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Commitments and Contingencies

3 Months Ended

Mar. 31, 2022

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

10.

Commitments and Contingencies

Commitments:

Leases

The Company determines whether an arrangement is a lease at inception. The Company and our subsidiaries have operating leases for certain manufacturing, laboratory, office facilities and certain equipment. The leases have remaining lease terms of less than one year to less than five years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of March 31, 2022 and December 31, 2021, the Company has no assets recorded under finance leases.

Lease expense for these leases is recognized on a straight-line basis over the lease term. For the three months ended March 31, 2022 and 2021 total lease costs are comprised of the following:


(Dollars in thousands)		Three Months Ended March 31,
		2022				2021
Operating lease cost		$	50			$	38
Short-term lease cost			—				—
Total net lease cost		$	50			$	38

Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases.

Other information related to leases was as follows:

(Dollars in thousands, except lease term and discount rate)		Three Months Ended March 31, 2022

Weighted Average Remaining Lease Term (in years):
Operating leases			2.14

Weighted Average Discount Rate:
Operating leases			3.83	%

(Dollars in thousands, except lease term and discount rate)		Three Months Ended March 31, 2022				Three Months Ended March 31, 2021

Supplemental Cash Flows Information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	49			$	36

Non-Cash Activity Right-of-use assets obtained in exchange for lease obligations:
Operating leases		$	13			$	—

Maturities of noncancellable operating lease liabilities are as follows for the three months ending March 31:

(Dollars in thousands)
		2022
2022 (remainder of year)		$	153
2023			164
2024			85
Total lease payments			402
Less: imputed interest			(17	)
Total lease obligations			385
Less: current obligations			(193	)
Long-term lease obligations		$	192

As of March 31, 2022, there were no additional operating lease commitments that had not yet commenced, except for the ground lease noted below.

On May 4, 2021, Soluna MC LLC, formerly EcoChain Block, LLC, (“Soluna MC”), a wholly owned subsidiary of SCI, executed a 25-year ground lease with a power-providing cooperative with respect to an existing building and certain surrounding land (the “Building Lease”), and a 25-year ground lease with the same landlord with respect to certain vacant land adjacent thereto, both located in the Southeastern United States (the “Vacant Land Lease”, and together with the Building Lease, the “Ground Leases”). In addition, Soluna MC and the landlord entered into a Power Supply Agreement (the “Power Supply Agreement”) whereby the landlord has agreed to supply power to the building leased under the Building Lease (the “Building Lease Premises”) and to the premises leased under the Vacant Land Lease (the “Vacant Land Premises”), some of which power, under certain circumstances, may be terminated by the landlord, on at least 6 months prior notice, any time after 12 months after the Building Commencement Date (as hereafter defined), in which case the landlord is required to reimburse Soluna MC for all of its construction costs, subject to certain exceptions, relating to buildings and other improvements developed by Soluna MC on the Vacant Land Premises. As of March 31, 2022, this lease has not commenced.

Soluna MC has agreed to pay rent to the landlord of $500,000 on the effective date of the Building Lease (such date, the “Building Commencement Date”) and the sum of $4,000,000 in periodic payments (the “Vacancy Payments”). The Company executed a guaranty in favor of the landlord with respect to the Vacancy Payments (the “Guaranty of Rent”). The amount of each Vacancy Payment is determined based on the percentage of the building that has been vacated by existing tenants and available for use by Soluna MC. The final Vacancy Payment is due within 60 days after the building has been completely vacated by the existing tenants, which date is contractually scheduled to be no later than March 31, 2022. Soluna MC has the option of making the Vacancy Payments in cash or by the Company’s issuance of common stock in an amount that equals the Vacancy Payment then due based on the prior day’s closing price (any such shares, “Vacancy Payment Shares”). If Soluna MC elects to make any payment in Vacancy Payment Shares, then the landlord has an option to accept such Vacancy Payment Shares or require such shares to be converted to cash as more fully provided in the Building Lease. The Building Lease also includes provisions relating to the issuance of additional shares of the Company’s common stock, which may be applied as an advance against future Vacancy Payments, all as fully provided in the Building Lease.

The Company is required to issue to the landlord 100,000 shares of the Company’s common stock, in connection with the Vacant Land Lease, upon the effective date of the Vacant Land Lease, which may not occur prior to the Building Commencement Date. In addition, Soluna MC and the landlord have entered into a memorandum of understanding providing Soluna MC with a six-month exclusivity period to expand the Vacant Land Premises, including obtaining additional power, in connection therewith. Soluna MC and the landlord have not agreed on any of the terms of such expansion other than the exclusivity period previously described. Soluna MC and the landlord have also entered into a transition services agreement (the “Transition Services Agreement”) by which the landlord will provide certain transition services to Soluna MC at a fee to be mutually agreed by the landlord and Soluna MC. The Transition Services Agreement also requires the landlord to pay Soluna MC an amount approximately equal to the landlord’s net profits received from the landlord’s other tenants operating out of the Building Lease Premises.

Contingencies:

Legal

We are subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. When applicable, we accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.

The Company has been named as a party in the December 19, 2019 United States Environmental Protection Agency (“EPA”) Demand Letter regarding the Malta Rocket Fuel Area Superfund Site (“Site”) located in Malta and Stillwater, New York in connection with an alleged release of hazardous materials into the environment. The EPA is seeking reimbursement of response costs from all named parties in the amount of approximately $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. 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.