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 and majority owned subsidiaries and strategic investments, we own and operate a data center at which we mine Bitcoin, and provide mission-critical products that support a diverse range of industries, including defense/aerospace, industrial, automotive, medical/biopharma, karaoke audio equipment, hotel operations and textiles. In addition, we own and operate 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 (“Ascendiant Capital”) 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 Common ATM Offering”). As of June 30, 2022, we had sold an aggregate of 239.7 million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $163.4 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. (“TurnOnGreen”), 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 TurnOnGreen that we own, and (ii) forgive and eliminate the intracompany accounts between us and TurnOnGreen evidencing historical equity investments made by us in TurnOnGreen, in the approximate amount of $25 million, 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 TurnOnGreen and other customary closing conditions. Immediately following the completion of the Transaction, TurnOnGreen 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 TurnOnGreen shall cease to exist, IMHC shall own TurnOnGreen’s two operating subsidiaries, TOG Technologies Inc. and Digital Power Corporation. Following the closing of the Transaction, IMHC will dissolve its dormant subsidiary. 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, were to 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 $67.7 million, which includes the purchase price for the Assets under the Asset Purchase Agreement of $62.5 million, 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 $11.8 million, and less the amount of certain liabilities assumed by Ault Alliance. The Asset Purchase Agreement required the Asset Purchase to close by June 30, 2022. Consummation of the Asset Purchase was 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. On July 7, 2022, we announced that Ault Alliance did not acquire the assets of EYP as a result of a higher bidder. Ault Alliance lent $8.0 million to EYP and earned $4.7 million in interest, penalties and break-up fees from October 2021 through June 2022. The principal amount of the loans, interest, penalties and break-up fees, were fully repaid on June 30, 2022. 1 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. DP Lending retains the option to acquire an additional 6,666,667 shares of Alzamend common stock and warrants to purchase another 3,333,334 such shares for an aggregate of $10 million. 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. On May 26, 2022, we entered into an underwriting agreement (the “Underwriting Agreement”) with Alexander Capital, L.P., as representative of the several underwriters named therein (collectively, the “Underwriters”), relating to a firm commitment public offering of 123,423 newly issued shares of our 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”) at a public offering price of $25.00 per share. On June 1, 2022, we and the Underwriters mutually agreed to increase the size of the offering of our Series D Preferred Stock from 123,423 shares to 144,000 shares. Thus, we and the Underwriters agreed to terminate the Underwriting Agreement and entered into a side letter to terminate such Underwriting Agreement (the “Side Letter”). Following the execution of the Side Letter, on June 1, 2022, we entered into a new underwriting agreement (the “New Underwriting Agreement”) with the Underwriters, relating to a firm commitment public offering of 144,000 newly issued shares of our Series D Preferred Stock at a public offering price of $25.00 per share. On June 3, 2022, we closed the offering of the sale of the 144,000 shares of our Series D Preferred Stock for gross proceeds of approximately $3.6 million, before deducting offering expenses. Net proceeds to us, after payment of commissions, non-accountable fees and offering expenses, were approximately $3.1 million. On June 14, 2022, we entered into an At-The-Market issuance sales agreement with Ascendiant Capital to sell shares of Series D Preferred Stock having an aggregate offering price of up to $46.4 million from time to time, through an “at the market offering” program (the “2022 Preferred ATM Offering”). As of June 30, 2022, we had sold an aggregate of 2,618 shares of Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for gross proceeds of $57,000. On June 1, 2022, we converted our convertible promissory notes of Avalanche International Corp. (“AVLP”) and accrued interest into common stock of AVLP. We converted $20.0 million principal and $5.9 million of accrued interest receivable at a conversion price of $0.50 per share and received 51,889,168 shares of common stock increasing our common stock ownership of AVLP from less than 20% to approximately 92%. Beginning in June 2022, we, through DP Lending, began making open market purchases of The Singing Machine Company, Inc. (“SMC”) common stock and on June 15, 2022, we owned more than 50% of the issued and outstanding common stock of SMC. As of June 15, 2022, the purchase price of the common stock acquired totaled $7.4 million and on June 15, 2022 a $3.1 million gain was recognized in interest and other income for the remeasurement of our previously held ownership interest to $10.5 million, based on the trading price of SMC common stock. 2 On August 10, 2022, BNI and DP Lending entered into a Note Purchase Agreement (the “NPA”) with two accredited investors (the “Investors”) providing for the issuance of Secured Promissory Notes (individually, a “Note” and collectively, the “Notes”) with an aggregate principal face amount of $11,000,000. The Notes have a principal face amount of $11,000,000 and bear interest at 10% per annum, payable monthly in arrears, pursuant to the terms of the Notes. The maturity date of the Notes is August 10, 2023. BNI is required to make an aggregate monthly payment (a “Monthly Payment”) of $1,000,000 on the tenth calendar day of each month, starting in September 2022. The Monthly Payment includes principal and interest pursuant to the amortization table set forth in the Notes. After BNI makes the first six Monthly Payments, BNI may elect to pay a forbearance fee of $125,000 to an Investor, or an aggregate of $250,000 to the two Investors (each, a “Monthly Forbearance”) in lieu of a Monthly Payment, which Monthly Forbearance would extend the maturity date of such Notes by one month, provided that BNI may not elect to make a Monthly Forbearance in consecutive months. BNI may prepay the full outstanding principal and accrued but unpaid interest at any time, provided that if BNI prepays the Notes, BNI is required to pay the Investors the amount of interest that would have accrued from the date of prepayment until the first anniversary of the issuance date of the Notes. The purchase price for the Notes was $10 million. Pursuant to the NPA, BNI, DP Lending and Helios Funds LLC, as the collateral agent on behalf of the Investors (the “Agent”) entered into a security agreement (the “Security Agreement”), pursuant to which (i) DP Lending granted to the Investors a security interest in marketable securities, investments and other property having a value of $10 million in a DP Lending brokerage account and (ii) BNI granted to the Investors a security interest in 4,000 S19 Pro Antminers (the “Miners”), provided that the number of Miners would be reduced to 2,000 after BNI makes the third Monthly Payment (as defined below), as set forth in the Security Agreement. In addition, pursuant to a subsidiary guaranty, DP Lending jointly and severally agreed to guarantee and act as surety for BNI’s obligation to repay the Notes. The Notes are further secured by a guaranty we provided. On August 15, 2022, BNI entered into a Master Agreement (the “Master Agreement”) and Order Form (the “Order Form” and together with the Master Agreement, the “Hosting Documents”) with Compute North LLC (“Compute North”) providing for the hosting by Compute North of Bitcoin miners owned by BNI. Pursuant to the Hosting Documents, Compute North will host 6,500 S19j Pro Antminers (the “Hosted Miners”) owned by BNI for a period of five (5) years (the “Term”). BNI agreed to pay a fee for the Hosted Miners (the “Monthly Service Fee”), together with a monthly package fee per Hosted Miner. The Monthly Service Fee is payable based on the actual hashrate performance of the Hosted Miners, of which 70% of the anticipated Monthly Service Fee is payable in advance, and the remaining Monthly Service Fee, if any, will be invoiced in arrears. Under the Master Agreement, BNI granted Compute North a continuing first-position security interest in the Hosted Miners, as collateral for BNI’s obligations under the Hosting Documents. Upon an event of default (as defined in the Master Agreement) by BNI, Compute North has the right to terminate the Hosting Documents and BNI is obligated to pay to Compute North all amounts then due under the Hosting Documents, together with a fee as liquidated damages, equal to the amount of fees that BNI would have been required to pay through the end of the Term. General As a holding company, our business objective is designed to increase stockholder value. Under the strategy we have adopted, 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 or 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. In recent years, we have provided capital and relevant expertise to fuel the growth of businesses in defense/aerospace, industrial, automotive, medical/biopharma, karaoke audio equipment, hotel operations and textiles. 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. 3 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 June 30, 2022 and 2021 The following table summarizes the results of our operations for the three months ended June 30, 2022 and 2021. For the Three Months Ended June 30, 2022 2021 Revenue $ 7,849,000 $ 8,564,000 Revenue, cryptocurrency mining 3,976,000 291,000 Revenue, hotel operations 4,598,000 - Revenue, lending and trading activities 943,000 53,274,000 Total revenue 17,366,000 62,129,000 Cost of revenue 12,369,000 6,278,000 Gross profit 4,997,000 55,851,000 Total operating expenses 28,716,000 10,028,000 (Loss) income from operations (23,719,000 ) 45,823,000 Interest and other income 81,000 14,000 Change in fair value of equity securities, related party - (5,893,000 ) Interest expense (2,031,000 ) (22,000 ) Change in fair value of marketable equity securities 241,000 (1,915,000 ) Realized loss on marketable securities (43,000 ) - Loss from investment in unconsolidated entity (391,000 ) - Gain on extinguishment of debt - 447,000 Change in fair value of warrant liability (6,000 ) 290,000 (Loss) income before income taxes (25,868,000 ) 38,744,000 Income tax (provision) benefit (217,000 ) (3,504,000 ) Net (loss) income (26,085,000 ) 35,240,000 Net loss attributable to non-controlling interest 321,000 1,083,000 Net (loss) income attributable to Ault Alliance, Inc. (25,764,000 ) 36,323,000 Preferred dividends (44,000 ) (4,000 ) Net (loss) income available to common stockholders $ (25,808,000 ) $ 36,319,000 Comprehensive (loss) income Net (loss) income available to common stockholders $ (25,808,000 ) $ 36,319,000 Other comprehensive income (loss) Foreign currency translation adjustment (1,471,000 ) 134,000 Other comprehensive loss (1,471,000 ) 134,000 Total comprehensive (loss) income $ (27,279,000 ) $ 36,453,000 4 Revenues Revenues by segment for the three months ended June 30, 2022 and 2021 are as follows: For the Three Months Ended June 30, Increase 2022 2021 (Decrease) % GWW $ 6,503,000 $ 6,475,000 $ 28,000 0 % TurnOnGreen 1,062,000 1,831,000 (769,000 ) -42 % BNI Revenue, cryptocurrency mining 3,976,000 291,000 3,685,000 1266 % Revenue, commercial real estate leases 272,000 185,000 87,000 47 % Ault Global Real Estate Equities, Inc. (“AGREE”) 4,598,000 - 4,598,000 — Ault Alliance: Revenue, lending and trading activities 943,000 53,274,000 (52,331,000 ) -98 % Other 12,000 73,000 (61,000 ) -84 % Total revenue $ 17,366,000 $ 62,129,000 $ (44,763,000 ) -72 % Our revenues decreased by $44.8 million, or 72%, to $17.4 million for the three months ended June 30, 2022, from $62.1 million for the three months ended June 30, 2021. GWW GWW revenues were flat at $6.5 million for both the three months ended June 30, 2022 and 2021. TurnOnGreen TurnOnGreen revenues for the three months ended June 30, 2022 of $1.1 million declined $0.8 million, or 42%, from $1.8 million for the three months ended June 30, 2021, due to supply chain challenges. The current supply chain crisis in the global economy has led to delivery delays and shortages of certain electronic components and associated raw materials that TurnOnGreen uses in its products. Should this supply chain crisis continue throughout 2022, it will likely extend TurnOnGreen’s production time periods and delay the timing of revenue recognition. TurnOnGreen cannot predict if or when circumstances may change, nor can it predict the amount by which bookings or shipments may change. BNI Revenues from BNI’s cryptocurrency mining operations were $4.0 million for the three months ended June 30, 2022, compared to $0.3 million for three months ended June 30, 2021. During 2021, we purchased Bitcoin mining equipment and increased our cryptocurrency mining activities. Our decision to increase our cryptocurrency mining operations 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. AGREE AGREE revenues were $4.6 million for the three months ended June 30, 2022 compared to $0 for the three months ended June 30, 2021. On December 22, 2021, AGREE 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. Ault Alliance Revenues from our lending and trading activities decreased to $0.9 million for the three months ended June 30, 2022, from $53.3 million for the three months ended June 30, 2021, which is attributable to significant unrealized gains in the prior year period and unrealized losses in the current year period from our investment portfolio. During the three months ended June 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. Revenue from lending and trading activities during the three months ended June 30, 2021 included an approximate $40 million unrealized gain from our investment in Alzamend. Under its business model, DP Lending also generates revenue through origination fees charged to borrowers and interest generated from each loan. 5 Revenues from our trading activities during the three months ended June 30, 2022 included 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 decreased to 28.8% for the three months ended June 30, 2022, compared to 89.9% for the three months ended June 30, 2021. Our gross margins have typically ranged between 30% and 35%, with slight variations depending on the overall composition of our revenue. Our gross margins of 28.8% recognized during the three months ended June 30, 2022 were impacted by the favorable margins from our lending and trading activities and modest margins on cryptocurrency mining operations due to the decline in the price of Bitcoin. Excluding the effects of margin from our lending and trading activities and cryptocurrency mining operations, our adjusted gross margins for the three months ended June 30, 2022 and 2021, would have been 33.1% and 30.0%, respectively, consistent with our historical range. Research and Development Research and development expenses increased by $0.2 million to $0.7 million for the three months ended June 30, 2022, from $0.5 million for the three months ended June 30, 2021. The increase in research and development expenses is due to product development efforts at TurnOnGreen. Selling and Marketing Selling and marketing expenses were $7.0 million for the three months ended June 30, 2022, compared to $1.5 million for the three months ended June 30, 2021, an increase of $5.5 million, or 364%. The increase was the result of $3.7 million higher marketing costs at Ault Alliance, including $2.4 million related to an advertising sponsorship agreement as well as increases in sales and marketing personnel and consultants. General and Administrative General and administrative expenses were $19.0 million for the three months ended June 30, 2022, compared to $8.0 million for the three months ended June 30, 2021, an increase of $11.0 million, or 138%. General and administrative expenses increased from the comparative prior period, mainly due to: · increased costs of $2.6 million related to the Michigan data center, operated by ACS; · $2.5 million increase in the accrual of a performance bonus related to realized gains on trading activities during the period; · general and administrative costs of $1.9 million from our hotel operations, which were acquired in December 2021; · higher salaries of $1.3 million and audit fees of $1.0 million; · non-cash stock compensation costs of $1.0 million; and · increased legal fees of $0.9 million, in part related to the efforts to acquire EYP. Loss From Operations We recorded a loss from operations of $23.7 million for the three months ended June 30, 2022, compared to a gain of $45.8 million for the three months ended June 30, 2021. The decrease in operating income is attributable primarily to the decrease in unrealized gains from trading activities from the prior year period, combined with an increase in operating expenses. 6 Interest and Other Income Interest and other income was $81,000 for the three months ended June 30, 2022 compared to $14,000 for the three months ended June 30, 2021. Other income for the three months ended June 30, 2022 included a $2.8 million gain related to remeasurement of our previously held ownership interest of SMC prior to the June 15, 2022 acquisition, based on the trading price of SMC common stock. In addition, other income for the three months ended June 30, 2022 included a $2.7 million loss related to remeasurement of our previously held ownership interest of AVLP prior to the June 1, 2022 acquisition. 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 June 30, 2022, compared to a loss of $5.9 million for the three months ended June 30, 2021. Interest Expense Interest expense was $2.0 million for the three months ended June 30, 2022, compared to $22,000 for the three months ended June 30, 2021. The increase in interest expense is due primarily to interest on the $55.1 million construction loans related to the December 2021 acquisition of hotel properties. Change in Fair Value of Warrant Liability Change in fair value of warrant liability was a loss of $6,000 for the three months ended June 30, 2022, compared to a gain of $0.3 million for the three months ended June 30, 2021. During the three months ended June 30, 2021, the fair value of the warrants that were issued during 2021 in a series of debt financings decreased by $0.3 million. The fair value of warrant liabilities 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) income. Change in Fair Value of Marketable Equity Securities Change in fair value of marketable equity securities was a gain of $0.2 million for the three months ended June 30, 2022, compared to a loss of $1.9 million for the three months ended June 30, 2021. The loss generated in the prior year period related 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 Loss on Marketable Securities Realized loss on marketable securities was $43,000 for the three months ended June 30, 2022, compared to $0 for the three months ended June 30, 2021. Realized loss for the three months ended June 30, 2022 included losses from Alpha Fund, which began operations in October 2021. Loss From Investment in Unconsolidated Entity Loss from investment in unconsolidated entity was $0.4 million for the three months ended June 30, 2022, compared to $0 for the three months ended June 30, 2021, representing our share of losses from our equity method investment in AVLP prior to the June 1, 2022 acquisition. Gain on Extinguishment of Debt Gain on extinguishment of debt was $0 for the three months ended June 30, 2022, compared to a gain of $0.4 million for the three months ended June 30, 2021. On May 20, 2021, Microphase received forgiveness of its Paycheck Protection Program loan in the principal amount of $0.4 million. Net (Loss) Income For the foregoing reasons, our net loss for the three months ended June 30, 2022 was $25.8 million, compared to net income of $36.3 million for the three months ended June 30, 2021. 7 Other Comprehensive Loss Other comprehensive loss was $1.5 million for the three months ended June 30, 2022, compared to other comprehensive income of $0.1 million for the three months ended June 30, 2021. Other comprehensive loss for the three months ended June 30, 2022 and 2021 was attributable to foreign currency translation adjustments between our functional currency, the U.S. Dollar, and the British Pound and Israeli Shekel. Results of Operations for the Six Months Ended June 30, 2022 and 2021 The following table summarizes the results of our operations for the six months ended June 30, 2022 and 2021. For the Six Months Ended June 30, 2022 2021 Revenue $ 16,508,000 $ 16,469,000 Revenue, cryptocurrency mining 7,524,000 421,000 Revenue, hotel operations 7,296,000 - Revenue, lending and trading activities 18,864,000 58,485,000 Total revenue 50,192,000 75,375,000 Cost of revenue 22,863,000 11,386,000 Gross profit 27,329,000 63,989,000 Total operating expenses 50,018,000 16,964,000 (Loss) income from operations (22,689,000 ) 47,025,000 Interest and other income 530,000 51,000 Change in fair value of equity securities, related party - (2,924,000 ) Interest expense (31,855,000 ) (337,000 ) Change in fair value of marketable equity securities 241,000 45,000 Realized gain on marketable securities 66,000 397,000 Loss from investment in unconsolidated entity (924,000 ) - Gain on extinguishment of debt - 929,000 Change in fair value of warrant liability (24,000 ) (388,000 ) (Loss) income before income taxes (54,655,000 ) 44,798,000 Income tax (provision) benefit (217,000 ) (3,510,000 ) Net (loss) income (54,872,000 ) 41,288,000 Net loss attributable to non-controlling interest 336,000 3,000 Net (loss) income attributable to Ault Alliance, Inc. (54,536,000 ) 41,291,000 Preferred dividends (49,000 ) (9,000 ) Net (loss) income available to common stockholders $ (54,585,000 ) $ 41,282,000 Comprehensive (loss) income Net (loss) income available to common stockholders $ (54,585,000 ) $ 41,282,000 Other comprehensive income (loss) Foreign currency translation adjustment (1,758,000 ) 41,000 Other comprehensive loss (1,758,000 ) (2,883,000 ) Total comprehensive (loss) income $ (56,343,000 ) $ 41,323,000 8 Revenues Revenues by segment for the six months ended June 30, 2022 and 2021 are as follows: For the Six Months Ended June 30, Increase 2022 2021 (Decrease) % GWW $ 13,748,000 $ 12,825,000 $ 923,000 7 % TurnOnGreen 2,191,000 3,213,000 (1,022,000 ) -32 % BNI Revenue, cryptocurrency mining 7,524,000 421,000 7,103,000 1687 % Revenue, commercial real estate leases 550,000 281,000 269,000 96 % AGREE 7,296,000 - 7,296,000 — Ault Alliance: Revenue, lending and trading activities 18,864,000 58,485,000 (39,621,000 ) -68 % Other 19,000 150,000 (131,000 ) -87 % Total revenue $ 50,192,000 $ 75,375,000 $ (25,183,000 ) -33 % Our revenues decreased by $25.2 million, or 33%, to $50.2 million for the six months ended June 30, 2022, from $75.4 million for the six months ended June 30, 2021. GWW GWW revenues increased by $0.9 million, or 7%, to $13.7 million for the six months ended June 30, 2022, from $12.8 million for the six months ended June 30, 2021. The increase in revenue from our GWW segment for customized solutions for the military markets reflects higher revenues from Enertec Systems 2001 Ltd., a GWW subsidiary, which primarily consisted of revenue recognized over time, grew to $6.2 million for the six months ended June 30, 2022, an increase of $1.3 million, or 27%, from $4.9 million in the prior-year period. TurnOnGreen TurnOnGreen revenues for the six months ended June 30, 2022 of $2.2 million declined $1.0 million, or 32%, from $3.2 million for the six months ended June 30, 2021, due to supply chain challenges. BNI Revenues from BNI’s cryptocurrency mining operations were $7.5 million for the six months ended June 30, 2022, compared to $0.4 million for six months ended June 30, 2021. During 2021, we purchased Bitcoin mining equipment and increased our cryptocurrency mining activities. Our decision to increase our cryptocurrency mining operations in 2022 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. AGREE AGREE revenues were $7.3 million for the six months ended June 30, 2022 compared to $0 for the six months ended June 30, 2021. On December 22, 2021, AGREE 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. Ault Alliance Revenues from our lending and trading activities decreased to $18.9 million for the six months ended June 30, 2022, from $58.5 million for the six months ended June 30, 2021, which is attributable to significant unrealized gains in the prior year period and unrealized losses in the current year period from our investment portfolio. During the six months ended June 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. Revenue from lending and trading activities during the six months ended June 30, 2021 included an approximate $40 million unrealized gain from our investment in Alzamend. 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 six months ended June 30, 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 decreased to 54.4% for the six months ended June 30, 2022, compared to 84.9% for the six months ended June 30, 2021. Our gross margins have typically ranged between 30% and 35%, with slight variations depending on the overall composition of our revenue. Our gross margins of 54.4% recognized during the six months ended June 30, 2022 were impacted by the favorable margins from our lending and trading activities and modest margins on cryptocurrency mining operations due to the decline in the price of Bitcoin. Excluding the effects of margin from our lending and trading activities and cryptocurrency mining operations, our adjusted gross margins for the six months ended June 30, 2022 and 2021 would have been 31.4% and 33.2%, respectively, consistent with our historical range. Research and Development Research and development expenses increased by $0.3 million to $1.4 million for the six months ended June 30, 2022, from $1.1 million for the six months ended June 30, 2021. The increase in research and development expenses was due to product development efforts at TurnOnGreen and GWW. Selling and Marketing Selling and marketing expenses were $13.5 million for the six months ended June 30, 2022, compared to $2.7 million for the six months ended June 30, 2021, an increase of $10.7 million, or 390%. The increase was the result of $8.2 million higher advertising and promotion costs at Ault Alliance, including $6.4 million related to an advertising sponsorship agreement as well as a $1.4 million increase in sales and marketing personnel and a $0.4 million increase in consulting expense. The increase is also attributable to a $0.4 million increase in 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 $32.7 million for the six months ended June 30, 2022, compared to $13.1 million for the six months ended June 30, 2021, an increase of $19.6 million, or 150%. General and administrative expenses increased from the comparative prior period, mainly due to: · general and administrative costs of $3.7 million from our hotel operations, which were acquired in December 2021; · non-cash stock compensation costs of $3.6 million; · $2.5 million increase in the accrual of a performance bonus related to realized gains on trading activities during the period; · higher salaries of $1.8 million and audit fees of $1.3 million; · increased costs of $1.5 million related to the Michigan data center, operated by ACS; and · increased legal fees of $1.5 million, in part related to the efforts to acquire EYP. (Loss) Income From Operations We recorded a loss from operations of $22.7 million for the six months ended June 30, 2022, compared to a gain of $47.0 million for the six months ended June 30, 2021. The decrease in operating income is attributable primarily to the decrease in unrealized gains from trading activities from the prior year period, combined with an increase in operating expenses. 10 Interest and Other Income Interest and other income was $0.5 million for the six months ended June 30, 2022 compared to $51,000 for the six months ended June 30, 2021. Other income for the six months ended June 30, 2022 included a $2.8 million gain related to remeasurement of our previously held ownership interest of SMC prior to the June 15, 2022 acquisition, based on the trading price of SMC common stock. In addition, other income for the six months ended June 30, 2022 included a $2.7 million loss related to remeasurement of our previously held ownership interest of AVLP prior to the June 1, 2022 acquisition. 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 six months ended June 30, 2022, compared to a loss of $2.9 million for the six months ended June 30, 2021. Interest Expense Interest expense was $31.9 million for the six months ended June 30, 2022 compared to $0.3 million for the six months ended June 30, 2021. The increase in interest expense relates primarily 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. In addition, the increase in interest expense is due, in part, to interest on the $55.1 million construction loans related to the December 2021 acquisition of hotel properties. Change in Fair Value of Warrant Liability Change in fair value of warrant liability was a loss of $24,000 for the six months ended June 30, 2022, compared to a loss of $0.4 million for the six months ended June 30, 2021. During the six months ended June 30, 2021, the fair value of the warrants that were issued during 2021 in a series of debt financings increased by $0.4 million. The fair value of warrant liabilities 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) income. Change in Fair Value of Marketable Equity Securities Change in fair value of marketable equity securities was a gain of $0.2 million for the six months ended June 30, 2022, compared to a gain of $45,000 for the six months ended June 30, 2021. The loss generated in the prior year period relates to an investment in marketable securities held by Microphase 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 six months ended June 30, 2022, compared to $0.4 million for the six months ended June 30, 2021. Realized gains in the prior year period relates to realized gains from an investment in marketable securities held by Microphase, a portion of which was sold during the six months ended June 30, 2021. Loss From Investment in Unconsolidated Entity Loss from investment in unconsolidated entity was $0.9 million for the six months ended June 30, 2022, compared to $3,000 for the six months ended June 30, 2021, representing our share of losses from our equity method investment in AVLP prior to the June 1, 2022 acquisition. Gain on Extinguishment of Debt Gain on extinguishment of debt was $0 for the six months ended June 30, 2022, compared to a gain of $0.9 million for the six months ended June 30, 2021. The prior year gain on extinguishment of debt represents forgiveness of Paycheck Protection Program loans. 11 Net (Loss) Income For the foregoing reasons, our net loss for the six months ended June 30, 2022 was $54.6 million, compared to net income of $41.3 million for the six months ended June 30, 2021. Other Comprehensive (Loss) Income Other comprehensive loss was $1.8 million for the six months ended June 30, 2022, compared to other comprehensive income of $41,000 for the six months ended June 30, 2021. Other comprehensive loss for the six months ended June 30, 2022 and 2021 was attributable to foreign currency translation adjustments between our functional currency, the U.S. Dollar, and the British Pound and Israeli Shekel. Liquidity and Capital Resources On June 30, 2022, we had cash and cash equivalents of $24.1 million (excluding restricted cash of $4.7 million). This compares to 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 was primarily due to cash provided by financing activities related to the sale of common and preferred stock, as well as proceeds from notes payable 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 $15.0 million for the six months ended June 30, 2022 compared to net cash used in operating activities of $21.7 million for the six months ended June 30, 2021. Cash provided by operating activities for the six months ended June 30, 2022 included $50.7 million net cash provided by marketable securities from trading activities related to the operations of DP Lending, partially offset by operating losses and changes in working capital. Net cash used in investing activities was $82.8 million for the six months ended June 30, 2022, compared to $29.7 million for the six months ended June 30, 2021. Net cash used in investing activities for the six months ended June 30, 2022 included $72.8 million of capital expenditures primarily related to Bitcoin mining equipment, $15.8 million for investments in equity securities and $8.2 million for the purchase of SMC, net of cash received, partially offset by $11.7 million proceeds from the sale of marketable equity securities, $10.5 million principal payments received on loans receivable and $4.4 million proceeds from the sale of digital currencies. Net cash provided by financing activities was $75.5 million for the six months ended June 30, 2022, compared to $138.1 million for the six months ended June 30, 2021, and reflects the following transactions: · 2022 Common ATM Offering – On February 25, 2022, we entered into an At-The-Market issuance sales agreement with Ascendiant Capital to sell shares of common stock having an aggregate offering price of up to $200 million from time to time, through the 2022 Common ATM Offering. As of June 30, 2022, we had sold an aggregate of 239.7 million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $163.4 million. Net proceeds to us, after payment of commissions, were $159.4 million. · Public Offering of Series D Preferred Stock – On June 3, 2022, we announced the closing of our public offering of 144,000 shares of our Series D Preferred Stock at a price to the public of $25.00 per share. Gross proceeds from the offering were approximately $3.6 million, before deducting offering expenses. Net proceeds to us, after payment of commissions, non-accountable fees and offering expenses were $3.1 million. · December 2021 Secured Promissory Notes – On December 30, 2021, we entered into a securities purchase agreement with certain accredited 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. · Purchase of Treasury Stock – During the six months ended June 30, 2022, Alpha Fund purchased 16.1 million shares of our common stock for $6.2 million and 53,033 shares of our Series D Preferred Stock for $1.3 million, accounted for as treasury stock as of June 30, 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 six months ended June 30, 2022 are issued. 12 Critical Accounting Policies Business Combination We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Acquired customer relations, technology, tradenames and know how are recognized at fair value. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquire is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.