Business context and reporting period
The supplied filing is DPW Holdings, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018—not a filing identified as Hyperscale Data, Inc. Investors should verify the issuer before relying on this summary. DPW reported a diversified portfolio spanning commercial and defense products, lending, cryptocurrency mining, and restaurant operations. It acquired Enertec and a controlling interest in I.AM during 2018; comparisons with 2017 therefore reflect a different business mix.
Unless otherwise noted, financial amounts below are in U.S. dollars in thousands.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $8,344 | $3,220 | $20,984 | $6,670 |
| Gross profit | $2,027 | $1,096 | $4,780 | $2,534 |
| Gross margin | 24.3% | 34.0% | 22.8% | 38.0% |
| Operating loss | $(4,189) | $(1,318) | $(11,256) | $(3,549) |
| Net loss | $(7,525) | $(2,071) | $(20,617) | $(4,916) |
| Net loss available to common shareholders | $(7,451) | $(1,994) | $(20,507) | $(5,054) |
| Basic and diluted loss per share | $(0.11) | $(0.15) | $(0.39) | $(0.46) |
Revenue rose 159% in Q3 and 215% for the nine-month period, principally reflecting acquisitions and new operations. Q3 revenue included $590 from crypto mining, $353 from related-party MTIX work, $1,585 from restaurants, and $85 from lending. Nine-month revenue included $1,546 from mining, $3,912 from MTIX, $2,087 from restaurants, and $194 from lending. Management attributed lower reported gross margins to low-margin MTIX work and negative mining margins while equipment was being placed in service.
Operating expenses were $6,216 in Q3 and $16,036 for the nine months. General and administrative costs rose substantially, including stock-based compensation of $1,352 in Q3 and $4,163 year to date. Interest expense was $3,359 in Q3 and $9,378 year to date; much of the increase was noncash amortization of debt discounts and financing costs ($3,034 in Q3; $8,813 year to date).
At September 30, cash was $703, current assets $14,626, current liabilities $24,370, and working capital was negative $9,744. Total assets were $53,104 and total liabilities $25,007. Current and long-term notes payable, including convertible notes and related-party notes, were reported across multiple balance-sheet lines; the filing reports $7,194 of net current convertible notes payable and $6,033 of net notes payable, including $5,539 current and $494 long-term.
For the first nine months, operating cash outflow was $9,430, investing cash outflow was $19,916, and financing cash inflow was $28,791. Cash declined by $775 to $703. Investing outlays included $9,318 for property and equipment, including cryptocurrency mining equipment, and $4,937 for the Enertec acquisition. Financing included $22,247 gross proceeds from common stock and warrants and substantial debt financing, offset by debt repayments.
Changes versus the prior comparable period
- Revenue expanded sharply, partly through acquisitions and new activities; the company reported five operating segments in 2018 versus two in 2017.
- Losses widened materially, driven by higher operating costs and interest expense. Nine-month net loss increased to $20,617 from $4,916.
- Gross margin fell to 22.8% from 38.0% for the nine-month period, although management said adjusted margin excluding MTIX and mining would have been 38.6%.
- Common shares outstanding increased from 30.2 million at December 31, 2017 to 69.3 million at September 30, 2018; the filing reports 73.2 million outstanding at November 12, 2018.
- Available-for-sale securities produced a $6,788 nine-month unrealized loss, largely associated with related-party AVLP warrants, contributing to a $6,998 total other comprehensive loss.
Outlook, risks, contingencies and unusual items
- Going concern: Management expects continued losses and additional capital needs. The company reported negative working capital, recurring losses, and substantial doubt about its ability to continue as a going concern. It said failure to raise capital could require operating cuts.
- Revenue outlook: Management cited a three-year, $50 million MTIX purchase order for MLSE systems as a potential revenue and cash-flow source. At September 30, $48,338 of transaction price remained allocated to a partially unsatisfied performance obligation, expected to be recognized over the next two and a half years. The filing also says $3,887 of MTIX-related recognized revenue remained uncollected; the related-party receivable was $3,888 on the balance sheet.
- Debt defaults: The secured 10% convertible note was in default after missed September and October amortization payments, with discussions to amend terms. Other short-term notes were also identified as in default at September 30, including an unsecured $1,000 12% note and certain smaller notes. The filing describes ongoing short-term financing and repayment needs.
- Related-party exposure: DPW had significant loans, notes, stock and warrants involving AVLP, a related party. AVLP investments were valued at $7,858 net; the warrants were Level 3 fair-value measurements. MTIX revenue was related-party revenue, and its receivable was a significant concentration.
- Legal matter: A shareholder derivative suit alleges fiduciary-duty breaches, unjust enrichment and gross mismanagement concerning loan and related-party transactions. DPW disputes the claims; it could not estimate a possible loss range.
- Controls: Management concluded disclosure controls were ineffective due to material weaknesses involving limited accounting resources and inadequate segregation of duties. Remediation steps included hiring a CFO and Chief Accounting Officer and using an accounting advisory firm.
- Dilution and financing: The filing reports substantial equity issuance, warrants, and convertible securities. It also describes a new post-quarter ATM program of up to $25 million; by November 12, it had generated $771 net proceeds through 3,001,322 shares. The earlier $50 million ATM program was terminated in September.
- Other unusual items: The company made a $1,815 investment in a New York hotel partnership and described future monthly capital contributions subject to specified conditions. A post-quarter restaurant management agreement included a $1,000 termination payment if terminated without cause.
No formal earnings guidance is provided. Management expected losses to continue and anticipated further equity or debt financing. Actual results may differ from forward-looking statements, and the filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the issuer: the supplied 10-Q is for DPW Holdings, Inc., despite the request metadata naming Hyperscale Data, Inc.
- Check liquidity, maturity dates, default status, collateral, and any subsequent amendments or repayments of the company’s debt.
- Assess collectability and timing of the large MTIX-related receivable and the remaining MLSE contract performance obligation.
- Review the assumptions and sensitivity of AVLP-related Level 3 warrant valuations, and the extent of related-party credit and investment exposure.
- Track cash burn, future capital raises, share and warrant dilution, and progress on the disclosed material-weakness remediation.
- Reconcile the nine-month operating-loss figures: the financial statements report $11,256, while MD&A elsewhere states $11,326.