Hyperscale Data, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this quarterly report, the “Company,” “Ault Global,” “we,” “us” and “our” refer to Ault Global Holdings, Inc., a Delaware corporation. Ault Global is a diversified holding company pursuing growth by acquiring undervalued businesses and disruptive technologies with a global impact. Through its wholly and majority-owned subsidiaries and strategic investments, the Company owns and operates a data center at which it mines Bitcoin, and provides mission-critical products that support a diverse range of industries, including defense/aerospace, industrial, automotive, telecommunications, medical/biopharma, and textiles. In addition, the Company extends credit to select entrepreneurial businesses through a licensed lending subsidiary. Recent Developments 2021 ATM Offering On January 22, 2021, we entered into an At-The-Market Issuance Sales Agreement, as amended on February 17, 2021 and thereafter on March 5, 2021 (the “2021 Sales Agreement”) with Ascendiant Capital Markets, LLC, or the sales agent, relating to the sale of shares of common stock offered by a prospectus supplement and the accompanying prospectus, as amended by the amendments to the 2021 Sales Agreement dated February 16, 2021 and March 5, 2021. In accordance with the terms of the 2021 Sales Agreement, we may offer and sell shares of common stock having an aggregate offering price of up to $200.0 million from time to time through the sales agent. As of September 30, 2021, we had sold an aggregate of 34.7 million shares of common stock pursuant to the 2021 Sales Agreement for gross proceeds of $160.5 million. Acquisition of Michigan Cloud Data Center On January 29, 2021, Alliance Cloud Services, LLC, a majority-owned subsidiary of its wholly-owned subsidiary, Ault Alliance, closed on the acquisition of a 617,000 square foot energy-efficient facility located on a 34.5 acre site in southern Michigan for a purchase price of $3.9 million. The purchase price was paid in cash. Purchase Agreements for Bitcoin Mining Equipment During the quarter ended September 30, 2021, we executed contracts to purchase 4,000 Antminer S-19 Pro Bitcoin miners. As of September 30, 2021, we had received 1,000 of the Bitcoin miners. The remaining 3,000 units are expected to be delivered at a rate of 300 units per month between October 2021 and July 2021. The gross purchase price is $27.3 million, of which $18.1 million was paid as of September 30, 2021 with the balance scheduled to be paid between October 2021 and June 2022. During the quarter ended September 30, 2021, we capitalized $433,000 of shipping costs and $1.2 million of third-party commissions related to cryptocurrency machines and related equipment. In November 2021, we executed contracts to purchase an aggregate of 16,000 Bitcoin miners for $121 million. The purchase includes both the environmentally friendly S19 XP Antminers that feature a processing power of 140 terahashes per second (TH/s) with an energy consumption of 3.01 kilowatt-hours (kWh) and the S19j Pro Antminers that feature a processing power of 100 TH/s with an energy consumption of 2.95 kWh. Based on current delivery schedules, we expect that the 16,000 newly purchased miners will be shipped by Bitmain between March 2022 and September 2022. Investment in Alzamend Neuro, Inc. On March 9, 2021, DP Lending entered into a securities purchase agreement with Alzamend to invest $10.0 million in Alzamend common stock and warrants, subject to the achievement of certain milestones. DP Lending funded $4.0 million upon execution of the securities purchase agreement, which included the conversion of the short-term advance and convertible promissory note in the aggregate amount of $800,000, and funded an additional $2.0 million upon the achievement of a milestone related to Alzamend’s Phase 1 study of its Investigational New Drug application for AL001. The remaining $4.0 million will be funded upon Alzamend achieving certain milestones related to the U.S. Food and Drug Administration approval of Alzamend’s Investigational New Drug application and Phase 1a human clinical trials for Alzamend’s lithium based ionic cocrystal therapy, known as AL001. Under the securities purchase agreement, in aggregate, Alzamend has agreed to sell up to 6,666,667 shares of its common stock to DP Lending for $10.0 million, or $1.50 per share, and issue to DP Lending warrants to acquire 3,333,334 shares of Alzamend common stock with an exercise price of $3.00 per share. The transaction was approved by our independent directors after receiving a third-party valuation report of Alzamend. 1 On June 15, 2021, Alzamend closed an initial public offering at a price to the public of $5.00 per share. DP Lending purchased 2 million shares of Alzamend’s Common stock in the initial public offering for an aggregate of $10 million. Alzamend’s common stock is listed on The Nasdaq Capital Market under the ticker symbol “ALZN”. At September 30, 2021, the fair value of Alzamend’s common stock was $3.08 based on the closing price of Alzamend’s common stock. Based upon the fair value of Alzamend common stock at September 30, 2021, during the nine months ended September 30, 2021, we recorded an unrealized gain of $3.8 million related to our investment in Alzamend common stock. In conjunction with the March 2021 securities purchase agreement, Alzamend issued us warrants to purchase 1,333,334 shares of Alzamend common stock at an exercise price of $3.00 per share for a period of five years. We computed the fair value of Alzamend warrants using the Black-Scholes option pricing model. During the nine months ended September 30, 2021, we recorded an unrealized gain on its investment in warrants of Alzamend of $2.6 million. Our investment in Alzamend will be revalued on each balance sheet date. Significant Fluctuation in the Fair Value of Investment in Alzamend Revenues from our trading activities during the nine months ended September 30, 2021 included significant net gains on equity securities, including unrealized gains and losses from market price changes. These gains and losses have caused, and will continue to cause, significant volatility in our periodic earnings. At September 30, 2021, the fair value of Alzamend’s common stock was $3.08 based on the closing price of Alzamend’s common stock. Based upon the fair value of Alzamend common stock at September 30, 2021, during the three months ended September 30, 2021, we recorded an unrealized loss of $27.4 million related to our investment in Alzamend common stock and during the nine months ended September 30, 2021, we recorded an unrealized gain of $3.8 million related to our investment in Alzamend common stock. During the three months ended September 30, 2021, we recorded an unrealized loss on our investment in warrants of Alzamend of $6.0 million and during the nine months ended September 30, 2021, we recorded an unrealized gain on our investment in warrants of Alzamend of $2.6 million. Our investment in Alzamend will be revalued on each balance sheet date. Investment in Ault & Company, Inc. On February 25, 2021, Ault & Company, a related party, sold and issued an 8% Secured Promissory Note in the principal amount of $2.5 million to us. The principal amount of the Secured Promissory Note, plus any accrued and unpaid interest at a rate of 8% per annum, is due and payable on February 25, 2022. Forgiveness of Debt On January 11, 2021, we received forgiveness of a loan under the Paycheck Protection Program (“PPP”) in the principal amount of $715,000. On May 20, 2021, Microphase received forgiveness of a loan under the PPP in the principal amount of $467,000. Impact of Coronavirus on Our Operations The COVID-19 pandemic continues to present significant business challenges in 2021. During the third quarter of 2021, we continued to experience impacts in each of our business areas related to COVID-19, primarily in delays in supplier deliveries and the impacts of remote work and adjusted work schedules. During the third quarter, we continued to take measures to protect the health and safety of our employees, including measures to facilitate the provision of vaccines to our employees in line with state and local guidelines. We also continued to work with our customers and suppliers to minimize disruptions. 2 Although the COVID-19 pandemic did not have a significant impact on our financial results in the third quarter of 2021, the ultimate impact of COVID-19 on our operations and financial performance in future periods, including our ability to execute our programs in the expected timeframe, remains uncertain and will depend on future pandemic related developments, including the duration of the pandemic, any potential subsequent waves of COVID-19 infection, the effectiveness, distribution and acceptance of COVID-19 vaccines, and related government actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. The long-term impacts of COVID-19 on demand for our products and services are also difficult to predict but could negatively affect our future results and business operations. For additional risks to the corporation related to the COVID-19 pandemic, see Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020. General As a holding company, our business strategy is designed to increase shareholder value. Under this strategy, we are focused on acquiring, managing and financially supporting our subsidiaries and partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned to shareholders. We have, are and will consider initiatives including, among others: public offerings, the acquisition of new subsidiaries and/or partner companies, the sale of individual partner companies, the sale of certain or all partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. We anticipate returning value to shareholders after satisfying our debt obligations and working capital needs. From time to time, we engage in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of a process we initiate. To the extent we believe that a subsidiary partner company’s further growth and development can best be supported by a different ownership structure or if we otherwise believe it is in our shareholders’ best interests, we will seek to sell some or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets, mergers and acquisitions, public offerings of the subsidiary or partner company’s securities and, in the case of publicly traded partner companies, sales of their securities in the open market. Our plans may include taking subsidiaries or partner companies public through rights offerings and directed share subscription programs. We will continue to consider these (or similar) programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize value for our shareholders. Over the recent past we have provided capital and relevant expertise to fuel the growth of businesses in defense/aerospace, industrial, telecommunications, medical and textile industries. We have provided capital to subsidiaries as well as partner companies in which we have an equity interest or may be actively involved, influencing development through board representation and management support. We are a Delaware corporation with our corporate office located at 11411 Southern Highlands Pkwy #240, Las Vegas, Nevada 89141. Our phone number is 949-444-5464 and our website address is www.aultglobal.com. 3 Results of Operations Results of Operations for the Three Months Ended September 30, 2021 and 2020 The following table summarizes the results of our operations for the three months ended September 30, 2021 and 2020. For the Three Months Ended September 30, 2021 2020 Revenue $ 7,803,000 $ 5,705,000 Revenue, cryptocurrency mining 272,000 - Revenue, lending and trading activities (38,869,000 ) (29,000 ) Total revenue (30,794,000 ) 5,676,000 Cost of revenue 5,271,000 3,736,000 Gross profit (loss) (36,065,000 ) 1,940,000 Operating expenses Research and development 524,000 469,000 Selling and marketing 1,993,000 260,000 General and administrative 11,292,000 2,836,000 Total operating expenses 13,809,000 3,565,000 Loss from continuing operations (49,874,000 ) (1,625,000 ) Interest income 125,000 102,000 Accretion of discount on note receivable, related party 4,210,000 - Interest expense (140,000 ) (2,366,000 ) Change in fair value of marketable equity securities (750,000 ) (29,000 ) Realized gain on marketable securities 30,000 - Loss on extinguishment of debt - (12,823,000 ) Change in fair value of warrant liability 259,000 - Loss before income taxes (46,140,000 ) (16,741,000 ) Income tax benefit 3,366,000 6,000 Net loss (42,774,000 ) (16,735,000 ) Less: Net gain attributable to non-controlling interest (96,000 ) - Net loss attributable to Ault Global Holdings (42,870,000 ) (16,735,000 ) Preferred dividends (4,000 ) (3,000 ) Net loss available to common stockholders $ (42,874,000 ) $ (16,738,000 ) Comprehensive loss Net loss available to common stockholders $ (42,874,000 ) $ (16,738,000 ) Other comprehensive income (loss) Foreign currency translation adjustment (182,000 ) 44,000 Net unrealized gain (loss) on derivative securities of related party (4,849,000 ) 1,561,000 Other comprehensive income (loss) (5,031,000 ) 1,605,000 Total comprehensive loss $ (47,905,000 ) $ (15,133,000 ) 4 Revenues Revenues by segment for the three months ended September 30, 2021 and 2020 are as follows: For the Three Months Ended September 30, Increase 2021 2020 (Decrease) % Gresham Worldwide (“GWW”) $ 6,373,000 $ 4,329,000 $ 2,044,000 47 % TurnOnGreen 1,094,000 1,376,000 (282,000 ) -20 % Ault Alliance: Revenue, cryptocurrency mining 238,000 - 238,000 — Revenue, lending and trading activities (38,868,000 ) (29,000 ) (38,839,000 ) 133,928 % Other 369,000 — 369,000 — Total revenue $ (30,794,000 ) $ 5,676,000 $ (36,470,000 ) -643 % Our revenues decreased by $36.5 million, or 643%, to negative $30.8 million for the three months ended September 30, 2021, from $5.7 million for the three months ended September 30, 2020. GWW GWW revenues increased by $2.0 million, or 47%, to $6.4 million for the three months ended September 30, 2021, from $4.3 million for the three months ended September 30, 2020. GWW revenue in 2021 includes $1.8 million from Relec, which was acquired on November 30, 2020. In the prior year period, revenue was constrained by working capital issues. The increase in revenue from our GWW segment for customized solutions for the military markets reflects the benefit of our improved liquidity in 2021, as we were able to allocate additional funds to our defense business to improve their ability to fulfill backlog. Revenue from Enertec, which largely consists of revenue recognized over time, was $2.9 million for the three months ended September 30, 2021, a decrease of $687,000 or 31%, from $2.2 million in the prior-year period. TurnOnGreen TurnOnGreen revenues decreased by $282,000 or 20%, to $1.1 million for the three months ended September 30, 2021, from $1.4 million for three months ended September 30, 2020. The decrease is primarily due to supply chain disruptions during the quarter. Ault Alliance Revenues from our cryptocurrency mining operations were $238,000 for the three months ended September 30, 2021, compared to nil for the three months ended September 30, 2020, as we resumed our cryptocurrency mining operations during the first quarter of 2021. Our decision to resume cryptocurrency mining operations in 2021 was based on several factors, which had positively affected the number of active miners we operated, including the market prices of digital currencies, and favorable power costs available at our Michigan data center. Revenues from our lending and trading activities decreased to negative $38.9 million for the three months ended September 30, 2021, from negative revenues of $29,000 for the three months ended September 30, 2020. Revenues from our trading activities during the three months ended September 30, 2021 included significant unrealized losses from market price changes related to Alzamend. Unrealized gain and losses have caused, and will continue to cause, significant volatility in our periodic earnings. At September 30, 2021, the fair value of Alzamend’s common stock was $3.08 based on the closing price of Alzamend’s common stock. Based upon the fair value of Alzamend common stock at September 30, 2021, during the three months ended September 30, 2021, we recorded an unrealized loss of $27.4 million related to our investment in Alzamend common stock. During the three months ended September 30, 2021, we recorded an unrealized loss on our investment in warrants of Alzamend of $6.0 million. Our investment in Alzamend will be revalued on each balance sheet date. 5 Gross margins Gross margins were negative $36.0 million or 117.1% for the three months ended September 30, 2021 compared to 35.3% for the three months ended September 30, 2020. Our gross margins have typically ranged between 33% and 37%, with slight variations depending on the overall composition of our revenue. Our gross margins during the three months ended September 30, 2021, were impacted by the unfavorable margins from our lending and trading activities. Excluding the effects of margin from our lending and trading activities, our adjusted gross margins for the three months ended September 30, 2021, would have been 34.7%, consistent our historical range. Research and development Research and development expenses increased by $55,000 to $524,000 for the three months ended September 30, 2021, from $469,000 for the three months ended September 30, 2020. The increase in research and development expenses is due to costs incurred at GWW related to the development of products for defense applications. Selling and marketing Selling and marketing expenses were $2.0 million for the three months ended September 30, 2021, compared to $260,000 for the three months ended September 30, 2020, an increase of $1.7 million, or 667%. The increase was the result of increases in personnel costs directly attributed to an increase in sales and marketing personnel and consultants primarily at Ault Alliance related to digital marketing and digital learning. The increase is also attributable to costs incurred at TurnOnGreen to grow our selling and marketing infrastructure related to our electric vehicle charger products. General and administrative General and administrative expenses were $11.3 million for the three months ended September 30, 2021, compared to $2.8 million for the three months ended September 30, 2020, an increase of $8.5 million or 298%. General and administrative expenses increased from the comparative prior period, mainly due to: · non-cash stock compensation costs of $4.1 million; · the accrual of an $859,000 performance bonus related to realized gains on trading activities during the period; · general and administrative costs of $385,000 from Relec, which was acquired on November 30, 2020; · increased costs related to our Michigan Data Center, operated by Alliance Cloud Services; and · higher consulting, audit, legal and insurance costs. Loss from continuing operations We recorded loss from continuing operations of $49.9 million for the three months ended September 30, 2021, compared to an operating loss of $1.6 million for the three months ended September 30, 2020. The significant operating loss for the three months ended September 30, 2021 is attributable to the significant unrealized losses on our investment in Alzamend, coupled with the increase in operating expenses, primarily general and administrative expenses. 6 Interest income Interest income was $125,000 for the three months ended September 30, 2021 compared to $102,000 for the three months ended September 30, 2020. Accretion of discount on note receivable, related party Accretion of discount on note receivable, related party was $4.2 million for the three months ended September 30, 2021 compared to nil for the three months ended September 30, 2020, due to the significant decline in the value of warrants in AVLP, accretion of the warrant discount was accelerated, resulting in a discount of nil related to warrants issued in conjunction with the convertible promissory note of AVLP as of September 30, 2021. Interest expense Interest expense was $140,000 for the three months ended September 30, 2021 compared to $2.4 million for the three months ended September 30, 2020. The decrease in interest expense for the three months ended September 30, 2021 was primarily related to the decrease in our level of borrowings. Change in fair value of warrant liability During the three months ended September 30, 2021, the fair value of the warrants that were issued during 2021 in a series of debt financings decreased by $259,000. The fair value of these warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the Consolidated Statements of Operations and Comprehensive Loss. Change in fair value of marketable equity securities Change in fair value of marketable equity securities was a loss of $750,000 for the three months ended September 30, 2021 compared to a gain of $29,000 for the three months ended September 30, 2020. Loss on extinguishment of debt Gain on extinguishment of debt was nil for the three months ended September 30, 2021 compared to a loss of $12.8 million for the three months ended September 30, 2020. During the three months ended September 30, 2020, principal and accrued interest of $2.4 million and $699,000, respectively, on our debt securities was satisfied through the issuance of 4.9 million shares of our common stock. We recognized a loss on extinguishment of $10.3 million as a result of these issuances of common stock based on the fair value of our common stock at the date of the exchanges. The remaining loss on extinguishment is primarily due to the estimated fair value of warrants to purchase an aggregate of 1.4 million shares of common stock that were issued to Esousa pursuant to the Master Exchange Agreement. Net loss For the foregoing reasons, our net loss for the three months ended September 30, 2021, was $42.8 million compared to a net loss of $16.7 million for the three months ended September 30, 2020. Other comprehensive income (loss) Other comprehensive loss was $5.0 million for the three months ended September 30, 2021, compared to other comprehensive income of $1.6 million for the three months ended September 30, 2020. Other comprehensive loss for the three months ended September 30, 2021, which decreased our equity, was primarily due to unrealized losses in the warrant derivative securities that we received as a result of our investment in AVLP, a related party. During the three months ended September 30, 2020, unrealized losses in the warrant derivative securities of AVLP was the primary component of other comprehensive loss. 7 Results of Operations for the Nine Months Ended September 30, 2021 and 2020 The following table summarizes the results of our operations for the nine months ended September 30, 2021 and 2020. For the Nine Months Ended September 30, 2021 2020 Revenue $ 24,272,000 $ 16,709,000 Revenue, cryptocurrency mining 693,000 - Revenue, lending and trading activities 19,615,000 (27,000 ) Total revenue 44,580,000 16,682,000 Cost of revenue 16,657,000 11,085,000 Gross profit 27,923,000 5,597,000 Operating expenses Research and development 1,657,000 1,372,000 Selling and marketing 4,740,000 893,000 General and administrative 24,376,000 8,656,000 Total operating expenses 30,773,000 10,921,000 Loss from continuing operations (2,850,000 ) (5,324,000 ) Interest income 176,000 139,000 Accretion of discount on note receivable, related party 4,210,000 - Interest expense (475,000 ) (4,414,000 ) Change in fair value of marketable equity securities (705,000 ) (58,000 ) Realized gain on marketable securities 428,000 - Gain (loss) on extinguishment of debt 929,000 (13,298,000 ) Change in fair value of warrant liability (130,000 ) (6,000 ) Income (loss) from continuing operations before income taxes 1,583,000 (22,961,000 ) Income tax benefit (144,000 ) 18,000 Income (loss) from continuing operations 1,439,000 (22,943,000 ) Net loss from discontinued operations, net of taxes - (1,698,000 ) Net income (loss) 1,439,000 (24,641,000 ) Less: Net gain attributable to non-controlling interest (93,000 ) - Net income (loss) attributable to Ault Global Holdings 1,346,000 (24,641,000 ) Preferred dividends (13,000 ) (10,000 ) Net income (loss) available to common stockholders $ 1,333,000 $ (24,651,000 ) Comprehensive loss Net income (loss) available to common stockholders $ 1,333,000 $ (24,651,000 ) Other comprehensive income (loss) Foreign currency translation adjustment (141,000 ) (8,000 ) Net unrealized gain (loss) on derivative securities of related party (7,773,000 ) 1,080,000 Other comprehensive income (loss) (7,914,000 ) 1,072,000 Total comprehensive loss $ (6,581,000 ) $ (23,579,000 ) 8 Revenues Revenues by segment for the nine months ended September 30, 2021 and 2020 are as follows: For the Nine Months Ended September 30, Increase 2021 2020 (Decrease) % GWW $ 19,198,000 $ 12,906,000 $ 6,292,000 49 % TurnOnGreen 4,308,000 3,803,000 505,000 13 % Ault Alliance: Revenue, cryptocurrency mining 619,000 - 619,000 — Revenue, lending and trading activities 19,615,000 (27,000 ) 19,642,000 -72,748 % Other 840,000 — 840,000 — Total revenue $ 44,580,000 $ 16,682,000 $ 27,898,000 167 % Our revenues increased by $27.9 million, or 194%, to $44.6 million for the nine months ended September 30, 2021, from $16.7 million for the nine months ended September 30, 2020. GWW GWW revenues increased by $6.3 million, or 49%, to $19.2 million for the nine months ended September 30, 2021, from $12.9 million for the nine months ended September 30, 2020. GWW revenue in 2021 includes $5.3 million from Relec, which was acquired on November 30, 2020. In the prior year period, revenue was constrained by working capital issues. The increase in revenue from our GWW segment for customized solutions for the military markets reflects the benefit of our improved liquidity in 2021, as we were able to allocate additional funds to our defense business to improve their ability to fulfill backlog. Revenue from Enertec, which largely consists of revenue recognized over time, was $7.8 million for the nine months ended September 30, 2021, an increase of $1.0 million, or 14.3%, from $6.8 million in the prior-year period. TurnOnGreen TurnOnGreen revenues increased by $505,000, or 13%, to $4.3 million for the nine months ended September 30, 2021, from $3.8 million for nine months ended September 30, 2020. The increase is due, in part, to disruptions to TurnOnGreen’s business operations experienced in the prior year period related to the temporary suspension of operations related to the outbreak of COVID-19. Ault Alliance Revenues from our cryptocurrency mining operations were $619,000 for the nine months ended September 30, 2021, compared to nil for nine months ended September 30, 2020, as we resumed our cryptocurrency mining operations during the first quarter of 2021. Our decision to resume cryptocurrency mining operations in 2021 was based on several factors, which positively affected the number of active miners we operated, including the market prices of digital currencies, and favorable power costs available at our Michigan data center. Revenues from our lending and trading activities increased to $19.6 million for the nine months ended September 30, 2021, from a loss of revenues of $27,000 for the nine months ended September 30, 2020, which is attributable to a significant allocation of capital from our recent equity financing transactions to our loan and investment portfolio. During the nine months ended September 30, 2021, DP Lending generated significant income from appreciation of investments in marketable securities as well as shares of common stock underlying convertible notes and warrants issued to DP Lending in certain financing transactions. Under its business model, DP Lending also generates revenue through origination fees charged to borrowers and interest generated from each loan. 9 Revenues from our trading activities during the nine months ended September 30, 2021 included significant net gains on equity securities, including unrealized gains and losses from market price changes. These gains and losses have caused, and will continue to cause, significant volatility in our periodic earnings. At September 30, 2021, the fair value of Alzamend’s common stock was $3.08 based on the closing price of Alzamend’s common stock. Based upon the fair value of Alzamend common stock at September 30, 2021, during the nine months ended September 30, 2021, we recorded an unrealized gain of $3.8 million related to our investment in Alzamend common stock. During the nine months ended September 30, 2021, we recorded an unrealized gain on our investment in warrants of Alzamend of $2.6 million. Our investment in Alzamend will be revalued on each balance sheet date. Revenues from our trading activities in 2021 included significant net gains on equity securities, including unrealized gains and losses from market price changes. These gains and losses have caused, and will continue to cause, significant volatility in our periodic earnings. Gross margins Gross margins increased to 62.6% for the nine months ended September 30, 2021 compared to 33.6% for the nine months ended September 30, 2020. Our gross margins have typically ranged between 33% and 37%, with slight variations depending on the overall composition of our revenue. Our gross margins of 62.6% recognized during the nine months ended September 30, 2021, were impacted by the favorable margins from our lending and trading activities. Excluding the effects of margin from our lending and trading activities, our adjusted gross margins for the nine months ended September 30, 2021, would have been 33.3%, consistent with our historical range. Research and development Research and development expenses increased by $285,000 to $1.7 million for the nine months ended September 30, 2021, from $1.4 million for the nine months ended September 30, 2020. The increase in research and development expenses is due to costs incurred at TurnOnGreen related to the development of our electric vehicle charger products. Selling and marketing Selling and marketing expenses were $4.7 million for the nine months ended September 30, 2021, compared to $893,000 for the nine months ended September 30, 2020, an increase of $3.8 million, or 431%. The increase was the result of increases in personnel costs directly attributed to an increase in sales and marketing personnel and consultants primarily at Ault Alliance related to digital marketing and digital learning. The increase is also attributable to costs incurred at TurnOnGreen to grow our selling and marketing infrastructure related to our electric vehicle charger products. General and administrative General and administrative expenses were $24.4 million for the nine months ended September 30, 2021, compared to $8.7 million for the nine months ended September 30, 2020, an increase of $15.7 million, or 182%. General and administrative expenses increased from the comparative prior period, mainly due to: · non-cash stock compensation costs of $4.7 million; · the accrual of a $3.7 million performance bonus related to realized gains on trading activities during the period; · general and administrative costs of $1.1 million from Relec, which was acquired on November 30, 2020; · increased costs related to our Michigan Data Center, operated by Alliance Cloud Services; and 10 · higher consulting, audit, legal and insurance costs. Loss from continuing operations We recorded a loss from continuing operations of $2.9 million for the nine months ended September 30, 2021, compared to an operating loss of $5.3 million for the nine months ended September 30, 2020. The improvement in operating results is attributable to the increase in revenue and gross margins partially offset by the increase in operating expenses, primarily general and administrative expenses. Interest income Interest income was $176,000 for the nine months ended September 30, 2021 compared to $139,000 for the nine months ended September 30, 2020. Accretion of discount on note receivable, related party Accretion of discount on note receivable, related party was $4.2 million for the three months ended September 30, 2021 compared to nil for the nine months ended September 30, 2020, due to the significant decline in the value of warrants in AVLP, accretion of the warrant discount was accelerated, resulting in a discount of nil related to warrants issued in conjunction with the convertible promissory note of AVLP as of September 30, 2021. Interest expense Interest expense was $475,000 for the nine months ended September 30, 2021 compared to $4.4 million for the nine months ended September 30, 2020. The decrease in interest expense for the nine months ended September 30, 2021 was primarily related to the decrease in our level of borrowings. Change in fair value of warrant liability During the nine months ended September 30, 2021, the fair value of the warrants that were issued during 2021 in a series of debt financings increased by $130,000. The fair value of these warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the Consolidated Statements of Operations and Comprehensive Loss. Change in fair value of marketable equity securities Change in fair value of marketable equity securities was a loss of $705,000 for the nine months ended September 30, 2021 compared to a loss of $58,000 for the nine months ended September 30, 2020. Realized gain on marketable securities Realized gain on marketable securities was $428,000 for the nine months ended September 30, 2021 compared to nil for the nine months ended September 30, 2020. Gain (loss) on extinguishment of debt Gain on extinguishment of debt was $929,000 for the nine months ended September 30, 2021 compared to a loss of $13.3 million for the nine months ended September 30, 2020. During April 2020, we received loans under the PPP in the principal amount of $715,000 and our majority owned subsidiary, Microphase, received loans in the principal amount of $467,000. On January 11, 2021, we received forgiveness in the principal amount of $715,000 . On May 20, 2021, Microphase received forgiveness in the principal amount of $467,000 . During the nine months ended September 30, 2020, principal and accrued interest of $4.0 million and $1.6 million, respectively, on our debt securities was satisfied through the issuance of 6.8 million shares of our common stock. We recognized a loss on extinguishment of $10.5 million as a result of these issuances. The remaining loss on extinguishment is primarily due to the estimated fair value of warrants to purchase an aggregate of 1.7 million shares of common stock that were issued to Esousa pursuant to the Master Exchange Agreement. 11 Net loss from discontinued operations As a result of temporary closures of restaurants in San Diego County and the deteriorating business conditions at our restaurant businesses, during the first quarter of 2020, we concluded that discontinuing the operations of I.AM was ultimately in our best interest. Management determined that the permanent closing of the restaurant operations met the criteria for presentation as discontinued operations. Accordingly, the results of the restaurant operations are presented as discontinued operations in our consolidated statements of operations and comprehensive loss and are excluded from continuing operations for all periods presented. Additionally, on November 2, 2020, I.AM filed a voluntary petition for bankruptcy under Chapter 7 in the United States Bankruptcy Court in the Central District of California, Santa Ana Division, case number 8:20-bk-13076. As a result of I.AM’s bankruptcy filing on November 2, 2020, Ault Global ceded authority for managing the business to the Bankruptcy Court. For this reason, we concluded that Ault Global had lost control of I.AM, and no longer had significant influence over I.AM. Therefore, we deconsolidated I.AM effective with the filing of the Chapter 11 bankruptcy in November 2020. Net income (loss) For the foregoing reasons, our net income for the nine months ended September 30, 2021, was $1.4 million compared to a net loss of $24.6 million for the nine months ended September 30, 2020. Other comprehensive income (loss) Other comprehensive loss was $7.9 million for the nine months ended September 30, 2021, compared to other comprehensive income of $1.1 million for the nine months ended September 30, 2020. Other comprehensive loss for the nine months ended September 30, 2021, which decreased our equity, was primarily due to unrealized losses in the warrant derivative securities that we received as a result of our investment in AVLP, a related party. During the nine months ended September 30, 2020, unrealized losses in the warrant derivative securities of AVLP was the primary component of other comprehensive loss. Liquidity and Capital Resources On September 30, 2021, we had cash and cash equivalents of $44.0 million. This compares with cash and cash equivalents of $18.7 million at December 31, 2020. The increase in cash and cash equivalents was primarily due to cash provided by financing activities related to our 2021 ATM offering. Net cash used in continuing operating activities totaled $56.9 million for the nine months ended September 30, 2021, compared to $5.4 million for the nine months ended September 30, 2020. Cash used for operating activities included $34.7 million net cash used for marketable securities related to trading activities related to the operations of DP Lending and $1.1 million cash used to reduce accounts payable and accrued liabilities. Net cash used in investing activities was $68.7 million for the nine months ended September 30, 2021, compared to $894,000 for the nine months ended September 30, 2020 and reflects the following transactions: · Capital expenditures - $19.8 million of capital expenditures related to Bitcoin mining equipment at Ault Alliance. During the quarter ended September 30, 2021, we executed contracts to purchase 4,000 Antminer S-19 Pro Bitcoin miners. As of September 30, 2021, we had received 1,000 of the Bitcoin miners. The remaining 3,000 units are expected to be delivered at a rate of 300 units per month between October 2021 and July 2021. The gross purchase price is $27.3 million, of which $18.1 million was paid as of September 30, 2021 with the balance scheduled to be paid between October 2021 and June 2022. During the quarter ended September 30, 2021, we capitalized $433,000 of shipping costs and $1.2 million of third-party commissions related to cryptocurrency machines and related equipment. 12 · Acquisition of Michigan Cloud Data Center - On January 29, 2021, Alliance Cloud Services, LLC, a majority-owned subsidiary of Ault Alliance closed on the acquisition of a 617,000 square foot energy-efficient facility located on a 34.5 acre site in southern Michigan for a purchase price of $3.9 million. · Investment in Alzamend Neuro, Inc. - On March 9, 2021, our wholly owned subsidiary, DP Lending, entered into a securities purchase agreement with Alzamend, a related party, to invest $10 million in Alzamend common stock and warrants, subject to the achievement of certain milestones. We agreed to fund $4 million upon execution of the securities purchase agreement and to fund the balance upon Alzamend achieving certain milestones related to the U.S. Food and Drug Administration approval of Alzamend’s Investigational New Drug application and Phase 1a human clinical trials for Alzamend’s lithium based ionic cocrystal therapy, known as AL001. Under the securities purchase agreement, Alzamend has agreed to sell up to 6,666,667 shares of its common stock to DPL for $10 million, or $1.50 per share, and issue to DPL warrants to acquire up to 3,333,334 shares of Alzamend common stock with an exercise price of $3.00 per share. The transaction was approved by our independent directors after receiving a third-party valuation report of Alzamend. · Investment in Ault & Company, Inc. - On February 25, 2021, Ault & Company, a related party, sold and issued an 8% Secured Promissory Note in the principal amount of $2.5 million to us. The principal amount of the Secured Promissory Note, plus any accrued and unpaid interest at a rate of 8% per annum, is due and payable on February 25, 2022. · Executive Chairman relocation benefit - On February 23, 2021, as part of a relocation benefit for our Executive Chairman, Milton C. Ault, III, related to the moving of our corporate headquarters from Newport Beach, CA to Las Vegas, NV, we agreed to purchase Mr. Ault’s California residence for the appraised market value of the property of $2.7 million. The house was subsequently sold during April 2021 and no gain or loss was recognized from sale of the property. Historically, we have financed our operations principally through issuances of convertible debt, promissory notes and equity securities. During 2021, we continued to successfully obtain additional equity financing. Net cash provided by financing activities was $151.1 million and $7.1 million for the nine months ended September 30, 2021 and 2020, respectively. Financing activities during the nine months ended September 30, 2021, primarily related to proceeds from the 2021 ATM offering. On January 22, 2021, we entered into an At-The-Market Issuance Sales Agreement, as amended on February 17, 2021 and thereafter on March 5, 2021 (the “2021 Sales Agreement”) with Ascendiant Capital Markets, LLC, or the sales agent, relating to the sale of shares of common stock offered by a prospectus supplement and the accompanying prospectus, as amended by the amendments to the 2021 Sales Agreement dated February 16, 2021 and March 5, 2021. In accordance with the terms of the 2021 Sales Agreement, we may offer and sell shares of common stock having an aggregate offering price of up to $200.0 million from time to time through the sales agent. As of September 30, 2021, we had sold an aggregate of 34.7 million shares of common stock pursuant to the 2021 Sales Agreement for gross proceeds of $160.5 million. We believe our current cash on hand is sufficient to meet its operating and capital requirements for at least the next twelve months from the date the financial statements for the quarter ended September 30, 2021 are issued. Critical Accounting Policies Fair value of financial instruments In accordance with ASC No. 820, Fair Value Measurements and Disclosures , fair value is defined as the exit price, or the amount that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a three-tier hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs include those that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. 13 We assess the inputs used to measure fair value using the three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market. The Company’s investments in AVLP, a related party controlled by Philou, an affiliate of the Company, consist of convertible promissory notes, warrants and shares of AVLP common stock. As of December 31, 2020, the Company has provided loans to AVLP in the principal amount $13,924,136 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 27,858,272 shares of AVLP common stock at an exercise price of $0.50 per share for a period of five years. Management used both a market and income approach to quantify the carrying amount of the convertible notes, including credit risk. The market approach considered the fair value of AVLP’s common stock adjusted for a lack of marketability discount and the time value of money based on expectation as to the timing of a potential liquidity event which could affect the timing of a settlement of the convertible notes. The income approach was primarily based on a discounted cash flow analysis with assumptions regarding forecasted revenues, operating margins and a risk-adjusted discount rate to compute the net present value of such cash flows. In determining the revenue and expense assumptions that were used in the discounted cash flow analysis, the Company considered the disruptive nature of AVLP’s Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system, the size of the market for the treatment of textiles, customer demand, existing treatment methods, the performance capabilities of the MLSE system and the risk of business execution and the adoption of AVLP’s disruptive technology. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.