Business context and reporting period
The supplied filing is DPW Holdings, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018; it does not identify Hyperscale Data, Inc. as the registrant. DPW reported a diversified portfolio spanning commercial and defense products, lending, cryptocurrency mining and restaurant operations. Its five reporting segments reflect recent acquisitions, including Enertec and I. AM in May 2018.
Unless noted otherwise, financial amounts below are U.S. dollars in thousands. Year-over-year comparisons are to the periods ended June 30, 2017; balance-sheet comparisons are to December 31, 2017.
Financial performance and liquidity
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 |
|---|---|---|---|
| Total revenue | $7,444 | $12,640 | $1,822 quarterly; $3,450 six months |
| Gross profit / margin | $1,360 / 18.3% | $2,753 / 21.8% | $730 / 40.1% quarterly; $1,438 / 41.7% six months |
| Operating loss | $(4,100) | $(7,067) | $(1,444) quarterly; $(2,231) six months |
| Interest expense | $(2,887) | $(6,019) | $(407) quarterly; $(614) six months |
| Net loss | $(6,997) | $(13,092) | $(1,851) quarterly; $(2,845) six months |
| Net loss per common share | $(0.13) | $(0.29) | $(0.20) quarterly; $(0.32) six months |
- Six-month revenue rose 266%; quarterly revenue rose 309%. Management attributed growth to acquisitions and new cryptocurrency-mining and MTIX manufacturing revenue. Six-month revenue included $3,559 from related-party MTIX, $956 from mining, $502 from restaurants and $109 from lending activities.
- Management said lower-margin MTIX work and negative mining margins reduced gross margin. Mining’s negative margin reflected fixed colocation costs while equipment was being placed in service. Excluding MTIX and mining revenue and related costs, management calculated adjusted gross margins of 36.8% for Q2 and 35.5% for the first half.
- Operating costs increased, particularly general and administrative expense, including higher stock compensation, consultant, investor-relations, legal and audit costs, and staffing. First-half stock-based compensation was $2,811. Much of the increase in interest expense was noncash debt-discount and financing-cost amortization: $5,779 for the first half.
- Cash and cash equivalents were $1,518 at June 30, up from $1,478 at year-end. Six-month operating cash use was $5,664; investing cash use was $16,922; financing provided $22,794. Cash generation therefore relied heavily on financing.
- Current assets were $16,145 and current liabilities $21,257, implying negative working capital of approximately $5,112. Total liabilities were $21,904. The company reported $4,064 of current notes payable, net, and $4,065 of current convertible notes payable, net. Accumulated deficit was $36,551.
- Property and equipment rose to $11,282 from $1,217, largely reflecting cryptocurrency-mining equipment and acquisitions. Capital expenditures were a significant use of cash.
Material changes and financing
- Enertec was acquired for $4,851 and I. AM, which operates Prep Kitchen restaurants, was acquired for $981 in cash; the preliminary purchase accounting included goodwill. These acquisitions and prior acquisitions expanded the business and reporting segments.
- DPW issued substantial equity and debt. Six-month cash proceeds from common-stock and warrant sales were $18,552 before financing costs; financing also included new notes and convertible notes. The ATM program authorized up to $50 million; reported net proceeds were $14,551 through June 30 and $18,059 through August 15, 2018.
- Share count increased materially: 61,621,742 common shares were outstanding at June 30, versus 30,222,299 at year-end; 69,341,486 were outstanding at August 17. At June 30, the filing also listed 18.7 million warrants and 7.58 million options outstanding, in addition to other potentially dilutive securities.
- DPW had $3,644 in related-party receivables at June 30. The filing says $3,545 of recognized MTIX revenue from the first half and prior year remained uncollected. MTIX accounted for 28% of first-half revenue and 24% of Q2 revenue.
Outlook, risks and unusual items
- Going concern: Management expects continuing losses and says additional capital is required for working capital and business development. The filing states that substantial doubt exists about the company’s ability to continue as a going concern; inability to raise capital could require operating cuts. Management cited a three-year, $50 million MTIX purchase order as a potential revenue and cash source. The filing reports $48,691 of transaction price allocated to a partially unsatisfied performance obligation, expected to be recognized over approximately two and a half years.
- Debt and dilution: The company used short-term, high-cost notes, convertible debt and advances against future receipts. Some obligations were secured, personally guaranteed by the CEO, or carried substantial discounts and warrants. The May 2018 $6 million convertible note required biweekly cash amortization and was due in November 2018; other notes also had near-term maturities. Subsequent ATM sales and financing continued after quarter-end.
- Related-party and investment exposure: DPW reported significant investments and lending to AVLP, a related party controlled by a significant shareholder. AVLP warrants and common stock generated material unrealized losses; the warrant valuation used Level 3 inputs. Related-party transactions and collection of MTIX receivables merit attention.
- Subsequent commitment: DPW disclosed a hotel-related partnership investment of $720 at June 30 and a conditional commitment to contribute $500 monthly through an expected January 2020 funding completion. Failure to make a required contribution could allow other partnership entities to acquire half of DPW’s contributions made to that point.
- Legal and reporting matters: A shareholder derivative action filed July 31, 2018 alleges fiduciary-duty breaches and mismanagement involving loan and related-party transactions. DPW said it would defend the case but could not estimate a possible loss. Management also concluded disclosure controls were ineffective due to material weaknesses in accounting resources and segregation of duties; remediation efforts were described.
- Other uncertainty: Management noted that cryptocurrency-mining accounting lacked definitive U.S. GAAP guidance and required significant judgment. No specific full-year financial guidance was provided; management expected continued losses and further capital raising.
Important facts for investors to verify
- Confirm the registrant identity: this source is a DPW Holdings, Inc. filing, not a filing identified as Hyperscale Data, Inc.
- Track cash runway, negative working capital, debt maturities, payment terms, collateral and the company’s ability to secure additional funding.
- Assess whether MTIX performs and pays under its purchase order, including collection of the related-party receivable and timing of the remaining performance obligation.
- Review the economics and operating progress of cryptocurrency mining, including utilization, electricity and hosting costs, equipment depreciation and digital-currency price exposure.
- Evaluate continuing dilution from ATM sales, equity issuances, warrants, options and convertible securities, and check required shareholder approvals.
- Monitor the derivative litigation, the hotel partnership’s future capital calls, related-party exposures and remediation of the disclosed control weaknesses.