Filing summary: Ault Alliance, Inc. (10-Q, quarter ended March 31, 2023)
Entity note: The request identifies Hyperscale Data, Inc., but the supplied filing is for Ault Alliance, Inc. (NYSE American: AULT). The summary below reflects the filing provided.
Business context and reporting period
This unaudited 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Ault Alliance is a diversified holding company with businesses that include Bitcoin mining, crane operations, defense and electronics products, consumer electronics, hotels, commercial lending and investments. The company changed its name from BitNile Holdings, Inc. to Ault Alliance, Inc. on January 3, 2023.
The company reported nine segments, compared with seven in the prior-year period. Acquisitions included Giga-tronics, SMC and Circle 8; the company also completed a transaction involving BMI and BitNile.com in March 2023.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $31.2 million | $32.8 million |
| Gross profit / gross margin | $2.0 million / 7% | $22.3 million / 68% |
| Operating loss | $31.4 million | Operating income of $1.0 million |
| Net loss | $48.8 million | $28.8 million |
| Net loss available to common stockholders | $48.9 million | $28.8 million |
| Basic and diluted loss per share | $41.24 | $94.97 |
| Interest expense | $13.7 million | $29.8 million |
Revenue fell 5%. Products, cryptocurrency mining and crane operations contributed growth, offset by lending and trading revenue falling from $17.9 million to negative $4.9 million. The filing attributes the current-period negative amount principally to investment-portfolio losses. Gross margin was also pressured by negative margins in lending and trading and Bitcoin mining; excluding those activities, management reported adjusted gross margins of 31% versus 30%.
At March 31, 2023, cash and cash equivalents were $9.2 million, restricted cash was $1.9 million, and cash and marketable securities held in a trust account were $119.3 million. Current assets were $186.6 million and current liabilities were $224.6 million; management reported negative working capital of $37.9 million. Total assets were $526.9 million and total liabilities were $336.6 million. Notes payable were $121.8 million gross ($118.3 million net of discounts), and convertible notes payable were $15.3 million net.
The cash flow statement reports $7.7 million of cash provided by operating activities, $2.8 million used in investing activities and $8.1 million used in financing activities. Cash and restricted cash declined by $3.0 million to $11.1 million. However, MD&A states operating cash flow was $12.2 million, while the cash flow statement shows $7.7 million; the filing text does not reconcile this difference.
Material changes versus the prior comparable period
- Revenue mix changed substantially: crane revenue was $12.6 million, primarily following the Circle 8 acquisition; SMC contributed $3.4 million following its acquisition; and Bitcoin mining revenue rose to $7.3 million from $3.5 million.
- Lending and trading activities moved from $17.9 million of revenue to a $4.9 million loss, reflecting investment-related losses and market-price volatility.
- Operating expenses increased to $33.5 million from $21.3 million. General and administrative expense rose to $22.7 million from $13.7 million, with acquisitions, stock compensation and other costs cited as contributors.
- Net loss widened despite lower interest expense. The prior-year interest expense included substantial non-cash debt-discount amortization related to debt that was repaid in March 2022.
- Cash provided by operating activities was lower year over year according to the statement of cash flows; capital expenditures were $7.0 million versus $35.4 million in Q1 2022.
Outlook, risks, contingencies and unusual items
- Going concern: Management states that cash, receivables and marketable securities at March 31 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 debt or equity capital and may sell marketable securities and digital currencies, but gives no assurance financing will be available on acceptable terms. Failure to raise sufficient capital could require reduced operations or cessation.
- Debt and liquidity pressure: The filing lists $25.5 million of notes payable maturities in 2023 and $66.6 million in 2025. Certain short-term notes were in default, and the 16% secured notes were subject to extensions and fees after quarter-end. SMC obtained a waiver in May 2023 for a covenant violation on its credit line.
- Convertible financing and dilution: In March, $8.5 million fair value of Series E, F and G preferred liabilities was issued in connection with retirement of secured notes. These securities convert at a price based on 85% of the prior trading-day close, subject to a $0.10 floor. The filing classifies them as liabilities.
- Subsequent financing: After quarter-end, the company issued short-term notes and sold additional Series D preferred stock. A proposed related-party Series C preferred and warrant transaction of up to $40 million was conditional on financing and other closing requirements; the supplied filing does not establish that it closed.
- Market and investment exposure: Management warns that trading gains and losses can cause significant earnings volatility. The quarter included a $9.6 million impairment of equity securities and a $4.5 million gain on sale of fixed assets. Bitcoin mining results are exposed to Bitcoin prices and mining difficulty.
- Legal matters: The company accrued $3.1 million for litigation contingencies and $1.0 million for an ongoing SEC fact-finding investigation involving the company and certain affiliates. No final resolution of the SEC matter had been reached.
- Internal controls: Management concluded internal control over financial reporting was not effective at quarter-end due to unremediated material weaknesses involving accounting resources, segregation of duties, system access and change management, and revenue and digital-asset controls.
- Reverse split: A 1-for-300 reverse split became effective May 17, 2023. Share and per-share figures in the filing were adjusted for the split.
- Guidance: The filing provides no quantified earnings or revenue guidance.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is Ault Alliance, Inc., not Hyperscale Data, Inc.
- Reconcile the filing’s conflicting operating cash flow figures: $7.7 million in the cash flow statement versus $12.2 million in MD&A.
- Assess available unrestricted liquidity and the going-concern warning, including the availability and terms of any post-quarter financing.
- Review near-term maturities, defaults, extensions, fees, guarantees and collateral arrangements, along with potential dilution from convertible securities.
- Track remediation and testing of the disclosed material weaknesses and developments in the SEC investigation and other litigation.
- Assess whether investment-related losses, Bitcoin economics and acquisition-related costs continue to materially affect results and cash generation.