UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the quarterly period ended September 30, 2023 | ||
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the transition period from ________ to ________. | ||
Commission file number 1-12711
AULT ALLIANCE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 94-1721931 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
11411 Southern Highlands Pkwy #240
Las Vegas, NV 89141
(Address of principal executive offices) (Zip code)
(949) 444-5464
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Class A Common Stock, $0.001 par value | AULT | NYSE American | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding year (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o |
| Non-accelerated filer x | Smaller reporting company x |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
At November 17, 2023, the registrant had outstanding shares of common stock.
AULT ALLIANCE, INC.
TABLE OF CONTENTS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended December 31, 2022, as amended, particularly the “Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of filing of this Quarterly Report on Form 10-Q. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
AULT ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-1 |
AULT ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| LONG TERM LIABILITIES | ||||||||
| Operating lease liability, non-current | 8,697,000 | 5,836,000 | ||||||
| Notes payable | 21,211,000 | 29,831,000 | ||||||
| Convertible notes payable | 9,453,000 | 11,451,000 | ||||||
| Deferred underwriting commissions of Ault Disruptive Technologies Corporation (“Ault Disruptive”) subsidiary | 3,450,000 | 3,450,000 | ||||||
| Noncurrent liabilities of discontinued operations | 61,633,000 | |||||||
| TOTAL LIABILITIES | 257,218,000 | 337,526,000 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Redeemable noncontrolling interests in equity of subsidiaries | 2,179,000 | |||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Series A Convertible Preferred Stock, $ stated value per share, $ par value – shares authorized; shares issued and outstanding at September 30, 2023 and December 31, 2022 (liquidation preference of $176,000 as of September 30, 2023 and December 31, 2022) | ||||||||
| Series B Convertible Preferred Stock, $ stated value per share, share, $ par value – shares authorized; shares issued and outstanding at September 30, 2023 and December 31, 2022 (liquidation preference of $1,190,000 at September 30, 2023 and December 31, 2022) | ||||||||
| Series D Cumulative Redeemable Perpetual Preferred Stock, $ stated value per share, $ par value – shares authorized; shares authorized, shares and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively (liquidation preference of $10,630,000 and $4,321,000 as of September 30, 2023 and December 31, 2022, respectively) | ||||||||
| Class A Common Stock, $ par value – shares authorized; and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | 12,000 | 1,000 | ||||||
| Class B Common Stock, $ par value – shares authorized; shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Additional paid-in capital | 589,279,000 | 565,904,000 | ||||||
| Accumulated deficit | (467,088,000 | ) | (329,078,000 | ) | ||||
| Accumulated other comprehensive loss | (2,102,000 | ) | (1,100,000 | ) | ||||
| Treasury stock, at cost | (30,540,000 | ) | (29,235,000 | ) | ||||
| TOTAL AULT ALLIANCE STOCKHOLDERS’ EQUITY | 89,561,000 | 206,492,000 | ||||||
| Non-controlling interest | 29,498,000 | 17,496,000 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 119,059,000 | 223,988,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 378,456,000 | $ | 561,514,000 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-2 |
AULT ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | 28,164,000 | $ | 27,031,000 | $ | 54,594,000 | $ | 43,539,000 | ||||||||
| Revenue, cryptocurrency mining | 7,558,000 | 3,874,000 | 23,273,000 | 11,398,000 | ||||||||||||
| Revenue, crane operations | 12,490,000 | 37,726,000 | ||||||||||||||
| Revenue, lending and trading activities | (249,000 | ) | 13,360,000 | 4,337,000 | 32,224,000 | |||||||||||
| Total revenue | 47,963,000 | 44,265,000 | 119,930,000 | 87,161,000 | ||||||||||||
| Cost of revenue, products | 20,425,000 | 20,193,000 | 39,248,000 | 30,985,000 | ||||||||||||
| Cost of revenue, cryptocurrency mining | 10,228,000 | 5,255,000 | 28,057,000 | 12,206,000 | ||||||||||||
| Cost of revenue, crane operations | 7,642,000 | 22,671,000 | ||||||||||||||
| Cost of revenue, lending and trading activities | 1,180,000 | |||||||||||||||
| Total cost of revenue | 38,295,000 | 25,448,000 | 91,156,000 | 43,191,000 | ||||||||||||
| Gross profit | 9,668,000 | 18,817,000 | 28,774,000 | 43,970,000 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 1,769,000 | 521,000 | 5,415,000 | 1,945,000 | ||||||||||||
| Selling and marketing | 8,034,000 | 7,428,000 | 26,405,000 | 20,888,000 | ||||||||||||
| General and administrative | 17,760,000 | 15,362,000 | 59,540,000 | 44,357,000 | ||||||||||||
| Impairment of goodwill and intangible assets | 35,570,000 | |||||||||||||||
| Impairment of property and equipment | 3,895,000 | 3,895,000 | ||||||||||||||
| Impairment of deposit due to vendor bankruptcy filing | 2,000,000 | 2,000,000 | ||||||||||||||
| Impairment of mined cryptocurrency | 113,000 | 515,000 | 376,000 | 2,930,000 | ||||||||||||
| Total operating expenses | 31,571,000 | 25,826,000 | 131,201,000 | 72,120,000 | ||||||||||||
| Loss from operations | (21,903,000 | ) | (7,009,000 | ) | (102,427,000 | ) | (28,150,000 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest and other income | 309,000 | 725,000 | 3,888,000 | 1,255,000 | ||||||||||||
| Interest expense | (4,414,000 | ) | (2,367,000 | ) | (30,537,000 | ) | (32,063,000 | ) | ||||||||
| Loss on extinguishment of debt | (1,546,000 | ) | (1,700,000 | ) | ||||||||||||
| Realized and unrealized (loss) gain on marketable securities | 74,000 | 709,000 | (170,000 | ) | 1,016,000 | |||||||||||
| Loss from investment in unconsolidated entity | (924,000 | ) | ||||||||||||||
| Impairment of equity securities | (9,555,000 | ) | ||||||||||||||
| (Loss) gain on the sale of fixed assets | (33,000 | ) | 2,728,000 | |||||||||||||
| Change in fair value of warrant liability | (562,000 | ) | (3,000 | ) | 2,655,000 | (27,000 | ) | |||||||||
| Total other expense, net | (6,172,000 | ) | (936,000 | ) | (32,691,000 | ) | (30,743,000 | ) | ||||||||
| Loss before income taxes | (28,075,000 | ) | (7,945,000 | ) | (135,118,000 | ) | (58,893,000 | ) | ||||||||
| Income tax (benefit) provision | (565,000 | ) | 144,000 | 540,000 | 361,000 | |||||||||||
| Net loss from continuing operations | (27,510,000 | ) | (8,089,000 | ) | (135,658,000 | ) | (59,254,000 | ) | ||||||||
| Net (loss) income from discontinued operations | (929,000 | ) | 93,000 | (5,862,000 | ) | (3,614,000 | ) | |||||||||
| Net loss | (28,439,000 | ) | (7,996,000 | ) | (141,520,000 | ) | (62,868,000 | ) | ||||||||
| Net loss attributable to non-controlling interest | 6,668,000 | 725,000 | 10,420,000 | 1,061,000 | ||||||||||||
| Net loss attributable to Ault Alliance, Inc. | (21,771,000 | ) | (7,271,000 | ) | (131,100,000 | ) | (61,807,000 | ) | ||||||||
| Preferred dividends | (413,000 | ) | (190,000 | ) | (963,000 | ) | (239,000 | ) | ||||||||
| Net loss available to common stockholders | $ | (22,184,000 | ) | $ | (7,461,000 | ) | $ | (132,063,000 | ) | $ | (62,046,000 | ) | ||||
| Basic and diluted net income (loss) per common share: | ||||||||||||||||
| Continuing operations | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Discontinued operations | ) | ) | ) | |||||||||||||
| Net loss per common share | $ | (3.97 | ) | $ | (7.61 | ) | $ | (49.87 | ) | $ | (82.51 | ) | ||||
| Weighted average basic and diluted common shares outstanding | ||||||||||||||||
| Comprehensive loss | ||||||||||||||||
| Net loss available to common stockholders | $ | (22,184,000 | ) | $ | (7,461,000 | ) | $ | (132,063,000 | ) | $ | (62,046,000 | ) | ||||
| Foreign currency translation adjustment | (651,000 | ) | 306,000 | (1,001,000 | ) | (1,452,000 | ) | |||||||||
| Other comprehensive loss | (651,000 | ) | 306,000 | (1,001,000 | ) | (1,452,000 | ) | |||||||||
| Total comprehensive loss | $ | (22,835,000 | ) | $ | (7,155,000 | ) | $ | (133,064,000 | ) | $ | (63,498,000 | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-3 |
AULT ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Three Months Ended September 30, 2023
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Series A, B & D | Additional | Other | Non- | Total | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Controlling | Treasury | Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interest | Stock | Equity | |||||||||||||||||||||||||||||||
| BALANCES, July 1, 2023 | 557,237 | $ | 1,526,411 | $ | 2,000 | $ | 573,386,000 | $ | (444,371,000 | ) | $ | (1,450,000 | ) | $ | 23,853,000 | $ | (29,919,000 | ) | $ | 121,501,000 | ||||||||||||||||||||
| Stock-based compensation | - | - | 959,000 | 1,622,000 | 2,581,000 | |||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash | - | 10,707,601 | 11,000 | 20,404,000 | 20,415,000 | |||||||||||||||||||||||||||||||||||
| Financing cost in connection with sales of common stock | - | - | (715,000 | ) | (715,000 | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of preferred stock liabilities | - | 105,909 | 584,000 | 584,000 | ||||||||||||||||||||||||||||||||||||
Common stock issued in connection with issuance of notes payable | - | 39,752 | 162,000 | 162,000 | ||||||||||||||||||||||||||||||||||||
| Remeasurement of Ault Disruptive subsidiary temporary equity | - | - | (530,000 | ) | (530,000 | ) | ||||||||||||||||||||||||||||||||||
| Increase in ownership interest of subsidiary | - | - | (352,000 | ) | (352,000 | ) | ||||||||||||||||||||||||||||||||||
| Sale of subsidiary stock to non-controlling interests | - | - | 343,000 | 343,000 | ||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock - Ault Alpha LP (“Ault Alpha”) | - | - | (621,000 | ) | (621,000 | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | (21,771,000 | ) | (21,771,000 | ) | ||||||||||||||||||||||||||||||||||
| Preferred dividends | - | - | (413,000 | ) | (413,000 | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | (651,000 | ) | (651,000 | ) | ||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | (6,668,000 | ) | (6,668,000 | ) | ||||||||||||||||||||||||||||||||||
| Distribution of securities of Imperalis Holding Corp., d/b/a TurnOnGreen, Inc. (“TurnOnGreen”) to Ault Alliance stockholders ($1.44 per share) | - | - | (5,500,000 | ) | 10,700,000 | 5,200,000 | ||||||||||||||||||||||||||||||||||
| Other | - | - | (1,000 | ) | (1,000 | ) | (3,000 | ) | (1,000 | ) | (6,000 | ) | ||||||||||||||||||||||||||||
| BALANCES, September 30, 2023 | 557,237 | $ | 12,379,673 | $ | 12,000 | $ | 589,279,000 | $ | (467,088,000 | ) | $ | (2,102,000 | ) | $ | 29,498,000 | $ | (30,540,000 | ) | $ | 119,059,000 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-4 |
AULT ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Three Months Ended September 30, 2022
| Series A, B & D | Additional | Other | Non- | Total | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Controlling | Treasury | Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interest | Stock | Equity | |||||||||||||||||||||||||||||||
| BALANCES, July 1, 2022 | 278,658 | $ | 1,081,469 | $ | 1,000 | $ | 550,036,000 | $ | (200,184,000 | ) | $ | (1,863,000 | ) | $ | 18,048,000 | $ | (20,639,000 | ) | $ | 345,399,000 | ||||||||||||||||||||
| Preferred stock issued | 8,310 | - | 207,000 | 207,000 | ||||||||||||||||||||||||||||||||||||
| Preferred stock offering costs | - | - | (65,000 | ) | (65,000 | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 1,563,000 | 479,000 | 2,042,000 | |||||||||||||||||||||||||||||||||||
| Issuance of Gresham Worldwide, Inc. common stock for acquisition of Giga-tronics Incorporated (“GIGA”) | - | - | 1,669,000 | 1,669,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash | - | 56,688 | 4,557,000 | 4,557,000 | ||||||||||||||||||||||||||||||||||||
| Financing cost in connection with sales of common stock | - | - | (79,000 | ) | (79,000 | ) | ||||||||||||||||||||||||||||||||||
| Increase in ownership interest of subsidiary | - | - | (132,000 | ) | (1,539,000 | ) | (1,671,000 | ) | ||||||||||||||||||||||||||||||||
| Non-controlling interest from GIGA acquisition | - | - | 2,735,000 | 2,735,000 | ||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock - Ault Alpha | - | - | (8,148,000 | ) | (8,148,000 | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | (7,271,000 | ) | (7,271,000 | ) | ||||||||||||||||||||||||||||||||||
| Preferred dividends | - | - | (190,000 | ) | (190,000 | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | 306,000 | 306,000 | ||||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | (725,000 | ) | (725,000 | ) | ||||||||||||||||||||||||||||||||||
| Other | - | - | 2,000 | (2,000 | ) | (2,000 | ) | (1,000 | ) | (3,000 | ) | |||||||||||||||||||||||||||||
| BALANCES, September 30, 2022 | 286,968 | $ | 1,138,157 | $ | 1,000 | $ | 557,758,000 | $ | (207,647,000 | ) | $ | (1,557,000 | ) | $ | 18,996,000 | $ | (28,788,000 | ) | $ | 338,763,000 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-5 |
AULT ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Nine Months Ended September 30, 2023
| Series A, B & D | Additional | Other | Non- | Total | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Controlling | Treasury | Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interest | Stock | Equity | |||||||||||||||||||||||||||||||
| BALANCES, January 1, 2023 | 304,878 | $ | 1,274,157 | $ | 1,000 | $ | 565,904,000 | $ | (329,078,000 | ) | $ | (1,100,000 | ) | $ | 17,496,000 | $ | (29,235,000 | ) | $ | 223,988,000 | ||||||||||||||||||||
| Issuance of common stock for restricted stock awards | - | 4,974 | ||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for cash | 252,359 | - | 6,309,000 | 6,309,000 | ||||||||||||||||||||||||||||||||||||
| Preferred stock offering costs | - | - | (3,431,000 | ) | (3,431,000 | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | 5,642,000 | 3,546,000 | 9,188,000 | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash | - | 10,917,388 | 11,000 | 25,316,000 | 25,327,000 | |||||||||||||||||||||||||||||||||||
| Financing cost in connection with sales of common stock | - | - | (847,000 | ) | (847,000 | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of preferred stock liabilities | - | 143,402 | 912,000 | 912,000 | ||||||||||||||||||||||||||||||||||||
Common stock issued in connection with issuance of notes payable | - | 39,752 | 162,000 | 162,000 | ||||||||||||||||||||||||||||||||||||
| Remeasurement of Ault Disruptive subsidiary temporary equity | - | - | (5,945,000 | ) | (5,945,000 | ) | ||||||||||||||||||||||||||||||||||
| Increase in ownership interest of subsidiary | - | - | 13,000 | (1,597,000 | ) | (1,584,000 | ) | |||||||||||||||||||||||||||||||||
| Non-controlling position at RiskOn International, Inc. (“ROI”) subsidiary acquired | - | - | 6,357,000 | 6,357,000 | ||||||||||||||||||||||||||||||||||||
| Sale of subsidiary stock to non-controlling interests | - | - | 3,915,000 | 3,915,000 | ||||||||||||||||||||||||||||||||||||
| Distribution to Circle 8 Crane Services, LLC (“Circle 8”) non-controlling interest | - | - | (500,000 | ) | (500,000 | ) | ||||||||||||||||||||||||||||||||||
| Purchase of treasury stock - Ault Alpha | - | - | (1,306,000 | ) | (1,306,000 | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | (131,100,000 | ) | (131,100,000 | ) | ||||||||||||||||||||||||||||||||||
| Preferred dividends | - | (963,000 | ) | (963,000 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | (1,001,000 | ) | (1,001,000 | ) | ||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | (10,420,000 | ) | (10,420,000 | ) | ||||||||||||||||||||||||||||||||||
| Distribution of securities of TurnOnGreen to Ault Alliance stockholders ($2.02 per share) | - | - | (10,700,000 | ) | 10,700,000 | |||||||||||||||||||||||||||||||||||
| Other | - | - | (1,000 | ) | (2,000 | ) | (1,000 | ) | 1,000 | 1,000 | (2,000 | ) | ||||||||||||||||||||||||||||
| BALANCES, September 30, 2023 | 557,237 | $ | 12,379,673 | $ | 12,000 | $ | 589,279,000 | $ | (467,088,000 | ) | $ | (2,102,000 | ) | $ | 29,498,000 | $ | (30,540,000 | ) | $ | 119,059,000 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-6 |
AULT ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Nine Months Ended September 30, 2022
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Series A, B & D | Additional | Other | Non- | Total | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Controlling | Treasury | Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interest | Stock | Equity | |||||||||||||||||||||||||||||||
| BALANCES, January 1, 2022 | 132,040 | $ | 281,149 | $ | $ | 385,728,000 | $ | (145,600,000 | ) | $ | (106,000 | ) | $ | 1,613,000 | $ | (13,180,000 | ) | $ | 228,455,000 | |||||||||||||||||||||
| Issuance of common stock for restricted stock awards | - | 1,473 | ||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for cash | 154,928 | - | 3,873,000 | 3,873,000 | ||||||||||||||||||||||||||||||||||||
| Preferred stock offering costs | - | - | (602,000 | ) | (602,000 | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | 5,190,000 | 556,000 | 5,746,000 | |||||||||||||||||||||||||||||||||||||
| Issuance of Gresham Worldwide, Inc. common stock for acquisition of GIGA | - | - | 1,669,000 | 1,669,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash | - | 855,535 | 1,000 | 167,982,000 | 167,983,000 | |||||||||||||||||||||||||||||||||||
| Financing cost in connection with sales of common stock | - | - | (4,103,000 | ) | (4,103,000 | ) | ||||||||||||||||||||||||||||||||||
| Increase in ownership interest of subsidiary | - | - | (1,980,000 | ) | (1,921,000 | ) | (3,901,000 | ) | ||||||||||||||||||||||||||||||||
| Non-controlling interest from AVLP acquisition | - | - | 6,738,000 | 6,738,000 | ||||||||||||||||||||||||||||||||||||
| Non-controlling interest from SMC acquisition | - | - | 10,336,000 | 10,336,000 | ||||||||||||||||||||||||||||||||||||
| Non-controlling interest from GIGA acquisition | - | - | 2,735,000 | 2,735,000 | ||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock - Ault Alpha | - | - | (15,607,000 | ) | (15,607,000 | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | (61,807,000 | ) | (61,807,000 | ) | ||||||||||||||||||||||||||||||||||
| Preferred dividends | - | (239,000 | ) | (239,000 | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | (1,452,000 | ) | (1,452,000 | ) | ||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | (1,061,000 | ) | (1,061,000 | ) | ||||||||||||||||||||||||||||||||||
| Other | - | - | 1,000 | (1,000 | ) | 1,000 | (1,000 | ) | ||||||||||||||||||||||||||||||||
| BALANCES, September 30, 2022 | 286,968 | $ | 1,138,157 | $ | 1,000 | $ | 557,758,000 | $ | (207,647,000 | ) | $ | (1,557,000 | ) | $ | 18,996,000 | $ | (28,788,000 | ) | $ | 338,763,000 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-7 |
AULT ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (141,520,000 | ) | $ | (62,868,000 | ) | ||
| Net loss from discontinued operations | (5,862,000 | ) | (3,614,000 | ) | ||||
| Net loss from continuing operations | (135,658,000 | ) | (59,254,000 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 20,808,000 | 8,298,000 | ||||||
| Amortization of debt discount | 22,463,000 | 26,665,000 | ||||||
| Amortization of right-of-use assets | 2,142,000 | 1,193,000 | ||||||
| Impairment of goodwill and intangible assets | 35,570,000 | |||||||
| Impairment of property and equipment | 3,895,000 | |||||||
| Stock-based compensation | 9,188,000 | 5,746,000 | ||||||
| Impairment of deposit due to vendor bankruptcy filing | 2,000,000 | |||||||
| Gain on the sale of fixed assets | (2,728,000 | ) | ||||||
| Impairment of equity securities | 11,555,000 | |||||||
| Impairment of cryptocurrencies | 376,000 | 2,930,000 | ||||||
| Realized gain on the sale of cryptocurrencies | (404,000 | ) | (829,000 | ) | ||||
| Revenue, cryptocurrency mining | (23,273,000 | ) | (11,398,000 | ) | ||||
| Realized losses on sale of marketable securities | (33,140,000 | ) | (19,194,000 | ) | ||||
| Unrealized (gains) losses on marketable securities | (2,554,000 | ) | 16,937,000 | |||||
| Unrealized losses on investments in common stock, related parties | 3,752,000 | 5,676,000 | ||||||
| Unrealized gains on equity securities | (32,949,000 | ) | ||||||
| Income from cash held in trust | (2,561,000 | ) | ||||||
| Loss from investment in unconsolidated entity | 924,000 | |||||||
| Loss on remeasurement of investment in unconsolidated entity | 2,700,000 | |||||||
| Provision for loan losses | 1,180,000 | |||||||
| Change in the fair value of warrant liability | (2,655,000 | ) | (917,000 | ) | ||||
| Other | 1,550,000 | (766,000 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Proceeds from the sale of cryptocurrencies | 21,330,000 | 8,952,000 | ||||||
| Marketable equity securities | 71,159,000 | 68,532,000 | ||||||
| Accounts receivable | (5,582,000 | ) | (3,022,000 | ) | ||||
| Inventories | (456,000 | ) | (5,867,000 | ) | ||||
| Prepaid expenses and other current assets | (1,530,000 | ) | 1,599,000 | |||||
| Other assets | (3,969,000 | ) | (2,944,000 | ) | ||||
| Accounts payable and accrued expenses | 13,527,000 | 7,528,000 | ||||||
| Lease liabilities | (2,511,000 | ) | (1,334,000 | ) | ||||
| Net cash provided by operating activities from continuing operations | 1,474,000 | 21,206,000 | ||||||
| Net cash (used in) provided by operating activities from discontinued operations | (3,632,000 | ) | 683,000 | |||||
| Net cash (used in) provided by operating activities | (2,158,000 | ) | 21,889,000 | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (8,734,000 | ) | (80,058,000 | ) | ||||
| Investment in promissory notes and other, related parties | (2,200,000 | ) | ||||||
| Investments in common stock and warrants, related parties | (4,840,000 | ) | ||||||
| Purchase of SMC, net of cash received | (8,239,000 | ) | ||||||
| Purchase of GIGA, net of cash received | (3,687,000 | ) | ||||||
| Cash received upon acquisition of AVLP | 1,245,000 | |||||||
| Acquisition of non-controlling interests | (1,584,000 | ) | (3,901,000 | ) | ||||
| Purchase of marketable equity securities | (1,981,000 | ) | ||||||
| Sales of marketable equity securities | 11,748,000 | |||||||
| Investments in loans receivable | (182,000 | ) | (7,081,000 | ) | ||||
| Principal payments on loans receivable | 10,525,000 | |||||||
| Investments in equity securities | (10,702,000 | ) | (22,449,000 | ) | ||||
| Proceeds from the sale of fixed assets | 4,515,000 | |||||||
| Other | (79,000 | ) | ||||||
| Net cash used in investing activities from continuing operations | (16,766,000 | ) | (110,918,000 | ) | ||||
| Net cash used in investing activities from discontinued operations | (6,103,000 | ) | (4,442,000 | ) | ||||
| Net cash used in investing activities | (22,869,000 | ) | (115,360,000 | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-8 |
AULT ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-9 |
1. DESCRIPTION OF BUSINESS
Ault Alliance, Inc., a Delaware corporation (“Ault Alliance” or the “Company”) is a diversified holding company pursuing growth by acquiring undervalued businesses and disruptive technologies with a global impact. Through its wholly- and majority-owned subsidiaries and strategic investments, the Company owns and operates a data center at which it mines Bitcoin and offers colocation and hosting services for the emerging artificial intelligence ecosystems and other industries, and provides mission-critical products that support a diverse range of industries, including metaverse platform, oil exploration, crane services, defense/aerospace, industrial, automotive, medical/biopharma, consumer electronics, hotel operations and textiles. In addition, the Company extends credit to select entrepreneurial businesses through a licensed lending subsidiary.
Ault Alliance was founded by Milton “Todd” Ault, III, its Executive Chairman and is led by Milton “Todd” Ault, III, William B. Horne, its Chief Executive Officer and Vice Chairman and Henry Nisser, its President and General Counsel. Together, they constitute the Executive Committee, which manages the day-to-day operations of the Company. All major investment and capital allocation decisions are made for the Company by the Executive Committee. The Company has the following eight reportable segments:
| · | Energy and Infrastructure (“Energy”) – crane operations, advanced textiles processing and oil exploration; |
| · | Technology and Finance (“Fintech”) – commercial lending, activist investing, stock trading, media, and digital learning; |
| · | The Singing Machine Company, Inc. (“SMC”) – consumer electronics; |
| · | Sentinum, Inc. (“Sentinum”) – cryptocurrency mining operations and colocation and hosting services for the emerging artificial intelligence ecosystems and other industries; |
| · | GIGA – defense industry; |
| · | TurnOnGreen – commercial electronics solutions; |
| · | RiskOn International, Inc., formerly BitNile Metaverse, Inc. (“ROI”) – immersive metaverse platform; and |
| · | Ault Disruptive – a special purpose acquisition company. |
Reverse Stock Split
On May 15, 2023, pursuant to the authorization provided by the Company’s stockholders at a special meeting of stockholders, the Company’s board of directors approved an amendment to the Certificate of Incorporation to effectuate a reverse stock split of the Company’s issued and outstanding common stock by a ratio of one-for-three hundred (the “Reverse Split”). The Reverse Split did not affect the number of authorized shares of common stock, preferred stock or their respective par value per share. As a result of the Reverse Split, each three hundred shares of common stock issued and outstanding prior to the Reverse Split were converted into one share of common stock. The Reverse Split became effective in the State of Delaware on May 17, 2023. All share amounts in these financial statements have been updated to reflect the Reverse Split.
2. LIQUIDITY AND FINANCIAL CONDITION
As of September 30, 2023, the Company had cash and cash equivalents of $8.7 million, negative working capital of $45.1 million and a history of net operating losses. The Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. These factors create substantial doubt about the Company’s ability to continue as a going concern for at least one year after the date that these condensed consolidated financial statements are issued.
The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
In making this assessment management performed a comprehensive analysis of the Company’s current circumstances, including its financial position, cash flow and cash usage forecasts, as well as obligations and debts. Although management has a long history of successful capital raises, the analysis used to determine the Company’s ability as a going concern does not include cash sources beyond the Company’s direct control that management expects to be available within the next 12 months.
| F-10 |
Management expects that the Company’s existing cash and cash equivalents, accounts receivable and marketable securities as of September 30, 2023, will not be sufficient to enable the Company to fund its anticipated level of operations through one year from the date these financial statements are issued. Management anticipates raising additional capital through the private and public sales of the Company’s equity or debt securities and selling its marketable securities and digital currencies, or a combination thereof. Although management believes that such capital sources will be available, there can be no assurances that financing will be available to the Company when needed in order to allow the Company to continue its operations, or if available, on terms acceptable to the Company. If the Company does not raise sufficient capital in a timely manner, among other things, the Company may be forced to scale back its operations or cease operations altogether.
3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The Company has made estimates and judgments affecting the amounts reported in the Company’s condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from the Company’s estimates. The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s amended Annual Report on Form 10-K/A for the year ended December 31, 2022 (the “2022 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on May 22, 2023. The condensed consolidated balance sheet as of December 31, 2022 was derived from the Company’s audited 2022 financial statements contained in the above referenced 2022 Annual Report. Results of the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the full year ending December 31, 2023.
Significant Accounting Policies
Other than as noted below, there have been no material changes to the Company’s significant accounting policies previously disclosed in the 2022 Annual Report.
Revenue Recognition – Bitcoin Mining
The Company recognizes revenue from Bitcoin mining under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
| · | Step 1: Identify the contract with the customer; |
| · | Step 2: Identify the performance obligations in the contract; |
| · | Step 3: Determine the transaction price; |
| · | Step 4: Allocate the transaction price to the performance obligations in the contract; and |
| · | Step 5: Recognize revenue when the company satisfies a performance obligation. |
The Company has entered into a digital asset mining pool by executing a contract with a mining pool operator to provide computing power to the mining pool. The Company’s customer, as defined in ASC 606-10-20, is the mining pool operator with which the Company has agreed to the terms of service and user service agreement. The Company supplies computing power, in exchange for consideration, to the pool operator who in turn provides transaction verification services to third parties via a mining pool that includes other participants.
The Company’s enforceable right to compensation begins only when, and lasts as long as, the Company provides computing power to the mining pool operator and is created as power is provided over time. The only consideration due to the Company relates to the provision of computing power. The contracts are terminable at any time by and at no cost to the Company, and by the pool operator. Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. Providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators.
| F-11 |
The transaction consideration the Company receives, if any, is non-cash consideration in the form of Bitcoin. Changes in the fair value of the non-cash consideration due to form of the consideration (changes in the market price of Bitcoin) are not included in the transaction price and are therefore not included in revenue. The mining pool operator charges fees to cover the costs of maintaining the pool and are deducted from amounts the Company may otherwise earn and are treated as a reduction to the consideration received. Fees fluctuate and historically have been approximately 0.3% per reward earned, on average.
In exchange for providing computing power, the Company is entitled to a Full-Pay-Per-Share payout of Bitcoin based on a contractual formula, which primarily calculates the hash rate provided by the Company to the mining pool as a percentage of total network hash rate, and other inputs. The Company is entitled to consideration even if a block is not successfully placed by the mining pool operator. The contract is in effect until terminated by either party.
All consideration pursuant to this arrangement is variable. It is not probable that a significant reversal of cumulative revenue will occur and the Company is able to calculate the payout based on the contractual formula, non-cash revenue is estimated and recognized based on the spot price of the Company’s principal market for Bitcoin at the inception of each contract, which is determined to be daily. Non-cash consideration is measured at fair value at contract inception. Fair value of the crypto asset consideration is determined using the spot price of the Company’s principal market for Bitcoin at the beginning of the contract period. This amount is estimated and recognized in revenue upon inception, which is when hash rate is provided.
There is no significant financing component in these transactions.
Expenses associated with running the cryptocurrency mining business, such as equipment depreciation and electricity costs, are recorded as a component of cost of revenues.
Preferred Stock Liabilities
The Company follows ASC 480-10, “Distinguishing Liabilities from Equity” in its evaluation of the accounting for the Preferred Shares (as defined in Note 17). ASC 480-10-25-14 requires liability accounting for certain financial instruments, including shares that embody an unconditional obligation to transfer a variable number of shares, provided that the monetary value of the obligation is based solely or predominantly on one of the following three characteristics:
| · | A fixed monetary amount known at inception; |
| · | Variations in something other than the fair value of the issuer’s shares; or |
| · | Variations in the fair value of the issuer’s equity shares, but the monetary value to the counterparty moves in the opposite direction as the value of the issuer’s shares. |
The number of shares delivered is determined on the basis of (1) the fixed monetary amount determined as the stated value and (2) the current stock price at settlement, so that the aggregate fair value of the shares delivered equals the monetary value of the obligation, which is fixed or predominantly fixed. Accordingly, the holder is not significantly exposed to gains and losses attributable to changes in the fair value of the Company’s equity shares. Instead, the Company is using its own equity shares as currency to settle a monetary obligation.
Discontinued operations
The Company records discontinued operations when the disposal of a separately identified business unit constitutes a strategic shift in the Company’s operations, as defined in ASC Topic 205-20, Discontinued Operations (“ASC Topic 205-20”).
Reclassifications
Certain prior period amounts have been reclassified for comparative purposes to conform to the current-period financial statement presentation. These reclassifications had no effect on previously reported results of operations.
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses,” (“ASU No. 2016-13”) to improve information on credit losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13 replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. This guidance was effective for the Company beginning on January 1, 2023. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
| F-12 |
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, “Revenue from Contracts with Customers.” The guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. The guidance should be applied prospectively to acquisitions occurring on or after the effective date. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
4. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Presentation of AGREE Operations
In September 2023, the Company committed to a plan for its wholly owned subsidiary AGREE to list for sale its four recently renovated Midwest hotels, the Hilton Garden Inn in Madison West, the Residence Inn in Madison West, the Courtyard in Madison West, and the Hilton Garden Inn in Rockford. The decision to sell the hotels follows the decision to also list the multifamily development site in St. Petersburg, Florida and is driven by the Company’s desire to focus on its core businesses, Energy, Fintech and Sentinum. The Company’s real estate properties, which include both hotels and land are currently listed for sale.
In connection with the planned sale of AGREE assets, the Company concluded that the net assets of AGREE met the criteria for classification as held for sale. In addition, the proposed sale represents a strategic shift that will have a significant effect on the Company’s operations and financial results. As a result, the Company has presented the results of operations, cash flows and financial position of AGREE as discontinued operations in the accompanying consolidated financial statements and notes for all periods presented.
As of September 30, 2023, the Company expects the planned sale of AGREE assets to close within one year and, as a result, the Company has classified the total assets and total liabilities associated with AGREE as current in the consolidated balance sheets as of September 30, 2023.
The following table presents the assets and liabilities of AGREE operations:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Cash and cash equivalents | $ | 1,851,000 | $ | 2,550,000 | ||||
| Restricted cash | 2,831,000 | |||||||
| Accounts receivable | 256,000 | 264,000 | ||||||
| Inventories | 51,000 | 44,000 | ||||||
| Prepaid expenses and other current assets | 262,000 | 270,000 | ||||||
| Total current assets | 2,420,000 | 5,959,000 | ||||||
| Property and equipment, net | 96,176,000 | 92,535,000 | ||||||
| Total assets | 98,596,000 | 98,494,000 | ||||||
| Accounts payable and accrued expenses | 2,097,000 | 2,631,000 | ||||||
| Total current liabilities | 2,097,000 | 2,631,000 | ||||||
| Notes payable | 67,115,000 | 61,633,000 | ||||||
| Total liabilities | 69,212,000 | 64,264,000 | ||||||
| Net assets of discontinued operations | $ | 29,384,000 | $ | 34,230,000 | ||||
A disposal group classified as held for sale shall be measured at the lower of its carrying amount or fair value less costs to sell. No impairment was recognized up reclassification of the disposal group as held for sale.
| F-13 |
The following table presents the results of AGREE operations:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue, hotel and real estate operations | $ | 5,404,000 | $ | 5,513,000 | $ | 12,031,000 | $ | 12,809,000 | ||||||||
| Cost of revenue, hotel operations | 3,278,000 | 3,230,000 | 9,086,000 | 8,350,000 | ||||||||||||
| Gross profit | 2,126,000 | 2,283,000 | 2,945,000 | 4,459,000 | ||||||||||||
| General and administrative | 1,076,000 | 585,000 | 3,294,000 | 4,309,000 | ||||||||||||
| Total operating expenses | 1,076,000 | 585,000 | 3,294,000 | 4,309,000 | ||||||||||||
| Income (loss) from operations | 1,050,000 | 1,698,000 | (349,000 | ) | 150,000 | |||||||||||
| Interest expense | (1,979,000 | ) | (1,605,000 | ) | (5,513,000 | ) | (3,764,000 | ) | ||||||||
| Net (loss) income from discontinued operations | $ | (929,000 | ) | $ | 93,000 | $ | (5,862,000 | ) | $ | (3,614,000 | ) | |||||
5. REVENUE DISAGGREGATION
The following tables summarize disaggregated customer contract revenues and the source of the revenue for the three and nine months ended September 30, 2023 and 2022. Revenues from lending and trading activities included in consolidated revenues were primarily interest, dividend and other investment income, which are not considered to be revenues from contracts with customers under GAAP.
The Company’s disaggregated revenues consisted of the following for the three months ended September 30, 2023 (excludes Ault Disruptive, as that segment has no revenue):
| GIGA | TurnOn Green | Fintech | Sentinum | SMC | ROI | Energy | Total | |||||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||||||||
| North America | $ | 3,711,000 | $ | 1,075,000 | $ | $ | 7,891,000 | $ | 15,931,000 | $ | 18,000 | $ | 12,929,000 | $ | 41,555,000 | |||||||||||||||||
| Europe | 2,521,000 | 66,000 | 2,000 | 2,589,000 | ||||||||||||||||||||||||||||
| Middle East and other | 4,043,000 | 25,000 | 4,068,000 | |||||||||||||||||||||||||||||
| Revenue from contracts with customers | 10,275,000 | 1,166,000 | 7,891,000 | 15,931,000 | 18,000 | 12,931,000 | 48,212,000 | |||||||||||||||||||||||||
| Revenue, lending and trading activities (North America) | (249,000 | ) | (249,000 | ) | ||||||||||||||||||||||||||||
| Total revenue | $ | 10,275,000 | $ | 1,166,000 | $ | (249,000 | ) | $ | 7,891,000 | $ | 15,931,000 | $ | 18,000 | $ | 12,931,000 | $ | 47,963,000 | |||||||||||||||
| Major Goods or Services | ||||||||||||||||||||||||||||||||
| Radio frequency/microwave filters | $ | 2,201,000 | $ | $ | $ | $ | $ | $ | $ | 2,201,000 | ||||||||||||||||||||||
| Power supply units & systems | 2,316,000 | 1,074,000 | 3,390,000 | |||||||||||||||||||||||||||||
| Healthcare diagnostic systems | 1,243,000 | 1,243,000 | ||||||||||||||||||||||||||||||
| Defense systems | 4,155,000 | 4,155,000 | ||||||||||||||||||||||||||||||
| Digital currency mining | 7,558,000 | 7,558,000 | ||||||||||||||||||||||||||||||
| Karaoke machines and related consumer goods | 15,931,000 | 15,931,000 | ||||||||||||||||||||||||||||||
| Crane rental | 12,490,000 | 12,490,000 | ||||||||||||||||||||||||||||||
| Other | 360,000 | 92,000 | 333,000 | 18,000 | 441,000 | 1,244,000 | ||||||||||||||||||||||||||
| Revenue from contracts with customers | 10,275,000 | 1,166,000 | 7,891,000 | 15,931,000 | 18,000 | 12,931,000 | 48,212,000 | |||||||||||||||||||||||||
| Revenue, lending and trading activities | (249,000 | ) | (249,000 | ) | ||||||||||||||||||||||||||||
| Total revenue | $ | 10,275,000 | $ | 1,166,000 | $ | (249,000 | ) | $ | 7,891,000 | $ | 15,931,000 | $ | 18,000 | $ | 12,931,000 | $ | 47,963,000 | |||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||||||
| Goods transferred at a point in time | $ | 5,391,000 | $ | 1,162,000 | $ | $ | 7,891,000 | $ | 15,931,000 | $ | 18,000 | $ | 441,000 | $ | 30,834,000 | |||||||||||||||||
| Services transferred over time | 4,884,000 | 4,000 | 12,490,000 | 17,378,000 | ||||||||||||||||||||||||||||
| Revenue from contracts with customers | $ | 10,275,000 | $ | 1,166,000 | $ | $ | 7,891,000 | $ | 15,931,000 | $ | 18,000 | $ | 12,931,000 | $ | 48,212,000 | |||||||||||||||||
| F-14 |
The Company’s disaggregated revenues consisted of the following for the nine months ended September 30, 2023 (excludes Ault Disruptive, as that segment has no revenue):
| GIGA | TurnOn Green | Fintech | Sentinum | SMC | ROI | Energy | Total | |||||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||||||||
| North America | $ | 8,901,000 | $ | 2,401,000 | $ | $ | 24,389,000 | $ | 21,939,000 | $ | 63,000 | $ | 38,604,000 | $ | 96,297,000 | |||||||||||||||||
| Europe | 7,232,000 | 77,000 | 109,000 | 7,418,000 | ||||||||||||||||||||||||||||
| Middle East and other | 11,590,000 | 288,000 | 11,878,000 | |||||||||||||||||||||||||||||
| Revenue from contracts with customers | 27,723,000 | 2,766,000 | 24,389,000 | 21,939,000 | 63,000 | 38,713,000 | 115,593,000 | |||||||||||||||||||||||||
| Revenue, lending and trading activities (North America) | 4,337,000 | 4,337,000 | ||||||||||||||||||||||||||||||
| Total revenue | $ | 27,723,000 | $ | 2,766,000 | $ | 4,337,000 | $ | 24,389,000 | $ | 21,939,000 | $ | 63,000 | $ | 38,713,000 | $ | 119,930,000 | ||||||||||||||||
| Major Goods or Services | ||||||||||||||||||||||||||||||||
| Radio frequency/microwave filters | $ | 5,420,000 | $ | $ | $ | $ | $ | $ | $ | 5,420,000 | ||||||||||||||||||||||
| Power supply units & systems | 6,994,000 | 2,544,000 | 9,538,000 | |||||||||||||||||||||||||||||
| Healthcare diagnostic systems | 3,481,000 | 3,481,000 | ||||||||||||||||||||||||||||||
| Defense systems | 10,719,000 | 10,719,000 | ||||||||||||||||||||||||||||||
| Digital currency mining | 23,273,000 | 23,273,000 | ||||||||||||||||||||||||||||||
| Karaoke machines and related consumer goods | 21,939,000 | 21,939,000 | ||||||||||||||||||||||||||||||
| Crane rental | 37,726,000 | 37,726,000 | ||||||||||||||||||||||||||||||
| Other | 1,109,000 | 222,000 | 1,116,000 | 63,000 | 987,000 | 3,497,000 | ||||||||||||||||||||||||||
| Revenue from contracts with customers | 27,723,000 | 2,766,000 | 24,389,000 | 21,939,000 | 63,000 | 38,713,000 | 115,593,000 | |||||||||||||||||||||||||
| Revenue, lending and trading activities | 4,337,000 | 4,337,000 | ||||||||||||||||||||||||||||||
| Total revenue | $ | 27,723,000 | $ | 2,766,000 | $ | 4,337,000 | $ | 24,389,000 | $ | 21,939,000 | $ | 63,000 | $ | 38,713,000 | $ | 119,930,000 | ||||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||||||
| Goods transferred at a point in time | $ | 15,517,000 | $ | 2,755,000 | $ | $ | 24,389,000 | $ | 21,939,000 | $ | 63,000 | $ | 987,000 | $ | 65,650,000 | |||||||||||||||||
| Services transferred over time | 12,206,000 | 11,000 | 37,726,000 | 49,943,000 | ||||||||||||||||||||||||||||
| Revenue from contracts with customers | $ | 27,723,000 | $ | 2,766,000 | $ | $ | 24,389,000 | $ | 21,939,000 | $ | 63,000 | $ | 38,713,000 | $ | 115,593,000 | |||||||||||||||||
The Company’s disaggregated revenues consisted of the following for the three months ended September 30, 2022 (excludes Ault Disruptive, as that segment has no revenue):
| GIGA | TurnOn Green | Fintech | SMC | Sentinum | Total | |||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||
| North America | $ | 2,472,000 | $ | 1,428,000 | $ | $ | 16,138,000 | $ | 4,146,000 | $ | 24,184,000 | |||||||||||||
| Europe | 2,288,000 | 32,000 | 201,000 | 306,000 | 2,827,000 | |||||||||||||||||||
| Middle East and other | 3,022,000 | 202,000 | 670,000 | 3,894,000 | ||||||||||||||||||||
| Revenue from contracts with customers | 7,782,000 | 1,662,000 | 201,000 | 17,114,000 | 4,146,000 | 30,905,000 | ||||||||||||||||||
| Revenue, lending and trading activities (North America) | 13,360,000 | 13,360,000 | ||||||||||||||||||||||
| Total revenue | $ | 7,782,000 | $ | 1,662,000 | $ | 13,561,000 | $ | 17,114,000 | $ | 4,146,000 | $ | 44,265,000 | ||||||||||||
| Major Goods or Services | ||||||||||||||||||||||||
| Power supply units | $ | 2,799,000 | $ | 1,480,000 | $ | $ | $ | $ | 4,279,000 | |||||||||||||||
| Digital currency mining, net | 3,874,000 | 3,874,000 | ||||||||||||||||||||||
| Karaoke machines and related | 17,114,000 | 17,114,000 | ||||||||||||||||||||||
| Other | 4,983,000 | 182,000 | 201,000 | 272,000 | 5,638,000 | |||||||||||||||||||
| Revenue from contracts with customers | 7,782,000 | 1,662,000 | 201,000 | 17,114,000 | 4,146,000 | 30,905,000 | ||||||||||||||||||
| Revenue, lending and trading activities | 13,360,000 | 13,360,000 | ||||||||||||||||||||||
| Total revenue | $ | 7,782,000 | $ | 1,662,000 | $ | 13,561,000 | $ | 17,114,000 | $ | 4,146,000 | $ | 44,265,000 | ||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||
| Goods transferred at a point in time | $ | 5,821,000 | $ | 1,662,000 | $ | 201,000 | $ | 17,114,000 | $ | 4,146,000 | $ | 28,944,000 | ||||||||||||
| Services transferred over time | 1,961,000 | 1,961,000 | ||||||||||||||||||||||
| Revenue from contracts with customers | $ | 7,782,000 | $ | 1,662,000 | $ | 201,000 | $ | 17,114,000 | $ | 4,146,000 | $ | 30,905,000 | ||||||||||||
| F-15 |
The Company’s disaggregated revenues consisted of the following for the nine months ended September 30, 2022:
| GIGA | TurnOn Green | Fintech | SMC | Sentinum | Total | |||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||
| North America | $ | 5,094,000 | $ | 3,262,000 | $ | 19,000 | $ | 16,138,000 | $ | 12,220,000 | $ | 36,733,000 | ||||||||||||
| Europe | 7,007,000 | 79,000 | 201,000 | 306,000 | 7,593,000 | |||||||||||||||||||
| Middle East and other | 9,429,000 | 512,000 | 670,000 | 10,611,000 | ||||||||||||||||||||
| Revenue from contracts with customers | 21,530,000 | 3,853,000 | 220,000 | 17,114,000 | 12,220,000 | 54,937,000 | ||||||||||||||||||
| Revenue, lending and trading activities (North America) | 32,224,000 | 32,224,000 | ||||||||||||||||||||||
| Total revenue | $ | 21,530,000 | $ | 3,853,000 | $ | 32,444,000 | $ | 17,114,000 | $ | 12,220,000 | $ | 87,161,000 | ||||||||||||
| Major Goods or Services | ||||||||||||||||||||||||
| Power supply units | $ | 6,928,000 | $ | 3,592,000 | $ | $ | $ | $ | 10,520,000 | |||||||||||||||
| Healthcare diagnostic systems | 2,285,000 | 2,285,000 | ||||||||||||||||||||||
| Defense systems | 6,842,000 | 6,842,000 | ||||||||||||||||||||||
| Digital currency mining | 11,398,000 | 11,398,000 | ||||||||||||||||||||||
| Karaoke machines and related | 17,114,000 | 17,114,000 | ||||||||||||||||||||||
| Other | 5,475,000 | 261,000 | 220,000 | 822,000 | 6,778,000 | |||||||||||||||||||
| Revenue from contracts with customers | 21,530,000 | 3,853,000 | 220,000 | 17,114,000 | 12,220,000 | 54,937,000 | ||||||||||||||||||
| Revenue, lending and trading activities | 32,224,000 | 32,224,000 | ||||||||||||||||||||||
| Total revenue | $ | 21,530,000 | $ | 3,853,000 | $ | 32,444,000 | $ | 17,114,000 | $ | 12,220,000 | $ | 87,161,000 | ||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||
| Goods transferred at a point in time | $ | 12,934,000 | $ | 3,853,000 | $ | 220,000 | $ | 17,114,000 | $ | 12,220,000 | $ | 46,341,000 | ||||||||||||
| Services transferred over time | 8,596,000 | 8,596,000 | ||||||||||||||||||||||
| Revenue from contracts with customers | $ | 21,530,000 | $ | 3,853,000 | $ | 220,000 | $ | 17,114,000 | $ | 12,220,000 | $ | 54,937,000 | ||||||||||||
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy:
| Fair Value Measurement at September 30, 2023 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Investment in common stock of Alzamend Neuro, Inc. (“Alzamend”) – a related party | $ | 2,712,000 | $ | 2,712,000 | $ | $ | ||||||||||
| Investments in marketable equity securities | 72,000 | 72,000 | ||||||||||||||
| Cash and marketable securities held in trust account | 2,171,000 | 2,171,000 | ||||||||||||||
| Total assets measured at fair value | $ | 4,955,000 | $ | 4,955,000 | $ | $ | ||||||||||
| Liabilities: | ||||||||||||||||
| Warrant and embedded conversion feature liabilities | $ | 832,000 | $ | $ | $ | 832,000 | ||||||||||
| Convertible promissory notes | 18,054,000 | 18,054,000 | ||||||||||||||
| Total liabilities measured at fair value | $ | 18,886,000 | $ | $ | $ | 18,886,000 | ||||||||||
| Fair Value Measurement at December 31, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Investment in common stock of Alzamend – a related party | $ | 6,449,000 | $ | 6,449,000 | $ | $ | ||||||||||
| Investments in marketable equity securities | 6,590,000 | 6,590,000 | ||||||||||||||
| Cash and marketable securities held in trust account | 118,193,000 | 118,193,000 | ||||||||||||||
| Investments in other equity securities | 13,340,000 | 13,340,000 | ||||||||||||||
| Total assets measured at fair value | $ | 144,572,000 | $ | 131,232,000 | $ | $ | 13,340,000 | |||||||||
| Liabilities: | ||||||||||||||||
| Warrant and embedded conversion feature liabilities | $ | 2,967,000 | $ | $ | $ | 2,967,000 | ||||||||||
| Convertible promissory notes | 12,776,000 | 12,776,000 | ||||||||||||||
| Total liabilities measured at fair value | $ | 15,743,000 | $ | $ | $ | 15,743,000 | ||||||||||
| F-16 |
The Company assesses the inputs used to measure fair value using the three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market. For investments where little or no public market exists, management’s determination of fair value is based on the best available information which may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration various factors including earnings history, financial condition, recent sales prices of the issuer’s securities and liquidity risks.
The following table summarizes the changes in investments in other equity securities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the nine months ended September 30, 2023 (no changes during the three months ended September 30, 2023):
| Investments in other equity securities | ||||
| Balance at January 1, 2023 | $ | 13,340,000 | ||
| Conversion to Level 1 marketable securities | (13,340,000 | ) | ||
| Balance at September 30, 2023 | $ | |||
Equity Investments for Which Measurement Alternative Has Been Selected
As of September 30, 2023 and December 31, 2022, the Company held equity investments in other securities, which consisted of investments in preferred stock, valued at $26.0 million and $29.2 million, respectively, that were valued using a measurement alternative. These investments are included in other equity securities in the accompanying condensed consolidated balance sheets.
Measurement Alternative Impairment
The Company has made cumulative downward adjustments for impairments for equity securities that do not have readily determinable fair values as of September 30, 2023, totaling $11.6 million. Approximately $9.6 million of these adjustments have been reflected in other income (expense) and $2.0 million of these adjustments related to Fintech lending operations and have been recorded against revenue from lending and trading activities on the consolidated statement of operations and comprehensive loss.
7. Marketable EQUITY Securities
Marketable equity securities with readily determinable market prices consisted of the following as of September 30, 2023 and December 31, 2022:
| Marketable equity securities at September 30, 2023 | ||||||||||||||||
| Gross unrealized | Gross unrealized | |||||||||||||||
| Cost | gains | losses | Fair value | |||||||||||||
| Common shares | $ | 5,133,000 | $ | 26,000 | $ | (5,087,000 | ) | $ | 72,000 | |||||||
| Marketable equity securities at December 31, 2022 | ||||||||||||||||
| Gross unrealized | Gross unrealized | |||||||||||||||
| Cost | gains | losses | Fair value | |||||||||||||
| Common shares | $ | 10,271,000 | $ | 383,000 | $ | (4,064,000 | ) | $ | 6,590,000 | |||||||
The Company’s investment in marketable equity securities is revalued on each balance sheet date.
| F-17 |
8. DIGITAL CURRENCIES
The following table presents the activities of the digital currencies (included in prepaid expenses and other current assets) for the nine months ended September 30, 2023 and 2022:
| Digital Currencies | ||||
| Balance at January 1, 2022 | $ | 2,165,000 | ||
| Additions of mined digital currencies | 11,398,000 | |||
| Payments to vendors | (418,000 | ) | ||
| Impairment of mined cryptocurrency | (2,930,000 | ) | ||
| Sale of digital currencies | (8,952,000 | ) | ||
| Realized gain on sale of digital currencies | 829,000 | |||
| Balance at September 30, 2022 | $ | 2,092,000 | ||
9. PROPERTY AND EQUIPMENT, NET
At September 30, 2023 and December 31, 2022, property and equipment consisted of:
| September 30, 2023 | December 31, 2022 | |||||||
| Building and improvements | $ | 11,796,000 | $ | 10,428,000 | ||||
| Bitcoin mining equipment | 50,640,000 | 42,438,000 | ||||||
| Crane rental equipment | 34,341,000 | 32,453,000 | ||||||
| Land | 2,692,000 | 2,567,000 | ||||||
| Computer, software and related equipment | 23,517,000 | 23,168,000 | ||||||
| Aircraft | 15,983,000 | 15,983,000 | ||||||
| Vehicles | 4,797,000 | 3,314,000 | ||||||
| Office furniture and equipment | 682,000 | 610,000 | ||||||
| Oil and natural gas properties, unproved properties | 3,878,000 | 972,000 | ||||||
| 148,326,000 | 131,933,000 | |||||||
| Accumulated depreciation and amortization | (25,726,000 | ) | (5,882,000 | ) | ||||
| Property and equipment placed in service, net | 122,600,000 | 126,051,000 | ||||||
| Construction in progress AVLP equipment | 9,444,000 | 9,400,000 | ||||||
| Deposits on cryptocurrency machines | 11,328,000 | |||||||
| Property and equipment, net | $ | 132,044,000 | $ | 146,779,000 | ||||
Summary of depreciation expense:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Depreciation expense | $ | 7,805,000 | $ | 2,779,000 | $ | 20,047,000 | $ | 7,742,000 | ||||||||
| F-18 |
10. INTANGIBLE ASSETS, NET
At September 30, 2023 and December 31, 2022, intangible assets consisted of:
| Useful Life | September 30, 2023 | December 31, 2022 | ||||||||
| Definite-lived intangible assets: | ||||||||||
| Developed technology | 3-8 years | $ | 7,984,000 | $ | 24,584,000 | |||||
| Customer list | 8-10 years | 5,755,000 | 5,865,000 | |||||||
| Trade names | 5-10 years | 3,916,000 | 4,316,000 | |||||||
| Domain name and other intangible assets | 5 years | 580,000 | 630,000 | |||||||
18,235,000 | 35,395,000 | |||||||||
| Accumulated amortization | (2,753,000 | ) | (2,102,000 | ) | ||||||
| Total definite-lived intangible assets | $ | 15,482,000 | $ | 33,786,000 | ||||||
| Indefinite-lived intangible assets: | ||||||||||
| Trade name and trademark | Indefinite life | 1,498,000 | 1,493,000 | |||||||
Total intangible assets, net | $ | 16,980,000 | $ | 34,786,000 | ||||||
Certain of the Company’s trade names and trademarks were determined to have an indefinite life. The remaining definite-lived intangible assets are primarily being amortized on a straight-line basis over their estimated useful lives.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Amortization expense | $ | 254,000 | $ | 223,000 | $ | 761,000 | $ | 381,000 | ||||||||
As of September 30, 2023, intangible assets subject to amortization have an average remaining useful life of 9.5 years. The following table presents estimated amortization expense for each of the succeeding five calendar years and thereafter.
| 2023 | $ | 507,000 | ||
| 2024 | 2,026,000 | |||
| 2025 | 1,926,000 | |||
| 2026 | 1,826,000 | |||
| 2027 | 1,826,000 | |||
| Thereafter | 7,371,000 | |||
| $ | 15,482,000 |
Impairment of AVLP Intangible Assets
Due to indicators of impairment, AVLP intangible assets were tested for impairment as of June 30, 2023. Based on internally developed forecasts of undiscounted expected future cash flows, it was determined that the carrying amount of the assets were not recoverable and, based on an assessment of the fair value of the assets, impairment of $17.0 million was recognized as a non-cash impairment charge during the nine months ended September 30, 2023.
The tradenames and patents/developed technology intangible assets were valued using the relief-from-royalty method. The relief-from-royalty method is one of the methods under the income approach whereby estimates of a company’s earnings attributable to the intangible asset are based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying royalty rates of 18% for patents and developed technology and 0.25% for trademarks. The resulting net annual royalty payments are then discounted to present value using a discount factor of 25.7%.
11. GOODWILL
The following table summarizes the changes in the Company’s goodwill for the nine months ended September 30, 2023:
| Goodwill | ||||
| Balance as of January 1, 2023 | $ | 27,902,000 | ||
| Acquisition of ROI | 17,000 | |||
| Impairment of goodwill | (18,570,000 | ) | ||
| Effect of exchange rate changes | (376,000 | ) | ||
| Balance as of September 30, 2023 | $ | 8,973,000 | ||
| F-19 |
Impairment of AVLP Goodwill
The Company tests the recorded amount of goodwill for impairment on an annual basis on December 31 or more frequently if there are indicators that the carrying amount of the goodwill exceeds its carried value. The Company performed a goodwill impairment test as of June 30, 2023 related to AVLP as there were indicators of impairment related to certain unforeseen business developments and changes in financial projections.
The valuation of the AVLP reporting unit was determined using a market and income approach methodology of valuation. The income approach was based on the projected cash flows discounted to their present value using discount rates that, in the Company’s judgment, consider the timing and risk of the forecasted cash flows using internally developed forecasts and assumptions. Under the income approach, the discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. The analysis included assumptions regarding AVLP’s revenue forecast and discount rates of 26.7% using a weighted average cost of capital analysis. The market approach utilized the guideline public company method.
The results of the quantitative test indicated that the fair value of the AVLP reporting unit did not exceed its carrying amounts, including goodwill, in excess of the carrying value of the goodwill. As a result, the entire $18.6 million carrying amount of AVLP’s goodwill was recognized as a non-cash impairment charge during the nine months ended September 30, 2023.
12. CONSOLIDATED VARIABLE INTEREST ENTITY - SMC
During the quarter ended September 30, 2023, the Company’s voting interest in SMC was less than 50%. As a result, the Company assessed its interest in SMC under the Variable Interest Entity Model. As a result of that assessment, the Company consolidates SMC as a variable interest entity (a “VIE”) due to the Company’s significant level of influence and control of SMC, the size of its investment, and its ability to participate in policy making decisions. As a result, the Company is considered the primary beneficiary of the VIE.
13. BUSINESS COMBINATION
ROI Acquisition
On March 6, 2023, the Company closed a Share Exchange Agreement (the “Agreement”) with ROI and sold to ROI all of the outstanding shares of capital stock of the Company’s subsidiary, BitNile.com, Inc. (“BitNile.com”) as well as RiskOn360, Inc. (formerly Ault Iconic, Inc.) and the securities of Earnity, Inc. (“Earnity”) beneficially owned by BitNile.com as of the date of the Agreement (the “Transaction”). As consideration for the acquisition, ROI issued shares of preferred stock convertible into common stock of ROI representing approximately 73.2% of ROI’s outstanding common stock. Pending approval of the transaction by the Nasdaq Stock Market and ROI’s shareholders, the preferred stock combined are subject to a 19.99% beneficial ownership limitation. The Transaction benefits the Company as ROI is a publicly traded company and provides BitNile.com access to capital markets as the primary focus for ROI to fund the expected growth of the ROI metaverse platform.
The holders of preferred stock will be entitled to receive dividends at a rate of 5% of the stated value of the preferred stock.
The Company consolidates ROI as a VIE due to its significant level of influence and control of ROI, the size of its investment, and its ability to participate in policy making decisions. The Company is considered the primary beneficiary of the VIE.
| Ault Alliance investment in ROI | Amount | |||
| Common stock | $ | 287,000 | ||
The total purchase price to acquire ROI has been allocated to the assets acquired and assumed liabilities based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. The goodwill resulting from this acquisition is not tax deductible. The fair value of the acquired assets and assumed liabilities as of the date of acquisition are based on preliminary estimates provided, in part, by a third-party valuation expert. The estimates are subject to change upon the finalization of appraisals and other valuation analyses, which are expected to be completed no later than one year from the date of acquisition. Although the completion of the valuation activities may result in asset and liability fair values that are different from the preliminary estimates included herein, it is not expected that those differences would alter the understanding of the impact of the Transaction on the consolidated financial position and results of operations of the Company.
| F-20 |
The preliminary purchase price allocation is as follows:
| Preliminary Allocation | ||||
| Fair value of Company interest | $ | 287,000 | ||
| Fair value of non-controlling interest | 6,357,000 | |||
| Total consideration | $ | 6,644,000 | ||
| Identifiable net assets acquired: | ||||
| Cash | $ | 67,000 | ||
| Investment in equity securities | 8,076,000 | |||
| Prepaid expenses and other current assets | 172,000 | |||
| Property and equipment, net | 4,109,000 | |||
| Right-of-use assets | 339,000 | |||
| Accounts payable and accrued expenses | (5,790,000 | ) | ||
| Lease liabilities | (346,000 | ) | ||
| Net assets acquired | 6,627,000 | |||
| Goodwill | $ | 17,000 | ||
14. INVESTMENTS – RELATED PARTIES
Investments in Alzamend and Ault & Company, Inc. (“Ault & Company”) at September 30, 2023 and December 31, 2022, were comprised of the following:
Investment in Promissory Notes, Related Parties – Ault & Company
| Interest | September 30, | December 31, | ||||||||||
| rate | Due Date | 2023 | 2022 | |||||||||
| Investment in promissory note of Ault & Company | 8% | December 31, 2023 | $ | 2,500,000 | $ | 2,500,000 | ||||||
| Accrued interest receivable, Ault & Company | 518,000 | 368,000 | ||||||||||
| Total investment in promissory note, related party | $ | 3,018,000 | $ | 2,868,000 | ||||||||
Summary of interest income, related party, recorded within interest and other income on the condensed consolidated statement of operations:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Interest income, related party | $ | 50,000 | $ | 50,000 | $ | 150,000 | $ | 150,000 | ||||||||
Investment in Common Stock, Related Parties – Alzamend
| Investments in common stock, related parties at September 30, 2023 | ||||||||||||
| Cost | Gross unrealized losses | Fair value | ||||||||||
| Common shares | $ | 24,688,000 | $ | (21,976,000 | ) | $ | 2,712,000 | |||||
| Investments in common stock, related parties at December 31, 2022 | ||||||||||||
| Cost | Gross unrealized losses | Fair value | ||||||||||
| Common shares | $ | 24,673,000 | $ | (18,224,000 | ) | $ | 6,449,000 | |||||
| F-21 |
The following table summarizes the changes in the Company’s investments in Alzamend common stock during the three months ended September 30, 2023 and 2022:
| For the Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Balance at July 1 | $ | 5,836,000 | $ | 8,845,000 | ||||
| Investment in common stock of Alzamend | 177,000 | |||||||
| Unrealized gain (loss) in common stock of Alzamend | (3,124,000 | ) | 3,372,000 | |||||
| Balance at September 30 | $ | 2,712,000 | $ | 12,394,000 | ||||
The following table summarizes the changes in the Company’s investments in Alzamend common stock during the nine months ended September 30, 2023 and 2022:
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Balance at January 1 | $ | 6,449,000 | $ | 13,230,000 | ||||
| Investment in common stock of Alzamend | 15,000 | 4,840,000 | ||||||
| Unrealized loss in common stock of Alzamend | (3,752,000 | ) | (5,676,000 | ) | ||||
| Balance at September 30 | $ | 2,712,000 | $ | 12,394,000 | ||||
Unrealized loss in common stock of Alzamend is recorded within revenue from lending and trading activities on the condensed consolidated statements of operations.
15. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Other current liabilities at September 30, 2023 and December 31, 2022 consisted of:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts payable | $ | 36,883,000 | $ | 20,027,000 | ||||
| Accrued payroll and payroll taxes | 12,420,000 | 9,789,000 | ||||||
| Financial instrument liabilities | 863,000 | 651,000 | ||||||
| Interest payable | 3,946,000 | 3,207,000 | ||||||
| Accrued legal | 4,390,000 | 3,168,000 | ||||||
| Accrued lender profit participation rights | 2,497,000 | 6,000,000 | ||||||
| Related party advances | 68,000 | 352,000 | ||||||
| Other accrued expenses | 27,146,000 | 17,586,000 | ||||||
| $ | 88,213,000 | $ | 60,780,000 | |||||
16. DIVIDEND PAYABLE IN TURNONGREEN COMMON STOCK
During the nine months ended September 30, 2023, the Company, in connection with a planned distribution of its holdings of TurnOnGreen, distributed to its stockholders million shares of TurnOnGreen common stock and warrants to purchase million shares of TurnOnGreen common stock, which resulted in an adjustment to additional paid in capital and increase to non-controlling interest of $10.7 million based on the recorded value of the Company’s holdings in TurnOnGreen at the record dates of the distributions.
17. PREFERRED STOCK LIABILITY
March 28, 2023 Security Purchase Agreement
On March 28, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Investors”), pursuant to which the Company sold, in a private placement (the “Offering”), an aggregate of shares of its preferred stock, with each such share having a stated value of $100.00 and consisting of (i) shares of Series E Convertible Preferred Stock (the “Series E Preferred Stock”), (ii) shares of Series F Convertible Preferred Stock (the “Series F Preferred Stock”) and (iii) shares of Series G Convertible Preferred Stock (the “Series G Preferred Stock” and collectively, the “Preferred Shares”). The Preferred Shares are convertible into shares of the Company’s common stock at the option of the holders and, in certain circumstances, by the Company.
| F-22 |
The purchase price of the Series E Preferred Stock and the Series F Preferred Stock was paid for by the Investors’ canceling outstanding secured promissory notes in the principal amount of $8.4 million, whereas the purchase price of the shares of Series G Preferred Stock consisted primarily of accrued but unpaid interest on these notes. The Company recorded a loss on extinguishment of debt of $0.1 million related to the transaction. The Preferred Shares have been classified as a liability as they embody an unconditional obligation to transfer a variable number of shares, based on a fixed monetary amount known at inception. The Company elected the fair value option to record the Preferred Shares with changes in fair value recorded through earnings.
During the nine months ended September 30, 2023, the Investors converted shares of Series F Preferred Stock and shares of Series G Preferred Stock into an aggregate of shares of the Company’s common stock. During the nine months ended September 30, 2023, the Company recorded a loss of $0.3 million on the conversions of Series F Preferred Stock and Series G Preferred Stock.
Exchange of Preferred Shares for Secured Debt and Assignment of Secured Note
In August 2023, the Company and the Investors entered into an Exchange Agreement (the “Exchange Agreement”) pursuant to which the Investors exchanged 83,000 shares of Series E Convertible Stock and 9,244 shares of Series G Convertible Stock as well as their demand notes (the “Demand Notes”) with each Demand Note having a principal outstanding amount of approximately $0.8 million for two new 10% Secured OID Promissory Notes (the “Exchange Notes”), each with a principal face amount of $5.3 million, for an aggregate of amount owed of $10.5 million (the “Principal Amount”). The Company recorded a loss on extinguishment of debt of $1.5 million related to the transaction based on the difference between the carrying amount of the preferred stock liability and the value of the Exchange Notes.
Concurrent with the Exchange Agreement, the Company assigned the Exchange Notes to Ault & Company. As consideration for Ault & Company assuming the Exchange Notes from the Company, the Company issued a 10% demand promissory note in the principal face amount of $10.5 million to Ault & Company. The Company and Milton “Todd” Ault, III, the Company’s Executive Chairman, entered into guaranty agreements with the Investors guaranteeing Ault & Company’s repayment of the Exchange Notes.
Certificates of Elimination of Series E Preferred Stock, Series F Preferred Stock, and the Series G Preferred Stock
On August 17, 2023, the Company filed certificates of elimination with respect to the Company’s Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock.
18. REDEEMABLE NONCONTROLLING INTERESTS IN EQUITY OF SUBSIDIARY LIABILITY
The Company records redeemable noncontrolling interests in equity of subsidiaries to reflect the economic interests of the common stockholders in Ault Disruptive. As of September 30, 2023, the carrying amount of the redeemable noncontrolling interest in equity of subsidiaries was recorded at its redemption value of $2.2 million. In June 2023, approximately million shares of Ault Disruptive common stock were redeemed at a redemption price of $ per share, for an aggregate redemption amount of $120.0 million.
The following table summarizes the changes in the Company’s redeemable noncontrolling interests in equity of subsidiaries during the nine months ended September 30, 2023:
| Redeemable noncontrolling interests in equity of subsidiaries as of December 31, 2022 | $ | 117,993,000 | ||
| Redemption of ADRT common stock | (120,064,000 | ) | ||
| Remeasurement of carrying value to redemption value | 4,250,000 | |||
| Redeemable noncontrolling interests in equity of subsidiaries as of September 30, 2023 | $ | 2,179,000 |
| F-23 |
19. NOTES PAYABLE
Notes payable at September 30, 2023 and December 31, 2022, were comprised of the following:
| Collateral | Guarantors | Interest rate | Due date | September 30, 2023 | December 31, 2022 | |||||||||||
| Circle 8 revolving credit facility | Circle 8 cranes | - | 8.4% | December 16, 2025 | $ | 16,960,000 | $ | 14,724,000 | ||||||||
| 8.5% secured promissory notes | Deposit accounts, 19,389 Antminers, BNI Montana assets, Circle 8 membership interests, Florida property, Michigan property, aircraft | Ault & Company, Ault Lending, Sentinum, Alliance Cloud Services, Inc., Ault Aviation, LLC, Third Avenue Apartments LLC, BNI Montana, LLC, Milton C. Ault, III | 8.5% | May 7, 2024 | 22,749,000 | 17,389,000 | ||||||||||
| 16% promissory notes | - | Ault & Company, Sentinum, Ault Lending, Milton C. Ault, III | 16.0% | December 16, 2023 | 2,662,000 | 17,456,000 | ||||||||||
| Circle 8 equipment financing notes | Circle 8 equipment | - | 7.2% | Various dates from March 15, 2024 to November 15, 2026 | 7,375,000 | 10,677,000 | ||||||||||
| 3% secured promissory notes | - | - | 3.0% | N/A | 5,672,000 | |||||||||||
| 8% demand loans | - | - | 8.0% | Upon demand | 1,800,000 | |||||||||||
| Short-term bank credit facilities | - | - | 5.7% | Renews monthly | 2,056,000 | 1,702,000 | ||||||||||
| XBTO note payable | 2,482 Antminers | - | 12.5% | December 30, 2023 | 1,087,000 | 2,749,000 | ||||||||||
| 10% secured promissory notes | - | - | 10.0% | N/A | 8,789,000 | |||||||||||
| SMC line of credit | SMC assets | - | 8.0% | October 14, 2025 | 1,761,000 | |||||||||||
| Other ($0.4 million in default) | - | - | 400,000 | 858,000 | ||||||||||||
| Total notes payable | - | - | $ | 55,089,000 | $ | 81,777,000 | ||||||||||
| Less: | - | - | ||||||||||||||
| Unamortized debt discounts | - | - | (3,623,000 | ) | (12,325,000 | ) | ||||||||||
| Total notes payable, net | - | - | $ | 51,466,000 | $ | 69,452,000 | ||||||||||
| Less: current portion | - | - | (30,255,000 | ) | (39,621,000 | ) | ||||||||||
| Notes payable – long-term portion | - | - | $ | 21,211,000 | $ | 29,831,000 | ||||||||||
| F-24 |
Notes Payable Maturities
The contractual maturities of the Company’s notes payable, assuming the exercise of all extensions that are exercisable solely at the Company’s option, as of September 30, 2023 were:
| Year | ||||
| 2023 | $ | 12,546,000 | ||
| 2024 | 23,405,000 | |||
| 2025 | 18,697,000 | |||
| 2026 | 441,000 | |||
| $ | 55,089,000 | |||
Interest Expense
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Contractual interest expense | $ | 3,262,000 | $ | 2,263,000 | $ | 5,002,000 | $ | 4,373,000 | ||||||||
| Forbearance fees | 518,000 | 7,319,000 | 1,203,000 | |||||||||||||
| Amortization of debt discount | 634,000 | 104,000 | 18,216,000 | 26,487,000 | ||||||||||||
| Total interest expense | $ | 4,414,000 | $ | 2,367,000 | $ | 30,537,000 | $ | 32,063,000 | ||||||||
Amendment to 8.5% Secured Promissory Notes
On July 19, 2023, the Company and certain of its subsidiaries entered into an amendment agreement with the institutional investors and increased the principal balance of the secured promissory notes by an additional $8.8 million. The net proceeds to the Company from the amendment agreement were $7.5 million.
10% Secured Promissory Notes
The 10% secured promissory notes were retired in March 2023 and converted into the Preferred Shares, as described in Note 17 – Preferred Stock Liability.
20. NOTES PAYABLE, RELATED PARTY
Notes payable, related party at September 30, 2023 and December 31, 2022, were comprised of the following:
| Interest rate | Due date | September 30, 2023 | December 31, 2022 | |||||||||||
| Loan agreement | 9.5 | % | Upon demand | $ | 4,580,000 | $ | ||||||||
| 12% demand promissory note | 12.0 | % | Upon demand | 1,100,000 | ||||||||||
| 10% demand promissory note | 10.0 | % | Upon demand | 10,545,000 | ||||||||||
| Total notes payable, related party | $ | 16,225,000 | $ | |||||||||||
Ault & Company Loan Agreement
On June 8, 2023, the Company entered into a loan agreement with Ault & Company as lender. The loan agreement provides for an unsecured, non-revolving credit facility in an aggregate principal amount of up to $10 million. All loans under the loan agreement are due within five business days after request by Ault & Company. Ault & Company is not obligated to make any further advances under the loan agreement after December 8, 2023. Advances under the loan agreement bear interest at the rate of 9.5% per annum and may be repaid at any time without penalty or premium. As of September 30, 2023, $4.6 million has been advanced under the loan agreement.
In August 2023, Ault & Company assumed $11.6 million of secured promissory notes previously issued by the Company for which the Company has issued term notes to Ault & Company in the same amount. One term note has a principal amount of $1.1 million and bears interest at 12% and the second term note has a principal amount of $10.5 million and bears interest at 10%.
| F-25 |
Summary of interest expense, related party, recorded within interest expense on the condensed consolidated statement of operations:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Interest expense, related party | $ | 287,000 | $ | $ | 292,000 | $ | ||||||||||
21. CONVERTIBLE NOTES
Convertible notes payable at September 30, 2023 and December 31, 2022, were comprised of the following:
| Conversion price per share | Interest rate | Due date | September 30, 2023 | December 31, 2022 | ||||||||||
| Convertible promissory note | $4.00 | 4% | May 10, 2024 | $ | $ | 660,000 | ||||||||
| Convertible promissory note - OID only | OID Only | September 28, 2024 | 2,200,000 | |||||||||||
| AVLP convertible promissory notes | $0.35 (AVLP stock) | 7% | August 22, 2025 | 9,911,000 | 9,911,000 | |||||||||
| GIGA senior secured convertible notes - in default | $0.25 (GIGA stock) | 18% | October 11, 2023 | 2,317,000 | ||||||||||
| ROI senior secured convertible notes | $3.28 (ROI stock) | OID Only | April 27, 2024 | 6,875,000 | ||||||||||
| Fair value of embedded conversion options | 528,000 | 2,316,000 | ||||||||||||
| Total convertible notes payable | $ | 21,831,000 | $ | 12,887,000 | ||||||||||
| Less: unamortized debt discounts | (3,777,000 | ) | (111,000 | ) | ||||||||||
| Total convertible notes payable, net of financing cost, long term | $ | 18,054,000 | $ | 12,776,000 | ||||||||||
| Less: current portion | (8,601,000 | ) | (1,325,000 | ) | ||||||||||
| Convertible notes payable, net of financing cost – long-term portion | $ | 9,453,000 | $ | 11,451,000 | ||||||||||
The contractual maturities of the Company’s convertible notes payable, assuming the exercise of all extensions that are exercisable solely at the Company’s option, as of September 30, 2023 were:
| Year | Principal | |||
| 2023 | $ | 2,317,000 | ||
| 2024 | 9,075,000 | |||
| 2025 | 10,439,000 | |||
| $ | 21,831,000 | |||
Significant inputs associated with the embedded conversion options include:
| September 30, 2023 | December 31, 2022 | At Inception | ||||||||
| Contractual term in years | – | |||||||||
| Volatility | – | % | % | |||||||
| Dividend yield | 0% | 0 | % | % | ||||||
| Risk-free interest rate | – | % | % | |||||||
Activity related to the embedded conversion option derivative liabilities for the nine months ended September 30, 2023 was as follows:
| Balance as of December 31, 2022 | $ | 2,316,000 | ||
| Fair value of embedded conversion options issued | 1,652,000 | |||
| Change in fair value | (3,440,000 | ) | ||
| Ending balance as of September 30, 2023 | $ | 528,000 |
| F-26 |
22. COMMITMENTS AND CONTINGENCIES
Contingencies
Litigation Matters
The Company is involved in litigation arising from other matters in the ordinary course of business. The Company is regularly subject to claims, suits, regulatory and government investigations, and other proceedings involving labor and employment, commercial disputes, and other matters. Such claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil penalties, or other adverse consequences.
Certain of these outstanding matters include speculative, substantial or indeterminate monetary amounts. The Company records a liability when it believes that it is probable that a loss has been incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or range of loss can be estimated, the Company discloses the reasonably possible loss. The Company evaluates developments in its legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and makes adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters.
With respect to the Company’s other outstanding matters, based on the Company’s current knowledge, the Company believes that the amount or range of reasonably possible loss will not, either individually or in aggregate, have a material adverse effect on the Company’s business, consolidated financial position, results of operations, or cash flows. However, the outcome of such matters is inherently unpredictable and subject to significant uncertainties.
As of September 30, 2023, the Company had accrued $4.4 million as a loss contingency related to litigation matters.
23. STOCKHOLDERS’ EQUITY
2023 Issuances
2022 Common ATM Offering
On February 25, 2022, the Company entered into an At-The-Market issuance sales agreement with Ascendiant Capital Markets, LLC (“Ascendiant Capital”) to sell shares of common stock having an aggregate offering price of up to $200 million from time to time, through an “at the market offering” program (the “2022 Common ATM Offering”). During the three months ended March 31, 2023, the Company sold an aggregate of 0.1 million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $4.2 million. Effective March 17, 2023, the 2022 Common ATM Offering was terminated.
2022 Preferred ATM Offering
On June 14, 2022, the Company entered into an At-The-Market sales agreement with Ascendiant Capital under which it may sell, from time to time, shares of its Series D Preferred Stock for aggregate gross proceeds of up to $46.4 million (the “2022 Preferred ATM Offering”). During the nine months ended September 30, 2023, the Company sold an aggregate of shares of Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for net proceeds of $2.9 million. Effective June 16, 2023, the 2022 Preferred ATM Offering was terminated.
| F-27 |
2023 ATM Offering – Common Stock
On June 9, 2023, the Company entered into an At-The-Market issuance sales agreement with Ascendiant Capital to sell shares of common stock having an aggregate offering price of up to $10 million from time to time, through an “at the market offering” program (the “2023 Common ATM Offering”). On July 13, 2023 and September 8, 2023, the sales agreement was amended increasing the size of the 2023 ATM Offering to $20 million and $50 million, respectively. During the nine months ended September 30, 2023, the Company sold an aggregate of 10.8 million shares of common stock pursuant to the 2023 Common ATM Offering for gross proceeds of $21.2 million.
Issuance of Common Stock Upon Conversion of Preferred Stock
During the nine months ended September 30, 2023, the Investors converted shares of Series F Preferred Stock and shares of Series G Preferred Stock into an aggregate of shares of the Company’s common stock. A loss on extinguishment of $0.3 million was recognized on the issuance of common stock based on the fair value of the Company’s common stock at the date of the conversions.
Issuance of Common Stock for Restricted Stock Awards
During the nine months ended September 30, 2023, the Company issued 4,974 shares of common stock upon vesting of restricted stock awards.
Proceeds from Subsidiaries’ Sale of Stock to Non-Controlling Interests
During the nine months ended September 30, 2023, SMC and ROI sold an aggregate of $2.3 million of common stock pursuant to their respective at-the-market issuance sales agreements.
24. INCOME TAXES
The Company calculates its interim income tax provision in accordance with ASC Topic 270, Interim Reporting, and ASC Topic 740, Income Taxes. The Company’s effective tax rate (“ETR”) from continuing operations was (2.0%) and 1.8% for the three months ended September 30, 2023 and 2022, respectively, and 0.4% and 0.6% for the nine months ended September 30, 2023 and 2022, respectively. The Company recorded income tax (benefit) provision of ($0.6) million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively, and $0.5 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively. The difference between the ETR and federal statutory rate of 21% is primarily attributable to items recorded for GAAP but permanently disallowed for U.S. federal income tax purposes and changes in valuation allowance.
Net loss per share is computed by dividing the net loss to common stockholders by the weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is the same for all periods presented as the effect of the potential common stock equivalents is anti-dilutive due to the Company’s net loss position for all periods presented. Anti-dilutive securities, which are convertible into or exercisable for the Company’s common stock, consisted of the following at September 30, 2023 and 2022:
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | 19,000 | 21,000 | ||||||
| Restricted stock grants | 7,000 | |||||||
| Warrants | 52,000 | 62,000 | ||||||
| Convertible notes | 1,000 | |||||||
| Total | 71,000 | 91,000 | ||||||
| F-28 |
26. SEGMENT AND CUSTOMERS INFORMATION
The Company had the following reportable segments as of September 30, 2023 and six as of September 30, 2022; see Note 1 for a brief description of the Company’s business.
The following data presents the revenues, expenditures and other operating data of the Company and its operating segments for the three and nine months ended September 30, 2023:
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
| GIGA | TurnOn Green | Fintech | Sentinum | Ault
Disruptive | SMC | Energy | ROI | Holding Co. | Total | |||||||||||||||||||||||||||||||
| Revenue | $ | 27,723,000 | $ | 2,766,000 | $ | $ | 1,116,000 | $ | $ | 21,939,000 | $ | 987,000 | $ | 63,000 | $ | $ | 54,594,000 | |||||||||||||||||||||||
| Revenue, cryptocurrency mining | 23,273,000 | 23,273,000 | ||||||||||||||||||||||||||||||||||||||
| Revenue, lending and trading activities | 4,337,000 | 4,337,000 | ||||||||||||||||||||||||||||||||||||||
| Revenue, crane operations | 37,726,000 | 37,726,000 | ||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 27,723,000 | $ | 2,766,000 | $ | 4,337,000 | $ | 24,389,000 | $ | $ | 21,939,000 | $ | 38,713,000 | $ | 63,000 | $ | $ | 119,930,000 | ||||||||||||||||||||||
| Depreciation and amortization expense | $ | 852,000 | $ | 68,000 | $ | $ | 14,362,000 | $ | $ | 779,000 | $ | 3,053,000 | $ | 152,000 | $ | 1,542,000 | $ | 20,808,000 | ||||||||||||||||||||||
| Income (loss) from operations | $ | (5,620,000 | ) | $ | (4,067,000 | ) | $ | 1,091,000 | $ | (4,363,000 | ) | $ | (1,052,000 | ) | $ | (4,598,000 | ) | $ | (30,216,000 | ) | $ | (33,590,000 | ) | $ | (20,012,000 | ) | $ | (102,427,000 | ) | |||||||||||
| Capital expenditures for the nine months ended September 30, 2023 | $ | 410,000 | $ | 131,000 | $ | $ | 1,426,000 | $ | $ | 383,000 | $ | 12,471,000 | $ | 407,000 | $ | 2,906,000 | $ | 18,134,000 | ||||||||||||||||||||||
| Segment identifiable assets as of September 30, 2023 | $ | 36,917,000 | $ | 5,461,000 | $ | 24,727,000 | $ | 63,327,000 | $ | 2,465,000 | $ | 36,653,000 | $ | 73,447,000 | $ | 10,939,000 | $ | 25,924,000 | 279,860,000 | |||||||||||||||||||||
| Assets of discontinued operations | 98,596,000 | |||||||||||||||||||||||||||||||||||||||
| Total identifiable assets as of September 30, 2023 | $ | 378,456,000 | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
| GIGA | TurnOn Green | Fintech | Sentinum | Ault
Disruptive | SMC | Energy | ROI | Holding Co. | Total | |||||||||||||||||||||||||||||||
| Revenue | $ | 10,275,000 | $ | 1,166,000 | $ | $ | 333,000 | $ | $ | 15,931,000 | $ | 441,000 | $ | 18,000 | $ | $ | 28,164,000 | |||||||||||||||||||||||
| Revenue, cryptocurrency mining | 7,558,000 | 7,558,000 | ||||||||||||||||||||||||||||||||||||||
| Revenue, lending and trading activities | (249,000 | ) | (249,000 | ) | ||||||||||||||||||||||||||||||||||||
| Revenue, crane operations | 12,490,000 | 12,490,000 | ||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 10,275,000 | $ | 1,166,000 | $ | (249,000 | ) | $ | 7,891,000 | $ | $ | 15,931,000 | $ | 12,931,000 | $ | 18,000 | $ | $ | 47,963,000 | |||||||||||||||||||||
| Depreciation and amortization expense | $ | 286,000 | $ | 24,000 | $ | $ | 5,792,000 | $ | $ | 338,000 | $ | 1,073,000 | $ | 32,000 | $ | 514,000 | $ | 8,059,000 | ||||||||||||||||||||||
| Income (loss) from operations | $ | (503,000 | ) | $ | (1,498,000 | ) | $ | (1,039,000 | ) | $ | (2,661,000 | ) | $ | (214,000 | ) | $ | 181,000 | $ | 2,505,000 | $ | (13,315,000 | ) | $ | (5,359,000 | ) | $ | (21,903,000 | ) | ||||||||||||
| Capital expenditures for the three months ended September 30, 2023 | $ | 275,000 | $ | 121,000 | $ | $ | 261,000 | $ | $ | 199,000 | $ | 11,135,000 | $ | $ | 314,000 | $ | 12,305,000 | |||||||||||||||||||||||
| Identifiable assets as of September 30, 2023 | $ | 36,917,000 | $ | 5,461,000 | $ | 24,727,000 | $ | 63,327,000 | $ | 2,465,000 | $ | 36,653,000 | $ | 73,447,000 | $ | 10,939,000 | $ | 25,924,000 | 279,860,000 | |||||||||||||||||||||
| Assets of discontinued operations | 98,596,000 | |||||||||||||||||||||||||||||||||||||||
| Total identifiable assets as of September 30, 2023 | $ | 378,456,000 | ||||||||||||||||||||||||||||||||||||||
| F-29 |
Segment information for the three and nine months ended September 30, 2022:
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| GIGA | TurnOn Green | Fintech | Sentinum | Ault Disruptive | SMC | Holding Company | Total | |||||||||||||||||||||||||
| Revenue | $ | 21,530,000 | $ | 3,853,000 | $ | 220,000 | $ | 822,000 | $ | $ | 17,114,000 | $ | $ | 43,539,000 | ||||||||||||||||||
| Revenue, cryptocurrency mining | 11,398,000 | 11,398,000 | ||||||||||||||||||||||||||||||
| Revenue, lending and trading activities | 32,224,000 | 32,224,000 | ||||||||||||||||||||||||||||||
| Total revenues | $ | 21,530,000 | $ | 3,853,000 | $ | 32,444,000 | $ | 12,220,000 | $ | $ | 17,114,000 | $ | $ | 87,161,000 | ||||||||||||||||||
| Depreciation and amortization expense | $ | 1,259,000 | $ | 403,000 | $ | 240,000 | $ | 6,949,000 | $ | $ | 166,000 | $ | 474,000 | $ | 9,491,000 | |||||||||||||||||
| Income (loss) from operations | $ | (1,881,000 | ) | $ | (2,577,000 | ) | $ | 4,212,000 | $ | (8,139,000 | ) | $ | (1,100,000 | ) | $ | 597,000 | $ | (19,262,000 | ) | $ | (28,150,000 | ) | ||||||||||
| Capital expenditures for the nine months ended September 30, 2022 | $ | 612,000 | $ | 176,000 | $ | 1,739,000 | $ | 77,299,000 | $ | $ | 66,000 | $ | 166,000 | $ | 80,058,000 | |||||||||||||||||
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| GIGA | TurnOn Green | Fintech | Sentinum | Ault Disruptive | SMC | Holding Company | Total | |||||||||||||||||||||||||
| Revenue | $ | 7,781,000 | $ | 1,662,000 | $ | 201,000 | $ | 273,000 | $ | $ | 17,114,000 | $ | $ | 27,031,000 | ||||||||||||||||||
| Revenue, cryptocurrency mining | 3,874,000 | 3,874,000 | ||||||||||||||||||||||||||||||
| Revenue, lending and trading activities | 13,360,000 | 13,360,000 | ||||||||||||||||||||||||||||||
| Total revenues | $ | 7,781,000 | $ | 1,662,000 | $ | 13,561,000 | $ | 4,147,000 | $ | $ | 17,114,000 | $ | $ | 44,265,000 | ||||||||||||||||||
| Depreciation and amortization expense | $ | 740,000 | $ | 393,000 | $ | 172,000 | $ | 2,809,000 | $ | $ | 166,000 | $ | (264,000 | ) | $ | 4,016,000 | ||||||||||||||||
| Income (loss) from operations | $ | (661,000 | ) | $ | (957,000 | ) | $ | 3,786,000 | $ | (4,322,000 | ) | $ | (314,000 | ) | $ | 597,000 | $ | (5,138,000 | ) | $ | (7,009,000 | ) | ||||||||||
| Capital expenditures for the three months ended September 30, 2022 | $ | 327,000 | $ | 51,000 | $ | 890,000 | $ | 5,915,000 | $ | $ | 66,000 | $ | 47,000 | $ | 7,296,000 | |||||||||||||||||
| F-30 |
27. CONCENTRATIONS OF CREDIT AND REVENUE RISK
The following table summarizes accounts receivable that are concentrated with certain large customers as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| Customer A | * | 13 | % | |||||
| Customer B | 18 | % | 14 | % | ||||
The following table provides the percentage of total revenues attributable to customers from which 10% or more of total revenues are derived:
| For the Three Months Ended | For the Nine Months Ended | |||||||
| September 30, | September 30, | |||||||
| 2023 | 2022 | 2023 | 2022 | |||||
| Customer V (Mining Pool Operator) | * | * | 10% | * | ||||
| Customer W (Mining Pool Operator) | 13% | * | * | * | ||||
| Customer X | 12% | 17% | * | * | ||||
| Customer Y | * | 11% | * | * | ||||
| Customer Z | * | * | * | 10% | ||||
| * | Less than 10% |
28. SUBSEQUENT EVENTS
2023 Common ATM Offering
During the period between October 1, 2023 through November 17, 2023, the Company sold an aggregate of million shares of common stock pursuant to the 2023 Common ATM Offering for gross proceeds of $10.0 million.
Note Conversions
In October 2023, an investor converted $0.5 million in principal of a convertible note into million shares of the Company’s common stock.
Senior Secured Convertible Note, Related Party
On October 13, 2023 (the “Closing Date”), the Company entered into a note purchase agreement with Ault & Company, pursuant to which the Company sold to the Purchaser (i) a senior secured convertible promissory note in the principal face amount of $17,519,832 (the “Note”) and warrants (the “Warrants”) to purchase shares of the Company’s common stock for a total purchase price of up to $17,519,832 (the “Transaction”).
The purchase price was comprised of the following: (i) cancellation of $4.6 million of cash loaned by Ault & Company to the Company since June 8, 2023 pursuant to the loan agreement; (ii) cancellation of $11.6 million of term loans made by the Company to Ault & Company in exchange for Ault & Company assuming liability for the payment of $11.6 million of secured notes; and (iii) the retirement of $1.25 million stated value of 125,000 shares of the Company’s Series B Convertible Preferred Stock (representing all shares issued and outstanding of that series) being transferred from Ault & Company to the Company.
The Note has a principal face amount of $17,519,832 and has a maturity date of October 12, 2028 (the “Maturity Date”). The Note bears interest at the rate of 10% per annum. Interest is payable, at the Purchaser’s option, in cash or shares of Common Stock at the applicable Conversion Price (as defined below). Accrued interest is payable on the Maturity Date, provided, however, that Ault & Company has the option, on not less than 10 calendar days’ notice to the Company, to require payment of accrued but unpaid interest on a monthly basis in arrears.
| F-31 |
The Note is convertible into shares of common stock at a conversion price equal to the greater of (i) $0.10 per share (the “Floor Price”), and (ii) the lesser of (A) $0.2952 or (B) 105% of the volume weighted average price of the common stock during the ten trading days immediately prior to the date of conversion (the “Conversion Price”). The Conversion Price is subject to adjustment in the event of an issuance of common stock at a price per share lower than the Conversion Price then in effect, as well as upon customary stock splits, stock dividends, combinations or similar events. The Floor Price shall not be adjusted for stock dividends, stock splits, stock combinations and other similar transactions.
The Warrants grant Ault & Company the right to purchase shares of common stock. The Warrants have a five-year term, expiring on the fifth anniversary of the Closing Date, and become exercisable on the first business day after the six-month anniversary of the Closing Date. The exercise price of the Warrants is $0.1837, which is subject to adjustment in the event of customary stock splits, stock dividends, combinations or similar events.
In addition, the Company and various subsidiaries of the Company granted Ault & Company a senior security interest in substantially all of their assets as collateral for the repayment of the Note, which is subordinated to the security interest granted to the holders of the outstanding secured promissory notes.
Series C Preferred Purchase Agreement, Related Party
On November 6, 2023, the Company entered into a securities purchase agreement (the “SPA”) with Ault & Company, pursuant to which the Company agreed to sell to Ault & Company up to 50,000 shares of Series C convertible preferred stock and warrants to purchase up to 370 million shares of common stock for a total purchase price of up to $50 million, of which up to $17.5 million of the Note may be tendered for cancellation. The consummation of the transactions contemplated by the SPA, specifically the conversion of the Series C convertible preferred stock and the exercise of the warrants in an aggregate number in excess of 19.99% on the execution date of the Agreement, are subject to various customary closing conditions as well as regulatory and stockholder approval. In addition to customary closing conditions, the closing of the financing is also conditioned upon the receipt by Ault & Company of financing to consummate the transaction. The SPA contains customary termination provisions for Ault & Company under certain circumstances, and the Agreement shall automatically terminate if the closing has not occurred prior to December 29, 2023, although such date may be extended by Ault & Company for a period of 90 days as set forth in the SPA.
Series D Preferred Purchase Agreement, Related Party
On November 15, 2023, the Company purchased from ROI 603.44 shares of ROI’s newly designated Series D Convertible Preferred Stock for a total purchase price of $15.1 million. The purchase price was paid by the cancellation of $15.1 million of cash advances made by the Company to ROI between January 1, 2023 and November 9, 2023. The preferred shares each have a stated value of $25,000 per share and each preferred share is convertible into a number of shares of ROI’s common stock determined by dividing the stated value by $0.51, or an aggregate of 29.6 million shares of ROI common stock, subject to adjustment in the event of an issuance of ROI common stock at a price per share lower than the conversion price, as well as upon customary stock splits, stock dividends, combinations or similar events. The preferred shares holders are entitled to receive dividends at a rate of 10% per annum from issuance until November 14, 2033.
In addition, for as long as at least 25% of the Preferred Shares remain outstanding, ROI must obtain from the Company consent with respect to certain corporate events, including reclassifications, fundamental transactions, stock redemptions or repurchases, increases in the number of directors, and declarations or payment of dividends, and further ROI is subject to certain negative covenants, including covenants against issuing additional shares of capital stock or derivative securities, incurring indebtedness, engaging in related party transactions, selling of properties having a value of over $50,000, altering the number of directors, and discontinuing the business of any subsidiary, subject to certain exceptions and limitations.
Payment of Related Party Advances
On October 5, 2023, William B. Horne, the Company’s Chief Executive Officer, loaned the Company $262,500, including a $12,500 original issue discount. On October 12, 2023, the loan was repaid.
On October 10, 2023, ROI repaid $52,000 of advances payable to Mr. Horne, the Company’s Chief Executive Officer and director of ROI.
| F-32 |
Eco Pack Acquisition
On November 10, 2023, the Company’s wholly owned subsidiary, Eco Pack Technologies, Inc., completed the acquisition of an 80% ownership interest in Eco Pack Technologies Limited, a company incorporated in England and Wales. As of the closing date, the total consideration paid amounted to $0.8 million. Additionally, the Company is committed to providing approximately $2.5 million in further funding over the next two years.
Deficiency Letter from the NYSE American
On November 13, 2023, the Company received a deficiency letter (the “Letter”) from the NYSE American LLC (the “NYSE American” or the “Exchange”) indicating that the Company is not in compliance with the Exchange’s continued listing standard set forth in Section 1003(f)(v) of the NYSE American Company Guide (the “Company Guide”) because the shares of common stock of the Company (the “Common Stock”) for a substantial period of time have been selling at a low price per share, which the Exchange determined to be a 30-trading day average price of less than $0.20 per share. The Letter has no immediate effect on the listing or trading of the Company’s Common Stock and the Common Stock will continue to trade on the NYSE American under the symbol “AULT”. Additionally, the Letter does not result in the immediate delisting of the Common Stock from the NYSE American.
Pursuant to Section 1003(f)(v) of the Company Guide, the NYSE American staff determined that the Company’s continued listing is predicated on it demonstrating sustained price improvement within a reasonable period of time or effecting a reverse stock split of its common stock, which the staff determined to be no later than May 13, 2024. The Company intends to regain compliance with the NYSE American’s continued listing standards by undertaking a measure or measures that are in the best interests of the Company and its stockholders.
The Company intends to closely monitor the price of its common stock and consider available options if the Common Stock does not trade at a consistent level likely to result in the Company regaining compliance by May 13, 2024. The Company’s receipt of the Letter does not affect the Company’s business, operations or reporting requirements with the Securities and Exchange Commission. The Company is actively engaged in discussions with the Exchange and is developing plans to regain compliance with the NYSE American’s continued listing standards within the cure period.
| F-33 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
In this quarterly report, the “Company,” “AAI,” “we,” “us” and “our” refer to Ault Alliance, Inc., a Delaware corporation. AAI is a diversified holding company pursuing growth by acquiring undervalued businesses and disruptive technologies with a global impact. Through our wholly and majority owned subsidiaries and strategic investments, we own and operate a data center at which we mine Bitcoin and offer colocation and hosting services for the emerging artificial intelligence ecosystems and other industries, and provide mission-critical products that support a diverse range of industries, including metaverse platform, oil exploration, crane services, defense/aerospace, industrial, automotive, medical/biopharma, consumer electronics, hotel operations and textiles. In addition, we own and operate hotels and extend credit to select entrepreneurial businesses through a licensed lending subsidiary.
Recent Events and Developments
On January 23, 2023, we filed a Certificate of Elimination with the Secretary of State of the State of Delaware with respect to our Series C convertible redeemable preferred stock (“Series C Preferred Stock”) which, effective upon filing, eliminated the Series C Preferred Stock.
On February 8, 2023, we entered into a Share Exchange Agreement (the “Agreement”) with ROI and the other signatories thereto. The Agreement provides that, subject to the terms and conditions set forth therein, ROI will acquire all of the outstanding shares of capital stock of our then subsidiary, BitNile.com, Inc. (“BitNile.com”), of which we owned approximately 86%, and the remaining 14% was owned by minority shareholders (the “Minority Shareholders”), as well as Ault Iconic, (formerly Ault Media Group) and the securities of Earnity beneficially owned by BitNile.com (which represented approximately 19.9% of the outstanding equity securities of Earnity as of the date of the Agreement), in exchange for the following: (i) 8,637.5 shares of newly designated Series B Convertible Preferred Stock of ROI to be issued to our company (the “Series B Preferred”), and (ii) 1,362.5 shares of newly designated Series C Convertible Preferred Stock of ROI to be issued to the to the Minority Shareholders (the “Series C Preferred,” and together with the Series B Preferred, the “Preferred Stock”). The Series B Preferred and the Series C Preferred each have a stated value of $10,000 per share (the “Stated Value”), for a combined stated value of the Preferred Stock to be issued by ROI of $100 million, and subject to adjustment, are convertible into an aggregate of 13.3 million shares of common stock of ROI (the “ROI Common Stock”). ROI received approval of the Series A Convertible Preferred Stock transaction by its’s shareholders and the Nasdaq Stock Market to exceed the 19.9% beneficial ownership limitation.
Pursuant to the Certificates of Designations of the Rights, Preferences and Limitations of the Series B Preferred and the Series C Preferred (collectively, the “Preferred Stock Certificates”), each share of Preferred Stock will be convertible into a number of shares of ROI Common Stock determined by dividing the Stated Value by $7.50 (the “Conversion Price”), or 1,333 shares of ROI Common Stock. The Conversion Price will be subject to certain adjustments, including potential downward adjustment if ROI closes a qualified financing resulting in at least $25 million in gross proceeds at a price per share that is lower than the Conversion Price then in effect. The holders of Preferred Stock will be entitled to receive dividends at a rate of 5% of the Stated Value per annum from issuance until February 7, 2033 (the “Dividend Term”). During the first two years of the Dividend Term, dividends will be payable in additional shares of Preferred Stock rather than cash, and thereafter dividends will be payable in either additional shares of Preferred Stock or cash as each holder may elect. If ROI fails to make a dividend payment as required by the Preferred Stock Certificates, the dividend rate will be increased to 12% for as long as such default remains ongoing and uncured. Each share of Preferred Stock will also have an $11,000 liquidation preference in the event of a liquidation, change of control event, dissolution or winding up of ROI, and will rank senior to all other capital stock of ROI with respect thereto, except that the Series B Preferred and Series C Preferred shall rank pari passu. Each share of Series B Preferred was originally entitled to vote with the ROI Common Stock at a rate of 10 votes per share of Common Stock into which the Series B Preferred is convertible, but that provision was subsequently eliminated. Other than certain rights granted to the Company relating to amendments or waiver of various negative covenants, the terms, rights, preferences and limitations of the Preferred Stock Certificates are essentially identical. The Agreement closed on March 6, 2023.
On March 28, 2023, we entered into a securities purchase agreement (the “Purchase Agreement”) with certain sophisticated investors (the “Investors”), pursuant to which we agreed to issue and sell, in a private placement, an aggregate of 100,000 shares of our preferred stock, with each such share having a stated value of $100.00 and consisting of (i) 83,000 shares of Series E Convertible Preferred Stock (the “Series E Preferred Stock”), (ii) 1,000 shares of Series F Convertible Preferred Stock (the “Series F Preferred Stock”) and (iii) 16,000 shares of Series G Convertible Preferred Stock (the “Series G Preferred Stock” and collectively, the “Preferred Shares”).
| 1 |
Each share of Series E Preferred Stock and Series F Preferred Stock had a purchase price of $100.00, equal to each such share’s stated value. The purchase price of the Series E Preferred Stock and the Series F Preferred Stock was paid for by the Investors’ canceling outstanding secured promissory notes in the principal amount of $8.4 million, whereas the purchase price of the shares of Series G Preferred Stock consisted of accrued but unpaid interest on these notes, as well as for other good and valuable consideration. Each Preferred Share is convertible into shares of our common stock at a conversion price equal to 85% of the closing sale price of our common stock on the trading day prior to the date of conversion, subject to a floor price of $0.10. The Preferred Shares are convertible at the option of the holder at any time following our receipt of stockholder approval of the Reverse Split (as defined below). The private placement closed on March 30, 2023.
On April 6, 2023, we issued a term note with a principal amount of $1.1 million, bearing an interest rate of 12% (the “Term Note”). The Term Note was issued at a discount, with net proceeds to us amounting to $1.0 million. The Term Note was scheduled to mature on June 5, 2023. We exercised the option to extend the maturity date by one month, by paying a $30,000 extension fee. Ault & Company guaranteed repayment of the Term Note.
On May 1, 2023, we entered into a securities purchase agreement (the “Series C Agreement”) with Ault & Company, pursuant to which we agreed to sell to Ault & Company up to 40,000 shares of Series C convertible preferred stock and warrants to purchase up to 1.3 million shares of common stock for a total purchase price of up to $40 million. The consummation of the transactions contemplated by the Series C Agreement are subject to various customary closing conditions and the receipt of certain third party consents. In addition to customary closing conditions, the closing of the transaction is also conditioned upon the receipt by Ault & Company of financing in an amount sufficient to consummate the transaction, in whole or in part. The Series C Agreement contains customary termination provisions for Ault & Company under certain circumstances, and the Series C Agreement shall automatically terminate if the closing has not occurred prior to May 31, 2023, although such date may be extended by Ault & Company for a period of 90 days as set forth in the Series C Agreement.
Our stockholders approved, at a special meeting of our stockholders called for such purpose, an amendment (the “Amendment”) to our certificate of incorporation to authorize a reverse split of our common stock (the “Reverse Split”). The Investors agreed in the Purchase Agreement to not transfer, offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of the Preferred Shares until after the Reverse Split. Pursuant to the certificate of designation of the Series E Preferred Stock, the shares of Series E Preferred Stock have the right to vote on such Amendment on an as converted to common stock basis. In addition, pursuant to the certificate of designation of the Series F Preferred Stock, the shares of Series F Preferred Stock have the right to vote on such Amendment. Each Investor has separately agreed to vote the shares of the Series E Preferred Stock in favor of the Amendment and that the shares of the Series F Preferred Stock shall automatically be voted in a manner that “mirrors” the proportions on which the shares of our common stock and Series E Preferred Stock are voted on the Amendment. The Amendment requires the approval of the majority of the votes associated with our outstanding capital stock entitled to vote on the proposal. Because the Series F Preferred Stock will automatically and without further action of the purchaser be voted in a manner that “mirrors” the proportions on which the shares of common stock and Series E Preferred Stock are voted on the Reverse Split, abstentions by common stockholders will not have any effect on the votes cast by the holders of the Series F Preferred Stock. The Series G Preferred Stock does not carry any voting rights, except as required by law or expressly provided by its certificate of designation.
On June 8, 2023, we entered into a loan agreement with Ault & Company as lender. The loan agreement provides for an unsecured, non-revolving credit facility in an aggregate principal amount of up to $10 million. All loans under the loan agreement are due within five business days after request by Ault & Company and Ault & Company is not obligated to make any further advances under the loan agreement after December 8, 2023. Advances under the loan agreement bear interest at the rate of 9.5% per annum and may be repaid at any time without penalty or premium. As of the date of this report, $4.7 million has been advanced under the loan agreement and not repaid.
On June 9, 2023, we entered into an At-the-Market Issuance Sales Agreement with Ascendiant Capital Markets, LLC, as sales agent (“Ascendiant Capital”) to sell shares of our common stock having an aggregate offering price of up to $10,000,000 (the “Shares”) from time to time, through an “at the market offering” (the “2023 Common ATM Offering”). On July 12, 2023, we and Ascendiant Capital entered into an amendment to the At-The-Market issuance sales agreement to increase the size of the 2023 Common ATM Offering from $10.0 million to $20.0 million. Through August 14, 2023, we have sold an aggregate of 3.8 million shares of common stock pursuant to the 2023 Common ATM Offering for gross proceeds of $16.1 million.
| 2 |
On June 26, 2023, we established a record date for our initial distribution of TurnOnGreen securities. Stockholders as of this date were entitled to 40 shares of TurnOnGreen common stock, along with warrants to purchase 40 shares of TurnOnGreen common stock (the “TurnOnGreen Securities”) for every share of our common stock they held on the record date. The initial distribution was finalized in July 2023. We distributed 58.7 million TurnOnGreen Securities in the first distribution.
On July 24, 2023, we established a record date for our second partial distribution of TurnOnGreen Securities. Stockholders as of this date were entitled to 15 shares of TurnOnGreen Securities for every share of the Company’s common stock they held on the record date. The second distribution was finalized on August 7, 2023, whereby we relinquished control of voting interests of TurnOnGreen. We distributed 56.4 million TurnOnGreen Securities in the second distribution.
On July 19, 2023 we along with certain of our subsidiaries entered into a First Amendment and Joinder to Loan and Guarantee Agreement (the “Amendment”) with the institutional investors pursuant to which the (i) Loan and Guarantee Agreement, dated November 7, 2022, entered into between us and the institutional investors (the “Loan Agreement”) and (ii) Security Agreement, dated November 7, 2022, entered into between the institutional investors and Sentinum (the “Security Agreement”) was amended. Pursuant to the Amendment, we borrowed an additional $8.8 million. The net proceeds of the additional loan amount were $7.5 million.
Effective August 3, 2023, we and the Investors entered into an Exchange Agreement (the “Exchange Agreement”) pursuant to which the Investors exchanged all of their Preferred Shares as well as their demand notes (the “Demand Notes”) issued to the Investors by us on or about May 20, 2023, with each Demand Note having a principal outstanding amount of approximately $0.8 million for two new 10% Secured OID Promissory Notes (the “Exchange Notes”), each with a principal face amount of $5.3 million, for an aggregate of amount owed of $10.5 million (the “Principal Amount”). We and Milton “Todd” Ault, III, our Executive Chairman, entered into guaranty agreements with the Investors guaranteeing repayment by Ault & Company, Inc., a related party (“Ault & Company”) of the Exchange Notes.
Effective as of August 3, 2023, we assigned the Exchange Notes to Ault & Company. As consideration for Ault & Company assuming the Exchange Notes from us, we issued a 10% demand promissory note in the principal face amount of $10.5 million (the “First A&C Demand Note”) to Ault & Company.
Effective as of August 10, 2023, we assigned the Term Note to Ault & Company. As consideration for Ault & Company assuming the Term Note from us, we issued a 12% demand promissory note in the principal face amount of $1.1 million (the “Second Demand Note”) to Ault & Company.
On October 13, 2023 (the “Closing Date”), we entered into a note purchase agreement with Ault & Company, pursuant to which we sold to the Purchaser (i) a senior secured convertible promissory note in the principal face amount of $17.5 million (the “Note”) and warrants (the “Warrants”) to purchase shares of our common stock for a total purchase price of up to $17.5 million (the “Transaction”).
The purchase price was comprised of the following: (i) cancellation of $4.6 million of cash loaned by Ault & Company to us since June 8, 2023 pursuant to the loan agreement; (ii) cancellation of $11.6 million of term loans made by us to Ault & Company in exchange for Ault & Company assuming liability for the payment of $11.6 million of secured notes; and (iii) the retirement of $1.25 million stated value of 125,000 shares of our Series B Convertible Preferred Stock (representing all shares issued and outstanding of that series) being transferred from Ault & Company to us.
The Note has a principal face amount of $17.5 million and has a maturity date of October 12, 2028 (the “Maturity Date”). The Note bears interest at the rate of 10% per annum. Interest is payable, at the Purchaser’s option, in cash or shares of Common Stock at the applicable Conversion Price (as defined below). Accrued interest is payable on the Maturity Date, provided, however, that Ault & Company has the option, on not less than 10 calendar days’ notice to us, to require payment of accrued but unpaid interest on a monthly basis in arrears.
The Note is convertible into shares of common stock at a conversion price equal to the greater of (i) $0.10 per share (the “Floor Price”), and (ii) the lesser of (A) $0.2952 or (B) 105% of the volume weighted average price of the common stock during the ten trading days immediately prior to the date of conversion (the “Conversion Price”). The Conversion Price is subject to adjustment in the event of an issuance of common stock at a price per share lower than the Conversion Price then in effect, as well as upon customary stock splits, stock dividends, combinations or similar events. The Floor Price shall not be adjusted for stock dividends, stock splits, stock combinations and other similar transactions.
| 3 |
The Warrants grant Ault & Company the right to purchase 47,685,988 shares of common stock. The Warrants have a five-year term, expiring on the fifth anniversary of the Closing Date, and become exercisable on the first business day after the six-month anniversary of the Closing Date. The exercise price of the Warrants is $0.1837, which is subject to adjustment in the event of customary stock splits, stock dividends, combinations or similar events.
In addition, we and various of our subsidiaries granted Ault & Company a senior security interest in substantially all of our assets as collateral for the repayment of the Note, which is subordinated to the security interest granted to the holders of the outstanding secured promissory notes.
On November 6, 2023, we entered into a securities purchase agreement (the “SPA”) with Ault & Company, pursuant to which we agreed to sell to Ault & Company up to 50,000 shares of Series C convertible preferred stock and warrants to purchase up to 370 million shares of common stock for a total purchase price of up to $50 million, of which up to $17.5 million of the Note may be tendered for cancellation. The consummation of the transactions contemplated by the SPA, specifically the conversion of the Series C convertible preferred stock and the exercise of the warrants in an aggregate number in excess of 19.99% on the execution date of the Agreement, are subject to various customary closing conditions as well as regulatory and stockholder approval. In addition to customary closing conditions, the closing of the financing is also conditioned upon the receipt by Ault & Company of financing to consummate the transaction. The SPA contains customary termination provisions for Ault & Company under certain circumstances, and the Agreement shall automatically terminate if the closing has not occurred prior to December 29, 2023, although such date may be extended by Ault & Company for a period of 90 days as set forth in the SPA.
On November 15, 2023, we purchased from ROI 603.44 shares of ROI’s newly designated Series D Convertible Preferred Stock for a total purchase price of $15.1 million. The purchase price was paid by the cancellation of $15.1 million of cash advances made by us to ROI between January 1, 2023 and November 9, 2023. The preferred shares each have a stated value of $25,000 per share and each preferred share is convertible into a number of shares of ROI’s common stock determined by dividing the stated value by $0.51, or an aggregate of 29.6 million shares of ROI common stock, subject to adjustment in the event of an issuance of ROI common stock at a price per share lower than the conversion price, as well as upon customary stock splits, stock dividends, combinations or similar events. The preferred shares holders are entitled to receive dividends at a rate of 10% per annum from issuance until November 14, 2033. In addition, for as long as at least 25% of the Preferred Shares remain outstanding, ROI must obtain our consent with respect to certain corporate events, including reclassifications, fundamental transactions, stock redemptions or repurchases, increases in the number of directors, and declarations or payment of dividends, and further ROI is subject to certain negative covenants, including covenants against issuing additional shares of capital stock or derivative securities, incurring indebtedness, engaging in related party transactions, selling of properties having a value of over $50,000, altering the number of directors, and discontinuing the business of any subsidiary, subject to certain exceptions and limitations.
Presentation of AGREE as Discontinued Operations
In September 2023, we committed to a plan for our wholly owned subsidiary AGREE to list for sale its four recently renovated Midwest hotels, the Hilton Garden Inn in Madison West, the Residence Inn in Madison West, the Courtyard in Madison West, and the Hilton Garden Inn in Rockford. The decision to sell the hotels follows the decision to also list the multifamily development site in St. Petersburg, Florida and is driven by our desire to focus on our core businesses, Energy, Fintech and Sentinum. We plan to use the proceeds from the sales of the hotel properties to pay off debt and commit more capital to our core businesses. Our real estate properties, which include both hotels and land are currently listed for sale.
In connection with the planned sale of AGREE assets, we concluded that the net assets of AGREE met the criteria for classification as held for sale. In addition, the proposed sale represents a strategic shift that will have a major effect on our operations and financial results. As a result, we have presented the results of operations, cash flows and financial position of AGREE as discontinued operations in the accompanying consolidated financial statements and notes for all periods presented.
General
As a holding company, our business objective is designed to increase stockholder value. Under the strategy we have adopted, we are focused on managing and financially supporting our existing subsidiaries and partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned to stockholders. We have, are and will consider initiatives including, among others: public offerings, the sale of individual partner companies, the sale of certain or all partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize stockholder value. We anticipate returning value to stockholders after satisfying our debt obligations and working capital needs.
| 4 |
From time to time, we engage in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of a process we initiate. To the extent we believe that a subsidiary or partner company’s further growth and development can best be supported by a different ownership structure or if we otherwise believe it is in our stockholders’ best interests, we will seek to sell some or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets, mergers and acquisitions, public offerings of the subsidiary or partner company’s securities and, in the case of publicly traded partner companies, sales of their securities in the open market. Our plans may include taking subsidiaries or partner companies public through rights offerings and directed share subscription programs. We will continue to consider these (or similar) initiatives and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize value for our stockholders.
In recent years, we have provided capital and relevant expertise to fuel the growth of businesses in metaverse platform, oil exploration, crane services, defense/aerospace, industrial, automotive, medical/biopharma, consumer electronics, hotel operations and textiles. We have provided capital to subsidiaries as well as partner companies in which we have an equity interest or may be actively involved, influencing development through board representation and management support.
We are a Delaware corporation with our corporate office located at 11411 Southern Highlands Pkwy, Suite 240, Las Vegas, NV 89141. Our phone number is 949-444-5464 and our website address is www.ault.com.
Results of Operations
Results of Operations for the Three Months Ended September 30, 2023 and 2022
The following table summarizes the results of our operations for the three months ended September 30, 2023 and 2022.
| For the Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 28,164,000 | $ | 27,031,000 | ||||
| Revenue, cryptocurrency mining | 7,558,000 | 3,874,000 | ||||||
| Revenue, crane operations | 12,490,000 | - | ||||||
| Revenue, lending and trading activities | (249,000 | ) | 13,360,000 | |||||
| Total revenue | 47,963,000 | 44,265,000 | ||||||
| Cost of revenue, products | 20,425,000 | 20,193,000 | ||||||
| Cost of revenue, cryptocurrency mining | 10,228,000 | 5,255,000 | ||||||
| Cost of revenue, crane operations | 7,642,000 | - | ||||||
| Total cost of revenue | 38,295,000 | 25,448,000 | ||||||
| Gross profit | 9,668,000 | 18,817,000 | ||||||
| Total operating expenses | 31,571,000 | 25,826,000 | ||||||
| Loss from operations | (21,903,000 | ) | (7,009,000 | ) | ||||
| Other income (expense): | ||||||||
| Interest and other income | 309,000 | 725,000 | ||||||
| Interest expense | (4,414,000 | ) | (2,367,000 | ) | ||||
| Loss on extinguishment of debt | (1,546,000 | ) | - | |||||
| Realized and unrealized gain on marketable securities | 74,000 | 709,000 | ||||||
| Loss on the sale of fixed assets | (33,000 | ) | - | |||||
| Change in fair value of warrant liability | (562,000 | ) | (3,000 | ) | ||||
| Total other expense, net | (6,172,000 | ) | (936,000 | ) | ||||
| Loss before income taxes | (28,075,000 | ) | (7,945,000 | ) | ||||
| Income tax (benefit) provision | (565,000 | ) | 144,000 | |||||
| Net loss from continuing operations | (27,510,000 | ) | (8,089,000 | ) | ||||
| Net income (loss) from discontinued operations | (929,000 | ) | 93,000 | |||||
| Net loss | (28,439,000 | ) | (7,996,000 | ) | ||||
| Net loss attributable to non-controlling interest | 6,668,000 | 725,000 | ||||||
| Net loss attributable to Ault Alliance, Inc. | (21,771,000 | ) | (7,271,000 | ) | ||||
| Preferred dividends | (413,000 | ) | (190,000 | ) | ||||
| Net loss available to common stockholders | $ | (22,184,000 | ) | $ | (7,461,000 | ) | ||
| Comprehensive loss | ||||||||
| Net loss available to common stockholders | $ | (22,184,000 | ) | $ | (7,461,000 | ) | ||
| Other comprehensive loss | ||||||||
| Foreign currency translation adjustment | (651,000 | ) | 306,000 | |||||
| Other comprehensive loss | (651,000 | ) | 306,000 | |||||
| Total comprehensive loss | $ | (22,835,000 | ) | $ | (7,155,000 | ) | ||
| 5 |
Revenues
Revenues by segment for the three months ended September 30, 2023 and 2022 were as follows:
| For the Three Months Ended September 30, | Increase | |||||||||||||||
| 2023 | 2022 | (Decrease) | % | |||||||||||||
| GIGA | $ | 10,275,000 | $ | 7,781,000 | $ | 2,493,000 | 32 | % | ||||||||
| TurnOnGreen | 1,166,000 | 1,662,000 | (496,000 | ) | -30 | % | ||||||||||
| SMC | 15,931,000 | 17,114,000 | (1,183,000 | ) | -7 | % | ||||||||||
| Sentinum | ||||||||||||||||
| Revenue, cryptocurrency mining | 7,558,000 | 3,874,000 | 3,684,000 | 95 | % | |||||||||||
| Revenue, commercial real estate leases | 333,000 | 273,000 | 61,000 | 22 | % | |||||||||||
| Fintech: | ||||||||||||||||
| Revenue, lending and trading activities | (249,000 | ) | 13,360,000 | (13,609,000 | ) | -102 | % | |||||||||
| Other | 18,000 | 201,000 | (183,000 | ) | -91 | % | ||||||||||
| Energy | 12,931,000 | - | 12,931,000 | — | ||||||||||||
| Total revenue | $ | 47,963,000 | $ | 44,265,000 | $ | 3,698,000 | 8 | % | ||||||||
GIGA
GIGA revenues were up $2.5 million for the three months ended September 30, 2023, including $0.4 million growth attributable to our acquisition of Giga-tronics Incorporated on September 8, 2022. Continued conflicts and tensions worldwide are driving defense-related investments in force protection technologies at GIGA across the United States, U.K., Europe, Asia, and the Middle East. Additionally, demand for key electronics solutions, particularly for customers in medicine and telecommunications, accelerated in the three months ended September 30, 2023.
TurnOnGreen
TurnOnGreen revenues were down $0.5 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022 due to the cancellation of large projects that contributed to revenue in 2022.
SMC
SMC revenues decreased by $1.2 million primarily due to timing of shipments to a large customer.
Sentinum
Revenues from Sentinum’s cryptocurrency mining operations increased $3.7 million as we increased our cryptocurrency mining activities from the prior period, and further increased by a 32% increase in the average Bitcoin price, partially offset an 84% increase in the average Bitcoin mining difficulty level in the current year period.
Fintech
Revenues from our lending and trading activities were negative $0.2 million. Revenue from lending and trading activities for the three months ended September 30, 2023 included an approximate $3.0 million unrealized losses from our investment in Alzamend, partially offset by realized gains from our investment portfolio for the three months ended September 30, 2023. During the three months ended September 30, 2022, Ault Lending generated income from appreciation of investments in marketable securities as well as shares of common stock underlying equity securities issued to Ault Lending in certain financing transactions. Ault Lending also generates revenue through origination fees charged to borrowers and interest generated from each loan.
| 6 |
Revenues from our trading activities for the three months ended September 30, 2023 included net losses on equity securities, including unrealized gains and losses from market price changes. These gains and losses have caused, and will continue to cause, significant volatility in our periodic earnings.
Energy
Energy revenues increased by $12.9 million for the three months ended September 30, 2023, due to the acquisition of the Circle 8 crane operations in December 2022.
Gross Margins
Gross margins decreased to 20% for the three months ended September 30, 2023, compared to 43% for the three months ended September 30, 2022. Our gross margins of 21% recognized during the three months ended September 30, 2023 were negatively impacted by unfavorable margins from our lending and trading activities and negative margins from our Sentinum cryptocurrency mining segment due to the significant increase in Bitcoin mining difficulty level. Excluding the effects of margin from our lending and trading activities and cryptocurrency mining operations, our adjusted gross margins for the three months ended September 30, 2023 and 2022 would have been 31% and 25%, respectively.
Research and Development
Research and development expenses increased by $1.2 million for the three months ended September 30, 2023, due to expenditures related to development work on ROI’s BitNile metaverse platform.
Selling and Marketing
Selling and marketing expenses were $8.0 million for the three months ended September 30, 2023, compared to $7.4 million for the three months ended September 30, 2022, an increase of $0.6 million, or 8%. The increase was primarily the result of higher advertising and promotion costs related to ROI’s BitNile metaverse platform, partially offset by a decline in employee related costs and consulting expenses.
General and Administrative
General and administrative expenses were $17.8 million for the three months ended September 30, 2023, compared to $15.4 million for the three months ended September 30, 2022, an increase of $2.4 million, or 16%. General and administrative expenses increased from the comparative prior period, mainly due to increases from new acquisitions:
| · | general and administrative costs of $2.2 million from ROI, which was acquired in March 2023; |
| · | general and administrative costs of $2.0 million from Circle 8, which was acquired in December 2022; and |
| · | general and administrative costs of $0.7 million from GIGA, which was acquired in September 2022. |
The increases above were partially offset by a $2.4 million decrease performance bonus related to realized gains on trading activities.
Impairment of Property and Equipment
During the three months ended September 30, 2023, we recognized an impairment charge of $3.9 million related to property and equipment at ROI’s Agora and Bitstream Bitcoin mining operations as they have been unable to commence Bitcoin mining operations, either for themselves or from others through hosting arrangements.
| 7 |
Impairment of Deposit Due to Vendor Bankruptcy Filing
During the three months ended September 30, 2022, Compute North Holdings, Inc. (along with its affiliated debtors, collectively, “Compute North”), filed for chapter 11 bankruptcy protection. We had a deposit of approximately $2.0 million with Compute North for services yet to be performed by Compute North. We assessed this financial exposure and recorded an impairment of the deposit totaling $2.0 million during the three months ended September 30, 2022.
Impairment of Mined Cryptocurrency
Impairment of mined cryptocurrency for the three months ended September 30, 2023 and 2022 was $0.1 million and $0.5 million, respectively. Impairment losses are attributable to the volatility of the Bitcoin market as market price of Bitcoin drops below our carrying value within the respective periods. The impairment of mined cryptocurrency for the three months ended September 30, 2023 is lower than the comparable prior year period as the average amount of digital currency held decreased during the three months ended September 30, 2023 as we generally sold our mined digital currency the next business day.
Other Expense, Net
Other expense, net was $6.2 million for the three months ended September 30, 2023, compared to $0.9 million for the three months ended September 30, 2022.
Interest and other income was $0.3 million for the three months ended September 30, 2023, compared to $0.7 million for the three months ended September 30, 2022. The decrease in interest and other income is primarily due to the decline in ADRT’s cash and marketable securities held in the trust account as a result of redemptions that occurred in June 2023.
Interest expense was $4.4 million for the three months ended September 30, 2023, compared to $2.4 million for the three months ended September 30, 2022. Interest expense increased due to higher levels of borrowing during the three months ended September 30, 2023 as compared to the three months ended September 30, 2023. Interest expense for the three months ended September 30, 2023 included contractual interest of $3.3 million, amortization of debt discount of $0.6 million, and forbearance and extension fees of $0.5 million. Interest expense for the three months ended September 30, 2022 consisted primarily of contractual interest.
The $1.5 million loss on extinguishment of debt for the three months ended September 30, 2023 related to the August 2023 exchange of preferred stock liabilities for secured notes. The preferred stock liabilities were remeasured from their fair value prior to the exchange to the fair value of the secured notes at the date of the exchange.
Income Tax (Benefit) Provision
Benefit from income taxes was $0.6 million during the three months ended September 30, 2023 compared to a provision of $0.1 million during the three months ended September 30, 2022. The effective income tax benefit rate was 2.0% for the three months ended September 30, 2023 as compared to a provision of 1.8% for the three months ended September 30, 2022.
| 8 |
Results of Operations for the Nine Months Ended September 30, 2023 and 2022
The following table summarizes the results of our operations for the nine months ended September 30, 2023 and 2022.
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 54,594,000 | $ | 43,539,000 | ||||
| Revenue, cryptocurrency mining | 23,273,000 | 11,398,000 | ||||||
| Revenue, crane operations | 37,726,000 | - | ||||||
| Revenue, lending and trading activities | 4,337,000 | 32,224,000 | ||||||
| Total revenue | 119,930,000 | 87,161,000 | ||||||
| Cost of revenue, products | 39,248,000 | 30,985,000 | ||||||
| Cost of revenue, cryptocurrency mining | 28,057,000 | 12,206,000 | ||||||
| Cost of revenue, crane operations | 22,671,000 | - | ||||||
| Cost of revenue, lending and trading activities | 1,180,000 | - | ||||||
| Total cost of revenue | 91,156,000 | 43,191,000 | ||||||
| Gross profit | 28,774,000 | 43,970,000 | ||||||
| Total operating expenses | 131,201,000 | 72,120,000 | ||||||
| Loss from operations | (102,427,000 | ) | (28,150,000 | ) | ||||
| Other income (expense): | ||||||||
| Interest and other income | 3,888,000 | 1,255,000 | ||||||
| Interest expense | (30,537,000 | ) | (32,063,000 | ) | ||||
| Loss on extinguishment of debt | (1,700,000 | ) | - | |||||
| Realized and unrealized (loss) gain on marketable securities | (170,000 | ) | 1,016,000 | |||||
| Loss from investment in unconsolidated entity | - | (924,000 | ) | |||||
| Impairment of equity securities | (9,555,000 | ) | - | |||||
| (Loss) gain on the sale of fixed assets | 2,728,000 | - | ||||||
| Change in fair value of warrant liability | 2,655,000 | (27,000 | ) | |||||
| Total other expense, net | (32,691,000 | ) | (30,743,000 | ) | ||||
| Loss before income taxes | (135,118,000 | ) | (58,893,000 | ) | ||||
| Income tax provision | 540,000 | 361,000 | ||||||
| Net loss from continuing operations | (135,658,000 | ) | (59,254,000 | ) | ||||
| Net income (loss) from discontinued operations | (5,862,000 | ) | (3,614,000 | ) | ||||
| Net loss | (141,520,000 | ) | (62,868,000 | ) | ||||
| Net loss attributable to non-controlling interest | 10,420,000 | 1,061,000 | ||||||
| Net loss attributable to Ault Alliance, Inc. | (131,100,000 | ) | (61,807,000 | ) | ||||
| Preferred dividends | (963,000 | ) | (239,000 | ) | ||||
| Net loss available to common stockholders | $ | (132,063,000 | ) | $ | (62,046,000 | ) | ||
| Comprehensive loss | ||||||||
| Net loss available to common stockholders | $ | (132,063,000 | ) | $ | (62,046,000 | ) | ||
| Other comprehensive loss | ||||||||
| Foreign currency translation adjustment | (1,001,000 | ) | (1,452,000 | ) | ||||
| Other comprehensive loss | (1,001,000 | ) | (1,452,000 | ) | ||||
| Total comprehensive loss | $ | (133,064,000 | ) | $ | (63,498,000 | ) | ||
| 9 |
Revenues
Revenues by segment for the nine months ended September 30, 2023 and 2022 were as follows:
| For the Nine Months Ended September 30, | Increase | |||||||||||||||
| 2023 | 2022 | (Decrease) | % | |||||||||||||
| GIGA | $ | 27,723,000 | $ | 21,530,000 | $ | 6,193,000 | 29 | % | ||||||||
| TurnOnGreen | 2,766,000 | 3,853,000 | (1,087,000 | ) | -28 | % | ||||||||||
| SMC | 21,939,000 | 17,114,000 | 4,825,000 | 28 | % | |||||||||||
| Sentinum | ||||||||||||||||
| Revenue, cryptocurrency mining | 23,273,000 | 11,398,000 | 11,875,000 | 104 | % | |||||||||||
| Revenue, commercial real estate leases | 1,116,000 | 822,000 | 294,000 | 36 | % | |||||||||||
| Fintech: | ||||||||||||||||
| Revenue, lending and trading activities | 4,337,000 | 32,224,000 | (27,887,000 | ) | -87 | % | ||||||||||
| Other | 63,000 | 220,000 | (157,000 | ) | -71 | % | ||||||||||
| Energy | 38,713,000 | - | 38,713,000 | — | ||||||||||||
| Total revenue | $ | 119,930,000 | $ | 87,161,000 | $ | 32,769,000 | 38 | % | ||||||||
GIGA
The $6.2 million increase in our GIGA segment revenue for the nine months ended September 30, 2023 included $1.6 million attributable to our acquisition of Giga-tronics Incorporated on September 8, 2022. Continued conflicts and tensions worldwide are driving defense-related investments in force protection technologies at GIGA across the United States, UK, Europe, Asia, and the Middle East. Additionally, demand for key electronics solutions, particularly for customers in medicine and telecommunications, accelerated in the nine months ended September 30, 2023.
TurnOnGreen
TurnOnGreen revenues were down $1.1 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022 due to the cancellation of large projects that contributed to revenue in 2022.
SMC
SMC revenues increased by $4.8 million primarily due to the acquisition of SMC in June 2022.
Sentinum
Revenues from Sentinum’s cryptocurrency mining operations increased $11.9 million as we increased our cryptocurrency mining activities from the prior period, partially offset by 17% lower average Bitcoin prices and a 66% increase in average Bitcoin mining difficulty level in the current year period.
Fintech
Revenues from our lending and trading activities were $4.3 million due to realized gains for the nine months ended September 30, 2023 from our investment portfolio. During the nine months ended September 30, 2022, Ault Lending generated income from realized gains from investments in marketable securities as well as shares of common stock underlying equity securities issued to Ault Lending in certain financing transactions. Revenue from lending and trading activities for the nine months ended September 30, 2023 included an approximate $3.6 million unrealized loss from our investment in Alzamend. Ault Lending also generates revenue through origination fees charged to borrowers and interest generated from each loan.
Revenues from our trading activities for the nine months ended September 30, 2023 included net losses on equity securities, including unrealized gains and losses from market price changes. These gains and losses have caused, and will continue to cause, significant volatility in our periodic earnings.
| 10 |
Energy
Energy revenues increased by $38.7 million for the nine months ended September 30, 2023, due to the acquisition of the Circle 8 crane operations in December 2022.
Gross Margins
Gross margins decreased to 24% for the nine months ended September 30, 2023, compared to 50% for the nine months ended September 30, 2022. Our gross margins of 24% recognized during the nine months ended September 30, 2023 were impacted by negative margins from our Sentinum cryptocurrency mining segment due to the decline in the price of Bitcoin coupled with an increase in Bitcoin mining difficulty level, offset by favorable margins from our lending and trading activities as compared to other segments. Excluding the effects of margin from our lending and trading activities and cryptocurrency mining operations, our adjusted gross margins for the nine months ended September 30, 2023 and 2022 would have been 32% and 29%, respectively.
Research and Development
Research and development expenses increased by $3.5 million for the nine months ended September 30, 2023, primarily due to expenditures related to development work on ROI’s BitNile metaverse platform.
Selling and Marketing
Selling and marketing expenses were $26.4 million for the nine months ended September 30, 2023, compared to $20.9 million for the nine months ended September 30, 2022, an increase of $5.5 million, or 26%. The increase was the result of $6.4 million higher advertising and promotion costs related to ROI’s BitNile metaverse platform, partially offset by a $2.6 million decline in employee related costs and consulting expenses. The increase is also attributable to $1.5 million increases in sales and marketing costs from SMC, which was acquired in June 2022.
General and Administrative
General and administrative expenses were $59.5 million for the nine months ended September 30, 2023, compared to $44.4 million for the nine months ended September 30, 2022, an increase of $15.2 million, or 34%. General and administrative expenses increased from the comparative prior period, mainly due to increases from new acquisitions:
| · | general and administrative costs of $8.4 million from Circle 8, which was acquired in December 2022; |
| · | general and administrative costs of $5.3 million from SMC, which was acquired in June 2022; |
| · | general and administrative costs of $5.3 million from ROI, which was acquired in March 2023; |
| · | general and administrative costs of $4.3 million from GIGA, which was acquired in September 2022; and |
| · | general and administrative costs of $1.2 million from AVLP, which was acquired in June 2022. |
The increases above were partially offset by the following decreases in general and administrative expenses:
| · | $6.5 million lower performance bonus related to realized gains on trading activities; and |
| · | $2.4 million lower corporate legal fees. |
Impairment of AVLP Goodwill and Intangible Assets
Goodwill
We test the recorded amount of goodwill for impairment on an annual basis on December 31 or more frequently if there are indicators that the carrying amount of the goodwill exceeds its carried value. We performed a goodwill impairment test as of June 30, 2023 related to AVLP as there were indicators of impairment related to certain unforeseen business developments and changes in financial projections.
The valuation of the AVLP reporting unit was determined using a market and income approach methodology of valuation.
| 11 |
The income approach was based on the projected cash flows discounted to their present value using discount rates, that in the Company’s judgment, consider the timing and risk of the forecasted cash flows using internally developed forecasts and assumptions. Under the income approach, the discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. The analysis included assumptions regarding AVLP’s revenue forecast and discount rates of 26.7% using a weighted average cost of capital analysis. The market approach utilized the guideline public company method.
The results of the quantitative test indicated the fair value of the AVLP reporting unit did not exceed its carrying amounts, including goodwill, in excess of the carrying value of the goodwill. As a result, the entire $18.6 million carrying amount of AVLP’s goodwill was recognized as a non-cash impairment charge during the nine months ended September 30, 2023.
Intangible Assets
Due to indicators of impairment, AVLP intangible assets were tested for impairment as of June 30, 2023. Based on internally developed forecasts of undiscounted expected future cash flows, it was determined that the carrying amount of the assets were not recoverable and, based on an assessment of the fair value of the assets, impairment of $17.0 million was recognized as a non-cash impairment charge during the nine months ended September 30, 2023.
The tradenames and patents/developed technology intangible assets were valued using the relief-from-royalty method. The relief-from-royalty method is one of the methods under the income approach wherein estimates of a company’s earnings attributable to the intangible asset are based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying royalty rates of 18% for patents and developed technology and 0.25% for trademarks. The resulting net annual royalty payments are then discounted to present value using a discount factor of 25.7%.
Impairment of Property and Equipment
During the nine months ended September 30, 2023, we recognized an impairment charge of $3.9 million related to property and equipment at ROI’s Agora and Bitstream Bitcoin mining operations as they have been unable to commence Bitcoin mining operations, either for themselves or from others through hosting arrangements.
Impairment of Deposit Due to Vendor Bankruptcy Filing
During the nine months ended September 30, 2022, Compute North filed for chapter 11 bankruptcy protection. We had a deposit of approximately $2.0 million with Compute North for services yet to be performed by Compute North. We assessed this financial exposure and recorded an impairment of the deposit totaling $2.0 million during the nine months ended September 30, 2022.
Impairment of Mined Cryptocurrency
Impairment of mined cryptocurrency for the nine months ended September 30, 2023 and 2022 was $0.4 million and $2.9 million, respectively. Impairment losses are attributable to the volatility of the Bitcoin market as market price of Bitcoin drops below our carrying value within the respective periods. The impairment of mined cryptocurrency for the nine months ended September 30, 2023 is lower than the comparable prior year period as the average amount of digital currency held decreased during the first half of 2023 as we generally sold our mined digital currency the next business day.
Other Expense, Net
Other expense, net was $32.7 million for the nine months ended September 30, 2023, compared to $30.7 million for the nine months ended September 30, 2022.
Interest and other income was $3.9 million for the nine months ended September 30, 2023, compared to $1.3 million for the nine months ended September 30, 2022. The increase in interest and other income is primarily due to higher interest rates resulting in higher income from ADRT’s cash and marketable securities held in the trust account as a result of redemptions that occurred in June 2023.
Interest expense was $30.5 million for the nine months ended September 30, 2023, compared to $32.1 million for the nine months ended September 30, 2022. Interest expense for the nine months ended September 30, 2023 included amortization of debt discount of $18.2 million, forbearance and extension fees of $7.3 million and contractual interest of $5.0 million. Interest expense for the nine months ended September 30, 2022 related primarily to amortization of debt discount of $26.4 million, contractual interest of $4.4 million, and forbearance and extension fees of $1.2 million.
| 12 |
The $1.5 million loss on extinguishment of debt for the nine months ended September 30, 2023 related to the August 2023 exchange of preferred stock liabilities for secured notes. The preferred stock liabilities were remeasured from their fair value prior to the exchange to the fair value of the secured notes at the date of the exchange.
Loss from investment in unconsolidated entity was $0 for the nine months ended September 30, 2023, compared to $0.9 million for the nine months ended September 30, 2022, representing our share of losses from our equity method investment in AVLP prior to the June 1, 2022 acquisition.
Cumulative downward adjustments for impairments for our equity securities without readily determinable fair values held at September 30, 2023 were $9.6 million.
Income Tax Provision
Provision for income taxes was $0.5 million during the three months ended September 30, 2023 compared to a provision of $0.4 million during the nine months ended September 30, 2022. The effective income tax provision rate was 0.4% for the nine months ended September 30, 2023 as compared to a provision of 0.6% for the nine months ended September 30, 2022.
Liquidity and Capital Resources
On September 30, 2023, excluding cash and cash equivalents from discontinued operations, we had cash and cash equivalents of $8.7 million (excluding restricted cash of $1.9 million), compared to cash and cash equivalents of $7.9 million (excluding restricted cash of $0.7 million) at December 31, 2022. The increase in cash and cash equivalents was primarily due to cash provided by operating activities and cash provided by financing activities related to the sale of common and preferred stock, as well as proceeds from convertible notes partially offset by the payment of debt, purchases of property and equipment and investments in equity securities.
Net cash used in operating activities totaled $2.2 million for the nine months ended September 30, 2023, compared to net cash provided by operating activities of $21.9 million for the nine months ended September 30, 2022. Cash used in operating activities for the nine months ended September 30, 2023 included $71.2 million net cash provided by marketable securities from trading activities related to the operations of Ault Lending and $21.3 million proceeds from the sale of cryptocurrencies from our Sentinum Bitcoin mining operations, offset by operating losses and changes in working capital. Net cash used in operating activities for the nine months ended September 30, 2023 included $3.6 million cash used in operating activities from discontinued operations.
Net cash used in investing activities was $22.9 million for the nine months ended September 30, 2023, compared to $115.4 million for the nine months ended September 30, 2022, which included $80.1 million of capital expenditures, primarily for Bitcoin mining equipment. Net cash used in investing activities for the nine months ended September 30, 2023 was primarily related to $8.7 million capital expenditures and the $10.7 million purchase of equity securities, partially offset by proceeds from the sale of fixed assets of $4.5 million. Net cash used in investing activities for the nine months ended September 30, 2023 included $6.1 million cash used in investing activities from discontinued operations.
Net cash provided by financing activities was $23.8 million for the nine months ended September 30, 2023, compared to net cash provided by financing activities of $86.1 million for the nine months ended September 30, 2022, and primarily reflects the following transactions:
| · | 2022 Common ATM Offering – During the nine months ended September 30, 2023, we sold an aggregate of 0.1 million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $4.2 million and effective March 17, 2023, the 2022 Common ATM Offering was terminated; |
| · | 2022 Preferred ATM Offering – During the nine months ended September 30, 2023, we sold an aggregate of 162,175 shares of Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for net proceeds of $3.0 million and effective June 16, 2023, the 2022 Preferred ATM Offering was terminated; |
| · | 2023 Common ATM Offering –On June 9, 2023, we entered into the 2023 Common ATM Offering with Ascendiant Capital. During the nine months ended September 30, 2023, we sold an aggregate of 10.8 million shares of common stock pursuant to the 2023 Common ATM Offering for gross proceeds of $21.2 million; |
| 13 |
| · | $58.1 million payments on notes payable, partially offset by $40.6 million proceeds from notes payable; and |
| · | $9.2 million proceeds from convertible notes payable, partially offset by $0.7 million payments on convertible notes payable. |
Net provided by financing activities for the nine months ended September 30, 2023 included $5.2 million cash provided by financing activities from discontinued operations.
Financing Transactions Subsequent to September 30, 2023
Financing transactions subsequent to September 30, 2023 included the following:
2023 Common ATM Offering
During the period between October 1, 2023 through November 17, 2023, we sold an aggregate of 54.2 million shares of common stock pursuant to the 2023 Common ATM Offering for gross proceeds of $10.0 million.
Senior Secured Convertible Note, Related Party
On October 13, 2023 (the “Closing Date”), we entered into a note purchase agreement with Ault & Company, pursuant to which we sold to the Purchaser (i) a senior secured convertible promissory note in the principal face amount of $17.5 million (the “Note”) and warrants (the “Warrants”) to purchase shares of our common stock for a total purchase price of up to $17.5 million (the “Transaction”).
The purchase price was comprised of the following: (i) cancellation of $4.6 million of cash loaned by Ault & Company to us since June 8, 2023 pursuant to the loan agreement; (ii) cancellation of $11.6 million of term loans made by us to Ault & Company in exchange for Ault & Company assuming liability for the payment of $11.6 million of secured notes; and (iii) the retirement of $1.25 million stated value of 125,000 shares of our Series B Convertible Preferred Stock (representing all shares issued and outstanding of that series) being transferred from Ault & Company to us.
The Note has a principal face amount of $17.5 million and has a maturity date of October 12, 2028 (the “Maturity Date”). The Note bears interest at the rate of 10% per annum. Interest is payable, at the Purchaser’s option, in cash or shares of Common Stock at the applicable Conversion Price (as defined below). Accrued interest is payable on the Maturity Date, provided, however, that Ault & Company has the option, on not less than 10 calendar days’ notice to us, to require payment of accrued but unpaid interest on a monthly basis in arrears.
The Note is convertible into shares of common stock at a conversion price equal to the greater of (i) $0.10 per share (the “Floor Price”), and (ii) the lesser of (A) $0.2952 or (B) 105% of the volume weighted average price of the common stock during the ten trading days immediately prior to the date of conversion (the “Conversion Price”). The Conversion Price is subject to adjustment in the event of an issuance of common stock at a price per share lower than the Conversion Price then in effect, as well as upon customary stock splits, stock dividends, combinations or similar events. The Floor Price shall not be adjusted for stock dividends, stock splits, stock combinations and other similar transactions.
The Warrants grant Ault & Company the right to purchase 47,685,988 shares of common stock. The Warrants have a five-year term, expiring on the fifth anniversary of the Closing Date, and become exercisable on the first business day after the six-month anniversary of the Closing Date. The exercise price of the Warrants is $0.1837, which is subject to adjustment in the event of customary stock splits, stock dividends, combinations or similar events.
In addition, we and various of our subsidiaries granted Ault & Company a senior security interest in substantially all of our assets as collateral for the repayment of the Note, which is subordinated to the security interest granted to the holders of the outstanding secured promissory notes.
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Series C Preferred Purchase Agreement, Related Party
On November 6, 2023, we entered into a securities purchase agreement (the “SPA”) with Ault & Company, pursuant to which we agreed to sell to Ault & Company up to 50,000 shares of Series C convertible preferred stock and warrants to purchase up to 370 million shares of common stock for a total purchase price of up to $50 million, of which up to $17.5 million of the Note may be tendered for cancellation. The consummation of the transactions contemplated by the SPA, specifically the conversion of the Series C convertible preferred stock and the exercise of the warrants in an aggregate number in excess of 19.99% on the execution date of the Agreement, are subject to various customary closing conditions as well as regulatory and stockholder approval. In addition to customary closing conditions, the closing of the financing is also conditioned upon the receipt by Ault & Company of financing to consummate the transaction. The SPA contains customary termination provisions for Ault & Company under certain circumstances, and the Agreement shall automatically terminate if the closing has not occurred prior to December 29, 2023, although such date may be extended by Ault & Company for a period of 90 days as set forth in the SPA.
Series D Preferred Purchase Agreement, Related Party
On November 15, 2023, we purchased from ROI 603.44 shares of ROI’s newly designated Series D Convertible Preferred Stock for a total purchase price of $15.1 million. The purchase price was paid by the cancellation of $15.1 million of cash advances made by us to ROI between January 1, 2023 and November 9, 2023. The preferred shares each have a stated value of $25,000 per share and each preferred share is convertible into a number of shares of ROI’s common stock determined by dividing the stated value by $0.51, or an aggregate of 29.6 million shares of ROI common stock, subject to adjustment in the event of an issuance of ROI common stock at a price per share lower than the conversion price, as well as upon customary stock splits, stock dividends, combinations or similar events. The preferred shares holders are entitled to receive dividends at a rate of 10% per annum from issuance until November 14, 2033. In addition, for as long as at least 25% of the Preferred Shares remain outstanding, ROI must obtain our consent with respect to certain corporate events, including reclassifications, fundamental transactions, stock redemptions or repurchases, increases in the number of directors, and declarations or payment of dividends, and further ROI is subject to certain negative covenants, including covenants against issuing additional shares of capital stock or derivative securities, incurring indebtedness, engaging in related party transactions, selling of properties having a value of over $50,000, altering the number of directors, and discontinuing the business of any subsidiary, subject to certain exceptions and limitations.
Critical Accounting Policies
Variable Interest Entities
The accounting guidance requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a Variable Interest Entity (“VIE”); to eliminate the solely quantitative approach previously required for determining the primary beneficiary of a VIE; to add an additional reconsideration event for determining whether an entity is a VIE when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide readers of financial statements with more transparent information about an enterprise’s involvement in a VIE.
For VIEs, the Company assesses whether it is the primary beneficiary as prescribed by the accounting guidance on the consolidation of a VIE.
The Company evaluates its business relationships with related parties to identify potential VIEs under ASC 810, Consolidation. The Company consolidates VIEs in which it is considered to be the primary beneficiary. Entities are considered to be the primary beneficiary if they have both of the following characteristics: (i) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (ii) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE. The Company’s judgment with respect to its level of influence or control of an entity involves the consideration of various factors including the form of its ownership interest, its representation in the entity’s governance, the size of its investment, estimates of future cash flows, its ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to replace the Company as manager and/or liquidate the joint venture, if applicable.
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Business Combination
We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Acquired customer relations, technology, trade names and know how are recognized at fair value. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquire is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable for a smaller reporting company.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Our principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon our evaluation, each of our principal executive officer and principal financial officer has concluded that the Company’s internal control over financial reporting was not effective as of the end of the period covered by this Quarterly Report on Form 10-Q because the Company has not yet completed its remediation of the material weakness previously identified and disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, the end of its most recent fiscal year.
Management has identified the following material weaknesses:
| 1. | We do not have sufficient resources in our accounting department, which restricts our ability to gather, analyze and properly review information related to financial reporting, including applying complex accounting principles relating to consolidation accounting, fair value estimates and analysis of financial instruments for proper classification in the consolidated financial statements, in a timely manner; |
| 2. | Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties during our assessment of our disclosure controls and procedures and concluded that the control deficiency that resulted represented a material weakness; |
| 3. | Our primary user access controls (i.e., provisioning, de-provisioning, privileged access and user access reviews) to ensure appropriate authorization and segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to appropriate personnel were not designed and/or implemented effectively. We did not design and/or implement sufficient controls for program change management to certain financially relevant systems affecting our processes; and |
| 4. | The Company did not design and/or implement user access controls to ensure appropriate segregation of duties or program change management controls for certain financially relevant systems impacting the Company’s processes around revenue recognition and digital assets to ensure that IT program and data changes affecting the Company’s (i) financial IT applications, (ii) digital currency mining equipment, and (iii) underlying accounting records, are identified, tested, authorized and implemented appropriately to validate that data produced by its relevant IT system(s) were complete and accurate. Automated process-level controls and manual controls that are dependent upon the information derived from such financially relevant systems were also determined to be ineffective as a result of such deficiency. In addition, the Company has not effectively designed a manual key control to detect material misstatements in revenue. |
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Planned Remediation
Management continues to work to improve its controls related to our material weaknesses, specifically relating to user access and change management surrounding our IT systems and applications. Management will continue to implement measures to remediate material weaknesses, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) enhancing design and documentation related to both user access and change management processes and control activities; and (ii) developing and communicating additional policies and procedures to govern the area of IT change management. In order to achieve the timely implementation of the above, management has commenced the following actions and will continue to assess additional opportunities for remediation on an ongoing basis:
| · | Engaging a third-party specialist to assist management with improving the Company’s overall control environment, focusing on change management and access controls; |
| · | Implementing new applications and systems that are aligned with management’s focus on creating strong internal controls; and |
| · | Continuing to increase headcount across the Company, with a particular focus on hiring individuals with strong Sarbanes Oxley and internal control backgrounds. |
We are currently working to improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. These material weaknesses will not be considered to be remediated until the applicable remediated controls are operating for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Despite the existence of these material weaknesses, we believe that the condensed consolidated financial statements included in the period covered by this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.
Changes in Internal Controls over Financial Reporting.
Except as detailed above, during the fiscal quarter ended September 30, 2023, there were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II — OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
Litigation Matters
The Company is involved in litigation arising from other matters in the ordinary course of business. We are regularly subject to claims, suits, regulatory and government investigations, and other proceedings involving labor and employment, commercial disputes, and other matters. Such claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil penalties, or other adverse consequences.
Certain of these outstanding matters include speculative, substantial or indeterminate monetary amounts. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss. We evaluate developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and make adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters.
With respect to our other outstanding matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such matters is inherently unpredictable and subject to significant uncertainties.
| ITEM 1A. | RISK FACTORS |
There are no updates or changes to the risk factors set forth in our amended Annual Report on Form 10-K/A for the year ended December 31, 2022.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
From July 1, 2023 through September 30, 2023, Ault Alpha LP purchased 147,000 shares of common stock. Ault Alpha LP may be deemed to be an “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended. The purchases were made through open market transactions.
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs | |||||||||||||
| July 1, 2023 – July 31, 2023 | 147,000 | $ | 4.22 | |||||||||||||
| August 1, 2023 – August 31, 2023 | - | $ | - | |||||||||||||
| September 1, 2023 – September 30, 2023 | - | $ | - | |||||||||||||
| Total | 147,000 | $ | 4.22 | - | - | |||||||||||
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From July 1, 2023 through September 30, 2023, Ault Alpha LP purchased 9,500 shares of series D preferred stock. Ault Alpha LP may be deemed to be an “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended. The purchases were made through open market transactions.
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs | |||||||||||||
| July 1, 2023 – July 31, 2023 | 9,500 | $ | 15.50 | |||||||||||||
| August 1, 2023 – August 31, 2023 | - | $ | - | |||||||||||||
| September 1, 2023 – September 30, 2023 | - | $ | - | |||||||||||||
| Total | 9,500 | $ | 15.50 | - | - | |||||||||||
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
On November 15, 2023, we filed the certificate of designation of the Series C convertible preferred stock to be issued pursuant to the SPA entered into with Ault & Company on November 6, 2023. As of the date of this filing, no shares of Series C convertible preferred stock have been issued.
| ITEM 6. | EXHIBITS |
| 20 |
| 21 |
_______________________
| * | Filed herewith. | |
| ** | Furnished herewith. |
| 22 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 20, 2023
| AULT ALLIANCE, INC. | ||||
| By: | /s/ William B. Horne | |||
| William B. Horne | ||||
| Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| By: | /s/ Kenneth S. Cragun | |||
| Kenneth S. Cragun | ||||
| Chief Financial Officer | ||||
| (Principal Accounting Officer) | ||||
23
Exhibit 3.18
DelawareThe First StatePage 1 6551776 8100Authentication: 204606135SR# 20233988486Date: 11-16-23You may verify this certificate online at corp.delaware.gov/authver.shtmlI, JEFFREY W. BULLOCK, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "AULT ALLIANCE, INC.", FILED IN THIS OFFICE ON THE FIFTEENTH DAY OF NOVEMBER, A.D. 2023, AT 5:38 O`CLOCK P.M.
EXHIBIT 31.1
CERTIFICATION
I, William B. Horne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ault Alliance, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: November 20, 2023
| /s/ William B. Horne | |
| Name: William B. Horne | |
| Title: Chief Executive Officer | |
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
I, Kenneth S. Cragun, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ault Alliance, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: November 20, 2023
| /s/ Kenneth S. Cragun | |
| Name: Kenneth S. Cragun | |
| Title: Chief Financial Officer | |
| (Principal Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Ault Alliance, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| Date: November 20, 2023 | ||
| By: /s/ William B. Horne | ||
| Name: William B. Horne | ||
| Title: Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 20, 2023 | ||
| By: /s/ Kenneth S. Cragun | ||
| Name: Kenneth S. Cragun | ||
| Title: Chief Financial Officer | ||
| (Principal Accounting Officer) |