Hyperscale Data Inc

1. DESCRIPTION OF BUSINESS

Hyperscale Data, Inc. (f/k/a Ault Alliance, Inc.), a Delaware corporation (“Hyperscale Data” or the “Company”) is a diversified holding company pursuing growth by acquiring and developing undervalued businesses and disruptive technologies with a global impact. Through its wholly- and majority-owned subsidiaries and strategic investments, the Company owns and operates a data center at which it mines Bitcoin and offers colocation and hosting services for the emerging artificial intelligence ecosystems and other industries, and provides mission-critical products that support a diverse range of industries, including a metaverse platform, oil exploration, crane services, defense/aerospace, industrial, automotive, medical/biopharma and hotel operations. In addition, the Company extends credit to select entrepreneurial businesses through a licensed lending subsidiary.

The Company has the following reportable segments:

The Company had a change to its reportable segments due to the discontinued operations of itsmajority owned subsidiary, Gresham Worldwide, Inc. (“GIGA”). See Note 4 below.

On September 10, 2024, the Company changed its name from Ault Alliance, Inc. to Hyperscale Data, Inc. and its Class A common stock ticker symbol was changed to “GPUS.” The name change did not affect the rights of security holders of the Company.

2. LIQUIDITY AND FINANCIAL CONDITION

As of September 30, 2024, the Company had cash and cash equivalents of $7.2 million (excluding restricted cash of $8.3 million), negative working capital of $151.5 million and a history of net operating losses. The Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. These factors create substantial doubt about the Company’s ability to continue as a going concern for at least one year after the date that these condensed consolidated financial statements are issued.

The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

In making this assessment management performed a comprehensive analysis of the Company’s current circumstances, including its financial position, cash flow and cash usage forecasts, as well as obligations and debts. Although management has a long history of successful capital raises, the analysis used to determine the Company’s ability as a going concern does not include cash sources beyond the Company’s direct control that management expects to be available within the next 12 months.

Management expects that the Company’s existing cash and cash equivalents, accounts receivable and marketable securities as of September 30, 2024, will not be sufficient to enable the Company to fund its anticipated level of operations through one year from the date these financial statements are issued. Management anticipates raising additional capital through the private and public sales of the Company’s equity or debt securities and selling its marketable securities as well as crypto assets, or a combination thereof. Although management believes that such capital sources will be available, there can be no assurances that financing will be available to the Company when needed in order to allow the Company to continue its operations, or if available, on terms acceptable to the Company. If the Company does not raise sufficient capital in a timely manner, among other things, the Company may be forced to scale back or cease its operations altogether.

3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The Company has made estimates and judgments affecting the amounts reported in the Company’s condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from the Company’s estimates. The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2023 (the “2023 Annual Report”) as amended, filed with the Securities and Exchange Commission (the “SEC”) on September 24, 2024. The condensed consolidated balance sheet as of December 31, 2023 was derived from the Company’s audited 2023 financial statements contained in the above referenced 2023 Annual Report. Results of the three and nine months ended September 30, 2024, are not necessarily indicative of the results to be expected for the full year ending December 31, 2024.

Prior Period Revision - Statement of Cash Flows

For the nine months ended September 30, 2024, the Company disclosed the borrowings of lines of credit and repayments of lines of credit as separate line items within notes payable activity of the financing activities section of the consolidated statement of cash flows. The Company has corrected these line items for the nine months ended September 30, 2023 for comparability purposes.

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 2023 Annual Report.

Revenue Recognition Crypto Assets Mining

The Company has entered into a crypto assets mining pool by executing a contract with a mining pool operator to provide hash calculation services to the mining pool. The Company’s customer, as defined in Accounting Standards Codification (“ASC”) 606-10-20, is the mining pool operator with which the Company has agreed to the terms of service and user service agreement. The Company supplies hash calculation services, in exchange for consideration, to the pool operator who in turn provides transaction verification services to third parties via a mining pool that includes other participants. The Company’s performance obligation is the provision of hash calculation services to the pool operator and this performance obligation is an output of the Company’s ordinary activities for which it decides when to provide services under the contract.

The Company’s enforceable right to compensation begins only when, and lasts as long as, the Company provides hash calculation services to the mining pool operator and is created as power is provided over time. The only consideration due to the Company relates to the provision of hash calculation services. The contract with the pool operator provides both parties the unilateral enforceable right to terminate the contract at any time without penalty. The customer termination option results in a contract that continuously renews throughout the day and therefore has a duration of less than 24 hours. The implied renewal option is not a material right because there are no upfront or incremental fees in the initial contract and the terms, conditions, and compensation amount for the renewal options are at the then market rates. Providing such hash calculation services is the only performance obligation in the Company’s contracts with mining pool operators.

The transaction consideration the Company receives, if any, is non-cash consideration in the form of Bitcoin. Changes in the fair value of the non-cash consideration due to form of the consideration (changes in the market price of Bitcoin) are not included in the transaction price and are therefore not included in revenue. The mining pool operator charges fees to cover the costs of maintaining the pool and are deducted from amounts the Company may otherwise earn and are treated as a reduction to the consideration earned. Fees fluctuate and historically have been approximately 0.3% per reward earned, on average.

The Company participated in mining pools that used the full pay-per-share (“FPPS”) payout method for the nine months ended September 30, 2024. The Company is entitled to compensation once it begins to perform hash calculations for the pool operator in accordance with the operator’s specifications over a 24-hour period beginning midnight UTC and ending 23:59:59 UTC on a daily basis. The non-cash consideration that the Company is entitled to for providing hash calculations to the pool operator under the FPPS payout method is made up of block rewards and transaction fees less pool operator fees determined as follows:

The contract is in effect until terminated by either party.

All consideration pursuant to this arrangement is variable. It is not probable that a significant reversal of cumulative revenue will occur. The Company is able to calculate the payout based on the contractual formula, non-cash revenue is estimated and recognized based on the fair value of Bitcoin on the date of contract inception. Fair value of the crypto assets consideration is determined using the midnight UTC spot price of the Company’s principal market for Bitcoin. The Company recognizes non-cash consideration on the same day that control of the contracted service is transferred to the pool operator, which is the same day as the contract inception.

There is no significant financing component in these transactions.

Expenses associated with running the crypto assets mining business, such as equipment depreciation and electricity costs, are recorded as a component of cost of revenues.

Revenue Recognition Hotel Operations

The primary sources of revenue include room and food and beverage revenue from the Company’s hotels.

Rooms revenue represents revenue from the occupancy of the Company’s hotel rooms, which is driven by the occupancy and average daily rate charged. Rooms revenue includes revenue from guest no-shows, daily use, and early/late departure fees. The contracts for room stays with customers are generally short in duration and revenues are recognized as services are provided over the course of the hotel stay at the daily transaction price agreed to under the contract.

Food and beverage revenue consists of revenue from the restaurants and lounges, in room dining and mini bars, and banquet/catering revenue from group and social functions. Payment of the transaction price is due immediately when the customer purchases the goods and services. Therefore, revenue is recognized at a point in time when the physical possession has transferred to the customer.

Reclassifications

Certain prior period amounts have been reclassified for comparative purposes to conform to the current-period financial statement presentation, including the discontinued operations presentation of GIGA financial results. These reclassifications had no effect on previously reported results of operations.

Recently Issued Accounting Standards

On December 14, 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures(“ASU 2023-09”). ASU 2023-09 requires entities to disclose specific rate reconciliations, amount of income taxes separated by federal and individual jurisdiction, and the amount of income (loss) from continuing operations before income tax expense (benefit) disaggregated between federal, state, and foreign. The new standard is effective for the Company for its fiscal year beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of adopting the standard.

On November 27, 2023, the FASB issued ASU No. 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 is designed to improve the reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker. The new standard is effective for the Company for its fiscal year beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of adopting the standard.

In March 2024, the FASB issued ASU No. 2024-01Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards (“ASU 2024-01”). ASU 2024-01 improves clarity and operability without changing the guidance. ASU 2024-01 is effective on a prospective basis, with the option for retrospective application, for annual periods beginning after December 15, 2024 and early adoption is permitted. The Company does not expect the adoption of ASU 2024-01 to have a material impact on its consolidated financial statements.

4. DECONSOLIDATION OF SUBSIDIARY AND DISCONTINUED OPERATIONS

**Presentation of GIGA as Discontinued Operations **

On August 14, 2024, GIGA, filed a petition for reorganization under Chapter 11 of the bankruptcy laws. The filing placed GIGA under the control of the bankruptcy court, which oversees its reorganization and restructuring process. The Company assessed the inherent uncertainties associated with the outcome of the Chapter 11 reorganization process and the anticipated duration thereof, and concluded that it was appropriate to deconsolidate GIGA and its subsidiaries effective on the petition date. The Company recognized a gain on deconsolidation of GIGA of $2.0 million included in net gain (loss) from discontinued operations.

In connection with the Chapter 11 reorganization process, the Company concluded that the operations of GIGA met the criteria for discontinued operations as this strategic shift that will have a significant effect on the Company’s operations and financial results. As a result, the Company has presented the results of operations, cash flows and financial position of GIGA as discontinued operations in the accompanying consolidated financial statements and notes for all periods presented.

The following table presents the assets and liabilities of GIGA operations:

Net assets of discontinued operations excludes $14.0 million of intercompany notes payable to Hyperscale Data and Ault lending as of December 31, 2024.

The following table presents the results of GIGA operations:

The net gain (loss) from discontinued operations for the three and nine months ended September 30, 2024 on the condensed consolidated statement of operations and comprehensive loss includes the gain on deconsolidation as follows:

The cash flow activity related to discontinued operations is presented separately on the statement of cash flows as summarized below:

5. CHANGE IN PLAN OF SALE OF AGREE HOTEL PROPERTIES

On April 30, 2024, the Company had a change in plan of sale for its four hotels owned and operated by AGREE. As a result, as of April 30, 2024, the assets no longer met the held for sale criteria and were required to be reclassified as held and used at the lower of adjusted carrying value or the fair value at the date of the not to sell.

For presentation purposes, the assets and liabilities previously held for sale as of December 31, 2023, were reclassified in the December 31, 2023 balance sheet in the accompanying financial statements back to their original asset and liability groups at their previous carrying values. In connection with this change in plan of sale, the Company recorded a loss on impairment of property and equipment related to the real estate assets of AGREE of $8.0 million during the nine months ended September 30, 2024. The fair values of property and equipment related to the real estate assets of AGREE were based on a discounted cash flow income approach for the hotel properties and a comparable sales market approach for the vacant land assets.

6. REVENUE DISAGGREGATION

The following tables summarize disaggregated customer contract revenues and the source of the revenue for the three months ended September 30, 2024 and 2023. 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, 2024:

The Company’s disaggregated revenues consisted of the following for the nine months ended September 30, 2024:

The Company’s disaggregated revenues consisted of the following for the three months ended September 30, 2023:

The Company’s disaggregated revenues consisted of the following for the nine months ended September 30, 2023:

7. 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:

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 changes in Level 3 fair value hierarchy during the three and nine months ended September 30, 2024 and 2023 were as follows:

8. Equity Investments for Which Measurement Alternative Has Been Selected

As of September 30, 2024 and December 31, 2023, the Company held equity investments in other securities valued at $5.3 million and $21.8 million, respectively, that were valued using a measurement alternative. These investments are included in other equity securities in the accompanying consolidated balance sheets.

The Company has made cumulative downward adjustments for impairments for equity securities that do not have readily determinable fair values for the nine months ended September 30, 2024 and 2023, totaling $6.3 million and $11.6 million, respectively. Approximately $6.3 million of the impairment charge for the nine months ended September 30, 2024 was reflected in other income (expense) on the condensed consolidated statement of operations and comprehensive loss. Approximately $9.6 million of the impairment charge for the nine months ended September 30, 2023 was reflected in other income (expense) and $2.0 million of the impairment charge related to Fintech lending operations and was recorded against revenue from lending and trading activities on the condensed consolidated statement of operations and comprehensive loss.

9. Marketable EQUITY Securities

Marketable equity securities with readily determinable market prices consisted of the following as of September 30, 2024 and December 31, 2023:

The Company’s investment in marketable equity securities is revalued on each balance sheet date.

10. CRYPTO ASSETS

The following table presents revenue from mined crypto assets for the three and nine months ended September 30, 2024 and 2023:

The following table presents the activities of the crypto assets (included in prepaid expenses and other current assets) for the nine months ended September 30, 2024 and 2023:

11. PROPERTY AND EQUIPMENT, NET

At September 30, 2024 and December 31, 2023, property and equipment consisted of:

Summary of depreciation expense:

Impairment of Property and Equipment

During the three months ended September 30, 2024, due to increases in the Bitcoin mining difficulty level, which compounded the continued impact of the Bitcoin halving event, we concluded that indicated that an impairment triggering event had occurred. Testing performed indicated the estimated fair value of the Company’s miners to be less than their net carrying value as of September 30, 2024, and an impairment charge of $10.5 million was recognized, decreasing the net carrying value of the Company’s crypto assets mining equipment to their estimated fair value. The Company valued the miners using an income approach utilizing a discounted cash flow and a discount rate of 20%. The Company estimated the cash flow from the miners over a two-year period assuming a utilization rate of 98%, a mining difficulty level of 101.6 trillion, a Bitcoin price of $76,000 and a power cost of $0.055 per kilowatt-hour. The estimated fair value of the Company’s miners is classified in Level 3 of the fair value hierarchy with no observable inputs using a discounted cash flow methodology.

In addition, the Company has recorded $1.2 million and $9.2 million in impairment charges related to real estate assets of AGREE during the three and nine months ended September 30, 2024, respectively.

12. INTANGIBLE ASSETS, NET

At September 30, 2024 and December 31, 2023, intangible assets consisted of:

Certain of the Company’s trade names and trademarks were determined to have an indefinite life. The remaining definite-lived intangible assets are primarily being amortized on a straight-line basis over their estimated useful lives.

Summary of amortization expense:

As of September 30, 2024, intangible assets subject to amortization have an average remaining useful life of 6.9 years. The following table presents estimated amortization expense for each of the succeeding five calendar years and thereafter.

13. INVESTMENTS – RELATED PARTIES

Investments in Alzamend, Ault & Company, Inc. (“Ault & Company”) and GIGA at September 30, 2024 and December 31, 2023, were comprised of the following:

Investment in Promissory Notes, Related Parties – Ault & Company and GIGA (Recorded in “Investment in Promissory Notes and Other, Related Party” on the Condensed Consolidated Balance Sheets)

Summary of interest income, related party, recorded within interest and other income on the condensed consolidated statement of operations:

At each reporting date, the Company applies its judgment to evaluate the collectability of the note receivable and makes a provision based on the assessed amount of expected credit loss. This judgment is based on parameters such as interest rates, market conditions and creditworthiness of the creditor.

The Company determined that the collectability of certain notes receivables is doubtful based on information available.

Upon the deconsolidation of the GIGA, the Company established an allowance for credit losses of $2.6 million related to notes receivable from GIGA included in net gain (loss) from discontinued operations.

During the three months ended March 31, 2024, due to uncertainties surrounding collection, the Company recorded a loan loss reserve of $3.1 million related to the promissory note from Ault & Company recorded in provision for loan losses, related party, reversed the related accrued receivable and did not record interest income on the note.

Investment in Alzamend Series B Convertible Preferred Stock, Warrants and Common Stock, Related Parties – Alzamend (Recorded in “Investments in Common Stock and Equity Securities, Related Party” on the Condensed Consolidated Balance Sheets)

The following tables summarize the changes in the Company’s investments in Alzamend common stock during the three and nine months ended September 30, 2024 and 2023:

Ault Lending, LLC (“Ault Lending”) Investment in Alzamend Series B Convertible Preferred Stock and Warrants

In connection with a securities purchase agreement entered into with Alzamend in January 2024, the Company purchased 2,100 shares of Alzamend Series B Convertible Preferred Stock and warrants to purchase 2.1 million shares of Alzamend common stock with a five-year term and an exercise price of $1.20 per share for a total purchase price of $2.1 million.

The Agreement provides that Ault Lending may purchase up to $6 million of Alzamend Series B Convertible Preferred Stock in one or more closings. There have been additional closings subsequent to January 2024.

The Company has elected to account for investment in other investments securities, related party, using a measurement alternative under which they are measured at cost and adjusted for observable price changes and impairments.

Messrs. Ault, Horne and Nisser are each paid $50,000 annually by Alzamend.

14. EQUITY METHOD INVESTMENT

Equity Investments in Unconsolidated Entity – Algorhythm Holdings, Inc. (f/k/a The Singing Machine Company) (“SMC”)

The following table summarizes the changes in the Company’s equity investments in an unconsolidated entity, SMC, included in other assets on the condensed consolidated balance sheet, during the nine months ended September 30, 2024:

There was no activity in the investment in the unconsolidated entity account during the three months ended September 30, 2024, prior to the transition from the equity method of accounting on September 5, 2024, as described below. Consequently, the beginning balance, activity, and ending balance for this period were all zero.

On September 5, 2024, three of the Company’s employees resigned from the board of directors of SMC. As a result of the resignations, and as the Company owned less than 20% of SMC at the time, the Company no longer had the ability to exert significant influence over the operating and financial policies of SMC. The Company discontinued the equity method of accounting for the investment in SMC on September 5, 2024. As a result, the Company changed its accounting for SMC to an investment in marketable equity securities and recognized the investment at fair value, with a gain of $1.3 million recognized as revenue from lending and trading activities in the condensed consolidated statement of operations and comprehensive loss.

15. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Other current liabilities at September 30, 2024 and December 31, 2023 consisted of:

16. DIVIDEND PAYABLE IN TURNONGREEN COMMON STOCK

In March 2024, the Company, in connection with a planned distribution of its common stock holdings of TurnOnGreen, announced the distribution to its stockholders of 25.0 million shares of TurnOnGreen common stock and warrants to purchase 25.0 million shares of TurnOnGreen common stock, which resulted in an adjustment to additional paid in capital and increase to non-controlling interest of $4.9 million based on the recorded value of the Company’s holdings in TurnOnGreen at the record date of the distribution.

17. ROI Transfers of White River Common Stock

In January of 2024, ROI announced that it had concluded that, for regulatory reasons, ROI would be unable to effect the distribution of its shares of common stock of White River as contemplated by a registration statement previously filed by White River. In an effort to attempt to fulfill its original intent to transfer the shares to ROI shareholders of record as of September 30, 2022, ROI would send such shareholders an agreement whereby qualified shareholders can demonstrate to ROI’s satisfaction that they in fact were beneficial shareholders of ROI’s common or preferred stock as of September 30, 2022 and affirm that they are “accredited investors” by July 26, 2024.

During the nine months ended September 30, 2024, ROI transferred 12.0 million shares of White River common stock with a fair value of $19.2 million at the date of transfer to certain of its accredited investors to resolve the matters discussed above.

In conjunction with the transfers to non-controlling interests, shares of ROI’s investment in White River’s Series A Convertible Preferred Stock were converted into shares of White River common stock, resulting in a non-cash $17.9 million gain on conversion.

Ault Lending Transfer

On February 14, 2024, ROI transferred 2.5 million shares of White River common stock with a carryover basis of $0.5 million and a fair value of $7.5 million on the date of transfer to Ault Lending.

18. REDEEMABLE NONCONTROLLING INTERESTS IN EQUITY OF SUBSIDIARY LIABILITY

The Company records redeemable noncontrolling interests in equity of subsidiaries to reflect the economic interests of the common stockholders in Ault Disruptive.

Redemption of Shares

On September 27, 2024, Ault Disruptive announced that it will redeem all of its outstanding shares of common stock which occurred as of the close of business on October 11, 2024, because Ault Disruptive would not consummate an initial business combination within the time period required by its Amended and Restated Certificate of Incorporation, as amended. During the nine months ended September 30, 2024, shares of Ault Disruptive common stock were redeemed for an aggregate redemption amount of $1.5 million.

On October 11, 2024, all remaining shares of Ault Disruptive common stock were redeemed for a redemption amount of $0.8 million.

The following table summarizes the changes in the Company’s redeemable noncontrolling interests in equity of subsidiaries during the three months ended September 30, 2024 and 2023:

The following table summarizes the changes in the Company’s redeemable noncontrolling interests in equity of subsidiaries during the nine months ended September 30, 2024 and 2023:

Merger Agreement

On June 23, 2024, Ault Disruptive entered into a Merger Agreement with GIGA, intending for GIGA to become a majority owned subsidiary and for Ault Disruptive to be renamed Gresham Worldwide, Inc., trading under the ticker “GWWI” on the NYSE American. However, due to GIGA’s bankruptcy filing, the merger agreement was subsequently terminated.

On August 14, 2024, GIGA filed a petition for reorganization under Chapter 11 of the bankruptcy laws.

19. NOTES PAYABLE

Notes payable at September 30, 2024 and December 31, 2023, were comprised of the following:

OID Only Term Note

On July 2, 2024, the Company entered into a term note agreement with institutional investors for the sale of up to $2.6 million in term notes, of which the principal amount of $1.8 million was immediately funded. A term note was issued at a discount, with net proceeds to the Company of $1.5 million. The term note does not accrue any interest. The term note was scheduled to mature on August 2, 2024. The term note is guaranteed by Mr. Ault. The term note maturity was extended to October 16, 2024, and an extension fee of $0.2 million accrues monthly until the term note is paid in full. The term note is included in “Other” in the table above.

ROI 15% Term Note

On February 9, 2024, ROI entered into a $1.77 million term note agreement with an institutional investor bearing interest of 15%. The term note was issued at a discount, with net proceeds to ROI of $1.75 million. The term note was scheduled to mature February 14, 2024. This note has been guaranteed by Ault & Company and Mr. Ault. The term note was subsequently amended to increase the principal amount due to $2.1 million, increase the interest rate to 18% and extend the maturity date to April 30, 2024. The term note is in default as of May 1, 2024.

15% Term Notes

Between April 29, 2024 and August 29, 2024, the Company entered into note agreements totaling $5.7 million with an institutional investor bearing interest of 15%. The term notes were issued at a discount, with net proceeds to the Company of $5.1 million. The term notes were amended to extend the maturity dates to October 31, 2024. The note is default as of November 1, 2024.

$20 Million Credit Agreement

On June 4, 2024 the Company entered into a Loan Agreement (the “Credit Agreement”) with two institutional investors (collectively, the “Lender”). The Credit Agreement provides for an unsecured, non-revolving credit facility with an aggregate draw limit of $20.0 million. However, the Company is restricted to having no more than $2.0 million in principal amount of outstanding advances at any given time under the Credit Agreement. As of September 30, 2024, $2.0 million has been advanced, exclusive of a $0.4 million original issue discount (“OID”).

All loans under the Credit Agreement will be evidenced by a promissory note. The Lender made an Advance to the Company of $1.5 million on the execution date. The advances are due December 4, 2024, provided, however, that if on such date, the Company has executed an equity line of credit agreement relating to the sale of shares of the Company’s 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock, has an effective registration statement relating thereto and is not currently in default under such agreement, then the maturity date shall be automatically extended until June 4, 2025. The Lender is not obligated to make any further Advances under the Credit Agreement after the maturity date. Advances under the Credit Agreement will include the addition of an OID of 20% to the amount of each Advance and all Advances will bear interest at the rate of 15.0% per annum and may be repaid at any time without penalty or premium.

The obligations of the Company under the Credit Agreement are secured by a guaranty provided by Milton C. Ault, the Executive Chairman of the Company.

Circle 8 revolving credit facility

On October 16, 2024, Circle 8 was in default related to reporting requirements under the terms of their revolving credit facility. Circle 8 was able to obtain a waiver on November 19, 2024 to cure the event of default.

Notes Payable Maturities

The contractual maturities of the Company’s notes payable, assuming the exercise of all extensions that are exercisable solely at the Company’s option, as of September 30, 2024 were:

Interest Expense

20. NOTES PAYABLE, RELATED PARTY

Notes payable, related party at September 30, 2024 and December 31, 2023, were comprised of the following:

Summary of interest expense, related party, recorded within interest expense on the condensed consolidated statement of operations:

21. CONVERTIBLE NOTES

Convertible notes payable at September 30, 2024 and December 31, 2023, were comprised of the following:

10% OID Convertible Promissory Note

On July 18, 2024, the Company entered into a note purchase agreement (the “Purchase Agreement”) with an institutional investor (the “Investor”) pursuant to which the Investor purchased from the Company, on July 19, 2024, in a registered direct offering, a $5.4 million 10% OID Convertible Promissory Note (the “Note”). The Note was sold to the Investor for a purchase price of $4.9 million, which included an OID of $0.5 million. The Note accrues interest at the rate of 15%. The Note matured on October 19, 2024 and is in default as of October 20, 2024. The Note is convertible into shares of Class A common stock at a conversion price of $0.17 per share.

During the three and nine months ended September 30, 2024, the Investor converted $0.7 million of the Note into 3.0 million shares of Class A common stock that had a fair value of $0.9 million at the time of conversion and the Company recognized a $0.2 million loss on extinguishment of debt.

6% Convertible Promissory Notes

On March 11, 2024, the Company entered into a note purchase agreement with two institutional investors pursuant to which the investors agreed to acquire, and the Company agreed to issue and sell in a registered direct offering to the investors an aggregate of $2.0 million convertible promissory notes, bearing interest of 6%. The convertible promissory notes were converted into shares of Class A common stock in May 2024 at a conversion price of $0.35 per share and the Company recognized a $0.7 million loss on extinguishment of debt.

ROI Gain on Extinguishment of Senior Secured Convertible Notes

During the nine months ended September 30, 2024, ROI converted $2.3 million of ROI senior secured convertible notes that had a fair value of $0.9 million at the time of conversion and recognized a $1.4 million gain on extinguishment of debt.

Contractual Maturities

The contractual maturities of the Company’s convertible notes payable, assuming the exercise of all extensions that are exercisable solely at the Company’s option, as of September 30, 2024 were:

Significant inputs associated with the embedded conversion options include:

Activity related to the embedded conversion option derivative liabilities for the nine months ended September 30, 2024 was as follows:

22. COMMITMENTS AND CONTINGENCIES

Contingencies

Litigation Matters

The Company is involved in litigation arising from other matters in the ordinary course of business. The Company is regularly subject to claims, suits, regulatory and government investigations, and other proceedings involving labor and employment, commercial disputes, and other matters. Such claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil penalties, or other adverse consequences.

Certain of these outstanding matters include speculative, substantial or indeterminate monetary amounts. The Company records a liability when it believes that it is probable that a loss has been incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or range of loss can be estimated, the Company discloses the reasonably possible loss. The Company evaluates developments in its legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and makes adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters.

Arena Litigation

Arena Investors, LP (ROI Litigation)

On May 30, 2024, Arena Investors, LP (“Arena”), in its capacity as collateral agent for five noteholders, filed a filed a Complaint (the “ROI Complaint”) in the Supreme Court of the State of New York, County of New York against the Company and ROI, in action captionedArena Investors, LP v. Ault Alliance, Inc. and RiskOn International, Inc., Index No. 652792/2024.

The ROI Complaint asserts a cause of action for breach of contract against the Company based on a Guaranty, dated April 27, 2023, and entered into, amongst others, the Company and Arena, and seeks damages in the amount of in excess of $3.75 million, plus interest, attorneys’ fees, costs, expenses, and disbursements.

The ROI Complaint also asserts a cause of action for breach of contract against ROI based on an alleged breach of that certain Security Agreement, dated April 27, 2023, and entered into among ROI and Arena. In connection with this cause of action, Arena seeks, among other things, costs and expenses from the Company and ROI.

On July 31, 2024, the Company and ROI filed a motion to dismiss seeking to partially dismiss the ROI Complaint, as against the Company, and to dismiss the Compliant, in its entirety, as against ROI.

The Motion has been fully briefed and is currently pending before the Court.

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 recorded the unpaid portion of the notes. An unfavorable outcome may have a material adverse effect on the Company’s business, financial condition and results of operations.

Arena Investors, LP (Gresham Litigation)

On June 6, 2024, Arena, in its capacity as collateral agent for Arena and Walleye Opportunities Master Fund Ltd. (“Walleye”), filed a Complaint (the “Complaint”) in the Supreme Court of the State of New York, County of New York against the Company and GIGA, in action captionedArena Investors, LP v. Gresham Worldwide, Inc. f/k/a Giga-Tronics Incorporated and Ault Alliance, Inc., Index No. 652898/2024.

On July 8, 2024, Arena filed an Amended Complaint (the “Amended Complaint”) in the above-referenced action. The Amended Complaint asserts a cause of action against the Company for declaratory and injunctive relief seeking an injunction enjoining the Company, and its agent, affiliates, servants, and employees from taking actions in breach of that certain Subordination Agreement, dated January 9, 2023, and entered into among Walleye, Arena, and the Company.

The Amended Complaint also asserts causes of action for breach of contract against GIGA based on two discrete convertible promissory notes (the “Notes”) that GIGA entered into with each of Arena and Walleye, as well as a claim for breach duty of good faith and fair dealing, against GIGA, and seeks, among other things, monetary damages in excess of $4.2 million, with interest thereon, attorneys’ fees, costs, and disbursements. The Amended Complaint further asserts another cause of action against GIGA for breach of contract seeking declaratory and injunctive relief based on alleged inspection rights contained in a Security Agreement, dated January 9, 2023 (the “Security Agreement”), and entered into between the Walleye, Arena, and GIGA, which seeks the issuance of an injunction related to such alleged inspection rights, plus the costs and out-of-pocket expenses associated with the enforcement of same.

On July 12, 2024, the Court granted injunctive relief to Arena and ordered GIGA to comply with the inspection rights provision of the Security Agreement by July 17, 2024.

On July 19, 2024, Arena voluntarily discontinued its cause of action for breach duty of good faith and fair dealing claim against GIGA.

On July 29, 2024, the Company and GIGA filed a motion to dismiss, strike, and for sanctions (the “Motion”), in response to the Amended Complaint, on the grounds that, amongst other things, the underlying Notes are criminally usurious under New York.

On August 14, 2024, GIGA filed a petition for reorganization under Chapter 11 of the bankruptcy laws.

On November 12, 2024, GIGA removed the state court action to the United States District Court for the Southern District of New York.

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 recorded the unpaid portion of the Notes. An unfavorable outcome may have a material adverse effect on the Company’s business, financial condition and results of operations.

Other Litigation 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.

The Company had accrued loss contingencies related to litigation matters of $2.4 million and $2.3 million as of September 30, 2024 and December 31, 2023, respectively.

23. STOCKHOLDERS’ EQUITY

Reverse Stock Split

On January 12, 2024, pursuant to the authorization provided by the Company’s stockholders at the annual meeting of stockholders, the Company’s board of directors approved an amendment to the Certificate of Incorporation to effectuate a reverse stock split of the Company’s issued and outstanding common stock by a ratio of one-for-twenty-five (the “1-for-25 Reverse Split”). The 1-for-25 Reverse Split did not affect the number of authorized shares of common stock, preferred stock or their respective par value per share. As a result of the 1-for-25 Reverse Split, each twenty-five shares of common stock issued and outstanding prior to the 1-for-25 Reverse Split were converted into one share of common stock. The 1-for-25 Reverse Split became effective in the State of Delaware on January 16, 2024.

2023 Issuances

Common ATM Offering

During the three and nine months ended September 30, 2024, the Company sold an aggregate of 0 and 25.6 million shares of Class A common stock pursuant to the At-The-Market issuance sales agreement, as amended, entered into with Ascendiant Capital Markets, LLC in 2023 (the “2023 Common ATM Offering”) for gross proceeds of $0 and $14.6 million, respectively.

Series C Convertible Preferred Stock Offering, Related Party

During the three and nine months ended September 30, 2024, the Company sold to Ault & Company an aggregate of 300 and 2,800 shares of Series C Preferred Stock and Warrants to purchase 0.1 million and 0.8 million shares of Class A common stock, for a total purchase price of $0.3 million and $2.8 million, respectively.

Amendment to Loan and Guarantee Agreement

On September 17, 2024, the loan and guarantee agreement, dated as of December 14, 2023, as amended, pursuant to which the Company has guaranteed financial obligations of Ault & Company borrowings, was amended regarding the Company’s obligations to fund the restricted cash Segregated Account.

The Company agreed to deposit in the Segregated Account:(i) $0.4 million monthly commencing on September 30, 2024 and ending on February 28, 2025; and (ii) $0.5 million monthly commencing on March 31, 2025 and ending on the earlier of the term loan maturity date, prepayment of the term loan in full or the date on which the balance of the Segregated Account exceeds 110% of the outstanding balance of the term loan. As of September 30, 2024, the Company had deposited $6.5 million in the Segregated Account. In October 2024, the Company deposited an additional $0.4 million in the Segregated Account.

ELOC Purchase Agreement

On June 20, 2024, the Company entered into a purchase agreement, as amended on November 1, 2024 (the “ELOC Purchase Agreement”) with Orion Equity Partners, LLC (“Orion”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right to direct Orion to purchase up to an aggregate of $37.5 million of shares of the Company’s 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock, par value $0.001 per share (the “Preferred Shares”) over the 36-month term of the ELOC Purchase Agreement at a purchase price equal to 91% of the average closing stock price during the seven consecutive trading days immediately preceding a given purchase date. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, including, without limitation, the effectiveness of a resale registration statement registering the Preferred Shares for sale (the “Registration Statement”).

The ELOC Purchase Agreement may be terminated by the Company at any time after commencement, at its discretion, provided that at the time of termination, the Company does not have any outstanding amounts owed to the Lenders, who are affiliates of Orion, pursuant to the Credit Agreement.

There have been no purchases under the ELOC Purchase Agreement.

**24. INCOME TAXES **

The Company calculates its interim income tax provision in accordance with ASC Topic 270,Interim Reporting, and ASC Topic 740,Income Taxes. The Company’s effective tax rate (“ETR”) from continuing operations was 0.1%and 2.0% for the three months ended September 30, 2024 and 2023, respectively, and (0.21%) and 0.4% for the nine months ended September 30, 2024 and 2023, respectively. The Company recorded an income tax provision of $67,000 and $0.1 million for the three months ended September 30, 2024 and 2023, respectively, and an income tax provision of $47,000 and an income tax provision of $0.5 million for the nine months ended September 30, 2024 and 2023, 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.

25. NET LOSS PER SHARE

Net loss per share is computed by dividing the net loss to common stockholders by the weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is the same for all periods presented as the effect of the potential common stock equivalents is anti-dilutive due to the Company’s net loss position for all periods presented. Anti-dilutive securities, which are convertible into or exercisable for the Company’s common stock, consisted of the following at September 30, 2024 and 2023:

26. SEGMENT AND CUSTOMERS INFORMATION

The Company had the following reportable segments as of September 30, 2024 and 2023; see Note 1 for a brief description of the Company’s business.

The following data presents the revenues, expenditures and other operating data of the Company and its operating segments for the three and nine months ended September 30, 2024:

The following data presents the revenues, expenditures and other operating data of the Company and its operating segments for the three and nine months ended September 30, 2023:

27. CONCENTRATIONS OF CREDIT AND REVENUE RISK

Significant customers are those that represent more than 10% of the Company’s total revenue or accounts receivable balances for the periods and as of each balance sheet date presented. For each significant customer, revenue as a percentage of total revenue and gross accounts receivable as a percentage of total gross accounts receivable as of the periods presented were as follows:

28. SUBSEQUENT EVENTS

Additional Closings of Series C Preferred Stock, Related Party

In October and November 2024, the Company sold to Ault & Company an aggregate of 2,230 shares of Series C Preferred Stock and Warrants to purchase 0.7 million shares of Class A common stock, for a total purchase price of $2.2 million.

Agreement to Sell St. Petersburg Property

On October 2, 2024, Third Avenue Apartments LLC, a wholly owned indirect subsidiary of the Company, entered into a contract of sale with a third-party purchaser and agreed to sell its real estate property in St. Petersburg, Florida for $13.2 million. The closing of the sale of the property is expected to occur on or before December 31, 2024. The Company is obligated to pay $11 million of the purchase price into the segregated account for the benefit of its senior secured lenders. Based on the expected sale price of the St. Petersburg property, the Company recorded an impairment charge of $1.3 million during the three and nine months ended September 30, 2024 in the condensed consolidated statement of operations and comprehensive loss.

10.00% Series E Cumulative Redeemable Perpetual Preferred Stock (the “Series E Preferred Stock”)

On November 11, 2024 the Company filed a Certificate of Designation, Rights and Preferences (the “Certificate of Designation”) with the Secretary of State of the State of Delaware to establish the preferences, voting powers, limitations as to dividends or other distributions, qualifications, terms and conditions of redemption and other terms and conditions of the Company’s Series E Preferred Stock. The following is a summary description of those terms and the general effect of the issuance of the shares of Series E Preferred Stock on the Company’s other classes of registered securities.

The Series E Preferred Stock will, as to dividend rights and rights as to the distribution of assets upon the Company’s liquidation, dissolution or winding-up, rank: (1) senior to all classes or series of Common Stock and to all other equity securities issued by the Company other than equity securities referred to in clauses (2) and (3); (2) on parity with any future class or series of the Company’s equity securities expressly designated as ranking on parity with the Series E Preferred Stock, (3) junior to the Company’s Series A Cumulative Redeemable Perpetual Preferred Stock and its Series C Convertible Preferred Stock; and all equity securities issued by the Company expressly designated as ranking senior to the Series E Preferred Stock; and (4) junior to all the Company’s existing and future indebtedness.

To the extent the shares of Series E Preferred Stock are issued, the Company will pay cumulative cash dividends on the Series E Preferred Stock when, as and if declared by its board of directors (or a duly authorized committee of its board of directors), only out of funds legally available for payment of dividends. Dividends on the Series E Preferred Stock will accrue on the stated amount of $25.00 per share of the Series E Preferred Stock at a rate per annum equal to 10.00% (equivalent to $3.00 per year), payable monthly in arrears.

The Series E Preferred Stock is redeemable by the Company. Holders of shares of the Series E Preferred Stock generally will have no voting rights, except as required by law and as provided in the Certificate of Designation. Voting rights for holders of the Series E Preferred Stock exist primarily with respect to material and adverse changes in the terms of the Series E Preferred Stock and the creation of additional classes or series of preferred stock that rank senior to the Series E Preferred Stock.

Further, unless the Company has received the approval of two-thirds of the votes entitled to be cast by the holders of Series E Preferred Stock, the Company will not effect any consummation of a binding share exchange or reclassification of the Series E Preferred Stock or a merger or consolidation of the Company with another entity, unless (a) the shares of Series E Preferred Stock remain outstanding or, in the case of a merger or consolidation with respect to which the Company is not the surviving entity, the shares of Series E Preferred Stock are converted into or exchanged for preference securities, or (b) such shares remain outstanding or such preference securities are not materially less favorable than the Series E Preferred Stock immediately prior to such consummation.

Reverse Stock Split

At the June 28, 2024 annual meeting of stockholders, voted upon and approved Proposal 5, an amendment to the Company’s Certificate of Incorporation to effect a Reverse Split with a ratio of not less than one-for-two and not more than one-for-thirty-five at any time prior to June 27, 2025, with the exact ratio to be set at a whole number within this range as determined by the Company’s board of directors in its sole discretion.

On October 24, 2024, the board of directors authorized a special committee of the board to determine the ratio of the reverse split. On November 8, 2024, the special committee approved a one-for-thirty-five reverse split of the Class A common stock that will be effective in the State of Delaware on Friday, November 22, 2024. The Company anticipates that beginning with the opening of trading on Monday, November 25, 2024, the Company’s Class A common stock will trade on the NYSE American on a split-adjusted basis.

Special Dividend of Class B Common Stock

On November 15, 2024, the Company announced that it plans to issue a special one-time dividend (the “Distribution”) of 5.0 million shares of its Class B Common Stock (the “Class B Common Stock”) to all holders of its Class A Common Stock (the “Class A Common Stock”) and the Series C Convertible Preferred Stock on an as-converted basis.

The record date for the Distribution is November 29, 2024. Stockholders who own the Company’s Class A Common Stock at the close of trading on that date will be eligible to receive the shares of Class B Common Stock. Further, the Company has set a payment date of December 16, 2024, subject to adjustment. On the record date, the Company anticipates there will be approximately 1.1 million shares of Class A Common Stock and approximately 5.9 million Class A Common Stock equivalents, based on the current conversion price of the Company’s Series C Convertible Preferred Stock, issued and outstanding (collectively, the “Eligible Capital Stock”), for an aggregate of approximately 7.0 million shares of Eligible Capital Stock. Consequently, the number of shares of Class B Common Stock issuable is approximately 0.71 for each share of Eligible Capital Stock. The foregoing figures reflect the implementation of the one-for-thirty-five reserve stock split that will be effectuated on November 25, 2024.

The Class B Common Stock is identical to the currently outstanding Class A Common Stock, with the exception that each share thereof carries ten times the voting power of a share of Class A Common Stock. The Class B Common Stock is convertible at any time after the payment date into Class A Common Stock on a one-for-one basis.