DPW Holdings, Inc. (NYSE American: DPW), a diversified holding
company (“DPW” or the “Company”), today reported
financial results for its second quarter, the three-month period
ended June 30, 2019 on its Form 10-Q with the Securities and
Exchange Commission.
Highlights
- First half revenues up 3.5% from prior year period
- First half gross profit up 22.7% from prior year period
- Q2 2019 realizes a $3.3 million improvement in interest income
(expense)
- Q2 2019 interest income, net of $379,000
- Q2 2018 interest expense, net of $2.9 million
- Q2 2019 resulted in a $2.8 million or 41% improvement in
bottom-line results primarily due to lower interest expense
- Current liabilities, excluding operating lease liabilities
which were recorded on January 1, 2019 upon adoption of new
accounting standards, reduced by $4.7 million or 13% from year-end
2018
Revenues
Although revenues increased by 3.5% for the six months ended
June 30, 2019 as compared to the six months ended June 30, 2018,
our revenues decreased by $1,295,767, or 17.4%, to $6,148,067 for
the three months ended June 30, 2019, from $7,443,834 for the three
months ended June 30, 2018. Further, during the year ended December
31, 2018 we acquired 98.1% of the outstanding equity interests of
I.AM and all the equity securities of Enertec. During the three
months ended June 30, 2019 and 2018, these acquisitions represented
$3,336,783 and $1,720.362, respectively, of our revenues. Excluding
revenues from these acquisitions, we would have recognized revenues
of $2,811,284 and $5,723,472, respectively, during the three months
ended June 30, 2019 and 2018, a decrease of $2,912,188. The
decrease of $2,912,188 from the three months ended June 30, 2018,
was primarily due to a decrease in revenue from the manufacture of
the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser
system and from our cryptocurrency mining operations and, to a
lesser extent, a decrease in revenue from customized solutions for
the military markets caused by shortages in components required for
the manufacture of these solutions. The following table shows
revenue for the three months ended June 30, 2019 and 2018 generated
from acquisitions completed during the year ended December 31,
2018.
For the Three Months Ended
June 30,
Company acquired
Date of Acquisition
2019
2018
Enertec Systems 2001 Ltd.
May 22, 2018
$2,175,651
$1,217,870
I.AM, Inc.
May 23, 2018
1,161,132
502,492
$3,336,783
$1,720,362
Revenues, cryptocurrency mining
In January 2018, we formed Digital Farms, Inc. (“Digital
Farms”), a wholly-owned subsidiary formerly known as Super Crypto
Mining, Inc. Digital Farms was established to operate our
cryptocurrency business, which is pursuing a variety of digital
currencies. We are mining the top three cryptocurrencies for our
own account, consisting of Bitcoin, Litecoin and Ethereum. The
market prices of digital currencies were lower during the three
months ended June 30, 2019 compared to the prior-year period; as a
result we curtailed our mining operations, which resulted in a
decrease in revenues of $462,641. Compared to the three months
ended March 31, 2019, revenues from crypto-mining increased
$227,312 or 789%.
Revenues, related party
During the three months ended June 30, 2018, we recognized
$1,765,875 in revenues from our purchase order with MTIX Limited, a
company formed under the laws of England and Wales (“MTIX”). Due to
working capital constraints, we did not recognize any revenues from
MTIX during the three months ended June 30, 2019. MTIX was acquired
by AVLP on August 22, 2017 and is therefore a related party. In
March 2017, the Company was awarded a purchase order by MTIX to
manufacture, install and service MLSE plasma-laser systems. Over
the next several years, management believes that the MLSE purchase
order will be a source of revenue and generate significant cash
flows. The lack of revenue during the three months ended June 30,
2019, was due to an emphasis on reducing the debt obligations
incurred in May 2018 to acquire Enertec. Payments, and the related
manufacturing services, that otherwise would have gone to
subcontractors of the MLSE plasma-laser system have been delayed in
order to enable us to restructure and reduce our overall debt
obligations.
Gross Margins
Gross margins increased to 25.4% for the three months ended June
30, 2019 compared to 18.3% for the three months ended June 30,
2018. The Company’s gross margins have typically ranged between 33%
and 37%, with slight variations depending on the overall
composition of our revenue. Our gross margins during the three
months ended June 30, 2018, of 18.3%, were affected by the lower
margin related party revenue of $1,765,875 from MTIX combined with
negative margins on revenues of $718,757 at Digital Farms. The
negative gross margins at Digital Farms resulted from monthly
recurring fixed costs at our colocation facilities which
temporarily exceed the revenues from our mining operations.
Excluding the effects of Digital Farms and our contract with MTIX,
then our adjusted gross margins for the three months ended June 30,
2018, would have been 36.8%.
Our gross margin of 25.4% recognized during the three months
ended June 30, 2019, was also impacted by the negative margins at
Digital Farms. Excluding the effects of Digital Farms, our adjusted
gross margin for the three months ended June 30, 2019, would have
been 37.4%. which is consistent with our historical average.
The Company also reported that its order backlog was $73.6
million, including $46 million of related party backlog
(related-party backlog is delinquent in the production schedule),
Digital Power Corp. which includes Power-Plus Technical
Distributors, LLC and Digital Power, Ltd. (aka “Gresham Power”)
with an order backlog of $5.1M while Microphase posted an order
backlog of $8.7M as Enertec reduced its order backlog to $13.8M.
The Company was pleased that Enertec continues to improve its order
delivery and reduce its order backlog.
General and Administrative
General and administrative expenses were $4,634,151 for the
three months ended June 30, 2019, compared to $4,387,974 for the
three months ended June 30, 2018, an increase of $246,177. Our
acquisitions of Enertec and I.AM represented an increase in general
and administrative expenses for $1,018,295. Excluding the impact of
acquisitions, general and administrative expenses decreased by
$772,118 from the comparative prior period, mainly due to lower
stock compensation expense and legal fees partially offset by an
increase in cost attributed to the hiring of a Chief Accounting
Officer and Senior Vice President of Finance. The remaining
increase in general and administrative expenses is due to various
costs, none of which are significant individually.
Operating Loss
The Company recorded an operating loss of $3,968,188 for the
three months ended June 30, 2019, compared to an operating loss of
$4,099,024 for the three months ended June 30, 2018. The decrease
in operating loss is mostly attributable higher gross profit and
lower selling and marketing expenses, partially offset by an
increase in general and administrative expenses.
Interest Income
Interest income was $911,537 for the three months ended June 30,
2019 compared to $603,519 for the three months ended June 30, 2018.
The increase in interest income for the three months ended June 30,
2019 is primarily related to an increase in interest income
pursuant to the Loan and Security Agreement entered into on
September 6, 2017, with AVLP, a related party.
Interest Expense
Interest expense was $532,255 for the three months ended June
30, 2019 compared to $3,490,310 for the three months ended June 30,
2018. The decrease in interest expense for the three months ended
June 30, 2019 is primarily related to a reduction of amortization
of debt discount resulting from original issue discount from the
issuance of warrants in conjunction with the sale of debt
instruments. During the three months ended June 30, 2019 and 2018,
as a result of these issuances, non-cash interest expense of
$185,544 and $2,727,960, respectively, was recorded from the
amortization of debt discount and debt financing costs.
Loss on issuance of warrants
We recognized a loss on issuance of warrants of $1,763,481 for
the three months ended June 30, 2019, based upon the fair value of
the warrants issued in our April public offering (the “Offering”)
in excess of the proceeds received from the Offering. The loss on
issuance is a non-cash charge and in no event will we be required
to make cash payments to the warrantholders upon settlement of the
warrants.
Change in fair value of warrant liability
During the three months ended June 30, 2019, the fair value of
the warrants that were issued in our Offering decreased by
$946,825. The fair value of these warrants is re-measured at each
financial reporting period and immediately before exercise, with
any changes in fair value recorded as change in fair value of
warrant liability in the Condensed Consolidated Statements of
Operations and Comprehensive Loss.
Geographic Segment Reporting
We conduct operations in several geographical markets and for
three-month period-ended June 30, 2019 and 2018. Other than as
shown, no foreign country or region contributed materially to
revenues or long-lived assets for these periods:
For the three-month periods ended June 30:
2019
2018
Revenues:
North America
$ 3,320,231
$ 5,613,714
Middle East
2,175,651
1,217,870
Europe
481,566
377,933
Other
170,619
234,317
Total revenues
$ 6,148,067
$ 7,443,834
During the three months ended June 30, 2019 and 2018, our
reported net loss included non-cash charges of $1,908,433 and
$4,332,708, respectively. A summary of these non-cash charges is as
follows:
For the Three Months
Ended
June 30,
2019
2018
Interest expense – debt discount
$ 185,544
$ 2,727,960
Stock-based compensation
370,995
1,373,326
Depreciation and amortization
1,164,745
676,839
Amortization of right-of-use assets
29,124
—
Accretion of original issue discount on
notes receivable – related party
(650,113)
(445,417)
Accretion of original issue discount on
notes receivable
(8,518)
—
Fair value in excess of proceeds upon
issuance of warrants
1,763,481
—
Change in fair value of warrant
liability
(946,825)
—
Non-cash items included in net loss
$ 1,908,433
$ 4,332,708
DPW’s CEO and Chairman, Milton “Todd” Ault, III said, “The first
half of 2019 has been challenging as we targeted to reduce our
short-term debt which has impacted our working capital. We have
been successful by turning our net income expense into net interest
income, now $379,282 instead of $2.9 million in expense. The
Company has achieved a 41% improvement in our bottom-line results
for this quarter and an increase in gross profit for the first half
of 2019 compared to the first half of 2018. Stockholders won’t see
the benefit of our lowered cost of capital or proportional revenue
from MTIX, Ltd. until the third quarter of 2019 at the earliest.
For the remainder of 2019, we anticipate Digital Power Corp’s.
renewing the recognition of revenue from the MTIX, Ltd. MLSE
contract and from our hospitality segment generating increasing
revenues from I.AM due to drier, warmer weather in the seasons
ahead. In summary, there are three important indicators that
stockholders and investors should pay attention to: first, the
reduction of outstanding debt; second, the continuing increase in
sales; and thirdly, moderate growth in our backlog due to new
customers and new orders.”
Ault continued, “I would like to reiterate our mission. We are a
growth company seeking to increase our revenues through
acquisitions. We continually assess acquisition opportunities and
are exploring acquisitions in the financial sector. Over the recent
past, we have provided capital and relevant expertise to fuel the
growth of businesses in defense/aerospace, industrial,
telecommunications, medical, crypto-mining, textiles and a select
portfolio of commercial hospitality properties. Through our lending
subsidiary, DP Lending, we have launched an online fintech portal,
MonthlyInterest.com, that facilitates investments that pay monthly
interest. As a holding company, we have been developing DP Lending
to enable the capacity to fund entrepreneurs, our subsidiaries and
partner companies. We believe MonthlyInterest.com will provide
investors the opportunity to invest directly into companies and
technology that will have a global impact, bypassing traditional
banking and lending institutions. As a holding company, our
business strategy is designed to increase shareholder value. Under
this strategy, we are focused on managing and financially
supporting our existing subsidiaries and partner companies, with
the goal of pursuing monetization opportunities and maximizing the
value returned to shareholders. We have, are and will consider
initiatives including, among others: public offerings, the sale of
individual partner companies, the sale of certain or all partner
company interests in secondary market transactions, or a
combination thereof, as well as other opportunities to maximize
shareholder value. We anticipate returning value to shareholders
after satisfying our debt obligations and working capital
needs.”
For more information on DPW Holdings and its subsidiaries, the
Company recommends that stockholders, investors and any other
interested parties read the Company’s public filings and press
releases available under the Investor Relations section at
www.DPWHoldings.com or available at www.sec.gov.
About DPW Holdings, Inc.
DPW Holdings, Inc. is a diversified holding company pursuing
growth by acquiring undervalued businesses and disruptive
technologies that provide a global impact. Through its wholly owned
subsidiaries and strategic investments, the Company provides
mission-critical products that support a diverse range of
industries, including defense/aerospace, industrial,
telecommunications, medical, crypto-mining, and textiles. In
addition, the Company owns a select portfolio of commercial
hospitality properties and extends credit to select entrepreneurial
businesses through a licensed lending subsidiary. DPW’s
headquarters are located at 201 Shipyard Way, Suite E, Newport
Beach, CA 92663; www.DPWHoldings.com.
Forward-Looking Statements
This press release contains “forward looking statements” within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements generally include
statements that are predictive in nature and depend upon or refer
to future events or conditions, and include words such as
“believes,” “plans,” “anticipates,” “projects,” “estimates,”
“expects,” “intends,” “strategy,” “future,” “opportunity,” “may,”
“will,” “should,” “could,” “potential,” or similar expressions.
Statements that are not historical facts are forward-looking
statements. Forward-looking statements are based on current beliefs
and assumptions that are subject to risks and uncertainties.
Forward-looking statements speak only as of the date they are made,
and the Company undertakes no obligation to update any of them
publicly in light of new information or future events. Actual
results could differ materially from those contained in any
forward-looking statement as a result of various factors. More
information, including potential risk factors, that could affect
the Company’s business and financial results are included in the
Company’s filings with the SEC including, but not limited to, the
Company’s Forms 10-K, 10-Q and 8-K. All filings are available at
www.sec.gov and on the Company’s website at
www.DPWHoldings.com.
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