to significantly increase over the next several quarters.

46

General and Administrative Expenses, exclusive of depreciation and amortization: General and administrative expenses, exclusive of depreciation and amortization include cash and non-cash compensation, benefits and related costs in support of our general corporate operations, including general management, finance and accounting, human resources, marketing, information technology, corporate development, and legal services.

● General and administrative expenses, exclusive of depreciation and amortization increased approximately $1.2 million or 30% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. General and administrative expenses, exclusive of depreciation and amortization were approximately $5.4 million, including approximately $1.4 million of stock compensation expense for the three months ended June 30, 2024, compared to approximately $4.1 million, including $2.0 million of stock compensation for the three months ended June 30, 2023. The increase in general and administrative expenses, exclusive of depreciation and amortization was mainly due to employee related expenses, legal fees, investor relations, and professional fees, which are offset with a decrease in stock compensation expenses.
● The Company had an increase of approximately $900 thousand in employee related expense for the three months ended June 30, 2024 compared to three months ended June 30, 2023 due to an increase in resources and salaries of approximately $515 thousand, and in anticipation of hitting performance based targets of approximately $365 thousand.
● Legal fees increased by approximately $248 thousand for the three months ended June 30, 2024 compared to the three months ended June 30, 2023; the increase is due to the legal work related to projects Dorothy 2 and other development projects.
● The Company took a provision for expected credit loss for approximately $240 thousand for the three months ended June 30, 2024, compared to no provision for the three months ended June 30, 2023.
● Investor relations increased by approximately $197 thousand for the three months ended June 30, 2024 compared to June 30, 2023 due to the Company implementing a series of investor acquisition and influencer marketing programs to attract new investors to Soluna Holdings.
● Professional fees associated to audit and tax increased by approximately $177 thousand for the three months ended June 30, 2024 compared to June 30, 2023 due to additional costs related to subsidiary audits and tax preparation.
● Offsetting the increase in general and administrative expenses, the Company's stock compensation decreased by approximately $600 thousanddue to an acceleration of grants and awards in May of 2023, which did not occur for the three months ended June 30, 2024.

Depreciation and Amortization associated with general and administrative expenses: Depreciation and amortization expense was comparable for the three months ended June 30, 2024 and the three months ended June, 2023 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 June 30, 2024, there were no impairment charges on fixed assets, compared to the Company had impairment charges of approximately $169 thousand for the three months ended June 30, 2023 due to revaluing the S19 miners to the current market conditions.

Interest expense: Interest expense for the three months ended June 30, 2024 was approximately $449 thousand related to approximately $361 thousand to the NYDIG loan and $37 thousand to the Navitas loan. In addition there was compounded interest and deferred financing amortization expense of approximately $50 thousand for the equipment financing loan and June 2024 secured note financing. Interest expense for the three months ended June 30, 2023, was $486 thousand which primarily related to amortization of warrants for the convertible notes of $115 thousand and interest on the NYDIG Financing Loan of approximately $315 thousand, as well as interest on the Navitas loan of $47 thousand.

Loss on Debt Extinguishment and Revaluation: For the three months ended June 30, 2024, the Company had a loss on debt revaluation of approximately $5.6 million, in which was in relation to approximately $4.0 million for the convertible notes due to factors including assumptions on conversions and payouts, annual volatility and stock price conditions on the dates of valuations compared to what the noteholders could convert at as of June 30, 2024. In addition, there was a $1.6 million loss on the valuation of a warrant liability. The warrant liability was ultimately reversed when Shareholder approval occurred on May 30, 2024, however, the Company needed to revalue the warrants as of May 30, 2024, in which created a loss of approximately $1.6 million due to mainly changes in the stock price as amount of warrants outstanding. For the three months ended June 30, 2023, the Company had a loss on debt revaluation of approximately $2.1 million. On May 11, 2023, the Company entered into a new debt agreement with the convertible noteholders and issued new warrants, and with doing so, created a debt extinguishment and loss of approximately $1.8 million, in which the main factor was the valuation of the new warrants. There was an additional $170 thousand valuation loss as of June 30, 2023 due to additional assumptions and assessments on the valuation of the debt at quarter end. See Note 8 for further details.

47

Loss (Gain) on Sale of Fixed Assets: The Company had an immaterial loss on sale of equipment of approximately $21 thousand for the three and six months ended June 30, 2024, in which related to equipment held for sale and in storage. The Company received proceeds on the sale of equipment $145 thousand for the three months ended June 30, 2024, in which the net book value was approximately $166 thousand. For the three months ended June 30, 2023, the Company had a gain on sale of equipment of $48 thousand in relation to the sale of M30 miners in May and June of 2023, which the Company sold the miners for a higher value than the current net book value. The Company received proceeds of approximately $561 thousand in which the miners had a net book value of approximately $513 thousand. In addition, the Company sold Switchgear and M31 miners for cash proceeds of approximately $476 thousand in which no gain or loss was recognized as the switchgear and miners were sold at net book value.

Other expense, net: For the three months ended June 30, 2024, other expense, net was approximately $49 thousand, compared to $238 thousand for the three months ended June 30, 2023. The main reason for the decrease in other expense, net, was that for the three months ended June 30, 2023 , there was a $250 thousand expense in relation to an extension fee for the noteholders of the convertible debt when the 2nd Amendment was signed on May 11, 2023, whereas for the three months ended June 30, 2024, there was an extension fee expense of approximately $325 thousand, offset with a gain on settlement of litigation with Atlas of approximately $254 thousand, in addition to some small additional other income items.

Income Tax Benefit: Income tax benefit for the three months ended June 30, 2024 was $649 thousand, compared to $547 thousand for the three months ended June 30, 2023. The comparable balances were mainly 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 June 30, 2024 and June 30, 2023, the Company amortized $547 thousand, respectively. In addition, for the three months ended June 30, 2024, the income tax benefit increased due to changes in estimable income and permanent differences in 2024.

Net income / (loss) attributable to non-controlling interest: Net income attributable to non-controlling interest for the three months ended June 30, 2024 was $1.7 million compared to a net loss of approximately $482 thousand for the three months ended June 30, 2023. This amount relates to Spring Lane's 85% noncontrolling interest of the net profit in Soluna DVSL and Navitas 45.0% through 46.7% noncontrolling interest of the net profit in Soluna DV ComputeCo for the three months ended June 30, 2024 and 2023. The change in non-controlling interest relates to continued profitability at Dorothy 1A and Dorothy 1B, creating a total net profit which started to grow in the third quarter of fiscal year 2023. There was no minority interest for Dorothy 1B until the 2nd quarter of 2023, when Navitas obtained interest in DV ComputeCo. Dorothy 1A had a net profit of approximately $1.4 million for three months ended June 30, 2024, creating a non-controlling interest profit of approximately $1.2 million, compared to a $463 thousand net loss for the three months ended June 30, 2023, creating a non-controlling interest loss of $396 thousand. In addition, the increase also related to Dorothy 1B, which had a $87 thousand non-controlling interest loss for the three months ended June 30, 2023 to a non-controlling interest profit of $564 thousand for the three months ended June 30, 2024. As the Company was generating revenue from energization at Project Dorothy, the Company began to see a shift from a net loss to profit within non-controlling interest.

Consolidated Results of Operations for the Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023.

The following table summarizes changes in the various components of our net loss during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

(Dollars in thousands)

Six Months Ended

June 30, 2024

Six Months Ended

June 30, 2023

$

Change

%
Change
Cryptocurrency mining revenue $ 10,880 3,711 7,169 193 %
Data hosting revenue 10,176 1,439 8,737 607 %
Demand response service revenue 1,168 - 1,168 100 %
Operating costs and expenses:
Cost of cryptocurrency mining revenue, exclusive of depreciation 3,724 3,410 314 9 %
Cost of data hosting revenue, exclusive of depreciation 4,427 1,031 3,396 329 %
Costs of revenue- depreciation 3,029 1,164 1,865 160 %
General and administrative expenses, exclusive of depreciation and amortization 9,378 8,496

882

10

%
Depreciation and amortization associated with general and administrative expenses 4,805 4,756 49 1 %
Impairment on fixed assets 130 377 (247 ) (66 )%
Operating loss (3,269 ) (14,084 ) 10,815 (77 )%
Other expense, net (25 ) (226 ) 201 (89 )%
Interest expense (873 ) (1,861 ) 988 (53 )%
Loss on sale of fixed assets (21 ) (30 ) 9 (30 )%
Loss on debt extinguishment and revaluation, net (8,698 ) (1,581 ) (7,117 ) 450 %
Loss before income taxes (12,886 ) (17,782 ) 4,896 (28 )%
Income tax benefit 1,197 1,093 104 10 %
Net loss (11,689 ) (16,689 ) 5,000 (30 )%
Net income (loss) attributable to non-controlling interest 4,438 (852 ) 5,290 (621 )%
Net loss attributable to Soluna Holdings, Inc. $ (16,127 ) (15,837 ) (290 ) 2 %
48

The following table summarizes the balances for the Project sites for cryptocurrency mining revenue, data hosting revenue, cost of cryptocurrency mining revenue, exclusive of depreciation, cost of data hosting revenue, exclusive of depreciation, and cost of depreciation during the six months ended June 30, 2024:

(Dollars in thousands)
Project Dorothy 1B Project Dorothy 1A Project Sophie Project Marie Other Total
Cryptocurrency mining revenue $ 10,880 $ - $ - $ - $ - $ 10,880
Data hosting revenue - 7,108 3,068 - - 10,176
Demand response services - - - - 1,168 1,168
Total revenue $ 10,880 $ 7,108 $ 3,068 $ - $ 1,168 $ 22,224
Cost of cryptocurrency mining, exclusive of depreciation $ 3,724 $ - - - - 3,724
Cost of data hosting revenue, exclusive of depreciation - 3,495 931 - 1 4,427
Cost of revenue- depreciation 2,167 560 302 - - 3,029
Total cost of revenue $ 5,891 $ 4,055 $ 1,233 $ - $ 1 $ 11,180

The following table summarizes the balances for the Project sites for cryptocurrency mining revenue, data hosting revenue, cost of cryptocurrency mining revenue, exclusive of depreciation, cost of data hosting revenue, exclusive of depreciation, and cost of depreciation during the six months ended June 30, 2023:

(Dollars in thousands)
Project Dorothy 1B Project Dorothy 1A Project Sophie Project Marie Other Total
Cryptocurrency mining revenue $ - $ - $ 2,942 $ 769 $ $ 3,711
Data hosting revenue - 456 693 276 14 1,439
Demand response services - - - - - -
Total revenue $ - $ 456 $ 3,635 $ 1,045 $ 14 $ 5,150
Cost of cryptocurrency mining, exclusive of depreciation $ 286 $ - 2,323 801 - 3,410
Cost of data hosting revenue, exclusive of depreciation - 566 251 214 - 1,031
Cost of revenue- depreciation 15 185 834 130 - 1,164
Total cost of revenue $ 301 $ 751 $ 3,408 $ 1,145 $ - $ 5,605

Cryptocurrency Mining Revenue: Cryptocurrency revenue consists of revenue recognized from Soluna's cryptocurrency mining operations. Cryptocurrency revenue was approximately $10.9 million for the six months ended June 30, 2024 compared to $3.7 million for the six months ended June 30, 2023. For the six months ended June 30, 2024, all cryptocurrency mining revenue related to Project Dorothy 1B, which began energization in the fourth quarter of 2023, and has been running at a full 25 MWs. Operations were stopped for Project Marie in February 2023 with the CCMA termination and NYDIG repossession of collateralized assets, and Project Sophie switched to Data Hosting beginning in the second quarter of fiscal year, as such no revenue was recognized for either Project Marie or Sophie for the six months ended June 30, 2024. The Company also noted for the six months ended June 30, 2024, that Project Marie shut down when only 8 MW was running for Proprietary Mining and Project Sophie was beginning to struggle and was not able to maintain running at 25 MW, therefore we started our transition to a hosting model and was fully switched by June 2023. In addition to the above, the average price of Bitcoin increased by 134% in the six months ended June 30, 2023 compared to the same period for June 2024.

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Data Hosting Revenue: The Company's cryptocurrency hosting services provide energized space and operating services to third-party mining companies who locate their mining hardware at one of our mining locations. Services include fees for hosting the miners which could be fixed fees or profit sharing, as well as potential additional fees for services provided such as installation charges or other services fees. Data hosting revenue was approximately $10.2 million for the six months ended June 30, 2024 compared to $1.4 million for the six months ended June 30, 2023. The significant increase was primarily related to energization and the deployment of hosting customers at Project Dorothy 1A in the second quarter of 2023 creating approximately $7.1 million in data hosting revenue for the six months ended June 30, 2024 compared to approximately $456 thousand for the same period in 2023, approximately a $6.7 million increase. In addition, Project Sophie switched their business model from proprietary mining to data hosting in the second quarter of 2023 which created an additional increase of approximately $2.4 million from approximately $692 thousand for the six months ended June 30, 2023 to approximately $3.1 million for the six months ended June 30, 2024. As such, the Company was performing hosting services utilizing approximately 50 MW between Project Dorothy 1A and Project Sophie. Offsetting the increase was the decommission of Project Marie operations in February 2023 causing a decline of approximately $276 thousand six months ended June 30, 2024 compared to June 30, 2023. For the first quarter of 2023, Project Marie was hosting at approximately 10 MW.

Demand Response Service: In November 2023, we completed our registration of Project Dorothy for one of ERCOT's demand response programs, and we began services in December 2023. On a monthly basis we stand ready to deliver a set amount of committed capacity per period when and if called upon by ERCOT. We note that based on the time of the year, certain months and weather create more lucrative rewards. No such services were performed for the six months ended June 30, 2023.

Cost of Cryptocurrency Revenue, exclusive of depreciation: Cost of cryptocurrency mining revenue includes direct utility costs, site overhead expenses, and overhead costs that relate to the operations of our cryptocurrency mining facilities in Kentucky and Texas. Going forward, cost of cryptocurrency revenue will include any additional cryptocurrency mining facilities that are part of the Company's future pipeline.

Cost of cryptocurrency revenue, exclusive of depreciation costs was approximately $3.7 million and $3.4 million for the six months ended June 30, 2024 and 2023, respectively, approximately a $314 thousand increase. The higher costs during the six months ended June 30, 2024 compared to 2023 were due to the full Project Dorothy 1B site being active the entire six months ended June 30, 2024, versus as a start up beginning in the second quarter of 2023. Also noted, Project Sophie was no longer a proprietary mining site in the second quarter of 2023. The increase was slightly offset with the Company operating only one facility for the six months ended June 30, 2024, compared to two facilities for the six months ended June 30, 2023. Also, the electricity costs at Project Dorothy 1B are comparatively lower than the costs were at Project Sophie and Marie.

Cost of Data Hosting Revenue, exclusive of depreciation: Cost of data hosting revenue includes utility charges, site overhead expenses, and other charges.

Cost of data hosting revenue was approximately $4.4 million for the six months ended June 30, 2024 compared to $1.0 million for the six months ended June 30, 2023. This increase was due to Project Dorothy 1A which began operations and hosting services in May 2023, creating costs of approximately $3.5 million for the six months ended June 30, 2024, compared to $566 thousand for the six months ended June 30, 2023. Also, the Company began data hosting operations at Project Sophie in mid-April 2023, which created an increase in costs of approximately $680 thousand between the comparable periods. The increase was offset as a direct result by Project Marie's operations ceasing in February 2023, where the main hosting contract was also simultaneously terminated, creating a decline in costs of approximately $214 thousand.

Cost of revenue- depreciation: Depreciation costs associated with cryptocurrency and data hosting revenue was approximately $3.0 million for the six months ended June 30, 2024 compared to approximately $1.2 million for the six months ended June 30, 2023. The increase related to the capital additions to fixed assets between the second quarter of fiscal year 2023 through the second quarter of 2024. It was noted that Project Marie was discontinued in February of 2023, Project Sophie had sold a majority of its miners in the second quarter of 2023, and the significant additions of capital expenditures at Project Dorothy, causing an increase in depreciation costs period over period. As the Company has begun to invest more in capital expenditures, we expect to see depreciation costs to significantly increase over the next several quarters.

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General and Administrative Expenses, exclusive of depreciation and amortization: General and administrative expenses, exclusive of depreciation and amortization include cash and non-cash compensation, benefits and related costs in support of our general corporate operations, including general management, finance and accounting, human resources, marketing, information technology, corporate development, and legal services.

● General and administrative expenses, exclusive of depreciation and amortization increased approximately $882 thousand or 10% for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. General and administrative expenses, exclusive of depreciation and amortization were approximately $9.4 million, including approximately $2.0 million of stock compensation expense for the six months ended June 30, 2024, compared to approximately $8.5 million, including $2.8 million of stock compensation for the six months ended June 30, 2023. This increase was mainly related to employee related expenses, professional fees and services, and investor relations, offset by a decrease in legal and stock compensation expenses.
● The Company had an increase of approximately $1.3 million in wage related expense for the six months ended June 30, 2024 compared to six months ended June 30, 2023 due to an increase in resources and salaries of approximately $530 thousand and in anticipation of hitting performance based targets of approximately $742 thousand.
● Professional fees associated to audit and tax increased by approximately $178 thousand for the six months ended June 30, 2024 compared to June 30, 2023 due to additional costs related to subsidiary audits and tax preparation.
● The Company took a provision for expected credit loss for approximately $240 thousand for the six months ended June 30, 2024, compared to no provision for the six months ended June 30, 2023.
● Consulting and other professional services increased by approximately $116 thousand for the six months ended June 30, 2024 compared to June 30, 2023 due to using outside support to navigate complex accounting transactions.
● Investor relations increased by approximately $104 thousand for the six months ended June 30, 2024 compared to June 30, 2023 due to the Company implementing a series of investor acquisition and influencer marketing programs to attract new investors to Soluna Holdings.
● Stock based compensation expense decreased by approximately $800 thousandfor the six months ended June 30, 2024 compared to the six months ended June 30, 2023, due to an acceleration of the Company's grants and awards that occurred in May of 2023, as such, the outstanding grants and awards were higher in the previous year for the six months ended June 30, 2023, compared to the six months ended June 30, 2024.
● Legal fees decreased by approximately $220 thousand for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease was mainly attributable to project associated legal expenses.

Depreciation and Amortization associated with general and administrative expenses: Depreciation and amortization expense was comparable for the six months ended June 30, 2024 and the six months ended June, 2023 in which the balances totaled approximately $4.8 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 six months ended June 30, 2024, the Company had impairment charges of approximately $130 thousand. This charge related to the sale of S19 miners that occurred in April 2024, whereas the Company wrote down the net book value of the miners to the subsequent sales price. During the six months ended June 30, 2023, the Company had impairment charges of approximately $377 thousand in which related to impairment of approximately $165 thousand for power supply units (PSUs) at the 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.

Interest expense: Interest expense for the six months ended June 30, 2024 was approximately $873 thousand related to approximately $722 thousand to the NYDIG loan and $100 thousand to the Navitas loan. In addition there was compounded interest and deferred financing amortization expense of approximately $50 thousand for the equipment financing loan and June 2024 secured note financing. Interest expense for the six months ended June 30, 2023 was $1.8 million and related to default and continuing interest expense of the NYDIG loan of approximately $692 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 $475 thousand, as well as default interest charged through March 10, 2023 for the convertible holders of approximately $420 thousand.

Loss on Debt Extinguishment and Revaluation: For the six months ended June 30, 2024, the Company had a loss on debt extinguishment and revaluation of approximately $8.7 million. This was due to on February 28, 2024, the Company entered into the Fourth Amendment with the Noteholders and lowered the conversion price and issued new warrants and repriced additional warrants with certain exercise features. The issuance and reprice of warrants created a loss of extinguishment of debt of approximately $5.8 million, in which was offset by a gain on debt revaluation of the convertible debt of approximately $1.3 million as of February 28, 2024 (date of Fourth Amendment) and March 31, 2024 due to several factors including assumptions on conversions and payouts, annual volatility and stock price conditions on the dates of valuations. In addition, there was a revaluation of the warrant liability, in which created a gain on revaluation of approximately $1.5 million. The Company did a fair value assessment of the notes as of June 30, 2024, in which created a loss on revaluation of approximately $4.0 million in which was noted above. In addition, in the second quarter of fiscal year 2024, the Company did a revaluation of the warrants through May 30, 2024 in which was the date of Annual Shareholder approval, in which created a loss on revaluation of approximately $1.6 million. The Company notes for the six months ended June 30, 2023, the Company had a net loss on debt extinguishment and revaluation of $1.6 million due to the extinguishment and revaluation noted above in the second quarter of 2023, offset with a gain of $473 thousand in the first quarter of 2023. See Note 8 for further details.

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Loss on Sale of Fixed Assets: The Company had an immaterial loss on sale of equipment of approximately $21 thousand for the six months ended June 30, 2024, in which related to equipment held for sale and in storage. The Company received proceeds on the sale of equipment of approximately $215 thousand for the six months ended June 30, 2024, in which the net book value was approximately $236 thousand.

For the six months ended June 30, 2023, the Company had a loss on sale of equipment of approximately $30 thousand. In January 2023, the Company sold M20 and M21 miners for a loss on sale of equipment of approximately $82 thousand in which the Company received proceeds of $213 thousand for our M20 and M21 miners which were previously reported as held for sale as of December 31, 2022, in which had a net book value of $295 thousand. There were additional proceeds of $36 thousand in March 2023, in which resulted in a gain of approximately $3 thousand of scrap and other equipment. This was offset with a gain on sale of approximately $48 thousand in relation to the sale of M30 miners in May and June of 2023, which the Company sold the miners for a higher value than the current net book value. The Company received proceeds of approximately $561 thousand in which the miners had a net book value of approximately $513 thousand. In addition, the Company sold Switchgear and M31 miners for cash proceeds of approximately $476 thousand in which no gain or loss was recognized as the switchgear and miners were sold at net book value.

Other expense, net: For the six months ended June 30, 2024, other expense, net was approximately $25 thousand, respectively, compared to $226 thousand for the six months ended June 30, 2023. The main reason for the decrease in other expense, net, was that for the six months ended June 30, 2023 , there was a $250 thousand expense in relation to an extension fee for the noteholders of the convertible debt when the 2nd Amendment was signed on May 11, 2023, whereas for the six months ended June 30, 2024, there was an extension fee expense of approximately $325 thousand, offset with a gain on settlement of litigation with Atlas of approximately $254 thousand, in addition to some small additional other income items.

Income Tax Benefit: Income tax benefit for the six months ended June 30, 2024 was approximately $1.2 million, compared to approximately $1.1 million for the six months ended June 30, 2023. The comparable balances were mainly 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 six months ended June 30, 2024 and June 30, 2023, the Company amortized approximately $1.1 million.

Net income / (loss) attributable to non-controlling interest: Net income attributable to non-controlling interest for the six months ended June 30, 2024 was $4.4 million compared to a net loss of approximately $852 thousand for the six months ended June 30, 2023. This amount relates to Spring Lane's 85% noncontrolling interest of the net profit in Soluna DVSL and Navitas 45.0% through 49% noncontrolling interest of the net profit in Soluna DV ComputeCo for the six months ended June 30, 2024 and 2023. The change in non-controlling interest relates to continued profitability at Dorothy 1A and Dorothy 1B, creating a total net profit which started to grow in the third quarter of fiscal year 2023. There was no minority interest for Dorothy 1B until the 2nd quarter of 2023, when Navitas obtained interest in DV ComputeCo. Dorothy 1A had a net profit of approximately $2.8 million for six months ended June 30, 2024, creating a non-controlling interest profit of approximately $2.4 million, compared to a $896 thousand net loss for the six months ended June 30, 2023, creating a non-controlling interest loss of $765 thousand. In addition, the increase also related to Dorothy 1B, which had a $87 thousand non-controlling interest loss for the six months ended June 30, 2023 to a non-controlling interest profit of $2.1 million for the six months ended June 30, 2024. As the Company was generating revenue from energization at Project Dorothy, the Company began to see a shift from a net loss to profit within non-controlling interest.

Non-GAAP Measures

In addition to financial measures calculated in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), we also use "Adjusted EBITDA." Adjusted EBITDA is a non-GAAP financial measure defined as net income (loss) from interest, taxes, depreciation and amortization ("EBITDA") adjusted to eliminate the effects of certain non-cash, non-recurring items, that we believe 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 and hosting customers engaged in cryptocurrency mining.

We believe Adjusted EBITDA can be an important financial measure because it allows management, investors, and the Board 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 U.S. 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.

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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 loss, the most comparable GAAP financial metric, for historical periods are presented in the table below:

(Dollars in thousands)

Three Months Ended

June 30,

Six Months Ended

June 30,

2024 2023 2024 2023
Net loss $ (9,145 ) $ (9,257 ) $ (11,689 ) $ (16,689 )
Interest expense 449 486 873 1,861
Income tax benefit (649 ) (547 ) (1,197 ) (1,093 )
Depreciation and amortization 3,909 2,918 7,834 5,920
EBITDA (5,436 ) (6,400 ) (4,179 ) (10,001 )
Adjustments: Non-cash items
Stock-based compensation costs 1,368 2,232 2,029 3,111
(Gain) loss on sale of fixed assets 21 (48 ) 21 30
Provision for credit losses 244 - 244 -
Impairment on fixed assets - 169 130 377
Loss on debt extinguishment and revaluation , net 5,600 2,054 8,698 1,581
Adjusted EBITDA $ 1,797 $ (1,993 ) $ 6,943 $ (4,902 )

Stock based compensation costs represented approximately $1.4 million non-cash restricted stock awards, units and options for the three months ended June 30, 2024 to members of our Board of Directors and certain Company employees compared to non-cash restricted stock units and options of $2.2 million to members of our Board of Directors and certain Company employees for the three months ended June 30, 2023. Stock based compensation costs represented approximately $2.0 million non-cash restricted stock units, awards and options for the six months ended June 30, 2024 to members of our Board of Directors and certain Company employees compared to non-cash restricted stock units and options of approximately $3.1 million to members of our Board of Directors and certain Company employees for the six months ended June 30, 2023.

The following table represents the Adjusted EBITDA activity between each three-month period from January 1, 2024 through June 30, 2024.

(Dollars in thousands)

Three months ended

March 31, 2024

Three months ended

June 30, 2024

Net loss $ (2,544 ) $ (9,145 )
Interest expense, net 424 449
Income tax (benefit) expense (548 ) (649 )
Depreciation and amortization 3,926 3,909
EBITDA 1,258 (5,436 )
Adjustments: Non-cash items
Stock-based compensation costs 661 1,368
Loss on sale of fixed assets 1 21
Provision for credit losses - 244
Impairment on fixed assets 130 -
Loss (gain) on debt extinguishment and revaluation, net 3,097 5,600
Adjusted EBITDA $ 5,147 $ 1,797
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The following table represents the Adjusted EBITDA activity between each three-month period from January 1, 2023 through December 31, 2023.

(Dollars in thousands)

Three months ended

March 31,

2023

Three months ended

June 30,

2023

Three months ended

September 30,

2023

Three months ended

December 31,

2023

Net loss $ (7,432 ) $ (9,257 ) $ (6,016 ) $ (4,998 )
Interest expense, net 1,374 486 495 393
Income tax (benefit) expense (547 ) (547 ) 569 (542 )
Depreciation and amortization 3,002 2,918 3,579 3,877
EBITDA (3,603 ) (6,400 ) (1,373 ) (1,270 )
Adjustments: Non-cash items
Stock-based compensation costs 879 2,232 595 606
Loss (gain) on sale of fixed assets 78 (48 ) 373 (5 )
Impairment on fixed assets 209 169 41 156
Loss (gain) on debt extinguishment and revaluation, net (473 ) 2,054 769 1,554
Adjusted EBITDA $ (2,910 ) $ (1,993 ) $ 405 $ 1,041

Liquidity and Capital Resources

Several key indicators of our liquidity are summarized in the following table:

(Dollars in thousands)

Six Months

Ended or as of

Six Months

Ended or as of

Year Ended or

as of

June 30, June 30, December 31,
2024 2023 2023
Cash $ 9,558 $ 7,464 $ 6,368
Restricted cash 1,951 2,780 3,999
Working capital (deficit) (5,046 ) 6,140 (13,891 )
Net loss (11,689 ) (16,689 ) (27,703 )
Net cash provided by (used in) operating activities (3,473 ) (3,836 ) (2,987 )
Purchase of property, plant and equipment (278 ) (2,895 ) (12,705 )

The Company had a consolidated accumulated deficit of approximately $267.1 million as June 30, 2024. As of June 30, 2024, the Company had negative working capital of approximately $5.0 million, $5.3 million outstanding principal in notes payable that may be converted to common stock, a subsidiary of the Company that defaulted on equipment financing and has a current outstanding loan of $9.2 million, a 3-year secured loan financing of approximately $12.5 million, an equipment financing of approximately $720 thousand, and a 2-year $2.05 million principal loan commitment to Navitas, in which as of June 30, 2024 has an outstanding principal balance of approximately $472 thousand. The Company had outstanding commitments as of June 30, 2024, related to SDI of $2.4 million in capital expenditures related to Project Dorothy 2 and $34.3 million related to Cloudco with HPE, and approximately $9.6 million of cash available to fund its operations.

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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. The Company 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, and data centers to provide specialized AI Cloud and colocation services.

We plan to continue funding operations from our current cash position and our projected 2024 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 and its AI initiative 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 June 30, 2024. 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 June 30, 2024, or August 14, 2024.

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 by operations was approximately $3.5 million during the six months ended June 30, 2024. The Company had a net loss for the six months ended June 30, 2024 of approximately $11.7 million. Non-cash items included approximately $3.1 million of depreciation expense and $4.7 million of amortization expenses, $2.0 million of stock compensation expenses, $8.7 million of loss on debt extinguishment and revaluation, $244 thousand in provision for credit losses, and $130 thousand of impairment of fixed assets. These non-cash items were offset with a deferred tax benefit of $1.2 million. The change in asset and liabilities of $9.7 million is mainly due to an increase in prepaid expenses by $10.8 million due to a prepayment of an arrangement with HPE of $10.3 million, an increase in accounts receivable of $486 thousand attributable for demand service revenue and data hosting customer receivables increasing, offset with an increase in accrued expenses and accounts payable of $2.1 million in relation to bonus accruals, NYDIG interest, and Project Dorothy 2 and Kati related bills. The other changes in assets and liabilities were not material.

Net cash used in operations for continuing operations was approximately $3.8 million during the six months ended June 30, 2023. The Company had a net loss for the six months ended June 30, 2023 of $16.7 million. Non-cash items included $1.2 million of depreciation expense and approximately $4.7 million of amortization expenses, as well as amortization on deferred financing costs and discount on notes of approximately $739 thousand, $3.1 million of stock-based compensation expenses, and $1.6 million loss on debt extinguishment and revaluation, net. These non-cash items were offset with a deferred tax benefit of $1.1 million. The change in asset and liabilities of approximately $2.1 million related to increase in accounts payable of $696 thousand in which Spring Lane made noncash contributions to pay off approximately $1.1 million that was outstanding as of December 31, 2022, increases of $1.3 million in other long term liabilities related to electricity deposits to Western Kentucky and Washington state, increases in accrued expenses of $995 thousand for interest on NYDIG loan, utility accruals, and security deposits, and increases of $532 to deferred revenue for receipt of cash for hosting services for more customers, offset with an increase in accounts receivable of $924 thousand in relation to performing further hosting services as of June 30, 2023. The other changes in assets and liabilities were not material.

Investing Activities

Net cash used in investing activities during the six months ended June 30, 2024 was approximately $2.2 million consisting mainly of capital expenditures of $278 thousand and increase in deposits on equipment of $2.1 million. Net cash used in investing activities during the six months ended June 30, 2023 was approximately $9.6 million consisting mainly of capital expenditures of $2.9 million, in addition to net increase through purchases on deposits and credits on equipment of $7.9 million, less cash proceeds from sale of equipment of $1.3 million. Net cash used in investing activities from continuing operations during the six months ended June 30, 2022 was approximately $50.6 million.

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Financing Activities

Net cash provided by financing activities was approximately $7.8 million consisting mainly of proceeds from financing of approximately $13.2 million in which $12.5 million was from 2024 secured loan financing and $720 thousand was drawn down for equipment financing. In addition, there was $2.3 million in warrants exercised. Offsetting the net cash provided by financing activities was $5.8 million in cash distributions to non-controlling interest members, and payments of $1.9 million relation to Navitas loan and deferred financing charges. Net cash provided by financing activities was approximately $21.8 million during the six months ended June 30, 2023, which consisted of cash contributions for non-controlling interest of approximately $19.4 million. The Company also received net proceeds from debt issuances of $2.9 million less debt payment costs of $175 thousand and $350 thousand for payment on the Company's line of credit.

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. 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 December 31, 2023, the entire original $1.0 million outstanding balance has been paid down, and the Company did not have an outstanding balance as of December 31, 2023 and June 30, 2024. 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 71,043 shares of the Company's common stock. On May 11, 2023, the Company entered into the Second Amendment with the Noteholders in which increased the principal outstanding balance to approximately $13.3 million and extending the maturity date to July 2024. On November 20, 2023 the Company and the Noteholders entered into a Third Amendment Agreement to amend the Notes, the October SPA and related agreements to facilitate future financings by the Company that may include funds for prepayment of the Notes by permitting the Company to force conversion of up to $1.5 million of the Notes under certain circumstances and reduce the prepayment penalty in return for reducing the conversion price of the $4.7 million of the Notes to $3.78 and reducing the exercise price of 150 thousand of the Warrants to $0.01.The Noteholders have converted approximately $4.6 million between May 11, 2023 to December 31, 2023, reducing the principal balance to approximately $8.7 million as of December 31, 2023. On February 28, 2024, the Company and the Noteholders have entered into a Fourth Amendment which allowed all the outstanding debt to be converted at a rate of $3.78. The Noteholders converted approximately $3.7 million between January 1, 2024 through June 30, 2024, reducing the outstanding principal balance to approximately $5.3 million as of June 30, 2024, which included an extension fee of approximately $325 thousand.

On January 14, 2022, the Company effected an initial drawdown under the Master Equipment Finance Agreement with NYDIGin 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. On February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, and repossessed the collateralized assets that totaled approximately $3.4 million, in which approximately $560 thousand was first used to pay off accrued interest and penalty to date. On September 5, 2023, NYDIG provided a letter finalizing the accounting for the repossessed collateralized assets totaling proceeds of approximately $3.4 million. This included legal and other expenses associated with the sale of the assets net a modest gain on the estimated net book value of the assets totaling $251 thousand that was expensed as a loss on disposition of assets for the year ended December 31, 2023. On December 7, 2023, NYDIG filed its Motion for Summary Judgment seeking entry of a judgment against Soluna in the approximate amount of $10.3 million for principal and interest and penalties. On January 12, 2024, Soluna filed its objection to NYDIG's motion for summary judgment on the grounds that NYDIG failed to explain what collateral of which loan was sold and how the sale proceeds were allocated to each loan. A summary judgment motion was performed on February 13, 2024, and was agreed upon by both NYDIG and the Borrower, that the total outstanding loan principal balance would be approximately $9.2 million, in which a penalty fee was applied of approximately $1.0 million to the repossessed collateralized assets, and outstanding interest and penalty balance would be approximately $936 thousand as of December 31, 2023. As of June 30, 2024, the Company still has an outstanding loan principal of approximately $9.2 million and outstanding interest and penalty balance of approximately $1.5 million.

On May 9, 2023, Soluna DV ComputeCo, LLC and Navitas West Texas Investments SPV, LLC entered into a 2-year Loan Agreement for $2,050,000. The unpaid principal balance of the Term Loan shall bear interest at per annum rate equal to 15%. As of June 30, 2024, the Company has an outstanding principal balance of approximately $472 thousand.

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On May 16, 2024, SDI SL Borrowing - 1, LLC, an affiliate of Soluna Holdings, Inc. (the "Borrower") entered into a loan agreement (the "Equipment Loan Agreement" or the "Loan") with Soluna2 SLC Fund II Project Holdco LLC (the "Lender", and collectively, the "Parties"). The Equipment Loan Agreement provides for the Company to borrow, from time to time, up to $1.0 million to be used to purchase necessary equipment for the progression of Project Dorothy 2. Any loans made under the Equipment Loan Agreement have a maturity date of May 16, 2027, and will bear interest at a rate of 15% per annum. On May 17, 2024, the Borrower drew down $720 thousand of the equipment loan with the Lender. As of June 30, 2024, the Borrower has an outstanding principal and compounded interest of approximately $734 thousand. Subsequently, on July 22, 2024, the Borrower satisfied and repaid the Borrowing Amount in full by issuing the Investor Class B Membership Interests in the Dorothy 2 project at three times the value of the Borrowing Amount (i.e., $2.16 million).

On June 20, 2024, pursuant to the terms and subject to the conditions of a June SPA by and among (i) CloudCo, (ii) Soluna Cloud, (iii) the Company and (iv) Investor, CloudCo issued to the Investor a secured promissory note in a principal amount equal to $12.5 million (the "June 2024 Note"). The June 2024 Note accrues interest at a rate 9.0% per annum, subject to adjustment upon an event of default. The June 2024 Note matures on June 20, 2027.

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, 2023 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, 2023. 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.

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:

● the availability of financing opportunities, risks associated with economic conditions, dependence on management and conflicts of interest;
● the ability to service debt obligations and maintain flexibility in respect of debt covenants;
● economic dependence on regulated terms of service and electricity rates;
● the speculative and competitive nature of the technology sector;
● ability of the Company to attract and retain hosted customers for its hosting operations;
● ability of the Company to successfully implement its business expansion strategy into cloud service for artificial intelligence;
● dependency in continued growth in blockchain and cryptocurrency usage;
● lawsuits and other legal proceedings and challenges;
● conflict of interests with directors and management;
● government regulations;
● The ability of the Company to construct and complete the anticipated expansion of our data centers; and
● other factors beyond the Company's control;
● 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, 2023.
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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

Revenue Sources:

Our revenue streams consist of several components:

1. Hosting Revenues: We provide electrical power and network connectivity to cryptocurrency mining customers, who pay a specified amount and rate for these services. In the first quarter of 2024, we have entered in a co-location agreement with a GPU startup delivering specialized GPU services for AI computing.

2. Block Rewards in Bitcoin: These are fixed rewards programmed into the Bitcoin software and awarded to miners for solving cryptographic problems and creating new blocks on the blockchain.

3. Participation in Demand Response Programs: We also generate revenue by participating in demand response programs.

Market Price of Bitcoin

Changes in the market value of Bitcoin directly impact our revenues. For example, in 2021 and 2022, the average Bitcoin price was $47,432 and $28,298, respectively. By December 31, 2023, the price of Bitcoin had reached a high of $44,146. For the three and six months ended June 30, 2024, the price of Bitcoin had reached a high of $71,631 and $73,083, and the average price of Bitcoin for the three and six months ended June 30, 2024 was $65,678 and $59,628.

Halving

Halving events occur periodically in the Bitcoin network, reducing block rewards. The reduction is designed to occur irrespective of ongoing demand. While halving can impact our revenues negatively by reducing the rewards for mining, it will continue until the total Bitcoin rewards issued reach approximately 21 million, expected around 2140. For fiscal year 2023 and through April 19, 2024, the block rewards were fixed at 6.25 Bitcoin per block, and on April 19, 2024 Bitcoin halved again to 3.125.

Network Hash Rate and Difficulty

A miner's chance of earning Bitcoin rewards depends on their hash rate relative to the global network hash rate. As demand for Bitcoin increases, the global network hash rate rises rapidly, leading to higher network difficulty. This adjustment ensures a ten-minute block validation time, making the network more secure but requiring more computing power to earn rewards. Failure to keep pace with industry trends in deploying additional hash rate can decrease a miner's share of the global network hash rate and, consequently, their chance of earning rewards.

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.

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(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 June 30, 2024. 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 June 30, 2024, 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 June 30, 2024 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.

EPA

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

NYDIG ABL LLC, ("NYDIG") filed a complaint against SMCB1("Borrower") and SMC ("Guarantor", and together with Borrower, "NYDIG 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 NYDIG Defendants. Also on February 15, 2023, the NYDIG Defendants filed their answer and affirmative defenses in this proceeding. The NYDIG 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 NYDIG Defendants. Additionally, NYDIG has stated its intention to pursue SCI, the parent company of Guarantor, under a piercing of the corporate veil claim relating to NYDIG 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. NYDIG filed a motion to dismiss in response to SCI's declaratory judgment complaint on April 13, 2023. SCI filed a response in opposition to NYDIG's motion to dismiss on April 27, 2023. The court heard oral arguments on May 16, 2023. On June 22, 2023, the court issued an order granting NYDIG's motion to dismiss, on the basis that the case was not ripe for decision, without prejudice. SCI intends to continue to vigorously defend any allegations regarding liability on account of NYDIG Defendants' debts and liabilities to NYDIG under their loan documents and intends to refile a declaratory judgment complaint against NYDIG.

On February 23, 2023, NYDIG proceeded to foreclose on all of the collateral securing the MEFA, and repossessed the collateralized assets that totaled approximately $3.4 million, in which approximately $560 thousand was first used to pay off accrued interest and penalty to date. On September 5, 2023, NYDIG provided a letter finalizing the accounting for the repossessed collateralized assets totaling proceeds of approximately $3.4 million. This included legal and other expenses associated with the sale of the assets net a modest gain on the estimated net book value of the assets totaling $251 thousand that was expensed as a loss on disposition of assets for the year ended December 31, 2023. On December 7, 2023, NYDIG filed its Motion for Summary Judgment seeking entry of a judgment against Soluna in the approximate amount of $10.3 million for principal and interest and penalties. On January 12, 2024, Soluna filed its objection to NYDIG's motion for summary judgment on the grounds that NYDIG failed to explain what collateral of which loan was sold and how the sale proceeds were allocated to each loan. A summary judgment motion was performed on February 13, 2024, and was agreed upon by both NYDIG and the Borrower, that the total outstanding loan principal balance would be approximately $9.2 million. This settlement did not result in the admission of any liability on the part of SHI, whose declaratory judgment remains the subject of litigation. On March 13, 2024, NYDIG served the Company with a post-judgment discovery seeking information regarding the Company's assets and liabilities. Per agreement between NYDIG and the NYDIG Defendants, the deadline to respond to the discovery demands was extended to May 13, 2024 but with rolling weekly production that commenced on April 12, 2024. The Company intends to vigorously defend itself from NYDIG's parent company claims.

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Atlas

In September 2023, Atlas Technology Group LLC ("Atlas") filed a complaint against Soluna MC LLC, Soluna Computing, Inc., and Soluna Holdings, Inc. (collectively, the "Atlas Defendants") in the Supreme Court of New York regarding a co-location services agreement. Atlas alleged that Soluna MC's termination of the agreement was a breach, seeking a return of pre-paid fees of approximately $464 thousand, additional damages of at least $7.9 million, and reimbursement of legal fees. The complaint also mentioned alter ego liability and corporate veil piercing.

The Atlas Defendants filed a motion to dismiss, and on April 17, 2024, the Court dismissed three of the four counts. The remaining count was answered on May 6, 2024, with counterclaims against Atlas. The Court denied the dismissal of Soluna Computing, Inc. and Soluna Holdings, Inc. as parties, leading to an appeal filed on May 7, 2024.

On June 25, 2024, Atlas and the Atlas Defendants entered into a settlement agreement.

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 April 1, 2024, 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.

We have a Limited History in the Cloud Service and Artificial Intelligence Business

We are implementing a strategy to move into the cloud service business to provide green energy to power-intensive artificial intelligence applications. This is a new business for the Company and no history of operations in this industry from which to evaluate our future operating performance in this segment. Our ability to implement this strategy is dependent upon successfully deploy new supercomputers in conjunction with our strategic partner and to attract and retain customers in a very competitive market.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

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Item 6. Exhibits
Exhibit No. Description
10.101 Side Letter Agreement, dated July 22, 2023 by and between Soluna Digital, Inc. and Soluna2 SLC Fund II Project Holdco LLC
10.102 Payoff Letter between SDI SL Borrowing - 1, LLC and Soluna2 SLC Fund II Project Holdco LLC, dated July 22, 2023
10.103 Assignment of Equipment and Debt Agreement by and between Soluna DVSL II Computeco, LLC and SDI SL Borrowing - 1, LLC, dated July 22, 2024
10.104 Assignment of Equipment Agreement by and between Soluna EPC Services, LLC and Soluna DVSL II Computeco, LLC, dated July 22, 2024
10.105 HPE Greenlake Services Custom Statement of Work, dated June 18, 2024
10.1061 Promissory Note between Soluna AL Cloudco, LLC and [***], dated June 20, 2024
10.1071 Note Purchase Agreement by and among Soluna AL Cloudco, LLC, Soluna Cloud, Inc., Soluna Holdings, Inc. and [***]
10.1081 Guaranty Agreement between Soluna Cloud, Inc. and [***] dated June 20, 2024
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* Inline XBRL Instance Document
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* Inline XBRL Taxonomy Definition Linkbase Document
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)

1Certain confidential portions of this Exhibit have been redacted pursuant to Item 601(b)(10) of Regulation S-K. The omitted information is not material and would be competitively harmful if disclosed.

All other exhibits for which no other filing information is given are filed herewith.

* 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 June 30, 2024, formatted in eXtensible Business Reporting Language (XBRL) and tagged as blocks of text and including detailed tags: (i) Condensed Consolidated Balance Sheets at June 30, 2024 and December 31, 2023; (ii) Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2024 and 2023; (iii) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023; 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: August 14, 2024 By: /s/ John Belizaire
John Belizaire
Chief Executive Officer
By: /s/ John Tunison
John Tunison
Chief Financial Officer
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