Hyperscale Data, Inc. (identified in this filing as BitNile Holdings, Inc.) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The financial statements are unaudited. The filing was signed August 22, 2022. The company-name difference between the request metadata and the filing should be verified.
Business context
BitNile described itself as a diversified holding company with Bitcoin mining, commercial lending and investment trading, defense and electronics businesses, hotel operations, karaoke equipment and textiles. During the quarter it gained control of Avalanche International (AVLP) and The Singing Machine Company (SMC). Its results include multiple acquisitions and volatile investment-related revenue; AVLP and SMC results were not included in reported operations for the quarter because of consolidation reporting lags.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $17.4 million | $62.1 million | $50.2 million | $75.4 million |
| Gross profit | $5.0 million | $55.9 million | $27.3 million | $64.0 million |
| Operating income (loss) | $(23.7) million | $45.8 million | $(22.7) million | $47.0 million |
| Net income (loss) | $(26.1) million | $41.1 million | $(54.9) million | $44.2 million |
| Net income (loss) available to common stockholders | $(25.8) million | $42.2 million | $(54.6) million | $44.2 million |
| Basic loss per share | $(0.09) | $0.83 income | $(0.29) | $0.98 income |
| Gross margin | 28.8% | 89.9% | 54.4% | 84.9% |
| Cash provided by (used in) operating activities | Not separately stated for the quarter | Not separately stated for the quarter | $15.0 million | $(21.7) million |
- Q2 revenue fell 72% year over year; six-month revenue fell 33%. Lending and trading revenue declined to $0.9 million for Q2 and $18.9 million for the half, from $53.3 million and $58.5 million, respectively. Management attributed the comparison largely to substantial prior-year unrealized investment gains, including an approximately $40 million Alzamend gain in first-half 2021.
- Mining revenue rose to $4.0 million in Q2 and $7.5 million for the half, versus $0.3 million and $0.4 million. Hotel operations contributed $4.6 million and $7.3 million, respectively, following the prior-year hotel acquisition. TurnOnGreen revenue declined, which management linked to supply-chain constraints.
- Management said reported margins were affected by the mix of investment-trading and mining revenue and Bitcoin price declines. Excluding those activities, adjusted gross margin was 33.1% for Q2 and 31.4% for the half, versus 30.0% and 33.2% in the comparable periods.
- First-half interest expense was $31.9 million, primarily including a $26.3 million noncash amortization of debt discount on senior notes repaid in March, as well as interest on hotel construction loans.
- At June 30, cash and cash equivalents were $24.1 million, restricted cash $4.7 million, and working capital $51.4 million. Current assets were $106.6 million and current liabilities $55.2 million. Management said cash on hand and ATM proceeds were sufficient for at least 12 months from issuance of the statements.
- Notes payable, net, were $62.9 million and convertible notes payable, net, were $16.1 million. Total liabilities were $134.0 million. These figures exclude lease liabilities.
- First-half investing cash outflow was $82.8 million, including $72.8 million in property and equipment spending, primarily mining equipment. Financing provided $75.5 million, including common-stock proceeds. Cash and restricted cash ended the half at $28.8 million.
Material changes and unusual items
- The common ATM offering raised $163.4 million gross through June 30, with 239.7 million shares sold. Common shares outstanding increased from 84.3 million at year-end to 324.4 million at June 30; 330.96 million were outstanding August 18.
- The company acquired approximately 92% of AVLP by converting notes and accrued interest into shares, and acquired 51.6% of SMC through stock purchases. Preliminary purchase accounting added $42.8 million of goodwill for AVLP and $3.2 million for SMC. Purchase allocations remained subject to revision.
- The company repaid its approximately $66 million senior secured notes in March 2022. It also repaid $18.5 million in margin accounts during the first quarter.
- Operating expenses increased materially: first-half selling and marketing expense was $13.5 million versus $2.7 million, and general and administrative expense was $32.7 million versus $13.1 million. The company cited advertising and sponsorship costs, acquisitions, compensation, data-center expenses, audit fees and legal fees.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and warned that investment trading gains and losses can make earnings volatile.
- Management reported that internal control over financial reporting was not effective at quarter-end because previously identified material weaknesses had not been remediated. Cited deficiencies included limited accounting resources, segregation of duties, system access controls and IT change management.
- The company disclosed several SEC subpoenas concerning a non-public fact-finding inquiry and said it was cooperating; it noted the subpoenas do not indicate that violations occurred. Litigation includes a vendor dispute with claimed damages exceeding $1.4 million and a separate shareholder-related action with claimed damages exceeding $1.1 million; potential losses could not be estimated. The filing says the vendor-claim reserve is the unpaid contract amount.
- Management identified supply-chain delays affecting TurnOnGreen, Bitcoin-price exposure, customer concentration (two customers represented approximately 38% of receivables), and risks around AVLP, including related-party exposure, lack of a liquid market for its shares and potential conflicts of interest.
- Subsequent to quarter-end, the company issued secured notes with $11 million face value for $10 million proceeds, bearing 10% interest and requiring monthly payments of $1 million beginning September 2022. It also agreed to a five-year hosting arrangement for 6,500 miners, granting the host a first-priority security interest in those machines.
Most important facts for investors to verify
- Confirm the registrant’s identity and name history, given the metadata’s “Hyperscale Data, Inc.” name versus “BitNile Holdings, Inc.” in this filing.
- Review the sources and sustainability of operating cash flow, particularly the contribution from marketable-securities trading, and the company’s substantial mining capital expenditures.
- Assess dilution from the large common ATM issuance, remaining ATM capacity, and subsequent share issuance.
- Verify debt service capacity, collateral and payment terms for the August 2022 secured notes and the five-year miner-hosting agreement.
- Track remediation and independent testing of the disclosed material weaknesses, as well as updates on SEC inquiries and litigation.
- Review final purchase-price allocations and the performance of AVLP and SMC once their results are incorporated into consolidated reporting.