Related Party Transactions

9 Months Ended

Sep. 30, 2021

Related Party Transactions [Abstract]

Related Party Transactions

9. 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 $380 thousand 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 $0.07 per share. Interest began accruing on January 1, 2014. The Company recorded a full allowance against the Note. As of September 30, 2021 and December 31, 2020, $327 thousand and $321 thousand, 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 nine months ended September 30, 2021, the Company incurred $3 thousand and $18 thousand, respectively, to Couch White, LLP for legal services associated with contract review. During the three and nine months ended September 30, 2020, the Company incurred $8 thousand and $85 thousand, 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 SHI’s Directors.

Harmattan Energy, Ltd. Transactions

On January 8, 2020, the Company formed EcoChain as a wholly-owned subsidiary to pursue a new business line focused on cryptocurrency and the blockchain ecosystem. In connection with this new business line, EcoChain established a facility to mine cryptocurrencies and integrate with the blockchain network. Pursuant to an Operating and Management Agreement dated January 13, 2020, by and between EcoChain and HEL, HEL assisted the Company, and later EcoChain, in developing, and is now operating, the cryptocurrency mining facility. The Operating and Management Agreement requires, among other things, that HEL provide developmental and operational services, as directed by EcoChain, with respect to the cryptocurrency mining facility in exchange for EcoChain’s payment to HEL of a one-time management fee of $65 thousand and profit-based success payments in the event EcoChain achieves explicit profitability thresholds. Once aggregate earnings before interest, taxes, depreciation and amortization of the mine exceeds the total amount of funding provided by EcoChain to HEL (whether pursuant to this agreement or otherwise) for the purposes of creating, developing, assembling, and constructing the mine (the “Threshold”), HEL is entitled to ongoing success payments of 20.0% of the earnings before interest, taxes, depreciation and amortization of the mine. As of September 30, 2021, $118 thousand of payments have been made or are due, as certain Thresholds have been achieved. Pursuant to the Operating and Management Agreement, during the developmental phase of the cryptocurrency mining facility, which ended on March 14, 2020, HEL gathered and analyzed information with respect to EcoChain’s cryptocurrency mining efforts and produced budgets, financial models, and technical and operational plans, including a detailed business plan, that it delivered to EcoChain in March 2020 (the “Deliverables”), all of which was designed to assist with the efficient implementation of a cryptocurrency mine. The agreement provided that, following EcoChain’s acceptance of the Deliverables, which occurred on March 23, 2020, HEL, on behalf of EcoChain, would commence operations of the cryptocurrency mine in a manner that would allow EcoChain to mine and sell cryptocurrency. In that regard, on May 21, 2020, EcoChain acquired the intellectual property of GigaWatt, Inc. (“GigaWatt”) and certain other property and rights of GigaWatt associated with GigaWatt’s operation of a crypto-mining operation located in Washington State. The acquired assets formed the cornerstone of EcoChain’s current cryptocurrency mining operation. EcoChain sells for U.S. dollars all cryptocurrency it mines and is not in the business of accumulating cryptocurrency on its balance sheet for speculative gains. On October 22, 2020, EcoChain loaned HEL $112 thousand to acquire additional assets from the bankruptcy trustee for GigaWatt’s assets. On the same day, HEL transferred title of the assets to EcoChain, which under the terms thereof paid off the note. 

On November 19, 2020, EcoChain and HEL entered into a second Operating and Management Agreement related to a potential location for a cryptocurrency mine in the Southeast United States. In accordance with the terms of the agreement, which are consistent with the first Operating and Management agreement noted above, HEL is entitled to ongoing success payments of 20.0% of the earnings before interest, taxes, depreciation and amortization of the mine. EcoChain paid HEL $150 thousand in 2020 and $200 thousand in the nine months ended September 30, 2021 related to the one-time fees.

On December 1, 2020, EcoChain and HEL entered into a third Operating and Management Agreement with respect to a potential location for a cryptocurrency mine in the Southwestern United States. In accordance with the terms of the agreement, which are consistent with the first Operating and Management agreement noted above, HEL is entitled to ongoing success payments of 20.0% of the earnings before interest, taxes, depreciation and amortization of the mine. EcoChain paid HEL $38,000 during 2020 in relation to the one-time fees; this target location did not meet the business requirements to continue pursuing the potential acquisition, and as a result EcoChain will not make any further payments to HEL under this agreement.  

On February 8, 2021, EcoChain and HEL entered into a fourth Operating and Management Agreement related to a potential location for a cryptocurrency mine in the Southeast United States. In accordance with the terms of the agreement, which are consistent with the first Operating and Management agreement noted above, HEL is entitled to ongoing success payments of 20.0% of the earnings before interest, taxes, depreciation and amortization of the mine. EcoChain paid HEL $544 thousand during the nine months ended September 30, 2021 in relation to the one-time fees.

Each Operating and Management Agreement requires that HEL provide project sourcing services to EcoChain, including acquisition negotiations and establishing an operating model, investments/financing timeline, and project development path.  

Simultaneously with entering into the initial Operating and Management Agreement with HEL, the Company, pursuant to a purchase agreement it entered into with HEL, made a strategic investment in HEL by purchasing 158,730 Class A Preferred Shares of HEL for an aggregate purchase price of $500 thousand on January 13, 2020. After acceptance of the Deliverables, as required by the terms of the purchase agreement, on March 23, 2020, the Company purchased an additional 79,365 Class A Preferred Shares of HEL for an aggregate purchase price of $250 thousand. The Company also has the right, but not the obligation, to purchase additional equity securities of HEL and its subsidiaries (including additional Class A Preferred Shares of HEL) if HEL secures certain levels or types of project financing with respect to its own wind power generation facilities. Each preferred share may be converted at any time and without payment of additional consideration, into Common shares. The Company has additionally entered into a Side Letter Agreement, dated January 13, 2020, with HEL Technologies Investment I, LLC, a Delaware limited liability company that owns, on a fully diluted basis, 57.9% of HEL and is controlled by a Brookstone Partners-affiliated director of the Company. The Side Letter Agreement provides for the transfer to the Company, without the payment of any consideration by the Company, of additional Class A Preferred Shares of HEL in the event HEL issues additional equity below agreed-upon valuation thresholds.

On August 11, 2021, the Company entered into (i) an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, SCI Merger Sub, Inc., the Company’s indirect wholly-owned subsidiary (“Merger Sub”), and Soluna Computing, Inc., a Delaware corporation (“SCI”) and (ii) a Termination Agreement by and among the Company, EcoChain and HEL (the transactions contemplated by the Merger Agreement and the Termination Agreement are hereinafter referred to as the “Soluna Transactions”). The purpose of the Soluna Transactions is to effect our acquisition of substantially all of the assets (other than those assets physically located in Morocco) formerly held by HEL; such assets consist solely of SCI’s existing pipeline of certain cryptocurrency mining projects that HEL previously transferred to SCI (the “Projects”), which was formed on May 18, 2021 expressly for this purpose. The Soluna Transactions also provide us, through EcoChain, with the opportunity to directly employ or retain the services of four individuals whose services are currently retained through HEL. Soluna Holdings US, LLC, a Delaware limited liability company, is the sole stockholder of SCI (“Soluna Parent”). Soluna Parent has the same ownership structure as HEL.

Pursuant to the Merger Agreement, subject to the terms and conditions thereof, Merger Sub will be merged with and into SCI, with SCI as the surviving corporation such that SCI becomes a wholly-owned subsidiary of EcoChain and an indirect wholly-owned subsidiary of SHI (the “Merger”). Under the terms of the Merger Agreement, each share of common stock of SCI issued and outstanding immediately prior to the effective time of the Merger, other than shares of SCI common stock owned by SCI, Merger Sub, SHI, or any of their subsidiaries, will be cancelled and converted into the right to receive a proportionate share of the Merger Consideration described immediately below.

The consideration (the “Merger Consideration”) payable to the holders of SCI common stock as of immediately prior to the effective time of the Merger (the “Effective Time Holders”), which we expect will be solely Soluna Parent, is an aggregate of up to 2,970,000 shares of the Company’s common stock (the “Merger Shares”), payable if, within five years after the effective time of the Merger, EcoChain or SCI achieve one or more milestones related to the cryptocurrency projects that are currently in SCI’s pipeline and that may be identified and developed from time to time going forward, with a certain number of Merger Shares payable for each such milestone achieved, all as set forth in the Merger Agreement and/or the schedules thereto. The Merger Consideration and the timing of the payment thereof is subject to certain qualifications and limitations, and adjustments, including customary anti-dilution adjustments.

The Merger Agreement contains customary representations and warranties from both SHI and SCI, and each has agreed to customary covenants, including, among others, to use all commercially reasonable efforts to obtain any consents, waivers, and approvals required to be obtained in connection with the Merger and, with respect to SCI, covenants relating to the conduct of its business during the interim period between the execution of the Merger Agreement and the effective time of the Merger or termination of the Merger Agreement, as well as non-solicitation obligations relating to alternative acquisition proposals.

The obligation of SHI and Merger Sub, on the one hand, and SCI, on the other hand, to consummate the Merger is subject to a number of customary conditions, including (1) the accuracy of the representations and warranties of the other and (2) performance in all material respects by the other of its obligations under the Merger Agreement. In addition, each party’s obligation to consummate the Merger is subject to certain additional conditions, including: (1) SHI and the Effective Time Holders having entered into a mutually acceptable registration rights agreement with respect to the Merger Shares; (2) SHI and Soluna Parent having entered into a conversion agreement with respect to the shares of Soluna Parent’s preferred stock held by SHI; and (3) SHI, Brookstone Partners Acquisition, XXIV, LLC (“Brookstone XXIV”), and Soluna Parent having entered into a voting agreement pursuant to which, at the effective time of the Merger, John Belizaire, Chief Executive Officer of SCI and a director of SCI and HEL, and John Bottomley, a director of HEL and SCI, will be elected to SHI’s Board of Directors, and Brookstone XXIV will agree to vote all of its voting equity securities in SHI for the election of Messrs. Belizaire and Bottomley as directors of SHI. Further, SHI’s and Merger Sub’s obligation to consummate the Merger is also subject to, among other things: (1) the receipt of all required approvals of SHI’s stockholders, including approval of the Merger Agreement and the Merger by holders of at least a majority of the outstanding shares of the Company’s common stock that are not “interested stockholders,” as defined under Nevada law, of SHI, SCI, or an affiliate thereof; (2) the receipt of all required regulatory or third-party approvals and consents; (3) each of John Belizaire, Mohammed Larbi Loudiyi (through ML&K Contractor, a limited liability company organized under the laws of Morocco that is owned by Mr. Loudiyi and his wife), Vice President, Energy of SCI, Phillip Ng, Vice President, Corporate Development of SCI, and Dipul Patel, Chief Technology Officer of SCI, who currently provides developmental and operational services for EcoChain’s cryptocurrency mine located in Washington State and project sourcing services to EcoChain under certain Operating and Management Agreements between HEL and EcoChain, having entered into an employment or service agreement, a related proprietary rights agreement with EcoChain and an equity grant agreement with SHI; and (4) Soluna Parent being the sole record and beneficial owner of 100% of SCI’s outstanding equity interests.

In addition to providing that SHI and SCI can mutually agree to terminate the Merger Agreement, the Merger Agreement contains certain termination rights for both SHI and SCI, as the case may be, including: (1) if the Merger has not been consummated by October 31, 2021 (unless principally caused by a breach of the Merger Agreement by the party seeking to terminate); (2) if a governmental authority shall have issued a final, nonappealable order, decree, or ruling, or taken any other action, having the effect of permanently restraining, enjoining, or otherwise prohibiting the Merger; or (3) upon a breach of any representation, warranty, covenant, or agreement of the other or if any representation or warranty of the other has become untrue, in either case such that the closing conditions related thereto would not be satisfied, subject to a 30-day cure period.

Upon and subject to the terms and conditions of the Termination Agreement, including approval by the stockholders of SHI’s issuance of the Termination Shares (as hereinafter defined) five business days after such stockholder approval (the “Termination Effective Date”): (1) the existing Operating and Management Agreements between HEL and EcoChain will be terminated in all respects; and (2)(A) EcoChain will pay HEL $725,000, (B) SHI will issue to HEL 150,000 shares of the Company’s common stock (the “Termination Shares”), and (C) HEL and SHI will enter into an Amended and Restated Contingent Rights Agreement that, among other things, will amend 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. The Termination Agreement also provides that SHI will file a registration statement with the SEC to register the resale of the Termination Shares within 20 days of the Termination Effective Date.

The Merger closed on October 29, 2021. Please see Note 14 for additional information regarding the Merger and related transactions.

Several of HEL’s equityholders are affiliated with Brookstone Partners, the investment firm that holds an equity interest in the Company through Brookstone Partners Acquisition XXIV, LLC. The Company’s two Brookstone-affiliated directors also serve as directors and, in one case, as an officer, of HEL and also have ownership interest in HEL. In light of these relationships, the various transactions by and between the Company and EcoChain, on the one hand, and HEL, on the other hand, were negotiated on behalf of the Company and EcoChain via an independent investment committee of Board and separate legal representation. The transactions were subsequently unanimously approved by both the independent investment committee and the full Board.

Three of the Company’s directors have various affiliations with HEL.

Michael Toporek, our Chief Executive Officer and a director, 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 as acting Secretary and Treasurer 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 through September 30, 2021, were $375 thousand and $0, respectively.

Finally, the Company’s director William P. Phelan serves as an observer on HEL’s board of directors on behalf of the Company.

The Company’s investment in HEL is carried at the cost of investment and was $750 thousand as of September 30, 2021. The Company owned approximately 1.79% of HEL, calculated on a converted fully-diluted basis, as of September 30, 2021. The Company may enter into additional transactions with HEL in the future.