This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as ~~"anticipates," "expects," "intends," "goals," "plans," "believes," "seeks," "estimates," "continues," "may," "will,"~~“anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” ~~"should,"~~“should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on ~~management's~~management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, particularly the ~~"Risk Factors"~~“Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of ~~November~~August 20, ~~2017.~~2018. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaims any duty, to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except per share data

	June 30,		December 31,
	2018		2017
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,518	$	1,478
Marketable securities		318		1,835
Accounts receivable, net of allowance of $5 at June 30, 2018 and December 31, 2017		3,981		1,898
Accounts and other receivable, related party		3,644		174
Inventories, net		4,236		1,993
Prepaid expenses and other current assets		2,448		1,407
TOTAL CURRENT ASSETS		16,145		8,785

Intangible assets		2,874		2,898
Digital currencies		8		—
Goodwill		10,709		3,652
Property and equipment, net		11,282		1,217
Investments - related party, net of original issue discount of $2,653 and $2,115, respectively		3,508		2,333
Investments in warrants and common stock - related party		4,171		7,728
Investments in preferred stock of private company		1,000		1,000
Other investments		2,348		1,637
Other investments, related parties		878		917
Other assets		518		343
TOTAL ASSETS	$	53,441	$	30,510
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	9,670	$	4,273
Accounts payable and accrued expenses, related party		70		70
Advances on future receipts		2,107		1,963
Short term advances		—		2,439
Short term advances, related party		14		245
Revolving credit facility		268		388
Notes payable, net		4,064		402
Notes payable, related party		166		134
Convertible notes payable		4,065		398
Other current liabilities		833		708
TOTAL CURRENT LIABILITIES		21,257		11,020
LONG TERM LIABILITIES
Notes payable		505		525
Notes payable, related parties		142		175
TOTAL LIABILITIES	$	21,904	$	11,720

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-1

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

U.S. dollars in thousands, except shares and per share data

September 30, December 31,
2017 2016
(Unaudited)
ASSETS

CURRENT ASSETS

Cash and cash equivalents $ 314 $ 996
Accounts receivable, net 2,892 1,439
Inventories, net 1,858 1,122
Prepaid expenses and other current assets 603 285
TOTAL CURRENT ASSETS 5,667 3,842

Intangible assets 420 —
Goodwill 6,490 —
Property and equipment, net 603 570
Investments - related parties, net of original issue discount of $127
and $45, respectively, at September 30, 2017 and December 31, 2016 3,782 1,036
Other investments 679 —
Other investments, related parties 354 —
Other assets 265 24
TOTAL ASSETS $ 18,260 $ 5,472

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Accounts payable and accrued expenses $ 5,460 $ 1,231
Accounts payable and accrued expenses, related party 104 —
Advances on future receipts, net of discount of $671 1,475 —
Revolving credit facility 310 —
Notes payable 1,609 —
Notes payable, related parties 274 250
Convertible notes payable, net 465 —
Other current liabilities 144 398
TOTAL CURRENT LIABILITIES 9,841 1,879

LONG TERM LIABILITIES
Notes payable 659 —
Notes payable, related parties 132 —
Convertible notes payable, related party, net of discount of $364
and $496, respectively, at September 30, 2017 and December 31, 2016 166 34

TOTAL LIABILITIES $ 10,798 $ 1,913

	June 30,			December 31,
	2018			2017
	(Unaudited)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred Stock, $0.001 par value, designated in the following classes; 25,000,000 shares authorized; 125,000 and 478,776 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively	$	—		$	—
Series B Convertible Preferred Stock, $10 stated value per share, share, $0.001 par value – 500,000 shares authorized; 125,000 and 100,000 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively (liquidation preference of $1,250 and $1,000 at June 30, 2018 and December 31, 2017, respectively)		—			—
Series C Convertible Preferred Stock, $2.40 stated value per share, $0.001 par value – 460,000 shares authorized; nil shares issued and outstanding at June 30, 2018 and December 31, 2017		—			—
Series D Convertible Preferred Stock, $0.01 stated value per share, $0.001 par value – 378,776 shares authorized; nil and 378,776 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively (liquidation preference of $4 at December 31, 2017)		—			—
Series E Convertible Preferred Stock, $45 stated value per share, $0.001 par value – 10,000 shares authorized; nil shares issued and outstanding at June 30, 2018 and December 31, 2017		—			—
Preferred Stock, $0.001 par value – 23,651,224 shares authorized; nil shares issued and outstanding at June 30, 2018 and December 31, 2017		—			—
Class A Common Stock, $0.001 par value – 200,000,000 shares authorized; 61,621,742 and 30,222,299 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		62			30
Class B Common Stock, $0.001 par value – 25,000,000 shares authorized; nil shares issued and outstanding at June 30, 2018 and December 31, 2017		—			—
Additional paid-in capital		68,431			36,888
Accumulated deficit		(36,551	)		(23,412	)
Accumulated other comprehensive loss		(1,075	)		4,503
TOTAL DPW HOLDINGS STOCKHOLDERS’ EQUITY		30,867			18,009
Non-controlling interest		670			781
TOTAL STOCKHOLDERS’ EQUITY		31,537			18,790
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	53,441		$	30,510

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-2

~~DIGITAL POWER CORPORATION~~DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED ~~BALANCE SHEETS (continued)~~

STATEMENTS OF OPERATIONS AND COMPREHNSIVE LOSS
(Unaudited)

U.S. dollars in thousands, except shares and per share data

September 30, December 31,
2017 2016
(Unaudited)

COMMITMENTS AND CONTINGENCIES — —

STOCKHOLDERS' EQUITY

Series A Redeemable Convertible Preferred Stock, no par value – — —
  500,000 shares authorized; nil shares issued and outstanding at
  September 30, 2017 and December 31, 2016
Series B Redeemable Convertible Preferred Stock, $10 stated value per — —
  share, no par value – 500,000 shares authorized; 100,000 and nil
  shares issued and outstanding at September 30, 2017 and December 31,
  2016, respectively (liquidation preference of $1,000 and nil at
  September 30, 2017 and December 31, 2016, respectively)
Series C Redeemable Convertible Preferred Stock, $2.40 stated value — —
  per share, no par value – 460,000 shares authorized; 455,002 and
  nil shares issued and outstanding at September 30, 2017 and December
  31, 2016, respectively (liquidation preference of $1,092 and nil at
  September 30, 2017 and December 31, 2016, respectively)
Series D Redeemable Convertible Preferred Stock, $0.01 stated value — —
  per share, no par value – 378,776 shares authorized; 378,776 and
  nil shares issued and outstanding at September 30, 2017 and December
  31, 2016, respectively (liquidation preference of $0.01 per share)
Series E Redeemable Convertible Preferred Stock, $45 stated value per — —
  share, no par value – 10,000 shares authorized; 10,000 and nil shares
  issued and outstanding at September 30, 2017 and December 31, 2016,
  respectively (liquidation preference of $0.01 per share)
Preferred Stock, no par value – 151,224 shares authorized; nil shares — —
  issued and outstanding at September 30, 2017 and December 31, 2016
Common Stock, no par value – 30,000,000 shares authorized; 14,150,154
and 7,677,637 shares issued and outstanding at September 30, 2017 and — —
December 31, 2016, respectively
Additional paid-in capital 24,667 16,537
Accumulated deficit (17,212 ) (12,158 )
Accumulated other comprehensive loss (722 ) (820 )
TOTAL DIGITAL POWER STOCKHOLDERS' EQUITY 6,733 3,559

Non-controlling interest 729 —

TOTAL EQUITY 7,462 3,559

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 18,260 $ 5,472

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017

Revenue	$	4,348		$	1,822		$	7,514		$	3,450
Revenue, cryptocurrency mining		719			—			956			—
Revenue, related party		1,766			—			3,559			—
Revenue, restaurant operations		502			—			502			—
Revenue, lending activities		109			—			109			—
Total revenue		7,444			1,822			12,640			3,450
Cost of revenue		6,084			1,092			9,887			2,012
Gross profit		1,360			730			2,753			1,438
Operating expenses
Engineering and product development		367			265			710			492
Selling and marketing		775			327			1,500			622
General and administrative		4,388			1,582			7,610			2,555
Change in fair value of digital currency		(70	)		—			—			—
Total operating expenses		5,460			2,174			9,820			3,669
Loss from operations		(4,100	)		(1,444	)		(7,067	)		(2,231	)
Interest expense		(2,887	)		(407	)		(6,019	)		(614	)
Loss before income taxes		(6,987	)		(1,851	)		(13,086	)		(2,845	)
Income tax benefit		(10	)		—			(6	)		—
Net loss		(6,997	)		(1,851	)		(13,092	)		(2,845	)
Less: Net loss attributable to non-controlling interest		108			112			144			112
Net loss attributable to DPW Holdings	$	(6,889	)	$	(1,739	)	$	(12,948	)	$	(2,733	)
Preferred deemed dividends on Series B and Series C Preferred Stock		(108	)		(319	)		(108	)		(319	)
Preferred dividends on Series C
Preferred Stock		—			(8	)		—			(8	)
Net loss available to common stockholders	$	(6,997	)	$	(2,066	)	$	(13,056	)	$	(3,060	)
Basic and diluted net loss per common share	$	(0.13	)	$	(0.20	)	$	(0.29	)	$	(0.32	)
Basic and diluted weighted average common shares outstanding		54,009,472			10,467,658			45,407,279			9,430,945
Comprehensive Loss
Loss available to common stockholders	$	(6,997	)	$	(2,066	)	$	(13,056	)	$	(3,060	)
Other comprehensive income (loss)
Foreign currency translation adjustment		(158	)		78			(132	)		99
Net unrealized loss on securities available-for-sale		(705	)		—			(5,446	)		—
Other comprehensive income (loss)		(863	)		78			(5,578	)		99
Total Comprehensive loss	$	(7,860	)	$	(1,988	)	$	(18,634	)	$	(2,961	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-3

~~DIGITAL POWER CORPORATION~~DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS AND COMPREHNSIVE LOSS~~

CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

U.S. dollars in thousands, except ~~shares and per~~ share data

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2017 2016 2017 2016

Revenue $ 3,220 $ 1,826 $ 6,670 $ 5,603
Cost of revenue 2,124 1,123 4,136 3,526
Gross profit 1,096 703 2,534 2,077

Operating expenses
Engineering and product development 306 147 798 511
Selling and marketing 423 235 1,045 723
General and administrative 1,685 404 4,240 1,115
Total operating expenses 2,414 786 6,083 2,349

Loss from operations (1,318 ) (83 ) (3,549 ) (272 )

Interest (expense) income, net (753 ) 23 (1,367 ) 85

Loss before income taxes (2,071 ) (60 ) (4,916 ) (187 )

Income tax benefit — 22 — 22

Net loss $ (2,071 ) $ (38 ) $ (4,916 ) $ (165 )

Less: Net loss attributable to non-controlling interest 104 — 216 —

Net loss attributable to Digital Power Corp (1,967 ) (38 ) (4,700 ) (165 )

Preferred deemed dividends — — (319 ) —
Preferred dividends (27 ) — (35 ) —

Loss available to common shareholders $ (1,994 ) $ (38 ) $ (5,054 ) $ (165 )

Basic and diluted net loss per common share $ (0.15 ) $ (0.01 ) $ (0.46 ) $ (0.02 )

Basic and diluted weighted average common shares outstanding 13,745,540 6,775,971 10,884,948 6,775,971

Comprehensive Loss
Loss available to common shareholders $ (1,994 ) $ (38 ) $ (5,054 ) $ (165 )
Other comprehensive income (loss)
Change in net foreign currency translation adjustments 42 (55 ) 141 (265 )
Net unrealized loss on securities available-for-sale, net of income taxes (43 ) — (43 ) —
Other comprehensive income (loss) (1 ) (55 ) 98 (265 )
Total Comprehensive loss $ (1,995 ) $ (93 ) $ (4,956 ) $ (430 )

															Accumulated
									Additional						Other						Total
	Preferred Stock			Common Stock					Paid-In			Accumulated			Comprehensive			Non-Controlling			Stockholders’
	Shares			Shares			Amount		Capital			Deficit			Income (Loss)			Interest			Equity
BALANCES, December 31, 2017		478,776			30,222,299		$	30	$	36,888		$	(23,412	)	$	4,503		$	781		$	18,790
Compensation expense due to stock option issuances		—			—			—		427			—			—			—			427
Compensation expense due to warrant issuances		—			—			—		47			—			—			—			47
Issuance of common stock and warrants for cash		—			19,056,783			19		18,533			—			—			—			18,552
Issuance of common stock for services		—			2,683,059			3		3,752			—			—			—			3,755
Issuance of common stock for conversion of debt		—			2,030,015			2		2,166			—			—			—			2,168
Issuance of common stock for conversion of short-term advances		—			3,632,159			4		2,816			—			—			—			2,820
Issuance of common stock upon exercise of stock options		—			60,000			—		98			—			—			—			98
Issuance of common stock upon exercise of warrants		—			2,145,641			2		865			—			—			—			867
Issuance of Series B preferred stock for conversion of short-term advances		25,000			—			—		250			—			—			—			250
Issuance of common stock for conversion of Series E preferred stock		(378,776	)		757,552			1		(1	)		—			—			—			—
Issuance of common stock in connection with convertible notes		—			1,089,232			1		675			—			—			—			676
Repurchase of common stock		—			(54,998	)		—		(55	)		—			—			—			(55	)
Beneficial conversion feature in connection with convertible notes		—			—			—		289			—			—			—			289
Fair value of warrants issued in connection with convertible notes		—			—			—		3,411			—			—			—			3,411
Cash for exchange fees and other financing costs		—			—			—		(1,838	)		—			—			—			(1,838	)
Non-controlling interest from acquisition of I. AM		—			—			—		—			—			—			33			33
Comprehensive loss:
Net loss		—			—			—		—			(12,948	)		—			—			(12,948	)
Preferred deemed dividends		—			—			—		108			(108	)		—			—			—
Net unrealized gain on securities available-for-sale, net of income taxes		—			—			—		—			—			(5,446	)		—			(5,446	)
Foreign currency translation adjustments		—			—			—		—			(83	)		(132	)		—			(215	)
Net loss attributable to non-controlling interest		—			—			—		—			—			—			(144	)		(144	)

BALANCES, June 30, 2018		125,000			61,621,742		$	62	$	68,431		$	(36,551	)	$	(1,075	)	$	670		$	31,537

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-4

~~DIGITAL POWER CORPORATION~~DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

U.S. dollars in thousands ~~except shares and per share data~~

For the Nine Months Ended September 30,
2017 2016

Cash flows from operating activities:
Net loss $ (4,916 ) $ (165 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation 128 123
Amortization 6 —
Interest expense – debt discount 1,239 —
Accretion of original issue discount on notes receivable – related party (36 ) —
Interest expense on conversion of demand notes to common stock 13 —
Stock-based compensation 1,269 129
Changes in operating assets and liabilities:
Accounts receivable (737 ) 82
Inventories 228 243
Prepaid expenses and other current assets (166 ) (60 )
Other assets (197 ) —
Accounts payable and accrued expenses 2,083 (101 )
Accounts payable, related parties 104 —
Other current liabilities (595 ) (113 )

Net cash (used in) provided by operating activities (1,577 ) 138

Cash flows from investing activities:
Purchase of property and equipment (22 ) (78 )
Purchase of intangible asset (50 ) —
Purchase of Power-Plus (409 ) —
Sale of investment — 90
Investments – related party (2,710 ) —
Investment in real property (300 ) —
Investments – others (25 ) —
Loans to related parties (54 ) —
Loans to third parties (814 ) —

Net cash (used in) provided by investing activities (4,384 ) 12

Cash flows from financing activities:
Gross proceeds from sales of common stock and warrants 745 —
Proceeds from issuance of preferred stock 1,540 —
Financing cost in connection with sales of equity securities (275 ) —
Proceeds from convertible notes payable 1,514 —
Payments on convertible notes payable (157 ) —
Proceeds from notes payable – related party 350 —
Proceeds from notes payable 785 —
Payments on notes payable (30 ) —
Proceeds from advances on future receipts 1,772 —
Payments on advances on future receipts (439 ) —
Payments of preferred dividends (8 ) —
Financing cost in connection with sales of debt securities (122 ) —
Payments on revolving credit facilities, net (481 ) —

Net cash provided by financing activities 5,194 —

Effect of exchange rate changes on cash and cash equivalents 85 (99 )

Net (decrease) increase in cash and cash equivalents (682 ) 51

Cash and cash equivalents at beginning of period 996 1,241

Cash and cash equivalents at end of period $ 314 $ 1,292

	For the Six Months Ended June 30,
	2018			2017

Cash flows from operating activities:
Net loss	$	(13,092	)	$	(2,845	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		758			78
Amortization		67			2
Interest expense – debt discount		5,779			587
Accretion of original issue discount on notes receivable – related party		(930	)		(19	)
Interest expense on conversion of promissory notes to common stock		—			13
Stock-based compensation		2,811			752
Realized losses on sale of digital currencies		101			—
Realized losses on sale of marketable securities		158			—
Changes in operating assets and liabilities:
Accounts receivable		770			651
Accounts receivable, related party		(3,274	)		—
Digital currencies		(915	)		—
Inventories		(628	)		216
Prepaid expenses and other current assets		431			72
Other assets		(158	)		(82	)
Accounts payable and accrued expenses		2,465			(91	)
Accounts payable, related parties		—			100
Other current liabilities		(7	)		(307	)

Net cash used in operating activities		(5,664	)		(873	)

Cash flows from investing activities:
Purchase of property and equipment		(9,005	)		(21	)
Purchase of intangible asset		(42	)		—
Purchase of Enertec		(4,937	)		—
Cash received on acquisitions		237			—
Investments – related party		(257	)		(1,527	)
Related party investment in real property		—			(300	)
Investments in warrants and common stock - related party		(1,808	)		—
Investments in marketable securities		(856	)		—
Sales of marketable securities		2,132			—
Loans to third party		—			(489	)
Proceeds from loans to related parties		16			—
Investments in debt and equity securities		(2,402	)		(95	)

Net cash used in investing activities	$	(16,922	)	$	(2,432	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-5

~~DIGITAL POWER CORPORATION~~DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)

U.S. dollars in thousands

For the Nine Months Ended September 30,
2017 2016

Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 69 $ -

Non-cash investing and financing activities:
Cancellation of notes payable – related party into shares of common stock $ 100 $ -
Cancellation of notes payable into shares of common stock $ 648 $ -
Cancellation of note payable – related party into series B convertible preferred stock $ 500 $ -
Cancellation of convertible note payable into shares of common stock $ 145 $ -

In connection with the Company's acquisition of Microphase Corporation, equity instruments were issued and liabilities assumed during 2017 as follows:

Fair value of assets acquired $ 7,893
Equity instruments issued (1,451 )
Minority interest (945 )
Liabilities assumed $ 5,497

	For the Six Months Ended June 30,
	2018			2017

Cash flows from financing activities:
Gross proceeds from sales of common stock and warrants	$	18,552		$	300
Repurchase of common stock		(55	)		—
Proceeds from issuance of preferred stock		—			1,540
Financing cost in connection with sales of equity securities		(1,838	)		(275	)
Proceeds from stock option exercises		98			—
Proceeds from warrant exercises		867			—
Proceeds from convertible notes payable		8,550			354
Proceeds from notes payable – related party		—			350
Proceeds from notes payable		9,370			710
Proceeds from short-term advances – related party		64			—
Proceeds from short-term advances		761			—
Payments on short-term advances		(425	)		—
Payments on notes payable		(10,581	)		—
Payments on convertible notes payable		(1,025	)		—
Proceeds from advances on future receipts		2,990			—
Payments on advances on future receipts		(4,242	)		—
Payments on revolving credit facilities, net		(292	)		(268	)
Net cash provided by financing activities		22,794			2,711
Effect of exchange rate changes on cash and cash equivalents		(168	)		41
Net increase (decrease) in cash and cash equivalents		40			(553	)
Cash and cash equivalents at beginning of period		1,478			996

Cash and cash equivalents at end of period	$	1,518		$	443

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-6

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)

U.S. dollars in thousands

	For the Six Months Ended June 30,
	2018		2017

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	600	$	32

Non-cash investing and financing activities:
Cancellation of convertible note payable into shares of common stock	$	2,168	$	—
Cancellation of short term advances into shares of common stock	$	2,775	$	—
Cancellation of short term advances, related party into shares of common stock	$	45	$	—
Cancellation of short term advances, related party into shares of Series B Preferrred Stock	$	250	$	—
Issuance of common stock for prepaid services	$	1,359	$	—
Cancellation of notes payable – related party into shares of common stock	$	—	$	100
Cancellation of notes payable into shares of common stock	$	—	$	625
Cancellation of note payable – related party into series B convertible preferred stock	$	—	$	500

In connection with the Company’s acquisition of Microphase Corporation, equity instruments were issued and liabilities assumed during 2017 as follows:

Fair value of assets acquired	$	8,275
Equity instruments issued		(1,451	)
Non-controlling interest		(945	)
Liabilities assumed	$	5,879

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-7

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

1. DESCRIPTION OF BUSINESS

DPW Holdings, Inc., a Delaware corporation (“DPW” or the “Company”), formerly known as Digital Power Corporation, (~~"Digital Power"~~) was incorporated in ~~1969, under~~September 2017. The Company isa diversified holding company owning subsidiaries engaged in the ~~General Corporation Law of the State of California. Digital Power~~following operating businesses: commercial and defense solutions, commercial lending, cryptocurrency blockchain mining, advanced textile technology and restaurant operations. The Company’s wholly-owned subsidiaries areCoolisys Technologies, Inc. (“Coolisys”), Digital Power Limited ("(“DP ~~Limited"~~Limited”), a wholly owned subsidiary, located in the United Kingdom, are currently engaged in the design, manufacture and sale of switching power supplies and converters. On November 30, 2016, Digital Power formedEnertec Systems 2001 Ltd (“Enertec”), Power-Plus Technical Distributors, LLC (“Power-Plus”), Digital Power Lending, LLC (“(“DP Lending”), and ~~on April 25, 2017, Digital Power formed Coolisys Technologies,~~Super Crypto Mining, Inc. (~~“Coolisys~~”(“SC Mining”). Both DP Lending and Coolisys are wholly-owned subsidiaries. DP Lending is engaged in providing commercial loans to companies throughout the United States to provide them with operating capital to finance the growth of their businesses. The loans will primarily be short-term, ranging from six to twelve months. The Company ~~intends to operate its existing businesses~~also has a controlling interest in the customized and flexible power system solutions for the medical, military, telecom and industrial markets, other than the European markets which are primarily served by DP Limited, in Coolisys. On June 2, 2017, Digital Power ~~purchased 56.4% of the outstanding equity interests of~~ Microphase Corporation ~~a Delaware corporation (the~~ “(“Microphase”~~). Microphase is a design-to-manufacture original equipment manufacturer (“OEM”) delivering radio frequency (“RF”~~) and ~~microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector logarithmic video amplifiers (“DLVA”) to the military, aerospace and telecommunications industries. Microphase is headquartered in Shelton, Connecticut.~~ ~~Further, on September 1, 2017, Coolisys acquired all of the outstanding membership interests in Power-Plus Technical Distributors, LLC, a California limited liability company (“Power-Plus”~~I. AM, Inc. (“I.AM”). ~~Power-Plus is an industrial distributor of value added power supply solutions, UPS systems, fans, filters, line cords, and other power-related components.~~ The ~~Company’s results of~~Company has five reportable segments – North America with operations ~~include the results of Microphase and Power-Plus from their respective acquisition dates forward.~~ ~~Digital Power, DP Limited,~~conducted by Microphase, Coolisys, Power-Plus and DP Lending, ~~(collectively, the~~ ~~“Company”) has two reportable geographic segments - North America (sales through Digital Power, Microphase, Coolisys, Power-Plus and DP Lending) and~~ Europe ~~(sales~~with operations through DP ~~Limited).~~

Limited, Middle East with operations through Enertec, digital currency blockchain mining through SC Mining and restaurant operations through I.AM.

2. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS

The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. As of ~~September~~June 30, ~~2017,~~2018, the Company had cash and cash equivalents of ~~$314,~~$1,518, an accumulated deficit of ~~$17,212~~$36,551 and a negative working capital of ~~$4,174.~~$5,112. The Company has incurred recurring losses and reported losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, totaled ~~$1,967~~$6,997 and ~~$4,700,~~$13,092, respectively. In the past, the Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. During ~~2017, as reflected below,~~2018, the Company ~~continues~~continued to successfully obtain additional equity and debt financing and in restructuring existing debt. ~~The following financings transactions were consummated during 2017:~~

In February 2017, the Company issued demand promissory notes and warrants to purchase 333,333 shares of common stock at $ 0.70 per share for aggregate proceeds of $400. Further in February 2017, the holders of $400 in demand promissory notes agreed to extinguish their $400 of debt by cancelling their notes to purchase 666,667 shares of common stock of the Company at $0.60 per share (See Note 10).

~~On March 9, 2017, the Company entered into a Preferred Stock Purchase Agreement with Philou Ventures LLC (~~

~~“Philou”~~), a related party, pursuant to which Philou was granted the right to invest up to $5,000 in the Company through the purchase of Series B Preferred Stock over a term of 36 months. On March 24, 2017, Philou purchased 25,000 shares of Series B Preferred Stock pursuant to the Preferred Stock Purchase Agreement in consideration of cancellation of Company debt of $250 due to MCKEA, an affiliate of Philou. On May 5, 2017, Philou purchased an additional 50,000 shares of Series B Preferred Stock pursuant to the Preferred Stock Purchase Agreement for $500 (See Note 14).

On March 15, 2017, the Company entered into a subscription agreement with one investor for the sale of 500,000 shares of common stock at $0.60 per share for the aggregate purchase price of $300 (See Note 14).

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

On March 20, 2017, the Company issued $250 in demand promissory note to one of the Company's shareholders (See Note 14). This $250 demand promissory note was converted in shares of the Series B Preferred Stock for the benefit of Philou.

On March 28, 2017, the Company issued $270 in demand promissory notes to several investors. The Company received gross proceeds of $220 on March 31, 2017 and the remaining balance of $50 was received on April 3, 2017. On April 5, 2017, the Company canceled these promissory notes by issuing to the holders 360,000 shares of common stock at $0.75 per share and warrants to purchase 180,000 shares of common stock at $0.90 per share (See Note 10).

~~On April 17, 2017, the Company entered into two 7% convertible notes (the~~ ~~“7% Convertible Notes”~~) in the aggregate principal amount of $250. The 7% Convertible Notes accrue interest at 7% simple interest on the principal amount and were due on June 2, 2017. The 7% Convertible Notes were not repaid on the maturity date and as such were in default at June 30, 2017. During July 2017 these two 7% Convertible Notes were repaid (See Note 12).

Between May 5, 2017 and June 30, 2017, the Company received additional short-term loans of $140 from four accredited investors of which $75 was from the Company’s corporate counsel, a related party. As additional consideration, the investors received five-year warrants to purchase 224,371 shares of common stock at a weighted average exercise price of $0.77 per share.On June 28, 2017, the holders of $55 of these short-term loans cancelled their notes for the purchase of 100,001 shares of the Company’s common stock at a price of $0.55 per share. An additional $52 in short-term loans that was received from the related party was also converted on June 28, 2017, into one of the Series C Units (See Note 10).

~~Between May 24, 2017 and June 19, 2017, the Company entered into subscription agreements (the~~ ~~“Series C Subscription Agreement”) with approximately twenty accredited investors (the~~ ~~“Series C Investors”) in connection with the sale of twenty-one Units at a purchase price of $52 per Unit raising in the aggregate $1,092 with each Unit consisting of Series C Preferred Stock and Warrants (See Note 14).~~

Between July 6, 2017 and September 13, 2017, the Company received funding as a result of entering into multiple Agreements for the Purchase and Sale of Future Receipts with TVT Capital, LLC pursuant to which the Company sold in the aggregate $2,585 in Future Receipts of the Company for $1,772. Under the terms of the agreements, the Company will be obligated to pay the initial daily amount of $13 until the $2,585 has been paid in full. The term Future Receipts means cash, check, ACH, credit card, debit card, bank card, charged card or other form of monetary payment (See Note 8).

~~On July 24, 2017, we entered into subscription agreements with six investors, and on July 25, 2017 we entered into securities purchase agreements (the~~ ~~“Securities Purchase Agreement”~~) with an institutional investor, under which we agreed to issue and sell in the aggregate 851,363 shares of common stock to the investors at $0.55 per share for an aggregate purchase price of $468. Of the aggregate purchase price of $468, $445 was paid in cash and $23 was in consideration for the cancellation of debt from a related party of the Company (See Note 14).

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

On July 28, 2017, we entered into an exchange agreement with an institutional investor who was the owner of (i) a 7% Convertible Note in the principal amount of $125 and a warrant dated April 17, 2017 to purchase 83,334 shares of our common stock at $0.90. Under the terms of the exchange agreement, we agreed to exchange the 7% Convertible Note for three new promissory notes in the principal amounts of $110 due August 1, 2017; $35 due August 1, 2017; and $34 due August 8, 2017 (individually an Exchange Note and collectively the Exchange Notes) and to exchange the prior warrant for a new warrant to purchase 83,334 shares of common stock at $0.55 per share. Concurrent with entering into this exchange agreement, the institutional investor entered into a subscription agreement under which we issued and sold in a registered direct offering 200,000 shares of common stock at $0.55 per share for an aggregate purchase price of $110. The 200,000 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $110. In addition, in a concurrent private placement, the institutional investor entered into a separate securities purchase agreement under which we issued and sold 63,600 shares of common stock at $0.55 per share for an aggregate of purchase price of $35. The 63,600 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $35. Further, we issued a warrant to purchase 120,000 shares of common stock at $0.55 per share (See Note 14).

On August 3, 2017, the Company entered into a Securities Purchase Agreement to sell a 12% Convertible (“12% Convertible Note”) and a warrant to purchase 666,666 shares of common stock to an accredited investor (the “Investor”). The principal of the Convertible Note may be converted into shares of common stock at $0.55 per share and under the terms of the Warrant, up to 666,666 shares of common stock may be purchased at an exercise price of $0.70 per share. The Convertible Note is in the principal amount of $400 and was sold for $360, bears interest at 12% simple interest on the principal amount, and is due on August 13, 2018. Interest only payments are due on a quarterly basis and the principal is due on August 3, 2018. The principal may be converted into shares of the Company’s common stock at $0.55 per share (See Note 12).

On August 10, 2017, the Company, entered into Securities Purchase Agreements (“Agreements”) with five institutional investors (the “Investors”) to sell for an aggregate purchase price of $800, 10% Senior Convertible Promissory Notes (“Convertible Notes”) with an aggregate principal face amount of $880 and warrants to purchase an aggregate of 1,475,000 shares of common stock. The principal of the Convertible Notes and interest earned thereon may be converted into shares of common stock at $0.60 per share and under the terms of the Warrant, up to 1,475,000 shares of common stock may be purchased at an exercise price of $0.66 per share. The Convertible Notes are in the aggregate principal amount of $880 and were sold for $800 and bear simple interest at 10% on the principal amount, and principal and interest are due on February 10, 2018. Subject to certain beneficial ownership limitations, each Investor may convert the principal amount of the Convertible Note and accrued interest earned thereon at any time into shares of common stock at $0.60 per share. The conversion price of the Convertible Notes is subject to adjustment for customary stock splits, stock dividends, combinations or similar events (See Note 12).

The Company expects to continue to incur losses for the foreseeable future and needs to raise additional capital to continue its business development initiatives and to support its working capital requirements. In March 2017, the Company was awarded a 3-year, $50 million purchase order by MTIX Ltd. (“~~MTIX"~~MTIX”) to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system. Management believes that the MLSE purchase order will be a source of revenue and generate significant cash flows for the Company. Management believes that the Company has access to capital resources through potential public or private issuance of debt or equity securities. However, if the Company is unable to raise additional capital, it may be required to curtail operations and take additional measures to reduce costs, including reducing its workforce, eliminating outside consultants and reducing legal fees to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America (“(“GAAP”). The Company has made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from our estimates. The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, filed with the Securities and Exchange Commission on April ~~10, 2017.~~17, 2018. The consolidated balance sheet as of December 31, ~~2016~~2017 was derived from the Company’s audited ~~2016~~2017 financial statements contained in the above referenced Form 10-K. Results of the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, are not necessarily indicative of the results to be expected for the full year ending December 31, ~~2017.~~2018.

F-8

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

Principles of Consolidation

The condensed consolidated financial statements include the accounts of ~~Digital Power,~~DPW and its wholly-owned subsidiaries, Coolisys, DP Limited, ~~Coolisys,~~ Power-Plus, ~~and~~Enertec, DP Lending and SC Mining and its majority-owned ~~subsidiary, Microphase.~~subsidiaries, Microphase and I.AM. All significant intercompany accounts and transactions have been eliminated in consolidation.

Accounting Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates, judgments and assumptions. The ~~Company's~~Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Key estimates include acquisition accounting, fair value of certain financial instruments, reserve for trade receivables and inventories, carrying amounts of investments, fair value of digital currencies, accruals of certain liabilities including product warranties, useful lives and depreciation, and deferred income taxes and related valuation allowance.

~~Investments in Debt and Equity Securities~~

Revenue Recognition

The Company ~~classifies its investments in Avalanche International, Corp (“AVLP”), consisting of shares of common stock and debt securities, in accordance~~recognizes revenue under ASC 606,Revenue from Contracts with ~~ASC No. 320,~~ ~~Investment in Debt and Equity Securities~~ (~~“ASC No. 320”) and ASC No. 325,~~ ~~Investment – Other~~ (~~“ASC No. 325”~~)Customers. The ~~investment~~core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in marketable securities and convertible promissory notes are both classified as “available-for-sale securities” and are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported as a separate component of stockholder’s equity, accumulated other comprehensive loss. When evaluatingan amount that reflects the ~~Company’s debt and equity investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent~~consideration to which ~~fair value has been below cost basis,~~ the ~~financial condition~~company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

●

Step 1: Identify the contract with the customer

●

Step 2: Identify the performance obligations in the contract

●

Step 3: Determine the transaction price

●

Step 4: Allocate the transaction price to the performance obligations in the contract

●

Step 5: Recognize revenue when the company satisfies a performance obligation

F-9

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

The Company’s disaggregated revenues consist of the ~~issuer and any changes thereto, and~~following for the ~~Company’s intent to sell, or whether it is more likely than not that it will be required to sell, the investment before recovery~~six months ended June 30, 2018:

	Six Months ended June 30, 2018
	DPC		DPL		Enertec		SC Mining		I.AM		Total

Primary Geographical Markets
North America	$	8,967	$	7	$	—	$	956	$	502	$	10,432
Europe		—		645		—		—		—		645
Middle East		—		—		1,218		—		—		1,218
Other		259		86		—		—		—		345
	$	9,226	$	738	$	1,218	$	956	$	502	$	12,640

Major Goods
RF/Microwave Filters	$	1,232	$	—	$	—	$	—	$	—	$	1,232
Detector logarithmic video amplifiers		58		—		—		—		—		58
Power Supply Units		4,268		—		—		—		—		4,268
Power Supply Systems		—		738		—		—		—		738
Healthcare diagnostic systems		—		—		416		—		—		416
Defense systems		—		—		802		—		—		802
Digital Currency Mining		—		—		—		956		—		956
Restaurant operations		—		—		—		—		502		502
Lending activities		109		—		—		—		—		109
MLSE Systems		3,559		—		—		—		—		3,559
	$	9,226	$	738	$	1,218	$	956	$	502	$	12,640

Timing of Revenue Recognition
Goods transferred at a point in time	$	5,667	$	738	$	1,218	$	956	$	502	$	9,081
Services transferred over time		3,559		—		—		—		—		3,559
	$	9,226	$	738	$	1,218	$	956	$	502	$	12,640

Sales of the investment’s amortized cost basis. Equity securities that do not have readily determinable fair values (i.e., non-marketable equity securities) and are not required to be accounted for under the equity method are typically carried at cost (i.e., cost method investments), as described in ASC No. 325-20. Additionally, the investment in debt securities of AVLP qualifies for application of the fair value option in accordance with ASC No. 825.Products

~~Revenue Recognition~~

The Company generates revenues from the sale of its products through a direct and indirect sales force. ~~Revenues from~~The Company’s performance obligations to deliver products are ~~recognized~~satisfied at the point in ~~accordance with ASC No. 605,~~ ~~Revenue Recognition~~,time when products are received by the customer, which is when the ~~following criteria are met: persuasive evidence~~customer has title and the significant risks and rewards of ~~an arrangement exists, delivery has occurred,~~ownership. The Company provides standard assurance warranties that the ~~seller's price to~~products function as intended. The Company primarily receives fixed consideration for sales of product. Some of the ~~buyer is fixed or determinable, no further obligation exists and collectability is reasonably assured. Generally, the Company does not grant a right of return. However, certain~~Company’s contracts with distributors ~~are allowed, in the six months after the initial stock purchase, to rotate stock that has not been sold for other products. Revenues subject to~~include stock rotation rights ~~are deferred~~after six months for slow moving inventory, which represents variable consideration. The Company uses an expected value method to estimate variable consideration and constrains revenue for estimated stock rotations until it is probable that a significant reversal in the ~~products are sold~~amount of cumulative revenue recognized will not occur. To date, returns have not been material. The Company’s customers generally pay within 30 days from the receipt of a valid invoice.

Because the Company’s product sales agreements have an expected duration of one year or less, the Company has elected to adopt the practical expedient in ASC 606-10-50-14(a) of not disclosing information about its remaining performance obligations.

Manufacturing Services

The Company provides manufacturing services in exchange for fixed fees. The Company’s performance obligation for manufacturing services is satisfied over time as the Company creates or enhances an asset that the customer controls as the asset is created or enhanced. The Company recognizes revenue over time using a cost to cost method which measures progress based on the costs incurred to total expected costs in satisfying its performance obligation. This method provides a faithful depiction of the progress in providing the manufacturing service because there is a direct relationship between the costs incurred by the Company and the transfer of the manufacturing service to the end customer or until the rotation rights expire. Service revenues are deferred and recognized on a straight-line basis over the term of the service agreement. Service revenues are immaterial in proportion to the Company's revenues. customer.

F-10

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

~~Warranty~~

The period between when the Company transfers its promised good or service to the customer and when the customer pays is one year or less. Therefore, the Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.

The aggregate amount of the transaction price allocated to the performance obligation that is partially unsatisfied as of June 30, 2018 was $48,691. The Company ~~offers~~expects to recognize the remaining revenue related to the partially unsatisfied performance obligation over the next two and a ~~warranty period~~half years. The Company will be paid in installments for ~~all~~this performance obligation over the next two and a half years.

Digital Currency Blockchain Mining

The Company derives its ~~products. Warranty periods range~~revenue by providing transaction verification services within the digital currency networks of cryptocurrencies, such as Bitcoin, Bitcoin Cash and Litecoin. The Company satisfies its performance obligation at the point in time that which the Company is awarded a unit of digital currency through its participation in the applicable network and network participants benefit from ~~one to two years depending~~the Company’s verification service. In consideration for these services, the Company receives digital currencies which are recorded as revenue, using the closing U. S. dollar price of the related cryptocurrency on the ~~product.~~date of receipt. The coins are recorded on the balance sheet at their fair value and re–measured at each reporting date. Revaluation gains or losses, as well as gains or losses on sale of digital currencies are recorded as a component of operating expenses in the statement of operations. Expenses associated with running the cryptocurrency mining business, such as equipment deprecation and electricity cost are recorded as a component of cost of revenues.

There is currently no definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting for the production and mining of digital currencies. The Company ~~estimates~~has exercised significant judgement in determining appropriate accounting treatment for the ~~costs that~~recognition of revenue for mining of digital currencies. Management has examined various factors surrounding the substance of the Company’s operations and the guidance in ASC 606, Revenue from Contracts with Customers, including the transfer of control being the completion and addition of a block to a blockchain and the reliability of the measurement of the digital currency received. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (“FASB”), the Company may be ~~incurred under~~required to change its ~~warranty and records~~policies which could result in a ~~liability~~change in the ~~amount of such costs~~Company’s financial statements.

Restaurant Operations

The Company records revenue from restaurant sales at the time ~~product revenue is recognized. Factors that affect~~of sale, net of discounts, coupons, employee meals and complimentary meals and gift cards. Restaurant cost of sales primarily includes the ~~Company's warranty liability include the number~~cost of ~~units sold, historical rates of warranty claims~~good, beverages, and ~~cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability~~merchandise and ~~adjusts the amounts as necessary. As of September 30, 2017~~disposable paper and ~~December 31, 2016,~~plastic goods used in preparing and selling the Company’s ~~accrued warranty liability was $86.~~

~~Common Stock Purchase Warrants~~menu items, and ~~Other Derivative Financial Instruments~~

~~The Company classifies common stock purchase warrants~~exclude depreciation and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. The Company determined that certain freestanding derivatives, which principally consist of issuance of warrants to purchase shares of commonamortization. Vendor allowances received in connection with ~~convertible notes, units and to employees~~the purchase of a vendor’s products are recognized as a reduction of the ~~Company, satisfy the criteria for classification~~related food and beverage costs as ~~equity instruments as these warrants do not contain cash settlement features or variable settlement provision that cause them to not be indexed to the Company’s own stock.~~earned.

F-11

~~Stock-Based Compensation~~

~~The Company accounts for stock-based compensation in accordance with ASC No. 718,~~ ~~Compensation – Stock Compensation~~ (~~"ASC No. 718"~~). Under ASC No. 718, compensation expense related to stock-based payments is recorded over the requisite service period based on the grant date fair value of the awards. Compensation previously recorded for unvested stock options that are forfeited is reversed upon forfeiture. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.

~~The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC No. 505-50,~~ ~~Equity Based Payments to Non-Employees~~. Accordingly, the measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

~~Convertible Instruments~~

~~The Company accounts for hybrid contracts that feature conversion options in accordance with ASC No. 815,~~ ~~Derivatives and Hedging Activities~~ (~~“ASC No. 815”~~). ASC No. 815 requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

~~Conversion options that contain variable settlement features such~~

Property and Equipment, Net

Property and equipment as ~~provisions to adjust~~well as an intangible asset are stated at cost, net of accumulated depreciation and amortization. Repairs and maintenance costs are expensed as incurred. Depreciation and amortization are calculated using the ~~conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in~~straight-line method over the ~~hybrid contract generally result in their bifurcation from the host instrument.~~

The Company accounts for convertible instruments, when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC No. 470-20, ~~Debt with Conversion and Other Options~~ (~~“ASC No. 470-20”~~). Under ASC No. 470-20 the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair valueestimated useful lives of the ~~underlying common stock~~assets, at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC No. 815.

~~Comprehensive Loss~~

~~The Company reports comprehensive loss in accordance with ASC No. 220,~~ following annual rates:

		Useful lives (in years)
Cryptocurrency machines and related equipment		3 - 5
Computer, software and related equipment		3 - 5
Office furniture and equipment		5 - 10
Leasehold improvements		Over the term of the lease or the life of the asset, whichever is shorter.

~~Comprehensive Income~~. This statement establishes standards for the reporting and presentation of comprehensive loss and its components in a full set of general purpose financial statements. Comprehensive loss generally represents all changes in equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its items of other comprehensive loss relate to changes in foreign currency translation adjustments.

Fair value of Financial Instruments

In accordance with ASC No. 820,Fair Value Measurements and Disclosures, fair value is defined as the exit price, or the amount that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.

The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2:Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations. All significant inputs used in our valuations are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or ~~liabilities~~. liabilities. Level 2 inputs also include quoted prices that were adjusted for security-specific restrictions which are compared to output from internally developed models such as a discounted cash flow models.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

The carrying amounts of financial instruments carried at cost, including cash and cash equivalents, ~~trade~~accounts receivables and ~~trade~~accounts and other receivable – related party, investments, notes receivable, trade payables and trade payables – related party approximate their fair value due to the short-term maturities of such instruments.

As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the fair value of the Company’s investments were ~~$3,782~~$4,554 and ~~$1,036,~~$9,563, respectively, and were concentrated in ~~debt and~~ equity securities of AVLP, a related party (See Note 4)9), which are classified as available-for-sale investments. At ~~September~~June 30, ~~2017,~~2018, the ~~Company's~~Company’s investment in AVLP ~~is comprised of convertible promissory notes of $3,670, net of unamortized discount, and~~included marketable equity securities of ~~$112.~~$758 and warrants to purchase 11,167,440 shares of AVLP common stock at an exercise price of $0.50 per share of common stock. At December 31, ~~2016,~~2017, the ~~Company's~~Company’s investment in AVLP ~~is comprised of convertible promissory notes of $952, net of unamortized discount, and~~included marketable equity securities of ~~$84.~~$826 and warrants to purchase 8,248,440 shares of AVLP common stock at an exercise price of $0.50 per share of common stock. For investments in marketable equity securities, the Company took into consideration general market conditions, the duration and extent to which the fair value is ~~below~~above cost, and the Company’s ability and intent to hold the investment for a sufficient period of time to allow for recovery of value in the foreseeable future. As a result of this analysis, the Company has determined that its ~~cost basis~~investment in ~~AVLP equitable~~AVLP’s marketable equity securities ~~approximates~~are valued based upon the ~~current fair value.~~closing market price of common stock at June 30, 2018 and December 31, 2017, which resulted in an unrealized gain of $130 and $550, respectively.

F-12

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

Consistent with the guidance at ASC No. 835, the Company’s presumption is that the fair value of its convertible promissory notes in AVLP have a present value equivalent to the cash proceeds exchanged. Further, the discount shall be reported in the balance sheet as a direct deduction from the face amount of the convertible promissory notes. Thus,

At June 30, 2018, the Company ~~has determined~~held shares of common stock in four companies and held certain cryptocurrencies that the amortized cost of its convertible promissory notes approximates fair value and are subject to a periodic impairment review. The interest income, including amortization of the discount arising at acquisition, for the convertible promissory notes are included in earnings. In the future, if the Company does not expect to recover the entire amortized cost basis, the Company shall recognize other-than-temporary impairments in other comprehensive income (loss).

~~During 2017, the Company~~it had either purchased at the market ~~shares of common stock of three companies~~or received from mining for its own account, for a total cost of ~~$25.~~$300. In accordance with ASC No. 320-10, these investments are accounted for ~~pursuant to the fair value method~~ based upon the closing market prices of the respective common stock ~~for these three companies~~and cryptocurrency at ~~September~~June 30, ~~2017.~~

2018 and December 31, 2017, resulting in an unrealized gain $27 and $133, respectively.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy:

Fair Value Measurement at September 30, 2017
Total Level 1 Level 2 Level 3
Investments – AVLP – a related party $ 3,782 $ 112 $ 3,670 $ —

Investments in other companies $ 25 $ 25 $ — $ —

Fair Value Measurement at December 31, 2016
Total Level 1 Level 2 Level 3
Investments – AVLP – a related party $ 1,036 $ 84 $ 952 $ —

	Fair Value Measurement at June 30, 2018
	Total		Level 1		Level 2		Level 3
Investments in common stock and warrants of AVLP – a related party	$	4,171	$	758	$	—	$	3,413
Investments in digital currencies		8		8		—		—
Investments in marketable securities		318		318		—		—
Investment in warrants of Parallax		57		—		—		57
Total Investments	$	4,554	$	1,084	$	—	$	3,470

	Fair Value Measurement at December 31, 2017
	Total		Level 1		Level 2		Level 3
Investments in common stock and warrants of AVLP – a related party	$	7,728	$	826	$	—	$	6,902
Investments in marketable securities		1,835		1,835		—		—
Total Investments	$	9,563	$	2,661	$	—	$	6,902

We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market:

·●

Level 1 – inputs include quoted prices for identical instruments and are the most observable.

·●

Level 2 – inputs include quoted prices for similar assets and observable inputs such as interest rates, currency exchange rates and yield curves.

·●

Level 3 – inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability.

F-13

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

~~Debt Discounts~~

~~The Company accounts for debt discount according to ASC No. 470-20,~~

~~Debt with Conversion and Other Options~~. Debt discounts are amortized through periodic charges to interest expense over the term of the related financial instrument using the effective interest method. During the three and nine months ended September 30, 2017, the Company recorded amortization of debt discounts of $652 and $1,239, respectively. The Company did not recognize any debt discount during the three and nine months ended September 30, 2016.

Net Loss per Share

Net loss per share is computed by dividing the net loss to common stockholders by the weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock equivalents is anti-dilutive due to the Company’s net loss position for all periods presented. The Company has included 317,460 warrants, with an exercise price of $.01, in its earnings per share calculation for the three and ~~nine~~six months ended ~~September~~June 30, 2018 and 2017. Anti-dilutive securities, ~~consisted~~which are convertible into the Company’s Class A common stock, consist of the following at ~~September~~June 30,

2017 2016
Stock options 2,891,000 1,001,000
Warrants 10,233,199 —
Convertible notes 3,157,576 —
Conversion of preferred stock 4,606,131 —
Total 20,887,906 1,001,000

~~At September 30, 2017, the 20,887,906 of potential common stock equivalents included 6,926,095 in warrants, convertible notes~~ 2018 and preferred stock in which the holders are contractually prohibited from exercising or converting the warrants, convertible notes and preferred stock into shares of the Company’s common stock. The restriction shall remain until shareholder approval is received.

Subsequent to September 30, 2017, the Company entered into agreements to issue an additional 2,042,239 shares of common stock and issued convertible notes and warrants that when exercised would result in the issuance of an additional 2,274,800 shares of common stock. As a result, on November 2, 2017, if all of the potential common stock equivalents in which there are no contractual restrictions upon exercise were converted into shares of the Company’s common stock it would exceed the Company’s authorized shares of common stock.

2017:

	2018		2017
Stock options		7,580,000		2,841,000
Warrants¹		18,410,160		7,426,080
Convertible notes		—		1,296,969
Conversion of preferred stock		1,785,714		4,606,131
Total		27,775,871		16,170,180

⁽¹⁾

The Company has excluded the 317,460 warrants with an exercise price of $0.01 per share in its anti-dilutive securities but included the warrants in its weighted average shares outstanding.

Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”) and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification on a number of specific issues as well as requiring additional disclosures. The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

The Company ~~has considered~~adopted ASC 606 effective January 1, 2018 to all ~~other recently issued accounting standards and does not believe~~contracts using the modified retrospective approach. The adoption of ~~such standards will~~ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.

In July 2017, the FASB issued ASU No. 2017-11,Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) (“ASU 2017-11”). ASU 2017-11 consists of two parts. The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part II of this update do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial ~~statements.~~statements and related disclosures but does not expect it to have a material impact.

F-14

~~4. INVESTMENTS – RELATED PARTIES~~

~~Investments in AVLP at September 30, 2017, and December 31, 2016, are comprised of the following:~~

September 30, December 31,
2017 2016
Investment in convertible promissory note of AVLP $ 3,797 $ 997
Investment in common stock of AVLP 112 84
Total investment in AVLP P – Gross 3,909 1,081
Less: original issue discount (127 ) (45 )
Total investment in AVLP P – Net $ 3,782 $ 1,036

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under ASU 2018-07, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after Dec. 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements and related disclosures but does not expect it to have a material impact.

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of June 30, 2018 that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 2018 or 2017, and it does not believe that any of those pronouncements will have a significant impact on our condensed consolidated financial statements at the time they become effective.

4. Digital Currencies

The following table presents additional information about digital currencies:

	Digital Currencies
Balance at January 1, 2018	$	—
Additions of digital currencies		915
Realized loss on sale of digital currencies		(101	)
Payment on convertible notes payable with digital currencies		(605	)
Purchase of fixed assets with digital currencies		(201	)
Balance at June 30, 2018	$	8

As June 30, 2018, the Company’s digital currencies consisted of Bitcoin, Bitcoin Cash and Litecoin. Digital currencies are recorded at their fair value on the date they are received as revenues and are revalued to their current fair value at each reporting date. Fair value is determined by taking the closing price from the most liquid exchanges.

5. Marketable Securities

Marketable securities in equity securities with readily determinable market prices consisted of the following as of June 30, 2018 and December 31, 2017:

	Available-for-sale securities at June 30, 2018
			Gross unrealized		Gross realized
	Cost		gains		gains (losses)		Fair value
Common shares	$	291	$	27	$	—	$	318

	Available-for-sale securities at December 31, 2017
			Gross unrealized		Gross realized
	Cost		gains		gains (losses)		Fair value
Common shares	$	1,702	$	133	$	—	$	1,835

F-15

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

The following table presents additional information about marketable securities:

Balance at January 1, 2018	$	1,835
Purchases of marketable securities		856
Sales of marketable securities		(2,132	)
Realized losses on marketable securities		(158	)
Unrealized loss on marketable securities		(83	)
Balance at June 30, 2018	$	318

Available-for-sale Securities

At June 30, 2018 and December 31, 2017, the Company had invested in the marketable securities of certain publicly traded companies. At June 30, 2018 and December 31, 2017, the Company recorded an unrealized loss of $27 and $132, respectively, representing the difference between the cost basis and the estimated fair value, as accumulated other comprehensive income in the stockholder’s equity section of the Company’s consolidated balance sheet and as a change in unrealized gains and losses on marketable securities in the Company’s consolidated statements of comprehensive income (loss). The Company’s investment in marketable securities shall be revalued on each balance sheet date. The fair value of the Company’s holdings in marketable securities at June 30, 2018 and December 31, 2017 is a Level 1 measurement based on quoted prices in an active market.

6. PROPERTY AND EQUIPMENT, NET

At June 30, 2018 and December 31, 2017, property and equipment consist of:

	June 30,			December 31,
	2018			2017
Cryptocurrency machines and related equipment	$	9,084		$	—
Computer, software and related equipment		2,423			2,432
Restaurant equipment		974			—
Office furniture and equipment		297			289
Buildings and improvements		305			—
Leasehold improvements		1,225			788
		14,308			3,509
Accumulated depreciation and amortization		(3,026	)		(2,292	)
Property and equipment, net	$	11,282		$	1,217

For the three and six months ended June 30, 2018, depreciation expense amounted to $643 and $758, respectively. During the ~~year~~three and six months ended June 30, 2017, depreciation expense amounted to $45 and $78, respectively.

F-16

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

7. INTANGIBLE ASSETS, NET

At June 30, 2018 and December 31, ~~2016,~~2017 intangible assets consist of:

	Intangible Assets
Balance as of January 1, 2017	$	—
Trade name and trademark		1,740
Customer list		988
Non-competition agreements		150
Domain name		81
Accumulated amortization		(60	)
Balance as of December 31, 2017	$	2,899
Trade name and trademark		3
Start-up costs		39
Accumulated amortization		(67	)
Balance as of June 30, 2018	$	2,874

During 2017, the Company acquired the trade name and trademark of Microphase, that was determined to have an indefinite life, for $1,740. The remaining definite lived intangible assets are being amortized on a straight-line basis over their estimated useful lives. Amortization expense was $34 and $67, respectively, for the three and six months ended June 30, 2018 and nil and $2, respectively, for the three and six months ended June 30, 2017.

8. GOODWILL

The Company’s goodwill relates to the acquisitions of a controlling interest in Microphase on June 2, 2017 and I. AM, Inc. (“I. AM”) on May 23, 2018, the acquisition of Enertec Systems 2001 Ltd. (“Enertec”) on May 22, 2018, and the acquisition of all of the outstanding membership interests in Power Plus on September 1, 2017.

9. INVESTMENTS – RELATED PARTIES

Investments in AVLP at June 30, 2018 and December 31, 2017, are comprised of the following:

	June 30,			December 31,
	2018			2017
Investment in convertible promissory note of AVLP	$	5,536		$	4,124
Investment in warrants of AVLP		3,413			6,902
Investment in common stock of AVLP		758			826
Accrued interest in convertible promissory note of AVLP		626			324
Total investment in AVLP – Gross		10,333			12,176
Less: original issue discount		(2,653	)		(2,115	)
Total investment in AVLP – Net	$	7,680		$	10,061

F-17

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

The following table summarizes the changes in our investments in AVLP during the six months ended June 30, 2018:

	Investment in			Investment in
	warrants and			convertible			Total
	common stock			promissory			investment
	of AVLP			note of AVLP			in AVLP – Net
Balance at January 1, 2018	$	7,728		$	2,333		$	10,061
Investment in convertible promissory notes of AVLP		—			1,063			1,064
Payment of convertible promissory notes of AVLP		—			(1,108	)		(1,108	)
Investment in common stock of AVLP		352			—			352
Fair value of warrants issued by AVLP		1,456			—			1,456
Unrealized loss in warrants of AVLP		(4,945	)		—			(4,945	)
Unrealized loss in common stock of AVLP		(420	)		—			(420	)
Accretion of discount		—			918			918
Accrued Interest		—			302			302
Balance at June 30, 2018	$	4,171		$	3,508		$	7,680

The Company has made a strategic decision to invest in AVLP, a related party controlled by Philou, ~~an existing majority stockholder.~~a significant stockholder of the Company. The Company’s investments in AVLP ~~primarily~~ consist of convertible promissory notes, warrants and shares of common stock of AVLP.

~~On October 5, 2016, November 30, 2016, and February 22, 2017, the Company entered into three 12% Convertible Promissory Notes with AVLP (the~~ ~~"AVLP Notes"~~) in the principal amount of $525 each. The AVLP Notes included a 5% original issue discount, resulting in net loans to AVLP of $1,500 and an original issue discount of $75. The AVLP notes accrued interest at 12% per annum and were due on or before two years from the origination dates of each note. The Company had the right, at its option, to convert all or any portion of the principal and accrued interest into shares of common stock of AVLP at approximately $0.74536 per share. ~~Subject to adjustment,~~ ~~the~~ ~~AVLP~~ ~~Notes, inclusive of the original issue discount, were convertible into 2,113,086 shares of the Company’s common stock~~. ~~During the period from March 29, 2017 to August 16, 2017, the Company funded $1,809 in excess of the $1,500 net loan amount required pursuant to the terms of the AVLP Notes~~

On September 6, 2017, the Company and AVLP entered into a Loan and Security Agreement (“(“AVLP Loan Agreement”) with an effective date of August 21, 2017 pursuant to which the Company will provide Avalanche a non-revolving credit facility of up to $5,000 ~~inclusive of prior amounts loaned to AVLP,~~ for a period ending on August 21, 2019, subject to the terms and conditions stated in the Loan Agreement, including that the Company having available funds to grant such credit.

~~In consideration of entering into the AVLP Loan Agreement,~~ At June 30, 2018, the Company ~~and~~has provided loans to AVLP ~~cancelled the AVLP Notes and consolidated the AVLP Notes and prior advances totaling $3,309 plus original issue discount of $165 and issued a new Convertible Promissory Note~~ in the ~~aggregate~~ principal amount ~~of $3,474 (the~~ ~~“New Note”) that is~~$5,536 and, in addition to the 12% convertible ~~into shares of~~promissory notes, AVLP at a conversion price of $0.50 per share. The New Note is due in two years and accrues interest at 12% per annum on the principal amount. Prior interest accrued under the AVLP Notes and advances will continue to be an obligation of AVLP. The New Note contains standard events of defaults. In addition, concurrent to issuing the New Note, AVLPhas issued to the Company ~~a five-year Warrant~~warrants to purchase ~~6,948,800~~11,167,440 shares of AVLP Common Stock at $0.50 per share. Future advances under the AVLP Loan Agreement, if any, will be evidenced by a convertible promissory containing a conversion price feature at $0.50 per share and warrant with an exercise price of $0.50 per share. Further, undercommon stock. Under the terms of the AVLP Loan Agreement, any notes issued by AVLP to the Company are secured by the assets of AVLP.

The ~~Warrant entitles~~warrants entitle the Company to purchase up to ~~6,948,800~~11,167,440 shares of AVLP common stock at an exercise price of $0.50 per share for a period of five years. The exercise price of $0.50 is subject to adjustment for customary stock splits, stock dividends, combinations or similar events. The ~~Warrant~~warrant may be exercised for cash or on a cashless basis. At June 30, 2018 and December 31, 2017, the Company recorded an unrealized gain (loss) on its investment in warrants of AVLP of ($432) and $4,513, respectively, representing the difference between the cost basis and the estimated fair value of the warrants in the Company’s accumulated other comprehensive income in the stockholder’s equity section of the Company’s consolidated balance sheet and as a change in net unrealized gains on securities available-for-sale in the Company’s consolidated statements of comprehensive loss. During the three and six months ended June 30, 2018, the Company’s investment in warrants and common stock of AVLP represented $705 and $5,365, respectively, of the Company’s aggregate $705 and $5,448, respectively, in net unrealized loss on securities available-for-sale. The Company’s investment in Avalanche will be revalued on each balance sheet date. The fair value of the Company’s holdings in the Avalanche warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate, which ranged between 1.92% and 2.43%, was derived from the U.S. Treasury yield curve, matching the term of our investment, in effect at the measurement date. The volatility factor of 80.4% was determined based on historical stock prices for similar technology companies with market capitalizations under $100 million. The warrant valuation is a Level 3 measurement.

F-18

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

In accordance with ASC No. 310, Receivables (“ASC 310”), the Company accounts for its convertible promissory notes in AVLP at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted for accrued interest and accretion of original issue discount and discount attributed to the fair value of the 11,167,440 warrants that the Company received in conjunction with its investment. Interest is accreted using the effective interest method. The Company records interest on an accrual basis and recognizes it as earned in accordance with the contractual terms of the convertible promissory notes, to the extent that such amounts are expected to be collected. The original issue discount of $165 on the New Note isand the discount attributed to the fair value of the warrants of $3,845 are being amortized as interest income through the maturity ~~date using the interest rate method.~~date. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, the Company recorded ~~$18~~$428 and ~~$38,~~$918, respectively, of interest income for the discount accretion. During the three and six months ended June 30, 2017, the Company recorded $12 and $19, respectively, of interest income for the discount accretion As of ~~September~~June 30, ~~2017,~~2018 and December 31, ~~2016,~~2017, the Company recorded contractual interest receivable attributed to the AVLP Notes and AVLP Loan Agreement of ~~$208~~$626 and ~~$13,~~$324, respectively.

The Company ~~has classified~~evaluated the collectability of both interest and principal for the convertible promissory notes in AVLP ~~Notes as Available-for-Sale securities, subject~~to determine whether there was an impairment. Based on current information and events, the Company determined that it is probable that it will be able to collect amounts due according to the ~~guidance in ASC No. 320. The Company elected to apply the Fair Value Option Subsections of Subtopic 320-10~~existing contractual terms. Impairment assessments require significant judgments and ~~825-10~~are based on significant assumptions related to the ~~AVLP Notes. At September~~borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.

During the six months ended June 30, 2018 and the year ended December 31, 2017, the ~~closing~~Company also acquired in the open market ~~price~~370,100 shares of ~~AVLP’s~~AVLP common ~~Stock was $0.64. Subsequent to quarter-end,~~stock for $352 and 221,333 shares of AVLP common stock for $192, respectively. At June 30, 2018, the closing market price of AVLP’s common stock was ~~in the range of $0.51 and $ 0.85 and due to the illiquidity and significant volatility of AVLP’s common stock, the~~$0.90, a decline from $1.75 at December 31, 2017. The Company has determined that its ~~cost basis~~investment in AVLP marketable equity securities are accounted for pursuant to the fair value method and based upon the closing market price of common stock ~~approximates~~at June 30, 2018, the ~~current~~Company has recognized an unrealized gain of $130.

10. INVESTMENTS IN PREFERRED STOCK OF PRIVATE COMPANY AND OTHER INVESTMENTS

We hold a portfolio of investments in equity and debt securities in other entities that are accounted for under the cost method.

Investment in Preferred Stock of Private Company

On December 15, 2017, the Company and Sandstone Diagnostics, Inc. (“Sandstone”) entered into a Series A1 Preferred Stock Purchase Agreement (“Loan Agreement”) pursuant to which the Company purchased 976,286 shares of Sandstone’s Series A1 Preferred Shares for $1,000. Sandstone is a medical device company focused on a data-driven approach to men’s reproductive health. Founded in 2012 in part by government scientists from Sandia National Laboratories, Sandstone’s mission is to provide innovative, data-driven tools to help men assess, manage, and improve their reproductive health. The funding from the Series A1 Preferred Stock financing will support sales growth and continued product development leveraging the company’s unique technology platform, Sandstone’s Trak™ Male Fertility Testing System.

The Company elected to follow the guidance of ASC No. 321,Equity Securities (“ASC 321”), which provides a measurement alternative to the requirement to carry equity interests at fair ~~value.~~value in accordance with ASC 820, Fair value measurement, for certain equity interests without readily determinable fair values. Equity interests measured in accordance with the measurement alternative in ASC 321 are not required to be included within the fair value hierarchy. The Company’s equity investment in Sandstone is recorded at cost. However, any change to the carrying amount will be subsequently adjusted up or down for observable price changes (i.e., prices in orderly transactions for the identical investment or similar investment of the same issuer) and any adjustments to the carrying amount shall be recorded in net income.

Other Investments

On November 1, 2017, the Company and I. AM, Inc. (“I. AM”) entered into a Loan and Security Agreement pursuant to which the Company provided I. AM with a non-revolving credit facility of up to $1,600 for a period ending on September 25, 2022. On May 23, 2018, DP Lending entered into and closed a securities purchase agreement with I. AM. At the date of the acquisition, I. AM owed DP Lending $1,715 in outstanding principal, pursuant to the loan and security agreement. The purchase agreement provides that as I. AM repays the outstanding loan to DP Lending in accordance with the loan agreement, DP Lending will on a pro rata basis transfer shares of common stock of I. AM to David J. Krause, up to an aggregate of 471 shares (see Note 12).

F-19

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

The Company, primarily through DP Lending, has ~~concluded that indicators of impairment, including those described in ASC No. 320-10-35-27, do not currently exist for the Company’s investment~~made additional investments in debt and equity securities of ~~AVLP.~~

~~5. ACQUISITIONS~~

~~Microphase Corporation~~

various entities. At June 30, 2018 and December 31, 2017, the outstanding balance of these investments was $2,348 and $1,637, respectively.

11. OTHER INVESTMENTS, RELATED PARTIES

The Company’s other related party investments primarily consist of two investments.

MTIX, Ltd.

On ~~April 28,~~December 5, 2017, the Company entered into ~~a Share Exchange Agreement (the~~ ~~“Share Exchange Agreement”~~)an exchange agreement with ~~Microphase; Microphase Holding~~WT Johnson pursuant to which the Company ~~LLC, a limited liability company organized under~~issued to WT Johnson two convertible promissory notes in the ~~laws~~principal amount of ~~Connecticut (“MHC”), Ergul Family Limited Partnership, a partnership organized under the laws of Connecticut~~$600 (“~~EFLP”) RCKJ Trust, a trust organized under the laws of New Jersey (“RCKJ”~~ ~~and with MHC and EFLP, the~~ ~~“Significant Stockholders”~~Note A”) and ~~those additional persons who have executed~~$1,668 (“Note B”), in exchange for cancellation of amounts due to WT Johnson by MTIX Ltd., a related party of the ~~Agreement (collectively, the~~ ~~“Minority Stockholders”~~ ~~and with the Significant Stockholders, the~~ ~~“Stockholders”). Upon the terms and subject to the conditions set forth in the Agreement,~~Company.

During December 2017, the Company ~~acquired 1,603,434~~issued 600,000 shares ~~(the~~ ~~“Subject Shares”~~) of ~~the issued and outstanding~~its common stock to WT Johnson & Sons upon the conversion of ~~Microphase (the~~ ~~“MPC Common Stock”~~),Note A and WT Johnson subsequently sold the 600,000 shares. The proceeds from the ~~Stockholders in exchange (the~~ ~~“Exchange”) for~~sale of Note A were sufficient to satisfy the ~~issuance by the Company of 1,842,448 shares of Digital Power common stock (“Common Stock”) and 378,776 shares of Digital Power Series D Preferred Stock (collectively, the~~ ~~“Exchange Shares”), which shares of Digital Power Series D Preferred Stock are, subject to shareholder approval, convertible into~~entire $2,268 obligation as well as an ~~aggregate of 757,552 shares of Common Stock and warrants (the~~ ~~“Exchange Warrants”) to purchase an aggregate of 1,000,000 shares of Common Stock (the~~ ~~“Warrant Shares”). The Exchange Shares and the Exchange Warrants are at times collectively referred to herein as the~~ ~~“Exchange Securities.”~~ ~~At the time of the closing of the acquisition the Exchange Shares constituted~~ ~~56.4% of the outstanding equity interests of Microphase Corporation~~. ~~The operating results of Microphase from the closing date of the acquisition, June 2, 2017, through September 30, 2017, are included in the consolidated financial statements.~~

At closing, the purchase price of Digital Power’s 56.4% interest in Microphase was determined to be $1,451, comprised of the Exchange Shares, valued at $1,222 based on the closing price of the Company’s common stock on June 2, 2017, and the Exchange warrants, valued at $229. ~~The Company computed the fair value of these warrants using the Black-Scholes option pricing model.~~

~~Power-Plus Technical Distributors~~

~~On August 3, 2017, Coolisys entered into a Securities Purchase Agreement (the~~ ~~“Purchase Agreement”) to acquire all the outstanding membership Interests of Power-Plus. Power-Plus is an industrial distributor~~additional $400 of value added ~~power supply solutions, UPS systems, fans, filters, line cords, and other power-related components. On September 1, 2017, Coolisys completed~~tax due to WT Johnson. Concurrent with entering into the ~~acquisition.~~

~~Under~~exchange agreement, the ~~terms of the Agreement, Coolisys Technologies acquired all the membership Interests of Power-Plus for~~Company received a ~~price of $850, which was reduced by certain debts of Power-Plus in the amount of $186. The purchase price of $664 will be paid by (i) a two-year~~ promissory note in the amount of ~~$255,000 payable~~$2,668 from MTIX and cancelled Note B. At June 30, 2018 and December 31, 2017, the Company has valued the note receivable at $600, the carrying amount of Note A. The Company will recognize the remainder of the amount due from MTIX upon payment of the promissory note by MTIX.

Israeli Property

During the year ended December 31, 2017, our President, Amos Kohn, purchased certain real property that serves as a facility for the Company’s business operations in ~~24 monthly installments;~~Israel. The Company made $300 of payments to the seller of the property and ~~(ii)~~received a 28% undivided interest in the real property (“Property”). The Company’s subsidiary, Coolisys, entered into a Trust Agreement and Tenancy In Common Agreement with Roni Kohn, who owns a 72% interest in the Property, is the daughter of Mr. Kohn and is an Israeli citizen. The Property was purchased to serve as a residence/office facility for the Company in order to oversee its Israeli operations and to expand its business in the hi-tech industry located in Israel. Pursuant to the Trust Agreement, Ms. Kohn will hold and manage Coolisys’ undivided 28% interest in the Property. The trust will be in effect until it is terminated by mutual agreement of the parties. During the term of the trust, Ms. Kohn will not sell, lease, sublease, transfer, grant, encumber, change or effect any other disposition with respect to the Property or Coolisys’ interest without the Company’s approval.

F-20

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

Under the Tenancy In Common Agreement, Coolisys and its executive officers shall have the exclusive rights to use the Property for the Company and its affiliates’ business operations. The Property shall be managed by Ms. Kohn. Further, pursuant to the Tenancy In Common Agreement, for each completed calendar month of employment of Mr. Kohn by the Company, Ms. Kohn shall have the right to purchase a portion of the Company’s interest in the Property. Such right shall fully vest at the end of five years of continuous employment and the Trustee shall have the right to purchase the Company’s 28% interest in the Property for a nominal value. The Company will amortize its $300 investment over ten years, subject to a cliff vesting after five years. During the three and six months ended June 30, 2018, the Company recognized $7 and $14, respectively, in amortization expense. In the event that Mr. Kohn is not employed by the Company, the Company shall have the right to demand that Ms. Kohn purchase the Company’s remaining interest in the Property that was not subject to vesting for the fair market value of such unvested Property interest.

Other investments and interest receivable

During the year ended December 31, 2017, DP Lending made loans to Alzamend Neuro, Inc. (“Alzamend”), in the amount of $44, these loans were repaid during the three months ended March 31, 2018. AVLP is a party to a management services agreement pursuant to which Avalanche provides management, consulting and financial services to Alzamend. As additional consideration, the Company received a warrant to purchase 22,000 shares of Alzamend’s common stock at an exercise price of $0.30 per share of common stock. The warrants were determined to have a de minimis value.

12. ACQUISITIONS

Microphase Corporation and Power-Plus Technical Distributors

Enertec Systems 2001 Ltd.

On December 31, 2017, CooliSys entered into a share purchase agreement with Micronet Enertec Technologies, Inc. (“MICT”), a Delaware corporation, Enertec Management Ltd., an Israeli corporation and wholly owned subsidiary of MICT (“EML” and, together with MICT, the “Seller Parties”), and Enertec Systems 2001 Ltd. (“Enertec”), an Israeli corporation and wholly owned subsidiary of EML, pursuant to which Coolisys acquired Enertec (the “Acquisition”). The Company believes that Enertec is Israel’s largest private manufacturer of specialized electronic systems for the military market. On May 23, 2018, Coolisys acquired Enertec for an aggregate cash ~~at closing of $409 resulting in a net~~ purchase price of ~~$664.~~

$4,851.

I. AM, Inc.

On May 23, 2018, DP Lending entered into and closed a securities purchase agreement with I. AM, David J. Krause and Deborah J. Krause. Pursuant to the securities purchase agreement, I. AM sold to DPL, 981 shares of common stock for a purchase price of $981, representing, upon the closing, 98.1% of I. AM’s outstanding common stock.

I. AM owns and operates the Prep Kitchen brand restaurants located in the San Diego area. I.AM owed DP Lending $1,715 in outstanding principal, pursuant to a loan and security agreement, between I. AM and DP Lending, which I. AM used to acquire the restaurants. The purchase agreement provides that, as I. AM repays the outstanding loan to DP Lending in accordance with the loan agreement, DP Lending will on a pro rata basis transfer shares of common stock of I. AM to David J. Krause, up to an aggregate of 471 shares.

The acquisition of ~~Microphase~~Enertec and ~~Power-Plus is~~I. AM are being accounted for under the purchase method of accounting in accordance with ASC No. 805, Business Combinations. Under the purchase method, assets acquired and liabilities assumed are recorded at their estimated fair values. Goodwill is recorded to the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired less liabilities assumed at the date of acquisition. The initial accounting for the acquisition is not yet complete, and the Company is still performing procedures to determine the appropriate accounting.

F-21

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

Upon initial measurement, components of the preliminary purchase price are as follows:

Microphase

Power-Plus

Cash and cash equivalents $ 11 $ 27
Accounts receivable 439 235
Inventories 667 241
Prepaid expenses and other current assets 139 2
Restricted cash 100 —
Intangible assets 95 250
Property and equipment 93 23
Other investments 303 —
Deposits and loans 44 —
Accounts payable and accrued expenses (1,680 ) (392 )
Revolving credit facility (880 ) (210 )
Notes payable (2,204 ) —
Notes payable, related parties (406 ) —
Other current liabilities (327 ) —
Net liabilities assumed/assets acquired (3,606 ) 176
Goodwill and other intangibles 6,002 488
Non-controlling interest (945 ) —
Purchase price $ 1,451 $ 664

	Enertec			I. AM
Accounts receivable	$	3,078		$	29
Inventories		1,634			40
Prepaid expenses and other current assets		20			—
Property and equipment		649			985
Other assets		96			3
Accounts payable and accrued expenses		(2,615	)		(159	)
Notes payable		(4,236	)		—
Accrued severance pay		(132	)		—
Net liabilities assumed		(1,506	)		898
Goodwill		6,357			700
Non-controlling interest		—			(33	)
Purchase price	$	4,851		$	1,565

The following pro forma data for the three and six months ended June 30, 2017 summarizes the results of operations for the ~~periods~~period indicated as if the Microphase, Power-Plus and ~~Power-Plus~~Enertec acquisitions, which closed on June 2, 2017, September 1, 2017, and May 23, 2018, respectively, had been completed as of the beginning of each period presented. The pro forma data gives effect to actual operating results prior to the acquisition. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of each period presented or that may be obtained in future periods:

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Total Revenue	$	7,621		$	5,485		$	15,395		$	16,755
Net loss	$	(9,196	)	$	(2,484	)	$	(15,332	)	$	(5,295	)
Less: Net loss attributable to non-controlling interest		108			118			144			623
Net loss attributable to common stockholders	$	(9,088	)	$	(2,366	)	$	(15,188	)	$	(4,672	)
Preferred deemed dividends		(108	)		(319	)		(108	)		(319	)
Preferred dividends		—			(8	)		—			(8	)
Loss available to common shareholders	$	(9,196	)	$	(2,693	)	$	(15,296	)	$	(4,999	)

Basic and diluted net loss per common share	$	(0.17	)	$	(0.26	)	$	(0.34	)	$	(0.53	)

Basic and diluted weighted average common shares outstanding		54,009,472			10,467,658			45,407,279			9,430,945

Comprehensive Loss
Loss available to common shareholders	$	(9,196	)	$	(2,693	)	$	(15,296	)	$	(4,999	)
Other comprehensive income (loss)
Change in net foreign currency translation adjustments		(158	)		78			(132	)		99
Net unrealized gain (loss) on securities available-for-sale		(705	)		—			(5,446	)		—
Other comprehensive income (loss)		(863	)		78			(5,578	)		99
Total Comprehensive loss	$	(10,059	)	$	(2,615	)	$	(20,874	)	$	(4,900	)

F-22

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2017 2016 2017 2016

Revenue $ 3,583 $ 3,751 $ 10,329 $ 12,692

Net loss $ (2,277 ) $ (711 ) $ (4,820 ) $ (1,742 )

Less: Net loss attributable to non-controlling interest 103 290 103 714

Net loss attributable to Digital Power Corp $ (2,144 ) $ (421 ) $ (4,717 ) $ (1,028 )

Preferred deemed dividends — — (319 ) —
Preferred dividends (27 ) — (35 ) —

Loss available to common shareholders $ (2,171 ) $ (421 ) $ (5,071 ) $ (1,028 )

Basic and diluted net loss per common share $ (0.14 ) $ (0.05 ) $ (0.40 ) $ (0.12 )

Basic and diluted weighted average common shares
outstanding
15,587,988 8,618,419 12,727,396 8,618,419

Comprehensive Loss
Loss available to common shareholders $ (2,171 ) $ (421 ) $ (5,071 ) $ (1,028 )
Other comprehensive income (loss)
Change in net foreign currency translation adjustments 42 (55 ) 141 (265 )
Net unrealized gain (loss) on securities available-for-
sale, net of income taxes
(43 ) 186 (43 ) 204
Other comprehensive income (loss) (1 ) 131 98 (61 )
Total Comprehensive loss $ (2,172 ) $ (290 ) $ (4,973 ) $ (1,089 )

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

13. STOCK-BASED COMPENSATION

Under the ~~Company's~~Company’s 2017 Stock Incentive Plan (the “2017 Plan”), 2016 Stock Incentive Plan (the ~~“2016~~“2016 Plan”) and the 2012 Stock Option Plan, as amended (the ~~“2012~~“2012 Plan”) (collectively, the ~~“Plans”~~“Plans”), options may be granted to employees, officers, consultants, service providers and directors of the Company. The Plans, as amended, provide for the issuance of a maximum of ~~5,372,630~~7,372,630 shares of the Company’s common stock. The Company also has 206,000 outstanding options that were granted between 2009 and 2011 pursuant to the terms of the ~~Company's~~Company’s 2002 Stock Option Plan (the ~~“2002~~“2002 Plan”). Options granted pursuant to the 2002 Plan expire between September 2008 and February 2021.

Options granted under the Plans have an exercise price equal to or greater than the fair value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant. Typically, options granted generally become fully vested after four years. Any options that are forfeited or cancelled before expiration become available for future grants. The options expire between 5 and 10 years from the date of grant. Restricted stock awards granted under the Plans are subject to a vesting period determined at the date of grant. As of ~~September~~June 30, ~~2017,~~2018, an aggregate of ~~1,350,832~~55,773 of the ~~Company's~~Company’s options are still available for future grant.

During the ~~three and nine~~six months ended ~~September~~June 30, 2018, the Company granted 1,000,000 options to its employees from the Plans and also granted 2,897,500 options outside of the Plans. During the six months ended June 30, 2017, the Company granted ~~50,000 and 560,000~~510,000 options ~~respectively,~~ from the ~~Plans to its employees at an average exercise price of $0.61 per share.~~Plans. These options become fully vested after four years. The Company estimated that the grant date fair value of ~~these~~ options granted utilizing the Black-Scholes option pricing model during the six months ended June 30, 2018 and 2017 was ~~$251,~~$514 and $229, respectively, which is being recognized as stock-based compensation expense over the requisite four-year service period. During the ~~three and nine~~six months ended ~~September~~June 30, 2018 and 2017, the Company also issued ~~380,645~~1,583,059 and ~~1,336,798,~~nil, respectively, shares of common stock to its consultants and service providers pursuant to the ~~2016~~2017 Plan. The Company estimated that the grant date fair value of these shares of common stock was ~~$742,~~ $2,640, which was determined from the closing price of the Company’s common stock on the date of issuance.

The Company ~~did not grant any options or restricted stock awards during the three and nine months ended September 30, 2016.~~

~~The Company~~ has valued the options at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables such as the options’ term, exercise price, current stock price, risk-free interest rate estimated over the expected term and estimated volatility of our stock over the expected term of the options. The risk-free interest rate used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options as calculated using the simplified method. The estimated volatility was determined based on the historical volatility of our common stock.

During the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, the Company estimated the fair value of stock options granted using the Black-Scholes option pricing model with the following weighted average assumptions:

	Six Months Ended
	June 30, 2018		June 30, 2017
Weighted average risk-free interest rate	2.41% — 2.80%		1.89% — 2.14%
Weighted average life (in years)		4.75		5.0
Volatility		124.7% — 131.7%		98.4% — 98.6%
Expected dividend yield		0%		0%
Weighted average grant-date fair value per share of options granted	$	0.92	$	0.45

F-23

September 30, 2017
Weighted average risk free interest rate 1.73% — 2.14 %
Weighted average life (in years) 5.0
Volatility 98.41% — 107.22 %
Expected dividend yield 0 %
Weighted average grant-date fair value per share of options granted $ 0.45

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

The options outstanding as of ~~September~~June 30, ~~2017,~~2018, have been classified by exercise price, as follows:

Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
$0.57 - $0.79 2,425,000 9.14 $ 0.66 1,249,167 $ 0.66
$1.10 - $1.32 25,000 6.10 $ 1.28 20,000 $ 1.27
$1.51 - $1.69 441,000 5.11 $ 1.61 378,500 $ 1.60

$0.57 - 1.69 2,891,000 8.50 $ 1.10 1,647,667 $ 0.88

Outstanding						Exercisable
				Weighted
				Average		Weighted				Weighted
				Remaining		Average				Average
Exercise		Number		Contractual		Exercise		Number		Exercise
Price		Outstanding		Life (Years)		Price		Exercisable		Price
	$0.57 - $0.80		3,350,000		7.97	$	0.67		1,749,999	$	0.67
	$1.00 - $1.38		170,000		9.03	$	1.37		36,875	$	1.36
	$1.51 - $1.69		62,500		4.21	$	1.64		62,500	$	1.64
	$0.57 - $1.69		3,582,500		7.95	$	0.72		1,849,374	$	0.71

Issuances outside of Plans
$0.80 - $2.32	3,997,500	7.90	$	1.30	325,694	$	1.61

Total Options
$0.57 - 2.32			7,580,000				7.92			$	1.03				2,175,068			$	0.85

The total stock-based compensation expense related to stock options and ~~restricted~~ stock awards issued pursuant to the Plans to the Company’s employees, consultants and directors, included in reported net loss for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, is comprised as follows:

Three Months Ended Nine Months Ended
Sept. 30, 2017 Sept. 30, 2016 Sept. 30, 2017 Sept. 30, 2016
Cost of revenues $ 2 $ 1 $ 6 $ 5
Engineering and product development 6 1 20 3
Selling and marketing 8 5 18 13
General and administrative 349 35 1,017 108

Stock-based compensation from Plans 365 42 1,061 129

Stock-based compensation from
issuances outside of Plans
152 — 208 —
Total stock-based compensation $ 517 $ 42 $ 1,269 $ 129

	Three Months Ended				Six Months Ended
	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
Cost of revenues	$	—	$	3	$	5	$	4
Engineering and product development		—		6		13		13
Selling and marketing		—		6		12		11
General and administrative		843		557		1,507		668
Stock-based compensation from Plans	$	843	$	572	$	1,537	$	696
Stock-based compensation from issuances outside of Plans		530		—		1,274		—
Total Stock-based compensation	$	1,373	$	572	$	2,811	$	696

The combination of stock-based compensation of ~~$1,061~~$1,537 from the issuances of ~~equity based~~equity-based awards pursuant to the Plans and stock-based compensation attributed to ~~restricted~~ stock awards of ~~$130~~$940 and warrants and options of ~~$78,~~$334, which were issued outside of the Plans, resulted in aggregate stock-based compensation of ~~$1,269~~$1,373 and $2,811 during the ~~nine~~three and six months ended ~~September~~June 30, ~~2017.~~2018. During the ~~three~~six months ended ~~September~~June 30, ~~2017, aggregate stock-based compensation was $517, which consisted~~2018, the Company issued 2,897,500 options to purchase shares of ~~$365 from the issuances~~common stock at an average exercise price of ~~equity based awards pursuant~~$1.30 per share to ~~the Plans~~its directors and ~~stock-based compensation attributed to restricted stock award of $120 warrants and options of $32, which~~officers. These shares were issued outside of the ~~Plans.~~Plans and are subject to shareholder approval. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2016,~~2017, the only stock-based compensation expense was from issuances pursuant to the Plans.

F-24

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

A summary of option activity under the ~~Company's~~Company’s stock option plans as of ~~September~~June 30, ~~2017,~~2018, and changes during the ~~nine~~three months ended are as follows:

Outstanding Options
Weighted
Weighted Average
Shares Average Remaining Aggregate
Available Number Exercise Contractual Intrinsic
for Grant of Shares Price Life (years) Value

December 31, 2016 3,247,630 2,331,000 $ 0.83 9.08 $ 0
Restricted stock awards (1,336,798 )
Grants (510,000 ) 560,000 $ 0.61

September 30, 2017 1,350,832 2,891,000 $ 0.81 8.50 $ 0

							Weighted		Average
	Shares						Average		Remaining		Aggregate
	Available			Number			Exercise		Contractual		Intrinsic
	for Grant			of Shares			Price		Life (years)		Value
January 1, 2018		2,538,832			2,742,500		$	0.77		8.80	$	6,688
Restricted stock awards		(1,583,059	)		—
Granted		(1,000,000	)		1,000,000		$	0.70
Forfeited		100,000			(100,000	)	$	1.38
Exercised		—			(60,000	)	$	1.63
June 30, 2018		55,773			3,582,500		$	0.72		7.95	$	0

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the ~~Company's~~Company’s closing stock price on ~~September~~June 30, ~~2017, $0.55~~2018, $0.54 and the exercise price, multiplied by the number of in-the-money-options).

As of ~~September~~June 30, ~~2017,~~2018, there was ~~$425~~$949 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the ~~Company's stock option plans.~~Plans. That cost is expected to be recognized over a weighted average period of ~~2.3~~3.4 years.

14. WARRANTS

During the ~~nine~~three months ~~and~~ ended ~~September 30, 2017,~~March 31, 2018, the Company issued a total of ~~8,484,073~~2,450,000 warrants at an average exercise price of ~~$0.81~~$1.16 per share. ~~Warrant issuances during the current quarter ended September 30, 2017, included:~~

(i)

On ~~April 17, 2017,~~January 23, 2018, the Company ~~issued warrants to purchase 166,668 shares of common stock, at an exercise price of $0.90 per share of common stock,~~ ~~in connection with the issuance of two 7% convertible notes in the aggregate principal amount of $250. On July 25, 2017, the Company agreed to~~ ~~reduce the exercise price of warrants to purchase 83,334 shares of common stock from $0.90 per share to $0.55 per share and on July 28, 2017, the Company~~ ~~issued a new warrant to purchase 83,334 shares of common stock at $0.55 per share and cancelled the prior warrant to purchase 83,334 shares of common stock at $0.90 per share (See Note 12).~~

~~(ii)~~

~~On July 25, 2017, we~~ issued warrants to purchase an aggregate of 163,636 shares of the Company’s common stock at an exercise price equal to $0.55 per share in connection with a private placement agreement under which we issued and sold 272,727 shares of common stock to the investor at $0.55 per share for an aggregate purchase price of $150. At that time, we also issued warrants to purchase 109,090 shares of the Company’s common stock at an exercise price equal to $0.75 per share to two investors that purchased shares of our common stock at $0.55 per share pursuant to subscription agreements (See Note 14).

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

~~(iii)~~

On July 28, 2017, we entered into an exchange agreement related to a 7% Convertible Note in the principal amount of $125 in which we exchanged the 7% Convertible Note for three new promissory notes in the principal amounts of $110,000 due August 1, 2017; $35,000 due August 1, 2017; and $34,000 due August 8, 2017 (individually an Exchange Note and collectively the Exchange Notes). Concurrent with entering into the exchange agreement, the investor entered into a subscription agreement under which we issued and sold in a registered direct offering 200,000 shares of common stock at $0.55 per share for an aggregate purchase price of $110,000. The 200,000 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $110,000. Further, we issued a warrant to purchase 120,000 shares of common stock at $0.55 per share (See Note 12).

~~(iv)~~

On August 3, 2017, we issued warrants to purchase an aggregate of 666,666 shares of the Company’s common stock at an exercise price equal to $0.70 per share in connection with the issuance of a 12% Convertible Promissory Note in the aggregate principal amount of $400 (See Note 12).

~~(v)~~

On August 10, 2017, we issued warrants to purchase an aggregate of 1,475,000 shares of the Company’s common stock at an exercise price equal to $0.66 per share in connection with the issuance of 10% Convertible Promissory Notes in the aggregate principal amount of $880 (See Note 12).

~~(vi)~~

~~On August 23, 2017, the Company issued~~ ~~warrants to purchase 272,727~~625,000 shares of common stock at an exercise price equal to ~~$0.65~~$2.20 per share of common stock in connection with ~~entering~~the issuance of a 10% senior convertible promissory note in the aggregate principal amount of $1,250 (See Note 18c).

(ii)

On January 25, 2018, the Company entered into ~~securities~~three agreements for the Purchase and Sale of Future Receipt, pursuant to which the Company sold up to (i) $562 of the Company’s future receipts for a purchase price of $375, (ii) $337 in future receipts for a purchase price of $225 and (iii) $118 in future receipts for a purchase price of $100. Under the terms of these agreements, the Company issued warrants to ~~issue and sell 272,727~~purchase an aggregate of 112,500 shares of common stock at an exercise price of $2.25 per share of common stock and warrants to purchase 162,500 shares of common stock at an exercise price of $2.50 per share of common stock (See Note 15).

(iii)

On March 22, 2018, the Company issued warrants to purchase an aggregate of 1,250,000 shares of common stock at an exercise price equal to $1.15 per share of common stock in connection with the issuance of a promissory note in the principal amount of $1,750,000 with a term of two months, subject to the ~~investors~~Company’s ability to prepay within one month (See Note 16a).

(iv)

On March 23, 2018, the Company entered into a securities purchase agreement to sell and issue a 12% promissory note in the principal amount of $1,000 and a warrant to purchase 300,000 shares of common stock to an accredited investor if the promissory note is paid in full on or before May 23, 2018, or up to 450,000 shares of common stock, if the promissory note is paid by June 22, 2018 (See Note 16b).

F-25

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

During the three months ended June 30, 2018, the Company issued a total of 12,252,758 warrants at an average exercise price of $0.71 per share.

(i)

On April 16, 2018, the Company issued warrants to purchase an aggregate of 993,588 shares of common stock at ~~$0.55~~an exercise price equal to $1.30 per share of common stock in connection with the issuance of 12% secured convertible promissory notes in the aggregate principal amount of $1,722 (See Note 18b).

(ii)

On April 24, 2018, the Company issued warrants to purchase 357,143 shares of common stock, at an exercise price of $0.70 per share of common stock, in connection with the Preferred Stock Purchase Agreement to purchase 25,000 shares of Series B Preferred Stock by Philou (See Note 20).

(iii)

On October 5, 2017, Ault & Company purchased 75,000 shares of the Company’s common stock at $0.60 per share and a warrant to purchase up to 75,000 shares of the Company’s common stock at $0.60 per share for an aggregate purchase price of ~~$150~~$45. The shares and warrants were issued by the Company on May 8, 2018, the date all necessary approvals to issue the shares were received. Ault & Company is controlled by Mr. Milton Ault, the Company’s Chairman and Chief Executive Officer (See Note 20). ~~The~~

(iv)

On May 15, 2018, the Company entered into securities purchase agreements with certain investors in which it sold an aggregate of 7,691,775 shares of its common stock ~~has yet~~for aggregate consideration of $6,000. In connection with this financing, the Company issued (i) five-year warrants to bepurchase 1,922,944 shares of the Company’s Class A common stock and (ii) five-year warrants to purchase 5,768,834 shares of the Company’s Class A common stock. The warrants were issued at an exercise price of $0.94 per share of common stock(See Note 20).

(v)

On May 15, 2018, the Company entered into a securities purchase agreement with an institutional investor to sell and ~~is subject~~issue a senior secured convertible promissory note with a principal face amount of $6,000 and (i) a five-year warrant to ~~approval from~~purchase 1,111,111 shares of the ~~NYSE American prior~~Company’s Class A common stock at an exercise price of $1.35 per share of Class A common stock (the “Series A Warrant”) and (ii) a five-year warrant to ~~issuance, which had not been received~~purchase 1,724,138 shares of the Company’s Class B common stock at ~~September 30, 2017.~~an exercise price of $0.87 per share of Class A common stock (See Note 18a). In connection with the financing, the Company issued the placement agent a warrant to purchase 150,000 shares of common stock with an exercise price of $1.00.

(vi)

Pursuant to the terms of a securities purchase agreement entered into on March 23, 2018, the Company issued an additional warrant to purchase 150,000 shares of common stock, at an exercise price of $1.15 per share of common stock, on May 23, 2018 (See Note 16b).

F-26

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

The following table summarizes information about common stock warrants outstanding at ~~September~~June 30, ~~2017:~~

Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
$0.01 317,460 9.09 $ 0.01 79,364 $ 0.01
$0.55 450,304 5.05 $ 0.55 — —
$0.65 272,727 2.90 $ 0.65 — —
$0.66 1,475,000 4.86 $ 0.66 1,475,000 $ 0.66
$0.70 2,428,571 4.92 $ 0.70 690,476 $ 0.70
$0.72 182,003 4.72 $ 0.72 — —
$0.75 244,999 4.69 $ 0.75 — —
$0.80 1,415,128 2.55 $ 0.80 1,166,666 $ 0.80
$0.90 445,002 3.05 $ 0.90 265,000 $ 0.90
$1.00 2,002,005 4.68 $ 1.00 — —
$1.10 1,000,000 2.67 $ 1.10 — —

$0.01 - 1.10 10,233,199 4.26 $ 0.79 3,676,506 $ 0.32

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

2018:

Outstanding					Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
Exercise	Number		Contractual		Exercise		Number		Exercise
Price	Outstanding		Life (Years)		Price		Exercisable		Price
$0.01		317,460		8.35	$	0.01		238,092	$	0.01
$0.55		283,636		4.36	$	0.55		283,636	$	0.55
$0.60		75,000		4.84	$	0.60		75,000	$	0.60
$0.66		148,133		4.34	$	0.66		148,133	$	0.66
$0.70		2,125,715		4.37	$	0.70		1,768,572	$	0.70
$0.75		135,909		3.88	$	0.75		135,909	$	0.75
$0.80		481,666		2.20	$	0.80		481,666	$	0.80
$0.87		1,724,138		4.87	$	0.87		1,724,138	$	0.87
$0.94		7,691,778		4.88	$	0.94		7,691,778	$	0.94
$1.00		280,000		4.45	$	1.00		280,000	$	1.00
$1.10		759,486		3.18	$	1.10		759,486	$	1.10
$1.15		1,700,000		4.74	$	1.15		1,700,000	$	1.15
$1.30		993,588		4.79	$	1.30		993,588	$	1.30
$1.35		1,111,111		4.87	$	1.35		1,111,111	$	1.35
$2.20		625,000		4.57	$	2.20		625,000	$	2.20
$2.25		112,500		4.57	$	2.25		112,500	$	2.25
$2.50		162,500		4.57	$	2.50		162,500	$	2.50
$0.01 - $2.50		18,727,620		4.68	$	1.01		18,291,109	$	1.02

The Company has valued the warrants at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables such as the warrants’ term, exercise price, current stock price, risk-free interest rate and estimated volatility of our stock over the contractual term of the ~~options.~~warrants. The risk-free interest rate used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the contractual life of the warrants.

The Company utilized the Black-Scholes option pricing model and the assumptions used during the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017:

September 30, 2017
Weighted average risk free interest rate 1.42% — 2.01 %
Weighted average life (in years) 4.9
Volatility 98.5% — 107.5 %
Expected dividend yield 0 %
Weighted average grant-date fair value per
share of warrants granted
$ 0.41

	2018		2017
Weighted average risk-free interest rate		2.41% — 2.94%		1.42% — 2.01%
Weighted average life (in years)		4.8		4.8
Volatility		124.8% — 138.4%		98.5% — 107.1%
Expected dividend yield		0%		0%
Weighted average grant-date fair value per share of warrants granted	$	0.79	$	0.38

15. ADVANCES ON FUTURE RECEIPTS

~~Between July 6, 2017 and September 13,~~

During the second half of 2017, the Company received funding as a result of entering into multiple Agreements for the Purchase and Sale of Future Receipts ~~with TVT Capital, LLC~~ pursuant to which the Company sold in the aggregate ~~$2,585~~$4,068 in future receipts of the Company for ~~$1,772. Under the terms of the agreements, the Company will be obligated to pay the initial daily amount of $13 until the $2,585 has been paid in full.~~$2,889. As of ~~September 30,~~December 31, 2017, the Company had ~~paid back $439.~~repaid $1,526.

During the three months ended March 31, 2018, the Company entered into a total of nine additional Agreements for the Purchase and Sale of Future Receipts (collectively, the “Agreements on Future Receipts”) pursuant to which the Company sold up to $5,632 in “future receipts” for a purchase price in the amount of $4,100. During the three months ended June 30, 2018, the Company did not enter into any of these Purchase and Sale of Future Receipts Agreements. The term ~~future receipts~~“future receipts” means cash, check, ACH, credit card, debit card, bank card, ~~charged~~charge card or other form of monetary payment. The Agreements on Future Receipts have been personally guaranteed by the Company’s Chief Executive Officer and in one instance has also been guaranteed by Philou.

F-27

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

During the three months ended March 31, 2018, the Company recorded a discount in the amount of ~~$813.~~$1,651, in connection with these nine additional agreements, based upon the difference between the amount of future receipts sold and the actual proceeds received by the Company. Under the terms of these agreements, the Company also issued warrants to purchase an aggregate of 112,500 shares of common stock at an exercise price of $2.25 per share of common stock and warrants to purchase 162,500 shares of common stock at an exercise price of $2.50 per share of common stock. The Company recorded an additional discount isof $258 based on the estimated fair value of these warrants. The Company computed the fair value of these warrants using the Black-Scholes option pricing model. These discounts are reflected as a reduction on the outstanding liability and are being amortized as non-cash interest expense over the term of the agreement. As of June 30, 2018, the unamortized amount of the $258 discount was $39. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, non-cash interest expense of ~~$142~~$657 and $1,653, respectively, was recorded from the amortization of debt discounts.

~~9. REVOLVING CREDIT FACILITY~~

~~Microphase entered into a revolving loan agreement with Gerber Finance, Inc. (~~

~~“Gerber”~~16. NOTES PAYABLE~~) in February of 2012, as amended in September 2015~~

Notes Payable at June 30, 2018 and ~~July~~December 31, 2017, ~~(the~~ ~~“Revolving Credit Facility”~~). Under the Revolving Credit Facility, Microphase can receive funds based on a borrowing base, which consists of a percentage of eligible accounts receivable, up to a maximum revolving amount of $1,400 (the ~~“Maximum Revolving Amount”). Pursuant to the terms~~are comprised of the Revolving Credit Facility, Microphase is subject to an annual facility fee in an amount equal to 1.75% of the Maximum Revolving Amount due on each anniversary, a monthly collateral monitoring fees of $1 and other fees. ~~Interest accrues at the~~ ~~prime rate plus three and three-quarters percent (3.75%) on the~~ ~~unpaid principal~~. Effective June 15, 2017, the prime rate was increased from 4.00% to 4.25% resulting in a base rate of 8.00%. If borrowings under the Revolving Credit Facility exceed the collateral borrowing base, then Microphase is subject to an additional 2.5% interest charge per month on the over-advance amounts and a separate additional charge of 2.5% if borrowings exceed the Maximum Revolving Amount. At September 30, 2017, the amount due pursuant to the Revolving Credit Facility, was $310. The interest expense for the three months ended September 30, 2017 and for the period from June 3, 2017 (date loan was assumed) to September 30, 2017, was $35 and $49, respectively.following.

	June 30,			December 31,
	2018			2017
12% short-term promissory note^(b)	$	1,000		$	—
Other short-term notes payable^(c)		889			—
Notes payable to Wells Fargo^(d)		298			300
Note payable to Dept. of Economic and Community Development^(e)		275			292
Power-Plus Credit Facilities^(f)		—			171
Note payable to Power-Plus Member^(g)		66			130
Note payable to People’s United Bank^(h)		20			19
10% short-term promissory notes⁽ⁱ⁾		—			15
Short term bank credit^(j)		2,044			—
Total notes payable		4,592			927
Less:
Unamortized debt discounts		(23	)		—
Unamortized financing cost		0			—
Total notes payable, net of financing cost	$	4,569		$	927
Less: current portion		(4,064	)		(402	)
Notes payable – long-term portion	$	505		$	525

(a)

On February 20, 2018, the Company issued promissory note in the principal face amount of $900 to an accredited investor. This promissory note included an original issue discount (“OID”) of $150 resulting in net proceeds of $750. The principal and OID on this note was due and payable on March 22, 2018. On March 23, 2018, the Company entered into a new promissory note in the principal amount of $2,100 for a term of two months, subject to the Company’ ability to prepay within one month. The new promissory note included an OID of $350 if paid within one month and $700 if paid within two months, resulting in net proceeds of $1,750. The Company also issued to the lender a warrant to purchase 1,250,000 shares of the Company’s common stock at an exercise price of $1.15 per share. The principal amount of the new promissory note consisted of cash of $1,000 and the cancellation of principal of $750 from the February 20, 2018 promissory note. The interest on the February 20, 2018 note in the amount of $150 was paid to the lender prior to entering into the new promissory note. The warrants are exercisable commencing on issuance date for a term of three years. The exercise price of these warrants is subject to adjustment for customary stock splits, stock dividends, combinations and other standard anti-dilution events. The warrants may be exercised for cash or on a cashless basis. During the quarter ended March 31, 2018, the Company recorded debt discount in the amount of $604 based on the estimated fair value of these warrants. The Company computed the fair value of these warrants using the Black-Scholes option pricing model. The debt discount was amortized as non-cash interest expense over the term of the debt. During the three and six months ended June 30, 2018, non-cash interest expense of $448 and $604, respectively, was recorded from the amortization of debt discount and interest expense of $260 and $350 was recorded from the amortization of the OID on the new promissory note. On April 23, 2018, the Company paid the entire outstanding principal on the new promissory note of $2,100. The new promissory note had been guaranteed by our Chief Executive Officer and had also been guaranteed by Philou.

F-28

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

On July 14, 2017, as a result of a notice that Microphase received from Gerber identifying several events of default under the terms of the Revolving Credit Facility, Microphase and Gerber entered into a Forbearance Agreement. The events of default were primarily related to, (i) the change in control that occurred on June 2, 2017, when Digital Power acquired a majority interest in Microphase, and (ii) borrowings under the Revolving Credit Facility exceeding the collateral borrowing base. The Forbearance agreement accelerated the repayment of borrowings that were secured by inventories and equipment until such borrowings were repaid and required the Company to provide a corporate guarantee for amounts advanced under the Revolving Credit Facility, which guarantee was provided on July 20, 2017. As of September 30, 2017, approximately $65 of borrowings subject to acceleration remained outstanding on the Revolving Credit Facility.

~~10. NOTES PAYABLE~~

~~Notes Payable at September 30, 2017, are comprised of the following. At December 31, 2016 the Company did not have any Notes Payable.~~

September 30,
2017
10% short-term promissory notes ^(a)
$ 705
Notes payable to Lucosky Brookman, LLP ^(b)
450
Notes payable to Wells Fargo ^(c)
304
Note payable to Department of Economic and
Community Development ^(d)
298
Note payable to People's United Bank ^{( e)}
19
Power-Plus Credit Facilities ^(f)
182
Note payable to Power-Plus Member ^(g)
255
Other short-term notes payable ^(h)
55
Total notes payable 2,268
Less: current portion (1,609 )
Notes payable – long-term portion $ 659

~~(a)~~

~~In December 2016, Microphase~~(b)

On March 23, 2018, the Company entered into a securities purchase agreement to sell and issue a 12% promissory note and a warrant to purchase 300,000 shares of common stock to an accredited investor if the promissory note is paid in full on or before May 23, 2018, or up to 450,000 shares of common stock, if the promissory note is paid by June 22, 2018. The promissory note was issued ~~$705~~with a 10% OID. The promissory note is in ~~10%~~the principal amount of $1,000 and was sold for $900, bears interest at 12% simple interest, and was due on June 22, 2018. The Company is in negotiations with the investor to amend the payment terms on this 12% promissory note. Interest only payments are due, in arrears, on a monthly basis commencing on April 23, 2018. The exercise price of the warrant is $1.15 per share. During the six months ended June 30, 2018, the Company recorded debt discount in the amount of $271 based on the estimated fair value of these warrants. The Company computed the fair value of these warrants using the Black-Scholes option pricing model. The debt discount is being amortized as non-cash interest expense over the term of the debt. During the three and six months ended June 30, 2018, non-cash interest expense of $245 and $271, respectively, was recorded from the amortization of debt discount and interest expense of $87 and $100, respectively, was recorded from the amortization of the OID on the 12% promissory note. The 12% promissory note is unsecured by any of the Company’s assets but is guaranteed by our Chief Executive Officer.

(c)

During the six months ended June 30, 2018, the Company entered into three short-term promissory notes:

(i)

On February 7, 2018, the Company issued demand promissory notes in the aggregate principal face amount of $440 to ~~nineteen~~ accredited ~~investors which, after deducting $71~~investors. These promissory notesincluded an aggregate OID of ~~placement fees to its selling agent, Spartan Capital Securities, LLC (“Spartan”), resulted in $634~~$40 resulting in net proceeds to ~~Microphase (the~~ ~~“10% Short-Term Notes”~~).the Company of $400. The ~~10% Short-Term Notes are~~principal and OID on these notes were due ~~one year from the date of issuance. The amount due pursuant to the 10% Short-Term Notes is equal to the entire original principal amount multiplied by 125% (the~~ ~~“Loan Premium”) plus accrued interest.~~and payable on demand after April 24, 2018. These loans were paid on April 27, 2018. During the three and six months ended ~~September~~June 30, ~~2017~~2018, the Company recognized $14 and $40, respectively, from the ~~period June 3, 2017 to September 30, 2017, Microphase incurred $19 and $25, respectively,~~amortization of ~~interest~~OID on these ~~10% short-term~~demand promissory notes. ~~Concurrently, Microphase entered into~~

(ii)

On February 26, 2018, the Company issued a ~~one-year agreement with Spartan for investment banking services which provided for: (i) $120~~10% promissory note in the principal amount of ~~consulting fees that were paid~~$330 to an accredited investor. This promissory noteincluded an OID of $30 resulting in ~~cash from~~net proceeds to the ~~proceeds~~Company of ~~the 10% Short-Term Notes;~~$300. The principal and ~~(ii) if Microphase completes an initial public offering, $90 payable in shares of Microphase common stock. As of September 30, 2017,~~ accrued interest on ~~the 10% Short-Term Notes~~this note was ~~$237.~~

~~(b)~~

~~On June 2, 2017, pursuant~~due and payable on April 12, 2018, subject to a 30-day extension available to the ~~terms of the Share Exchange Agreement and in consideration of legal services, Microphase issued a $450 8%~~Company. This 10% promissory note ~~with a maturity date~~was paid on April 27, 2018. During the three and six months ended June 30, 2018, the Company recognized $11 and $36 from interest and the amortization of ~~November 25, 2017 to Lucosky Brookman, LLP (the~~ OID on this 10% promissory note.

(iii)

~~“Lucosky Note”). In conjunction with the issuance of the Lucosky Note,~~On March 27, 2018, the Company issued ~~Lucosky Brookman 10,000 shares of redeemable convertible Series E preferred stock (the~~ ~~“Series E Preferred Stock”) with~~ a ~~stated value of $45 per share as an alternative to providing a guarantee for~~10% promissory note in the principal amount of $200 to an accredited investor. The principal and accrued interest on this note was due and payable on March 29, 2018. On March 29, 2018 and April 24, 2018, the ~~Lucosky Note.~~Company paid $50 and $150, respectively, on this 10% promissory note of $200,000.

(iv)

On May 23, 2018, the Company issued a promissory note in the aggregate principal face amount of $81 to an accredited investor. The ~~Company, at its option, may redeem for cash,~~promissory noteincluded an aggregate OID of $6 resulting in ~~whole or in part, at any time and from time to time, the shares of Series E Preferred Stock at the time outstanding, upon written notice~~net proceeds to the ~~holder~~Company of $75. The principal and OID on this note is due and payable on August 20, 2018. At June 30, 2018, the ~~shares, at a cash redemption price equal to $45 multiplied by the number of shares being redeemed. Any such optional redemption by the Company shall be credited against the Lucosky Note.~~outstanding balance on this note was $36, which was paid on July 25, 2018. During the three and six months ended ~~September~~June 30, ~~2017 and~~2018, the ~~period June 3, 2017 to September 30, 2017, Microphase incurred~~Company recognized $3 ~~and $6, respectively,~~from the amortization of ~~interest~~OID on ~~the Lucosky Note.~~this promissory note. ~~As of September 30, 2017, accrued interest on the~~ ~~Lucosky Note~~ ~~was $6.~~

F-29

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

~~(c)~~

(v)

On May 23, 2018, the Company issued a promissory note in the aggregate principal face amount of $360 to an accredited investor. The promissory note included an aggregate OID of $60 resulting in net proceeds to the Company of $300. The principal and OID on this note was due and payable on June 22, 2018. At June 30, 2018, the outstanding balance on this note was $277, which was paid on July 2, 2018. During the three and six months ended June 30, 2018, the Company recognized $60 from the amortization of OID on this promissory note.

(vi)

On June 5, 2018, the Company received loans in the aggregate amount of $75 from accredited investors. The principal and interest on these loans was paid on July 16, 2018.

(vii)

On June 8, 2018, the Company issued a promissory note in the aggregate principal face amount of $512 to an accredited investor. The promissory note included an aggregate OID of $67 resulting in net proceeds to the Company of $445. The principal and OID on this note was due and payable on July 9, 2018. At June 30, 2018, the outstanding balance on this note was $502. During the three and six months ended June 30, 2018, the Company recognized $47 from the amortization of OID on this promissory note.

(d)

At ~~September~~June 30, ~~2017,~~2018, Microphase had guaranteed the repayment of two equity lines of credit in the aggregate amount of ~~$304~~$300 with Wells Fargo Bank, NA (“(“Wells Fargo”) (collectively, the ~~“Wells~~“Wells Fargo Notes”). These loans originated prior to the Company’s acquisition of Microphase and Microphase was the recipient of the actual proceeds from the loans. Microphase had previously guaranteed the payment under the first Wells Fargo equity line during 2008, the proceeds of which Microphase had received from a concurrent loan from Edson Realty Inc., a related party owned real estate holding company. As of ~~September~~June 30, ~~2017,~~2018, the first line of credit, which is secured by residential real estate owned by a former officer, had an outstanding balance of ~~$214,~~$213, with an annual interest rate of 4.00%. Microphase had guaranteed the payment under the second Wells Fargo equity line in 2014. Microphase had received working capital loans from the former CEO from funds that were drawn against the second Wells Fargo equity line. As of ~~September~~June 30, ~~2017,~~2018, the second line of credit, secured by the former CEO’s principal residence, had an outstanding balance of ~~$90,~~$85, with an annual interest rate of 3.00%. During the three and six months ended ~~September~~June 30, ~~2017 and the period June 3, 2017 to September 30, 2017,~~2018, Microphase incurred $3 and ~~$4,~~$12, respectively, of interest on the Wells Fargo Notes.

~~(d)~~

(e)

In August 2016, Microphase received a $300 loan, of which $2$25 has been repaid, pursuant to the State of Connecticut Small Business Express Job Creation Incentive Program which is administered through the Department of Economic and Community Development (“(“DECD”) (the ~~“DECD~~“DECD Note”). The DECD Note bears interest at a rate of 3% per annum and is due in August 2026. Payment of principal and interest was deferred during the initial year and commencing in September 2017, payable in equal monthly installments over the remaining term. During the three and six months ended ~~September~~June 30, ~~2017 and the period June 3, 2017 to September 30, 2017,~~2018, Microphase incurred $3 and $5 of interest on the DECD Note. In conjunction with the DECD Note, Microphase was awarded and received a Small Business Express Matching Grant of ~~$100.~~$100 by the State of Connecticut. State grant funding requires ~~a dollar for dollar match~~Microphase to spend an equal amount of cash on ~~behalf of Microphase. As of June 30, 2017, the~~eligible expense. The Company has utilized $18 of the grant and the balance of $82 is reported within deferred revenue and classified in ~~Accounts~~accounts payable and accrued in the accompanying ~~condensed~~ consolidated balance sheet at ~~September~~June 30, ~~2017.~~2018.

~~(e)~~

In December 2016, Microphase utilized a $20 overdraft credit line at People’s United Bank with an annual interest rate of 15%. As of September 30, 2017, the balance of that overdraft credit line was $19.

(f)

At ~~September 30,~~December 31, 2017, Power-Plus had guaranteed the repayment of two lines of credit in the aggregate amount of ~~$182~~$169 with Bank of America NA (~~“B of A”~~) and Wells Fargo (collectively, the ~~“Power-Plus~~“Power-Plus Lines”). As of September 30, 2017, the B of A line of credit had an outstanding balance of $107, with an annual interest rate of 6.25%. As of September 30, 2017, the Wells Fargo line of credit had an outstanding balance of $75, with an annual interest rate of 10.00%. During the ~~period September 2 to September~~three months ended June 30, ~~2017, Power-Plus incurred $1 of interest on~~2018, the Power-Plus ~~Lines.~~

Lines had been paid.

(g)

Pursuant to the terms of the Purchase Agreement with Power-Plus, the Company entered into a two-year promissory note in the amount of $255 payable to the former owner as part of the purchase consideration. The $255 note is payable in 24 equal monthly installments.

~~(h)~~

~~Between May 5,~~ On October 18, 2017, ~~and September 30, 2017,~~for cancellation of debt, the Company ~~received additional short-term loans of $215 from five accredited investors, of~~entered into a subscription agreement with the former owner under which ~~$75 was from~~ the ~~Company’s corporate counsel, a related party. As additional consideration, the investors received five-year warrants to purchase 224,371~~Company sold 138,806 shares of common stock at ~~a weighted average exercise~~$0.67 per share for an aggregate purchase price of ~~$0.77 per share. The warrants are exercisable commencing~~$93. During the three and six months after the issuance date and are subject to certain beneficial ownership limitations. The exercise price of these warrants is subject to adjustment for customary stock splits, stock dividends, combinations and other standard anti-dilution events. The warrants may be exercised for cash or on a cashless basis. During the quarter ended June 30, ~~2017,~~2018, the Company ~~recorded debt discount~~paid $32 and $64, respectively, in the amount of $95 based on the estimated fair value of these warrants. The Company computed the fair value of these warrants using the Black-Scholes option pricing model. As a result of the short-term feature of these loans and advances, the debt discount was amortized as non-cash interest expense upon issuance of the warrants using the effective interest method.principal payments.

F-30

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

(h)

In December 2016, Microphase utilized a $20 overdraft credit line at People’s United Bank with an annual interest rate of 15%. As of June 30, 2018, the balance of that overdraft credit line was $20.

(i)

In December 2016, Microphase issued $705 in 10% short-term promissory notes to nineteen accredited investors which, after deducting $71 of placement fees to its selling agent, Spartan Capital Securities, LLC (“Spartan”), resulted in $634 in net proceeds to Microphase (the “10% Short-Term Notes”). The 10% Short-Term Notes were due one year from the date of issuance. The amount due pursuant to the 10% Short-Term Notes is equal to the entire original principal amount multiplied by 125% (the “Loan Premium”) plus accrued interest. On December 5, 2017, in exchange for the cancellation of $690 of outstanding principal and $250 of accrued interest owed to the investors by Microphase Corporation, the Company entered into an Exchange Agreement pursuant to which the Company issued an aggregate of 1,523,852 shares of common stock and warrants to purchase 380,466 shares of common stock with an exercise price of $1.10 per share of common stock. During the three months ended March 31, 2018, the Company paid the remaining balance of principal and accrued interest of $15 and $6, respectively.

(j)

On January 25, 2018, the Company issued two 5% promissory notes, each in the principal face amount of $2,500, for an aggregate debt of $5,000 to two institutional investors. The entire unpaid balance of the principal and accrued interest on each of the 5% promissory notes was due and payable on February 23, 2018, subject to a 30-day extension available to the Company. The proceeds from these two 5% promissory notes were used to purchase 1,000 Antminer S9s manufactured by Bitmain Technologies, Inc. in connection with our crypto mining operations. Between March 23 and March 27, 2018, the Company paid the entire outstanding principal and accrued interest on the 5% promissory notes of $5,101,127.

(k)

At June 30, 2018, Enertec had short term bank credit of $2,044 that bears interest of prime plus 0.7% through 3.85% paid either on a monthly or weekly basis. Further, the Company has committed to certain covenants under its bank loan. During the period from the date of acquisition, May 23, 2018 to June 30, 2018, the Company recorded interest expense of $10 from Enertec’s short term bank credit.

17. NOTES PAYABLE – RELATED PARTIES

Notes Payable – Related parties at June 30, 2018 and December 31, 2017, are comprised of the following:

	June 30,			December 31,
	2018			2017
Notes payable to former officer and employee	$	308		$	309
Total notes payable		308			309
Less: current portion		(166	)		(134	)
Notes payable – long-term portion	$	142		$	175

Microphase is a party to several notes payable agreements with seven of its past officers, employees and their family members. As of June 30, 2018, the aggregate outstanding balance pursuant to these notes payable agreements, inclusive of $50 of accrued interest, was $359, with annual interest rates ranging between 3.00% and 6.00%. During the three and six months ended June ~~2017, the holders~~30, 2018, Microphase incurred $4 and $7 of ~~$55~~interest on these notes payable agreements. In July 2016, one of these ~~short-term loans~~noteholders initiated litigation to collect the balance owed under the terms of his respective agreement. In October 2017, Microphase and the noteholder entered into a settlement agreement whereby Microphase agreed to ~~cancel their notes for~~pay the outstanding principal and interest of $122 and $43, respectively, by issuing to the noteholder 95,834 shares of Microphase common stock valued at $115 and paying $25 in cash. The value of the Microphase common stock was derived from the Company’s recent acquisition of a majority interest in Microphase. Further, the parties agreed a final $25 would be paid within 18 months of the settlement agreement or Microphase would be required to pay the noteholder an additional $25.

F-31

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

18. CONVERTIBLE NOTES

Convertible Notes Payable at June 30, 2018 and December 31, 2017, are comprised of the following:

	June 30,			December 31,
	2018			2017
10% Convertible secured note^(a)	$	4,806		$	—
12% April 2018 Convertible secured notes^(b)		1,287			—
5% Convertible secured notes^(c)		—			550
12% Convertible secured note^(d)		—			202
Total convertible notes payable		6,093			752
Less:
Unamortized debt discounts		(1,719	)		(351	)
Unamortized financing cost		(309	)		(3	)
Total convertible notes payable, net of financing cost	$	4,065		$	398

(a)

On May 15, 2018, the Company entered into a securities purchase agreement to sell (i) a 10% convertible note (the “10% Convertible Note”), (ii) a five-year warrant to purchase 1,111,111 shares of the Company’s common stock at an exercise price of $1.35 per share; (iii) a five-year warrant to purchase 1,724,138 shares of the Company’s Class A common stock at an exercise price of $0.87 per share; and (iv) 344,828 shares of the Company’s common stock to an institutional investor. The 10% Convertible Note is convertible into common stock at $0.75 per share, but may only be converted if an event of default thereunder has occurred and not been cured on a timely basis.

The 10% Convertible Note is in the principal amount of $6,000 and bears interest at 10% simple interest on the principal amount with 50% of the total interest due on the principal payable at the closing and the remaining 50% payable over the term of the 10% Convertible Note. The Company is required to make principal and interest payments every 2 weeks until the 10% Convertible Note is satisfied in full on November 27, 2018. In connection with the financing, the Company agreed to pay the placement agent, Alliance Global Partners, a cash fee of $300,000 and a warrant to purchase ~~of 100,001~~150,000 shares of the Company’s common stock ~~at a~~with an exercise price of ~~$0.55~~$1.00 per share. An additional $75 in short-term loans from the Company’s corporate counsel was converted into the Company’s equity securities; $52 was converted into one of the Series C Units and $23 was converted into the Company’s common stock.

The Company ~~did not record any additional interest expense as a result of the extinguishment of $130 in short-term loans since the carrying amount of the short-term loans was equivalent to~~ computed the fair value of the ~~consideration transferred, which was determined from~~warrants using the ~~closing price~~Black-Scholes option pricing model and, as a result of ~~the Company’s equity securities on the date of~~ ~~extinguishment. During the three months ended September 30, 2017, the Company also repaid $30 in short-term loans.~~

~~Other Notes Payable~~

~~In February 2017, the Company issued to~~ ~~eight accredited investors~~ $400 in demand promissory notes bearing interest at a rate of 6% per annum. Of the eight accredited investors, one investor was deemed a related party. As additional consideration, the investors received five-year warrants to purchase 333,333 shares of common stock at an exercise price of $0.70 per share (the ~~“Feb. 2017 Warrants”~~). The Feb. 2017 Warrants are exercisable commencing six months after the issuance date and are subject to certain beneficial ownership limitations. The exercise price of the Feb. 2017 Warrants is subject to adjustment for customary stock splits, stock dividends, combinations and other standard anti-dilution events. The Feb. 2017 Warrants may be exercised for cash or on a cashless basis. During the quarter ended March 31, 2017, the Companythis calculation, recorded debt discount in the amount of ~~$151~~$1,398 based on the estimated fair value of the ~~Feb. 2017 Warrants.~~warrants. The Company ~~computed~~estimated that the fair value of these warrants using the Black-Scholes option pricing model. As a result of the due on demand feature of the promissory notes, the debt discount was amortized as non-cash interest expense upon issuance of the Feb. 2017 Warrants using the effective interest method.

Between February 16, 2017 and February 23, 2017, the holders of the $400 in demand promissory notes agreed to cancel their demand promissory notes for the purchase of 666,667 shares of the Company’s common stock, an extinguishment price of $0.60 per share. During the quarter ended March 31, 2017, the Company recorded additional interest expense of $13 as a result of the extinguishment of the $400 in demand promissory notes based on the difference of the carrying amount of the demand promissory notes and ~~the~~grant date fair value of the ~~consideration transferred,~~shares of common stock was $193, which was determined from the closing price of the Company’s common stock on the date of ~~extinguishment~~.

~~On March 28, 2017,~~issuance. In aggregate, the Company ~~issued $270~~recorded debt discount in ~~demand promissory notes to several investors. These demand promissory notes accrued interest at~~ the ~~rate~~amount of ~~6% per annum. The Company received gross proceeds~~$1,958 based on the relative fair values of ~~$220 on March 31, 2017. The remaining balance of $50 was received on April 3, 2017. On April 5, 2017,~~ the ~~Company canceled these promissory notes by issuing to the investors 360,000 shares of~~warrants, common stock ~~at $0.75 per share,~~ and ~~warrants to purchase 180,002 shares~~debt issuance costs of ~~common stock at $0.90 per share.~~$367. During the ~~quarter~~three months ended June 30, ~~2017, the Company recorded additional~~2018, non-cash interest expense of ~~$109 as a result~~$452 was recorded from the amortization of debt discounts. The fair value of the ~~extinguishment~~warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 2.94% was derived from the U.S. Treasury yield curve, matching the term of the ~~$270~~warrant, in ~~demand promissory notes~~effect at the measurement date. The volatility factor of 127.9% was determined based on the ~~difference~~Company’s historical stock prices.

As the effective conversion price of the ~~carrying~~10% Convertible Note was below the market price of the Company’s common stock on the date of issuance, it was determined that these discounts represent contingent beneficial conversion features, or BCF. The BCF embedded in the 10% Convertible Note is accounted for under ASC No. 470, Debt(“ASC 470”). At issuance, the intrinsic value of the BCF totaled $2,198. However, the 10% Convertible Note may only be converted if an event of default thereunder has occurred and not been cured on a timely basis. The BCF shall be recognized if an event of default occurs and is not timely cured.

F-32

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2018

U.S. dollars in thousands, except share and per share data

(b)

On April 16, 2018, the Company entered into securities purchase agreements to sell (i) a 12% convertible note (the “12% April 2018 Convertible Note”), (ii) a five-year warrant to purchase 993,588 shares of the Company’s common stock at an exercise price of $1.30 per share; and (iii) 200,926 shares of the Company’s common stock to three institutional investors. The 12% April 2018 Convertible Note is convertible into common stock at $0.70 per share, but may only be converted if an event of default thereunder has occurred and not been cured on a timely basis.

The 12% April 2018 Convertible Note is in the principal amount of $1,722, included an OID of $172 resulting in net proceeds to the ~~demand promissory notes~~Company of $1,550 and bears interest at 12% simple interest on the principal amount. The Company is required to make monthly principal and interest payments until the 12% April 2018 Convertible Note is satisfied in full on October 16, 2018.

The Company computed the fair value of the ~~consideration transferred,~~warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $539 based on the estimated fair value of the warrants. The Company estimated that the grant date fair value of the shares of common stock was $129, which was determined from the closing price of the Company’s common stock on the date of ~~extinguishment~~issuance.

In aggregate, the Company recorded debt discount in the amount of $885 based on the relative fair values of the warrants, common stock, OID and debt issuance costs of $45. During the three months ended June 30, 2018, non-cash interest expense of $363 was recorded from the amortization of debt discounts. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 2.94% was derived from the U.S. Treasury yield curve, matching the term of the warrant, in effect at the measurement date. The volatility factor of 127.9% was determined based on the Company’s historical stock prices.

(c)

On December 4, 2017, the Company entered into a securities purchase agreement to sell a 5% Convertible Note (the “5% Convertible Note”) and 150,000 shares of restricted common stock to an institutional investor. The principal of the 5% Convertible Note and interest thereon was convertible into shares of common stock at $0.60 per share of common stock, subject to adjustments for lower priced issuances, stock splits, stock dividends, combinations or similar events. The 5% Convertible Note was in the principal amount of $550, included an OID of $50 resulting in net proceeds to the Company of $500, accrued interest at 5% simple interest on the principal amount, and was due on August 13, 2018. Interest only payments were due on a quarterly basis and the principal was due on June 3, 2018.

At the time of issuance of the 5% Convertible Note, the closing price of the Company’s common stock was in excess of the conversion price, resulting in a BCF. The BCF embedded in the 5% Convertible Note is accounted for under ASC No.470, Debt. At issuance, the intrinsic value of the BCF totaled $244 based on the difference between the effective conversion price and the fair value of the Company’s common stock at the commitment date of the transaction. The intrinsic value of the BCF exceeded the proceeds allocated to the relative fair value of the 5% Convertible Note. The BCF was amortized to interest expense over the term of the 5% Convertible Note using the effective interest method. The valuation of the BCF was calculated based on the effective conversion price compared with the market price of the Company’s common stock on the date of issuance of the 5% Convertible Note.

In aggregate, the Company recorded debt discount in the amount of $550 based on the relative fair values of the 150,000 shares of common stock of $256, BCF of $244 and OID of $50. The debt discount is being amortized as non-cash interest expense over the term of the debt. During the year ended December 31, 2017, non-cash interest expense of $381 was recorded from the amortization of debt discounts. In January 2018, the 5% Convertible Note was converted into 921,645 shares of the Company’s common stock based upon the contractual rights included in the 5% Convertible Note (See Note 20).

F-33

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

~~11. NOTES PAYABLE – RELATED PARTIES~~

~~Notes Payable – Related parties at September 30, 2017, and December 31, 2016, are comprised of the following:~~

September 30, December 31,
2017 2016
Notes payable to MCKEA Holdings, LLC ^(a)
$ — $ 250
Notes payable to former officer and employee ^(b)
406 —
Total notes payable 406 250
Less: current portion (274 ) —
Notes payable – long-term portion $ 132 $ 250

~~(a)~~

(d)

On ~~December 29, 2016,~~August 3, 2017, the Company entered into a securities purchase agreement to sell a 12% Convertible Note (the “12% Convertible Note”) and a warrant to purchase 666,666 shares of common stock to an ~~agreement with~~ ~~MCKEA Holdings, LLC~~ ~~(“MCKEA”). MCKEA is the majority member of Philou Ventures, LLC, which is the Company’s controlling shareholder. Kristine L. Ault, a director and the wife of Milton C. Ault III, Executive~~ ~~Chairman~~accredited investor. The principal of the ~~Company’s Board of Directors, is the manager and owner of MCKEA, for a demand promissory note (The~~ ~~“MCKEA Note”) in the amount of $250 bearing interest at the rate of 6% per annum on unpaid principal. The MCKEA~~12% Convertible Note may be ~~prepaid, in whole or in part, without penalty,~~converted into shares of common stock at ~~the option of the Company~~$0.55 per share and ~~without the consent of MCKEA. As of December 31, 2016, no interest was accrued on the MCKEA Note.~~ ~~On March 24, 2017, the MCKEA Note was cancelled to purchase the Company’s~~ ~~Series B Preferred Stock pursuant to~~under the terms of the ~~Preferred Stock Purchase Agreement entered into on March 9, 2017 (See Note 14). Since there was no difference between the reacquisition~~Warrant, up to 666,666 shares of common stock may be purchased at an exercise price ~~and the net carrying value~~ of ~~the cancelled debt, no gain or loss was recognized as a result of this transaction.~~$0.70 per share.

~~(b)~~

Microphase is a party to several notes payable agreements with seven of its past officers, employees and their family members. As of September 30, 2017, the aggregate outstanding balance pursuant to these notes payable agreements, inclusive of $87 of accrued interest, was $493, with annual interest rates ranging between 3.00% and 6.00%. During the three months ended September 30, 2017 and the period June 3, 2017 to September 30, 2017, Microphase incurred $7 of interest on these notes payable agreements. In July 2016, one of these noteholders initiated litigation to collect the balance owed under the terms of his respective agreement. At September 30, 2017, the outstanding principal balance and accrued interest owed under this particular agreement was $162.

~~12. CONVERTIBLE NOTES~~

~~Convertible notes at September 30, 2017, are comprised of the following. At December 31, 2016 the Company did not have any Convertible Notes.~~

September 30,
2017
10% Convertible secured notes $ 880
12% Convertible secured note 400
Total convertible notes payable 1,280
Less:
Unamortized debt discounts (726 )
Unamortized financing cost (89 )
Total convertible notes payable, net of debt discounts and
financing cost
$ 465

The 12% Convertible ~~secured notes~~

On August 3, 2017, the Company entered into a Securities Purchase Agreement (“Agreement”) to sell a 12% Convertible (“Convertible Note”) and a warrant to purchase 666,666 shares of common stock to an accredited investor (the “Investor”). The principal of the Convertible Note ~~may be converted into shares of common stock at $0.55 per share and under the terms of the Warrant, up to 666,666 shares of common stock may be purchased at an exercise price of $0.70 per share.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

~~The Convertible Note is~~was in the principal amount of $400, included an ~~original issue discount (“OID”~~)OID of $40 resulting in net proceeds to the Company of $360, ~~bears~~accrued interest at 12% simple interest on the principal amount, and iswas due on August 13, 2018. Interest only payments ~~are~~were due on a quarterly basis and the principal iswas due on August 3, 2018. The principal may be converted into shares of the Company’s common stock at $0.55 per share.

The Company computed the fair value of the 666,666 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $167 based on the estimated fair value of the 666,666 warrants.

The ~~beneficial conversion feature (“BCF”~~)BCF embedded in the 12% Convertible Note is accounted for under ASC ~~No.~~ ~~470, Debt.~~470. At issuance, the ~~estimated fair~~intrinsic value of the BCF totaled $187. The Company, however, iswas prohibited from issuing shares of common stock pursuant to the 12% Convertible Note ~~unless~~until stockholder approval of such issuance of securities iswas obtained as required by applicable NYSE ~~MKT~~American listing rules. The Company ~~has not yet~~ received stockholder approval ~~of such~~for the share ~~issuances.~~issuances on December 28, 2017. The ~~fair~~intrinsic value of the BCF was ~~allocated from the net proceeds of the~~ ~~Convertible Note~~ ~~and, upon stockholder approval, if received, will be~~ amortized to interest expense over the term of the 12% Convertible Note using the effective interest method. The valuation of the BCF was calculated based on the effective conversion price compared with the market price of the Company’s common stock on the date of issuance of the 12% Convertible Note. In aggregate, the Company recorded debt discount in the amount of ~~$207~~$394 based on the relative fair values of the 666,666 warrants, BCF and OID of $40. During the ~~three and nine months~~year ended ~~September 30, 2017, non-cash interest expense of $37 was recorded from the amortization of debt discounts.~~

~~10% Convertible secured note~~

The Convertible Notes are in the aggregate principal amount of $880, included an OID of $80 resulting in net proceeds to the Company of $800, bear simple interest at 10% on the principal amount, and principal and interest are due on February 10, 2018. Subject to certain beneficial ownership limitations, each Investor may convert the principal amount of the Convertible Note and accrued interest earned thereon at any time into shares of common stock at $0.60 per share. The conversion price of the Convertible Notes is subject to adjustment for customary stock splits, stock dividends, combinations or similar events.

The Company computed the fair value of the 1,475,000 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $357 based on the estimated fair value of the 1,475,000 warrants.

~~The beneficial conversion feature (“BCF”) embedded in the~~ ~~Convertible Notes~~ ~~is accounted for under ASC No.~~ ~~470, Debt. At issuance, the estimated fair value of the BCF totaled $327. The fair value of the BCF was allocated from the net proceeds of the~~ ~~Convertible Notes~~ ~~and was amortized to interest expense over the term of the~~ ~~Convertible Notes~~ using the effective interest method. The valuation of the BCF was calculated based on the effective conversion price compared with the market price of the Company’s common stock on the date of issuance of the Convertible Note. In aggregate, the Company recorded debt discount in the amount of $764 based on the relative fair values of the 1,475,000 warrants of $357, BCF of $327 and OID of $80. During the three and nine months ended September 30,December 31, 2017, non-cash interest expense of $212 was recorded from the amortization of debt discounts.

On December 28, 2017, principal and accrued interest of $198 and $5, respectively, on the 12% Convertible Note was satisfied through the issuance of 368,760 shares of the Company’s common stock and the remaining balance was converted into 377,678 shares of the Company’s common stock on January 10, 2018 (See Note 20). The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 1.79% was derived from the U.S. Treasury yield curve, matching the term of the warrant, in effect at the measurement date. The volatility factor of 107.3% was determined based on the Company’s historical stock prices.

(e)

On January 23, 2018, we entered into a securities purchase agreement with an institutional investor to sell, for an aggregate purchase price of $1,000, a 10% senior convertible promissory note (the “January 2018 10% Convertible Note”) with an aggregate principal face amount of $1,250, a warrant to purchase an aggregate of 625,000 shares of our common stock and 543,478 shares of our common stock. The transactions contemplated by the Securities Purchase Agreement closed on February 8, 2018. The January 2018 10% Convertible Note was convertible into 625,000 shares of the Company’s common stock, a conversion price of $2.00 per share. The exercise price of the warrant to purchase 625,000 shares of the Company’s common stock is $2.20 per share. On February 9, 2018, in addition to the 543,478 shares of common stock provided for pursuant to the securities purchase agreement, the Company issued to the investor an aggregate of 691,942 shares of the Company’s common stock upon the conversion of the entire outstanding principal and accrued interest on the January 2018 10% Convertible Note of $1,384 (See Note 20).

F-34

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

~~Other Convertible Notes Payable~~

19. COMMITMENTS AND CONTINGENCIES

On ~~April 17, 2017,~~July 31, 2018 a shareholder derivative complaint was filed in the United States District Court for the Central District of California against the Company ~~entered into two 7% convertible notes~~as the nominal defendant, as well as its current directors and a former director styledEthan Young and Greg Young, Derivatively on Behalf of Nominal Defendant, DPW Holdings, Inc. v. Milton C. Ault, III, Amos Kohn, William B. Horne, Jeff Bentz, Mordechai Rosenberg, Robert O. Smith, and Kristine Ault and DPW Holdings, Inc., as the nominal defendant (Case No.: 2:18-cv-6587) (the “~~7% Convertible Notes”~~Complaint”) ~~each~~. No hearings have been scheduled as of the date hereof.

The Complaint alleges violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants as, in the aggregate principal amount of $125 for a total of $250. The 7% Convertible Notes accrue interest at 7% simple interest on the principal amount and were due on June 2, 2017. The principal may be converted into sharesview of the Company’s common stock at $0.75 per share. The noteholder may convert the principal amount of the 7% Convertible Notes at any time into common stock. The 7% Convertible Notes contains standard and customary events of default including, but not limited to, failure to make payments when due under the 7% Convertible Note agreements and bankruptcy or insolvency of the Company. The Company has the right to prepay the 7% Convertible Notes. The 7% Convertible Notes were repaid during July 2017.

~~As additional consideration, the investors received five and a half year warrants to purchase 166,668 shares of common stock at an exercise price of $0.90 per share (collectively the~~ ~~“7% Convertible Note Warrants”~~). The 7% Convertible Note Warrants are exercisable commencing six months after the issuance date. The exercise price of the 7% Convertible Note Warrants is subject to adjustment for customary stock splits, stock dividends, combinations and other standard anti-dilution events. The 7% Convertible Note Warrants may be exercised for cash or on a cashless basis. ~~The Company computed the fair value of the 7%~~ ~~Convertible Note~~ Warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $61 based on the estimated fair value of the 7% Convertible Note Warrants.

~~The beneficial conversion feature (“BCF”) embedded in the 7%~~ ~~Convertible Notes~~ ~~is accounted for under ASC No.~~ ~~470, Debt. At issuance, the estimated fair value of the BCF totaled $31. The fair value of the BCF was allocated from the net proceeds of the 7%~~ ~~Convertible Note~~ ~~and was amortized to interest expense over the term of the 7%~~ ~~Convertible Notes~~ using the effective interest method. The valuation of the BCF was calculated based on the effective conversion price compared with the market price of the Company’s common stock on the date of issuance of the Convertible Note. In aggregate, the Company recorded debt discount in the amount of $93 based on the relative fair values of the 7% Convertible Note Warrants of $61 and BCF of $32. During the three months ended June 30, 2017, the entire non-cash interest expense of $93 was recorded from the amortization of debt discounts.

On July 25, 2017, the Company repaid one of the 7% Convertible Notes. Due to the event of default, the Company agreed to reduce the exercise price of warrants to purchase 83,334 shares of common stock from $0.90 per share to $0.55 per share and made a payment of $144. As a result of this transaction, the Company recorded additional interest expense of $17 and recorded an additional $3 in non-cash interest expense based upon the change in the fair value of the warrants due to the adjustment to the exercise price.

On July 28, 2017, we entered into an exchange agreement related to the second 7% Convertible Note. Under the terms of the exchange agreement, we agreed to exchange the 7% Convertible Note for three new promissory notes in the principal amounts of $110,000 due August 1, 2017; $35,000 due August 1, 2017; and $34,000 due August 8, 2017 (individually an Exchange Note and collectively the Exchange Notes) and issue a new warrant to purchase 83,334 shares of common stock at $0.55 per share and cancel the prior warrant to purchase 83,334 shares of common stock at $0.90 per share.

Concurrent with entering into the exchange agreement, the investor entered into a subscription agreement under which we issued and sold in a registered direct offering 200,000 shares of common stock at $0.55 per share for an aggregate purchase price of $110,000. The 200,000 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $110,000. In addition, in a concurrent private placement, the investor entered into a separate securities purchase agreement under which we issued and sold 63,600 shares of common stock at $0.55 per share for an aggregate of purchase price of $35,000. The 63,600 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $35,000. Further, we issued a warrant to purchase 120,000 shares of common stock at $0.55 per share. The final Exchange Note in the principal amount of $34 was repaid. ~~During the quarter ended September 30, 2017, the Company recorded additional non-cash interest expense of $110 as a result of the extinguishment of the $125~~ ~~7% Convertible Note~~ ~~based on the difference of the carrying amount of the~~ ~~7% Convertible Note~~ ~~and~~ ~~the fair value of the consideration transferred, which was determined from the closing price of the Company’s common stock on the date of~~ extinguishment and based upon (i) the change in the fair value of the warrants due to the exchange of the warrant with an exercise price of $0.90 per share with a new warrant with an exercise price of $0.55 per share, (ii) the fair value of the warrant to purchase 120,000 shares of common stock and (iii) the value of the shares of cash and common stock in excess of the amount owed pursuant to the ~~7% Convertible Note~~.

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

On April 26, 2017, the Company entered into a 7% convertible note in the aggregate principal amount of $104. On June 28, 2017, the noteholder converted the outstanding balance into 189,091 shares of the Company’s common stock~~. The Company did not record any additional interest expense as a result of the extinguishment since the carrying amount of the convertible notes was equivalent to~~ ~~the fair value of the consideration transferred, which was determined from the closing price of the Company’s equity securities on the date of~~ ~~extinguishment~~.

As additional consideration, the investor received a five-year warrant to purchase 160,000 shares of common stock at an exercise price of $0.80 per share. The warrants are exercisable commencing six months after the issuance date. The exercise price of the warrants is subject to adjustment for customary stock splits, stock dividends, combinations and other standard anti-dilution events. The warrants may be exercised for cash or on a cashless basis. The Company computed the fair value of these warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $25 based on the estimated fair value of the warrants.

~~The beneficial conversion feature (“BCF”) embedded in this~~ ~~convertible note~~ ~~is accounted for under ASC No.~~ ~~470, Debt. At issuance, the estimated fair value of the BCF totaled $26. The fair value of the BCF was allocated from the net proceeds of the~~ ~~convertible note~~ ~~and was amortized to interest expense over the term of the convertible note~~ using the effective interest method. The valuation of the BCF was calculated based on the effective conversion price compared with the market price of the Company’s common stock on the date of issuance of the convertible note. In aggregate, the Company recorded debt discount in the amount of $51 based on the relative fair values of the warrants of $25 and BCF of $26. During the three months ended June 30, 2017, non-cash interest expense of $51 was recorded from the amortization of debt discounts.

~~13. CONVERTIBLE NOTE – RELATED PARTY~~

~~Convertible notes – related party at September 30, 2017, and December 31, 2016, are comprised of the following:~~

September 30, December 31,
2017 2016
12% Convertible secured note $ 530 $ 530
Less:
Unamortized debt discounts (355 ) (484 )
Unamortized financing cost (9 ) (12 )
Convertible note – related party, net of debt discounts and
financing cost
$ 166 $ 34

~~On October 21, 2016, the Company entered into a 12% convertible secured note (the~~ ~~“Convertible Note”) in the principal amount of $530. The Convertible Note included an original issue discount (“OID”~~) of $30 resulting in net proceeds to the Company of $500. Additionally, the Convertible Note accrues interest at 12% simple interest on the principal amount, is secured by all the assets of the Company, and is due on October 20, 2019. Interest only payments are due on a quarterly basis and the principal may be converted into shares of the Company’s common stock at $0.55 per share. Subject to certain beneficial ownership limitations, the noteholder may convert the principal amount of the Convertible Note at any time into common stock. The conversion price of the Convertible Note is subject to adjustment for customary stock splits, stock dividends, combinations or other standard anti-dilution events.

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

The Convertible Note contains standard and customary events of default including, but not limited to, failure to make payments when due under the Convertible Note agreement and bankruptcy or insolvency of the Company. Upon 30 days’ notice,plaintiffs, the Company has entered into poorly advised loan transactions and related party transactions. The Company and the ~~right~~individual defendants believe that these claims are without merit and intend to ~~prepay~~vigorously defend themselves. Based on the ~~Convertible Note. In addition, provided that the closing price for a share~~Company’s assessment of the ~~Company’s common stock exceeds $3.00 per share for 30 consecutive trading days,~~facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company ~~has~~cannot estimate the ~~right to compel the noteholder to convert the principal amount into shares~~reasonably possible loss or range of ~~common stock at the contractual conversion price.~~

~~As additional consideration, the investor received a three-year warrant to purchase 265,000 shares of common stock, at~~loss that may result from this action. However, an ~~exercise price of $0.80 per share, and a three-year warrant to purchase 265,000 shares of common stock, at an exercise price of $0.90 per share (collectively the~~ ~~“Convertible Note Warrants”~~). The Convertible Note Warrants are exercisable commencing six months after the issuance date and are subject to certain beneficial ownership limitations. The exercise price of the Convertible Note Warrants is subject to adjustment for customary stock splits, stock dividends, combinations and other standard anti-dilution events. The Convertible Note Warrantsunfavorable outcome may ~~be exercised for cash or on a cashless basis. The Convertible Note Warrants~~ have a ~~call feature that permits the Company to force redemption at $0.001 per share in the event the closing price for a share~~material adverse effect on our business, financial condition and results of ~~the Company’s common stock exceeds $3.00 for 30 consecutive trading days.~~ ~~The Company computed the fair value of the~~ ~~Convertible Note~~ Warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $159 based on the estimated fair value of the Convertible Note Warrants.

~~The beneficial conversion feature (“BCF”) embedded in the~~ ~~Convertible Note~~ ~~is accounted for under ASC No.~~ ~~470, Debt. At issuance, the estimated fair value of the BCF totaled $329. The fair value of the BCF was allocated from the net proceeds of the~~ ~~Convertible Note~~ ~~and the respective discount and is being amortized to interest expense over the term of the~~ ~~Convertible Note~~ using the effective interest method. The valuation of the BCF was calculated based on the effective conversion price compared with the market price of the Company’s common stock on the date of issuance of the Convertible Note.

In aggregate, the Company recorded debt discount in the amount of $518 based on the relative fair values of the Convertible Note Warrants of $159, BCF of $329 and OID of $30. The debt discount is being amortized as non-cash interest expense over the term of the debt. In addition, the Company incurred $13 of debt issuance costs which are also being amortized as non-cash interest expense over the term of the debt. During the three and nine months ended September 30, 2017, non-cash interest expense of $44 and $129, respectively, was recorded from the amortization of debt discounts and debt financing cost. As of September 30, 2017 and December 31, 2016, accrued interest on the Convertible Note was $16 and $12, respectively.

~~14.~~operations.

20. STOCKHOLDERS’ EQUITY

Preferred Stock

The Company is authorized to issue ~~2,000,000~~25,000,000 shares of Preferred Stock ~~with no~~$0.001 par value. The Board of Directors has designated 500,000 shares ~~of its Preferred Stock as~~ ~~Series A cumulative Redeemable Convertible Preferred shares (the~~ ~~“Series A Preferred Stock”), 500,000 shares~~ as Series B Convertible Preferred Stock (the ~~“Series~~“Series B Preferred Stock”), 460,000 shares as Series C Convertible Preferred Stock (the ~~“Series~~“Series C Preferred Stock”), 378,776 shares as Series D Convertible Preferred Stock (the ~~“Series~~“Series D Preferred Stock”), and 10,000 shares as Series E Convertible Preferred Stock (the ~~“Series~~“Series E Preferred Stock”). The rights, preferences, privileges and restrictions on the remaining authorized ~~151,224~~23,651,224 shares of Preferred Stock have not been determined. The Company’s Board of Directors is authorized to create a new series of preferred shares and determine the number of shares, as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of preferred shares. As of ~~September~~June 30, ~~2017,~~2018, there were ~~100,000~~125,000 shares of Series B Preferred Stock ~~455,002 shares of Series C Preferred Stock, 378,776 shares of Series D Preferred Stock, 10,000 shares of Series E Preferred Stock issued and outstanding~~ and no other shares of Preferred Stock ~~were~~ issued or outstanding. ~~As of December 31, 2016, there were no shares of Preferred Stock issued or outstanding.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

~~Series B Preferred Stock~~

On ~~March 9, 2017, the Company entered into a Preferred Stock Purchase Agreement with Philou, a related party. Pursuant~~April 24, 2018, pursuant to the terms of the Preferred Stock Purchase Agreement, Philou ~~may invest up to $5,000 in the Company through the purchase of Series B Preferred Stock over the term of 36 months.~~

Each share of Series B Preferred Stock has a stated value of $10.00 per share. Each share of Series B Preferred Stock may be convertible at the holder’s option into shares of common stock of the Company at a conversion rate of $0.70 per share, upon the earlier to occur of: (i) 60 months from the closing date, or (ii) upon the filing by the Company of one or more periodic reports that, singly or collectively, evidence(s) that the Company’s gross revenues have reached no less than $10,000 in the aggregate, on a consolidated reporting basis, over four consecutive quarters in accordance with U.S. GAAP. ~~The conversion price will be subject to standard anti-dilution provisions in connection with any stock split, stock dividend, subdivision or similar reclassification of the common stock.~~

~~Each share of~~ ~~Series B Preferred Stock~~ ~~shall have the right to receive dividends equal to one ten millionth (0.0000001) of earnings before interest, taxes, depreciation, amortization and stock-based compensation (“EBITDAS”~~) calculated for a particular calendar year. Assuming the purchase of the entire $5,000 of shares of Preferred Stock, the holders thereof will be entitled to receive dividends equal to five percent (5%) in the aggregate of EBITDAS. Payment of dividends shall be calculated for a calendar year, payable on a quarterly basis, with payments to occur no later than 90 days in arrears from each reporting period subject to a year-end reconciliation. EBITDAS shall mean earnings before interest, taxes, depreciation, amortization, and stock-based compensation.

~~At such time as (i) all shares of common stock issuable upon conversion of all outstanding~~purchased an additional 25,000 shares of Series B Preferred Stock ~~(the~~ ~~“Conversion Shares”~~) shall have been registered for resale pursuant to an effective Registration Statement covering such Conversion Shares, (ii) but no earlier than the twenty-fifth (25th) anniversary of the effective date, the shares of Series B Preferred Stock shall be subject to redemption in cash at the option of the Company in an amount per share equal to 120% of the greater of (a) the stated value plus all accrued and unpaid dividends, if any and (b) the fair market value of such shares of Series B Preferred Stock.

In addition, for each share of Series B Preferred Stock purchased, Philou will receive warrants to purchase shares of common stock in a number equal to the stated value of each share of Series B Preferred Stock purchased divided by $0.70, at an exercise price equal to $0.70 per share of common stock. The warrants do not require a net cash-settlement or provide the holder with a choice of net-cash settlement. The warrants also do not contain a variable settlement provision. Accordingly, any warrants issued to Philou pursuant to the terms of the Preferred Stock Purchase Agreement shall be classified as equity instruments.

Further, Philou shall have the right to participate in the Company’s future financings under substantially the same terms and conditions as other investors in those respective financings in order to maintain its then percentage ownership interest in the Company. Philou’s right to participate in such financings shall accrue and accumulate provided that it still owns at least 100,000 shares of Series B Preferred Stock.

~~Between March 24, 2017 and June 2, 2017, Philou purchased 1,000,000 shares of Series B Preferred Stock pursuant to the Preferred Stock Purchase Agreement~~ in consideration of the cancellation of ~~the Company debt~~short-term advances due to ~~an affiliate of~~ Philou in the aggregate amount of ~~$250 and cash of $750.~~$250. In addition, Philou received warrants to purchase ~~1,428,572~~357,143 shares of common stock at an exercise price of $0.70 per share of common stock, which have been classified as equity instruments. The Company determined that the estimated relative fair value of these warrants, which are classified as equity, was ~~$401~~$142 using the Black-Scholes option pricing model. Since the warrants were classified as equity securities, the Company allocated the ~~$1,000~~$250 purchase price based on the relative fair values of the Series B Preferred Stock and the warrants following the guidance in ASC No. 470,Debt.

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

The Series B Convertible Preferred Stock is convertible at any time, in whole or in part, at the option of Philou, into shares of common stock at a fixed conversion price, which is subject to adjustment for stock splits, stock dividends, combinations or similar events, of $0.70 per share. As the effective conversion price of the Series B Convertible Preferred Stock on a converted basis was below the market price of the Company’s common stock on the date of issuance, it was determined that these discounts represent ~~contingent~~ beneficial conversion features, which were valued at ~~$265~~$108 based on the difference between the effective conversion price and the market price of the Company’s common stock on the date of issuance.

The Company, however, is prohibited from issuing shares of common stock pursuant to the Series B Convertible Preferred Stock unless stockholder approval of such issuance of securities is obtained as required by applicable NYSE MKT listing rules. The Company has not yet received stockholder approval of such share issuances. This provision resulted in a contingent beneficial conversion feature that shall be recognized once the contingency is resolved. These features are analogous to preference dividends and ~~shall be~~are recorded as a non-cash return to preferred shareholders through accumulated ~~deficit upon resolution of the contingency.~~deficit.

F-35

~~Series C Preferred Stock~~

~~Between May 24, 2017 and June 19, 2017, Digital Power entered into subscription agreements (the~~ ~~“Series C Subscription Agreement”) with approximately twenty accredited investors (the~~ ~~“Series C Investors”~~) in connection with the sale of twenty-one Units at a purchase price of $52 per Unit raising in the aggregate $1,092 with each Unit consisting of Series C Preferred Stock and Warrants. Each Unit consists of 21,667 shares of Series C Preferred Stock and Warrants to purchase 86,667 shares of common stock.

Each share of Series C Preferred Stock has a stated value of $2.40 per share. Each share of Series C Preferred Stock may be convertible at the holder’s option into shares of Common Stock of the Company at a conversion price of $0.60 per share, which, currently, represents four shares of Common Stock. The conversion price is subject to standard anti-dilution provisions in connection with any stock split, stock dividend, subdivision or similar reclassification of the Common Stock. Each share of Series C Preferred stock is mandatorily converted into shares of Common Stock based on the then conversion price in effect in the event that the Company’s Common Stock closing price exceeds $1.20 per share for 20 consecutive trading days. As the effective conversion price of the Series C Convertible Preferred Stock on a converted basis was below the market price of the Company’s common stock on the date of issuance, it was determined that these discounts represent beneficial conversion features, which were valued at $371 and recognized as a deemed dividend, based on the difference between the effective conversion price and the market price of the Company’s common stock on the date of issuance.

Each share of Series C Preferred Stock has the right to receive dividends equal $0.24 per share per annum as declared by the Company’s Board of Directors. The dividends will be paid on a quarterly basis on the 20th day following each calendar quarter.

Each share of Series C Preferred Stock shall have dividend and liquidation rights in priority to any shares of Common Stock, the Company’s Series A Preferred Stock (of which none are outstanding) and any other subordinated securities; but shall be subordinated to any senior securities including the Company’s Series B Preferred Stock.

Each share of Series C Preferred Stock is subject to redemption by the Company for the stated value plus accrued but unpaid dividends five years after issuance, provided the holders of Series C Preferred Stock had not elected previously to convert the Series C Preferred Stock into shares of Common Stock.

~~Series D Preferred Stock~~

On June 2, 2017, pursuant to the terms of the Share Exchange Agreement, the Company acquired 1,603,434 shares of the issued and outstanding common stock of Microphase Common Stock in exchange for the issuance by the Company of 1,842,448 shares of the Company’s Common Stock and 378,776 shares of the Company’s Series D Preferred Stock, ~~no par value per share,~~ ~~and warrants to purchase an aggregate of 1,000,000 shares of the Company’s Common Stock.~~

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

In the event the Company shall liquidate, dissolve or wind up, the holders of Series D Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Common Stock, the Company’s Series A Preferred Stock, or to the holders of any other junior series of preferred stock, by reason of their ownership thereof and subject to the rights of the Company’s Series B Preferred Stock, Series C Preferred Stock and any other class or series of Company stock subsequently issued that ranks senior to the Series D Preferred Stock, an amount per share in cash or equivalent value in securities or other consideration equal to its Stated Value of $0.01 per share.

The holders of Series D Preferred Stock shall not be entitled to receive dividends and shall have no voting rights except as otherwise required by law. Upon the shareholders of DPW Common Stock approving the conversion of the Series D Preferred Stock into shares of DPW Common Stock in connection with the acquisition of MPC Common Stock and for purposes of compliance with Rule 713 of the NYSE MKT, then each share of Series D Preferred Stock shall automatically be converted into two shares of DPW Common Stock, for an aggregate of 757,552 shares of DPW Common Stock.

~~Series E Preferred Stock~~

On June 2, 2017, pursuant to the terms of the Share Exchange Agreement and in consideration of legal services, Microphase issued a $450 8% promissory note with a maturity date of November 25, 2017 to an unsecured creditor, Lucosky Brookman, LLP (the ~~“Lucosky Note”). In conjunction with the issuance of the Lucosky Note, the Company issued Lucosky Brookman 10,000 shares of Series E Preferred Stock,~~ ~~no par value per share,~~ ~~with a stated value~~ ~~equal to forty-five dollars ($45.00) per share~~. The Company, at its option, may redeem for cash, in whole or in part, at any time and from time to time, the shares of Series E Preferred Stock at the time outstanding, upon written notice to the holder of the shares, at a cash redemption price equal to $45 multiplied by the number of shares being redeemed. Any such optional redemption by the Company shall be credited against the Lucosky Note.

In the event the Company shall liquidate, dissolve or wind up, the holders of Series E Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the DPW Common Stock, the Company’s Series A Preferred Stock, or to the holders of any other junior series of preferred stock, by reason of their ownership thereof and subject to the rights of the Company’s Series B Preferred Stock, Series C Preferred Stock and any other class or series of Company stock subsequently issued that ranks senior to the Series E Preferred Stock an amount per share in cash or equivalent value in securities or other consideration equal to $0.01 per share. The holders of Series E Preferred Stock shall not be entitled to receive dividends and shall have no voting rights except as otherwise required by law. Subject to the shareholders of DPW Common Stock of the Company approving the conversion of the Series E Preferred Stock into shares of Common Stock in connection with the acquisition of MPC Common Stock and for purposes of compliance with Rule 713 of the NYSE MKT, then each share of Series E Preferred Stock may be converted into sixty (60) shares of DPW Common Stock, for an aggregate of 600,000 shares of DPW Common Stock.

Common Stock

Common stock confers upon the holders the rights to receive notice to participate and vote in the general meeting of shareholders of the Company, to receive dividends, if and when declared, and to participate in a distribution of surplus of assets upon liquidation of the Company.

Issuance of Common Stock pursuant to the At the Market Offering

On ~~November 15, 2016,~~February 27, 2018, the Company entered into ~~subscription agreements~~a sales agreement with H.C. Wainwright & Co., LLC (“HCW”) to sell shares of the Company’s common stock, having an aggregate offering price of up to $50 million from time to time, through an “at the market offering” program (the ~~“2016 Subscription Agreements”~~“ATM Offering”) ~~with nine accredited investors. Pursuant~~under which HCW acts as sales agent. Between February 27, 2018 and June 30, 2018, the Company had received net proceeds of $14,551 through the sale of 14,922,167 shares of the Company’s common stock through the ATM Offering. The offer and sale of the shares through the ATM Offering are made pursuant to the ~~terms~~Company’s effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the ATM Offering, dated February 27, 2018.

Issuance of Common Stock for Services

During the ~~2016 Subscription Agreements,~~three and six months ended June 30, 2018, the Company ~~sold 901,666 units at $0.60 for~~issued to its consultants a total of 1,000,000 shares and 2,683,059 shares, respectively, of its common stock with an aggregate ~~purchase price~~value of ~~approximately $541. Each unit consists~~$3,758, an average of ~~one~~$1.40 per share for services rendered.

Issuance of common stock for conversion of debt

On January 3, 2018, accrued interest of $23 on the 10% Convertible Notes was satisfied through the issuance of 37,750 shares of the Company’s common stock.

On January 10, 2018, principal and ~~one warrant~~accrued interest of $202 and $6, respectively, on the 12% Convertible Note was satisfied through the issuance of 377,678 shares of the Company’s common stock (See Note 18d).

On January 12, 2018, principal and accrued interest of $550 and $3, respectively, on the 5% Convertible Note was satisfied through the issuance of 921,645 shares of the Company’s common stock (See Note 18c).

On February 9, 2018, principal and accrued interest of $1,250 and $134, respectively, on the January 2018 10% Convertible Note was satisfied through the issuance of 691,942 shares of the Company’s common stock (See Note 18e).

Issuances of Common Stock upon Exercise of Stock Options

During January 2018, the Company issued a total of 60,000 shares of its common stock upon the cash exercise of options. These options were issued pursuant to the Company’s Plans. The Company received cash of $98 as a result of these option exercises.

Issuances of Common Stock upon Exercise of Warrants

During January 2018, the Company issued a total of 1,866,471 shares of its common stock upon the cash and cashless exercise of warrants to purchase ~~one share~~an aggregate of 2,187,646 shares of its common stock. These warrants were issued between August 2017 and December 2017 in conjunction with various common stock ~~(the “Nov. 2016 Warrants”) at an exercise price~~and debt financings. The Company received cash of ~~$0.80.~~$867 as a result of these warrant exercises.

F-36

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

~~The 2016 Subscription Agreement provides that, until November 15,~~

On May 8, 2018, the Company issued 279,170 shares of common stock pursuant a cashless exercise of warrants issued to Divine Capital Markets, LLC, its Placement Agent (the “Placement Agent”) for the 2017 ~~investors who purchased~~private placement of the Series C Preferred Stock and warrants. For its services, the Placement Agent received, a warrant to purchase 182,003 shares of the Company’s common stock at ~~least $100,000 have~~$0.72 per share and a second warrant to purchase 182,003 shares of the ~~right~~Company’s common stock at $1.00 per share.

Issuances of common stock in connection with convertible notes

On February 9, 2018, in conjunction with the securities purchase agreement to ~~participate~~sell the January 2018 10% Convertible Note in the ~~purchase~~principal amount of up$1,250, the Company issued 543,478 shares of restricted common stock to ~~50% of~~the institutional investor (See Note 18c).

On April 16, 2018, in conjunction with the securities ~~offered by~~purchase agreements to sell the 12% April 2018 Convertible Note in the principal amount of $1,722, the Company issued 993,588 shares of restricted common stock to the institutional investor (See Note 18b).

On May 15, 2018, in ~~any future financing transactions,~~conjunction with ~~limited exceptions.~~

~~The Nov. 2016 Warrants entitle~~ the ~~holders~~securities purchase agreements to ~~purchase,~~sell the 10% Convertible Note in the ~~aggregate, up~~principal amount of $6,000, the Company issued 344,828 shares of restricted common stock to ~~901,666 shares~~the institutional investor (See Note 18a).

Issuances of Common Stock ~~at an exercise price~~upon Conversion of ~~$0.80 per share for a period of three years. The Nov. 2016 Warrants are exercisable upon~~Series D Preferred Stock

During the ~~six-month anniversary~~six months ended June 30, 2018, pursuant to the conversion terms of the ~~issuance date. The exercise price~~Series D Preferred Stock, 378,776 shares of the ~~Nov. 2016 Warrants is subject to adjustment for stock splits, stock dividends, combinations and other standard anti-dilution events. The Nov. 2016 Warrants may be exercised~~Series D Preferred Stock was converted into 757,552 shares of the Company’s Common Stock.

Issuances of Common Stock for cash ~~or, upon the failure to maintain an effective registration statement, on a cashless basis.~~

~~Between February 16,~~and cancellation of short-term advances

On October 5, 2017, ~~and February 23, 2017, the~~Ault & Company ~~issued 666,667~~purchased 75,000 shares of ~~its common stock, an extinguishment price of $0.60 per share, for~~ the ~~cancellation of $400 in demand promissory notes.~~

~~On March 8, 2017, the Company issued an aggregate of 12,549 shares of its common stock as payment for services to a consultant.~~ ~~The shares were valued at $10, an average of $0.80 per share~~.

~~On March 15, 2017, Company entered into a subscription agreement with a related party for the sale of 500,000 shares of~~Company’s common stock at $0.60 per share ~~for the aggregate~~and a warrant to purchase ~~price of $300.~~

~~On April 5, 2017, the Company issued 360,002~~up to 75,000 shares of ~~its~~the Company’s common stock at ~~a price of $0.75 per share, for the cancellation of $270 in demand promissory notes.~~

~~Between May 9, 2017 and June 18, 2017, the Company issued an aggregate of 956,153 shares of its common stock as payment for services to its consultant.~~ ~~The shares were valued at $498, an average of $0.52 per share.~~

~~On June 28, 2017, the Company issued 189,091 shares of its common stock, at a price of $0.55 per share, for the cancellation of a 7% convertible promissory note in the principal amount of $104.~~

~~On June 28, 2017, the holders of $55 of in short-term loans agreed to cancel their notes for the purchase of 100,001 shares of the Digital Power’s common stock at a price of $0.55 per share.~~

On July 7, 2017, the Company entered into an asset purchase agreement to acquire the intellectual property of Coolisys.com, consisting of the common law rights associated with the trademarks and name as well as the domain name and content of ~~www.Coolisys.com. The aggregate purchase price of $81 was comprised of 50,000 shares of common stock, valued at $31~~ ~~based on the closing price of the Common Stock on the date of the acquisition,~~ ~~and cash of $50.~~

~~On July 24, 2017, we entered into subscription agreements with six investors, and on July 25, 2017 we entered into securities purchase agreements (the~~ ~~“Securities Purchase Agreement”) with an institutional investor, under which we agreed to issue and sell in the aggregate 851,363 shares of common stock to the investors at $0.55~~$0.60 per share for an aggregate purchase price of ~~$468. Of~~$45. The shares and warrants were issued by the ~~aggregate purchase price of $468, $445 was paid in cash~~Company on May 8, 2018. Ault & Company is controlled by Mr. Milton Ault, the Company’s Chairman and ~~$23 was in consideration for~~Chief Executive Officer.

On May 15, 2018, the ~~cancellation of debt of the Company. The company granted warrants to purchase 109,090 shares of common stock to two of the investors that~~Company entered into securities purchase agreements with certain investors in which the ~~subscription agreements at $0.75 per share.~~

~~In a concurrent private placement, we~~Company sold ~~to the institutional investor warrants to purchase~~ an aggregate of ~~163,636 shares of the Company’s common stock at an exercise price equal to $0.55 per share.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

Concurrent with entering into this exchange agreement, the institutional investor entered into a subscription agreement under which we issued and sold in a registered direct offering 200,000 shares of common stock at $0.55 per share for an aggregate purchase price of $110. The 200,000 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $110. In addition, in a concurrent private placement, the institutional investor entered into a separate securities purchase agreement under which we issued and sold 63,600 shares of common stock at $0.55 per share for an aggregate of purchase price of $35. The 63,600 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $35. Further, we issued a warrant to purchase 120,000 shares of common stock at $0.55 per share.

~~Between August 21, 2017 and September 5, 2017, the Company issued an aggregate of 680,645~~7,691,775 shares of its common stock, ~~as payment for services~~and five-year warrants to ~~its consultant.~~ purchase such number of shares of common stock equal to the shares of common stock purchased by the investors. The ~~shares~~Company received aggregate consideration of $6,000, consisting of cash and the cancellation of short-term advances of $3,225 and $2,775, respectively. These securities were ~~valued at $424, an average of $0.62 per share.~~

~~15.~~issued pursuant to our registration statement filed with the Securities and Exchange Commission (File No. 333-222132) which became effective on January 11, 2018.

21. RELATED PARTY TRANSACTION

~~In anticipation~~The Company has made a strategic investment in AVLP in expectation of future business generated by the ~~acquisition of~~Company from MTIX Ltd., an advanced materials and processing technology company located in Huddersfield, West Yorkshire, UK (“(“MTIX”) by, a wholly-owned subsidiary of AVLP. The Company’s investments in AVLP ~~and the expectation~~consist of future business generated by the Company from a strategic investment into AVLP, the Company entered into the AVLP Notes, three 12% Convertible Promissory Notes agreements in the principal amount of $525 each. The AVLP Notes included a 5% original issue discount, resulting in net loans to AVLP of $1,500convertible promissory notes, warrants and an original issue discount of $75. The AVLP notes accrued interest at 12% per annum and were due on or before two years from the origination dates of each note. The Company had the right, at its option, to convert all or any portion of the principal and accrued interest into shares of common stock of ~~AVLP at approximately $0.74536 per share.~~ ~~Subject to adjustment,~~ ~~the~~ ~~AVLP~~ ~~Notes, inclusive of the original issue discount, were convertible into 2,113,086 shares of the Company’s common stock~~. ~~During the period from March 29, 2017 to August 16,~~AVLP. On September 6, 2017, the Company ~~funded $1,809~~and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”) with an effective date of August 21, 2017 pursuant to which the Company will provide Avalanche a non-revolving credit facility of up to $5,000 for a period ending on August 21, 2019, subject to the terms and conditions stated in ~~excess~~the Loan Agreement, including that the Company having available funds to grant such credit. At June 30, 2018, the Company has provided loans to AVLP in the principal amount $5,536 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 11,167,440 shares of ~~the $1,500 net loan amount required pursuant to~~AVLP common stock. Under the terms of the AVLP ~~Notes~~.

Loan Agreement, any notes issued by AVLP are secured by the assets of AVLP. As of June 30, 2018 and December 31, 2017, the Company recorded contractual interest receivable attributed to the AVLP Loan Agreement of $626 and $324, respectively.

F-37

~~On September 6, 2017, the Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”~~) with an effective date of August 21, 2017 pursuant to which the Company provided Avalanche a non-revolving credit facility of up to $5,000, inclusive of prior amounts loaned to AVLP, for a period ending on August 21, 2019, subject to the terms and conditions stated in the Loan Agreement, including that the Company having available funds to grant such credit. In consideration of entering into the AVLP Loan Agreement, the Company and AVLP cancelled the AVLP Notes and consolidated the AVLP Notes and prior advances and issued a new Convertible Promissory Note in the aggregate principal amount of $3,474 (the ~~“New Note”~~) that is convertible into shares of AVLP at a conversion price of $0.50 per share. The New Note is due in two years and accrues interest at 12% per annum on the principal amount. Prior interest accrued under the AVLP Notes and advances will continue to be an obligation of AVLP. The New Note contains standard events of defaults. In addition, concurrent to issuing the New Note, AVLP issued to the Company a five-year Warrant to purchase 6,948,800 shares of AVLP Common Stock at $0.50 per share. Future advances under the AVLP Loan Agreement, if any, will be evidenced by a convertible promissory containing a conversion price feature at $0.50 per share and warrant with an exercise price of $0.50 per share. Further, under the terms of the AVLP Loan Agreement, any notes issued by AVLP are secured by the assets of AVLP. (See Note 4).

~~During the nine months ended September 30, 2017,~~ ~~the Company invested $2,682 pursuant to~~ ~~the AVLP Loan Agreement and acquired 71,746 shares of AVLP common stock in the open market for $28.~~

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

During the ~~three~~six months ended June 30, 2018 and the year ended December 31, ~~2016,~~2017, the Company ~~invested $950 pursuant to~~ also acquired in the ~~AVLP Loan Agreement and acquired~~ ~~250,900~~open market 370,100 shares of AVLP common stock for $352 and 221,333 shares of AVLP common stock for $192, respectively. At June 30, 2018, the closing market price of AVLP’s common stock was $0.90, a decline from $1.75 at December 31, 2017. The Company has determined that its investment in AVLP marketable equity securities are accounted for pursuant to the ~~open~~fair value method and based upon the closing market ~~for $85.~~

price of common stock at June 30, 2018, the Company has recognized an unrealized gain of $130.

Philou is AVLP’s controlling shareholder. Mr. Ault is Chairman of AVLP’s Board of Directors and the ~~Executive~~ Chairman of the Company’s Board of Directors. Mr. William B. Horne is the Chief Financial Officer of AVLP and also ~~the audit committee chairman~~a director of the Company.

~~On October 24, 2016, AVLP entered into a letter of intent to acquire~~

During the three and six months ended June 30, 2018, the Company recognized $1,766 and $3,559 in revenues resulting from its relationship with MTIX, ~~and made an initial payment of $50 towards the purchase.~~ Onwhich was acquired by Avalanche on August 22, 2017 ~~pursuant~~and is therefore deemed to ~~the terms of~~be a ~~Share Exchange Agreement dated as of March 3, 2017, and as amended on July 13, 2017 and August 21, 2017 (the~~ ~~“Exchange Agreement”) with MTIX Limited, a company formed under the laws of England and Wales (“MTIX”) and the three (3) shareholders of MTIX (the “Sellers”), AVLP completed its acquisition of MTIX.~~ ~~Upon the terms and subject to the conditions set forth in the Exchange Agreement, AVLP acquired MTIX from the Sellers through the transfer of all issued and outstanding ordinary shares of MTIX (the~~ ~~“MTIX Shares”) by the Sellers to AVLP in exchange (the~~ ~~“Exchange”) for the issuance by AVLP of: (a) 7% secured convertible promissory notes (individually, a~~ ~~“Note”~~ ~~and collectively, the~~ ~~“Notes”~~) in the aggregate principal face amount of $9,500 to the Sellers in pro rata amounts commensurate with their current respective ownership percentages of MTIX’s ordinary shares, (b) (i) $500 in cash, $50, of which was paid on October 26, 2016, and (ii) 100,000 shares of AVLP’s newly designated shares of Class B Convertible Preferred Stock (the ~~“Class B Shares”) to the principal shareholder of MTIX (the~~ ~~“Majority Shareholder”~~).

On the closing date, the fully-diluted AVLP shares shall be approximately 52 million shares of common stock, assuming that (i) the MTIX promissory notes are convertible into shares of AVLP common stock at a conversion price of $0.50 per share, (ii) the shares of AVLP Class B Convertible Preferred Stock are convertible into shares of AVLP common stock at a conversion rate of $0.50 per share and (iii) the issuance of stock options to purchase an aggregate of 531,919 shares of AVLP common stock to the members of the MTIX management group.

~~During~~related party. In March 2017, the Company was awarded a 3-year, $50 million purchase order by MTIX to manufacture, install and service the ~~MLSE~~Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system.

Management believes that the MLSE purchase order will be a source of revenue and generate significant cash flows for the Company. However, at June 30, 2018, the $3,545 in revenues recognized during the six months ended June 30, 2018 and year ended December 31, 2017, had not yet been received and was reflected on the financial statements as accounts receivable, related party.

On ~~September 22, 2016,~~April 13, 2018, the Company entered into an amended and restated consulting agreement with Mr. Ault pursuant to ~~assist~~which the parties thereto agreed to amend and restate that certain independent contractor agreement dated September 22, 2016, by and between the Company and Mr. Ault. In accordance with the terms set forth in ~~developing a business strategy, identifying new business opportunities, developing a capital raising program~~the Agreement, Mr. Ault shall continue to serve as the Company’s Chief Executive Officer and ~~implementing~~Chairman of the Board of Directors in consideration of a ~~capital deployment program.~~monthly fee of $33, effective November 15, 2017. On June 17, 2018, the Company entered into a ten year executive employment agreement with Mr. Ault. For his services, Mr. Ault will be paid a base salary of $400 per annum. For his services, Mr. Ault was paid ~~$135~~$100 and $200 during the ~~nine~~three and six months ended ~~September~~June 30, 2018 and $208 during the year ended December 31, 2017.

On October 21, 2016, the Company entered into a 12% convertible secured note in the principal amount of $530 and warrants with the Barry Blank Living Trust, an existing stockholder of the Company, for $500 due on October 20, 2019. The principal amount of the 12% convertible secured note may be convertible into shares of the Company’s common stock at $0.55 per share. Subject to certain beneficial ownership limitations, the Barry Blank Living Trust may convert the principal amount of the convertible note at any time into common stock. During the nine months ended September 30, 2017 the Company recorded interest expenses of $48 on the convertible note obligation.

On December 29, 2016, the Company received a $250 short term loan from MCKEA. Kristine Ault, a director of the Company and the wife of Mr. Ault, is the managing member of MCKEA which, in turn, is the Manager of Philou, the majority stockholder of the Company. On March 24, 2017, the $250 loan was cancelled in consideration for the issuance of 25,000 shares of Series B preferred stock of the Company to Philou. ~~During the nine months ended September 30, 2017 the Company recorded interest expenses of $3 on the~~ ~~short-term loan from MCKEA.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

~~In February 2017, the Company issued to~~ ~~eight accredited investors~~ ~~$400 in demand promissory notes bearing interest at a rate of 6% per annum. Of the eight accredited investors, one investor was deemed a related party.~~

On March 9, 2017, the Company entered into a Preferred Stock Purchase Agreement with Philou. Pursuant to the terms of the Preferred Stock Purchase Agreement, Philou may invest up to $5,000 in the Company through the purchase of Series B Preferred Stock over 36 months. ~~Between March 24, 2017 and June 2, 2017,~~ Philou has purchased ~~100,000~~125,000 shares of Series B Preferred Stock pursuant to the terms of the ~~Preferred Stock~~ Purchase ~~Agreement.~~

~~On March 15, 2017, Company entered into a subscription agreement with a related party~~Agreement, the most recent purchase having occurred on April 24, 2018 for the ~~sale~~purchase of ~~500,000~~25,000 shares ~~of common stock at $0.60 per share for the aggregate purchase price of $300.~~

On March 20, 2017, the Company received a $250 short term loan from JLA Realty, an entity which owns 666,667 shares of the Company’s common stock, constituting approximately 4.7% of the Company’s outstanding shares of common stock at September 30, 2017, on behalf of Philou. The proceeds from this short-term loan comprised a portion of Philou’s purchase of Series B Preferred Stock.

i.d.

Between May 5, 2017 and June 30, 2017, the Company received additional short-term loans of $140 from four accredited investors of which $75 was from the Company’s corporate counsel, a related party. As additional consideration, the investors received five-year warrants to purchase 224,371 shares of common stock at a weighted average exercise price of $0.77 per share.On June 28, 2017, $52 in short-term loans that was received from the related party was converted into one of the Series C Units (See Note 10) and on July 24, 2017, the remaining $23 in short-term loans was converted in 41,818 shares of the Company’s common stock ~~in conjunction with the subscription agreements that the Company entered into with six investors (See Note 14).~~

Between July 6, 2017 and ~~September~~June 30, ~~2017,~~2018, Milton C. Ault, III, the Company’s Chairman and Chief Executive ~~Chairman,~~Officer, personally guaranteed the repayment of (i) ~~$2,585 to TVT Capital,~~$8,218 from the sale of Advances on Future Receipts (ii) ~~$400~~and $4,380 from the sale of the ~~Convertible Note and (iii) $880 from the sale of the Convertible Notes.~~promissory notes. These personal guarantees were necessary to facilitate the consummation of these financing transactions. Mr. Ault’s payment obligations would be triggered if the Company failed to perform under these financing obligations. Our board of directors has agreed to compensate Mr. Ault for his personal guarantees. The amount of annual compensation for each of these guarantees, which will be in the form of non-cash compensation, is approximately 2%1.5% of the amount of the obligation.

k.e.

During the ~~three months~~year ended June 30, 2017, our Chief Executive Officer Amos Kohn purchased certain real property that will serve as a facility for the Company’s business operations in Israel. The Company made $300 of payments to the seller of the property that will be applied to either (i) an ownership interest, that would be transferred to the Company upon the approval of certain governmental authorities that authorize foreign ownership of real property in Israel or (ii) a leasing arrangement providing for the Company’s use of the property should such authorization not be obtained. The payments are classified as ~~Other investments, related party~~ ~~in the accompanying condensed consolidated balance sheet at September 30, 2017.~~

~~During the three and nine months ended September 30,~~December 31, 2017, DP Lending made loans to ~~related parties of $54. The loans were made to~~ Alzamend Neuro, Inc. (“(“Alzamend”),~~Restaurant Capital Group, LLC, a wholly-owned subsidiary of AVLP,~~ ~~and Click Media, Inc. (“Cross Click”~~) in the ~~amounts~~amount of ~~$44, $5, and $5, respectively. The loans are classified as~~ ~~Other investments, related party~~ ~~in the accompanying condensed consolidated balance sheet at September 30, 2017.~~ $44. AVLP is a party to a management services agreement ~~with Alzamend Neuro, Inc. (“Alzamend”~~) pursuant to which Avalanche provides management, consulting and financial services to Alzamend. ~~MCKEA is~~At June 30, 2018, the ~~controlling shareholder~~outstanding principal under these loans had been repaid. As additional consideration, the Company received a warrant to purchase 22,000 shares of ~~Cross Click.~~

Alzamend’s common stock at an exercise price of $0.30 per share of common stock.

F-38

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

~~16.~~

22. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION

The Company has five reportable segments as of June 30, 2018 and two reportable ~~geographic segments;~~segments as of June 30, 2017; see Note 1 for a brief description of the Company’s business.

The following data presents the revenues, expenditures and other operating data of the Company’s geographic operating segments and presented in accordance with ASC No. 280.

	Six Months ended June 30, 2018
	DPC			DPL			Enertec		SC Mining			I.AM			Eliminations			Total
Revenue	$	5,558		$	738		$	1,218	$	—		$	—		$	—		$	7,514
Revenue, cryptocurrency mining		—			—			—		956			—			—			956
Revenue, related party		3,559			—			—		—			—			—			3,559
Revenue, restaurant operations		—			—			—		—		$	502			—			502
Revenue, lending activities		109			—			—		—			—			—			109
Inter-segment revenues		5			—			—		—			—			(5	)		—
Total revenues	$	9,231		$	738		$	1,218	$	956		$	502		$	(5	)	$	12,640
Depreciation and amortization expense	$	86		$	31		$	10	$	632		$	—		$	—		$	759
Loss from operations	$	(1,070	)	$	(451	)	$	146	$	(1,850	)	$	(1	)	$	—		$	(3,226	)
Capital expenditures for segment assets, as of June 30, 2018	$	343		$	1		$	32	$	8,807		$	23		$	—		$	9,206
Identifiable assets as of June 30, 2018	$	28,650		$	1,390		$	12,501	$	8,785		$	2,115		$	—		$	53,441

	Six Months ended June 30, 2017
	DPC			DPL			Eliminations			Total
Revenue	$	2,329		$	1,121		$	—		$	3,450
Inter-segment revenues		37			—			(37	)		—
Total revenues	$	2,366		$	1,121		$	(37	)	$	3,450
Depreciation and amortization expense	$	43		$	37		$	—		$	80
Loss from operations	$	(2,140	)	$	(91	)	$	—		$	(2,231	)
Capital expenditures for segment assets, as of June 30, 2018	$	8		$	13		$	—		$	21
Identifiable assets as of June 30, 2018	$	12,315		$	1,666		$	—		$	13,981

F-39

Nine months ended September 30, 2017 (unaudited)
DPC DPL Eliminations Total

Revenues $ 5,206 $ 1,464 $ — $ 6,670
Inter-segment revenues $ 43 $ — $ (43 ) $ —
Total revenues $ 5,249 $ 1,464 $ (43 ) $ 6,670

Depreciation and amortization expense $ 75 $ 53 $ — $ 128

Loss from operations $ (3,277 ) $ (272 ) $ — $ (3,549 )

Interest expense, net $ (1,367 )

Net loss attributable to non-controlling interest $ 216

Net loss attributable to Digital Power Corp $ (4,700 )

Capital expenditures for segment assets, as Sept. 30, 2017 $ 8 $ 13 $ — $ 21

Identifiable assets as of September 30, 2017 $ 12,315 1,666 $ — $ 13,981

Nine months ended September 30, 2016 (unaudited)
DPC DPL Eliminations Total

Revenues $ 3,408 $ 2,195 $ — $ 5,603
Inter-segment revenues $ 89 $ — $ (89 ) $ —
Total revenues $ 3,497 $ 2,195 $ (89 ) $ 5,603

Depreciation and amortization expense $ 57 $ 66 $ — $ 123

Loss from operations $ (147 ) $ (125 ) $ — $ (272 )

Interest income, net $ 85

Income tax benefit $ 22

Net loss $ (165 )

Capital expenditures for segment assets, as of Sept. 30, 2016 $ 23 $ 51 $ — $ 74

Identifiable assets as of September 30, 2016 $ 2,084 $ 2,371 $ — $ 4,455

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

	Three Months ended June 30, 2018
	DPC			DPL			Enertec		SC Mining			I.AM			Eliminations			Total
Revenue	$	2,718		$	412		$	1,218	$	—		$	—		$	—		$	4,348
Revenue, cryptocurrency mining		—			—			—		719			—			—			719
Revenue, related party		1,766			—			—		—			—			—			1,766
Revenue, restaurant operations		—			—			—		—		$	502			—			502
Revenue, lending activities		109			—			—		—			—			—			109
Inter-segment revenues		5			—			—		—			—			(5	)		—
Total revenues	$	4,598		$	412		$	1,218	$	719		$	502		$	(5	)	$	7,444
Depreciation and amortization expense	$	43		$	14		$	10	$	577		$	—		$	—		$	644
Loss from operations	$	(503	)	$	(199	)	$	146	$	(987	)	$	(1	)	$	—		$	(1,544	)
Capital expenditures for segment assets, as of June 30, 2018	$	32		$	—		$	32	$	1,641		$	23		$	—		$	1,728
Identifiable assets as of June 30, 2018	$	28,650		$	1,390		$	12,501	$	8,785		$	2,115		$	—		$	53,441

	Three Months ended June 30, 2017
	DPC			DPL			Eliminations			Total
Revenue	$	1,316		$	506		$	—		$	1,822
Inter-segment revenues		12			—			(12	)		—
Total revenues	$	1,328		$	506		$	(12	)	$	1,822
Depreciation and amortization expense	$	27		$	20		$	—		$	47
Loss from operations	$	(1,396	)	$	(48	)	$	—		$	(1,444	)
Capital expenditures for segment assets, as of June 30, 2018	$	8		$	11		$	—		$	19
Identifiable assets as of June 30, 2018	$	12,315		$	1,666		$	—		$	13,981

F-40

Three months ended September 30, 2017 (unaudited)
DPC DPL Eliminations Total

Revenues $ 2,877 $ 343 $ — $ 3,220
Inter-segment revenues $ 6 $ — $ (6 ) $ —
Total revenues $ 2,883 $ 343 $ (6 ) $ 3,220

Depreciation and amortization expense $ 32 $ 16 $ — $ 48

Loss from operations $ (1,137 ) $ (181 ) $ — $ (1,318 )

Interest expense, net $ (753 )

Net loss attributable to non-controlling interest $ 104

Net income (loss) $ (1,967 )

Capital expenditures for segment assets, as of Sept. 30, 2017 $ - $ - $ — $ -

Identifiable assets as of September 30, 2017 $ 12,315 $ 1,666 $ — $ 13,981

Three months ended September 30, 2016 (unaudited)
DPC DPL Eliminations Total

Revenues $ 1,248 $ 578 $ — $ 1,826
Inter-segment revenues $ 27 $ — $ (27 ) $ —
Total revenues $ 1,275 $ 578 $ (27 ) $ 1,826

Depreciation and amortization expense $ 19 $ 21 $ — $ 40

Income (loss) from operations $ 34 $ (117 ) $ — $ (83 )

Interest income, net $ 23

Income tax benefit $ 22

Net income (loss) $ (38 )

Capital expenditures for segment assets, as of September 30,
2016
$ — $ 4 $ — $ 4

Identifiable assets as of September 30, 2016 $ 2,084 $ 2,371 $ — $ 4,455

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

~~Concentration Risk:~~

Concentration Risk:

The following table provides the percentage of total revenues attributable to a single customer from which 10% or more of total revenues are derived:

For the three months ended Sept. 30, 2017 For the nine months ended Sept. 30, 2017

Total Revenues Total Revenues
by Major Percentage of by Major Percentage of
Customers Total Company Customers Total Company
(in thousands) Revenues (in thousands) Revenues
Customer A $ 433 13 % $ 1,062 16 %

For the three months ended Sept. 30, 2016 For the nine months ended Sept. 30, 2016

Total Revenues Total Revenues
by Major Percentage of by Major Percentage of
Customers Total Company Customers Total Company
(in thousands) Revenues (in thousands) Revenues
Customer A $ 407 22 % $ 1,176 21 %
Customer B $ 253 14 % $ — —
Customer C $ 196 11 % $ — —

For the three months ended June 30, 2018

For the six months ended June 30, 2018

Total Revenues

by Major

Percentage of

by Major

Percentage of

Customers

Total Company

Customers

Total Company

(in thousands)

Revenues

(in thousands)

Revenues

Customer A

1,766

3,559

For the three months ended June 30, 2017

For the six months ended June 30, 2017

Total Revenues

by Major

Percentage of

by Major

Percentage of

Customers

Total Company

Customers

Total Company

(in thousands)

Revenues

(in thousands)

Revenues

Customer B

320

629

Revenue from Customer A ~~and B were~~is related party revenue attributable to ~~Digital Power~~Coolisys and revenue from Customer CB is also attributable to ~~DP Limited.~~

Coolisys. At June 30, 2018, MTIX represented all of the Company’s accounts and other receivable, related party.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, total revenues from external customers divided on the basis of the Company’s product lines are as follows:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016

Revenues:
Commercial products $ 1,342 $ 1,505 $ 3,362 $ 3,971
Defense products 1,878 321 3,308 1,632
Total revenues $ 3,220 $ 1,826 $ 6,670 $ 5,603

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
Revenues:
Commercial products	$	5,136	$	1,083	$	8,801	$	2,023
Defense products		2,308		739		3,839		1,427
Total revenues	$	7,444	$	1,822	$	12,640	$	3,450

Financial data relating to geographic areas:

The Company’s total revenues are attributed to geographic areas based on the location. The following table presents total revenues for the ~~three and nine months~~years ended ~~September 30,~~December 31, 2017 and 2016. Other than as shown, no foreign country contributed materially to revenues or long-lived assets for these periods:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
Revenues:
North America	$	5,613	$	1,184	$	10,432	$	2,180
Europe		378		386		645		901
Middle East		1,218		—		1,218		—
Other		235		252		345		369
Total revenues	$	7,444	$	1,822	$	12,640	$	3,450

F-41

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

U.S. dollars in thousands, except share and per share data

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016

Revenues:
North America $ 2,671 $ 1,125 $ 4,746 $ 3,128
Europe 342 314 1,244 1,548
South Korea 3 196 223 499
Other 204 191 457 428
Total revenues $ 3,220 $ 1,826 $ 6,670 $ 5,603

~~17.~~

23. SUBSEQUENT EVENTS

In accordance with FASB ASC 855-10, the Company has analyzed its operations subsequent to ~~September~~June 30, ~~2017~~2018 and thru the date of this report being issued and has determined that it does not have any material subsequent events to disclose in these financial statements except for the following.

~~Common Stock~~

~~On October 4, 2017,~~

Between July 1, 2018 and August 15, 2018, the Company ~~entered into a Securities Purchase Agreement to sell 75,000 shares~~had received net proceeds of ~~common stock and warrants to purchase 75,000 shares of common stock at $0.60 per share to Ault & Company for $50. Mr. Ault is the Chairman and majority shareholder of Ault & Company.~~

On October 18, 2017, the Company entered into subscription agreements with five investors, under which we agreed to issue and sell in the aggregate 452,239 shares of common stock to the investors at $0.67 per share for an aggregate purchase price of $303. $75 of the purchase price was paid in cash and $228 was paid$3,508 through the ~~cancellation~~sale of ~~debt incurred by the Company, of which $93 was from a related party.~~

On November 7, 2017, the Company entered into subscription agreements with investors under which the Company agreed to issue and sell in the aggregate 725,000 shares of common stock to the investors at $0.60 per share for an aggregate purchase price of $435. $180 of the aggregate purchase price was paid in cash and $255 was paid through the cancellation of debt incurred by the Company.

~~October 3, 2017, the Company issued an aggregate of 490,000 shares of its common stock as payment for services to its consultant.~~ ~~The shares were valued at $265, an average of $0.54 per share.~~

~~Advance on Future Receipts~~

On October 17, 2017, the Company and Microphase, entered into an Agreement for the Purchase and Sale of Future Receipts with TVT Capital LLC pursuant to which the Company and Microphase collectively sold in the aggregate $834 in Future Receipts of the Company and Microphase for $600. Under the terms of the agreement, the Company and Microphase will be obligated to pay $21 in the aggregate on a weekly basis until the purchase price of $834, has been paid in full. In connection with entering into the agreement, the Company and Microphase collectively paid a $30 origination fee. In addition, the purchase price of $834 has been personally guaranteed by Milton Ault, III, the Company’s Executive Chairman.

~~On November 1, 2017, the Company and Libertas Funding LLC (“Libertas”~~), entered into an Agreement for the Purchase and Sale of Future Receivables pursuant to which the Company and Libertas collectively sold the rights of up to $594 in future receipts of the Company for $400. If the Company pays Libertas by January 3, 2018, the purchased amount will be discounted to $497. Until that date, no specific payment schedules are required. After January 3, 2018, if the Company has not paid the $497, the Company agrees to pay the aggregate of $594 in future receipts under the following terms. The Company will be obligated to pay $25 on a weekly basis until the purchased price of $594 has been paid in full. In conjunction with this agreement, the Company also issued warrants to purchase an aggregate of 200,000 shares of the Company’s Common Stock at $0.725 per share. The purchase price of $400 has been personally guaranteed by Philou and by Milton and Kristine Ault, directors of the Company.

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

On November 1, 2017, the Company entered into an Agreement for the Purchase and Sale of Future Receipts with TVT pursuant to which the Company sold up to $223 in Future Receipts of the Company for $150. If the Company pays TVT by January 3, 2018, the purchased amount will be discounted to $177. Until that date, no specific payment schedules are required. After January 3, 2018, if the Company has not paid the $177, the Company agrees to pay an aggregate amount of $223 under the following terms. The Company will be obligated to pay $13 on a weekly basis until the purchase price of $223 has been paid in full. The Agreement also includes warrants to purchase 75,0006,319,744 shares of the Company’s common stock ~~at an exercise price of $0.725 per share. In addition,~~through the ~~purchase price of $150 has been personally guaranteed by Mr. Ault.~~

~~Convertible Debentures~~

ATM Offering.

On ~~November~~July 2, ~~2017, Digital Power~~2018, the Company entered into a ~~Securities Purchase Agreement (the~~ ~~“Nov. Purchase Agreement”~~)securities purchase agreement with an institutional investor providing for the issuance of (i) a senior secured convertible promissory note (the “~~Purchaser”~~), pursuant to which the Company has agreed, upon the terms and subject to the conditions of the Nov. Purchase Agreement, to issue and sell to the Purchaser (i) at the first closing, 300,000 shares of restricted common stock of the Company (the ~~“Restricted Shares”) and a 10% Original Issue Discount~~ Convertible ~~Debenture for a purchase price of $1,010~~Note”) with a principal face amount of ~~$1,111 (the~~ ~~“First~~$1,000, which Convertible ~~Debenture”~~)Note is, subject to certain conditions, convertible into 1,333,333 shares of Class A common stock of the Company at $0.75 per share and (ii) ~~at the second closing, an additional 10% Original Issue Discount Convertible Debenture for an aggregate purchase price of $990 with an aggregate principal face amount of $1,089 (the~~ ~~“Second Convertible Debenture”, and together with the First Convertible Debenture, the~~ ~~“Convertible Debentures”~~). The Company and the Purchaser consummated the first closing on November 2, 2017. The second closing, if any, shall occur only at both parties’ mutual agreement at any time following the Company’s registration for resale of the Restricted Shares andup to 400,000 shares of common stock underlying the First Convertible Debenture, and shareholder approval of the transactions contemplated by the Purchase Agreement in accordance with Section 713 of the NYSE American Company Guide.

~~10% Original Issue Discount Convertible Debentures~~

The Convertible Debentures have a term of eight months, bear interest at 5% per year and the principal of the Convertible Debentures and interest earned thereon may be converted into shares of common stock at $0.60 per share, subject to adjustments for lower priced issuances, stock splits, stock dividends, combinations or similar events. In the event that the Company consummates any debt or equity financing with gross proceeds to the Company equal to or greater than $7,500, then the Company shall prepay to the holder in cash 110% of the outstanding principal amounts of the Convertible Debentures and any accrued and unpaid interest if the closing of such transaction occurs within ninety days from the original issue date of a debenture, and the Company shall prepay to the holder in cash 115% of the outstanding principal amounts of the Convertible Debentures and any accrued and unpaid interest if the closing of such transaction occurs between 91 days from the original issue date and the maturity date of the Convertible Debenture.Common Stock. The Company has the option to prepay all amounts owed under the Convertible Debentures in cash at a rate of 110% within 90 days from the original issue date and 115% from 91 days from the original issue date through the maturity date.

~~Registration Rights Agreement~~

~~In connection with the Nov. Purchase Agreement, the Company entered into a registration rights agreement (the~~ ~~“Registration Rights Agreement”) with the Purchaser, pursuant to which the Company has~~ agreed to file a registration statement on Form S-3 to register these securities by July 23, 2018. The Convertible Note has a principal face amount of bears interest at 10% per annum and is due on January 1, 2019.

On August 3, 2018, the Company and lender of the June 8, 2018 promissory note in the principal amount of $512 entered into an agreement to extend the maturity date from July 9, 2018 to August 31, 2018. The Company agreed to pay the lender an extension fee of 100,000 shares of common stock.

On August 10, 2018, the Company issued to its consultant 1,000,000 shares of its common stock with an aggregate value of $450 for services rendered.

On August 16, 2018, the Company entered into a securities purchase agreement with certain institutional investors providing for the issuance of (i) secured promissory notes (the “Notes”) in the aggregate principal face amount of $1,212 due February 15, 2019, at an interest rate of eight percent (8%) per annum for which the Company received an aggregate of $1,010, and (ii) an aggregate of 400,000 shares of common stock to be issued by the Company, subject to approval of the NYSE American. The Company agreed that the 400,000 shares shall be registered under the Securities Act of 1933, as amended, within fourteen (14) days after the date that the Securities and Exchange Commission ~~covering~~shall have declared the ~~Restricted Shares~~Company’s presently filed registration statement on Form S-3 (File No. 333-226301) effective.

On June 8, 2018, the Company entered into a limited partnership agreement, in which it agreed to become a limited partner in the partnership (the “NY Partnership”). The NY Partnership is a limited partner in the partnership that is responsible for the construction and ~~the shares~~related activities of ~~common stock underlying~~a hotel in New York City. In connection with this transaction, the ~~First Convertible Debenture within 30 days of the first closing and the shares of common stock underlying the Second Convertible Debenture within 30 days of the second closing. The~~ Company has agreed to ~~use its best efforts to have~~finance a portion of the ~~registration statement declared effective within 60 days~~capital required by the NY Partnership. The Company used $1,000 from the proceeds of ~~each closing date. If~~the August 16, 2018 Notes as an additional capital contribution in the partnership. As of June 30, 2018, the Company had an initial investment in the NY Partnership of $720, which is ~~unable~~a component of other investments on the Company’s balance sheet. Subject to ~~meet its obligations under~~ the ~~Registration Rights Agreement, on each such date~~occurrence of ~~failure or breach~~certain events and ~~on each monthly anniversary thereof if not cured by such date,~~other conditions over which the Company ~~shall pay~~has no control, it is required to ~~each Holder an amount~~make monthly capital contributions of $500,000 every thirty days until DPW’s commitment is funded in ~~cash, as partial liquidated damages and not as a penalty, equal~~full, which is expected to ~~1% of the subscription amount paid pursuant to the Purchase Agreement. Subsequent to the 90~~^th ~~day from such date of failure or breach, the 1% penalty shall increase to 2%, with an aggregate cap of 20% per year.~~occur in January 2020. If the Company fails to ~~pay any partial liquidated damages within seven days after~~make a monthly contribution when due, then the ~~date payable,~~other entities affiliated with the NY Partnership could potentially have the right to acquire fifty percent (50%) of the capital contributions that the Company will ~~pay interest thereon at a rate of 18% (or such lesser maximum amount that is permitted to be paid by applicable law).~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)~~

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share and per share data~~

~~Warrant Issued to Financial Advisor~~

~~In connection with the transactions contemplated by the Nov. Purchase Agreement, on November 2, the Company paid to Aegis Capital Corp. (“Aegis”~~), its financial advisor, a cash fee of $81 and issued to Aegis a warrant to purchase up to 148,133 shares of common stock with an exercise price of $0.66 per share (the “Warrant”), subject to adjustment for stock splits, stock dividends, combinations or similar events. The Warrant is exercisable at any time commencing six months from the date of issuance through five years from the date of issuance. The Warrant may be exercised for cash or on a “cashless” basis if there is no effective registration statement registering, or no current prospectus available for the resale of, all of the shares of Common Stock underlying the Warrant. Holders of the Warrant have ~~“piggy-back” registration rights for a period of five years from the date of issue.~~

~~Loan and Security Agreement with I.AM, Inc.~~

~~On November 1, 2017, the Company and I.AM, Inc. (“I.AM”) entered into a Loan and Security Agreement (“Loan Agreement”) pursuant to which the Company will provide I.AM a non-revolving credit facility of up to $1,300, for a period ending on September 25, 2022, subject~~made to the ~~terms and conditions stated in the Loan Agreement, including~~NY Partnership at that the Company having available funds to grant such credit. Advances on the credit facility accrue at a rate of 6.0% on the outstanding daily balance. The Loan Agreement is secured by the assets of I.AM’s membership interests in three restaurant LLCs.time.

F-42

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this quarterly report, the “Company,” ~~“Digital Power,~~“DPW Holdings,” “we,” “us” and “our” refer to ~~Digital Power Corporation,~~DPW Holdings, Inc., a ~~California~~Delaware corporation, our wholly-owned subsidiaries, Coolisys Technologies, Inc., Power-Plus Technical Distributors, LLC, Digital Power Lending, LLC, Super Crypto Mining, Inc., Digital Power Limited, ~~and~~EnertecSystems 2001 Ltdand our majority owned subsidiaries, Microphase Corporation and I. AM, LLC.

Recent Developments

of MICT (“EML” and, together with MICT, the “Seller Parties”), and Enertec Systems 2001 Ltd. (“Enertec”), an Israeli corporation and wholly owned subsidiary of EML, pursuant to which Coolisys acquired Enertec (the “Acquisition”). Enertec is Israel’s largest private manufacturer of specialized electronic systems for the military market. On May 23, 2018, Coolisys acquired Enertec for an aggregate cash purchase price of $4,851.

On February 27, 2018, we entered into a sales agreement with H.C. Wainwright & Co., LLC (“HCW”) to sell shares of our common stock, having an aggregate offering price of up to $50 million from time to time, through an “at the market offering” program (the “ATM Offering”) under which HCW will act as sales agent. As of August 15, 2018, we had received net proceeds of $18,059 through the sale of 21,241,911 shares of our common stock through the ATM Offering. The offer and sale of the shares through the ATM Offering are made pursuant to our effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the ATM Offering, dated February 27, 2018.

On May 23, 2018, DP Lending entered into and closed a securities purchase agreement with I.AM, Inc. (“I.AM”), David J. Krause and Deborah J. Krause. Pursuant to the securities purchase agreement, I.AM sold to DPL, 981 shares of common stock for a purchase price of $981, representing, upon the closing, 98.1% of I. AM’s outstanding common stock.

I.AM owns and operates the Prep Kitchen brand restaurants located in the San Diego area. I.AM owed DP Lending $1,715 in outstanding principal, pursuant to a loan and security agreement, between I.AM and DP Lending, that I.AM used to acquire the restaurants. The purchase agreement provides that, as I.AM repays the outstanding loan to DP Lending in accordance with the loan agreement, DP Lending will on a pro rata basis transfer shares of common stock of I.AM to David J. Krause, up to an aggregate of 471 shares.

GENERAL

We are a growth company seeking to increase our revenues through acquisitions. Our strategy reflects our management and Board’s current philosophy ~~that occurred as a result of a~~which we began implementing upon the change in control that was completed inon September 22, 2016. Our acquisition and development target strategy ~~includes~~include companies that have developed a “new way of doing business” in mature, well-developed industries experiencing changes due to new technology; companies that may become profitable or more profitable through efficiency and reduction of costs; companies that are related to our core business in the commercial and defense industries; and companies that will enhance our overall revenues. It is our goal to substantially increase our gross revenues in the near future.

We were originally a solution-driven organization that designs, develops, manufactures and sells high-grade customized and flexible power system solutions for the medical, military, telecom and industrial markets. Although we intend to seek growth through acquisitions, we will continue to focus on high-grade and custom product designs for the commercial, medical and military/defense markets, where customers demand high density, high efficiency and ruggedized products to meet the harshest and/or military mission critical operating conditions.

We have operations located in Europe through our wholly-owned subsidiary, Digital Power Limited ("(“DP ~~Limited"~~Limited”), Salisbury, England, which operates under the brand name of “Gresham Power Electronics” (“(“Gresham”). DP Limited designs, manufactures and sells power products and system solutions mainly for the European marketplace, including power conversion, power distribution equipment, DC/AC (Direct Current/Active Current) inverters and UPS (Uninterrupted Power Supply) products. Our European defense business is specialized in the field of naval power distribution products.

On November 30, 2016, ~~Digital Power~~DPW Holdings formed Digital Power Lending, LLC (“(“DP Lending”), a wholly-owned subsidiary. DP Lending is engaged in providing commercial loans to companies throughout the United States to provide them with operating capital to finance the growth of their businesses. The loans will primarily be short-term, ranging from six to twelve ~~months.~~

months, but may be of longer duration.

On June 2, 2017, ~~Digital Power~~ DPW Holdings purchased 56.4% of the outstanding equity interests of Microphase Corporation ~~(the~~ “(“Microphase”). Microphase is a design-to-manufacture original equipment manufacturer (“(“OEM”) industry leader delivering world-class radio frequency (“(“RF”) and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector logarithmic video amplifiers (“(“DLVA”) to the military, aerospace and telecommunications industries. Microphase is headquartered in Shelton, Connecticut.

On April 25, 2017, ~~Digital Power~~DPW Holdings formed Coolisys Technologies, Inc. (~~“Coolisys~~”(“Coolisys”), a wholly-owned subsidiary. The Company intends to operate its existing businesses in the customized and flexible power system solutions for the medical, military, telecom and industrial markets, other than the European markets which are primarily served by DP Limited, in Coolisys.

Further, on September 1, 2017, Coolisys acquired all of the outstanding membership interests in Power-Plus Technical Distributors, LLC, a California limited liability company (~~“Power-Plus”~~(“Power-Plus”). Power-Plus is an industrial distributor of value added power supply solutions, UPS systems, fans, filters, line cords, and other power-related components. In addition to its current business, Power-Plus will serve as an extended sales organization for the Company’s overall flexible power system solutions.

We are a Delaware corporation with our corporate office located at 201 Shipyard Way, Suite E, Newport Beach, California ~~corporation formed in 1969 and located in the heart of the Silicon Valley at 48430 Lakeview Blvd, Fremont, California 94538-3158.~~92663. Our phone number is 510-657-2635 and our website address is ~~www.digipwr.com.~~www.dpwholdings.com.

Results of Operations

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, 2018 AND 2017 ~~COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2016~~

~~Revenues~~

~~Our revenues increased by $1,394 or 76% to $3,220~~

The following table summarizes the results of our operations for the three months ended ~~September~~June 30, ~~2017, from $1,826~~2018 and 2017.

	For the Three Months Ended
	June 30,
	2018			2017

Revenue	$	4,348		$	1,822
Revenue, cryptocurrency mining		719			—
Revenue, related party		1,766			—
Revenue, restaurant operations		502			—
Revenue, lending activities		109			—
Total revenue		7,444			1,822
Cost of revenue		6,084			1,092
Gross profit		1,360			730
Total operating expenses		5,460			2,174
Loss from operations		(4,100	)		(1,444	)
Interest expense		(2,887	)		(407	)
Loss before income taxes		(6,987	)		(1,851	)
Income tax benefit		(10	)		—
Net loss		(6,997	)		(1,851	)
Less: Net loss attributable to non-controlling interest		108			112
Net loss attributable to DPW Holdings	$	(6,889	)	$	(1,739	)
Preferred deemed dividends on Series B and Series C Preferred Stock		(108	)		(319	)
Preferred dividends on Series C Preferred Stock		—			(8	)
Net loss available to common stockholders	$	(6,997	)	$	(2,066	)
Basic and diluted net loss per common share	$	(0.13	)	$	(0.20	)
Basic and diluted weighted average common shares outstanding		54,009,472			10,467,658
Comprehensive Loss
Loss available to common stockholders	$	(6,997	)	$	(2,066	)
Other comprehensive income (loss)
Foreign currency translation adjustment		(158	)		78
Net unrealized loss on securities available-for-sale		(705	)		—
Other comprehensive income (loss)		(863	)		78
Total Comprehensive loss	$	(7,860	)	$	(1,988	)

Revenues

Our revenues increased by $5,622 or 309% to $7,444 for the three months ended ~~September~~June 30, ~~2016.~~2018, from $1,822 for the three months ended June 30, 2017. The increase in revenue was primarily due to our acquisition of 56.4% of the outstanding equity interests of Microphase on June 2, 2017 and 98.1% of the outstanding equity interests of I.AM on May 23, 2018, combined with our ~~acquisition~~acquisitions of all of the outstanding equity interests of Power-Plus on September 1, ~~2017.~~2017 and Enertec on May 23, 2018. Revenues generated by ~~Microphase and Power-Plus~~these four acquisitions during the three months ended ~~September~~June 30, ~~2017, were $1,340 and $224, respectively.~~2018, represented $2,963 of our increase in revenues. Excluding the increase in revenues that were generated by our recent acquisitions, ~~of Microphase and Power-Plus,~~ the Company generated revenues of ~~$1,656, a decrease~~$4,481, which represented an increase of ~~$170~~$2,659. As discussed below, the increase of $2,659 from the three months ended ~~September~~June 30, ~~2016.~~2017, was primarily due to our cryptocurrency mining operations and on revenue from the manufacture of the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system.

Revenues, cryptocurrency mining

In January 2018, we formed Super Crypto Mining, Inc. (“SC Mining”), a wholly-owned subsidiary. SC Mining was established to operate our newly formed cryptocurrency business, which is pursuing a variety of digital currencies. We are mining the top three cryptocurrencies for our own account. These cryptocurrencies include Bitcoin, Litecoin and Ethereum. During the three months ended June 30, 2018, we recognized $719 of revenues generated by SC Mining.

Revenues, related party

During the three months ended June 30, 2018, we recognized $1,766 in revenues resulting from our ~~U.S. operations increased~~relationship with MTIX Limited, a company formed under the laws of England and Wales (“MTIX”). MTIX was acquired by ~~130.5%~~Avalanche on August 22, 2017 and is therefore deemed to ~~$2,877~~be a related party. In March 2017, the Company was awarded a 3-year, $50 million purchase order by MTIX to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system. Management believes that the MLSE purchase order will be a source of revenue and generate significant cash flows for the Company. However, at June 30, 2018, $3,544 was reflected on the financial statements as accounts receivable, related party.

Gross Margins

Gross margins decreased to 18.3% for the three months ended ~~September~~June 30, ~~2017, from $1,248~~2018 compared to 40.1% for the three months ended ~~September~~June 30, ~~2016.~~ As previously noted, our consolidated revenues include $1,564 in revenues generated from our recent acquisitions of Microphase and Power-Plus. If we had not closed on these acquisition, then revenues from our U.S. operations would have been $1,313, an increase of 5.2%. The increase in revenues from our U.S. operations is attributed to the recognition of $109 in revenue from the MLSE $50 million purchase order contract which was offset by a slight decrease in sales of our legacy products. The recognition of revenue from the MLSE contract during the three months ended September 30, 2017, represents the first revenues recognized from this contract, which is expected to extend over several years.

~~Revenues from our European operation in Gresham, U.K. (“DP Limited”~~) decreased by $235 to $343 for the three months ended September 30, 2017, from $578 for the three months ended September 30, 2016, a decrease of 40.7%. The decrease was primarily attributable to a decrease of military and commercial products sales and the impact of a weakening of the British Pound and Euro against the USD. The decline in commercial product sales was mainly attributed to standard commodity products. The decline in military product sales was attributed to technical changes in the design of one of our development contracts.

~~Gross Margins~~

~~Gross margins decreased to 34.0% for the three months September 30, 2017 compared to 38.5% for the three months ended September 30, 2016.~~2017. The decrease in gross margins was partially attributable to the lower margin revenue of $1,766 from MTIX, a related party, with gross margins of 21.1% combined with negative margins of (116.4%) on revenues of $719 at SC Mining. The negative gross margins at SC Mining are attributed to monthly recurring fixed costs at our colocation facilities which temporarily exceed the revenues from our mining operations while we place our miners in service. If we had not recognized revenue, and the related cost of revenue, from SC Mining and our contract with MTIX, then our adjusted gross margins for the three months ended June 30, 2018 would have been 36.8%. The decrease in gross margins from 40.1% to 36.8% is mainly attributable to ~~the decrease~~an increase in ~~sales from~~costs of our ~~European~~commercial products sold in our U.S. operations, ~~combined with slightly lower margins of 34.5% generated by our Microphase and Power-Plus subsidiaries. As the Company integrates its recent acquisitions of Microphase and Power-Plus, it expects that~~which historically have had much greater gross ~~margins from its U.S. based operations will be fairly consistent among the three companies.~~

margins.

Engineering and Product Development

Engineering and product development expenses increased by ~~$159~~$102 to ~~$306~~$367 for the three months ended ~~September~~June 30, ~~2017~~2018 from ~~$147~~$265 for the three months ended ~~September~~June 30, ~~2016.~~2017. The increase is ~~partly~~primarily attributed to our acquisition of Microphase. Due to the timing of the acquisition of Microphase, ~~which~~June 2, 2017, during the three months ended June 30, 2017 Microphase reported ~~$118~~only $55 in engineering and product development ~~expenses. The remaining increase was primarily related~~expenses as opposed to ~~an increase in direct manpower cost from the addition of a new Head of Engineering and Technology, a highly-compensated position that was created~~$115 during the ~~fourth quarter of 2016.~~

three months ended June 30, 2018.

Selling and Marketing

Selling and marketing expenses were ~~$423~~$775 for the three months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$235~~$327 for the three months ended ~~September~~June 30, ~~2016,~~2017, an increase of ~~$188.~~$448. Our acquisition of Microphase and Power-Plus accounted for ~~$46~~$36 and ~~$55,~~$224, respectively, of the increase in selling and marketing expenses. The remaining increase of $188 is attributed to an increase in personnel costs directly attributed to sales and marketing personnel at ~~the Company’s~~our U.S. and UK based operations. ~~Beginning in December 2016 and throughout~~Throughout the quarter ended March 31, 2017, we augmented our sales and marketing team in the U.S. with the addition of a Vice President of Business Development and two regional sales managers. During the three months ended September 30, 2016, the services of our current Chief Executive Officer were reported within selling and marketing expenses due to the significant amount of time in which he devoted to the sales process. The increase in the headcount of our sales and marketing team allowed our CEO to spend the majority of his time on general corporate matters related to our restructuring and expansion. As such, during the three months ended September 30, 2017, the salary of our Chief Executive officer, which is $300 per year, or $75 per quarter, was reported within general and administrative expenses. The increase in selling and marketing expenses is partially attributed to the increase in salaries and benefits and travel related costs for the three new sales and marketing ~~positions and~~positions. Due to the timing of these personnel additions, the full cost was only partially ~~offset by~~realized during the ~~allocation of~~three months ended March 31, 2017. Further, during December 2017, we hired a Sales Director at our ~~Chief Executive Officer’s salary to general and administrative expense.~~UK operations.

General and Administrative

General and administrative expenses were ~~$1,685~~$4,388 for the three months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$404~~$1,582 for the three months ended ~~September~~June 30, ~~2016,~~2017, an increase of ~~$1,281.~~$2,806. Our ~~acquisition~~acquisitions of Microphase, Enertec and I. AM accounted for ~~$410~~$635 of the increase in general and administrative expenses. The adjusted increase of ~~$871~~$2,171 from the comparative prior period was mainly due to higher ~~stock based~~stock-based compensation expenses, an increase in legal and audit costs, an increase in investor relationship costs and hiring of additional consultants to build an infrastructure in anticipation of our future growth and the ~~allocation~~increase in cost attributed to the hiring of ~~our~~a new Chief ~~Executive Officer’s salary to general and administrative expense.~~Financial Officer. The remaining increase in general and administrative expenses is due to various costs, none of which are significant individually.

In aggregate, we incurred ~~$517~~$1,361 of stock-based compensation during the three months ended ~~September~~June 30, ~~2017.~~2018. Of this amount, ~~$365~~$831 was from issuances of ~~equity based~~equity-based awards pursuant to our Plans and ~~$152~~$530 was from stock, options and warrants which were issued outside the Plans. It has been our policy to allocate the majority of ~~stock based~~stock-based compensation to general and administrative expense. During the three months ended ~~September~~June 30, ~~2016~~2018 and 2017, and inclusive of ~~equity based~~equity-based awards issued outside the Plans, we recorded ~~$35~~$1,361 and ~~$311,~~$580, respectively, of stock-based compensation in general and administrative expense.

We experienced an aggregate increase of ~~$168~~$16 in audit and legal fees due to an overall increase in the operations conducted and the level of complexity and significant number of the transactions entered into during the three months ended ~~September~~June 30, ~~2017.~~2018.

Beginning during the quarter ended December 31, 2016, we spent significant effort on expanding our investor base and on hiring additional consultants to assist building an infrastructure to support our anticipated growth. ~~As a result, we experienced~~These efforts were continued during the three months ended June 30, 2018 and resulted in an increase of ~~$220~~$189 in costs attributed to investor relations and other consulting fees.

During January 2018 we hired a new Chief Financial Officer and in September 2017 we hired a senior executive to assist in management at Coolisys. These two hires resulted in an overall increase in payroll expense of approximately $108 during the three months ended June 30, 2018.

Finally, ~~during~~in January 2018 we established SC Mining, our digital currency blockchain mining subsidiary and DP Lending, our commercial lending subsidiary. During the three months ended ~~September~~June 30, 2016, our Chief Executive Officer’s salary was reflected in selling and marketing expenses. As discussed above, our current practice is to record the salary and benefits of our Chief Executive Officer to2018, general and administrative ~~expense.~~costs attributed to these subsidiaries were $302.

Interest (expense) income, net

Interest expense ~~net~~ was ~~$753~~$2,887 for the three months ended ~~September~~June 30, ~~2017~~2018 compared to ~~income of $23~~$407 for the three months ended ~~September~~June 30, ~~2016.~~2017. The increase in interest expense for the three months ended ~~September~~June 30, ~~2017~~2018 is primarily related to the amortization of debt discount, in the aggregate amount of ~~$669,~~$2,728, resulting from original issue discount the issuance of warrants in conjunction with the sale of debt ~~and equity~~ instruments in the aggregate amount of ~~$3,452.~~$18,745. During the three months ended ~~September~~June 30, ~~2017,~~2018, as a result of these issuances, non-cash interest expense of ~~$669~~$2,728 was recorded from the amortization of debt discount and debt financing costs. The remaining increase in interest expense ~~net,~~ was due to an increase in the amount of the Company’s total ~~borrowings. At September 30, 2017, the outstanding balance of the Company’s convertible notes payable~~borrowings and ~~notes payable~~which was ~~$3,458. Conversely, at September 30, 2016, the Company did not have any outstanding convertible notes payable or notes payable. Interest expense was partially~~primarily offset by interest income and the accretion of original issue discount pursuant to the Loan and Security Agreement entered into on September 6, 2017, between the Company and AVLP (“(“AVLP Loan Agreement”) of ~~$141.~~

$585.

Operating Loss

The Company recorded an operating loss of ~~$1,318~~$4,100 for the three months ended ~~September~~June 30, ~~2017~~2018 compared to an operating loss of ~~$83~~$1,444 for the three months ended ~~September~~June 30, ~~2016.~~2017. The increase in operating loss is mostly attributable from the increase of general and administrative expenses.

Net Loss

~~The Company recorded a~~

For the foregoing reasons, our net loss ~~of $2,071~~ for the three months ended ~~September~~June 30, ~~2017~~2018, was $6,997 compared to a net loss of ~~$38~~$1,851 for the three months ended ~~September~~June 30, ~~2016 as a result of the aforementioned changes.~~2017. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders of Microphase during the three months ended June 30, 2018 and 2017, of $108 and $112, respectively, the net loss ~~attributable~~available to common shareholders during the ~~Company~~three months ended June 30, 2018 and 2017, was ~~$1,967~~$6,997 and 38$2,066, respectively.

As reflected in our consolidated statement of cash flows for the three months ended June 30, 2018 and 2017, our reported net loss is comprised of non-cash charges of $4,333 and $1,035, respectively. A summary of these non-cash charges is as follows:

	For the Three Months Ended
	June 30,
	2018			2017
Interest expense – debt discount	$	2,728		$	392
Stock-based compensation		1,373			595
Depreciation and amortization		677			47
Interest expense on conversion of promissory notes to common stock		—			13
Accretion of original issue discount on notes receivable – related party		(445	)		(12	)
Non-cash items included in net loss	$	4,333		$	1,035

Othercomprehensive income (loss)

Other comprehensive income (loss) was ($863) and $78, respectively, for the three months ended June 30, 2018 and 2017. Other comprehensive loss for the three months ended June 30, 2018, which decreased our equity, reflects the impact of the weakening of the British Pound on the equity of DP Limited combined with unrealized losses in our investments in marketable securities, primarily in the warrants that we received as a result of our investment in Avalanche International, Corp, a related party. During the three months ended June 30, 2017, the effect of the foreign currency adjustment of the British Pound was the only component of our other comprehensive income of $78.

~~NINE~~

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, 2018 AND 2017 ~~COMPARED TO NINE MONTHS ENDED SEPTEMBER~~

The following table summarizes the results of our operations for the six months ended June 30, ~~2016~~

2018 and 2017.

	For the Six Months Ended
	June 30,
	2018			2017

Revenue	$	7,514		$	3,450
Revenue, cryptocurrency mining		956			—
Revenue, related party		3,559			—
Revenue, restaurant operations		502			—
Revenue, lending activities		109			—
Total revenue		12,640			3,450
Cost of revenue		9,887			2,012
Gross profit		2,753			1,438
Total operating expenses		9,820			3,669
Loss from operations		(7,067	)		(2,231	)
Interest expense		(6,019	)		(614	)
Loss before income taxes		(13,086	)		(2,845	)
Income tax benefit		(6	)		—
Net loss		(13,092	)		(2,845	)
Less: Net loss attributable to non-controlling interest		144			112
Net loss attributable to DPW Holdings	$	(12,948	)	$	(2,733	)
Preferred deemed dividends on Series B and Series C Preferred Stock		(108	)		(319	)
Preferred dividends on Series C Preferred Stock		—			(8	)
Net loss available to common stockholders	$	(13,056	)	$	(3,060	)
Basic and diluted net loss per common share	$	(0.29	)	$	(0.32	)
Basic and diluted weighted average common shares outstanding		45,407,279			9,430,945
Comprehensive Loss
Loss available to common stockholders	$	(13,056	)	$	(3,060	)
Other comprehensive income (loss)
Foreign currency translation adjustment		(132	)		99
Net unrealized loss on securities available-for-sale		(5,446	)		—
Other comprehensive income (loss)		(5,578	)		99
Total Comprehensive loss	$	(18,634	)	$	(2,961	)

Revenues

Our revenues increased by ~~$1,067~~$9,190 or ~~19%~~266% to ~~$6,670~~$12,640 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, from ~~$5,603~~$3,450 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The increase in revenue was primarily due to our ~~acquisition of 56.4%~~ ~~of the outstanding equity interests of Microphase~~ ~~on June 2,~~four acquisitions completed during 2017 ~~combined with our acquisition of all of the outstanding equity interests of Power-Plus on September 1, 2017.~~and 2018. Revenues generated by ~~Microphase and Power-Plus~~these four acquisitions during the ~~nine~~six months ended ~~September~~June 30, ~~2017, were $1,563 and $224, respectively.~~2018, represented $5,050 of our increase in revenues. Excluding the increase in revenues that were generated by our recent acquisitions, ~~of Microphase and Power-Plus,~~ the Company generated revenues of ~~$4,883.~~$7,813, which represented an increase of $4,362. As discussed below, the ~~decrease~~increase of ~~$720~~$4,362 from the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, was primarily due to our cryptocurrency mining operations and on revenue from the manufacture of the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system.

Revenues, cryptocurrency mining

In January 2018, we formed SC Mining. During the six months ended June 30, 2018, we recognized $956 of revenues generated by SC Mining.

Revenues, related party

During the six months ended June 30, 2018, we recognized $3,559 in revenues resulting from our relationship with MTIX. In March 2017, the Company was awarded a 3-year, $50 million purchase order by MTIX to manufacture, install and service the MLSE plasma-laser system.

Gross Margins

Gross margins decreased to 21.8% for the six months ended June 30, 2018 compared to 41.7% for the six months ended June 30, 2017. The decrease in gross margins was partially attributable to the lower margin revenue of $3,559 from MTIX, a related party, with gross margins of 21.5% combined with negative margins of (94.1%) on revenues of $956 at SC Mining. The negative gross margins at SC Mining are attributed to monthly recurring fixed costs at our colocation facilities which temporarily exceed the revenues from our ~~European operations.~~

~~Revenues from~~mining operations while we place our ~~U.S. operations increased by $1,798, or 52.8%, to $5,206 for the nine months ended September 30, 2017, from $3,408 for the nine months ended September 30, 2016.~~ ~~As previously noted, our consolidated revenues include $1,787~~miners in ~~revenues generated from our recent acquisitions of Microphase and Power-Plus.~~service. If we had not ~~closed on these acquisition,~~recognized revenue, and the related cost of revenue, from SC Mining and our contract with MTIX, then ~~revenues from~~ our ~~U.S. operations~~adjusted gross margins for the six months ended June 30, 2018 would have been $3,419, an increase of 0.3%. The increase in revenues from our U.S. operations is attributed to the recognition of $109 in revenue from the MLSE $50 million purchase order contract which was offset by a slight decrease in sales of our legacy products.

~~Revenues from our European operation in Gresham, U.K. (“DP Limited”) decreased by $731 to $1,464 for the nine months ended September 30, 2017, from $2,195 for the nine months ended September 30, 2016, a decrease of 33.3%~~35.5%. The decrease was primarily attributable to a decrease of military and commercial products sales and the impact of a weakening of the British Pound and Euro against the USD. The decline in commercial product sales was mainly attributed to standard commodity products. The decline in military product sales was attributed to technical changes in the design of one of our development contracts.

~~Gross Margins~~

~~Gross margins increased to 38.0% for the nine months September 30, 2017 compared to 37.1% for the nine months ended September 30, 2016. The increase~~ in gross margins ~~was~~from 41.7% to 35.5% is mainly attributable to ~~the~~an increase in ~~sales~~costs of our commercial products sold in our U.S. operations, which historically have had much greater gross ~~margins, combined with the decrease in sales from our European operations.~~

margins.

Engineering and Product Development

Engineering and product development expenses increased by ~~$287~~$218 to ~~$798~~$710 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 from ~~$511~~$492 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The increase is ~~partly~~primarily attributed to our acquisition of Microphase. Due to the timing of the acquisition of Microphase, ~~which~~June 2, 2017, during the six months ended June 30, 2017 Microphase reported ~~$173~~only $55 in engineering and product development ~~expenses. The remaining increase is attributed~~expenses as opposed to ~~a $95 increase in personnel costs directly attributed to engineering and product development at Digital Power’s U.S. based operations. During~~$236 during the ~~fourth quarter of 2016, as part of its growth plan, Digital Power hired a new Head of Engineering and Technology, a highly-compensated position.~~

six months ended June 30, 2018.

Selling and Marketing

Selling and marketing expenses were ~~$1,045~~$1,500 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$723~~$622 for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, an increase of ~~$322.~~$878. Our acquisition of Microphase and Power-Plus accounted for ~~$55~~$92 and ~~$65,~~$429, respectively, of the increase in selling and marketing expenses. The remaining increase of $357 is attributed to an increase in personnel costs directly attributed to sales and marketing personnel at ~~Digital Power’s~~our U.S. and UK based operations. ~~Beginning in December 2016 and throughout~~Throughout the quarter ended March 31, 2017, we augmented our sales and marketing team in the U.S. with the addition of a Vice President of Business Development and two regional sales managers. During the nine months ended September 30, 2016, the services of our current Chief Executive Officer were reported within selling and marketing expenses due to the significant amount of time in which he devoted to the sales process. The increase in the headcount of our sales and marketing team allowed our CEO to spend the majority of his time on general corporate matters related to our restructuring and expansion. As such, during the nine months ended September 30, 2017, the salary of our Chief Executive officer, which is $300 per year, was reported within general and administrative expenses. The increase in selling and marketing expenses is partially attributed to the increase in salaries and benefits and travel related costs for the three new sales and marketing ~~positions and~~positions. Due to the timing of these personnel additions, the full cost was only partially ~~offset by~~realized during the ~~allocation of~~three months ended March 31, 2017. Further, during December 2017, we hired a Sales Director at our ~~Chief Executive Officer’s salary to general and administrative expense.~~

UK operations.

General and Administrative

General and administrative expenses were ~~$4,240~~$7,610 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$1,115~~$2,555 for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, an increase of ~~$3,125.~~$5,055. Our ~~acquisition~~acquisitions of Microphase, Enertec and I. AM accounted for ~~$577~~$870 of the increase in general and administrative expenses. The adjusted increase of ~~$2,548~~$4,185 from the comparative prior period was mainly due to higher ~~stock based~~stock-based compensation expenses, an increase in legal and audit costs, an increase in investor relationship costs and hiring of additional consultants to build an infrastructure in anticipation of our future growth and the ~~allocation~~increase in cost attributed to the hiring of ~~our~~a new Chief ~~Executive Officer’s salary to general and administrative expense.~~Financial Officer. The remaining increase in general and administrative expenses is due to various costs, none of which are significant individually.

In aggregate, we incurred ~~$1,269~~$2,811 of stock-based compensation during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. Of this amount, ~~$1,061~~$1,537 was from issuances of ~~equity based~~equity-based awards pursuant to our Plans and ~~$208~~$1,273 was from stock, options and warrants which were issued outside the Plans. It has been our policy to allocate the majority of ~~stock based~~stock-based compensation to general and administrative expense. During the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and 2017, and inclusive of ~~equity based~~equity-based awards issued outside the Plans, we recorded ~~$108~~$2,781 and ~~$980,~~$651, respectively, of stock-based compensation in general and administrative expense.

We experienced an aggregate increase of ~~$486~~$250 in audit and legal fees due to an overall increase in the operations conducted and the level of complexity and significant number of the transactions entered into during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018.

Beginning during the quarter ended December 31, 2016, we spent significant effort on expanding our investor base and on hiring additional consultants to assist building an infrastructure to support our anticipated growth. ~~As a result, we experienced~~These efforts were continued during the six months ended June 30, 2018 and resulted in an increase of ~~$589~~$378 in costs attributed to investor relations and other consulting fees.

Finally, ~~during~~we recently established SC Mining, our digital currency blockchain mining subsidiary, and DP Lending, our commercial lending subsidiary. During the ~~nine~~six months ended ~~September~~June 30, 2016, our Chief Executive Officer’s salary was reflected in selling and marketing expenses. As discussed above, our current practice is to record the salary and benefits of our Chief Executive Officer to2018, general and administrative ~~expense.~~costs attributed to these subsidiaries were $516.

Interest (expense) income, net

Interest expense ~~net~~ was ~~$1,367~~$6,019 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~income of $85~~$614 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The increase in interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 is primarily related to the amortization of debt discount, in the aggregate amount of ~~$1,269,~~$5,779, resulting from original issue discount on the issuance of warrants in conjunction with the sale of debt ~~and equity~~ instruments in the aggregate amount of ~~$6,706.~~$18,745. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, as a result of these issuances, non-cash interest expense of ~~$1,269~~$5,779 was recorded from the amortization of debt discount and debt financing costs. The remaining increase in interest expense ~~net,~~ was due to an increase in the amount of the Company’s total ~~borrowings. Interest expense~~borrowings and which was ~~partially~~primarily offset by interest income and the accretion of original issue discount pursuant to the Loan and Security Agreement entered into on September 6, 2017, between the Company and AVLP (“AVLP Loan ~~Agreement~~Agreement”) of ~~$242.~~

$1,219.

Operating Loss

The Company recorded an operating loss of ~~$3,549~~$7,067 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to an operating loss of ~~$272~~$2,231 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The increase in operating loss is mostly attributable from the increase of general and administrative expenses.

Net Loss

~~The Company recorded a~~

For the foregoing reasons, our net loss ~~of $4,916~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018, was $13,092 compared to a net loss of ~~$187~~$2,845 for the ~~nine~~six months ended ~~September~~June 30, ~~2016 as a result of the aforementioned changes.~~2017. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders of Microphase of $144 and ~~an income tax benefit that was recognized~~$112 and preferred dividends of $108 and $327 during the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018 and 2017, respectively, the net loss ~~attributable~~available to common shareholders during the ~~Company~~six months ended June 30, 2018 and 2017, was ~~$4,700~~$13,056 and ~~$165,~~$3,060, respectively.

As reflected in our consolidated statement of cash flows for the six months ended June 30, 2018 and 2017, our reported net loss is comprised of non-cash charges of $8,485 and $1,413, respectively. A summary of these non-cash charges is as follows:

	For the Six Months Ended
	June 30,
	2018			2017
Interest expense – debt discount	$	5,779		$	587
Stock-based compensation		2,811			752
Depreciation and amortization		825			80
Interest expense on conversion of promissory notes to common stock		—			13
Accretion of original issue discount on notes receivable – related party		(930	)		(19	)
Non-cash items included in net loss	$	8,485		$	1,413

Othercomprehensive income (loss)

Other comprehensive income (loss) was ($5,578) and $99, respectively, for the six months ended June 30, 2018 and 2017. Other comprehensive loss for the six months ended June 30, 2018, which decreased our equity, reflects the impact of the weakening of the British Pound on the equity of DP Limited combined with unrealized losses in our investments in marketable securities, primarily in the warrants that we received as a result of our investment in Avalanche International, Corp, a related party. During the six months ended June 30, 2017, the effect of the foreign currency adjustment from the weakening of the British Pound was the only component of our other comprehensive income of $99.

LIQUIDITY AND CAPITAL RESOURCES

On ~~September~~June 30, ~~2017,~~2018, we had cash and cash equivalents of ~~$314.~~$1,518. This compares with cash and cash equivalents of ~~$996~~$1,478 at December 31, ~~2016.~~2017. The ~~decrease~~increase in cash and cash equivalents was primarily due to cash provided by financing activities being slightly in excess of the amount of cash used in operating and investing ~~activities in excess of funds provided by financing~~ activities.

Net cash used in operating activities totaled ~~$1,577~~$5,664 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, compared to net cash ~~provided~~used by operating activities of ~~$138~~$873 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, the ~~decrease~~increase in net cash ~~provided by~~used in operating activities compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was mainly due to the ~~September~~net loss for the six months ended June 30, ~~2017 nine months loss~~2018 of ~~$4,916.~~$13,092. The net loss was partially offset by a number of non-cash charges, the amortization of debt discount of ~~$1,239~~$5,779 and stock-based compensation of ~~$1,269,~~$2,811, an increase in accounts receivable, related party of $3,274 and accounts payable and accrued expenses of ~~$2,083~~$2,465 and decreases in our accounts receivable of ~~$737 and other current liabilities of $595.~~

$770.

Net cash used in investing activities was ~~$4,384~~$16,922 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$12~~$2,432 of net cash ~~provided by~~used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The increase of the net usage of cash from investing activities was primarily ~~related~~attributed to the purchase of property and equipment at SC Mining, the investment in AVLP, ~~loans to third parties~~the acquisition of Enertec and ~~the purchase of Power-Plus.~~

investments in debt and equity securities.

Net cash provided by financing activities was ~~$5,194~~$22,794 and ~~nil~~$2,711 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The financing activities primarily related to the sale of ~~1,309,545~~19,056,783 shares of common stock through a registered direct offering and from our ATM Offering for net proceeds of ~~$672, the sale of Series B and Series C Preferred Stock of $1,540, gross~~$18,552, net proceeds from the Company’s debt financings ~~of $2,649, gross proceeds~~and from advances of future receipts of ~~$1,772 and~~$21,735 which was offset by payments on debt ~~facilities~~instruments of ~~$626.~~

$16,565 and proceeds from the exercise of options and warrants of $965.

Historically, the Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. During ~~2017,~~2018, as reflected below, the Company ~~continues~~continued to successfully obtain additional equity and debt financing and in restructuring existing debt. ~~The following financings transactions were consummated during 2017:~~

·●

On ~~March 9, 2017, the Company~~January 23, 2018, we entered into a ~~Preferred Stock Purchase Agreement with Philou Ventures LLC (“Philou”~~), a related party, pursuant to which Philou was granted the right to invest up to $5,000 in the Company through the purchase of Series B Preferred Stock over a term of 36 months. On March 24, 2017, Philou purchased 25,000 shares of Series B Preferred Stock pursuant to the Preferred Stock Purchase Agreement in consideration of cancellation of Company debt of $250 due to MCKEA, an affiliate of Philou. On May 5, 2017, Philou purchased an additional 50,000 shares of Series B Preferred Stock pursuant to the Preferred Stock Purchase Agreement for $500.

~~On March 15, 2017, the Company entered into a subscription agreement with one investor for the sale of 500,000 shares of common stock at $0.60 per share for the aggregate purchase price of $300.~~

~~On March 20, 2017, the Company issued $250 in demand promissory note to one of the Company's shareholders.~~

Between May 5, 2017 and June 30, 2017, the Company received additional short-term loans of $140 from four accredited investors of which $75 was from the Company’s corporate counsel, a related party. As additional consideration, the investors received five-year warrants to purchase 224,371 shares of common stock at a weighted average exercise price of $0.77 per share.During June 2017, the holders of $55 of these short-term loans agreed to cancel their notes for the purchase of 100,001 shares of the Digital Power’s common stock at a price of $0.55 per share. An additional $52 in short-term loans from the related party was converted into one of the Series C Units.

~~Between May 24, 2017 and June 19, 2017, Digital Power entered into subscription agreements (the~~ ~~“Series C Subscription Agreement”) with approximately twenty accredited investors (the~~ ~~“Series C Investors”) in connection with the sale of twenty-one Units at a purchase price of $52 per Unit raising in the aggregate $1,092 with each Unit consisting of Series C Preferred Stock and Warrants.~~

Between July 6, 2017 and September 13, 2017, the Company received funding as a result of entering into multiple Agreements for the Purchase and Sale of Future Receipts with TVT Capital LLC pursuant to which the Company sold in the aggregate $2,585 in Future Receipts of the Company for $1,772. Under the terms of the agreements, the Company will be obligated to pay the initial daily amount of $13 until the $2,585 has been paid in full. The term Future Receipts means cash, check, ACH, credit card, debit card, bank card, charged card or other form of monetary payment.

~~On July 24, 2017, we entered into subscription agreements with six investors, and on July 25, 2017 we entered into~~ securities purchase ~~agreements (the~~ ~~“Securities Purchase Agreement”~~)agreement with an institutional investor ~~under which we agreed~~ to ~~issue and~~ sell, ~~in the aggregate 851,363 shares of common stock to the investors at $0.55 per share~~ for an aggregate purchase price of ~~$468. Of~~$1,000, a 10% senior convertible promissory note (the “Note”) with an aggregate principal face amount of $1,250, a warrant to purchase an aggregate of 625,000 shares of our common stock and 543,478 shares of our common stock. The transactions contemplated by the ~~aggregate~~securities purchase agreement closed on February 8, 2018. The Note is convertible into 625,000 shares of our common stock, a conversion price of ~~$468, $445 was paid in cash and $23 was in consideration for the cancellation of debt from a related party~~$2.00 per share, subject to adjustment. The exercise price of the ~~Company.~~

warrant to purchase 625,000 shares of our common stock is $2.20 per share, subject to adjustment. On February 9, 2018, in addition to the 543,478 shares of common stock provided for pursuant to the securities purchase agreement, we issued to the investor an aggregate of 691,942 shares of our common stock upon the conversion of the entire outstanding principal and accrued interest on the Note of $1,384.

·●

On ~~July 28, 2017,~~January 25, 2018, we issued two 5% promissory notes, each in the principal face amount of $2,500 for an aggregate debt of $5,000 to two institutional investors. The proceeds from the two promissory notes was used to purchase 1,000 Antminer S9s manufactured by Bitmain Technologies, Inc. in connection with our mining operations. We received delivery of the Miners on February 1, 2018. On March 27, 2018, we paid the principal and accrued interest on each of the 5% promissory notes.

●

On February 20, 2018, we issued a promissory note in the principal face amount of $900 to an accredited investor. This promissory note included an original issue discount (“OID”) of $150 resulting in net proceeds of $750. The principal and OID on this note was due and payable on March 22, 2018. On March 23, 2018, we entered into ~~an exchange agreement with an institutional investor who was the owner of (i)~~ a ~~7% Convertible Note~~new promissory note in the principal amount of ~~$125 and~~$1,750 for a term of two months, subject to our ability to prepay within one month. The interest rate payable on this new promissory note shall be twenty percent per thirty calendar days, payable in a lump sum on the maturity date. We also issued to the lender a warrant ~~dated April 17, 2017~~ to purchase ~~83,334~~1,250,000 shares of our common stock at ~~$0.90. Under the terms~~an exercise price of $1.15 per share, pursuant to a consulting agreement. The principal amount of the ~~exchange agreement, we agreed to exchange the 7% Convertible Note for three~~ new promissory ~~notes in the principal amounts~~note consisted of ~~$110 due August 1, 2017; $35 due August 1, 2017;~~net proceeds of $1,000 and $34 due August 8, 2017 (individually an Exchange Note and collectively the Exchange Notes) and to exchange the prior warrant for a new warrant to purchase 83,334 shares of common stock at $0.55 per share. Concurrent with entering into this exchange agreement, the institutional investor entered into a subscription agreement under which we issued and sold in a registered direct offering 200,000 shares of common stock at $0.55 per share for an aggregate purchase price of $110. The 200,000 shares of common stock were purchased through the cancellation of the ~~Exchange Note~~principal of $750 from the February 20, 2018 promissory note. The interest on the February 20, 2018 note in the amount of $150 was paid to the lender prior to entering into the new promissory note. On April 23, 2018, we paid the entire outstanding principal and accrued interest on the new promissory note of $2,100.

●

On February 26, 2018, we issued a 10% promissory note in the principal face amount of ~~$110. In addition,~~$330 to an accredited investor. This promissory note included an OID of $30 resulting in net proceeds to us of $300. The principal and accrued interest on this note is due and payable on April 12, 2018, subject to a ~~concurrent private placement, the institutional investor~~30-day extension available to us.

●

On February 27, 2018, we entered into a ~~separate~~sales agreement with H.C. Wainwright & Co., LLC (“HCW”) to sell shares of our common stock, having an aggregate offering price of up to $50 million from time to time, through an “at the market offering” program (the “ATM Offering”) under which HCW acts as sales agent. As of August 15, 2018, we had received net proceeds of $18,059 through the sale of 21,241,911 shares of our common stock through the ATM Offering. The offer and sale of the shares through the ATM Offering will be made pursuant to our effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the ATM Offering, dated February 27, 2018.

●

On March 23, 2018, we entered into a securities purchase agreement under which we issued and sold 63,600 shares of common stock at $0.55 per share for an aggregate of purchase price of $35. The 63,600 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $35. Further, we issued a warrant to purchase 120,000 shares of common stock at $0.55 per share.

~~On August 3, 2017, the Company entered into a Securities Purchase Agreement~~ to sell and issue a 12% ~~Convertible (“12% Convertible Note”)~~promissory note and a warrant to purchase ~~666,666~~300,000 shares of common stock to an accredited investor ~~(the “Investor”). The principal of~~if the ~~Convertible Note may be converted into~~promissory note is paid in full on or before May 23, 2018, or up to 450,000 shares of common stock, ~~at $0.55 per share and under~~if the ~~terms of the Warrant, up to 666,666 shares of common stock may be purchased at an exercise price of $0.70 per share.~~promissory note is paid by June 22, 2018. The ~~Convertible Note~~promissory note was issued with a 10% OID. The promissory note is in the principal amount of ~~$400~~$1,000 and was sold for ~~$360,~~$900, bears interest at 12% simple interest on the principal amount, and is due on ~~August 13,~~June 22, 2018. Interest only payments are due, in arrears, on a ~~quarterly~~monthly basis ~~and the principal is due~~commencing on ~~August 3,~~April 23, 2018. The ~~principal may be converted into shares~~exercise price of the ~~Company’s common stock at $0.55~~warrant is $1.15 per share. The promissory note is unsecured by any of our assets but is guaranteed by our Chief Executive Officer.

·●

On ~~August 10, 2017,~~March 27, 2018, we issued a 10% promissory note in the ~~Company,~~principal face amount of $200 to an accredited investor. The principal and accrued interest on this note was due and payable on March 29, 2018. Between March 29 and April 24, 2018, we paid the entire outstanding principal on this 10% promissory note of $200.

●

On April 16, 2018, we entered into ~~Securities Purchase Agreements (“Agreements”)~~securities purchase agreements with ~~five~~three institutional investors ~~(the “Investors”)~~ to sell, for an aggregate purchase price of ~~$800, 10% Senior Convertible Promissory Notes~~$1,550, 12% secured convertible promissory notes (“Convertible Notes”) with an aggregate principal face amount of ~~$880 and~~$1,722, warrants to purchase an aggregate of ~~1,475,000~~993,588 shares of our common stock, and an aggregate of 200,926 shares of our common stock. The ~~principal of the~~ Convertible Notes and interest earned thereon may be converted into shares of common stock at $0.60 per share and under the terms of the Warrant, up to 1,475,000 shares of common stock may be purchased at an exercise price of $0.66 per share. The Convertible Notes are in the aggregate principal amount of $880 and were sold for $800 and bear simple interest at ~~10%~~12% on the principal amount ~~and principal and~~with a guarantee of interest ~~are due on February 10, 2018.~~during the initial six months in the amount of $103. Subject to certain beneficial ownership limitations ~~each Investor~~and an event of default having occurred and not been cured, the investors may convert the principal amount of the Convertible ~~Note~~Notes and accrued interest earned thereon ~~at any time~~ into shares of our common ~~stock~~Stock at ~~$0.60~~$0.70 per ~~share. The conversion price of the Convertible Notes is~~share, subject to adjustment for customary stock splits, stock dividends, combinations or similar events. Beginning on May 16, 2018, we are required to make six monthly cash payments in the aggregate amount of $304 until the Convertible Notes are satisfied in full, which is to occur on October 16, 2018. The warrants entitle the holders to purchase, in the aggregate, up to 993,588 shares of our common stock at an exercise price of $1.30 per share for a period of five years subject to certain beneficial ownership limitations. In connection with these three securities purchase agreements, we entered into security agreements pursuant to which we granted to each investor a security interest in, among others, SC Mining’s accounts, chattel paper, documents, equipment, general intangibles, instruments and inventory, and all proceeds, as set forth in the security agreements.

●

On May 15, 2018, we entered into securities purchase agreements with certain investors for the sale and issuance of an aggregate of 7,691,775 shares of our Class A common stock, and five-year warrants to purchase such number of shares of common stock equal to the shares of common stock purchased by the investors. We received aggregate consideration of $6,000, consisting of cash and the cancellation of short-term advances of $3,225 and $2,775, respectively. These securities were issued pursuant to our registration statement filed with the Securities and Exchange Commission (File No. 333-222132) which became effective on January 11, 2018.

●

On May 15, 2018, we entered into a securities purchase agreement with an institutional investor providing for the issuance of (i) a Senior Secured Convertible Promissory Note (the “Convertible Note”) with a principal face amount of $6,000, which Convertible Note is, subject to certain conditions, convertible into 8,000,000 shares (the “Conversion Shares”) of the Company’s common stock at $0.75 per share; (ii) a five-year warrant to purchase 1,111,111 shares of the Company’s common stock (the “Series A Warrant Shares”) at an exercise price of $1.35 (the “Series A Warrant”); (iii) a five-year warrant to purchase 1,724,138 shares of the Company’s common stock (the “Series B Warrant Shares” and with the Series A Warrant Shares, the “Warrant Shares”) at an exercise price of $0.87 per share (the “Series B Warrant” and together with the Series A Warrant, the “Warrants”); and (iv) 344,828 shares of our common stock (the “Commitment Shares” and with the Conversion Shares and the Warrant Shares, the “Issuable Shares”). The Warrant Shares and the Commitment Shares will be registered under the Securities Act pursuant to the Company’s currently effective registration statement on Form S-3 (File No. 333-222132). Pursuant to a registration rights agreement entered into with the Investor on the Closing Date, the Company agreed to file a registration statement on Form S-3 to register the Note and the Conversion Shares within twenty-one (21) days of the Closing Date.

The Convertible Note bears interest at 10% per annum, with 50% of the total interest due on the principal payable at the closing and the remaining 50% payable as Amortization Payments. We are required to make amortization payments in cash to the investor for a period of 26 weeks in 13 equal payments every 2 weeks until the Convertible Note is satisfied in full (each, an “Amortization Payment”). The Convertible Note is convertible into common stock at $0.75 per share, subject to adjustment, but may only be converted if an event of default thereunder has occurred and not been cured on a timely basis. The conversion price of the Convertible Note is subject to adjustment for customary stock splits, stock dividends, combinations or similar events. The Convertible Note contains standard and customary events of default including, but not limited to, failure to make payments when due under the Convertible Note, failure to comply with certain covenants contained in the Convertible Note, or bankruptcy or insolvency of the Company. We may prepay the full outstanding principal and accrued and unpaid interest at any time without penalty.

In connection with the financing, pursuant to an engagement agreement with Alliance Global Partners (“AGP”), a licensed broker-dealer with FINRA, we agreed to pay to AGP a cash fee, or placement agent fee, equal to 5% of the aggregate gross proceeds raised. Such fee was paid at the closing of the offering. In addition, AGP shall receive a cash fee equal to 5% of such cash exercise price proceeds received by us, payable within 48 hours of our receipt of any cash exercise price proceeds from the exercise of any warrants sold, provided that no such fee is due and payable hereunder in the event the warrants are not exercised for cash. AGP is also entitled to receive a warrant to purchase 150,000 shares of common stock with an exercise price of $1.00, which warrant shall be exercisable for 5-years via cashless exercise until registered and via cash thereafter.

●

On July 2, 2018, we entered into a securities purchase agreement with an institutional investor providing for the issuance of (i) a senior secured convertible promissory note (the “Convertible Note”) with a principal face amount of $1,000, which Convertible Note is, subject to certain conditions, convertible into 1,333,333 shares of Class A common stock of the Company at $0.75 per share and (ii) up to 400,000 shares of Common Stock. The Company agreed to file a registration statement on Form S-3 to register these securities within twenty-one July 23, 2018. The Convertible Note bears interest at 10% per annum and is due on January 1, 2019.

●

On August 16, 2018, we entered into a securities purchase agreement with certain institutional investors providing for the issuance of (i) secured promissory notes (the “Notes”) in the aggregate principal face amount of $1,212 due February 15, 2019, at an interest rate of eight percent (8%) per annum for which we received an aggregate of $1,010, and (ii) an aggregate of 400,000 shares of common stock to be issued by us, subject to approval of the NYSE American. We agreed that the 400,000 shares shall be registered under the Securities Act of 1933, as amended, within fourteen (14) days after the date that the Securities and Exchange Commission shall have declared our presently filed registration statement on Form S-3 (File No. 333-226301) effective.

We expect to continue to incur losses for the foreseeable future and will be required to raise additional capital to continue to support our working capital requirements. We believe that the MLSE purchase order contract of $50 million and revenue generated by SC Mining will ~~contribute to~~ generate meaningful revenue and corresponding cash in ~~2017.~~2018. In addition, we have been successful over the last 12 months in raising capital to support our working capital requirements. We anticipate that we will continue to raise capital through public and private equity offerings, debt financings, or other means. If we are unable to secure additional capital, we may be required to curtail our current operations and take additional measures to reduce costs expenses, including reducing our workforce, eliminating outside consultants, ceasing or reducing our due diligence of potential future acquisitions, including the associated legal fees, in order to conserve cash in order to sustain operations and meet our obligations.

Based on the above, these matters raise substantial doubt about the Company’s ability to continue as a going concern.

CRITICAL ACCOUNTING POLICIES

In our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. The basis for developing the estimates and assumptions within our critical accounting policies is based on historical information and known current trends and factors. The estimates and assumptions are evaluated on an ongoing basis and actual results have been within our expectations. We have not changed these policies from those previously disclosed in our Annual Report.

~~ITEM 3.~~

~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for a smaller reporting company.

~~ITEM 4.~~

~~CONTROLS AND PROCEDURES~~

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Our principal executive officer and principal financial officer, with the assistance of other members of the ~~Company's~~Company’s management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report and has determined that our disclosure controls and procedures were not effective as of June 30, ~~2017~~2018 due to certain material weaknesses as described herein.

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following two material weaknesses:

(i)

a lack of sufficient internal accounting resources to provide reasonable assurance that information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure and

(ii)

a lack of segregation of duties to ensure adequate review of financial statement preparation.

Planned Remediation

Management, in coordination with the input, oversight and support of our Board of Directors, has identified the measures below to strengthen our control environment and internal control over financial reporting.

~~Until such time as~~

During January 2018 we ~~hire~~hired a new Chief Financial Officer and engaged the services of a financial accounting advisory firm. Further, until we expand our internal accounting department, the Chairman of the Audit Committee shall perform the following:

·●

assists with documentation and implementation of policies and procedures and monitoring of controls,

·●

reviews all anticipated transactions that are not considered in the ordinary course of business to assist in the early identification of accounting issues and ensure that appropriate disclosures are made in the Company’s financial statements.

We are currently working to improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures.

Changes in Internal Controls over Financial Reporting.

~~During~~

Except as detailed above, during the most recent fiscal quarter ~~2017~~2018 there were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On July 31, 2018 a shareholder derivative complaint was filed in the United States District Court for the Central District of California against the Company as the nominal defendant, as well as its current directors and a former director styledEthan Young and Greg Young, Derivatively on Behalf of Nominal Defendant, DPW Holdings, Inc. v. Milton C. Ault, III, Amos Kohn, William B. Horne, Jeff Bentz, Mordechai Rosenberg, Robert O. Smith, and Kristine Ault and DPW Holdings, Inc., as the nominal defendant (Case No.: 2:18-cv-6587) (the “Complaint”). No hearings have been scheduled as of the date hereof.

~~ITEM 1.~~

~~LEGAL PROCEEDINGS~~14

~~None~~

The Complaint alleges violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants as, in the view of the plaintiffs, the Company has entered into poorly advised loan transactions and related party transactions. The Company and the individual defendants believe that these claims are without merit and intend to vigorously defend themselves. Based on the Company’s assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action. However, an unfavorable outcome may have a material adverse effect on our business, financial condition and results of operations.

~~ITEM 1A.~~

~~RISK FACTORS~~

ITEM 1A. RISK FACTORS

The risks described in Part I, Item 1A, ~~"Risk~~“Risk Factors,"” in our ~~2016~~2017 Form 10-K, could materially and adversely affect our business, financial condition and results of operations, and the trading price of our common stock could decline. These risk factors do not identify all risks that we face - our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. The Risk Factors section of our ~~2016~~2017 Annual Report on Form 10-K remains current in all material ~~respects except that we identified~~ ~~material weaknesses in our internal control over financial reporting and in our disclosure controls and procedures~~.

If We Fail to Establish and Maintain an Effective System of Internal Control, We May Not Be Able to Report Our Financial Results Accurately or Prevent Fraud. Any Inability to Report and File Our Financial Results Accurately and Timely Could Harm Our Reputation and Adversely Impact the Trading Price of Our Common Stock.

Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operations and access to capital. We have also experienced complications reporting as a result of material weaknesses which resulted in the restatement of our ~~Form 10-Q for the quarterly period ended June 30, 2017, which was filed with the Securities and Exchange Commission (“SEC”) on August 21, 2017~~, and amended on November 14, 2017. We have carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent period covered by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

~~A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCAOB”~~) Audit Standard No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that as of June 30, 2017 our internal controls over financial reporting (~~“ICFR”) were not effective at the reasonable assurance level:~~

We do not have sufficient resources in our accounting function, which restricts our ability to gather, analyze and properly review information related to financial reporting in a timely manner. In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties during our assessment of our disclosure controls and procedures and concluded that the control ~~deficiency that resulted represented a material weakness.~~

We have inadequate controls to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting. Management evaluated the impact of the lack of timely communication between non–financial and financial personnel on our assessment of our reporting controls and procedures and has concluded that the control deficiency represented a material weakness.

We have taken steps to remediate some of the weaknesses described above, including a greater level of involvement by our Audit Committee. We intend to continue to address these weaknesses as resources permit.

respects.

~~ITEM 2.~~

~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~On July 7,~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the six months ended June 30, 2018, pursuant to the Company’s 2017 Stock Incentive Plan, the Company ~~entered into~~issued an ~~asset purchase agreement to acquire the intellectual property~~aggregate of ~~Coolisys.com, in consideration for, in part, 50,000~~1,583,059 shares of ~~common stock. The seller of the intellectual property and purchaser of the~~its common stock ~~was an accredited investor.~~

~~On August 16, 2017, the Company approved the issuance and sale of (i) 272,727 shares of our common stock at a purchase price equal~~as payment for services to $0.55 per share and (ii) warrants to purchase up to 272,727 shares of our common stock at $0.65 per share, which become exercisable six months after the issuance date, to two accredited investors for an aggregate purchase price of $150.its consultants. The shares ~~have yet to be issued by the Company and are subject to approval from the NYSE American prior to issuance.~~

~~In addition, on September 9, 2017, the Company approved the issuance~~were valued at $2,640, an average of 100,000 shares of our common stock to Spartan Capital for capital advisory services. Spartan Capital is an accredited investor. The shares of common stock have yet to be issued by the Company and are subject to approval from the NYSE American prior to issuance.

$1.67 per share.

On October 5, 2017, Ault & Company purchased 75,000 shares of our common stock at $0.60 per share and a warrant to purchase up to 75,000 shares of our common stock at $0.60 per share for an aggregate purchase price of $45. These shares and warrants ~~have yet to be~~were issued by the Company ~~and are subject to approval from the NYSE American prior to issuance.~~on May 8, 2018. Ault & Company is controlled by Mr. Milton Ault, our Chairman and Chief Executive ~~Chairman.~~

Officer.

The Company engaged Divine Capital Markets, LLC (“Divine”) to act as Placement Agent (the “Placement Agent”) for the 2017 private placement of the Series C Preferred Stock and warrants. For its services, the Placement Agent received, in addition to a 10.0% commission on the sale of each Unit and a 3.0% non-refundable expense allowance, warrants to purchase 10% of the Units sold at 120% of the Unit purchase price. The warrants to purchase 2.1 Units equates to a warrant to purchase 182,003 shares of the Company’s common stock at $0.72 per share and a second warrant to purchase 182,003 shares of the Company’s common stock at $1.00 per share. On May 8, 2018, the Company issued 279,170 shares of common stock pursuant a cashless exercise of these warrants.

On September 9, 2017, the Company approved the issuance of 100,000 shares of our common stock to Spartan Capital for capital advisory services. On February 2, 2018, the Company amended the terms of the consulting agreement with Spartan Capital and agreed to issue an additional 200,000 shares of the Company’s common stock. Spartan Capital is an accredited investor. The shares of common stock were issued by the Company on May 8, 2018.

On May 8, 2018, the Company issued an aggregate of 400,000 shares of its common stock as payment for services to a consultant. The shares were valued at $904, an average of $1.13 per share.

On August 10, 2018, the Company issued to its consultant 1,000,000 shares of its common stock with an aggregate value of $450 for services rendered.

The foregoing issuances and sales and purchases were exempt from registration upon reliance of Section 4(a)(2) and Regulation D promulgated thereunder.

~~ITEM 3.~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

~~None.~~

~~ITEM 4.~~

~~MINE SAFETY DISCLOSURES~~

ITEM 4. MINE SAFETY DISCLOSURES

None

ITEM 5. OTHER INFORMATION

None

~~ITEM 5.~~

~~OTHER INFORMATION~~16

~~None~~

ITEM 6. EXHIBITS

~~ITEM 6.~~

~~EXHIBITS~~

Exhibit Number	Description
~~2.1~~	Share Exchange Agreement by and among Digital Power Corporation, Microphase Corporation, Microphase Holding Company, RCKJ Trust, Ergul Family Limited Partnership, To Hong Yam and Eagle Advisers, LLC, dated as of April 28, 2017 (Incorporated by reference to Exhibit 2.1 of the Company’s current report filed on Form 8-K with the Securities and Exchange Commission on May 3, 2017)
3.1	Certification of Incorporation, dated September 22, 2017. Incorporated herein by reference to the Current Report on Form 8-K filed on December 29, 2017 as Exhibit 3.1 thereto.
3.2	Bylaws, dated September 25, 2017. Incorporated herein by reference to the Current Report on Form 8-K filed on December 29, 2017 as Exhibit 3.2 thereto.
3.3	Amended and Restated Articles of Incorporation of ~~Digital Power Corporation (Incorporated~~the Company, dated September 29, 1992. Incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on October 16, ~~1996)~~1996.
~~3.2~~	Certificate of Amendment to Articles of Incorporation of Digital Power Corporation (Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on October 16, 1996)
~~3.3~~	Certificate of Amendment to Articles of Incorporation of Digital Power Corporation (Incorporated by reference to Exhibit 3.1 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on December 9, 2013)
3.4	~~Bylaws~~Form of ~~Digital Power Corporation (Incorporated~~Certificate of Determination of Preferences, Rights and Limitations of Series B Convertible Preferred Stock, dated March 3, 2017. Incorporated by reference to ~~Exhibit 3.3 of~~ the ~~Company’s Registration Statement~~Current Report on Form ~~SB-2~~8-K filed ~~with the Securities and Exchange Commission~~ on ~~October 16, 1996)~~March 9, 2017 as Exhibit 3.1 thereto.
3.5		Form of Certificate of Determination of Preferences, Rights and Limitations of Series C ~~Certificate of Determination (Incorporated~~Convertible Preferred Stock, dated May 15, 2017. Incorporated by reference to ~~Exhibit 3.1 of~~ the ~~Company’s current report filed~~Current Report on Form 8-K ~~with the Securities and Exchange Commission~~filed on May 31, ~~2017)~~2017 as Exhibit 3.1 thereto.
3.6	Form of Certificate of Determination of Preferences, Rights and Limitations of Series D ~~Certificate of Determination (Incorporated~~Convertible Preferred Stock. Incorporated by reference to ~~Exhibit 3.1 of~~ the ~~Company’s current report filed~~Current Report on Form 8-K ~~with the Securities and Exchange Commission~~filed on May 3, ~~2017)~~2017 as Exhibit 3.1 thereto.
3.7	Form of Certificate of Determination of Preferences, Rights and Limitations of Series E Convertible Preferred Stock. Incorporated by reference to the Current Report on Form 8-K filed on May 3, 2017 as Exhibit 3.2 thereto.
4.1	Form of Common Stock Purchase Warrant, dated April 16, 2018. Incorporated by reference to the Current Report on Form 8-K filed on April 16, 2018 as Exhibit 4.1 thereto.
4.2	Form of Series ~~E Certificate of Determination (Incorporated~~A Common Stock Purchase Warrant, dated May 17, 2018. Incorporated by reference to ~~Exhibit 3.2 of~~ the ~~Company’s current report filed~~Current Report on Form 8-K ~~with the Securities and Exchange Commission~~filed on May ~~3, 2017)~~16, 2018 as Exhibit 4.1 thereto.
4.3	Form of Series B Common Stock Purchase Warrant, dated May 17, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 4.2 thereto.
4.4	Form of Senior Secured Convertible Promissory Note, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 4.1 thereto.
4.5	Form of Series A Common Stock Purchase Warrant, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 4.2 thereto.
4.6	Form of Series B Common Stock Purchase Warrant, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 4.3 thereto.
4.7	Form of Registration Rights Agreement, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 4.4 thereto.
10.1	~~Preferred Stock~~Form of Securities Purchase Agreement, ~~date March 9, 2017 between Digital Power Corporation, and Philou Ventures, LLC. (Incorporated~~dated April 16, 2018. Incorporated by reference to ~~Exhibit 10.1 of~~ the ~~Company’s current report filed~~Current Report on Form 8-K ~~with~~filed on April 16, 2018 as Exhibit 10.1 thereto.
10.2	Form of Secured Convertible Promissory Note, dated April 16, 2018. Incorporated by reference to the Current Report on Form 8-K filed on April 16, 2018 as Exhibit 10.2 thereto.
10.3	Form of Security Agreement, dated April 16, 2018. Incorporated by reference to the Current Report on Form 8-K filed on April 16, 2018 as Exhibit 10.3 thereto.
10.4	Form of Securities Purchase Agreement, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 10.1 thereto.
10.5	Form of Securities Purchase Agreement, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 10.1 thereto.
10.6	Form of Security Agreement, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 10.2 thereto.
10.7	Form of Security and ~~Exchange Commission~~Pledge Agreement, dated May 15, 2018. Incorporated by reference to the Current Report on ~~March 9, 2017)~~Form 8-K filed on May 16, 2018 as Exhibit 10.3 thereto.
10.8	Form of Intellectual Property Security Agreement, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 10.4 thereto.

Exhibit Number		Description
10.9		Form of Subsidiary Guarantee, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 10.5 thereto.
10.10		Form of Lock-Up Agreement, dated May 15, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2018 as Exhibit 10.6 thereto.
31.1*		Certification of Chief Executive ~~and~~Officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2*		Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1**		Certification of Chief Executive and Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
101.INS***		XBRL Instance Document
101.INS*		XBRL Instance Document
101.SCH***		XBRL Taxonomy Extension Schema Document
101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***		XBRL Taxonomy Extension Label Linkbase Document
101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document

~~______________________~~

* Filed herewith.

** Furnished herewith.

*** In accordance with Rule 402 of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: ~~November~~August 20, ~~2017~~

~~Digital Power Corporation~~

2018

~~By:~~	~~/s/ Amos Kohn~~	DPW HOLDINGS, INC.

	~~Amos Kohn~~	By:	/s/ Milton C. Ault, III
	~~President,~~		Milton C. Ault, III
			Chief Executive ~~and~~ Officer
			(Principal Executive Officer)


		By:	/s/ William B. Horne
			William B. Horne
			Chief Financial Officer ~~and~~
			(Principal Accounting ~~Officer~~Officer)

~~California~~Delaware	94-1721931
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

			Page
PART I – FINANCIAL INFORMATION

	Item 1.		Financial Statements

		Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2018 (Unaudited) and December 31, ~~2016~~2017 (Audited)	~~1-2~~F-1 – F-2

		Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and ~~nine~~ six months ended ~~September~~June 30, 2018 and 2017 ~~and 2016~~ (Unaudited)	3F-3

		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2018 (Unaudited)	F-4

		Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017 ~~and 2016~~ (Unaudited)	~~4-5~~F-5 – F-7

		Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	~~6 - 42~~F-8 – F-42

	Item 2.	~~Management's~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations	431

Item 3.	~~Item 3.~~	Quantitative and Qualitative Disclosures about Market Risk	5113

	Item 4.		Controls and Procedures	5113

PART II – OTHER INFORMATION

	Item 1.		Legal Proceedings	5214
	Item 1A.		Risk Factors	5215
	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	5315
	Item 3.		Defaults Upon Senior Securities	5315
	Item 4.	~~Reserved~~	54Mine Safety Disclosures	16
	Item 5.		Other Information	5416
	Item 6.		Exhibits	55
			17

☑	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended ~~September~~June 30, ~~2017~~2018

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the transition period from ________ to ________.

	September 30,		December 31,
	2017		2016
	(Unaudited)
ASSETS

CURRENT ASSETS

Cash and cash equivalents	$	314	$	996
Accounts receivable, net		2,892		1,439
Inventories, net		1,858		1,122
Prepaid expenses and other current assets		603		285
TOTAL CURRENT ASSETS		5,667		3,842

Intangible assets		420		—
Goodwill		6,490		—
Property and equipment, net		603		570
Investments - related parties, net of original issue discount of $127
and $45, respectively, at September 30, 2017 and December 31, 2016		3,782		1,036
Other investments		679		—
Other investments, related parties		354		—
Other assets		265		24
TOTAL ASSETS	$	18,260	$	5,472


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Accounts payable and accrued expenses	$	5,460	$	1,231
Accounts payable and accrued expenses, related party		104		—
Advances on future receipts, net of discount of $671		1,475		—
Revolving credit facility		310		—
Notes payable		1,609		—
Notes payable, related parties		274		250
Convertible notes payable, net		465		—
Other current liabilities		144		398
TOTAL CURRENT LIABILITIES		9,841		1,879

LONG TERM LIABILITIES
Notes payable		659		—
Notes payable, related parties		132		—
Convertible notes payable, related party, net of discount of $364
and $496, respectively, at September 30, 2017 and December 31, 2016		166		34

TOTAL LIABILITIES	$	10,798	$	1,913

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☑

~~Non-accelerated filer~~ ☐

~~(Do~~(Do not check if a smaller reporting company)

~~Smaller reporting company~~ ☑

Emerging growth company ☐