Business context and reporting period
Unaudited Form 10-Q for the three months ended March 31, 2021. The filing is by Ault Global Holdings, Inc. (formerly DPW Holdings; ticker DPW), a diversified holding company with defense/electronics, lending and trading, and other operations. The request names Hyperscale Data, Inc.; that company name does not match the registrant identified in this filing.
Financial performance and position
- Revenue: $13.24 million, up 136% from $5.61 million. Components included $7.90 million of other revenue, $5.21 million from lending and trading, and $0.13 million from cryptocurrency mining.
- Profitability: Gross profit was $8.14 million versus $1.75 million; gross margin was 61.2% versus 31.3%. Management said margin excluding lending and trading activities was 36.1%. Income from continuing operations before other income and expenses was $1.20 million versus a $2.93 million loss. Net income was $3.08 million versus a $6.53 million loss; income available to common shareholders was $1.99 million, or $0.05 per share, versus a $6.54 million loss, or $1.44 per share.
- Cash flow: Operating cash use was $14.24 million, investing cash use $16.73 million, and financing cash provided $119.93 million. Cash rose to $107.80 million from $18.68 million, principally due to equity proceeds.
- Liquidity: Current assets were $172.23 million and current liabilities $52.75 million; reported working capital was $119.5 million. Management said cash on hand was sufficient for operating and capital needs for at least 12 months from issuance of the financial statements.
- Debt and liabilities: Total liabilities were $57.56 million. Notes payable, related-party notes, convertible notes and the revolving facility were reported separately; the filing does not provide a single consolidated total debt figure. Operating lease liabilities totaled $4.88 million.
- Equity: Stockholders’ equity was $176.47 million. Common shares outstanding increased to 49.50 million from 27.75 million at year-end.
Material changes versus the prior-year quarter
- Revenue growth reflected higher GWW revenue (up 45%, including Relec, acquired in November 2020), Coolisys revenue (up 17%), and a sharp increase in lending and trading activity, from $36,000 to $5.21 million. Cryptocurrency mining resumed in March 2021.
- Gross margin more than doubled, primarily because of lending and trading activity; management said the underlying margin excluding that activity was broadly in line with its historical range.
- Operating expenses rose to $6.94 million from $4.68 million, including higher general and administrative and selling and marketing costs. Interest expense declined to $0.31 million from $1.09 million.
- Results included marketable-security fair-value and realized gains, a gain on debt extinguishment, and a warrant-liability fair-value loss. These items contributed to the year-over-year profit swing; the 2020 period also included discontinued restaurant losses and a $1.0 million credit-loss provision.
- Financing included $125.0 million gross proceeds from an at-the-market offering, from issuing 21.6 million shares by March 5. The offering authorization was up to $200 million.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management described its strategy as supporting subsidiaries and pursuing monetization opportunities, including potential sales or offerings of subsidiary interests.
- COVID-19 continued to cause added costs, supplier delays, travel and site-access restrictions, and work-schedule impacts. Management said first-quarter financial results were not significantly affected, but future effects remained uncertain.
- The company acquired a Michigan data-center facility for $3.9 million. It is subject to environmental monitoring and remediation obligations; the estimated cost was approximately $300,000, with actual costs potentially materially different.
- Related-party activity included investments and loans involving AVLP, Alzamend and Ault & Company, plus a $2.7 million purchase of the Executive Chairman’s residence as a relocation benefit. The residence was resold in April 2021 with no gain or loss reported.
- A $10 million Alzamend investment was partly funded in the quarter; the remaining $6 million depended on specified FDA and clinical-trial milestones. The filing identifies these investments as related-party transactions.
- Market and valuation risk is notable: $29.28 million of investments were classified as Level 3 at quarter-end and depend on significant unobservable inputs. Lending/trading results and marketable-security gains may be volatile.
- Two material lawsuits remained unresolved; potential losses could not be reasonably estimated. The company also disclosed a non-public SEC document-production subpoena, stating it was cooperating and that the subpoena did not indicate that violations had occurred.
- Management reported that internal control over financial reporting was not effective because a previously disclosed material weakness had not been remediated. The weakness involved insufficient accounting resources and review capacity for complex accounting, including consolidation and fair-value estimates.
- The filing disclosed $48.0 million of remaining transaction price for partially unsatisfied MLSE obligations, expected to be recognized over an estimated three years, subject to production funding and performance.
Important facts for investors to verify
- Confirm that this Ault Global Holdings/DPW filing is the intended filing, given the request’s Hyperscale Data, Inc. company label.
- Assess how much first-quarter profit depended on investment gains, fair-value changes and lending/trading activity, rather than recurring operating performance.
- Review the ATM issuance’s dilution and any subsequent share sales; the quarter-end share count was substantially higher than at year-end.
- Evaluate the collectability and valuation of related-party loans and Level 3 investments, and the governance safeguards for related-party transactions.
- Monitor operating cash use, the Michigan facility’s remediation costs, and the outcome of litigation and the SEC inquiry.
- Track remediation and testing of the disclosed material weakness in financial reporting controls.