Hyperscale Data, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this quarterly report on Form 10-Q (the “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 offer colocation and hosting services for the emerging artificial intelligence ecosystems and other industries, 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, 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 31, 2024, Ault Lending entered into a securities purchase agreement with Alzamend pursuant to which Alzamend agreed to sell Ault Lending up to 6,000 shares of Alzamend Series A convertible preferred stock and warrants to purchase shares of the Alzamend common stock. The Agreement provides that Ault Lending may purchase up to $6 million of Alzamend Series A Convertible Preferred Stock in one or more closings. On January 31, 2024, Alzamend sold 1,220 shares of its Series A convertible preferred stock and warrants to purchase 1.2 million shares of its common stock to Ault Lending, for a total purchase price of $1.2 million. On March 26, 2024, Alzamend sold an additional 780 shares of its Series A convertible preferred stock and warrants to purchase 0.8 million shares of its common stock to Ault Lending, for a total purchase price of $0.8 million. On March 11, 2024, we entered into a note purchase agreement with two institutional investors pursuant to which the investors agreed to acquire, and we agreed to issue and sell in a registered direct offering to the investors, an aggregate of $2.0 million convertible promissory notes, bearing interest at 6%. The convertible promissory notes were issued at a discount, with net proceeds to us of $1.8 million. While the convertible promissory notes are scheduled to mature on June 12, 2024, we have the option to extend the maturity date to September 12, 2024, for which we will have to pay an additional increase in the principal amount of the notes of 5%. The notes are convertible into shares of Class A common stock at a conversion price of $0.35 per share. On each of March 7, 2024, March 8, 2024 , March 18, 2024, March 19, 2024 and April 17, 2024, pursuant to the November 2023 SPA entered into with Ault & Company on November 6, 2023, we sold to Ault & Company 500 shares of Series C Preferred Stock and Warrants to purchase 147,820 shares of Class A common stock, for a total purchase price of $0.5 million. As of the date of filing of this Quarterly Report, Ault & Company has purchased an aggregate of 44,000 shares of Series C Convertible Preferred Stock and Series C Warrants to purchase an aggregate of 13,008,132 Warrant Shares, for an aggregate purchase price of $44.0 million. The November 2023 SPA provides that Ault & Company may purchase up to $75.0 million of Series C Convertible Preferred Stock and Series C Warrants in one or more closings. On March 25, 2024, the November 2023 SPA entered into with Ault & Company was amended to increase the amount of Series C Preferred Stock and Series C Warrants that may be purchase under the agreement from $50.0 million to $75.0 million and an extension of the date to closing the final tranche of the financing to June 30, 2024. On April 3, 2024, we filed a Certificate of Increase to the Series C Designation of Preferences, Rights and Limitations to increase the number of authorized shares of Series C Preferred Stock from 50,000 to 75,000. On April 15, 2024, we established a record date for our final distribution of securities of TurnOnGreen. Stockholders as of this date were entitled to 0.83 shares of TurnOnGreen common stock, along with warrants to purchase 0.83 shares of TurnOnGreen common stock (the “TurnOnGreen Securities”) for every share of our common stock they held on the record date. The final distribution was paid on April 29, 2024. We distributed 25.0 million TurnOnGreen Securities in the final distribution. On April 29, 2024, we entered into a $1.7 million term note agreement with an institutional investor bearing interest of 15%. The term note was issued at a discount, with net proceeds to us of $1.6 million. The term note was scheduled to mature May 17, 2024. The term note was not paid on its scheduled maturity date and we are working with the institutional investor to obtain a waiver or amend the terms of the note. 1 Presentation of AGREE as Discontinued Operations In September 2023, we committed to a plan for our wholly owned subsidiary AGREE to list for sale its four recently renovated Midwest hotels, the Hilton Garden Inn in Madison West, the Residence Inn in Madison West, the Courtyard in Madison West, and the Hilton Garden Inn in Rockford. The decision to sell the hotels follows the decision to also list the multifamily development site in St. Petersburg, Florida and was driven by our desire to focus on our core businesses, Energy, Fintech and Sentinum. In connection with the planned sale of AGREE assets, we concluded that the net assets of AGREE met the criteria for classification as held for sale. In addition, the proposed sale represents a strategic shift that will have a major effect on our operations and financial results. As a result, we have presented the results of operations, cash flows and financial position of AGREE as discontinued operations in the accompanying consolidated financial statements and notes for all periods presented. On April 30, 2024, we had a change in plan of sale for our four hotels owned and operated by AGREE. As a result, as of April 30, 2024, the assets will no longer meet the held for sale criteria and will be required to be reclassified as held and used at the lower of adjusted carrying value or the fair value at the date of the subsequent decision not to sell. General As a holding company, our business objective is to increase stockholder value through developing and growing our subsidiaries. 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 all or a portion 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) initiatives 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 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. 2 Results of Operations Results of Operations for the Three Months Ended March 31, 2024 and 2023 The following table summarizes the results of our operations for the three months ended March 31, 2024 and 2023. For the Three Months Ended March 31, 2024 2023 Revenue $ 11,468,000 $ 13,889,000 Revenue, digital assets mining 11,447,000 7,347,000 Revenue, crane operations 12,918,000 12,646,000 Revenue, lending and trading activities 9,099,000 (4,939,000 ) Total revenue 44,932,000 28,943,000 Cost of revenue, products 9,164,000 9,787,000 Cost of revenue, digital assets mining 8,544,000 8,103,000 Cost of revenue, crane operations 7,715,000 7,388,000 Cost of revenue, lending and trading activities - 1,180,000 Total cost of revenue 25,423,000 26,458,000 Gross profit 19,509,000 2,485,000 Total operating expenses 19,112,000 32,348,000 Income (loss) from operations 397,000 (29,863,000 ) Other income (expense): Interest and other income 583,000 1,197,000 Interest expense (4,900,000 ) (12,100,000 ) Gain on conversion of investment in equity securities to marketable equity securities 17,900,000 - Loss on extinguishment of debt 1,405,000 (63,000 ) Loss from investment in unconsolidated entity (667,000 ) - Impairment of equity securities - (9,555,000 ) Provision for loan losses, related party (3,068,000 ) - Gain on the sale of fixed assets 68,000 4,515,000 Total other income (expense), net 11,321,000 (16,006,000 ) Income (loss) before income taxes 11,718,000 (45,869,000 ) Income tax benefit (44,000 ) (263,000 ) Net income (loss) from continuing operations 11,762,000 (45,606,000 ) Net loss from discontinued operations (1,801,000 ) (3,223,000 ) Net income (loss) 9,961,000 (48,829,000 ) Net (income) loss attributable to non-controlling interest (6,244,000 ) 183,000 Net income (loss) attributable to Ault Alliance, Inc. 3,717,000 (48,646,000 ) Preferred dividends (1,260,000 ) (229,000 ) Net income (loss) available to common stockholders $ 2,457,000 $ (48,875,000 ) Comprehensive loss Net loss available to common stockholders $ 2,457,000 $ (48,875,000 ) Other comprehensive income (loss) Foreign currency translation adjustment 36,000 170,000 Other comprehensive income 36,000 170,000 Total comprehensive income (loss) $ 2,493,000 $ (48,705,000 ) 3 Revenues Revenues by segment for the three months ended March 31, 2024 and 2023 were as follows: For the Three Months Ended March 31, Increase 2024 2023 (Decrease) % Sentinum Revenue, digital assets mining $ 11,447,000 $ 7,347,000 $ 4,100,000 56 % Revenue, commercial real estate leases 302,000 458,000 (156,000 ) -34 % Energy Revenue, crane operations 12,918,000 12,646,000 272,000 2 % Other 39,000 464,000 (425,000 ) -92 % Fintech Revenue, lending and trading activities 9,099,000 (4,939,000 ) 14,038,000 -284 % GIGA 9,573,000 8,708,000 865,000 10 % SMC - 3,383,000 (3,383,000 ) -100 % TurnOnGreen 1,225,000 876,000 349,000 40 % ROI 28,000 - 28,000 - Other 301,000 - 301,000 - Total revenue $ 44,932,000 $ 28,943,000 $ 15,989,000 55 % Sentinum Revenues from Sentinum’s digital assets mining operations increased $4.1 million due primarily to a 134% increase in the average Bitcoin price, partially offset a 94% increase in the average Bitcoin mining difficulty level in the current quarter period. On April 19, 2024, a Bitcoin halving event occurred on the Bitcoin network. Halving is a key part of the Bitcoin protocol and serves to control the overall supply and reduce the risk of inflation in digital assets using a proof-of-work consensus algorithm. The Bitcoin halving event reduced the block subsidy by half from 6.25 to 3.125 Bitcoin. Transaction fees are not directly impacted by the halving. Energy Energy revenues from the Circle 8 crane operations increased by $0.3 million, or 2%, for the three months ended March 31, 2024. Fintech Revenues from our lending and trading activities were $9.1 million for the three months ended March 31, 2024. On February 14, 2024, ROI transferred 2.5 million shares of White River common stock with a recorded value of $0.5 million and a fair value of $7.5 million at the date of transfer to Ault Lending. As of March 31, 2024, the 2.5 million shares of White River common stock held by Ault Lending had a fair value of $9.4 million and Ault Lending recorded an unrealized gain of $8.9 million during the quarter ended March 31, 2024 included in revenue from lending and trading activities. Revenues from our lending and trading activities were negative for the three months ended March 31, 2023, due to a $2.0 million impairment related to investments in equity securities, a $1.5 million unrealized loss from our investment in Alzamend and $1.7 million of realized and unrealized losses from our investment portfolio. Revenues from our trading activities for the three months ended March 31, 2024 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. GIGA For the three-month period ending March 31, 2024, GIGA revenues increased by $0.9 million. This growth is driven by ongoing global conflicts and tensions, which have spurred investments in force protection technologies in the United States, U.K., Europe, Asia and the Middle East. 4 SMC Due to the significant change in our ownership and voting rights, we determined that we no longer met the criteria of the primary beneficiary and, accordingly, we deconsolidated SMC as of November 20, 2023. SMC revenues were $0 for the three months ended March 31, 2024, a decrease of $3.4 million compared to the corresponding period in 2023. TurnOnGreen TurnOnGreen's revenues increased by $0.3 million for the three months ended March 31, 2024, compared to the corresponding period in 2023. This rise was primarily due to higher sales from a single, higher-margin customer in the defense industry during the period ended March 31, 2024. Gross Margins Gross margins increased to 43% for the three months ended March 31, 2024, compared to 9% for the three months ended March 31, 2023. Our gross margins of 43% recognized during the three months ended March 31, 2024 and 2023 were impacted by margins from our lending and trading activities, with a positive impact during the three months ended March 31, 2024 and a negative impact during the three months ended March 31, 2023. Excluding the effects of margin from our lending and trading activities, our adjusted gross margins for the three months ended March 31, 2024 and 2023 would have been 29% and 25%, respectively. Our gross margins improved, in part, due to lower margin revenue from SMC during the three months ended March 31, 2023. We deconsolidated SMC as of November 20, 2023. Research and Development Research and development expenses decreased by $0.8 million for the three months ended March 31, 2024, due to lower expenditures related to development work on ROI’s BitNile metaverse platform. Selling and Marketing Selling and marketing expenses were $4.7 million for the three months ended March 31, 2024, compared to $8.8 million for the three months ended March 31, 2023, a decrease of $4.1 million, or 47%. The decrease was primarily the result of a $3.4 million decrease in sales and marketing expenses at ROI primarily due to lower advertising and promotion costs and a $0.8 million decrease in sales and marketing expenses from SMC due to the deconsolidation of SMC as of November 20, 2023 . General and Administrative General and administrative expenses were $13.4 million for the three months ended March 31, 2024, compared to $21.6 million for the three months ended March 31, 2023, a decrease of $8.2 million, or 38%. General and administrative expenses decreased from the comparative prior period, mainly due to the following: · $5.2 million lower stock compensation expense; · $2.6 million decrease in general and administrative expenses from SMC due to the deconsolidation of SMC as of November 20, 2023 ; and · $0.7 million lower performance bonus related to realized gains on trading activities. Other Expense, Net Other income, net was $11.3 million for the three months ended March 31, 2024, compared to other expense, net of $16.0 million for the three months ended March 31, 2023. Interest and other income was $0.6 million for the three months ended March 31, 2024, compared to $1.1 million for the three months ended March 31, 2023. The decrease in interest and other income is primarily due to the decline in Ault Disruptive’s cash and marketable securities held in the trust account as a result of redemptions of Ault Disruptive common stock subject to possible redemption. 5 Interest expense was $4.9 million for the three months ended March 31, 2024, compared to $12.1 million for the three months ended March 31, 2023. Interest expense for the three months ended March 31, 2024 included contractual interest of $1.3 million, amortization of debt discount of $2.1 million, and forbearance and extension fees of $1.5 million. Interest expense for the three months ended March 31, 2023 included amortization of debt discount of $10.4 million, contractual interest of $1.1 million, and forbearance and extension fees of $0.6 million. Gain on conversion of investment in equity securities to marketable equity securities of $17.9 million relates to ROI conversion of White River common stock. During the quarter ended March 31, 2024, ROI transferred 6.7 million shares of White River common stock with a fair value of $19.2 million at the date of transfer. In conjunction with the transfers, ROI converted a portion of their White River’s Series A Convertible Preferred Stock into common stock and recorded a noncash $17.9 million gain on conversion. During the three months ended March 31, 2024, ROI converted $2.3 million of ROI senior secured convertible notes that had a fair value of $0.9 million at the time of conversion and recognized a $1.4 million gain on extinguishment of debt. Loss from investment in unconsolidated entity was $0.7 million for the three months ended March 31, 2024, representing our share of losses from our equity method investment in SMC. For the three months ended March 31, 2024, the provision for loan losses on the related party note receivable from Ault & Company was $3.1 million, due to uncertainties regarding collection. This compares to no provision for the same period in 2023. Income Tax Benefit The income tax benefit was $44,000 and $0.3 million during the three months ended March 31, 2024 and 2023, respectively. The effective income tax benefit rate was 0.4% and (0.6%) for the three months ended March 31, 2024 and 2023, respectively. Liquidity and Capital Resources On March 31, 2024, excluding cash and cash equivalents from discontinued operations, we had cash and cash equivalents of $9.4 million (excluding restricted cash of $5.5 million), compared to cash and cash equivalents of $8.6 million (excluding restricted cash of $5.0 million) at December 31, 2023. The increase in cash and cash equivalents was primarily due cash provided by financing activities related to the sale of common and preferred stock, as well as proceeds from notes payable and convertible notes, partially offset by the payment of debt, purchases of property and equipment and cash used in operating activities. Net cash used in operating activities totaled $10.2 million for the three months ended March 31, 2024, compared to net cash provided by operating activities of $7.7 million for the three months ended March 31, 2023. Cash used in operating activities for the three months ended March 31, 2024 included $8.6 million proceeds from the sale of digital assets from our Sentinum Bitcoin mining operations, offset by operating losses and changes in working capital. Net cash used in operating activities for the three months ended March 31, 2024 included $1.7 million cash used in operating activities from discontinued operations. Net cash used in investing activities was $1.7 million for the three months ended March 31, 2024, compared to $2.8 million for the three months ended March 31, 2023. Net cash used in investing activities for the three months ended March 31, 2024 was primarily related to $0.9 million capital expenditures and $0.6 million cash used in investing activities from discontinued operations. Net cash provided by financing activities was $13.0 million for the three months ended March 31, 2024, compared to net cash used in financing activities of $8.1 million for the three months ended March 31, 2023, and primarily reflects the following transactions: · During the period between January 1, 2024 through March 13, 2024, we sold an aggregate of 25.6 million shares of common stock pursuant to the 2023 Common ATM Offering for gross proceeds of $14.6 million and effective March 14, 2024, the 2023 Common ATM Offering was terminated ; · $2.0 million proceeds from sales of Series C preferred stock, related party; · $1.5 million proceeds from subsidiaries’ sale of stock to non-controlling interests; · $1.9 million payments on notes payable, related party; · $1.3 million payments of preferred dividends; · $5.2 million payments on notes payable, partially offset by $2.3 million proceeds from notes payable; and · $1.8 million proceeds from convertible notes payable, partially offset by $1.0 million payments on convertible notes payable. Net provided by financing activities from discontinued operations was $1.1 million and $2.5 million for the three months ended March 31, 2024 and 2023, respectively. 6 Financing Transactions Subsequent to March 31, 2024 On April 17, 2024, we sold to Ault & Company 500 shares of Series C Preferred Stock and Warrants to purchase 0.1 million shares of Class A common stock, for a total purchase price of $0.5 million. On April 29, 2024, we entered into a $1.7 million term note agreement with an institutional investor bearing interest of 15%. The term note was issued at a discount, with net proceeds to us of $1.6 million. The term note was scheduled to mature May 17, 2024. On May 16, 2024, the due date was extended to June 15, 2024. On May 16, 2024, we entered into a $0.5 million term note agreement with an institutional investor bearing interest of 15%. The term note is scheduled to mature June 15, 2024. Critical Accounting Estimates There have been no material changes to our critical accounting estimates previously disclosed in the 2023 Annual Report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.