Business context and reporting period
The supplied filing is DPW Holdings, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2019; it does not identify the registrant as Hyperscale Data, Inc. DPW was a diversified holding company with businesses in commercial and defense products, lending, cryptocurrency mining, and restaurants.
Financial results
| Metric | Three months ended Sep. 30, 2019 | Three months ended Sep. 30, 2018 | Nine months ended Sep. 30, 2019 | Nine months ended Sep. 30, 2018 |
|---|---|---|---|---|
| Total revenue | $6.38 million | $8.34 million | $19.47 million | $20.98 million |
| Gross profit; margin | $1.74 million; 27.3% | $2.03 million; 24.3% | $5.12 million; 26.3% | $4.78 million; 22.8% |
| Operating loss | $(7.97) million | $(4.19) million | $(16.48) million | $(11.26) million |
| Net loss | $(10.34) million | $(7.52) million | $(21.11) million | $(20.62) million |
| Net loss per common share | $(6.47) | $(88.23) | $(24.62) | $(311.53) |
For the nine months, operating cash used was $8.38 million, investing cash used was $2.69 million, and financing cash provided was $11.08 million. Cash declined by $145,677 to $756,652.
At September 30, 2019, total assets were $47.43 million and total liabilities were $29.50 million. Current assets of $9.77 million compared with current liabilities of $25.85 million, a working-capital deficit of $16.09 million. Stockholders’ equity was $17.93 million. Current and long-term debt-related balances included notes payable, convertible notes, advances on future receipts, and related-party borrowings.
Material changes versus comparable periods
- Third-quarter revenue fell 23.5%; nine-month revenue fell 7.2%. Management attributed weakness to lower restaurant, cryptocurrency-mining, and MTIX/MLSE-related revenue, with component shortages also affecting military solutions.
- Nine-month gross profit increased despite lower revenue, and reported gross margin rose to 26.3% from 22.8%. Management said adjusted gross margins excluding cryptocurrency mining were 37.9% in 2019 and 38.6% in 2018.
- Operating loss worsened, principally because of a $4.32 million impairment of cryptocurrency-mining equipment and higher general and administrative expenses. Interest expense declined year over year, largely because of lower amortization of debt discounts.
- Revenue mix changed: no MTIX related-party revenue was recognized in the first nine months of 2019 versus $3.91 million in the comparable 2018 period. Restaurant revenue rose to $3.37 million from $2.09 million, while mining revenue fell to $592,092 from $1.55 million.
- The company completed two reverse stock splits during 2019 (1-for-20 and 1-for-40) and raised funds through equity offerings and debt transactions. Reported per-share comparisons are affected by the reverse splits and substantial changes in weighted-average shares.
Outlook, risks and unusual items
- Management expects continuing losses and says additional capital is needed for working capital and business development. It warned that failure to raise capital could require operational and cost reductions. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- A $2.9 million secured promissory note issued in June 2019 was in default because required monthly amortization payments were not made; the company was negotiating revised terms. The filing also reports defaults on certain future-receipts agreements, with $1.65 million outstanding.
- Cryptocurrency equipment impairment was $4.32 million, attributed to lower bitcoin values and reduced projected cash flows. The company reduced active miners from 1,512 to 978, citing power costs and mining difficulty.
- Related-party exposure included approximately $12.09 million of net investments in AVLP and Alzamend, including AVLP notes and warrants. Management concluded AVLP note amounts were collectible, but these valuations and related-party arrangements involve significant judgment.
- Internal control over financial reporting was not effective at quarter-end due to an unremediated material weakness, including inadequate segregation of accounting duties, transaction-information communication, and certain IT controls.
- The company disclosed an SEC subpoena for a non-public fact-finding inquiry and said it was cooperating; the filing notes that the subpoena is not an indication of a violation. A shareholder derivative action was tentatively settled after quarter-end, without a monetary component; finalization was pending. A separate vendor suit seeks approximately $1.39 million, for which the company had established a reserve.
- No quantified earnings or revenue guidance is provided. Management described acquisition exploration and potential future capital raises, but did not assure that financing would be available.
Important facts for investors to verify
- Confirm the registrant identity: the provided 10-Q is for DPW Holdings, Inc., not Hyperscale Data, Inc.
- Review the company’s cash needs, negative working capital, going-concern disclosure, and ability to obtain additional financing.
- Check the status and terms of the defaulted $2.9 million note and future-receipts obligations.
- Assess dilution from equity offerings, warrants, convertible notes, and reverse splits; the filing reports 3,251,871 common shares outstanding on November 18, 2019.
- Monitor the SEC inquiry, litigation outcomes, and remediation of the disclosed material weakness.
- Evaluate the assumptions supporting the cryptocurrency impairment and related-party investment valuations and collectibility.