Filing summary: Ault Alliance, Inc. (10-Q, quarter ended June 30, 2023)
Entity note: The supplied filing identifies the registrant as Ault Alliance, Inc., not Hyperscale Data, Inc. Verify that this is the intended filing. Financial statements are unaudited and present results under U.S. GAAP.
Business context and reporting period
Ault Alliance is a diversified holding company with operations spanning defense and electronics, consumer products, Bitcoin mining and data-center hosting, crane services, hotels and real estate, lending and trading, and other investments. It reported nine segments at June 30, 2023. The filing covers the three and six months ended June 30, 2023, with comparisons to 2022.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $47.4 million | $17.4 million | $78.6 million | $50.2 million |
| Gross profit | $17.9 million | $5.0 million | $19.9 million | $27.3 million |
| Gross margin | 38% | 29% | 25% | 54% |
| Operating loss | $(50.5) million | $(23.7) million | $(81.9) million | $(22.7) million |
| Net loss attributable to common stockholders | $(61.0) million | $(25.8) million | $(109.9) million | $(54.6) million |
| Basic and diluted loss per share | $(50.08) | $(26.73) | $(91.41) | $(85.83) |
Q2 revenue rose 173%, including $12.6 million from crane operations, $9.5 million from lending and trading, and $8.4 million from cryptocurrency mining. Six-month revenue grew 57%, principally reflecting acquired crane and consumer-electronics businesses and higher mining revenue. Six-month gross margin fell to 25%; management cited negative mining margins, partly offset by favorable lending and trading margins. Excluding those two activities, management reported adjusted gross margins of 33% for the first half of 2023 versus 36% in 2022.
Q2 operating expenses included $35.6 million of non-cash goodwill and intangible-asset impairment charges related to AVLP. Six-month results also included $9.6 million of impairment of equity securities. Q2 interest expense was $15.9 million, including $7.2 million of debt-discount amortization and $6.2 million of forbearance and extension fees. First-half interest expense was $29.7 million.
- Cash and working capital: At June 30, cash and cash equivalents were $19.7 million; restricted cash was $1.1 million. Current assets were $76.9 million and current liabilities $146.8 million, a reported negative working-capital position of approximately $70 million.
- Cash flows, first half: Operating activities provided $12.9 million, investing activities used $18.9 million, and financing activities provided $12.8 million. Cash and restricted cash increased by $6.7 million to $20.8 million. The MD&A separately states investing cash use of $21.8 million, which does not agree with the cash-flow statement; verify the correct figure.
- Debt: Notes payable, net, were $134.0 million, and convertible notes payable, net, were $15.3 million. Total liabilities were $254.9 million. Several notes were past due or in default at quarter-end, including $5.5 million of 3% secured notes and certain other obligations; the filing reports some were paid or amended after quarter-end.
Material changes, outlook, and risks
- Management stated that cash, receivables, and marketable securities at June 30 were not expected to fund anticipated operations for one year from issuance of the statements. The filing says this creates substantial doubt about the company’s ability to continue as a going concern. Management expects to seek additional equity or debt financing and may sell marketable securities or digital currencies, but gives no assurance financing will be available on acceptable terms. No specific revenue or earnings guidance is provided.
- Reported acquisitions and business changes materially affect comparability: crane operations and SMC contributed revenue in 2023 that was not present in the comparable period, and the company completed a BMI transaction in March 2023. The company also effected a 1-for-300 reverse stock split in May 2023; share and per-share data reflect the split.
- After quarter-end, the company expanded its common-stock ATM offering and reported selling about 3.9 million shares for gross proceeds of approximately $15.6 million through August 18. This provides funding but creates dilution risk. Other subsequent financing included an $8.8 million increase to secured notes and additional related-party advances.
- Bitcoin mining revenue and trading results are exposed to volatile asset prices and mining difficulty. Management said trading gains and losses can cause significant earnings volatility. Receivables also have customer concentration: one customer represented 15% at June 30.
- The company reported material weaknesses in internal control over financial reporting, including insufficient accounting resources, segregation-of-duties limitations, and ineffective IT access, change-management, and revenue controls. Remediation was ongoing. The SEC settlement announced August 15 required a $0.7 million company penalty, already accrued, and an independent consultant review of controls; the company and named executives neither admitted nor denied the findings.
- The filing reports $5.3 million accrued for litigation matters. It describes the outcome of other legal proceedings as uncertain. Related-party financing and guarantees, including obligations involving Ault & Company and the executive chairman, are also relevant to assess.
Most important facts for investors to verify
- Confirm the registrant identity: the source filing is for Ault Alliance, Inc., despite the request metadata naming Hyperscale Data, Inc.
- Assess the going-concern warning, near-term cash needs, access to financing, debt maturities, and the status and terms of defaulted or amended obligations.
- Reconcile the $18.9 million investing cash outflow in the cash-flow statement with the $21.8 million figure in MD&A.
- Review dilution from the ATM sales, preferred securities and conversions, reverse split, and subsequent share issuances.
- Evaluate the $35.6 million AVLP impairment, other investment impairments, and management’s valuation assumptions and control weaknesses.
- Verify the status of the SEC settlement, independent controls review, accrued litigation, and related-party debt arrangements.