Hyperscale Data, Inc. quarterly report, Q2 FY2021

Business context and reporting period

This is Ault Global Holdings, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The filing identifies the registrant as Ault Global Holdings, formerly DPW Holdings; its stock traded as DPW. The request’s company name, Hyperscale Data, Inc., does not appear in the filing.

Ault Global is a diversified holding company with three reportable segments: defense solutions (Gresham Worldwide), commercial electronics (Coolisys), and Ault Alliance, which includes lending, trading, digital learning and cryptocurrency mining.

Financial performance and position

Metric	Q2 2021	Six months 2021
Total revenue	$62.1 million	$75.4 million
Gross profit / reported gross margin	$55.9 million / 89.9%	$64.0 million / 84.9%
Net income available to common stockholders	$42.2 million; $0.83 basic and $0.81 diluted EPS	$44.2 million; $0.98 basic and $0.92 diluted EPS
Cash from operating activities	Used $21.7 million
Cash from investing activities	Used $29.7 million
Cash from financing activities	Provided $138.1 million

• Revenue from lending and trading activities was $53.3 million in Q2 and $58.5 million for the half year. Management attributes the increase largely to capital deployed into investments and appreciation in securities, including unrealized gains and losses.
• Management reported that gross margin excluding lending and trading activities was 29% in Q2 and 33% for the half year, compared with reported margins of 89.9% and 84.9%, respectively.
• At June 30, cash and cash equivalents were $105.4 million, current assets $151.4 million, current liabilities $23.5 million, working capital $127.9 million, total assets $259.1 million and stockholders’ equity $231.4 million. Total liabilities were $27.7 million.
• Reported borrowings included $1.8 million of current notes payable, a $103,000 revolving credit balance and $427,000 of net convertible notes. Operating lease liabilities totaled about $4.7 million.
• Cash increased from $18.7 million at year-end, primarily due to equity financing. The company sold 27.9 million shares through its ATM offering for $144.0 million gross proceeds during the half year.

Changes versus the prior comparable period

• Q2 revenue rose from $5.4 million to $62.1 million; first-half revenue rose from $11.0 million to $75.4 million. Lending and trading activities accounted for most of the increase. The company resumed cryptocurrency mining in March 2021, generating $291,000 in Q2 and $421,000 for the half year.
• Common-stockholder income improved from a Q2 loss of $1.4 million and a first-half loss of $7.9 million in 2020 to income of $42.2 million and $44.2 million, respectively, in 2021. The company cautions that investment-related gains and losses can materially affect periodic earnings.
• Gresham Worldwide and Coolisys revenue increased year over year; Gresham’s 2021 results included Relec, acquired in November 2020. General and administrative expense rose to $8.0 million in Q2 and $13.1 million for the half year, including a $2.9 million trading-related performance bonus, Gresham stock compensation, acquired-company costs and higher professional fees.
• Net cash used in operating activities increased from $2.3 million to $21.7 million for the six-month period. Financing cash inflow increased from $3.6 million to $138.1 million, primarily reflecting the ATM share sales.

Outlook, risks and unusual items

• Management stated that cash on hand should meet operating and capital requirements for at least 12 months from issuance of the financial statements. No numerical revenue or earnings guidance was provided.
• The company reported substantial exposure to related-party investments: promissory notes and common stock/warrants in related parties totaled $74.3 million at June 30. Alzamend’s share-price appreciation contributed materially to reported gains. Its closing share price fell from $8.74 at June 30 to $3.83 on August 12; management warned that a lower September 30 price could result in a significant quarterly unrealized loss.
• Management described continuing COVID-19-related costs, supplier delays, travel and site-access restrictions, and remote-work impacts. The ultimate effect on operations and demand remained uncertain.
• The company disclosed an SEC subpoena for a non-public fact-finding inquiry and stated it was cooperating. The filing says the subpoena is not an indication that a violation occurred.
• Two material lawsuits remained unresolved. The Blockchain Mining action seeks more than $1.388 million plus fees; the company recorded a reserve for the unpaid purchase-agreement amount but could not estimate potential loss. The Gu and Wang action seeks more than $1.1 million, among other relief; the court dismissed the fraud claim at July 2021 oral argument but reserved decision on other claims.
• A material weakness in internal control over financial reporting remained unremediated, primarily due to insufficient accounting resources and challenges reviewing complex accounting matters. Management said remediation efforts were ongoing but had not operated long enough to establish effectiveness through testing.
• The Michigan data-center property is subject to environmental monitoring and remediation obligations. The company estimated remediation costs of approximately $369,000, but actual costs could differ materially.
• After quarter-end, the company sold an additional 2.4 million ATM shares for $6.0 million gross proceeds through August 13. Following an FDA “Study May Proceed” letter for Alzamend, it made an additional $2.0 million investment and received further shares and warrants.

Important facts for investors to verify

1. How much of reported revenue and earnings reflects recurring operating activity versus realized and unrealized investment gains, and how sensitive results are to market prices.
2. The valuation methods, assumptions and related-party governance for the $74.3 million related-party investment balance, particularly Alzamend and AVLP exposures.
3. Cash burn, planned investment and capital requirements, and remaining availability under the $200 million ATM program; assess the resulting share dilution.
4. Progress and outcomes in the disclosed litigation and SEC inquiry, as well as the status of the environmental remediation obligation.
5. Whether management remediates the disclosed material weakness and demonstrates effective financial-reporting controls through sustained testing.
6. Post-quarter Alzamend share-price changes and subsequent investment activity, including the possible effect on future earnings.