Item 2. Management’s Discussion and Analysis
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this quarterly report,
the “Company,” “AAI,” “we,” “us” and “our” refer to Ault Alliance, Inc., a
Delaware corporation. AAI is a diversified holding company pursuing growth by acquiring undervalued businesses and disruptive technologies
with a global impact. Through our 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 metaverse platform,
oil exploration, crane services, defense/aerospace, industrial, automotive, medical/biopharma, consumer electronics, hotel operations
and textiles. In addition, we own and operate hotels and extend credit to select entrepreneurial businesses through a licensed lending
subsidiary.
Recent Events and Developments
On January 23, 2023, we filed
a Certificate of Elimination with the Secretary of State of the State of Delaware with respect to our Series C convertible redeemable
preferred stock (“Series C Preferred Stock”) which, effective upon filing, eliminated the Series C Preferred Stock.
On February 8, 2023, we entered
into a Share Exchange Agreement (the “Agreement”) with BMI and the other signatories thereto. The Agreement provides that,
subject to the terms and conditions set forth therein, BMI will acquire all of the outstanding shares of capital stock of our then subsidiary,
BitNile.com, Inc. (“BitNile.com”), of which we owned approximately 86%, and the remaining 14% was owned by minority shareholders
(the “Minority Shareholders”), as well as Ault Iconic, (formerly Ault Media Group) and the securities of Earnity beneficially
owned by BitNile.com (which represented approximately 19.9% of the outstanding equity securities of Earnity as of the date of the Agreement),
in exchange for the following: (i) 8,637.5 shares of newly designated Series B Convertible Preferred Stock of BMI to be issued to our
company (the “Series B Preferred”), and (ii) 1,362.5 shares of newly designated Series C Convertible Preferred Stock of BMI
to be issued to the to the Minority Shareholders (the “Series C Preferred,” and together with the Series B Preferred, the
“Preferred Stock”). The Series B Preferred and the Series C Preferred each have a stated value of $10,000 per share (the “Stated
Value”), for a combined stated value of the Preferred Stock to be issued by BMI of $100 million, and subject to adjustment, are
convertible into an aggregate of 400 million shares of common stock of BMI (the “BMI Common Stock”), which represent and pursuant
to the Agreement will represent approximately 92.4% of BMI’s outstanding BMI Common Stock on a fully-diluted basis as of the date
of the Agreement. However, pending approval of the transaction by BMI’s shareholders, the Preferred Stock is subject to a 19.9%
beneficial ownership limitation, including the Series A Convertible Preferred Stock that we acquired from BMI in June of 2022. The Agreement
provides that BMI will seek shareholder approval (the “Shareholder Approval”) following the closing.
Pursuant to the Certificates
of Designations of the Rights, Preferences and Limitations of the Series B Preferred and the Series C Preferred (collectively, the “Preferred
Stock Certificates”), each share of Preferred Stock will be convertible into a number of shares of BMI Common Stock determined by
dividing the Stated Value by $0.25 (the “Conversion Price”), or 40,000 shares of BMI Common Stock. The Conversion Price will
be subject to certain adjustments, including potential downward adjustment if BMI closes a qualified financing resulting in at least $25
million in gross proceeds at a price per share that is lower than the Conversion Price then in effect. The holders of Preferred Stock
will be entitled to receive dividends at a rate of 5% of the Stated Value per annum from issuance until February 7, 2033 (the “Dividend
Term”). During the first two years of the Dividend Term, dividends will be payable in additional shares of Preferred Stock rather
than cash, and thereafter dividends will be payable in either additional shares of Preferred Stock or cash as each holder may elect. If
BMI fails to make a dividend payment as required by the Preferred Stock Certificates, the dividend rate will be increased to 12% for as
long as such default remains ongoing and uncured. Each share of Preferred Stock will also have an $11,000 liquidation preference in the
event of a liquidation, change of control event, dissolution or winding up of BMI, and will rank senior to all other capital stock of
BMI with respect thereto, except that the Series B Preferred and Series C Preferred shall rank pari passu. Each share of Series B Preferred
was originally entitled to vote with the BMI Common Stock at a rate of 10 votes per share of Common Stock into which the Series B Preferred
is convertible, but that provision was subsequently eliminated. Other than certain rights granted to the Company relating to amendments
or waiver of various negative covenants, the terms, rights, preferences and limitations of the Preferred Stock Certificates are essentially
identical. The Agreement closed on March 6, 2023.
On March 28, 2023, we entered
into a securities purchase agreement (the “Purchase Agreement”) with certain institutional investors (the “Investors”),
pursuant to which we sold, in a private placement, an aggregate of 100,000 shares of our preferred stock, with each such share having
a stated value of $100.00 and consisting of (i) 83,000 shares of Series E Convertible Preferred Stock (the “Series E Preferred Stock”),
(ii) 1,000 shares of Series F Convertible Preferred Stock (the “Series F Preferred Stock”) and (iii) 16,000 shares of Series
G Convertible Preferred Stock (the “Series G Preferred Stock” and collectively, the “Preferred Shares”). The Preferred
Shares are convertible into shares of our common stock at the option of the holders and, in certain circumstances, by us.
1
Each share of Series E Preferred
Stock and Series F Preferred Stock had a purchase price of $100.00, equal to each such share’s stated value. The purchase price
of the Series E Preferred Stock and the Series F Preferred Stock was paid for by the Investors’ canceling outstanding secured promissory
notes in the principal amount of $8.4 million, whereas the purchase price of the shares of Series G Preferred Stock consisted of accrued
but unpaid interest on these notes, as well as for other good and valuable consideration. Each Preferred Share is convertible into shares
of our common stock at a conversion price equal to 85% of the closing sale price of our common stock on the trading day prior to the date
of conversion, subject to a floor price of $0.10. The Preferred Shares became convertible at the option of the holder following our receipt
of stockholder approval of the Reverse Split (as defined below). The private placement closed on March 30, 2023.
We called a special meeting
of stockholders, which was held on May 15, 2023, to consider an amendment (the “Amendment”) to our Certificate of Incorporation
to authorize a reverse split of our common stock (the “Reverse Split”). The Investors agreed in the Purchase Agreement to
not transfer, offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of the Preferred Shares until after the Reverse
Split. Pursuant to the certificate of designation of the Series E Preferred Stock, the shares of Series E Preferred Stock had the right
to vote on such Amendment on an as converted to common stock basis. In addition, pursuant to the certificate of designation of the Series
F Preferred Stock, the shares of Series F Preferred Stock had the right to vote on such Amendment. Each Investor agreed to vote the shares
of the Series E Preferred Stock in favor of the Amendment and that the shares of the Series F Preferred Stock shall automatically be voted
in a manner that “mirrors” the proportions on which the shares of our common stock and Series E Preferred Stock are voted
on the Amendment. The Amendment required the approval of the majority of the votes associated with our outstanding capital stock entitled
to vote on the proposal.
On May 15, 2023, we held the
special meeting of stockholders, at which meeting the Reverse Split was approved by the stockholders. On May 15, 2023, we approved a ratio
with respect to the Reverse Split of one-for-three hundred. The Reverse Split did not affect the number of authorized shares of common
stock or preferred stock or their par value per share. As a result of the Reverse Split, each three hundred shares of common stock issued
and outstanding prior to the Reverse Split were converted into one share of common stock. The Reverse Split became effective in the State
of Delaware on May 17, 2023. All share amounts in this Quarterly Report have been updated to reflect the Reverse Split.
On May 1, 2023, we entered
into a securities purchase agreement (the “Series C Agreement”) with Ault & Company, Inc. (“Ault & Company”),
a related party, pursuant to which we agreed to sell to Ault & Company up to 40,000 shares of Series C convertible preferred stock
and warrants to purchase up to 1.3 million shares of common stock for a total purchase price of up to $40 million. The consummation of
the transactions contemplated by the Series C Agreement are subject to various customary closing conditions and the receipt of certain
third party consents. In addition to customary closing conditions, the closing of the transaction is also conditioned upon the receipt
by Ault & Company of financing in an amount sufficient to consummate the transaction. The Series C Agreement contains customary termination
provisions for Ault & Company under certain circumstances, and the Series C Agreement shall automatically terminate if the closing
has not occurred prior to May 31, 2023, although such date may be extended by Ault & Company as set forth in the Series C Agreement.
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.
2
In recent years, we have provided
capital and relevant expertise to fuel the growth of businesses in metaverse platform, oil exploration, crane services, defense/aerospace,
industrial, automotive, medical/biopharma, consumer electronics, 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.
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.ault.com.
Results of Operations
Results of Operations for the Three Months Ended March 31, 2023
and 2022
The following table summarizes
the results of our operations for the three months ended March 31, 2023 and 2022.
For the Three Months Ended March 31,
2023
2022
Revenue
$ 13,889,000
$ 8,659,000
Revenue, cryptocurrency mining
7,347,000
3,548,000
Revenue, hotel operations
2,243,000
2,698,000
Revenue, crane operations
12,646,000
-
Revenue, lending and trading activities
( 4,939,000 )
17,921,000
Total revenue
31,186,000
32,826,000
Cost of revenue, products
9,787,000
5,748,000
Cost of revenue, cryptocurrency mining
8,103,000
2,497,000
Cost of revenue, hotel operations
2,688,000
2,249,000
Cost of revenue, hotel operations
7,388,000
-
Cost of revenue, lending and trading activities
1,180,000
-
Total cost of revenue
29,146,000
10,494,000
Gross profit
2,040,000
22,332,000
Total operating expenses
33, 458,000
21,302,000
Loss from operations
( 31,418,000 )
1,030,000
Other income (expense):
Interest and other income
1,197,000
449,000
Interest expense
(13,730,000 )
(29,824,000 )
Loss on extinguishment of debt
(63,000 )
-
Realized gain on marketable securities
(38,000 )
109,000
Loss from investment in unconsolidated entity
-
(533,000 )
Impairment of equity securities
(9,555,000 )
-
Gain on the sale of fixed assets
4,515,000
-
Change in fair value of warrant liability
-
(18,000 )
Loss before income taxes
( 49,092,000 )
(28,787,000 )
Income tax benefit
(263,000 )
-
Net loss
( 48,829,000 )
(28,787,000 )
Net loss attributable to non-controlling interest
183,000
15,000
Net loss attributable to Ault Alliance, Inc.
( 48,646,000 )
(28,772,000 )
Preferred dividends
(229,000 )
(5,000 )
Net loss available to common stockholders
$ ( 48,875,000 )
$ (28,777,000 )
Comprehensive loss
Net loss available to common stockholders
$ ( 48,875,000 )
$ (28,777,000 )
Other comprehensive income (loss)
Foreign currency translation adjustment
170,000
(287,000 )
Total comprehensive loss
$ ( 48,705,000 )
$ (29,064,000 )
3
Revenues
Revenues by segment for the
three months ended March 31, 2023 and 2022 were as follows:
For the Three Months Ended
March 31,
Increase
2023
2022
(Decrease)
%
GIGA
$ 8,708,000
$ 7,245,000
$ 1,463,000
20 %
TurnOnGreen
876,000
1,129,000
(253,000 )
-22 %
SMC
3,383,000
-
3,383,000
—
BNI
Revenue, cryptocurrency mining
7,347,000
3,548,000
3,799,000
107 %
Revenue, commercial real estate leases
458,000
278,000
180,000
65 %
AGREE
2,243,000
2,698,000
(455,000 )
-17 %
Fintech:
Revenue, lending and trading activities
(4,939,000 )
17,921,000
(22,860,000 )
-128 %
Other
-
7,000
(7,000 )
-100 %
Energy
13,110,000
-
13,110,000
—
Total revenue
$ 31,186,000
$ 32,826,000
$ (1,640,000 )
-5 %
Our revenues decreased by
$1.6 million, or 5%, to $31.2 million for the three months ended March 31, 2023, from $32.8 million for the three months ended March
31, 2022.
GIGA
The $1.5 million increase
in our GIGA segment revenue for the three months ended March 31, 2023 included $0.4 million attributable to our recent acquisition of
Giga-tronics Incorporated on September 8, 2022. The improved economic environment following COVID-19 disruptions, along with increased
military spending, drove growth in our GIGA segment, which provides customized solutions for military markets. Additionally, revenue from
Enertec Systems 2001 Ltd., a subsidiary of Giga-tronics Incorporated, which is primarily recognized over time, increased by 7%, to $3.5 million
for the three months ended March 31, 2023, up $0.2 million from $3.3 million in the prior-year period.
TurnOnGreen
TurnOnGreen revenues were
down $0.3 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.
SMC
SMC revenues increased by
$3.4 million due to the acquisition of SMC in June 2022.
BNI
Revenues from BNI’s
cryptocurrency mining operations increased $3.8 million as we increased our cryptocurrency mining activities from the prior period, partially
offset by lower Bitcoin prices and an increase in Bitcoin mining difficulty level in the current year period.
AGREE
AGREE’s revenues decreased
by $0.5 million due to interruptions in business operations as the properties were being renovated
during the three months ended March 31, 2023. The renovations were completed in April 2023 .
4
Fintech
Revenues from our lending
and trading activities were negative $4.9 million due to significant unrealized losses for the three months ended March 31, 2023 from
our investment portfolio. During the three months ended March 31, 2022, Ault 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 Ault Lending
in certain financing transactions. Revenue from lending and trading activities for the three months ended March 31, 2023 included an approximate
$1.5 million unrealized loss from our investment in Alzamend. Under its business model, Ault Lending also generates revenue through origination
fees charged to borrowers and interest generated from each loan.
Revenues
from our trading activities for the three months ended March 31, 2023 included net losses 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.
Energy
Energy revenues increased
by $13.1 million for the three months ended March 31, 2023, primarily due to the acquisition of the Circle 8 crane operations in December
2022.
Gross Margins
Gross margins decreased to
7% for the three months ended March 31, 2023, compared to 68% for the three months ended March 31, 2022. 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 7% recognized
during the three months ended March 31, 2023 were impacted by negative margins from our lending and trading activities and negative margins
from our BNI cryptocurrency mining segment due to the decline in the price of Bitcoin coupled with an increase in Bitcoin mining difficulty
level. Excluding the effects of margin from our lending and trading activities and cryptocurrency mining operations, our adjusted gross
margins for the three months ended March 31, 2023 and 2022 would have been 31% and 30%, respectively, with gross margins slightly lower
than our historical averages due to gross margins from SMC, which were 23%.
Research and Development
Research and development expenses
increased by $1.1 million for the three months ended March 31, 2023 due to expenditures related to development work on the BMI metaverse
platform.
Selling and Marketing
Selling and marketing expenses
were $8.8 million for the three months ended March 31, 2023, compared to $6.5 million for the three months ended March 31, 2022, an increase
of $2.3 million, or 36%. The increase was the result of $1.3 million higher advertising and promotion costs related to BMI’s metaverse
platform, including an increase of $0.6 million related to an advertising sponsorship agreement. The increase is also attributable to
$0.8 million increases in sales and marketing costs from SMC, which was acquired in June 2022 and $0.3 million from GIGA, which was acquired
in September 2022
General and Administrative
General and administrative
expenses were $22.7 million for the three months ended March 31, 2023, compared to $13.7 million for the three months ended March
31, 2022, an increase of $9.0 million, or 66%. General and administrative expenses increased from the comparative prior period, mainly
due to:
· general and administrative costs of $3.0 million from Circle 8, which was acquired in December 2022;
· general and administrative costs of $2.2 million from SMC, which was acquired in June 2022;
· general and administrative costs of $1.3 million from GIGA, which was acquired in September 2022;
· higher stock-based compensation of $1.3 million;
5
· $1.0 million higher travel costs;
· $0.8 million increase in the accrual of a performance bonus related to realized gains on trading activities
during the period;
· general and administrative costs of $0.6 million from AVLP, which was acquired in June 2022; and
· partially offset by a decrease in corporate legal fees of $1.0 million.
Impairment of Mined Cryptocurrency
Impairment of mined cryptocurrency
for the three months ended March 31, 2023 and 2022 was $0.1 million and $0.4 million, respectively, attributable to the volatility of
the Bitcoin market as market price of Bitcoin drops below the Company’s carrying value within the respective periods.
Interest and Other Income
Interest and other income was
$1.2 million for the three months ended March 31, 2023, compared to $0.4 million for the three months ended March 31, 2022. The increase
in interest and other income is primarily due to higher interest rates resulting in higher income from ADRT’s cash and marketable
securities held in the trust account.
Interest Expense
Interest expense was $13.7
million for the three months ended March 31, 2023, compared to $29.8 million for the three months ended March 31, 2022. The $29.8 million
interest expense for the three months ended March 31, 2022 related primarily to amortization of debt discount of $26.3 million from the
issuance of warrants, a non-cash charge, and original issue discount, in connection with the $66.0 million of senior notes issued in December
2021, which were fully paid in March 2022. Interest expense for the three months ended March 31, 2023 includes $9.0 amortization of debt
discount primarily related to new debt agreements compared to the prior year period.
Loss on Extinguishment of Debt
Loss on extinguishment of
debt was $0.1 million for the three months ended March 31, 2023, compared to $0 for the three months ended March 31, 2022. The current
period loss on extinguishment of debt relates to the issuance of $8.5 million fair value of convertible preferred stock liabilities to
satisfy $8.4 million of principal amount of secured promissory notes.
Loss From Investment in Unconsolidated Entity
Loss from investment in unconsolidated
entity was $0 for the three months ended March 31, 2023, compared to $0.5 million for the three months ended March 31, 2022, representing
our share of losses from our equity method investment in AVLP prior to the June 1, 2022 acquisition.
Impairment of Equity Securities
Cumulative downward adjustments
for impairments for our equity securities without readily determinable fair values held at March 31, 2023 were $9.6 million.
Other Comprehensive (Loss) Income
Other comprehensive gain was
$0.2 million compared to other comprehensive loss of $0.3 million for the three months ended March 31, 2023 and 2022, respectively. The
balance of other comprehensive income for both years was caused by foreign currency translation adjustments between our functional currency,
the U.S. Dollar, and the British Pound and Israeli Shekel.
Liquidity and Capital Resources
On March 31, 2023, we had
cash and cash equivalents of $9.2 million (excluding restricted cash of $1.9 million), compared to cash and cash equivalents of $10.5
million (excluding restricted cash of $3.6 million) at December 31, 2022. The decrease in cash and cash equivalents was primarily due
the payment of debt and purchases of property and equipment partially offset by 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.
6
Net cash provided by operating
activities totaled $12.2 million for the three months ended March 31, 2023, compared to $29.4 million for the three months ended
March 31, 2022. Cash provided by operating activities for the three months ended March 31, 2023 included $22.0 million net cash provided
by marketable securities from trading activities related to the operations of Ault Lending, partially offset by operating losses and changes
in working capital.
Net cash used in investing
activities was $2.8 million for the three months ended March 31, 2023, compared to $28.8 million for the three months ended March 31,
2022. Net cash used in investing activities for the three months ended March 31, 2023 was primarily related to capital expenditures, partially
offset by proceeds from the sale of fixed assets of $4.5 million.
Net cash used in financing
activities was $8.1 million for the three months ended March 31, 2023, compared to net cash provided by financing activities of $22.2 million
for the three months ended March 31, 2022, and reflects the following transactions:
· 2022 Common ATM Offering – During the three months ended March 31, 2023, we sold an aggregate
of 0.1 million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $4.2 million. Effective March 17,
2023, we terminated the 2022 Common ATM Offering;
· 2022 Preferred ATM Offering – During the three months ended March 31, 2023, we sold an aggregate
of 90,184 shares of Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for net proceeds of $1.2 million;
· $19.7 million payments on notes payable, partially offset by $5.0 million proceeds from notes payable;
and
· $2.7 million proceeds from convertible notes payable, partially offset by $0.2 million payments on convertible
notes payable.
Financing Transactions Subsequent to March
31, 2023
Financing transactions subsequent
to March 31, 2023 included the following:
2022 Preferred ATM
Offering
During
the period between April 1, 2023 through May 18, 2023, we sold an aggregate of 105,475 shares of
Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for net proceeds of $ 1.1 million.
12% Term Note
On April 5, 2023, we issued
a term note with a principal amount of $1.1 million, bearing an interest rate of 12%. The term note was issued at a discount, with net
proceeds to us amounting to $1.0 million. The note is scheduled to mature on June 5, 2023. We have the option to extend the maturity date
by one month, upon payment of a $30,000 extension fee. Ault & Company, a related party, guaranteed the term note.
Original Issuance Discount Term Notes
On May 15, 2023, we issued
a term note with a principal amount of $1.3 million, which does not bear interest unless there is an event of default. The term note was
issued at a discount, with net proceeds to us amounting to $1.0 million. We are obligated to repay $1.0 million of the note on June 15,
2023 and the remaining $0.3 million on June 30, 2023. Upon an event of default, we will pledge our ownership of the membership interests
in 456 Lux Hotel NYC, LLC, which is a limited partner in NYREIC 456 LP. Milton “Todd” Ault, III, our Executive Chairman, and
his wife, guaranteed repayment of the term note.
On May 16, 2023, we issued
a term note with a principal amount of $120,000, which does not bear interest. The term note was issued at a discount, with net proceeds
to us amounting to $100,000. The note is scheduled to mature on June 16, 2023. We have the option to extend the maturity date by 15 days,
upon payment of an extension fee equal to 1% of the amount then outstanding.
On May 17, 2023, we issued
a term note with a principal amount of $1.3 million, which does not bear interest unless there is an event of default. The term note was
issued at a discount, with net proceeds to us amounting to $1.0 million. The note is scheduled to mature on July 17, 2023. Milton “Todd”
Ault, III, our Executive Chairman, and Ault & Company guaranteed repayment of the term note.
7
BMI Securities Purchase Agreement
On April 27, 2023, BMI entered
into a securities purchase agreement with certain accredited investors providing for the issuance of senior secured convertible notes
with an aggregate principal face amount of $6.9 million convertible into shares of BMI common stock and five-year warrants to purchase
an aggregate of 63.0 million shares of BMI common stock at an exercise price of $0.1091 per share, subject to adjustment. The Notes are
secured by a guaranty provided by us, as well as by Milton “Todd” Ault, III, our Executive Chairman, and Ault & Company
guaranteed repayment of the term note.
BMI and the investors entered
into a registration rights agreement whereby BMI agreed to file a registration statement to register the conversion shares and warrant
shares.
The senior secured convertible
notes bear no interest as they were issued with an original issuance discount. The maturity date of the Notes is April 27, 2024. The
senior secured convertible notes are convertible at a price per share equal to the lower of (i) $0.1091 or (ii) the greater of (A) $0.0168
and (B) 85% of the lowest volume weighted average price of BMI common stock during the 10 trading days prior to the date of conversion,
subject to adjustment.
Critical Accounting Policies
Variable Interest Entities
The accounting guidance requires
an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling
financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary
of a Variable Interest Entity (“VIE”); to eliminate the solely quantitative approach previously required for determining the
primary beneficiary of a VIE; to add an additional reconsideration event for determining whether an entity is a VIE when any changes in
facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar
rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance;
and to require enhanced disclosures that will provide readers of financial statements with more transparent information about an enterprise’s
involvement in a VIE.
For VIEs, the Company assesses
whether it is the primary beneficiary as prescribed by the accounting guidance on the consolidation of a VIE.
The Company evaluates its
business relationships with related parties to identify potential VIEs under Accounting Standards Codification (“ASC”) 810,
Consolidation. The Company consolidates VIEs in which it is 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. The Company’s judgment with respect to its level of influence or control of an entity
involves the consideration of various factors including the form of its ownership interest, its representation in the entity’s governance,
the size of its investment, estimates of future cash flows, its ability to participate in policy making decisions and the rights of the
other investors to participate in the decision making process and to replace the Company as manager and/or liquidate the joint venture,
if applicable.
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, trade names 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.
8
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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.