Business context and reporting period
This is DPW Holdings, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed April 16, 2019. The filing identifies the registrant as DPW Holdings, Inc.; the request metadata names Hyperscale Data, Inc. DPW was a diversified holding company with businesses in commercial and defense electronics, lending, cryptocurrency mining, restaurant operations, and related-party textile technology services. It expanded through acquisitions, including Enertec and control of I.AM, which operates Prep Kitchen restaurants.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $27.15 million | $10.17 million |
| Gross profit / margin | $5.38 million / 19.8% | $3.85 million / 37.8% |
| Operating expenses | $24.99 million | $9.83 million |
| Operating loss | $19.61 million | $5.98 million |
| Interest expense | $13.45 million | $4.99 million |
| Net loss | $32.98 million | $10.90 million |
| Net loss available to common stockholders | $32.34 million; $11.15 per share | $11.25 million; $18.05 per share |
| Cash and cash equivalents at year-end | $0.90 million | $1.48 million |
| Net cash used in operating activities | $10.42 million | $4.12 million |
| Net cash used in investing activities | $20.62 million | $8.67 million |
| Net cash provided by financing activities | $30.54 million | $13.22 million |
At December 31, 2018, total assets were $49.43 million, total liabilities $31.36 million, and stockholders’ equity $18.06 million. Current liabilities of $30.74 million exceeded current assets of $12.29 million, producing an $18.45 million working-capital deficiency. Total liabilities increased from $11.72 million in 2017. Current notes payable and convertible notes payable were $6.39 million and $6.74 million, respectively; the filing also reports advances on future receipts and other borrowings.
Material changes versus the prior comparable period
- Revenue rose 166.9%, primarily reflecting acquired businesses and newly reported activities. The filing attributes $13.17 million of the increase to acquisitions; cryptocurrency mining, restaurant operations, lending, and MTIX-related revenue also contributed.
- Gross margin fell to 19.8% from 37.8%. Management cites Digital Farms’ negative gross margin and lower-margin MTIX work; excluding both Digital Farms and MTIX revenue and associated cost, management says adjusted gross margin would have been 36.8%.
- Operating loss more than tripled. General and administrative expense increased by $12.85 million, including acquisition-related costs, higher stock-based compensation, professional and investor-relations costs, consultants, and new subsidiary expenses.
- Interest expense rose to $13.45 million, including $11.19 million of noncash amortization of debt discounts and financing costs. Other comprehensive loss was $8.41 million, chiefly reflecting unrealized losses on securities and foreign-currency translation.
- Cash used in operations and investing increased substantially. Financing inflows—largely equity and debt proceeds—offset those outflows, but year-end cash still declined.
Outlook, commentary, risks, contingencies, and unusual items
- Going concern: Management and the independent auditor state that recurring losses, the working-capital deficiency, and the need for additional financing raise substantial doubt about the company’s ability to continue as a going concern. The audit opinion is unqualified but includes a going-concern explanatory paragraph.
- Outlook and funding: Management expects continued losses and says additional capital will be needed. It expected the three-year, $50 million MTIX purchase order to generate revenue and cash, and expected mining revenue to contribute; it cautions that failure to raise funds could require cost cuts or curtailed operations. No specific earnings or revenue guidance is provided.
- MTIX and related parties: The company recognized $3.91 million of MTIX-related revenue in 2018. At year-end, approximately $3.89 million of related-party receivables remained outstanding; the company later reported receiving $2.68 million for services on the first MLSE system. Approximately $48 million of MLSE performance obligations remained, expected to be recognized over about 2.5 years. MTIX is related through Avalanche, in which DPW also had substantial debt, warrant, and equity investments.
- Debt and liquidity: Several short-term notes were in default at year-end, including notes with stated principal balances of $1.00 million, $0.79 million, and $0.57 million, as well as other overdue notes described in the notes. Some borrowings carried high original-issue discounts or personal guarantees. Verify the status and settlement of each obligation.
- Cryptocurrency: Digital Farms reported $1.68 million of mining revenue but a negative gross margin of 202.7%, which management attributed to fixed colocation costs while equipment was being placed in service. The filing says mining with the purchased machines was no longer profitable following cryptocurrency price declines. Year-end digital currencies were valued at just $1,535 after disposals, payments, and losses.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing insufficient accounting resources and segregation of duties, untimely transaction communication, and weaknesses in IT change-management and physical safeguards for mining equipment and cryptocurrency wallets. Remediation included additional finance hires and enhanced oversight.
- Legal matters: A shareholder derivative suit alleging fiduciary-duty breaches and mismanagement was amended after an initial dismissal; the company said it could not estimate possible loss. A mining-equipment vendor sought $1.39 million in a contract dispute; the company recorded a reserve for the unpaid purchase-agreement amount.
- Other subsequent events: After year-end, DPW completed a 1-for-20 reverse stock split and a public offering that generated approximately $6 million net proceeds; it also raised further funds through an ATM program. These 2019 events are not 2018 operating results and involved substantial potential dilution.
Important facts for investors to verify
- Confirm the company and filing identity: this document is DPW Holdings, Inc.’s 2018 Form 10-K, not a filing naming Hyperscale Data, Inc.
- Review the audited financial statements and debt footnotes for current maturities, defaults, conversion terms, personal guarantees, and post-year-end repayments or exchanges.
- Assess collectability and timing of MTIX-related receivables and the feasibility, funding, margins, and delivery schedule of the remaining MLSE order.
- Check current cash, working capital, financing availability, dilution from shares and warrants, and compliance with NYSE American listing requirements.
- Track remediation of material weaknesses and the security and accounting controls over digital assets; assess whether mining can operate profitably.
- Monitor outcomes of the derivative litigation and vendor dispute, and compare subsequent events with the company’s disclosed liquidity plans.