Business context and reporting period
The filing is Ault Global Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2021, filed November 19, 2021. The request identifies Hyperscale Data, Inc., but the filing names Ault Global Holdings, Inc. (formerly DPW Holdings, Inc.; ticker DPW), so confirm the issuer identity. Ault Global was a diversified holding company with defense electronics, commercial electronics, Bitcoin mining/data-center operations, lending and investment activities.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $(30.8) million | $5.7 million | $44.6 million | $16.7 million |
| Gross profit (loss) | $(36.1) million | $1.9 million | $27.9 million | $5.6 million |
| Net income (loss) | $(42.8) million | $(16.7) million | $1.4 million | $(24.6) million |
| Net income (loss) available to common stockholders | $(42.9) million | $(16.7) million | $1.3 million | $(24.7) million |
| Basic and diluted EPS | $(0.73) | $(1.69) | $0.03 | $(3.65) |
Q3 reported revenue was driven down by a $38.9 million negative contribution from lending and trading activities, principally fair-value losses on Alzamend shares and warrants. Revenue from products and services was $7.8 million and cryptocurrency mining revenue was $0.3 million. The company reported a 117.1% negative gross margin for the quarter; management said adjusted gross margin excluding lending and trading was 34.7%. For the nine months, reported gross margin was 62.6%, but management’s adjusted figure excluding lending and trading was 33.3%.
For the nine months, operating expenses were $30.8 million, including $24.4 million of general and administrative expense. Cash used in operating activities was $56.9 million and cash used in investing activities was $68.7 million; financing provided $151.1 million. Cash and cash equivalents were $44.0 million at September 30, 2021, versus $18.7 million at year-end 2020. Management reported working capital of $93.9 million and stockholders’ equity of $201.0 million.
Total assets were $225.7 million and total liabilities were $24.7 million. Notes payable were $1.7 million current and convertible notes payable, net, were $0.4 million; the filing reported no revolving-credit balance. Operating lease liabilities totaled $5.3 million. Marketable equity securities were $49.9 million, and related-party investments in promissory notes, common stock and warrants were significant.
Material changes versus prior comparable periods
- For Q3, total reported revenue swung from $5.7 million to negative $30.8 million, primarily reflecting volatile investment marks; core product/service revenue rose to $7.8 million from $5.7 million. Gresham Worldwide revenue increased 47% to $6.4 million, while TurnOnGreen revenue declined 20% to $1.1 million.
- Nine-month total revenue increased about 167% to $44.6 million. Gresham Worldwide revenue rose 49% to $19.2 million and TurnOnGreen rose 13% to $4.3 million. Lending and trading contributed $19.6 million, compared with negative $27,000 a year earlier.
- Q3 net loss widened to $42.8 million, despite a $4.2 million related-party note-discount accretion benefit and lower interest expense. Nine-month net income of $1.4 million compared with a $24.6 million loss in 2020; results benefited from investment gains, debt forgiveness and lower interest expense, among other items.
- Operating expenses increased materially: nine-month selling and marketing rose to $4.7 million from $0.9 million, and general and administrative expense to $24.4 million from $8.7 million. The filing cites stock compensation, trading-related performance bonuses, acquired-business costs and data-center expenses.
- Cash increased following $160.5 million of gross proceeds from the 2021 at-the-market equity offering through September 30. Common shares issued and outstanding rose to 63.3 million from 27.8 million at December 31, 2020.
Outlook, risks and unusual items
- Management said existing cash was expected to fund operating and capital requirements for at least 12 months from issuance of the financial statements; no specific revenue or earnings guidance was provided.
- The company had contracted to buy 4,000 Bitcoin miners for $27.3 million, with $18.1 million paid by September 30 and the balance scheduled through June 2022. A subsequent November agreement committed to another 16,000 miners for $121 million, with expected shipments from March through September 2022. The filing’s delivery schedule for the first order is inconsistent: a note says October 2021–July 2022, while MD&A contains an apparent July 2021 end date.
- After quarter-end, the company sold 17.9 million additional ATM shares for $39.5 million gross proceeds through November 18, 2021, adding further dilution. It also invested another $8.5 million in the Alpha Fund in October and November.
- Management emphasized that trading and investment fair-value movements can cause substantial earnings volatility. Q3 included a $27.4 million unrealized loss on Alzamend common stock and a $6.0 million loss on its warrants. Related-party valuations and AVLP’s limited market liquidity add estimation and realization risk.
- The company disclosed an unremediated material weakness in internal control over financial reporting, citing insufficient accounting resources and challenges reviewing complex consolidation and fair-value accounting. Management said remediation was ongoing and controls had not operated long enough to conclude they were effective.
- Risks include an SEC non-public fact-finding subpoena (the company said it was cooperating; the subpoena is not an indication of a violation), litigation with claimed damages exceeding $1.4 million and $1.1 million respectively, and potential environmental remediation costs estimated at approximately $369,000 for the Michigan facility. The company said litigation outcomes could be materially adverse and could not estimate potential losses in the two principal cases.
- COVID-19 continued to cause supplier delays and work-schedule disruption; management said Q3 financial impact was not significant but future effects remained uncertain.
Important facts for investors to verify
- Confirm whether this Ault Global Holdings/DPW filing is the intended filing for Hyperscale Data, Inc.
- Reconcile reported revenue and gross margin with management’s adjusted figures, especially the trading-related fair-value effects and Q3 losses.
- Review the valuation, liquidity and related-party exposure of Alzamend and AVLP investments, and the basis for the $4.2 million note-discount accretion.
- Assess cash needs and funding for the Bitcoin-miner commitments, including the $121 million post-quarter order, and verify delivery schedules.
- Evaluate dilution from the ATM offering and subsequent share sales, as well as the terms and governance of related-party investments and Alpha Fund holdings.
- Track remediation of the material weakness, the SEC inquiry, litigation developments and environmental obligations.