UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☑ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended September 30, 2022 |
| 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
BITNILE HOLDINGS, 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 | NILE | 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 þ 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 þ 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 ¨ | Accelerated filer ¨ |
| Non-accelerated filer þ | Smaller reporting company |
| Emerging growth company ¨ |
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 þ
At November 18, 2022 the registrant had outstanding shares of common stock.
BITNILE HOLDINGS, 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, 2021, 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. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. 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.
BITNILE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-1 |
BITNILE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| LONG TERM LIABILITIES | ||||||||
| Operating lease liability, non-current | 4,980,000 | 4,213,000 | ||||||
| Notes payable | 58,310,000 | 55,055,000 | ||||||
| Convertible notes payable | 13,878,000 | 468,000 | ||||||
| Deferred underwriting commissions of Ault Disruptive subsidiary | 3,450,000 | 3,450,000 | ||||||
| TOTAL LIABILITIES | 155,028,000 | 145,106,000 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Redeemable noncontrolling interests in equity of subsidiaries | 117,114,000 | 116,725,000 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Series A Convertible Preferred Stock, $ stated value per share, | ||||||||
| $ par value – shares authorized; shares | ||||||||
| issued and outstanding at September 30, 2022 and December 31, 2021 | ||||||||
| (redemption amount and liquidation preference of $176,000 as of | ||||||||
| September 30, 2022 and December 31, 2021) | ||||||||
| Series B Convertible Preferred Stock, $ stated value per share, | ||||||||
| share, $ par value – shares authorized; shares issued | ||||||||
| and outstanding at September 30, 2022 and December 31, 2021 (liquidation | ||||||||
| preference of $1,190,000 at September 30, 2022 and December 31, 2021) | ||||||||
| 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, 2022 and December 31, 2021, respectively (liquidation | ||||||||
| preference of $3,665,450 and $0 as of September 30, 2022 and December 31, 2021, respectively) | - | - | ||||||
| Class A Common Stock, $ par value – shares authorized; | 341,000 | 84,000 | ||||||
| and shares issued and outstanding at September 30, | ||||||||
| 2022 and December 31, 2021, respectively | ||||||||
| Class B Common Stock, $ par value – shares authorized; | ||||||||
| shares issued and outstanding at September 30, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | 557,418,000 | 385,644,000 | ||||||
| Accumulated deficit | (207,647,000 | ) | (145,600,000 | ) | ||||
| Accumulated other comprehensive loss | (1,557,000 | ) | (106,000 | ) | ||||
| Treasury stock, at cost | (28,788,000 | ) | (13,180,000 | ) | ||||
| TOTAL BITNILE HOLDINGS STOCKHOLDERS’ EQUITY | 319,767,000 | 226,842,000 | ||||||
| Non-controlling interest | 18,996,000 | 1,613,000 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 338,763,000 | 228,455,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 610,905,000 | $ | 490,286,000 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-2 |
BITNLE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | 27,031,000 | $ | 7,803,000 | $ | 43,539,000 | $ | 24,272,000 | ||||||||
| Revenue, cryptocurrency mining | 3,874,000 | 272,000 | 11,398,000 | 693,000 | ||||||||||||
| Revenue, hotel operations | 5,513,000 | 12,809,000 | ||||||||||||||
| Revenue, lending and trading activities | 13,360,000 | (38,869,000 | ) | 32,224,000 | 19,615,000 | |||||||||||
| Total revenue | 49,778,000 | (30,794,000 | ) | 99,970,000 | 44,580,000 | |||||||||||
| Cost of revenue, products | 20,193,000 | 5,011,000 | 30,985,000 | 16,011,000 | ||||||||||||
| Cost of revenue, cryptocurrency mining | 5,255,000 | 260,000 | 12,206,000 | 646,000 | ||||||||||||
| Cost of revenue, hotel operations | 3,230,000 | 8,350,000 | ||||||||||||||
| Total cost of revenue | 28,678,000 | 5,271,000 | 51,541,000 | 16,657,000 | ||||||||||||
| Gross profit | 21,100,000 | (36,065,000 | ) | 48,429,000 | 27,923,000 | |||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 521,000 | 524,000 | 1,945,000 | 1,657,000 | ||||||||||||
| Selling and marketing | 7,428,000 | 1,993,000 | 20,888,000 | 4,740,000 | ||||||||||||
| General and administrative | 15,947,000 | 11,292,000 | 48,666,000 | 24,376,000 | ||||||||||||
Impairment of deposit due to vendor bankruptcy filing | 2,000,000 | 2,000,000 | ||||||||||||||
| Impairment of mined cryptocurrency | 515,000 | 2,930,000 | ||||||||||||||
| Total operating expenses | 26,411,000 | 13,809,000 | 76,429,000 | 30,773,000 | ||||||||||||
| Loss from operations | (5,311,000 | ) | (49,874,000 | ) | (28,000,000 | ) | (2,850,000 | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Interest and other income | 725,000 | 125,000 | 1,255,000 | 176,000 | ||||||||||||
| Accretion of discount on note receivable, related party | 4,210,000 | 4,210,000 | ||||||||||||||
| Interest expense | (3,972,000 | ) | (140,000 | ) | (35,827,000 | ) | (475,000 | ) | ||||||||
| Change in fair value of marketable equity securities | 114,000 | (750,000 | ) | 355,000 | (705,000 | ) | ||||||||||
| Realized gain on digital currencies and marketable securities | 595,000 | 30,000 | 661,000 | 428,000 | ||||||||||||
| Loss from investment in unconsolidated entity | (924,000 | ) | ||||||||||||||
| Gain on extinguishment of debt | 929,000 | |||||||||||||||
| Change in fair value of warrant liability | (3,000 | ) | 259,000 | (27,000 | ) | (130,000 | ) | |||||||||
| Total other (expenses) income, net | (2,541,000 | ) | 3,734,000 | (34,507,000 | ) | 4,433,000 | ||||||||||
| (Loss) income before income taxes | (7,852,000 | ) | (46,140,000 | ) | (62,507,000 | ) | 1,583,000 | |||||||||
| Income tax (provision) benefit | (144,000 | ) | 3,366,000 | (361,000 | ) | (144,000 | ) | |||||||||
| Net (loss) income | (7,996,000 | ) | (42,774,000 | ) | (62,868,000 | ) | 1,439,000 | |||||||||
| Net loss (income) attributable to non-controlling interest | 725,000 | (96,000 | ) | 1,061,000 | (93,000 | ) | ||||||||||
| Net (loss) income attributable to BitNile Holdings, Inc. | (7,271,000 | ) | (42,870,000 | ) | (61,807,000 | ) | 1,346,000 | |||||||||
| Preferred dividends | (190,000 | ) | (4,000 | ) | (239,000 | ) | (13,000 | ) | ||||||||
| Net (loss) income available to common stockholders | $ | (7,461,000 | ) | $ | (42,874,000 | ) | $ | (62,046,000 | ) | $ | 1,333,000 | |||||
| Basic net (loss) income per common share | $ | (0.03 | ) | $ | (0.73 | ) | $ | (0.27 | ) | $ | 0.03 | |||||
| Diluted net (loss) income per common share | $ | (0.03 | ) | $ | (0.73 | ) | $ | (0.27 | ) | $ | 0.03 | |||||
| Weighted average basic common shares outstanding | 294,141,000 | 58,987,000 | 225,662,000 | 49,714,000 | ||||||||||||
| Weighted average diluted common shares outstanding | 294,141,000 | 58,987,000 | 225,662,000 | 50,145,000 | ||||||||||||
| Comprehensive (loss) income | ||||||||||||||||
| Net (loss) income available to common stockholders | $ | (7,461,000 | ) | $ | (42,874,000 | ) | $ | (62,046,000 | ) | $ | 1,333,000 | |||||
| Other comprehensive income (loss) | ||||||||||||||||
| Foreign currency translation adjustment | 306,000 | (182,000 | ) | (1,452,000 | ) | (141,000 | ) | |||||||||
| Net unrealized loss on derivative securities of related party | (4,849,000 | ) | (7,773,000 | ) | ||||||||||||
| Other comprehensive income (loss) | 306,000 | (5,031,000 | ) | (1,452,000 | ) | (7,914,000 | ) | |||||||||
| Total comprehensive loss | $ | (7,155,000 | ) | $ | (47,905,000 | ) | $ | (63,498,000 | ) | $ | (6,581,000 | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-3 |
BITNILE HOLDINGS, 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 | $ | 324,440,579 | $ | 324,000 | $ | 549,713,000 | $ | (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 common stock for GIGA acquisition | - | - | 1,669,000 | 1,669,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash | - | 17,006,403 | 17,000 | 4,540,000 | 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 | $ | 341,446,982 | $ | 341,000 | $ | 557,418,000 | $ | (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-4 |
BITNILE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Three Months Ended September 30, 2021
| Series A & B | Additional | Other | Total | |||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Non-Controlling | Treasury | Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interest | Stock | Equity | |||||||||||||||||||||||||||||||
| BALANCES, July 1, 2021 | 132,040 | $ | 56,159,963 | $ | 56,000 | $ | 311,759,000 | $ | (77,190,000 | ) | $ | (4,600,000 | ) | $ | 1,364,000 | $ | $ | 231,389,000 | ||||||||||||||||||||||
| Issuance of common stock for restricted stock awards | - | 449,373 | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||||||
| Options | - | - | 1,794,000 | 1,794,000 | ||||||||||||||||||||||||||||||||||||
| Restricted stock awards | - | - | 2,312,000 | 2,312,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of stock options at Gresham Worldwide | - | - | 42,000 | 42,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash | - | 6,737,585 | 7,000 | 16,432,000 | 16,439,000 | |||||||||||||||||||||||||||||||||||
| Financing cost in connection with sales of common
stock | - | - | (411,000 | ) | (411,000 | ) | ||||||||||||||||||||||||||||||||||
| Adjustment
to treasury stock for holdings in investment partnerships | - | - | (2,773,000 | ) | (2,773,000 | ) | ||||||||||||||||||||||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | (42,870,000 | ) | (42,870,000 | ) | ||||||||||||||||||||||||||||||||||
| Preferred dividends | - | - | (4,000 | ) | (4,000 | ) | ||||||||||||||||||||||||||||||||||
| Net unrealized gain on derivatives in related party | - | - | (4,849,000 | ) | (4,849,000 | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | (182,000 | ) | (182,000 | ) | ||||||||||||||||||||||||||||||||||
| Net income attributable to non-controlling interest | - | - | 96,000 | 96,000 | ||||||||||||||||||||||||||||||||||||
| Other | - | - | (2,000 | ) | (2,000 | ) | ||||||||||||||||||||||||||||||||||
| BALANCES, September 30, 2021 | 132,040 | $ | 63,346,921 | $ | 63,000 | $ | 331,886,000 | $ | (120,066,000 | ) | $ | (9,631,000 | ) | $ | 1,502,000 | $ | (2,773,000 | ) | $ | 200,981,000 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-5 |
BITNILE HOLDINGS, 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 | $ | 84,344,607 | $ | 84,000 | $ | 385,644,000 | $ | (145,600,000 | ) | $ | (106,000 | ) | $ | 1,613,000 | $ | (13,180,000 | ) | $ | 228,455,000 | ||||||||||||||||||||
| Issuance of common stock for restricted stock awards | - | 441,879 | ||||||||||||||||||||||||||||||||||||||
| Preferred stock issued | 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 common stock for GIGA acquisition | - | - | 1,669,000 | 1,669,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash | - | 256,660,496 | 257,000 | 167,726,000 | 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 | $ | 341,446,982 | $ | 341,000 | $ | 557,418,000 | $ | (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-6 |
BITNILE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Nine Months Ended September 30, 2021
| Series A & B | Additional | Other | Total | |||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Non-Controlling | Treasury | Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interest | Stock | Equity | |||||||||||||||||||||||||||||||
| BALANCES, January 1, 2021 | 132,040 | $ | 27,753,562 | $ | 28,000 | $ | 171,396,000 | $ | (121,396,000 | ) | $ | (1,718,000 | ) | $ | 822,000 | $ | $ | 49,132,000 | ||||||||||||||||||||||
| Issuance of common stock for restricted stock awards | - | 449,373 | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||||||
| Options | - | - | 1,833,000 | 1,833,000 | ||||||||||||||||||||||||||||||||||||
| Restricted stock awards | - | - | 2,312,000 | 2,312,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of stock options at Gresham Worldwide | - | - | 587,000 | 587,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash | - | 34,684,910 | 35,000 | 160,448,000 | 160,483,000 | |||||||||||||||||||||||||||||||||||
| Financing cost in connection with sales of common stock | - | - | (4,952,000 | ) | (4,952,000 | ) | ||||||||||||||||||||||||||||||||||
| Adjustment
to treasury stock for holdings in investment partnerships | - | - | (2,773,000 | ) | (2,773,000 | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of convertible notes payable |
|
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- |
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183,214 |
|
|
|
|
|
|
|
449,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449,000 |
|
||
| Issuance of common stock for conversion of convertible notes payable, related party |
|
|
- |
|
|
|
|
|
|
|
275,862 |
|
|
|
|
|
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000 |
|
||
| Comprehensive loss: | - | - | ||||||||||||||||||||||||||||||||||||||
| Net income | - | - | 1,346,000 | 1,346,000 | ||||||||||||||||||||||||||||||||||||
| Preferred dividends | - | (13,000 | ) | (13,000 | ) | |||||||||||||||||||||||||||||||||||
| Net unrealized loss on derivatives in related party | - | - | (7,773,000 | ) | (7,773,000 | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | (141,000 | ) | (141,000 | ) | ||||||||||||||||||||||||||||||||||
| Net income attributable to non-controlling interest | - | - | 93,000 | 93,000 | ||||||||||||||||||||||||||||||||||||
| Other | - | - | (3,000 | ) | 1,000 | (2,000 | ) | |||||||||||||||||||||||||||||||||
| BALANCES, September 30, 2021 | 132,040 | $ | 63,346,921 | $ | 63,000 | $ | 331,886,000 | $ | (120,066,000 | ) | $ | (9,631,000 | ) | $ | 1,502,000 | $ | (2,773,000 | ) | $ | 200,981,000 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-7 |
BITNILE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (62,868,000 | ) | $ | 1,439,000 | |||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 11,977,000 | 1,713,000 | ||||||
| Interest expense – debt discount | 26,958,000 | 61,000 | ||||||
| Gain on extinguishment of debt | (929,000 | ) | ||||||
| Change in fair value of warrant liability | (917,000 | ) | (259,000 | ) | ||||
| Accretion of original issue discount on notes receivable – related party | (4,213,000 | ) | ||||||
| Accretion of original issue discount on notes receivable | (618,000 | ) | (366,000 | ) | ||||
| Increase in accrued interest on notes receivable – related party | (148,000 | ) | (119,000 | ) | ||||
| Stock-based compensation | 5,746,000 | 4,732,000 | ||||||
Impairment of deposit due to vendor bankruptcy filing | 2,000,000 | |||||||
| Impairment of cryptocurrencies | 2,930,000 | |||||||
| Realized gains on sale of marketable securities | (19,194,000 | ) | (15,154,000 | ) | ||||
| Unrealized losses on marketable securities | 16,937,000 | 6,353,000 | ||||||
| Unrealized losses (gains) on investments in common stock, related parties | 5,676,000 | (6,150,000 | ) | |||||
| Unrealized gains on equity securities | (32,949,000 | ) | (2,795,000 | ) | ||||
| Loss from investment in unconsolidated entity | 924,000 | |||||||
| Loss on remeasurement of investment in unconsolidated entity | 2,700,000 | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Marketable equity securities | 68,532,000 | (34,196,000 | ) | |||||
| Accounts receivable | (3,022,000 | ) | (1,270,000 | ) | ||||
| Accrued revenue | (109,000 | ) | (166,000 | ) | ||||
| Inventories | (5,867,000 | ) | (492,000 | ) | ||||
| Prepaid expenses and other current assets | 1,780,000 | (5,155,000 | ) | |||||
| Digital currencies | (12,227,000 | ) | ||||||
| Other assets | (2,944,000 | ) | (407,000 | ) | ||||
| Accounts payable and accrued expenses | 8,974,000 | (1,082,000 | ) | |||||
| Other current liabilities | 2,210,000 | |||||||
| Lease liabilities | (1,334,000 | ) | (666,000 | ) | ||||
| Net cash provided by (used in) operating activities | 12,937,000 | (56,911,000 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (84,500,000 | ) | (28,145,000 | ) | ||||
| Investment in promissory notes and other, related parties | (2,200,000 | ) | (4,994,000 | ) | ||||
| Investments in common stock and warrants, related parties | (4,840,000 | ) | (19,590,000 | ) | ||||
| Investment in real property, related party | (2,670,000 | ) | ||||||
| Proceeds from sale of investment in real property, related party | 2,670,000 | |||||||
| 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 | (3,901,000 | ) | ||||||
| Purchase of marketable equity securities | (1,981,000 | ) | (2,144,000 | ) | ||||
| Sales of marketable equity securities | 11,748,000 | 430,000 | ||||||
| Investments in loans receivable | (7,081,000 | ) | ||||||
| Principal payments on loans receivable | 10,525,000 | |||||||
| Sale of digital currencies | 8,952,000 | |||||||
| Investments in equity securities | (22,449,000 | ) | (14,287,000 | ) | ||||
| Net cash used in investing activities | (106,408,000 | ) | (68,730,000 | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-8 |
BITNILE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from financing activities: | ||||||||
| Gross proceeds from sales of common stock | $ | 167,983,000 | $ | 160,483,000 | ||||
| Financing cost in connection with sales of common stock | (4,103,000 | ) | (4,952,000 | ) | ||||
| Proceeds from sales of preferred stock | 3,873,000 | |||||||
| Financing cost in connection with sales of preferred stock | (602,000 | ) | ||||||
| Proceeds from notes payable | 18,565,000 | 724,000 | ||||||
| Repayment of margin accounts | (16,111,000 | ) | ||||||
| Payments on notes payable | (67,698,000 | ) | (2,263,000 | ) | ||||
| Payments of preferred dividends | (239,000 | ) | (13,000 | ) | ||||
| Purchase of treasury stock | (15,607,000 | ) | (2,773,000 | ) | ||||
| Payments on revolving credit facilities, net | (125,000 | ) | ||||||
| Net cash provided by financing activities | 86,061,000 | 151,081,000 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 920,000 | (73,000 | ) | |||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | (6,490,000 | ) | 25,367,000 | |||||
| Cash and cash equivalents and restricted cash at beginning of period | 21,233,000 | 18,680,000 | ||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 14,743,000 | $ | 44,047,000 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | 5,202,000 | $ | 712,000 | ||||
| Non-cash investing and financing activities: | ||||||||
| Conversion of convertible notes payable into shares of common stock | $ | $ | 449,000 | |||||
| Settlement of accounts payable with digital currency | $ | 417,000 | $ | 119,000 | ||||
| Conversion of investment in unconsolidated entity for acquisition of AVLP | $ | 20,706,000 | $ | |||||
| Conversion of convertible notes payable, related party into shares of common stock | $ | 400,000 | $ | 400,000 | ||||
| Conversion of debt and equity securities to marketable securities | $ | 40,324,000 | $ | 2,656,000 | ||||
| Conversion of loans receivable to marketable securities | $ | 3,650,000 | $ | |||||
| Conversion of interest receivable to marketable securities | $ | 250,000 | $ | |||||
| Conversion of loans receivable to debt and equity securities | $ | $ | 150,000 | |||||
| Recognition of new operating lease right-of-use assets and lease liabilities | $ | 2,188,000 | $ | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-9 |
1. DESCRIPTION OF BUSINESS
BitNile Holdings, Inc., a Delaware corporation (“BitNile” or the “Company”) was incorporated in September 2017. BitNile 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 provides mission-critical products that support a diverse range of industries, including oil exploration, defense/aerospace, industrial, automotive, medical/biopharma, karaoke audio equipment, hotel operations and textiles. In addition, the Company extends credit to select entrepreneurial businesses through a licensed lending subsidiary. BitNile was founded by Milton “Todd” Ault, III, its Executive Chairman and is led by Mr. Ault, 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 Mr. Ault and the other members of the Executive Committee. The Company has seven reportable segments:
| · | BitNile, Inc. (“BNI”) – cryptocurrency mining operations; |
| · | Ault Alliance, Inc. (“Ault Alliance”) – commercial lending, activist investing, advanced textiles processing technology, media, and digital learning; |
| · | Gresham Worldwide, Inc. (“GWW”) – defense solutions; |
| · | Imperalis Holding Corp., to be renamed TurnOnGreen, Inc. (“TurnOnGreen”) – commercial electronics solutions; |
| · | The Singing Machine Company, Inc. (“SMC”) – karaoke audio equipment; |
| · | Ault Global Real Estate Equities, Inc. (“AGREE”) – hotel operations and other commercial real estate holdings; and |
| · | Ault Disruptive Technologies Corporation (“Ault Disruptive”) – a special purpose acquisition company (“SPAC”). |
2. LIQUIDITY AND FINANCIAL CONDITION
As of September 30, 2022, the Company had cash and cash equivalents of $10.1 million and working capital of $25.7 million. The Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. The Company believes its current cash on hand is sufficient to meet its operating and capital requirements for at least the next twelve months from the date these financial statements are issued.
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 Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2022. The condensed consolidated balance sheet as of December 31, 2021 was derived from the Company’s audited 2021 financial statements contained in the above referenced Form 10-K. Results of the three and nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.
| F-10 |
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 2021 Annual Report.
Business Combination
The Company allocates 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. The purchase price allocation process requires management to make significant estimates and assumptions at the acquisition date with respect to intangible assets. 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. Direct transaction costs associated with the business combination are expensed as incurred. The Company includes the results of operations of the business that it has acquired in its 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 acquirer 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.
Oil and Gas Properties
The Company uses the successful efforts method of accounting for oil and natural gas producing properties, as further defined under Accounting Standards Codification (“ASC”) 932, Extractive Activities - Oil and Natural Gas. Under this method, costs to acquire mineral interests in oil and natural gas properties are capitalized. The costs of non-producing mineral interests and associated acquisition costs are capitalized as unproved properties pending the results of leasing efforts and drilling activities of exploration and production (“E&P”) operators on our interests. As unproved properties are determined to have proved reserves, the related costs are transferred to proved oil and gas properties. Capitalized costs for proved oil and natural gas mineral interests are depleted on a unit-of-production basis over total proved reserves. For depletion of proved oil and gas properties, interests are grouped in a reasonable aggregation of properties with common geological structural features or stratigraphic conditions.
Impairment of Oil and Gas Properties
The Company evaluates its producing properties for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When assessing proved properties for impairment, the Company compares the expected undiscounted future cash flows of the proved properties to the carrying amount of the proved properties to determine recoverability. If the carrying amount of proved properties exceeds the expected undiscounted future cash flows, the carrying amount is written down to the properties’ estimated fair value, which is measured as the present value of the expected future cash flows of such properties. The factors used to determine fair value include estimates of proved reserves, future commodity prices, timing of future production, and a risk-adjusted discount rate. The proved property impairment test is primarily impacted by future commodity prices, changes in estimated reserve quantities, estimates of future production, overall proved property balances, and depletion expense. If pricing conditions decline or are depressed, or if there is a negative impact on one or more of the other components of the calculation, we may incur proved property impairments in future periods.
Unproved oil and gas properties are assessed periodically for impairment of value, and a loss is recognized at the time of impairment by charging capitalized costs to expense. Impairment is assessed when facts and circumstances indicate that the carrying value may not be recoverable, at which point an impairment loss is recognized to the extent the carrying value exceeds the estimated recoverable value. Factors used in the assessment include but are not limited to commodity price outlooks and current and future operator activity in the respective basins. The Company recognized no impairment of unproved properties for the three and nine months ended September 30, 2022 and 2021.
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.
| F-11 |
Recently Adopted Accounting Standards
In May 2021, the Financial Accountings Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-04, “Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815- 40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.” The guidance became effective for the Company on January 1, 2022. The Company adopted the guidance on January 1, 2022, and has concluded the adoption did not have a material impact on its unaudited condensed consolidated financial statements.
In June 2016, the FASB issued 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 is effective for the Company beginning on January 1, 2023, with early adoption permitted. The Company does not expect that the adoption of this standard will have a significant impact on its condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)-Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Effective January 1, 2022, the Company early adopted ASU 2020-06 using the modified retrospective approach, which resulted in no impact on its condensed consolidated financial statements.
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. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. The Company is currently evaluating this guidance to determine the impact it may have on its condensed consolidated financial statements.
| F-12 |
4. 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, 2022 and 2021. 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, 2022:
| Three months ended September 30, 2022 | ||||||||||||||||||||||||||||
| GWW | TurnOn Green | Ault Alliance | SMC | BNI | AGREE | Total | ||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||||
| North America | $ | 2,472,000 | $ | 1,428,000 | $ | $ | 16,138,000 | $ | 4,146,000 | $ | 5,513,000 | $ | 29,697,000 | |||||||||||||||
| 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 | 5,513,000 | 36,418,000 | |||||||||||||||||||||
| 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 | $ | 5,513,000 | $ | 49,778,000 | ||||||||||||||
| 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 | |||||||||||||||||||||
| Hotel operations | - | - | - | - | - | 5,513,000 | 5,513,000 | |||||||||||||||||||||
| 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 | 5,513,000 | 36,418,000 | |||||||||||||||||||||
| 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 | $ | 5,513,000 | $ | 49,778,000 | ||||||||||||||
| 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 | $ | 5,513,000 | $ | 34,457,000 | ||||||||||||||
| 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 | $ | 5,513,000 | $ | 36,418,000 | ||||||||||||||
The Company’s disaggregated revenues consisted of the following for the nine months ended September 30, 2022:
| Nine months ended September 30, 2022 | ||||||||||||||||||||||||||||
| GWW | TurnOn Green | Ault Alliance | SMC | BNI | AGREE | Total | ||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||||
| North America | $ | 5,094,000 | $ | 3,262,000 | $ | 19,000 | $ | 16,138,000 | $ | 12,220,000 | $ | 12,809,000 | $ | 49,542,000 | ||||||||||||||
| 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 | 12,809,000 | 67,746,000 | |||||||||||||||||||||
| 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 | $ | 12,809,000 | $ | 99,970,000 | ||||||||||||||
| 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 | |||||||||||||||||||||
| Hotel operations | - | - | - | - | - | 12,809,000 | 12,809,000 | |||||||||||||||||||||
| 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 | 12,809,000 | 67,746,000 | |||||||||||||||||||||
| 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 | $ | 12,809,000 | $ | 99,970,000 | ||||||||||||||
| 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 | $ | 12,809,000 | $ | 59,150,000 | ||||||||||||||
| 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 | $ | 12,809,000 | $ | 67,746,000 | ||||||||||||||
| F-13 |
The Company’s disaggregated revenues consisted of the following for the three months ended September 30, 2021:
| Three Months ended September 30, 2021 | ||||||||||||||||
| GWW | TurnOnGreen | Ault Alliance | Total | |||||||||||||
| Primary Geographical Markets | ||||||||||||||||
| North America | $ | 1,415,000 | $ | 1,103,000 | $ | 608,000 | $ | 3,126,000 | ||||||||
| Europe | 1,848,000 | (97,000 | ) | - | 1,751,000 | |||||||||||
| Middle East | 2,949,000 | - | - | 2,949,000 | ||||||||||||
| Other | 161,000 | 88,000 | - | 249,000 | ||||||||||||
| Revenue from contracts with customers | 6,373,000 | 1,094,000 | 608,000 | 8,075,000 | ||||||||||||
| Revenue, lending and trading activities (North America) | (38,869,000 | ) | (38,869,000 | ) | ||||||||||||
| Total revenue | $ | 6,373,000 | $ | 1,094,000 | $ | (38,261,000 | ) | $ | (30,794,000 | ) | ||||||
| Major Goods | ||||||||||||||||
| Power supply units | $ | 1,256,000 | $ | 1,094,000 | $ | - | $ | 2,350,000 | ||||||||
| Defense systems | 2,940,000 | - | - | 2,940,000 | ||||||||||||
| Digital currency mining | - | - | 272,000 | 272,000 | ||||||||||||
| Other | 2,177,000 | - | 336,000 | 2,513,000 | ||||||||||||
| Revenue from contracts with customers | 6,373,000 | 1,094,000 | 608,000 | 8,075,000 | ||||||||||||
| Revenue, lending and trading activities | - | - | (38,869,000 | ) | (38,869,000 | ) | ||||||||||
| Total revenue | $ | 6,373,000 | $ | 1,094,000 | $ | (38,261,000 | ) | $ | (30,794,000 | ) | ||||||
| Timing of Revenue Recognition | ||||||||||||||||
| Goods transferred at a point in time | $ | 3,336,000 | $ | 1,094,000 | $ | 607,000 | $ | 5,037,000 | ||||||||
| Services transferred over time | 3,037,000 | - | - | 3,037,000 | ||||||||||||
| Revenue from contracts with customers | $ | 6,373,000 | $ | 1,094,000 | $ | $ | ||||||||||
The Company’s disaggregated revenues consisted of the following for the nine months ended September 30, 2021:
| Nine Months Ended September 30, 2021 | ||||||||||||||||
| GWW | TurnOnGreen | Ault Alliance | Total | |||||||||||||
| Primary Geographical Markets | ||||||||||||||||
| North America | $ | 5,444,000 | $ | 3,600,000 | $ | 1,459,000 | $ | 10,503,000 | ||||||||
| Europe | 5,600,000 | 318,000 | 5,918,000 | |||||||||||||
| Middle East | 7,845,000 | 7,845,000 | ||||||||||||||
| Other | 309,000 | 390,000 | 699,000 | |||||||||||||
| Revenue from contracts with customers | 19,198,000 | 4,308,000 | 1,459,000 | 24,965,000 | ||||||||||||
| Revenue, lending and trading activities (North America) | 19,615,000 | 19,615,000 | ||||||||||||||
| Total revenue | $ | 19,198,000 | $ | 4,308,000 | $ | 21,074,000 | $ | 44,580,000 | ||||||||
| Major Goods | ||||||||||||||||
| Power supply units | $ | 1,734,000 | $ | 4,308,000 | $ | — | $ | 6,042,000 | ||||||||
| Power supply systems | 5,253,000 | — | — | 5,253,000 | ||||||||||||
| Defense systems | 7,731,000 | — | — | 7,731,000 | ||||||||||||
| Digital currency mining | 693,000 | 693,000 | ||||||||||||||
| Other | 4,480,000 | — | 766,000 | 5,246,000 | ||||||||||||
| Revenue from contracts with customers | 19,198,000 | 4,308,000 | 1,459,000 | 24,965,000 | ||||||||||||
| Revenue, lending and trading activities | 19,615,000 | 19,615,000 | ||||||||||||||
| Total revenue | $ | 19,198,000 | $ | 4,308,000 | $ | 21,074,000 | $ | 44,580,000 | ||||||||
| Timing of Revenue Recognition | ||||||||||||||||
| Goods transferred at a point in time | $ | 10,957,000 | $ | 4,308,000 | $ | 1,459,000 | $ | 16,724,000 | ||||||||
| Services transferred over time | 8,241,000 | 8,241,000 | ||||||||||||||
| Revenue from contracts with customers | $ | 19,198,000 | $ | 4,308,000 | $ | 1,459,000 | $ | 24,965,000 | ||||||||
| F-14 |
5. 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, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Investment in common stock of Alzamend Neuro, Inc. (“Alzamend”) – a related party | $ | 12,394,000 | $ | 12,394,000 | $ | $ | ||||||||||
| Investments in marketable equity securities | 8,561,000 | 8,561,000 | ||||||||||||||
| Cash and marketable securities held in trust account | 117,421,000 | 117,421,000 | ||||||||||||||
| Investments in other equity securities | 3,916,000 | - | 3,916,000 | |||||||||||||
| Total assets measured at fair value | $ | 142,292,000 | $ | 138,376,000 | $ | $ | 3,916,000 | |||||||||
| Fair Value Measurement at December 31, 2021 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Investment in common stock of Alzamend – a related party | 13,230,000 | 13,230,000 | ||||||||||||||
| Investments in marketable equity securities | 40,380,000 | 40,380,000 | ||||||||||||||
| Cash and marketable securities held in trust account | 116,725,000 | 116,725,000 | ||||||||||||||
| Investments in other equity securities | 9,215,000 | - | 9,215,000 | |||||||||||||
| Total assets measured at fair value | $ | 179,550,000 | $ | 170,335,000 | $ | $ | 9,215,000 | |||||||||
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, 2022:
| Investments in other equity securities |
||||
| Balance at January 1, 2022 | $ | 9,215,000 | ||
| Investment in preferred stock | 6,495,000 | |||
| Change in fair value of financial instruments | 25,850,000 | |||
| Conversion to marketable securities | (37,644,000 | ) | ||
| Balance at September 30, 2022 | $ | 3,916,000 | ||
Other equity securities also include investments in entities that do not have a readily determinable fair value and do not report net asset value per share. These investments are accounted for using a measurement alternative under which they are measured at cost and adjusted for observable price changes and impairments. Observable price changes result from, among other things, equity transactions for the same issuer executed during the reporting period, including subsequent equity offerings or other reported equity transactions related to the same issuer. For these transactions to be considered observable price changes of the same issuer, the Company evaluates whether these transactions have similar rights and obligations, including voting rights, distribution preferences, conversion rights, and other factors, to the investments the Company holds. Any investments adjusted to their fair value by applying the measurement alternative are disclosed as nonrecurring fair value measurements, including the level in the fair value hierarchy that was used.
| F-15 |
As of September 30, 2022 and December 31, 2021, investments in other equity securities valued using a measurement alternative of $41.6 million and $21.4 million, respectively, are included in other equity securities in the accompanying condensed consolidated balance sheets.
The following table presents information on certain assets measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2022 and December 31, 2021. There were no observable price changes or indicators of impairment for these investments during the nine months ended September 30, 2022.
| Fair Value Measurement Using | ||||||||||||||||
| Total | Quoted prices in active markets for identical assets (Level 1) | Other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| As of September 30, 2022 | ||||||||||||||||
| Investments in other equity securities that do not report net asset value | $ | 41,641,000 | $ | $ | $ | 41,641,000 | ||||||||||
| Fair Value Measurement Using | ||||||||||||||||
| Total | Quoted prices in active markets for identical assets (Level 1) | Other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| As of December 31, 2021 | ||||||||||||||||
| Investments in other equity securities that do not report net asset value | $ | 21,241,000 | $ | $ | $ | 21,241,000 | ||||||||||
6. MARKETABLE EQUITY SECURITIES
Marketable equity securities with readily determinable market prices consisted of the following as of September 30, 2022 and December 31, 2021:
| Marketable equity securities at September 30, 2022 | ||||||||||||||||
| Gross unrealized | Gross unrealized | |||||||||||||||
| Cost | gains | losses | Fair value | |||||||||||||
| Common shares | $ | 16,182,000 | $ | 281,000 | $ | (7,902,000 | ) | $ | 8,561,000 | |||||||
| Marketable equity securities at December 31, 2021 | ||||||||||||||||
| Gross unrealized | Gross unrealized | |||||||||||||||
| Cost | gains | losses | Fair value | |||||||||||||
| Common shares | $ | 53,475,000 | $ | 32,000 | $ | (13,127,000 | ) | $ | 40,380,000 | |||||||
The Company’s investment in marketable equity securities are revalued on each balance sheet date.
| F-16 |
7. PROPERTY AND EQUIPMENT, NET
At September 30, 2022 and December 31, 2021, property and equipment consisted of:
| September 30, 2022 | December 31, 2021 | |||||||
| Cryptocurrency machines and related equipment | $ | 131,141,000 | $ | 10,763,000 | ||||
| Computer, software and related equipment | 20,315,000 | 8,884,000 | ||||||
| Office furniture and equipment | 2,750,000 | 702,000 | ||||||
| Oil and natural gas properties, unproved properties | 972,000 | |||||||
| Land | 25,646,000 | 25,696,000 | ||||||
| Building and improvements | 76,012,000 | 68,959,000 | ||||||
| 256,836,000 | 115,004,000 | |||||||
| Accumulated depreciation and amortization | (14,180,000 | ) | (5,096,000 | ) | ||||
| Property and equipment placed in service, net | 242,656,000 | 109,908,000 | ||||||
| Deposits on cryptocurrency machines | 11,328,000 | 64,117,000 | ||||||
| Property and equipment, net | $ | 253,984,000 | $ | 174,025,000 | ||||
Summary of depreciation expense:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Depreciation expense | $ | 3,942,000 | $ | 265,000 | $ | 10,229,000 | $ | 711,000 | ||||||||
Ault Energy Oil and Gas Properties
On July 11, 2022, the Company announced the formation of Ault Energy, LLC (“Ault Energy”), as an indirect wholly-owned subsidiary of the Company through Ault Alliance. Ault Energy is partnering with White River Holdings Corp. (“White River”), a wholly owned subsidiary of Ecoark Holdings, Inc. (“Ecoark”), on drilling projects across 30,000 acres in Texas, Louisiana and Mississippi. Ault Energy, as the designee of Ault Lending, LLC (“Ault Lending”), has the right to purchase up to 25%, or such higher percentages at the discretion of White River, in various drilling projects of White River. In August 2022, Ault Energy purchased a 40% working interest of the Harry O’Neal 20-9 No.1 drilling project in Mississippi for $972,000 included in property and equipment. The Company has not recorded any depletion as the Harry O’Neal 20-9 No.1 drilling project was considered an unproved property as of September 30, 2022.
Compute North Bankruptcy
On September 22, 2022, Compute North Holdings, Inc. (along with its affiliated debtors, collectively, “Compute North”), filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas under Chapter 11 of the U.S. Bankruptcy Code (11 U.S. Code section 101 et seq.). At the time of Compute North’s bankruptcy filing, BitNile had 6,572 Bitcoin miners with a carrying amount of $38.0 million, classified within property and equipment on the consolidated balance sheet, with Compute North at the Wolf Hollow hosting facility in Texas. Additionally, the Company has a deposit of approximately $2.0 million with Compute North for services yet to be performed by Compute North. The ultimate outcome of the bankruptcy process, and its impact on the deposit held by the Company, remains to be determined. The Company assessed this financial exposure and recorded an impairment of the deposit totaling $2 million during the three months ended September 30, 2022. The Company has inspected the Bitcoin miners that are installed at the hosting facility in Texas. No impairment on the mining equipment was recorded as of September 30, 2022. The Company has retained counsel to assist in this matter.
8. BUSINESS COMBINATIONS
Avalanche International Corp. (“AVLP”) Acquisition
On June 1, 2022, the Company converted the principal amount under the convertible promissory notes issued to it by AVLP and accrued unpaid interest into common stock of AVLP. The Company converted $20.0 million in principal and $5.9 million of accrued interest receivable at a conversion price of $0.50 per share and received 51,889,168 shares of common stock increasing its common stock ownership of AVLP from less than 20% to approximately 92%.
Prior to the conversion of the convertible promissory notes, the Company accounted for its investment in AVLP as an investment in an unconsolidated entity under the equity method of accounting. In connection with the conversion of the convertible promissory notes, the Company’s consolidated financial statements now include all of the accounts of AVLP, and any significant intercompany balances and transactions have been eliminated in consolidation.
| F-17 |
The consideration transferred for the Company’s approximate 92% ownership interest in connection with this acquisition aggregated $20.7 million, which represented the fair value of the Company’s holdings in AVLP immediately prior to conversion. The carrying amount of the Company’s holdings in AVLP immediately prior to conversion was $23.4 million, resulting in a $2.7 million loss for the related remeasurement, which was recognized in interest and other income.
The Company estimated the fair values of assets acquired and liabilities assumed using valuation techniques, such as the income, cost and market approaches. The fair values are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. The income method to measure the fair value of intangible assets, is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflected a consideration of other marketplace participants and included the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances could affect the accuracy or validity of the estimates and assumptions.
The allocation of the total consideration transferred to the assets acquired, including intangible assets and goodwill, and the liabilities assumed is preliminary and could be revised as a result of additional information obtained due to the finalization of a third-party valuation report, leases and related commitments, tax related matters and contingencies and certain assets and liabilities, including receivables and payables. Amounts will be finalized within the measurement period, which will not exceed one year from the acquisition date. Goodwill represents the excess of the purchase price over the preliminary fair value of identifiable assets acquired and liabilities assumed at the acquisition date and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. The goodwill resulting from this acquisition is not tax deductible.
The following table presents the final allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values.
| Preliminary allocation | ||||
| Total purchase consideration | $ | 20,706,000 | ||
| Fair value of non-controlling interest | 6,738,000 | |||
| Total consideration | $ | 27,444,000 | ||
| Identifiable net liabilities assumed: | ||||
| Cash | $ | 1,245,000 | ||
| Prepaid expenses and other current assets | 55,000 | |||
| Property and equipment | 5,057,000 | |||
| Note receivable | 800,000 | |||
| Accounts payable and accrued expenses | (5,018,000 | ) | ||
| Convertible notes payable, principal | (9,734,000 | ) | ||
| Fair value of embedded derivative | (1,226,000 | ) | ||
| Fair value of bifurcated conversion option | (4,425,000 | ) | ||
| Fair value of bifurcated put option | (200,000 | ) | ||
| Net liabilities assumed | (13,446,000 | ) | ||
| Goodwill | $ | 40,890,000 | ||
The Company consolidates the results of AVLP on a one-month lag, therefore the statements of operations include results for AVLP for the three months ended August 31, 2022.
Overview of SMC Acquisition
Beginning in June 2022, the Company, through its subsidiary Ault Lending, began making open market purchases of SMC common stock. These purchases granted the Company a greater than 20% effective ownership on June 9, 2022, and subsequently, on June 15, 2022, the Company owned more than 50% of the issued and outstanding common stock of SMC. The Company’s ownership of SMC stood at approximately 57% as of September 30, 2022.
As of June 15, 2022 (“Acquisition Date”), the purchase price of the common stock acquired totaled $7.4 million and on June 15, 2022 a $3.1 million gain was recognized in interest and other income for the remeasurement of the Company’s previously held ownership interest to $10.5 million, based on the trading price of SMC common stock. The Company also recognized non-controlling interest at fair value as of the Acquisition Date in the amount of $10.3 million.
The tradenames and 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 between of 0.5% and 1.0% to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value.
The Company determined an estimated fair value of customer relationships using an income approach utilizing a discounted cash flow methodology. The analysis included assumptions regarding the development of new businesses and organic growth rates, a discount rate of 12% using a weighted average cost of capital analysis, and capital expenditure requirements associated with any new initiatives developed by SMC. Significant assumptions utilized in the income approach were based on company specific information and projections which are not observable in the market and are therefore considered Level 3 fair value measurements.
The allocation of the total consideration transferred to the assets acquired, including intangible assets and goodwill, and the liabilities assumed, is preliminary and could be revised as a result of additional information obtained due to the finalization of a third-party valuation report, leases and related commitments, tax related matters and contingencies and certain assets and liabilities, including receivables and payables. Amounts will be finalized within the measurement period, which will not exceed one year from the Acquisition Date. The goodwill resulting from this acquisition is not tax deductible.
| F-18 |
The following table presents the preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values.
| Preliminary Allocation | ||||
| Total purchase consideration | $ | 10,517,000 | ||
| Fair value of non-controlling interest | 10,336,000 | |||
| Total consideration | $ | 20,853,000 | ||
| Identifiable net assets acquired: | ||||
| Cash | $ | 2,278,000 | ||
| Accounts receivable | 9,891,000 | |||
| Prepaid expenses and other current assets | 673,000 | |||
| Inventories | 12,840,000 | |||
| Property and equipment, net | 529,000 | |||
| Right-of-use assets | 1,073,000 | |||
| Other assets | 83,000 | |||
| Intangible assets: | ||||
| Tradenames (19 year estimated useful life) | 2,470,000 | |||
| Customer relationships (16 year estimated useful life) | 1,380,000 | |||
| Proprietary technology (3 year estimated useful life) | 600,000 | |||
| Accounts payable and accrued expenses | (10,052,000 | ) | ||
| Notes payable | (2,972,000 | ) | ||
| Lease liabilities | (1,124,000 | ) | ||
| Net assets acquired | 17,669,000 | |||
| Goodwill | $ | 3,184,000 | ||
Unaudited Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations for the nine months ended September 30, 2022 have been prepared as if the SMC acquisition had occurred on January 1, 2022.
| Nine Months Ended | ||||
| September 30, 2022 | ||||
| Total revenues | $ | 131,609,000 | ||
| Net loss attributable to BitNile Holdings, Inc. | $ | (62,202,000 | ) | |
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
Overview of GIGA acquisition
On September 8, 2022, Giga-tronics Incorporated (“GIGA”) acquired 100% of the capital stock of GWW from the Company in exchange for 2.92 million shares of GIGA’s common stock and 514.8 shares of GIGA’s Series F Convertible Preferred Stock (“Series F”) that are convertible into an aggregate of 3.96 million shares of GIGA’s common stock. GIGA also assumed GWW’s outstanding equity awards representing the right to receive up to 749,626 shares of GIGA’s common stock, on an as-converted basis. The transaction described above resulted in a change of control of GIGA. Assuming the Company was to convert all of the Series F, the common stock owned by the Company after such conversion would result in the Company owning approximately 71.2% of GIGA’s outstanding shares.
| F-19 |
On September 8, 2022, the Company loaned GIGA $4.25 million by purchasing a convertible note that carries an interest rate of 10% per annum and matures on February 14, 2023. The convertible note between the Company and GIGA is eliminated in consolidation beginning on September 8, 2022. The Company received the right to appoint four members of a seven member GIGA board of directors. These factors contributed to the Company’s determination that GWW be treated as the accounting acquirer.
The Company believes there are synergies between GIGA and GWW. GIGA manufactures specialized electronics equipment for use in both military test and airborne operational applications. GIGA focuses on the design and manufacture of custom microwave products for military airborne, sea, and ground applications as well as the design and manufacture of high-fidelity signal simulation and recording solutions for RADAR and electronic warfare test applications. GIGA’s results of operations subsequent to the acquisition are included in the Company’s GWW defense business segment.
In respect of the above transactions, the acquired assets and assumed liabilities, together with acquired processes and employees, represent a business as defined in ASC 805, Business Combinations. The transactions were accounted for as a reverse acquisition using the acquisition method of accounting with GIGA treated as the legal acquirer and GWW treated as the accounting acquirer. In identifying GWW as the acquiring entity for accounting purposes, GIGA and GWW took into account a number of factors, including the relative voting rights, executive management and the corporate governance structure of the Company. GWW is considered the accounting acquirer since the Company controls the board of directors of GIGA following the transactions and received a 71.2% beneficial ownership interest in GIGA. However, no single factor was the sole determinant in the overall conclusion that GWW is the acquirer for accounting purposes; rather all factors were considered in arriving at such conclusion.
The fair value of the purchase consideration was $9.5 million, consisting of $4.0 million for GIGA’s common stock and prefunded warrants, $0.4 million fair value of vested stock incentives, $3.7 million cash and $1.3 million related to an existing loan agreement between Ault Lending and GIGA, which was deemed settled.
The tradenames and 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 between 1.0% and 7.0% to the prospective revenue attributable to the intangible asset. The resulting annual royalty payments are tax-affected and then discounted to present value.
The Company determined an estimated fair value of customer relationships using an income approach utilizing a discounted cash flow methodology. The analysis included assumptions regarding the development of new businesses and organic growth rates, a discount rate of 22% using a weighted average cost of capital analysis, and capital expenditure requirements associated with any new initiatives developed by GIGA. Significant assumptions utilized in the income approach were based on company specific information and projections which are not observable in the market and are therefore considered Level 3 fair value measurements.
The total purchase price to acquire GIGA 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 assisted, 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 this transaction on the consolidated financial position and results of operations of the Company.
The preliminary purchase price allocation is as follows:
| Preliminary allocation | ||||
| Total purchase consideration | $ | 6,763,000 | ||
| Fair value of non-controlling interest | 2,735,000 | |||
| Total consideration | $ | 9,498,000 | ||
| Identifiable net assets acquired (liabilities assumed): | ||||
| Cash | $ | 107,000 | ||
| Trade accounts receivable | 536,000 | |||
| Inventories | 5,180,000 | |||
| Prepaid expenses | 116,000 | |||
| Accrued revenue | 363,000 | |||
| Property and equipment | 331,000 | |||
| Right-of-use asset | 370,000 | |||
| Other long-term assets | 446,000 | |||
| Intangible assets: | ||||
| Tradename ( year estimated useful life) | 1,040,000 | |||
| Developed Technology ( year estimated useful life) | 1,410,000 | |||
| Existing customer relationships (- year estimated useful life) | 3,910,000 | |||
| Accounts payable | (2,831,000 | ) | ||
| Loans payable, net of discounts and issuance costs | (387,000 | ) | ||
| Accrued payroll and benefits | (1,488,000 | ) | ||
| Lease obligations | (491,000 | ) | ||
| Other current liabilities | (368,000 | ) | ||
| Other non-current liabilities | (17,000 | ) | ||
| Net assets acquired | 8,227,000 | |||
| Goodwill | $ | 1,271,000 | ||
| F-20 |
9. GOODWILL
The following table summarizes the changes in the Company’s goodwill for the nine months ended September 30, 2022:
| Goodwill | ||||
| Balance as of January 1, 2022 | $ | 10,090,000 | ||
| Acquisition of AVLP | 40,890,000 | |||
| Acquisition of SMC | 3,184,000 | |||
| Acquisition of GIGA | 1,271,000 | |||
| Effect of exchange rate changes | (891,000 | ) | ||
| Balance as of September 30, 2022 | $ | 54,544,000 | ||
10. INCREASE IN OWNERSHIP INTEREST OF SUBSIDIARIES
On May 12, 2022, BNI closed a $1.8 million membership interest purchase agreement whereby BNI acquired the 30% minority interest of Alliance Cloud Services, LLC (“ACS”) which BNI did not previously own, resulting in ACS becoming a wholly-owned subsidiary of BNI. ACS owns and operates the Company’s Michigan data center, where BNI conducts the Company’s Bitcoin mining operations.
Between June 15, 2022 and September 30, 2022, Ault Lending increased the Company’s ownership interest in SMC through the open market purchase of approximately shares for $2.1 million.
11. INVESTMENTS – RELATED PARTIES
Investments in Alzamend and Ault & Company at September 30, 2022 and December 31, 2021, were comprised of the following:
Investment in Promissory Notes, Related Parties
| Interest | Due | September 30, | December 31, | |||||||||
| rate | date | 2022 | 2021 | |||||||||
| Investment in promissory note of Ault & Company | 8% | December 31, 2022 | $ | 2,500,000 | $ | 2,500,000 | ||||||
| Accrued interest receivable, Ault & Company | 318,000 | 170,000 | ||||||||||
| Other | 172,000 | |||||||||||
| Total investment in promissory note, related party | $ | 2,818,000 | $ | 2,842,000 | ||||||||
Investment in Common Stock and Options, Related Parties
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Investment in common stock and options of Alzamend | $ | 12,394,000 | $ | 13,230,000 | ||||
| F-21 |
The following table summarizes the changes in the Company’s investments in Alzamend and Ault & Company during the nine months ended September 30, 2022:
| Investment in warrants and common stock of Alzamend | Investment in promissory notes of Ault & Company | |||||||
| Balance at January 1, 2022 | $ | 13,230,000 | $ | 2,842,000 | ||||
| Investment in common stock and options of Alzamend | 4,840,000 | - | ||||||
| Unrealized loss in common stock of Alzamend | (5,676,000 | ) | - | |||||
| Amortization of related party investment | - | (173,000 | ) | |||||
| Accrued interest | - | 149,000 | ||||||
| Balance at September 30, 2022 | $ | 12,394,000 | $ | 2,818,000 | ||||
Investments in Alzamend Common Stock
The following table summarizes the changes in the Company’s investments in Alzamend common stock during the nine months ended September 30, 2022:
| Shares of | Per Share | Investment in | ||||||||||
| Common Stock | Price | Common Stock | ||||||||||
| Balance at January 1, 2022 | 6,947,000 | $ | 1.90 | $ | 13,230,000 | |||||||
| March 9, 2021 securities purchase agreement* | 2,667,000 | $ | 1.50 | 4,000,000 | ||||||||
| Open market purchases after initial public offering | 801,000 | $ | 1.05 | 840,000 | ||||||||
| Unrealized loss in common stock of Alzamend | (5,676,000 | ) | ||||||||||
| Balance at September 30, 2022 | 10,415,000 | $ | 1.19 | $ | 12,394,000 | |||||||
| * | Pursuant to the March 9, 2021 securities purchase agreement, in aggregate, Alzamend agreed to sell up to 6,666,667 shares of its common stock to Ault Lending for $10.0 million, or $1.50 per share, and issue to Ault Lending warrants to acquire 3,333,334 shares of Alzamend common stock with an exercise price of $3.00 per share. As of December 31, 2021, Ault Lending funded $6.0 million, including the conversion of notes and advances of $0.8 million, and the remaining $4.0 million was funded upon Alzamend achieving certain milestones during the nine months ended September 30, 2022. |
12. INVESTMENT IN UNCONSOLIDATED ENTITY – AVLP
Equity Investments in Unconsolidated Entity – AVLP
The Company converted its AVLP convertible promissory note on June 1, 2022 as part of the acquisition of AVLP (see Note 8). Equity investments in the then unconsolidated entity, AVLP, at December 31, 2021, were comprised of the following:
Investment in Promissory Notes
| Interest rate | Due date | December 31, 2021 | ||||||
| Investment in convertible promissory note | 12% | 2022-2026 | $ | 17,799,000 | ||||
| Investment in promissory note – Alpha Fund | 8% | June 30, 2022 | 3,600,000 | |||||
| Accrued interest receivable | 2,092,000 | |||||||
| Other | 600,000 | |||||||
| Total investment in promissory notes, gross | 24,091,000 | |||||||
| Less: provision for loan losses | (2,000,000 | ) | ||||||
| Total investment in promissory note | $ | 22,091,000 | ||||||
| F-22 |
The following table summarizes the changes in the Company’s equity investments in the then unconsolidated entity, AVLP, during the nine months ended September 30, 2022:
| Investment in | Investment in | |||||||||||
| warrants and | promissory notes | Total | ||||||||||
| common stock | and advances | investment | ||||||||||
| Balance at January 1, 2022 | $ | 39,000 | $ | 22,091,000 | $ | 22,130,000 | ||||||
| Investment in convertible promissory notes | - | 2,200,000 | 2,200,000 | |||||||||
| Loss from equity investment | (39,000 | ) | (885,000 | ) | (924,000 | ) | ||||||
| Accrued interest | - | 143,000 | 143,000 | |||||||||
| Loss on remeasurement upon conversion | - | (2,700,000 | ) | (2,700,000 | ) | |||||||
| Conversion of AVLP convertible promissory notes | - | (17,040,000 | ) | (17,040,000 | ) | |||||||
| Elimination of intercompany debt after conversion | - | (3,809,000 | ) | (3,809,000 | ) | |||||||
| Balance at September 30, 2022 | $ | $ | $ | |||||||||
13. CONSOLIDATED VARIABLE INTEREST ENTITY - ALPHA FUND
Alpha Fund – Consolidated Variable Interest Entity
As of September 30, 2022 and December 31, 2021, the Company held an investment in Ault Alpha LP (“Alpha Fund”). Alpha Fund operates as a private investment fund. The general partner of Alpha Fund, Ault Alpha GP LLC (“Alpha GP”) is owned by Ault Capital Management LLC (the “Investment Manager”), which also acts as the investment manager to Alpha Fund. The Investment Manager is owned by Ault & Company. Messrs. Ault, Horne, Nisser and Cragun, who serve as executive officers and/or directors of the Company, are executive officers of the Investment Manager, and Messrs. Ault, Horne and Nisser are executive officers and directors of Ault & Company.
As of September 30, 2022, Ault Lending subscribed for $33 million or approximately 100% of the limited partnership interests in Alpha Fund, the full amount of which was funded, an increase of $16 million from the $17 million subscribed and funded as of December 31, 2021. These investments are subject to a rolling five-year lock-up period, provided that after three years, Alpha GP will waive 24 months of the lock-up period upon receipt of written notice from an executive officer of the Company that a withdrawal of capital is required to prevent a going concern opinion from the Company’s auditors, under the terms of Alpha Fund’s partnership agreement and side letter entered into between the Company and Alpha Fund.
The Company consolidates Alpha Fund as a variable interest entity (a “VIE”) due to its significant level of influence and control of Alpha Fund, the size of its investment, and its ability to participate in policy making decisions, the Company is considered the primary beneficiary of the VIE.
Investments by Alpha Fund – Treasury Stock
As of September 30, 2022, Alpha Fund owned shares of the Company’s common stock and shares of the Company’s 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”), accounted for as treasury stock as of September 30, 2022.
14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Other current liabilities at September 30, 2022 and December 31, 2021 consisted of:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | 22,467,000 | $ | 6,902,000 | |||||
| Accrued payroll and payroll taxes | 9,531,000 | 5,027,000 | ||||||
| Financial instrument liabilities | 937,000 | 4,249,000 | ||||||
| Accrued legal | 1,787,000 | 2,637,000 | ||||||
| Interest payable | 4,140,000 | 187,000 | ||||||
| Other accrued expenses | 11,745,000 | 3,753,000 | ||||||
| Total | $ | 50,607,000 | $ | 22,755,000 | ||||
| F-23 |
Financial Instruments
Under authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments that do not have fixed settlement provisions are deemed to be derivative instruments. In prior years, the Company granted certain warrants that resulted in these warrants accounted for as a financial instrument and being re-measured every reporting period with the change in value reported in the statement of operations.
The financial instruments were valued using a variety of pricing models with the following valuation assumptions:
| September 30, 2022 | December 31, 2021 | |||||||
| Contractually stipulated stock price | $ | 2.50 | $ | 2.50 | ||||
| Exercise price | $ | 2.50 | $ | 2.50 | ||||
| Contractually defined remaining term | ||||||||
| Contractually defined volatility | 135 | % | 135 | % | ||||
| Dividend yield | 0 | % | 0 | % | ||||
| Risk-free interest rate | 4.1 | % | 1.3 | % | ||||
Per the terms of the warrant agreements underlying the financial instruments, the value to the warrant holders is defined within the agreement based on a stock price, contractual term, volatility factor and dividend rate as defined in the warrant agreement, and not indexed to the company’s stock, resulting in the financial instrument accounting. The risk-free interest rate was based on rates established by the Federal Reserve Bank.
The following table sets forth a summary of the changes in the estimated fair value of the financial instruments during the nine months ended September 30, 2022 and 2021:
| September 30, 2022 | September 30, 2021 | |||||||
| Beginning balance | $ | 4,249,000 | $ | 4,192,000 | ||||
| Change in fair value | 27,000 | 388,000 | ||||||
| Extinguishment | (3,339,000 | ) | - | |||||
| Ending balance | $ | 937,000 | $ | 4,580,000 | ||||
15. NOTES PAYABLE
Notes payable at September 30, 2022 and December 31, 2021, were comprised of the following:
| Interest rate | Due date | September 30, 2022 | December 31, 2021 | |||||||||
| Short-term notes payable | 12.0% | Nov. 2022 | $ | 35,000 | $ | 118,000 | ||||||
| 10% original issue discount senior secured notes | 65,972,000 | |||||||||||
| AGREE Madison secured construction loans | 7.0% | January 1, 2025 | 58,351,000 | 55,055,000 | ||||||||
| SMC line of credit | 15.5% | June 11, 2023 | 2,500,000 | - | ||||||||
| SMC installment notes | 7.6% | June 18, 2024 | 177,000 | - | ||||||||
| SMC notes payable | 6.0% | Sept. 2024-Feb. 2025 | 353,000 | - | ||||||||
| XBTO note payable | 12.5% | December 30, 2023 | 3,384,000 | - | ||||||||
| 10% secured promissory notes | 10.0% | August 10, 2023 | 10,093,000 | - | ||||||||
| Short-term bank line of credit | 4.7% | Renews monthly | 2,325,000 | 960,000 | ||||||||
| Total notes payable | $ | 77,218,000 | $ | 122,105,000 | ||||||||
| Less: | ||||||||||||
| Unamortized debt discounts | (1,776,000 | ) | (27,496,000 | ) | ||||||||
| Total notes payable, net | $ | 75,442,000 | $ | 94,609,000 | ||||||||
| Less: current portion | (17,132,000 | ) | (39,554,000 | ) | ||||||||
| Notes payable – long-term portion | $ | 58,310,000 | $ | 55,055,000 | ||||||||
| F-24 |
10% Secured Promissory Notes
On August 10, 2022, the Company, through its BNI subsidiary, entered into a note purchase agreement providing for the issuance of secured promissory notes with an aggregate principal face amount of $11,000,000 and an interest rate of 10%. The purchase price (proceeds to the Company) for the secured promissory notes was $10.0 million. The secured promissory notes have a security interest in $10 million of marketable securities and investments and certain Bitcoin mining equipment with a carrying amount of $23.1 million. The secured promissory notes are further secured by a guaranty provided by the Company, Ault Lending and by Milton C. Ault, the Executive Chairman of the Company.
The maturity date of the secured promissory notes is August 10, 2023. The Company is required to make monthly payment (principal and interest) of $1,000,000 on the tenth calendar day of each month, starting in September 2022. Provided that the Company makes the first six monthly payments in full and on a timely basis, after six months, the Company may elect to pay a forbearance fee of $250,000 in lieu of a monthly payment, which would extend the maturity date of the related secured promissory notes by one month for each forbearance. The Company may not elect forbearance in consecutive months.
SMC Debt Security Interest
The SMC debt is secured by a perfected security interest in all SMC assets including a first-priority security interest in SMC accounts receivable and inventory.
Amortization of Debt Discount of Secured Promissory Notes
During the three months ended March 31, 2022, the $66 million Secured Promissory Notes were repaid and the Company fully amortized the related debt discount of $26.3 million, which is included within interest expense on the condensed consolidated statements of operations.
The following table summarizes the principal maturity schedule for our notes payable outstanding as of September 30, 2022:
| Year | Principal | ||||
| 2022 | $ | 18,049,000 | |||
| 2023 | 818,000 | ||||
| 2024 | |||||
| 2025 | 58,351,000 | ||||
| Total | $ | 77,218,000 | |||
16. CONVERTIBLE NOTES
Convertible notes payable at September 30, 2022 and December 31, 2021, were comprised of the following:
| Conversion price per share | Interest rate | Due date | September 30, 2022 |
December 31, 2021 |
||||||||||
| Convertible promissory note | $ | 4% | May 10, 2024 | $ | 660,000 | $ | 660,000 | |||||||
| AVLP convertible promissory notes | $ (AVLP stock) | 15% | August 22, 2025 | 9,911,000 | - | |||||||||
| Fair value of embedded options and derivatives | 4,908,000 | - | ||||||||||||
| Less: unamortized debt discounts | (132,000 | ) | (192,000 | ) | ||||||||||
| Total convertible notes payable, net of financing cost | $ | 15,347,000 | $ | 468,000 | ||||||||||
| Less: current portion | (1,469,000 | ) | - | |||||||||||
| Total convertible notes payable, net of financing cost, long term | $ | 13,878,000 | $ | 468,000 | ||||||||||
AVLP convertible promissory notes
The AVLP convertible notes payable are due and payable on August 22, 2025, with interest at 7% per annum. At the election of the holders, outstanding principal and accrued interest under the notes are convertible into shares of AVLP’s common stock at a conversion price equal to either (i) if the aggregate market capital of AVLP on the date of conversion (the “Market Cap”) is $35 million or less, at a 25% discount to the market price, or (ii) if the Market Cap is greater than $35 million, at a 25% discount to the market price, provided that such discount shall be increased by dividing it by the quotient that shall be obtained by dividing $35 million by the Market Cap at the time of conversion, provided, however, any increase in the discount to the market price shall not result in a discount that is greater than a 75% discount (the “Conversion Price”). Notwithstanding the foregoing, in no event shall the Conversion Price be less than $0.35.
| F-25 |
17. COMMITMENTS AND CONTINGENCIES
Blockchain Mining Supply and Services, Ltd.
On November 28, 2018, Blockchain Mining Supply and Services, Ltd. (“Blockchain Mining”) a vendor who sold computers to one of the Company’s subsidiaries, filed a Complaint (the “Complaint”) in the United States District Court for the Southern District of New York against the Company and the Company’s subsidiary, Digital Farms, Inc. (f/k/a Super Crypto Mining, Inc.), in an action captioned Blockchain Mining Supply and Services, Ltd. v. Super Crypto Mining, Inc. and DPW Holdings, Inc., Case No. 18-cv-11099.
The Complaint asserts claims for breach of contract and promissory estoppel against the Company and its subsidiary arising from the subsidiary’s alleged failure to honor its obligations under the purchase agreement. The Complaint seeks monetary damages in excess of $1,388,495, plus attorneys’ fees and costs.
The Company intends to vigorously defend against the claims asserted against it in this action.
On April 13, 2020, the Company and its subsidiary, jointly filed a motion to dismiss the Complaint in its entirety as against the Company, and the promissory estoppel claim as against its subsidiary. On the same day, the Company’s subsidiary also filed a partial Answer to the Complaint in connection with the breach of contract claim.
On April 29, 2020, Blockchain Mining filed an amended complaint (the “Amended Complaint”). The Amended Complaint asserts the same causes of action and seeks the same damages as the initial Complaint.
On May 13, 2020, the Company and its subsidiary, jointly filed a motion to dismiss the Amended Complaint in its entirety as against the Company, and the promissory estoppel claim as against of its subsidiary. On the same day, the Company’s subsidiary also filed a partial Answer to the Amended Complaint in connection with the breach of contract claim.
In its partial Answer, the Company’s subsidiary admitted to the validity of the contract at issue and also asserted numerous affirmative defenses concerning the proper calculation of damages.
On December 4, 2020, the Court issued an Order directing the parties to engage in limited discovery to be completed by March 4, 2021. In connection therewith, the Court also denied the defendants’ motion to dismiss without prejudice.
On June 2, 2021, the Company and its subsidiary filed a motion to dismiss the Amended Complaint in its entirety as against the Company, and the promissory estoppel claim as against the subsidiary.
On August 8, 2022, the Court issued an Order denying the motion to dismiss, in its entirety.
On September 2, 2022, the Company and its subsidiary filed an answer to the Amended Complaint and asserted numerous affirmative defenses.
Based on the Company’s assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot reasonably estimate the potential loss or range of loss that may result from this action. Notwithstanding, the Company has established a reserve in the amount of the unpaid portion of the purchase agreement, which is included in accounts payable and accrued expenses. An unfavorable outcome may have a material adverse effect on the Company’s business, financial condition and results of operations.
Ding Gu (a/k/a Frank Gu) and Xiaodan Wang Litigation
On January 17, 2020, Ding Gu (a/k/a Frank Gu) (“Gu”) and Xiaodan Wang (“Wang” and with “Gu” collectively, “Plaintiffs”), filed a Complaint (the “Complaint”) in the Supreme Court of the State of New York, County of New York against the Company and the Company’s Chief Executive Officer, Milton C. Ault, III, in an action captioned Ding Gu (a/k/a Frank Gu) and Xiaodan Wang v. DPW Holdings, Inc. and Milton C. Ault III (a/k/a Milton Todd Ault III a/k/a Todd Ault), Index No. 650438/2020.
| F-26 |
The Complaint asserts causes of action for declaratory judgment, specific performance, breach of contract, conversion, attorneys’ fees, permanent injunction, enforcement of Guaranty, unjust enrichment, money had and received, and fraud arising from: (i) a series of transactions entered into between Gu and the Company, as well as Gu and Ault, in or about May 2019; and (ii) a term sheet entered into between Plaintiffs and the Company, in or about July 2019. The Complaint seeks, among other things, monetary damages in excess of $1.1 million, plus a decree of specific performance directing the Company to deliver unrestricted shares of common stock to Gu, plus attorneys’ fees and costs.
The Company intends to vigorously defend against the claims asserted against it in this action.
On May 4, 2020, the Company and Ault jointly filed a motion to dismiss the Complaint in its entirety, with prejudice.
On July 28, 2021, the Court conducted oral argument in connection with the motion to dismiss. During the oral argument, the Court informed the parties that the Court was dismissing the fraud claim, in its entirety, and provided Plaintiffs an opportunity to amend their fraud claim within sixty days of the date of the oral argument. The Court reserved decision on the other causes of action.
On December 14, 2021, the Court entered a decision and order in connection with the motion to dismiss whereby the Court dismissed Plaintiff’s causes of action for specific performance, conversion, permanent injunction, and reiterated its prior determination that the fraud claim was also dismissed. The Court denied the motion to dismiss in connection with the other causes of action asserted in the complaint.
On January 26, 2022, the Company and Mr. Ault filed an answer to the complaint and asserted numerous affirmative defenses.
On November 1, 2022, the parties informed the Court that they reached a settlement in principle and requested an extension of time, until November 22, 2022, to file motions for summary judgment to allow the parties time to draft formal settlement documents. The Court granted the parties’ request and the deadline for the Company and Mr. Ault to file their summary judgment is November 22, 2022.
Based on the terms of the settlement in principle, the Company believes its current legal accrual is adequate to cover the cost of settlement.
Subpoena
The Company and certain affiliates and related parties have received several subpoenas from the SEC for the production of documents and testimony. The Company is fully cooperating with this non-public, fact-finding inquiry and management believes that the Company has operated its business in compliance with all applicable laws. The subpoenas expressly provide that the inquiry is not to be construed as an indication by the SEC or its staff that any violations of the federal securities laws have occurred, nor should they be considered a reflection upon any person, entity or security. However, there can be no assurance as to the outcome of this matter.
Other 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.
| F-27 |
18. STOCKHOLDERS’ EQUITY
2022 Issuances
2022 ATM Offering – Common Stock
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”). As of September 30, 2022, the Company had sold an aggregate of 256.7 million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $168.0 million.
Public Offering of Series D Preferred Stock
The Company has designated shares of preferred stock, par value $0.001 per share, of the Company as the Series D Preferred Stock.
On June 3, 2022, the Company announced the closing of its public offering of shares of its Series D Preferred Stock at a price to the public of $ per share. Gross proceeds from the offering were approximately $3.6 million, before deducting offering expenses. Net proceeds to the Company, after payment of commissions, non-accountable fees and offering expenses were $3.1 million.
2022 ATM Offering – Preferred Stock
On June 14, 2022, the Company entered into an At-The-Market equity offering program 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 $46,400,000 (the “2022 Preferred ATM Offering”). As of September 30, 2022, the Company had sold an aggregate of shares of Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for gross proceeds of $207,000.
19. 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 0.6% and (9.1%) for the nine months ended September 30, 2022 and 2021, respectively. The Company an income tax provision of $0.4 million and $0.1 million for the nine months ended September 30, 2022 and 2021, 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.
| For the Nine Months Ended September 30, 2021 | ||||||||||||
| Income | Shares | Per-Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| Net income attributable to BitNile Holdings | $ | 1,346,000 | ||||||||||
| Less: Preferred stock dividends | (13,000 | ) | ||||||||||
| Basic earnings per share | ||||||||||||
| Net income available to common stockholders | 1,333,000 | 49,714,000 | $ | 0.03 | ||||||||
| Effect of dilutive securities | ||||||||||||
| Restricted stock grants | 431,000 | |||||||||||
| Diluted earnings per share | ||||||||||||
| Income available to common stockholders plus assumed conversions | $ | 1,333,000 | 50,145,000 | $ | 0.03 | |||||||
| F-28 |
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, excluding the nine months ended September 30, 2021, 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, consist of the following at September 30, 2022 and 2021:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Stock options | 6,396,000 | 4,761,000 | ||||||
| Restricted stock grants | 2,085,000 | |||||||
| Warrants | 18,493,000 | 5,936,000 | ||||||
| Convertible notes | 165,000 | 165,000 | ||||||
| Convertible preferred stock | 2,000 | 2,000 | ||||||
| Total | 27,141,000 | 10,864,000 | ||||||
21. SEGMENT AND CUSTOMERS INFORMATION
The Company had reportable segments as of September 30, 2022 and as of September 30, 2021; 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’s operating segments for the three and nine months ended September 30, 2022:
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||
| GWW | TurnOn Green | Ault Alliance | BNI | AGREE | Ault Disruptive | SMC | Holding Company | Total | ||||||||||||||||||||||||||||
| Revenue | $ | 21,530,000 | $ | 3,853,000 | $ | 220,000 | $ | $ | $ | $ | 17,114,000 | $ | $ | 42,717,000 | ||||||||||||||||||||||
| Revenue, cryptocurrency mining | 11,398,000 | 11,398,000 | ||||||||||||||||||||||||||||||||||
| Revenue, commercial real estate leases | 822,000 | 822,000 | ||||||||||||||||||||||||||||||||||
| Revenue, lending and trading activities | 32,224,000 | 32,224,000 | ||||||||||||||||||||||||||||||||||
| Revenue, hotel operations | 12,809,000 | 12,809,000 | ||||||||||||||||||||||||||||||||||
| Total revenues | $ | 21,530,000 | $ | 3,853,000 | $ | 32,444,000 | $ | 12,220,000 | $ | 12,809,000 | $ | $ | 17,114,000 | $ | $ | 99,970,000 | ||||||||||||||||||||
| Depreciation and amortization expense | $ | 1,259,000 | $ | 403,000 | $ | 240,000 | $ | 6,949,000 | $ | 2,487,000 | $ | $ | 166,000 | $ | 473,000 | $ | 11,977,000 | |||||||||||||||||||
| Income (loss) from operations | $ | (1,881,000 | ) | $ | (2,577,000 | ) | $ | 4,212,000 | $ | (6,138,000 | ) | $ | 149,000 | $ | (1,100,000 | ) | $ | 597,000 | $ | (19,262,000 | ) | $ | (26,000,000 | ) | ||||||||||||
| Capital expenditures for the nine months ended September 30, 2022 | $ | 612,000 | $ | 176,000 | $ | 1,739,000 | $ | 77,299,000 | $ | 4,444,000 | $ | $ | 66,000 | $ | 164,000 | $ | 84,500,000 | |||||||||||||||||||
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||
| GWW | TurnOn Green | Ault Alliance | BNI | AGREE | Ault Disruptive | SMC | Holding Company | Total | ||||||||||||||||||||||||||||
| Revenue | $ | 7,781,000 | $ | 1,662,000 | $ | 201,000 | $ | $ | $ | $ | 17,114,000 | $ | $ | 26,758,000 | ||||||||||||||||||||||
| Revenue, cryptocurrency mining | 3,874,000 | 3,874,000 | ||||||||||||||||||||||||||||||||||
| Revenue, commercial real estate leases | 273,000 | 273,000 | ||||||||||||||||||||||||||||||||||
| Revenue, lending and trading activities | 13,360,000 | 13,360,000 | ||||||||||||||||||||||||||||||||||
| Revenue, hotel operations | 5,513,000 | 5,513,000 | ||||||||||||||||||||||||||||||||||
| Total revenues | $ | 7,781,000 | $ | 1,662,000 | $ | 13,561,000 | $ | 4,147,000 | $ | 5,513,000 | $ | $ | 17,114,000 | $ | $ | 49,778,000 | ||||||||||||||||||||
| Depreciation and amortization expense | $ | 740,000 | $ | 393,000 | $ | 172,000 | $ | 2,809,000 | $ | 832,000 | $ | $ | 166,000 | $ | (264,000 | ) | $ | 4,848,000 | ||||||||||||||||||
| Income (loss) from operations | $ | (661,000 | ) | $ | (957,000 | ) | $ | 3,786,000 | $ | (2,321,000 | ) | $ | 1,697,000 | $ | (314,000 | ) | $ | 597,000 | $ | (5,138,000 | ) | $ | (3,311,000 | ) | ||||||||||||
| Capital expenditures for the three months ended September 30, 2022 | $ | 327,000 | $ | 51,000 | $ | 890,000 | $ | 5,915,000 | $ | 4,425,000 | $ | $ | 66,000 | $ | 47,000 | $ | 11,721,000 | |||||||||||||||||||
AVLP, SMC and GIGA Segment Information
The AVLP and SMC acquisitions were completed in June 2022 and the GIGA acquisition was completed in September 2022. As of September 30, 2022, identifiable assets for AVLP, SMC and GIGA were $47.5 million, $40.0 million and $19.2 million, respectively.
| F-29 |
Segment information for the three and nine months ended September 30, 2021:
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| GWW | TurnOnGreen | Ault Alliance | BNI | Ault Disruptive | Holding Company | Total | ||||||||||||||||||||||
| Revenue | $ | 19,198,000 | $ | 4,308,000 | $ | 236,000 | $ | 23,742,000 | ||||||||||||||||||||
| Revenue, cryptocurrency mining | 693,000 | 693,000 | ||||||||||||||||||||||||||
| Revenue, commercial real estate leases | 530,000 | 530,000 | ||||||||||||||||||||||||||
| Revenue, lending and trading activities | 19,615,000 | 19,615,000 | ||||||||||||||||||||||||||
| Revenue, hotel operations | ||||||||||||||||||||||||||||
| Total revenues | $ | 19,198,000 | $ | 4,308,000 | $ | 19,851,000 | $ | 1,223,000 | $ | $ | $ | 44,580,000 | ||||||||||||||||
| Depreciation and amortization expense | $ | 951,000 | $ | 69,000 | $ | 146,000 | $ | 250,000 | $ | $ | 297,000 | $ | 1,713,000 | |||||||||||||||
| Income (loss) from operations | $ | (766,000 | ) | $ | (490,000 | ) | $ | 12,390,000 | $ | (839,000 | ) | $ | (331,000 | ) | $ | (12,814,000 | ) | $ | (2,850,000 | ) | ||||||||
| Capital expenditures for the nine months ended September 30, 2021 | $ | 686,000 | $ | $ | $ | 27,459,000 | $ | $ | $ | 28,145,000 | ||||||||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| GWW | TurnOn Green | Ault Alliance | BNI | Ault Disruptive | Holding Company | Total | ||||||||||||||||||||||
| Revenue | $ | 6,373,000 | $ | 1,094,000 | $ | 110,000 | $ | $ | $ | $ | 7,577,000 | |||||||||||||||||
| Revenue, cryptocurrency mining | 272,000 | 272,000 | ||||||||||||||||||||||||||
| Revenue, commercial real estate leases | 226,000 | 226,000 | ||||||||||||||||||||||||||
| Revenue, lending and trading activities | (38,869,000 | ) | (38,869,000 | ) | ||||||||||||||||||||||||
| Revenue, hotel operations | ||||||||||||||||||||||||||||
| Total revenues | $ | 6,373,000 | $ | 1,094,000 | $ | (38,759,000 | ) | $ | 498,000 | $ | $ | $ | (30,794,000 | ) | ||||||||||||||
| Depreciation and amortization expense | $ | 523,000 | $ | 56,000 | $ | 118,000 | $ | 98,000 | $ | $ | 281,000 | $ | 1,076,000 | |||||||||||||||
| Income (loss) from operations | $ | 19,000 | $ | (408,000 | ) | $ | (41,390,000 | ) | $ | (339,000 | ) | $ | (143,000 | ) | $ | (7,613,000 | ) | $ | (49,874,000 | ) | ||||||||
| Capital expenditures for the three months ended September 30, 2021 | $ | 120,000 | $ | $ | 22,435,000 | $ | $ | $ | 22,555,000 | |||||||||||||||||||
22. CONCENTRATIONS OF CREDIT AND REVENUE RISK
Accounts receivable are concentrated with certain large customers. At September 30, 2022, approximately 36% of accounts receivable were due from two customers in North America, each of which individually accounted for over 10% of consolidated accounts receivable.
For the three months ended September 30, 2022, one customer represented 15% and one customer represented 10% of consolidated revenues.
23. SUBSEQUENT EVENTS
2022 Common ATM Offering
During the period between October 1, 2022 through November 18, 2022, the Company sold an aggregate of million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $2.6 million.
2022 Preferred ATM Offering
During the period between October 1, 2022 through November 18, 2022, the Company sold an aggregate of shares of Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for gross proceeds of $124,000.
Investments in Alpha Fund
During the period between October 1, 2022 through November 18, 2022, Ault Lending purchased an additional $0.2 million of limited partnership interests in Alpha Fund.
| F-30 |
SMC Credit and Security Agreement with Fifth Third Bank
On October 14, 2022, SMC entered into a credit agreement with Fifth Third Bank. The credit agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15 million decreased to $7.5 million during the non-peak period of January 1 through July 31 of each year. The credit agreement matures on October 14, 2025.
The revolving credit facility bears interest of the Prime Rate plus 0.50% or the 30-day term secured overnight financing rate plus 3.00%.
Under the credit agreement:
| · | Accounts receivable advance rate up to an 85% against SMC’s eligible accounts receivable; |
| · | Inventory advance of up to 85% of SMC’s eligible inventory; and |
| · | SMC must maintain a minimum fixed charge coverage of 1.05 to 1. |
Availability under the credit agreement was approximately $4.0 million as of November 18, 2022.
Secured Debt Financing
On November 7, 2022, the Company and certain of its subsidiaries borrowed $18.9 million of principal amount of term loans (the “Loans”) from a group of institutional investors (the “Financing”). The Loans mature in 18 months, which may be extended to 24 months, accrue interest at the rate of 8.5% per annum and are secured by certain assets of the Company and various subsidiaries. Starting in January 2023, the lenders have the right to require the Company to make monthly payments of $0.6 million, which will increase to $1.1 million in November 2023. The Loans were issued with an original issue discount of $1.89 million.
The lenders received warrants to purchase approximately million shares of the Company’s common stock, exercisable for four years at $ per share and warrants to purchase another approximately million shares of the Company’s common stock, exercisable for four years at $ per share, subject to adjustment.
On November 7, 2022, Ault Aviation used proceeds from the Loans to purchase a private aircraft for a total purchase price of $15.8 million. In addition, the Company and certain of its subsidiaries entered into various agreements as collateral for the repayment of the Loans, including (i) a security interest in certain Bitcoin mining equipment, (ii) a pledge of the membership interests of Third Avenue Apartments, LLC, a wholly owned subsidiary of the Company (“Third Apartments”), (iii) a pledge of the membership interests of Alliance Cloud Services, LLC, a wholly owned subsidiary of the Company (“Alliance Cloud”), (iv) a pledge of the membership interests of Ault Aviation, LLC, a wholly owned subsidiary of the Company (“Ault Aviation”), (v) a pledge in a segregated deposit account of $1.5 million of cash, (vi) a mortgage and security agreement by Third Avenue on the real estate property owned by Third Avenue in St. Petersburg, Florida, (vii) a future advance mortgage by Alliance Cloud on the real estate property owned by Alliance Cloud in Dowagiac, Michigan, and (viii) an aircraft mortgage and security agreement by Ault Aviation on the private aircraft purchased by Ault Aviation on November 7, 2022. The Loans are further secured by a guaranty provided by Ault Lending and Milton C. Ault, the Executive Chairman of the Company.
3% Secured Promissory Notes
On November 18, 2022, the Company, through its BNI subsidiary, entered into a note purchase agreement providing for the issuance of secured promissory notes with an aggregate principal face amount of $8,181,819 and an interest rate of 3%. The purchase price (proceeds to the Company) for the secured promissory notes was $8.2 million. The secured promissory notes have a security interest in certain marketable securities to be acquired by BNI (the “Collateral”).
The maturity date of the secured promissory notes is May 18, 2023. When the Company sells the Collateral, the Company is required to make a payment towards the secured promissory notes equal to 45% of the realized gains. After the secured promissory notes have been repaid in full and until all of the Collateral is sold, when the Company sells any remaining Collateral, the Company is required to give the investors a profits participation interest equal to 45% of the realized gains.
| F-31 |
Amendment to 10% Secured Promissory Notes
On November 18, 2022, the Company’s BNI subsidiary entered into an amendment to the 10% secured promissory notes issued on August 10, 2022, whereby the investors permitted the Company to (i) elect to utilize one of the six monthly forbearances under the notes for the November 2022 monthly payment and (ii) make the forbearance payment with the December 2022 monthly payment.
| F-32 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this quarterly report, the “Company,” “BitNile,” “we,” “us” and “our” refer to BitNile Holdings, Inc., a Delaware corporation. BitNile 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, we own and operate a data center at which we mine Bitcoin, and provide mission-critical products that support a diverse range of industries, including defense/aerospace, industrial, automotive, medical/biopharma, karaoke audio equipment, hotel operations and textiles. In addition, we own and operate hotels and extends credit to select entrepreneurial businesses through a licensed lending subsidiary.
Recent Events and Developments
On February 4, 2022, we and our wholly owned subsidiary Ault Alliance, Inc. (“Ault Alliance”) entered into a securities purchase agreement providing for our purchase of BitNile, Inc. (“BNI”) from Ault Alliance. As a result of this transaction, both BNI and Ault Alliance are each stand-alone wholly owned subsidiaries of ours.
On February 10, 2022, consistent with our objective to have BNI operate the entirety of our business that relates to cryptocurrencies, Ault Alliance assigned the entirety of its interest in Alliance Cloud Services, LLC (“ACS”) to BNI.
On February 25, 2022, we 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”). As of September 30, 2022, we had sold an aggregate of 256.7 million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $168.0 million.
On March 20, 2022, we and our majority owned subsidiary Imperalis Holding Corp. (“IMHC”) entered into a securities purchase agreement (the “Agreement”) with TurnOnGreen, Inc. (“TurnOnGreen”), a wholly owned subsidiary of ours. According to the Agreement, which closed on September 6, 2022. we (i) delivered to IMHC all of the outstanding shares of common stock of TurnOnGreen that we own, and (ii) eliminated the intracompany accounts between us and TurnOnGreen evidencing historical equity investments made by us in TurnOnGreen, in the approximate amount of $36 million, in consideration for the issuance by IMHC to us (the “Transaction”) of an aggregate of 25,000 newly designated shares of Series A Preferred Stock (the “IMHC Preferred Stock”), with each such share having a stated value of $1,000. The IMHC Preferred Stock has an aggregate liquidation preference of $25 million, is convertible into shares of IMHC’s common stock, par value $0.001 per share (the “IMHC Common Stock”) at our option, is redeemable by us, and entitles us to vote with the IMHC Common Stock on an as-converted basis. On September 5, 2022, we, IMHC and TurnOnGreen entered into an amendment to the Agreement (the “Amendment”), pursuant to which IMHC agreed to (i) use commercially reasonable efforts to effectuate a distribution by us of approximately 140 million shares of IMHC Common Stock beneficially owned by us (the “Distribution”), including the filing of a registration statement (the “Distribution Registration Statement”) with the Securities and Exchange Commission (the “SEC”), (ii) to issue our warrants to purchase an equivalent number of shares of IMHC Common Stock to be issued in the Distribution (the “Warrants”), and (iii) to register the Warrants and the shares of IMHC Common Stock issuable upon exercise of the Warrants on the Distribution Registration Statement. IMHC and us will mutually agree to the terms and conditions of the Warrants and the Distribution Registration Statement after the Closing Date.
On March 30, 2022, we fully paid our $66 million senior secured notes (the “Senior Notes”) and accrued interest. The 10% original issuance discount promissory notes were sold in December 2021 and were due and payable on March 31, 2022.
On April 22, 2022, Ault Alliance entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with EYP Group Holdings, Inc. and each of its subsidiaries and affiliates listed on the signature page to the Asset Purchase Agreement (collectively, “EYP”), pursuant to which Ault Alliance agreed to purchase substantially all of the assets of EYP (such assets, the “Assets,” and such transaction, the “Asset Purchase”). On April 24, 2022, EYP filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Bankruptcy Court has permitted joint administration of the Chapter 11 cases under the caption “In re EYP Group Holdings, Inc., et al.”, Case No. 22-10367 (MFW) (the “Chapter 11 Cases”).
| 1 |
Under the Asset Purchase Agreement, Ault Alliance or its designee(s), upon the closing of the transactions contemplated thereby, were to purchase the Assets and assume certain of EYP’s obligations associated with the purchased Assets through a supervised sale under Section 363 of the Bankruptcy Code. Ault Alliance’s stalking horse bid is based on an enterprise value of approximately $67.7 million, which includes the purchase price for the Assets under the Asset Purchase Agreement of $62.5 million, as adjusted by a closing working capital adjustment (the “Purchase Price”), plus Ault Alliance’s assumption of certain liabilities. The Purchase Price would be paid in cash, less the outstanding amount of the DIP Loans and the senior secured loans previously issued by Ault Alliance to EYP, in an approximate aggregate amount of $11.8 million, and less the amount of certain liabilities assumed by Ault Alliance. The Asset Purchase Agreement required the Asset Purchase to close by June 30, 2022. Consummation of the Asset Purchase was subject to Bankruptcy Court approved bidding procedures, higher and better offers made in the auction by other potential bidders, approval of the highest bidder by the Bankruptcy Court and customary closing conditions. On July 7, 2022, we announced that Ault Alliance did not acquire the assets of EYP as a result of a higher bidder. Ault Alliance lent $8.0 million to EYP and earned $4.7 million in interest, penalties and break-up fees from October 2021 through June 2022. The principal amount of the loans, interest, penalties and break-up fees, were fully repaid on June 30, 2022.
On April 26, 2022, Ault Lending, LLC (“Ault Lending”) made an additional $4 million investment in Alzamend Neuro, Inc. (“Alzamend”), a related party and early clinical-stage biopharmaceutical company focused on developing novel products for the treatment of neurodegenerative diseases and psychiatric disorders. During 2021, Ault Lending entered into a securities purchase agreement (the “SPA”) with Alzamend to invest $10 million in Alzamend common stock and warrants, subject to the achievement of certain milestones. Ault Lending had previously funded $6 million pursuant to the terms of the SPA and the achievement of certain milestones related to the U.S. Food and Drug Administration approval of Alzamend’s Investigational New Drug application and Phase 1a human clinical trials for AL001. On April 26, 2022, Ault Lending funded the remaining amount due to achievement of the final milestone, the receipt of the full data set from Alzamend’s Phase 1 clinical trial for AL001. Ault Lending retains the option to acquire an additional 6,666,667 shares of Alzamend common stock and warrants to purchase another 3,333,334 such shares for an aggregate of $10 million.
On May 12, 2022, BNI closed a $1.8 million membership interest purchase agreement whereby BNI acquired the 30% minority interest of ACS which BNI did not previously own, resulting in ACS becoming a wholly-owned subsidiary of BNI. ACS owns and operates our Michigan data center, where BNI conducts our Bitcoin mining operations.
On May 26, 2022, we entered into an underwriting agreement (the “Underwriting Agreement”) with Alexander Capital, L.P., as representative of the several underwriters named therein (collectively, the “Underwriters”), relating to a firm commitment public offering of 123,423 newly issued shares of our 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”) at a public offering price of $25.00 per share.
On June 1, 2022, we and the Underwriters mutually agreed to increase the size of the offering of our Series D Preferred Stock from 123,423 shares to 144,000 shares. Thus, we and the Underwriters agreed to terminate the Underwriting Agreement and entered into a side letter to terminate such Underwriting Agreement (the “Side Letter”). Following the execution of the Side Letter, on June 1, 2022, we entered into a new underwriting agreement (the “New Underwriting Agreement”) with the Underwriters, relating to a firm commitment public offering of 144,000 newly issued shares of our Series D Preferred Stock at a public offering price of $25.00 per share. On June 3, 2022, we closed the offering of the sale of the 144,000 shares of our Series D Preferred Stock for gross proceeds of approximately $3.6 million, before deducting offering expenses. Net proceeds to us, after payment of commissions, non-accountable fees and offering expenses, were approximately $3.1 million.
On June 14, 2022, we entered into an At-The-Market issuance sales agreement with Ascendiant Capital to sell shares of Series D Preferred Stock having an aggregate offering price of up to $46.4 million from time to time, through an “at the market offering” program (the “2022 Preferred ATM Offering”). As of September 30, 2022, we had sold an aggregate of 2,618 shares of Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for gross proceeds of $57,000.
On June 1, 2022, we converted our convertible promissory notes of Avalanche International Corp. (“AVLP”) and accrued interest into common stock of AVLP. We converted $20.0 million principal and $5.9 million of accrued interest receivable at a conversion price of $0.50 per share and received 51,889,168 shares of common stock increasing our common stock ownership of AVLP from less than 20% to approximately 92%.
Beginning in June 2022, we, through Ault Lending, began making open market purchases of The Singing Machine Company, Inc. (“SMC”) common stock and on June 15, 2022, we owned more than 50% of the issued and outstanding common stock of SMC. As of June 15, 2022, the purchase price of the common stock acquired totaled $7.4 million and on June 15, 2022 a $3.1 million gain was recognized in interest and other income for the remeasurement of our previously held ownership interest to $10.5 million, based on the trading price of SMC common stock.
| 2 |
On August 10, 2022, BNI and Ault Lending entered into a Note Purchase Agreement (the “NPA”) with two accredited investors (the “Investors”) providing for the issuance of secured promissory notes (the “Notes”). The Notes have a principal face amount of $11,000,000 and bear interest at 10% per annum, payable monthly in arrears, pursuant to the terms of the Notes. The maturity date of the Notes is August 10, 2023. BNI is required to make an aggregate monthly payment (a “Monthly Payment”) of $1,000,000 on the tenth calendar day of each month, starting in September 2022. The Monthly Payment includes principal and interest pursuant to the amortization table set forth in the Notes. After BNI makes the first six Monthly Payments, BNI may elect to pay a forbearance fee of $125,000 to an Investor, or an aggregate of $250,000 to the two Investors (each, a “Monthly Forbearance”) in lieu of a Monthly Payment, which Monthly Forbearance would extend the maturity date of such Notes by one month, provided that BNI may not elect to make a Monthly Forbearance in consecutive months. BNI may prepay the full outstanding principal and accrued but unpaid interest at any time, provided that if BNI prepays the Notes, BNI is required to pay the Investors the amount of interest that would have accrued from the date of prepayment until the first anniversary of the issuance date of the Notes. The purchase price for the Notes was $10 million.
Pursuant to the NPA, BNI, Ault Lending and Helios Funds LLC, as the collateral agent on behalf of the Investors (the “Agent”) entered into a security agreement (the “Security Agreement”), pursuant to which (i) Ault Lending granted to the Investors a security interest in marketable securities, investments and other property having a value of $10 million in an Ault Lending brokerage account and (ii) BNI granted to the Investors a security interest in 4,000 S19 Pro Antminers (the “Miners”), provided that the number of Miners would be reduced to 2,000 after BNI makes the third Monthly Payment (as defined below), as set forth in the Security Agreement. In addition, pursuant to a subsidiary guaranty, Ault Lending jointly and severally agreed to guarantee and act as surety for BNI’s obligation to repay the Notes. The Notes are further secured by a guaranty we provided.
On August 15, 2022, BNI entered into a Master Agreement (the “Master Agreement”) and Order Form (the “Order Form” and together with the Master Agreement, the “Hosting Documents”) with Compute North LLC (“Compute North”) providing for the hosting by Compute North of Bitcoin miners owned by BNI. Pursuant to the Hosting Documents, Compute North will host approximately 6,500 S19j Pro Antminers (the “Hosted Miners”) owned by BNI for a period of five (5) years (the “Term”). BNI agreed to pay a fee for the Hosted Miners (the “Monthly Service Fee”), together with a monthly package fee per Hosted Miner. The Monthly Service Fee is payable based on the actual hashrate performance of the Hosted Miners, of which 70% of the anticipated Monthly Service Fee is payable in advance, and the remaining Monthly Service Fee, if any, will be invoiced in arrears. We paid Compute North a deposit of approximately $2.0 million (the “Deposit”) to be used towards the Monthly Service Fee. As of the date of this filing, none of the Hosted Miners are in operation as we are awaiting the energization of the Hosted Miners at the facility.
Under the Master Agreement, BNI granted Compute North a continuing first-position security interest in the Hosted Miners, as collateral for BNI’s obligations under the Hosting Documents. Upon an event of default (as defined in the Master Agreement) by BNI, Compute North has the right to terminate the Hosting Documents and BNI is obligated to pay to Compute North all amounts then due under the Hosting Documents, together with a fee as liquidated damages, equal to the amount of fees that BNI would have been required to pay through the end of the Term.
On September 22, 2022, Compute North (along with its affiliated debtors), filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas under Chapter 11 of the U.S. Bankruptcy Code (11 U.S. Code section 101 et seq.). The ultimate outcome of the bankruptcy process, and its impact on the Deposit, remains to be determined. We assessed this financial exposure and recorded an impairment of the Deposit totaling $2 million during the three months ended September 30, 2022. We have retained counsel to assist in this matter.
On November 7, 2022, we and certain of our subsidiaries borrowed $18.9 million of principal amount of term loans (the “Loans”) from a group of institutional investors (the “Financing”). The Loans mature in 18 months, which may be extended to 24 months, accrue interest at the rate of 8.5% per annum and are secured by certain of our assets and our various subsidiaries. Starting in January 2023, the lenders have the right to require us to make monthly payments of $0.6 million, which will increase to $1.1 million in November 2023. The Loans were issued with an original issue discount of $1.89 million.
The lenders received warrants to purchase approximately 4.5 million shares of our common stock, exercisable for four years at $0.45 per share and warrants to purchase another approximately 4.5 million shares of our common stock, exercisable for four years at $0.75 per share, subject to adjustment.
| 3 |
On November 7, 2022, Ault Aviation used proceeds from the Loans to purchase a private aircraft for a total purchase price of $15.8 million. In addition, we and certain of our subsidiaries entered into various agreements as collateral for the repayment of the Loans, including (i) a security interest in certain Bitcoin mining equipment, (ii) a pledge of the membership interests of Third Avenue Apartments, LLC, our wholly owned subsidiary (“Third Apartments”), (iii) a pledge of the membership interests of Alliance Cloud Services, LLC, our wholly owned subsidiary (“Alliance Cloud”), (iv) a pledge of the membership interests of Ault Aviation, LLC, our wholly owned subsidiary (“Ault Aviation”), (v) a pledge in a segregated deposit account of $1.5 million of cash, (vi) a mortgage and security agreement by Third Avenue on the real estate property owned by Third Avenue in St. Petersburg, Florida, (vii) a future advance mortgage by Alliance Cloud on the real estate property owned by Alliance Cloud in Dowagiac, Michigan, and (viii) an aircraft mortgage and security agreement by Ault Aviation on the private aircraft purchased by Ault Aviation on November 7, 2022. The Loans are further secured by a guaranty provided by Ault Lending and Milton C. Ault, our Executive Chairman.
On November 18, 2022, BNI entered into another Note Purchase Agreement (the “November NPA”) with the Investors providing for the issuance of secured promissory notes (the “November Notes”). The November Notes have a principal face amount of $8,181,819 and bear interest at 3% per annum pursuant to the terms of the November Notes. The maturity date of the November Notes is May 18, 2023. When BNI sells the Collateral (as defined below), BNI is required to make a payment towards the November Notes equal to 45% of the realized gains. After the November Notes have been repaid in full and until all of the Collateral is sold, when BNI sells any remaining Collateral, BNI is required to give the investors a profits participation interest equal to 45% of the realized gains.
Pursuant to the November NPA, BNI, Ault Lending and the Agent entered into a security agreement (the “November Security Agreement”), pursuant to which BNI and Ault Lending granted to the Investors a security interest in marketable securities to be acquired by BNI (the “Collateral”).
On November 18, 2022, BNI and the Investors also entered into an amendment to the Notes issued in August 2022, whereby the Investors permitted BNI to (i) elect to utilize one of the six monthly forbearances under the Notes for the November 2022 monthly payment and (ii) make the forbearance payment with the December 2022 monthly payment.
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.
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) programs 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 oil exploration, defense/aerospace, industrial, automotive, medical/biopharma, karaoke audio equipment, 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.bitnile.com.
| 4 |
Results of Operations
Results of Operations for the Three Months Ended September 30, 2022 and 2021
The following table summarizes the results of our operations for the three months ended September 30, 2022 and 2021.
| For the Three Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 27,031,000 | $ | 7,803,000 | ||||
| Revenue, cryptocurrency mining | 3,874,000 | 272,000 | ||||||
| Revenue, hotel operations | 5,513,000 | - | ||||||
| Revenue, lending and trading activities | 13,360,000 | (38,869,000 | ) | |||||
| Total revenue | 49,778,000 | (30,794,000 | ) | |||||
| Cost of revenue, products | 20,193,000 | 5,011,000 | ||||||
| Cost of revenue, cryptocurrency mining | 5,255,000 | 260,000 | ||||||
| Cost of revenue, hotel operations | 3,230,000 | - | ||||||
| Total cost of revenue | 28,678,000 | 5,271,000 | ||||||
| Gross profit (loss) | 21,100,000 | (36,065,000 | ) | |||||
| Total operating expenses | 26,411,000 | 13,809,000 | ||||||
| Loss from operations | (5,311,000 | ) | (49,874,000 | ) | ||||
| Interest and other income | 725,000 | 125,000 | ||||||
| Accretion of discount on note receivable, related party | - | 4,210,000 | ||||||
| Interest expense | (3,972,000 | ) | (140,000 | ) | ||||
| Change in fair value of marketable equity securities | 114,000 | (750,000 | ) | |||||
| Gain on extinguishment of debt | - | - | ||||||
| Realized gain on digital currencies and marketable securities | 595,000 | 30,000 | ||||||
| Loss from investment in unconsolidated entity | - | - | ||||||
| Change in fair value of warrant liability | (3,000 | ) | 259,000 | |||||
| Loss income before income taxes | (7,852,000 | ) | (46,140,000 | ) | ||||
| Income tax (provision) benefit | (144,000 | ) | 3,366,000 | |||||
| Net loss | (7,996,000 | ) | (42,774,000 | ) | ||||
| Net loss (income) attributable to non-controlling interest | 725,000 | (96,000 | ) | |||||
| Net loss attributable to BitNile Holdings, Inc. | (7,271,000 | ) | (42,870,000 | ) | ||||
| Preferred dividends | (190,000 | ) | (4,000 | ) | ||||
| Net loss available to common stockholders | $ | (7,461,000 | ) | $ | (42,874,000 | ) | ||
| Comprehensive loss | ||||||||
| Net loss available to common stockholders | $ | (7,461,000 | ) | $ | (42,874,000 | ) | ||
| Other comprehensive income (loss) | ||||||||
| Foreign currency translation adjustment | 306,000 | (182,000 | ) | |||||
| Net unrealized loss on derivative securities of related party | - | (4,849,000 | ) | |||||
| Other comprehensive income (loss) | 306,000 | (5,031,000 | ) | |||||
| Total comprehensive loss | $ | (7,155,000 | ) | $ | (47,905,000 | ) | ||
| 5 |
Revenues
Revenues by segment for the three months ended September 30, 2022 and 2021 are as follows:
| For the Three Months Ended Sept 30, | ||||||||||||||||
| 2022 | 2021 | Increase | % | |||||||||||||
| GWW | $ | 7,782,000 | $ | 6,373,000 | $ | 1,409,000 | 22 | % | ||||||||
| TurnOnGreen | 1,662,000 | 1,094,000 | 568,000 | 52 | % | |||||||||||
| SMC | 17,114,000 | - | 17,114,000 | — | ||||||||||||
| BNI | ||||||||||||||||
| Revenue, cryptocurrency mining | 3,874,000 | 272,000 | 3,602,000 | 1324 | % | |||||||||||
| Revenue, commercial real estate leases | 272,000 | 249,000 | 23,000 | 9 | % | |||||||||||
| Ault Global Real Estate Equities, Inc. (“AGREE”) | 5,513,000 | - | 5,513,000 | — | ||||||||||||
| Ault Alliance: | ||||||||||||||||
| Revenue, lending and trading activities | 13,360,000 | (38,869,000 | ) | 52,229,000 | -134 | % | ||||||||||
| Other | 201,000 | 87,000 | 114,000 | 131 | % | |||||||||||
| Total revenue | $ | 49,778,000 | $ | (30,794,000 | ) | $ | 80,572,000 | -262 | % | |||||||
Our revenues increased by $80.6 million to $49.8 million for the three months ended September 30, 2022, from negative $30.8 million for the three months ended September 30, 2021.
GWW
GWW revenues increased by $1.4 million, or 22%, to $7.8 million for the three months ended September 30, 2022, from $6.4 million for the three months ended September 30, 2021. The increase in revenue from our GWW segment for customized solutions for the military markets reflects $0.9 million from GIGA, which was acquired on September 8, 2022 and $0.5 million higher revenues from Gresham UK, a GWW subsidiary, related to naval power projects that had previously been delayed.
TurnOnGreen
TurnOnGreen revenues for the three months ended September 30, 2022 of $1.7 million increased $0.6 million, or 52%, from $1.1 million for the three months ended September 30, 2021, due to increased sales to defense customers.
SMC
SMC revenues increased by $17.1 million for the three months ended September 30, 2022, compared to $0 for the three months ended September 30, 2021, due to the acquisition of SMC in June 2022.
BNI
Revenues from BNI’s cryptocurrency mining operations were $3.9 million for the three months ended September 30, 2022, compared to $0.3 million for three months ended September 30, 2021. During 2021, we began to purchase Bitcoin mining equipment, which were primarily delivered in 2022, and increased our cryptocurrency mining activities. Our decision to increase our cryptocurrency mining operations was based on several factors, which positively affected the number of active miners we operated, including the market prices of digital currencies, and favorable power costs available at our Michigan data center.
AGREE
AGREE revenues were $5.5 million for the three months ended September 30, 2022 compared to $0 for the three months ended September 30, 2021. On December 22, 2021, AGREE acquired four hotel properties for $71.3 million, consisting of a 136-room Courtyard by Marriott, a 133-room Hilton Garden Inn and a 122-room Residence Inn by Marriott in Middleton, WI, as well as a 135-room Hilton Garden Inn in Rockford, IL.
| 6 |
Ault Alliance
Revenues from our lending and trading activities increased to $13.4 million for the three months ended September 30, 2022, from negative revenues of $38.9 million for the three months ended September 30, 2021, which is attributable to significant realized and unrealized gains in the current year period and unrealized losses in the prior year period from our investment portfolio. During the three months ended September 30, 2022, Ault Lending generated significant income from appreciation of investments in marketable securities as well as shares of common stock underlying convertible notes and warrants issued to Ault Lending in certain financing transactions. Revenue from lending and trading activities during the three months ended September 30, 2022 included an approximate $2.5 million unrealized gain from our investment in Alzamend. Under its business model, Ault Lending also generates revenue through origination fees charged to borrowers and interest generated from each loan.
Revenues from our trading activities during the three months ended September 30, 2021 included significant unrealized losses from market price changes related to Alzamend. During the three months ended September 30, 2021, we recorded an unrealized loss of $27.4 million related to our investment in Alzamend common stock. During the three months ended September 30, 2021, we recorded an unrealized loss on our investment in warrants of Alzamend of $6.0 million. Our investment in Alzamend will be revalued on each balance sheet date.
Revenues from our trading activities during the three months ended September 30, 2022 included net gains 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.
Gross Margins
Gross margins were 42.4% for the three months ended September 30, 2022, compared to 117.1% for the three months ended September 30, 2021. Our gross margins have typically ranged between 30% and 35%, with slight variations depending on the overall composition of our revenue.
Our gross margins of 42.4% recognized during the three months ended September 30, 2022 were impacted by the favorable margins from our lending and trading activities and modest margins on cryptocurrency mining operations due to the decline in the price of Bitcoin. 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, 2022 and 2021, would have been 27.6% and 35.8%, respectively, with gross margins for the three months ended September 30, 2022 slightly lower than our historical averages due to gross margins from SMC, which were 23.8%.
Research and Development
Research and development expenses were flat at $0.5 million for the three months ended September 30, 2022 and 2021.
Selling and Marketing
Selling and marketing expenses were $7.4 million for the three months ended September 30, 2022, compared to $2.0 million for the three months ended September 30, 2021, an increase of $5.4 million, or 273%. The increase was the result of $4.2 million higher marketing costs at Ault Alliance, including $3.2 million related to an advertising sponsorship agreement as well as a $0.9 million increases in sales and marketing costs from SMC, which was acquired in June 2022.
General and Administrative
General and administrative expenses were $15.9 million for the three months ended September 30, 2022, compared to $11.3 million for the three months ended September 30, 2021, an increase of $4.7 million, or 41%. General and administrative expenses increased from the comparative prior period, mainly due to:
| · | general and administrative costs of $2.6 million from SMC, which was acquired in June 2022; |
| · | general and administrative costs of $0.6 million from AVLP, which was acquired in June 2022; |
| · | general and administrative costs of $0.6 million from our hotel operations, which were acquired in December 2021; |
| · | $2.2 million increase in the accrual of a performance bonus related to realized gains on trading activities during the period; |
| · | increased costs of $0.6 million, in part related to the efforts to spin off TurnOnGreen and GWW; and |
| · | partially offset by lower non-cash stock compensation costs of $2.5 million. |
| 7 |
Interest and Other Income
Interest and other income was $0.7 million for the three months ended September 30, 2022 compared to $0.1 million for the three months ended September 30, 2021. The increase in interest and other income is primarily due to income from Ault Disruptive from cash and marketable securities held in the trust account.
Accretion of discount on note receivable, related party
Accretion of discount on note receivable, related party was $0 for the three months ended September 30, 2022 and $4.2 million for the three months ended September 30, 2021. The prior year amount was due to the significant decline in the value of warrants in AVLP, accretion of the warrant discount was accelerated, resulting in a discount of $0 related to warrants issued in conjunction with the convertible promissory note of AVLP as of September 30, 2021.
Interest Expense
Interest expense was $4.0 million for the three months ended September 30, 2022, compared to $0.1 million for the three months ended September 30, 2021. The increase in interest expense is due primarily to interest on the $58.4 million construction loans related to the hotel properties purchased in December 2021 and interest on the $11 million secured promissory notes issued in August 2022.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability was a loss of $3,000 for the three months ended September 30, 2022, compared to a gain of $0.3 million for the three months ended September 30, 2021. During the three months ended September 30, 2021, the fair value of the warrants that were issued during 2021 in a series of debt financings decreased by $0.3 million. The fair value of warrant liabilities is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the condensed consolidated statements of operations and comprehensive (loss) income.
Change in Fair Value of Marketable Equity Securities
Change in fair value of marketable equity securities was a gain of $0.1 million for the three months ended September 30, 2022, compared to a loss of $0.8 million for the three months ended September 30, 2021. The loss generated in the prior year period relates to an investment in marketable securities held by Microphase that was fully sold in the fourth quarter of 2021 as well as the loss on an investment in AVLP common stock.
Realized Gain on Digital Currencies and Marketable Securities
Realized gain on digital currencies and marketable securities was $0.6 million for the three months ended September 30, 2022, compared to $30,000 for the three months ended September 30, 2021. Realized gain for the three months ended September 30, 2022 related primarily to gains on the sale of Bitcoin by BNI.
Other Comprehensive Loss
Other comprehensive loss was $0.3 million for the three months ended September 30, 2022, compared to other comprehensive loss of $5.0 million for the three months ended September 30, 2021. Other comprehensive loss of $0.3 million for the three months ended September 30, 2022 was attributable to changes in currency exchange rates. Other comprehensive loss for the three months ended September 30, 2021, was primarily due to unrealized losses in the warrant derivative securities that we received as a result of our investment in AVLP, a related party.
| 8 |
Results of Operations for the Nine Months Ended September 30, 2022 and 2021
The following table summarizes the results of our operations for the nine months ended September 30, 2022 and 2021.
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 43,539,000 | $ | 24,272,000 | ||||
| Revenue, cryptocurrency mining | 11,398,000 | 693,000 | ||||||
| Revenue, hotel operations | 12,809,000 | - | ||||||
| Revenue, lending and trading activities | 32,224,000 | 19,615,000 | ||||||
| Total revenue | 99,970,000 | 44,580,000 | ||||||
| Cost of revenue, products | 30,985,000 | 16,011,000 | ||||||
| Cost of revenue, cryptocurrency mining | 12,206,000 | 646,000 | ||||||
| Cost of revenue, hotel operations | 8,350,000 | - | ||||||
| Total cost of revenue | 51,541,000 | 16,657,000 | ||||||
| Gross profit | 48,429,000 | 27,923,000 | ||||||
| Total operating expenses | 76,429,000 | 30,773,000 | ||||||
| (Loss) income from operations | (28,000,000 | ) | (2,850,000 | ) | ||||
| Interest and other income | 1,255,000 | 176,000 | ||||||
| Accretion of discount on note receivable, related party | - | 4,210,000 | ||||||
| Interest expense | (35,827,000 | ) | (475,000 | ) | ||||
| Change in fair value of marketable equity securities | 355,000 | (705,000 | ) | |||||
| Gain on extinguishment of debt | - | 929,000 | ||||||
| Realized gain on digital currencies and marketable securities | 661,000 | 428,000 | ||||||
| Loss from investment in unconsolidated entity | (924,000 | ) | - | |||||
| Change in fair value of warrant liability | (27,000 | ) | (130,000 | ) | ||||
| (Loss) income before income taxes | (62,507,000 | ) | 1,583,000 | |||||
| Income tax (provision) benefit | (361,000 | ) | (144,000 | ) | ||||
| Net (loss) income | (62,868,000 | ) | 1,439,000 | |||||
| Net loss (gain) attributable to non-controlling interest | 1,061,000 | (93,000 | ) | |||||
| Net (loss) income attributable to BitNile Holdings, Inc. | (61,807,000 | ) | 1,346,000 | |||||
| Preferred dividends | (239,000 | ) | (13,000 | ) | ||||
| Net (loss) income available to common stockholders | $ | (62,046,000 | ) | $ | 1,333,000 | |||
| Comprehensive (loss) income | ||||||||
| Net (loss) income available to common stockholders | $ | (62,046,000 | ) | $ | 1,333,000 | |||
| Other comprehensive income (loss) | ||||||||
| Foreign currency translation adjustment | (1,452,000 | ) | (141,000 | ) | ||||
| Net unrealized loss on derivative securities of related party | - | (7,773,000 | ) | |||||
| Other comprehensive loss | (1,452,000 | ) | (7,914,000 | ) | ||||
| Total comprehensive loss | $ | (63,498,000 | ) | $ | (6,581,000 | ) | ||
| 9 |
Revenues
Revenues by segment for the nine months ended September 30, 2022 and 2021 are as follows:
| For the Nine Months Ended September 30, | Increase | |||||||||||||||
| 2022 | 2021 | (Decrease) | % | |||||||||||||
| GWW | $ | 21,530,000 | $ | 19,198,000 | $ | 2,332,000 | 12 | % | ||||||||
| TurnOnGreen | 3,853,000 | 4,308,000 | (455,000 | ) | -11 | % | ||||||||||
| SMC | 17,114,000 | - | 17,114,000 | — | ||||||||||||
| BNI | ||||||||||||||||
| Revenue, cryptocurrency mining | 11,398,000 | 693,000 | 10,705,000 | 1545 | % | |||||||||||
| Revenue, commercial real estate leases | 822,000 | 530,000 | 292,000 | 55 | % | |||||||||||
| AGREE | 12,809,000 | - | 12,809,000 | — | ||||||||||||
| Ault Alliance: | ||||||||||||||||
| Revenue, lending and trading activities | 32,224,000 | 19,615,000 | 12,609,000 | 64 | % | |||||||||||
| Other | 220,000 | 236,000 | (16,000 | ) | -7 | % | ||||||||||
| Total revenue | $ | 99,970,000 | $ | 44,580,000 | $ | 55,390,000 | 124 | % | ||||||||
Our revenues increased by $55.4 million, or 124%, to $100.0 million for the nine months ended September 30, 2022, from $44.6 million for the nine months ended September 30, 2021.
GWW
GWW revenues increased by $2.3 million, or 12%, to $21.5 million for the nine months ended September 30, 2022, from $19.2 million for the nine months ended September 30, 2021. The increase in revenue from our GWW segment for customized solutions for the military markets reflects $0.9 million from GIGA, which was acquired on September 8, 2022 and $0.7 million higher revenues from Gresham UK, a GWW subsidiary, related to naval power projects that had previously been delayed, and $0.5 million higher revenues from Relec.
TurnOnGreen
TurnOnGreen revenues for the nine months ended September 30, 2022 of $3.9 million declined $0.5 million, or 11%, from $4.2 million for the nine months ended September 30, 2021, due to supply chain challenges in the first half of the year partially offset by increased sales to defense customers in the third fiscal quarter of 2022.
SMC
SMC revenues increased by $17.1 million for the nine months ended September 30, 2022, compared to $0 for the nine months ended September 30, 2021, due to the acquisition of SMC in June 2022.
BNI
Revenues from BNI’s cryptocurrency mining operations were $11.4 million for the nine months ended September 30, 2022, compared to $0.7 million for nine months ended September 30, 2021. During 2021, we began to purchase Bitcoin mining equipment, which were primarily delivered in 2022, and increased our cryptocurrency mining activities. Our decision to increase our cryptocurrency mining operations in 2022 was based on several factors, which positively affected the number of active miners we operated, including the market prices of digital currencies, and favorable power costs available at our Michigan data center.
AGREE
AGREE revenues were $12.8 million for the nine months ended September 30, 2022 compared to $0 for the nine months ended September 30, 2021. On December 22, 2021, AGREE acquired four hotel properties for $71.3 million, consisting of a 136-room Courtyard by Marriott, a 133-room Hilton Garden Inn and a 122-room Residence Inn by Marriott in Middleton, WI, as well as a 135-room Hilton Garden Inn in Rockford, IL.
| 10 |
Ault Alliance
Revenues from our lending and trading activities increased to $32.2 million for the nine months ended September 30, 2022, from $19.6 million for the nine months ended September 30, 2021, which is primarily attributable to significant realized and unrealized gains in the current year period and unrealized gains in the prior year period from our investment portfolio. During the nine months ended September 30, 2022, Ault Lending generated significant income from appreciation of investments in marketable securities as well as shares of common stock underlying convertible notes and warrants issued to Ault Lending in certain financing transactions. Revenue from lending and trading activities during the nine months ended September 30, 2022 included a $4.8 million unrealized loss from our investment in Alzamend. Revenue from lending and trading activities during the nine months ended September 30, 2021 included a $3.8 million unrealized gain from our investment in Alzamend. Under its business model, Ault Lending also generates revenue through origination fees charged to borrowers and interest generated from each loan.
Revenues from our trading activities during the nine months ended September 30, 2022 included significant net gains 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.
Gross Margins
Gross margins decreased to 48.4% for the nine months ended September 30, 2022, compared to 62.6% for the nine months ended September 30, 2021. Our gross margins have typically ranged between 30% and 35%, with slight variations depending on the overall composition of our revenue.
Our gross margins of 48.4% recognized during the nine months ended September 30, 2022 were impacted by the favorable margins from our lending and trading activities and modest margins on cryptocurrency mining operations due to the decline in the price of Bitcoin. 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, 2022 and 2021 would have been 29.2% and 34.0%, respectively, with gross margins for the three months ended September 30, 2022, slightly lower than our historical averages due to gross margins from SMC, which were 23.8%.
Research and Development
Research and development expenses increased by $0.3 million to 1.9 million for the nine months ended September 30, 2022, from $1.7 million for the nine months ended September 30, 2021. The increase in research and development expenses was due to product development efforts at TurnOnGreen and GWW.
Selling and Marketing
Selling and marketing expenses were $20.9 million for the nine months ended September 30, 2022, compared to $4.7 million for the nine months ended September 30, 2021, an increase of $16.1 million, or 341%. The increase was the result of $14.7 million higher advertising and promotion costs at Ault Alliance, including $9.4 million related to an advertising sponsorship agreement as well as a $1.8 million increase in sales and marketing personnel and a $0.9 million increase in travel expense. The increase is also attributable to a $0.7 million increase in costs incurred at TurnOnGreen to grow our selling and marketing infrastructure related to our electric vehicle charger products as well as a $0.9 million increases in sales and marketing costs from SMC, which was acquired in June 2022.
General and Administrative
General and administrative expenses were $48.7 million for the nine months ended September 30, 2022, compared to $24.4 million for the nine months ended September 30, 2021, an increase of $24.3 million, or 100%. General and administrative expenses increased from the comparative prior period, mainly due to:
| · | general and administrative costs of $4.3 million from our hotel operations, which were acquired in December 2021; |
| · | general and administrative costs of $2.6 million from SMC, which was acquired in June 2022; |
| · | general and administrative costs of $0.6 million from AVLP, which was acquired in June 2022; |
| 11 |
| · | increased general and administrative costs of $0.8 million from Ault Disruptive, a SPAC which completed its IPO in December 2021; |
| · | non-cash stock compensation costs of $1.0 million; |
| · | $5.0 million increase in the accrual of a performance bonus related to realized gains on trading activities during the period; |
| · | higher salaries of $1.6 million; |
| · | higher audit fees of $1.6 million; |
| · | increased costs of $1.9 million related to the Michigan data center and Bitcoin mining operations; and |
| · | increased legal fees of $2.2 million, including $0.7 million related to the efforts to acquire EYP, Inc. |
Interest and Other Income
Interest and other income was $1.3 million for the nine months ended September 30, 2022, compared to $0.2 million for the nine months ended September 30, 2021. The increase in interest and other income is primarily due to income from Ault Disruptive from cash and marketable securities held in the trust account. Other income for the nine months ended September 30, 2022 included a $2.8 million gain related to remeasurement of our previously held ownership interest of SMC prior to the June 15, 2022 acquisition, based on the trading price of SMC common stock. In addition, other income for the nine months ended September 30, 2022 included a $2.7 million loss related to remeasurement of our previously held ownership interest of AVLP prior to the June 1, 2022 acquisition.
Accretion of discount on note receivable, related party
Accretion of discount on note receivable, related party was $0 for the nine months ended September 30, 2022, compared to $4.2 million for the nine months ended September 30, 2021. The prior year amount was due to the significant decline in the value of warrants in AVLP, accretion of the warrant discount was accelerated, resulting in a discount of $0 related to warrants issued in conjunction with the convertible promissory note of AVLP as of September 30, 2021.
Interest Expense
Interest expense was $35.8 million for the nine months ended September 30, 2022 compared to $0.5 million for the nine months ended September 30, 2021. The increase in interest expense relates primarily to the $66.0 million of Senior Notes issued in December 2021, which were fully paid in March 2022. Interest expense from these Senior Notes included the amortization of debt discount of $26.3 million from the issuance of warrants, a non-cash charge, and original issue discount, in connection with these Senior Notes. In addition, the increase in interest expense includes interest on the $58.4 million construction loans related to the hotel properties purchased in December 2021 and interest on the $11 million secured promissory notes issued in August 2022.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability was a loss of $27,000 for the nine months ended September 30, 2022, compared to a loss of $0.1 million for the nine months ended September 30, 2021. The fair value of warrant liabilities is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the condensed consolidated statements of operations and comprehensive (loss) income.
Change in Fair Value of Marketable Equity Securities
Change in fair value of marketable equity securities was a gain of $0.4 million for the nine months ended September 30, 2022, compared to a loss of $0.7 million for the nine months ended September 30, 2021. The loss generated in the prior year period relates to an investment in marketable securities held by Microphase that was fully sold in the fourth quarter of 2021 as well as the loss on an investment in AVLP common stock.
Realized Gain on Digital Currencies and Marketable Securities
Realized gain on marketable securities was $0.7 million for the nine months ended September 30, 2022, compared to $0.4 million for the nine months ended September 30, 2021. Realized gain for the nine months ended September 30, 2022 related primarily to gains on the sale of Bitcoin by BNI. Realized gains in the prior year period related to realized gains from an investment in marketable securities held by Microphase, a portion of which was sold during the nine months ended September 30, 2021.
| 12 |
Loss From Investment in Unconsolidated Entity
Loss from investment in unconsolidated entity was $0.9 million for the nine months ended September 30, 2022, compared to $0 for the nine months ended September 30, 2021, representing our share of losses from our equity method investment in AVLP prior to the June 1, 2022 acquisition.
Gain on Extinguishment of Debt
Gain on extinguishment of debt was $0 for the nine months ended September 30, 2022, compared to a gain of $0.9 million for the nine months ended September 30, 2021. The prior year gain on extinguishment of debt represents forgiveness of Paycheck Protection Program loans.
Other Comprehensive Loss
Other comprehensive loss was $1.5 million for the nine months ended September 30, 2022, compared to other comprehensive loss of $7.9 million for the nine months ended September 30, 2021. Other comprehensive loss of $1.5 million for the nine months ended September 30, 2022 was attributable to changes in currency exchange rates. Other comprehensive loss for the nine months ended September 30, 2021 was primarily due to unrealized losses in the warrant derivative securities that we received as a result of our investment in AVLP.
Liquidity and Capital Resources
On September 30, 2022, we had cash and cash equivalents of $10.1 million (excluding restricted cash of $4.6 million). This compares to cash and cash equivalents of $15.9 million (excluding restricted cash of $5.3 million) at December 31, 2021. The decrease in cash and cash equivalents was primarily due the payment of debt and purchases of property and equipment partially offset by cash provided by financing activities related to the sale of common and preferred stock, as well as proceeds from notes payable and cash provided by operating activities.
Net cash provided by operating activities totaled $12.9 million for the nine months ended September 30, 2022, compared to net cash used in operating activities of $56.9 million for the nine months ended September 30, 2021. Cash provided by operating activities for the nine months ended September 30, 2022 included $68.5 million net cash provided by marketable securities from trading activities related to the operations of Ault Lending, partially offset by operating losses and changes in working capital.
Net cash used in investing activities was $106.4 million for the nine months ended September 30, 2022, compared to $68.7 million for the nine months ended September 30, 2021. Net cash used in investing activities for the nine months ended September 30, 2022 included $84.5 million of capital expenditures primarily related to Bitcoin mining equipment, $22.4 million for investments in equity securities, $8.2 million for the purchase of SMC and $3.7 million for the purchase of GIGA, net of cash received, partially offset by $11.7 million proceeds from the sale of marketable equity securities, $10.5 million principal payments received on loans receivable and $9.0 million proceeds from the sale of digital currencies.
| 13 |
Net cash provided by financing activities was $86.1 million for the nine months ended September 30, 2022, compared to $151.1 million for the nine months ended September 30, 2021, and reflects the following transactions:
| · | 2022 Common ATM Offering – On February 25, 2022, we 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 $200 million from time to time, through the 2022 Common ATM Offering. As of September 30, 2022, we had sold an aggregate of 256.7 million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $168 million. Net proceeds to us, after payment of commissions, were $164 million. |
| · | Public Offering of Series D Preferred Stock – On June 3, 2022, we announced the closing of our public offering of 144,000 shares of our Series D Preferred Stock at a price to the public of $25.00 per share. Gross proceeds from the offering were approximately $3.6 million, before deducting offering expenses. Net proceeds to us, after payment of commissions, non-accountable fees and offering expenses were $3.1 million. |
| 14 |
| · | 2022 Preferred ATM Offering – On June 14, 2022, we entered into an At-The-Market equity offering program with Ascendiant Capital under which we may sell, from time to time, shares of our Series D Preferred Stock for aggregate gross proceeds of up to $46,400,000. As of September 30, 2022, we had sold an aggregate of 10,928 shares of Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for gross proceeds of $0.2 million. |
| · | December 2021 Secured Promissory Notes – On December 30, 2021, we entered into a securities purchase agreement with certain accredited investors providing for the issuance of Senior Notes that bore interest at 8% per annum with an aggregate principal face amount of $66.0 million. The Senior Notes were repaid in March 2022. |
| · | Margin Accounts Payable – During the year ended December 31, 2021, we entered into leverage agreements on certain brokerage accounts, whereby we borrowed $18.5 million. The margin accounts payable were repaid during the three months ended March 31, 2022. During the quarter ended September 30, 2022, we borrowed $2.4 million on our margin account. |
| · | 10% Secured Promissory Notes – On August 10, 2022, we, through our BNI subsidiary, entered into a note purchase agreement providing for the issuance of secured promissory notes with an aggregate principal face amount of $11,000,000 and an interest rate of 10%. The purchase price (proceeds to us) for the secured promissory notes was $10.0 million. The secured promissory notes have a security interest in marketable securities, investments and certain Bitcoin mining equipment. The secured promissory notes are further secured by a guaranty provided by us, Ault Lending and Milton C. Ault, our Executive Chairman. The maturity date of the secured promissory notes is August 10, 2023. We are required to make monthly payment (principal and interest) of $1,000,000 on the tenth calendar day of each month, starting in September 2022. Provided that we make the first six monthly payments in full and on a timely basis, after six months, we may elect to pay a forbearance fee of $250,000 in lieu of a monthly payment, which would extend the maturity date of the related secured promissory notes by one month for each forbearance. We may not elect forbearance in consecutive months. |
| · | Purchase of Treasury Stock – During the nine months ended September 30, 2022, Alpha Fund purchased 38.9 million shares of our common stock for $13.4 million and 91,033 shares of our Series D Preferred Stock for $2.2 million, accounted for as treasury stock as of September 30, 2022. |
Financing Transactions Subsequent to September 30, 2022
Financing transactions subsequent to September 30, 2022 include the following:
2022 Common ATM Offering
During the period between October 1, 2022 through November 18, 2022, we sold an aggregate of 14.8 million shares of common stock pursuant to the 2022 Common ATM Offering for gross proceeds of $2.6 million.
2022 Preferred ATM Offering
During the period between October 1, 2022 through November 18, 2022, we sold an aggregate of 8,933 shares of Series D Preferred Stock pursuant to the 2022 Preferred ATM Offering for gross proceeds of $124,000.
SMC Credit and Security Agreement with Fifth Third Bank
On October 14, 2022, SMC entered into a credit agreement with Fifth Third Bank. The credit agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15 million decreased to $7.5 million during the non-peak period of January 1 through July 31 of each year. The credit agreement matures on October 14, 2025.
The revolving credit facility bears interest of the Prime Rate plus 0.50% or the 30-day term secured overnight financing rate plus 3.00%.
Under the credit agreement:
| · | Accounts receivable advance rate up to an 85% against SMC’s eligible accounts receivable; |
| · | Inventory advance of up to 85% of SMC’s eligible inventory; and |
| 15 |
| · | SMC must maintain a minimum fixed charge coverage of 1.05 to 1. |
Availability under the credit agreement was approximately $4.0 million as of November 18, 2022.
Secured Debt Financing
On November 7, 2022, we and certain of our subsidiaries borrowed $18.9 million of principal amount of term loans (the “Loans”) from a group of institutional investors (the “Financing”). The Loans mature in 18 months, which may be extended to 24 months, accrue interest at the rate of 8.5% per annum and are secured by certain of our assets and the assets of our various subsidiaries. Starting in January 2023, the lenders have the right to require us to make monthly payments of $0.6 million, which will increase to $1.1 million in November 2023. The Loans were issued with an original issue discount of $1.89 million.
The lenders received warrants to purchase approximately 4.5 million shares of our common stock, exercisable for four years at $0.45 per share and warrants to purchase another approximately 4.5 million shares of our common stock, exercisable for four years at $0.75 per share, subject to adjustment.
On November 7, 2022, Ault Aviation used proceeds from the Loans to purchase a private aircraft for a total purchase price of $15.8 million. In addition, we and certain of our subsidiaries entered into various agreements as collateral for the repayment of the Loans, including (i) a security interest in certain Bitcoin mining equipment, (ii) a pledge of the membership interests of Third Avenue Apartments, LLC, our wholly owned subsidiary (“Third Apartments”), (iii) a pledge of the membership interests of Alliance Cloud Services, LLC, our wholly owned subsidiary (“Alliance Cloud”), (iv) a pledge of the membership interests of Ault Aviation, LLC, our wholly owned subsidiary (“Ault Aviation”), (v) a pledge in a segregated deposit account of $1.5 million of cash, (vi) a mortgage and security agreement by Third Avenue on the real estate property owned by Third Avenue in St. Petersburg, Florida, (vii) a future advance mortgage by Alliance Cloud on the real estate property owned by Alliance Cloud in Dowagiac, Michigan, and (viii) an aircraft mortgage and security agreement by Ault Aviation on the private aircraft purchased by Ault Aviation on November 7, 2022. The Loans are further secured by a guaranty provided by Ault Lending and Milton C. Ault, our Executive Chairman.
3% Secured Promissory Notes
On November 18, 2022, BNI entered into the November NPA with the Investors providing for the issuance of the November Notes. The November Notes have a principal face amount of $8,181,819 and bear interest at 3% per annum pursuant to the terms of the November Notes. The maturity date of the November Notes is May 18, 2023. When BNI sells the Collateral, BNI is required to make a payment towards the November Notes equal to 45% of the realized gains. After the November Notes have been repaid in full and until all of the Collateral is sold, when BNI sells any remaining Collateral, BNI is required to give the investors a profits participation interest equal to 45% of the realized gains.
Pursuant to the November NPA, BNI, Ault Lending and the Agent entered into the November Security Agreement pursuant to which BNI and Ault Lending granted to the Investors a security interest in the Collateral.
We believe our current cash on hand combined with the proceeds from the 2022 ATM Offering are sufficient to meet our operating and capital requirements for at least the next twelve months from the date the financial statements for the nine months ended September 30, 2022 are issued.
Critical Accounting Policies
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, tradenames 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.
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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.
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, 2021, the end of its most recent fiscal year.
Specifically, management has determined that we do not have sufficient resources in our accounting function, which restricts our ability to gather, analyze and properly review information related to financial reporting, including applying complex accounting principles relating to consolidation accounting and fair value estimates, in a timely manner. 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. 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.
A material weakness is a control deficiency or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
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. |
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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 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 most recent fiscal quarter of 2022, 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
Blockchain Mining Supply and Services, Ltd.
On November 28, 2018, Blockchain Mining Supply and Services, Ltd. (“Blockchain Mining”) a vendor who sold computers to our subsidiary, filed a Complaint (the “Complaint”) in the United States District Court for the Southern District of New York against us and our subsidiary, Digital Farms, Inc. (f/k/a Super Crypto Mining, Inc.), in an action captioned Blockchain Mining Supply and Services, Ltd. v. Super Crypto Mining, Inc. and DPW Holdings, Inc., Case No. 18-cv-11099.
The Complaint asserts claims for breach of contract and promissory estoppel against us and our subsidiary arising from the subsidiary’s alleged failure to honor its obligations under the purchase agreement. The Complaint seeks monetary damages in excess of $1.4 million, plus attorneys’ fees and costs.
We believe that these claims are without merit and intend to vigorously defend them.
On April 13, 2020, we and our subsidiary, jointly filed a motion to dismiss the Complaint in its entirety as against us, and the promissory estoppel claim as against our subsidiary. On the same day, our subsidiary also filed a partial Answer to the Complaint in connection with the breach of contract claim.
On April 29, 2020, Blockchain Mining filed an amended complaint (the “Amended Complaint”). The Amended Complaint asserts the same causes of action and seeks the same damages as the initial Complaint.
On May 13, 2020, we and our subsidiary, jointly filed a motion to dismiss the Amended Complaint in its entirety as against us, and the promissory estoppel claim as against of our subsidiary. On the same day, our subsidiary also filed a partial Answer to the Amended Complaint in connection with the breach of contract claim.
In its partial Answer, the Company’s subsidiary admitted to the validity of the contract at issue and also asserted numerous affirmative defenses concerning the proper calculation of damages.
On December 4, 2020, the Court issued an Order directing the Parties to engage in limited discovery which was completed on March 4, 2021. In connection therewith, the Court also denied the previously filed motion to dismiss without prejudice.
On June 2, 2021, we and our subsidiary filed a motion to dismiss (the “Motion to Dismiss”) the Amended Complaint in its entirety as against us, and the promissory estoppel claim as against the subsidiary.
On August 8, 2022, the Court issued an Order denying the Motion to Dismiss, in its entirety.
On September 2, 2022, the Company and its subsidiary filed an answer to the Amended Complaint and asserted numerous affirmative defenses.
Based on our assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, we cannot reasonably estimate the potential loss or range of loss that may result from this action. Notwithstanding, we have established a reserve in the amount of the unpaid portion of the purchase agreement. An unfavorable outcome may have a material adverse effect on our business, financial condition and results of operations.
Ding Gu (a/k/a Frank Gu) and Xiaodan Wang Litigation
On January 17, 2020, Ding Gu (a/k/a Frank Gu) (“Gu”) and Xiaodan Wang (“Wang” and with “Gu” collectively, “Plaintiffs”), filed a Complaint (the “Complaint”) in the Supreme Court of the State of New York, County of New York against us and our Chief Executive Officer, Milton C. Ault, III, in an action captioned Ding Gu (a/k/a Frank Gu) and Xiaodan Wang v. DPW Holdings, Inc. and Milton C. Ault III (a/k/a Milton Todd Ault III a/k/a Todd Ault), Index No. 650438/2020.
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The Complaint asserts causes of action for declaratory judgment, specific performance, breach of contract, conversion, attorneys’ fees, permanent injunction, enforcement of Guaranty, unjust enrichment, money had and received, and fraud arising from: (i) a series of transactions entered into between Gu and us, as well as Gu and Ault, in or about May 2019; and (ii) a term sheet entered into between Plaintiffs and DPW, in or about July 2019. The Complaint seeks, among other things, monetary damages in excess of $1.1 million, plus a decree of specific performance directing DPW to deliver unrestricted shares of DPW’s common stock to Gu, plus attorneys’ fees and costs.
We believe that these claims are without merit and intend to vigorously defend them.
On May 4, 2020, we and Ault jointly filed a motion to dismiss the Complaint in its entirety, with prejudice (the “Motion to Dismiss”).
On July 28, 2021, the Court conducted oral argument (the “Oral Argument”), via Microsoft Teams, in connection with the Motion to Dismiss. During the Oral Argument, the Court informed the parties that the Court would be dismissing the fraud claim, in its entirety, and provided Plaintiffs an opportunity to amend their fraud claim within sixty days of the date of the Oral Argument. The Court reserved decision on the other causes of action.
On December 14, 2021, the Court entered a Decision and Order in connection with the Motion to Dismiss (the “Order”) whereby the Court dismissed Plaintiff’s causes of action for specific performance, conversion, permanent injunction, and reiterated its prior determination that the fraud claim was also dismissed. The Court denied the Motion to Dismiss in connection with the other causes of action asserted in the Complaint.
On January 26, 2022, we and Ault filed an Answer to the Complaint and asserted numerous affirmative defenses.
On November 1, 2022, the parties informed the Court that they reached a settlement in principle and requested an extension of time, until November 22, 2022, to file motions for summary judgment to allow the parties time to draft formal settlement documents. The Court granted the parties’ request and the deadline for us and Mr. Ault to file their summary judgment is November 22, 2022.
Based on our assessment of the facts underlying the above claims, the uncertainty of litigation, and the preliminary stage of the case, we cannot reasonably estimate the potential loss or range of loss that may result from this action. An unfavorable outcome may have a material adverse effect on our business, financial condition and results of operations.
Subpoena
The Company and certain affiliates and related parties have received several subpoenas from the SEC for the production of documents and testimony. The Company is fully cooperating with this non-public, fact-finding inquiry and management believes that the Company has operated its business in compliance with all applicable laws. The subpoenas expressly provide that the inquiry is not to be construed as an indication by the Commission or its staff that any violations of the federal securities laws have occurred, nor should they be considered a reflection upon any person, entity or security. However, there can be no assurance as to the outcome of this matter.
Other 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.
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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
The risks described in Part I, Item 1A, “Risk Factors,” in our 2021 Annual Report on Form 10-K, could materially and adversely affect our business, financial condition and results of operations, and the trading price of our common stock could decline. These risk factors do not identify all risks that we face - our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. The Risk Factors section of our 2021 Annual Report on Form 10-K remains current in all material respects, with the exception of updated risk factors filed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, and the first risk factor under the “Risks Related to Ownership of Our Common Stock” section of Risk Factors section of our 2021 Annual Report on Form 10-K, which is hereby amended and restated in its entirety to read as follows:
“If we do not continue to satisfy the NYSE American continued listing requirements, our common stock could be delisted from NYSE American.
The listing of our common stock on the NYSE American is contingent on our compliance with the NYSE American’s conditions for continued listing. On November 2, 2022, we received a deficiency letter (the “Letter”) from the NYSE American LLC (the “NYSE American” or the “Exchange”) indicating that we are 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 our shares of 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 our common stock and our common stock will continue to trade on the NYSE American under the symbol “NILE”. Additionally, the Letter does not result in the immediate delisting of our common stock from the NYSE American.
Pursuant to Section 1003(f)(v) of the Company Guide, the NYSE American staff determined that our continued listing is predicated on us demonstrating sustained price improvement within a reasonable period of time or effecting a reverse stock split of our common stock, which the staff determined to be no later than May 2, 2023. We intend to regain compliance with the NYSE American’s continued listing standards by undertaking a measure or measures that are in our best interests and our stockholders.
We intend to closely monitor the price of our common stock and consider available options if our common stock does not trade at a consistent level likely to result in us regaining compliance by May 2, 2023. We are actively engaged in discussions with the Exchange and are developing plans to regain compliance with the NYSE American’s continued listing standards within the cure period.
If we should fail to achieve compliance with NYSE American low-priced continued listing standard or fail to meet any other NYSE American listing requirement, then our common stock will be subject to delisting. In the event our common stock is no longer listed for trading on the NYSE American, our trading volume and share price may decrease and we may experience further difficulties in raising capital which could materially affect our operations and financial results. Further, delisting from the NYSE American could also have other negative effects, including potential loss of confidence by partners, lenders, suppliers and employees and could also trigger various defaults under our lending agreements and other outstanding agreements. Finally, delisting could make it harder for us to raise capital and sell securities. You may experience future dilution as a result of future equity offerings. In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
From July 1, 2022 through September 30, 2022, Ault Alpha LP purchased 21,024,871 shares of common stock and 9,025 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.
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Common Stock Purchased
| 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, 2022 – July 31, 2022 | 7,063,221 | $ | 0.33 | |||||||||||||
| August 1, 2022 – August 31, 2022 | 10,432,136 | $ | 0.34 | |||||||||||||
| September 1, 2022 – September 30, 2022 | 3,529,541 | $ | 0.24 | |||||||||||||
| Total | 21,024,871 | $ | 0.32 | - | - | |||||||||||
Series D Preferred Stock Purchased
| 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, 2022 – July 31, 2022 | 37,000 | $ | 24.30 | |||||||||||||
| August 1, 2022 – August 31, 2022 | - | $ | - | |||||||||||||
| September 1, 2022 – September 30, 2022 | 1,000 | $ | 13.89 | |||||||||||||
| Total | 38,000 | $ | 24.02 | - | - | |||||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
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| 31.1* | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| 31.2* | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| 32.1** | Certification of Chief Executive and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
| 101.INS* | Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
_________________
* Filed herewith.
** Furnished herewith.
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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 21, 2022
| BITNILE HOLDINGS, 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) | ||||
25
Exhibit 10.8
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (“Agreement”) is made as of the 18th day of November, 2022, by and among BitNile, Inc., a Nevada corporation (the “Company”), and each investor identified on the signature pages hereto (each, including its successors and assigns, an “Investor” and collectively, the “Investors”).
Recital
The Investors wish to purchase from the Company, and the Company wishes to sell and issue to the Investors, upon the terms and conditions stated in this Agreement, promissory notes in the aggregate principal amount of $8,181,819, bearing interest at the rate of 3% per annum, in the form attached hereto as Exhibit A (the “Note”);
In consideration of the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Definitions. In addition to those terms defined above and elsewhere in this Agreement, for the purposes of this Agreement, the following terms shall have the meanings set forth below:
“Business Day” means a day, other than a Saturday or Sunday, on which banks in New York City are open for the general transaction of business.
“Closing” has the meaning set forth in Section 3.
“Closing Date” has the meaning set forth in Section 3.
“Common Stock” means the Parent’s Class A common stock, $0.001 par value per share.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Note” has the meaning set forth in recitals.
“Material Adverse Effect” means a material adverse effect on (i) the assets, liabilities, results of operations, condition (financial or otherwise), business, or prospects of the Company and any Subsidiary of the Company taken as a whole, or (ii) the ability of the Company to consummate the transactions contemplated by this Agreement or the ability of the Company to perform its obligations under the Transaction Documents.
“Parent” means BitNile Holdings, Inc., a Delaware corporation.
“Person” means an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, sole proprietorship, unincorporated organization, governmental authority or any other form of entity not specifically listed herein.
“Principal Market” means the NYSE American, LLC.
“Purchase Price” means $8,181,819.
“SEC” means the United States Securities and Exchange Commission.
“SEC Documents” has the meaning set forth in Section 4.4.
“Security Agreement” means the Security Agreement by and among the Company, Ault Lending, LLC and Helios Funds LLC as collateral agent for the Investors in the form attached hereto as Exhibit B.
“Subsidiary” of any Person means another Person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests of which) is owned directly or indirectly by such first Person.
“Transaction Documents” means this Agreement, the Notes and the Security Agreement.
2. Purchase and Issuance of the Notes.
2.1 Note. Subject to the terms and conditions of this Agreement, on the Closing Date each Investor shall purchase, and the Company shall sell and issue to each Investor, the Note in the amount set forth opposite each Investor’s name on the signature pages attached hereto in exchange for the Purchase Price.
3. Closing. On the date of executing this Agreement, the Company shall cause the delivery of the certificates representing the Notes, registered in the names and amounts of the Investors as set forth on the signature pages attached hereto to the Investors and the Investors shall wire to the Company, pursuant to wiring instruction attached hereto as Exhibit C, in same day funds in an amount representing such Investor’s Purchase Price, as set forth on the signature page hereto (“Closing” or “Closing Date”). The Closing shall occur upon confirmation that the conditions to Closing in Section 6 hereof have been satisfied. The Closing of the purchase and sale of the Notes shall take place at the offices of the Company. Notwithstanding anything else to the foregoing, the sale of the Notes may be made in one or more Closings and on one or more Closing Dates.
4. Representations and Warranties of the Company. The Company hereby represents and warrants to each Investor that:
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4.1 Organization and Standing of the Company. Each of the Company and its subsidiaries are entities duly organized and validly existing and in good standing under the laws of the jurisdiction in which they are formed, and have the requisite power and authorization to own their properties and to carry on their business as now being conducted and as presently proposed to be conducted. Each of the Company and its subsidiaries is duly qualified as a foreign entity to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect.
4.2 Authority. The Company has the requisite power and authority to enter into and perform its obligations under the Transaction Documents and to issue the Notes in accordance with the terms hereof and thereof. The execution and delivery of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Notes have been duly authorized by the Company’s Board of Directors and no further filing (other than a Form 8-K by the Parent), consent, or authorization is required by the Company, its Board of Directors or its stockholders. This Agreement and the other Transaction Documents have been duly executed and delivered by the Company, and constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies and except as rights to indemnification and to contribution may be limited by federal or state securities laws.
4.3 No Conflict. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby will not (A) result in a violation of the Certificate of Incorporation (as defined below) or other organizational documents of the Company or any of its subsidiaries, any share capital of the Company or any of its subsidiaries or Bylaws (as defined below) of the Company or any of its subsidiaries, (B) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or (C) result in a violation of any law, rule, regulation, order, judgment or decree, including foreign, federal and state securities laws and regulations and the rules and regulations of the Principal Market applicable to the Parent or any of its Subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected except, in the case of clause (B) or (C) above, to the extent such violations that could not reasonably be expected to have a Material Adverse Effect.
4.4 Consents. Neither the Company nor any of its subsidiaries is required to obtain any consent from, authorization or order of, or make any filing (other than a Form 8-K by the Parent) or registration with, any court, governmental agency or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of its respective obligations under or contemplated by the Transaction Documents, in each case, in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings (other than a Form 8-K by the Parent) and registrations which the Company or any of its subsidiaries is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the Closing Date, and neither the Company nor any of its subsidiaries are aware of any facts or circumstances which might prevent the Company or any of its subsidiaries from obtaining or effecting any of the filings contemplated by the Transaction Documents.
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4.4 SEC Documents. The Parent has, during the preceding 12 months, filed with the SEC all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements, notes and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the “SEC Documents”). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Parent included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto as in effect as of the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Parent as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments which will not be material, either individually or in the aggregate). No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein not misleading, in the light of the circumstance under which they are or were made. There is no event, pending event or threatened event that could result in the Parent not filing with the SEC all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable, in compliance in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to such filings.
4.5 Information. The Company confirms that neither it nor any other Person acting on its behalf has provided the Investor or its agents or counsel with any information that constitutes or could reasonably be expected to constitute material, non-public information concerning the Company or any of its subsidiaries, other than the existence of the transactions contemplated by the Transaction Documents. The Company understands and confirms that the Investor will rely on the foregoing representations in effecting transactions in securities of the Company. To the knowledge of the Company after reasonable inquiry, all disclosures provided to the Investor regarding the Company and its subsidiaries, their businesses and the transactions contemplated hereby, including any schedules to this Agreement, furnished by or on behalf of the Company or any of its subsidiaries is true and correct in all material respects and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.
| -4- |
4.6 Valid Issuance. The Notes are duly authorized by the Company and, when executed and delivered by the Company, will be valid and binding agreements of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles.
4.7 Arm’s Length Transaction. The Company acknowledges and agrees that with respect to this Agreement and the transactions contemplated hereby, (A) the Investor is acting solely in an arm’s length capacity, (B) the Investor does not make and has not made any representations or warranties, other than those specifically set forth in this Agreement, (C) except as set forth in this Agreement, the Company’s obligations hereunder are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of any claim the Company may have against the Investor, (D) the Investor has not and is not acting as a legal, financial, accounting or tax advisor to the Company, or agent or fiduciary of the Company, or in any similar capacity, and (E) any statement made by the Investor or any of the Investor’s representatives, agents or attorneys is not advice or a recommendation to the Company.
4.8 Exchange Listing. Except as disclosed in SEC Documents, the Parent has not, in the 12 months preceding the date of this Agreement, received notice from any national securities exchange or automated quotation system on which the shares of Common Stock are listed or designated for quotation to the effect that the Company is not in compliance with the listing or maintenance requirements of such national securities exchange or automated quotation system. As of the date of this Agreement, to the Company’s actual knowledge based solely on absence of, as of the date hereof, any notice from any such securities exchange or automated quotation system that the Parent is not in compliance with the listing or maintenance requirements of such national securities exchange or automated quotation system, the Parent is in compliance with all such listing and maintenance requirements.
4.9 Principal Market. The Common Stock is listed on the Principal Market (or traded on other exchange or market reasonably acceptable to the Purchaser).
4.10 No Suspension. No suspension of trading of the Common Stock is in effect.
4.11 No Injunction. No injunctions or other legal proceedings relating to the sale of the Notes is pending or threatened against the Company.
4.12 No Default. Except as disclosed in SEC Documents, the Company is not in a default under, or has given to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party.
| -5- |
4.13 Litigation and Regulatory Proceedings. Except as disclosed in SEC Documents, there are no material actions, causes of action, suits, claims, proceedings, inquiries or investigations (collectively, “Proceedings”) before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of the Subsidiaries, threatened against or affecting the Company or any of the Subsidiaries, the Common Stock or any other class of issued and outstanding shares of the Company’s capital stock, or any of the Company’s or the Subsidiaries’ officers or directors in their capacities as such and there is no reason to believe that there is any basis for any such Proceeding.
4.14 No Undisclosed Events, Liabilities or Developments. No event, development or circumstance has occurred or exists, or is reasonably anticipated to occur or exist that (a) would reasonably be anticipated to have a Material Adverse Effect or (b) would be required to be disclosed by the Parent under applicable securities laws in a Registration Statement relating to an issuance and sale by the Parent of its Common Stock and which has not been publicly announced.
4.15 Compliance with Law. The Parent and each of the Subsidiaries have conducted and are conducting their respective businesses in compliance in all material respects with all applicable laws and are in compliance in all material respects with the rules and regulations of the Principal Market. Other than as publicly disclosed by the Parent, the Company is not aware of any facts which could reasonably be anticipated to lead to a delisting of the Common Stock by the Principal Market in the future.
4.16 No Materially Adverse Contracts, Etc. Neither the Company nor any of the Subsidiaries is (a) subject to any charter, corporate or other legal restriction, or any judgment, decree or order which in the judgment of the Company’s officers has or is expected in the future to have a Material Adverse Effect or (b) a party to any contract or agreement which in the judgment of the Company’s management has or would reasonably be anticipated to have a Material Adverse Effect.
4.17 Taxes. The Company and the Subsidiaries each has correctly prepared and duly and timely made or filed, or caused to be made or filed, all United States federal, and applicable state, provincial, local and non-U.S. Tax returns, reports and declarations required by any jurisdiction to which it is subject and has paid all Taxes and other governmental assessments and charges that are material in amount, required to be paid by it, regardless of whether such amounts are shown or determined to be due on such returns, reports and declarations, except those being contested in good faith by appropriate proceedings and for which it has set aside on its books provision reasonably adequate for the payment of all Taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid Taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and, to the knowledge of the Company, there is no basis for any such claim. Each of the Company and the Subsidiaries has collected, withheld and remitted all Taxes due and payable to the proper taxing or other governmental authority. There are no audits, assessments, reassessments, suits, proceedings, investigations or claims pending against the Company or any of the Subsidiaries in respect of Taxes paid or payable, and there are no matters under discussion with any taxing or governmental authority of any jurisdiction involving the Company or any Subsidiary with, or the subject of any agreement with, any taxing or governmental authority relating to claims for additional Taxes. There are no agreements, waivers or other arrangements providing for an extension of time with respect to the assessment or reassessment of any Tax owing by the Company or any subsidiary, the filing of any tax returns by the Company or any Subsidiary or the payment of any Tax by the Company or any Subsidiary.
| -6- |
4.18 OFAC. None of the Company nor any of the Subsidiaries nor any director, officer, agent, employee, affiliate or person acting on behalf of the Company and/or any Subsidiary has been or is currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”); and the Company will not directly or indirectly use any proceeds received from the Investor, or lend, contribute or otherwise make available such proceeds to its Subsidiaries or to any affiliated entity, joint venture partner or other person or entity, to finance any investments in, or make any payments to, any country or person currently subject to any of the sanctions of the United States administered by OFAC.
4.19 No Foreign Corrupt Practices. None of the Company or any of the Subsidiaries has, directly or indirectly: (a) made or authorized any contribution, payment or gift of funds or property to any official, employee or agent of any governmental authority of any jurisdiction except as otherwise permitted under applicable Law; or (b) made any contribution to any candidate for public office, in either case, where either the payment or the purpose of such contribution, payment or gift was, is, or would be prohibited under the Foreign Corrupt Practices Act or the rules and regulations promulgated thereunder or under any other legislation of any relevant jurisdiction covering a similar subject matter applicable to the Company or its Subsidiaries and their respective operations and the Company has instituted and maintained policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance with such legislation.
4.20 Anti-Money Laundering. The operations of each of the Company and the Subsidiaries are and have been conducted at all times in compliance with all applicable anti-money laundering laws, regulations, rules and guidelines in its jurisdiction of incorporation and in each other jurisdiction in which such entity, as the case may be, conducts business (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental authority involving the Company or its Subsidiaries with respect to any of the Money Laundering Laws is, to the best knowledge of the Company, pending, threatened or contemplated.
5. Representations and Warranties of the Investors. Each Investor, for itself and for no other Investor, hereby represents and warrants as of the date hereof to the Company as follows:
5.1 Organization and Existence. Such Investor, if an entity, is a validly existing corporation, limited partnership or limited liability company and has all requisite corporate, partnership or limited liability company power and authority to invest in the Note pursuant to this Agreement.
5.2 Authorization. The execution, delivery and performance by such Investor of the Transaction Documents to which such Investor is a party have been duly authorized and will each constitute the valid and legally binding obligation of such Investor, enforceable against such Investor in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability, relating to or affecting creditors’ rights generally.
| -7- |
5.3 Investment Experience. Investor acknowledges that it can bear the economic risk and complete loss of its investment in the Note and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment contemplated hereby.
5.4 Collateral Agent Appointment. Pursuant to a separate collateral agent agreement dated as of even date herewith, Investor has appointed Helios Funds LLC, a New York limited liability company as its collateral agent (the “Collateral Agent”). Investor hereby certifies that the Collateral Agent is authorized, on behalf of the Investor, to execute the Security Agreement and take all actions undertaken by the Collateral Agent in the Security Agreement. Unless the Company has been advised in writing by the Investor that the Collateral Agent no longer is authorized to act on the Investor’s behalf, the Company may rely upon and shall not be liable for acting or refraining from acting upon any written notice, document, instruction or request furnished to it under the Security Agreement and believed by it to be genuine and to have been signed or presented by the Collateral Agent without inquiry and without requiring substantiating evidence of any kind.
6. Conditions to Closing.
6.1 Conditions to the Investors’ Obligations. The obligation of each Investor to purchase its Note at the Closing is subject to the fulfillment to each Investor’s satisfaction, on or prior to the Closing Date, of the following conditions, any of which may be waived by Investor:
(a) all of the representations and warranties of the Company set forth herein being true, correct, complete and accurate; and
(b) full and timely performance by the Company of all of its obligations and covenants under this Agreement.
6.2 Conditions to Obligations of the Company. The Company's obligation to sell and issue the Notes at the Closing is subject to the fulfillment to the satisfaction of the Company on or prior to the Closing Date of the following conditions, any of which may be waived by the Company:
(a) all of the representations and warranties of the Investor set forth being true, correct, complete and accurate; and
(b) Each Investor shall have delivered the Purchase Price to the Company.
| -8- |
7. Other Agreements of the Parties.
7.1 Security Agreement. Contemporaneous with the issuance of the Notes, the Company will execute and deliver a Security Agreement in a form reasonably satisfactory to the Investors.
7.2 Right of Future Participation. The Investors shall have the right, upon one (1) Business Day written notice from the Company, to elect to participate, on a proportionate basis, in the $4,909,091 purchase right pursuant to the amended and restated section 1(c) of the Securities Purchase Agreement dated as of June 7, 2022 by Mullen Automotive Inc., Ault Lending, LLC and the other purchaser signatories thereto, as amended by Amendment No. 3 to Securities Purchase Agreement, effective November 15, 2022 (the “Additional Investment Right”), on the same terms and conditions as these Transaction Documents. In the event that the Investors fail to execute transaction documents on the same terms and conditions as these Transaction Documents within one (1) Business Day of receipt of written notice from the Company relating to the Additional Investment Right, such Additional Investment Right shall be deemed null and void, ab initio.
7.3 Form 8-K. In the event of an Event of Default (as defined in the Notes), the Parent will file a Report on Form 8-K with the SEC within four (4) Business Days of the occurrence of the Event of Default to report the occurrence of such Event of Default.
8. Miscellaneous.
8.1 Delivery of Notes. The Company shall, within five (5) Business Days after the Closing Date, delivery the originally executed Notes to each Investor.
8.2 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
8.3 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given as hereinafter described (i) if given by personal delivery, then such notice shall be deemed given upon such delivery, (ii) if given by email, then such notice shall be deemed given upon transmission, (iii) if given by mail, then such notice shall be deemed given upon the earlier of (A) receipt of such notice by the recipient or (B) three days after such notice is deposited in first class mail, postage prepaid, and (iv) if given by an internationally recognized overnight air courier, then such notice shall be deemed given one Business Day after delivery to such carrier. All notices shall be addressed to the party to be notified at the address as follows, or at such other address as such party may designate by ten days’ advance written notice to the other party:
| -9- |
If to the Company:
BitNile, Inc.
11411 Southern Highlands Parkway, Suite 240
Las Vegas, Nevada 89141
Attention: William B. Horne
Email:
If to the Investor, to the address set forth on the signature page.
8.4 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investors. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Note purchased under this Agreement at the time outstanding, each future holder of all such Note, and the Company.
8.5 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof but shall be interpreted as if it were written so as to be enforceable to the maximum extent permitted by applicable law, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereby waive any provision of law which renders any provision hereof prohibited or unenforceable in any respect.
8.6 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and thereof. All proposals, negotiations and representations (if any) made prior, and with reference to the subject matter of this Agreement, are merged herein. This Agreement has been negotiated by the parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either party. Neither the Company nor the Investor shall be bound by any oral agreement or representation, irrespective of when made.
8.7 Further Assurances. The parties shall execute and deliver all such further instruments and documents and take all such other actions as may reasonably be required to carry out the transactions contemplated hereby and to evidence the fulfillment of the agreements herein contained.
8.8 Expenses. Each party to this Agreement shall bear its own expenses in connection with transactions contemplated hereby.
8.9 No Strict Construction. The language used in this Amendment will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
| -10- |
8.10 Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York without regard to the choice of law principles thereof. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the courts of the State of New York located in New York County and the United States District Court for the Southern District of New York for the purpose of any suit, action, proceeding or judgment relating to or arising out of this Agreement and the transactions contemplated hereby. Service of process in connection with any such suit, action or proceeding may be served on each party hereto anywhere in the world by the same methods as are specified for the giving of notices under this Agreement. Each of the parties hereto irrevocably consents to the jurisdiction of any such court in any such suit, action or proceeding and to the laying of venue in such court. Each party hereto irrevocably waives any objection to the laying of venue of any such suit, action or proceeding brought in such courts and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.
[signature pages follow]
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IN WITNESS WHEREOF, the parties have executed this Agreement or caused their duly authorized officers to execute this Agreement as of the date first above written.
| The Company: | BITNILE, INC. | ||
| By: | |||
| Name: | William B. Horne | ||
| Title: | Chief Executive Officer | ||
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOR INVESTORS FOLLOW]
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[INVESTOR SIGNATURE PAGES TO bitnile PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
| Name of Purchaser: |
| Signature of Authorized Signatory of Purchaser: |
| Name of Authorized Signatory: |
| Title of Authorized Signatory: |
| Email Address of Authorized Signatory: |
Address for Notice of Purchaser:
Address for Delivery of Note for Purchaser (if not same as address for notice):
Aggregate Purchase Price: $
[SIGNATURE PAGES CONTINUE]
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[INVESTOR SIGNATURE PAGES TO bitnile PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
| Name of Purchaser: |
| Signature of Authorized Signatory of Purchaser: |
| Name of Authorized Signatory: |
| Title of Authorized Signatory: |
| Email Address of Authorized Signatory: |
Address for Notice of Purchaser:
Address for Delivery of Note for Purchaser (if not same as address for notice):
Aggregate Purchase Price: $
| -14- |
EXHIBIT A
FORM OF NOTE
EXHIBIT B
FORM OF SECURITY AGREEMENT
EXHIBIT C
WIRING INSTRUCTIONS
Exhibit 10.9
Original Issue Date: November 18, 2022
| $4,090,909.50 |
3% SECURED PROMISSORY NOTE
THIS NOTE of BitNile, Inc., a Nevada corporation, having a principal place of business at 11411 Southern Highlands Parkway, Suite 240, Las Vegas, Nevada 89141 (the “Company”), designated as its 3% Secured Promissory Note (the “Note”). Capitalized terms used herein not otherwise defined shall have the meaning ascribed to them in the Purchase Agreement by and among the Company and the Investors named therein (“Purchase Agreement”).
FOR VALUE RECEIVED, the Company promises to pay to __________ or its registered assigns (the “Holder”), the principal sum of Four Million Ninety Thousand Nine Hundred Nine Dollars and Fifty Cents ($4,090,909.50) (“Principal Amount”) and to pay accrued interest thereon at the rate of three percent (3%) (the “Interest Rate”) per annum from the date of this Note through the date on which such Principal Amount is paid in full (whether payment in full is at stated maturity, by acceleration or otherwise) in accordance with the terms of this Note.
This Note is subject to the terms and conditions set forth in the Purchase Agreement, as well as to the following additional provisions:
Section 1. This Note is exchangeable for an equal aggregate Principal Amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange.
Section 2. This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations. Prior to due presentment to the Company for transfer of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.
Section 3. Events of Default.
(a) “Event of Default”, wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
(i) default shall be made in the payment of the Principal Amount or interest on this Note when the same becomes due and payable and the default continues for a period of ten (10) calendar days; or
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(iii) any representation or warranty made by the Company in the Purchase Agreement was incorrect in any material respect on or as of the date made; or
(iv) the Company shall fail to observe or perform any other covenant or agreement contained in this Note, the Purchase Agreement, the Security Agreement (as defined in Section 15 below) which failure is not cured, if possible to cure, within 10 calendar days after written notice of such default is sent by the Holder; or
(v) the Company shall (A) default in any payment of any amount or amounts of principal of or interest (if any) on any Indebtedness (other than the indebtedness hereunder), the aggregate principal amount of which indebtedness is in excess of $250,000 that will permit the holder or holders of such indebtedness to become due prior to its stated maturity or (B) default in the observance or performance of any other agreement or condition relating to any such indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such indebtedness to cause with the giving of notice if required, such indebtedness to become due prior to its stated maturity and any such default is not remedied within ten (10) Business Days (as defined in Section 15 below) from the Event of Default occurring by the Company’s failure to comply with this Section 3(a)(vi); or
(vi) the Company shall commence, or there shall be commenced against the Company a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or there is commenced against the Company any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company makes a general assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company; or any corporate or other action is taken by the Company or any Subsidiary thereof for the purpose of effecting any of the foregoing; or
(vii) default with respect to any contractual obligation of the Company under or pursuant to any contract, lease, or other agreement to which the Company is a party and such default shall continue for more than the period of grace, if any, therein specified, if the aggregate amount of the Company’s contractual liability arising out of such default exceeds or is reasonably estimated to exceed $500,000; or
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(viii) final judgment for the payment of money in excess of $100,000 shall be rendered against the Company and the same shall remain undischarged for a period of 60 days during which execution shall not be effectively stayed; or
(ix) the occurrence of a Material Adverse Effect in respect of the Company, or the Company and its Subsidiaries taken as a whole, and any such occurrence is not remedied within ten (10) Business Days from the Event of Default occurring by the Company’s failure to comply with this Section.
(b) If any Event of Default occurs, the full Principal Amount of this Note, together with all accrued but unpaid interest to the date of acceleration shall become immediately due and payable in cash. Commencing upon an Event of Default that results in the eventual acceleration of this Note, the interest rate on this Note shall accrue at the rate of 10% per annum, or such lower maximum amount of interest permitted to be charged under applicable law). The Holder need not provide, and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a Note holder until such time, if any, as the full payment under this Section shall have been received by it. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
(c) Upon the occurrence of any Event of Default, the Company shall, as promptly as possible but in any event within three (3) Business Days of such Event of Default, notify the Holder of the occurrence of such Event of Default, describing the event or factual situation giving rise to the Event of Default and specifying the relevant subsection or subsections of Section 3(a) hereof under which such Event of Default has occurred
Section 4. This Note is a direct obligation of the Company, and the obligation of the Company to repay this Note is absolute and unconditional. The obligation to repay this Note shall be secured pursuant to the Security Agreement.
Section 5. Interest on the amount advanced will accrue on this Note until the Maturity Date (as defined in Section 15 below) at the rate of three percent (3%) per annum based on a 365-day year. All accrued but unpaid interest will be paid in arrears with each Conversion Payment (as defined in Section 6 below). If an Event of Default shall occur, interest at the rate of ten percent (10%) per annum or the highest rate allowed by law, whichever is lower, shall accrue on the outstanding principal of this Note from and after the date of the Event of Default until the date that the Event of Default is cured. All past due interest shall accrue on a daily basis and shall be payable in cash. The Holder may demand payment of all or any part of this Note, together with accrued interest, if any, and any other amounts due hereunder, as of the Maturity Date or any date thereafter.
| 3 |
Section 6. Upon the sale of Collateral (as defined in the Security Agreement), the Company shall make a payment to the Holder (each a “Conversion Payment”) equal to twenty-two and one-half percent (22.5%) of the Realized Gains from the sale of such Collateral. Any such Conversion Payments shall be made on weekly basis, no later than the second Business Day of a calendar week, representing Realized Gains received by the Company from the sale of Collateral in the prior calendar week. The entire outstanding Principal Amount and all accrued and unpaid interest thereon shall be due and payable upon the Maturity Date.
Section 7. Notwithstanding anything to the contrary contained herein, once the Principal Amount of this Note has been repaid in full, together with such accrued interest thereon, the Holder shall be entitled to continue to receive twenty-two and one-half percent (22.5%) of the Realized Gains from the sale of the Collateral (the “Profits Participation Interest”) until all of the Collateral has been sold. The Profits Participation Interest shall not accrue any interest. Any such payment of a Profits Participation Interest shall be made on weekly basis, no later than the second Business Day of a calendar week, representing Realized Gains received by the Company from the sale of Collateral in the prior calendar week.
Section 8. [Reserved]
Section 9. Any payment made by the Company to the Holder, on account of this Note shall be applied in the following order of priority: (i) first, to accrued interest, through and including the date of payment, and any amounts other than principal, if any, owed hereunder, (ii) second, to Principal Amount of this Note, and (iii) then, to Profits Participation Interest.
Section 10. Amounts due under this Note may be prepaid at any time without penalty.
Section 11. This Note shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive jurisdiction of the state courts of the State of New York located in New York County and the United States District Court for the Southern District of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non convenes, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Holder for any reasonable legal fees and disbursements incurred by the Holder in enforcement of or protection of any of its rights under this Note. The Company and the Holder hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with this Agreement or the Note.
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Section 12. Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any notice of conversion, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above Attn: William B. Horne or by email to will@bitnile.com or such other address or email address as the Company may specify for such purposes by notice to the Holder delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, sent by a nationally recognized overnight courier service addressed to each Holder or at the email address of Holder appearing on the books of the Company, or if no such email address or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via email prior to 5:30 p.m. (New York, New York time), (ii) the date after the date of transmission, if such notice or communication is delivered via email specified in this Section later than 5:30 p.m. (New York, New York time) on any date and earlier than 11:59 p.m. (New York, New York time) on such date, (iii) the second Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
Section 13. If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company.
Section 14. If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.
Section 15. Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Note: (a) capitalized terms not otherwise defined herein have the meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the following meanings:
“Business Day” means any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.
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“Maturity Date” means the six month anniversary of the Original Issue Date; provided, however, that the Maturity Date is subject to acceleration as provided in Section 3(b) above.
“Person” means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency.
“Purchase Agreement” means the Purchase Agreement, dated as of the date hereof, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.
“Realized Gains” means the net proceeds from the sale of Collateral minus the cost basis for the same Collateral.
“Security Agreement” means the Security Agreement, dated as of the date hereof, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.
*********************
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.
|
BITNILE, INC. |
|||
| By: | |||
| Name: William B. Horne | |||
| Title: Chief Executive Officer | |||
7
Exhibit 10.10
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this “Security Agreement”) is entered into as of November 18, 2022 by and among BitNile, Inc., a Nevada corporation with offices located at 11411 Southern Highlands Parkway, Suite 240, Las Vegas Nevada 89141 (“Debtor”), Ault Lending, LLC, a California limited liability company (“Ault Lending” and together with Debtor, the “Grantors”) and Helios Funds LLC, a New York limited liability company with offices located at 45 Broadway – 19th Floor, New York, New York 10006, as collateral agent acting in the manner and to the extent described in the Collateral Agent Agreement defined below (the “Collateral Agent”) for the benefit of the holders of the Debtor’s 3% Secured Promissory Notes (each a “Secured Party” and collectively, the “Secured Parties”).
BACKGROUND INFORMATION
WHEREAS, pursuant to the Note Purchase Agreement, dated as of the date hereof (the “Purchase Agreement”) each of the Secured Parties has been issued a 3% Secured Promissory Note of even date herewith in the principal amount of $4,090,909.50 (as such notes may be amended, restated, refinanced, supplemented or otherwise modified from time to time, the “Notes”) by the Debtor;
WHEREAS, in consideration for the loans evidenced by the Notes, the Grantors desire to grant to the Collateral Agent for the benefit of the Secured Parties a security interest in the “Collateral” (as hereinafter defined) in accordance with the terms of this Security Agreement to secure the obligations of the Debtor to the Secured Parties under the Notes (the “Obligations”); and
WHEREAS, the Secured Parties have appointed Helios Funds LLC as Collateral Agent pursuant to that certain Collateral Agent Agreement dated as of November 18, 2022 (the “Collateral Agent Agreement”) among the Secured Parties and the Collateral Agent.
PROVISIONS
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows:
1. Grant of Security Interest. As security for the obligations of the Debtor under the Notes, Grantors hereby grant and assign to the Collateral Agent for the benefit of the Secured Parties a security interest as set forth below in the following, in each case whether now or hereafter existing or in which the Grantor now has or hereafter acquires an interest and wherever the same may be located (the “Collateral”):
(A) Ault Lending hereby grants and assign to the Collateral Agent for the benefit of the Secured Parties a security interest in (i) the securities of Mullen Automotive Inc., a Delaware corporation (“Mullen”), to be purchased by Ault Lending in the Second Closing (as defined in the Mullen Agreement) for $8,181,819.00 (the “Purchased Securities”) pursuant to the Amendment No. 3 to Securities Purchase Agreement, effective November 15, 2022, by and among Mullen, Ault Lending and the other purchaser signatories thereto (the “Mullen Agreement”), (ii) any other securities of Mullen that the Purchased Securities are convertible into or exchangeable or excisable for (collectively, the “Mullen Securities”), and (iii) and all Proceeds from the Mullen Securities.
The term “Proceeds” includes proceeds of insurance policies insuring the Collateral against loss by theft, casualty or otherwise, and all cash or non-cash proceeds and receivables arising from the sale or transfer of such property.
The security interest hereby granted is to secure the prompt and full payment and complete performance of all obligations of the Grantors to the Secured Parties and the Collateral Agent under the Notes and this Security Agreement.
2. General Covenants. Each Grantor represents, warrants and covenants to and for the benefit of the Collateral Agent and the Secured Parties as follows:
(a) Except for the security interests granted hereby, (i) such Grantor is the sole owner of the Collateral in which it is granting a security interest free from any and all liens, security interests, encumbrances, claims and other adverse interests and (ii) no security agreement, financing statement, equivalent security or lien instrument or continuation statement covering any of the Collateral has been executed by such Grantor, or is on file or of record in any public office;
(b) Such Grantor shall not create, permit or suffer to exist, and shall take such action as is necessary to remove, any claim to or interest in or lien or encumbrance upon the Collateral owned by it, other than the security interest granted hereby. Each Grantor shall defend the right, title and interest of the Collateral Agent and the Secured Parties in, to and under the Collateral owned by it against all claims and demands of all persons and entities at any time claiming the same or any interest therein;
(c) Subject to any limitation stated therein or in connection therewith, all information furnished by a Grantor concerning the Collateral, is or shall be at the time the same is furnished, accurate, correct and complete in all material respects; and
(d) Each Grantor agrees to promptly notify the Collateral Agent in writing of any change (i) in the jurisdiction of organization of such Grantor, (ii) in the company name or in any trade names used to identify such Grantor in the conduct of its business or in the ownership of its properties, (iii) in the location of its chief executive office, its principal place of business, or offices in which it maintains any books and records or any offices or facilities at which Collateral owned by it is located (including the establishment of any such new offices or facilities), (iv) in its identity or corporate structure including any merger or reorganization thereof, or (v) in its Federal Taxpayer Identification Number.
3. Additional Assurances. Each Grantor shall perform, do, make, execute and deliver all such additional and reasonable further acts, things, deeds, assurances and instruments as the Collateral Agent may reasonably require to more completely vest in and assure to the Collateral Agent its rights hereunder and in, to or under the Collateral.
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4. Preservation and Disposition of Collateral.
(a) Except for the security interest granted hereby, each Grantor shall keep the Collateral owned by it free from any and all liens, security interests, encumbrances, claims and interests. Each Grantor shall advise the Collateral Agent promptly, in writing and in reasonable detail: (i) of any material encumbrance upon or claim asserted against any of the Collateral owned by it; and (ii) the occurrence of any other event that would have a material effect upon the aggregate value of the Collateral owned by it or upon the security interest of the Collateral Agent.
(b) The Collateral Agent and the Secured Parties acknowledge that Ault Lending intends to sell the Collateral and shall be entitled to do so without the prior written consent of the Collateral Agent. Ault Lending acknowledges and agrees that a portion of the proceeds of such sales will be paid to the Secured Parties in accordance with Section 6 and Section 7 of the Notes. Upon the written request of the Collateral Agent, the Grantors and the Collateral Agent will execute an escrow agreement with an escrow agent reasonably satisfactory to parties providing for proceeds from such sales to be deposited into an escrow account for disbursement to the Secured Parties and Grantors in accordance with the terms of the Notes.
(c) Each Grantor agrees that pending their sale, the Mullen Securities will not be transferred to a brokerage account with any firm other than Spartan Capital Securities, LLC without the prior written consent of the Collateral Agent.
(d) Neither Grantor shall use the Collateral in violation of any statute, ordinance, regulation, rule, decree or order. Each Grantor shall pay and/or satisfy any charges or levies upon the Collateral owned by it or in respect to the income or profits therefrom, except that no such charge need be paid if (i) the validity thereof is being contested in good faith by appropriate proceedings, and (ii) such proceedings do not involve any danger of sale, forfeiture or loss of any Collateral or any interest therein.
(e) At reasonable times and upon reasonable notice, Collateral Agent may examine the Collateral and each Grantor’s records pertaining to it, wherever located, and make copies of such records.
5. Financing Statements. At the request of the Collateral Agent, each Grantor shall join with the Collateral Agent in executing one or more financing statements in form satisfactory to the Collateral Agent and shall pay the cost of filing the same in all public offices wherever filing is deemed by the Collateral Agent to be necessary or desirable. Each Grantor hereby agrees that a carbon, photographic or other reproduction of this Security Agreement or of a financing statement shall be sufficient as a financing statement.
6. Default. If an Event of Default (as defined in the Notes) shall occur:
(a) The Collateral Agent may, in accordance with the terms of the Notes, declare the unpaid balance of the Notes immediately due and payable and this Security Agreement in default.
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(b) The Collateral Agent shall have the rights and remedies of a secured party under this Security Agreement and under the laws of the State of New York, including the Uniform Commercial Code as adopted and in effect from time to time in the State of New York (the “UCC”), and in addition to all of the rights and remedies of a secured party under the UCC (such rights and remedies of the Collateral Agent to be cumulative and non-exclusive), the Collateral Agent may (i) require each Grantor to, and each Grantor hereby agrees that it will at its expense and upon request of the Collateral Agent forthwith, assemble all or any part of the Collateral as directed by the Collateral Agent and make it available to the Collateral Agent at a place to be designated by the Collateral Agent that is reasonably convenient to both parties, (ii) subject to the terms and conditions of any agreements in place relating to the Collateral, enter onto the property where any Collateral is located and take possession thereof with or without judicial process or (iii) sell, transfer, or otherwise dispose of all or any of the Collateral, at any time, or from time to time consistent with the provisions of the UCC. The Collateral Agent shall give the applicable Grantor at least ten (10) days’ prior written notice of either the date after which any intended private sale is to be made or the time and place of any intended public sale. The Collateral Agent shall have the right to conduct such sales on the applicable Grantor’s premises upon prior written consent of the Grantor (which shall not be unreasonably withheld or delayed), and such sales may be adjourned from time to time in accordance with applicable law. After deducting all costs of sale as provided for under the UCC, the Collateral Agent may apply the net proceeds of the sale to the Obligations with such allocation as to item and maturity as the Collateral Agent, in its sole discretion, deems advisable and shall refund the surplus to the applicable Grantor. The Collateral Agent may sell or otherwise dispose of the Collateral without giving any warranties as to the Collateral and may specifically disclaim any warranties of title or the like.
7. Disposition of Proceeds of Collateral. All proceeds received by the Collateral Agent for the benefit of the Secured Parties in respect of any sale, collection or other enforcement or disposition of Collateral, shall be applied (after deduction of any amounts payable to the Collateral Agent pursuant to Paragraph 8 hereof) against the Obligations pro rata among the Secured Parties in proportion to their interests in the Obligations. Upon payment in full of all Obligations, Grantors shall be entitled to the return of all Collateral, including cash, which has not been used or applied toward the payment of Obligations or used or applied to any and all costs or expenses of the Collateral Agent incurred in connection with the liquidation of the Collateral (unless another person is legally entitled thereto). Any assignment of Collateral by the Collateral Agent to a Grantor shall be without representation or warranty of any nature whatsoever and wholly without recourse. To the extent allowed by law, each Secured Party may purchase the Collateral and pay for such purchase by offsetting up to such Secured Party’s pro rata portion of the purchase price with sums owed to such Secured Party by Debtor arising under the Obligations or any other source.
8. Expenses. Debtor shall pay to the Collateral Agent, on demand, the amount of any and all reasonable expenses, including, without limitation, attorneys’ fees, legal expenses and brokers’ fees, which the Collateral Agent may incur in connection with: (a) sale, collection or other enforcement or disposition of Collateral; (b) exercise or enforcement of any rights, remedies or powers of the Collateral Agent hereunder or with respect to any or all of the Obligations upon breach or threatened breach; or (c) failure by Debtor to perform and observe any agreements of Debtor contained herein which are performed by the Collateral Agent.
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9. Waiver, Amendment and Other Actions. The provisions of this Agreement may be waived or amended by a written instrument executed by each Grantor and the Collateral Agent.
10. Miscellaneous Provisions.
(a) All of the Collateral Agent’s rights and remedies, whether at law or in equity and whether evidenced hereby or by any other agreement, instrument or paper, shall be cumulative and may be exercised singularly or concurrently. The exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies.
(b) All notices and other communications provided for hereunder shall be given in accordance with the notice provision of the Purchase Agreement.
(c) The Collateral Agent shall not be deemed to have waived any of their rights hereunder or under any other agreement, instrument or paper signed by a Grantor unless such waiver be in writing and signed by the Secured Parties.
(d) This Security Agreement and all rights and obligations hereunder, including matters of constructions, validity and performance, shall be governed by the laws of the State of New York. The parties hereto agree that the venue for any action concerning, relating to or involving this Security Agreement shall be the State of New York, and the parties hereby consent to the jurisdiction of the courts of the State of New York.
(e) The provisions hereof shall, as the case may require, bind or inure to the benefit of the respective successors and assigns of each of the Grantors, the Collateral Agent and each of the Secured Parties.
(f) Any provision of this Security Agreement, which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
(g) This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
[signature page follows]
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IN WITNESS WHEREOF, Debtor and the Collateral Agent have signed this Security Agreement this 18th day of November, 2022.
| BITNILE, INC. | |||
| By: | |||
| Name: | William B Horne | ||
| Title: | Chief Executive Officer |
| AULT LENDING, LLC | |||
| By: | |||
| Name: | David J. Katzoff | ||
| Title: | Manager |
| COLLATERAL AGENT | |||
| HELIOS FUNDS LLC | |||
| By: | |||
| Name: | John Lowry | ||
| Title: | Manager |
6
EXHIBIT 31.1
CERTIFICATION
I, William B. Horne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BitNile Holdings, 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 21, 2022
| /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 BitNile Holdings, 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 21, 2022
| /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 BitNile Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2022, 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 21, 2022 |
|
|
| By: /s/ William B. Horne | ||
| Name: William B. Horne | ||
| Title: Chief Executive Officer | ||
| (Principal Executive Officer) |
| Date: November 21, 2022 |
|
|
| By: /s/ Kenneth S. Cragun | ||
| Name: Kenneth S. Cragun | ||
| Title: Chief Financial Officer | ||
| (Principal Accounting Officer) |