Hyperscale Data, Inc. 10-Q/A

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this quarterly report, the “Company,” “BitNile,” “we,” “us” and “our” refer to Ault Alliance, Inc., a Delaware corporation which was then known as BitNile Holdings, Inc. BitNile is a diversified holding company pursuing growth by acquiring undervalued businesses and disruptive technologies with a global impact. Through its wholly 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 owns and operates hotels and extends credit to select entrepreneurial businesses through a licensed lending subsidiary. Recent Events and Developments On February 4, 2022, we and our wholly owned subsidiary Ault Alliance, Inc. (“Ault Alliance”) entered into a securities purchase agreement providing for our purchase of BitNile, Inc. (“BNI”) from Ault Alliance. As a result of this transaction, both BNI and Ault Alliance are each stand-alone wholly owned subsidiaries of ours. On February 10, 2022, consistent with our objective to have BNI operate the entirety of our business that relates to cryptocurrencies, Ault Alliance assigned the entirety of its interest in Alliance Cloud Services, LLC (“ACS”) to BNI. On February 25, 2022, we entered into an At-The-Market issuance sales agreement with Ascendiant Capital Markets, LLC to sell shares of common stock having an aggregate offering price of up to $200 million from time to time, through an “at the market offering” program (the “2022 ATM Offering”). As of March 31, 2022, we had sold an aggregate of 140.0 million shares of common stock pursuant to the 2022 ATM Offering for gross proceeds of $110.1 million. On March 20, 2022, we and our majority owned subsidiary Imperalis Holding Corp. (“IMHC”) entered into a securities purchase agreement (the “Agreement”) with TurnOnGreen, Inc. (“TOGI”), a wholly owned subsidiary of ours. According to the Agreement, we will (i) deliver to IMHC all of the outstanding shares of common stock of TOGI that we own, and (ii) forgive and eliminate the intracompany accounts between us and TOGI evidencing historical equity investments made by us in TOGI, in the approximate amount of $25,000,000, in consideration for the issuance by IMHC to us (the “Transaction”) of an aggregate of 25,000 newly designated shares of Series A Preferred Stock (the “IMHC Preferred Stock”), with each such share having a stated value of $1,000. The closing of the Transaction is subject to our delivery to IMHC of audited financial statements of TOGI and other customary closing conditions. Immediately following the completion of the Transaction, TOGI will be a wholly-owned subsidiary of IMHC. The parties to the Agreement have agreed that, upon completion of the Transaction, IMHC will change its name to TurnOnGreen, Inc., and, through an upstream merger whereby the current TOGI shall cease to exist, IMHC shall have TOGI’s two operating subsidiaries, TOG Technologies Inc. and Digital Power Corporation. Promptly following the closing of the Transaction, IMHC will dissolve its three dormant subsidiaries. On March 30, 2022, we fully paid our $66 million senior secured notes (the “Senior Notes”) and accrued interest. The 10% original issuance discount promissory notes were sold in December 2021 and were due and payable on March 31, 2022. On April 22, 2022, Ault Alliance entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with EYP Group Holdings, Inc. and each of its subsidiaries and affiliates listed on the signature page to the Asset Purchase Agreement (collectively, “EYP”), pursuant to which Ault Alliance agreed to purchase substantially all of the assets of EYP (such assets, the “Assets,” and such transaction, the “Asset Purchase”). On April 24, 2022, EYP filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Bankruptcy Court has permitted joint administration of the Chapter 11 cases under the caption “In re EYP Group Holdings, Inc., et al.”, Case No. 22-10367 (MFW) (the “Chapter 11 Cases”). Under the Asset Purchase Agreement, Ault Alliance or its designee(s), upon the closing of the transactions contemplated thereby, will purchase the Assets and assume certain of EYP’s obligations associated with the purchased Assets through a supervised sale under Section 363 of the Bankruptcy Code. Ault Alliance’s stalking horse bid is based on an enterprise value of approximately Sixty-Seven Million Seven Hundred Thousand Dollars ($67,700,000), which includes the purchase price for the Assets under the Asset Purchase Agreement of Sixty-Two Million Five Hundred Thousand Dollars ($62,500,000), as adjusted by a closing working capital adjustment (the “Purchase Price”), plus Ault Alliance’s assumption of certain liabilities. The Purchase Price would be paid in cash, less the outstanding amount of the DIP Loans and the senior secured loans previously issued by Ault Alliance to EYP, in an approximate aggregate amount of Eleven Million Seven Hundred Fifty Thousand Dollars ($11,750,000), and less the amount of certain liabilities assumed by Ault Alliance. The Asset Purchase Agreement requires the Asset Purchase to close by June 30, 2022. Consummation of the Asset Purchase is subject to Bankruptcy Court approved bidding procedures, higher and better offers made in the auction by other potential bidders, approval of the highest bidder by the Bankruptcy Court and customary closing conditions. 1 In connection with the Chapter 11 Cases, EYP filed a motion seeking Bankruptcy Court approval of debtor-in-possession financing on the terms set forth in that certain Senior Secured Superpriority Debtor-in-Possession Financing Term Sheet, dated April 22, 2022 (the “DIP Financing Agreement”), by and among Ault Alliance and EYP. The DIP Financing Agreement provides for senior secured superpriority debtor-in-possession financing facilities (the “DIP Financing”) in a $5 million commitment, with up to $2.5 million of such commitment available upon entry of an interim order (the “Interim DIP Order”) approving the DIP Financing (the “Initial Draw”). The DIP Financing will become available upon the satisfaction of customary conditions precedent thereto, including the entry of the Interim DIP Order. The remaining portion of the commitment, minus the Initial Draw, shall become available upon entry of the final order of the Bankruptcy Court approving the DIP Financing (collectively, any borrowings under the DIP Financing the “DIP Loans”). On April 26, 2022, the Bankruptcy Court entered the Interim DIP Order. On or about April 29, 2022, EYP made an Initial Draw in the amount of $1.5 million pursuant to the Interim DIP Order. A hearing on approval of the DIP Financing on a final basis is scheduled for May 25, 2022. The DIP Financing matures on the earlier of (i) June 30, 2022, (ii) the closing date following entry of one or more final orders approving the sale of the Assets in the Chapter 11 Cases, (iii) the acceleration of any outstanding DIP Loans following the occurrence of an uncured event of default (as defined in the DIP Financing Agreement), or (iv) entry of an order by the Bankruptcy Court in the Chapter 11 Cases either (a) dismissing such case or converting such Chapter 11 Case to a case under Chapter 7 of the Bankruptcy Code, or (b) appointing a Chapter 11 trustee or an examiner with enlarged powers relating to the operation of the business of EYP (i.e., powers beyond those set forth in sections 1106(a)(3) and (4) of the Bankruptcy Code), in each case without the consent of Ault Alliance. On April 26, 2022, Digital Power Lending, LLC (“DP Lending”) made an additional $4 million investment in Alzamend Neuro, Inc. (“Alzamend”), a related party and early clinical-stage biopharmaceutical company focused on developing novel products for the treatment of neurodegenerative diseases and psychiatric disorders. During 2021, DP Lending entered into a securities purchase agreement (the “SPA”) with Alzamend to invest $10 million in Alzamend common stock and warrants, subject to the achievement of certain milestones. DP Lending had previously funded $6 million pursuant to the terms of the SPA and the achievement of 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 AL001. On April 26, 2022, DP Lending funded the remaining amount due to achievement of the final milestone, the receipt of the full data set from Alzamend’s Phase 1 clinical trial for AL001. On May 12, 2022, BNI closed a $1.8 million membership interest purchase agreement whereby BNI acquired the 30% minority interest of ACS which BNI did not previously own, resulting in ACS becoming a wholly-owned subsidiary of BNI. ACS owns and operates our Michigan data center, where BNI conducts our Bitcoin mining operations. General As a holding company, our business strategy is designed to increase stockholder value. Under this strategy, we are focused on managing and financially supporting our existing subsidiaries and partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned to stockholders. We have, are and will consider initiatives including, among others: public offerings, 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 stockholder value. We anticipate returning value to stockholders 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 stockholders’ 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 stockholders. 2 Over the recent past we have provided capital and relevant expertise to fuel the growth of businesses in defense/aerospace, industrial, telecommunications, medical, crypto-mining, textiles and a select portfolio of commercial hospitality properties. 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, Suite 240, Las Vegas, NV 89141. Our phone number is 949-444-5464 and our website address is www.bitnile.com. Results of Operations Results of Operations for the Three Months Ended March 31, 2022 and 2021 The following table summarizes the results of our operations for the three months ended March 31, 2022 and 2021. For the Three Months Ended March 31, 2022 2021 Revenue $ 8,659,000 $ 7,905,000 Revenue, cryptocurrency mining, net 3,548,000 130,000 Revenue, hotel operations 2,698,000 - Revenue, lending and trading activities 17,921,000 5,210,000 Total revenue 32,826,000 13,245,000 Cost of revenue 10,494,000 5,108,000 Gross profit 22,332,000 8,137,000 Operating expenses Research and development 695,000 602,000 Selling and marketing 6,481,000 1,242,000 General and administrative 13,687,000 5,092,000 Impairment of mined cryptocurrency 439,000 - Total operating expenses 21,302,000 6,936,000 Income from operations 1,030,000 1,201,000 Interest and other income 449,000 37,000 Change in fair value of equity securities, related party - 2,969,000 Interest expense (29,824,000 ) (314,000 ) Change in fair value of marketable equity securities - 1,960,000 Realized gain on marketable securities 109,000 397,000 Loss from investment in unconsolidated entity (533,000 ) - Gain on extinguishment of debt - 482,000 Change in fair value of warrant liability (18,000 ) (679,000 ) (Loss) income before income taxes (28,787,000 ) 6,053,000 Income tax (provision) benefit - (6,000 ) Net (loss) income (28,787,000 ) 6,047,000 Net loss (income) attributable to non-controlling interest 15,000 (1,081,000 ) Net (loss) income attributable to Ault Alliance, Inc. (28,772,000 ) 4,966,000 Preferred dividends (5,000 ) (4,000 ) Net (loss) income available to common stockholders $ (28,777,000 ) $ 4,962,000 Comprehensive (loss) income Net (loss) income available to common stockholders $ (28,777,000 ) $ 4,962,000 Other comprehensive income (loss) Foreign currency translation adjustment (287,000 ) (93,000 ) Other comprehensive (loss) income (287,000 ) (93,000 ) Total comprehensive (loss) income $ (29,064,000 ) $ 4,869,000 3 Revenues Revenues by segment for the three months ended March 31, 2022 and 2021 are as follows: For the Three Months Ended March 31, Increase 2022 2021 (Decrease) % Gresham Worldwide, Inc. (“GWW”) $ 7,245,000 $ 6,350,000 $ 895,000 14 % TOGI 1,129,000 1,383,000 (254,000 ) -18 % Cryptocurrency Revenue, cryptocurrency mining, net 3,548,000 130,000 3,418,000 2,629 % Revenue, commercial real estate leases 278,000 172,000 106,000 62 % Real estate 2,698,000 - 2,698,000 — Ault Alliance: Revenue, lending and trading activities 17,921,000 5,210,000 12,711,000 244 % Other 7,000 - 7,000 — Total revenue $ 32,826,000 $ 13,245,000 $ 19,581,000 148 % Our revenues increased by $19.6 million, or 148%, to $32.8 million for the three months ended March 31, 2022, from $13.2 million for the three months ended March 31, 2021. GWW GWW revenues increased by $0.9 million, or 14%, to $7.2 million for the three months ended March 31, 2022, from $6.4 million for the three months ended March 31, 2021. The increase in revenue from our GWW segment for customized solutions for the military markets reflects higher revenue from Enertec, which largely consists of revenue recognized over time, grew to $3.3 million for the three months ended March 31, 2022, an increase of $0.8 million, or 33.4%, from $2.4 million in the prior-year period. TOGI TOGI revenues for the three months ended March 31, 2022 of $1.1 million declined $0.3 million, or 18%, from $1.4 million for the three months ended March 31, 2021, due to supply chain challenges. Cryptocurrency Revenues from our cryptocurrency mining operations were $3.5 million for the three months ended March 31, 2022, compared to $0.1 million for three months ended March 31, 2021. During 2021, we purchased Bitcoin mining equipment and increased our cryptocurrency mining activities. Our decision to increase our 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. Real Estate Real estate segment revenues were $2.7 million for the three months ended March 31, 2022 compared to nil for the three months ended March 31, 2021. On December 22, 2021, the real estate segment acquired four hotel properties for $71.3 million, consisting of a 136-room Courtyard by Marriott, a 133-room Hilton Garden Inn and a 122-room Residence Inn by Marriott in Middleton, WI, as well as a 135-room Hilton Garden Inn in Rockford, IL. Other than the cryptocurrency segment Michigan data center, we did not have any income-producing real estate prior to the hotel acquisitions. Ault Alliance Revenues from our lending and trading activities increased to $17.9 million for the three months ended March 31, 2022, from $5.2 million for the three months ended March 31, 2021, which is attributable to a significant allocation of capital from our equity financing transactions to our loan and investment portfolio. During the three months ended March 31, 2022, 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. 4 Revenues from our trading activities during the three months ended March 31, 2022 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 68.0% for the three months ended March 31, 2022, compared to 61.4% for the three months ended March 31, 2021. 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 68.0% recognized during the three months ended March 31, 2022 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 three months ended March 31, 2022, would have been 30%, slightly lower than our historical range, due in part to lower margins at TOGI related to higher freight costs for the three months ended March 31, 2022. Research and Development Research and development expenses increased by $0.1 million for the three months ended March 31, 2022, from $0.6 million for the three months ended March 31, 2021. The increase in research and development expenses is due to product development efforts at GWW. Selling and Marketing Selling and marketing expenses were $6.5 million for the three months ended March 31, 2022, compared to $1.2 million for the three months ended March 31, 2021, an increase of $5.2 million, or 422%. The increase was the result of $5.0 million higher marketing costs at Ault Alliance, including $3.5 million related to an advertising sponsorship agreement as well as increases in sales and marketing personnel and consultants. The increase is also attributable to a $0.2 million increase in costs incurred at TOGI to grow our selling and marketing infrastructure related to our EV charger products. General and Administrative General and administrative expenses were $13.7 million for the three months ended March 31, 2022, compared to $5.1 million for the three months ended March 31, 2021, an increase of $8.6 million, or 169%. General and administrative expenses increased from the comparative prior period, mainly due to: · non-cash stock compensation costs of $2.6 million; · general and administrative costs of $1.8 million from our hotel operations, which were acquired in December 2021; · increased costs of $0.9 million related to the Michigan data center, operated by ACS; and · higher legal expense of $1.3 million, salaries of $0.5 million and audit fees of $0.3 million. Income From Operations We recorded income from operations of $1.0 million for the three months ended March 31, 2022, compared to $1.2 million for the three months ended March 31, 2021. The decrease in operating income is attributable to the increase in operating expenses partially offset by the increase in revenue and gross margins. Interest and Other Income Interest and other income was $0.4 million for the three months ended March 31, 2022 compared to $37,000 for the three months ended March 31, 2021. Other income for the three months ended March 31, 2022 included $0.3 million other income from Alpha Fund, which was formed in July 2021. 5 Change in fair value of equity securities, related party Change in fair value of equity securities, related party resulting from the warrant securities that we received as a result of our investment in AVLP was nil for the three months ended March 31, 2022, compared to a gain of $3.0 million for the three months ended March 31, 2021. Interest Expense Interest expense was $29.8 million for the three months ended March 31, 2022, compared to $0.3 million for the three months ended March 31, 2021. The increase in interest expense relates to the $66.0 million of Senior Notes issued in December 2021, which were fully paid in March 2022. Interest expense from these Senior Notes included the amortization of debt discount of $26.3 million from the issuance of warrants, a non-cash charge, and original issue discount, in connection with these Senior Notes. Change in Fair Value of Warrant Liability During the three months ended March 31, 2022, the fair value of the warrants that were issued during 2021 in a series of debt financings increased by $18,000. 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 condensed consolidated statements of operations and comprehensive loss. Change in Fair Value of Marketable Equity Securities Change in fair value of marketable equity securities was nil for the three months ended March 31, 2022, compared to a gain of $2.0 million for the three months ended March 31, 2021. The change relates to an investment in marketable securities held by Microphase Corporation (“Microphase”), a majority owned subsidiary of GWW, that was fully sold in the fourth quarter of 2021. Realized Gain on Marketable Securities Realized gain on marketable securities was $0.1 million for the three months ended March 31, 2022, compared to $0.4 million for the three months ended March 31, 2021. The change relates to realized gains from an investment in marketable securities held by Microphase, a portion of which was sold during the three months ended March 31, 2021. Loss From Investment in Unconsolidated Entity Loss from investment in unconsolidated entity was $0.5 million for the three months ended March 31, 2022, compared to nil for the three months ended March 31, 2021, representing our share of losses from our equity method investment in Avalanche International Corp. (“AVLP”). Gain on Extinguishment of Debt Gain on extinguishment of debt was nil for the three months ended March 31, 2022, compared to a gain of $0.4 million for the three months ended March 31, 2021. During the three months ended March 31, 2021, principal and accrued interest of $200,000 and $16,000, respectively, on our debt was satisfied through the issuance of 183,214 shares of our common stock. We recognized a loss on extinguishment of $0.2 million as a result of this issuance of common stock based on the fair value of our common stock at the date of the exchange. The loss on extinguishment from the issuance of the 183,214 shares of our common stock was offset by the forgiveness of our Paycheck Protection Program loan in the principal amount of $0.7 million. Net (Loss) Income For the foregoing reasons, our net loss for the three months ended March 31, 2022 was $28.8 million, compared to net income of $6.0 million for the three months ended March 31, 2021. Other Comprehensive (Loss) Income Other comprehensive loss was $0.3 million for the three months ended March 31, 2022 compared to $0.1 million for the three months ended March 31, 2021. Other comprehensive income for the three months ended March 31, 2021 was primarily due to foreign currency translation adjustments between our functional currency, the U.S. Dollar, and the British Pound and Israeli Shekel. 6 Liquidity and Capital Resources On March 31, 2022, we had cash and cash equivalents of $39.4 million (excluding restricted cash of $4.7 million). This compares with cash and cash equivalents of $15.9 million (excluding restricted cash of $5.3 million) at December 31, 2021. The increase in cash and cash equivalents cash was primarily due to cash provided by financing activities related to our 2022 ATM Offering and cash provided by operating activities, partially offset by the payment of debt and purchases of property and equipment. Net cash provided by operating activities totaled $25.0 million for the three months ended March 31, 2022 compared to net cash used in operating activities of $14.2 million for the three months ended March 31, 2021. Cash provided by operating activities for the three months ended March 31, 2022 included $32.6 million net cash provided by marketable securities from trading activities related to the operations of DP Lending. Net cash used in investing activities was $24.4 million for the three months ended March 31, 2022, compared to $16.7 million for the three months ended March 31, 2021. Net cash used in investing activities for the three months ended March 31, 2022 included $35.4 million of capital expenditures related to Bitcoin mining equipment, partially offset by $10.2 million proceeds from the sale of marketable equity securities. Net cash provided by financing activities was $22.2 million for the three months ended March 31, 2022, compared to $119.9 million for the three months ended March 31, 2021, and reflects the following transactions: · 2022 ATM Offering – On February 25, 2022, we entered into an At-The-Market issuance sales agreement with Ascendiant Capital Markets, LLC to sell shares of common stock having an aggregate offering price of up to $200 million from time to time, through the 2022 ATM Offering. As of March 31, 2022, we had sold an aggregate of 140.0 million shares of common stock pursuant to the 2022 ATM Offering for gross proceeds of $110.1 million. · December 2021 Secured Promissory Notes – On December 30, 2021, we entered into a securities purchase agreement with certain sophisticated investors providing for the issuance of Senior Notes that bore interest at 8% per annum with an aggregate principal face amount of $66.0 million. The Senior Notes were repaid in March 2022. · Margin Accounts Payable – During the year ended December 31, 2021, we entered into leverage agreements on certain brokerage accounts, whereby we borrowed $18.5 million. The margin accounts payable were repaid during the three months ended March 31, 2022. We believe our current cash on hand combined with the proceeds from the 2022 ATM Offering are sufficient to meet our operating and capital requirements for at least the next twelve months from the date the financial statements for the three months ended March 31, 2022 are issued. Critical Accounting Policies Variable Interest Entities For a variable interest entity (“VIE”), we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of a VIE. The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the performance of the entity and the obligation to absorb the losses or the right to receive the benefits that could potentially be significant to the entity. We evaluate our business relationships with related parties to identify potential VIEs under Accounting Standards Codification (“ASC”) 810, Consolidation . We consolidate VIEs in which we are considered to be the primary beneficiary. Entities are considered to be the primary beneficiary if they have both of the following characteristics: (i) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (ii) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE. Our judgment with respect to our level of influence or control of an entity involves the consideration of various factors including the form of our ownership interest, our representation in the entity’s governance, the size of our investment, estimates of future cash flows, our ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to replace us as manager and/or liquidate the joint venture, if applicable. 7 Variable Interest Entity Considerations – AVLP We have determined that AVLP is a VIE as it does not have sufficient equity at risk. We do not consolidate AVLP because we are not the primary beneficiary and do not have a controlling financial interest. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, among other factors. Although we have made a significant investment in AVLP, we have determined that Philou, which controls AVLP through the voting power conferred by its equity investment and which is deemed to be more closely associated with AVLP, is the primary beneficiary. As a result, AVLP’s financial position and results of operations are not consolidated in our financial position and results of operations. Equity Investment in Unconsolidated Entity As of March 31, 2022, our ownership percentage of AVLP was less than 20%. During the fourth quarter of 2021, we made additional advances to AVLP under the existing loan agreement and our consolidated VIE, Ault Alpha, entered into a loan agreement with AVLP totaling $3.6 million. Due to our cumulative lending position to AVLP and the facts and circumstances surrounding the terms of loan agreements, we reevaluated our level of influence over AVLP and determined that the equity ownership in AVLP should be accounted for under the equity method of accounting. The basis of our previously held interest in AVLP was remeasured to fair value immediately before adopting the equity method of accounting. Our interest in AVLP as of March 31, 2022 and December 31, 2021 has been presented as an equity investment in an unconsolidated entity. We have invested in AVLP based on the potential global impact of the novel technology of AVLP. AVLP has developed a novel cost effective and environmentally friendly material synthesis technology for textile applications. AVLP’s Multiplex Laser Surface Enhancement is a unique technology that has the ability to treat both natural and synthetic textiles for a wide variety of functionalities, including dyeability and printing enhancements, hydrophilicity, hydrophobicity, fire retardancy and anti-microbial properties. The use of water, harmful chemicals and energy is significantly reduced in comparison to conventional textile treatment methods. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.