Business context and reporting period
This is DPW Holdings, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019—not a filing identified as Hyperscale Data, Inc. DPW described itself as a diversified holding company with commercial and defense, lending, cryptocurrency mining, textile technology, and restaurant operations.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Revenue | $6.15 million | $13.09 million |
| Gross profit / margin | $1.56 million / 25.4% | $3.38 million / 25.8% |
| Operating loss | $3.97 million | $8.51 million |
| Net loss | $4.06 million | $10.77 million |
| Net loss available to common stockholders | $4.06 million | $10.74 million |
| Basic and diluted loss per share | $5.00 | $22.42 |
| Operating cash used | Not separately provided for the quarter | $4.78 million |
At June 30, cash and cash equivalents were $0.87 million, current assets were $9.96 million, and current liabilities were $26.79 million, producing negative working capital of $16.83 million. Total liabilities were $30.57 million. Debt-related balances included $8.57 million of notes payable, net; $0.26 million of convertible notes, net; $0.28 million of related-party notes; $1.91 million of advances on future receipts; and $0.39 million of related-party short-term advances. The filing reports a $0.085 million revolving credit balance. Six-month financing cash flow was positive $6.47 million; investing cash flow was negative $1.61 million. Cash declined $0.035 million from year-end 2018.
Material changes versus comparable periods
- Second-quarter revenue fell 17.4% year over year, while six-month revenue rose 3.5%. The six-month increase reflected, in part, the fuller contribution of Enertec and I.AM, acquired in 2018; excluding those acquisitions, management reported a substantial decline in revenue.
- Revenue from related-party customer MTIX was zero in both 2019 periods, compared with $1.77 million in Q2 2018 and $3.56 million in the first half of 2018. Management attributed the pause to working-capital constraints and prioritizing debt reduction, which delayed related manufacturing work.
- Cryptocurrency-mining revenue declined to $0.26 million in Q2 and $0.28 million in the first half, from $0.72 million and $0.96 million, respectively, as lower digital-currency prices led the company to curtail mining.
- Restaurant revenue increased to $1.16 million in Q2 and $2.33 million in the first half. Enertec revenue was $2.18 million in Q2 and $4.67 million in the first half.
- Reported gross margin improved from 18.3% to 25.4% in Q2 and from 21.8% to 25.8% in the first half. Management said mining losses depressed reported margins; excluding mining, it reported adjusted margins of 37.4% for Q2 and 37.1% for the first half.
- Six-month operating loss widened to $8.51 million from $7.07 million, despite higher gross profit, primarily due to higher general and administrative expense. Six-month net loss narrowed to $10.77 million from $13.09 million, principally alongside lower interest expense.
Outlook, risks, contingencies, and unusual items
- Going concern: Management expects continued losses and says additional capital is needed for working capital and business development. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. It reports $0.87 million cash, a $66.47 million accumulated deficit, and negative working capital at June 30.
- Funding and dilution: The April 2019 offering generated approximately $6.20 million net proceeds, used primarily to repay debt; the company also raised funds through an ATM program. A proposed Regulation A offering of up to $50 million in notes had not been qualified, and the company gave no assurance of sales. A new ATM program of up to $5.5 million was entered into in August; $0.14 million net proceeds had been raised through August 16. A 1-for-40 reverse split became effective August 5, following a 1-for-20 split in March.
- Default and refinancing: A $2.9 million note issued June 18 was in default after the company missed its first scheduled amortization payment on July 18. The company said it was negotiating revised terms. Subsequent July debt exchanges and additional short-term borrowing are described in the filing.
- Unusual noncash items: Q2 included a $1.76 million loss on warrant issuance and a $0.95 million gain from a decrease in warrant-liability fair value. First-half results also included a $0.81 million loss on extinguishment of convertible debt. Lower debt-discount amortization reduced interest expense versus 2018.
- Related-party exposure and concentration: The company reported an $11.86 million net investment in AVLP and Alzamend, including AVLP loans, derivatives, and equity. MTIX accounted for all related-party accounts receivable at June 30. One customer represented 23% of Q2 and 22% of first-half 2019 revenue.
- Legal matters: A shareholder derivative case remained pending, with trial set for August 25, 2020; the company could not estimate a possible loss. A mining-equipment vendor lawsuit sought $1.39 million, approximately the unpaid purchase-agreement amount reserved by the company.
- Controls: Management concluded disclosure controls were ineffective at June 30 due to material weaknesses involving accounting staffing and segregation of duties, timely communication of transaction information, and IT controls, including safeguards for digital-currency wallets and mining equipment.
- Management strategy: The company described a growth strategy involving acquisitions and support of subsidiaries and partner companies, with possible monetizations or sales. It provided no quantified earnings or revenue guidance.
Investor verification priorities
- Confirm the issuer identity: the supplied filing is for DPW Holdings, Inc., not Hyperscale Data, Inc.
- Review the going-concern disclosure, cash runway, negative working capital, and plans and ability to obtain further financing.
- Verify the status, terms, and consequences of the $2.9 million note default and the July debt exchanges.
- Assess dilution from equity and warrant issuances, ATM sales, convertible debt, and the reverse splits; confirm share counts on a consistent post-split basis.
- Evaluate whether delayed MTIX work and mining curtailments affect future revenue, cash collections, and reported margins.
- Review related-party investment collectability and valuation, customer concentration, litigation exposure, and remediation of the disclosed control weaknesses.