DPW Holdings, Inc. — Q1 2020 Form 10-Q
Filing identity: The provided filing is for DPW Holdings, Inc., not Hyperscale Data, Inc. It covers the three months ended March 31, 2020, and was signed July 6, 2020. The company said COVID-19 disruptions delayed its filing.
Business context
DPW was a diversified holding company with defense and commercial solutions, commercial lending, and cryptocurrency-mining and restaurant activities. During the quarter it ceased Digital Farms’ mining operations and permanently closed its I. AM restaurant business; restaurant results are presented as discontinued operations.
Financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $5.61 million | $5.77 million |
| Gross profit / margin | $1.75 million / 31.3% | $0.94 million / 16.3% |
| Operating expenses | $4.68 million | $5.37 million |
| Loss from continuing operations | $4.83 million net loss | $6.61 million net loss |
| Net loss | $6.53 million | $6.71 million |
| Net loss per common share | $1.44 | $46.92 |
| Cash from operations | $(1.12) million | $(2.17) million |
Revenue declined 2.8%. Management attributed improved gross profit mainly to higher defense revenue and lower cost of revenue; excluding mining-related effects, it reported adjusted gross margins of 33.0% in 2020 and 28.9% in 2019. Lower G&A and interest expense also reduced losses, partly offset by a $1.0 million provision for credit losses on the related-party AVLP loan and a $1.53 million impairment charge on restaurant assets. Interest income fell to $320 from $837,000, primarily because no AVLP loan interest was recognized in 2020.
Liquidity, debt and capital
- At March 31, cash was $626,000; current assets were $10.59 million and current liabilities $29.82 million. Management reported negative working capital of $19.23 million.
- Total liabilities were $35.28 million and stockholders’ equity $2.48 million. The balance sheet included $7.11 million of net notes payable, $1.37 million of net convertible notes payable, a separate $1.0 million related-party convertible note, and $2.19 million of advances on future receipts.
- Operating cash use was $1.12 million; investing cash use was $102,000; financing provided $1.27 million. Ending cash increased by $143,000 from year-end.
- Common shares outstanding rose from 3.32 million at December 31 to 5.40 million at March 31. Debt conversions and other stock issuances reduced obligations but diluted shareholders; warrants and potential conversions added further dilution exposure.
Outlook, risks and unusual items
- Going concern: The company said recurring losses, low cash, negative working capital and the need for additional capital raise substantial doubt about its ability to continue as a going concern. It expects losses to continue and says it must raise capital; failure to do so could require cost cuts or curtailed operations. No quantified earnings guidance was provided.
- COVID-19: Management said the pandemic materially disrupted the business. Coolisys and Gresham Power temporarily suspended operations; other sites used remote work or adjusted operations. The scale and duration of the effects were uncertain.
- Financing and defaults: A February Master Exchange Agreement gave Esousa rights to exchange notes of about $4.2 million, with an additional $3.5 million subject to approvals, for common shares under pricing terms that could create dilution. The company disclosed default on advances on future receipts and a $2.9 million note requiring amortization payments. It also reported reliance on ongoing debt and equity financing.
- Post-quarter funding: In April, DPW and majority-owned Microphase received PPP loans of $715,101 and $467,333, respectively. DPW received a $150,000 EIDL loan in May.
- Legal and regulatory matters: An SEC subpoena concerned a non-public fact-finding inquiry; the company said it was cooperating and the subpoena did not indicate a violation. Litigation included claims seeking more than $1.39 million from a vendor and more than $1.1 million from other plaintiffs; management said potential losses in those cases could not be reasonably estimated. A derivative-action settlement was preliminarily approved, with $600,000 in attorneys’ fees expected to be covered by D&O insurance and governance reforms lasting at least five years.
- Controls: Management concluded internal control over financial reporting was ineffective because previously identified material weaknesses had not been remediated, including insufficient segregation of accounting duties and deficiencies in transaction communication and IT controls.
Key investor verification points
- Confirm the registrant’s identity and the relationship, if any, to Hyperscale Data, Inc.
- Check current cash, working capital, going-concern disclosures, and access to financing; verify whether anticipated capital transactions and required approvals were completed.
- Review debt defaults, exchange/conversion pricing, warrants, share-count changes and subsequent dilution.
- Assess COVID-19 effects on operations and the status and potential forgiveness of PPP loans.
- Track AVLP loan recoverability, related-party exposures, litigation and the SEC inquiry.
- Confirm remediation of material weaknesses and any changes to the company’s reporting controls.