Business context and reporting period
This is DPW Holdings, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020, filed August 19, 2020. The request metadata names Hyperscale Data, Inc., but the filing identifies the registrant as DPW Holdings, Inc. DPW reported defense solutions, commercial solutions, and commercial lending segments. It ceased cryptocurrency-mining operations and permanently closed its restaurant operations during the first quarter; restaurant results are reported as discontinued operations.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $5.40 million | $4.99 million | $11.01 million | $10.75 million |
| Gross profit / margin | $1.91 million / 35.3% | $0.72 million / 14.4% | $3.66 million / 33.2% | $1.66 million / 15.4% |
| Loss from continuing operations | $1.38 million | $3.73 million | $6.21 million | $10.34 million |
| Net loss | $1.38 million | $4.06 million | $7.91 million | $10.77 million |
| Net loss available to common stockholders | $1.38 million | $4.06 million | $7.91 million | $10.74 million |
- Six-month operating cash use was $2.26 million, versus $4.67 million in 2019. Investing activities used $0.15 million; financing provided $3.61 million. Cash increased to $1.69 million from $0.48 million at year-end 2019.
- At June 30, total assets were $40.49 million, total liabilities $37.46 million, and stockholders’ equity $3.03 million. Current assets of $11.49 million were substantially below current liabilities of $32.31 million; reported negative working capital was $20.82 million.
- Current notes payable, net, were $9.01 million; current convertible notes, net, were $0.74 million, with $1.00 million of related-party convertible notes also current. The company also reported $2.28 million in advances on future receipts and $3.98 million in operating lease liabilities, current and non-current combined.
Changes versus prior comparable periods
- Revenue rose 8.3% in Q2 and 2.4% for the first half, chiefly on increased defense-market customized solutions. Lower lending revenue and discontinued mining partly offset growth.
- Gross margin improved markedly as the prior-year periods included negative cryptocurrency-mining margins. Management cited a typical gross-margin range of 33%–37%.
- Operating expenses declined, including lower general and administrative costs and selling and marketing costs. Q2 included a $1.00 million credit from a reduction in the provision for credit losses.
- Losses narrowed, but interest income fell substantially because DPW recognized no interest on its impaired related-party AVLP loan in the first half. Debt-related interest expense remained significant.
- Six-month discontinued-operations loss was $1.70 million, including $1.53 million of impairment charges related to the restaurant business.
Outlook, risks, contingencies, and unusual items
- Going concern and liquidity: Management expects continuing losses and says additional capital is needed for working capital and business development. The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Failure to raise capital could require cost reductions or curtailed operations.
- Financing and dilution: Esousa’s Master Exchange Agreement covers up to approximately $7.7 million of notes exchangeable for common shares, with share pricing adjustments. DPW reported issuing 5,771,580 total exchange shares to Esousa, including 4.91 million shares issued between July and August 5. At August 17, 11,059,617 common shares were outstanding, compared with 6,112,117 at June 30. Further borrowing and warrant issuance also create repayment, valuation, and dilution risks.
- COVID-19: The company said the pandemic had materially adversely affected its business; office closures, remote work, operating restrictions, supply-chain effects, customer demand, and liquidity remained uncertain. It received $1.16 million in Paycheck Protection Program loans and a $150,000 SBA disaster loan; it expected the PPP amount to qualify for forgiveness, which was not yet established as final.
- Defaults and listing: DPW disclosed it was in default on payment obligations under agreements for future receipts. On July 24, 2020, NYSE American notified the company that it failed stockholders’ equity listing standards and required a compliance plan by August 23, 2020, with a stated deadline to regain compliance of January 24, 2022.
- Legal and regulatory matters: A vendor lawsuit seeks more than $1.39 million; a separate investor lawsuit seeks more than $1.10 million and other relief. DPW said potential losses in these cases could not be reasonably estimated. It also disclosed a non-public SEC fact-finding subpoena and said it was cooperating; the subpoena does not itself indicate a violation. Other creditor claims included approximately $0.80 million of estimated maximum exposure, in addition to settled or reserved amounts.
- Controls and related parties: Management concluded internal control over financial reporting was ineffective due to an unremediated material weakness, including insufficient segregation of accounting duties, inadequate transaction-information communication, and IT control deficiencies. Significant related-party exposures include the AVLP loan and investments, and financing from Ault & Company and affiliates.
- Unusual accounting and subsequent events: The AVLP convertible-note investment was carried at $6.74 million after a substantial loan-loss provision; much of the company’s related-party investment valuation uses Level 3 inputs. Subsequent events included new short-term borrowing and stock issuances. The filing provides no quantified forward earnings guidance.
Most important facts for investors to verify
- Whether DPW obtained additional financing and met its listing-compliance requirements, and how much further share issuance or dilution resulted from the Esousa exchanges and other instruments.
- Whether cash, operating cash use, debt maturities, defaults on future-receipts agreements, and the company’s negative working capital permit it to meet obligations without further capital.
- Whether the expected PPP loan forgiveness was approved and how the SBA loan and later short-term notes affect repayment requirements.
- The recoverability and valuation of the AVLP-related receivable and other related-party investments, including assumptions used for Level 3 measurements.
- Developments in the SEC inquiry, litigation, creditor claims, and remediation of the disclosed material weakness in internal controls.