Filing summary
Entity and period: The supplied filing is BitNile Holdings, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2022, filed November 21, 2022. This does not match the request metadata naming Hyperscale Data, Inc.; verify the intended issuer.
Business context
BitNile describes itself as a diversified holding company with interests in cryptocurrency mining, commercial lending and investment trading, defense and electronics, karaoke products, hotels and other businesses. It reported seven segments at quarter-end. Acquisitions and consolidations during 2022, including AVLP, The Singing Machine Company (SMC) and GIGA, materially changed the business mix and comparability with 2021.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $49.8 million | $(30.8) million | $100.0 million | $44.6 million |
| Gross profit (loss) | $21.1 million | $(36.1) million | $48.4 million | $27.9 million |
| Operating loss | $(5.3) million | $(49.9) million | $(28.0) million | $(2.9) million |
| Net income (loss) | $(8.0) million | $(42.8) million | $(62.9) million | $1.4 million |
| Net loss available to common stockholders | $(7.5) million | $(42.9) million | $(62.0) million | $1.3 million income |
| Basic and diluted EPS | $(0.03) | $(0.73) | $(0.27) | $0.03 |
Margins: Reported gross margin was 42.4% in Q3 and 48.4% for nine months. Management’s adjusted gross margins, excluding lending/trading and cryptocurrency mining, were 27.6% and 29.2%, respectively; comparable 2021 adjusted figures were 35.8% and 34.0%. The Q3 2021 reported margin is not directly comparable because total revenue was negative, largely due to investment trading losses.
Cash flow, nine months: Operating activities provided $12.9 million, versus $56.9 million used in 2021; investing activities used $106.4 million, versus $68.7 million; financing activities provided $86.1 million, versus $151.1 million. Operating cash flow included $68.5 million associated with marketable securities and trading activity. Capital expenditures were $84.5 million, primarily for mining equipment. Cash and restricted cash declined by $6.5 million to $14.7 million.
Liquidity and debt at September 30: Cash and cash equivalents were $10.1 million, with another $4.6 million restricted. Working capital was $25.7 million. Current assets were $100.1 million and current liabilities $74.4 million. Notes payable, net, were $75.4 million; convertible notes, net, were $15.3 million. The company also reported $117.4 million of cash and marketable securities in a trust account, associated with its SPAC subsidiary. Management said available cash and ATM proceeds were expected to cover operating and capital requirements for at least 12 months from issuance of the statements.
Material changes versus prior comparable periods
- Nine-month revenue more than doubled, increasing 124% to $100.0 million. Growth reflected acquisitions and expanded mining, hotel and lending/trading activity; it should not be viewed as purely organic growth.
- Q3 revenue swung from negative $30.8 million to positive $49.8 million, mainly because the prior-year quarter included large unrealized investment losses. Lending and trading revenue was $13.4 million in Q3 2022 versus negative $38.9 million in Q3 2021.
- Nine-month net results moved from $1.4 million income to a $62.9 million loss. Interest expense rose to $35.8 million, including $26.3 million of noncash debt-discount amortization related to the senior notes repaid in March 2022.
- Common shares issued and outstanding rose to 341.4 million at September 30 from 84.3 million at December 31, 2021. The common ATM raised $168.0 million gross through September 30.
- Property and equipment rose to $254.0 million from $174.0 million, including substantial investment in cryptocurrency miners. Goodwill increased to $54.5 million, largely reflecting AVLP, SMC and GIGA acquisitions.
Outlook, risks and unusual items
- Liquidity outlook: Management stated that cash on hand and ATM proceeds should fund operations and capital needs for at least 12 months. This is a company assertion, not a formal earnings forecast.
- Subsequent financing: After quarter-end, the company borrowed $18.9 million of secured term loans at 8.5%, with warrants issued to lenders; proceeds funded, in part, a $15.8 million private aircraft purchase. In November it also issued $8.2 million of 3% secured notes with a 45% share of realized gains on collateral sales. These transactions add secured obligations and encumber assets.
- Compute North bankruptcy: The hosting provider filed for Chapter 11 in September. BitNile recorded a $2.0 million impairment of its service deposit. It had 6,572 miners, carrying value $38.0 million, at the facility; no equipment impairment was recorded at September 30. The ultimate recovery of the deposit and operational impact remained uncertain.
- Listing compliance: NYSE American notified the company in November that its shares failed the low-price continued-listing standard (30-trading-day average below $0.20). The company had until May 2, 2023 to demonstrate sustained improvement or take another qualifying measure, such as a reverse split.
- Controls: Management concluded internal control over financial reporting was ineffective due to an unremediated material weakness involving staffing, segregation of duties, IT access controls and change management. Remediation work was ongoing.
- Legal and regulatory: The company disclosed an SEC non-public fact-finding inquiry and said it was cooperating; the inquiry is not itself an indication of a violation. A separate vendor lawsuit seeks more than $1.4 million, with the company unable to estimate potential loss. A shareholder-related case had reached a settlement in principle after quarter-end.
- Other risks: Investment fair values and trading results may be volatile; management specifically noted that market price changes have caused and may continue to cause significant earnings volatility. Approximately 36% of accounts receivable was due from two customers. The filing also identifies potential dilution from equity issuance and substantial use of secured borrowing.
Most important facts for investors to verify
- Confirm the intended issuer: the filing is for BitNile Holdings, Inc., not Hyperscale Data, Inc.
- Reconcile the large revenue increase with acquisitions and investment gains, and distinguish recurring operating revenue from trading-related amounts.
- Assess cash availability and near-term debt service, including subsequent secured financings, required payments, collateral pledges and ATM capacity.
- Track the status and recovery prospects of the Compute North miners and deposit, and the effect on mining operations.
- Monitor NYSE American compliance, potential reverse-split action and dilution from outstanding shares, ATMs and lender warrants.
- Review remediation of the material weakness and developments in the SEC inquiry and litigation.