Hyperscale Data, Inc. (GPUS) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm Milton Todd Ault III, I go by Todd. Today, we have Will Horne, the actual CEO of Hyperscale Data. I know that, many people confuse me as the CEO. I am not. I'm the Executive Chairman. Will and I've been together for more than 20 years. We have Ken Cragun, the CFO, who I'm super excited is here. Ken has an enormous amount of public company reporting experience and has been with us for a long time, many, many years, I think more than half a decade, maybe longer than that. We have Jay Looney, the President of the Data Center business in Michigan, Alliance Cloud Services. And in the background there, that will be joining us the Chief Technology Officer of Hyperscale Data, Joe Spaziano, who's been with us for 20 years. So I thought it was important today to really bring the team together as this is a long culmination of us trying to figure out how we're going to grow the company, and we're pretty proud together that we're going to try to accomplish a $300 million to $350 million enterprise next year. It's taken a lot of work. And as you guys know, before we read these forward-looking comments, I'll say this. Building a small-cap holding company is like driving a car down the road where you have to lay the asphalt in the concrete to make the road. It is not an easy challenge. It is quite difficult. And as many shareholders have experienced like myself and Will and the whole team, quite volatile being a small cap company that has to raise capital in an environment that is such a difficult thing being so small as a holding company. Joe, could you give me a favor and read the forward-looking statements? Joe, the most important thing is you can just read down to the second paragraph.

Cautionary statements regarding forward-looking statements. This presentation and other written oral statements and communications made from time to time by representatives of Hyperscale Data Inc., Hyperscale Data or the company contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, the Securities Act and Section 21E of the Securities Exchange Act of 1934 as amended the Exchange Act. Forward-looking statements reflect the current view about future events, and they are not guarantees of assurance of future performance. Statements that are not historical in nature, such as forecasts, for the industries in which the company and its subsidiaries operate and which may be identified by the use of words like accept, assume, project, anticipate, estimate, believe, could be, future, intend, plan, guidance, potential, forecast, target or the negative of these terms and any other words similar meaning are forward-looking statements. Such statements include, but are not limited to the statements contained in this presentation relating to the business, business strategy, expansion, growth, products and services that may be offered in the future and the timing of their development, sales and marketing strategy and capital outlook of the company and its subsidiaries. Forward-looking statements are based on management's current expectations and assumptions regarding the company's business, the economy and other future conditions are subject to inherent risks, uncertainties and changes of circumstances that are difficult to predict and may cause actual results to differ materially from those contemplated or expressed. Hyperscale Data cautions the reader, therefore, against relying on any of these forward-looking statements. These risks and uncertainties include those risk factors discussed under the heading Risk Factors in the company's filing with the Securities and Exchange Commission, the SEC, including the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and other filings, each of which is available on the company's website and on the SEC's website at www.sec.gov. Any forward-looking statements made in this presentation speaks only as of the date of the presentation. All forward-looking statements are qualified in their entries by referencing the risk factors discussed in the company's SEC filings. And this cautionary statement regarding forward-looking statements should be one or more of these risks or uncertainties materialize or in certain cases, fail to materialize or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

Perfect. Thanks, Joe. Let's go to the next slide. Obviously, what we're going to talk about to do is the executive overview, the organizational chart, the key drivers around why we think EBITDA is going to appear in '27. We're going to talk about Ault Capital Group, the lending and financial services and digital outlook and try to bifurcate for everyone that we have a portfolio company, a group of portfolio companies. One example of this is I never hear anyone talk about the crane company, right? We own a crane company in Texas, about 140 employees, generating just under $50 million in revenue and about $10 million to $12 million of EBITDA. And this is because we started out as a holding company. And upfront, I want to say to people, there's a lot of outlook around the name changes and the things we've had over the last 9 years. And unfortunately, there's probably some poor decisions that have been made by myself. I don't blame anyone else for that. And around the idea that when we were Bitcoin miners, it became very difficult to operate as a public company for a long period of time. We can't remember back, but just not too long ago, we were being debanked multiple times, and it's a really difficult outlook. But we're going to try to summarize for everyone where we are today, and we're going to focus on where we are right now and where we think we're going to be over the next 18 months. So if we could go forward with this slide, that would be great. Okay. Let's continue. All right. So the bulk of what we're going to talk about today is 2 basic businesses, which is Hyperscale Data proper and Alliance Cloud Services, which is part of Hyperscale Data, owned by Hyperscale Data, Omnipresent Robotics and the MSA contract with the California Neocloud provider. If those of you, who don't know and understand the structure of the company properly, we do have a 617,000 square foot data center in Michigan, 30 megawatts live and energized, and we've been mining Bitcoin there for many, many years. I think we're close to 5 years of mining Bitcoin there. We have a targeted program to get to 300 megawatts. And of course, recently that we signed that master services agreement, this puts us in a great spot because 20 megawatts are critical, which we're going to have Jay Looney talk about today, that Jay and Will were smart enough to start ordering equipment last year, knowing and anticipating that we thought this was finally going to happen. We've commented before that we had a chance to consider doing deals for the data center. And we always thought that, we were being undercut by that. But now we feel very comfortable and have added space. If you see here some of the things we'll talk about, the business model, data center colocation, which is through Sentinum and ACS, digital treasury mining and robotics, the Michigan data center, 617,000 square feet, 30 megawatts, the MSA, which I want to point out to everyone. If the entire MSA is fully used, I think, Will, you would comment that isn't the entire MSA, if we use the full MSA which is 52 megawatts. We're going to be about 17% of the data center or what exactly, what percentage would be, if we did the full MSA for $3 billion?

It would just be about 20%, actually. 52 megawatts of critical, you assume that 65 to 70 megawatts energized, somewhere in that ballpark, 70 megawatts out of 340 is about 20%.

Yes. And I can tell you from personal experience and being involved with this that demand for compute is very high. We have multiple other tenants that we're talking to that potentially do more offtake. And so this is a really important asset for us to make sure that we monetize it and get the full value for the shareholders. And one of that's going to be a very key conversation because one of our stresses is the fact that we needed to raise more capital. And yet at the same time, we want to minimize dilution. Everyone thinks that we don't care about that. We deeply care about dilution, and we deeply care about putting these things in a place to earn the kind of money that we think they can earn. We'll talk -- we'll be talking about the Bitcoin treasury strategy and what we did there recently, and we'll definitely be talking about Omnipresent Robotics. But I really want everyone to understand, as Will said, who is the CEO, and we have Ken, the CFO here. It's about 20 megawatts or 20% of the data center if it's fully at full capacity, which means we have a lot of room for expansion. Let's go to the next slide. Next slide, please. Perfect. Thank you. Thank you. So we initially started off as effectively an investment from Ault & Company, and we have an internal business that controls everything that is not data center, robotics and Bitcoin mining, and that's called Ault Capital Group. We view Ault Capital Group, ACG, as a hybrid private equity and holding company that acquires finances, builds controlling interest in financial services, digital assets, defense technology, industrial services, hospitality, the real estate sector, private credit, structured credit activities conducted through our licensed lender in California, and we are a licensed lender, that licensed lender has really become something important over the last few years. And then we own and operate and manage the different portfolio companies. Some of those principal operations excludes private credit, Ault Lending, the blockchain protocol, which we went live in March for Mainnet. So Ault is actually the blockchain is operational. Our defense electronics business, Gresham Worldwide. The digital platform that is OnlyBulls and askROI, hospitality, Power Electronics, TurnOnGreen, Digital Power Corp., the equipment rental business, which we call Circle 8, the aviation business and our commodities business, which we'll talk about soon. One of the key elements that's the driver for Ault Capital Group is Ault Markets, which is a software program. You can actually see it in the background here. It is a software program that allows you to access decks, centralized exchanges. Effectively, you can trade -- think of it like a Bloomberg for DeFi, you can trade on multiple DEXs around the world. You can trade on actually things like Robinhood and Alpaca, they're all API connections. So it's a software we're rolling out that we've been investing a lot of time and energy to. And then we believe the big driver here is going to be tokenized real-world assets, which we'll talk about soon. Our investment that we have in a Fintech's holding company, where we own 24.9% of that, where we have a position in broker-dealers, transfer agents, corresponding clearing firms, et cetera. This will be a big driving component of the financial services part, the interest income, the net asset value of what we make around Ault Capital Group and its portfolio companies. Next slide, please. This is the current structure of the company. And to say that, this isn't a little frustrating for us. We -- there's an old saying, it takes 5 minutes to get married and a lifetime to get divorced. We probably didn't expect Ault Capital Group to be bigger than the data center side. That wasn't planned the way this worked itself out, but it has. And you can see some of the operating subsidiaries that are here. This is comprised of 618 employees in 5 countries. We recently deployed an office in Korea, and we operate effectively literally in England, Israel and across the United States. The 618 employees represent the entire package here, including crane, defense, et cetera. Let's go to the next slide. Let's go to the key performance drivers of what's happening next. Now I'm going to bring in Jay Looney and Will to talk about this. We also have the Chief Technology Officer, Joe Spaziano, here, who may comment. But I want to talk about the Michigan data center. And Jay, what I'd like you to first comment on is that kind of where we are. So we've set up -- they have a 2-year opportunity to expand to 52 megawatts by natural gas distribution. We have nuclear power on site that we've had there. Maybe can you talk about the data center itself, sort of where it started from when we bought it many years ago to where it is today? And then kind of an overview. I want to talk a little bit about Jay Looney, because I think that we don't give credit to the people that work here that are dedicated their lives to working here, and Jay is one of those guys. Jay came to us with years of data center experience. He actually started out in the industry in 1982. Believe it or not, he doesn't look that old. And he worked at EDS, which later became Hewlett-Packard, and he's been in the data center space solidly for 20 years. So we have real talent there. Jay runs the organization and the way it operates, et cetera. I have sort of lumped on to Jay, the visual testing for robotics. But Jay has a very big facility there. He just acquired an additional 48.5 acres. He has got an 83-acre campus. And Jay, could you talk a little bit about where the $1.2 billion MSA contract is, sort of where we think we're going to be in deployment and sort of where you are in sort of the big picture, what's happening there?

All right. Thanks, Todd. So current status on that, we're in the middle of renovation, retooling the existing space, which previously was dedicated to the mining operations. And so we've taken a portion of that and are repurposing that space as we speak. Our anticipation is that, we will have the first 10 megawatts of critical load up and active before the end of this year with the next 10 in Q1 of '27. So that makes that initial 20 megawatts worth of critical load conversion targeted to be complete by the end of '27. Things have been going on -- actively been going on over the past several weeks since -- in particular, since we've closed on this customer opportunity. As Todd had mentioned, we began ordering long lead time items, large equipment type things last year, I began receiving that equipment several months ago, continue to receive that equipment. And what we're doing right now is, again, repurposing the space so that we can deploy that equipment. And that's all on schedule to continue to move forward and with the goal of, like I said, the first 10 megawatts of critical IT load to be online before the end of this year.

So Jay, I want to talk about actually in the facility because I don't know if people on this call realize that when you build a data center and you offtake to someone important like this Neocloud provider in California, you actually build a data center inside a data center. So can you talk about kind of what that is like and the security around it and maybe the concept of building a data center inside a data center where we're actually not even really allowed to go in there. Can you -- with the customer on site, I just thought maybe you could give them a little bit of an overview of what that's kind of like?

For sure. So what you have is, as mentioned, it's a large existing structure. There are various physical security techniques that manage the perimeter and the -- an access to the campus, to the building. And inside portion of that building is another space. This is the part that I mentioned that is being repurposed. That will have its own access points to it. It will be controlled by biometrics and multilayer electronic security devices with camera systems and motion detectors and a very sophisticated security access system. But it takes multiple layers to work through. And as Todd mentioned, it's effectively a data center within a data center, if you will.

Yes. I want to comment on the cost here. So Jay, we've talked about $100 million to $120 million of cost to retrofit and build out the first 20 megawatts of critical. And you already have invested a lot of money and time and energy over the last year or so in the facility. Will, I wanted to bring you in on this conversation because I think one of the stress points that we have from people is they're worried about dilution. And I'm going to make a comment, and I'd like you to comment on that, too, Will, and that is $120 million for the development of the data center, the 20 megawatts of critical that could expand to 52, sounds like a lot of money. But we have a lot of ready access to capital outside funding available through traditional sources of lending money on data centers. So we could take non-dilutive capital and borrow, call it, $100 million, call it, $90 million. And we're presently evaluating 2 potential, I would say, considerably great financing on our side. But I'm going to comment to say that, we're able to borrow against our Bitcoin at 4.9%. And I really don't know that the market is giving us credit for the fact that we've been building up a Bitcoin treasury. But I wondered if you could comment about the contract, the size of the contract and the availability of capital to go borrow if we need to build that out -- if we need to provide more capital.

Absolutely. So as you pointed out, we have a contract. It's a 10-year initial term. There's 2, 5-year options. If all the customer wants is the 20 megawatts, then that's a $1.2 billion opportunity over a 20-year period. It's effectively, if you were to average that out, call it, $50 million a year. It has price escalators in it. $1.2 billion, 10% of that is going to be what we have to invest in the facility. It's a good return for us. It's a good return for our shareholders.

Yes.

Obviously, we have multiple sources. I don't think that we are going to fund the $120 million build-out entirely with use of proceeds from an ATM. I think we'll be using a significant amount of proceeds from third-party lenders. As you mentioned, we were talking to -- you said 2, I think there's 3 or 4, but multiple lenders have expressed interest. And with a signed contract with a quality customer, you can get these things on a loan-to-value ratio of, what, 70% to 80%?

For sure. Yes.

Yes.

Yes. I'm really proud of this asset because it's probably the first time the company has had the ability to borrow at really great rates to fund that $100 million to $120 million. And I think that if you were a shareholder or someone contemplating an investment, you should think that in the next 30 to 60 days, we will likely secure all the money needed to build out the data center and roll that out and explain that to shareholders. We're just being very careful here because we think the company is on a growth trajectory and will generate -- start generating free cash flow. It's very important to us that we're really deliberate here. We're not open willingly nilly selling equity and raising equity at the expense of not looking at other forms of capital. And Will, I want you to comment on the Bitcoin borrow, which I thought is just remarkable. I talked about Michael Saylor saying that digital credit is going to happen. We're a user of digital credit. I'm incredibly proud of that, Will. And by the way, Ken, you're part of that system with Morpho for us to be able to borrow that money. So maybe you could comment also on the ease of use there. Maybe, Ken, you could go first on the 4.9% loan that will allow us to potentially borrow hundreds of millions of dollars as we put Bitcoin to work.

Yes. The nice thing about having the Bitcoin treasury that we've built is it gives us some financial flexibility. There's a Morpho lending protocol or borrowing protocol that we've availed ourselves of where we're able to borrow against some coin pledged. It's very locked down as far as security with dual authentications and 2-factor authentications. But it's a great cost of capital for us, under 5%. And so it's been, again, it's been a double benefit. We still get to maintain the Bitcoin and benefit from what we hope to be appreciation, but also leverage the asset and get a low cost of capital.

I want to say, Ken, one thing that people should think about is we actually deploy Bitcoin that we mined back into the protocol. So we actually don't come out of pocket for more payments on that protocol loan. And you can do the entire borrow payback and not in less than 20, 30 minutes. Nowhere in history have I ever been part of something where we could borrow $30 million, and it took an hour to do it. So I really believe we built in some flexibility here. What about you, Will, your thoughts on the Bitcoin loan?

Well, I mean, there's really 2 components to it. One is purchasing the Bitcoin. And as we've put out, we acquire Bitcoin primarily through either mining operations, which are going to be trailing off to a certain extent as we transition the Michigan campus, which is the bulk of our Bitcoin mining. So purchases of Bitcoin are generally coming from proceeds raised on the ATM. And to me, it's a great strategy because you're taking cash and you're putting it into potentially a much more appreciating prone asset like Bitcoin. And at the same time, because it's a Bitcoin-backed loan, we've never been able to borrow the bulk of our corporate borrowings at sub 5%. It's a phenomenal rate. It's simple. There's no warrant coverage. There's no derivative liabilities associated with it. It's just -- it's really keeping it clean. And for small-cap companies, microcap companies, that's not the norm.

In talking about Omnipresent Robotics, Jay, maybe you could comment on the size of the facility and how this 100,000 square foot center of excellence robotics for assembly, et cetera, testing. And I want to give everyone a description of this. Imagine walking into 100,000 square feet where there's like a fake kitchen and a fake bathroom, but they're real. They're built there. And the robots activities are recorded visually and then used for large language models that we do not share outside the United States. Jay, I thought you could comment about what's underway there and what that looks like.

Right. So we've earmarked, as you said, roughly 100,000 feet, again, within the existing campus in the existing building, this 617,000 square foot building and are in the process of finalizing designs and layouts to accommodate these kind of scenario rooms, if you will, that could represent a convenience store. It could represent a laundry service with the idea being is that, the units would be able to execute tasks and be trained on those tasks based on what a preferred outcome would be from a potential customer, what they want to see it do, how they want to have that data collected and analyzed and captured. But again, that process is underway. We know where it's going to go. We're working to finalize designs and final layouts and looking to move forward to getting that piece of the building renovated and built out.

And Jay, we've already taken delivery on robots there. So that's an exciting thing. Guys, these are full humanoid robots that are built. They're really fascinating. And we actually have one in Vegas too, that we'll be demoing for one. When we look at Michigan and we look at key drivers, I think the key component is bringing the first 10 megawatts online, bringing the 20 megawatts online, looking for additional potential customers, seeing if the Neocloud provider expands to 52 megawatts, what's happening with robotics, I would assume we will be announcing partnerships there in the coming weeks and months ahead. And on the digital asset treasury side, we're going to maximize the flexibility to minimize dilution, so that we can build that data center out efficiently and borrow as lease money as possible and as little equity as possible. So very comfortable here. Will, do you have any comments before we move on at all?

No, I think that's a good summary.

Appreciate it. Okay. Let's go to the next slide. Jay stay with us. I know that some of the other stuff does involve you, but we'll probably bring you in later. Thanks. When you look at the licensed California lender, this is the core business that we're in. We lend to other companies. We just announced yesterday that Ault Lending provided $25 million to Alzamend Neuro, $7.5 million upfront. What people don't understand is that we're able to get participation agreements as a licensed lender. We have an investor group that participates. So sometimes we're able to do $20 million, $30 million, $40 million deals, even bigger than that because we're part of a participation group. We sometimes lead the loans, sometimes we don't lead the loans. Most of the loans are convertible, some of them are not. But when you look at structured finance and public private credit, this is a key driver of our balance sheet. So we actually have a lending balance sheet. We consolidate all that in as a reporting holding company, but there is actually activity. And you saw that in the first quarter when that $9 million came in from one of the old loans we had that we finally got paid back on. Ault Markets is a key driver of people being able to tokenize loans. The global commodity business will be tokenizing silver, gold, platinum and other precious metals through the Ault Blockchain. And we're pretty excited about that. We got great partners out of Korea. We really went -- after 10 years of development, we really went with the best developers we could that are really well known in the space. And I would say to you, if you want to compare Ault Markets and what we're doing internationally, I would compare it to Hyperliquid, sort of a Hyperliquid lighter model, but also the tokenization of real-world assets. This is going to be a huge driver for us with our relationship with Universal DeFi. And I think that the margins here and then the margins on the AI data centers are somewhat similar. We'll want to come back to this, but we kind of thought -- if you can think about -- I'll have you comment later, but we think the margins on the data center are around 65%. On the lending side, the margins are very big. We operate a small staff. And when we generate return there, the margins are substantial in the upper 85% range, with the only thing being our cost of capital and/or the employees that work there. So this is something we think is going to be a big driver in terms of lending financial services and data and digital assets. We have made strategic 24.9% investments in holding companies that own broker-dealers and transfer agents. So if you look to see what the driver is going to be there, there's going to be a lot of drivers around tokenization of real-world assets. We expect those broker-dealers we're part of to start tokenizing actual companies, companies that are public companies that are private. If you look at Securitize, which you can compare the 2 together, Securitize tokenize their own stock, right? And you can actually go to their website and trade their own stock. I think securitization around tokenization is going to happen in a big way. I think this is the next 5 to 10 years of growth around assets going on chain as DeFi and TradFi mix together and it becomes easier to put money on chain and off chain. I think this is going to be a key driver to our lending financial services. We've really spent a lot of time developing relationships there. In the future, you're going to see a lot of partnerships coming out of this and real growth opportunity, which we're going to get to in a second. OnlyBulls is a really consumer app. I can report today, there's over 25,000 people on OnlyBulls active accounts and growing. And that's a consumer-facing app that leads into the Ault Markets ecosystem to be able to trade stocks, bonds, commodities and ultimately, everything, including a DeFi wallet. We went with a very large provider for the DeFi wallet, so we could be secure and offer Web3 to clients around the world. This is something we think is going to be a big driver that leads into the entree of tokenization, block trade and trading and the idea of creating tokenized loans and structured products. This is going to be a big driver for us. Will, do you want to comment at all here? This is sort of a little bit of my domain and your domain in terms of the loans we make out there and maybe the margins a little bit because this is, I think, an untold story about how we make money in the financial services business.

Again, I think you did a great job describing it. Obviously, lending, financial services is going to get much bigger as the balance sheet grows. And I think that's really been our limiting factor over the last, I'll call it, 2 years.

Absolutely. Ken, would you like to comment at all on the financial services side? I know that you've seen a lot of volatility there, but this is something that continues to contribute.

Right. There has been volatility, but it has helped us generate some good returns. As you mentioned last quarter, we received $9 million, $10 million from a legacy investment that was 100% margin. It's encouraging to see --

Ken, I want to interrupt you. We actually received $9 million or $10 million of profit. We received an additional $16 million from one of our subsidiaries. So it was actually, I think, around a $26 million or $27 million cash change. Is that correct?

That's right. Of that $10 million was revenue for the lender and then the other $16 million we received, and we'll have some disclosures on that for the second quarter.

Okay. Great.

I think it's encouraging to see a pipeline of potential deals for the lender, which our expectation is that, that generates more consistent and higher level of revenue. So again, that's encouraging to see. It's good to see some participating partners. It's also nice to be some of these companies we lend to are public companies. So we get the warrants, we get the downside protection. We get a convertible note. So it's good to have the shoe on the other foot. As a small cap, we've experienced having to accept those terms as a borrower.

Yeah.

But -- as a licensed lender, it's kind of nice to have the shoe on the other foot lending to some of these smaller companies.

Joe, I hope you're available real quickly here. I wanted to talk about just very briefly the -- I don't want to mention them by name, but just if you could comment on the blockchain going live on Mainnet. We just went live on Mainnet for the DEX, which we talked about the last year or so and kind of where you think the key drivers are in there and some of the partners like Fireblocks. Maybe just a quick overview. You're the Chief Technology Officer. You've been spiriting this for the better part of 10 years. I wonder what your thoughts are.

Yes. I mean, we're pretty happy with where we are with blockchain right now. As Todd mentioned, we think we have a unique proposition in what our blockchain does and how the governance does and how we're building it and what we're building it for. We're pretty excited that the DEX has gone to Mainnet. Now it's in a private test mainnet for us just so that we can make sure that all the -- any of the security vulnerabilities that may happen when you trade are covered. We feel pretty confident that there won't be any as we've been audited multiple times.

Yes, we're pretty -- we audit a lot, don't we?

Yes, it's a lot.

Yes.