Business context and reporting period
The supplied filing is DPW Holdings, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2018, not a filing under the name Hyperscale Data, Inc. Figures below are in U.S. dollars, thousands, except per-share data and where noted. DPW was a diversified holding company with commercial and defense products, lending, cryptocurrency mining, and European power-systems operations.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $5,196 | $1,628 |
| Gross profit / margin | $1,393 / 26.8% | $708 / 43.5% |
| Operating expenses | $4,360 | $1,495 |
| Operating loss | $(2,967) | $(787) |
| Interest expense | $(3,132) | $(207) |
| Net loss | $(6,095) | $(994) |
| Net loss per common share | $(0.17) | $(0.12) |
| Operating cash flow | $(2,959) | $(272) |
| Investing cash flow | $(9,765) | $(692) |
| Financing cash flow | $11,892 | $1,097 |
Revenue increased 219% year over year, reflecting acquisitions and $1,793 of related-party revenue from MTIX. Revenue excluding related-party amounts was $3,403, up 109%; management attributed much of the increase to the Microphase and Power-Plus acquisitions. Gross margin fell, partly because MTIX revenue carried a 21.9% margin and cryptocurrency mining had a negative 26.5% margin while miners were being deployed. Management estimated adjusted gross margin excluding both activities at 33.6%.
Cash and cash equivalents were $630 at March 31, down from $1,478 at year-end. Current assets were $11,205 and current liabilities $15,995; management reported negative working capital of $4,790. Total liabilities were $16,661. Notes payable, net, totaled $3,680, including $3,160 current; short-term advances, future-receipt advances, and revolving credit balances added further obligations. The filing reports $3,051 of non-cash interest expense from debt discounts and financing costs, a major contributor to the quarter’s $3,132 interest expense.
Net loss was accompanied by a $4,715 other comprehensive loss, primarily unrealized losses on securities, including AVLP-related investments. Total comprehensive loss was $10,774. Property and equipment rose to $8,590 from $1,217, largely due to cryptocurrency-mining equipment purchases.
Material changes and notable items
- DPW formed SC Mining and reported $237 of mining revenue. It purchased 1,000 miners and reported a further 1,100-miner purchase agreement; mining costs temporarily exceeded mining revenue.
- Related-party MTIX revenue of $1,793 was recognized but remained unpaid at quarter-end. The filing also reports $1,967 due from MTIX in related-party receivables, including amounts recognized in prior periods.
- AVLP, a related party controlled by a significant shareholder, accounted for substantial investments and Level 3 warrant valuations. The company recorded $4,659 of unrealized losses on AVLP warrants and common stock during the quarter.
- DPW issued shares through an at-the-market offering, raising net proceeds of $5,928 in Q1. Shares outstanding were 42.0 million at March 31 and 59.3 million at May 18, reflecting substantial subsequent issuance and potential dilution.
- The filing describes a three-year, $50 million MTIX purchase order. It reports $50,457 of transaction price allocated to a partially unsatisfied performance obligation, expected to be recognized over the following two and a half years.
Outlook, risks, and contingencies
Management expected continued losses and said additional capital would be needed for working capital and business development. It cited the MTIX order and mining revenue as expected sources of future revenue and cash flow, but gave no specific earnings or cash-flow guidance. Management warned that inability to raise capital could require operating cuts. The filing states that these conditions raise substantial doubt about DPW’s ability to continue as a going concern.
After quarter-end, DPW reported further ATM proceeds, secured convertible financing, and a $6,000 senior secured convertible note with required cash amortization payments and potential share conversion. These transactions improve access to capital but increase repayment obligations and/or potential dilution; the May note is secured in part by assets of SC Mining. DPW also anticipated closing the Enertec acquisition during the quarter ending June 30, 2018, for a stated $5,250 cash purchase price subject to adjustments and assumption of liabilities.
Disclosure controls and procedures were deemed ineffective at March 31, 2018 due to material weaknesses: insufficient internal accounting resources and inadequate segregation of duties. Management described remediation steps, including hiring a CFO and engaging an accounting advisory firm. The filing reports no legal proceedings in the period.
Investor verification priorities
- Confirm the identity of the issuer: the supplied filing names DPW Holdings, Inc., not Hyperscale Data, Inc.
- Check collection and credit risk on the MTIX related-party receivable, and assess the contract’s remaining performance obligations and delivery schedule.
- Review the economics and funding needs of cryptocurrency mining, including electricity, hosting, miner deployment, and realized mining performance.
- Examine liquidity after quarter-end, debt maturities, secured claims, cash amortization requirements, and the cost and availability of further financing.
- Assess dilution from ATM sales, stock compensation, warrants, and convertible securities; verify the May 18 share count and subsequent issuances.
- Review valuation assumptions and conflicts of interest relating to AVLP investments, related-party dealings, and management guarantees.
- Track remediation of the disclosed material weaknesses and any later changes in financial reporting controls.